ENTREPRENEURSHIP: creating and leading an entrepreneurial organization 9788131765784, 9788131797679, 8131765784

Table of contents :
Cover......Page 1
Contents......Page 6
Preface......Page 16
Acknowledgements......Page 18
About the Author......Page 19
Learning Objectives......Page 20
1.1 Introduction......Page 21
1.2 Key to Development......Page 22
1.3 Evolving Concept of Entrepreneurship......Page 25
1.4 What is Entrepreneurship?......Page 28
1.5 Resource Organization and Value Creation......Page 31
1.5.1 What is a Resource?......Page 32
1.5.2 Types of Resources......Page 33
1.6.1 Need for Achievement......Page 37
1.6.2 Locus of Control......Page 40
1.6.3 Risk-taking......Page 41
1.6.4 Visionary and Dreamer......Page 44
1.6.6 Dynamic Leadership......Page 45
1.6.8 Excellent Networker......Page 46
1.7 Difference between Inventors and Entrepreneurs......Page 48
1.8 Inspiration from Role Models and Social Support......Page 49
1.8.1 Social and Psychological Support......Page 51
1.9 Business Model......Page 53
1.10 Entrepreneurship—Mindset......Page 54
1.12.2 Entrepreneurship is All About Money and Getting Rich Quickly......Page 57
1.12.6 Ignorance is Bliss for Entrepreneurs......Page 58
1.12.9 Banks Do Not Lend Money to Start-ups......Page 59
1.12.10 Starting a Business is Easy......Page 60
Endnotes......Page 61
References......Page 62
Critical Thinking Questions......Page 64
Case 1.1: How I Made my first Million......Page 65
Case 1.2: from Candle Seller to CEO......Page 67
Learning Objectives......Page 69
2.1 Types of Start-Ups......Page 70
2.2 Intrapreneurship......Page 72
2.3.1 To Have Freedom and Independence......Page 74
2.3.6 To Strengthen Resume......Page 75
2.4 Entrepreneurship as a Career Option......Page 76
2.4.1 Knowledge-driven Entrepreneurship......Page 80
2.4.2 Entrepreneurs—Born or Made......Page 81
2.5 Why Youth is Suited for Entrepreneurship......Page 82
2.6 Female Entrepreneurship......Page 85
2.7 Small and Medium Business Enterprises......Page 87
2.8 International Entrepreneurship......Page 90
2.9 Entrepreneurship Development—Role of Educational Institutions......Page 91
2.10.1 Single Founder or Not Having a Good Team......Page 95
2.10.3 Weak Planning and Wrong Assessment of Market Potential......Page 96
2.10.6 Lack of Financial Tie-ups and Awareness on Approvals Required......Page 97
2.10.9 Lack of Flexibility and Obsession with an Idea......Page 98
2.11 Managing Start-Ups During Downturn......Page 99
2.12 Entrepreneurship—Emerging Trends in the Global knowledge Economy......Page 100
2.12.1 Benefits and Emerging Challenges of e-Commerce......Page 102
Key Concepts......Page 104
References......Page 105
Conceptual Questions......Page 106
Case 2.1: Pets.Com......Page 107
Learning Objectives......Page 110
3.1 Leader vs Manager......Page 113
3.1.1 Managers......Page 115
3.1.2 Leaders......Page 117
3.2 Why do Ventures Require Dynamic Leaders?......Page 118
3.3.2 Service-oriented......Page 121
3.3.5 Lead Balanced Lives......Page 122
3.3.8 Perspective or Self-renewal......Page 123
3.4 Entrepreneurial Leadership......Page 125
3.5.1 Determining the Firm’s Purpose or Vision......Page 127
3.5.2 Developing Human Capital......Page 128
3.5.3 Sustaining an Effective Organizational Culture......Page 129
3.5.5 Establishing Balanced Organizational Controls......Page 130
Endnotes......Page 132
Conceptual Questions......Page 133
Case 3.1: Link_A_Media Devices......Page 134
Case 3.2: XYZ Transport......Page 135
Case 3.3: Entrepreneurial Profiles......Page 136
Learning Objectives......Page 140
4.1 Introduction......Page 141
4.1.1 Vertical Vs Lateral Thinking......Page 143
4.2 Creativity and Entrepreneurship......Page 144
4.3.1 Unconventional—Society’s Standards, Rituals and Norms......Page 148
4.3.5 Inventive and Intelligent......Page 149
4.3.8 Humble and Proud......Page 150
4.4.1 Habits......Page 151
4.4.5 Blocks Within......Page 152
4.5 Creativity at Work—a Must for Survival......Page 153
4.6 Sources of New Ideas......Page 156
4.6.1 Consumers......Page 157
4.6.2 Existing Products and Services......Page 158
4.6.4 Government Policies and Priorities......Page 160
4.6.5 Research and Development (R&D)......Page 161
4.7 Techniques for Generating Ideas......Page 162
4.7.2 Towards Solving the Problem......Page 163
4.7.4 Mind Mapping......Page 164
4.7.6 Focus Groups......Page 167
4.7.7 Brainstorming......Page 168
4.7.9 Synectics......Page 170
4.7.12 Value Analysis......Page 171
4.7.13 Problem Inventory Analysis......Page 172
4.7.16 Forced Relationships......Page 173
4.7.17 Attribute Listing......Page 174
4.7.19 Scamper......Page 176
4.7.20 Collective Notebook Method......Page 178
4.8 A Good Idea is not Enough......Page 179
Key Concepts......Page 180
Endnotes......Page 181
Conceptual Questions......Page 183
Critical Thinking Questions......Page 184
Case 4.1: Creativity in Start-UPS......Page 185
Case 4.2: Innovation: Creating and Defending New Sources of Value......Page 186
Learning Objectives......Page 192
5.1 Introduction......Page 193
5.2 Opportunity—Definition......Page 194
5.3 Opportunity Recognition......Page 196
5.5 Sources of Opportunity......Page 200
5.5.1 Broad Categories of Change......Page 201
5.5.2 Enhancement, Extensions and Specializations to Create Opportunities......Page 203
5.6 Indian Economy—Opportunities......Page 206
5.7.1 Idea Stage......Page 207
5.7.2 Concept Stage of an Idea......Page 209
5.7.3 Product Development Stage......Page 212
5.8 Steps Involved in Tapping Opportunity......Page 215
5.8.2 Evaluating Opportunity......Page 216
5.8.5 Establishing Need Through Preliminary Market Research......Page 217
5.8.6 Market Research—Data Collection and Analysis......Page 218
5.8.8 Identifying Resources Required and Sources to Acquire......Page 219
5.8.9 Managing the Venture......Page 220
Key Concepts......Page 221
Endnotes......Page 222
Conceptual Questions......Page 223
Case 5.1: Reusable Diaper......Page 224
Case 5.2: Opportunity—Earthmoving Industry......Page 230
Learning Objectives......Page 233
6.2 Formation of a Business Entity......Page 234
6.2.1 Ownership......Page 236
6.2.2 Cost of Incorporation......Page 237
6.2.5 Record Keeping and Statutory Requirements......Page 238
6.2.7 Capital Requirements......Page 239
6.2.8 Management Control......Page 240
6.3 Taxation Matters for Different Forms of Ventures......Page 241
6.5 Deemed Public Limited Company......Page 244
6.6 Requirements for Incorporation of a Private/Public Limited Company ......Page 245
6.7.2 Responsibilities of the Directors......Page 253
6.9 Legal Acts Governing Businesses in India......Page 254
6.9.2 Contract Labour (R&A) Act......Page 255
6.9.5 Payment of Bonus Act......Page 256
6.9.9 Workmen’s Compensation Act......Page 257
6.9.13 Bombay Shops and Establishments Act......Page 258
6.9.15 Employees’ State Insurance Act......Page 259
6.10.1 Voluntary Winding Up of a Registered Company......Page 260
6.11 Need for and Selection of a Lawyer......Page 261
Key Concepts......Page 264
References......Page 265
Critical Thinking Questions......Page 266
Case 6.1: Google......Page 267
Learning Objectives......Page 270
7.1 Introduction......Page 271
7.2 University Research Leading to Entrepreneurship......Page 273
7.3 IPRs and their Importance......Page 274
7.4.1 Evaluate the Competitiveness of One’s Technology......Page 276
7.6 What is a Patent?......Page 279
7.6.1 Scope and/or Ambit of the Invention......Page 281
7.7 International Patents......Page 284
7.8 Trademarks......Page 285
7.9 Copyright......Page 288
7.10 Geographical Indicators and Biological Diversity......Page 290
7.11 Industrial Design......Page 292
7.13 Plant Varieties......Page 293
Key Concepts......Page 295
Endnotes......Page 296
Conceptual Questions......Page 297
Case 7.1: Tata Motors—Nano......Page 298
Case 7.2: Informatica......Page 300
Case 7.3: Ranbaxy Laboratories Ltd—A Case Study......Page 303
Learning Objectives......Page 307
8.1 Introduction......Page 308
8.2 Entrepreneurial Opportunities and Business Plan......Page 309
8.3 What is a Business Plan?......Page 311
8.4 When and for Whom is a Business Plan Necessary?......Page 313
8.5 Business Plan Drivers......Page 314
8.5.2 Satisfy Real Customer Needs and Serve Real Customers......Page 315
8.5.4 Resource Focus, Organization and Commitment to Satisfy Customer Needs......Page 316
8.7 Business Failures......Page 319
8.8 Perspectives to be Considered in Business Plan Preparation......Page 321
8.8.1 Perspective of the Entrepreneur......Page 322
8.10 Basics of a Business Plan......Page 325
8.10.1 Introduction......Page 326
8.10.2 Executive Summary......Page 327
8.10.3 Vision/Mission Statement......Page 329
8.10.4 Business Environment and Competitive Analysis......Page 330
8.10.5 Market Research and Analysis......Page 335
8.10.6 Marketing Plan......Page 337
8.10.7 Financial Plan and Funding Needs......Page 338
8.10.8 Technology, Manufacturing and Operational Plan......Page 339
8.10.9 Intellectual Property......Page 340
8.10.10 Legal Considerations and Insurance Requirements......Page 341
8.10.11 Management Team and Organizational Structure......Page 342
8.10.13 Launching a Business and Measuring Plan Progress......Page 343
8.10.14 Growth and Exit Strategy......Page 344
8.11 What is Most Important in a Plan?......Page 345
8.12 Pitching a Business Plan......Page 346
8.12.1 Dos and Don’ts for Pitching......Page 349
8.13 Reasons for Failure of Business Plans......Page 350
Key Concepts......Page 352
Endnotes......Page 353
Conceptual Questions......Page 354
Critical Thinking Questions......Page 355
Case 8.1: Executive Summary—Yume Networks......Page 356
Case 8.2: Executive Summaries for Evaluation......Page 358
Learning Objectives......Page 367
9.1 Introduction......Page 368
9.2 Undertaking Marketing Research......Page 369
9.3 Benefits of Undertaking Marketing Research......Page 370
9.4 Factors Affecting the Decision to Undertake Marketing Research......Page 371
9.5 Scope and Steps Involved in Marketing Research......Page 372
9.6 Categories and Types of Market Research......Page 379
9.6.1 Research Methods for Data Collection......Page 380
9.7 Marketing Research on the Internet......Page 381
9.8 Industry Analysis......Page 383
9.9 Competitor Analysis......Page 385
9.10 Define Target Market......Page 387
9.10.1 Analyse Target Market......Page 388
9.10.2 Cohort Marketing......Page 389
9.10.3 Demand Estimation......Page 390
9.11.1 Define and Identify the Broad Target Market......Page 393
9.13 Building a Marketing Plan......Page 394
9.14.1 Product......Page 396
9.14.2 Price......Page 397
9.14.3 Promotion......Page 399
9.15 Critical Factors for Devising a Market Strategy......Page 400
9.16 Wilson Harrell’s ‘Marketing for the Amateur’......Page 403
Key Concepts......Page 406
Endnotes......Page 408
Conceptual Questions......Page 409
Critical Thinking Questions......Page 410
Case 9.1: Housekeeping Business—Pricing Decision......Page 411
Case 9.2: Food Industry in India......Page 413
Case 9.3: Mahindra & Mahindra......Page 417
Learning Objectives......Page 423
10.1 Introduction......Page 424
10.2 Types of Production Systems......Page 426
10.3.1 Goals for Product Design and Development......Page 427
10.4 New Product Development......Page 429
10.5 Location and Layout Decisions......Page 431
10.7 Plant and Technology Choices......Page 433
10.7.2 Exclusive Vs Non-exclusive Agreements......Page 437
10.8 Product Specifications and Customer Needs......Page 438
10.8.2 Aesthetics......Page 439
10.8.3 Quality......Page 440
10.9 Production, Planning and Control......Page 442
10.10 Commercializing Technologies......Page 444
Key Concepts......Page 446
References......Page 447
Critical Thinking Questions......Page 448
Case 10.1: Shoemoney......Page 449
Case 10.2: Ukiah Software, INC.......Page 454
Learning Objectives......Page 458
11.1 Introduction......Page 459
11.2 Venture Success—Importance of a Team......Page 460
11.3 Team Building for Venture—Vital Precautions......Page 461
11.4 Building an Effective Venture Team......Page 464
11.5 Venture Team Development......Page 470
11.6 People Management—Key to Venture Success......Page 471
11.7 Organizational Structure and Systems......Page 477
11.8 Designing an Effective Organizational Structure......Page 479
11.8.1 Informal Structure......Page 481
11.8.4 Matrix......Page 482
11.8.5 Systems and Procedures......Page 483
Key Concepts......Page 485
Endnotes......Page 486
References......Page 487
Critical Thinking Questions......Page 488
Case 11.1: Subhiksha......Page 489
Case 11.2: Mphasis......Page 492
Case 11.3: Tronix......Page 494
Learning Objectives......Page 497
12.1 Introduction......Page 498
12.2 Issues to be Sorted in Advance......Page 500
12.3 Meaning and Objectives of Financial Statement......Page 501
12.3.1 Users of Financial Statements......Page 502
12.4 Assumptions Underlying Preparation of Financial Statements......Page 503
12.5.1 Assets......Page 505
12.6 Profit and Loss Account/Income Statement......Page 511
12.7 Fund Flow and Cash Flow Statements......Page 517
12.7.1 Cash Flow Projections......Page 520
12.8 Inventory Management......Page 524
12.9 Break-Even Analysis......Page 526
12.9.1 Break-even Analysis with Non-linear Variable Cost......Page 528
12.9.3 Payback Period......Page 530
12.10 Ratio Analysis—Tool for Analysis......Page 531
12.10.1 Source of Information for Financial Analysis......Page 532
12.11 Valuation Ratios and Valuation Approaches......Page 542
12.11.2 Present Value of Future Cash Flow or Income Approach......Page 543
12.11.4 Business Valuation by Direct Capitalization......Page 544
12.11.7 Factor Approach......Page 545
Key Concepts......Page 547
Conceptual Questions......Page 549
Critical Thinking Questions......Page 550
Case 12.1: Infosys Technologies Ltd......Page 551
Case 12.2: Jindal Strips Ltd (JSL)......Page 556
Learning Objectives......Page 565
13.1 Introduction......Page 566
13.2 Why Does One Need Money?......Page 567
13.2.1 What Does One Need Money For?......Page 568
13.2.2 What Type of Money Does One Require?......Page 571
13.2.4 What Is Stored for Investors in Offering Money to an Entrepreneur?......Page 573
13.3.1 Early-stage Financing......Page 574
13.3.2 Expansion Financing......Page 575
13.4.1 Bootstrapping......Page 576
13.4.2 Sources of Bootstrapping......Page 577
13.5.1 Angel Investors......Page 581
13.5.2 Where to Look for Angel Funding......Page 583
13.5.3 Seed Support System—Technology Development Board (TDB)......Page 584
13.6 Venture Capital Funding......Page 585
13.6.2 Selecting a Venture Capitalist......Page 587
13.7 Funding from Banks......Page 590
13.7.1 Bank Loans......Page 592
13.7.2 Non-fund-based Limits......Page 595
13.8 Lease Financing......Page 597
13.9.1 Department of Scientific and Industrial Research (DSIR)......Page 600
13.9.2 Ministry of Micro Small Medium Enterprises (MoMSMEs)......Page 601
13.9.3 Department of Science and Technology......Page 602
13.9.5 Department of Bio-technology......Page 603
13.9.7 Department of Information Technology (DIT)......Page 604
13.9.10 Venture Capital Funding in India......Page 605
13.9.12 National Level Industrial Development Banks......Page 606
13.9.14 Industrial Development Bank of India......Page 607
13.9.16 Industrial Reconstruction Bank of India......Page 608
13.9.18 Small Industries Development Bank of India (SIDBI)......Page 609
13.9.19 Tourism Finance Corporation of India (TFCI)......Page 610
13.9.21 Commercial Banks Funding to Entrepreneurs......Page 611
Key Concepts......Page 614
Endnotes......Page 616
Conceptual Questions......Page 617
Critical Thinking Questions......Page 618
Case 13.1: Go Gold: How and Where to Approach for Finance?......Page 619
Case 13.2: Deals in Indian Environment......Page 620
Case 13.3: Phyzok......Page 622
Learning Objectives......Page 627
14.1 Introduction......Page 628
14.2 Steps Involved in Launching a Business......Page 629
14.5 Raise Different Resources Including Finance on Time......Page 630
14.6 Leverage of Intellectual Property......Page 632
14.7 Build a Winning Team......Page 633
14.8 Motivating and Inspiring the Team......Page 634
14.10 Prepare Pilot Testing......Page 637
14.12 Record Keeping of Expenses......Page 638
14.14 Managing Cash......Page 639
14.15 Due Diligence......Page 641
14.16 Scheduling—Implementation Plan......Page 642
Key Concepts......Page 643
Conceptual Questions......Page 644
Critical Thinking Questions......Page 645
Case 14.1: Day Care Business......Page 646
Case 14.2: Human Resource Consulting Firm......Page 647
Case 14.3: Kozmo.Com......Page 649
Learning Objectives......Page 655
15.1 Introduction......Page 656
15.2 Growth Sources......Page 657
15.3 Venture Development Stages......Page 658
15.4 How Fast can a Venture Grow?......Page 659
15.5.1 Control......Page 662
15.5.3 Tolerance to Failure......Page 663
15.6 Managerial Issues—Growth of a Venture......Page 664
15.6.1 Leadership......Page 665
15.6.2 Time Management......Page 666
15.6.3 Effective Delegation......Page 668
15.7 Why Entrepreneurs do Not Scale up......Page 670
15.8 Tips for Growth of a Venture......Page 671
15.9 Growth Strategies for Ventures......Page 673
15.9.1 Franchising......Page 676
15.9.2 Licensing......Page 678
15.9.4 Joint Ventures......Page 679
15.9.5 Growth Through Mergers and Acquisitions (M&A)......Page 681
15.9.6 Acquisitions......Page 683
15.9.7 Leveraged Buyouts......Page 684
Key Concepts......Page 686
References......Page 688
Conceptual Questions......Page 689
Case 15.1: Pilani Soft Labs Pvt. Ltd (redBus)......Page 690
Case 15.2: ESSEL Shyam Communication Ltd (ESCL)......Page 695
Learning Objectives......Page 703
16.1 Introduction......Page 704
16.2 What is an IPO?......Page 705
16.3 When to go for an IPO?......Page 706
16.4 Steps Involved in Issuing an IPO......Page 708
16.4.2 Disadvantages of Going Public......Page 711
16.5 Selection of Intermediaries to the IPO......Page 712
16.6 Rating of IPOS......Page 715
16.7 Marketing Strategies for IPO......Page 716
16.8 Misconceptions about IPOs......Page 717
16.8.2 IPOs Are Meant for Only High-tech Companies......Page 718
16.8.4 Start-ups Are in the Limelight and Attract Greater Focus of Analysts......Page 719
Key Concepts......Page 720
Conceptual Questions......Page 721
Case 16.1: Orbit Corporation Ltd (OCL)......Page 722
Case 16.2: Eclerx Services Ltd......Page 730
Learning Objectives......Page 738
17.1 Introduction......Page 739
17.2.1 Growth Company......Page 740
17.2.2 Weak and Sick Companies......Page 741
17.2.3 Definition of Sick Small Enterprises......Page 742
17.2.4 Viability of Sick Small Enterprises3......Page 743
17.2.5 Bankruptcy Defined......Page 744
17.2.6 Liquidation......Page 745
17.2.7 Potential Opportunity in Reviving Sick Units......Page 747
17.2.9 Revival of Weak/Sick Companies......Page 749
17.2.10 Causes of Sickness......Page 751
17.2.11 Rehabilitation Measures......Page 753
17.2.12 Rehabilitation Strategies—Preventive Measures When Symptoms Are Visible......Page 760
17.3.1 Entrepreneurial Turnaround......Page 762
17.3.2 Efficiency Turnaround Strategy......Page 763
17.3.4 Selling Surplus Assets Including Retrenchment of Surplus Labour......Page 764
17.4 Liquidation......Page 765
17.4.1 Different Types of Liquidation......Page 766
17.4.4 Role of Official Liquidator......Page 767
17.5 Exit Strategy for Entrepreneurs......Page 768
17.5.1 Family Succession......Page 769
17.5.2 Selling Business......Page 771
17.5.3 Impediments in Selling Business......Page 772
17.5.4 Buyouts......Page 774
17.5.5 Floating Business—Public Issue......Page 777
17.5.6 Closing Business......Page 778
Key Concepts......Page 780
Conceptual Questions......Page 781
Critical Thinking Questions......Page 782
Case 17.1: Prakash Industries Limited......Page 783
Case 17.2: MakeMyTrip......Page 791

Citation preview

Entrepreneurship Creating

an

Leading entrepreneuriaL OrganizatiOn and

Arya Kumar Acting Dean Student Welfare Division and Chief Entrepreneurship Development & IPR Unit Birla Institute of Technology & Science, Pilani

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ns

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd Licensees of Pearson Education in South Asia No part of this eBook may be used or reproduced in any manner whatsoever without the publisher’s prior written consent. This eBook may or may not include all assets that were part of the print version. The publisher reserves the right to remove any material present in this eBook at any time. ISBN 9788131765784 eISBN 9788131797679 Head Office: A-8(A), Sector 62, Knowledge Boulevard, 7th Floor, NOIDA 201 309, India Registered Office: 11 Local Shopping Centre, Panchsheel Park, New Delhi 110 017, India

Dedicated to my elder brother, the late Shri Anand Kumar (19 April 1952 to 6 March 2012), who was a constant source of inspiration and guidance to me

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Contents Preface xv Acknowledgements xvii About the Author xviii

1.  Fundamentals of Entrepreneurship 

Learning Objectives 1 1.1  Introduction  2 1.2  Key to Development  3 1.3  Evolving Concept of Entrepreneurship  6 1.4  What is Entrepreneurship?  9 1.5  Resource Organization and Value Creation  12 1.6  Entrepreneurial Traits  18 1.7  Difference Between Inventors and Entrepreneurs  29 1.8  Inspiration from Role Models and Social Support  30 1.9  Business Model  34 1.10  Entrepreneurship—Mindset  35 1.11  Big Companies Vs Start-ups  38 1.12  Misconceptions and Myths About Entrepreneurship  38 Key Concepts 42 Endnotes 42 References 43 Conceptual Questions 45 Critical Thinking Questions 45 Case 1.1: How I Made My First Million 46 Case 1.2: From Candle Seller to CEO 48

2.   E ntrepreneurship Development  in Emerging Markets 

Learning Objectives 50 2.1  Types of Start-ups  51 2.2  Intrapreneurship  53 2.3  Why Does One Become an Entrepreneur?  55 2.4  Entrepreneurship as a Career Option  57 2.5  Why Youth Is Suited for Entrepreneurship  63 2.6  Female Entrepreneurship  66

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2.7  Small and Medium Business Enterprises  68 2.8  International Entrepreneurship  71 2.9  Entrepreneurship Development—Role of Educational Institutions  72 2.10  Mistakes Start-ups Make  76 2.11  Managing Start-ups During Downturn  80 2.12   Entrepreneurship—Emerging Trends in   the Global Knowledge Economy  81 Key Concepts 85 Endnotes 86 References 86 Conceptual Questions 87 Critical Thinking Questions 88 Case 2.1: Pets.com 88

3.  Entrepreneurial Leadership 

Learning Objectives 91 3.1  Leader Vs Manager  94 3.2  Why Do Ventures Require Dynamic Leaders?  99 3.3  Principle-centred Leaders  102 3.4  Entrepreneurial Leadership  106 3.5  Components of Entrepreneurial Leadership  108 Key Concepts 113 Endnotes 113 References 114 Conceptual Questions 114 Critical Thinking Questions 115 Case 3.1: Link_A_Media Devices 115 Case 3.2: XYZ Transport 116 Case 3.3: Entrepreneurial Profiles 117

4.  Creativity and Business Ideas 

Learning Objectives 121 4.1 Introduction  122 4.2 Creativity and Entrepreneurship  125 4.3 Characteristics of Creative People  129 4.4 Blocks to Creativity  132 4.5 Creativity at Work—A Must for Survival  134 4.6 Sources of New Ideas  137 4.7 Techniques for Generating Ideas  143 4.8 A Good Idea Is Not Enough  160 Key Concepts 161 Endnotes 162

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Contents    

References 164 Conceptual Questions 164 Critical Thinking Questions 165 Case 4.1: Creativity in Start-ups 166 Case 4.2: Innovation: Creating and Defending New Sources of Value

vii

167

5.  Idea to Opportunity 

173

6.  Legal Aspects of Business 

214

Learning Objectives 173 5.1 Introduction  174 5.2 Opportunity—Definition  175 5.3 Opportunity Recognition  177 5.4 Opportunity Process  181 5.5 Sources of Opportunity  181 5.6 Indian Economy—Opportunities  187 5.7 Steps Involved in Assessing Business Potential of an Idea  188 5.8 Steps Involved in Tapping Opportunity  196 Key Concepts 202 Endnotes 203 References 204 Conceptual Questions 204 Critical Thinking Questions 205 Case 5.1: Reusable Diaper 205 Case 5.2: Opportunity—Earthmoving Industry 211

Learning Objectives 214 6.1 Introduction  215 6.2 Formation of a Business Entity  215 6.3 Taxation Matters for Different Forms of Ventures  222 6.4 Meaning of Holding Company  225 6.5 Deemed Public Limited Company  225 6.6 Requirements for Incorporation of a Private/Public  Limited Company  226 6.7 Board of Directors—Roles and Responsibilities  234 6.8 Procedure for Setting Up a Business in India  235 6.9 Legal Acts Governing Businesses in India  235 6.10 Winding Up a Registered Company  241 6.11 Need for and Selection of a Lawyer  242 Key Concepts 245 Endnotes 246 References 246 Conceptual Questions 247

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Critical Thinking Questions Case 6.1: Google 248

247

7.   E ntrepreneurship and Intellectual  Property Rights 

251

8.  Business Plan 

288

Learning Objectives 251 7.1 Introduction  252 7.2 University Research Leading to Entrepreneurship  254 7.3 IPRs and Their Importance  255 7.4 Importance of IP for Start-ups  257 7.5 What are IP Rights?  260 7.6 What Is a Patent?  260 7.7 International Patents  265 7.8 Trademarks  266 7.9 Copyright  269 7.10 Geographical Indicators and Biological Diversity  271 7.11 Industrial Design  273 7.12 Layout Design of Integrated Circuits  274 7.13 Plant Varieties  274 Key Concepts 276 Endnotes 277 References 278 Conceptual Questions 278 Critical Thinking Questions 279 Case 7.1: Tata Motors—Nano 279 Case 7.2: Informatica 281 Case 7.3: Ranbaxy Laboratories Ltd—A Case Study 284

Learning Objectives 288 8.1 Introduction  289 8.2  Entrepreneurial Opportunities and Business Plan  290 8.3 What Is a Business Plan?  292 8.4 When and for Whom Is a Business Plan Necessary?  294 8.5 Business Plan Drivers  295 8.6 Things to Remember While Preparing a Business Plan  300 8.7 Business Failures  300 8.8 Perspectives to Be Considered in Business  Plan Preparation  302 8.9 Who Should Prepare a Plan?  306 8.10 Basics of a Business Plan  306 8.11 What Is Most Important in a Plan?  326

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8.12 Pitching a Business Plan  327 8.13 Reasons for Failure of Business Plans  331 Key Concepts 333 Endnotes 334 References 335 Conceptual Questions 335 Critical Thinking Questions 336 Case 8.1: Executive Summary—YuMe Networks 337 Case 8.2: Executive Summaries for Evaluation 339

9.  Marketing Plan 

Learning Objectives 348 9.1 Introduction  349 9.2 Undertaking Marketing Research  350 9.3 Benefits of Undertaking Marketing Research  351 9.4 Factors Affecting the Decision to Undertake  Marketing Research  352 9.5 Scope and Steps Involved in Marketing Research  353 9.6 Categories and Types of Market Research  360 9.7 Marketing Research on the Internet  362 9.8 Industry Analysis  364 9.9 Competitor Analysis  366 9.10 Define Target Market  368 9.11 Market Segmentation  374 9.12 Market Positioning  375 9.13 Building a Marketing Plan  375 9.14 Marketing Mix  377 9.15 Critical Factors for Devising a Market Strategy  381 9.16 Wilson Harrell’s ‘Marketing for the Amateur’  384 Key Concepts 387 Endnotes 389 References 390 Conceptual Questions 390 Critical Thinking Questions 391 Case 9.1: Housekeeping Business—Pricing Decision 392 Case 9.2: Food Industry in India 394 Case 9.3: Mahindra & Mahindra 398

10.  Operation and Production Plan  Learning Objectives 404 10.1 Introduction  405 10.2 Types of Production Systems  407

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10.3 Product Design and Analysis  408 10.4 New Product Development  410 10.5 Location and Layout Decisions  412 10.6 Project Layout  414 10.7 Plant and Technology Choices  414 10.8 Product Specifications and Customer Needs  419 10.9 Production, Planning and Control  423 10.10 Commercializing Technologies  425 Key Concepts 427 Endnotes 428 References 428 Conceptual Questions 429 Critical Thinking Questions 429 Case 10.1: Shoemoney 430 Case 10.2: Ukiah Software, Inc. 435

11.  Venture Team and Organizational Plan 

439

12.  Insight from Financial Statements 

478

Learning Objectives 439 11.1 Introduction  440 11.2 Venture Success—Importance of a Team  441 11.3 Team Building for Venture—Vital Precautions  442 11.4 Building an Effective Venture Team  445 11.5 Venture Team Development  451 11.6 People Management—Key to Venture Success  452 11.7 Organizational Structure and Systems  458 11.8 Designing an Effective Organizational Structure  460 Key Concepts 466 Endnotes 467 References 468 Conceptual Questions 469 Critical Thinking Questions 469 Case 11.1: Subhiksha 470 Case 11.2: Mphasis 473 Case 11.3: Tronix 475

Learning Objectives 478 12.1 Introduction  479 12.2 Issues to Be Sorted in Advance  481 12.3 Meaning and Objectives of Financial Statement  482 12.4 Assumptions Underlying Preparation  of Financial Statements  484

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12.5 Balance Sheet—Concepts and Understanding  486 12.6 Profit and Loss Account/Income Statement  492 12.7 Fund Flow and Cash Flow Statements  498 12.8 Inventory Management  505 12.9 Break-even Analysis  507 12.10 Ratio Analysis—Tool for Analysis  512 12.11 Valuation Ratios and Valuation Approaches  523 Key Concepts 528 Endnotes 530 References 530 Conceptual Questions 530 Critical Thinking Questions 531 Case 12.1: Infosys Technologies Ltd 532 Case 12.2: Jindal Strips Ltd (JSL) 537

13.  Financing Venture 

Learning Objectives 546 13.1  Introduction  547 13.2  Why Does One Need Money?  548 13.3  Different Stages of Financing  555 13.4  Sources of Finance  557 13.5  Seed Funding  562 13.6  Venture Capital Funding  566 13.7  Funding From Banks  571 13.8  Lease Financing  578 13.9  Funding Opportunities for Start-ups in India  581 Key Concepts 595 Endnotes 597 References 598 Conceptual Questions 598 Critical Thinking Questions 599 Case 13.1: Go Gold: How and Where to Approach for Finance? Case 13.2: Deals in Indian Environment 601 Case 13.3: Phyzok 603

14.  Launching a Venture 

546

600

Learning Objectives 608 14.1  Introduction  609 14.2  Steps Involved in Launching a Business  610 14.3  Incorporation and Issuance of Stocks  611 14.4  Execute a Stockholders’ Agreement  611 14.5  Raise Different Resources Including Finance on Time  611

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14.6  Leverage of Intellectual Property  613 14.7  Build a Winning Team  614 14.8  Motivating and Inspiring the Team  615 14.9  Understand Clearly the Technology Trends  618 14.10  Prepare Pilot Testing  618 14.11   Manage Sales by a Clear Understanding—Market,   Marketing Strategies and Positioning  619 14.12  Record Keeping of Expenses  619 14.13  To-do Checklist—Daily, Weekly and Monthly  620 14.14  Managing Cash  620 14.15  Due Diligence  622 14.16  Scheduling—Implementation Plan  623 Key Concepts 624 Endnotes 625 References 625 Conceptual Questions 625 Critical Thinking Questions 626 Case 14.1: Day Care Business 627 Case 14.2: Human Resource Consulting Firm 628 Case 14.3: Kozmo.com 630

15.  Managing Growth 

Learning Objectives 636 15.1  Introduction  637 15.2  Growth Sources  638 15.3  Venture Development Stages  639 15.4  How Fast Can a Venture Grow?  640 15.5  Management—Key Factors for Growth  643 15.6  Managerial Issues—Growth of a Venture  645 15.7  Why Entrepreneurs Do Not Scale Up  651 15.8  Tips for Growth of a Venture  652 15.9  Growth Strategies for Ventures  654 Key Concepts 667 Endnotes 669 References 669 Conceptual Questions 670 Critical Thinking Questions 671 Case 15.1: Pilani Soft Labs Pvt. Ltd (redBus) 671 Case 15.2: Essel Shyam Communication Ltd (ESCL) 676

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16.  Start-up to Going Public 

684

17.  Revival, Exit and End to a Venture 

719

Learning Objectives 684 16.1  Introduction  685 16.2  What Is an IPO?  686 16.3  When to Go for an IPO?  687 16.4  Steps Involved in Issuing an IPO  689 16.5  Selection of Intermediaries to the IPO  693 16.6  Rating of IPOs  696 16.7  Marketing Strategies for IPO  697 16.8  Misconceptions About IPOs  698 Key Concepts 701 Endnotes 702 Conceptual Questions 702 Critical Thinking Questions 703 Case 16.1: Orbit Corporation Ltd (OCL) 703 Case 16.2: Eclerx Services Ltd 711

Learning Objectives 719 17.1  Introduction  720 17.2  Broad Categories into Which Ventures Can Be Classified  721 17.3  Key Strategies for Turning Around a Company  743 17.4  Liquidation  746 17.5  Exit Strategy for Entrepreneurs  749 Key Concepts 761 Endnotes 762 References 762 Conceptual Questions 762 Critical Thinking Questions 763 Case 17.1: Prakash Industries Limited 764 Case 17.2: MakeMyTrip 772

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Preface This book is about creating, managing and leading an entrepreneurial organization. It would help in inculcating an entrepreneurial mindset, developing entrepreneurial skills and equipping the reader with the basic knowledge and skills for launching and managing the growth of a venture. The focus here is on understanding:    

entrepreneurship, its relevance and importance in the 21st century, particularly in emerging economies how to become an entrepreneur the role that entrepreneurial leadership plays in the nurturing and growth of a start-up the art of preparing a business plan; its launching, managing, growth and, if need be, its exit strategy

Attempt has been made to include all the aspects of creating an entrepreneurial venture—right from conceptualizing the idea to the starting and then the growth of the business. This has been interwoven with adequate background information in the areas of finance, project preparation, technology, business plans, legal matters, market surveys, marketing and brand equity. This volume would help readers to understand various concepts of entrepreneurship such as generation of ideas, recognition and evaluation of opportunities, getting started and scaling up. Emphasis has been laid on drawing inspiration from successful entrepreneurs while building and leading an entrepreneurial organization. The prime focus here is on developing an opportunity assessment framework, developing a business plan and inculcating entrepreneurial leadership skills that are essential for the success of a venture. Students interested in taking up entrepreneurship as a career option and young working professionals interested in undertaking entrepreneurial ventures or contributing as intrapreneurs in their professional roles would be benefited much. The purpose of this book is to enable readers to start dreaming big, visualizing and working towards the realization of their dreams. It would encourage readers to think clearly and creatively. Profiles of leading entrepreneurs across the globe and also at national and local levels are shared, so that readers can relate themselves with these personalities and identify certain role models to pursue their journey towards entrepreneurship. The critical role that the leader and the team members of a venture play in its smooth take-off as also in responding effectively to challenges during an entrepreneurial journey to build long-lasting ventures has been highlighted. The importance of creativity and innovation, the core of entrepreneurship, by stretching imagination and thinking about problems and pain points in different areas at global, national or local levels have been duly emphasized. The key characteristic of an entrepreneur—they can see through things where others do not see anything—has been emphasized. The process of evaluation and analysis of ideas to assess their worth as an opportunity has been adequately covered with the help of concrete examples. The art and science of converting a business idea being identified as an opportunity into a business plan would enable readers to appreciate the need, importance and purpose of preparing an effective business plan, keeping in mind fundamental questions such as—Who should prepare it? How should it be prepared and written down? Will it really help in making money? Will the finished product reflect well on them and their investors? Will they really be adding value for all the stakeholders? Concepts relating to finance and financial statements (profit and loss account, balance sheet and fund flow/cash flow statements) have been elaborately explained to enable readers to learn about financial

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modelling, basic elements of finance, budgeting, cash flow analysis and its implications to business growth. It will enable them to appreciate the need for taxation planning and to learn the process of estimating start-up costs—fixed and working capital. Issues of raising finance, covering aspects—such as, Where and when to approach for finance? How to approach? What does it take to raise money? What do the financiers look for while making financial decisions?—have been covered to appreciate which source of funding, at what stage of growth of business would be most desirable and appropriate. The last four chapters (14–17) cover topics on launching a venture, managing growth, going public and strategies to revive or timely decide to exit by calling it an end. The need for inculcating an organizational culture conducive to growth and importance of open communication, building trusting relationships, empowerment of people, delegation of authority, providing feedback and training to equip employees to manage changing demands have been duly emphasized in the text. It is pertinent to mention that conventional learning methods actually develop non-entrepreneurial habits. In general, conventional methods train people to be reactive rather than proactive in taking initiative, focusing on past learning rather than embracing new ideas, accepting status quo rather than focusing on constant and continuing improvement. One fundamental question that is usually posed is whether entrepreneurship can be taught. Usually there are different views on it. However, the fact remains: if mathematics can be taught, if music can be taught, if art can be taught, then entrepreneurship can also be taught. Teaching entrepreneurship is just like teaching any other skill that requires a different pedagogy. As such, each student brings their own natural instincts, upbringing and talents, and can improve with relevant information and experience. Like any other discipline, entrepreneurship has its own vocabulary, tools, techniques, concepts and body of knowledge. The teaching/learning of entrepreneurship requires greater focus on experiential learning. Engagements such as interactive sessions, cases, games, exercises, role plays, films, projects and assignments, and group activities play a vital role in teaching entrepreneurship. It has been well proved that students who have gone through formal education in the area of entrepreneurship have done better in managing their start-ups and gone to greater heights. The book, therefore, extensively emphasizes on experiential learning and a hands-on approach—‘learning by doing’. It has cited a number of examples and presented cases and exercises from Indian as well as global contexts to make learning to be an entrepreneur an enjoyable experience. Arya Kumar

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Acknowledgements I sincerely offer my prayers to the Almighty for giving me inspiration to work on the important theme of entrepreneurship that would play a pivotal role in the economic development of emerging economies during the 21st century. The main thrust of this book has been on relating to the requirements of emerging economies in general and the Indian economy in particular; as also on taking an overview of leading economies and entrepreneurs across the globe. This volume could not have come out without the efforts of many individuals who have contributed towards the improvement of the text directly or indirectly. I express my sincere thanks and gratitude to all of them. I would especially like to extend my pranams (deep regards) to my parents for giving me the courage to undertake this task and for their love and affection. My indebtedness and gratitude to respected Shri Shambhu Dassji, my father, whose labour of love by way of going through the entire manuscript led to the incorporation of valuable suggestions and the use of a clear, lucid, unambiguous language. His suggestions have gone a long way in improving the quality of the manuscript. The idea of writing a book on entrepreneurship germinated after developing and teaching the newly developed course ‘Creating and Leading an Entrepreneurial Organization’ at the Birla Institute of Technology & Science (BITS), Pilani, for over seven years now. Interactions with students in the class, with entrepreneurs invited for the ‘Meet an Entrepreneur’ lecture series and with professionals on various occasions led to the identification of market requirements that need to be met by the development of different kinds of contents and pedagogy to make teaching and learning entrepreneurship an effective and enjoyable experience. My association with the National Entrepreneurship Network (NEN) since its inception in 2003 has given me a distinct advantage and inspiration to come out with this book. The pedagogy learnt after going through the Entrepreneurship Educators’ Course—convened by Stanford Technology Ventures Program, Stanford University; Wadhwani Foundation and NEN; and the Indian Institute of Management, Bangalore had enabled me to focus on a content that could make learning the subject an enjoyable experience. My special thanks to Laura A. Parkin, Co-founder and Chief Executive Officer, NEN, for interacting with me on the project and providing a distinct insight to come out with an unique manuscript. Thanks to the wonderful NEN team, in particular, Sunita Singh, Senior Director; and Arthi Gerald, Associate Director, Product Development, for their support in taking this project through. I am deeply grateful to BITS, Pilani, an outstanding institution of higher learning, where the culture of excellence and intellectual freedom breeds a spirit of enquiry that has provided me with a platform to work on this theme. My colleagues at the institute as also some entrepreneurs across the country have been a source of thought-provoking discussions on the theme that guided me at the different stages of writing the book. I also owe my gratitude to anonymous peer reviewers whose valuable feedback enabled me to improve the text and also the whole team at Pearson Education that facilitated the project to get crystalized into reality. My special gratitude to my wife Kusum and son Rakshit for their encouragement and support. I also extend my gratitude and special thanks to my brother, the late Anand Kumar, and sister Surekha Bhanot, and their families for their support. Arya Kumar

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About the Author Arya Kumar is Dean, Student Welfare Division and Chief Entrepreneurship Development & IPR Unit, Birla Institute of Technology & Science (BITS), Pilani. He also coordinates the activities of Technology Business Incubator and Centre for Entrepreneurial Leadership at BITS, Pilani. He topped the MA (Hons) Economics examination in 1977 and completed his Ph.D. in the area of Financial Management in Higher Education in India in 1982, both from BITS, Pilani. A diversified experience of over 33 years, serving educational institutions, research organizations, banks and other financial institutions, goes to his credit. Professor Kumar is on the Faculty Advisory Board of the National Entrepreneurship Network (NEN), India, which has done pioneering work in promoting entrepreneurship in educational institutions by creating a favourable eco-system over a span of more than seven years. He has contributed to the ‘Expert group consultation on developing a manual on Youth Enterprise Development’ organized by the Commonwealth Youth Programme Asia Centre, along with the Ministry of Youth Affairs and Sports, Government of India. Kumar has successfully completed the Entrepreneurship Educators Course (EEC), jointly organized by Stanford Technology Ventures Program (STVP), Stanford University, Indian Institute of Management (IIM) Bangalore and National Entrepreneurship Network (NEN); Goldman Sach 10,000 Women Programme: Tools for Growing your Business, organized by NEN in collaboration with London Business School; and Accelerated Commercialization of Technology Innovation, organized by Venture Centre, National Chemical Laboratory (NCL), Innovation Park, Pune, in association with Accelerator India, Cambridge University, British High Commission and National Science & Technology Entrepreneurship Development Board (NSTEDB), Government of India. His basic interests lie in the areas of entrepreneurship, strategic management, values in management and financial management. He has co-authored three books on general management, ethics in management and grassroots entrepreneurship, respectively. He has also contributed several research articles in national journals and economic dailies in the areas of entrepreneurship, management and economics. He has been serving as Guest Faculty with a number of leading management institutions and colleges of various banks.

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fundamentals of Entrepreneurship

1

 LEARNING OBJECTIVES   To understand the need for entrepreneurship.  To understand the relationship between entrepreneurship and wealth creation.  To learn about entrepreneurship as a key to development.  To understand different types of innovations and their implications.  To understand how the concept of entrepreneurship has evolved over the years.  To define entrepreneurship and study entrepreneurial traits.

 To understand the difference between inventors and entrepreneurs.  To understand the importance of inspiration from role models and social support in promotion of entrepreneurship.  To understand the concept of business models.  To understand the importance of mindset in entrepreneurship.  To be aware of the misconceptions and myths about entrepreneurship.

Steve Jobs, CEO, Apple Computer Inc. A lot of companies have chosen to downsize, and maybe that was the right thing for them. We chose a different path. Our belief was that if we kept putting great products in front of customers, they would continue to open their wallets. —Steve Jobs

Steve Jobs was born on 24 February 1955 in San Francisco, California. He was adopted by Paul and Clara Jobs, who named him Steven. He did his schooling at Cupertino, California, and during his high school days, he started visiting the company Hewlett Packard (HP) in Palo Alto to take part in after-school lectures. Jobs was hired by them to serve during summer with Steve Wozniak. He enrolled at Reed College Portland after his graduation in 1972, but dropped out soon thereafter. He returned home and started attending meetings at Homebrew Computer Club. Eventually, he entered into a business partnership with Wozniak, which resulted in producing ‘Blue Boxes’ used by the AT&T long-distance telephone system, which allowed free long-distance phone calls to be made. Steve grew up in the apricot orchards, which is now known as Silicon Valley, and still lives there with his family. Jobs and Wozniak founded the computer company Apple Computer Inc. and ended up creating a batch of completely assembled computers and launched them into the personal computer business in April 1976. Within four years thereafter, Apple I, II and III were released, which became a big success. In May 1980, Apple successfully became a publicly traded company on the stock exchange. (Continued)

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2

Entrepreneurship

Apple is a leading company that has revolutionized the information technology world by introducing personal computers, iPhone and App Store, its family of iPod media players and iTunes media store, and its Mac computers and iLife and iWork application suites. Apple has brought out iPad in the market, which is a breakthrough in Internet and digital media device, and the iBookstore, alongside iTunes and App Store. Jobs was a charismatic, unconventional and dynamic manager for Apple. However, he was also erratic and short tempered as would be evident from a power struggle in 1985 that resulted in the board of directors asking Jobs to resign. He resigned and sold all but one of his shares in Apple but remained chairman of Apple for some time. After leaving Apple, he founded another company called Next Computers, which released an advanced feature-rich computer called the Next Cube, but owing to its high cost, it failed to catch the market. He was also the co-founder and the CEO of Pixar Animation Studios, which produced some of the most successful and adored animated films of the present era, such as Toy Story, A Bug’s Life,  Monsters, Inc., Finding Nemo, The Incredibles, Cars and Ratatouille. He became a member of the board of The Walt Disney Company in 2006, after the acquisition of Pixar by Disney.

1.1  INTRODUCTION Emerging economies, in particular, and global economy, in general, are poised for accelerated growth and provide great opportunities in the globalized and liberalized era. There are a number of fast-growing economies that are poised to play a leading role in the global markets. The most critical input in taking these economies to still greater heights in the global markets would be the entrepreneurial mindset of their human resources. The role of an entrepreneur would be to innovate and create economic opportunities for others, and the role of a government and its partners would be to create a dynamic enterprise environment and a well-functioning market so that the economy becomes inherently entrepreneurial and innovative. This would also require making industries patent literate to be able to derive full benefit of their creativity by duly protecting their knowledge innovations. Thus, the future wars would be fought in knowledge markets. The fact remains that wealth creation, economic development and entrepreneurship are interdependent concepts and form an integrated idea. The core of conversion of economic resources, namely, land labour and capital, lies in entrepreneurship. Thus, entrepreneurship acts as a fulcrum around which economic development through value addition to resources takes place (Fig. 1.1). It is the ingenuity of an entrepreneur that results in the effective combination of other resources. The challenges to entrepreneurs are ever increasing because of the rapidly changing world, in which what created value in the mind of customers yesterday will not do so today, and certainly will be irrelevant tomorrow. It is even evident from the fact that the lifespan of Fortune 500 companies is continuously shortening. It is becoming more and more tough for these companies to retain their position or to improve it on the ladder of Fortune 500 companies. Business entities have to continuously remain alert to changing realities; else, failure would be inevitable. What matters the most in fast-changing business environments is the ability of business entities to keep coming out with development strategies that enable them to adapt and be responsive to ever-changing economic, technological, legal, cultural and social environments. The process of development in countries, regions and cities/towns has been traced back to the core link between wealth creation and economic development by various studies. Adam Smith, in Wealth of Nations (1776), traced the role of various factors, including entrepreneurship. According to

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Economic Development

Entrepreneurship Resources

Wealth Creation

Ever-changing Concept of Value Creation in the Mind of Customers Past Present Future

Figure 1.1 Entrepreneurship and Wealth Creation George Simmel’s (1882) writings, the societal structures that produced people with a tendency to start enterprises shifted fast from hunting and gathering to market economies, highlighting the importance of development of entrepreneurship. His findings led to Simmel’s famous statement: ‘The stranger as trader and trader as stranger’ (Wolff 1950). For him, entrepreneurs were strangers; having been denied opportunities in established societies led them to become catalytic agents for entrepreneurial development in Western societies. The key factors of production considered by economists in the 19th century were land (including natural resources), labour, capital goods and enterprise. Subsequently, entrepreneurship, that is, human capital, was added as a vital input in the process of the creation of wealth. Various studies have attached different degrees of importance to different factors of production, including entrepreneurship. According to the Austrian view, which is shared by neoclassical as well as free-market economists, the crucial factor of production that matters the most is entrepreneurship, which contributes to different degrees and quanta of value creation from the customer’s perspective, while combining other factors of production. Coordinating function and human ingenuity in production and distribution of goods and services, called entrepreneurship, was recognized as a vital input even by J. B. Clark. Later on, many economists have focused on human capital and social capital, both by way of intellectual capital and skills, as vital inputs to production and distribution systems. The relevance of intellectual capital as a factor of production has been increasing at an exponential rate since the information age (1971–91) and over the knowledge age (1991–2002) and the age of intangible economy (from 2002 onwards). Social capital is defined as ‘the stock of trust, mutual understanding, shared values, and socially held knowledge that facilitates the social coordination of economic activity’ (Goodwin et al. 2005). In the present knowledge economy, human capital is playing the most crucial role in growth and development. Thus, over the years, the importance of the primary factors of production has become less important in the creation of wealth and prosperity. However, the Marxian school of thought considers labour, which includes entrepreneurship, as the primary input in the process of conversion of other resources into goods and services.

1.2  KEY TO DEVELOPMENT In the 21st century dominated by knowledge economy, wherein intangibles would play a critical role, what would matter the most is the spirit and mindset of entrepreneurial leadership for development.

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4 

  Entrepreneurship

Opportunity Identification

Resource Organization

Value Creation

Sustainable Development

Figure 1.2 Key to Development ‘We reap what we sow’ is a well-known phrase implying that we cannot reap what we do not sow. Accordingly, in fast-changing business environments, developmental strategies and planning on the part of policy planners and executives at corporate level or business entity level would require a combination of vision, opportunity identification, value creation, resource organization—assets, tangible and intangible, and investments—and, above all, focus on sustainable development (Fig. 1.2). According to Joseph Alois Schumpeter (8 February 1883 to 8 January 1950), it is the entrepreneur who disturbs the equilibrium and is the prime reason behind economic development that results in business cycles. He made pioneering contributions in the area of entrepreneurship. He emphasized that the entrepreneurial spirit directly contributes to innovation and technological change in a nation, which leads to its prosperity. He developed the word Unternehmergeist—German for entrepreneur-spirit— one who makes things work and happen in the economy of a country. Entrepreneurship contributes not only to the growth in gross national product and per capita income but also to the development process through bringing in structural change in society. This change, by way of structural transformation, helps to achieve equitable distribution of income and greater opportunities to people belonging to the bottom of the pyramid and, in turn, contributes to their prosperity. It encourages innovations to be translated into reality and thus attracts new investments in new ventures. The new investments give momentum to economy through supply of capital formation which results in creation of additional capacities in existing and new products and service lines, which create demand side growth by way of additional spending on the part of consumers. This cycle keeps expanding, resulting in growth and development of the economy. The crux of the development process lies in channelizing scientific temper into innovations leading to technological developments with a key focus on societal needs. An entrepreneur translates innovations into reality, resulting in worthwhile value propositions. Thus, entrepreneurial development in an economy is the key to economic development (Fig. 1.3). As such, it is the most critical and crucial input in the process of economic development of a local area, region, country and global economy. It accelerates the process of growth and development by channelizing the factors of production in areas wherein they contribute the maximum possible value addition, resulting in a higher rate of economic growth, dispersal of economic activities and development of backward regions. In case entrepreneurship does not evolve from within at a local, regional or country level, entrepreneurs from outside enter to provide goods and services needed and demanded by the people.

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Development

Growth

Expansion

Entrepreneurship Leading to Economic Development

Scientific Temper

Innovation

Technological Development

Figure 1.3 Entrepreneurship and Economic Development However, under such a situation, entrepreneurs are most likely to take out profits to their place of origin and may not reinvest it there itself. This would adversely affect the overall development of a local area. M. M. Akhori refers to this practice as ‘the leech effect’. Therefore, it becomes more important to evolve entrepreneurship from within at the local level if we aim at an overall development of a local area. The innovations could possess different degrees of uniqueness which result in different degrees of success in the market and also the ability to sustain it (Fig. 1.4). According to this philosophy, there could be ordinary innovation, resulting in product development through improved technology, say, mobile applications such as games, video or messaging and so on; technological innovations, resulting in development of new products through substantial change in technology such as pager to mobile to integrating mobile set as a mini-computing machine; breakthrough innovations, resulting in the development of new products with some technological development. Other ways of looking at managing innovations from the business perspective in order to contribute to the growth and development of an economy and for maintaining and developing a competitive edge are continuous innovations that result in incremental change leading to capture of enlarged market potential or improved efficiency of operations. These types of innovations provide additional choices to the consumers without affecting their behaviour in any way. For example, telephone instruments of many colours, when they came for the first time, resulted in a wide choice and fulfilment of individual likings. The second type of innovations can be categorized into dynamically continuous innovations, which result from reconfiguration of existing technology to create process improvement. Such a change brings in improved product concept. However, it also requires a change in the behaviour of the consumer and thus results in initial resistance to penetration into the market. For example, when for the first time telephones came with the facility of

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Breakthrough

Discontinuous

Technological

Dynamically Continuous

Ordinary

Continuous

Innovations

Innovations

Figure 1.4 Types of Innovations pressing numbers rather than rotating a disc of numbers for dialling, it facilitated the smooth operation of an instrument and also resulted in change in consumer habit from rotating to pressing. The third type of innovations are called discontinuous innovations, which give rise to a new product concept involving new operating principles or revolutionary process changes. For example, the introduction of cordless telephones and, later on, mobile sets brought about a total transformation in the industry. These types of innovations in the industry provide long-term sustainable competitive advantage. Another way of looking at different types of innovations is product innovation, which results in the creation of new products or improvements in the existing products, for example, new models of mobile phones and new models of cars by companies such as Maruti and Honda. Process innovation results from the improvement in some part of the process or the introduction of a new process to provide additional benefits to the consumer by way of cost, service or utility, for example, existing drug manufacturing through a different process, introduction of the zero-budgeting concept to prepare and manage budget and just-in-time concept to manage inventory. Positioning innovation involves creating a market for the product or service through repositioning, for example, Reebok and Nike shoes, sports utility vehicles (SUV) and natural-flavour ice creams. Paradigm innovation involves major shift in thinking that causes change, for example, shift from mainframe computers to personal computers. The potential of innovation and the miracle it can create in the process of development are aptly highlighted in the following quote in the Business Week editorial, 75th Anniversary, stating, ‘An innovation economy demands that society be open, dynamic, educated, international, and risk-taking. Given a chance, innovation can improve all of our lives.’

1.3  EVOLVING CONCEPT OF ENTREPRENEURSHIP The term ‘entrepreneur’ has its origins in the French word entreprendre, which basically means ‘taker’ or ‘go between’. It also means a person who takes risks to build a new enterprise. Another simple meaning of this term is to go deep inside and ponder, take all sorts of risks and come out with clarity about an opportunity and translate it into reality. The concept of entrepreneurship has evolved with a degree of complexity that has emerged over a period of time (Fig. 1.5). During the earliest period, it was more by way of a merchant and a capitalist, wherein the merchant used to be an adventurer who played a key role in trading, taking physical and emotional risks. The returns without taking much risk used to be disproportionately shared by the capitalist. The term ‘entrepreneur’ underwent a change in the Middle Ages, when it was described as both an organizer of a circus or magical show and a manager of a large construction project. The entrepreneur did not take any risk but mainly managed the project using the given resources in the best possible manner.

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Earliest Period Middle Ages 17th Century 18th Century 19th and 20th Centuries 21st Century

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Concept of a Merchant and Capitalist

Concept of Cleric–One Who Oversees and Manages Projects

Projects Concept of Risk

Concept of Capital Provider

Concept of Risk and Profit and Innovator

Concept of Creative Destruction, Disruptive Technology, Mindset and Entrepreneurial Leadership

Figure 1.5 Evolving Concept of Entrepreneurship Thus, a typical entrepreneur in the Middle Ages can be classified as the cleric—a person overseeing and managing a great architectural work. In the 17th century, the concept of risk associated with entrepreneurial activity emerged. In this era, entrepreneurs were mainly individuals who used to enter into a contract at a fixed price with the government to deliver a particular product or service or execute a project. The resultant outcome of delivering as per contractual terms used to be profit or loss to the entrepreneur, reflecting the efforts of the entrepreneur. Thus, profit and loss used to be commensurate with the effectiveness and efficiency with which they had performed the job. It is in this era that Richard Cantillon, a well-known English economist, developed one of the first definitions of entrepreneur— a risk-taker because merchants, farmers, craftsmen and other sole proprietors buy at a certain price and sell at an uncertain price, therefore operating at a risk. Thus, the concept of risk got ingrained with entrepreneurship. In the 18th century, for the first time, the role of a capital provider was differentiated from that of one who needed capital. This led to a clear distinction between an entrepreneur and a capital provider— banker, money lender, angel investor and the present-day venture capitalist. One key reason for this differentiation arose because of industrialization, which resulted in the development of many inventions. For example, Thomas Edison, who pioneered many inventions resulting in development of new technologies, was unable to finance his inventions himself. Therefore, he raised capital from private sources to perform his experiments in the fields of electricity and chemistry. Edison was a capital user, i.e., an entrepreneur, and not a capital provider, i.e., a venture capitalist. In the later part of the 19th and the early 20th centuries, entrepreneurs without being distinguished from managers were looked at from an economic perspective thus: Briefly stated, the entrepreneur organizes and manages an enterprise for personal gain. He pays current prices for the materials consumed in the business, for the use of the land, for the services he employs and

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  Entrepreneurship for the capital he requires. He contributes his own initiative, skill and ingenuity in planning, organizing and administering the enterprise. He also assumes the chance of loss and gain consequent to unforeseen and uncontrollable circumstances. The net residue of the annual receipts of the enterprise after all costs have been paid, he retains for himself. (Ely and Hess 1937)

It was only in the middle of the 20th century that the concept of an entrepreneur as an innovator was established as is evident from the following: The function of the entrepreneurs is to recreate or revolutionize the pattern of production by introducing an invention or, more generally, by using new technological possibilities for producing a new commodity or producing an old one in a new way, by opening a new source of supply of materials or a new outlet for products; by reorganizing an old industry and creating a new one…. (Schumpeter 1952)

According to this definition, the concept of innovation and introducing something different, unique and new became the focal point and an integral part of entrepreneurship. As such, the greatest challenge before an entrepreneur lies in introducing some new ideas. This requires not only the ability to create but also the ability to analyse and understand different forces that work in the business environment. The newness may be in terms of anything—a new product, new market, new design, new organizational structure or a combination of these. For example, Sunil B. Mittal transformed his small business of bicycle parts into a telephoneequipment maker, and has now become India’s premier cellular operator. In 1994, Bharti Telecom Ltd resisted bidding on government licenses in South India. But by 1999, many rivals had faltered. Mittal spent $225 million for three licenses, spurring consolidation. Impressed, Singapore Telecom paid $400 million for 20 per cent of Bharti, which is growing at 50 per cent a year and, unlike most competitors, makes profit.1 Gururaj Desphande and Daniel E. Smith built Cascade Communications into an early rival of Cisco Systems Inc., and then sold the data-switch company for $3.7 billion in 1997. A year later, they teamed up to build Sycamore Networks Inc. (SCMR), an optical networking pioneer. The two are an odd couple. Desphande, a man of 50 and the chairman, is a visionary from India. Smith, a man of 51 and the CEO, is a Harvard MBA who served in a US Naval Destroyer. ‘People are surprised at how well we work together,’ and how Sycamore earned $20 million on revenues of $198 million in the year ended 31 July 2000, says Desphande. And despite the tech stock rout, which trimmed Sycamore’s shares some 85 per cent, the company is still worth a cool $10 billion.2 It is this unique ability to innovate that distinguishes human beings from animals. The inherent talent can be observed throughout the history of mankind, starting from Egyptians who designed and built great pyramids out of stone blocks weighing many tons each, to laser beams, supersonic planes and space stations. In the 21st century, the challenges for entrepreneurs have become far more complicated because of fast-changing business environments. The term ‘entrepreneurship’ is getting more closely associated with creative destruction, disruptive technologies mindset and entrepreneurial leadership. Creative destruction, as highlighted in Capitalism, Socialism and Democracy by Schumpeter (1975), was used to describe the process of transformation that accompanies radical innovation. Creative destruction provides a new insight into business entities to remain competitive and maintain excellence, requiring adoption of dynamic strategies of discontinuity and creative destruction. ‘Disruptive technology’ is a term coined by Clayton M. Christensen of the Harvard Business School to describe a new technology that unexpectedly displaces an established technology. It is evident from the research conducted at McKinsey & Company by Foster and Kaplan on more than 1,000 companies across 15 industries that even best-run and most widely admired companies cannot sustain market-beating levels of performance unless their focus is on creation and destruction.

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1.4  WHAT IS ENTREPRENEURSHIP? There are as many ways of defining entrepreneurship as has been described by writers dealing with the subject. There is no single definition of entrepreneurship. However, certain definitions of entrepreneurship cover a wider gamut and involve greater depth to understand the term. Entrepreneurship basically revolves around innovation and it should not mean inhibition or imitation. It mainly encompasses innovation that gives rise to an idea having potential economic value to the prospective customer and therefore requires founding an economic organization to pool up resources to give a shape to the idea, so as to earn profit under conditions of risk and uncertainty. The concept of entrepreneurship has undergone change over the years from emphasis on ‘profits from bearing uncertainty and risk’ (Knight 1921) to ‘creation of new organization’ (Gartner 1985) to ‘the pursuit of opportunity without regard to resources currently controlled, but constrained by the founders’ previous choices and industry related experience’, as given by Hart, Stevenson and Dial (1995). According to Stevenson, the characteristics that make entrepreneurs thrive are resource mobility, reinvestment in the community, joy in the success of others and valuing change. ‘Resource mobility is evident in product markets, where anyone who doesn’t believe they’re competing against everyone else in the world is crazy.’ English literature uses the term entrepreneurship, which has been derived from the French word enterprise. Schumpter while studying entrepreneurship used the German term Unternehmergeist, acknowledging entrepreneurs as personalities having ‘fiery souls’ or ‘spirits’. Richard Cantillon used the term entrepreneur for the first time. He introduced the concept of risk by highlighting that an entrepreneur is one who buys factors of production at known prices and converts these factors into goods and services that are sold at uncertain prices, and, in the process, assumes noninsurable risk (Fig. 1.6). Thus, entrepreneurship involves conditions of risk and uncertainty, wherein risk means variability of returns, implying that returns would be fixed if there is no risk involved. For example, a business that operates in a risk-free environment will keep thriving and growing without bounds.

Richard Cantillon David McClleland

Kilby Albert Shaperohas

Entrepreneur–Non-insurable Risk Bearer Person with a High Need for Achievement Imitates Technologies Developed by Others Takes Initiative, Accepts Risk and Has an Internal Locus of Control

‘Alertness’ to New Opportunities Kirzner

Figure 1.6 Concept of Entrepreneurship

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This implies that it is basically risk that limits the expansion prospects for a venture forever. On the other hand, uncertainty is related to the degree of confidence that an entrepreneur has in his future estimates of unfoldment of reality as regards various parameters. It also means his ability to understand causes and effects in the environment. David McClleland defined entrepreneur as a person with a high need for achievement who is highly energetic and a moderate risk-taker. Kilby emphasizes the role of an entrepreneur as an imitator who does not innovate but imitates technologies innovated by others. This works very well and is important for developing economies. Albert Shaperohas defined an entrepreneur as one who takes initiative, accepts risk of failure and has an internal locus of control. Persons with internal locus of control believe in themselves and accept that whatever happens to them in life is an outcome of their own efforts. They have a belief in creating their own future through their own efforts. As against this, people with external locus of control believe that others and external circumstances control their destiny. According to Kirzner’s work (1979, 1982), first, entrepreneurship is the ‘alertness’ to new opportunities. Entrepreneurs are alert; this is what they are like. Second, entrepreneurship is seizing an opportunity by taking ‘innovative actions’. Entrepreneurs innovate; this is what they do. Alertness leads to the discovery of new opportunities. If the opportunity discovered is a real one, the entrepreneur acts on it. Alertness necessarily leads to innovative actions such as founding a new venture. Robert Hébert and Albert Link (1982) came out with a list of 12 interrelated definitions of entrepreneur. An entrepreneur is            

a person who assumes the risk associated with uncertainty a supplier of financial capital an innovator a decision-maker an industrial leader a manager or superintendent an organizer or coordinator of economic resources a proprietor of an enterprise an employer of factors of production a contractor an arbitrageur a person who allocates resources to alternative uses

Peter Drucker has defined entrepreneurship as a systematic innovation, which consists in the purposeful and organized search for changes and systematic analysis of the opportunities such changes might offer for economic and social innovation.

Defintion of Entrepreneurship, Harvard Business School and Babson Entrepreneurship according to Harvard Business School’s (HBS’s) unique definition is ‘the pursuit  of opportunity without regard to resources currently controlled’.3 This means that entrepreneurship  is  seen  as  a  particular  type  of  managerial  behaviour  that  is  available  to  virtually  all  managers  in  organizations of all kinds and sizes. The Babson definition of entrepreneurship is ‘a mindset that is opportunity obsessed, holistic   in  approach,  and  leadership  balanced’.  Babson’s  definition  focuses  on  cultivating  the  mindset    that  prepares  students  with  broad-based  entrepreneurial  skills  relevant  to  any  organization    (Fig. 1.7).4,5

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According to Lester Center for Entrepreneurship and Innovation,6 University of California, Berkeley, Hass School of Business, entrepreneurship is defined as the pursuit of opportunity beyond the resources one currently controls. This has become part and parcel of a subject with varied interest across a wide variety of interrelated fields and topics such as new venture creation, venture capital, social ventures, business model innovation, open software, Internet, corporate entrepreneurship, global business and biotechnology. Fundamentally, three key components around which entrepreneurship revolves are opportunity identification, value creation and resource organization (Fig. 1.8). And in the present context, it is the idea and its worth that matters the most and not the capital. That is why there has emerged a focus, of late, on highlighting pursuit of an opportunity without regard to the resources currently controlled. This also means that capital chases good ideas and would never come in the way of entrepreneurial success of an idea whose time has come.

Opportunity Obsessed

Leadership Balanced

Holistic in Approach

Mindset

Entrepreneurship

Figure 1.7 Entrepreneurship—Defined

Opportunity Identification Entrepreneurship Value Creation

Resource Organization

Figure 1.8 What Is Entrepreneurship?

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1.5  RESOURCE ORGANIZATION AND VALUE CREATION Having identified an opportunity, it is the resources—tangible and intangible—that need to be organized to create value, so as to derive competitive advantage. The venture’s ability to create value for the customer depends mainly upon competition and the availability of resources and their organization. The challenge for creating customer value would be less in the markets wherein customer demand for the product or service is high and competition is low. Value-driven strategy for the success of a venture involves three basic rules: (1) to attract customers away from competitors, the company must provide sufficient customer value compared to rival firms; (2) to attract key suppliers away from competitors, the company must offer sufficient supplier value; and (3) to attract investment capital in competition with other market investment opportunities, the company must increase the value of the firm for its investors.7 Thus, the success of a venture mainly lies in creating a competitive advantage by adding total value to the resource inputs greater than that added by its competitors. This mainly requires product innovation, process innovation or transaction innovation (Fig. 1.9). The ultimate test of value creation lies in the hands of the customer, as they derive some benefit and utility by consuming a product and service. Its measure of value creation depends upon the maximum amount of money that a customer is willing to pay happily for the product. In case the customer is willing to pay $2 million for a painting by a master painter or $700 for a 300-l Samsung fridge, then it is considered as customer benefit from these products. Ultimate value creation depends and gets limited by the amount of money a customer is willing to pay for it. The value creation by a venture depends upon the tangible and intangible resources that are being deployed in creating a product or service. Certain resources are acquired by the entrepreneur from suppliers to which the entrepreneur adds their own inputs such as information, talent, methods, processes, procedures, innovations or market knowledge and so on to create the final product or service. To derive competitive advantage, one basically needs to innovate, so as to reduce the cost of production for a given quality, to introduce differentiation, to increase customer benefits and to introduce transaction innovations to reduce transaction cost. Competitive advantage largely depends upon intangible resources, for which it becomes difficult to assess the cost. On the other hand, for resources that are directly acquired from suppliers, one can take their market cost as the value to which further additions are made by an entrepreneur. It is important for an entrepreneur to assess the cost of all inputs acquired Innovation Process Product Transaction

Value Creation for Customer

Creating Competitive Advantage

Success of a Venture

Resources

Figure 1.9 Entrepreneurship Success Through Value Creation

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or owned, to find out the value addition that they make. For example, land owned by an entrepreneur or time and effort put in by them has to be considered as cost by way of opportunity cost of putting it to the best alternative use. The overall value created by an entrepreneur is the difference between the price customer is willing to pay minus the total cost of inputs—tangible or intangible. When Michael Dell8 started his company, he observed that IBM sold a personal computer for $3,000 even though it contained $600 worth of parts. This clearly indicated that because of lack of competition customers were willing to pay far higher than the input cost or IBM’s overheads and others’ costs were high. The main innovation on the part of Michael Dell revolved around reducing cost of assembly and distribution, so as to increase the value addition. Dell could dramatically reduce its cost by online sale of personal computers to the customers. Further, by reducing margins, Dell computer increased value to the customer by reducing the cost and the sale price and became a great success in the market. Resource-based theory is the most apt from a practical point of view to understand the importance of resource organization for entrepreneurial success. It derives importance because of its focus on assets, both tangible and intangible, and strengths and capabilities of an entrepreneur vis-à-vis the venture.

1.5.1  What Is a Resource? Resource is a person, an asset, material or capital that is useful and can be used to create value. From a venture’s perspective, it can be defined as the total means available to a company for increasing production or profit, including plant and machinery, land, labour, raw materials and intangible assets. Another simple way of defining resource is any thing or quality that is useful (Winter 1987). The resource-based view of the firm (RBV) (Peteraf 1993) argues that an organization can be regarded as a bundle of resources, and it is the scarcity and uniqueness of these resources in terms of being valuable, rare, non-imitable and non-substitutable that provide a sustainable competitive advantage to a venture (Fig. 1.10). Creation of sustainable competitive advantage requires an entrepreneur to have resources and capabilities that possess the following characteristics. Valuable  Barney (1986, 1991) states that a valuable resource ‘must enable a firm to do things and behave in ways that lead to high sales, low costs, high margins, or in others ways add financial value to the firm’. He further adds subsequently that ‘resources are valuable when they enable a firm to conceive of or implement strategies that improve its efficiency and effectiveness’. Resources are characterized as valuable because they are means to avail environmental opportunities. Amit and Schoemaker (1993) and Collis and Montgomery (1995) take a market orientation with the former suggesting that resources

Resources • Tangible • Intangible

Resource Characteristics • Valuable • Rare • Not Easily Replicable • Non-availability of Substitutes

Sustainable Competitive Advantage

Figure 1.10 Creating Competitive Advantage Through Resources

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are valuable in relation to a specific market and the latter stating that ‘a valuable resource must contribute to the production of something customers want at a price they are willing to pay’. Thus, resources are valuable as they are means to avail market opportunities and satisfy customer needs. Rare  Implies scarcity of resources and therefore their supplies are limited as against demand for resources by the producers. To be valuable, it is necessary that a resource should be rare and limited in its availability. Not  Easily  Replicable  The value of the resource depends much upon the degree of difficulty involved in duplicating it or copying it. In case a valuable and not an easily replicable resource is owned by a single entrepreneur, it becomes a major source of competitive advantage. The duration of competitive advantage depends upon the ability of competitors to duplicate it for long. It is the strategy of an entrepreneur to retain ambiguity and complexity in its resources that determines the market gains they can avail themselves of. For knowledge-based resources, chances of degree of ambiguity and complexity would be far higher and difficult to copy. Non-availability  of  Substitutes  Resources used by an entrepreneur for production of goods and services, if they do not have substitutes, would provide a great advantage. Therefore, over and above a resource to be rare, valuable and not easily replicable, it is important that there do not exist substitutes for it to derive its value on a continuing basis. In case competitors are able to bring substitute products to counter the value-creating strategy of an entrepreneur, the venture would lose its margins and the profit-making ability. Thus, the resource-based view of a firm emphasizes that a venture with superior margin performance must be endowed with resources that are highly valuable, rare and not easily replicable and do not have substitutes. In short, a resource is valuable in comparison with the competitors and will provide a much needed competitive advantage to a venture compared to the average firm (Bowman and Ambrosini 2004):  It enables the firm to charge an above-average price, whilst unit costs remain average.  It enables the firm to achieve below-average unit costs, whilst prices remain at the average.  It enables the firm to achieve both price and cost advantage.

1.5.2  Types of Resources According to the resource-based theory, there are six vital types of resources that facilitate an entrepreneur to generate profit. These include physical, reputational, organizational, financial, human and technological (Fig. 1.11). Physical Resources  These are tangible in nature, such as machines and building that are used in production of goods and services. These are either man-made, i.e., made through man’s abilities and skills such as buildings and technology, or natural. Natural resources are endowed in the environment. Many of them are essential for our survival, while others are used for satisfying human wants. Natural resources are mainly of two types: (1) biotic, which are obtained from biosphere such as forests, animals, birds, marine organisms, coal and petroleum and (2) abiotic, which are mainly non-living in nature such as land, water, air and minerals such as gold, iron, copper and silver. Another way of looking at resources could be renewable resources, which can be easily replenished or reproduced, and non-renewable resources, which are formed over a long geological cycle.

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Physical Resources Reputational Resources

Types of Resources

Organizational Resources Financial Resources Human Resources and Capabilities Technological Resources and Capabilities

Figure 1.11 Types of Resources Reputational  Resources  These are derived mainly from the public perception of your venture that gets recognized by things such as brand, person behind business and values of an entrepreneur. Reputation is derived on the basis of customer perception of quality, cost, speed of delivery, treatment received or role played by the business in the community around and so on. Reputation is basically an outcome of a competitive process wherein an entrepreneur projects their image to the stakeholders. This is derived out of its ability as a solid provider of quality goods/services, distinct taste, least price, financial soundness, stock value for investors, innovativeness, an attractive employer, efforts made in corporate social responsibility, concern for community around and so on. The studies reveal that the most important aspects leading to reputation are product quality, management integrity and financial soundness (Dollinger et al. 1997). Ken Powell, Chairman and CEO of General Mills, notes, ‘Reputation can be measured in recognition, employee recruitment and retention, even stock price multiple. But in the end, we believe the most important measure is trust. General Mills values its reputation tremendously, and we constantly strive to remain worthy of the trust of our customers, consumers, employees, investors and communities.’ The fact remains that customers value the reputation of a company and are willing to pay more for the products and services coming from reputed companies. According to a survey (undertaken by UK—Marks & Spencer Top in Public’s Eyes),9 ‘Excellent customer service was cited by almost half of all survey respondents (48 per cent) as the characteristic that most helps a firm build its reputation. Another third (36 per cent) said that products and services always living up to expectations mattered the most. Seven per cent said that a good reputation was down to being a good employer while four per cent attributed it to brand appeal.’

Google—What Does It Take to Get to the Top? What does it take to get to the top? Google is a wonderful example to learn from. In 2004, the company  was not included among the top 60 most visible companies on the list. But in 2008, Google rose to  no. 1, beating last year’s reputation leader, Microsoft. Google also beat the 2008 second runner-up,  Johnson & Johnson, which had been the top-ranked company until 2007, since the inception of the  survey in 1999. (Continued)

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‘How did Google achieve this stratospheric climb? The company scores either in first or second  place  on  reputation  drivers  of  financial  performance,  vision/leadership,  social  responsibility  and  workplace  environment,’  says  Fronk  of  Harris  Interactive.  ‘For  Americans  to  hold  a  company  in  high regards today, clearly more than just profits are needed; companies need to focus on overall  corporate social responsibility and how their employees are treated in order to build trust with today’s  consumers.’  It  is  interesting  to  note  that  Google  ranked  no.  2  in  2008  on  the  social  responsibility  dimension, but does not even make the top five of companies based on its support of good causes,  the  environment  or  communities.  ‘Google  received  a  top-ranking  for  social  responsibility  primarily  due to their workplace environment,’ Fronk notes, ‘demonstrating that corporate responsibility, in the  minds of consumers, starts with your own employees first.’10

Organizational Resources  This relates to an entrepreneur’s approach towards planning, organizing, controlling and directing business affairs. Normally start-ups depend a lot on the vision of the founders as against well-established companies having formalized systems, procedures, policies and structures. It refers mainly to a company’s reporting systems, hierarchy, information flow, planning process and decision-making systems. It is an intangible resource that, to a great extent, differentiates one venture from another and affects its effectiveness. A structure that is simple and is able to respond to challenges with speed can be a highly valuable resource. Organizational resources also reflect the skills and capabilities of the people in the organization. Even the past history of an organization leading to building and strengthening a desired culture in the organization is a valuable organizational resource. Financial Resources  This refers to the abilities of a business to generate internal funds and external capital. It all depends upon the worth of the idea and the team behind it to translate it into reality. What matters the most is assessment of required funds and their timely mobilization at most competitive rates, i.e., far below the average market cost. Financial resources are vital inputs and matter a lot in providing competitive advantage. It is rightly said that one needs to invest to generate more money and, therefore, if an entrepreneur is not able to raise required financial resources at competitive rates, they may not be able to launch their business successfully. However, there could be business ideas wherein entrepreneurs could collect money first from their customers/investors before incurring any expenses. Such businesses certainly provide an extra edge to the entrepreneur. The lesson to be learnt is that financial resources are vital for the business and are highly valuable but may not provide a distinct competitive advantage, because they are not rare and are easily replicable. Human Resources and Capabilities  It is human ability and ingenuity that transforms raw materials into valuable resources and, therefore, a valuable resource. The knowledge, experience, exposure, trust and talents available within a firm are vital resources for creation of value and competitive advantage. These resources are usually not captured by its formal, tangible systems and structures. Human capital also includes capital arising as a result of relationship building and networking in a business. It comes basically from all organization members known intimately and personally having information and linkage with the business. Networking is a great art that provides an entrepreneur quick access to quality resources at competitive rates. This helps an entrepreneur to reduce the risk of owning resources, thereby reducing the cost of production. For example, a young, enthusiastic crew known for competitive orientation and training with one airline can provide distinct advantage compared to another airline

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lacking these aspects. Similarly, in specialized industries such as information technology, pharma and electronics, availability of seasoned, experienced and highly knowledgeable human resources acts as a key differentiating factor compared to competitors. Human resources matter irrespective of the nature of a business, but it has greatest implication for knowledge-intensive and service-driven ventures. Thus, the founding entrepreneur and their team is the most crucial resource for the success of a venture. Human resources are considered to be the most important resource in any project as it is the key to building a winning team for the success of a venture.

McAfee: Importance of Human Resources Let us look at the views of Shikwang, from McAfee based in Bangalore, India, and serving as technical  support engineer. ‘I’ve  spent  nearly  two  years  working  in  McAfee’s  Korea  and  Singapore  offices.  As  a  technical  engineer you need to be confident with the products you support. This is certainly the case at McAfee.  I know the issue will be resolved sooner or later, and that during the process I’ll pick up all kinds of  new technical knowledge. The team is great too. Everybody is willing to help each other and share knowledge. They all show  the commitment, integrity, teamwork, professionalism and patience that’s needed to succeed here.  The  business  offers  “best  of  breed”  products,  is  growing  rapidly  and  has  a  diverse  culture  that’s  remarkably well integrated. Working here puts you at the core of a fast growing industry with excellent  career opportunities. On a personal level, I’ve always dreamed of working abroad and McAfee made  this dream come true. I believe that as long as I stay with this company, I will go a long way.’ Rohit,  also  from  McAfee  based  in  Bangalore,  India,  and  serving  as  field  response  engineer,  says,  ‘McAfee  is  a  comfortable  and  cool  place  to  work.  Company  operates  on  open  door  policy  where employees are not intimidated. We work with cutting-edge technologies in a highly secured  environment that adds thrill to work and contribute.’ Rohit had joined as a tier-3 field response engineer and is presently working as a tier-3 engineer,  supporting VirusScan, HIPS and Virex. It’s great fun to work in such an organization, because one  can choose to either grow technically or even venture into management, as per one’s choice. The  company extends all support to the development of its employees through individual growth plans  and  employees  are  openly  encouraged  to  discuss  with  managers  their  career  options  and  the  processes to achieve their goals. Rohit says that the best thing about his department is that it has a  global visibility and presence and the employees are able to work in close cohesion with engineering/ product management in order to enhance the quality of their products and grow our customer base.  Growing in such an organization requires honesty, integrity and a strong dedication to work. This clearly focuses on the policies of McAfee as regards the importance of human resources to  derive competitive advantage and have an extra edge.11

Technological  Resources  and  Capabilities  These are processes and systems to physically transform resources into products and services. These are mainly the outcome of knowledge generated through research and development efforts leading to technologies that enable cost reduction, productivity improvement or quality. Basically, technology is an outcome of skills and assets possessed by an enterprise that generates leading-edge products and services backed up by patents, trademarks, copyrights and trade secrets. These resources could be in physical form or intangibles owned by a company. They can provide competitive advantage, if protected through intellectual property rights.

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General Electric and DuPont: Technological Superiority For example, General Electric (GE) company, having a market capitalization of around $168 billion,  invests around $3 billion on research and development to have a technological superiority vis-à-vis  competitors by developing new technologies. In the recent past, it has innovated building the smart grid. The pilot programmes designed to  make the electrical grid more efficient and reliable are using several GE products, including highefficiency transformers, programmable thermostats, smart appliances and meters that communicate  real-time information on power consumption to utilities and customers. The company has set up a  smart-grid lab to simulate the effects of introducing power from intermittent sources such as wind and  solar and to study how two-way communication within the grid can make these renewable sources  easier to integrate. Similarly, DuPont, one of the leading innovative companies, has innovated new types of biofuel  similar to gasoline by partnering with BP to produce the transportation fuel butanol from agricultural  feedstocks. Since biobutanol has a higher energy density than the leading biofuel, ethanol, consumers  using it can drive more miles per gallon.12

1.6  ENTREPRENEURIAL TRAITS Research in the area of entrepreneurship has identified a large number of personality traits that differentiate an entrepreneur from others and contribute to their success. Three key traits discussed more frequently in a number of studies are need for achievement, locus of control and risk-taking ability (Fig. 1.12).

1.6.1  Need for Achievement Entrepreneurs are individuals having an intense desire for and focus on significant accomplishment and mastering of skills, and do not compromise on maintaining high standards. The term was first used by Henry Murray (1938) in Explorations in Personality and is associated with different steps leading to a set of actions. These include ‘intense, patient, persistent and repeated efforts to

Need for Achievement

Traits of Entrepreneur Risk-taking

Locus of Control

Figure 1.12 Traits of Entrepreneur

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accomplish something difficult’. Basically, it means wholeheartedly working for the fulfilment of a vision. Subsequently, McClelland contributed to the popularization of this concept through his work in the area of economic development and psychology. According to him, a set of people having an intense need to achieve are different from the rest of them. They prefer to work hard on a problem rather than leave it to chance or fate. They take a middle ground by taking a moderate degree of risk because they have faith in themselves and their abilities to influence the outcome. They take tasks challenging with moderate risk but that are achievable or within reach. This characteristic is the hallmark of a successful entrepreneur. For them, achieving goals or solving a difficult problem gives greater satisfaction than a reward by way of money. They get great satisfaction through recognition for their achievement. Money is valuable to them mainly from the perspective of measuring their performance. They prefer and love to get genuine feedback and act upon it. They consider it a very important input for achieving results. According to McClelland (1967), this characteristic can be inculcated through training programmes, and he developed it to measure and inculcate motivation for achievement in individuals. The characteristic of achievement orientation is more visible in people whose parents encourage independence; who associate with a peer group positive attitude and feeling; who believe in their efforts and competence rather than in luck and who have an intense desire to be effective and successful. The need for achievement is closely linked and correlated with entrepreneurial success as is evident from a large number of research studies. As such, 20 out of 23 major studies in the entrepreneurship literature have established and found a fairly consistent relationship between need for achievement and entrepreneurship despite inconsistencies among the results of the studies regarding samples and the operationalization of the need for achievement (Johnson 1990; Shaver and Scott 1991). The achievement-oriented entrepreneurs in the same industry with similar constraints have been found to perform far superior to the ones who lack this characteristic. The same is the case with students having a high need for achievement; they have been generally found to perform far better in examinations compared to equally bright students with weaker achievement needs. It is evident from various researches that higher need for achievement has a positive influence on entrepreneurial inclination or entrepreneurship as a career option. Thus, there is broad consensus that a high need for achievement is one of the most prominent factors contributing to entrepreneurial success.

Need for Achievement Solar Electric Power Association (SEPA) announced Don Brandt, Arizona Public Service Utility CEO,  as the Busiess Leader of 2009. His clear vision and perspective reflects the ‘need for achievement’  as one of the prominent traits in him as is evident from the citation ‘Less than 6 months after being  named CEO of Arizona Public Service (APS), Don Brandt was quoted as stating Arizona will “become  the solar capital of the world”. During the next 18 months, under Brandt’s leadership, APS has taken  daring and courageous steps to make this vision a reality. APS commissioned the 280 megawatt  Solana  Generating  Station,  which  includes  first-in-the-US  thermal  energy  storage  capabilities,  a  distributed  generation  study  to  look  at  long-term  planning  impacts  from  increased  penetration,  and  the  development  of  an  innovative  distributed,  photovoltaic  programme  that  integrates  smart  grid  capabilities.  APS  projects  had  added  600,000  new  customers  by  2025,  and  the  company  planned to meet half of the needs of these new customers with solar and other renewable energy  technologies’.13

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Nancy M. Barry, President, Women’s World Banking Nancy M. Barry did her B.A. Economics from Stanford University in 1971. She has been the instrument  in transforming the lives of millions of poor women and their families around the globe after having  taken  over  as  president  of  New  York  City–based  Women’s  World  Banking  (WWB).  This  non-profit  organization  has  a  network  of  53  microfinance  institutions  and  banks  in  developing  countries  that  lend small loans mainly to women for starting their own business so as to overcome poverty. ‘The  impact of these loans is extraordinary,’ says Barry. ‘Poor women have shown that they are the world’s  best customers, repaying their loans and using their increased income to feed, clothe, and educate  their children and strengthen their communities.’ WWB has expanded its network over years to extend  financial services in more than forty countries in Africa, Asia, the Caribbean, Europe, Latin America  and the Middle East. WWB and the leaders in its network work closely with policymakers to create  economic and financial systems for the needy majority, i.e., poor people in their regions. Barry joined  WWB as president in 1990 after having served for 15 years in top positions at the World Bank. WWB  was founded in 1979 and had a budget of only $2 million at the time of his joining. This decision of  leaving one of the world’s most prestigious institutions to join a much smaller player in the global  economy was questioned by many of Barry’s peers. ‘On day one I had to order my own pencils,’ she  recalls with a smile. However, Barry visualized the smaller size of WWB as a great virtue to contribute  her might. ‘It was a remarkably nimble organization,’ she explains, ‘with revolutionary principles and  a transformational agenda that focused on supporting local organizations and leaders and bringing  a business approach to effecting economic and social change.’ Barry  took  initiatives  to  put  together  a  small,  highly  competent  team  of  practitioners,  analysts  and managers from around the world. She worked towards the development of an organization that  engaged the talents and commitment of network leaders. ‘To create real networks, you have to believe  that the center of an operation does not have a monopoly on truth, and you need to trust the people,  trust  the  process,’  she  says.  As  the  network  took  shape,  the  members  began  holding  on  another  accountable for achieving a performance of high standards in a transparent manner and for using  their leadership to bring about a systematic change in their countries for the well-being of people. She joined World Bank’s Young Professionals Program after completion of her Harvard degree  and  made  a  remarkable  contribution.  She  pioneered  the  World  Bank’s  efforts  in  small  enterprise  development, and her initiative expanded over years and grew to a size of $3.3 billion over a decade.  She was also instrumental in leading much of the work on industry, trade and finance in Africa, Asia  and Latin America. She was heading the global Industry Development Division of the World Bank at  the time of leaving. In 1981, Barry had begun serving on the board of WWB—a role that dramatically  influenced the way she formulated her strategy at the World Bank. ‘I applied what I was learning in the  young WWB to create a network for learning and change at the Bank in areas such as small enterprise  lending and export promotion,’ she says. Barry  was  ready  to  make  a  move  at  a  time  when  the  WWB  board  asked  her  to  become  its  second president. During the past 15 years, the network’s aggregate portfolio has grown to more  than $8 billion, and WWB has grown from a small organization serving around 20,000 low-income  women to one helping over 18 million households. WWB supports this global system with an annual  budget of only $10 million, helping network members get what they need to succeed as microfinance  institutions and change agents. Under Barry’s leadership, the organization has also led and pioneered  in the development of microfinance industry in product innovation, industry standards, policy change  and the mobilization of banks for microfinance. Featured in Forbes magazine’s list of the world’s most powerful women for the past two years,  Barry continues to focus on showing how low-income women entrepreneurs and the institutions that  help  them  are  changing  the  way  our  world  works.  She  is  truly  making  a  difference  in  the  lives  of  millions of people and families.14

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Achievement Motivation Amitava Bhattacharya, an alumnus of IIT Kharagpur and a fellow of London School of Economics,  at the age of 43, gave up his lucrative job as a software engineer in the United States and returned  to India to try something unique that he loves doing. He started an NGO, Banglanatak.com, in 2000,  which has been helping Bengal’s folk artists to make their living from their art. The following are some  of the key aspects he highlighted in an interview with Shreya Roy Chowdhury. Banglanatak.com launched a unique project ‘Ethno-magic Going Global’ in 2004. It has a team of  3,200 artists specialising in six art forms from East Bengal. These include chau, jhumur (folk music  dance  from  Bankura  popular  in  Malda)  and  baul-fakiri  (from  Nadia).  We  formed  self-help  groups  linked with banks, and trained them through series of workshops. The musicians, for instance, were  trained  with  violinist  Sabina  Rakcheyeva  and  Oud-player  Attab  Haddad  from  London  and  pianist  Katahleen Tagg from New York. We then showcased their works in festivals. It required a unique skill to document oral presentations so as to give them a communicative and  professional shape. His venture has compiled 740 baul-fakiri songs in a book and is now working on  their audio documentation in CDs. We have jhumur, another oral tradition, and patergaan, which are  part of the patachitra songs, and Bangla qawwali—a tradition that got wiped off almost 120 years  back. Did you know fakirs sang Bangla qawwali? Also baul-fakiri, dhol, madol, clarinet and dhamsa,  folk traditions from Purulia, Bankur and Nadia, have been combined in an orchestra. Typically, baul  and  jhumur  group  consists  of  around  seven  members,  while  chau  ones  have  24.  We  are  putting  artists from different folk forms together to come out with an innovative outcome. For this to crystalize  well, people have been trained. It is interesting to know that installation artists from England have interacted with patachitra artists.  These new media artists have altogether a new way of thinking about using space. And patachitra  artists contribute through their special skills in decorating pandals, which too focuses on usage of  space. There’s  a  lot  of  potential  and  scope  in  India  for  cultural  tourism.  This  can  be  developed  as  community-owned  enterprises,  so  that  surplus  generated  can  go  directly  to  villagers.  The  fundamental point is that artists should be hired directly. The success of such a model is evident  from Durga Puja, last year, wherein 710 artists performed for four days and earned ` 21.2 lakhs.  Money is generated from a number of local festivals, many of which are spread throughout the year.  Highly talented performance artists can get an opportunity to perform at national and international  levels too. There has been excellent response so far. There were about 20 patachitra artists in 2004. Now  there are over 350. People who had left patachitra to pull rickshaws are now coming back. Resource  centres are under construction now the idea is to get the younger generation trained in the art. In the  early days, 2006–07, we got the elderly crowd at the shows. Typically, folk is regarded as old and  traditional, but it can also be interesting. Getting the youth interested is very important because that  is creating new audiences. Now, from 2009 onwards, the average age of the audience is between  30 and 35. So the young are coming in droves now. At our show at the habitat Centre in New Delhi, all the 425 seats were occupied and people  were standing. The G. D. Birla Sabhaghar in Kolkata was packed. But the highest so far was at  our festival held in Golf Green, Kolkata—3,500 people. And at the Sufi fest in Murshidabad, there  were over 20,000 people.15

1.6.2  Locus of Control The second vital trait associated with entrepreneurship is locus of control. The term ‘locus’ was first introduced by psychologist Julian Rotter in the 1950s, which refers to a person’s fundamental belief

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system about the events and outcomes that happen in their life. It can also be defined as an individual’s perceptions about the rewards and punishments in their life (Pervin 1980). It can be referred to as the perceived control over the events of one’s life (Rotter 1966). According to locus of control theory, there are two types of people, namely, internals and externals. Individuals with an internal locus of control believe and have a faith that they are able to control life events and the future depends upon their own efforts. It is something like an entrepreneur who starts a venture and has a firm belief that it is they and their efforts that would lead to happenings and outcomes in their life. They are proactive in assessing environmental changes and prepare themselves in advance to appropriately respond to such challenges. Individuals with an external locus of control believe that happenings in their life are the outcome of external factors, such as chance, people, luck or fate. They have a firm belief that it is outside forces that govern and affect their ability to achieve predetermined goals. They see things as a series of luck- and fate-driven events and may lead a life without much challenge and hard work. It is because of this belief that they put in less effort to achieve their goals. Research studies show that these people, in general, are less successful in their studies or careers than internals. Research findings reveal that internal locus of control is closely associated with an entrepreneurial characteristic and significantly affects entrepreneurial success. Internals are more willing to think about the future and appropriately prepare themselves to act proactively. Research indicates that people with higher degrees of internal locus of control tend to monitor the environment to obtain information (Van Zuuren and Wolfs 1991). This tendency is mainly on account of their desire to act on the environment. In a study of a sample of students, internal locus of control was found to be positively associated with the desire to become an entrepreneur (Bonnett and Furnham 1991). Research shows that internals tend to estimate the probability of failure as lower and decide in favour of risky options (Hendrickx et al. 1992). As an example of this tendency, internals are found to plan for expansion of their businesses even when unemployment rates are high (Ward 1993).

1.6.3  Risk-taking Risk-taking is an inbuilt imperative for an entrepreneur, because one cannot expect to gain something in the future without taking the risk of facing uncertainties and imponderables. According to Peter Drucker, entrepreneurship is about taking risks. Entrepreneurial behaviour is reflected in a person willing to take a risk of getting wedded to an idea at the cost of their career and financial security. For example, a student passing out from a reputed institution without having financial backing, when they plunge into an entrepreneurial venture, leaving aside a cosy and secure job, may reflect a tendency towards risk-taking by having a firm belief in the success of his idea. Knight classified three types of uncertainty—risk that can be measured statistically, ambiguity that is difficult to measure statistically and uncertainty that cannot be predicted statistically. Entrepreneurs come across all three types of risks, and the greatest challenge to them lies in having complete uncertainty in bringing out something really novel to the world whose market does not exist. However, even if a market for the product exists, there is never a guarantee that it exists for the new entrant under consideration. Risk-taking ability in a person is defined as ‘the perceived probability of receiving rewards associated with the success of a situation that is required by the individual before they will subject themselves to the consequences associated with failure, the alternative situation providing less reward

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as well as less severe consequences than the proposed situation’ (Brockhaus 1980). Risk-taking ability clearly distinguishes an entrepreneur from a non-entrepreneur. The degree of risk that an entrepreneur takes also positively affects their ability to innovate, which is a basic prerequisite for entrepreneurial success.

Entrepreneur Success Story Brian Scudamore started his company immediately after coming out of high school in 1989, with a  small sum of $700 and a beat-up old pick-up truck. Today, his company has 95 franchise partners  across North America with a nation-wide presence. He was a risk-taker, but was firm in his vision.  ‘With a vision of creating the “FedEx” of junk removal,’ says Scudamore, ‘I dropped out of university,  with just one year left, to become a fulltime JUNKMAN! Yes, my father, a liver transplant surgeon, was  not impressed to say the least.’ He chuckles, ‘He is onside now.’ He chose an altogether different  strategy to deliver value, as against minimizing the risk in a business by outsourcing to contractors. ‘I hired my first employee a week after I started. I knew I needed the help. His name was David  Sniderman—a good friend of mine. I really didn’t know yet how to hire so I just asked a buddy.’ It may  have started as a matter of simply not knowing what else to do, but it became a philosophical issue  for him. ‘On a bigger level, I always believed in hiring people vs contract or consultants. I felt that if I  wasn’t willing to make the investment then I was questioning my own faith in the business.’ On the other hand, he’s a big believer in managing risk by sharing as evident from his choice of  franchising  as  a  business  model.  This  business  model  enabled  him  to  have  rapid  growth  without  depending upon outside investors or other funding sources. ‘It’s  the  ultimate  leverage  model  in  a  business  wherein  people  pay  a  fee  up-front  to  help  them  grow.  Rather  than  lose  control  of  my  vision  by  going  public—I  chose  franchising.  It’s  the  ultimate  growth model.’ Their  business  model  for  success  has  been  simple.  Consider  a  fragmented  business;  add  clean shiny trucks that act as mobile billboards, uniformed drivers, on-the-dot service and up-front  rates;  and  above  mix  in  with  a  culture  that  focuses  on  young  team,  having  fun  while  working  and  completely focused on solid, healthy growth of the organization. He has managed to retain 100 per  cent ownership and bootstrapped the business solely out of cash flow which is rare to come across. Technology  has  been  the  backbone  and  one  of  the  most  prominent  reasons  to  deliver  quality  services and grow fast. Their secret has been taking a low-tech business and putting a high-tech  spin on it that enabled them to rapidly distinguish themselves from their competitors. All calls from  customers come into a central call centre wherein all the bookings are undertaken and dispatched to  their franchise partners. The task of the franchise partners is to analyse and assess all their real-time  reports, schedules, customer info, etc., and send to JUNKNET, their corporate Intranet. This enables  franchise  partners  to  get  into  business  swiftly  and  quickly,  and  to  focus  solely  on  growth,  i.e.,  the  difference between working on the business vs working in the business.16

Is Risk-taking a Questionable Trait? Malcolm  Gladwell’s  piece  in  Business Week,  New  York,  may  result  in  questioning  the  notion  of  entrepreneurs as risk-takers. According to him entrepreneurs who succeed get ulcers worrying about  potential losses and do everything they can to minimize their risk. (Continued)

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Gladwell  writes  that  successful  entrepreneurs  are  businessmen  whose  insights  and  decisions  have brought in transformation in the economy, but their entrepreneurial spirit could not have less in  common with that of the daring risk-taker of popular imagination. Would we so admire risk-taking if  we realized that the people who are supposedly taking bold risks in the cause of entrepreneurship  are doing no such thing? He  focuses  on  two  dealmakers—Ted  Turner’s  acquisitions  and  hedge  fund  manager  John  Paulson’s now famous bet against the housing market that earned his fund $15 billion in 2007. Both  had an insight and imagination to recognize profitable opportunities with minimal risk. Paulson paid  pennies on the dollar to buy credit default swaps—essentially insurance policies that would pay off  if  mortgage-backed  bonds  soured—only  when  he  was  certain  that  housing  prices  were  inflated.  Therefore,  instead  of  being  gamblers,  entrepreneurs  are  basically  ‘predators’  who  foresee  and  recognize opportunity. An exploration of the entrepreneurs’ attitudes toward risk based on comments and discussions  with business owners suggests that Gladwell’s conclusion will surprise people who actually run their  own  businesses.  When  people  have  their  own  livelihood  at  stake,  they  are  obviously  going  to  be  concerned about managing the downside and bottom line. One interesting observation that emerges from Gladwell’s piece is that while entrepreneurs want  to  minimize  their  financial  risk,  they  are  often  more  willing  to  take  social  risks.  During  the  housing  bubble, public thought that Paulson was foolish and crazy—including the people on the other side of  his trades. Sam Walton, another of Gladwell’s examples, borrowed money from his in-laws rather than  borrowing from a bank. Thus, the willingness to risk reputation and social standing is ‘just another  manifestation of their relentlessly rational pursuit of the sure thing’, he writes. One  can  come  out  with  interesting  conclusions  from  this  example  of  risk-taking  attribute  in  entrepreneurs.17

If we try to find a list of traits associated with entrepreneurial personalities, a big list of traits comes in front of us. Most of these traits are also associated with any successful personality in any walk of life and not necessarily an entrepreneur. The challenge lies in dissecting the personalities of different entrepreneurs and coming out with a minimal number of traits, that too in descending order of priority. Some of the broad traits associated with an entrepreneur that commonly come to mind are given in Table 1.1. Table 1.1 Traits of an Entrepreneur y y y y y y

y y y y

Visionary and dreamer Optimistic Calculated risk-taker Passionate, persistent and positive attitude Flexible and able to adapt Knowledgeable of markets and having technical expertise Good networker and relation builder Good communicator Able to get along well with others Energetic, sharp and intelligent

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y y y y y y y y y y y y y y y

Self-confident and self-disciplined Determined Energetic Resourceful Versatile Achievement-oriented Impatient Goal-oriented Takes initiatives Has a foresight Responsive to criticism Focused in approach Businesslike attitude Hard-working and sincere Independent

y y y y y y y y y y y y y y y

Profit-oriented Perceptive Responsive to change Eager to learn Responsible Competitive Efficient Highly motivated Courageous and confident Leadership Decision-maker Good executor Opportunist Creative and innovative Dynamic leader

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Visionary and Dreamer

Excellent Networker

Dynamic Leadership Entrepreneurship Traits

Resourceful

Innovative and Interest in Something ‘New’

Figure 1.13 Entrepreneurship Traits

The list may be further enlarged. However, some of the most crucial traits found in the majority of successful entrepreneurs revolve around being a visionary and a dreamer; an innovative, dynamic leader; and a resourceful and excellent networker (Fig. 1.13).

1.6.4  Visionary and Dreamer There have been many definitions of vision; perhaps, the one that most suits an entrepreneur is ‘the ability to see the unseen’. Visionary personalities have the ability to see through things in advance and dream big. Some think that vision is an intrinsic ability and a gift that you either have or do not have. It is certainly something innate. However, the fact remains that it comes with targeted knowledge and understanding. When someone has a special knowledge or understanding of a market sector, problem, technology, treatment or system, it is no great step to have a vision or opinion of where things might be in 10, 20 or 100 years from now. Unsuccessful visions are just opinions that cannot be realized. There are those who can, perhaps, foresee events with great clarity or accuracy and envisage milestones and major changes in technology or theory, like Stephen Hawking, Charles Darwin, Albert Einstein, Isambard Kingdom, Brunell, George Stephenson and Michael Faraday, and they became trendsetters and gurus to the rest of the world. However, entrepreneurship is not just about becoming a ‘guru’ or becoming a path setter; it is about finding the right path when others cannot, and it is about being able to see incremental needs as well as solutions to fulfil those needs by seeing through the opportunities that others do not see. It is that instinct backed up by concrete process that enables an entrepreneur to avail themselves of an opportunity in time. A vision from the past makes a great fortune for an inventor and acts as the cat’s eyes that can be

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seen in the middle of the road while driving in the dark. As against this, an incremental improvement is like making something more effective and deriving a benefit from it. Visionaries have a great ability to focus not only on idea/project-specific issues but also on ‘bigger pictures’ in their mind. They clearly know and understand where everything fits in the overall scheme of things. An entrepreneur needs to be highly directed and focused to translate the idea into reality.

1.6.5  Innovative—Being Interested in Something ‘New’ Entrepreneurs are highly innovative, and new and unique things interest them the most. They are always looking for new solutions to existing pain points or solutions to emerging pain points. They have a great curiosity backed by deep and everlasting interest in new ways of doing things, new ways of making things better, faster, more efficient, more effective, stronger, lighter, more beautiful, more tasty, more elegant, simpler, and so on. It is this interest and ingenuity in them that probably makes them click. Thus, it is not only new ideas that attract the entrepreneur, but also old problems that can be handled in a much simpler, better and efficient manner by identifying new workable solutions. The entrepreneur comes out with new problems and solutions to such problems. Albert Einstein put it in a far better way than we ever can: ‘Imagination is more important than knowledge—to raise new questions, new possibilities and to regard old problems from a new angle, requires creative imagination, and marks real advance in science.’

1.6.6  Dynamic Leadership An entrepreneur is often thrown into the role of leader because of their ability to visualize, formalize and understand the innovation and its value. They have to be necessarily a good leader first as well as a good manager. Not all entrepreneurs are suited to lead, and some may even feel uncomfortable to lead an organization. However, the chances of success as an entrepreneur depend much upon a good leader leading the team. In case one knows that one does not possess that spark of leadership, it is better for him to hand over the venture to someone who can steer, build and nurture a winning team. It is this quality of an entrepreneur that enables effective and efficient execution to achieve predetermined goals. Entrepreneurial leadership takes initiative, risk and responsibility and channelizes creativity in an organization, so as to achieve organizational goals with a deeper and genuine concern for all stakeholders. It is this trait that keeps entrepreneurs moving forward and going in spite of all odds and setbacks, which is the hallmark of all successful business leaders. Good leaders bring with them vision, optimism, courage, self-esteem, tolerance to ambiguity, achievement motivation, meticulous planning, focus on execution and goal-orientation. Above all, they have a faith in themselves and in what they do. They know what they do and do it confidently. Good leaders having carefully decided the path would rarely have self-doubts. If at all any doubt arises during the entrepreneurial journey, it will be shared with a few trusted friends or colleagues. Of course, it is important to recapitulate that not all good ideas with excellent planning will be successful, but without planning nothing will succeed. Very few entrepreneurs make it big the first time round; the majority learns through the hard way. What matters most is to be committed and patient. For example, Colonel Sanders and his Kentucky Fried Chicken was almost on the verge of collapse when he finally found the backing he needed. His success lay in self-belief and a strong desire to succeed. Similarly, Edison never looked at his 3,000 attempts to

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invent the light bulb as failure but simply as 3,000 ways of not doing it. Faith and will power can help in making the impossible possible. Great leaders have firm faith and commitment to their ideas and team to take them to logical conclusions.

1.6.7  Resourcefulness Entrepreneurs, in general, are highly resourceful to get hold of what they need with their creative and imaginative potential. They are highly ingenious and inventive to make best use of what they have at their disposal to respond to challenges effectively. This trait enables them in dealing effectively with the problems and difficulties that they are confronted with. In their dictionary, the word ‘no’ does not exist. They only know how to get things done against all odds. Entrepreneurs have to necessarily think out-of-the-box to improve their chances of getting the resources such as capital, the right people and the raw materials they need to succeed. As such, normally getting what they need the most becomes very difficult, but it is their ingenuity that enables them to succeed in getting what they need. True entrepreneurs are resourceful and can create something out of nothing.

1.6.8  Excellent Networker Networking is an essential part of building wealth. —Armstrong Williams

In fast-changing complex business environments, doing a business successfully requires right networking skills. Networking helps in the growth of the business through helping and seeking help from others. Entrepreneurs maintain and build contacts regularly with people who matter directly or indirectly to their business without expecting anything in return. Successful entrepreneurs have a charismatic personality. The secret behind their success in networking lies in having characteristics such as being open, receptive, flexible and winsome. They are highly attentive and intense listeners. They remember the names of people with whom they interact. It is these skills that enable entrepreneurs to build, develop and strengthen networks of relationships both in and outside the organization in a very smooth and harmonious manner. They have the nack of easily mingling with different people. They are good at building and nurturing relationships based on mutual dependency and give and take that matter in sustainable growth of the business. They are able to engage and channelize the energies of people who matter to their business. This skill requires building trusted relationships. Networking helps in building long-lasting relations with stakeholders who matter the most in the growth of the business. Above all, they passionately spot new opportunities and pursue opportunities relentlessly through alternative business models. Their main concern remains value proposition to the existing and prospective customers. At times, they are able to see through the value but it takes time for the customer to perceive it. For example, when Sony created the personal stereo, no one would have considered having a portable personal stereo to clip onto a belt with earphones and have the ability to wear it on the street. However, it became a great success in the eyes of customers. At times, entrepreneurs come up with their understanding of a product or service for a particular purpose, but find that its success really lies in a different usage. Successful entrepreneurs, although they focus the most on customer satisfaction and happiness, know and ensure that a project or an idea can succeed only in the long run by considering the interests of all stakeholders.

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Entrepreneurial Profiles N.  R.  Narayana  Murthy  is  the  Non-Executive  Chairman  and  Chief  Mentor  of  Infosys  Technologies  Limited. He was born on 20 August 1946. He did his B.E. Electrical from University of Mysore in 1967  and M.Tech from IIT Kanpur in 1969. He started his career with Patni Computer Systems in Pune.  In  1981,  Narayana  Murthy  founded  Infosys  with  six  other  software  professionals.  In  1987,  Infosys  opened its first international office in the United States. He had set up unique standards for doing business. He operated the business in this complex  environment with unique value propositions. He is a living legend and an embodiment of the fact that  honesty, transparency and moral integrity are not at variance with business acumen and are basically  the  hallmarks  of  long-term  success.  He  set  new  standards  in  corporate  governance  and  morality  when he stepped down as the Executive Chairman of Infosys at the age of 60. After the liberalization of Indian economy in the early nineties, Infosys grew rapidly. In 1993, the  company came up with its IPO. In 1995, Infosys set up development centres across cities in India  and in 1996, it set up its first office in Europe in Milton Keynes, UK. In 1999, Infosys became the first  Indian  company  to  be  listed  on  NASDAQ.  Infosys  has  a  global  footprint  with  over  50  offices  and  development  centres  in  India,  China,  Australia,  the  Czech  Republic,  Poland,  the  UK,  Canada  and  Japan, which is expanding year after year. Infosys and its subsidiaries have 1,13,796 employees as of  31 March 2010. Infosys takes pride in building strategic long-term client relationships. Over 97 per cent   of our revenues come from existing customers. Infosys has a turnover of more than $4.8 billion with  a  net  income  of  1.3  billion  for  the  year  ended  March  2010.  Infosys  was  ranked  no.  1  in  the  ‘Best  Employers in India 2002’ survey conducted by Hewitt and in the Business World’s survey of ‘India’s  Most Respected Company’ conducted in the same year. Along  with  the  growth  of  Infosys,  Narayana  Murthy  too  has  grown  in  stature.  He  has  received  many  honours  and  awards.  In  June  2000,  Asiaweek magazine  featured  him  in  a  list  of  Asia’s  50  most  powerful  people.  In  2001,  Narayana  Murthy  was  described  by  TIME/CNN  as  one  of  the  25  most influential global executives. He was the first recipient of the Indo-French Forum Medal in 2003  and was voted the World Entrepreneur of the year 2003 by Ernst & Young. The Economist ranked  Narayana  Murthy  eighth  on  the  list  of  the  15  most  admired  global  leaders  (2005)  and  Narayana  Murthy also topped the Economic Times Corporate Dossier list of India’s most powerful CEOs for two  consecutive years, 2004 and 2005. Kiran  Mazumdar  Shaw  was  born  on  23  March  1953  in  Bangalore.  She  had  her  schooling  at  Bishop Cotton Girls School and Mount Carmel College at Bangalore. After completing her B.Sc. in  Zoology from Bangalore University in 1973, she went to Ballarat University in Melbourne, Australia,  and qualified as a master brewer. Shaw started her professional career as trainee brewer in Carlton & United Beverages in 1974. In  1978, she joined as trainee manager with Biocon Biochemicals Limited in Ireland. In the same year,  Kiran Mazumdar Shaw founded Biocon India in collaboration with Biocon Biochemicals Limited, with a  capital of ` 10,000. She is Chairman and Managing Director of Biocon Ltd, the biggest biotechnology  company in India, and has been honoured with Padmashri in 1989 and Padma Bhushan in 2005. She  became India’s richest woman in 2004. She initially faced many problems regarding funds for her business. Banks were hesitant to give  loan to her as biotechnology was a totally new field at that time with associated risks, and she was a  woman entrepreneur, which was a rare phenomenon. Biocon’s initial operation was to extract an enzyme from papaya. Under Kiran Mazumdar Shaw’s  stewardship,  Biocon  was  transformed  from  an  industrial  enzymes  company  to  an  integrated  biopharmaceutical  company  with  strategic  research  initiatives.  Today,  Biocon  is  recognized  as 

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India’s pioneering biotech enterprise. In 2004, Biocon came up with an IPO and the issue was oversubscribed by over 30 times. Post-IPO, Kiran Mazumdar Shaw held nearly 40 per cent of the stock of  the company. Kiran  Mazumdar  Shaw  is  the  recipient  of  several  prestigious  awards.  These  include  ET  Businesswoman  of  the  Year,  Best  Woman  Entrepreneur,  Model  Employer,  Ernst  &  Young’s  Entrepreneur  of  the  Year  Award  for  Life  Sciences  and  Healthcare,  Leading  Exporter,  Outstanding  Citizen and Technology Pioneer.18

1.7  DIFFERENCE BETWEEN INVENTORS AND ENTREPRENEURS There is some confusion between the two terms ‘inventor’ and ‘entrepreneur’. An inventor is defined as ‘someone who is the first to think of or make something’.19 According to Wikipedia, invention is defined as ‘a new composition, device, or process. An invention may be derived from a pre-existing model or idea, or it could be independently conceived, in which case, it may be a radical breakthrough’.20 An inventor is a person who invents, particularly one who devises some new process, appliance, machine or article; one who makes inventions. For example, Archimedes (c. 287–12 bc), ancient Greek mathematician and philosopher, who made fundamental discoveries in the fields of physics and engineering; Cai Lun (c. 50–121 ad), the inventor of paper; Thomas Alva Edison, who patented 1,093 inventions. The most famous of his inventions was an incandescent light bulb. He also improved upon the original design of the stock ticker, the telegraph; Alexander Graham Bell, who invented the telephone; James Watt, who invented the steam engine, a major improvement on the inefficient steam engine of his time; and the Wright brothers, who designed and constructed the first practical aeroplane. Inventors are highly creative and educated; have family, education and occupational experiences that contribute to creative development and free thinking; are problem-solvers and capable of reducing complex problems to simple ones; have a very high level of self-confidence; are willing to take risks and have the ability to tolerate ambiguity and uncertainty (Hisrich 1985). Successful inventors use analogies to stimulate ideas for innovative inventions. They are basically unhappy with the existing state of affairs. It is this quality that drives them. They have a keen sense of observation. It is this quality that sparks new ideas in them. They have the ability to come out with revolutionary concepts, as they are not constrained by conventional wisdom. They are passionate about inventing rather than making money. They measure their achievements through the number of inventions made and patents granted. They do not value monetary gains as a measure of their success. Thus, inventors are creative, highly motivated, resourceful, hard-working and problem-solving. An entrepreneur is one who starts a business or other venture that promises economic gain. They organize and manage any enterprise, particularly a business that involves considerable initiative and risk. From the aforementioned points, it is evident that an inventor differs from an entrepreneur in a number of aspects, including the love of an entrepreneur for the venture and its commercial success. They will do anything and everything for the growth and survival of the organization, whereas an inventor would reluctantly modify their invention to suit commercial gains. It is an entrepreneur’s ingenuity, experience, organization-building ability and the ability to build a winning team that can help in translating an inventor’s work into a viable business venture. Thus, inventors love and enjoy inventions, while entrepreneurs love and enjoy translating them into reality by superior skills in execution.

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1.8  INSPIRATION FROM ROLE MODELS AND SOCIAL SUPPORT To take up entrepreneurship as a career option, what matters the most is the environment—home and outside home—in which the child is brought up and inspiration that the generation get from new generation and established entrepreneurs. The journey of an entrepreneur is most influenced by the choice of the ‘role model’ they have in mind. It is basically sociological perspective that focuses on the role society plays in entrepreneurship development and on the impact entrepreneurs make on society. A number of entrepreneur typologies have been reported. For example, Collins et al. (1964) have highlighted the following categories of entrepreneurs, mainly arising as a role of society in nurturing entrepreneurship:  ‘Craftsman’ entrepreneurs—Individuals who follow in the footsteps of family relations or role models who gave them early exposure to the craft they decide to follow as an entrepreneur.  ‘Like father like son’ entrepreneurs—Closely aligned with craftsman entrepreneurs, this type of entrepreneurs enter a business with father or mother as role model.  ‘Off-the-farm’ entrepreneurs—Individuals who have a fundamental dislike for, or disagreement with, their upbringing or some aspect of it. This engenders a strong desire to break away from the mould and be different.  ‘Opportunistic’ entrepreneurs—Entrepreneurs who seize opportunities as and when they arise. The opportunities need not necessarily fit any predetermined strategy and can be diverse and disconnected in nature. The parallel with the conglomerate management model is possibly a useful one here.  ‘Trained’ entrepreneurs—Individuals who have undergone training in the component skills of enterprise such as those offered in some MBA programmes.

According to McClelland (1967), the aforementioned justifies the notion that exposure to role models during one’s formative years can influence the disposition to entrepreneurship. Thus, sociological factors contribute a great deal in inspiring and encouraging upcoming generations to take up entrepreneurship. What matters most is societal upbringing and its consequences on future generations’ ways of thinking, for example, dependency culture, a system of social welfare that encourages people to stay on benefits rather than work and take initiative to come out with new and different ways of earning. Role model culture influences the youth to a large extent. Role models include parents, brothers, sisters, teachers, friends, relatives, entrepreneurs, scientists, innovators, spiritual leaders, political leaders, singers, actors, musicians, artists, athletes, comedians, celebrities and so on. The media often promotes certain personalities to increase their popularity. Certain individuals leave an indelible mark and excel in whatever they do that takes them to great heights. A role model is simply someone with whom a person identifies with and someone whose traits and qualities they aspire to emulate. Successful entrepreneurs act as a catalyst to promote entrepreneurship. Role models at times also serve as mentors to new entrepreneurs during the incubation and launching of their venture and provide support, guidance and direction. It is the beginning phase for the start-up that is most crucial and requires strong support and advice, which, coming from experienced and successful entrepreneurs, becomes a valuable input. Further, as an entrepreneur’s role is embodied in a social context, it is important that they build right networking in the early phase of venture formation process. It is for them to strengthen the ties with the people who would be helpful to them in the growth of their business. ‘The more frequent, in-depth and mutually beneficial a relationship, the stronger and more durable the network between the entrepreneur and the individual’ (Aldrich and Zimmer 1986).

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One of the entrepreneurs has stated that ‘my business role model is definitely my grandpa who has had a plethora of entrepreneurial success and most importantly, did it the right way through hard work, ethical relationships, and being smarter than everyone else (seriously, I wish I was 1/100 as smart as he is)’. Similarly, another person states that ‘Howard Schultz and Walt Disney are my two role models in business. They both epitomize the entrepreneurial spirit. They had a vision that they were determined to complete and absolutely nothing could stop them. Walt Disney failed several times and continued towards his vision to create one of the greatest business ventures. Howard Schultz started from almost nothing and was able to accomplish a vision driven by sheer passion. I have read everything about Howard Schultz and I believe one of the greatest ways to become a great business leader is to study past business minds’.21 For example, the names of some of the leading entrepreneurs that come before the majority of young aspiring entrepreneurs are Dhirajlal Hirachand Ambani, Kiran Mazumdar, N. R. Narayana Murthy, Azim Premji, G. D. Birla, Ratan Tata, Rahul Bajaj, John D. Rockefeller, Richard Branson, Warren Buffett, Jack Welch, Steve Jobs, Bill Gates, Anita Roddick, J. K. Rowling and Jacqueline Gold.

Example of Role Models Dhirajlal Hirachand Ambani is not just any other usual rags-to-riches story. He will be remembered as  the one who rewrote Indian corporate history and built a truly global corporate group. He changed  the rules of the game in the industry in an era when the private sector was hampered by the license  regime. A matriculate, he started his career as a worker at a Shell service station in Aden (Yemen)  but returned to the country to build a business empire that acts as a pointer to stock market in India. Born in Chorvad in Junagadh in 1932 as the third son to a village school teacher, Ambani embarked  on an entrepreneurial career by selling ‘bhajias’ to pilgrims in Mount Girnar over the weekends. Armed  with a matriculation certificate, he went to Aden only to return with a big idea of building a petroleum  company. He returned to India in 1958 with ` 50,000 and set up a textile trading company. Starting from scratch in 1966, Ambani and his two US-educated sons—Mukesh and Anil—have  built an empire to be reckoned with. He will be remembered for revolutionizing capital markets. From  nothing, he generated billions of rupees for those who put their trust in his companies. The  group  flagship  Reliance  Industries  had  a  turnover  of  ` 10,027  crores  with  a  net  profit  of  ` 1,151  crores  for  the  year  ended  March  2010.  Its  market  capitalization  stood  at  around  ` 30,000  crores. Dhirubhai managed to get his way and created his empire with remarkable ease, a way his business  rivals  could  not  digest  easily.  They  accuse  the  group  of  subverting  the  system  in  its  penchant  for  growth. Critics accuse the group of resorting to all tricks of the trade and breaking all rules of the game. In his relentless run to the pinnacle, Dhirubhai became the highest-paid chief executive officer with  a salary at ` 88.5 million leaving Wipro’s Azim Premji far behind at ` 42 million. Both are among the  world’s top 500 billionaires. In the words of Janki Ballabh, erstwhile Chairman of SBI, ‘No doubt that he was a visionary and  a dreamer, but he was converting all his vision and dreams into reality. He was a person who led  throughout by example. In fact, I would say that he raised the stature of common people’. Late Shri  K. K. Birla, an eminent industrialist and former Rajya Sabha member, stated, ‘He inspired countless  ordinary  men  and  women  to  perform  beyond  their  normal  capabilities.’  In  the  words  of  Ms  Sheila  Dikshit,  ‘Not  only  was  he  a  first  generation  industrialist  who  single  handedly  built  one  of  India’s  most  impressive  business  empires,  but  he  was  also  an  entrepreneur  and  a  visionary  who  will  be  remembered for shaping the industrial scenario of the country’.22

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VExTEC One may draw parallels and inspiration for his business from the launching strategies of Intel, the first  electronic design automation companies, and Apple. VEXTEC introduced product into the markets in almost a similar way early chip technology was  introduced.  Like  VEXTEC,  Intel’s  initial  products  were  intricate  and  complex,  which  were  built  with  the  most  advanced  engineering  technology  and  therefore  were  understood  by  few.  However,  the  company  turned  out  to  be  successful  mainly  because  it  released  the  product  in  functional  waves  based  on  targeted  customer  ‘pull’.  This  provided  a  unique  advantage  to  Intel  to  build  out  the  products, and the company, in stages that were linked to and driven by customer demand. VEXTEC  had adopted a similar approach that allows them to add features and functionalities as per requests  from the customer as identified through customer needs. As per the business model of the company, initial engagements are sold out as a managed service,  but all subsequent projects are worked out to deliver more and more of the product to the customer.  Ultimately,  as  customers  become  more  talented and  proficient  with  new technology,  company  will  move to a Web-based, software-as-a-service model. Apple  is  another  leading  company  that  had  experienced  launch  dynamics  similar  to  what  VEXTEC  has  gone  through—right  down  to  its  founders’  personalities.  At  Apple,  Steve  Wozniak  was  the  mastermind  and  genius  behind  the  development  of  complex  bit  processing  technology  that  ultimately  culminated  in  the  first  extensively  usable  personal  computer.  But  Steve  Jobs  had  the  technical  background  that  was  required  to  understand  the  consequence  of  what  Wozniak  had  done,  the  vision  to  see  its  possibilities  and  the  business  savvy  to  take  it  to  market.  VEXTEC’s  founders  had  similar  characteristics  and  advantage.  Dr  Robert  Tryon  and  Dr  Animesh  Dey  are  similar  to  Wozniaks  in  the  company—the  technical  virtuosos  who  conceived  VLM.  Loren  Nasser  (CEO)  is  like  Steve  Jobs  who  has  positioned  the  technology  for  widespread  market    acceptance. Many  companies  start  out  by  being  highly  innovative;  however,  subsequently  lose  their  entrepreneurial spirit when they become bigger. Therefore, VEXTEC’s challenge will lie in maintaining  the innovative spirit, as Apple has done, as the business grows.23

Other than inspiration from role models, what matters most is social and psychological support systems that can be conducive and favourable to new entrepreneurs. Some of the vital aspects of support system that need to be consciously developed for promotion of entrepreneurship are discussed in the following sub-section (see Fig. 1.14).

1.8.1  Social and Psychological Support It has been found that children are nurtured differently in different societies. In Western countries, children are encouraged to take risks and become independent as early as possible. Even parents may not keep providing an economic security net to them for long. Such culture encourages the entrepreneurial spirit in children. As against this, in certain societies like India, children are protected, and they usually do things after getting firm consent from their parents. Children are not encouraged to take risks, as normally their training at home keeps feeding them with negative signals such as this will fall, this is not right, this would not work and this is not your cup of tea. In the Indian context, it is found that parents would prefer their children to take up a government job rather than one in a private or multinational company. Further, parents may not support their children taking up an entrepreneurial venture.

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Professional Support System

Support Systems Moral Support

Social and Psychological Support

Figure 1.14 Entrepreneurship Support Systems After seeing the success of first generation entrepreneurs, a subtle change in thinking, especially in educated parents belonging to the middle and upper middle classes, is emerging. It is this group that is open enough to extend support to their children in doing what they like and love. For example, Saurav, only child and a final year student doing his MSc (Hons) in Economics with BE in Electronics and Instrumentation in Birla Institute of Technology and Science, Pilani, having wonderful options to get campus placement, opted for undertaking a venture in social entrepreneurship. His father is a brigadier in the Indian army and his mother is a doctor in the Indian army. When Saurav took up his proposal along with his friends to his parents, they happily accepted it and encouraged him to go ahead. Thus, parents who encourage their children to take risks and willingly extend psychological support as well as economic support facilitate in nurturing entrepreneurship. Socially, a failure in a venture is viewed as a setback and blot on the personality in developing countries such as India, Pakistan and Burma, while it is viewed as a milestone in learning in the developed world, such as the United States, the United Kingdom and European countries. Earlier, in developing countries, parents would not have liked to have their daughters married to a boy who has failed repeatedly in undertaking a venture. It used to be viewed as social stigma. However, the situation is changing slowly, and the experience of having failed in your own venture is viewed as highly valuable by prospective employers. In fact, they have started offering these individuals more responsible positions in professionally run organizations. This change in attitude of prospective employers has encouraged the younger generation to take up their own ventures as career options. Similarly, working wives and educated wives have been found to be far more supportive of their husbands in taking up entrepreneurial ventures compared to non-working or uneducated wives.

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1.8.2  Moral Support It is very important for an entrepreneur to develop a moral support system of family, friends, colleagues and other well-wishers. This helps in getting right advice and also provides support during difficult, trying and lonely moments that every entrepreneur goes through in their entrepreneurial journey. A study indicates that working spouses and spouses who have been extending all-out support help a lot in successfully translating ideas into reality. Further, family members, in general, and families with entrepreneurial background, in particular, act as a strong source of moral support. There is a saying that entrepreneurship starts at home. Therefore, whenever you want to plunge into entrepreneurship with your unique idea, make sure that you share it with your family members. They have the greatest concern for you and your well-being and, therefore, they will come up with genuine suggestions. You should have the capability to win their hearts and get their consent by convincing them. If you cannot convince your family members, it is certainly impossible for you to convince a customer and fetch an order. Similarly, it becomes your duty to make your family members understand the need for your taking a calculated risk for achieving the desired success. Over and above giving their moral support in crisis, family members will be able to provide you with worthwhile suggestions that suit you best, as they know well about your strengths and weaknesses. Well-wishers and close friends also play an important role in building a moral support network. Friends not only extend genuine and right advice in difficult times but also provide encouragement, understanding and financial support. Entrepreneurs find it easy to confide in friends certain things that they may not find easy to share with colleagues, parents and even other family members.

1.8.3  Professional Support System New entrepreneurs, in particular, and entrepreneurs, in general, need to have a network of mentors, business associates, trade associates and professionals in the organization to recourse to professional support system in their entrepreneurial journey. This enables them to get required information, support, feedback, guidance and direction on their plans. Specifically, business associates can provide industryspecific information and its relevance to your venture. Professionals such as bankers, venture capitalists, investment fund managers, consultants, accountants, lawyers and export import agents provide the much needed professional insight into business-related issues.

1.9  BUSINESS MODEL Derivation of economic value from an innovative idea being translated into reality requires appropriate conceptualization of a business model (Fig. 1.15). It provides basic clarity and link to translate new technology to deliver economic value. To understand the complex business environment in which entrepreneurs have to successfully deliver their products and services to a wide variety of customers, a clear and comprehensive understanding of the organization’s tasks is required. What is more important is to integrate the technical expertise of professionals with business expertise, so as to make a meaningful business and economic proposition out of it. Thus, business model describes the steps and the ways a particular business proposes to make money. It plays a critical role in ensuring flow of revenue stream coupled with good profit margins to derive a sustainable impact of an innovation. It fundamentally describes the process of making money by the company. A business model can be simple or very complex. A restaurant’s business model is to make money by cooking and serving food to hungry customers. A Web site’s business model might not be so

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Economic Value

Idea

Innovation

35

Margins

Technology

Revenue Model

Business Model

Figure 1.15 Business Model

clear, as there are many ways in which these types of companies can generate revenue. For example, some make money (or try to) by providing a free service and then selling advertising to other companies, while others might sell a product or service directly to online customers. John Mullins and Randy Komisar (2009), in their book Getting to Plan B, have defined a business model as a ‘pattern of economic activity—cash flowing into and out of your business for various purposes and the timings thereof—that dictates whether or not you run out of cash and whether or not you deliver attractive returns to your investors’. Business model translates operating activities into revenue model, margin model, operating mode—money spent to support sales, working capital model and investment model. The emphasis put in by Mullins is on cash flow from a business, which matters most in the survival and growth of a business. Simplicity or complexity of a business model depends upon the nature of business and the associated revenue model. For example, mango juice manufacturers make money by simply preparing delicious and tasty mango juice and serving it to customers who are thirsty or are otherwise in need of juice at an appropriate location and at a right time. Similarly, book publishers make money by publishing books required in the market and ensuring timely delivery through a network of distributors or directly to the readers. However, if we look at carbon credit trading as business, revenue stream may be relatively difficult to identify and, in turn, there could be a number of ways to make money in such a business. Similarly, if we consider Web-based business, revenue stream identification becomes complicated as it is relatively difficult to identify the same and different Web-based businesses that operate through different revenue models such as advertising as a major source, directly charging the customer or acting as intermediaries for the product or service provided and charging the manufacturer.

1.10  ENTREPRENEURSHIP—MINDSET In the 21st century, the concept of entrepreneurship acquired a new dimension of a mindset, which differentiated the earlier perspective of identifying opportunities, taking risks and crystallizing idea into reality. It is here that entrepreneurial leadership and mindset plays a critical role in successfully translating a business idea into reality. It is this perspective that makes a difference whereby even

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a relatively bad idea can yield good results, but a good idea need not necessarily yield good results in the entrepreneurship journey. It is this mindset that builds lasting businesses. Rita McGrath (2000), in her book The Entrepreneurial Mindset, highlights the key aspect of establishing an entrepreneurial mindset as ‘creating the conditions under which everyone involved is energized to look for opportunities to change the business model’. The question arises as to what is meant by mindset. It basically means how you think, what your belief system is, what your habits and traits are, how you feel about yourself, how confident and courageous you are, how much you trust others and whether you have the self-esteem to be successful. In short, success as an entrepreneur or otherwise depends, to a great extent, upon your character, your thinking and your belief system (Fig. 1.16). Therefore, it is also said that entrepreneurship is nothing but an attitude. It has been rightly said by William James: ‘The greatest discovery of my generation is that human beings can alter their lives by altering their attitudes of mind.’ A thought is the most powerful step in the process of achieving our goals, i.e., converting dreams into reality. A chain germinates from thoughts leading to our feelings that lead to actions, and it is actions that yield results. Thus, results are the outcome of a multiplicative function of thoughts, feelings and actions. This chain depends mainly upon the way we get nurtured by our parents and programmed in our childhood through our learning and de-learning that takes place in our interactions with teachers, friends, relatives, media, culture or priests and so on. Now the fundamental question that arises is ‘From where do “thoughts” come to us?’

Th

Mindset

ink

ing

lief Be tem s Sy

Entrepreneurship

Entrepreneurial Leadership

Attitude

r

cte

ara

Ch

Figure 1.16 Entrepreneurship—Mindset

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Thoughts germinate in us mainly from the information stored in mind, which comes mainly from our ‘past programming’. So it is the past programming and conditioning that governs our thought process. Thus, what matters most is our programming that is subject to modifications through conscious learning from our experiences. This leads to a fundamental question that governs our ‘mindset’—‘How do we get programmed?’ Fundamentally, there are three ways in which our programming keeps taking place: verbal programming, implying what we heard when we were young; modelling, implying what we saw when we were young; and specific incidents, implying what we experienced when we were young—for example, if our teacher or parents have been repeatedly sending us signals that we are stupid, useless and that we can never understand a problem or that we are smart, intelligent and wise, we see as to how our parents and teachers behaved in a specific incident which might have left an everlasting positive or negative impact on our personalities. All such incidents and experiences result in the formation of a mindset that matters the most in our attitude towards life and, ultimately, our success. The question is how to cultivate a mindset that facilitates our becoming an entrepreneur. What it takes to cultivate such a mindset is a conscious effort through a process of awareness, understanding, dissociation and affirmation by taking the following steps (Fig. 1.17):  Awareness—Write down all the statements you heard about whatever you are trying to change.  Understanding—Write down how you believe these have affected your life so far.  Disassociation—Decide whether you want to continue with these thoughts or beliefs or change them now.  Affirmation—Make an affirmation to yourself ‘What you have heard about this particular thing is not true and you choose to adopt new ways of thinking’.

Thus, for becoming a successful entrepreneur, the most important ingredient is our mindset that needs to be properly cultivated through the aforementioned steps. It has been usually found that it is this spark in an entrepreneur that ultimately plays the most crucial role in their success or failure as an entrepreneur.

Awareness

Affirmation

Cultivating Mindset

Understanding

Disassociation

Figure 1.17 Cultivating the Mindset

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1.11  BIG COMPANIES VS START-UPS Big, well-established companies vs start-ups have different challenges in the world of business. Fundamentally, entrepreneurship begins with a start-up, i.e., a small business, and over a period time, develops strong roots to become a well-established company. Inherently, because of both experience and financial resources, the challenge faced by well-established companies is far less than the challenges faced by start-ups. Therefore, one has to be careful in meticulous planning based on realistic assumptions before plunging into a start-up venture. Fundamentally, established companies have smooth operations with well-defined product and service characteristics, catering to a well-defined market. These companies usually have well-tested business models, which deliver under varied conditions. The job roles are professionally handled by different functional teams. Above all, the challenge of getting the first customer or expand clientele is not very crucial for them, because they have a loyal set of customers who help a lot in promoting the product or service through word of mouth. As against this, startups have a great passion to pursue their goals with a hunger to grow. They have limited resources and their cost is low compared to similar products or services delivered by well-established companies. The decision-making is quick as command lies usually with one man and there is a lack of hierarchy in the organization. They have a lot of flexibility to get adjusted to changing environments and also to changing needs of customers. Above all, start-ups are eligible for various funding schemes floated by the government and other organizations working for the cause of promotion of entrepreneurship, which well-established companies may not be able to do.

1.12  MISCONCEPTIONS AND MYTHS ABOUT ENTREPRENEURSHIP There are certain wrong notions, misconceptions and myths about entrepreneurship. The youth plunging into entrepreneurial ventures need to be very careful about these myths and act in a judicious manner to have a successful entrepreneurial journey. Some of the prominent myths and misconceptions about entrepreneurship are as follows.

1.12.1  Entrepreneurs Are Risk-takers It is said that most entrepreneurs take wild, uncalculated risks in starting a business. However, the fact remains that business requires risk-taking ability on the part of an entrepreneur. They take calculated risks looking at the pros and cons of a venture vis-à-vis returns. Fundamentally, greater uncertainty about future outcomes has to be weighed against greater returns before an entrepreneur plunges into a venture.

1.12.2  Entrepreneurship Is All About Money and Getting   Rich Quickly Entrepreneurship has certainly to do with earning money and investing it judiciously for further wealth creation. However, the primary objective of an entrepreneur is usually not becoming rich quickly but to serve customers with innovative products and services to earn their goodwill and, in turn, to generate wealth. ‘To think that entrepreneurship is about making money is to belittle the entrepreneurs themselves,’ says Raman Roy, who pioneered outsourcing to India at his stints with American Express, GE and Spectramind. He explains, ‘There are a lot easier ways to make money than to start out on your own. First of all, entrepreneurs are not rational people…. I had a great job in GE and it is not rational to quit such a job. It is not rational to drop out of Harvard, but Bill Gates did. As such, I am not sure if

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entrepreneurs can aim to be rich. For example, Gates did not set out to be the richest person in world. But, at the same time, he was possessed by the great idea—that of Windows. It is this idea that motivated him to quit Harvard. He was possessed by it’ (Eluvangal 2008). John D. Rockefeller once said, ‘I had no ambition to make a fortune. Mere money-making has never been my goal; I had an ambition to build.’ Thus, entrepreneurship is not to get rich quickly, as success takes its own toll and time, but it is mainly about being passionate about an idea and doing what you love and like to do, keeping in view the customer perspective.

1.12.3  Starting a Business Requires a Lot of Money It is also a misconception that without a lot of money in hand, one cannot plunge into an entrepreneurial venture. Money is certainly required, but not necessarily a huge sum to start a business. As such, the major chunk of Fortune 500 companies started their business with an investment of less than $5,000. Contrary to popular belief, starting a business does not require you to invest a lot of money. Seventeen per cent of all new businesses begin with less than $5,000 in cash according to Wachovia. Seventy-two per cent of companies with a net worth over $1,000,000 started with a capital of less than $50,000. One may remember the wealthy billionaire Ross Perot from his presidential campaign. Perot started his company Electronic Data Systems with just $1,000 in 1962. One could start a landscaping business, a Web site development company or one’s own consulting company with limited funds.24 Thus, what matters the most is the worth of an idea and not the money in hand to start a business. What differentiates successful ventures from unsuccessful ones is the ability to make use of little money and make the best out of it.

1.12.4  Entrepreneurs Are Born It is a misconception that entrepreneurs are necessarily born and possess certain traits gifted to them through their genes. This philosophy also limits the role of entrepreneurship teaching. There are umpteen first-generation entrepreneurs who did not have any background of entrepreneurship. The truth is that entrepreneurship is a lifestyle choice and not an accident. Therefore, if one works consciously for it, one becomes an entrepreneur. Thus, entrepreneurship can be taught and learnt.

1.12.5  Entrepreneurship Requires High-tech Invention Some believe that most successful entrepreneurs start their companies with a breakthrough invention, usually technological in nature. This, as such, is a myth. Innovation is certainly part and parcel of entrepreneurship, but breakthrough technological developments are not necessary at the beginning of a successful venture. Microsoft, Wal-Mart and Federal Express are examples of ventures that have made major changes in the way we do things. But all ventures are not necessarily high-tech driven with breakthrough technologies. It is not necessary to have a great idea that can revolutionize the world, but the idea must be good, workable, needed by the customer and priced well from a customer perspective. Basically, one has to be at the right place, at the right time with the right product or service.

1.12.6  Ignorance Is Bliss for Entrepreneurs Entrepreneurs need to be alert to and abreast of the latest in their field. They need to keep investing in them continuously to acquire more knowledge and sharpen their human skills. As such, not remaining

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in touch with latest developments, particularly in their area of operation, could be disastrous for an entrepreneur. Undertaking a business with closed eyes and being ignorant about the existing and emerging risks would inevitably lead the failure of a business. It is rightly said that taking blind shots without doing the required groundwork is like gambling.

1.12.7  Entrepreneurs Require Expertise and Experience in   Their Line of Business Experience and expertise is a sufficient condition but not a necessary condition to succeed as an entrepreneur. This too is a myth that one cannot start a business in an area in which one does not possess experience and expertise. Bill Gates started his first venture as a student with Paul Allen. The founder of Apple Computers, Steve Wozniak, started his business when he was an ordinary engineer at Hewlett Packard. There are large numbers of start-ups that have been started by entrepreneurs immediately after coming out from educational institutions, leaving aside a lucrative jobs. These examples clearly show that experience and expertise are not necessary prerequisites to success. Similarly, it is not necessary to be an expert in an area of one’s business at the time of founding a company, but one does become an expert and knowledgeable in one’s field, as one traverses the path to succeed in a business. As such, companies in early stages of growth are usually started by relative amateurs with little expertise in the chosen area of operation. A full 40 per cent of Inc. 500 founders had no prior experience in the industry they were entering, according to Nordic Center of Excellence (NCOE) research.

1.12.8  Venture Capital Funding Is a Must It is a wrong notion that successful businesses necessarily require a huge funding support from venture capitalists for developing an idea and procuring required tangible and intangible resources. There are certain fields such as biotech, pharma, nanotechnology and other high-tech start-ups that require huge funding support in the beginning phase itself and, therefore, may have necessarily recourse to venture capital funding. But venture capital or even other sources of funding are found to be uncommon among most successful entrepreneurial growth companies at their early stages of development. Research studies have revealed that even in developed countries like the United States, less than 1 per cent of new ventures get funded by venture capitalists. A classic example is Microsoft; even Bill Gates and Paul Allen could not succeed in getting venture capital funding when they started their company in 1975. Similarly, Cisco Systems, a networking giant, started their business using funds obtained from personal savings and borrowings by two of its founders.

1.12.9  Banks Do Not Lend Money to Start-ups This is a misconception, as banks have a number of schemes to promote new ventures and extend debt support as well as seed funding support to professionals even without collaterals. In a survey conducted by the Federal Reserve in the United States, 16 per cent of the financing of start-ups comes from banks. This is followed by 13 per cent from trade creditors such as business angels and venture capitalists. In the Indian context, financial assistance is available to new ventures from various institutions such as nationalized banks, Small Industries Development Bank of India (SIDBI), Regional Rural Banks (RRBs), National Small Industries Corporation and State Financial Corporations, depending on the project requirements and promoters’ background. There are schemes for professionals without even margin money requirements—initial contribution by the promoter in the business or collaterals.

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What matters the most is proper preparedness and homework on the part of the promoter regarding their financial requirements for starting a business.

 1 .12.10  Starting a Business Is Easy  It is a myth that starting a business is easy, as it requires a lot of struggle, hard work and commitment to run a business successfully. As such, one may not get time for the family and other social commitments, particularly during the initial phase of the business. If one cannot slog and seamlessly work for a bigger cause, it is not worth starting a business. There are no shortcuts or easy routes to entrepreneurial success. 

 Check Your Progress   10 Common Worries and How to Overcome Them 

  

It is natural to have attacks of self-doubt. Starting a business is a big responsibility, and you are very much on your own. Here are 10 common worries and how to overcome them. 1. I am not bright enough: Well, sometimes you can be too bright to succeed. Innocence and naivety can actually protect you from fear. It is possible to think too much! 2. I am not pushy enough: Do you like doing business with pushy people or do you prefer nice reasonable people? Pushy people are often less successful than you might think. 3. I am not rich enough: One of the best ways to watch your costs is to have no money to waste. Wealthy people can be careless with money—you probably cannot afford to be. 4. I am not good at sums: Relax, spreadsheets and accounting software make the numbers easy to work out. Remember that success is as much about instinct as arithmetic. 5. I cannot spell: Literacy is great if you want to write books but less important if your business communicates with customers verbally. Use document templates—there are some at the back of this book. 6. I will fail: Maybe you will, but equally you will not make your first million if you do not try. 7. Rivals will eat me alive: In fact, the opposite is usually the case. Young, small businesses can duck and weave beneath the fists of those nasty big competitors. 8. I am naturally pessimistic: So, you will not make false assumptions and step into the dark without a torch, will you? A glance at the downside puts the upside in perspective—just be sure to see both. 9. I do not take risks: Running a business is like crossing the road. You can jaywalk, wear dark clothing and risk getting squashed—or push the button and follow the green man when the traffic stops. There is almost always a choice. 10. I know my failings: We all know what we are bad at and we all underestimate the value of our strengths. No one is perfect nor is any business. That is why there is room for you too. Focus on what you do well.

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KEY CONCEPTS  Entrepreneurship: A person who takes the risk of building a new enterprise.  Entrepreneurship in the 21st Century: The term is getting associated more closely with creative destruction, disruptive technologies, mindset and entrepreneurial leadership.  Entrepreneurship Components: Fundamentally, the three key components around which entrepreneurship revolves are opportunity identification, value creation and resource organization.  Entrepreneurial Traits: Traits associated with entrepreneurial personalities.  Inventor: Someone who is the first to think of or make something.  Invention: A new composition, device or process.  Role Model: One from whom you get inspiration to imitate their traits.  Ordinary Innovation: Product development through improved technology.  Technological Innovations: Development of new products through substantial change in technology.  Breakthrough Innovations: Development of new products with some technological development.  Continuous Innovations: Incremental change leading to capturing enlarged market potential or improving the efficiency of operations.  Dynamically Continuous Innovations: Reconfiguration of existing technology to create process improvement.  Discontinuous Innovations: Gives rise to new product concept involving new operating principles or revolutionary process changes.  Product Innovation: Creation of new products or improvements in existing products.  Process Innovation: Improvement in some part of the process or introduction of a new process to provide additional benefit to the consumer by way of cost, service or utility.  Positioning Innovation: Involves creating a market for the product or service through repositioning.  Paradigm Innovation: Involves major shift in thinking that causes change.  Business Model: Provides a basic clarity and link to translate new technology to deliver economic value.  Entrepreneurial Mindset: Creating conditions under which everyone involved is energized to look for opportunities to change the business model. ENdNOTES 1. Business Week Online, 8 January 2001. 2. Ibid. 3. Harvard Business School, Entrepreneurship Program at Harvard Business School Wins Top Award, http://www.hbs.edu/news/releases/012204_entrepreneurship.html 4. Babson Web site, http://www3.babson.edu/eship/ 5. www.scribd.com/doc/2197576/Entrepreneurship

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6. Lester Center of Entrepreneurship and Innovation, http://entrepreneurship.berkeley.edu/main/ wie.html 7. Economics and Management of Competitive Strategy, World Scientific Publishing Co. Ltd., chap 7, 217–18, http://www.worldscibooks.com/etextbook/7171/7171_chap07.pdf 8. ‘Netspeed: The Supercharged Effect of the Internet’, Michael Dell address to The Executives’ Club of Chicago, http://www.executivesclub.org/static/News98-99/Michael%20Dell.htm, accessed on 23 October 1998. 9. Customers Will Pay More for Great Reputation, http://www.customerservicemanager.com/ customers-will-pay-more-for-great-customer-reputation.htm, accessed on 20 November 2007. 10. Posted by Siva Vaidhyanathan, 24 June 2008, http://www.googlizationofeverything. com/2008/06/the_company_with_the_best_repu.php 11. McAfee http://www.mcafee.com/careers/people_india.html 12. Technology Review, http://www.technologyreview.com/companywatch/company/ge/;http:// www.technologyreview.com/companywatch/company/dupont/ 13. SEPA, http://www.renewableenergyworld.com/rea/partner/solar-electric-power-association1410/news/article/2009/10/sepa-announces-winners-2009-solar-business-achievement-awards 14. Harvard Business School Alumni Award 2005, http://www.alumni.hbs.edu/awards/2005/barry.html 15. http://articles.timesofindia.indiatimes.com/…/28275098_1_artistes-patachitra-fakiri; Times of India, 26 July 2010 16. ‘Entrepreneur Success Story: Brian Scudamore’, Scott Allen, former About.com Entrepreneurs Guide; http://entrepreneurs.about.com/od/casestudies/a/1800gotjunk.htm 17. ‘The New Entrepreneur’, Business Week, http://www.businessweek.com/smallbiz/running_ small_business/archives/2010/01/malcolm_gladwell_punctures_the_risk-taker_myth.html 18. Iloveindia.com, http://www.iloveindia.com/indian-heroes/narayana-murthy.html 19. wordnetweb.princeton.edu/perl/webwn 20. en.wikipedia.org/wiki/Inventor 21. Who Is Your Business Role Model? – Entrepreneur Poll Results, http://www.youngentrepreneur. com/blog/entrepreneur-polls/who-is-your-business-role-model-entrepreneur-poll-results/ 22. Adapted from http://www.rediff.com/money/2002/jul/06obit.htm, accessed on 5 July 2010. 23. Adapted from Forbes.com; http://www.forbes.com/2009/09/08/model-business-ten-questionsentrepreneurs-promising.html, accessed on 5 July 2010. 24. ‘Financial Edge’, investopedia.com. Top 7 Myths About Starting a Business, http://financialedge. investopedia.com/financial-edge/0410/Top-7-Myths-About-Starting-A-Business.aspx?partner= msnbc REfERENCES Aldrich, H. and C. Zimmer. 1986. ‘Entrepreneurship Through Social Networks’, in The Art and Science of Entrepreneurship. Cambridge, MA: Ballinger, 3–24. Amit, R. and P. J. H. Shoemaker. 1993. ‘Strategic Assets and Organizational Rents’, Strategic Management Journal, 14: 33–46. Barney, J. B. 1986. ‘Organizational Culture: Can It Be a Source of Sustained Competitive Advantage?’, Academy of Management Review, 11(3): 656–65. Barney, J. B. 1991. ‘Firm Resources and Sustained Competitive Advantage’, Journal of Management, 17(1): 99–120.

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Bonnett, C. and A. Furnham. 1991. ‘Who Wants to be an Entrepreneur? A Study of Adolescents Interested in a Young Enterprise Scheme’, Journal of Economic Psychology, 12(3): 465–78. Bowman, C. and V. Ambrosini. 2004. What Is a Valuable Resource? Bedford, UK: Cranfield School of Management, Cranfield University. Presented at Strategic Management Society Conference, Puerto Rico, 28 September 2004. http://www.thestep.gr/trainmor/dat/%7B00143c13-9eba-4f9d-b823-1ea77655f16a%7D/article.pdf. Brockhaus, R. H. 1980. ‘Risk Taking Propensity of Entrepreneurs’, Academy of Management Journal, 23(3): 509–20. Collins, O. F., D. G. Moore and D. B. Unwalle. 1964. The Enterprising Man. East Lansing, MI: Michigan State University Press. Collis, D. and C. Montgomery. 1995. ‘Competing on Resources: Strategy in the 1990s’, Harvard Business Review, 73(4): 118–28. Dollinger, M., P. Golden and T. Saxton. 1997. ‘The Effects of Reputation on the Decision to Joint Venture’, Strategic Management Journal, 18(2): 127–40. Eluvangal, S. 2008. Entrepreneur. DARE—Because Entrepreneurs Do. Ely, R. T. and R. H. Hess. 1937. Outlines of Economics, 6th ed. New York: Macmillan, 488. Gartner, W. B. 1985. ‘A Framework for Describing the Phenomenon of New Venture Creation’, Academy of Management Review, 10(4): 696–706. Goodwin, N., J. A. Nelson, F. Ackerman and T. Weisskopf. 2005. Microeconomics in Context. 124. Hart, M., M. Stevenson, and J. Dial. 1995. ‘Entrepreneurial: A Definition Revisited’, in Frontiers of Entrepreneurship Research, ed. Bygrave, W. D. et al., Babson Park, MA: Center for Entrepreneurial Studies, 75–89. Hébert, R. F. and A. N. Link. 1982. The Entrepreneur: Mainstream Views and Radical Critique. New York: Praeger. Hendrickx, L., C. Vlek and H. Calje. 1992. ‘Effects of Frequency and Scenario Information on the Evaluation of Large-Scale Risks’, Organizational Behavior and Human Decision Processes, 52: 256–75. Hisrich, R. D. 1985. ‘The Inventor: A Potential Source of New Products’, The Mid Atlantic Journal of Business, 24: 67–80. Johnson, B. R. 1990. ‘Toward a Multidimensional Model of Entrepreneurship: The Case of Achievement Motivation and the Entrepreneur’, Entrepreneurship: Theory and Practice, 14: 39–54. Kirzner, I. 1979. Perception, Opportunity, and Profit. Chicago, IL: University of Chicago Press. ———, I., ed. 1982. ‘Uncertainty, Discovery, and Human Action: A Study of the Entrepreneurial Profile in the Misesian System’, in Method, Process, and Austrian Economics, chap 12. Lexington, MA: D. C. Heath and Company. Knight Frank, H. 1921. Risk Uncertainty and Profit. Cambridge: Hart Schaffner & Marx: Houghton Miffin Company, The Riverside Press, 1st ed. McClelland, D. 1967. The Achieving Society. New York: Van Nostrand. McGrath, R. and I. MacMillan. 2000. The Entrepreneurial Mindset. Boston, MA: Harvard Business School Press, 2–3. Mullins, J. and R. Komisar. 2009. Getting to Plan B. Boston, MA: Harvard Business Press, 5. Pervin, L. A. 1980. Personality: Theory, Assessment and Research. New York: John Wiley & Sons. Peteraf, M. A. 1993. ‘The Cornerstone of Competitive Advantage: A Resource-Based View’, Strategic Management Journal, 14: 179–91. Rotter, J. B. 1966. ‘Generalized Expectancies for Internal Versus External Control of Reinforcement’, Psychological Monographs: General and Applied, 80(1): 609. Schumpeter, J. A. 1975. Capitalism, Socialism and Democracy. New York: Harper. Schumpeter, J. 1952. Can Capitalism Survive? New York: Harper & Row, 72. Shaver, K. G. and Scott L. R. 1991. ‘Person, Process, Choice: The Psychology of New Venture Creation’, Entrepreneurship Theory and Practice, 16: 23–45. Stevenson, H. 1985. ‘The Heart of Entrepreneurship’, Harvard Business Review, March–April, 85–94. Van Zuuren, F. J. and H. M. Wolfs. 1991. ‘Styles of Information Seeking Under Threat: Personal and Situational Aspects of Monitoring and Blunting’, Personality and Individual Differences, 12(2): 141–9. Ward, E. A. 1993. ‘Motivation of Expansion Plans of Entrepreneurs and Small Business Managers (Measuring Locus of Control)’, Journal of Small Business Management, 31: 32–8.

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Weber, L. 2009. Digital World Digital Reputation. New Jersey: John Wiley & Sons. Winter, S. 1987. ‘Knowledge and Competence in Strategic Assets’, in The Competitive Challenge, ed. D. Teece. Cambridge, MA: Ballinger, 159–84. Wolff, K. 1950. (Trans.) The Sociology of Georg Simmel. New York: Free Press, 402–408.

CONCEPTUAL QUESTIONS 1. Define the three types of start-ups with examples. 2. Differentiate between big established companies and start-up ventures by giving examples. 3. How are entrepreneurs behaviourally different from managers? When can we expect entrepreneurs to behave managerially? 4. Define value creation and explain its importance in entrepreneurship. 5. What are the four different characteristics of resources? What is the significance of these characteristics for entrepreneurs to develop competitive advantage? 6. What are the six different types of resources? Explain. Which resource is more crucial from the point of view of driving sustainable competitive advantage in businesses related to knowledge economy? 7. What personal skills are required in entrepreneurs. Which personal skill do you think is the most critical and why? 8. Define entrepreneurship and compare your definition of entrepreneurship with the concept of entrepreneurship in the 17th century. 9. How has the concept of entrepreneurship undergone change over the years? What is the emerging new trend in defining entrepreneurship in the 21st century? Explain. 10. What is the importance of role models and support systems in entrepreneurship? 11. Define different categories of entrepreneurs highlighted by Collins mainly arising as a role of society in nurturing entrepreneurship. 12. Differentiate between entrepreneur and inventor by citing concrete examples. What does it take to be a successful entrepreneur? 13. ‘Banks do not lend money to start-ups.’ Do you agree with this statement? Examine critically. 14. ‘Entrepreneurship is all about money and getting rich quickly.’ Do you agree with this? Justify your answer. CRITICAL THINKING QUESTIONS 1. ‘Entrepreneurship and economic development are two sides of a coin.’ Examine the statement critically with the help of examples. 2. ‘It is important to develop and evolve entrepreneurship from within at local level, if we would like to have an overall development of a local area.’ What is the relevance of this statement? 3. ‘Certain regions, in spite of having entrepreneurial spirit, do not develop because of lack of other resources.’ Do you agree with the statement? Justify your answer. 4. Differentiate between foundation and gazelles companies with the help of concrete examples from the Indian business environment. 5. ‘The greatest discovery of my generation is that human beings can alter their lives by altering their attitudes of mind.’ What is the relevance of this statement in context to entrepreneurship? Explain.

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6. List down 15 vital traits that successful entrepreneurs may possess. Select the top 3 traits out of the list of 15 identified traits and put them in descending order of priority. Explain the rationale for the top three traits selected by you and their rank ordering. 7. An electronics manufacturer that makes components for flat TVs has costs that are below those of some of its competitors but above those of other competitors. Owing to a boom in demand for flat TVs, component manufacturers are able to operate profitably at full capacity. Would it be advisable for the electronics manufacturer to invest in adding further facilities to lower its operating costs? What factors do you think need to be evaluated well by the company’s managers to consider in making their decision? 8. Consider a movie rental chain operating in major metro cities in India. How, as an entrepreneur operating this chain, would you go about estimating the willingness of the customers to pay? What is the value created per movie by the movie rental chain and what are the resources organized by the chain to maximize value creation? 9. M. Thiagarajan, a pilot, was just 27 when he floated Paramount Airways, based out of Madurai, which launched commercial flights on 19 October 2005. This makes Thiagarajan the youngest airline CEO in the world. At the moment, Paramount Airways operates only in the south. Next year, Thiagarajan wants to launch it in the West. Two years after that, in 2008, he plans to enter the North and the East. ‘We want to dominate the West by 2009 and become a national player by 2011,’ he says. A business management graduate, he entered the family business as a thirdgeneration entrepreneur and established his own Paramount Mills before starting the aviation business. If the low-profile entrepreneur has donned an aggressive profile, it is because ‘we were making the right kind of noise and we are now leaders with 26 per cent market share in the south Indian market’, Thiagarajan says. ‘Now it is time to have a presence in western and central India.’ Thiagarajan may have eschewed a less-than-flamboyant lifestyle in his personal life, but where Paramount Airways is concerned, he chose a ‘high value carrier business model targeting the premium segment of customers with a business and first class configuration’ using Brazil-made Embraer aircraft. More recently, Delhi-based MDLR Airlines has chosen to follow the model with an exclusive business class configuration.What are the typical traits of an entrepreneur that can be observed in M. Thiagarajan? What do you see as the reason for the success of Paramount Airways?

CASE 1.1:

HOW I MADE MY FIRST MILLION 

 Starting Out  I never had much of an education. Did not matter at all. Self-esteem is generated by the way you behave, not by the abbreviated degrees next to your name. In fact, a few years ago, a good friend said that I have a degree. ‘I do?’ I enquired. ‘Yes’ he said. As I am not ‘schooled’ and ‘colleged’, I asked him what he meant. He said that I am an ISABF (Inter Science Appeared But Failed). I found it funny. However, that began a friendship that is both strong and endearing. But wait. How come I dropped out of school, way back in ’67? Did I not want to study? I guess I was too playful and couldn’t concentrate on something so tedious. So I opted out. My father was an accountant getting ` 150 a month. A good salary in those days, the time of the ’50s, but then he had six mouths to feed. And we were cramped in a single room, inside the chawls of Kalbadevi in Mumbai.

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 Initial Investment  With retirement round the corner, my father decided to start a business. So he opened a provisions store and put me in charge. Instead of attending to customers, I eyed the biscuits and Milan Supari stocks. And ate and ate and had nothing to show at the end of the day. The shop closed. What could I do? I borrowed ` 5,000 from my father and began selling leather covers for radios. But business floundered and soon the money was gone. Started another business with help from friends, but left after they began nosing around. That was in ’80. My friend in the United States sent me a ticket to come over for a visit. After I reached there, he asked me to sell sarees at his emporium. But the bait was exceptional: $1500 a month and 25 per cent partnership! Yet I said No. This kind of job could never satisfy. So I came back. No work here but I would leave home in the morning, as if off to work and return in the evening.

 Turning Point  Then in June ’83, I got a job with Gemini Impex Pvt Ltd, a clothing company, and was in charge of sales—but without salary, only on commission. As the company was not doing well, I moved into areas like production and administration. That was my turning point. In the course of my dealings, I developed a client who came with difficult orders. Like in a 3,000-piece order, he would want three colours in as many designs. Gemini couldn’t handle it: this could take four months of production time, whereas straight jobs were over in less than a month. Naturally, they refused. But the customer proposed to work with me and my bosses agreed. So I resigned and went into garment export. Borrowed money from friends. Small sums between ` 5,000 and ` 20,000, till I raised ` 1.5 lakhs. Started Jal Exports in April ’84. Rented a 1,000 sq. ft gala in Lower Parel for ` 5,000 a month. Sourced designs and manufacturing units from all over. Ensured strict adherence to client’s specifications. Sales soared. In the first year, the company’s turnover was ` 60 lakh. But I made nothing. I had debts to pay. The following year, sales nosedived, as another supplier undercut me in price. But my rival had erred. He undercut not only in price, but also in quality. The client was angry and I was back on rails and gunning for full speed. Made my million the next year on a turnover of ` 1 crore.

 Rules to Play By  Although I am relatively well off (group turnover today is ` 10 crore), I am not uneasy as many well-off people are. Why? Because my deals were done in absolute honesty. It is easy to compromise. Because business is like a rocky climb. You can slip and fall and be discouraged from trying again. Perseverance is the only way. I suffered losses, but accepted them as part of life. That I think is the most important thing.1  Questions  

1. What are the traits of the entrepreneur highlighted in this caselet? 2. What important lessons about entrepreneurship can be learnt? 3. Identify opportunity, value proposition and resource organization as keys to entrepreneurship from this caselet. (Continued)

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 Endnote  

1. Adapted from Business Standard, 3 April 1996.

 CASE 1.2:  FROM CANDLE SELLER TO CEO  Naresh Gulati, 39 years old, used to sell decorative candles to the newly wed couples along the roadside in Chandigarh. He was never interested in studies and always wanted to do something of his own. Today, he is the owner of the ` 440-crore Oceanic Consultants Australia Group (OCA Group). He tried many businesses, starting from selling candles to wholesale cloth trading to cosmetics wholesale and teaching at Aptech Computers to running a computer centre, and has finally settled down on overseas education consultancy business. Although Gulati flunked in Class 10 and performed miserably in college, he is now a guest lecturer on entrepreneurship in leading Australian universities and inspires budding entrepreneurs. He did his diploma in electronic data processing and went to RMIT, Melbourne, in 1995 for a postgraduate course in information systems. However, destiny had something else in store for him. ‘When I reached there, I realized that I had been duped. I was promised a job in Melbourne by my immigration consultant, and that would have helped me clear the loan that I took for going overseas,’ recalls Gulati. For the next six months, he came in touch with several students who had met the same fate. And this made him think about a fantastic business opportunity—immigration consultancy business. Gulati came back to Chandigarh in 1996 and started Oceanic Consultants. Chandigarh had over 110 such agencies at that time, and he was discouraged by many not to enter into this business. ‘There was a time when I had to choose between two options—paying the rent or using that money for advertising. I chose the latter and the risk paid off.’ In three years, Oceanic Consultants had opened branches in Ludhiana, Patiala, Jallandhar and Amritsar. However, the franchise model was not sustainable as quality was getting affected and people were not interested in investing money. Moreover, established players such as Study Overseas and IBP Education created a dent in whatever little marketing that Oceanic did. Oceanic Consultants then zeroed in on company-owned office model. And this decision yielded results. Oceanic now has 20 offices across India and plans to take the count to 60 by 2013. The company opened its first office abroad in Australia a decade back and an office in the United Kingdom in 2010. The company has plans to have their presence in the United States and Canada by the end of 2011. The promoter visualized another opportunity in printing and distribution particularly for the university segments. It developed a new technology for the same in the year 2005 that enabled institutions to put up online orders of prospectus printing, postage and tracking from India to anywhere in the world. This outsourcing facility resulted in substantial savings in the range of 25 to 65 per cent of their profits which just involved an investment in starting a BPO intelligence to the tune of just A$1,000. Within a period of years, BPO Intelligence became one of the leading companies in Australia with 29 of the 39 universities using its services.

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The next year the company came out with another idea on software solutions for the education industry that led to the formation of Object Next Software with an investment of A$5 million. The corporate restructuring of the company in 2007 resulted in OCA Group becoming the parent company of Oceanic Consultants, BPO Intelligence and Object Next, located in Australia. These three companies have been winning Australian Business Awards every year since 2008. In 2011, Oceanic Consultants won the Australian Business Award for best enterprise in personal services industry. Object Next had won the award for best new product, and BPO Intelligence had won the award in two categories—product value and product excellence. The Fairfax Media Group’s Business Review Weekly ranked BPO Intelligence as the 12th fastest growing company in Australia this year, up from 93rd in 2008. Today, it contributes to more than 30 to 40 per cent of the group’s total revenue of A$ 20 million. To make the Oceanic Consultants meaner and leaner, Gulati brought in Pricewaterhouse Coopers last year to do a performance management of the entire system, and at the same time added a virtual private network connecting all its offices across different countries. ‘The demand for quality education and a global qualification is high in India. We plan to capitalize on this demand and become a global player, enabling admissions from any place to any place in the world. We’re investing heavily into technology, which would allow us to hold global webinars providing virtual access to everyone,’ adds Naresh Gulati.1  Questions 

1. What has been the secret of success of Naresh Gulati? 2. What are the key traits visible in Naresh’s personality that led to his success? 3. Naresh had changed a number of businesses before settling down with a business. Is it advisable to keep changing businesses?  Endnote  

1. Adapted from the article by Gulveen Aulakh, Economic Times, 11 August 2010.

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 LEARNING OBJECTIVES    To know about the different types of start-ups.  To understand the term ‘intrapreneurship’ and how to inculcate intrapreneurial culture in an organization.  To know about the differences between corporate culture and intrapreneurial culture and application of these differences to identify enterprises following these cultures.  To learn about what it takes to become an entrepreneur.  To know what it means to take up entrepreneurship as a career option and how to go about it.

 To understand the meaning and implications of knowledge-driven entrepreneurship.  To understand why youth is suited for entrepreneurship.  To know about the opportunities and the role that educational institutions play in the development of entrepreneurship.  To understand the relationship between entrepreneurship and strategic management.  To be aware of the mistakes that start-ups make and how to take certain precautions against them.  To know about emerging entrepreneurship trends in the global knowledge economy.

Vijay Mallya, Chairman, United Breweries Group Go for the biggest challenge you can. Be determined to prove people wrong.

—Vijay Mallya

Vijay Mallya, born on 18 December 1955, is an Indian liquor baron and chairman of the United Breweries and Kingfisher Airlines. He is from an industrial family, son of Vittal Mallya, who was the chairman of United Breweries till 1983. Blessed with the Midas touch, he is a business tycoon who surely knows how to turn any simple opportunity into a gold mine. His vision and courage to take on new challenges in life has always given him an edge over other business tycoons. He is known for his distinct and lurid lifestyle. After taking over as chairman of UB Group, he lifted it to great heights. It was under his leadership that the group had a multifarious growth and became

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a multinational conglomerate of over 60 companies. The growth strategy of United Beverages led it to acquire several companies abroad. The UB Group has diversified business interests ranging from alcoholic beverages to life sciences, engineering, agriculture, chemicals, information technology and leisure and airlines. He launched a new domestic airline called Kingfisher Airlines in 2005, which is making great waves and is known for its high-quality customer service. It has carved out a distinct niche in the market. It was the first airline in India to operate with all new aircrafts and the first to introduce Airbus A-380 in the Indian market. The UB Group is highly focused and has dramatically contributed to value for its shareholders through its various operating businesses. Vijay Mallya is a multifaceted personality—a professional car racer, a keen yachtsman and an aviator. He has also won a number of trophies in horse racing, including several prestigious derbies. His net worth according to Forbes.com is $1.4 billion as of March 2011. He is ranked 879th in The Forbes World Billionaires list and 38th in India. Vijay Mallya entered politics in 2000 and succeeded Subramaniam Swamy as president of Janata Party. He is a Rajya Sabha MP. He owns the MarinScope newspaper that serves Marin County, California, where he maintains a home and keeps a portion of his car collection.

Entrepreneurship is becoming a buzzword in different parts of the world, in particular amongst emerging economies. It has been identified as a key input that can help in transforming the economic well-being of people. Some of the fundamental questions that arise are ‘How to inculcate the spirit of entrepreneurship in the youth?’, ‘What is the role of institutions in promoting entrepreneurship?’, ‘Are entrepreneurs born or made?’ and ‘Why is youth suited for entrepreneurship?’. It is these questions that this chapter tries to answer to develop a clear framework for promotion of entrepreneurship.

 2.1  TYPES OF START-UPS  Starting one’s own venture for the first time is a great shift from having a comfortable and cushioned salaried job. Starting a venture requires taking up the reins of a project, that is to say, becoming responsible for all the decisions regarding a project. The rewards for taking risk and responsibility come by way of profits or loss, depending upon the success or failure of a project. Therefore, it requires specific acumen and tools to sail through the venture successfully. Thus, start-ups are companies in their first stage of operations. These companies are rolled out through promoters and friends funding or through seed fund support from government organizations or through banks. It has been found that because of limited funds vis-à-vis requirements and small-scale operations, these companies face great challenges for their sustainable growth. The term ‘start-up’ became internationally very popular during the dot-com bubble when a large number of dot-com companies were founded in a short span of time. A high-tech start-up company is a start-up venture that specializes in technology-driven solutions to address the pain points of customers. Normally, the term ‘start-up’ is associated with high-technology and highgrowth ventures. It has been observed that successful start-ups are typically more scalable with limited resources than an established business. Technology-driven start-ups normally produce high returns to investors and their promoters, for example, the case of Infosys, Google and Apple. For technologybased start-ups, it is important that owners get intellectual property rights in their favour to derive full

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advantage from the technological innovation. The news magazine The Economist estimated that up to 75 per cent of the value of US public companies is now based on their intellectual property (up from 40 per cent in 1980).1 Often, 100 per cent of a small start-up company’s value is based on its intellectual property. As such, it is important for technology-oriented start-up companies to develop a sound strategy for protecting their intellectual capital as early as possible.2 Simultaneously, it is important to note that the failure rate of start-up companies is also very high. Start-ups are classified, according to one classification, into three broad categories—lifestyle firm, foundation company and gazelles (Fig. 2.1). Lifestyle firms spend limited funds on research and development. They achieve modest growth mainly because of their nature of business and market potential. Their employee strengths grow to 30 to 40 after several years of operations. They primarily exist for their owners and do have great opportunity to grow and expand. They merely provide reasonable living to their founders. These ventures normally have growth rates below 20 per cent per annum and are mainly funded through internal funds and rarely with outside equity funds. This category comprises around 90 per cent of start-ups. Foundation companies have a backbone of investment on research and development, which acts as a foundation for new businesses. This category of firms may grow to an employee strength of 300 to 400 within a period of 10 years. These companies usually do not go public and therefore attract the interest of private investors but not of venture capitalists. Gazelles are start-ups having high potential for growth. These ventures attract a lot of interest from investors, including venture capitalists. Their growth trajectory is unassuming, although they start as a foundation company. These companies are major job providers and are able to provide jobs to more than 500 people after 8 to 10 years of operation, which keeps expanding. These are typically companies that contribute a great deal to the economic development of an area in which they operate. A gazelle, according to Birch’s definition, is a business entity having at least 20 per cent sales growth every year, starting with a base of at least $0.1 million.3 Gazelles grow on the strength of their innovation, which is a hallmark of their growth. It has been found that ‘Gazelles produce twice as many product innovations per employee as do larger firms’ and similarly ‘new and smaller firms obtain more patents per sales dollar than do larger firms’ (Kuratoko and Hodgetts 2007). Gazelles are normally high-tech companies; in fact, the major share of businesses that make Fortune’s annual list of the 100 fastest-growing small companies are in high tech. ‘Those companies (by definition) are all publicly traded, which skews the list towards technology. Overall, though, close to 30 per cent of all gazelles are in wholesale and retail trade (not too techy), according to David Birch of the research company Cognetics. Roughly, another 30 per cent are in services (some techy, some not). Of the gazelles on last year’s Inc. 500, only 47 per cent were in computers or other electronics. Just as typical were companies such as HealthScribe Inc. (#20), a medical-transcription service.’4

Gazelles Foundation Lifestyle

Figure 2.1 Types of Start-ups

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2.2  INTRAPRENEURSHIP In 1992, The American Heritage Dictionary brought intrapreneurism into the mainstream by adding intrapreneur to its dictionary, defining it as ‘a person within a large corporation who takes direct responsibility for turning an idea into a profitable finished product through assertive risk-taking and innovation’. Entrepreneurship within the existing organization helps a lot in bridging the gap between science, technology and customer pain points as is evident from the feedback from the market. It is the practice of entrepreneurship by employees within an organization. Intrapreneurs usually possess most of the traits as entrepreneurs such as commitment, conviction, zeal, initiative and insight. If the organization supports an employee in pursuing their ideas for the good of the organization, the employee enjoys a sense of satisfaction and fulfillment, while if they are not allowed to pursue their ideas, they are likely to leave the organization and set up their own venture. An intrapreneur thinks and acts like an entrepreneur and always eagerly looks for worthwhile opportunities, which yields benefit in various ways, including profit to the organization. Intrapreneurship is a novel way of tapping individual innovative potential for making organizations competitive and profitable. Therefore, it is basically in the interest of an organization to encourage intrapreneurs. Carolyn Davis, founder and president of Alliance Coaching, an executive coaching firm, has four suggestions for creating an intrapreneurial culture in an organization, as follows:  Empower People to Make Decisions—Even if people commit mistakes initially, encourage them to take decisions and implement them by appropriately empowering them.  Reward the Kind of Behaviour You Want to See—Innovators should be appropriately rewarded— monetarily and non-monetarily.  Create a Learning Culture Where It Is OK to Make Mistakes—There is a saying that ‘success breeds success’. Intrapreneurs are charged and motivated by their confidence in success, not a fear of failure. Encourage employees to learn from their mistakes, which are part of the learning process.  Give People Ownership of Their Ideas and the Opportunity to Try Them Out—A mechanism should be set in place to encourage employee teams to own an idea that they think will be for the good of the organization and allow them to work on it without interference.

Corporate culture thrives on the foundation of a climate and reward system that encourage conservative decision-making. In the process, riskier decisions are not entertained unless and until they are backed up by the facts and analysis within the organization or a hired consultant is convinced of its worth. The inherent practice followed in a traditional corporate culture is to adhere to instructions and directions given; ensure that no mistakes are made; non-tolerance of failure; not encouraging new initiatives; and waiting for instructions before proceeding. Employees are expected to work within their boundaries. Such practices result in creation of such a culture that is not conducive to creativity, flexibility, independence, ownership and risk-taking, which are the basic prerequisites for encouraging intrapreneurship in an organization. As against this, intrapreneurial culture requires encouragement to employees having vision, goals and concrete action plans; who take initiative on their own; allow suggestions to come; encourage employees to experiment on new ideas; want employees to take risk, responsibility and ownership; and above all reward employees for taking actions on their own for the overall good of the organization. Traditional culture-dominated organizations are hierarchical in nature, with well-established and well-defined rules and procedures, reporting systems, processes, lines of authority, and responsibility and control mechanisms. Such values do not encourage development of new products and services, as they curb innovative spirit. Against this, the values and culture in intrapreneurial organizations emanate from a flat organizational structure with networking, teamwork and mentors who work and exchange

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Table 2.1 Difference Between Corporate Culture and Intrapreneurial Culture Corporate Culture y y y y y y y y y

Hierarchical organization structure. Reward system that encourages conservative decision-making. Employees are not encouraged to take risks. Employees should adhere to instructions and directions given. Mistakes are not tolerated. Failure is not tolerated. Employees are not encouraged to take new initiatives. Employees are expected to wait for instructions. Employees are expected to work within their boundaries.

Intrapreneurial Culture y y y y y y y y y

Flat organizational structure with networking. Work and task viewed as fun. Employees work beyond office hours to complete tasks. Employees are encouraged to experiment and take risks. Employees are given freedom in their work. Genuine mistakes are tolerated. Failure is taken in the right spirit. Employees are encouraged to take initiative. Employees can work beyond defined boundaries.

beyond their defined boundaries in an organization. Team work helps in creating an atmosphere of trust and confidence, which results in accomplishment of goals and objectives. Work and tasks are viewed as fun events and not mechanical chores, in which employees on their own put in the required number of hours even beyond office hours to ensure that the job gets done. Table 2.1 gives a relative study of corporate and intrapreneurial cultures. Some companies are known for their efforts towards nurturing their in-house talents to promote innovation through intrapreneurial culture. Prominent among them is ‘Skunk Works’ group at Lockheed Martin. This group was formed in 1943 to build P-80 fighter jets. Kelly Johnson was the director of the project, who gave ‘14 rules of intrapreneurship’. At ‘3M’, employees could spend 15 per cent of their time working on the projects they like for the betterment of the company. On the initial success of the project, 3M even funds it for further development. Genesis Grant is another 3M intrapreneurial programme that finances projects that might not end up getting funds through normal channels. Genesis Grant offers $85,000 to these innovators to carry forward their projects. Robbie Bach, J. Allard and team’s XBOX might not have been feasible without Microsoft’s money and infrastructure. The project required hundreds of millions and quality talent to make the product. Google, a wildly successful search company, reportedly encourages engineers to spend 20 per cent of their time on any project they are passionate about. This freedom of time and resources has led to the creation of some well-known Google products, including Gmail and Google News. Steve Jobs, the co-founder of Apple Inc., was present at the creation of the personal computer in the late 1970s and was later a member of the internal team of self-described ‘pirates’ who developed the groundbreaking Macintosh computer. Apple is still at it today with internal development teams producing innovative products and designs such as the iPhone. W. L. Gore, maker of Gore-Tex rain gear, has a ‘dabble time’ policy that lets workers devote time to personal projects. Back in 1997, an employee’s experiments with PTFE coatings on cables intended for use in animatronics led the employee to wonder if the coating would make guitar strings more comfortable to play. The answer was YES, and, even more important, the coated strings sounded better. Thus, ELIXAR Strings, one of the top-selling guitar string brands, was born.

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2.3  WHY DOES ONE BECOME AN ENTREPRENEUR? There are various reasons for one becoming an entrepreneur, which ranges from conscious decision to become an entrepreneur to accidentally becoming an entrepreneur as one does not have any other alternative in hand. There could be reasons such as not liking a job or getting frustrated with the job role provided, chances of getting laid off, not getting promotions in the early phase of their career in time or getting superseded by younger colleagues, cut in salary as the company is not doing well, chances of company becoming bankrupt, and mismatch between existing business and the skill profile of an individual. On the other hand, some individuals are averse to the idea of working for someone else or where they have to adhere to well-defined corporate culture. Some of the key reasons for an individual taking up entrepreneurship as a career option are described in Figure 2.2.

2.3.1  To Have Freedom and Independence The desire to be one’s own boss is the most important reason for turning out to be an entrepreneur. Around 40 per cent of individuals look for entrepreneurial opportunities because of their desire to be independent and act as their own boss. However, it may not be easy in reality to fulfill this instinct or desire in them because of varied factors such as inadequate financing, inadequate and poor planning, lack of uniqueness in the idea and intense competition. As a result, a large number of business start-ups fail within the first few years called death valley. The chances of success increase precipitously for those businesses that are effectively able to respond to the initial phase of challenges so as to keep running longer. It is established entrepreneurs who achieve a well-earned independence and enjoy the prestige and pride of being the person in charge.

To Have Freedom and Independence To Earn Lots of Money To Use Creativity and Personal Skills To Overcome Challenges Why Does One Become an Entrepreneur?

To Become a Community Booster/Job Provider To Strengthen Resume To Be a Network Builder To Be an Inspiration and Example for Others To Create Wealth for Family and Society

Figure 2.2 Why Does One Become an Entrepreneur?

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2.3.2  To Earn Lots of Money Successful ventures have many options at their disposal to grow and diversify. As such, one of the greatest challenges that lie before successful entrepreneurs is to strategically respond to the growth phase. Successful entrepreneurs keep reinvesting their profits in the business and avail themselves of opportunities to pump in more money through banks, venture capitalists, and angel funders to accelerate the growth of their business and, in turn, make more and more money. As against salaried employees, entrepreneurs have a great potential to keep multiplying their personal wealth beyond bounds. Earning lots of money has been identified as the second major reason for becoming entrepreneurs.

2.3.3  To Use Creativity and Personal Skills Entrepreneurial ventures provide a much needed opportunity to individuals to deploy and make use of their unique personalities and skill sets for the good of the venture. Such an opportunity usually does not exist for employees serving in corporate and other organizations. Ventures allow them to be innovative in establishing, strengthening and building businesses of their own. Individuals who are more creative find a good outlet to try out their new ideas in their venture, the possibility of which does not spontaneously exist while working for others. This has been identified as the third major reason for taking up entrepreneurial venture. Thus, to unfold one’s deep-rooted inner strengths, there cannot be any option other than to move on the path of entrepreneurship.

2.3.4  To Overcome Challenges There are individuals who look at problems as challenges and would like to overcome them against all odds. It is this instinct in them that differentiates entrepreneurs from other individuals. The positive attitude in them makes them solution focused rather than problem focused. Scientific research has also shown that people who have a positive attitude and strong will power are able to overcome challenges of life—personal or professional—in a much easier way than others. Thinking positively enables them to find creative solutions to challenges that are looked at as hurdles and obstacles by others. The approach that an entrepreneur uses is similar to the flow of river water, which keeps weakening or destroying big blocks on the way during its journey to merge with the sea but never stops.

2.3.5  To Become a Community Booster/Job Provider Entrepreneurs are usually concerned about the welfare of the community around them. They usually get integrated with the community around for their well-being. One of the ways in which this is done is job openings for local people, which acts as a booster to the local economy. Further, they take up varied activities that help communities in prospering. This gives them a great source of satisfaction of having left an impact on the well-being of local people and on society at large. Their main desire is to leave a mark in the minds of people around through their entrepreneurial venture. Thus, by becoming an entrepreneur, one acquires the power of making a difference in the life of one’s employees, friends, customers and community at large.

2.3.6  To Strengthen Resume Earlier, a failure in an entrepreneurial venture was looked upon as a stigma or blot on the personality. Socially, people used to consider them as unsuccessful and even boycott them. However, of late, the

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importance of even entrepreneurs who have failed is emerging, as they acquire extraordinary expertise while handling their business operations from top to bottom. Entrepreneurs manage everything from finances to marketing campaigns to customer relations. This provides them with the knack of managing different facets of the business and building relationships. Thus, entrepreneurs acquire indispensable knowledge and understanding of different facets of a business such as cost of operations, government regulations, tax and statutory compliances, production planning and control to customer satisfaction. Their experience in varied aspects and expertise strengthen their career resumes. As a result, in the present corporate world, even unsuccessful entrepreneurs are looked at as a precious lot for providing high-level jobs.

2.3.7  To Become a Network Builder There are individuals who have the knack of networking and building relations. This quality in them goes a long way in successfully running a business of their own. As entrepreneurs have to necessarily encounter individuals of a variety of professions and from different walks of life, the networking skill comes handy in working well in liaison with them. Networking with a diverse set of people not only helps in supporting and growing businesses but also complements entrepreneurs’ personal lives with friendships and good will.

2.3.8  To Be an Inspiration and Example for Others Successful entrepreneurs act as great role models for youth to traverse on the path of entrepreneurship. The motivation to leave a mark in life and act as an example worth emulating by others leads some people to take up entrepreneurship.

2.3.9  To Create Wealth for Family and Society Besides all the reasons stated earlier that lead to taking up entrepreneurship, which gives rise to great satisfaction to an individual as they do what they love and enjoy, they become an instrument in creating wealth for their family and society at large. This provides them with an opportunity to contribute directly to the process of growth and development.

2.4  ENTREPRENEURSHIP AS A CAREER OPTION Every year, millions of graduates and postgraduates come out of university portals to join a professional workforce with a view to taking up wage employment. Some get good placements on campus, while others slog for a long time to get a job of their choice. Still many continue doing jobs they do not like for their livelihood (Fig. 2.3). Thus, the majority of pass outs from universities look for job opportunities to earn a living, generate wealth and improve their standard of living. However, a new breed of university graduates is emerging who do not give up their entrepreneurial zeal and enter into an incubator to further fine-tune their ideas; or start a venture; or continue with their jobs along with their ventures. A few even forgo their six-figure salary packages in favour of joining a start-up to gain a different experience. It is this group of young minds that were provided with due support by the entrepreneurship cells on the campuses by the institutes that created a fire in their belly to drive these young minds to pursue their dreams. For these students, ‘career’ means a continuous process of learning, an ever-evolving, evergrowing opportunity for personal as well as business growth and development. For these individuals, entrepreneurship as a career option means being one’s own boss by owning one’s own enterprise. These individuals are clear-headed to pursue their goals and have a clear vision. Fundamentally, they love to

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Table 2.2 Difference Between Working for Others and Working for Oneself Working for Others y y y y y y y y

Working for Oneself

Dependent on others Following boss Fixed and secured earning Has a choice for alternative jobs in private, government or public sector Risk is borne by the organization and not self Little scope to unfold creativity Job seeker Contributes indirectly to wealth creation

y y y y y y y y

University Graduates and Post-graduates

Placements

Few Get Jobs They Love and Like

Majority Get Jobs They Do Not Like

Independent Following self Variable earning that is not assured Has a choice of alternative self-owned businesses—industry, trade and services Risk to be faced by self Plenty of scope to be creative and innovative Job provider Contributes directly to wealth creation

Entrepreneurship Education on Campus Career Means to These Students– Continuous Process of Learning, Ever-evolving, Ever-growing Opportunity for Personal as Well as Business Growth and Development. Join Incubators to Fine-tune Ideas Start a Venture Continue with Job Along with Venture

Figure 2.3 Entrepreneurship as a Career Option do what they love and enjoy to contribute to society at large and leave a mark in whatever they do. They do not want to work for others but would like to be their own boss. The fundamental differences between working for others in a government, private or public job and taking up entrepreneurship as a career option are given in Table 2.2.

What It Takes to Pursue Entrepreneurship as a Career Option It is a common question what it takes to pursue entrepreneurship as a career option? There could be  different reasons such as displacement from a job, frustration in the present job, not getting a job of  one’s choice and the present job not allowing deployment of potential and talent. At times, a person  may also get a signal in advance that their job is at risk as the company is moving towards closure.  At times when a deserving employee gets superseded in promotion, they may be compelled to leave  the job and may think of taking up something on their own. Some people, especially the talented  youth, may object to a system wherein promotions are often linked to seniority rather than merit.

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Gilad  and  Levine  (1986)  have  analysed  this  aspect  and  have  proposed  two  closely  related    xplanations of entrepreneurial motivation or taking up entrepreneurship as a career option. These  e have been comprehended in their ‘push’ and ‘pull’ theories. The ‘push’ theory suggests that individuals  are pushed into entrepreneurship by external negative forces, such as job dissatisfaction, difficulty  in finding employment, inadequate salary and inflexible work schedule. On the other hand, the ‘pull’  theory subscribes to the fact that individuals are attracted into entrepreneurial career options mainly  in their urge for  seeking independence, self-fulfilment, wealth, self-respect, freedom to do what they  love and other desirable outcomes. Research studies by Keeble et al. (1992) and Orhan and Scott  (2001) have shown that  individuals become entrepreneurs mainly because of ‘pull’ factors rather than  ‘push’ factors.5

Some of the prominent ‘pull’ factors that attract individuals towards entrepreneurship as a career option are as follows: i. High Need for Independence—There are personalities who would like to have freedom about things such as with whom to work, when to work and with whom to do business at what terms. It is this instinct in them that pushes such personalities to start something of their own. ii. To Satisfy the Dream of Having High Financial Rewards—The urge to satisfy the need to derive high financial rewards as an outcome of efforts leads some to start a business of their own. The fundamental difference between a job and one’s own venture lies in the degree of financial rewards for the efforts put in to achieve organizational goals. iii. Opportunity to Deal with All Aspects of a Business—No job can provide an opportunity to learn and deal effectively with a wide spectrum of business activities such as idea generation, conceptualization, design, creation, marketing, customer response and customer satisfaction. iv. Vision to Leave a Long-lasting Mark—Entrepreneurship creates an opportunity to make definite contribution to society by lifting the people in and around the venture. A continuous zeal to innovate helps in touching the heads and hearts of people at large. A strong urge from within to start a business, combined with workable innovative ideas, careful planning and hard work, can lead to a very engaging, self-satisfying, enjoyable and profitable endeavour. The greatest contributory factor to entrepreneurship is an intention, that is, a strong purpose in life coupled with determination to produce desired results.

Age is not a bar to entrepreneurship, but the youth are certainly more suited to take up an entrepreneurial venture, because they are technologically precocious, do not fear change and challenges, and have greater ability to see things differently. Thus, leaving aside the pull and push factors leading to entrepreneurship, the fundamental decision to take up entrepreneurship as a career option is guided by a three-part process in which an individual weighs the desirability of self-employment against the desirability of working for others, possession of competencies and capabilities to undertake an entrepreneurial venture. The fact remains that the present environment provides great entrepreneurial opportunities, and more and more youth are consciously opting for it as a career option.

Entrepreneurship as a Career Option Amruth B. R. completed his MSc (Hons) in Physics at Birla Institute of Technology & Science (BITS),  Pilani, India, with an overall cumulative grade point average of 9.04 out of 10 in the year 2004. He  could have easily got a best placement on campus on the basis of his extraordinary academic and  (Continued)

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extracurricular achievements. As per the BITS system of education, he could have opted to pursue  a dual degree in any discipline of his choice, which 99.9 per cent of students do. However, he did  not  opt  either  for  a  dual  degree  or  for  a  campus  placement.  He  was  determined  to  become  an  entrepreneur  immediately  after  coming  out  from  the  institute.  He  is  highly  focused,  level  headed,  dedicated, determined and passionate. He had his own entrepreneurial dreams and made it a point  to work towards it. Amruth  was  the  president  of  Center  for  Entrepreneurial  Leadership  (CEL),  BITS,  Pilani,  during  the years 2007 and 2008, which provided him with the much needed opportunity to work towards  his  goals.  As  the  CEL  President,  he  led  a  core  team  of  about  50  students  in  conceptualizing  and  implementing initiatives to facilitate and promote entrepreneurial thinking on campus. The initiatives  under his leadership ranged from an international business challenge (Conquest) to a rural initiative  enabling 21 women of an isolated village called Garinda near Pilani to become self-employed. He  has  to  his  credit  varied  awards  and  recognitions  such  as  GRAND  AWARD  (4th  Place)  and  NASA AWARD Intel International Science & Engineering Fair, Portland Individual, 2004; Intel—India  World  Ahead  Young  Achiever,  awarded  by  Craig  Barrett  on  behalf  of  Intel  Education,  India,  2007;  KVPY  Fellowship  (most  reputed  student  research  scholarship  in  India),  Department  of  Science  &  Technology,  India,  2004–08;  IAS  Fellowship  (research  fellowship  for  students  and  faculty),  Indian  Academy  of  Sciences,  India  Individual,  2007;  Delegate—One  Young  World  Global  Summit  for  Young Leaders, United Nations & Affiliated Organizations, 2009–10; Winning Team—Business Plan  Competitions in 2008; Eureka—Indian Institute of Technology, Mumbai, and Conquest—BITS Pilani;  Winner—Incubation Programmes Indian Institute of Management, Ahmedabad, 2009 and Finalist— Business Plan Competitions Indo-US & DST India Innovation Pioneers Challenge, 2008. He along with his team founded Vita Beans Neural Solutions Pvt Ltd and has been the CEO since  its  inception  in  2008.  The  company  provides  Web-based  solutions  for  recruitment  and  employee  management, with much better and measurable results at one third of the costs of existing solutions.  The company in the initial phase developed products for Bennett, Coleman group and Perot Systems.  Subsequently, it developed some new products in education space for NDTV’s Extramarks as well  as  iLearn  International,  which  are  emerging  players  in  the  education  segment.  After  two  years  of  successful operations, the company provides employment to about 24 personnel, and all of them are  above the age of Amruth B. R. He  shares  his  learning  from  an  exciting  experience  of  an  entrepreneurial  journey  for  the  past    two years as ‘I love this product—need to make others feel the same about it’ phase to ‘I love our  team—need  to  create  an  environment  where  we  can  keep  innovating  to  create  more  original  and  amazing products’ phase. A lot has got to do with the current team where everyone is exceptionally  talented and experienced in their field; it was a tough process to put together such a team, but loving  it all the more now. The growth has started picking speed since then, though the responsibilities are  also much more in comparison with running the start-up as a one-man show.

When IIM-A Grads Said ‘bus ’ (‘Enough!’) to Jobs They are making it easy to book bus tickets. Instead of rushing to the booking office for private bus  operators or haggling with agents over pricing, they came up with a plan that enables users to book  the best possible seats real time. The  duo  Aurvind  Lama,  29,  and  Parthasarthy  Sinha,  29,  graduates  from  Indian  Institute  of  Management  (IIM-A),  started  a  real-time  booking  system  Pan  India.  They  are  now  working  to  add  virgin travel destinations for weekend getaways in a number of cities.

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From the 2007 batch of the premier B-school, they decided to call it a day to start something of  their own in the travel industry after working for a year earning dollars. Lama’s nightmarish experience  in bus travel and arbitrary pricing of tickets gave birth to the idea. Lama said, ‘We developed our own computerized bus reservation system at the bus operator’s  booking offices and agent network to ensure that ticket booking is made real time or ‘live’. Seats are  visible to users when they book online. At present, we have one of the largest bus ticket inventories in  Pan-India bus routes and 50 operators are networked with us for the service.’ Started  with  a  seed  investment  of  ` 2  lakh,  Lama,  who  is  a  first-generation  entrepreneur,  said,  ‘Both of us saved our summer internship stipend earned during the two months in foreign firms while  studying at IIM-A to invest in the company. Later, a city-based IT expert Prateek Nigam joined us.  More than the money, it is for satisfaction that we started this whole venture.’ Lama added, ‘Our motivating force is providing quality customer service and making an impact  in the unorganised sector of the travel industry where customers are taken for a ride. We are trying to  democratise travel system, giving the best option to consumers.’ Lama is your very own ‘Rocket Singh salesman of the year’, juggling his professional commitments  and working diligently to start his own company. The  duo  is  getting  infrastructure  support  and  networking  facilities  from  Centre  for  Innovation,  Incubation and Entrepreneurship (CIIE) at IIM-A.6

2.4.1  Knowledge-driven Entrepreneurship The management practices to bring enterprise into the new millennium must be knowledge-based. The system has to be collaborative and not competitive or even cooperative. It is the intellectual property and its impact that would play a critical role in breeding entrepreneurship. Organizations would be flattered with self-managing knowledge workers contributing to the growth of business entities. The emphasis would be on team effort to solve problems or undertake projects. The cross-boundary learning and knowledge flow would dominate. The Indian economy has a major strength in this area because of having the third largest pool of scientific and technical manpower. It is this human asset that would play a critical role as regards promotion of entrepreneurship in the coming years, provided educational systems play their role in bringing in a change in the mindset of the youth. This would also require making industry patent literate to derive full benefit by duly protecting their knowledge. As such, the future wars would be fought in knowledge markets. For the Indian economy, education and health care would provide an extra edge to play a significant role in the global markets and derive inbuilt advantage as regards economic growth and development. The size of emerging market opportunities in the IT software industry alone was estimated to have touched $50 billion (` 230,000 crore) in the year 2009. To respond to this challenge, India’s pool of software professionals would have increased to 2.1 million by 2009. Entrepreneurship as defined by Timmons is the ‘ability to create and build something from practically nothing. It is initiating, doing, achieving, and building an enterprise or organization, rather than just watching, analyzing or describing one. It is the knack for sensing an opportunity where others see chaos, contradiction and confusion. …’ Joseph Schumpeter talks about creative destruction, whereby established ways of doing things are destroyed by the creation of new and better ways of getting things done. He described it as a process, and entrepreneurs as innovators who use processes to shatter the status quo through new methods.

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2.4.2  Entrepreneurs—Born or Made Until recently, very few people believed that entrepreneurs could be created through educational endeavours, or that entrepreneurship could be an area for teaching/training. Initially, educational interventions in entrepreneurship were hardly given any importance. However, it was only after a series of successful demonstrations by scholars such as David McClelland that it was established that entrepreneurs could be created through teaching, training and counselling interventions as well. There has been a phenomenal progress thereafter and in the present era, entrepreneurship development, especially through educational and training interventions, has become almost a movement. As such, inculcating skills and developing culture for entrepreneurship requires developing a conducive economic, legal, cultural, social and psychological environment. Therefore, what it takes to promote entrepreneurship development and encourage and prepare more and more entrepreneurs to take up entrepreneurial ventures—basically strategic interventions—are as follows:  inculcating and developing personal and behavioural traits and competencies amongst prospective entrepreneurs  creating an eco-system that motivates and inspires individuals having the required traits and competencies to take up entrepreneurial ventures

Amongst the various entrepreneurial traits and competencies, Schumpeter (1934) emphasized the most that an entrepreneur should be an ‘innovator’. Ferederick Harbinson (1956) focused on ‘organisational building’ being the key skill required to successfully run an enterprise. McClelland (1961) emphasized entrepreneur being innovative and having the ability to make decisions under uncertainty, thereby implying the traits of risk-bearing and decisiveness. Thus, these research findings clearly focus on entrepreneurs being action-oriented, motivated and calculated risk-takers to achieve goals. The common traits that come to mind most often while dissecting a profile of an entrepreneur for their success in a venture are leadership, vision, dream, decision-making, risk-taking, confidence, determination, courage, perceptive, foresight, team building, negotiation, networking, passion, patience and so on. However, without building an environment having a conducive eco-system, these competencies in a person may not get translated into successful venture creation. Therefore, both internal and external aspects are equally important. On the other hand is the theory that suggests that it is something inherent and innate that drives people to become entrepreneurs and it cannot that easily be inculcated. For example, while studying at a graduate college, a person converts their hobby of photography into business; for instance, a person standing in a queue at places such as a railway ticket counter, bank, McDonalds and a department store looking at the display of products with a different eye can identify inefficiencies and a clear thought that ‘I can do this better!’. These are the people who have a different atitude, that is, an attitude to enjoy doing things and leading to come up with workable solutions rather than cribbing about what they do not have or focusing on problems. It is this attitude that differentiates an entrepreneurial spirit, which cannot be easily inculcated and, therefore, entrepreneurs are born. There is a saying that children born in business families most probably launch their own businesses or carry forward their family business to the next level. It is because of entrepreneurial tendencies— including the ability to recognize business opportunities—which are mainly dependent on and influenced by genetic factors according to a study co-directed by Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University. Shane and his fellow researchers compared the entrepreneurial activity of 870 pairs of identical twins—who share 100 per cent of their genes—and

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857 pairs of same-sex fraternal twins—who share 50 per cent—to see how much of entrepreneurial behaviour is genetic and how much is environmental. According to their research study, about 40 per cent entrepreneurs are born and 60 per cent made. Shane says, 10 to 15 years from now, genetically advantaged entrepreneurs might be identified through DNA testing or psychological surveys.

2.4.3  Inspiration from Role Models If we recollect names of a few leading entrepreneurs, those who immediately come to mind are Steve Jobs, Bill Gates, Akio Morita, Sam Walton, Richard Branson, Michael Dell, Narayana Murthy, Azim Premji, Kiran Mazumdar, Sunil Mittal, Karsan Bhai Patel and Baba Kalyani. What is common amongst them is that all have been technology-focused, all are first-generation entrepreneurs and all have challenged the rules. All of them have been highly innovative in the process of creating and delivering new customer value in the marketplace. All of them have created a new paradigm for entrepreneurship by asking a question—‘Is there a better way of doing things?’, challenging customs, routine and traditions, and realizing that there may be more than one right answer. Favourable eco-systems exist today by way of social support, government incentives and a host of institutions working for the cause of promotion of entrepreneurship, which improves the chances of success for creating entrepreneurs through educational interventions. More and more graduates prefer to take up entrepreneurship as a career option. A recent survey in Economic Times revealed that 82 per cent of B School students are considering starting entrepreneurial ventures in the near future. Indian icons to most of them are Narayana Murthy, Ratan Tata, L. N. Mittal, Mukesh Ambani, Azim Premji and Indra Nooyi. Role models act as catalysts to budding entrepreneurs and serve in a supportive capacity as mentors to prospective entrepreneurs in giving shape to innovative ideas.

2.5  WHY YOUTH IS SUITED FOR ENTREPRENEURSHIP As such, age is not a bar to initiation of an entrepreneurial venture. There are different successful ventures that have been launched at different age profiles by entrepreneurs. However, it is said that youth is more suitable for taking up an entrepreneurial activity. In the present era, more and more youth are found to be getting attracted towards entrepreneurship either immediately after studies or after acquiring some experience in the corporate world. Students are getting exposed and also gaining knowledge in the class as well as outside the class on entrepreneurship and make up their mind to venture into it. Some of the significant factors that increase the chances of youth succeeding in entrepreneurship are as follows:  Technologically Precocious—Youth in the present era are technologically precocious as they interact and work with technology at a very early stage of growth and realize the potential of technology to respond to pain points. They do not have any inhibitions to try out new and updated technology in their daily use. Because of their upbringing in the family and school, youth develop greater maturity and in particular mental aptitude towards technology-driven solutions. They are much more advanced, forward and progressive as regards technology applications in daily lives. In general, they are exceptionally smart and ahead in understanding new developments taking place in their surroundings. This facilitates them in looking at technology as a solution provider to respond to problems and challenges faced in different walks of life. For example, Bill Gates, who was born on 28 October 1955 in Seattle and attended Harvard University from 1973 to 1975, started his career at a young age of 13 as founder of Lakeside Programming Group and subsequently sailed through another venture, Traf-O-Data, from

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1970 to 1973, before starting Microsoft Corporation as founder chairman in 1975. Because of his passion for technology and acumen, he got US National Medal of Technology, 1993; Chief Executive of the Year, Chief Executive, 1994; President’s Medal of Leadership Award, New York Institute of Technology, 1995; Louis Braille Gold Medal, Canadian National Institute for the Blind, 2002; Knight Commander of the Order of the British Empire, 2004, and so on. Bill Gates as CEO of Microsoft was able to borrow and integrate other computer programmers’ innovations and strategically sell them to an emerging and fast-expanding home computer market. Microsoft was able to touch a revenue of $140 million within 10 years of its inception that grew to $28 billion by 2002. Gates created a new concept and a wave in home computing system and proved himself to be a technological visionary and a software applications guru. Not Fearful of Change and Failure—The youth are generally open to taking risk and quickly adapt to changes. Fear of failure is the biggest block in starting a venture as about 95 per cent of businesses fail within the first five years. The list of ‘what if’s is endless such as ‘Am I cut out for entrepreneurship?’, ‘If the venture fails, what would happen?’ and ‘What if I lose everything in the process and become bankrupt?’. In general, it has been found that youth are less fearful to great uncertainties and willing to respond to changes quickly. This acts as a great strength in their favour to launch and passionately lift the business. Studies show that ‘fear of failure’ is one of the major reasons for not taking up entrepreneurial venture. As such, learning from failures so as to convert bad luck into good luck is the greatest lesson that has led to successful ventures. Youth are more attuned to facing such eventualities and, in turn, suited for taking entrepreneurial ventures. Think Differently—Youth have great potential in terms of thinking differently and seeing things differently, which is a basic prerequisite for innovation. It is this quality in them that inspires them and makes them good entrepreneurs to continuously be on the innovative path. Street Smart—Youth with a typical family background and educational system are street smart and sharp in their observation. Paul Hawken describes it as ‘trade skill’ in his excellent book Growing a Business, published by Simon & Schuster. Call it common sense, instinct or whatever else you want. Successful entrepreneurs seem to have intuitive good judgement when making complex business decisions. They have the knack of ‘getting things done’ against all odds. They have an instinct to know customers and how to excite them towards their product or service. Street-smart people have a sixth sense for competitors’ weaknesses. They see opportunities everywhere that have not been responded to and develop and design products to meet these needs. Passionate, Inquisitive and Challenging—Innovation is a hallmark of entrepreneurship, which requires creation and building of an eco-system wherein academic structure gives freedom to youth to unfold their creativity and try out new ideas. The environment—social, economic, technological, legal and cultural—is changing fast. This, in turn, is providing great opportunities. Organizations— corporate and non-corporate—are focusing on innovation for their survival and growth. Youth are far more suited because of their entrepreneurial acumen. Picasso once said, ‘Every child is an artist.’ The problem is how to remain an artist as we grow. Normally, it is said that inquisitiveness for creativity, tendency to challenge existing ways of things and innovative drive are at their peak in children and youth, which die down slowly as we grow older. Youth have the drive to passionately follow their ideas and take them to logical ends. Inclusion of entrepreneurial-themed courses and activities on campuses can go a long way in promoting entrepreneurship. Are Independent and Consider Them as Free Agents—Youth have a major advantage of being free with less social responsibilities and have very limited requirements for their survival. While in university, they develop a common tendency to manage with least of financial resources to take care of their food, shelter and studies. This comes in handy for them to take greater risk to venture into activities that they like, love and enjoy. Entrepreneurs tend to be independent souls and unhappy when forced to conform or toe the line, which is found to be a general tendency amongst youth. They enjoy working

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for themselves to pursue their goals and usually find it difficult to work for others. It is hard to imagine anyone who is more nonconformist and independent than Steve Jobs and Steve Wozniak, the founders of Apple Computer, or Bill Gates, the founder of Microsoft.

Therefore, youth need to be targeted for promoting entrepreneurship, because they possess certain inherent qualities that facilitate promotion of entrepreneurship. That youth is the most fertile ground for entrepreneurship development programmes is also evident from the ‘The Power of Ideas’ launched in India by Economic Times in association with Centre for Innovation, Incubation and Entrepreneurship, IIM Ahmadabad, and Department of Science & Technology, Government of India, in June 2010. ‘If the deluge of entries to the Power of Ideas programme this year is any indication, executives, especially the young, are willing to kick their jobs and become their own bosses.’ It had received as many as 16,242 business ideas, almost a third more than last year. 48 per cent of the total ideas had come from people below the age of 30 years and 35 per cent having less than one year of work experience.7 53 per cent of the ideas had come from people having less than four years of work experience. Only 16 per cent of ideas had come from people having more than 15 years of work experience. It is evident from this that although age is not a bar to starting a venture, youth has the greatest potential and is suited the most to start a business.

Age No Bar for Entrepreneurship At  the  age  of  49,  Sharat  Jain  co-founded  Online  Recharge  Services  Private  Limited,  a  provider  of  online recharge for prepaid services like mobile and DTH in India. Their Web site www.RechargeItNow. com is targeted at urban youth (college students and young executives). It is a first-of-its-kind online  prepaid recharging site in India. It provides easy, instant and PIN-less recharge for Airtel, Vodafone,  Loop mobile, Reliance, Idea, Bsnl, Virgin and Tata Indicom mobile for all circles across India and dish  TV and Tata Sky for DTH. Customers can use their credit cards, debit cards, net banking accounts or  cash cards for making online payment. There is no extra/hidden cost for recharging other than MRP.  The company was launched by Sharat in 2008. In 2010, the company started getting a turnover of   ` 8  crore  per  month  with  around  30,000  clicks  each  day,  of  which  around  15,000  recharged  their  mobiles online from the site. The company expected the monthly revenue to increase to ` 20 crore  in  2011.  As  a  president  of  this  company,  Sharat  has  successfully  established  it  as  a  thriving  new  business and its Web site as one of the fastest growing e-commerce sites in India today. In his last assignment, Sharat Jain held the position of CEO, Dentsu Media, part of the largest  single  brand  Ad  Agency  Network  in  the  world,  Dentsu  Japan.  He  provided  leadership  to  Dentsu  for its New Media and mobile-based advertising initiatives in India. He was also responsible for the  conceptualization and launch of www.LastMinuteInventory.com as the world’s first multimedia online  media trading platform. An  acclaimed  expert  in  Telecom  and  online  domain,  he  has  previously  worked  as  Managing  Director (Asia South) for Teleglobe Canada based at New Delhi. Teleglobe was a leading provider of  international voice, broadband and Internet services now merged with VSNL. He was responsible in  establishing them as a leading international telecom carrier in the region for international voice and  data services. In his other position as Vice President–India Operations for US-based Global TeleSystems Group,  he was responsible for managing the International Managed Data Services business targeted at the  Indian software companies for their international data and voice connectivity. He has also occupied  senior  management  positions  at  Tata  Elxsi  (India)  Limited  and  International  Computers  Indian  Manufacture Limited (ICIM). (Continued)

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Sharat Jain has 26 years of experience in Telecom, IT, media, advertising and managing technology  businesses. He holds an MBA from FMS, University of Delhi, and BE (Hons) in Electrical & Electronics  Engineering from Birla Institute of Technology & Science, Pilani. 8

2.6  FEMALE ENTREPRENEURSHIP In India, entrepreneurship has been dominated by a male-governed economy, where the role of women as entrepreneurs has been negligible. However, in the recent past, female entrepreneurs have been playing an increasingly important role in promoting growth and development of the country’s economy (Syal and Dhameja 2003). Female entrepreneurship is also gaining increasing importance in public policy circles. National governments and international organizations are coming to realize that promoting women’s economic development through female entrepreneurs plays a critical role in economic growth, particularly at the grass roots level. First and foremost, it enhances the tempo of economic growth and provides greater prosperity to the small-scale entrepreneurs and their workers. Moreover, it directly provides employment and economic independence to women and improves their social, educational and health status. A vast majority of the population of India still live in rural areas and depend on agriculture and allied economic activities for their economic sustenance. Although much has been written about women’s empowerment and entrepreneurship in India, not very much has been done when it comes to quantifying the extent of women’s business ownership and their contribution to economic growth. The relationship of economic activity among women to a country’s economic growth shows that there is a distinct and strong correlation between female entrepreneurship and GDP growth (Ray 1988). When it comes to defining the rationale for female entrepreneurship, there are two important arguments: the economic argument, which focuses on utilization of human resources forming around 50 per cent of the population, without overburdening the employment market; and the social argument, which deals with development of self-esteem and a sense of the ‘self’ for creation of an entrepreneurial society transcending the gender divide. In general, the characteristics of male and female entrepreneurs are more or less similar. However, different studies show that female entrepreneurs differ in some of the key aspects such as motivation level, business skills and occupational background (Hisrich et al. 2006). Even the process of business differs a lot in the case of females compared to males in areas such as support systems, sources of funds and other business-related problems (Hisrich and Brush 1986). Some of the key differences between female entrepreneurs and male entrepreneurs are as follows: i. Achievement Motivation—Male entrepreneurs are usually motivated by the drive to control their own future by making things happen. Their motivation level is guided by differences with bosses and their belief that they can do things better. While female entrepreneurs are motivated by frustration in the present job or family circumstances that do not allow them to unfold their potential to grow. Thus, accomplishment of a goal coupled with personal independence is more dominant in women. Therefore, once they take up entrepreneurship, their chances of success are found to be relatively higher. ii. Basic Departure Points—The usual reasons for starting a venture are more or less similar for males and females, as both are intensely passionate about their ventures. However, the transition for males is more dominated by existing occupation that facilitates the new venture creation, emanating from dissatisfaction with the present job, layoff from the present job or having being sidelined as a student in college days or in the present job. As against this, women usually plunge into entrepreneurship because of frustration in the present job or home environment coupled with a high degree of enthusiasm about

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the new venture rather than continuation to the past experience which makes entrepreneurial journey more challenging for them. In general, female entrepreneurs are more deeply involved with the venture and displacement from the circumstances makes their journey more difficult, which in the long term fructifies well in terms of improved chances of success. Funding Sources—Male entrepreneurs usually make all calculations to depend upon a variety of funding sources such as bank loans, personal assets and funds, loans from friends and relatives, and other sources of funds available. Given the social fabric in the majority of countries, female entrepreneurs have not been able to get funds from outside sources easily—banks, venture capitalists and so on, and therefore rely, to a very large extent, on their personal savings and assets or personal loans. Professional Experience—Male entrepreneurs are usually found to be having broad experience in a variety of industries such as manufacturing, banking and technical, while female entrepreneurs usually have experience either in administration up to a middle level of management or in a service industry such as hotels, tourism, education and hospitals. Relatively, male entrepreneurs acquire great expertise and experience in areas of their past professional career, which gives them a distinct edge. Female entrepreneurs are usually found to be excelling in service business such as clinic, education, researchdriven industries and tourism. Personality Traits—Both male and female entrepreneurs are found to be energetic, goal-oriented, passionate and independent. Female entrepreneurs are found to be more balanced, firm and soft-spoken. They have far greater ingenuity and ability to respond to social and economic challenges. They have been found to be able to take care of their household as well as entrepreneurial responsibilities with greater rigor without much compromise on either side. Female entrepreneurs have been found to be relatively more flexible compared to their male counterparts. Strength of the Business—Female entrepreneurs have a tendency to focus on building a business that could be self-proprelling and therefore could function successfully even in their absence. However, a general tendency in men is to build strong businesses, but often one in which they remain inescapable, that is, they are the central element that keeps things going. According to Heffernan, female entrepreneurs are more like the ‘conductor of the symphony—the person who doesn’t make the noise, but pulls it all together’. Ego and Its Implications on Business—Usually men, because of their strong ego coupled with greater pride, find it difficult to approach people for help when it comes to even problems in their own business, whereas most women do not have that strong an ego and therefore find it comfortable to accept what they do not know and seek help from the right source. This gives them an added advantage in a wellspring of knowledge from sources that help in sorting out business problems more quickly. Scalability and Wealth Creation—For female entrepreneurs, wealth is not the primary objective, and therefore, the majority of women-driven enterprises remain small and do not scale great heights. Their main motive is to have a better balance between family lives and business, which certainly comes on their way to scale greater heights. However, there are exceptions such as Kiran Mazumdar of Biotech, Martha Stewart of Omnimedia and Lillian Hochberg of Lillian Vernon, a leading catalogue and online retailer, markets gift, household, children’s and fashion accessory products, which have created huge wealth too. Tendency Towards Risk and Profits—Female entrepreneurs prefer to respond to lower risk opportunities and are happy with lower returns. Some women have a tendency not to push for profits, in turn, gets reflected in terms of having relatively very few highly scalable businesses by female entrepreneurs. Women businesses usually employ far less employees compared to male-driven businesses, again having direct implication on profits.

Thus, both have their own unique features as both speak different languages. None can be said as all right or all wrong. However, a whole, current numbers still reveal that businesses are dominated by

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men, but female entrepreneurs are fast emerging in different countries, irrespective of the prevailing social milieu.

2.6.1  Facilitating Entrepreneurship for Women There is an emerging need to pay due attention to the question of encouraging female entrepreneurship. Some of the key areas that would require distinct focus are as follows: i. Facilitating Finance—The challenge of reasonable access to financial capital to female entrepreneurs has been recognized by investors. With the advent of information technology, many banks / financial institutions have created Internet portals meant for meeting the needs of female entrepreneurs, providing information on how they can access financing or advice to be able to balance work and personal lives. An easy access to financial resources coupled with supportive taxation system and availability of the government schemes can make a positive contribution that can go a long way in encouraging female entrepreneurs. ii. Facilitating Education and Training—Even though the basic education is being provided by the government, this does not facilitate the generation of entrepreneurial activity or businesses. Often, balancing business with family responsibilities and gathering further information, by which they could develop the networking of their business, is a difficult task. Becoming updated on the current happenings and new avenues is often a challenge. A coordinated and integrated approach to networking for information sharing is needed. The typical set-up of the basic education should be knowledge oriented and should encourage entrepreneurial spirit, imaginative power and creativity. It is generally agreed that entrepreneurial education should be a long-term objective and should be started as early as possible in the formal educational process. Training activities should be based on an interdisciplinary approach and should involve experimental learning through input from successful female entrepreneurs. In this context, both imparting theoretical knowledge and sharing hands-on experience become equally important. iii. Instruments to Support Regional Networks—Successful support programmes have to follow the longterm goal of equal opportunities for women and men to promote a culture of female entrepreneurship. Determined public relations, projects in schools and resource centres for female entrepreneurs can contribute to achieve this goal. Women still need individual help when translating their plans into action, financing their projects or accessing networks. To initiate business, to generate business contacts and to collect information, women often have the aptitude for using networks for the benefit of their enterprises. Successful networks need clearly defined objectives, target groups and organizational structures. The networking in terms of individual aspects such as raw materials, distribution and transportation needs special consideration while devising an integrated approach to framing networks.

Above all, female entrepreneurs should be facilitated to understand market dynamics, business culture and finance, management of human resources, policy and trade network, and various supports of infrastructures available to them. For all these, training programmes that are conceived and chalked out from a socioeconomic point of view need to be regularly conducted jointly by governmental and nongovernmental organizations, to impart the needed knowledge and skills in the areas of entrepreneurship.

2.7  SMALL AND MEDIUM BUSINESS ENTERPRISES Small and medium business enterprises occupy a pivotal role in the growth of an economy by contributing in multifarious ways towards income generation, employment generation and balanced regional development. The conscious effort made through policy initiatives by way of incentives and reservation of certain products and services of this sector by government has paved the way for their key

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contribution to the overall growth of the economy. The liberalization of the economy in 1991 posed great challenges to the growth of this sector, although it provided great opportunities too. The greatest challenge was to build capabilities that could enable them to respond effectively to intense competition coupled with policy changes. The sector was also required to create its own niche be repositioning itself in the changed context to meet increasing demands from ancillary items, subcontracting and so on that required better quality products and adherence to schedules at economical production. At the initial phase of opening up of the economy, SMEs were apprehensive of facing the challenges of global competition. However, these units soon realized the potential opportunities available to them to cater to the requirements of giant global manufacturers who were looking for outsourcing their requirements from low-cost economies who were in a position to ensure quality products at prompt delivery. Globalization has helped small and medium enterprises in overcoming their dependence on a few major customers in India; problems associated with demand fluctuations related to regional business cycles; and growth opportunities for unique and niche products for which either there are no local markets or where these have been saturated. SMEs in their endeavour to tap export markets need strong vision, commitment and entrepreneurial leadership with dedicated and committed teams. The entrepreneur and the whole team need to be convinced that in spite of all associated challenges, strategic shift to tap global markets would be the key to long-term business growth. Above all, expanding business globally would require knowledge about international markets, which can be gained only by international exposure and training. If it is not available in-house, the company should induct the right people at senior management positions before taking the risk of going into international markets. This would require an openness and flexible thinking among the owners and the management team. Some of the key advantages that small and medium enterprises provide for fuelling the growth of the economy are as follows:  provide increased employment opportunities per unit of investment  contribute substantially to export promotion  facilitate innovation and technological development, which contributes to making the economy flexible  gestation period to achieve breakeven is short  easy to be spread in rural and semi-urban areas, which results in balanced regional development  contribute to promotion of entrepreneurship culture at local levels  cater to local consumer needs in a more cost-effective manner  help in improving the well-being and the standard of living of local people  dependence on limited market size providing inbuilt stability  small size providing scope for specialization to develop upon niche markets

The definition of small and medium enterprises has undergone change over the years, mainly because of investment in plant and machinery and the number of employees employed. Keeping in view their contribution and importance in the overall economic growth, Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, was enacted, wherein Micro, Small and Medium Enterprises (MSME) have been classified into two broad categories:  Manufacturing Enterprises—These are enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951. The Manufacturing Enterprise is defined in terms of investment in Plant and Machinery.  Service Enterprises—These are enterprises engaged in providing or rendering services and are defined in terms of investment in equipment.

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The investment in plant and machinery does not exceed ` 5 lakh in micro-enterprises; more than ` 25 lakh and not exceeding ` 5 crore in small enterprises; and more than ` 5 crore but not exceeding ` 10 crore in medium enterprises in the manufacturing sector. In the case of service sector, the limits are ` 10 lakh in the case of micro-enterprises; more than ` 10 lakh but not exceeding ` 2 crore in small enterprises; and more than ` 2 crore but not exceeding ` 5 crore in medium enterprises. Ever since independence, the Government of India has been taking policy measures to protect, support and promote SMEs to encourage them to play a critical role in the growth of the economy. Broadly, what it takes to promote these enterprises are providing a stable business environment; positive legal environment with simple taxation laws and procedures; simple process to incorporate companies and take necessary regulatory approvals; and conducive fiscal policies and institutional support system. Some of the specific promotional measures taken by the government are as follows:        

extension services credit facilities at concessional rates from banks and financial institutions setting up of industrial estates that provide sheds along with infrastructure facilities training facilities in different aspects of setting up a business entity support for marketing products and services incentives to set up units in backward areas technical consultancy services export promotion programmes and measures such as participation in international exhibitions and fairs, training programmes on packaging of exports, marketing development assistance scheme and awards for quality products.

Some of the salient features highlighting opportunities that MSMEs provide in India are as follows:  account for 8 per cent of GDP, 95 per cent of overall industrial units, 45 per cent of manufacturing output and 40 per cent of all exports of the country as at present  provide large employment—providing employment to about 6.59 crore persons by 2.85 crore enterprises in 2008–09  Indian MSMEs are manufacturing more than 6,000 products, ranging from traditional to high-tech items  they are suppliers of intermediary products and parts to larger corporates  their growth has been phenomenal, particularly from 2005–06 onwards

From an investment in plant and machinery point of view, micro-enterprises constitute the major share with around 95 per cent of the total units, while medium enterprises constitute hardly 0.21 per cent of the total number of MSMEs at present. This implies that from a number perspective, micro-enterprises need to be given a distinct impetus for taking care of their financial and infrastructural needs. The greatest challenge in promoting MSMEs is lack of infrastructure, quality labour force, business acumen, limited options/ opportunities to widen the business, and their inability to respond to market opportunities because of their inability to realize economies of scale. Some of the key reasons for greater opportunities in the MSME sector for start-up ventures in particular are as follows:      

low capital requirements to enter into entrepreneurial venture favourable government policies that provide support system reservation of certain products to be exclusively manufactured by the small-scale sector easy availability of funds at concessional rates coupled with availability of subsidies favourable policies for procurement of raw materials and machinery extensive network of institutions providing training—technical and managerial

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tooling and testing facilities and support export promotion incentives availability of domestic demand because of accelerated growth in the economy increasing demand for exports growth requirements for ancillary units in India and abroad

International experience indicates that MSMEs grow and flourish under clusters wherein it becomes easier to develop common infrastructural facilities of better quality. There is need for greater coordination at different levels to promote the policy of cluster development. According to a UNIDO study, there are 354 industrial clusters in India, of which 34 have a turnover exceeding ` 1,000 crore. Few clusters have a gross turnover exceeding ` 10,000 crore. Thus, the cluster approach of setting up MSMEs near the market demand has proved to be highly successful. As per a Reserve Bank of India policy, 40 per cent of the total advances to the MSME sector should go to micro (manufacturing) enterprises with an investment in plant and machinery not exceeding ` 5 lakh and to micro (service) enterprises having investment in equipment up to ` 2 lakh. 20 per cent of the total advances to the MSE sector should go to micro (manufacturing) enterprises with investment in plant and machinery above ` 5 lakh and not exceeding ` 25 lakh and to micro (service) enterprises with investment in equipment above ` 2 lakh and up to ` 10 lakh. This too indicates the emphasis that is being given at policy level to encourage flow of credit to start-ups requiring lower level of capital. Thus, given the infrastructural facilities in clusters and system to meet financial requirements of MSMEs, there is a wide range of opportunities that the sector provides for start-ups in India. What it would take on the part of entrepreneurs is to be innovative in their approach to improving products, processes and capture markets by creating a special niche, so as to effectively respond to the challenges of competition.

2.8  INTERNATIONAL ENTREPRENEURSHIP International entrepreneurship involves carrying out business activities across national border to respond to customer needs outside the country by availing opportunities outside the country. International business is becoming more and more important for ventures of all sizes, particularly in the present highly competitive global economy, wherein more and more countries are opening up their economies for international trade. As such, it has become a prerequisite for entrepreneurs to survive and grow in the international business environment. It is important to realize that although it helps an entrepreneur expand their business, it also requires a better understanding of international markets by appropriately diagnosing economic, political, technological, market, legal, social and cultural environments of each country wherein the entrepreneur proposes to enter. The key to entering into foreign markets is to understand the customer in detail first with due emphasis on issues related to language, social norms and culture. Entering into international markets mainly involves extending business internationally by adding customers, distribution channels and production facilities internationally. After having anlaysed the business environment to identify business opportunities abroad, an entrepreneur needs to respond to the following challenges before deciding to operate abroad:  management practices and style  strategic issues that need to be appropriately responded to  alternative strategies and their implications to enter into other countries

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 process to take decision for entering into international markets  ethical practices and propensities across nations and their implications for business  country-specific risk associated with change in government regulations

Entering into international markets requires greater risk and also reward, and therefore, an entrepreneur needs to be highly vigilant to changes in consumer preferences, competition and government regulations, so as to be ready with contingency plans to adjust swiftly and quickly to such changes. Before entering into business abroad, one should carefully analyse the entrepreneurial culture in different countries to find out the one that reflects the ease to launch a new enterprise and associated structural factors such as bankruptcy laws to tax policies and employment regulations that contribute to promotion of businesses, in general, and start-ups, in particular. The mode and method of entry into international markets depends largely upon the goals of the entrepreneur and the competitive advantage that they have compared to others for entering into specific markets abroad. Three broad strategies to enter into markets abroad are exporting, non-equity arrangement and direct foreign investment. Exporting involves providing products manufactured in one country to customers located in another country. It could be direct exports or indirect exports. In the case of direct exports, the entrepreneur routes their products through an independent distributor or through their own overseas sales office. The independent distributor takes the responsibility of identifying foreign customers and also takes care of technicalities related to documentation, financing and delivery of products and gets a set commission for it. Setting up an own office for greater involvement in sales becomes the first step to move forward by way of setting up a warehouse and a local assembly process and ultimately to establish a manufacturing facility. As against this, indirect export involves the foreign buyer’s presence in a local market or use of the services of an export management firm. The entrepreneur deals with the buyer or export management firm and the whole transaction is handled as if it were a domestic transaction, although goods will be transported from the country of origin to the customers in another country. Export management firm is another channel for indirect exporting and it provides this service at a fee. An export management firm takes care of all the associated work related to selling, marketing and delivery along with any other technicality that may arise. Non-equity arrangements for entering into foreign markets are of three types: licensing, turn-key projects and management contracts. Direct foreign investments are undertaken in multiple ways such as wholly owned foreign subsidiary as well as joint ventures with minority and majority equity stakes. However, direct foreign investments modes depend upon amount of investment made by the entrepreneur, nature of industry, and rules and regulations of the host country governing such investments. The minority shareholding approach is used by entrepreneurs to gain experience of catering to the needs of foreign market before entering into any major commitment. However, in case the entrepreneur has something unique to offer, it helps in influencing the decision-making process much more than their stake in the joint ventures as a mode of entry into foreign markets is attempted by an entrepreneur, particularly when the entrepreneur is keen to set up marketing and manufacturing facilities required to quickly respond to market needs. At times, depending upon the strength of the entrepreneur, a joint venture is dissolved and the entrepreneur takes 100 per cent stake with them.

2.9  ENTREPRENEURSHIP DEVELOPMENT—ROLE OF EDUCATIONAL  INSTITUTIONS One in 60 lakh high-technology business ideas reaches the initial public offering (IPO) stage. Less than 1 per cent plans received by VCs get funded. Founder CEOs own less than 4 per cent of high-tech companies’ ownership after IPO. 60 per cent of high-tech companies funded by VCs go bankrupt.

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Thus, success in technology entrepreneurship is a tough proposition. It is here that the role of educational institutions comes into play—to devise innovative programmes to increase the success of technology entrepreneurship ventures. Educational institutions have to be creative and innovative in building entrepreneurship development programmes. Some of the critical issues that an entrepreneur, existing and prospective, has to systematically diagnose and resolve are as follows:  What are likely to be the shape of things in India and abroad from the point of view of investment opportunities in the short, medium and long run?  What are the critical factors behind survival and growth of long business organizations in spite of all constraints and adversities?  How do successful business entities prepare and respond to the fast-changing environment of turbulence and flux?  What approach to management will be most effective vis-à-vis the size and nature of business to avail business opportunities by developing an inbuilt mechanism to respond to emerging challenges?  What are the likely implications for existing business activity of emerging changes in the economic, social, technological, political, legal and competitive environments?  What are the impacts of fast-changing consumerism on operations of business enterprises?

One fundamental question that is usually posed is ‘Can entrepreneurship be taught?’. There are usually different views on this. However, the fact remains that if maths can be taught, music can be taught and art can be taught, then entrepreneurship can also be taught. Teaching entrepreneurship is just like teaching any other skill, which requires a different pedagogy. As such, every student brings their own natural instincts, upbringing and talents and can improve with relevant information and experience. Like any other discipline, entrepreneurship has its own vocabulary, tools, techniques, concepts and body of knowledge. The teaching /learning of entrepreneurship requires greater focus on experiential learning and therefore things such as games, exercises, films, projects, assignments and group activities play a vital role in teaching entrepreneurship. It has been well proved that students who have gone through formal education in entrepreneurship area have done better in managing their start-ups and taking them to greater heights. If we look at the contribution of some of the leading institutions in the developed world, what strikes immediately are Stanford Technology Venture Program, Stanford; Lester Center for Entrepreneurship & Innovation UC Berkeley; MIT Entrepreneurship Center and so on. Stanford’s current Community of Scholars includes 18 Nobel Prize Laureates. Stanford Technology Ventures Program (STVP) located in the heart of Silicon Valley has its entrepreneurship centre at Stanford University’s School of Engineering. It ‘provides students with entrepreneurial skills that help them use technology innovations to solve major world problems, with an emphasis on the environment, human health, and other global issues. Our goal is to inspire and prepare students for leadership roles within existing organizations, new ventures and academia’. It has gained its international reputation as the pioneering Silicon Valley. CISCO, Hewlett Packard, Yahoo, Google and Sun Microsystems, which have changed the process of development, all are first-generation technology entrepreneurship ventures that were seeded and germinated from Stanford. Thus, the institution has made great contribution to promotion of entrepreneurship eco-system in and around the campus. Lester Center for Entrepreneurship & Innovation UC Berkeley is the primary locus at the University of California, Berkeley, for the study and promotion of entrepreneurship and innovation in management and new enterprise development. The Lester Center was founded in 1991 through a gift from W. Howard Lester, Chairman of Williams Sonoma, with a primary focus on enterprise development through the study and promotion of entrepreneurship. The Center ‘fosters teaching of successful entrepreneurship

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and innovation; encourages Berkeley students in the creation of new businesses; creates and disseminates knowledge of entrepreneurship and entrepreneurial finance to the business and university communities and facilitates interaction between the entrepreneurial community and the university’. Similarly, Massachusetts Institute of Technology (MIT) has made its own unique contribution to promotion of entrepreneurship. The MIT ‘Entrepreneurship Center team provides content, context and contacts that enable entrepreneurs to design and launch successful new ventures based on innovative technologies; and help MIT students, alumni and colleagues access an array of educational programmes, networking opportunities, technologies and resources, both at MIT and around the world’. The Entrepreneurship & Innovation Programme (E&I) is a new offering within the MBA Programme at MIT. E&I were made available as an option for the first time to select applicants in the entering MBA class of 2008. It is now a continuing part of the MIT Sloan MBA Programme. The programme focuses on launching and developing emerging technology companies. The research and development efforts at MIT are so directed and application focused that its licensing office files four patents a week and licenses hundreds of inventions to industry. MIT contributed to creation of 200 companies with a market value of $20 billion between 1985 and 1997. If the 4,000 companies founded by MIT graduates and faculty formed an independent nation, the companies would make that nation the 24th largest economy of the world.

Example of the Role Played by Leading Institutions in Promoting  Entrepreneurship Harvard  tops  Forbes’  list  of  ‘Billionaire  Universities’  this  year  with  62  of  its  alumni;  followed  by  Stanford, which takes pride of having 28 billionaire graduates. The number of Harvard alumni being  billionaires increased from 54 in 2009 to 62 in 2010. That is ‘more than any other American university  by  a  long  shot,’  Forbes  said.  Some  of  the  prominent  and  well-known  personalities  amongst  them  include Citadel founder Kenneth Griffin and New York Mayor Michael Bloomberg, who along with oil  and banking tycoon George Kaiser graduated from Harvard Business School in 1966. eBay’s Meg  Whitman  graduated  from  the  business  school  in  1979  and  Apollo  Management’s  Leon  Black  and  Hamilton James of Blackstone got their MBAs in 1975. Stanford  University has  the credentials  of being second on the list of schools that have turned  out the majority of billionaires. The number of billionaires from Stanford increased from 25 in 2009 to  28 in 2010. Prominent amongst them are Yahoo co-founder Jerry Yang and Google founders Sergey  Brin and Larry Page. Sun co-founder Vinod Khosla and Gap Chairman Robert Fisher were classmates  at this California university, graduating with MBAs in 1980, while Nike founder Philip Knight graduated  from the Stanford Graduate School of Business in 1962. Columbia  University  comes  third  in  contributing  to  the  list  of  billionaires,  the  number  of  whom  increased from 16 in 2009 to 20 in 2010. This is also a university that administers the Pulitzer Prize  known for educating billionaires such as Warren Buffett. The University of Pennsylvania ranks 4th with 18 billionaire graduates, followed by Yale University  with 16 billionaire graduates. The University of Chicago ranks sixth in the list of universities and takes  pride in having 13 billionaire graduates in 2010, which increased from 10 in 2009. ‘Schools with billionaire grads stand a chance to reap benefits down the road,’ Forbes said. For  example, Home Depot co-founder Kenneth Langone, who earned his MBA in a part-time programme  from New York University, which stands at 8th place with Northwestern University in the Forbes list with  its 10 billionaire alumni, subsequently became a heavy donor to the school. Knight had contributed  $105 million for the Knight Management Center at Stanford’s business school. Massachusetts Institute of Technology (MIT) has 11 billionaire graduates, while University of South  California, University of California, Berkeley, Princeton University and Cornell University stand at the  10th place with 9 billionaire graduates each.9

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Indian institutions of excellence can learn a great lesson from leading institutions of higher learning such as MIT, Stanford and UC Berkeley and take concrete steps for contributing to creation of an eco-system conducive to promotion of entrepreneurship. They have to come up with their own unique models for promotion of entrepreneurship. A humble beginning has been made towards promotion of entrepreneurship by institutions such as BITS, Pilani; IIT Mumbai; IIM Ahmadabad; S P Jain Institute of Management & Research, Mumbai; IIT Madras; IISC Bangalore; IIT Kharagpur and Nirma University. Each of them has a separate centre/cell/society for promotion of entrepreneurship. All of them provide, inter alia, incubation facilities having unique niche areas. In BITS, it all started when five students got together with faculty and alumni to start the Center for Entrepreneurial Leadership (CEL) in 2002. We strongly believe that entrepreneurship is a way of life; it is not just about having an ‘ idea’, taking few risks, going out to raise capital, putting a marketing plan in place and starting off. It is a venture to keep innovating and increasing the bottom lines that cause a qualitative change in the lives of people around one. BITS, Pilani, is one of the first technical universities to have a regular course on entrepreneurship running for more than two and a half decades. However, it has not been an easy task to spread awareness and create a spirit of entrepreneurship amongst students. The concept of entrepreneurship started infiltrating students’ minds when the centre got selected as one of the top five e-cells in India and became the cofounder of National Entrepreneurship Network (NEN), founded by the Wadhwani foundation in 2002. NEN is building up and leading a first-of-its-kind collaborative effort, to bring together Indian academia, industry and international experts for sharing knowledge, skills and resources to form a nationwide launch pad for new entrepreneurs. NEN now has a network of over 373 institutes having a body of 3.50 lakh students with 0.55 lakh students actively engaged in entrepreneurship programmes. It is leading the way in spreading and supporting entrepreneurship amongst the youth. Keeping the importance of entrepreneurship development in view, the Department of Science and Technology (DST), Government of India, has taken the initiative to promote entrepreneurship development programmes in academic institutions. The National Science & Technology Entrepreneurship Development Board (NSTEDB), established in 1982 by the Government of India under the aegis of the Department of Science & Technology, is an institutional mechanism to help promote knowledge-based and technology-driven enterprises. It has an institutional mechanism to promote entrepreneurship through Entrepreneurship Development Cell (EDC), Science & Technology Entrepreneurship Development (STED) Project, Science & Technology Entrepreneurs Park (STEP) and Technology Business Incubator (TBI). It has been playing a catalytic role by funding various initiatives for the promotion of entrepreneurship. DST has given a big boost to entrepreneurship development by funding a large number of technology business incubators in association with leading institutions during the last 7 to 8 years. It has also taken concrete steps to extend certain taxation benefits to incubates and incubators. Intel and Indo-US Science & Technology Forum along with DST have taken some major initiatives to encourage innovation and entrepreneurship. The seeds sown by different organizations have started sprouting as is evident from the number of start-up ventures coming up in different thrust areas, particularly during the last few years. The need of the hour is to make entrepreneurship development more effective by imparting relevant education, focusing on developing entrepreneurial competencies. The crucial change agents in the process of developing young entrepreneurs are teachers with adequate skills and knowledge in the area of entrepreneurship. Institutions of higher learning, especially technology-based, have to coordinate their efforts in an integrated manner with industry, government and voluntary organizations involved in entrepreneurship development to create an eco-system that can lead to the creation of key valleys and hubs on par with global standards in areas such as of biotechnology, nanotechnology, textiles, manufacturing, paper, auto part components, automobiles, and gems and jewellery.

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2.9.1  Entrepreneurship and Strategic Management Entrepreneurs create a competitive advantage on a continuous basis by innovation through production of goods and services. This brings a synergy between entrepreneurial process and strategic management, and once integrated, can facilitate the production of greatest wealth in the economy. Strategic management has been prominently a domain of large businesses. However, it is equally important to small businesses and start-up ventures. As such, any business activity has to focus on two prominent aspects, namely, opportunity-seeking and advantage-seeking actions and it is the proper alignment and integration between the two that is called strategic entrepreneurship. Strategic entrepreneurship is the integration of entrepreneurial and strategic dimensions to design, develop and implement entrepreneurial strategies that create wealth. Venkataraman and Sarasvathy (2001) referred to this activity as Romeo (entrepreneur) on the balcony (strategy). Integrating entrepreneurial and strategic actions is necessary for firms to create maximum wealth (Ireland et al. 2001). Entrepreneurial and strategic actions are complementary, not interchangeable (McGrath and MacMillan 2000; Meyer and Heppard 2000). Entrepreneurial action is designed to identify and pursue entrepreneurial opportunities. Therefore, strategic entrepreneurship is highly valuable in the fast-changing, dynamic and uncertain environment for entrepreneurs to respond to emerging challenges and opportunities on a continuous basis. It is the insight using strategic perspective that enables entrepreneurs to identify appropriate opportunities and respond to them by establishing sustainable competitive advantage.

2.10  MISTAKES START-UPS MAKE The majority of start-up ventures fail within one to three years of their inception. There are different reasons for failure of ventures, either internal or external. However, various studies show that internal reasons are more pronounced for failure than external ones. The fundamental and most crucial mistake that kills start-ups is offering a product and service that users do not want. Wrong assumptions or assessment about future market prospects for the product or service turns out to be the single-most important reason for failure. Some of the reasons found to be responsible for start-up venture failure are discussed in the following sub-sections.

2.10.1  Single Founder or Not Having a Good Team There could be rare examples of single founder succeeding in a business. As such, there are start-ups who believe in having a lean organization as long as they can afford to grow without building a team. Lean organizations require minimal initial costs, that is, small investments, and can respond to many small revenue opportunities. They attempt to leverage global opportunities through the Internet and technology and work on a strategy to remain small as long as they can afford to. Going alone in a venture also provides a great degree of flexibility in decision-making and provides a great opportunity to learn through experiencing it alone. Each decision is made alone, and its repercussions and implications have to be borne alone. However, the counterargument focuses on ventures that mainly fail because of a single founder. This basically means that during the initial stage itself, the founder could not convince like-minded people to build a team to start a venture. Taking the risk of starting a venture is too difficult for one person. It requires a team to discuss and to brainstorm on vital issues. The founder requires a lot of psychological support to face challenging situations, and at times the need for this gets further aggravated if the venture is started without getting the blessings of parents, relatives and friends. Team spirit helps a lot in passing through difficult times that a single founder may not be able to withstand. The greatest

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advantage that comes from a good team is the support system to face difficult times when things do not click and setbacks start chasing one after the other or one feels unsure about certain proposed actions. Above all, it provides great strength by way of reaffirming and realigning vision when the need arises. Dissention amongst team members too becomes a cause of failure of ventures. Usually, it arises either because of role or on financial matters. Usually, as the organization starts growing, financial matters, bank account operation and so on lead to incidences causing distrust, which breaks the team. The ground rules about clarity in terms of goals and objectives, roles and responsibilities, sharing financial gains and losses, and above all processes to resolve differences need to be well established and defined at the beginning itself while forming a team. For example, Swaroop C. H., co-founder of a start-up, quit the company that he helped build because of differences of vision and approach. However, he still maintains a view that having a team to run a business is far less risky than not having one.

2.10.2  Entering into a Business Without Ensuring   Competitive  A dvantage One has to be very clear about the niche that one’s idea provides vis-à-vis the competition prevailing in the industry. At times, one starts a business with very limited niche to avoid competition but that too does not work for long. One’s idea has to necessarily fill up a gap in the market that is perceived valuable by the customer. If we analyse successful start-ups, we will find that the majority had something dramatically innovative to offer, which provided them with the much needed competitive advantage. The source of such ideas remains unsolved problems that founders identified before others could see them. Ventures that imitate others do not last long. Lack of competitive advantage also arises when enough homework does not get done to ensure viability of the idea. 90 per cent of the ventures fail because they lack originality and are not viable from birth itself. These are also called born sick companies.

2.10.3  Weak Planning and Wrong Assessment of Market Potential Lack of planning particularly about the execution stage causes ventures to have a setback. Certain unrealistic assumptions made by an entrepreneur about the future cause ventures to drift from the path. The initial phase of problems cause a lack of support from the expected corners because everybody starts looking at the venture from a failure perspective. It has been usually found that when an entrepreneur needs a help in difficult times, everybody, including the nearest and dearest ones, lends a helping hand. Therefore, it is very important that one plans meticulously, so as to avoid any mis-happenings in the initial stage of business. Some of the vital assumptions in the planning that goes wrong in reality pertain to market size, time of entry and demand, entry barriers, if any, and potential market share. One has to diagnose prospective users of a product or a service well to understand their needs exactly. This can be done only by empirically testing it. One should not take the risk of guessing as to what will work; one has to necessarily identify users and measure their responses and to incorporate changes as suggested by them. Therefore, if one is making something for teenagers, young couples and old people, that too with a particular level of background or industrial users, one should necessarily interact with them to find out the value in them of what you are going to offer them. Getting the first customer is the most difficult task for start-up ventures and one should be very practical about it. In fact, businesses which are rolled out after ensuring customers in hand have far better chances

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of success. Over-enthusiasm on the part of an entrepreneur in looking at just 2 per cent of the market share of a market size of 500 crore may appear to be small but means a lot for a new venture.

2.10.4  Underestimating the Cost and Overestimating the Price It has been found in many entrepreneurs with technical background that they miss on proper estimation of cost by not including certain components, which results in estimation of higher margins. Further underestimation of cost with overestimation of prices acts as a double-edged sword to kill the business. Pricing decision for an innovative product or service needs to be made with a lot of caution and prudence.

2.10.5  Not Having Financial Prudence The beginning phase of a venture requires very judicious use of money to ensure that expected cash flows take place. Any laxity in handling money results in losing track of the business and, in turn, causes derailment. It has also been found that spending on items that are not very productive from a business perspective or are overheads may adversely affect the viability. Further, a number of entrepreneurs lose sight of business by channelizing profits for personal gains such as a good bungalow, cars and improvement of lifestyle rather than pumping it into the business for its growth. This also adversely affects the business. An entrepreneur should have a basic knowledge about accounting and financing principles and should be able to get signals sufficiently in advance about financial losses and should be able to account for financing these losses as fee paid for learning entrepreneurial skills. They should be alert to financial issues and should be ready to take corrective and hard decisions to respond to those issues in time.

2.10.6  Lack of Financial Tie-ups and Awareness on   Approvals  R equired Taking up a project beyond financial means or not having done sufficient spade work for financial tie-ups can cause a start-up to fail. For start-up funds availability has to be ascertained in time as the value of money to meet various targets lies in having money in hand at the right time. In the initial phase till the break-even is achieved, a surplus cash flow starts accruing, start-ups have certain time to run out of money and close the operations. This is also called as runway, as it indicates and gives a signal to the start-up about ‘How much runway do you have left?’. It reminds the founding team about the cash run out situation that causes operations to stop. When one has a magic idea in one’s hand in a design form, prototype form or concrete stage in which it can be taken to market but has little or no money to execute the project, what matters the most is to attract investors to support one’s idea with the requisite sum of funding. One’s ability to convince investors of the worth of the idea and its ability to generate cash matters the most. It is at this stage that the founding team has to ensure not only getting funding support at reasonable terms but more so the adequate flow of money as and when needed for project execution. Further, start-ups many a times invite problems because of lack of awareness and understanding of the regulatory mechanisms and the various approvals required for doing a business. They realize only at a later stage about contempt for laws and regulations which can adversely affect their operations and growth.

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2.10.7  Failure Due to Wrong or Non-ethical Purchasing Decisions Every start-up has to take purchasing decisions pertaining to land, machinery and raw materials. Mistakes committed in purchase or lease hold land documents can cause serious problems at a later stage. Many entrepreneurs realize that the title of property they have purchased have legal hassles and in turn invite legal disputes. Lease terms, especially in terms of period of lease or renewal, cause a problem when a particular location starts fetching a good business, and the loyalty of customers depends on the location of a business too. Further, it is observed that any compromise with suppliers for over-invoicing, inadequate search for alternative suppliers, lack of proper agreements with suppliers and inadequate vetting of suppliers can also cause problems in terms of operations.

2.10.8  Production Lacunae Compromising on quality for getting short-term gains in profits can have a disastrous impact on the longterm survival of a venture. Creating imbalance in a production chain resulting in capacity mismatches in different sections results in lack of optimum utilization production capacities and, in turn, escalation in per unit cost of production. Not delivering consignments on time affects the reputation of a business and, in turn, future orders. Some of the vital lacunae that result in failure of businesses are lack of adequate understanding of interdependencies and bottlenecks; lack of production planning and control; lack of cost control; lack of testing, inspection and quality control; and inadequate safety measures and contingent plans.

2.10.9  Lack of Flexibility and Obsession with an Idea Entrepreneurs need to have foresight to understand the long-term consequences of certain wrong decisions starting from the idea itself. They should be flexible to drop the idea if they get signals about its viability not being assured. The stick-to-your-vision approach may not always work in the field of business, particularly because of uncertainties resulting in lack of a clear definition of the problem. Start-ups are more like science, where entrepreneurs are required to follow the trail wherever it leads. It is here that an entrepreneur should not get over-attached with the idea and seeks proper mentoring to ensure that it is worthwhile to pursue; else, they should be thankful for an advice in time to drop the idea. It has been found in reality that successful start-ups end up doing something different from what the entrepreneurs originally intended. It is advisable for the entrepreneur, before dropping an idea, to ensure that there is synergy between the new idea and the lessons they have learnt and resources acquired by them can be put to reuse in trying out the new idea. So these ideas represent some sort of progression in their journey towards entrepreneurship.

eTOYS.COM (1997–2001) eToys is now back in business, yet its original incarnation is another classic boom-to-bust story. The  company raised $166 million in a May 1999 IPO, but in the course of 16 months, its stock went from   a high of $84 per share in October 1999 to a low of just 9 cents per share in February 2001. Much  like Pets.com, eToys spent millions on advertising, marketing and technology and battled with a host  of  competitors.  And  like  many  of  its  failed  brethren,  all  that  spending  outweighed  the  company’s  income, and investors quickly jumped ship. eToys closed in March 2001, but after being owned for a  period by KayBee Toys, it is now back for a second run.10

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Webvan (1999–2001) A  core  lesson  from  the  dot-com  boom  is  that  even  if  one  has  a  good  idea,  its  best  not  to  grow  too  fast  too  soon.  But  online  grocer  Webvan  was  the  poster  child  for  doing  just  that,  making  the  celebrated company our number one dot-com flop. In a mere 18 months, it raised $375 million in an  IPO, expanded from the San Francisco Bay Area to eight US cities, and built a gigantic infrastructure  from  the  scratch  including  a  $1  billion  order  for  a  group  of  high-tech  warehouses.  Webvan  was  worth  $1.2  billion  (or  $30  per  share  at  its  peak),  and  it  touted  a  26-city  expansion  plan.  However,  considering that the grocery business has a very thin margin to begin with, it was never able to attract  enough customers to justify its high expenses. Finally, the company had to close in July 2001, and  2,000 employees were out of work.11

2.11  MANAGING START-UPS DURING DOWNTURN The real test of a venture lies in recession or downturn economy. The recessionary phase, if it coincides with setting up a venture, becomes tough and challenging to respond to. As such, downturn economy provides different sorts of opportunities compared with the normal phase. Therefore, ventures that are suited to the downturn economy mainly in the areas of basic necessities such as education, health and telecom, and solution providers for productivity enhancement such as software and infrastructure, and agriculture not particularly dependent on food processing keep doing well. However, other ventures start seeing downturn as a cause of their failure. One has to find out ways and means to survive by identifying useful indicators and strategic action to sustain during difficult times. What matters most is to pull on in difficult times through creative solutions and having a balance between optimism and realism. It is the phase when crying and giving up does not help in any way whatsoever. Dynamic leaders with guts consider it a challenge and respond to it judiciously. Some of the key strategies that can help in responding to trying times are as follows: i. Do not get disturbed and panicky! Economic cycles in any economy are part and parcel of the growth process. The best companies successfully come out of worst times and strengthen their operations for the future. If founders give any signal of closure to a venture, employees will start quitting and remember that the toughest thing in building an organization is to get the right people. If one panics, one’s employees will panic. ii. Conserve cash and initial profits earned, if any, to face tough times. Cut all unproductive and allied expenses. Spend only on those items that directly contribute to revenue generation. Cut cost by adopting measures such as renegotiating with suppliers and reviewing rental contracts. iii. Focus on ways of improving productivity and means by channelizing human potential to come up with creative solutions. Encourage low performers to get aligned with high performers. iv. Regularly communicate and share your concern with employees. Develop confidence in your employees that you are serious about the business and this too shall pass. Make them realize that you are building a lasting and successful enterprise and that some of the cost-cutting measures are a must for survival in which you would like your employees to partner with. One needs to act smartly, swiftly and timely, especially in tough times. Anything adverse in bad times to the company should be shared with the employees to win their confidence and support in coming up with imaginative solutions to the problem. There is nothing that cannot be responded to and managed well by the united efforts of a strong winning team. Above all, at all times, particularly in a downturn phase, make sure that your team is having fun and enjoyment against all odds. This requires creation of a congenial environment of trust and faith.

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2.12  ENTREPRENEURSHIP—EMERGING TRENDS IN THE GLOBAL  KNOWLEDGE ECONOMY Entrepreneurship revolves around customers. The purpose and existence of a venture depends upon the customer as a source of knowledge. Only ventures having value proposition to the customer on a continuing basis can sustain and survive. Agile competition demands that the processes that support the creation, production and distribution of goods and services be centred on the customer-perceived value of products, which is very different from building a customer-centred company. Agility in competition focuses on enriching customers who are becoming more and more demanding. Customers pay a modest profit for products or pay a percentage of perceived value for the solution provided to his problem. The focus becomes more on value-based strategy to enrich customer satisfaction. Entrepreneurs in the knowledge economy have to particularly develop an entrepreneurial organization by responding to fast changes in the environment. Ventures in the 21st century have to thrive on change and uncertainty by having a horizontal structure rather than a hierarchical structure, so as to be innovative. Further, upcoming ventures would require their strength on knowledge and information through leveraging the strength of people. Companies would be making investments for talent management so as to increase the strategic impact of their people and information on their bottom line. The fundamental change that has taken place over the years is that first generation business had focused on management of technology or the product/service specific to the particular industry. This shifted to project as an asset to be managed with a focus on customer retention in the secondgeneration business. In the third generation, the emphasis shifted to enterprise as an asset with a focus on customer satisfaction. Thereafter, the customer became an asset and a central point of management, so as to bring in a new relationship with them. Now in the 21st century, the whole business emphasis is likely to be shifted to knowledge-based management practices that will have a foundation based on collaboration. Handy’s Sigmoid Curve is an S-shaped curve, described by Charles Handy (1994), highlighting the life cycle of products, organizations, empires and even relationships. The curve basically symbolizes that almost all endeavours start slowly. These dip and falter through an experimental stage before reaching an accelerated phase of success. The curve reaches the peak and decline thereafter. The success lies mainly in our ability to innovate and come up with another such curve on a continuous basis before the earlier curve reaches its peak. Charles Handy suggested that constant growth and development can be achieved only by those organizations that are always on the path of innovation to introduce related or non-related goods and services. The success of a venture lies in understanding and knowing when to start building a new curve in its growth trajectory. Further, whether the next curve in the chain of curves will be product, process, way of operation, a strategy or a culture mainly requires fresh ideas that are unique. According to Handy, the paradox of success is that what got you where you are will not keep you where you are. Thus, entrepreneurial journey requires foresight to start making changes even when it is not yet obvious that change is necessary, and the courage to switch from one curve to the next when the time has come.12 In the knowledge economy, the opportunities and challenges are increasing at an unprecedented rate. Hence, the greater relevance and significance of Handy’s Sigmoid curve. With the fast expansion of e-commerce business, particularly during 2000–10, a great opportunity arose for the e-commerce business solution providers. E-commerce service solution providers have to come up with e-commerce business solutions that are reliable, dependable and secured for transactions. They also perform multiple jobs such as market research, getting traffic for your e-commerce storefront and online ordering system.

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In the present business environment, because of the fast expansion of the Internet worldwide, e-commerce has become the latest mantra in increasing one’s sales. The applications have become widespread in all sorts of businesses, including running of a restaurant, travel booking, teaching online, retail stores, and selling industrial and consumer goods. E-commerce is bringing in a major change by way of intense compression and digitalization of business processes, resulting in reduction in operational costs. It is converting physical infrastructure into virtual ones on Web sites. Businesses will not be able to survive without speed of operations and cost competitiveness. For exports, especially, the Internet technology has become highly valuable because of dramatic reduction in communication cost and time-to-market for goods and services. This can significantly reduce costs and can facilitate a great deal in managing supply chains for goods and services in cross-border trade, cutting overheads associated with marketing, transport and distribution. The Internet has created many new business opportunities across the existing business and new ones to acquire competitive advantage, which is key to successful business-to-business and business-toconsumer trading. As more and more countries start using Internet technology for business and trade, its impact on the business world would dramatically improve. Its major impact would be realized through efficiency improvements by using market research, improved production systems, developing business alliances and improved integration of entire value chain, from suppliers to end users.

Internet—Emerging Trend for Entrepreneurship Opportunities Peter  Drucker  predicted  long  back  that  the  major  changes  in  society  would  take  place  through  information. He had highlighted that knowledge has become the key resource and does not have any  boundaries. According to him, the largest working group will constitute knowledge workers. The basic  characteristic  of these knowledge workers would be the level of their formal education. Therefore,  education and development, and to some extent training, will be the central concern around which  the knowledge society would develop. The transformation of business world will be guided by the  way customer would perceive value from goods and services. The number of Internet users has been  increasing at an accelerated rate globally. The estimated number of Internet users touched 1.80 billion  as against the world population of 6.76 billion, accounting for 26.6 per cent of the world population  as  of  December  2009.  The  growth  in  the  number  of  Internet  users  was  around  400  per  cent,  that  is,  an  increase  from  0.36  billion  in  2000  to  1.8  billion  between  2000  and  2009.  The  data  on  interregional variations reveal that penetration level of the Internet was highest at 76.2 per cent in North  America, followed by 60.8 per cent in Oceania/Australia, 53.0 per cent in Europe, 31.9 per cent in Latin  America/Caribbean, 28.8 per cent in Middle East, 20.1 per cent in Asia and 8.7 per cent in Africa as of  December 2009.13 The whole complexion of the business world is undergoing a fast change mainly  because of the penetration of the Internet. The ease of Internet usage has resulted in an emerging  trend  in  e-commerce,  which  is  spreading  like  wild  fire.  This  is  playing  a  key  role  in  globalization  through  greater  interdependency  amongst  countries.  E-commerce  has  completely  changed  and  brought  out  a  total  transformation  in  the  way  people  do  business.  Be  it  big  corporations  or  small  business entities like cottage industries, businesses’ wings have spread globally by providing their  products and services to customers across the globe. E-commerce is generally linked with buying and selling goods and services over the Internet. It  basically  implies  selling  goods  and  services  online  through  Internet.  This  requires  designing  and  developing an attractive Web site and an e-commerce outlet by entrepreneurs. The usage of other  media trade by businesses, such as the telephone, television, fax and electronic payment, has also  been increasing at an unprecedented rate. This has resulted in an added boom to the e-commerce  business because e-commerce has become an integral part of the global economy.14

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2.12.1  Benefits and Emerging Challenges of e-Commerce Some of the key benefits, as evident from the foregoing discussion, that would accrue to even small businesses are potential to capture global markets; great possibility for start-up ventures to respond to the opportunity, particularly because of reasonable or very low investment requirements; flexibility to transact, irrespective of business hours and doing business from home without necessarily having a physical business space; competitive advantage to small businesses because of less operational cost; and potential to grow and earn profits and enter into a field that threatens well-established businesses by creating their own niche. Other than these, the key benefits and challenges associated with e-commerce are discussed in the following sub-sections: Benefits         

cost reduction—production, marketing and distribution increased profits increased sales local to global market reach focus on selected market segments ease and flexibility in price quote and changes to effected encourages quick innovations facilitates business process reengineering

Challenges               

keeping pace with technological developments both on software and hardware front robust security systems—front-end and back-end to avoid any fraudulent activities costs of a technological solution and investments required to maintain the site identifying, recruiting and retaining skilled professionals insufficient telecommunication bandwidth integrating digital and non-digital information difficulty in integrating standard enterprise resource planning packages with organizational information technology systems privacy issues and scepticism in the minds of customers increasing customer expectations cyber laws and their incorporation customer resistance to accept language barriers across the globe inability to get critical mass of clients to support such services training requirements for employees

E-names  The first step to enter into an arena of e-commerce is to select an Internet name, which is not very easy for multiple reasons—someone else might have already been operating with a name that you thought for your business, and it needs to be simple, easy to remember and should have a potential to be built into a brand to reckon with. Sometimes most effective names may not have much to do with the nature of business such as eBay, Amazon and Bingo. It was 26 years ago, that is, 15 March 1985, that the first dot-com domain name—Symbolics.com— appeared on the Internet, ushering in the commercial age of the World Wide Web. This made it easy and simpler for the average person to access a Web site. Instead of having to remember a long series of numbers and dots, one could simply type in ATT.com, IBM.com or CNN.com. It took more than

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two years for the first 100 sites to go online and by 1995, the number grew to 18,000. Today, there are more than 80 million dot-com domain names. According to the Information Technology & Innovation Foundation (ITIF), crunching the numbers, 99.9 per cent of all Internet growth has occurred over the past 15 years.15 In the United States, initially Network Solutions, Inc. was authorized by National Science Foundation to handle registration of domain names at no charge to registrants. Subsequently, it was permitted charge fee from domain name registrants in 1995 by the federal government. It was only from 1998 after commercial application of the Internet became visible that government formed the Internet Corporation for Assigned Names and Numbers (ICANN). Today, there are more than 462 ICANN accredited registrars in the business of extending domain names services (Froomkin 2000). Domain names need to be unique and identifying them requires a good deal of search, as they should not be already in use by someone else. In case someone is particularly interested in existing names, they need to submit a bid to the existing owner with a hope to buy it from them. Developing a Web site for e-commerce requires a technical expertise, as the basic purpose is to attract greater and greater traffic to the site and respond to customer queries instantly. There are busy Web sites, which are able to attract 0.5 million visitors per day. It is important to remember that a Web site should easily and efficiently connect to the organization’s inventory system and supply chain to serve the purpose. To do it on one’s own, one basically requires to first build a Web site that can display merchandise and electronically take orders. Thereafter, someone has to host it, or one has to have one’s Web server and required programming skills. Thus, e-commerce-based opportunities are going to explode in the years to come for those who have vision and foresight and are technology driven and willing to take risks. What would be required is to create an eco-system wherein institutions will have to play a critical role in entrepreneurship education. It is these programmes on campuses that would enhance upcoming generation’ ability to be entrepreneurial. 

 Check Your Progress   Five Things That Might Make You Stay at Work  

  

1. I can buy out when the boss retires: So you will end up with your own business anyway. 2. I have a life-threatening condition and the company will be generous: Although illness can give you a ‘happy go lucky’ approach, it may be best to seek fulfilment in your homelife rather than becoming an entrepreneur. 3. I qualify for a bumper pension in two years: So why not hold fire and try to negotiate an early release? It will be easier to start a business if you are receiving a pension. 4. I actually like work, but my partner is pushing me: Is an all-too-common comment made by reluctant entrepreneurs. Should your partner start the business instead? 5. They are currently funding my MBA: Means that a start-up venture has never looked so appealing. Write the plan but wait until you get the piece of paper before resigning. Is there an opportunity to start a joint venture with your employer? 

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Five Things That Might Make You Decide to Leave

1. The boss is a control freak who will never let go: If work is uncomfortable and you think you can do better on your own, it is often worth giving it a go. 2. I think the firm is going down the tube: Ask if it is true. If it is, you might be able to buy the assets from the receiver and get off to a flying start with the business you know. 3. I have a personal pension scheme: So however old you are you will not lose out financially when you are old. 4. Work is depressing me: Life really is too short to be spent doing something you do not enjoy. Understand what it is about work that you want to change first though. 5. I have been trading on the side and am getting busier: Many businesses start because moonlighting is proving successful. Make sure you are not breaching your employment contract.

KEY CONCEPTS  High-tech Start-up Company: A venture that specializes in technology-driven solutions to the pain points of customers.  Lifestyle Firms: These spend limited funds on research and development and achieve modest growth.  Foundation Companies: They have a backbone of investment on research and development, which acts as a foundation for new businesses.  Gazelles: Start-ups having high potential for growth.  Intrapreneurship: Entrepreneurship within the existing organization.  Traditional Culture: Organizations are hierarchical in nature, with well-established and well-defined rules, procedures and so on.  Intrapreneurial Organizations: They have a flat organizational structure with networking, teamwork and mentors who work and exchange beyond their defined boundaries in the organization.  Intention: Strong purpose in life coupled with determination to produce desired results.  Creative Destruction: Destruction of established ways of doing things by creating new and better ways of getting things done.  Technologically Precocious: Not having any inhibitions to try out new and updated technology in one’s daily use.  Street Smart: Having the knack of ‘getting things done’ against all odds.  Strategic Entrepreneurship: The integration of entrepreneurial and strategic dimensions to design, develop and implement entrepreneurial strategies that create wealth.

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 Financial Prudence: Judicious use of money to ensure that expected cash flows take place.  Handy’s Sigmoid Curve: Is an S-shaped curve that highlights the life cycle of products, organizations, empires and even relationships.  E-commerce: Purchasing and selling goods and services on the Internet.  E-names: Is an electronic name given to the business that needs to be simple, easy to remember and have the potential to be built into a brand. ENDNOTES 1. The Economist, 22 October 2005, at 3, 3 (special insert). 2. Szirom, S. Z., ‘Strategic Management Issues for Starting an IP Company’ (ISBN:0-7695-0465-5); Szirom, S. Z., ‘What Business Owners Should Know About Patenting’, The Wall Street Journal, http://www.wsj.com/article/SB121820956214224545.html (Interview with James McDonough, Intellectual property attorney). 3. David Birch’s research firm, Cognetics, Inc., traces the employment and sales records of some 14 million companies with a Dun & Bradstreet file. 4. The Gazelle Theory, http://www.inc.com/magazine/20010515/22613.html. 5. timesascent.in/index.aspx?page=article§id=39. 6. Kumar Manish, TNN, 26 January 2010; Times of India, http://timesofindia.indiatimes.com/ city/ahmedabad/When-IIM-A-grads-said-bus-to-jobs/articleshow/5500751.cms, accessed on 8 July 2010. 7. ‘Deluge of Ideas from Across the Country’, The Economic Times, 23 July 2010. 8. http://www.rechargeitnow.com/ and discussion with Sharat Jain. 9. www.luxuo.com/super…/forbes-list-billionaire-universities.html. 10. Top 10 dot-com flops by Kent German; http://www.cnet.com/1990-11136_1-6278387-1.html, accessed on 3 July 2010. 11. Top 10 dot-com flops by Kent German; http://www.cnet.com/1990-11136_1-6278387-1.html, accessed on 3 July 2010; fail92fail.wordpress.com/2008/11/05/top-10-dotcom-flops. 12. Adapted from Handy (1994). 13. World Internet Usage and Population Statistics, http://www.internetworldstats.com/stats.htm 14. www.nwlink.com/~donclark/history_knowledge/drucker.html. 15. Dot-com marks 25th anniversary by Ed Payne, CNN; http://edition.cnn.com/2010/TECH/ ptech/03/15/internet.anniversery/index.html, accessed on 7 July 2010. REFERENCES Cheyfitz, K. 2003. Thinking Inside the Box: The 12 Timeless Rules for Managing a Successful Business. New York: Simon & Schuster, 30–32. Froomkin, M. A. 2000. ‘Wrong Turnin Cyberspace: Using ICANN to Route around the APA and the Constitution’, Duke Law Journal, 50(17): 17–184; http://www.internic.net/alpha.html.

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Gilad, B. and P. Levine. 1986. ‘A Behaviour Model of Entrepreneurial Supply’, Journal of Small Business Management, 24: 45–51. Haig, M. 2005. Brand Failures: The Truth About the 100 Biggest Branding Mistakes of All Time. London: Kogan Page Publishers, 188–91. Handy, C. 1994. The Empty Raincoat. London: Random House. Hisrich, R. D. and C. G. Brush. 1986. The Women Entrepreneur: Starting, Financing, and Managing a Successful New Business. Lexington, MA: Lexington Books. Hisrich, R. D., M. D. Peters, and D. A. Shepherd. 2006. Entrepreneurship, 6th ed. New Delhi: Tata McGraw-Hill Publishing Company Ltd, 69–71. Keeble, D., J. Bryson, and P. Wood. 1992. ‘The Rise and Fall of Small Service Firms in the United Kingdom’, International Small Business Journal, 11(1): 11–22. Kuratoko, D. F. and R. M. Hodgetts. 2007. Entrepreneurship—Theory, Process, Practice. New Delhi: Thomson Learning Inc., Indian Edition, 11. McClelland, D. C. 1961. The Achieving Society. Princeton, NJ: D. Van Nostrand. Orhan, M. and D. Scott. 2001. ‘Why Women Enter into Entrepreneurship: An Explanatory Model’, Women in Management Review, 16(5): 232–43. Ray, D. 1988. ‘The Role of Entrepreneurship in Economic Development’, Journal of Development Planning, 18: 3. Syal, P. and S. K. Dhameja. 2003. ‘Entrepreneurship—Key to Women Empowerment’, Science Tech Entrepreneur, http://www.techno-preneur.net/new-timeis/ScienceTechMag/june03/juneindex.htm, accessed on 15 July 2011.

CONCEPTUAL QUESTIONS 1. Define the three types of start-ups with examples. 2. Differentiate between corporate and intrapreneurial organizational culture. 3. Differentiate between intrapreneur and entrepreneur, giving concrete examples. What are the characteristics of intrapreneurial organizational culture? 4. ‘There are various reasons for one becoming an entrepreneur, which range anywhere from conscious decision to become an entrepreneur to accidentally becoming an entrepreneur.’ State various reasons for one becoming entrepreneur. 5. Why are more and more youth taking up entrepreneurship as a career option? How can this process be accelerated? 6. Define creative destruction and its implications for entrepreneurship. 7. Why is it said that the youth are suited for entrepreneurship? Explain giving concrete reasons and examples. 8. What are the critical issues that an entrepreneur, existing and prospective, has to systematically diagnose and resolve? Explain. 9. What are the salient features of the Massachusetts Institute of Technology (MIT) programme on entrepreneurship development? What are their contributions in promoting entrepreneurship? 10. Define strategic entrepreneurship. What is the relationship between strategic management and entrepreneurship? 11. The majority of start-up ventures fail within one to three years of their inception. What are the important mistakes start-ups make that lead to failure? Explain.

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12. What is the significance of Handy’s Sigmoid curve in diagnosing and initiating appropriate steps for the success of an entrepreneurial venture? 13. What is meant by e-commerce? What are the main benefits and challenges of e-commerce for entrepreneurial ventures? 14. What procedure and precaution need to be taken for getting an e-name for a venture?  CRITICAL THINKING QUESTIONS 1. Identify a company each from Indian and US economy that has turned out to be gazelles. Compare the growth process and the key stages through which these companies have emerged. 2. Consider an example from Indian corporate world having intrapreneurial culture by specifically highlighting its policies and practices followed to encourage such a culture. Compare its performance with another company in the same industry having corporate culture. 3. ‘Leaving on-campus lucrative placements, students have started taking up entrepreneurship as a career option.’ Critically examine the pros and cons of such a trend for Indian economy. 4. It is said that entrepreneurs are born and it is the prerogative of basically people belonging to business families having sufficient wealth. Do you agree or disagree with the statement. Analyse it critically sighting concrete examples to substantiate your arguments. 5. Go through the Web sites of Stanford Technology Ventures Program (STVP); Lester Center for Entrepreneurship & Innovation UC Berkeley, and Center for Entrepreneurial Leadership, BITS, Pilani. Analyse the approach that has been adopted by these institutions for entrepreneurship development on campus. Can there be a standard approach for this across countries and locales? Justify your answer? 6. Identify a venture that got acclaims in business plan competitions in India or abroad and was launched by a team immediately after coming out of institution and failed. What are the reasons for its failure? 7. It is said that knowledge economy provides entrepreneurial opportunities that do not require much substantial funding. Identify two or three e-commerce-based ventures started with a meagre fund base that have risen to great heights. Examine the reasons for their success.

 CASE 2.1:   PETS.COM   Pets.com was founded in 1998 in Emeryville, California, and got self-liquidated in November 2000. The company began its operations of selling pet accessories and supplies direct to consumers over the World Wide Web in February 1999. Its high-profile marketing campaign gave it a widely recognized public presence, including an appearance in the 1999 Macy’s Thanks giving Day Parade and an advertisement in the 2000 Super Bowl. Its popular sock puppet advertising spokes personality was interviewed by people magazine and appeared on Good Morning America.

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The company’s sales rose dramatically in the initial stage. However, weak fundamentals of the company resulted in its losing money on sales. Substantially high investment to the tune of $300 million got lost with the company’s failure. The company completed its whole cycle of inception to IPO to liquidation in 268 days. After its start by Greg McLemore, the site and domain were purchased in early 1999 by leading venture capital firm Hummer Winblad and executive Julie Wainwright. Amazon.com was involved in pets.com’s first round of venture funding. Pets.com bought out one online competitor, Petstore. com, in summer 2000. The company aggressively operated on a regional advertising campaign on a variety of media— TV, print, radio and eventually a Pets.com magazine. It started with a five-city advertising campaign, which was subsequently expanded to 10 cities by Christmas, 1999. Its mascot, the Pets.com sock puppet, became well known. The company’s site design was very well received, and could fetch several advertising awards. In January 2000, the company aired its first national commercial as a Super Bowl ad, which cost the company $1.2 million and introduced the country to their answer as to why customers should shop at an online pet store: ‘Because Pets Can’t Drive!’ That ad was ranked No. 1 by USA Today’s Ad Meter and had the highest recall of any ad that ran during the Super Bowl. The company came out with an IPO in February 2000. It was the last dot-com company to go public before the bubble burst. The company made significant investments in creating warehousing infrastructure. The management believed that the revenue target was close to $300 million to hit the breakeven point and that it would take a minimum of four to five years to achieve it. This period was based on the growth of Internet shopping and the percentage of pet owners that shopped on the Internet. Despite its success in building brand recognition, it was uncertain whether a substantial market niche existed for Pets.com (Cheyfitz 2003). No independent market research preceded the launch of Pets.com. During its first fiscal year (February–September 1999), Pets.com earned revenues of $619,000, yet spent $11.8 million on advertising.1 Pets.com lacked a workable business plan and lost money on nearly every sale because, even before the cost of advertising, it was selling merchandise for approximately one-third the price it paid to obtain the products.1 Pets.com tried to build a customer base by offering discounts and free shipping, but it was impossible to turn a profit while absorbing the costs of shipping heavy bags of cat litter and cans of pet food within a business field whose conventional profit margins are only 2 to 4 per cent (Haig 2005). By the fall of 2000, and in the light of the venture capital situation after the bursting of the dot-com bubble, the management of the company aggressively undertook actions to sell the company. Pets.com’s board turned down the offer from PetSmart, who had offered less than the net cash value of the company. The company announced they were closing their doors on the afternoon of 6 November 2000. The company’s stock fell from over $11 per share in February 2000 to $0.19 the day of its liquidation announcement. At its peak, the company had 320 employees, of which 250 were employed in the warehouses across the United States. After the company folded, Hakan and Associates and Bar None, Inc. purchased the rights to the puppet under a joint venture called Sock Puppet LLC for $125,000.2, 3 (Continued)

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Questions

1. What mistakes did Pets.com make that led to its failure? 2. Was the failure of the company linked with the dot-com burst? 3. What fundamental change in strategy could have helped the company to survive? Endnotes

1. Cheyfitz 2003: 30–32, http://books.google.com/books?id=mn_xucBVwzcC, accessed on 22 April 2009. 2. See the BarNone SockPuppet in Our Television Ads. Bar None, accessed on 11 March 2009. 3. Wikipedia, http://en.wikipedia.org/wiki/Pets.com.

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Entrepreneurial Leadership  LEARNING OBJECTIVES    To understand the significance of entrepreneurial leadership in entrepreneurship success.  To understand and apply the concept of entrepreneurial leadership.  To get an insight into the key dimensions of entrepreneurial leadership.

 To understand and identify the difference between a leader and a manager.  To understand the meaning and relevance of dynamic leaders to the success of a venture.  To know the characteristics of principlecentred leaders and their relevance to development of sustainable ventures.

Ghanshyam Das Birla, Builder, Birla Empire Now people talk only of people who’ve got money. They forget that if you read the puranas you do not find any history of some big landlord or a big merchant doing something. It is all about good people. Values have now changed. I don’t like it myself. —G. D. Birla

Ghanshyam Das Birla was born on 10 April 1894 in a small town called Pilani in Rajasthan, India. His learning at school was insignificant and his academic career unremarkable. While still in his teens, he started out as a jute broker in Calcutta, the hub of Marwari business. He made distinct and rare contributions to the growth of industry in India. He laid the foundations of the Birla Empire, which has made pioneering contributions to the growth of the economy even before independence. He was a multifaceted personality with varied interests. He was a close associate of Mahatma Gandhi and contributed his mite in the struggle for the independence of India. He advised Gandhiji on economic policies to build up a new emerging India. In 1919, Birla Brothers Limited was formed with an investment of ` 50 lakhs, and a mill was set up in Gwalior. He set up sugar and paper mills between 1930 and 1940. In 1942, Birla Brothers ventured into the territory of cars and established Hindustan Motors. His journey in contributing to the economic freedom was full of challenges, particularly during British rule. He was the founder of Federation of Indian Chamber of Commerce and Industry, which was established in 1927. After independence, he further diversified his business operations by investing in the tea and the textile industries mainly through a mode of acquisitions of erstwhile European companies. He also expanded and diversified into cement, chemicals, rayon and steel tubes, and set up an aluminium plant ‘Hindalco’ in 1958 in collaboration with Caesar, an American friend. It has become an industry leader in aluminium and copper. It is the flagship company of the Aditya Birla Group and is the world’s largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia. Its copper smelter is the world’s largest custom smelter at a single location. A philanthropist, he made great contributions to education and uplift of the masses. Birla Education Trust was founded at Pilani (Continued)

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in 1929. An intermediate college in 1943, became a post-graduate college in 1947 and a pharmacy college was started in 1950. Birla Institute of Technology and Science, Pilani, was established as a deemed university in 1964. G. D. Birla was awarded India’s second highest civilian honour, the ‘Padma Vibhushan’, by the Government of India in 1957. G. D. Birla award for scientific research has been established to encourage scientists for their contribution in the various fields of scientific research in his honour. He was an amazingly successful businessman, founding manufacturing units of nearly every description from textile and cement to metals. He is equally well known for his indubitably momentous contribution to education in India. Above all, he played a critical, influential and energetic role in politics in general and Indian independence in particular.

Success of a venture depends much upon the person and team behind a venture more than the idea per se. It is necessary to have a good idea that can be converted into a big venture (Fig. 3.1). However, giving it a shape in reality depends much upon entrepreneurial leadership. If we look at the traits of the best companies of the world, some of the common aspects that will be noticed are innovation, strong leadership, focus on customer service and clear vision for the future. As rightly highlighted by Paul Laudicina, Chairman of A. T. Kearney, ‘in an environment of continuous disruptive change, companies that have rigorous strategic planning initiatives that allow them to see over the horizon…are far more likely to win than those that make it up as they go along’.1 The list of world’s best companies shows that even when stock markets are down, smart companies can be on the way up. The secret of their performance even in bad times lies in their leaders who effectively leverage technology and innovation to enhance productivity through team building. With sales over $53 billion and a net income of $1.49 billion, Sears Holdings Corporation is the nation’s fourth largest broadline retailer with around 3,900 full-line and specialty retail stores in the United States and Canada. Sears Holdings is the leading home appliance retailer as well as a leader in tools, lawn and garden, home electronics, and automotive repair and maintenance. Sears Holdings is the 2010 ENERGY STAR® Retail Partner of the Year. It is the largest provider of home services, with more than 12 million service calls made annually. Sears Holdings Corporation operates through its subsidiaries, including Sears, Roebuck and Co. and Kmart Corporation. It is committed to improving the lives of

Good Idea

Entrepreneurial Leadership

Successful Venture

Figure 3.1 Entrepreneurial Leadership—Key to Business Success

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its customers by providing quality services, products and solutions that earn their trust and build lifetime relationships. In its associates it values teamwork, integrity and positive energy. Its culture is defined by a clear vision, mission, pace and values.2 Richard Sears (1863–1914) gave the company his name. He had the philosophy of business to foresee the needs of the customers and to satisfy the same through brilliant improvization that has led to a series of innovations. During his leadership of the company, General Robert E. Wood (1879–1969) brought out a major turning point by shifting Sear’s emphasis to retail stores equipped to serve both motorized farmers and city population. This led to a series of innovations on multiple fronts such as design of products, development of manufacturers capable of producing in large quantities, organization structure, store location, architecture and physical arrangements. Sam Walton was born near Kingfisher, Oklahoma, on 29 March 1918. During the Great Depression, to meet the financial ends for his family, he undertook various activities such as milking the family cow, bottling the surplus and driving it to customers. Afterwards, he would deliver newspapers on a paper route. In addition, he also sold magazine subscriptions (Gross and Forbes Magazine Staff 1997). He was voted ‘Most Versatile Boy’ during his graduation. Walton joined J. C. Penny’s as a management trainee in Des Moines, Iowa, immediately after his graduation at a salary of $75 per month. After having a short stint in the army, Walton opened a variety store in 1945 with a loan of $20,000 from his fatherin-law and his savings of $5,000. He purchased a Ben Franklin variety store in Newport, Arkansas. The store was a franchise of the Butler Brothers chain. He pioneered many concepts and innovations in retail business that led to his success. Walton offered managers the opportunity to become limited partners in his venture by a maximum of $1,000 in new outlets as they opened. The first true Wal-Mart retail outlet was opened on 6 July 1962 in Rogers, Arkansas. He launched a determined effort to market American-made products. Forbes ranked Sam Walton as the richest man in the United States from 1982 to 1988. Bill Gates first became the richest man in 1992, the year Walton died. The Walton family held five spots in the top 10 richest people in the United States until 2005. His leadership style was visible in his actions from the commitment he had to his business as evident from ‘each Wal-Mart store should reflect the values of its customers and support the vision they hold for their community’ and ‘outstanding leaders go out of their way to boost the self-esteem of their personnel. If people believe in themselves, it’s amazing what they can accomplish.’ The venture had achieved a turnover of $408.2 billion with a net income of $14.9 billion during 2009. It serves customers and members more than 200 million times per week at more than 8,400 retail units in 15 countries. The company employs more than 2 million associates worldwide. It is a leader in sustainability, corporate philanthropy and employment opportunity. It ranked first among retailers in Fortune Magazine’s 2010 Most Admired Companies survey. Today, if one has to recall the secrets of the success of Sears, it is innovative leadership that kept on strengthening the operations of the company. Entrepreneurial leadership has been able to build a winning team with a common vision and goals in which every team member is inspired, charged and motivated to deliver their best for contributing to the bigger purpose. It is like a World Cup football final, where every team member has to perform to the utmost extent to ensure that the team wins. Entrepreneurial leadership requires founding a team to identify staffing needs, professionally recruit people to fulfil those needs and lead the team to success. Entrepreneurial leadership revolves around taking initiative, responsibility, calculated risk and creating an environment for unfoldment of entrepreneurial creativity. It is basically an attitude focusing on instilling courage and confidence in team members to translate entrepreneurship for achievement of organizational goals along with the interest of the all associated stakeholders (Fig. 3.2). In the knowledge economy, the success of a venture depends much upon the guts of an entrepreneur to respond to challenges by systematically executing the project by building a team.

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Vision

Winning Team

Attitude

Entrepreneurial Leadership

Attitude

Innovation Attitude

Attitude

Customer Care and Concern

Initiative

Responsibility

Figure 3.2 Key Dimensions of Entrepreneurial Leadership This requires entrepreneurial leaders to foresee and respond to change before others could do so. Above all, in the ever-increasing turbulent and intense competitive environment that ventures face, it is a new type of ‘entrepreneurial’ leader and not ‘managerial’ leader.

3.1  LEADER VS MANAGER Developing and growing a business requires a vision and insight that goes with a leader, as maintaining a business requires managing. Setting up a venture that needs to grow and develop amidst highly competitive global environment necessarily requires a new set of entrepreneurial leaders with vision, speed and ingenuity coupled with values to be able to respond with conscience to emerging business challenges on par with global standards. Leaders have to create an organizational climate of which innovation becomes part and parcel at different tiers for responding to fast-changing economic, technological, legal, social and business environments. They have to set a process in place to channelize the innovative capability of people in reality by providing outlets to implement worthwhile innovations. The response time to the rapidly emerging challenges has to be short, that is, the response should be quick and time bound, with systematic planning. It will be the foresight, vision and systematic planning of a leader that gives a clear perspective of the problems involved in achieving and their implications for the goals in a dynamic framework in which the organization operates. Leadership by example matters the most and therefore the power to influence employees and their effective gearing for achievement of organizational goals would depend much upon the leader’s approach towards self-management. Many Indian companies, including MNCs, are not doing well as they are not adequately prepared to face competition and pressure, mainly because of lack of entrepreneurial leadership. It is rightly said that you cannot do business with yesterday’s tools, techniques and methods and be in business tomorrow. Both Bill Gates and Steve Jobs have been legendary leaders in the corporate world who have nurtured two giant organizations from inception, namely, Microsoft and Apple. Both have been highly successful

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as visionary leaders and have left a great mark through their style of leadership on the organization built by them. Bill Gates has operated on a participative style of management in decision-making, while Steve Jobs’ style has been nearer to autocratic style. Gates is a great visionary, energetic to enthuse his team and is hard working. His power to motivate and involve people became the secret of Microsoft’s success. With the success of Windows and Internet Explorer, Microsoft has become a common house hold name the world over and Bill Gates became a business genius. It is said that Steve Jobs, the founder of Apple Computer, possessed consummate charm, radiating enthusiasm and great charisma. This really helped Apple Computers to become a leading company in the IT Sector. According to Young (2005), ‘he may be supposed to be the central personality within the company, that he has become the icon and cult-like personality, and thus Apple may be seen as ‘personality-driven.’ His style could demonstrate that cult- and personality-driven companies could also turn out to be highly profitable and successful. He strategically emphasized the need for a balance combination of knowledge and vision of the future technology and marketing. ‘He is demanding both towards himself and towards his employees. His deadlines often seem impossible to meet, but are constantly moving, moving towards improvement in all spheres of his work’ (Erve 2004). Jobs’ charismatic leadership can be classified as a quality of a transformational leader who could make people do things they have never done for the realization of his vision and plans. Thus, both Bill Gates and Steve Jobs, two highly successful leaders, had different styles of leadership but a common thread that unites them is being customer-centric to satisfy their needs through innovation. Korean managers were able to do better compared to their Japanese counterparts as they developed managerial leadership qualities, which are flexible, adaptive and open. This led to huge success of Koreans in America and even in India. Leadership style should blend with managerial functions. An effective manager has a blend of skills that enables them to get the job done through high quantitative and qualitative standards of performance with satisfaction and high degree of commitment. A managerial culture emphasizes and revolves around rationality and control. It takes neither genius nor heroism to be a manager, but persistence, tough-mindedness, hard work, intelligence, analytical ability, tolerance and goodwill. However, leadership is a psychodrama in which an intelligent and innovative lonely person gains control of themselves for controlling others. Managers and leaders are different kinds of people. They differ in motivation, personal history and in how they think and act. The most important aspect of leadership is power to influence employees to achieve the objectives of the organization. To be a successful entrepreneur the most crucial trait that one needs to have is leadership. Successful entrepreneurs are effective leaders who win the trust and confidence of their team and are powerful and effective communicators. Trust can be built amongst team members in multiple ways such as working hard, accessibility to employees for solving their problems and setting an example. This in turn yields high employee satisfaction and commitment. Effective entrepreneurs need to be good managers and good leaders. Particularly for start-up ventures, a balance between the traits of a manager and those of a leader is a must, particularly as they may not be in a position to employ managers. Between the two, leadership traits are far more important than managerial traits to grow and develop a business. Good leaders, therefore, after bringing an organization to a stable phase, hand it over to managers for smooth running and look for greater change and challenges to start a new business or diversify the existing business. Successful entrepreneurs keep developing a chain of business ventures by acquiring, merging with or setting up new ventures. ‘Managers emphasize rationality and control; are problem-solvers, persistent, tough-minded, hardworking, intelligent, analytical and tolerant; and have goodwill towards others. On the other hand, leaders are perceived as brilliant and talented; achieve control of themselves before they try to control others; can visualize a purpose

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and generate value in work; and are creative imaginative, passionate and non-confirming risktakers’ (Anubhavananda and Kumar 2007). Typical characteristics that can be identified in managers are given in Fig. 3.3. Some of the key aspects of a manager that distinguish them from leaders are discussed in the following sub-sections.

3.1.1  Managers  Make Strategic and Tactical Plans—Managers focus their effort on operationalizing leaders’ vision into action through strategic and tactical plans. This requires formulation of concrete, measurable action plans that all employees in the organization embrace and every aspect of the business process of the venture gets aligned to it. Managers have to have clarity about the purpose for which the organization exists and determine critical success factors that would matter the most in delivering results. They have to establish goals aligned to the critical success factors that should be measurable. They should be able to measure the effectiveness of the organization and deliver the results as envisaged.  Gather Needed Resources—Managers should be in a position to acquire needed resources to achieve objectives. They have to have good relations with suppliers, so as to get quality resources at least prices in time for ensuring smooth production of goods and services. They should be good at getting right people recruited who would make a good team.  Set Goals, Tasks and Priorities—Managers have to need a trait of setting goals aligned to the vision and purpose of the organization and clearly specify the tasks required to be undertaken to achieve the set goals. They should be in a position to set priorities to identify important and urgent aspects or apply well the 80:20 rule to get the best out of resources at their disposal.

Measures Progress Towards Goals Has Subordinates

Gathers Needed Resources

Controls

Manager

Motivates Devises Strategic and Tactical Plans

Is a Boss

Sets Goals, Tasks and Priorities

Figure 3.3 Characteristics of a Manager

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 Measure Progresses Towards Goals—Managers are good at measuring the outcomes against predetermined standards and assess the progress made in the process of achievement of goals.  Motivate—One of the major differences between a manager and a leader is that a manager is supposed to motivate so that employees spontaneously channelize their energies for achievement of organizational goals. They have to use varied techniques to keep the people happy and charged. They give credit where due, asking for inputs and participation. They always give positive performance feedback. A manager thinks of personal rewards, status and how they look to outsiders.  Have Subordinates—A manager requires persistence, tough-mindedness, hard work, intelligence and highly sharpened analytical ability to manage people. They expect their subordinates to respond to their call for the work with similar traits. They do not tolerate chaos and lack of structure amongst their team. They look for order and control and are almost compulsively addicted to disposing of problems even before they understand their potential significance. A manager looks for scapegoats when things go wrong and is intolerant towards open disagreement. They are fair to the top but exploits the rest in the organization. They always look for taking personal credit and complain about lack of good people (Peters and Austin 1985).  Are Bosses—A manager influences people with the power acquired because of their position in the organization, as they are the boss. ‘The boss is always right.’ A leader influences through their capabilities and sound knowledge. A manager is more interested in gaining power and selfrecognition. The higher the position in the organizational hierarchy, the greater the influencing ability. A manager energizes their people through seat of command. Many a times, they make a decision and announce it, or they may sell a decision or they present ideas and invite questions in order to take a decision or they present tentative decisions or present problems and get suggestions and they make a decision, or allow the group to take decisions under certain limitations. Many a times, a manager aims at shifting balance of power towards an acceptable solution as a compromise among conflicting values.  Control—Managers seek order and control, and are almost compulsively addicted to disposing of problems even before they understand their potential significance. Managers see themselves as conservators and regulators. Leaders, on the other hand, empower people and get the work done. Empowerment can lead to greater commitment, which goes much ahead of self-gain. This selfless approach leads to better productivity from people. Jawahar Lal Nehru and Lal Bahadur Shastri are good examples of empowered people. Communication and computer revolution by Rajiv Gandhi is also a typical example of empowerment.

Today a manager’s role has changed. A mesh of managerial qualities with leadership abilities will be the key to the success of managers in today’s environment. We do not need managers only but managerial leaders. (See Table 3.1.) Table 3.1 Characteristics of Managers and Leaders Managers y y y y y y y y

Devise strategic and tactical plans Gather needed resources Set goals, tasks and priorities Motivate Have subordinates Are bosses Control Measure progresses towards goals

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Leaders y y y y y y y y

Set clear vision and goals Find and motivate people Set missions Inspire others to the cause Have followers Are guides Empower Great communicators

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3.1.2  Leaders Typical characteristics that can be found in leaders are given in Fig. 3.4.  Clear Vision and Goals—The most dominant quality that distinguishes leaders from others is having a clear, exhilarating and stimulating vision for the organization that would charge and inspire people to act and perform. It is a leader who can think through and see through distant future and in turn provide a short-term purpose to their team. In case vision is not defined in crystal clear terms, it may not inspire people and people may not exactly know where the organization is going and what is in store for them. A vision statement clearly states ‘Where do we want to go?’ If a leader does not have vision for the organization, venture would be without a direction and any direction will take them to the destination. It is vision that inspires, motivates, stimulates and encourages people in the organization to act and achieve predetermined goals. Vision statements reflect ‘big dreams’ with a focus on continuing success with long-term horizon and infusion of passion in it.

Microsoft’s vision statement is ‘Create experiences that combine the magic of software with the power of Internet services across a world of devices’; Google has defined it as ‘To develop a perfect search engine’; FedEx’s vision statement is ‘Leading the way’; Nokia’s vision statement is ‘Connecting people and very human technology’. These statements clearly reflect the leaders behind these ventures. It is their clarity about vision that has led them to achieve great heights in the corporate world.  Set Mission—Leaders are good at providing a purpose to each and every individual in an organization by defining mission for their venture. Mission statement clearly defines what the venture does. It sets the direction and framework for one and all in the organization. It answers questions such as

Inspires Others Is a Great Communicator

Is a Guide

Has Clear Vision and Goals

Leader

Sets Mission

Finds and Motivates People

Empowers Has Followers

Figure 3.4 Characteristics of a Leader

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









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‘why do we exist’. It should inspire commitment, courage and innovative spirit behind the venture. For example, the mission statement of Nike is ‘To bring inspiration and innovation to every athlete in the world’; Ben & Jerry’s mission statement is ‘to make, distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome, natural ingredients and promoting business practices that respect the earth and the environment’.3 Find People and Build a Team—Leaders are good at recruiting and building a winning team. Building one’s team demands better understanding of required skills and talents and identifying people having those strengths. This would mean hiring right persons to add to the team and giving them responsibilities according to skill level, without bothering about their closeness to the leaders or personal prejudices. Great Communicators—Great communicators touch the heart before the head of the followers. It is this charismatic impact of a leader that followers get influenced. ‘Communication is the real work of leadership,’ says HBS professor Nitin Nohria, who documented the importance of persuasion in his 1992 book Beyond the Hype: Rediscovering the Essence of Management. Nohria also feels that leaders are able to distil their message, however complex it may be, to something that is accessible to those who may not share their knowledge or background. Inspire Others to the Cause—A leader is a coach appealing to the best in each person; a problem-solver and an advice giver as against a manager who is invisible—gives orders to the staff and expects them to be carried out. A leader always thinks of ways and means to make people more productive and more focused on organizational goals and how to reward them. Leaders Have Followers—A leader influences others, evoking expectation and establishing specific aims and objectives, which determine the direction a business has to take. A leader gives honest and frequent feedback, knows when and how to fire people, sees growth as a by-product of excellence, is straightforward, admits their mistakes and comforts others when they admit them. They trust people and delegates important jobs to them (Peters and Austin 1985). The net result of their influence brings out the change in the way people think about what is desirable, possible and necessary. Followers have complete faith in their leader and are willing to do anything without expecting any reward. They have complete trust and faith in them. Leader Is a Guide—A leader influences through their abilities and knowledge, which is more convincing to others. They are interactive and proactive instead of reactive, building and shaping ideas instead of responding to them. The influence a leader exerts in altering moods, evoking images and expectations and in establishing specific desires and objectives determines the direction a business takes. The net result of this influence brings out the change that is desirable, possible and necessary. Narayana Murthy is a managerial leader. Because of his attributes of a ‘Guru’, he has imbibed both the qualities of a guru and a boss. Leader Empowers—Leaders get the job done through empowerment of people, which brings in commitment and involvement. They give a degree of freedom to employees to perform and achieve a set goals.

Leaders have a great knack for involving everyone around them and welcome their suggestions and contributions. Leaders create an environment, wherein the people around them feel comfortable putting their ideas forward and acting on them. Great leaders nurture leadership in an organization at every level by empowering people.

3.2  WHY DO VENTURES REQUIRE DYNAMIC LEADERS? Survival, growth and development amidst highly competitive global environments necessarily require a new set of corporate leaders having the basic values of Indian ethos coupled with vision, speed and ingenuity to be able to respond with conscience to global standards and challenges (Fig. 3.5).

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  Entrepreneurship Global Business Standards and Challenges Indian Ethos Vision, Speed and Ingenuity

Corporate Leaders

Survive

Grow

Develop

Figure 3.5 Corporate Leaders to Respond to Business Environment Challenges It has been highlighted in the Bhagavadgita that ‘As leader performs, others follow. And whatever standards the leader sets the entire world pursues’. Thus, achievement of greater heights in any walk of life basically requires leaders who can lead by example. They should necessarily follow basic values and virtues as propounded in our epics. G. D. Birla, who became a legend in his lifetime and could establish an industrial empire encompassing a wide spectrum of capital and consumer goods, rightly stated, ‘Now people talk only of people who’ve got money. They forget that if you read the puranas you do not find any history of some big landlord or a big merchant doing something. It is all about good people. Values have now changed. I don’t like it myself.’ It is a leader with firm commitment to basic ethical and moral values who effectively responds and manages the challenging business situations on a continuous basis. One can come across innumerable examples of businessmen and business houses that collapsed mainly because of their short-sighted approach towards business, on the one hand, and lack of basic values, on the other. The key to the success of an organization basically depends on the leader and their philosophy to create an organizational culture conducive to accelerated growth. In 1998, Fortune round-up of America’s most admired companies thus identified the common denomination of exemplary organizations: ‘The truth is that no one factor makes a company admirable,’ wrote Thomas Stewart, ‘but if you were forced to pick the one that makes the most difference, you’d pick leadership.’ In Warren Buffet’s words, ‘People are voting for the artist and not the painting.’ In today’s fast-changing economic, technological, legal, social and business environments, leaders, have to continuously strive and work for their effectiveness. The response to the rapidly emerging challenges has to be quick, with systematic planning. It is foresight, vision and systematic planning that

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gives a clear perspective of the problems involved in achieving and their implications for the goals in a dynamic framework. In the process of managing men, machines, materials, markets, money, data and morale, the key emphasis has to be on management of human resources in a well-defined organizational set-up. For effective gearing of human resources in order to achieve organizational goals, what matters the most is the leader’s approach towards self-management. Many Indian companies, including MNCs, are not doing well as they are not adequately prepared to face competition and pressure and as they fail to make ‘quick right’ decisions. It is said that you cannot do business with yesterday’s tools, techniques and methods and be in business tomorrow. A manager has to develop good leadership qualities in order to take the company to the top. The leadership style keeps changing with change in situations and with the types and maturity of people around. It is said that Steve Jobs, founder of Apple Computer, possessed consummate charm, infectious enthusiasm and overdose of charisma. This really helped Apple Computer to become a leading company in the IT sector. Korean managers were able to do better as compared to the Japanese as they developed managerial leadership qualities, which are flexible, adaptive and open. This led to the success of Koreans in America and even in India. Leadership style should blend with managerial functions. Leadership basically requires use of power to influence the thoughts and actions of other people. An effective manager gets the job done through high quantitative and qualitative standards of performance with satisfaction and high degree of commitment. A managerial culture emphasizes rationality and control. It takes neither genius nor heroism to be a manager, but persistence, tough-mindedness, hard work, intelligence, analytical ability, tolerance and goodwill. Leadership is a psychodrama in which a brilliant lonely person gains control of themselves for controlling others. A leader always thinks of ways and means to make people more productive and is more focused on organizational goals and how to reward them. As against this, a manager thinks of personal rewards, status and how they look to outsiders (Peters and Austin 1985). The key ingredient for successfully translating dreams into reality lies in dynamic leadership with a clear understanding of vision, strategy, risk and tactics. Entrepreneurial leadership traits revolve around the process that involves identifying and reducing four major types of risks over time, namely (1) people, (2) technology, (3) market and (4) financial. This could be accomplished by the appropriate combination of vision, strategy and execution. Although strategy is a crucial input, it is often execution that differentiates great companies from good ones. An excellent team under the guidance of a dynamic and adaptable leader can sail through the venture against its challenging journey of growth and adversity where everyone channelizes their energies, talent and knowledge diligently on clear goals (Fig. 3.6). Built to Last by Collins and Porras (2002) is an excellent reference as is Competing on the Edge: Strategy as Structured Chaos by Brown and Eisenhardt (1998).

Dream

Vision, Strategy and Execution

Reality

Business Challenges of Growth and Adversity

Figure 3.6 Ingredients of Dynamic Leadership to Translate Dreams into Reality

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3.3  PRINCIPLE-CENTRED LEADERS The success in today’s fast-changing complex environment comes to leaders who are principle-centred. Covey (2004) from his studies and observation has pinpointed eight discernible characteristics of people who are principle-centred leaders. These traits not only characterize effective leaders but also serve as guidelines of progress for all of us. The characteristics of principle-centred leaders are discussed in the following sub-sections (Fig. 3.7).

3.3.1  Continually Learning Principle-centred leaders constantly and continuously keep learning consciously from their experiences. They judiciously learn through their ears and eyes. They continually keep expanding and sharpening their abilities to do things. They are always eager to develop new skills and new interests. They keep noticing that the more they know, the more they realize and understand that they do not know. They keep themselves updated in their areas of expertise.

3.3.2  Service-oriented These leaders see life as a mission and not as a career. Their nurturing and grooming prepares them for selfless service, that is, other-centeredness. This trait in them facilitates getting the best of cooperation from the people around them. They are customer-centric and deliver more than promised. Their approach would be to win the hearts of the customers and keep innovating on the basis of the feedback received from them. For example, Accenture’s goal, Leadership in Customer Service: Delivering on the Promise, is to help public service organizations map out the important next steps towards

Are Service Oriented

Are Continually Learning

Radiate Positive Energy

Trust Before Allocation of Resources

Lead Balanced Lives

See Life as an Adventure

Exercise for Self-renewal

Principlecentred Leaders

Are Synergistic

Figure 3.7 Characteristics of Principle-centred Leaders

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high performance. We pull together many elements—a “point in time” picture of government’s current performance, hard-earned wisdom from public service executives, feedback from citizens and our own insights and recommendations built on extensive research and client experience—to point governments and other public service organizations towards the customer service competencies’.4

3.3.3  Radiate Positive Energy Principle-centred leaders are found to be cheerful. Their attitude towards happenings in life is highly positive and optimistic and their spirit is enthusiastic and hopeful. These qualities in them create an energy field around them that charges or changes the people around them having weaker and negative energy fields. They possess self-confidence, which comes to them from their inner voice that tells them what they can do. It is the ability to assess and judge oneself properly. Self-confidence comes to them from competence. The secret of their competence lies in continuing to gain experience consciously through hard work, expertise, practice, knowledge, skills and abilities. It is basically a mental attitude wherein individuals believe in themselves, respect themselves and rely on their abilities, capabilities, competencies and intuition.

3.3.4  Trust Before Allocation of Resources Principle-centred leaders have a tendency not to overreact to negative behaviours, criticism or human weaknesses. They believe in tapping the potential of the people around them. They do not grumble or grudge about weaknesses of others. They never label other people stereotyped, inefficient, worthless and so on. Rather, they believe in tapping the full potential of people around them by creating a conducive environment that enables them to excel in their assigned tasks and jobs. For start-up ventures, acquiring and optimally utilizing resources is an exceptional challenge. Converting an idea into reality goes through bumps and turns, and multiple iterations. Since they do not have any past history of channelizing resources, their strategic resource allocation decisions are mainly based on availability of current information. In case wrong resources are acquired, that is, resources that do not fit the opportunity or waste other productive resources, this may lead to adverse implications for survival and growth. It is for this reason that many new ventures fail. Therefore, new ventures should be particular to build their early phase of growth on unique capabilities that are deep rooted in innovative combinations of resources.

3.3.5  Lead Balanced Lives Principle-centred leaders read good literature and magazines and keep themselves updated about current affairs, particularly the developments in their field. They have active social life with many friends but few confidantes. They keenly observe and learn from the events around them. They enjoy and have lots of fun. They have a distinct sense of humour, having healthy regard for and honesty about themselves. They are courageous and have a high sense of integrity. They are transparent, open, simple and straight in their communication. According to Dan Ryan, ‘A symmetrical leader is one who is balanced and responsive to the situation at hand. This does not mean that you are only reactive, but it does mean that you are flexible and able to analyze the situation or task at hand. Experience is a key in becoming a symmetrical leader.’5 Thus, in short, balanced leaders have the great characteristics of focus, confidence, courage, independence, perseverance and flexibility to quickly analyse and respond to challenges.

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3.3.6  See Life as an Adventure Principle-centred leaders are courageous and enjoy expedition into unknown territories. Although they are not confident as to what could happen on the way but have a belief that it would be exciting and growth-stimulating. Their security comes from their initiatives, strengths to face the unknown, resourcefulness, courage, creativity, willpower and foresight rather than moving in the comfort zones. They are highly adaptable to the situations that come their way. They are highly principled but at the same time flexible and lead a life full of abundance. They feel quite comfortable in dealing with unknown situations. Research indicates that entrepreneurs have a propensity to take on more challenges, be more persistent and engage in higher level of risk-taking experiences than other leaders (Malach-Pines et al. 2002). For entrepreneurs life is like competing in the Olympics. They take it as a great adventure and put in their best of untiring efforts for a number of years, knowing it very well that a fraction of a second may decide whether they qualify or win. They accept this fact as a challenge and knowing this very well does not diminish their passion for practising to win the race.

3.3.7  Are Synergistic Principle-centred leaders are synergistic implying that the whole is more than sum of its parts. They are change agents and are able to improve on any situation they get into. They work hard and smart. They are highly productive in their contributions that come in new, different and creative ways. They are good at getting results through team efforts. They feel at ease in delegation of their authority. In their negotiations to sort out problems, they are problem focused rather than people focused. It is for this reason that others happily participate in the creative problem-solving process that results in arriving at synergistic solutions. They exhibit a synergistic combination of managerial and visionary leadership.

3.3.8  Perspective or Self-renewal Principle-centred leaders regularly exercise to keep themselves fit—physically, mentally, emotionally and spiritually. This provides them with the strength of endurance—of body and mind. They exercise their mind through creative problem-solving. Emotionally, they practise to be patient and listen to others with empathy and concern from the core of their heart. They believe in extending unconditional love. They accept responsibility for their decisions and the outcomes of their decisions. For spiritual growth, they focus on prayers, study of scriptures and meditation. Thus, principle-centred entrepreneurs create business by operating on their firm values in life and see to it that they succeed in spite of all hurdles without budging down on their principles. They create financially viable and successful businesses by serving customers and earning their goodwill along with great concern for the planet. They operate business with a purpose, mission and values. In his address at the ‘Shaping Young Minds Program’ organized by the All India Management Association in collaboration with the Bombay Management Association (BMA) on 9 February 2004 at NCPA in Mumbai, WIPRO Chief Azim Premji had stated on the importance of values: ‘Character is one factor that will guide all our actions and decisions. While you must be open to change, do not compromise on your values…. You must define what your core values are and what you stand for. And these values are not so difficult to define. Values like honesty, integrity, consideration and humility have survived for generations. Values are not in the words used to describe them as much as in the simple acts. At the end of the day, it is values that define a person more than the achievements. Because it is the means of achievement that decide how long the achievements will sustain.’

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Examples of Principle-centred Leaders Kiran  Mazumdar  Shaw  is  Chairman  and  Managing  Director  of  Biocon  Ltd,  one  of  the  leading  biotechnology company. She has been felicitated with Padmashri in 1989 and Padma Bhushan in  2005. After her schooling at Bishop Cotton Girls School and Mount Carmel College at Bangalore, she  did her B.Sc. in Zoology from Bangalore University in 1973. Thereafter, she went to Ballarat University  in Melbourne, Australia, and qualified as a master brewer. She started her professional career as trainee brewer in Carlton and United Beverages in 1974.  She founded Biocon India in collaboration with Biocon Biochemicals Limited, with a capital of ` 10,000  in 1978. Under her leadership, the company got transformed from an industrial enzymes company  to  an  integrated  biopharmaceutical  company  with  a  distinct  focus  on  research  and  development.  Biocon public issue in 2004 got oversubscribed by more than 30 times. Her leadership traits of conviction and determination are evident from ‘It’s a sense of conviction  and a single minded determination to succeed that makes one a leader’. And ‘Leadership is about  being able to influence others to share your beliefs and goals’. In one of the interviews she has stated  that ‘I have a deep sense of values and integrity and will not stand for dishonesty and injustice’. It is  this aspect of her personality that attracts good brains as employees to the organization and makes  them contribute their best to lifting up Biocon. She  is  the  richest  woman  entrepreneur  who  is  a  recipient  of  prestigious  awards  such  as  ET  Businesswoman  of  the  Year,  Best  Woman  Entrepreneur,  Model  Employer,  Ernst  and  Young’s  Entrepreneur  of  the  Year  Award  for  Life  Sciences  and  Healthcare,  Leading  Exporter,  Outstanding  Citizen  and  Technology  Pioneer.  These  awards  speak  for  her  unique  contributions  in  the  biotech  industry in India and in the World and act as inspiration for young minds to see her as a ‘Role Model’. Shiv Nadar is the Chief Executive Officer of Hindustan Computers Limited (HCL). He is an Indian  entrepreneur who appears in the Forbes list of Indian billionaires. Initially, he served in DCM Ltd. to  gain experience. The entrepreneurial spirit in him led to start his own business in the area of making  office products such as copiers, along with six of his colleagues in 1976. Rightly in the seventies HCL grabbed the opportunity of entering into the computer market when  IBM quit India. Shiv Nadar states that the main challenge faced by the company initially was getting  government approvals rather than manufacturing and designing innovative computers. ‘Interestingly,  our  toughest  challenge  was  not  designing  or  making  computers  but  getting  the  government’s approval to produce them.’ HCL came out with its first computer in the year 1982 and  since then, it has not looked back. The company presently gets around 80 per cent of its revenue  from computers and office equipment and has spread its operations world over. It has driven its path  to excellence through innovation. The vision that was born in 1976 out of a Delhi ‘barsaati’ has taken  a shape of global transformational technology enterprise with $5 billion revenue. The  company’s  corporate  governance  policy  being  followed  in  spirit  highlights  ‘its  primary  objective ... to create and adhere to a corporate culture of conscience and consciousness, integrity,  transparency  and  accountability  for  efficient  and  ethical  conduct  of  business  for  meeting  its  obligations towards shareholders and other stakeholders’. In a short span of time, Shiv Nadar has  reached the pinnacle of success by his hard work, vision and entrepreneurial spirit. He was awarded  Padma Bhushan by the President of India in January 2008. Forbes Magazine featured him in the list  of 48 Heroes of Philanthropy in the Asia Pacific region in 2009. In September 2009, UK Trade and  Investment India presented him the 2009 CNBC Asia Business Leader Award for Corporate Social  Responsibility. He has also received the Asia Viewers’ Choice Award and the CNBC’s The 2009 India  Business Leader Award.6

The experience of some of the very successful entrepreneurs reveals that reputation for ethical dealing can dramatically increase business opportunities and helps in attracting talent and contributes

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to the venture financing options. Therefore, value-based and principled leadership plays a critical role in the growth of the business. On the other hand, unethical and short cuts to business success could be highly damaging in the long run. As such, customers’ reaction to unethical management behaviour can kill the business entity. For example, if an entrepreneur realizing the urgency of the need for a product or a spare part on the part of a customer and knowing that alternatives hardly exist before them, exploits the situation by charging exorbitant price, say three times the usual price, the customer may be forced to buy the product, but this may lead to damaging the image of the entrepreneur forever. Therefore, value-based leadership plays a pivotal role in the growth of the venture. Entrepreneurs must live by example to protect the interest of stakeholders, as some unethical behaviours on their part could lead them to imprisonment as well as lost of dignity, creativity and innovation. For example, ImClone’s stock price fell sharply at the end of 2001 when its drug Erbitux, an experimental monoclonal antibody, could not get the expected Food and Drug Administration (FDA) approval. It later came to the limelight through the investigations of the US Securities and Exchange Commission that just prior to the announcement of the FDA’s decision, a large number of executives of the company had sold their stock. Its founder, Samuel D. Waksal, was arrested on charges of insider trading, for asking friends and family members to sell their stock in 2002. His daughter, Aliza Waksal, had sold $2.5 million in shares on 27 December; his father, Jack Waksal, sold $8.1 million in shares over 27 and 28 December. Subsequently, founder Waksal pleaded guilty to various charges, including securities fraud, and on 10 June 2003, was sentenced to seven years and three months of imprisonment.7

3.4  ENTREPRENEURIAL LEADERSHIP ‘To be a successful entrepreneur, one has to learn and respond to challenges that arise and adapt one’s strategy accordingly,’ says Jeff Raikes of Microsoft. ‘Broad-based leadership is important to the success of a venture,’ says Raikes. It is necessary to build a leadership team having both a broad and a deep set of experiences. Researchers Ireland and Hitt (1999) identified some of the most important concepts in effective strategic leadership. This type of leadership can be classified as entrepreneurial leadership, which arises when an entrepreneur attempts to manage the fast-paced, growth-oriented company (Hitt et al. 2001). Fast-growing companies are also called ‘gazelles’. These companies create many job opportunities, and are publically traded and grow at an accelerated rate. These ventures require a different leadership having greater insight to envision, energize and enthuse the team, and think strategically, so as to create a viable future for the organization. Their success lies in creating a great degree of difficulty for others to replicate the firm’s strategies. This provides them with long-lasting competitive advantage. Entrepreneurial leaders have to take decisions and ensure effective implementation of them to respond to the fast-changing environment in which competition is becoming more and more severe. A new competitive mindset in which organizational excellence has to be focused through speed, innovation, leadership and customer service is required to keep moving on a growth path. This would enable them to avail themselves of emerging opportunities in the highly competitive environment. The backbone of new opportunities would revolve around research and development leading to new technologies for solving problems. In the ongoing phase of rapid changes and knowledge-based enterprises, entrepreneurial leadership would be the hallmark of success, as it is the crucial force behind successful change. Entrepreneurial leadership is leadership that is fundamentally based on the attitude that the leader is self-employed.

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‘An entrepreneur engages in energetic behaviours in conjunction with social networking in order to innovate and instill a competitive advantage’ (De Carolis and Saparito 2006). These leaders lead, create and build long-lasting organization. De Carolis and Saparito (2006) have identified five distinct behavioural characteristics in these leaders—innovation, achievement, action, leadership and organizational growth (Fig. 3.8). Being innovators, these leaders have a knack for identifying unmet needs, see through opportunities where others do not see anything and come up with viable and workable solutions to them. They have vision and foresight to see the potential behind new technologies, markets and products, services and processes. They have patience and perseverance to convert their ideas into reality which focuses on their achievement motivation quality. They believe in taking action and do so with their risk-taking ability, guts, intuition and instincts. This inherent aptitude of being proactive in their proposed solution and firmly implementing it provides an entrepreneurial orientation to them to lift the organization to the next stage of alleviation. They are passionate and committed and have a firm set of deep-rooted values and leadership philosophy. ‘Research indicates that entrepreneurs are stronger in emotional intelligence by turning adversity into determination, frustration into motivation and stress and anxiety into self-reflection’ (Cross and Travaglione 2003). According to Gartner (1988), entrepreneurial leaders are organizational builders. They build organization through a cycle of launching a business to growth, expansion and diversification in their journey towards excellence. They have to channelize most of their efforts in not running but developing and growing business. They have to be alert and vigilant to developments in the business and have to either take corrective steps or even make timely decisions to come out of it, in case happenings are giving signal to its failure.

Achievement

Organizational Growth

Innovation Entrepreneurial Leadership

Leadership

Action

Figure 3.8 Entrepreneurial Leadership—Behavioural Characteristics

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Gordon L. Lippitt has defined an entrepreneurial leader as one who is able to take risks, innovate, focus on the task, assume personal responsibility and possess an economic orientation. They have to lead the enterprise with energy, self-confidence, persistence and learning capabilities.8 Entrepreneurial leadership involves germinating and fructifying the seeds of confidence to think, behave and act with entrepreneurship for the purpose for which the organization exists with a beneficial growth of all stakeholders involved. Thus, they have a great instinct and sense of opportunity, drive to innovate, capacity and tenacity for achievement. It is these qualities in individuals coupled with efforts being made to create an ecosystem conducive to growth of entrepreneurship that are responsible for the accelerated growth in the entrepreneurial ventures during the 21st century.

3.5  COMPONENTS OF ENTREPRENEURIAL LEADERSHIP According to Ireland and Hitt (1999), the five major components of entrepreneurial leadership are discussed in the following sub-sections (also see Fig. 3.9).

3.5.1  Determining the Firm’s Purpose or Vision Mission statement is the core ideology of a company that revolves around the purpose for which it exists and the values through which it aspires to achieve extraordinary goals. The core purpose of a business venture needs to be crystal clear to the leader and their team. It is the reason for which the company exists. In other words, it also focuses on ‘what company does’. The core purpose for existence is expressed in a mission statement. Everybody in the organization

Determining the Firm’s Purpose or Vision

Emphasizing Ethical Practices

Establishing Balanced Organizational Controls

Developing Human Capital Components of Entrepreneurial Leadership

Sustaining an Effective Organizational Culture

Figure 3.9 Components of Entrepreneurial Leadership

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should be able to relate to it and contribute their best for the same in the defined role. The core purpose of a venture remains steady for firms and may continue for many decades or even centuries. This becomes the guiding spirit that provides the direction in which the firm will proceed. A company’s core ideals in terms of vision and mission remain steady and become the basis for strategic decision-making. Core values are deeply held values that are central to the firm. The changes in the business environment of the company does not lead to any change in its core values. Many companies define ‘innovation’ as their core value, implying that irrespective of the environment they would keep innovating to satisfy customer needs—existing as well as new. For example, HINDALCO—Flagship Company of Aditya Birla Group—has defined its vision and mission ‘to be a premium metals major, global in size and reach, excelling in everything we do, and creating value for its stakeholders’. And ‘to relentlessly pursue the creation of superior shareholder value, by exceeding customer expectation profitably, unleashing employee potential, while being a responsible corporate citizen, adhering to our values’, respectively. The core values of the company are as follows: integrity—honesty in every action commitment—on the foundation of integrity, doing whatever it takes to deliver, as promised passion—missionary zeal arising out of an emotional engagement with work seamlessness—thinking and working together across functional silos, hierarchy levels, businesses and geographies  speed—responding to stakeholders with a sense of urgency    

Infosys Technologies Ltd. a global leader in the ‘next generation’ of IT and consulting has defined its vision statement ‘to be a globally respected corporation that provides best-of-breed business solutions, leveraging technology, delivered by best-in-class people’ and mission ‘to achieve our objectives in an environment of fairness, honesty, and courtesy towards our clients, employees, vendors and society at large’. The core values of the company are:  customer delight—to surpass customer expectations consistently  leadership by example—to set standards in our business and transactions and be an exemplar for the industry and ourselves  integrity and transparency—to be ethical, sincere and open in all our transactions  fairness—to be objective and transaction-oriented and to thereby earn trust and respect  pursuit of excellence—to strive relentlessly, that is, constantly improve ourselves, our teams, our services and products to become the best  exploiting and maintaining the core competencies—according to Peter F. Drucker, ‘The entrepreneur always searches for change, responds to it, and exploits it as an opportunity. Innovation is the specific instrument of entrepreneurship. [It’s the entrepreneurial] act that endows resources with a new capacity to create wealth.’

As such, if we look at the profile of leading entrepreneurs such as Richard Branson, Bill Gates and Steve Jobs, we would observe that they had the attributes of a leader. To lead an organization, one needs to have a blend of competencies required by entrepreneurial leaders—inculcated or innate.

3.5.2  Developing Human Capital The success of a venture depends much upon strategy, process and, above all, human capital management. Irrespective of the organization dominated by technology or human resources, human capital plays a crucial role in achievement of organizational goals. Entrepreneurial leaders consciously

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spend a lot of their time on building winning teams and nurturing leadership at different tiers of their organizations. Entrepreneurs inculcate an organizational culture conducive to human capital development through appropriate strategies related to reward system, flexibility in operations, freedom to innovate, environment that allows for genuine failures and so on. Entrepreneurial leaders have been able to foresee future human resource requirements, and provide timely training and develop resources from within or hire people from outside. They are good at continuously reinforcing the core vision of the organization through past incidences and examples in their team. Usually for unfoldment of creative potential of human capital, they deliberately have a flat organization wherein communications across groups and departments is encouraged. Some organizations and start-ups encourage their employees to have financial stake in the organization to enhance their involvement and commitment. For example, ‘the Northwest is widely recognized as a leader in clean technology development and deployment,’ said Patrick Quinton, business and industry division manager at the Portland Development Commission. ‘With our region’s strong history of customer demand and policy support for clean, green and sustainable businesses we provide a unique environment for innovation.’9 Northwest created the Pivotal Leaders programme with two main aspirations:10  To demonstrate to investors and the business community that Northwest does have a wealth of talented leadership, that is, people who have the knowledge, skills, motivation and business acumen to lead successful clean technology companies.  To create a mechanism for helping these leaders identify one another and the resources they need to realize their goals in leading clean-technology companies here in the Northwest.

3.5.3  Sustaining an Effective Organizational Culture Entrepreneurial leaders are particular about building a culture that is manifested in all they do. Organizational culture reflects the philosophy and belief system following which an organization conducts its business. Basically, culture is the way things are done which basically depends upon business principles and values that founders would like to inculcate in one and all in the organization. Therefore, these values get translated through rules, policies and procedures; attitude of employees while discharging their duties; peer pressure that is exerted in following core values; oft-repeated traditions and stories that strengthen belief systems; and the way it deals with external stakeholders. The crux of the culture originates from the founders, belief system and values or the strong leaders in the organization who have been able to exert influence about their values and principles amongst a large number of employees. Continuing and strengthening the culture of the organization gets perpetuated through selection of new employees who would easily become part and parcel of the philosophy of the organization; through systematic training of new employees with due emphasis on values of the organization; by reiterating actions in tune with the values on the typical problems faced by the organization; by rewarding people who do not succumb to external pressure and stick to the business philosophy in trying circumstances and so on. For example, entrepreneurial leadership requires a focus on innovative culture, and hence would require testing people as to ‘how good they are at out-of-box thinking’ before hiring. For example, a founder of a start-up that was growing well was particular about honesty in dealing. He also came to know that few employees who were good professionally were submitting their false and inflated travel claims. He could have outrightly removed such employees from the organization after taking required disciplinary steps. This could be one way of handling the problem and giving signals to others that such things would not be tolerated. However, realizing their professional contribution and to give such employees an opportunity to rectify themselves, he decided to publically

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display the travel claim bills to all employees in the organization through a notice board. This adversely affected the image of the individuals who were doing wrong; some of them stopped doing it and others left the organization on their own.

3.5.4  Emphasising Ethical Practices Entrepreneurial leaders put in action ethical practices and expect that one and all in the organization would follow these practices in letter and spirit. They are clear in their mind to do business with values. Entrepreneurial leadership demands honesty in operation and integrity above all. What they say and do have to be in tandem. As rightly pointed out by Zenger and Folkman (2004), ethics is the basis of character; and ‘character is the essence of leadership’. The importance of ethics is ever increasing with the trust and confidence of employees; the customer and public at large is shaking because of the projections by the media about the increasing number of cases related to scandals, bribes, corruption, arrests, lawsuits and so on. This have more so come into the limelight after incidences of WorldCom that faked nearly $4 million in operating cash flow; manipulations of financial statements by Enron’s executives and so on. Similarly, the incident that happened in People’s Republic of China pertaining to milk powder exports containing melamine and animal feed to boost the protein content has alerted consumers. This has resulted in removal of Chinese dairy products from the shelf of many countries such as Hong Kong, Canada, France and India. Similarly, a different set of ethical issues have become prominent with the emergence of technological solutions to human problems. Thus, for their long-term sustainable growth , businesses need to operate on values of honesty, integrity and trust, which can only result in winning the hearts of customers, suppliers, government and public at large. Strategic leaders distinctly focus on this aspect of a business by establishing and communicating specific goals to describe the firm’s ethical standards. They build a culture in an organization that encourages implementation of the values in their employees. Above all, they work for creating a work environment in which all people are treated with a humane touch and dignity.

3.5.5  Establishing Balanced Organizational Controls Organizational control basically implies a set of processes involving checks and balances that an organization introduces to ensure achievement of organizational goals. An effective design and efficient implementation of control mechanisms enable an organization to give a required degree of freedom to its employees and also enable it to achieve better performance. It is something like a checklist used by motor mechanics while servicing a vehicle that has come into the workshop. It involves establishing standards, tools and techniques to measure performance both in qualitative and quantitative terms, getting timely feedback in terms of deviation in performance compared to standards set, and taking appropriate corrective measures to ensure that performance improves. It helps in reducing cost and in increasing productivity and profits. For example, in a fast restaurant such as McDonald’s, what matters the most is productivity of serving people and the meal preparers. McDonald’s can estimate the performance in a best outlet on these two counts and attempt to put that as a benchmark for all other outlets. Setting up of appropriate control mechanisms that help in improving performance coupled with innovation require a balanced approach. It is more important for start-ups in their initial stage, as any negative deviations can very costly to be rectified. In the fast-changing environment, the success of a venture depends upon its ability to be proactive and introduce strategies that can enable it to adapt to the fast-changing dynamic markets. The new breed

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of leaders are called entrepreneurial leaders who are capable of responding to a highly uncertain and unpredictable environment where competition is becoming more and more intense. Entrepreneurial leaders have the capability to facilitate proactively to transform an organization by continuously looking for new opportunities for the growth of the organization. They are always open to learning and adding to their stock of knowledge to be productively utilized. They understand their resource limitations and capabilities to convert an adversary situation into a favourable one. Ireland and Hitt (1999) believe that ‘the ability to build, share, and leverage knowledge will replace the ownership and/or control of assets as a primary source of competitive advantage’. Other than the usual traits of a entrepreneurial leader as highlighted by various researchers, Tarabishy, Solomon and Fernald (2005) have focused on the dimensions such as capability as a manager, reward equity, communication, credibility, creativeness, confident, follower-centredness, vision, principles, facilitating of proactive transformation, dynamic market leadership and entrepreneurship. It is entrepreneurial leadership that would lead to multiplication of entrepreneurial ventures that would take India to greater heights. Successful entrepreneurs always believe and have faith in unbound possibility of a limitless experience of inner stability and outer treasure, which keep unfolding in a natural and harmonious way. They consciously work for higher aims and achieve them. Their focus remains on predetermined goals and objectives to be achieved through trusting relationships, hard work and bias for action, curiosity and courage. The greatest quality that distinguishes successful entrepreneurs is their belief in success, the starting point for which is focused and realistic visualization. It is detached action with absolute concentration, care and concern that leads to miracles, that is, achievement of extraordinary results in all facets of life. Thus, super-achievers in professional and personal fields have qualities of detachment, vision, persistence, persuasiveness, clear-sightedness about their role, and priorities and zeal for learning continuously; above all, they have firm faith in themselves and the cosmic wisdom.  Check Your Progress   10 Questions to Ask Yourself As You Start to Plan 

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Only you know what the important things are in your life. Starting a business is a great way to realize ambitions and achieve goals. You need to make sure that running a business is what you really want to do, and not simply something someone close to you is suggesting. Ask yourself these questions. 1. What turns you on? This business is going to dominate your life for several years. You need to find the work you will be doing exciting and stimulating, not dull. 2. How rich do you want to be? How wealthy do you want to become and why? Do you aspire to something more than just money? 3. What would you do if you could afford to? What are the world issues you would like to change? If you make a mint, maybe you could invest in changing the world! 4. Is your family behind you? Your business must fit with their plans too. Remember that your partner as well as you may have to make sacrifices. Make sure they are with you. 5. What do you want for your kids? Watch them sleeping. What do you want for their future? How will your business deliver it?

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6. ‘Take a risk’ rating: Ask yourself whether you are really a risktaker or whether borrowing money would keep you awake at night. Maybe a slow, steady start is better than a debt-laden big bang. 7. What are the things that really matter to you? Have you ever sat quietly in a place of worship watching the comings and goings? Make time to go somewhere spiritual and reflect on your personal values, priorities and goals. 8. Where does it fit in the big picture? Take a long walk and watch nature. It is a great way to put your new venture in perspective with the world. 9. Who are your business heroes? Read how some of your business heroes got started. Remember, every big successful business was once small and fragile. 10. What use are notes of? You are embarking on an exciting journey that, one day, others will want to learn about. Keep a diary and record your feelings.

KEY CONCEPTS  Entrepreneurial Leadership: Builds a winning team with a common vision and goals in which every team member is inspired, charged and motivated to deliver their best for contributing to the bigger purpose.  Managers: Emphasize on rationality and control; are problem-solvers, persistent, tough-minded, hardworking, intelligent, analytical and tolerant; and have goodwill towards others.  Leaders: Are perceived as brilliant, talented, achieve control of themselves before they try to control others, can visualize a purpose and generate value in work, are creative, imaginative, passionate, non-conforming risktakers.  Leadership: Is the power to influence employees to achieve the objectives of the organization.  Dynamic Leaders: Have clear understanding about vision, strategy, risk and tactics.  Principle-centred Leaders: Create business by operating on their firm values in life and see to it that they succeed in spite of all hurdles without budging down on their principles.  Organizational Culture: Reflects the philosophy and belief system in which organization conducts its business.  Organizational Control: Implies a set of processes involving checks and balances that an organization introduces to ensure achievement of organizational goals. ENDNOTES 1. ‘Nintendo Beats Apple, Google As “World’s Best Company”’, Kris Graft, http://www. gamasutra.com/php-bin/news_index.php?story=25538 2. Sears Holdings Corporation, http://www.searsholdings.com/about/, accessed on 8 July 2010. 3. Ben & Jerry’s, http://www.benjerry.com/activism/mission-statement/ 4. Accenture, http://www.accenture.com/Global/Services/By_Industry/Government_and_Public_ Service/PS_Global/R_and_I/DeliveringonthePromise.htm, accessed on 11 July 2010.

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5. Dan Ryan’s View, Leaders and Entrepreneurs, http://danryansview.com/, accessed on 12 July 2010. 6. Iloveindia.com, http://www.iloveindia.com/indian-heroes/kiran-mazumdar-shaw.html, accessed on 7 July 2010. 7. Wikipedia, http://en.wikipedia.org/wiki/Martha_Stewart_insider_trading_charges 8. Strategic Management—Entrepreneurial Leadership, http://www.scribd.com/doc/21556127/ Strategic-Management-Entrepreneurial-Leadership 9. Pivotal Leaders Program to Recognize Clean Tech Leaders in the Pacific Northwest; 24 February 2010, Clean Edge News, http://www.cleanedge.com/news/story.php?nID=6713 10. ‘Leaders List Highlights Human Capital’, Gregg Semler, http://www.sustainablebusinessoregon. com/columns/2010/05/leaders_list_highlights_human_capital.html REFERENCES Brown, S. L. and K. M. Eisenhardt. 1998. Competing on the Edge: Strategy as Structured Chaos. Boston, MA: Harvard Business Press. Collins, J. and J. Porras. 2002. Built to Last. New York: HarperCollins. Covey, S. R. 2004. ‘Principled-Centered People’, Unity Magazine, September/October 2004, Unity Village: MO, 17–19. Cross, B. and A. Travaglione. 2003. ‘The Untold Story: Is the Entrepreneur of 21st Century Defined By Emotional Intelligence’, International Journal of Organizational Analysis, 11: 221–28. De Carolis, D. and P. Saparito. 2006. ‘Social Capital, Cognition, and Entrepreneurial Opportunities’, Entrepreneurship Theory & Practice, 30(1): 41–56. Erve, M. 2004. ‘Temporal Leadership’, European Business Review, 16(6): 605–17. Fernald, L., G. Solomon, and A. El Tarabishy. 2005. ‘A New Paradigm: Entrepreneurial Leadership’, Southern Business Review, 30(2): 1–10. Gartner, W. 1988. ‘Who is an Entrepreneur? Is the Wrong Question’, American Journal of Small Business, 12(4): 11–32. Gross, D. and Forbes Magazine Staff. 1997. Greatest Business Stories of All Time (1st ed.). New York: John Wiley & Sons, Inc., 269. Hitt, M. A., R. D. Ireland, S. M. Camp and L. S. Donald. 2001. ‘Strategic Entrepreneurship: Entrepreneurial Strategies for Wealth Creation’, Strategic Management Journal, 22(6): 479–92. Ireland, D. R. and Hitt, M. A. 1999. ‘Achieving and Maintaining Strategic Competitiveness in the 21st Century: The Role of Strategic Leadership’, Academy of Management Executive, 13(1): 43–57. Jeffrey S. Young and William L. Simon. 2005. Icon Steve Jobs: The Greatest Second Act in the History of Business. Hoboken, New Jersey: John Wiley & Sons, Inc. Malach-Pines, A., A. Sadeh, D. Dvir, and O. Yofe-Yanai. 2002. ‘Entreprenerurs and Managers: Similar Yet Different’, International Journal of Organizational Analysis, 10(2): 172–90. Peters, T. and N. Austin. 1985. A Passion for Excellence, The Leadership Difference. New York: Warner Books, 354–57. Swami Anubhavananda and Arya Kumar. 2007. Ethics in Management. New Delhi: Ane Books, 106.

CONCEPTUAL QUESTIONS 1. Define entrepreneurial leadership, which is a key to business success. 2. What is the lesson learnt on entrepreneurial leadership from the example of Sear Holding Corporation? 3. What are the key dimensions of entrepreneurial leadership?

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4. Differentiate between a leader and a manager with examples. 5. What are the key aspects of a manager that distinguish them from leaders? 6. ‘Manager motivates and leader inspires.’ What are the implications of this for an entrepreneurial venture? 7. What are the implications of the term ‘leader empowers’ from the point of view of success of a venture? 8. Why do ventures require dynamic leaders? Explain with examples. 9. What are the key characteristics of principle-centred leaders? 10. What are the six major components of entrepreneurial leadership? Explain briefly the significance of each component. CRITICAL THINKING QUESTIONS 1. Can there be an entrepreneur who does not have followers? Examine critically with examples. 2. ‘Many Indian companies, including MNCs, are not doing well, as they are not adequately prepared to face competition and pressure and fail to make “quick right” decisions. It is said that one cannot do business with yesterday’s tools, techniques and methods and be in business tomorrow.’ Critically examine the statement. 3. ‘Success in today’s fast-changing complex environment comes to leaders who are principlecentred.’ Identify businesses that have collapsed because of lack of clarity about principlecentred leadership, giving exact situations that have led to their downfall. 4. ‘Principle-centred leaders lead a balanced life and see life as an adventure.’ Explain with concrete examples the implications of these two characteristics for the success of a business venture. 5. ‘Entrepreneurial leaders build organizations through a cycle of launching a business to growth, expansion and diversification in their journey towards excellence.’ Identify a company that has undergone these three phases and highlight the challenges that it has faced in these phases.

 CASE 3.1:  LINK_A_MEDIA DEVICES  Link_A_Media Devices (LAMD) is a company that has emerged as a new leader in developing and manufacturing custom system-on-chip (SoC) solutions for peripheral data storage devices. This includes hard disk drives (HDDs) and solid-state drives (SSDs). The SoC solution has uniqueness in integrating the read/write channel, disk controller functions, microprocessor(s) and memories, and servo processing for HDD application on a single chip. This company was established in 2004 and has grown over the years as one of the most successful technology-driven companies. Reza Norouzian is a co-founder of the company. He did his BS in Electrical Engineering from the Ohio State University and has over 20 years of executive level experience in sales and general management in areas of communications and storage semiconductors devices. He was the key person behind developing the company’s partnerships and strategies. He had served earlier in World Wide Sales at Vixel Corporation as Vice President, which is a leader in embedded storage networking field. He was instrumental in complete re-engineering of Vixel to make it a successful merchant storage SoC supplier before the company was taken over by Emulex. He expressed great (Continued)

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enthusiasm at the time of joining Vixel and stated that it is management team has established a new market that could dramatically change the way businesses store and access information would take place in the coming years. Earlier, he served at Transwitch Corporation as Vice President and General Manager. He also held executive positions at Exis Inc., which was NEC Corporation’s/DataPath’s worldwide Storage IC representative, and at GEC Plessey. He started his career in design engineering at General Instruments wherein he came up with some innovative technologies. The company, in its journey towards growth and excellence, could get a Series B financing to the tune of $22 million in 2008. The credibility of the company and its products was evident from the interest shown by other leading investors in funding the company. The funding round, led by AIG SunAmerica Ventures, was secured from four prominent financial and corporate investors— KeyNote Ventures, NEC Electronics, Micron Technology, Inc and Seagate Technology.1 AIG SunAmerica Ventures has preferred to make an investment in Link_A_Media Devices at the critical phase of technology development. Link_A_Media Devices is providing a unique and distinct opportunity mainly because of its team strength that has a successful track record and deep domain experience. Subsequently, the company could secure another $18 million Series C funding from Lightspeed Venture Partners, a new investor in the company. The other key investors in the company are ITOCHU Technology Ventures, Keynote Ventures, SunAmerica Ventures and several strategic partners. The series of funding availed by the company has enabled it to accelerate the pace of bringing out new products to market.2  Questions  

1. What entrepreneurial leader’s characteristics are visible in the personality of Reza Norouzian? 2. What are the secrets of success of Link_A_Media Devices? 3. What style of management did Reza Norouzian follow? 4. What type of organizational culture needs to be developed by a company such as Link_A_Media Devices for long-term success?  Endnotes  

1. www.zoominfo.com/people/Norouzian_Reza_33396610.aspx 2. http://www.link-a-media.com/technology.html; http://www.businesswire.com/portal/site/home/permalink/?ndmViewId=news_view&news Id=20091102005130&newsLang=en; www.linkamedia.com/news1.html

 CASE 3.2:  XYZ TRANSPORT  XYZ Transport is a freight-handling and logistics firm. The private company began its operations in 1966 and now operates a fleet of 10,000 trucks and 2,000 trailers that haul freight 5 lakh kms per day. Revenues are approximately ` 85 crores a year.

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The company has had only three leaders. The first was the founder; the second was his own son, Krish and in August 2002, the first non-family member took the helm when Chris was made CEO, replacing Goodman, who was 67 years old. But it was not as if the company was not making preparations for change over to executive leadership. In fact Krish had told his board of directors in 1998 that their primary task was finding a successor. Chris joined the company in 1994 as a vice president and became chief operating officer in 2000. After being appointed COO, Chris began to develop an organizational framework for the five-person executive group that today shares many of the company’s strategic responsibilities. Everyone who knows Krish closely agrees that he is a tough personality to follow. ‘Krish is an icon,’ says another top executive of the company. ‘He probably has great say and commands more respect in transportation and logistics than anybody else in the industry,’ says Chris, ‘our approach has been to put together an executive team that has a set of skills, perspectives, clarity about goals, and commitment is broader and bigger than ever before.’ The idea, according to Chris, is to have individuals with knowledge and expertise in product line or functional areas, while maintaining their oversight of those areas, develop a sense of responsibility, accountability and commitment for the financial performance of the whole company. ‘If you have people who aren’t taking an enterprise solution, their only role is their function or their business, then ultimately it has to go to someone who’s going to referee the points of tension.’ says Chris. And Chris has no intention of playing the referee role. To resolve the points of conflict, the executive group formed by Chris after a lot of spadework and analysis has had to learn how to work together. The company had even hired a renowned consultant to help them better listen and understand one another and debate critical issues. ‘Conflict between people or between groups of people is not positive. Conflict around business issues is the most wonderful, healthy thing,’ says Chris. ‘Any business without tension will fall to its lowest level of performance.’  Questions  

1. Explain why the transition in leadership from Krish to Chris was relatively conflict free. 2. Define the strategy of conflict management Chris uses. What are the attributes of people delivering results through such a strategy? What type of approach within the broad strategy would be more effective in the given situation and why? 3. Trust-building is the most crucial aspect of conflict management. How do you think trust-building can be ensured amongst the top management executive team and in different tiers in the organization.

 CASE 3.3:  ENTREPRENEURIAL PROFILES  The brief profiles of four of the leading entrepreneurs and corporate leaders have much to learn about the secrets of entrepreneurial success. These four personalities have made a mark and left permanent prints about their contributions in the field of ‘what it takes to build successful organizations’. (Continued)

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 Shahnaz Husain, CMD, The Shahnaz Group  The Shahnaz Husain Group is one of the leading Indian companeis in the field of natural beauty and anti-ageing treatments. The company was founded in 1970 by Shahnaz Husain in New Delhi. The group has vertically integrated its operations over the years to encompass varied aspects of Ayurvedic care and cure. The group has activities varying from beauty training institutes, growing its own herbs to manufacturing its cosmetics line to retail to specialized treatments through its chain of over 200 beauty centres worldwide. Shahnaz Husain, the woman behind the venture has been honoured with many distinguished national and international awards, including Padma Shree, in the field of industry and trade for bringing Ayurveda to the West. Today Shahnaz’ distinguished contributions have taken India’s Ayurvedic tradition to every nook and corner of the world. After gaining experience and training for 10 years in cosmetic therapy and cosmetic chemistry, at leading institutions of the West, such as Helena Rubinstein, Arnould Taylor, Swarzkopf, Christine Valmy, Lancome and Lean of Copenhagen, Shahnaz came back to India and studied Ayurveda and could identify a great opportunity to use it for introduction of pioneer concept ‘care and cure’. Today, she has a chain of over 400 franchise salons in India and abroad. She has always been on a look out for new challenges through latest techniques and unique innovations. Her keen interests and instincts coupled with great foresight have always led her to be ahead of time. On money she states, ‘I’m not there for the money, and people know that it is my love of the job. Money was never the purpose. People pay for our concern, they can tell we care.’ She categorically states that it is important to have a dream and to believe in the magic of your dreams. You can achieve anything in life if you have total faith in your own abilities and the courage to follow your dreams. On ethics in business, she feels, ‘Ethics and business should co-exist. In fact, you cannot last long in any business or profession without ethics.’1

 Sunil Bharti Mittal, CMD, Bharti Group  Sunil Bharti Mittal is founder chairman and managing director of Bharti Enterprises. It is India’s leader in the telecom industry with more than $7.2 billion turnover. He started business as a firstgeneration entrepreneur in April 1976 at the age of 18 to make crankshafts for local bicycle manufacturers with a meagre investment of ` 20,000 borrowed from his father. After selling bicycle parts and yarn factories in 1980, he moved over to Mumbai. In 1981 he entered into a business of importing undertook Suzuki Motor’s portable electric-power generators from Japan. In 1984, he entered into the business of assembling push-button phones in India replacing the old fashioned, bulky rotary phones. Bharti Telecom Limited (BTL) was incorporated along with a technical tie-up with Siemens AG of Germany for manufacture of electronic push-button phones. Mittal was in the business of making fax machines, cordless phones and other telecom gear by early 1990s. In 1992, they succeeded in getting one of the four mobile phone network licences auctioned by the Government of India. Sunil Bharti’s ingenuity and foresight led him to timely identify and enter into a great opportunity in India for mobile telecom business. His plans were given shape in reality by launching mobile services under the brand name ‘AirTel’ in Delhi in 1995 by forming Bharti Cellular Limited (BCL).

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Within a few years, Bharti became the first telecom company to cross the 2 million mobile subscriber mark. In November 2006, he entered into a joint venture deal with Wal-Mart to start a number of retail stores across India. On his business philosophy he states, ‘We did things never tried before in India. We are very fair to the people we work with. We wanted to prove that even with meagre capital we could do bigger things.’2

 Phanindra Sama, Founder of redBus  redBus is one of Pilani Soft Labs ‘Innovations for public convenience’ formed in 2005. It facilitates ticket booking for privately run buses for outward journeys from many important cities in India. The company had a turnover of around 2.5 crores in the initial years, which increased 10 times within a period of three to four years. The founders all leapt off accelerated career paths. The three founders—Phani, Sudhakar Paspunuri and Charan Padmaraju—were classmates from BITS Pilani, and all held jobs at IT multinational companies in Bangalore. They quit to found redBus. The company was amongst the Forbes top five start-ups to be watched in 2010. The idea was born when Sama could not get bus tickets for a visit home. Phanindra Sama is a CEO of the company from August 2006 onwards. Before plunging into a venture, he served as Senior Design Engineer with Texas Instruments between May 2004 and September 2006. Before that, he served in ST Microelectronics between May 2002 and April 2004. redBus revenue model is based on commission from booking tickets and advertisements on the site. The company already has a tie-up with nearly 30 private bus operators in South India. Payments are accepted through all major credit and debit cards. The company is optimistic that Indians are increasingly adopting online transactions for expenses such as bookings, and the business will improve. redBus has drawn up expansion plans for cities such as Agra, Delhi and Jaipur.

 N. R. Narayana Murthy, Chairman, Infosys Technologies Ltd  N. R. Narayana Murthy is a rare example of having made leading contributions in the IT industry without compromising in any way whatsoever on his ethical precepts and deep-rooted values. He was born in 1946 and his father was a schoolteacher in Kolar district, Karnataka, India. He was a brilliant student. He acquired his undergraduate degree in Electrical Engineering from Mysore University and subsequently studied Computer Science at the IIT, Kanpur, India. In 1981, he started his venture, Infosys, along with six friends to fructify his dream. He had his own minor apprehensions and doubts about starting a business, as he did not have any seed money. However, like other Indian women, his wife Sudha Murthy, an engineer then with the Tatas had a savings of ` 10,000, which came handy as initial investment. That was how his first big leap forward in his journey towards entrepreneurship began. He introduced stock option for employees to have their greater involvement and commitment. He never gave up pursuing his dreams against all the odds that came his way, to respond to the entrepreneurial challenges. He had a great philosophy of ‘simple thinking and high living’ which he followed in letter and spirit. He has built a world-class company that is based on best management practices from around the world such as a strong corporate brand, transparency in (Continued)

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operations, sharing wealth and best training practices. His team has offered a unique example for entrepreneurial leadership in the economy.  Questions 

1. Identify and analyse the common traits in the profile of the aforementioned leading entrepreneurs. 2. What are the important traits that can be attributed to the success of each of them? 3. With whom can you relate your personality to and what traits would you like to imbibe?  Endnotes  

1. eBay.com.sg http://cgi.ebay.com.sg/Shahnaz-Husain-Shafair-Salon-Size-Fairness-FormulaUSA-/150421226095?cmd=ViewItem&pt=Skin_Care_test&hash=item2305cdc26f 2. Wikipedia, http://en.wikipedia.org/wiki/Sunil_Mittal

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4

Creativity and Business Ideas  LEARNING OBJECTIVES   To understand the meaning and implication of creativity to entrepreneurship.  To understand the difference between convergent thinking and divergent thinking.  To understand and appreciate the ecosystem for the promotion of entrepreneurship.  To study the characteristics of creative people.  To understand blocks to creativity.

 To appreciate the relevance of creativity at work in the present context.  To identify the sources that look at new ideas for business.  To learn about techniques for generating new ideas.  To recognize the fact that a good idea is not enough for entrepreneurial success.

Shahnaz Husain, CEO, Shahnaz Herbals Inc. Entrepreneurs are not born, they’re created. If you accept the word ‘fail’, you stop trying. If you never accept the word ‘fail’, you never stop trying, so you go on until you achieve success. —Shahnaz Husain

Shahnaz Husain is a prominent woman entrepreneur who is known for her herbal cosmetics, particularly for skin care. The Shahnaz Husain Group has more than 400 franchises across the world, covering over 138 countries. Her group’s herbal care products are sold at leading global stores, including Bloomingdale’s (New York), Galleries Lafayette (Paris), Seibu (Japan) and Harrods and Selfridges (London). Husain has been coming up with continuous developments in skin treatment with her herbal products. She was brought up in a traditional family, but was fortunate enough to receive a modern education. She got married at the age of 15. Her visit to Tehran along with her husband developed in her a keen interest in beauty treatments. She then studied cosmetology and Ayurveda and developed a firm belief that these were the best alternatives to chemical cosmetics. She also undertook extensive training in cosmetic therapy for around 10 years at leading institutions in London, Paris, New York and Copenhagen before returning to India in 1977 and establishing her first beauty salon. Husain made use of Ayurvedic products that were absolutely safe and skin-friendly. Her products became popular not only in the Indian market but also in the international market. (Continued)

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Husain has not only been able to tap the Indian market, but has also made her presence felt in the international market. Her company, Shahnaz Herbals Inc., has witnessed tremendous growth over the years, having launched more than 400 different kinds of beauty products. The average growth rate of her company, which is based in New Delhi, was nearly 19.4 per cent between 1990 and 1999. Husain is a recipient of many awards such as The Arch of Europe Gold Star for Quality, the 2000 Millennium Medal of Honor and the Rajiv Gandhi Sadbhavana Award. She was awarded the Padma Shri by the Government of India in 2006 and Success Magazine’s World’s Greatest Woman Entrepreneur Award in 1996.

4.1  INTRODUCTION Creativity is the ability to generate innovative ideas and convert them to reality. It basically involves imaginative and original thinking and implementing that into reality. It is the ability to think and design something new, solve problems in new and different ways and to give shape to an abstract idea in the mind based on an original, new or unconventional approach. The term ‘creativity’ includes human innovation, especially in the arts and sciences, and led to the emergence of the creative class.1 Creative thinking is a mental process that involves creative problem-solving and discovery of new ideas and concepts or new ways of looking at existing things through conscious or unconscious insight. It is looking at the same thing as everyone else but thinking something different. It is a prerequisite when there is no immediate solution to the problem. Thus, creativity is a process, technique or mindset that helps in the creation of an innovative concept, design or product. It could be a new design for a cell phone, a new advertising campaign, a new sitting arrangement for accommodating a greater number of people in a vehicle or a new design for a car that would appeal to customers. This basically requires looking at things differently. It is an act of turning new and imaginative ideas into reality. Many people equate creativity with intelligence; however, ‘creativity’ and ‘intelligence’ are two different terms having different meanings. As such, it is not necessary for someone to have a high level of intelligence to be creative. Researchers have also established through scientific studies that the environment plays a critical role when compared with heredity in influencing creative instinct in an individual. A child’s creativity can be either strongly encouraged or discouraged through the experiences that they undergo at home or in school. Edward de Bono was a multifaceted personality—physician, author, inventor and consultant. He is known as the originator of the term ‘lateral thinking’, which he coined in 1967 to describe the process of breaking out of the habitual patterns of linear and logical thought processes. Lateral thinking helps in changing the direction of thinking, to look at things in a totally different way by having a fresh and original approach coupled with humour. The brain has two parts—the right side and the left side. The right side of the brain is given to illogical thinking through creative, visual and spatial activities, while the left side of the brain contributes to logical, mathematical, judgemental and analytical activities. According to de Bono, ‘The obvious solution makes it very difficult to look for solutions that might be quicker, simpler or cheaper. This is what I call “being blocked by openness”. Even when there is a routine solution to a problem or a routine way of achieving a task, there is a real need to spend some time in creative thinking to try to find a better solution. You are not forced to do this. But you should want to do it and to invest the creative effort that is required.’2 Improvement requires creativity to add

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new value proposition. It helps in identifying opportunities that others do not see. The human brain is good at adapting to the environment and quickly recognizes and identifies set patterns. De Bono coined a new term ‘main track thinking’ for effective thinking that runs the organization. According to him, ‘Creativity involves breaking out of established patterns in order to look at things in a different way.’ Creativity is a great motivator, because it makes people interested in what they are doing. It gives hope that there can be a worthwhile idea. It also gives the possibility of some sort of achievement to everyone. ‘Creativity makes life more fun and more interesting.’ Creativity is the outcome of inputs given to the brain throughout our lives and more so when we are young. Our experiences and learning through visual stimulation and contact with other individuals and their reactions to the situations result in the development of our creative instincts. As such, whatever we experience through the five senses is considered as an input. These inputs, processed by our brains, get stored and assigned to designated areas. During a sleep cycle, we undergo a dream phase. Many a times, the information that is brought to the surface is scrambled and hectic. Our brain is most creatively active during the sleep cycle. When an individual is awake, they may do something creative in response to the information that their brain has processed while asleep.3 Does this mean that it is a natural process and everybody is creative? No, it does not, as the majority of us have a tendency to live our lives in a routine manner without being influenced by our experiences. As such, everyone has the potential to be creative, but most of us are not. There are even things that an individual can do to enhance and sharpen their creativity. Convergent thinking is a thinking process that attempts to consider all available information and arrive at the best possible answer that is unique (Fig. 4.1). It is the ability in an individual to come up with a single correct answer to a problem. Schools usually emphasize on this pattern of thinking and develop it through the learning process adopted by them. School learning usually requires students to gather, remember and reproduce information and to make logical decisions and answers acceptable to a vast majority of the population on the basis of the information processed. This type of thinking is useful when a single correct answer exists for a problem, and it can be arrived at by an analysis of available information and tools. Divergent thinking, on the other hand, is a more creative process that involves multiple possible solutions to the problem under consideration. This enables a person to come up with new and unusual solutions to the problem. Effective thinking is said to be a combination of convergent and divergent Convergent Thinking— Consider All Available Information and Arrive at the Unique Best Possible Answer Types of Thinking Divergent Thinking— Involving Multiple Possible Solutions to the Problem Under Consideration

Figure 4.1 Different Types of Thinking

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Precise Thinking—Focuses on Logic, Yes and No, and Right and Wrong

Effective Thinking

To Come Up with

Workable, Acceptable and Practical Solutions with Economic Sense

Creative Thinking—Focuses on No Definite Answers, Illogical Answers, and ‘May or May Not Be’ Kind of Outcomes

Figure 4.2 Effective Thinking thinking, or precise and creative thinking (Fig. 4.2). Precise thinking focuses on logic, yes and no, and right and wrong, whereas creative thinking focuses on no definite answers, is often illogical, and consists of may or may not be kind of outcomes. Therefore, one needs to start from creative thinking to come up with unusual solutions to the pain points and examine them with an open mind to find out whether they can become workable, acceptable and practical in an economic sense.

4.1.1  Vertical Vs Lateral Thinking Lateral thinking helps in solving problems and pain points faced by customers by a process of nonconventional and illogical methods. It is a process of looking at things differently. It helps in coming up with new ideas, resulting in the creation of new products, services and new processes. Lateral thinking involves trials and errors, can make jumps from the existing frame of reference and is probabilistic as far as outcomes are concerned. It is proactive and open to new and unseen paths and is generative in nature. On the other hand, vertical thinking is sequential, selective, finite and analytical. It is important to understand that lateral thinking is not a substitute for vertical thinking. Both are important and play a critical role in effective thinking. They complement each other, as lateral thinking is generative while vertical thinking is selective. In vertical thinking, one moves step by step through logic. In vertical thinking, one has to go through the test of being right at every stage to arrive at a correct solution for the problem, whereas in lateral thinking, one deliberately looks for irrelevant information and illogical solutions to the problem. It involves being wrong at some stage in order to achieve an innovative and correct solution. Edward de Bono (1970) summarized the relationship between vertical and lateral thinking as follows: ‘Some people are unhappy about lateral thinking, because they feel that it threatens the validity of vertical thinking. This is not so at all. The two processes are complementary, not antagonistic. Lateral thinking enhances the effectiveness of vertical thinking by offering it more to select from. Vertical thinking amplifies the effectiveness of lateral thinking by making good use of the ideas generated.’ Lateral thinking expands the horizons and vision of a person, which is very critical to an entrepreneur, while vertical thinking focuses on making use of the expertise of an individual to get logical results. It is a combination of the two with a right balance between them that leads to effective thinking that delivers results by converting new ideas into reality.

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According to the IBM 2010 Global CEO Study, which surveyed 1,500 chief executive officers spread over 60 countries and 33 industries worldwide, CEOs believe in more than rigour, management discipline, integrity or even vision—successfully navigating an increasing complex world would require creativity. According to them, creativity helps in overcoming complex situations. ‘The effects of rising complexity call for CEOs and their teams to lead with bold creativity, connect with customers in imaginative ways and design their operations for speed and flexibility to position their organizations for twenty-first century success.’4 According to this study, creative leaders invite disruptive innovations that change the existing way of doing things, are comfortable with ambiguity and confusion so as to come up with new business models through experimentation, and are uncomfortable with the status quo, thereby always questioning the status quo.

4.2  CREATIVITY AND ENTREPRENEURSHIP The fundamental question that an entrepreneur needs to answer is ‘What could be the “secret” for creating value proposition for the customer?’. As such, there is no real secret for applying creativity and innovation to respond to pain points of customers. It is the pain points of customers that keep generating worthwhile market opportunities, and the entrepreneur needs to be alert to these by coming up with appropriate, commercially acceptable unique solutions. Creativity, as we have seen, is the ability to come up with new ideas and to identify new and different ways of looking at problems and opportunities. Innovation is the application of such new ideas to enhance and enrich people’s well-being. The ‘entrepreneur succeeds by thinking and doing new things or old things in new ways’ (Thomas and Norman 2005). Management Guru Peter Drucker says, ‘Innovation is the specific instrument of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service.’5 Creativity deals mainly with the creation of novelty and value, and entrepreneurship deals with novelty in business through innovative ideas to achieve positive returns in the market through existing and new business models. Entrepreneurship is an outcome of a systematic and organized process of applying innovations through creativity to respond to the needs of customers in a marketplace. It basically involves application of strategies to translate new ideas into reality. It is entrepreneurs who see the worth of a creative idea leading to innovation and are able to give meaning to them through the concrete actions of an organized venture. Joseph A. Schumpeter (1883–1950), in his pioneering work Capitalism, Socialism and Democracy (1975), highlights the process of ‘creative destruction’. He focuses on competition and entrepreneur intervention by being an innovator that results in continuous improvement in structures, systems, procedures, products and services and renders obsolescent the old ones. According to him, the basic drive that feeds the engine of an economy comes mainly from the introduction of new products and services, new production systems, better distribution processes and from innovative forms of industrial organization that the capitalist enterprises create in a market economy. These come mainly from within the organization on a continuous basis, which destroys the old structure and creates a new one. This is what he called creative destruction. In turn, this has as significant impact on cost and quality, leading to change in the competitive structure of the market mechanism. Being alert to the changing environment and subconscious learning through repeated experiences are ‘discovery processes’ that result in innovation for the sustainable survival of the entrepreneur. Both entrepreneurship and creativity benefit from in-depth knowledge or expertise. They are not limited by existing knowledge, and challenge and push the barriers in developing new ideas, processes and applications.6 The fundamental difference between creativity and entrepreneurship lies

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in the process. Creativity involves a process that sees a problem in a new way through generation and selection of ideas. Entrepreneurship, taking a clue from creative problem-solving, focuses on identification of opportunity, value creation and, above all, commitment to and identification with the start-up and concrete efforts to legitimize a venture. In a fast-changing business environment, creativity and innovation acts as a double-edged sword for the survival and success of an enterprise. This is a fundamental mantra for all sorts of businesses, irrespective of industries. Therefore, creativity in business has become a core business skill to be encouraged by an entrepreneur in business entity. Even small and medium enterprises can create their own niche through innovation that would enable them to develop effective competitive advantage. It is this differentiating factor that results in more and more innovations coming from small and medium enterprises, in spite of their limited capacity to invest in research and development. Leadership expert Warren Buffet (1997) states, ‘Today’s successful companies live and die according to the quality of their ideas.’ A study by Sarasvarthy (2001) points out that entrepreneurship, rather than being a causation process, is a more emergent process relevant to the attributes of the individual. She classified this emergent and interactive process as an effectuation process. The four fundamental principles of the effectuation model as highlighted by Davidsson (2006) are:    

focus on affordable loss rather than expected returns strategic alliances rather than competitive analysis exploitation of contingencies rather than pre-existing knowledge control of an unpredictable future rather than prediction of an uncertain one

The study by Davidson provides a new perspective of entrepreneurship by focusing on affordable loss as a critical factor for taking risks and translating ideas into reality. It also highlights the need for appropriate networking with the stakeholders and entering into strategic alliance that can pay more visible results than an effort to channelize resources to respond to competitive environment, particularly for start-ups. Above all, a proactive approach to respond quickly to the unpredictable future events goes a long way in having complete control over the business, particularly during the initial stages of growth. The need for coming up continuously with new ideas is imperative for an entrepreneur because of very low success rate. In general, only 5–6 per cent of ideas that go through the concept and prototypes stages materialize, while the remaining 94–95 per cent of ideas die a natural death. The outcomes of various studies of invention success rates7 make the following evident:  95 Per cent Fail—Only 5 Per cent Earn Money—‘It’s been reported, without confirmation, that worldwide, only 5 per cent of all patented inventions ever earn any money for their inventors.’8  95 Per cent Fail—Only 5 Per cent of Independent Inventor Patents Are Produced in the Marketplace—‘Independent inventors…are responsible for 15 per cent of all US patents. Fewer than 5 per cent of those patents are ever produced in the marketplace.’  95 Per cent of All New Products Fail—‘But the market can’t absorb that many new ideas and an estimated 95 per cent of all new products fail. In part, this reflects the way many new products come about. Individual inventors often work outside corporate structures, have limited product-development funds and are unfamiliar with industry standards and practices.’ Success rates for independent inven-

tors (Brown 1993). Successful entrepreneurs accept the high failure rate and rather focus their energies on backing the few ideas that would make it big. Further, they never take failure as a setback. They consider it a learning process to come up with a still more powerful idea that would click amongst customers. Entrepreneurship requires courage to keep trying in spite of repeated failure, to be flexible enough to discard the ones that do not work and wise enough to learn from each experience.

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Government Policies

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Marketable Products and Services

Funding Organizations

Marketing System

Figure 4.3 Ecosystem to Promote Entrepreneurship Thus, creativity is a necessary input but not a sufficient precondition of entrepreneurship. The right ecosystem for the promotion of entrepreneurship, comprising educational institutions, funding organizations, research institutions, marketing systems and government policies, can fuel the creative spirit to bring about marketable products and services (Fig. 4.3). It is fundamentally the incentives to provide a functioning market economy with well-defined business and entrepreneurship conditions that pays rich dividends. Innovation has to be a continuous process as the majority of new ideas are unsuccessful. Therefore, as Michael (2002) rightly said, ‘Trial—and lots of error—is embedded in entrepreneurship.’

Udemy—A Venture with Creativity in Education Udemy is a Web site that enables anyone to create an online course on any subject. The goal of the  company is to provide teachers with everything they could possibly need to create a great learning  experience  over  the  Internet.  The  users  can  create  an  online  course  using  text,  video,  pictures  or  any other form available on the Web. Gagan Biyani is the founder of Udemy. According to him, the  reason for him to start a venture was that he did not find his work in a leading company impactful and  challenging. He got bored with the job he was doing. It was reading blogs such as TechCrunch that  inspired him to get into start-up culture. The  resources  on  the  site  are  provided  completely  free,  because  the  company’s  policy  is  that  nobody has to pay for using Udemy unless they are making money themselves. The company wants  to democratize online education and enable anyone to become an online instructor. The creativity  of  the  founders  have  provided  an  opportunity  to  learn  about  Udemy  things  such  as  photo  shop,  engineering,  entrepreneurship  and  poker.  The  company  has  a  long  list  of  academic  courses  from  institutions such as Harvard, Stanford, MIT and Yale. The  differentiation  created  by  Udemy  is  mainly  in  respect  of  flexibility  to  students  to  learn  at  their own convenient time and pace and it develops a community around the course. The software  features incorporated enable students to easily interact amongst one another and with their instructor.  The  company  has  been  fortunate  to  win  awards  at  major  competitions  such  as  VatorSplash  and  (Continued)

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the  Arizona  State  University  (ASU)  Education  Innovation  Summit.  The  mission  of  ASU  Education  Innovation Summit is ‘to design and build a global education innovation business hub at SkySong’.9

The World’s Most Innovative Companies Some  of  the  world’s  most  innovative  companies  have  been  ranked  by  the  Business Week  (issue  dated  24  April  2006)  and  the  Boston  Consulting  Group  (BCG).‘Apple Computer Inc. (AAPL),  once  again the creative king. To launch the iPod, says innovation consultant Larry Keeley of Doblin Inc.,  Apple used no fewer than seven types of innovation. They included networking (a novel agreement  among music companies to sell their songs online), business model (songs sold for a buck each  online) and branding (how cool are those white ear buds and wires?). Consumers love the ease and  feel of the iPod, but it is the simplicity of the iTunes software platform that turned a great MP3 player  into a revenue-gushing phenomenon.’ ‘Toyota Motor Corp., which leapt 10 spots to No. 4, is becoming a master of many as well. The  Japanese auto giant is best known for an obsessive focus on innovating its manufacturing processes.  But thanks to the hot-selling Prius, Toyota is earning even more respect as a product innovator. It is  also  collaborating  more  closely  with  suppliers  to  generate  innovation.  Last  year,  Toyota  launched  its Value Innovation strategy. Rather than working with suppliers just to cut costs of individual parts,  it is delving further back into the design process to find savings spanning entire vehicle systems.’ ‘Procter & Gamble Co. (P&G) (No. 7) has done just that in transforming its traditional in-house  research  and  development  process  into  an  open-source  innovation  strategy  it  calls  “connect  and  develop”.  The  new  method—Embrace  the  collective  brains  of  the  world.  Make  it  a  goal  [so]  that  50 per cent of the company’s new products come from outside P&G’s labs. Tap networks of inventors,  scientists and suppliers for new products that can be developed in-house. The radically different approach could not be shoehorned into managers’ existing responsibilities.  Rather,  P&G  had  to  tear  apart  and  restrict  much  of  its  research  organization.  It  created  new  job  classifications, such as 70 worldwide “technology entrepreneurs” (TEs), who act as scouts, looking  for the latest breakthroughs from places such as university labs. TEs also develop “technology game  boards” that map out where technology opportunities lie and help P&Gers get inside the minds of its  competitors.’10

Innovate or Get Ready to Perish Noted  academician  and  management  guru  Peter  Drucker  once  said,  ‘Innovation  and  marketing  are  the  only  two  functions  in  business.’  A  business,  according  to  him,  must  understand  what  its  consumers’ wants are and keep innovating products/services and methods to satisfy the identified  wants. If a company fails to do this, it gets extinct. Till 1989 there were only four major brands of men’s readymade shirts in India which used to have  a hefty premium. The cost used to be far more than the shirt stiched with the finest Vimal fabric (which  used to be the most expensive fabric in India then), that too by the best tailor in the city. Between  1991 and 1999, a number of prominent brands such as Arrow, Louis Philippe and Van Heusen and  others entered into the Indian market. They changed the dynamics of the Indian readymade men’s  clothing industry with superfine, non-ironing multi-ply cotton shirts priced at more than four times the  price of shirts sold by their traditional Indian rivals who were still following their ancient strategies of  selling polyester shirts at a nominal price. Cambridge shirts, for example, are available for ` 500 to  ` 750, while a Louis Philippe shirt costs ` 2,000 onwards. Today, most of these old Indian brands are  not perceived as premium brands and are sold at a very low price.

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HMT watches ruled the Indian wristwatch market almost single-handedly till Titan arrived on the  horizon. HMT watches were sold in some little shops in a remote corner of the market, which would  sell all other brands of watches, cassettes and other items, including electrical appliances. Where are  the HMT watches today? HMT made rugged watches of excellent quality. But did the consumer want  that stuff? Titan understood the pulse of the consumers. They offered them ornamental watches or  rather ‘bracelets that would also show time’. Obviously, an ornament cannot be sold at a low price.   A  consumer  not  only  happily  pays  a  higher  price  but  also  buys  a  number  of  watches  to  suit  their  dress, function or mood. Watches, according to Titan, are fashion accessories.11

4.3  CHARACTERISTICS OF CREATIVE PEOPLE Creative people have some distinct characteristics that differentiate them from other normal human beings. They are usually spontaneous and impulsive in their reactions to situations. They do not conform to set ways and means and are eager to experiment with new things and situations. They do not easily succumb to peer pressure and retain their identity even in tough and unusual situations. They believe in themselves and do not hesitate to express their true feelings, even if it means going against conventional wisdom. Creative people free themselves from conventional shackles and restrictions to create something new by pursuing hobbies such as painting, music, dancing, reading, software programming and designing so as to unfold and discover themselves. They have a great urge to express more of themselves. Some of the distinct characteristics that can be observed in creative people are discussed in the following sub-sections (see also Fig. 4.4).

4.3.1  Unconventional—Society’s Standards, Rituals and Norms Unconventional people enjoy their own way of doing things and mostly swim against the current. They have a gift and ingenuity that comes from their genes and upbringing to have original ideas that can transform the world. For example, the 16th century Italian astronomer Galileo proved for the first time that the earth revolves around the sun as against the prevalent belief that the sun revolves around the earth; Unconventional Independent and Individualistic Sensitive Not Motivated by Money

Characteristics of Creative People

Inventive and Intelligent Possessing High Physical Energy and Drive Visionary Humble and Proud Intuitive

Figure 4.4 Characteristics of Creative People

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James Watt patented the modern-day steam engine in 1769; Wilhelm Roentgen, a German physicist, discovered X-rays in 1895; J. J. Thomson, a British physicist, discovered the electron in 1897; and in 1905, Albert Einstein proposed that light can be described as a stream of separate particles of energy.

4.3.2  Independent and Individualistic Creative people are crazy and require a high degree of independence. They resist dependence or overdependence. However, they can thrive on beneficial mutual inter-dependence amongst people who are passionate about creativity. Their basic urge to get to the bottom of things results in their having a strong streak of independence. They are usually found to be ahead of their time. Their work is appreciated when it fructifies into a real workable contribution to solving societal problems, and usually they are criticized at the initial phase of coming up with an idea.

4.3.3  Sensitive Creative people are sensitive to happenings around them. It is this trait in them that contributes to creativity in many ways such as awareness of problems, known and unknown; helps them sense things more easily, and allows them to care and commit themselves to challenges or get to the root cause of problems. These individuals are good at noticing subtle details, which helps them in feeling and perceiving happenings around more intensely, dramatically and with a wildly vivid colour palate to draw from. It is important to note that being sensitive helps in fuelling creativity and a richer experience of life; however, being highly sensitive can also make an individual highly vulnerable to emotional overwhelm and anxiety. Pearl Buck, an American novelist living in China who received the Nobel and Pulitzer Prize, best describes a highly sensitive person by saying, ‘The truly creative mind in any field is no more than this: A human creature born abnormally, inhumanely sensitive. To them…a touch is a blow, a sound is a noise, a misfortune is a tragedy, a joy is an ecstasy, a friend is a lover, a lover is a god and failure is death.’ According to psychologist Elaine Aron, the author of The Highly Sensitive Person: How to Thrive When the World Overwhelms You, 20 per cent of the population has this innate quality.12

4.3.4  Not Motivated by Money To creative people, money is not a motivator. Thus, creative outcomes cannot be expected from individuals by giving them the allure of money. They generally have an intuitive sense of the amount of money they basically need to take care of their basic necessities, and once that need is fulfilled, money stops driving them. Creativity flourishes where people have a shared sense of higher purpose and common understanding—not where they are trying to compete against one another for money. Respondents to the global McKinsey survey viewed three non-cash motivators—praise from immediate managers, leadership attention (e.g. one-on-one conversations) and a chance to lead projects or task forces—as no less or even more effective motivators than the three highest-rated financial motivators. For example, artists, musicians and scientists are driven by a fundamental need to create something new, which gives them great satisfaction. Therefore, even in a world without money, there would be constant developments in the fields of music, art and science.

4.3.5  Inventive and Intelligent Creative people live in their own world and are engrossed with ideas. They are highly intelligent, always optimistic and keep coming up with bright new ideas. They always view things from the perspective of

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‘how to improve?’. Take for instance Thomas Edison, who invented hundreds of things in his lifetime, the most famous being the light bulb. Creative people have a heightened sense of imagination but are, at the same time, rooted in reality. It is a great art and great science that involves a bound of imagination into a world that is different from the present. It is combination of art and science that goes beyond existing so as to create a new reality. It is this aspect in creative people that makes them inventive. They are usually smart and naive at the same time. How smart they actually are is open to question. It is probably true that what psychologists call the ‘g factor’, meaning a core of general intelligence, is high among people who make important creative contributions.13 Various studies show that intelligence is one of the pre-requisite for being creative. However, a very high level of intelligence does not necessarily imply higher creativity.

4.3.6  High Physical Energy and Drive Creative people have high physical energy to pursue their goals and ideas. They have the stamina to work for long hours with great concentration. The secret of their higher physical energy is because of their focused attention to the problem without any diversions whatsoever. It, of course, does not mean that they are hyperactive. What is important is their control over inner strength and energy. They enjoy the rhythm of activity followed by idleness or self-reflection, which they consider very important for the success of their work. They have that ‘fire in their belly’ called passion to make positive changes for the betterment of the world. Because of their high drive, they can produce a lot in a relatively short time. Madonna has not let public praise or criticism stop her from being a superstar. She is a modern day diva—multi-talented as a singer, dancer and actress—who has released hundreds of songs, albums, videos, movies and books— reinventing herself all the while.14

4.3.7  Visionary Creative people have a great vision that permeates their head, heart and soul. As such, there cannot be any hope, dreams and goals for the future in the absence of visionaries who are creative. Creative visionaries are those who express themselves from their innermost recesses. It is simply an action that involves our complete being, that is mind, body and emotions, so as to bring something new into the world. People with vision use their imagination to envision something distinct and new that can become a reality. It is something like visualizing a place you are planning to go on a vacation or imagining how the garden would look like when it is in full bloom. However, it is important to note that our imagination could be both positive and negative. We can imagine a great new venture in the area of information technology; at the same time, nobody can prevent us from imagining all that could go wrong in our venture and try not to make it happen. Creative visionaries must be true to their inner selves and must pursue their vision with positivity and confidence.15 Envisioning, as opposed to fantasy, is a focused, peaceful, centred endeavour, to help us explore and expand our creative inspirations. Creative envisioning opens a space within us, inviting ideas, inspirations and possibilities—for a change in lifestyle a business venture or an invention that will make our lives easier.16

4.3.8  Humble and Proud Creative people, in general, are found to be humble as well as proud. Their respect for the field in which they work makes them aware of and realize the vast knowledge that already exists in the field, so as to

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put their own perspective and develop clarity to take it further. They are highly focused in their efforts about future projects including current challenges. Their pride stems from the fact that they have made unique contributions in their fields.

4.3.9  Intuitive The intuitive trait in creative people enables them to find answers to problems with minimum information and facts and sense the problems where others do not see anything. Creative people have a great quality of associating themselves with their inner selves. They pay a keen interest in and great attention to signs, synchronicities and symbols around them and use them in their work. They act as an instrument wherein ideas and inspiration come from a higher plane. As regards ideas coming out of the blue, remember how scientist Isaac Newton ‘discovered’ gravity? He was sitting under a tree and an apple fell on his head! Had he not made a connection with his intuitive nature, he would have missed a major theory about the world we live in!17 Intuitive thinking helps individuals to access and use their full potential in decision-making. Intuitive thinkers have certain unique qualities such as being unfocused and non-linear, seeing many things at once and having the big picture in mind. Intuitive people work best where either explanation is not required or there is not sufficient time to ponder and analyse. Intuition is experience translated by expertise to quickly convert an idea into reality, with a gut feeling that it will click.

4.4  BLOCKS TO CREATIVITY There are many mental blocks to creativity which curb new ideas and towards innovation. These blocks come in the way of individual thinking and curb creativity. The reasons for these mental blocks are mainly our upbringing and the experiences that we go through in different phases of life and, in particular, during our childhood. To promote creativity and innovation amongst their employees, organizations have to be very careful at the time of recruiting people and, after recruitment, have to see to it that every employee is given due training to overcome mental blocks, if any, to creativity. Business environments are becoming more and more complex and competitive and, therefore, require continuous innovation to maintain and develop competitive edge. However, mental blocks do not allow people to come up with creative ideas. Mental blocks in individuals are formed through their past experiences, learning and upbringing, which leads to behaviour in which individuals become victim of sentences such as ‘this is the only right answer’, ‘that is not logically tenable’, ‘follow the rules strictly’, ‘one should be practical in life’, ‘that is not my cup of a tea or area of operation’, ‘don’t be foolish to do this’, ‘one should avoid ambiguity’ and ‘I am not creative’. Some of the commonly observed blocks to creativity are discussed in the following sub-section.

4.4.1  Habits We develop certain habits and become victims of those habits in our daily routine. These are formed over a period of time through repetitive outcomes of our experiences. In turn, habits become set acquired patterns in an individual’s life. Once we acquire a habit, it becomes well nigh impossible to break it. However, for creating new possibilities, one has to objectively analyse the implications of our habits in blocking creativity. Some of the common statements made by people who we wish changed their habits are ‘We’ve never done it before.’, ‘I know what is the right way of doing it.’, ‘We have been doing it right without proposed change.’ and ‘We have been doing it this way for the last 30 years.’ Thus, habits become a curse for us to change and think differently.

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It is always better to ask oneself while dealing with a problem whether one is reacting and responding to it out of one’s habit. Can there be an innovative solution to the problem? This would certainly alert us and make us open to suggestions.

4.4.2  Perceptual Blocks Perceptual blocks are also an outcome of our learning and experiences that may ultimately become our habits. Our natural approach to perception hinders new learning, new relationships and new meanings to the things around. According to psychologists, our perceptual behaviour gets set in our mind and we see things as we want to see them. As a result, at times, being professionals, we wrongly keep classifying a problem, react to it and handle it wrongly. As a result of our set perceptions, we start resorting to reactions such as ‘It’s too late to try this out.’, ‘I have not used this method for this type of project/ problem.’ and ‘I told you earlier that such a problem does not exist.’ Thus, it is our perceptual limitations that come in our way as blocks to solving problems. According to the work of Adams (1979) and Simberg (1964), major perceptual blocks include stereotyping and labelling the problem; difficulty in isolating the problem; narrowing the problem too much; failing to use all senses while observing; failing to see remote relationships; not being able to distinguish between cause and effect and, above all, inability to investigate the obvious. It requires bold moves to overcome our perceptual barriers, so as to come up with creative solutions. Although this is difficult, it is always good to remain flexible and open-minded and to see problems from a different angle.

4.4.3  Emotional Blocks Emotional blocks are the outcome of past traumatic experiences and the stress of daily living. Insecurity, fear and anxiety are the main causes of emotional blocks to creativity. According to the work of Adams (1979) and Simberg (1964), major emotional blocks that come in the way of our problem-solving are fear of failure or making mistakes; fear of taking a risk; rigid opinions, prejudices and preferences; frustration and lack of drive.

4.4.4  Environmental Blocks Some blocks occur in our environment. These could be obstructive in our creative process, even when we are working alone. It is better to go off site from the normal place of work to imbibe creative thoughts. One can shift to an environment that promotes free thinking and open the flow of thoughts. A conducive environment acts as a stimulant to creative thinking. However, effectiveness of an environment differs from person to person as well as their moods and feelings. Therefore, one may need to experiment with alternative environments to identify which one suits the most in contributing creatively.

4.4.5  Blocks Within Another hindrance to creativity comes from within. It is our subconscious mind that keeps warning us against the dangers of unconventional or lateral thinking. It is this signal from within that restricts us from experimenting because of the fear of failure. Blocks within come mainly from our past experiences and training that we have gone through. These get programmed in our personality traits from an early age. We are taught by our parents and teachers to follow rules, be logical and not to take risks. These powerful psychological blocks are ingrained in our personality to make us remain socially acceptable. However, for becoming creative, it is a major hindrance.

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4.4.6  Rules and Traditions All organizations, irrespective of which country they are in, follow certain rules, regulations, policies and traditions to guide personal and group behaviour. These rules and regulations become a hindering force to the unfoldment of creativity. At times, in formal organizations, it is hierarchy that inhibits open flow of ideas, as it is presumed that lower status people know less than higher status people and, in turn, they are reluctant to suggest ideas to people in higher positions, mainly because of insecurity and fear. Similarly, higher-level people mostly resist or restrict the flow of ideas that threaten or question the hierarchy. Further, if group members necessarily have to comply with procedures, creativity will be curbed. Procedural barriers are basically written or unwritten policies and regulations that curb innovative tendency. Consider these squelchers: generally, we come across the arguments ‘it is not permissible under regulations’; ‘it does not fall under the purview or our department’; ‘that is not part of the strategic plan or annual plan’ and ‘we have not been allocated budget for this’. Organizations with people who challenge the rules and procedures come up with innovations that facilitate their working and contribute to growth. Challenging the rule is one of the most effective ways to come up with innovative solutions. Roger von Oech, author of A Whack on the Side of the Head, has suggested holding sessions to discard and inspect rules as a way to innovate. According to ‘The Business Week–BCG Survey’, the main obstacle to innovation that executives face today is slow development time as against speed in the market, a paramount factor for success. Fast-changing consumer demands, global outsourcing and open-source software make speed to market of paramount importance today. Yet, companies often cannot organize themselves to move faster, says George Stalk Jr., a senior vice-president with BCG, who has studied time-based competition for 25 years. The second obstacle highlighted is the lack of coordination amongst various groups, teams and departments. The most successful organizations team up people from across the organizational chart and link rewards to innovation. Innovative companies build innovation cultures. ‘You have to be willing to get down into the plumbing of the organization and align the nervous system of the company,’ says James P. Andrew, who heads the innovation practice at BCG.18 It is very important to take specific steps and deliberate actions that can help in overcoming blocks to creativity. For example, a creative activity that children engage in is playing, which, by putting aside belief, becomes open to exploration of new things. Childlike behaviour itself permeates creativity. Some of the measures that help in overcoming blocks are walking away from one’s creative block and taking a short nap; revisiting one’s creative moments; using forms, styles and characters that are linked to one’s creative expression; spending time with someone who one thinks is a catalyst for creativity; physical exercise, a wonderful way to clear one’s mental cobwebs; and getting associated with and taking help from a person who sees things and problems from a new perspective.

4.5  CREATIVITY AT WORK—A MUST FOR SURVIVAL Organizations gain and get multiple advantages by channelizing and tapping individual creativity in a variety of ways. Organizational members are, in general, more satisfied with their jobs when they can share their ideas with their co-workers and superiors (Albrecht and Hall 1991) and believe that their creative efforts will be valued and rewarded (Amabile 1988). A number of studies have linked entrepreneurial success as measured through productivity and profits through creativity and innovation. Innovation is essential for long-term survival of organizations and innovation requires individual creative action (Ford 1996). Coming up with an idea for a new business or existing business requires creative thinking on the part of its employees, irrespective of tiers and organizations. The intense competition and increasing expectations

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of customers in a globalized era have necessitated creativity on the part of organizations to continuously come up with new and better solutions to problems for their survival and growth. It is not enough for entrepreneurs to bring in incremental changes in the solutions to problems that have worked in the past. What is required is a bold new move through the culture of creativity in the organization. There are many techniques to get one’s creative juices flowing and to test out ideas already in the pipeline. The fact remains that projections based on historical developments cannot be reliable and dependable predictors of the shape businesses would take in the future. Leaping forward like a kangaroo requires questioning limiting assumptions, beliefs and behaviours and coming up with new insights to add to the value proposition of customers through organization of resources and identification of opportunities in time. Entrepreneurs need to take a leading role and positions in the organization to see to it that traditional assumptions, ways of doing things and perspectives that act as killers of creativity do not come in the way of the growth of the business. The people talent in a knowledge economy, that adds a significant value because of its capacity for innovation, should be organized and structured in such a manner as to facilitate the unfolding of creativity in people like the blossoming of a bud into a flower. Creativity at the work place can be called artful making. ‘Artful’, because it derives from the theory and practice of collaborative art and requires an artistlike attitude from managers and team members. ‘Making’, because it requires that you conceive your work as altering or combining materials into a form, for a purpose.19 This was thought of for the first time by Aristotle about 2,500 years ago. He applied it to unique products composed of interdependent parts, or, in other words, unique handmade things. Modern organizations need to involve themselves completely with strategies, product designs or software development resulting in new and different products and services that individuals or groups create through collaboration. Thus, for their very survival, organizations today have to create an environment for generating more and more ideas that could be analysed, evaluated and implemented; build tools and techniques that facilitate generation of ideas; inculcate a culture for brainstorming and creative collaboration and, above all, foster an innovative environment (Fig. 4.5).

Xerox—A Highly Innovative Company That Nurtures Creativity Xerox  is  known  for  nurturing  creativity  to  come  up  with  innovations  that  can  keep  it  ahead  of  its  competitors. It has built up culture in the organization wherein people feel secure and happy to keep  coming up with creative ideas. Their research centre works on the ideas and keeps coming up with  innovative products. The company’s philosophy is as follows: ‘In this context of constant change, we  must continue to differentiate the products and services Xerox offers to our customers. Our current  focus  is  on  technologies  and  methodologies  that  enable  new  services  that  simplify  documentintensive  business  processes;  affordable  colour  for  the  office  and  applications  for  personalized 

Culture to Generate More and More Ideas

Analyse and Evaluate Ideas

Implement Worthwhile Innovative Ideas

Need for Organizational Culture to Promote Innovation

Figure 4.5 Organizational Culture to Promote Innovation

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printing and publishing. We also see great things ahead with our environmentally friendly solid ink  printing technology, continuing to find ways for this exciting marking technology to better serve our  current customers and expand into new markets.’ Xerox focuses on technologies that ‘disrupt the existing cost of products and services’. One recent  example is the tightly integrated parallel processing technology that was introduced in the Nuvera 288  product. Here, we exploited parallelism and redundancy to create a breakthrough cut-sheet duplex  printer  capable  of  producing  288  pages  per  minute.  Other  examples  include  our  image  services  platform  and  our  smarter  document  technologies,  which  significantly  improve  our  customers’  document-intensive processes. Xerox researchers and business teams worldwide have delighted their customers by continuously  coming up with a stream of product and service innovations. The mission of the company’s global  research centres is to ‘pioneer high-impact technologies that enable us to lead in our core markets  and to create future markets for Xerox’. Xerox  research  is  one  wherein  invention  and  entrepreneurship  are  truly  valued  and  leadership  empowers its employees to deliver.20

IBM Study: CEOs Say Creativity and Managing Complexity Are Vital Today IBM has just released its study outcomes based on 1500 face-to-face interviews with global CEOs  from companies of all sizes across 60 countries, representing 33 industries for the year 2010. Earlier  studies have been vital sources of understanding the emerging trends that company leaders consider  important for shaping their businesses in future. The opening statement by IBM’s own CEO, Samuel J.   Palmisano,  sets  the  stage  for  this  year’s  study:  ‘[E]vents,  threats  and  opportunities  aren’t  just  coming  at  us  faster  or  with  less  predictability;  they  are  converging  and  influencing  each  other  to  create  entirely  unique  situations.  These  firsts-of-their-kind  developments  require  unprecedented  degrees of creativity—which has become a more important leadership quality than attributes such as  management discipline, rigor or operational acumen.’ Subsequently, reports highlight that for CEOs  and their organizations, avoiding complexity is not at all an option. Basically, the choice lies in only the  way they respond to it. Will they allow complexity to become a stifling force that slows responsiveness,  overwhelms employees and customers or threatens profits? Or do they have the creative leadership,  customer relationships and operating dexterity to turn it into a true advantage? The degree of complexity is only going to rise in the years to come and almost half of the CEOs  doubt their ability to manage it. According to the study, a set of organizations that can be called ‘Standouts’ has turned increased  complexity to derive financial advantage and leverage over the past five years. The  CEOs’  response  indicate  that  Creativity  is  the  most  important  leadership  quality,  which  encourages  experimentation  and  innovation  throughout  the  organization  by  creating  a  culture  conducive  to  expression  of  creative  ideas.  To  take  their  organizations  to  greater  heights,  creative  leaders take calculated risks, find new ideas and keep innovating continuously. These organizations  innovate for survival and growth mainly through their strengths in the following areas:   Creative Leadership—Creative leaders encourage disruptive innovation, encourage people  to drop outdated approaches and take balanced risks.   Customer Relationships—In a highly interconnected and interdependent world, CEOs focus  the  most  on  developing  customer  intimacy,  mainly  because  of  the  exponential  increase  in  customers’ option in the globalized era, wherein information flow is instantaneous.   Operating Dexterity—CEOs adapt quickly to changes in the environment by revamping their  operations to stay ready to act when opportunities or challenges arise.21

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4.6  SOURCES OF NEW IDEAS Budding entrepreneurs need to be very clear about sources that can fetch them good ideas. Ideas that can a make business sense are said to be the foundation of any start-up venture. In general, if one finds something one enjoys and loves doing, money will automatically flow. This is, of course, true but not completely true. Basically, doing what one enjoys doing is a fundamental pre-requisite but the idea on which someone is working should result in a product or service that has a market backed up by willingness on the part of customers to pay. Gerald Celente, founder and director of The Trends Research Institute in Rhinebeck, New York, has rightly said regarding searching for new ideas, ‘First, understand that current events form future trends. If you keep up with what’s going on socially, environmentally and with business and consumers, you can see that all things are connected.’22 This implies that by being alert to the changing environment and, in particular, to the customer and their existing and prospective needs, one can identify continuously a chain of ideas. With intense listening and keen observation too, one can look for worthwhile ideas. This is evident from the statement of Sean Glass, 26, who found the inspiration for his company while standing in a long queue at a university bookstore: ‘Listen to and observe what’s going on around you.’ A sophomore at Yale University in 1999, Glass noticed that most students preferred to make purchases using their student ID cards, which electronically charged purchases to tuition bills. The student ID checkout line was so long, in fact, that Glass wondered, ‘What would happen if those same students could use their ID cards to make purchases at businesses—a pizza joint or a coffee shop outside Yale’s campus?’23 Another way of getting good ideas could be to take note of the obvious problems one encounters in everyday life. Some of the prominent sources for business ideas could be consumers and understanding them well, existing products and services, distribution channels and promotional techniques in use, government policies and priorities, and research and development priorities and outcomes (Fig. 4.6).

Consumers

Existing Products and Services

Distribution Channels Sources of New Ideas

Research and Development

Government Policies and Priorities

Figure 4.6 Sources of New Ideas

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4.6.1  Consumers Observing and studying consumers helps potential entrepreneurs identify business ideas that make meaning and serve the purpose of customers. It requires a clear understanding of the psychology of a consumer, that is, the way they think, feel, reason and choose from among different alternatives. It also depends on understanding the way a consumer is influenced by their social, cultural, technological, legal and competitive environments. Consumer choices about buying goods and services are influenced by external and internal factors. The external factors that govern their consumption are culture, demographics and social aspects, religious and regional subcultures, families and households, and peer groups. The internal factors that influence their decision to buy or not to buy a particular product and service are perception, learning, memory, motives, personality, emotions and attitude. Understanding consumer behaviour is the study of individuals, groups or organizations and the processes used by them to satisfy their needs and the impact that these processes make on the consumers and society at large. It is a decision-making process that involves blending of factors constituting psychology, sociology, anthropology and economics. Thus, it requires an entrepreneur to pay close attention to understand and dissect the preferences of potential consumers. Some of the simple questions that an entrepreneur needs to seek answers to are:      

What do individuals, groups and organizations buy? What do they want but are not able to buy? What do they buy and are not happy with? When, how and where do they prefer to buy? What are the motivations for buying? What more are they looking for that is not available?

The success of a venture depends on an idea that satisfies consumer needs. A consumer’s attraction to buy a product or service depends on their ability to solve their problems and fulfil their needs. Once they are aware of the product and its capabilities vis-à-vis their needs, and find it to be the best possible available solution, they decide to buy it for consumption. The repeat purchase depends on whether the gap is minimum between their expectations and what they got in reality by consuming the product. Consumer responses to new products could be seen by monitoring potential ideas informally or by seeking their responses formally.

Make Customers Your R&D Experts Koss Brothers faced three prominent challenges in working for their big dreams no cash, unawareness  on the part of general public about the benefits of organic food and competing with the three corporate  giants  that  controlled  the  baby  food  market.  The  Kosses  looked  for  and  systematically  collected  input  from  customers  before  introduction  of  the  company’s  first  line  of  products.  They  conducted  scientifically-focused group surveys with parents and children to collect feedback on early product  ideas. The company got much-needed insight from focus groups into what customers needed so as to  adjust their initial product concepts and simplify them as per customer feedback. The real challenge  faced by the company was interpreting what young children were trying to communicate while they  were gumming away on one spoonful and spitting out the next. According to Ron, it was a collection of input from potential customers during the early stage of  the product-development process that had forced the brothers to separate the fantasy of starting a  company from the reality of trying to introduce a product that had never been sold commercially in  the market. ‘Without the focus groups, we wouldn’t have hit the target, let alone approach it in terms  of choosing the right initial product line,’ he says.24

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Customer-made: Time to Tap into Global Brain i.  Dutch supermarket chain Albert Heijn did something unique and sensible by asking customers  for detailed suggestions on how to improve their stores through Web sites, leaflets and billboards  instead of putting up suggestion boxes that customers hardly use and that stores do not empty  regularly. It attracted more than 55,000 customers, who gave wonderful suggestions on service,  assortment  and  convenience  levels  in  over  the  700  stores  in  The  Netherlands.  Seven  hundred  submitters  of  ‘Golden  Tips’,  which  were  made  available  online  for  all  to  see,  won  one-minute  shopping  sprees,  with  individual  stores  committed  and  ready  to  implement  suggestions  at  the  earliest. ii.  Electrolux  Design  Lab  attracted  entries  from  more  than  3,058  design  students  spread  over  88  countries  around  the  world.  The  top  six  countries  that  contributed  entries  were  the  United  States, the United Kingdom, China, India, Brazil and Italy. Participants were asked to visualize and  design household appliances for the year 2020. All the entries were evaluated by experts and,  finally, 12 finalists participated in a six-day design event in Stockholm, including workshops, model  building and a competition for cash awards among many other things. The registration process for the competition was operated via Design boom, an industrial design  community. The lesson learnt was that any smart move as customer-made need not always involve  hundreds of millions of contributors. There’s no harm in focusing on relevant pockets of expertise that  matters, if one is inviting others to co-create something specific and unique.25

4.6.2  Existing Products and Services Looking for new business ideas could be through monitoring and evaluation of existing manufactured products, the way these get distributed and the services are made available to consumers. One can get ideas from existing products/services and existing markets, existing markets and new products/services, new markets and existing products/services, and new markets and new products/services. The simplest business ideas come from a combination of existing markets and existing products/services, while the most difficult ones come from new markets and new products/services. In case entrepreneurs focus attention on the simplest category, they get exposed to higher risks associated with severe competition. However, searching for an idea that pertains to new markets and new products/services provides an entrepreneur with the highest possible security from competition and would help them get the first mover advantage. This becomes a highly creative act on the part of an entrepreneur. A relatively safer bet for an entrepreneur lies in existing markets and new products/services or new markets with existing products/services. Analysing and evaluating the existing products from the aforementioned perspective leads to new products/services having a greater market appeal and potential. Some of the common ways to develop and modify existing products and services are as follows:        

making them larger/smaller, lighter/heavier or faster/slower changing their colour, material or shape altering quality and quantity increasing mobility, easy access, ease in transportation and disposability coming up with simple ways and means to repair, maintain, replace and clean introducing convenience through automation or technology upgradation combining products and services by adding new features and accessories changing the distribution and delivery modes

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 altering the packaging material and unit size/shape for convenience and cost reduction  improving usability, performance or safety  improving quality

For the long-term sustainable growth of a venture, entrepreneurs should always aim for quality rather than cheapness. It has been rightly said in Indian parlance, sastha roye bar bar aur mahenga roye ek bar (the cheap cries time and again, the pricey cries but once). Further, it is not advisable to pursue ideas that may result in price wars or are going to be very price sensitive in the market. Similarly, it may not be desirable for start-ups to look for products and services that are likely to remain short-lived fads or having to compete head-to-head with large, entrenched businesses.

Business Through Market Development The  iPhone  is  powered  by  a  rechargeable  lithium  battery.  The  battery  should  be  charged  at  least  once a month. For doing so, the battery is required to be discharged completely after it has been  fully charged. There are certain factors that reduce the life of the battery, such as frequent retrieval of  e-mails, automatic checking of e-mail accounts, push applications, the locations of the services and  the amount of time since the battery was last charged. Therefore, any conscious effort on the part of  a customer to reduce use of these services will significantly improve the battery’s performance. Here  are some of facts of iPhone battery replacement.

iPhone Battery Replacement Warranty The replacement warranty for the iPhone battery is good for a year if the original battery is defective.  However,  there  is  a  plan  that  allows  the  consumer  to  increase  the  coverage  for  replacement  for  two years from the date the iPhone was purchased. This plan provides for the replacement of the  battery for a minimal service fee.

iPhone Battery Replacement Programme Apple will replace your battery under the iPhone battery replacement programme for $79 plus local  taxes. However, it is the consumer’s responsibility to replace the battery if this service is not available  or if the reduced life of the battery has been caused by negligence on the part of the consumer.

iPhone Battery Replacement Tips Repairing  devices  yourself  can  be  very  challenging  and  replacing  a  battery  in  an  iPhone  is  not  easy. Since the battery is tightly sealed within the device, replacement of the battery is very difficult.  However, with a little time and patience, you can replace the battery. The instructions for replacing the iPhone battery advise to remove the existing battery from the  iPhone and to keep in its place a new battery. One can buy a replacement kit for the iPhone battery  from a retailer, which contains the opening tools and the main battery. Compared to contacting Apple, the iPhone battery replacement kit with the instructions is a timesaving  and  cost-effective  alternative.  However,  one  should  go  through  the  instructions  carefully  to  avoid unnecessary damage while replacing the iPhone battery. If one does not, one might ruin one’s  iPhone and has to buy a new one. When replacing an iPhone battery, the correct tools should be used  patiently. In addition, the tips on how to increase the battery life should be followed to be able to talk  longer before the battery is recharged.26

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4.6.3  Distribution Channels The people involved in the distribution chain are an excellent source of new ideas. It is this group of people who directly interact with the people in the whole chain after the product comes out of the production system. These people come up with suggestions for introducing new products and facilitate marketing of these products. To take advantage of the people involved in the distribution channel, they need to be trained to be conscious and alert to questions such as ‘What problems are your customers trying to solve when they buy from you?’; ‘Are there competitors providing similar products, and if so, what are their unique features?’; ‘Are there complementary services or products that come before or after they join you?’ and ‘What other features in your product or service can dramatically enhance value for the customer?’. People involved in the distribution channel should also broadly think about aspects such as the following:  media that are popular amongst customers, such as online content, podcasts, industry publications and newspapers  the services customers subscribe to  brands and distribution channels that people like the most  brands preferred by customers and the reasons for their preferences  companies they buy from regularly

But if one is looking for new ways to gain leverage and build one’s own business, one has to review one’s distribution strategy. One can start small with a single partnership and work up from there.

4.6.4  Government Policies and Priorities Government policies and priorities and regulatory mechanisms clearly indicate the opportunities that exist in any economy. Every government, irrespective of the political setup, comes up with yearly and long-term plans for the growth and development of its economy. These plans indicate the sources of money and the uses thereof in specific sectors and activities to promote development. For example, since 1991 ‘new economic policies’ or reforms have been introduced in the Indian economy. These include currency devaluations and making currency partially convertible, reduced quantitative restrictions on imports, reduced import duties on capital goods, decreases in subsidies, liberalized interest rates, abolition of licenses for most industries, the sale of shares in selected public enterprises and tax reforms. All these reforms have resulted in a plethora of opportunities for entrepreneurs who could come up with innovative ideas in response to these challenges. The average importweighted tariff was reduced from 87 per cent in FY (financial year) 1991 to 33 per cent in the FY 1994, resulting in a need for Indian entrepreneurs to improve their efficiency and to cut cost, so that they could compete with their counterparts in the global economy. The government has initiated, sustained and refined many programmes since Independence to help the poor attain self-sufficiency in food production. Education, health and rural development have been the key focus of these programmes for the last few years. Thus, these sectors provide a scope for business ideas that can serve the need for ‘bottom of the pyramid’ and avail benefits arising out of resource flow to these sectors. Similarly, if we look at the economy of Canada and its government priorities, we may observe that small business is the largest segment of the Canadian business population, accounting for 98 per cent of all business establishments in Canada. For creating sustainable wealth in Canada, Industry Canada offers

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a wide range of support to entrepreneurs and small businesses to ensure that they remain competitive in the global economy. It also works with participating governments to introduce new business sectors as well as new content beyond permits and licenses, in order to increase the value and completeness of the service to Canadians. The Canadian Youth Business Foundation (CYBF) helps young people to become entrepreneurs by providing access to financing and mentoring. It is a non-profit, private sector organization funded jointly by the private and public sectors, whose programme is delivered in partnership with other entrepreneurship organizations across communities in Canada. The Foundation, as part of its business plan for 2009, made a commitment to increase the number of start-ups it supports to 480. The CYBF will also need to increase its mentor pool to meet the projected 480 start-ups since working with a mentor is a mandatory requirement of any loan CYBF provides.27 This clearly provides opportunities to small businesses to innovate by coming up with new ideas aligned to government policies. Further, the patent office in each country, including the Indian patent office, publishes the details of existing patents and the patent applications in the pipeline. The analysis of this information contains wide-ranging possibilities for new product developments in different areas. Such information also provides detailed knowledge in different areas, and the areas that are attracting greater emphasis from a research and development perspective. Similarly, the United States Patent and Trademark Office (USPTO) administers patent and trademark laws in the country. This office has been operating from 1802. It examines applications for patents to determine if the applicants are entitled to patents; publishes issued patents and various publications concerning patents; records assignments of patents; maintains a search room for the use of the public to examine issued patents and records; and supplies copies of records and other papers. This information provides a lot of scope to avoid duplication of work and come up with innovative ideas that can fetch market worth.

4.6.5  Research and Development (R&D) The greatest source for an entrepreneur to come up with new ideas is the entrepreneur’s own research and development endeavours. These efforts could be of a formal nature within the organization or taken up in association with industry. These also could be informal, wherein entrepreneurs, on their own or with the help of a team, keep pursuing their research interests. Even the research and development efforts being pursued by competitors in the industry provide insights into where to focus efforts for product development. It is important to note that research and development investment is mainly done by big corporates, and it may not be feasible for small and medium enterprises to invest heavy sums on research and development. Therefore, as a source of new ideas, this is more prominent for well-established big corporates. It is also evident from the study undertaken by IBM, which affirms on the basis of the views of 750 CEOs that ‘[i]n terms of how to drive innovation, the study found that 76 per cent of CEOs ranked business partner and customer collaboration as top sources for new ideas. This greatly contrasts with internal R&D, which ranked eighth as a source for new ideas—cited by only 14 per cent of CEOs’. This is fascinating. The top sources can be considered sources outside of the company.28

Product Development in the Fibre Industry Through R&D The most commonly used fibres in nonwovens are polypropylene and polyester. These fibres have  been affected by rapidly fluctuating costs in recent months, mainly because of their dependence on  petroleum  pricing.  FiberVisions,  for  one,  has  developed  a  polypropylene  fibre  capable  of  soaking 

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up  water  and  lotion.  The  material  allows  manufacturers  to  make  a  100  per  cent  polypropylene    non-woven with absorbency nearly six times its own weight, allowing lower basis weights in many  key applications. ‘FiberVisions  believes  in  the  value  that  the  inherent  properties  of  polypropylene  bring  to  the  marketplace,’  said  CEO  Stephen  Wood.  ‘Polypropylene’s  ability  to  be  embossed  and  its  excellent  chemical  resistance,  low  specific  gravity,  moisture  control,  softness  and  drape  afford  innovative  opportunities  for  use  in  nonwovens.  Its  versatility  and  demonstrated  performance  in  nonwovens  processes such as high-speed carding, hydroentangling and needlepunching will continue to drive  polypropylene staple fibre growth in the nonwovens industry.’ FiberVisions  has  a  long  history  of  innovation  in  polyolefin  and  bicomponent  fibres.  Their  R&D  focuses  on  creating  new  fibres  that  help  reduce  system  cost  while  enhancing  performance  and  sustainability. Here is a sampling of their major innovations since 2006:                              

trilobal PP fibres for carded spunlaced non-woven fabrics, such as baby wipes hollow PP for carded through air-bonded non-wovens used in acquisition distribution layers PE sheath/PET (polyester) core short-cut bico fibres, air-laid wipes and hygiene products special finish for air-laid fibres that reduces dusting in air-laid non-wovens containing fluff pulp eccentric core PE/PP bico fibres for enhanced bulk in air through bonded non-wovens fine PP fibres for carded spunlace non-wovens for wipes and sanitary applications fine PP fibres for carded thermal-bond applications monocomponent PE binder fibres for binding natural and recycled materials for insulation and  similar high loft materials purpose-designed PP binder fibres for lightweight composites with glass and other reinforcing  fibres PE/PP and PP/PET splittable fibres biodegradable bico fibres low-melting-point PE sheath/PP core fibres for very low bonding temperatures disperse dyeable PP stable fibres durably wettable PP fibres that remain wettable after extensive spunlacing special  PP  fibres  for  carded,  needlepunch  furniture  backing,  mattress  covers  and  similar  applications29

Above  all,  entrepreneurs  need  to  be  alert  to  the  environment  for  coming  up  with  new  ideas  to  respond to customer needs. They should always be eager to identify obvious gaps. They have to be,  by all means, inventive, imaginative and original in thinking so as to stay ahead of the market and be  consumer orientated rather than product obsessed.

4.7  TECHNIQUES FOR GENERATING IDEAS The trick to creativity is thinking ‘out of the box’, that is, keeping aside pre-conceived notions, assumptions and prejudices. Edward de Bono propounded and developed the concept of lateral thinking and highlighted the process in the following five steps: i. ii. iii. iv. v.

escape from clichés and fixed patterns challenge assumptions generate alternatives jump to new ideas and then see what happens find new entry points from which to move forward

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Roger von Oech states in his entertaining book, A Whack on the Side of the Head (1990), ‘We all need an occasional whack on the side of the head to shake us out of routine patterns, to force us to rethink our problems and to stimulate us to ask questions that may lead to other right answers.’ Similarly, at times, changing physical surroundings can facilitate the process of creative thinking and help look at things from a different perspective. The fundamental challenge lies in changing the way one looks at problems and ideas, but it is essential to be non-judgemental while participating in a creative process. It is very easy to stunt new ideas through negativity and criticism. The first step to channelize one’s creativity is to identify, understand and define the problem. This is the first and foremost step in the process of coming up with unique solutions to existing and future problems. Three key steps to solve a problem creatively are as follows (Fig. 4.7).

4.7.1  Understanding the Problem Defining the problem in simple terms, without over-simplifying it, is very important. E. F. Schumacher states: ‘Any intelligent fool can make things bigger, more complex and more violent. It takes a touch of genius—and a lot of courage—to move in the opposite direction.’ Even Albert Einstein stated, ‘Everything should be made as simple as possible, but not simpler.’ It is very pertinent to be clear about one’s business in a simple way. In case an entrepreneur himself is not clear about it, the chances of making the customer understand the business and its value proposition will be very low. As an entrepreneur, one should be able to communicate things in a simple way. One simple, single purpose of being in a business and what it means to them and to their prospective customers need to be well-defined. One should not complicate things, no matter how trivial they are. It is important to remember that simplicity has far more value proposition than complexity. The entrepreneur will realize this once he simplifies things and sees the gains that he makes. Therefore, as an entrepreneur, one needs to define the problem and the objective in simple words that can be understood by a layman. Are there other possible definitions worth considering? What are the important factors that revolve around the problem?

4.7.2  Towards Solving the Problem While making an attempt to solve a well-defined problem, one should check all the major assumptions and their implications. One should pose questions such as what, why, how, when, where and who related to the problem under consideration. List the obstacles that seem to block the path in solving the Understanding the Problem

Steps—Creative Problem-solving Towards Solving the Problem

Using Your Brain Effectively and Absurdly

Figure 4.7 Steps to Solve a Problem Creatively

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problem. List all possible solutions to the problem with an open mind. Compile a list of solutions that are feasible to work on with the resources at your disposal. Select the best solution, keeping in view the yardsticks to evaluate and concretize the implementation programme, specifying dates or times for completion. Check the solution from all possible angles and make sure that the plan chalked is workable and realistic. Take feedback during implementation in the light of experience as you proceed.

4.7.3  Using Your Brain Effectively and Absurdly While using creative problem-solving to come up with unique solutions, it is important to understand the way the two hemispheres of the human brain work. The left side deals with logic as enumerated through functions such as words, numbers and sequences, whilst the right side deals with more imaginative and intuitive functions, such as spatial relationships, daydreaming, music and art. To channelize our creative potential, we need to stimulate right-brain activity. This can be done through a number of techniques as given in Fig. 4.8. Although some of these techniques may seem vague, hazy, foolish and far remote from practical realities at first instance, they are important and can really help in working effectively. One of the best techniques is called mind mapping, pioneered by Tony Buzan. Mind Map® is a registered trademark of the Buzan organization. It helps in organizing our thoughts and stimulating creativity. Another good technique comes from Mindstore (1994), by Jack Black, which provides practical insights into motivation, self-awareness and creativity.

4.7.4  Mind Mapping Mind mapping is a pictorial way of giving a shape to ideas and concepts. It is a visual-thinking technique that facilitates structuring information, better analysis and synthesis, quick recollection of information and generation of new ideas. The tool has become powerful because of its simplicity. In mind mapping, the information flow is structured more closely to the way our brain actually works. As it is an activity that has both analytical and artistic facets, it allows flow of thoughts from the brain by engaging it in a much richer way. Above all, in this technique, it is fun coming up with worthwhile propositions to diagnose and solve problems. A mind map is a diagram that is used to represent a central theme or idea through words, ideas and tasks linked to, and arranged around, the idea. Mind maps are mainly used to create, visualize, structure

Mind Mapping Focus Groups Brainstorming Reverse Brainstorming Synectics Gordon Method Scientific Method Value Analysis Problem Inventory Analysis

Free Association Forced Relationships Attribute Listing Reversal SCAMPER Collective Notebook Method Big Dream Approach

Figure 4.8 Techniques for Creative Problem-solving

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and classify ideas that facilitate in solving problems and making decisions by proper understanding. The various elements of a given mind map are arranged according to the importance of the concepts, and are divided into groupings, branches or areas, with the purpose of representing semantic connections between the available pieces of information related to the central theme around which the map is constructed. The representation of ideas in a radial, graphical, non-linear manner encourages group members to use the brainstorming approach to planning and organizational tasks. Although the branches of a mind map represent hierarchical tree structures, their radial arrangement disrupts the prioritization of concepts typically associated with hierarchies presented with more linear visual cues. This orientation towards brainstorming encourages users to enumerate and connect concepts without a tendency to begin within a particular conceptual framework.30 One major strength of this technique lies in reflecting the way the brain actually works. It would be noticed that while undergoing a mind mapping exercise, the ideas do not flow in a linear fashion. As such, the brain jumps from one idea to another and, thereby, adds a random flow of ideas. It is a graphical representation of a problem and proposed linkages and relationships affecting the problem, so as to come up with a solution to the problem. It mainly improves the ability to look at the problem from multiple perspectives to get a better understanding. It is an effective tool for improving the creative thought process as well as crystallizing and concretizing ideas and information that can lead to creative problem-solving. Further, the process involved is faster than taking notes, and therefore, it helps in saving time to organize material. Further, the process allows to come up with new thoughts and ideas through free association between concepts and ideas. Tony Buzan (2000) in his book on mind maps suggests the following simple guidelines for creating mind maps, so as to use these maps as potential and creative tools for solving problems:31 i. Start at the centre of a large sheet of a paper with an image symbolizing the problem or the area of focus at the centre of a blank sheet of paper. It is advisable to use at least three colours. ii. Use key images, symbols, codes and dimensions to record ideas in short hand. Work as quickly as possible to capture the flow of spontaneous ideas from the brain. You should not judge ideas that flow from your team members’ brains. At the first stage, the aim should be to get them onto the paper. Keep building new ideas linked to existing ones. Wherever there is connection between a new idea and an existing one, connect them with a line. In case there is no linkage, connect them with the symbol at the centre. Organization and processing of ideas get done at a later stage. iii. Select key words and print using upper or lower case letters. iv. Each word/image is best set alone and on its own line. v. The lines should be connected, starting from the central image. The central lines are thicker, organic and flowing, and become thinner as they radiate out from the centre. vi. Use multiple colours throughout the mind map for visual stimulation and also to encode or group. vii. Clearly emphasize wherever required and show associations between various thoughts in the mind map. viii. Keep the mind map clear by using radial hierarchy, numerical order or outlines to embrace your branches. ix. When the flow of ideas slows down, it is better to stop. x. Above all, moving away from the mind map and the central problem for some time helps inflow of several new ideas or relationships among ideas.

Mind mapping is a powerful technique that can be utilized for various purposes such as problemsolving, outlining design, anonymous collaboration, interlinking words and visuals, individual expression of creativity, putting thoughts and material into a concise and memorable format, team building or synergy creating activity, and enhancing team spirit that can go a long way in the execution of a proposed solution (see Fig. 4.9).

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Need Scientific Setting Received

Not Received

Reasonable

Management Support

High

Not Reasonable

Targets Given

Business Performance Review

Productivity Low Staff

Objectives

Success

Surplus Number

Achieved

Financial/ Non-financial

Quantitative/ Qualitative

Not Achieved

Shortage

Past, Present, Future

Short-term

Long-term

Figure 4.9 Mind Mapping—Business Performance Review

Examples Suppose  we  would  like  to  work  out  details  for  the  business  performance  review   meeting  wherein  branch  heads  of  marketing  departments  are  to  participate  and  arrive  at  next  year’s  targets  after  reviewing this year’s performance. One may develop a series of links through words, resulting in a  mind map like the following one. This map can help in understanding the rationale for the existing  performance and setting up accordingly targets for the next year and the next three years objectively. Suppose we consider a venture undertaking a SWOT (strengths, weaknesses, opportunities and  threats) analysis to identify its key strengths that can be encashed while introducing a new product  line  emerging  as  an  opportunity  while  minimizing  the  effect  of  weaknesses  and  averting  adverse  implications from the external threats. We can use the mind mapping technique to identify the key  components  of  SWOT  analysis  to  appropriately  chalk  out  a  strategy  for  the  introduction  of  a  new  product line to avail the opportunity effectively. Figure 4.10 illustrates a mind map.

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Staff

Geographic Markets Potential for Foreign Business

Fast-expanding Market

Scope for New Product Lines

Technology

Strengths

Opportunities

Latest Outdated Patents Economies of Scale Customer Service

Identify and Apply

Discover SWOT

Avert/Safeguard Against Threats

Number Skills Productivity Qualification

Overcome Weaknesses

Good Service Good Customer Base Good Reputation Brand Image Weak Financials

Regulatory Requirements

Shift in Taste and Preferences

Competition Few Giant Players Scope for Niche Products Intense Competitition

Under-utilized Plant Capacity

Figure 4.10 SWOT Analysis of a Branch

4.7.5  Group Creativity There are many techniques and exercises that can be used to generate new ideas, especially when used in collaboration with others. These techniques can be used for multiple purposes by entrepreneurs, particularly for generating and testing new ideas. In this chapter, some of these techniques and their relevance and utility to the entrepreneurs are discussed.

4.7.6  Focus Groups The focus group technique has been used by market researchers and opinion pollsters from 1950 onwards. This technique involves a moderator to lead the group through an open, in-depth discussion on a particular subject and channelize the thought process and debate pre-selected issues. The moderator allows free flow of ideas in a focused manner rather than seeking participants’ response to specific questions. The discussion can be focused by a moderator, particularly in case of a new product area, either

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in a directive or in a non-directive manner. Moderating a group effort requires special skills wherein they should be able to stimulate group creativity in conceptualizing and developing a new product idea to respond to consumer needs as evident from market. Some important guidelines that can facilitate productive and innovative outcomes through focus groups are:  clarity about the objectives of the meeting and to ensure that discussion revolves around it  not allowing one or few persons to dominate the discussion  keeping the discussion positive and constructive to get the maximum from the group

Focus groups usually comprise 8 to 12 people. Members of the group are selected on the basis of the problem. Usually, the group members are a diversified and cross section of people related to the problem. For example, if the purpose is to generate a new idea, it would be desirable to select creative people who are conversant with and have been using formal techniques such as brainstorming, problem inventory analysis, the checklist method and attribute listing to stimulate debate. Focus group technique is an effective way of coming up with creative solutions to a problem, especially involving exploration, investigation, new idea generation, strategic planning, and positioning and word of mouth research. Focus groups enable unfolding of hidden information through flexibility in the process of encouraging group members to come up with ideas. Entrepreneurs can use this technique from an exploration perspective to answer the questions such as ‘What are the present satisfactions and dissatisfactions with our product in the market?’; To come up with a list of minor improvements that could make our product unique in the market and ‘What would be the likely response of the market to our product or service?’. An investigative approach through a focus group works out to be highly powerful in situations where each person has only a piece of the puzzle. When piecemeal information is put together, the big picture is seen and possible solutions emerge. For example, to answer the question as to the reasons for drop in our sales while competitors’ sales are increasing: What is missing in our sales people message to the customers in the market? What is the gap between their saying and doing? Focus groups can be used to generate new ideas and to create new products, services, explanations, thoughts and images. In a group that works for idea generation that could be taken up as entrepreneurial ventures, it is usually the case that someone expresses a desire, someone else reacts to it, a third person comes up with a way to do it and, finally, someone modifies it to make it practical. As a whole, the group yells, ‘Yeah, that’s it!’. Similarly, from a strategic positioning and planning point of view, a focus group through its flexibility and creative stimulation can come up with wonderful strategies to develop product positioning and to test and refine positioning decisions. Can one think of working on the way we get positioned vis-à-vis our competitors? What are the special features that distinguish us from others? How can redefining the product or service create a better niche? How to define uniqueness in a product from a marketing perspective?

4.7.7  Brainstorming The word ‘brainstorming’, which was a pathbreaking concept in problem-solving and creative thinking, was first coined by Alex Osborn. He developed this technique in 1941 while he was president and founder of an advertising firm. He used this to stimulate his employees to come up with creative ideas in the 1930s and 1940s. He deployed it among his employees to generate new ideas for the advertising business, where creativity plays a very crucial role. It worked out to be highly successful, and as a result, it became a popular technique being used in a variety of situations requiring new ideas to solve problems. Brainstorming is a group technique to generate maximum number of ideas possible in a

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short time by involving as many people as possible. A group of people are encouraged to come up with as many new ideas as possible, without bothering about how good or bad they are. The emphasis is on the quantity of ideas rather than quality. Spontaneous participation of the group members is a must. They keep driving their thought process on the basis of the ideas that flow from other group members. Normally, as an outcome of the process, it is the craziest ideas that work out to be the most creative and original ones. The process is more of fun and is normally operationalized on a flip chart or board by noting all the ideas, so that everyone can see the results and use it for channelizing their thought process. The fundamental ground rules that are used in brainstorming sessions are discussed in the following sub-sections:        

Involve one and all in the process of brainstorming. Quantity is more important than quality. Give importance to all the ideas by jotting down on a board or a flip chart. Come up with as many ideas as the group can within a short time. No criticism and negativity of any idea whatsoever. Spontaneity and freewheeling are encouraged. The foolish and wilder the idea, the better. Combining and improving ideas on the basis of others’ ideas is desirable and encouraged. Crossfertilization of ideas is encouraged.

Finally, after the completion of the brainstorming process, apply the 80:20 rule, that is, underlining the 20 per cent that will give rise to 80 per cent of the results you are looking for. Thus, it is one of the very powerful tools for the generation of ideas and options that lead to creative solutions to problems and challenges. This technique enables a group to come up with creative solutions to a wide range of entrepreneurial problems such as design problems, naming a product, identifying an opportunity, coming up with business ideas and interdepartmental problems faced while implementing a solution. It can also be used to work out and develop an idea from scratch and to refine an idea or develop a strategy to respond to challenges posed by competitors.

Examples i.  A  company  may  need  to  cut  costs  to  become  competitive  while  retaining  quality.  A  group  of  members  of  the  company  may  sit  together  and  brainstorm  to  identify  ways  and  means  to  cut  cost  without  compromising  on  quality.  Solutions  may  come  from  varied  perspectives  such  as  inventory holding, efficiency of operations to be improved, manpower to be cut or manpower to  be increased that may lead to more than relative gains in output compared with cost, focusing  on particular territories and reducing the staff from certain territories, changing the suppliers for  inputs, reducing rejections through improved quality checks, specializing on certain product lines  and discontinuing less remunerative product lines, increasing the productivity of people through  improved working environment and incentives, reducing wastages in scrap and reducing power  cost by better equipments and lighting system. ii.  A start-up venture having good prospects for product demand—industrial users—is in financial  crisis and is likely to default in meeting salary commitment this weekend. Brainstorming can be  used to identify possible solutions to come out of the financial crisis. A group of employees from  different departments may brainstorm and come up with solutions such as selling the company,  asking the employees to forgo their salaries, paying a small fraction of the salaries and for the  remaining amount, giving them stocks of the company, giving some discount to customers for 

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prepayment, asking customers to pay in advance, borrowing money from relatives and friends,  inducting an investor quickly, reducing salaries with commitment to compensate for as and when  financial position improves, absorbing trainees without any stipend to them in place of employees  who are likely to leave, cutting staff to save upon salary budget, selling some spare assets of the  company and outsourcing the work. iii.  Nestle  exploring  low-cost  infant  milk  market.  Nestle  India  plans  to  enter  the  mass  segment  of  infant milk-based nutrition through low-priced products. The India arm of the world’s largest food  company’s existing infant nutrition products—Lactogen, Nan and Cerelac—cater to the premium  segment  of  the  market.  The  ` 4,324  crore  company  is  looking  to  widen  its  portfolio  across  categories by expanding distribution and price points, they said on condition of anonymity. The  maker of Maggi noodles, Nescafe coffee and Kit Kat chocolates had last year extended Maggi  noodles  and  seasoning  to  the  bottom-of-the-pyramid  segment  by  selling  ` 4  and  ` 2  packs  at  select low-income markets such as Mumbai’s Dharavi. The company is exploring three or four  new categories, including breakfast cereals and other innovations in chocolates and beverages  across price points. How to penetrate into mass market is the challenge to the company. It can  come up with creative solutions by having an  in-house brainstorming process.32

4.7.8  Reverse Brainstorming Reverse brainstorming is similar to brainstorming but the process allows criticism (Fig. 4.11). The technique encourages fault finding through asking questions with a focus on why this idea would not work? Or why this idea will fail? The process requires extra care to see to it that group members’ morale does not get adversely affected as a result of questioning their ideas. It can be effectively used to stimulate innovative thinking among group members. The process focuses on finding out everything that is wrong with an idea and ways and means to overcome it.

4.7.9  Synectics Synetics is a process that requires solving problems by using one of the four analogy mechanisms, that is, personal, direct, symbolic and fantasy (Gordon 1961). The first step involved in the process is to Brainstorming with Criticism Identify Everything That Is Wrong with an Idea Identify Ways and Means to Overcome Criticism

Come Up with Innovative, Workable and Worthwhile Ideas

Figure 4.11 Reverse Brainstorming

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familiarize oneself with a new problem. This requires generalization, or models involving reversal of things, and putting the problem into a stable and familiar perspective, so that unfamiliarity is removed. After overcoming the first stage, participants get involved in the group and come up with unique solutions to the problem by developing personal, direct and symbolic analogies.

4.7.10  The Gordon Method The Gordon method is one of the creative techniques developed by Osborn in his famous book L’arte Della Creativity. It involves group members not knowing the nature of the problem. This ensures that the thought process does not get clouded or biased by preconceived notions of the group members. An entrepreneur initiates the process of thinking by mentioning a general concept or a word associated with the problem. The group members respond to the concept/word by stating their ideas. This helps in developing the concept by picking up related concepts under the guidance of the entrepreneur. At last, the actual problem under consideration is revealed to get suggestions for implementation or improvement to the solution. ‘In Operational Creativity by William J. J. Gordon, collective discussion firstly addresses every conceivable aspect of a broad problem-solving approach. For example, to devise a new tin opener, the Gordon group discusses the “opening” theme and examines any possible meaning of this word and any possible example of opening (items and nature). This process helps to discover unusual approaches to the planning of a new tin opener. Afterwards, the group studies and develops these approaches’ (Osborn 1992).

4.7.11  Scientific Method The scientific method used invariably in different fields requires the use of well-established principles and processes, observation and experimentation, and analysis of data so as to validate or otherwise the hypothesis proposed to be tested. The process involves scientific steps into enquiry of a problem to develop and test potential solutions and ultimately to choose the best solution. The focus is on working through scientific methods to answer how and why things work the way they work. It eliminates the influence of ‘faith’ or ‘subjective bias’ of the experimenter so that the process is valid anywhere under given conditions. The art of problem-solving involves multiple techniques and requires a typical rigour and clarity about the problem. One always attempts to find out the best solution to the problem at any given point of time, which, as per scientific method, would require a system in place and analysis through logical principles without being judgemental in any way whatsoever. It has been rightly said that ‘defective problem-solving is the cause of all disorders in the world’. Scientific method involves four key steps, namely, observation and description of a phenomenon, so as to concretely define the problem; formulation of a hypothesis to explain the phenomena; use of the hypothesis to predict the existence of other phenomena, or to predict quantitatively the results of new observations; and lastly, prediction through several independent experiments. In case experiments do not bear out the hypothesis, they must be rejected or modified. The fundamental advantage of a scientific method is in its having a predictive power under assumed conditions.

4.7.12  Value Analysis This method attempts to develop solutions to a problem that can result in maximizing the value to the entrepreneur and the new venture. For maximizing the value, the entrepreneur analyses each and

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Problem

Analysis

Identify Criticality of Steps

Develop New Solutions

153

For Non-critical Steps, Compromise on Quality to Reduce Cost

Reduce Cost or Improve Quality

Improve Overall Value

Figure 4.12 Value Analysis to Reduce Cost every step and stage to identify the criticality of the step, and if it is not highly critical to take a view on compromising on quality to reduce the cost so as to improve the value (Fig. 4.12). Further, the technique involves regular development of new solutions that can refine ideas and reduce cost or add proportionately a value far higher than the incremental cost. Value analysis is a powerful problemsolving technique that can help in reducing costs while maintaining or improving performance and quality requirements. For an entrepreneurial venture, this technique helps to compete more effectively in local, national and international markets by reducing costs, increasing profits, improving quality and expanding market share. As such, entrepreneurs attempt to make efficient use of resources to increase profit margins and profits through their ventures.

4.7.13  Problem Inventory Analysis This technique uses individuals almost similar to focus groups to generate new ideas by providing a list of problems in a general product category to consumers. This method is more effective, as it is relatively easy for consumers to relate to existing products compared to generating altogether a new product idea. This technique can also be used to test the new product idea among consumers. It can help in identifying opportunities within established markets. The group is asked to respond to a list of problems such as ‘too big’, ‘too small’, ‘too heavy’, ‘too cheap’, ‘too salty’, ‘too bitter’ or ‘too costly’ plus a product or service that is proposed to be examined. It can be anything from a local school, health club, swimming club, television, vacuum cleaner, washing machine to soft drinks. The group is asked to respond to identify and specify characteristics liked or disliked by them of products or services within the given framework that have these particular problems. This method works well because it becomes easier for consumers to relate known products in the light of suggested problems. The responses received can help in defining the attributes of the product or service liked by consumers, which can give a competitive edge to the company. For example, let us consider take the case of a car manufacturer who launched a new car model two years back and would like to identify the attributes preferred by the consumers and the ones disliked by them. The greatest challenge lies in identifying an exhaustive list of problems in terms of colour, cost, design, fuel efficiency, security, comfort and ground clearance. After identifying an exhaustive list of problems, it is easy for the respondents to associate the product with the problem.

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4.7.14  Checklist Method The checklist method facilitates generation of a new idea through listing related issues, suggestions and questions. An entrepreneur can use a list of questions to channelize and guide the process of thinking so as to develop an entirely new idea. This is when a new idea is assessed against a checklist, which can include questions such as the following (Alex 1957):      

Put to other uses? New ways to use as is? Other uses if modified? Adapt? What else is like this? What other ideas does this suggest? Modify? Change meaning/colour/shape/look? Other changes? What to add? More time? Greater frequency? Stronger? Larger? Re-arrange? Swap over components? Other layout? Other order? Combine? Combine units? Combine appeal?

4.7.15  Free Association One of the powerful techniques that can be used to generate new ideas is free association. This technique provides an altogether new angle to the problem under consideration. The process begins by writing a word related to the problem, which is followed by writing other words sequentially. Thus, each word gives rise to a chain of ideas related to the problem under consideration. This process is continued till a useful idea is found. According to Taylor, there are basically two ways in which the free association technique can be used, namely, unstructured free association and structured free association. In unstructured free association, ideas are listed as they occur through a natural process and, as such, ideas are generated out of a open mind. As against this, in the case of structured free association, where an attempt is made to consciously increase the relevance of ideas to the problem under consideration. The steps involved in undertaking this technique are as follows: i. Write down a word, number or a symbol that is related to the problem or some aspect of the problem.

ii. Keep adding in a structured or an unstructured manner the suggestions coming, ignoring their relevance to the problem. Develop as many associations as the group can. iii. Review the list of associations and select those that appear to have special relevance to the problem. iv. Keeping in view the selected associations, develop ideas that look capable of solving the

problem. In case none of the ideas appear to be useful, start the process again from the first step using some other word, symbol or number.

4.7.16  Forced Relationships As the name suggests, this technique attempts to visualize forced relationships among given products by combining them. In this technique, one attempts to ask questions about objects to come up with a new idea. This technique is a fun-filled way of generating ideas. The basic idea is to compare the problem or object under consideration with something else that has little or nothing in common, to gain new insight by developing forced relationships. You can force a relationship between almost any two things, and get new insights—companies and whales, management systems and telephone networks, or you and a pencil.

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Forcing relationships is one of the most powerful ways of developing new insights and new solutions. A useful way of developing the relationships is to have a selection of objects or cards with pictures to help you generate ideas. Choose an object or card at random and see what relationships you can force. The new combination and eventual concept is developed through a five-step process (Rawlinson 1981), as follows: i. ii. iii. iv. v.

isolate the elements of the problem find the relationships between these elements record the relationships in an orderly form analyse the resulting relationships to find new ideas and patterns develop new ideas from these patterns

Example A  furniture  manufacturer  is  thinking  of  coming  up  with  a  brand  new  design  for  a  three-piece  sofa  set. Consider a totally unrelated thing such as a peaock to the problem. Let the group come up with  everything  that  they  know  about  it  by  posing:  Who?  What?  When?  Where?  Why?  How?—physical,  visual  and  other  senses—regarding  peacocks.  Similarly,  let  them  list  down  everything  they  know  about the problem. Now take the items from the first list and develop forced relationships with the  items in the second list. The purpose of picking up unrelated items from these two lists is to improve,  change or insert certain features in a two-piece sofa set to improve its design. For instance, one may  come across wide-ranging combinations such as feather soft seats of sofa; blue or green colour of  sofa; shape of a sofa like a peacock; peacock colour seat covers of a sofa, sofa with two legs instead  of four; no hand rests on a sofa and sofa with a back having dancing postures of a peacock.

4.7.17  Attribute Listing This technique is used when an entrepreneur is confronted with a situation that can be decomposed into certain key attributes. As such, listing attributes itself is a creative process. Attributes are main ingredients constituting parts, properties, qualities or design elements of the object or a situation being examined. For example, the attributes of a pen are ink, colour, weight, quality, jotter or ink pen, nib or refill tip, and the duration for which ink can last. Similarly, a plot in the television serial will have attributes such as actors, characters, actions, locations, light effects, sound system, cameras and costumes. This technique is commonly used when we deal with physical objects. However, there is no restriction to use it elsewhere too. It is quite a rational, analytic and objective approach that is used prominently for engineering type of situations. The first step involved in using this technique is to list as many attributes as you can. One can set these out as column headings on a table and then brainstorm for variations in characteristics to be listed down under each attribute. In this step, one attempts to jot down characteristics of each attribute below it. This table is sometimes known as a ‘morphological box’ or ‘Zwicky box’ after the scientist Fritz Zwicky, who developed the technique in 1966 (Zwicky 1969). For example, if we look at personal computers and their attributes, things that come to mind immediately are processor, speed, compact, storage, software to access it, tool for computing and accessing Web-based applications, mobile, touch screen, graphics screen and compatibility to alternative software. The second step involves considering the value of attributes to the user. This needs to be extracted by asking a simple question: ‘What does this give?’. One should be able to find out the real value of

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each attribute. It is also likely that some attributes have a negative value. For example, the screen of a personal computer that displays all information has a negative value too by way of adverse effects on eyes if the user sits in front of the screen continuously for long hours. The third and most crucial step lies in modifying the attributes to strengthen their positive value proposition and minimizing their negative value proposition, or creating an altogether new value proposition by combining the variations listed under each attribute through selection of one entry under each attribute. This can be done either randomly or by selecting interesting combinations. By picking up one characteristic under each attribute, one can create a new mixture of components, resulting in a new product, service or strategy. Finally, evaluate and improve that mixture to suit customer needs to make a profitable market for it. For example, at one stage, innovation of a mouse added a value to the usage of personal computer, which further led to working without mouse by simply touching the plate specified beneath the keyboard itself. For example, let us consider a plan to develop a chair suited for people having back pain. One may jot down attributes as cost, material, design, size, width, height, stable, rotate, angle, folding, comfort and space required. Now one can work out the characteristics under each attribute and look at some combination that can result in the greatest value proposition to the customer. Suppose we would like to develop an energy-saving bulb/tube. We can use the attribute listing technique to first identify the key attributes of a bulb such as the type of bulb, light intensity, colour of bulb, material used, shape of bulb and power supply. Now, one can come up with—through brainstorming or collective thinking—variations under each attribute in a tabulated form as in Table 4.1. After having developed a table listing attributes and variations under each attribute, one can come up with several permutations and combinations to develop a wide variety of bulbs. Some of the interesting combinations that can provide good opportunity to entrepreneurs could be solar powered/battery; low intensity, daylight bulb used at places where one would like to know the true colour of a product in daylight; LED, high intensity, white bulb, round and modern fed with electric power to save energy; a ceramic oil lamp in Roman style—used in themed restaurants, resurrecting the olive oil lamps of 2,000 years ago; and a normal table lamp designed to be painted and wallpapered so that it matches the style of a room perfectly. Some of these combinations may give rise to novel ideas for the lighting manufacturer that may be worthwhile from a business point of view, while others may not be. What matters is the entrepreneur’s experience coupled with market research to establish demand for the new product. Table 4.1 Variations of Attributes Type of Bulb

Light Intensity

Colour of Bulb

Material Used

Shape and Style of Bulb

Power Supply

LED Halogen

Low High

Red Green

Metal Stone

Round and modern Cylindrical and antique

Gas Solar

Coloured Daylight

Medium Variable

White Colourless Yellow Blue

Glass Ceramic Tungsten Gas

Square and ethnic Round and roman Industrial and conical

Electricity Gas Oil/petrol Hydrogen

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4.7.18  Reversal Reversal is a good technique for improving a product or a service. To use this technique, one should ask the opposite of the question one wants to ask, and apply the results. The strength of this technique lies in assuming that all assumptions are false, limiting, reversible and, therefore, one needs to make assumptions. For example, if we consider a situation as students go to school and reverse it by stating that school goes to the students. Reversing the basic assumption leads to developing concepts of distance education and mobile education, and providing education at the doorstep through Internet technology. Similarly, one can look into a situation where a patient goes to a laboratory for a blood check-up and collects reports. By reversing it, we may say that the technician goes to the patient to collect a blood sample and the report is delivered at the doorstep of the patient. A new business model emerges. Consider improving service at your branch of a bank located at the heart of the city, which has a poor reputation for its customer service. By using the reversal technique, the fundamental question that we will pose is how to reduce customer satisfaction in the branch. After posing this question, we may come across suggestions such as making the person wait for long to be served at different desks; not answering phone calls; not responding to the queries at the ‘May I Help You’ desk; keeping people to serve with no authentic knowledge about the desk they are serving; not deputing staff for training in the bank college or outside institutions; keeping rude, dissatisfied and troublesome employees at front desks to face customers; allowing the staff to come late and leave early; encouraging unions to create conflict amongst staff. After identifying all these reasons, you would be in a better position to identify the areas that matter the most in delivering good customer service and you will start taking concrete steps to provide training to staff, penalize people if they come late and place appropriate staff with knowledge about the desk they are expected to handle. The purpose would be to overcome shortcomings identified and take corrective steps for resolving them to improve customer service.

4.7.19  SCAMPER SCAMPER is a method having a checklist that facilitates thinking of changes one can make to an existing product or service to create a new one. The changes proposed can be used directly to come up with a new product or service or as a starting point for lateral thinking. This technique too helps in overcoming challenges by sparking creativity. The technique has idea-driven questions which are powerful in coming up with new thoughts and ideas. The fundamental presumption in this technique lies in the fact that everything new comes up through modification of an existing one, and a chain of new things keeps building up. Developed by Bob Eberle, the changes SCAMPER stands for are as follows (Fig. 4.13):       

S:  substitute—materials, components, designs, shapes and people C:  combine—mix, combine with other products or parts, integrate processes and parts A:  adapt—alter, change, use part of another element to suit different situations M: modify—increase or reduce in size and scale, change shape and modify attributes of the product P:  put to another use to derive different value proposition E:  eliminate—remove elements, simplify, reduce to improve core functionality R:  reverse—turn upside down or inside out to find the implications and arrive at new ideas

 Substitute—Think of all possible ways and means to replace products, processes, ingredients and constituents with something else that can ultimately provide the same utility but with enhanced value

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Put to Other Use

Substitute

Adapt

Reverse

Modify

Combine

SCAMPER

Eliminate

Generation of New Ideas

Figure 4.13 SCAMPER Technique for New Ideas





 





proposition to the customer. One can think of changing things, place to provide it and procedures used in delivering it and people required. Combine—Combining two or more parts of your problem can give rise to a new product or process enhancing its utility. Creative thinking involves combining unrelated products or services to create something new. Adapt—Make minor changes in your idea and adapt it to different situations to solve a problem. You may already have a solution that fits into a required context and problem. Some of the words that can help in adapting the given idea to a new situation are acclimatize, adjust, alter a bit here and there, amend to suit the new situation, conform it to given context, contextualize, make suitable changes, revise and rework. Modify—Change the size so as to take care of demand for some other market segment or one needs to change the attributes such as colour, design and content. Put to Other Use—Think of all possible alternative uses to which given idea can be effectively put. Many a times, it so happens that the value of an idea increases manyfold when it is applied for a use different from the one originally thought of. Eliminate—Visualize the implications of eliminating certain parts or steps involved in the process. Think how certain components of the product can be simplified or eliminated either by improving its overall utility or without sacrificing on its utility. Above all, by trimming ideas, products and processes, one can redefine the problem from its crucial and most critical angle. Reverse—Workout the implications if the problem, product or process would have operated in a reverse manner or steps involved are arranged in a different order.

Example If we consider a bicycle having the following components: handle, gear, frame, pedals, drive sprocket,  chain, brakes, tires, lock, basket to carry goods and carrier at the back to accommodate one more 

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person, and apply the SCAMPER technique to develop a new type of bicycle, we may come across  the following ideas to improve it: S:  Substitute—new material for frames, handle and gears chain C:  Combine—frame, handle, pedals with a better grip of the feet into a single mould that is collapsible, so as to easily carry from one place to another. Put multiple seats with multiple pedals to  accommodate more people who could simultaneously drive it A: Adapt—stronger multiple gears so that one can ride at different speeds M:  Modify—reduce the size to suit customers in various age groups. Create alternative designs  in  different  colours  to  make  them  appealing  and,  at  the  same  time,  requiring  less  manual  energy. Attach a small motor to have gas or petrol as an alternative energy source that can  also increase the speed. Modify tyres so that they can have better grip on the road and also  less friction P:  Put to other uses—racing bicycles with alternative designs, cycles for carrying luggage to be  transported to nearby places, cycles with attachments so as to carry milk containers E:   Eliminate—wheel frame containing multiple small rods with few rods with greater strength and  wheel balance R: Reverse—turn upside down or inside out to find the implications and arriving at new ideas. Similarly, if we look at NANO cars by TATA, which is small, cute and fuel efficient, we will observe  that a number of principles of SCAMPER technique were used such as substitute for two  wheelers,  modification  in  the  engine,  size  and  design,  and  adaptation  to  Indian  roads  in  terms  of  ground  clearance

The beauty of the SCAMPER technique lies in providing a list of active verbs that can be associated with a given problem and hence help in creating new ideas. The use of this technique requires developing an idea or solving a problem. It can be related to business or any other area or development of product, service, process or design. Thereafter, one can keep posing SCAMPER questions to get new insights to solve the problem or develop an idea.

4.7.20  Collective Notebook Method This method of creative idea generation requires a small notebook containing the problem statement and some blank pages along with pertinent background data. This notebook is given to the participants. The notebook also contains some suggestions for coming up with new ideas such as transformation method—reverse, expand, minimize; exploration method—listing similar problems or problem characteristics; and remote association—random stimuli from different senses. Participants consider the problem and its possible solutions, recording ideas at least once, but preferably three times a day. At the end of a month, a list of the best ideas is developed, along with any suggestions (Haefele 1962). At regular intervals, the participants are given information related to the problem from experts and from the literature. At the end of the month, the participants present a summary of the best ideas to solve the problem, ideas that require further analysis that might be useful for solving the problem and absolutely new ideas that are completely unconnected to the problem. The person coordinating the whole process can categorize ideas and solutions, and a summary report can be discussed by the group as a whole to come up with solutions to the problem.

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4.7.21  Big Dream Approach Thinking big and dreaming is the key trait of an entrepreneur. As such, entrepreneurial ventures are the outcomes of the dreams of an entrepreneur that they pursue in reality. The big-dream approach helps in coming up with new ideas through entrepreneur’s dream about the problem and solution or solution and finding out the problem. It requires thinking big, irrespective of focusing on constraints that would or could come on the way of pursuing those dreams. Fundamentally, ideas need to be conceptualized without any constraints until an idea is developed into a workable form (Edwards 1966). Entrepreneurs create their own destiny by dreaming big and working smartly to make those dreams come true. Their main concern is to create something of great value to society by enjoying independence through their own venture.

4.8  A GOOD IDEA IS NOT ENOUGH It is not enough to have a good idea. A successful venture requires products or services to be sourced, manufactured, priced and distributed efficiently to the satisfaction of customers. If entrepreneurs do not themselves or with a team have the knack of doing all this, it is obvious that having a good idea is not enough. For example, let us consider the example of an entrepreneur who wants to come up with a variety of mugs for children to drink milk and juice called Silly Mugs. The concept is to sell ordinary, regular mugs but to label them ‘the original silly mugs’, with some clever copy that would fascinate children by manufacturing them in various colours with fun shapes such as animals, circus and sports that kids collect and enjoy preserving. It may seem funny, timely and perhaps might even make a little money. This would make an entrepreneur realize that more than an idea what is needed the most is sourcing, manufacturing and distributing to ensure that more than the promised value gets delivered to the customers. All this at the end of the day should mean that for the time and effort put in by the entrepreneur, they get more than duly compensated for by the return on investment. This basically means that when it comes to marketing, a good idea is often all you need. But more than that one needs additional resources—monetary and non-monetary—to translate an idea into reality that makes business sense. To translate a good idea into a business proposition that has an inbuilt business model in place, a smart entrepreneur needs to connect with their customers to provide direction for product development on a continuous basis. It is certainly different from the usual market research techniques that depend on surveys, questionnaires and focus groups. This basically requires developing an intimate relationship with customers, so that your users become involved customers because of how they feel about your product, not because you are offering a material reward. This is not easy to do, but it is what can deliver unimaginative rewards. The foundation for a successful business is not the idea: it is the opportunity. Opportunities are always market-driven and one needs to have desired skills to diagnose, dissect and debate the idea to establish whether it could be an opportunity or not. Fundamentally, opportunities are not easily apparent to everyone and that is why they are not always understood straight away without seeking help and support of mentors, bankers, venture capitalists and advisers. Entrepreneurs need to innovate, which requires illogical thinking and then crystallizing the idea into reality by producing the product or delivering the service. If someone has ideas but does not act on them after establishing their market worth, they could be imaginative but not innovative. Innovative persons bring something new into being that requires passion, determination and commitment. Creativity is the most desired attribute of a business plan, particularly from the point of view of explaining competitive advantage for marketing the product or service.

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Whether you are simply too busy to think, feel that your brain is stagnating or are somewhere between the two extremes, generating the big idea is a daunting task. Here are 10 ways to start the creative process. 1. Buy a notebook: Keep it in your pocket, beside the bed and everywhere you go. Ideas can strike at any time. Write them down. 2. Ask a friend: Ask a friend who knows you well what they would buy from you, what you are good at and what they feel you should avoid. 3. Beware of the hobby habit: Many people feel that their hobby holds the key, but are there enough people who share your passion and have money to spend? 4. Watch the weather: Will your idea appeal to your customers all year round? Selling Christmas decorations or hiring bikes might not keep you in groceries for a full year. Perhaps, you could run two seasonal businesses. 5. Read books: As well as reading this one, pick up biographies of some entrepreneurs you admire. See how they started, often in a small way, and then became household names. What can you learn from their experience and apply to your own situation? 6. Open your eyes: All around you are people running businesses. What do you think you could do better? You may not want to run a coffee shop, but thinking about how the one you visit every morning could improve will help you think more entrepreneurially. 7. Stroll in the park: and other places you only rarely visit. Watch people. What’s missing? Observe, if possible, your potential customers. How can you influence them? 8. Travel: You do not need to go far. Visit local trade fairs and see what is promoted there. Pose as a buyer and ask questions. Compare your business vision with what you are experiencing. 9. Check your CV: Most people actually start a business in an area in which they have worked before. Do not take this for granted, but accept it as a possibility all the same. 10. Shake the pig: Emptying your money box onto the bed is the ultimate reality check for the budding entrepreneur. If Auntie Violet has just died and left you a million, your choice is wide. For most of us though, cash will constrain our start-up plans.

KEY CONCEPTS  Creativity: It is the ability to generate innovative ideas and convert them from thought into reality.  Convergent Thinking: It is a thinking process that attempts to consider all available information and arrive at the unique best possible answer.

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 Divergent Thinking: It is a more creative process involving multiple possible solutions to the problem under consideration.  Lateral Thinking: It is a process to look at things differently. It involves trial and error, can make jumps from the existing frame of reference and is probabilistic as far as outcomes are concerned.  Vertical Thinking: It involves a step-by-step movement through logic. One has to go through the test of being right at every stage to arrive at the correct solution to the problem.  Creative Destruction: It is a process that results in continuous improvement in structures, systems, procedures, products and services, and renders obsolescent the old ones to come up with innovative products and services.  Blocks to Creativity: The mental blocks that curb new ideas and attitude towards innovation.  Perceptual Blocks: It is seeing things as we want to see them.  Mind Mapping: It is a pictorial way to give a shape to ideas and concepts.  Focus Group: The technique involves a moderator to lead the group through an open, in-depth discussion on a particular subject and channelize the thought process and debate pre-selected issues.  Brainstorming: It is a group technique to generate the maximum number of ideas possible in a short time by involving as many people as are there without any criticism whatsoever.  Reverse Brainstorming: It is similar to brainstorming, but allows criticism.  Synetics: It is a process that requires solving problems by using one of the four analogy mechanisms, namely, personal, direct, symbolic and fantasy.  Gordon Method: It is a process that involves group members not knowing the nature of the problem, so that their thought process does not get clouded or biased by preconceived notions.  Value Analysis: It is a process that attempts to develop methods and solutions to the problem that can result in maximization of the value to the entrepreneur and new venture.  Checklist Method: It facilitates generation of new ideas through a listing of related issues, suggestions and questions.  Attribute Listing: It involves situations that can be decomposed into certain key attributes.  Reversal: It is a process that involves listing all the assumptions related to the problem and then reversing these assumptions or distorting them to get new insights.  SCAMPER: It is a method which consists of a checklist that facilitates thinking of changes one can make to an existing product or service to create a new one. ENDNOTES 1. Wikipedia, http://en.wikipedia.org/wiki/Creativity 2. ‘Why Do You Need New Ideas?’, Edward de Bono and Robert Heller, http://www.thinking managers.com/management/new-ideas 3. ‘An Exploration of Creative Traits and Behaviors’, Melissa Hoban, http://serendip.brynmawr. edu/bb/neuro/neuro02/web3/m1hoban.htmls

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4. IBM, 2010, Global CEO Study: Creativity Selected as Most Crucial Factor for Future Success, http://www-03.ibm.com/press/us/en/pressrelease/31670.wss 5. The Power of Innovation, Inc., State of Small Business, 2001, p.103; Leigh Buchanan, ‘Built to Invent,’ Inc., August 2002, 53. 6. ‘Creativity and Entrepreneurship: Potential Partners or Distant Cousins?’, Judy Matthews, School of Management, Queensland University of Technology, Brisbane, Australia; http:// eprints.qut.edu.au/11214/1/11214.pdf 7. Invention Success Rate, http://www.inventionstatistics.com/Innovation_Risk_Taking_ Inventors.html 8. Business Daily, Philippines, 27 November 1998. 9. http://www.udemy.com/; http://www.yourstory.in/entrepreneurs/tech-entrepreneurs/4325-gaganbiyani-founder-udemy 10. ‘The World’s Most Innovative Companies’, Business Week, 24 April 2006; http://www. businessweek.com/magazine/content/06_17/b3981401.htm 11. Economic Times, 6 August 2010; http://economictimes.indiatimes.com/Corporate-Trends/ articleshow/6263705.cms 12. ‘Highly Sensitive Personality and Creativity’, Lisa A. Riley, http://highlysensitive.org/325/ highly-sensitive-personality-and-creativity 13. ‘The Creative Personality’, Mihaly Csikszentmihalyi, http://www.psychologytoday.com/ articles/199607/the-creative-personality 14. ‘The 6 Characteristics of Highly Creative People’, Michelle L. Casto, http://www.howtoadvice. com/Creative 15. ‘Living as a Creative Visionary’, Carol Kurtz Walsh, http://www.ckwalsh.com/articles/ creativevisionary.htm 16. See Note 15. 17. See Note 14. 18. Business Week, 24 April 2006, http://www.businessweek.com/magazine/content/06_17/ b3981401.htm 19. ‘Why Managing Innovation Is Like Theater’, Robert D. Austin and Lee Devin, Creativity at Work, Newsletter, December 2003, http://www.creativityatwork.com/Newsletters/Dec03Austin-innovation.html 20. Xerox Web site; http://www.xerox.com/innovation/xerox-innovation-group/enin.html 21. An article by Adam Richardson dated 24 May 2010; http://designmind.frogdesign.com/blog/ ibm-study-ceos-say-creativity-and-managing-complexity-are-vital-today.html 22. ‘Of the Moment, Spotting Trends Can Put Your Business in the Money for the Long Haul’, Karen E. Spaeder, Entrepreneur’s StartUps—February 2007, http://www.entrepreneur.com/ magazine/entrepreneursstartupsmagazine/2007/february/174142.html 23. ‘Flip the Switch’, Jennifer Alsever, Entrepreneur Magazine—February 2006, http://www. entrepreneur.com/magazine/entrepreneur/2006/february/82998.html 24. ‘Make Customers Your R&D Experts’, Kevin Woo, Entrepreneur, http://www.entrepreneur.com/ startingabusiness/startupbasics/article206714.html; www.carpbizs.com/index.php?option… customers, accessed on 18 May 2010.

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25. Customer Made, http://trendwatching.com/trends/CUSTOMER-MADE.htm 26. ‘Everything You Ever Wanted to Know About iPhone Battery Replacement’, James John, http://www.articlesnatch.com/Article/Everything-You-Ever-Wanted-To-Know-About-IphoneBattery-Replacement/1405286 27. Industry Canada, http://www.ic.gc.ca/eic/site/ic1.nsf/eng/04447.html 28. Open Innovators, http://www.openinnovators.net/sources-of-innovation-where-do-businessleaders-think-ideas-innovation-come-from/ 29. Nonwoven Industry/June 2006 www.nonwovens-industry.com and FiberVisions Web site, http://www.fibervisions.com/Technology-Innovation.aspx 30. Wikipedia, http://en.wikipedia.org/wiki/Mind_map 31. See Note 30. 32. Article by Ratna Bhushan, Economic Times, 12 August 2010. REFRENCES Albrecht, T. L. and B. J. Hall. 1991. ‘Facilitating Talk About New Ideas: The Role of Personal Relationships in Organizational Innovation’, Communication Monographs, 58: 278–88. Alex, F. O. 1957. Applied Imagination. New York: Scribner Book Companies, 318. Amabile, T. M. 1988. ‘A Model of Creativity and Innovation in Organizations’, Research in Organizational Behavior, 10: 123–67. Brown, C. 1993. ‘Making Money Making Toys: How Black Inventors Are Bringing Innovative Ideas to the Toy Market’, Black Enterprise, 1 November. Buffet, W. 1997. ‘Cultivating Creative Collaboration’, Industry Week, 18 August, 86. Buzan, T. 2000. The Mind Map Book. New York: Penguin Books. Davidsson, P. 2006. The Types and Contextual Fit of Entrepreneurial Processes in Modern Perspectives on Entrepreneurship, ed. A. E. Burke. Dublin: Senate Hall Academic Publishing, 9. De Bono, E. 1970. Lateral Thinking: Creativity Step by Step. New York: Harper Perennial, 50. Edwards, O. 1966. ‘Solving Problems Creatively’, Journal of Systems Management, 17(1): 16–24. Ford, C. M. 1996. ‘A Theory of Individual Creative Action in Multiple Social Domains’, Academy of Management Review, 21(4): 1112–42. Gordon, W. J. 1961. Synectics: The Development of Creative Capacity. New York: Harper & Row, 37–53. Haefele, J. W. 1962. Creativity and Innovation. New York: Reinhold Publishing Corp., 152. Michael, M. 2002. ‘They Almost Changed the World’, Forbes, 23 December, 217. Osborn, A. F. 1992. L’arte Della Creativity. Milano: Franco Angeli, ed. orig. del, 1953. Rawlinson, J. G. 1981. Creative Thinking and Brainstorming. UK: Gower, 52–59. Sarasvathy, S. D. 2001. ‘Causation and Effectuation: Toward a Theoretical Shift from Economic Inevitability to Entrepreneurial Contingency’, Academy of Management Review, 24(3): 244–88. Schumpeter, J. A. 1975. Capitalism, Socialism and Democracy. New York: Harper Torchbooks, 81–6. Thomas, W. Z. and M. S. Norman. 2005. Essentials of Entrepreneurship and Small Business Management, 4th ed. New Delhi: Prentice Hall of India Pvt. Ltd, 35. Zwicky, F. 1969. Discovery, Invention, Research: Through the Morphological Approach. Toronto: The Macmillian Company.

CONCEPTUAL QUESTIONS 1. Define creativity and its relevance to problem-solving. 2. Differentiate between creativity and intelligence.

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3. Differentiate between convergent thinking and divergent thinking. 4. What is meant by effective thinking? What is its relevance to entrepreneurs? 5. Define the major components for creating a conducive ecosystem for promotion of entrepreneurship. 6. Joseph A. Schumpeter had coined the term ‘creative destruction’. What is its relevance to entrepreneurship in the 21st century? 7. What are the prominent characteristics of creative people? 8. What are the important blocks to creativity? How can these blocks be overcome to create an organizational culture to promote creativity? 9. What is the difference between perceptual and emotional blocks to creativity? 10. What are the different sources of getting new ideas? 11. How and why do rules and traditions come in the way of organizational growth? Analyse. 12. Describe the key steps involved in creative problem-solving. 13. What is the difference between the mind mapping technique and the Gordon method for identifying creative ways to solve problems? 14. Differentiate between brainstorming and reverse brainstorming for generating creative ideas, considering a concrete example. 15. Define value analysis technique that can help an entrepreneur get a competitive edge in the market. 16. Forced relationship and free association are two different techniques for generating creative ideas. Differentiate between the two with the help of an example. 17. From an entrepreneurial perspective, explain the significance of the statement: ‘A good idea is not enough.’ CRITICAL THINKING QUESTIONS 1. What are some of the most innovative companies? Explain the secret behind their innovative capability by citing examples. 2. It has been rightly said, ‘innovate or get ready to perish.’ Critically examine this statement with the help of examples. 3. There are around nine prominent characteristics of creative people. Classify them in descending order of priority, giving due rationale. 4. ‘The best source of getting new ideas is to work with consumers, as they know where the product or service pinches.’ Examine the relevance of this statement to the growth of the venture. 5. Draw a mind map involving group members for coming up with innovative concept of fresh juices business that can create a wave in the student community of leading institutions. 6. Consider an entrepreneur who would like to enter into professional higher education business. Use the attribute listing technique to develop an innovative concept of a business in this industry. 7. Using the SCAMPER technique, identify the range of new opportunities that may lie in the mobile application business. 8. ‘There are communities in which women make a choice and buy husbands. If you like a man, you go to the family and make an offer to purchase. In case the deal clicks, you buy it. In these

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communities, women are highly educated, forward looking and own inherited property.’ Using appropriate creative problem-solving techniques, identify alternative business opportunities that can be tried out in such communities. Explain the rationale for using a particular technique for identifying ideas that have potential to be opportunities. 9. An organization has managed over the years by inducting more and more part-time employees as against the requirement for full-time employees. A situation has been built up wherein more than 60 per cent of the total employees are part time. Part-time employees do not get all benefits and have less job security. Identify the views on the accumulated problem that has built over the last 20 years in the organization from different perspectives such as part-time employees, unions, politicians, management of the company and full-time workers. Identify creative solutions to the problem that can help in managing the increasing conflict and tension that are building up in the organization.   CASE 4.1:  CREATIVITY IN START-UPS  Innovation sometimes requires a lot of wasteful experimentation that may or may not yield any positive returns for the organization. At times, it looks as though it is completely against to the whole efficiency argument. This is a common sentiment in organizations that derail many efficiency programmes. But according to the Lessons Learned by Eric Reis, it is a fundamental misconception of what lean start-ups are all about. Part of the problem lies in understanding that the difference is the distinction between lean start-ups and lean companies. In a typical lean company, waste is defined as ‘every activity that does not create value for the customer’. And this is 100 per cent correct. By driving this kind of waste out of your company, you actually boost creativity by eliminating bureaucracy, busy work, unnecessary hierarchy and, of course, excess inventory. In ‘The Four Steps to the Epiphany’, Steven Gary Blank has rightly focused on the concept of ‘Get out of the building’. Normally start-ups do not fail because of lack of technology; but they usually fail because of lack of customers. This requires learning about the customer through creative processes and techniques. This is where Steve’s maxim ‘In a start-up no facts exist inside the building, only opinions’ is so applicable. Your business plan is likely to be loaded with opinions and guesses, and sprinkled with a dash of vision and hope. The second important aspect to be taken into consideration is the theory of market types. It is this theory that explains the rationale behind why different start-ups face wildly different challenges and time horizons. There are two fundamental situations that necessitate your company to create a new market: bringing a new product to an existing market and continuously segmenting an existing market. The four phases of growth that a start-up involved in innovation goes through are as follows: (1) customer discovery—to identify if there are any customers who might want your products/services, (2) customer validation— getting first revenue stream by selling the products/services, (3) customer creation—concrete strategy to launch the products/services and (4) company building—stabilization and growth phase of a venture. The major mistake that start-ups make is to undertake a premature execution of an idea without ensuring its innovative strength and credibility in the eyes of a customer. Start-ups need time to diagnose the potential of an idea well and use creative techniques to come up with unique ideas in association with customers on a continuous basis.

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Start-ups require a special kind of creativity: disruptive innovation. This is not in actual fact a matter of efficiency. By the standard of ‘customer value’, most innovation-seeking experiments are a waste. Lean start-ups operate by a different standards. In general, ‘waste’ can be defined as ‘any and every activity that does not contribute to learning about customers’. Of course, both lean start-ups and lean companies follow the same underlying principles. It is just the implementation that changes, as the focus shifts from learning to execution. On the other hand, there are great companies, such as Toyota, Xerox and IBM, that successfully incorporate innovation into their execution discipline. The true meaning of waste is as follows: ‘anything that does not carry out the company’s mission’. However, it is necessary for start-ups to realize that the mission of the venture keeps changing through the natural phase of growth. The crux lies in trying to understand waste. The process of coming up with new and radical ideas is, oftentimes, not waste.1  Questions  

1. ‘Normally start-ups do not fail because of lack of technology but usually fail because of lack of customers.’ What is the significance of this statement from the point of view of creativity and innovation? 2. What is meant by theory of market types? What is its significance to start-up ventures? 3. Experimentation is not necessarily waste. Explain the significance of this statement to start-up ventures. 4. ‘Start-ups require a special kind of creativity: disruptive innovation.’ What is meant by disruptive innovation? How can creativity help in coming up with destructive innovations?   Endnote  

1. Lessons Learned by Eric Reis, http://www.startuplessonslearned.com/2008/10/lean-startupsvs-lean-companies.html

 CASE 4.2:  INNOVATION: CREATING AND DEFENDING NEW SOURCES OF VALUE  In the present era of the business world, the term ‘innovation’ is being indiscriminately used, as it is being covered in the mainstream without describing it in specific terms. However, to harness the potential of innovation, companies need to understand that innovation is a discipline—one that can be imbibed as part and parcel of organizational culture. Creation of breakthrough products through disruptive and sustainable innovation requires that companies should look to incorporate more forms of innovation than just around the core features of an offering. A study by Business Today and Monitor Group, who jointly interviewed key leaders of innovative organizations, reveals that true breakthroughs are usually a set of innovative elements that (Continued)

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work together as a holistic system and reinforce the defensibility of the new offering. A notable feature of the study reveals that every organization in the study exhibited substantial innovation around core processes. This implies that to develop, launch or operate a new offering, companies had to fundamentally alter existing ways of working, and in some cases, they developed wholly new and even patentable processes. From executing large-scale research to launching newspapers (Dainik Bhaskar) to changing ways in which education is delivered in India (Gyan Shala), these companies showed a willingness to first determine what was desirable, and then built a backend model to deliver it. It sounds simple, but this market- or consumer-centric approach is rare compared with what it should be. Paying heed to the pulse of the external world is a hallmark of companies that tend to be able to innovate repeatedly, in contrast to companies that get bogged down by a particular model and whose blind spots grow. This is the difference between core competence–driven planning and strategy, which builds from internal capabilities outward, and innovation planning, which requires the ability to look at customer needs and market potential. Some of the prominent areas of innovations that are seen in the corporate world and that have contributed a great deal are as follows.1

 ‘Finance’ Innovation: Reinventing Business Models  Innovative companies have been able to succeed by developing and defining new economic models suited to the present business environment. This enables them to create a more permeable business enterprise, that is, one that aligns incentives among stakeholders to create and capture distinct value. Such innovations are said to be the most powerful ones, and as and when these happen, they have been able to bring in a fundamental change in the competitive dynamics in the industry that brings out a complete change in the industry model itself. For example, Moser Baer could create a disruptive change in the Indian home entertainment industry by bringing in a fundamental change on the basis of competition along with their economic model. For many years, a fragmented industry continued wherein many small players were producing high-cost VCDs and DVDs. It was ... impossible to compete with low-cost pirated discs in the industry. However, Moser Baer innovated a new business model with their singular cost position and pricing approach, and strengthened and protected it through a new model by adding a complementary new distribution approach and aggressively developed a wide content base to consolidate market share in an unprecedented manner.2 Network and alliance innovations focus on clearly defining each partner’s strengths and weaknesses; have well-designed and shared operating processes and technology; and above all, a strong governance system in place. There are a large number of organizations that are using the networks approach to achieve important goals such as a direct source of revenue, especially in B2B arrangements, as evident in the case of ITC’s e-Choupal platform, and leverage on the technical expertise of network partners to create open innovation networks. For example, TCS has created an ‘extended co-innovation network’ which constitutes apart from employees of TATA group companies, academic institutions and other strategic partners. This network has facilitated TCS to come up with a large number of marketable innovations.3

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 ‘Process’ Innovation: Guts and Imagination  The enabling activities or the capabilities a company leverages in order to deliver its product or service are categorized into two types: enabling process innovations and core process innovations. Enabling process innovation supports the enterprise’s primary work, value delivery and workers. The research-intensive approach adopted by Dainik Bhaskar to launch its Gujarati daily provides a good example of how enabling processes can positively affect the outcome. Although most media companies rely on internal expertise to develop the content strategy for their offerings, Dainik Bhaskar used a form of ‘crowd sourcing’ to get inputs from a large number of potential consumers in order to structure the content of its new newspaper. This not only enabled the creation of a successful product but also helped in building a customer connect that subsequently resulted in high circulation. Core processes are the capabilities inherent or consciously developed in an organization that others cannot duplicate. For product companies, this often involves their R&D, manufacturing and marketing capabilities. Core process innovation typically involves dramatic changes in ‘business as usual’. For example, Gyan Shala, a one-of-its-kind budget private school in India, has innovated significantly in its core process: pedagogy. It creates detailed teaching manuals with step-by-step instructions for each minute of each day, including answers to probable questions that students may have.

 ‘Offering’ Innovation: Breakthrough Change, Not Continuous Improvement  Conventional innovation teams normally introduce innovations bringing in changes to the functionality of the product/service. This helps in playing an important role to bring incremental innovation, that is, refreshing a product or service on a continuous basis that can keep customer loyalty in place by basically taking an advantage of ongoing technology advances. However, companies that aspire to conquer a new market or fundamentally reshape their position need to necessarily think bigger, unique ways.4 Product system innovation demonstrates the ways and the means in which several individual products get connected with one another to create a new and larger system, which can help in enhancing its functionality. Such innovations help in bridging the needs gap between constraints imposed by production complexity, and to help individuals fulfil their unique requirements. For example, modular offerings or systems that allow customization fall in this category of innovation. Similarly, Microsoft Office bundles a variety of specific products (Word, Excel, PowerPoint and Outlook) into an overall system that is designed to improve overall productivity in the workplace. ITC e-Choupal’s recent improvements to its well-established village kiosk model of agricommodity procurement has provided a platform that offers new consumer goods partners a costeffective way to ‘plug in’ to the rural consumers. On the other hand, the resulting wide range of products help address a number of unmet needs of farmers in rural areas. This is a unique example of a product system that actually spans the offerings of multiple companies, linked to a distribution model that takes an advantage of a one proprietary channel.5 (Continued)

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 ‘Delivery’ Innovation: The Customer Connect  How a company gets its product to the customer is the domain of delivery. There are three facets of delivery where innovation can yield disproportionately better results—Channel, Brand and Customer experience. Channel innovations encompass all the ways that a company gives a customer access to its offering. Successful channel innovations use an ideal mix between retailers of all sorts, wholesalers and warehouses, distributors, call centres, catalogues, Internet and home delivery to permit customers to buy what they want, when they want it and how they want it. For example, Nike has created eye-wateringly expensive retail cathedrals called Niketown stores to use as product showcases. Brand innovations are ways that companies use their brands in novel and powerful ways. For instance, through extension to try to incite customer reaction in a new area—the way that Virgin has used its brand to enter an extremely wide range of industries such as air travel, mobile phones, music—and convey a similar value proposition to customers across each one. Above all, it is an interaction with customers that delivers them psychological satisfaction while delivering the product that acts as a powerful source of differentiation and helps in creating a longlasting emotional bondage with the company and its products. This is called a very holistic and challenging type of innovation, as its secret lies in knowing and understanding your customers so deeply that your products and employees are able to provide a unique and long-lasting experience that delights and enriches their lives, mostly by focusing on their unfulfilled needs and deep-rooted aspirations and expectation. It, as such, helps an organization to get connected with the heart of customers and develop a long-lasting permanent mutually interdependent relationship.6 One classic global example is how Lexus managed to move from no place to the first place in customer satisfaction rating in the very first full year of their operations—an astonishing achievement up against entrenched luxury brands such as BMW, Mercedes and Porsche. They did this mostly by reinventing not the cars, but how they were sold, serviced and supported.

 What Can Leadership Do to Help?  Pursuing innovation using a disciplined approach can reliably yield powerful results; it takes both courage and coordination among multiple tiers and layers of the organization to do it well. Top and senior management play a crucial role in harnessing the creative potential of its employees. They set the organizational context in which innovation must occur. They provide a set of permissions that empowers individual employees or specially commissioned teams to stretch beyond the current paradigms of how the company delivers value. Unlike day-to-day operations, which can be reutilized, efforts around innovation require employees to think beyond the company’s current capabilities and imagine what it might require to meet consumer needs or market opportunities that cannot yet be quantified or proved using familiar techniques. To create the latitude that must be given to think in that way and avoid prematurely shutting down big ideas, most companies create some form of specialized mechanisms that are outside the normal day-to-day processes. For example, when faced with the threat of extinction due to changes in the competitive landscape, ITC commissioned four cross-functional teams to focus on different aspects of the business model. These teams were tasked with discovering customer needs, leveraging capabilities from different parts of the organization, and synthesizing the findings to design new customer interfaces

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and backend procurement arrangements. The effort was branded internally as ‘Project Symphony’, to emphasize the degree of coordination across the organization that would need to be implemented. This is what led to ITC e-Choupal. Another route is to create a shared services model, where the responsibility—and deep expertise—for innovation is embedded in a permanent unit that serves many parts of a larger company. TCS uses this model. A third approach is when a chief executive is widely regarded as a visionary, and the organization builds on and executes his ideas. Steve Jobs at Apple can be seen as this kind of ‘benevolent dictator’; this model works as long as the ‘golden gut’ of the CEO remains infallible. However, the long-term sustainability of this approach is questionable. One contrasting approach is that of a ‘free market’ innovation model, exemplified by a handful of companies such as Google, which allows employees to pursue ideas in which they have individual conviction during part of the work week. By institutionalizing this practice, they have found ways to capitalize on the doggedness that their workforce of engineers applies to exciting problems. Regardless of the approach, leaders who enable innovation in their organizations are found to be doing the following:

 Use context to mobilize and catalyze organizational action, whether it is a specific project mandate or an urgent competitive threat.  Establish a clear level of ambition and for the innovation effort to set the appropriate permissions about the degree of stretch that the organization is willing to make as a result of the initiative.  Commission cross-functional teams whose members do more than ‘represent the voice’ of various functional areas, but actually work as an integrative, multidisciplinary unit to cross organizational silos.  Challenge orthodoxies that the industry or the company may have developed over the years.  Refuse to accept that innovation is an accident or the result of a stroke of insight.7  Questions 

1. Why is it said that the term ‘innovation’ is being used in a loose and indiscriminate way? 2. What are the key lessons that can be learnt from the innovations introduced by Dainik Bhaskar and Gyan Shala in the Indian environment? 3. Differentiate between finance innovations and process innovations, giving concrete examples. 4. Delivery innovations mainly revolve around channel, brand and customer experience. What are the major gains that can arise through delivery innovations? Highlight giving concrete examples. 5. How can leadership channelize the creative potential of human resources to come up with innovations to derive competitive edge? 6. What has been the secret of innovative organizations? (Continued)

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 Endnotes  

1. 2. 3. 4. 5. 6. 7.

Adapted from businesstoday.intoday.in/story/innovation-creating…/5628.html businesstoday.intoday.in/story/innovation…new…value/…/5628.html www.itcportal.com/about-itc/newsroom/…/PressReport.aspx? www.itcportal.com/about…/PressReport.aspx?id…innovation…. businesstoday.intoday.in/story/how-innovation-really…/5598.html businesstoday.intoday.in/story/innovation…sources-of…/5628.html ‘Innovation: Creating and Defending New Sources of Value’, Business Today, 18 May 2010.

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5

 LEARNING OBJECTIVES    To understand the difference between an idea and an opportunity.  To understand the steps involved in assessing the business potential of an idea.  To understand the meaning of ‘opportunity recognition’ and the steps therein.  To understand and apply the opportunity evaluation process.

 To know about various sources of opportunity.  To learn about creation of opportunities.  To learn about different facets of product development.  To learn about the steps involved in tapping opportunity.

Tulsi Tanti, Chairman and Managing Director, Suzlon Energy Ltd It is fundamentally crazy to build wind farms out at sea. But it works! We have already installed facilities 40 kilometres off the coast at a depth of 50 metres. But calculating the time new developments take is always difficult. A lot of tests and approvals are required. —Tulsi Tanti

Tulsi Tanti, Chairman of Suzlon Energy Ltd, is amongst the top 10 richest men of India. He has built one of the world’s largest wind-turbine companies in an incredibly short time. He saw opportunity and great potential in an embryonic and unclear idea, and decided to venture into it and made it a big success. A commerce graduate and a diploma holder in mechanical engineering, Tulsi Tanti hails from Rajkot in Gujarat. He started a business in the textile industry in Gujarat but soon realized that he would not be able to make a great mark in the industry because of infrastructural bottlenecks. He started his journey in wind energy by investing in two Vestas windmills in 1990, which has grown to a more than $2 billion market cap wind-power company. He founded Suzlon in 1995 and soon decided to wind up his earlier textiles business. Suzlon Energy is the largest wind energy company in Asia and the sixth-largest in the world. It later ventured into building the world’s largest wind parks of its kind at 1,000 MW capacities. The innovative aspect of his idea had more to do with the service he was providing through a concept that would revolutionize the wind energy business. Tanti is determined to make Suzlon one of the world’s top three wind companies. A company that started its operations with just 20 people in 1995 has at present more than 13,000 people in 32 countries with a fully integrated supply chain with manufacturing facilities in three continents and sophisticated R&D capabilities in Belgium, Denmark, Germany, India and the Netherlands. (Continued)

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Suzlon is concentrating its present initiatives on a global expansion drive. It acquired Hansen Transmissions, a Belgian maker of wind-turbine gearboxes. The company is building a rotor-blade factory in Minnesota and has invested $60 million in a factory in Tianjin, China. Tulsi Tanti is determined to make India a wind-power export hub. Although he has made lasting contributions in the renewable energy area, he feels that he has a long way to reach his goal.

5.1  INTRODUCTION Having identified ideas that may make a business sense at the first site requires appropriate diagnosis to ensure that it is an opportunity at a given point of time. The series of ideas that could respond to customer pain points need to be evaluated prima facie to find out their business potential. There exists a big difference between having a great idea and converting it into a great opportunity. At times in over excitement to plunge into an entrepreneurial venture, an entrepreneur may get confused between the two and miss a subtle difference between a great idea and a great opportunity. Entrepreneurs must learn the art of identifying a particular idea from amongst many ideas that could be said to be a genuine opportunity. As such, true opportunities at a particular point of time are a great treasure and are highly valuable. The entrepreneur may have an opportunity that may appear to be an excellent one, but what matters the most is whether it can be converted into a profitable opportunity, which needs to be thoroughly explored and doubly ensured. The fundamental difference between an idea and an opportunity lies in whether the entrepreneur can turn it into a product/service that would attract customers’ attention and bring profits to the entrepreneur. Therefore, before plunging into a risk of investing money on an idea, the entrepreneur must analyse critically the various facets of an idea to find out whether it would a worthwhile opportunity to convert it into a reality. They need to meticulously examine their assumptions and test them. Thus, the fundamental difference between an idea and an opportunity lies in an idea having a value that can make a business out of it (Fig. 5.1). An opportunity is an idea that, if successfully implemented, can yield a prosperous business. Therefore, opportunities are rare and highly valuable compared to ideas. It is rightly said that for every new-idea-based business, there are tens of thousands of new businesses based on giving people more value. Entrepreneurs should doubly make sure that they have an opportunity and not just an idea that could make a real difference to the customers. One should examine the importance of obtaining legitimacy with the early stakeholders as a prerequisite to venture survival (Delmer and Shane 2004). Opportunity— Rare and Valuable

Idea

Value That Can Make a Business Out of It

Figure 5.1 Difference Between an Idea and an Opportunity

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Idea

Business Potential vis-àvis Entrepreneur Competencies

175

Business Model

Customer Validation

Figure 5.2 Steps Involved in Assessing Business Potential of an Idea Entrepreneurs need to be very clear that opportunities do not come out of thin air. It is a myth that opportunities are undiscovered fruit waiting to be plucked. According to Isenberg (2010), ‘opportunities consist of three vital parameters, namely, the alignment of a market need (hunger); a personal competence (ability to reach the goal), and values or motivation (willingness to man a 24-hour watch). Fruit—lowhanging or otherwise—are opportunities only if you can reach them and want to reach them. So make sure that you have some unusual ability to soothe a market pain and that you are excited about doing so.’ The fundamental question that needs to be answered is whether an idea has a business model in place. Some of the fundamental associated questions that need to be answered are: ‘How much investment would be required?’, ‘What would be the cash flows and revenue model behind the idea?’, ‘Will the market favourably respond to the idea?’ and ‘Who are the key competitors and what shape the industry may take in regard to competition in the years to come?’ In case one does not have crystal clear answers to these questions, effort of an entrepreneur may lead to either false starts or early defeat. Thus opportunity analysis and assessment requires thorough screening of ideas to clearly understand their business potential, in the backdrop of the entrepreneur’s competencies to execute an idea well. The essence of a successful idea that can be said to be an opportunity lies in having customers to back it by availing the proposed product or service at the proposed price (Fig. 5.2). Therefore, at times it becomes more sensible for an entrepreneur to undertake customer validation of an idea before launching the business. In case prospective customers from identified target market do not offer positive feedback at the validation stage, it may indicate lack of opportunity in the identified area and therefore give rise to a need for either abandoning the idea or incorporating substantial revision in it. Although it is said that at times after creating a product or service, one may look for the ideas to solve the problems, implying that ‘build it and they will come’ philosophy. However, for start-ups, it is not advisable to follow this route unless the cost of failure is exceedingly low.

5.2  OPPORTUNITY—DEFINITION Entrepreneurial Opportunity The Oxford English Dictionary defines opportunity as ‘A time, juncture or condition of things favourable to  an end or purpose, or admitting of something being done or effected.’ An entrepreneurial opportunity,  therefore, consists of a set of ideas, beliefs and actions that enable the creation of future goods and  services in the absence of current markets for them (Venkataraman 1997). Shane (2003) describes  an  entrepreneurial  opportunity  as  ‘…a  situation  in  which  a  person  can  create  a  new  means-end  framework for recombining resources that the entrepreneur believes will yield a profit’. This definition  highlights two key aspects, namely an entrepreneurial event taking place in the environment by using  resources and an individual at the back of it who steers it through creation, recombination and their  (Continued)

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belief system. The word belief has a special significance as ultimately all opportunities thought to be  profitable may not turn out to be profitable and secondly there are opportunities that are not pursued  with a pure profit motive.1

For example, the entrepreneurial opportunity that led to the creation of eBay was based on the belief that the Internet could be used for online auction and shopping of goods and services and a Web browser that can provide relevant information made available on site. eBay was founded in 1995 by entrepreneur Pierre Omidyar in his living room in San Jose, California. It is an outcome of decisions made and actions taken by Pierre Omidyar along with Jeffrey Skoll—first full-time employee and president of the company. It is one of the notable success stories of the dot.com bubble. It is now a multi-billion dollar business with operations localized in over 30 countries. The decision to change the name from AuctionWeb to eBay was made by Omidyar and Jeffrey Skoll, eBay’s first full-time employee and president, in mid-1997. The change was spurred by the fact that most customers referred to the site as ‘eBay’, and the initial media coverage, though sparse, also used ‘eBay’ more than ‘AuctionWeb’. The actual name change took place in September 1997 and involved a migration of existing users to a completely new platform with a more graphical Web site and home page. It also introduced the world to the multi-coloured eBay logo we know today. In short, an entrepreneurial opportunity consists of a new idea or invention that may or may not lead to the achievement of one or more economic ends; the basic belief on the part of the founding team that it could be translated into the achievement of possible valuable ends; and associated actions that contribute to the creation of economic wealth by crystallizing it into a reality. The basis of opportunity lies in the entrepreneur having ideas that are used to respond to pain points (Fig. 5.3). It could be an idea that is used to respond to a problem—existing or emerging—or a problem looking for a solution. Ideas are basically hypotheses related to a product or a service, customer problems, distribution process, market demand and competition. Testing hypotheses and developing a clearer perspective on the market potential of an idea result in identification of an opportunity. Hypotheses testing with facts and figures helps in screening different ideas. A stage wherein an idea gets transformed into a well-defined solution aligned with the value proposition to the customer coupled with the business model in place is called an opportunity.

Conceptual and Technical Insight

Idea

Assessment Preparation Presentation

Reality Check with Other Opportunities

Opportunity Recognition

Team Formation for Implementation

Systematic Evaluation

Figure 5.3 Opportunity Recognition

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5.3  OPPORTUNITY RECOGNITION How to Recognize an Opportunity? Opportunity recognition is of central importance to entrepreneurship (Baron 2007). The decision to  found  a  new  venture  often  arises  from  a  person’s  belief  that  they have recognized  an  opportunity  with profit potential, suggesting that variance in the tendency of people to start businesses can be  explained by the differences between them in their tendency to recognize entrepreneurial opportunities  (Gaglio and Katz 2001). Opportunity recognition was perhaps best defined by Christensen, Madsen  and Petersenas (1989):‘perceiving a possibility for new profit through (1) the founding and formation  of  a  new  venture  or  (2)  the  significant  improvement  of  an  existing  venture’.  From  this,  opportunity  recognition can be defined broadly as an activity that can occur both prior to establishment of a firm  and after founding it (throughout the life of the firm and throughout the life of the entrepreneur) (Singh,  Hills and Lumpkin 1999). It  is  interesting  to  note  that  a  study  undertaken  with  entrepreneurs  revealed  that  normally  entrepreneurs try with more than one idea to finally stick to one of them. Nearly 26 per cent of the  respondents reported that they examined only one opportunity, 37.5 per cent considered two or three  and 26.6 per cent reported that they considered five or more. This clearly highlights the large variance  in the number of ideas considered by different entrepreneurs. A  simple  way  to  find  prima  facie  whether  an  idea  that  one  has  would  be  an  opportunity  lies  in  answering some of the following fundamental questions:   Does your business idea respond to someone’s pain, discomfort, displeasure, anxiety and  so on?   Do you find a large market for your idea as could be assessed from having a large number  of people looking forward to relief from the aforementioned pains and discomfort?   Do these people from the assessed target market consisting of individuals, companies or  governments have adequate money to pay for relieving themselves from their pain, anxiety  and discomfort?   Do they need your product or service immediately or can their need be postponed?   Does your idea have something unique in it so that it can avoid competition?   Do you possess some of the important assets such as money, access to customers, technology, leadership skills, employees, execution capability, location and patent that would  give you sustainable competitive advantage.   Do you have a winning team with complementary skills and similar values to execute your  idea?   Would your idea generate adequate cash flows and valuable information to take it further? If ‘yes’ is the answer to most of these questions, you can be sure that it is an opportunity at a given  point of time.2

Answering these questions scientifically and backed up by facts and figures help in opportunity recognition, which passes through the idea stage, concept stage, product/service development stage, test marketing stage and the product/service launch stage (Fig. 5.4). The real test of an idea lies in the market testing stage that could be said to be a litmus test for the success or failure of a venture. A simple model like the following one can categorize responses to these areas in being a learner, apprentice, practitioner and specialist or professional (Table 5.1). Each of these categories may be assigned 1, 3, 5 and 7 marks. Under the five categories, one can identify the status of an opportunity to earmark in one of these categories. An equal weightage of 10 each can be assigned to these five categories. Thus, the total maximum marks could be 350 in case opportunity can be classified under specialist/professional for

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Concept Stage

Product/Service Development Stage

Test Marketing Stage

Product/Service Launch Stage

Idea Stage

Figure 5.4 Stages Involved in Opportunity Recognition Table 5.1 Opportunity Evaluation Through Five Fundamental Questions Learner 1

Apprentice 3

Practitioner 5

3

Need identification lacks clarity. Value proposition to customer not very clear.

‘Need identification’ or ‘value proposition’ is driven by subjectivity of opportunity perceived rather than guided by customer responses.

Potential customer responses confirm the value proposition.

Clear market need established by experts and is based on potential customer responses.

Competitors/ availability of substitutes

3

Competitors and availability of substitutes not identified.

Competitors identified with similar value proposition.

Competitors identified along with distinct substitutes that are likely to influence potential customer decisions.

Competitors and substitutes—related and unrelated—clearly identified based on specific measurable parameters and their implications on the proposed opportunity.

Customer identification

4

Not at all clear about potential customers.

Presumably customers Customers identified with identified without having explicit clarity. well clearly defined needs backed up by paying capacity.

Questions Question 1: Market identification

Weight

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Specialist/Professional 7

Customers identified with clear market segmentation and paying capacity.

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Question 2: Product

10

Product clear to the entrepreneur.

Product features and characteristics well understood and defined with proposed benefits to customers.

Product features and characteristics understood in detail, including various marketing mix elements— price, place, product and promotion.

Product well defined considering different elements of the marketing mix and their implications for different segments.

Question 3: Market

10

Not very clear about market sizing.

For market sizing logical assumptions made.

Established market sizing with the help of logical assumptions and analysis of reliable data.

Established market sizing along with implications for the growth of changing environment such as economic, regulatory, technological and legal.

10

Explained unique Not very clear about uniqueness and differentiating and differentiating factors. factors.

Explained unique and differentiating factors by clear comparison with existing products and services in the market.

Explained unique and differentiating factors with existing products or substitutes highlighting benefit to customer.

10

Not a clear strategy in place.

Clearly identified competitors and proposed responses to defend.

Clearly identified threats from key competitors and identified concrete and workable strategies to defend with estimated cost and effort required.

Question 4: Uniqueness/ differentiating factors

Question 5: Strategy for responding to competitors

Identified certain strategies to defend based on parameters such as patents, brand, service and cost.

all the criteria mentioned under the five categories. This would be a minimum of 50, if learner is assigned under all the criteria. The opportunity having at least 250 can be said to be feasible, workable opportunity that can be turned into a successful venture with great determination and clarity. The chances of success would be very high, in case the score works out to be more than 300 out of 350. Opportunity recognition can take place both prior to launching a venture and after launching throughout the life of a venture and throughout the life of an entrepreneur. A business opportunity has two vital components, namely, an ‘idea’ and an ‘entrepreneurial opportunity’, which have potential for generating profit in the future. Therefore, it is necessary to understand that an idea per se does not necessarily lead to an entrepreneurial opportunity, although it is a basic prerequisite and always at the heart of an opportunity. In order to appreciate the boundaries of the opportunity recognition process, it is perhaps

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Timely Sustainable Attractive

Figure 5.5 Opportunity Characteristics for Sustainable Business useful to understand those activities and parameters that may be considered to sit on the periphery of the process, but are not part of opportunity recognition. These include3:  The circumstances, incentives and triggers (although these may prompt ideas) or ‘motivated propensity’ that drive an individual to embark on opportunity recognition in order to pursue entrepreneurial opportunities.  After identifying a viable entrepreneurial opportunity, whether the entrepreneur actually pursues the opportunity, and if so, the acquisition of new resources or effective management of the existing resources in order to exploit the opportunity.

Opportunities need to have the characteristics of being attractive, sustainable and timely so that they lead to a sustainable business proposition (Fig. 5.5). Further, it is not enough to enter into the market at an opportune moment and there should be a right management team to avail it. Opportunities are usually situational and emerge under changing circumstances, confusion, knowledge addition or gaps and many other gaps in the market. It is the entrepreneurial mindset that has been able to see through these changes and have an idea to respond to the changes and challenges of market dynamics. Opportunities in different sectors and industries could be by way of new products and services, new production techniques and processes, new operating practices, new ways and means used for distribution of products or services, new organizational structure to manage relationships within and outside the organization or could be a combination of these.

Disposal of E-waste—Opportunity Recognition Government  of  India  is  considering  banning  the  import  of  used  computers  and  other  electronic  waste—coming primarily from developed nations such as the United States, Australia, Canada and  parts of Europe—after several cases of e-waste smuggling came to light recently. The e-waste issue  assumed  significance  after  the  Directorate  of  Revenue  Intelligence  (DRI)  seized  some  containers  in Chennai containing large quantities of such waste. The imports were made despite a prohibitory  order  in  this  regard.  The  half-a-dozen  seized  containers  were  filled  with  outdated  computers  and  electrical waste. On further investigation, it was found that the containers carried hundreds of tonnes  of e-waste sourced from Australia, Canada, Korea and Brunei in violation of norms. E-waste  is  being  dumped  in  the  country  by  developing  nations  using  loopholes  in  domestic  rules, which allow NGOs and educational institutions to import such gadgets freely on the pretext of  donations. On 13 May 2010, through a public notice, the Government of India prohibited educational and other  institutions  from  importing  second-hand  computers,  laptops  and  computer  peripherals,  including  printers, plotters, scanners, monitors, keyboards and storage units, looking into its disastrous impact  on the environment. The step was short of a complete ban on such imports.

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Until  the  Directorate  General  of  Foreign  Trade  (DGFT)  came  up  with  the  May  13  amendment  prohibiting e-waste import, second-hand computers and laptops were brought into the country using  this clause that allowed such imports through donations made to educational institutions, registered  charitable  hospitals,  public  libraries,  research  and  development  organizations  and  community  information centres.4 Disposal of e-waste often leads to emission of dangerous gases, as in the process of recovery  of  copper  from  e-waste,  dioxins  are  released  in  the  environment.  Toxic  cyanide  is  released  in  the  process of extraction of yellow metal from electrical waste and computer components. Environmental  agencies  worldwide  have  estimated  that  dumping  of  e-waste  in  India  is  likely  to  go up by 500 per cent in the next 10 years. Already, environment bodies have estimated that India  generates nearly 4 lakh tonnes of e-waste annually, which is likely to double in the next few years.  The  country  lacks  effective  disposal  mechanism.  The  ineffective  e-waste  disposal,  if  not  handled  scientifically, would cause great catastrophic impact on the environment. There is going to be great  opportunity  to create wealth from  waste by coming up with innovative solutions to the problem of  e-waste disposal.5

5.4  OPPORTUNITY PROCESS Having identified an opportunity, one has to translate it into reality by delivering the results that are sustainable, scaleable and are based on a well-defined business model. The fundamental aspect is the mindset and passion of an entrepreneur to take reasonable and required steps to convert an opportunity into reality. The crux of a success would lie in developing and nurturing customer relationships, as there will not be any business without a customer. This requires continuous partnership with customers based on trust and shared objectives. Identification of an opportunity requires a clear perspective on: what is; what could be; what is possible to understand and anticipate customer needs. This needs to be backed up by an appropriate analysis of realities, strengths, weaknesses, opportunities and threats and available options. One has to accept the reality as it is to respond to the challenges. A concrete action plan needs to be in place that addresses challenges with passion. One should have appropriate team backing to translate these actions into reality. The implementation process needs to be accelerated within given infrastructural constraints and it should keep modifying its implementation mechanism on the basis of a concrete feedback mechanism through analysis of facts and figures. The learning curve of an entrepreneur and their team has to assimilate these processes into organizational culture.

5.5  SOURCES OF OPPORTUNITY Fundamentally, although the status quo is good for well-established business because of having smooth operations, sales and profits, it is the change that brings in disruption, which brings in new products and services to respond to ever-increasing customer expectations and changing needs. This disruption could come as a result of technological developments, new business models, new cost structures, new and different distribution chains and even change in the payment mechanism. The main cause of a change is the new-generation entrepreneurs, who are flexible and adaptive. Examples of entrepreneurs exploiting change—Evans and Wurster (2000) have outlined the progress of Dell from a business that, in 1984, offered a simplified product offering with orders taken by fax/ telephone—a simplified service with wider reach. In the era of Internet technology that gave a big shock to a number of ventures, Dell innovated at the right time to offer individualized configurations, price combinations and technical support to its customers through the Internet. It offers this choice to a wide audience at a highly competitive price.

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Similarly, in a distribution chain that has earlier been used to sell to retailers through distributors, management could make a decision to sell directly, electronically, to customers, for example, eBay. This is an innovation resulting in disintermediation. The argument basically is to reduce distribution cost and become far more responsive and efficient to customer needs. Amazon worked on a model that required building its own warehouses in order to increase the speed and reliability of its delivery of online orders. Amazon sought to add value in the sales and fulfilment activities through its core competency. All the three are examples of entrepreneurs exploiting change.

5.5.1  Broad Categories of Change There are a variety of changes that keep taking place in an environment resulting in new opportunities for entrepreneurs. Entrepreneurs need to be alert to these changes and have to come up with solutions that enable responding effectively to customer needs and pain points. The broad areas of concern that cause changes to take place are as follows (Fig. 5.6): Demographic  The population growth has a direct impact on increased demand for goods and services leading to a positive impact on entrepreneurial ventures. Population growth also has a tendency to put pressure on wages, thus lowering the opportunity cost of starting a business (Verheul et al. 2001). Similarly, population density and urbanization extend many benefits for entrepreneurship to take root, as a result of high growth and high technology-driven entrepreneurship emanating from universities and research centres. As such, entrepreneurs always look for a high-density population to start their ventures, as it provides great scope for a readily available market, for which there is relatively low cost on transportation and communication. Changing age profile of population gives rise to a complete change in the demand for existing and new goods and services. Brindley (2008) highlights three significant UK forms of demographic trends, namely, an ageing population, changing household structure and geographic distribution. From 1960 onwards, a decline in birth rates combined with advances in health care has resulted in a shift of population

Change Causes Disruption, Resulting in Technological Developments, New Business Models, New Cost Structures, New and Different Distribution Chain and Payment Mechanism

Economic Growth, Emerging Demographic Markets, Population Income Growth, Distribution Density, Urbanization and Pattern, Cost, Productivity and Age Profile Government Policy

Socio-cultural Value System, Role Models, Environmental and Health Concerns

Technological R&D Outcomes Resulting in Technological Developments

Political Democratic, Socialistic, Communistic, and Capitalist System and Its Impact on Business Environment

Legal and Regulatory Competitive Mechanisms, Intellectual and Physical Property Rights and Insolvency Laws

Figure 5.6 Sources of Opportunity

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in favour of old age. Further, more and more high-income households have been shifting from urban to rural areas, such as those in the south of England. As against this, the Indian population is becoming more and more young as evident from nearly one-third of Indian people being in the age group of 15 to 34 years. Accordingly, these young people, by the mere fact of being young, are aspiring to modern consumerist ways, and are put off by consumption of goods and services related to Indian culture. It is expected that this large number of youth who are more open to the consumerist Western culture is likely to offer great economic opportunities in India. Economic  Emerging markets are offering great opportunities to global business players. Further, the growth in general and changing income distribution pattern give rise to new opportunities. Above all, if we look at Indian economy as a knowledge economy, we can see that it has provided a large number of jobs to youth in the Information Technology industry as a result of business process outsourcing. The impact on cost of production through increased productivity and technological developments creates great opportunities. Socio-cultural  The changing value system and role models have been bringing out a total change in the lifestyle of people across the globe. The 1990s, and in particular, the early 21st century has brought in an enormous shift in both social and cultural perspectives and opinions, including greater public concern about both the environment and healthy lifestyle. The increasing concern for the environment and health has opened up flood gates of opportunities in the health sector, more so in preventive health and industries contributing to protection against environmental hazards. Another key area is in terms of low-fat, organic and fat-free or diet products with dieting-related pills and foods now being part of a multi-million dollar industry. Technological  Entrepreneurial opportunities are usually an outcome of new ideas emanating from technological developments as an outcome of research endeavours. The technological changes have been taking placing at an accelerated rate. In the 21st century, more and more first-generation entrepreneurs are knowledge driven and technology savvy. R&D outcomes resulting in technological advancements have a direct relationship with entrepreneurial opportunities, as they make it possible for people to allocate resources in more productive ways. According to Casson (1995), it enables the creation of new products, which diversifies and intensifies demand. Technology that advances the way communication is done and information is exchanged aids in market-based coordination supporting the existence of small firms (Jovanovich 1993).

Technology—Different Perspectives For  example,  evolution  of  digital  imaging  has  given  rise  to  multiple  opportunities  that  have  been  exploited differently by different industries and different entrepreneurs. After the emergence of this  technology, many firms with very different perspectives have been trying to make sense of what this  new technology is and how they should deal with it. Established firms saw it differently to adapt to  this new technology compared to new start-ups in the area. Established firms were also concerned  about  how  they  can  influence  the  perspective  of  others  and  ultimately  the  industry’s  evolution.  In  attempting to adapt, firms are constrained by their prior history: their particular skills, capabilities,  assets and, most importantly, mindset. Photography firms such as Nikon, Canon or Kodak, coming  into this new arena think about it very differently from Sony or another consumer electronics firms, or  HP or Intel as computer industry firms. So given the historical perspective on different user industries,  each thought of a different opportunity to adapt to it. (Continued)

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Similarly,  some  the  emerging  technologies  that  would  transform  the  way  things  are  happening  are  wireless  applications  around  security,  embedded  systems,  technological  developments  in  IT,  BPO, financial inclusion and Cloud computing. A deeper insight into various dimensions can help  entrepreneurial firms understand where opportunity lies and how they can exploit it.6

Political  Political set-up by way of being democratic, socialistic, communistic and so on affects the business environment as reflected through government policies. Further, the stability of the political system has a direct impact on entrepreneur risk perception and in turn on their investment decisions. For example, the liberalized policies introduced in Indian system from 1991 onwards had changed the whole business environment and promoted entrepreneurial zeal in a big way. Political will as reflected through government policies stimulate firms’ access to labour, financial capital and information/knowledge. According to Storey (1994), policies have the distinction of improving either the financial conditions of the firm or the operating efficiency of the firm. Research has shown that government-supplied entrepreneurial services help most in initiating and stabilizing a business but does very little for the growth of the business (Bosma and Harding 2006). Legal  and  Regulatory  System  Legal and regulatory frameworks, including competitive mechanisms, intellectual and physical property rights and insolvency laws and government facilitation process, act as a key to entrepreneurship development in any economy. An appropriate and efficient legal system enhances the social legitimacy of economic growth, which acts as a catalyst for sustainable growth. Even the ease in formation of companies as legal entities helps a lot in overcoming apprehensions that new-generation entrepreneurs may have. Legal and policy frameworks giving rise to regulatory mechanisms consisting of a conducive policy framework, appropriate and efficient regulatory infrastructure for licensing and regulation coupled with ease in flow of capital from within and outside economies go a long way in encouraging entrepreneurs to avail and exploit opportunities. As has been just highlighted, there are many different factors such as economic, social and cultural, demographic, legal and regulatory that influence the way in which entrepreneurs look at seizing existing and emerging opportunities. It is crucial that changes in these areas are recognized, analysed, interpreted and wherever necessary, practical firms must seek to adapt their products and manufacturing methods, so as to maintain their competitive edge to keep operating on a sustainable basis.

5.5.2  Enhancement, Extensions and Specializations   to Create  O pportunities Enhancement, extensions and specialization are the three key approaches to creating opportunities. Each has its own significance and role to add strength to the entrepreneurial venture (Fig. 5.7). Enhancement is a continuous process to keep adding value to the product or service through improvements and augmentation as an outcome of research efforts emanating from customer feedback. An entrepreneur needs to have a sharp eye and strong relationship with customers to get new ideas that can be given a concrete workable shape from a business perspective. i. For example, the shift from DOS to Windows was an outcome of enhancement that has changed the whole concept of applications on personal computers. DOS is an acronym for disk operating system, originally called MS-DOS. DOS was developed for IBM-compatible computers in 1981, which

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Opportunity Creation Enhancement— Process to Add Value to the Product or Service Through Improvements and Augmentation Through Customer Feedback

Extension—Increasing the Applications Inbuilt into the Product and Thus Creating an Enhanced Market

Specialization—In Core Area of Competence Creates Advantage About Cost Economics and Makes an Entrepreneurial Venture Competitive

Figure 5.7 Creation of Opportunities was enhanced to MS-DOS with a 16-bit program with limited graphics capacity as against no video resources or drivers in DOS. Subsequently, Windows came up with further enhancements having a graphical user interface (GUI)-based program. It differs from DOS in that DOS requires commandline entries for execution. Windows, on the other hand, provides an ostensibly user-friendly means for the user to execute commands through mouse clicks and menu choices rather than command-line commands. Even in DOS, more than 35 versions with upgradation through enhancement were introduced during the five years between 2004 and 2010. ii. Similarly, if we look for enhancement leading to a new shape of the personal computer industry, we find that fast changes have taken place to enhance computing efficiency, flexibility in carrying, ease of use and multiple applications to cost reduction when the industry has shifted in the following path: desktops—laptops—notebooks—tablet PCs—ultra-mobile PCs—home theatre PCs—pocket PCs. From main frame computers the development led to introduction of desktops that could fit on a desk, which was considered very small compared to the earlier versions of computers. The next development was introduction of laptop computers, also called notebook computer or sometimes notebooks. A laptop is a small personal computer designed for portability and ease of use. Thereafter, further enhancement led to introduction of netbooks, a category of small, lightweight and inexpensive laptop computers suitable for general computing and accessing Internet applications. A tablet PC is a special notebook introduced in the early 1990s with their PenGo tablet computer and popularized by Microsoft. Its touch screen technology allows the user to operate the computer with a digital pen or fingertips instead of a keyboard or a mouse. An ultra-mobile PC is a specification for a small form factor of tablet PCs. These have inbuilt features, including the Windows XP, Windows Vista, Windows 7 or Linux operating systems and low-voltage Intel processors. A home theatre PC (HTPC) is a convergence device that combines the functions of a personal computer and a digital video recorder.

Today, for example, HP offers a broad family of laptops, notebook computers, net books and tablet PCs for a variety of applications and users ranging from individuals, small business and education to commercial applications in large firms. Their product range includes high-performance laptops for watching movies, playing music and sharing photos. The powerful notebook computers can handle extreme gaming needs of users. The company highlights a wide range of products that are available for a variety of needs and lifestyles and the computers range from personal to official applications.

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Extension results in increasing the applications inbuilt into the product, thus creating an enhanced market. Product line extension enables an organization to expand its offerings to the customer by including a new functionality or capability while remaining consistent with the existing products. From a marketing perspective, it provides the organization with ease of forecasting the degree of success of the new product with an extension amongst its existing customers on the basis of their needs, the willingness to buy the existing products with the extension and the appeal that the capabilities inbuilt in the new product offer them. For example, the Nokia 5130 MP3 player, 2.0 megapixel camera and FM Radio Video Calling Bluetooth have inbuilt extended features of MP3 player functionality with music keys; FM radio with short-cut keys; 2.0 MP camera with a video recorder and 4X digital zoom; Nokia Xpress Audio Messaging; Bluetooth® connectivity and text, audio, picture and video messaging. Similarly, if we look at a day care centre in the campus of a school that provides extended facilities to the school children after schooling hours and caters to the tuition requirements, it can be said to be an extension of service for the parents. Further, in case all accessories required by the children such as toys, books and dresses are made available in the day care centre, it would enable parents to take care of other requirements of their children while putting them in a day care centre. ‘Adam Smith’s Wealth of Nations published in 1776 was one of the first works promoting ‘specialization labour’ to improve productivity. He observed in pin making that the division of the task into four separate operations increased output by a factor of almost 5. One worker performing all the operations produced 1,000 pins per day, whereas 10 workers employed on four more specialized tasks were able to produce 48,000 pins per day (Smith 1904).’ According to him, labour becomes more productive when it is more specialized by dividing and subdividing the steps involved in production until anyone can easily learn to do any job and do it well. The division of labour helps in performing the job in a highly skilled manner and in introducing innovations in the production system. Specialization in the core area of competence or in a niche market creates an inbuilt advantage about cost economics and makes an entrepreneurial venture competitive. Further, job specialization by appropriate division of labour helps in realizing economies of scale and in turn in reducing the cost of production. The term ‘specialization’ differs from industry to industry and within an industry, from function to function or from domain to domain. For example, for a sales force, specialization means understanding customers well to increase sales turnover as well as help the company in product development. For a research and development department, it means analysing research problems deeply to come up with solutions.

What Is Precisely Deep Specialization? The definition will vary according to the job being performed or the domain being learnt. In a sales  force,  deep  specialization  might  mean  the  ability  to  understand  a  customer’s  industry  thoroughly  enough to recommend suites of solutions rather than just a list of products. For a pharmaceutical  R&D function, it might mean conceiving and executing a new course of research rather than simply  performing steps directed by another researcher. Above all, in general, it means creating a workforce  that  specializes  in  performing  their  tasks  so  as  to  improve  their  productivity  that  results  in  cost  economics.  It  also  implies  building  organizations  wherein  people  are  enthusiastic  to  innovate  in  production, marketing and distribution systems.7

Specialization leads to employees acquiring expertise in their domain. In turn, they become thinking employees and just do not follow a routine given path to meet their end results. They start reinventing

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their paths for creating existing products with greater efficiency and also contribute in creation of new products and services. At a still higher level of specialization, the experts in the organization acquire unique specialized skills and in-depth knowledge in the area, which they are able to translate it into innovations. For example, Air Deccan, promoted by Capt. Gopinath, Capt. K. J. Samuel and Vishnu Raval, was the first low-cost carrier of India that had completely changed the level playing field in the Indian aviation industry. The airline could fulfil the dream of a common Indian to fly. Every common Indian could think of flying because of the cheap airfares offered by Air Deccan. It was the first airline in the history of Indian aviation industry that offered fares from just ` 1 to ` 500 and dropped fares when fuel prices increased. The young and versatile fleet of Air Deccan coupled with dynamic and enthusiastic staff contributed to increased productivity that could make its operations viable. Similarly, ABC Consultants is one of the pioneer firms providing highly specialized and organized recruitment services in India and has established itself as the best recognized recruitment brand nationally. Over the last 40 years, ABC Consultants has grown to be a premier executive search and selection group. It has a specialty of searching for the best of the talents across industries to meet highly specialized job profiles in India and abroad.

5.6  INDIAN ECONOMY—OPPORTUNITIES Indian economy, growing at a rate ranging between 8 and 9 per cent per annum, with more than 1.10 billion population that is growing at a rate of more than 1.8 per cent per annum, provides great opportunities for entrepreneurial ventures. It has an estimated 27.3 million middle-income households, 12.5 million upper middle-income households and 12.2 million high-income households. It is one of the ‘youngest’ economies in terms of percentage of people in the age group of 15 to 34 years with rising literacy and prosperity. Middle-class population is growing fast, contributing to the accelerated demand for goods and services. The overall size of the Indian market is estimated at more than $1.5 trillion as per purchasing power parity. It has a great prominence by way of having over 3 million scientific and technical manpower, and a stock of more than 0.8 million postgraduates in sciences, over 1 million graduate engineers, more than 0.4 million doctors, and 0.3 million agriculture and veterinary science graduates. Further, it is adding more than 0.05 million computer professionals and 0.36 million engineering graduates every year. Today, India turns out more than 50,000 computer professionals and 360,000 engineering graduates every year. Indian economy has a great tradition of more than 5,000 years of entrepreneurship. Business sense and acumen is deep rooted in Indians and particularly amongst certain group of population traditionally classified as ‘vaishya’. Indians in general are characterized as being liberal, having businesslike values for pursuit of wealth. Indian environment is conducive to business and having different institutional structures that promote business development, as evident from well-developed ‘institutions’—judiciary, capital markets, stock exchanges, media (free and independent), educational institutions and regulatory bodies. Indian entrepreneurs are spread globally and are showing their entrepreneurial talents in different parts of the world, including technology-driven entrepreneurship in Silicon Valley. A similar ingenuity of Indians is required to tap huge market opportunities in Indian economy. This would require an entrepreneurial approach to making a difference in the life of people by increasing their quality of life by enhancing the value proposition in the existing consumption pattern or creating a demand for new products and services. An entrepreneurial approach that can lead in generating real opportunities for Indian

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entrepreneurs would require creating an improvement that can result not in a twofold impact but in an 8- to 10-fold impact on cost reduction or quality improvement or price reduction or time required or on sales. One has to be innovative and specific, so as to come up with unique business models that make money, market or minute sense. A new idea could only make a great sense, if it flattens the learning curve and does not ask people to do something that you as an entrepreneur will not do.

5.7  STEPS INVOLVED IN ASSESSING BUSINESS POTENTIAL   OF AN IDEA 5.7.1  Idea Stage At the idea stage, individuals find their mind obsessed and occupied with an idea which keeps growing. They find great potential for the idea in their mental frame of reference. This is the first stage for the budding entrepreneurs in the start-up’s lifecycle. A wild guess indicates a business opportunity behind the idea, as it could bring in a change in the way things are happening. For giving shape to the idea and to achieve a high impact on society, the idea needs to be pursued further with the help of relevant and specific information. Hence, the need and importance to link the idea to a clear and feasible business opportunity. The most significant features that describe the idea stage of a venture are listed as follows8:  Idea—Born from a single person, or at times a group effort of few people.  Sense—A mission that inspires us with sense and moves us, both through the entrepreneur project and in the personal field.  Uncertainty—A high level of uncertainty in all areas (such as technology, market, sector, finance, regulation, rivalry), apart from the sense itself.  Sacrifice—Entrepreneurs work without a salary and with huge devotion and commitment.  Informal—Company is not yet incorporated.  Public Vs Private—Hard balance between keeping the project confidential and making it public while seeking information, advise, answers and feedback.  Austerity—Care to keep the operational costs as low as possible.  Significance—Many key decisions are made that will have a deep impact (positive or negative) on the future project evolution.  Learning—Broad, slow and expensive, due to the complexity of the circumstances, and to the multiple faces of the project (technology, market, industry, strategy, finance, operations, channel, sources of capital…).  Speed.  Transition—Time to get ready for a change, assess the situation and decide whether you make this great jump towards entrepreneurship.

A budding entrepreneur starts their journey towards entrepreneurship with one or few unique ideas in their hand which, according to them, click in the market. The most crucial step lies in identifying one unique idea that separates out from hundreds of other ideas that are either impractical or less promising. One of the prominent evaluation methods successfully used in this stage is the systematic market evaluation checklist, where each new product idea is expressed in terms of its chief values, merits and benefits (Gedimen 1965). Customers are offered new product with alternative values to find out which, if any, new product alternative would be liked the most by the customers and which

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alternatives should be dropped. The purpose is to further develop the product on the basis of customers’ likes and dislikes vis-à-vis the pain points by channelizing resources that would be compatible with market values. Another way of looking at the ideas to come up with a unique idea that can have a great business opportunity requires diagnosing various ideas to identify which one would be a great opportunity by giving a broad shape in terms of a business model to each one of them. This requires identifying various associated uncertainties and appropriate strategies to mitigate them and sharing the idea with dependable and trusted people who can further elaborate on uncertainties and possible ways to manage them. Above all, it clearly requires a prima facie market analysis with a focus on various aspects such as product, client, rivalry, industry, size, trend, channel, regulatory, existing competition, potential new entrants and paying capacity of customers to avail the product/service. At the idea stage, one needs to assess the need for the product and the value that it could fetch for the venture. It is obvious that in case a firm need for the product commensurate with proposed investment does not get established, the idea should not be taken further for development. While assessing the need for the new product, one should define the potential needs of the market in the light of such aspects as timeframe, value to the customer, price they will be willing to pay, alternatives available to the customer, future emerging scenario in the market and future economic conditions. The need for product assessment clearly requires a focus on marketing variables—price, product, place, promotion, market structure—competition and characteristics and the timings. An objective analysis based on these parameters will help in assessing the extent to which an opportunity exists. It is also not advisable to take up the idea for further development, in case it does not ensure reasonable gains and value to the venture.

Are You Ready to Invest? Many individuals in Bengaluru have started becoming entrepreneurial and started venturing on their  own. There are many venture capitalists (VCs) in the city as well as those outside looking to fund  promising start-ups. However, sometimes, even if an idea is promising and backed up by a good  team, the venture may not be support worthy by the VCs. Gyan, an advisor, was interacting with a group of entrepreneurs and potential entrepreneurs in  Bengaluru in late 2006. Kumar was one amongst those who raised many pertinent questions about  how  the  business  plan  should  be  written  and  how  one  should  approach  a  venture  capitalist  for  funding. Kumar mentioned that he had a degree in law and had pipeline customers and infrastructure  in place and wanted to start a venture. Kumar further went on to give his experience, which was quite  creditable; he had close to 15 years of work experience, in India and in the United States. He had  in fact helped establish the Indian unit of a US multinational in India. In addition to all this, he had  worked for some years in a senior position in a leading BPO in India and was therefore aware of the  opportunities and difficulties in this industry. On the basis of this information, Gyan said that this looked like a promising case for funding, since  VCs were looking at the KPO sector, which was essentially looking at moving up the value chain in the  Indian outsourcing industry. Kumar was pleased to hear this and then set up a one-on-one meeting  session with Gyan so that he could understand the way one needs to approach VCs for funding. At the next interaction, Gyan and Kumar exchanged thoughts on details regarding the idea. Gyan,  after listening to Kumar’s point of view on the idea, explained to Kumar that if a company was not  ready for seeking funding, it would not be advisable to approach a VC at that stage. This could in fact   be counterproductive in some cases, since the VC may perceive that the company had many gaps  (Continued)

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yet  to  be  fulfilled.  Investors  having  such  initial  perceptions,  whether  right  or  wrong,  may  at  times  jeopardize funding prospects in long term. Another piece of pertinent advice given by Gyan was that  if one approaches a VC too early in the business, perhaps one could lose out on the value of the  business. During  further  discussions  with  Gyan,  Kumar  gave  some  more  details  about  his  proposed  company. The business idea in the pipeline was related to the connections he had with a law firm in the   United States, which had prima facie expressed interest in the fact that they would like to outsource  business  to  India.  Discussions  were  really  in  the  very  early  stage  in  this  case.  He  also  expressed  that  his  brother  who  was  in  the  real  estate  business  had  allocated  some  office  space  to  him  for  starting a venture. His brother was also interested in diversifying his business who visualized this as  an opportunity. The understanding was that his brother would contribute to the required infrastructure  and  he  will  manage  the  day-to-day  operations  and  the  marketing.  Kumar  also  mentioned  that  on  the  basis  of  the  spade  work  done  by  him,  there  are  few  potential  employees  who  were  willing  to  join,  provided  he  was  willing  to  pay  them  market  rates.  Kumar  now  wanted  funding  to  hire  these  employees and then get the contracts on hand from the overseas legal firm. While Kumar did have the experience in other companies, he had not really been an entrepreneur  who had run a company. While the market was big and opportunity was there, investors would like to  understand how Kumar would be able to translate all these factors into a successful company. Gyan  then suggested that Kumar take stock of the position and first undertake projects on pilot scale. This  would help him refine his process and prove to potential customers that he could deliver. Once he  had a few customers lined up, he would be in a better position to seek external funding.9

5.7.2  Concept Stage of an Idea After a new product/service idea has been through at the idea stage, it needs to be further processed, developed and refined through seeking feedback and valuable views from the professionals, members of distribution channel and prospective customers. The concept stage of an idea is the beginning phase of a technology venture, which is also called formation of an idea for a pre-seed stage. The concept stage attempts to predict the probability of success of a new product idea before it is taken to the next phase of investment. This mainly involves seeking consumer’s reactions to various statements that describe the basic idea of the product to either further develop it on the basis of the responses received or abandon it (Fig. 5.8). The main purpose of this exercise is to incorporate necessary changes to make it acceptable in the market. This improves the chances of success of an idea in the market by providing guidance for the communication of benefits, uses, packaging, advertising, sales approaches, product information, distribution and pricing. The fundamental question that is addressed at this stage is the value proposition of an idea, which should answer key questions such as the product/service you propose to make/deliver; for whom the product/service is meant; why would someone buy it? How big is the market for it? This stage requires testing your well-defined concept with professionals, personal advisers, co-founders and, above all, potential customers. This basically requires a market research input to validate your concept. The concept stage usually lasts for three to six months to ultimately either abandon the idea or advance it to the seed stage. The main purpose of the concept stage is to test the idea to find out about its acceptability or otherwise by the prospective customers. One of the simplest techniques is to have a conversational interview with selected respondents who are expected to respond to various statements that

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Concept Stage—Issues

Seek Customer Reactions to Product/Service

Not Favourable Abandon

Incorporate Necessary Changes Based on Customer Feedback

Product/Service Superior as Compared to Existing Available Choices

Figure 5.8 Concept State—Issues to Be Addressed reflect the physical characteristics and attributes of the product idea. In case similar products already exist, one may seek responses to the statements that compare the new product with the existing one on various attributes. This exercise helps in identifying strengths and weaknesses, good and bad points, and favourable and unfavourable features in a product. On the basis of the positive responses, product can be further developed. At this stage, one also attempts to evaluate attributes, price and promotion mechanism vis-à-vis competing products in the market by focusing on questions such as ‘How do you compare the quality and reliability of the new product with those of the existing ones?’, ‘Will it be a good market opportunity for the venture?’, ‘How does the value proposition compare with the price proposed vis-à-vis other similar products?’ and ‘Will the product fetch proposed sales targets in the beginning phase of a launch?’. The purpose of the concept stage of an idea is to ensure that the new product/service would be viable by ensuring that it is far more superior to the existing available choices based on the fundamental principle that ‘It is not what you know your product is, but what others think it is that determines product acceptance.’

Examples of Concept Stage Ideas—The IBM Jr and The IBM Convertible The IBM personal computer was one of the greatest business successes of all time. However, their  introduction of the PC Jr and the Convertible were astonishingly far below customer expectations. The  IBM PC Jr was the company’s first attempt to enter the market for relatively inexpensive educational  and home-use personal computers. This particular model, 4860, retained the IBM PC’s 8088 CPU  and the BIOS interface for compatibility, but differences in the PCjr’s architecture, as well as other  design and implementation decisions, eventually led the PCjr to be a commercial failure in the market  place. The PC Jr was launched with an enormous amount of advance publicity, including live newsbroadcast  coverage  of  the  product  announcement.  However,  the  PCjr  was  never  well  received.    A prime target of criticism was its keyboard; IBM chose to use an infrared wireless chiclet keyboard,  (Continued)

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similar to that of a pocket calculator, with wide spaces between keys to leave room for instructional  overlays bundled with some software packages. It was widely criticized as feeling cheap and being  difficult to type on. IBM eventually replaced it for free with a different wireless keyboard with more  conventional keys. Regardless of the keys’ design, with only 62 keys, it lacked the numeric keypad  and separate function keys of the IBM PC, and the layout was more awkward than that of most of its  competitors. At $669, the PC Jr’s price was not competitive. It cost more than twice as much as the Commodore  64 and the Atari 8bit family; its price was close to that of the Coleco Adam, but the Adam also included  a tape drive, a printer and software. With the exception of the Apple II, it was possible to purchase a  complete system (computer, disk drive, printer and monitor) from almost any of IBM’s competitors for  less than the PCjr’s entry price. IBM could have avoided the setback, and possibly turned it into a grand success, with greater  care at the concept development stage. This also made them realize that a series of successes do  not necessarily guarantee success for the next product, if appropriate precautions and steps are not  taken at the concept stage.

The Joggers Stopwatch The  first  digital  jogger’s  stopwatch  was  a  great  idea—except  that  you  could  not  switch  from  the  stopwatch mode to see the real time, without wiping out the elapsed time on the stopwatch function.  So,  a  jogger  could  not  tell  what  time  it  actually  was,  only  how  long  they  had  been  running.  The  execution of the concept is as important as its abstract description. Also, it often pays to concept-test  your competitors’ products. You can often find a fatal flaw in an otherwise good concept, which is  easily correctable.

Buccal Tablets—Principles This invention is directed to a buccal tablet comprising an effective amount of an active ingredient in  combination with an excipient, the excipient being comprised essentially of sorbitol and a lubricant.  The tablet provides extremely rapid drug delivery in an unexpected manner, leading to blood levels  that are comparable to parenteral administration of the active ingredient. This application is directed to a tablet for the buccal administration of an active ingredient. Buccal  administration (in the pouch of the cheek of the subject) is particularly useful for active ingredients  that  show  poor  bioavailability  upon  administration  through  other  non-parenteral  modes.  This  poor  availability can be attributed to low solubility, degradation by enzymes or destruction by acid upon  passing  through  the  intestinal  tract,  or  first  pass  destruction  by  the  liver  enzymes  after  absorption  from the gastrointestinal tract. Buccal administration of estradiol gives an unexpected early peak in the blood level followed by a  slowly decreasing concentration. This tracks the natural occurrence of estradiol in the body, and thus  is an improvement over transdermal administration, which provides a relatively constant blood level.  Oral administration of estrogens such as estradiol is impractical in view of the destruction of the active  ingredient in the liver shortly after absorption from the gastrointestinal tract. These are tablets that are placed between the upper gum and the cheek, in the ‘buccal cavity’.  The tablet slowly releases its drug over a period of hours directly into the small blood vessels in the  gum. It is one of many ‘new drug delivery systems’, designed to bypass the stomach, where many  drugs are destroyed. The need for this type of system is unquestioned, especially for the very large  and fragile molecules of newer bioengineered drugs. The first drug to use that system was believed 

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by physicians to be unacceptable to patients, even though the few patients, who were on it, loved it.  There were several flaws in how the product was demonstrated, which the company was not aware of.   Make sure that there is not an unsold segment of the marketplace, which can kill the product. Also,  how  the  product  will  be  demonstrated  is  an  integral  part  of  the  product  and  should  be  carefully  considered.10

5.7.3  Product Development Stage Product development may relate to a product that is either altogether new to the marketplace or new to the company or it could be an improved version of an existing product produced by the company (Fig. 5.9). Product development is a process focused on developing systematic methods for guiding all the steps involved in and associated with getting a new product to market. Product development ‘serves as a bridge between a problem or need and providing a solution in life’.11 Product development model becomes relatively easy, in case it revolves around known customers, product, business model, pricing, distribution process and competition. However, complications increase as uncertainties and unknown parameters increase. The new product development stages provide the last opportunity to twist and squeeze the product design to improve its performance and outlook aesthetically. Even at this stage, the product development team keeps coming up with further opportunities for cost savings or feature enhancement. The key to successfully taking advantage of this stage of development lies in working closely as a team to maintain the design intent while making final improvements to the new product. The process adopted in this stage for improvements is to seek consumer reaction to the physical features of the product. One of the tools commonly used in this stage is the consumer panel, in which a group of potential consumers are provided with product samples. Participants give feedback on the positives and negatives of the product on the basis of the record kept by them while using it. At times along with a product sample, some competitive products are also given to the panel of potential customers. Thereafter, various methods such as multiple brand comparison, durability, risk analysis, level of repeat purchases and preference analysis are undertaken to assess consumer preferences. Some of the leading companies keep developing their products through continuous innovation, incorporating critical inputs received through such people as focus groups and consumers.

New Product to Marketplace

Product Development

New Product to the Company Improved Version of Existing Product

Figure 5.9 Different Facets of Product Development

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  Entrepreneurship Collate Critical Inputs Received Through Focus Groups, Consumers Generate Design Specifications and Incorporate in the Product Continuous Evaluation Based on Predetermined Objective Criteria

Prototype Development

Full Working Model

Figure 5.10 Product Development Steps Product development goes through a rigorous and continuous planning process (Fig. 5.10). This requires evaluation at every stage of product development to ensure that the new product is worth the investment to continue. The evaluation process should be based on a specific set of predetermined objective criteria and should not be guided by whims and fancies or just someone’s gut feeling. The key to remember is market potential for the product that ensures profit and not necessarily product per se. Documentation at every stage is necessary to come up with a right prototype for one’s product idea. It is advisable to create a concept and replicate it with the help of materials that will allow one to create a 3-D model of one’s design. Once one is satisfied with the model, one should prepare a full-working model of one’s idea. In case the invention requires a lot of money or is going to be unreasonable to prototype, it would be advisable to consider using a computer-animated virtual prototype. Waterfall Model and Agile Model for Product Development  In the software engineering development industry, the term ‘waterfall method’ and ‘agile method’ for product development are used. This industry, like other business processes, has specific time-bound goals to be achieved. Two commonly used models for product development in the software industry are waterfall model and agile model. The waterfall model in software engineering was introduced by Winston Royce in 1970. It was inherited from the hardware manufacture strategies and construction strategies that were in practice during the 1970s. This approach to product development was highly structured to software development. The waterfall model phases of software development are as follows: requirement, analysis, design, implementation, integration, testing and finally operations and maintenance. On the other hand, the agile model for software development came into existence in the 1990s. This was an outcome of software developers deciding to break away from a structured to a flexible development style. The approach was highly responsive to customer needs. The agile model phases of software development are as follows: user requirements, analysis, design, implementation, testing and, unlike the waterfall model, there is another add on phase called the UAT phase, where bugs are identified from the users point of view before the final release of the software. Fundamentally, the agile approach is focused on customer experience and needs to incorporate the necessary changes in the software as against the highly structured approach used under the waterfall model.

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Product  Development  Dilemma  for  Start-ups  Start-ups are on a continuous path of product development in their core area of operations to continuously respond to customer needs. The main challenge that they go through is lack of resources, limited or no customers at times, and continuously looking for funding support. With these limitations, they have to come up with a quality product that fulfils a special need of customers, so that they get attracted towards it. They have to ensure quality products with unique features and ensure delivery before or on time. This can be done only through a team of quality people developing quality products. In the process, they have to keep facing a constant struggle between deciding either to pursue building of customer base or to enhance their revenue flow. In a longterm strategy what matters to them is to provide a unique customer experience, so that the customer base keeps expanding, which in turn would result in flow of revenue in due course. However, in case emphasis gets shifted towards revenue generation, they may find it difficult to retain their customer base. Therefore, product development poses a continuous challenge to all entrepreneurs but more so to start-ups because of their limited customer base.

Insight into Product Development When  Anand  Deshpande,  Founder,  Chairman  and  MD,  Persistent  Systems,  started  the  venture  in  May 1990, it was a daunting task. In the early 1990s, there was political uncertainty and the Indian  economy was going through difficult times. There has been a big change between the way technology  was  perceived  then  and  the  way  we  see  it  today,  and  right  from  the  government  policies  to  the  number of market players, everything has changed and so has the market dynamics. The importance  of  networking  for  developing  a  venture  and  in  particular  for  sales  and  business  development  is  paramount.  For  business  to  happen,  one  needs  to  have  three  things,  which  Deshpande  calls  the  NBA, that is, one should create a Need and a Budget and have the Authority. A founder’s job is to sell  to new employees and customers. When Persistent Systems was started, product development was not a significant IT segment. The  evolution of the outsourced software product development (OPD) segment has been very similar to  the manufacturing industry in India, where the first stage was about cost arbitrage and the second  was about the process efficiencies. At stage 3, the focus is on Design for Manufacturing (DFM), while  stage 4 brings Original Design and Manufacturing (ODM). Today,  Persistent  Systems  is  helping  companies  architect  their  products  in  the  initial  stages  of  development. The company works closely with Web 2.0 companies, who have a business model defined  but are looking for scalable and efficient architecture designs to implement it in their business model.  We assist them for building the architecture working very closely with them on the architecture front. Its customers belong to a range of industries with a domain expertise in Life Sciences, Telecom,  Business Intelligence (BI), Embedded Systems, Security, Software as a Service (SaaS), Virtualization  and Usability Engineering. Product  development  is  a  continuous  process  for  companies  such  as  Persistent  Systems,  especially because of continuous technological developments. Some of the opportunities for product  development that lie ahead of the emerging technology trends are as follows:   M   anaging  information  overload  is  a  key  to  the  future,  and  there  are  too  much  data  that  are  floating  around  today  and  managing  them  for  better  decision-making  and  operation  is  necessary.    Mobile commerce is on its threshold and with the number of mobile phone subscribers in India  going up, this is surely going to be a strong trend to watch for.    Real-time  data  analytics  is  yet  another  emerging  technology,  the  best  example  of  which  concept would be the customer-specific advertisements we see on Web sites. (Continued)

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  C   loud  computing  is  also  going  to  be  very  big,  while  scientific  computing  importance  is  expected to grow as well, especially with reference to many fields of pure sciences such as  physics, biology and mathematics. Scientists all over are researching and collecting enormous  amounts of data. The method of research has been revolutionized by scientific computing. It  provides an integrated approach towards the collection of data, its analysis and its consequent  transformation into useful results.12

5.7.4  Test Marketing Stage As such, the results of the product development stage provide the foundation for developing a final marketing plan. However, a market test is undertaken to increase the chances of success at the commercial production stage. Test marketing provides actual sales outcomes in terms of turnover and specific preferences revealed by the customers from a promotion and distribution point of view revealing the acceptance level on the part of the consumers. Positive test outcomes reveal the probability of successful product launch. This stage involves testing market response and promotion and distribution strategy on a smaller scale. The whole process replicates typically in one area that is proposed to be extended to wider geographical markets. The results of the test marketing are carefully monitored, to derive its advantage in terms of launching the product on a larger scale. The test marketing can be undertaken in any area or combination of areas such as television area, Internet online test, test town and residential neighbourhood, and this stage requires basically decisions to be taken related to the following:    

Which test market? What exactly is to be tested? How long does a test need to be conducted? What are the success criteria?

The prominent outcome of the test marketing stage results in a go or a no-go decision along with comprehending related associated risk. This exercise can also be used to test specific elements of marketing mix for the new product, such as the version of the product itself, the promotional message and media spend, the distribution channels and the price. One can use several test markets to know the outcomes associated with testing different marketing mixes. Some of the key disadvantages of test markets are as follows:  Limitation of Replicability—Implies that possibility of distortions on a small scale may not get replicated on a larger scale. Even if the scales of test market are expanded, it may not totally represent the wider market. Test market results, therefore, have to be used with caution.  Problem with Effectiveness—As such, major investments have already been made to reach a stage of test marketing, and therefore, the scope for minimizing the risk may be minimal. Further, test markets give scope for the competitors to react on the basis of your advance signals.  Cost Reduction—There is hardly much scope for further cost reduction at this stage, although the main objective of test markets is to reduce the amount of investment put at risk.

5.8  STEPS INVOLVED IN TAPPING OPPORTUNITY The greatest challenge that an entrepreneur faces is to identify the idea that can be said to be an opportunity to be tapped that can ensure commercial success. It requires a deep insight on the part of an

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Seizing the Opportunity

Evaluating Opportunity

Understanding Timeframe of an Opportunity

Identifying Need for Partners, If Any

Establishing Need, Undertaking Market Research

Computing the Worth of an Opportunity

Managing the Venture

Identifying Resources Required and Sources to Acquire

197

Figure 5.11 Steps Involved in Tapping an Opportunity

entrepreneur to take concrete steps to see to it that an opportunity is seized successfully at the right time and right place. The fundamental fact lies in taking appropriate steps and actions to ensure that things start unfolding as expected on the basis of opportunity recognition. The steps involved in tapping an opportunity are discussed in the following sub-sections (Fig. 5.11).

5.8.1  Seizing the Opportunity Seizing an opportunity implies defining a set of criteria that would give confidence to an entrepreneur that an opportunity is worthwhile to pursue. Pursuing for opportunity will invariably require time and money and therefore one has to necessarily ensure seizing the opportunity at a right time so that one can fetch commensurate returns from investment. The opportunity should not only be profitable but also ensure reasonable profitability from the venture vis-à-vis the competitors in the area. A business opportunity emerges from change, chaos and uncertainty in the environment. Business ventures require an eye on these to come up with solutions to the problems that can turn into big business opportunities. One has to be alert to the government legislation that endangers existing business models and create scope for new business opportunities; product or service issues related to the environment, health and safety; and an activist group that targets your product or business model. Seizing an opportunity implies understanding the risks associated with the opportunity, so as to be ready with the right strategy to improve the bottom line of a business.

5.8.2  Evaluating Opportunity Opportunity evaluation basically starts with customer pain points or the needs that can be fulfilled. There should be concrete evidence backed up by a customer’s responses to a proposed solution and its acceptance by the customer. This should help in a clear identification of a target market for the product/service. One should be able to estimate the market potential at a given point of time and over a period. At this stage, one needs to undertake competitive analysis of the strengths and weaknesses of the offering made in the same product/service line by others. The obviously successful products could be the ones that have great competitive advantage in terms of such things as cost, delivery, quality, price and revenue generation vis-à-vis competitors. One needs to clearly define a value proposition to the customer with the help of clearly and concretely identified gains.

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5.8.3  Understanding the Timeframe Every opportunity has a time horizon for which it exists. Opportunity does not exist before a particular time and ceases after a given time horizon. Therefore, entrepreneurs need to be ready with delivery of their product/service exactly at a time during which opportunity exists. For a good and unique opportunity having no or least barriers to avail would attract competitors to quickly flood into the market and squeeze the share market for all those players operating in it. Therefore, ‘entrepreneur must get in quickly and get out before revenues become dispersed in an overdeveloped market (Jiambalvo 2001)’. Therefore, for a special niche created in the market by start-ups, they always gain a lot until others do not enter into the market or they are able to retain their niche because a proprietary item or secrecy is involved in duplication or governmental protection through patenting. Successful ventures identify and exploit markets in time, while others miss those opportunities because of lack of sense about timings.

5.8.4  Computing the Worth of an Opportunity From a business perspective, whenever one has exclusive choices to be made, the cost of making a particular choice becomes the best alternative course of choice forgone by one. Opportunity cost is defined as the cost related to the next-best choice available to someone who has picked from among several mutually exclusive choices.13 The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.14 For example, the opportunity cost of going in for an MBA programme after completing a BE would be two years of salary through a job plus expenses to be incurred on doing the MBA programme. Of course, one hopes to earn more during one’s career and expects to have a faster career progression. Similarly, if a farmer decides to grow turmeric in 5 acres of land, their opportunity cost will be the forgone earnings through the best alternative crops such as tomatoes, ladys finger and groundnut that might have been grown instead on the same 5 acres of land. Suppose one has 5 acres of land in the heart of a city and decides to build a hotel on it. The opportunity cost of building a hotel is the value of the benefits that would be forgone by putting the funds on the next-best alternative use to which the same land could have been put to. By putting the land to hotel use, the possible alternative opportunities forgone could be building a hospital, school and shopping complex. It is important to remember that the total opportunity costs of choosing an option amongst exclusive alternative options can never be estimated with certainty, and are therefore called ‘hidden costs’ or ‘hidden losses’ as what has been prevented from being produced cannot be seen or known.

5.8.5  Establishing Need Through Preliminary Market Research ‘Entrepreneurs are often so passionate about their ideas, they can lose objectivity,’ adds Nancy A. Shenker, president of the ONswitch LLC, a full-service marketing firm in Westchester, New York. ‘Rather than taking the time to thoroughly plan and research, they sometimes plow ahead with execution, only to spend valuable dollars on unfocused or untargeted activities.’15 This highlights the need for prima facie market research before plunging into greater depth to establish viability of an idea or taking a risk for launching a venture. Entrepreneurs need to precisely measure with facts and figures in quantifiable terms the need for the product or service. This would require specific estimates for sales in physical units and financial terms leading to expected return from the proposed product or service. It may be reiterated that in the beginning, the entrepreneur should get confidence by undertaking prima facie estimates for the sales

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in physical and financial terms which need to be investigated in detail in the market research module of the business plan at a later stage. Some of the pertinent questions that need to be investigated in the beginning are as follows:  Will customers take interest in the proposed product or service, implying thereby establishment of customers’ real needs. This has to respond to the question of what is it that customers are looking for in the product?  Do you have a unique value proposition that makes it unique and different to create your niche over the competitors? What is stored in your product that will result in customers’ preferring it to competitor’s products?  What is going to be the market opportunity for your product or service in terms of size of the market; growth potential in the market and competition in the market?  Can you create exclusive rights on the product through patenting, copyright, design, trademark or trade secrets?  What is the range in which customers will be willing to pay for the product? What will be the material, labour and other cost of production and distribution? How does the venture make money, that is, revenue model?  How do you propose to expand the market by bringing under your fold new customers?  What will be the distribution and packaging strategy and cost?  Who are the competitors and what are their strengths and weaknesses? How are you going to be superior in delivering value to the customer vis-à-vis competitors?  What does your team consist of by way of promoters and employees that give you extra edge?

It is important for a start-up venture to undertake preliminary market research to identify whether your idea has any gaps or weaknesses that need to be filled to ensure its success.

5.8.6  Market Research—Data Collection and Analysis Given the problem and proposed solution being looked at as an opportunity, entrepreneurs need to collect data and undertake necessary research to establish the viability of their opportunity. Data collection needs to be focused and precise from reliable and dependable sources. Abundant data are available from a variety of sources; however, precision and specificity of data matters the most. Data can be obtained first from readily available sources that may not cost much such as Internet searches, government publications, publication of industrial and trade associations and research articles available in libraries. This being an initial phase to establish the viability of an idea, it would be desirable to be extensive but specific, to answer key questions posed earlier for undertaking market research. If greater insight into the problem and proposed solution does not come from secondary sources of data that are easily and cheaply available, one may have to necessarily go in for primary sources such as interacting with experts, undertaking surveys, questionnaires and interviews to collect data. The entrepreneur may have to collect data from the companies operating in the similar products and services. This may require a good networking and ability to catch hold of right people from whom relevant information could be obtained. The next vital step is to analyse the collected data from different sources to establish or otherwise hypotheses about prima facie concerns that lead to success or otherwise of a venture. Analysis of data needs to be undertaken with the help of simple techniques to answer vital questions and estimate the future demand for the product or service. Analysis of data and its interpretation should result in a confirmatory test about prospects or otherwise of a venture and its sustainability.

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Having analysed the basic data, one needs to prepare a plan to give it an actionable shape. This basically requires answering questions such as ‘Who all will constitute the team?’, ‘What type of people does one need as employees and how would one go about inducting them?’, ‘What will be the decisionmaking process?’ and ‘How would one capitalize on all one’s assets while maintaining a degree of flexibility to change paths as and when required?’. The key feature of the plan is being proactive and the ability to adapt to the unexpected changes for increasing the probability of success of the venture. The need for developing a plan in writing is obvious from the quote by Casey Stengel—‘If you don’t know where you’re going, you may end up going somewhere else.’ Therefore, it is a solid plan that ensures degree of success of a venture by preparing your business for the future. A solid plan has an inbuilt action plan which your business will do in reference to competitors’ action plan. That is why it is said to be a strategic document. It has to be a cohesive exercise resulting in developing a grand strategy of the business and the functional strategies with reference to different operational units of the venture. For developing a grand strategy, an entrepreneur has to be very clear about their business and team’s core competency and how to translate that competency into sustainable competitive advantage while responding to specific needs of the customer. The entrepreneur, for driving benefits from its sustainable advantage, needs to inbuilt it into different functional domains of a venture such as marketing, finance, human resources, operations and information technology. Above all, one has to validate the different strategies for different functional domains through data from primary and secondary sources.

5.8.7  Identifying the Need for Partners, If Any While making a plan for the venture, the entrepreneur depending upon the business venture has to develop a clear understanding of the need for inducting co-founders if any. There are ventures that start lean with sole and single founder and with growth induct co-founders. While there are others that need to have a team in place from the beginning. This basically depends upon the nature of the business and size of operations. Of course, technologies and nature of business today are generally sophisticated to be fully developed by a single individual and deployed by any single organization. Therefore, early market research should identify possible collaborators to help develop and translate the opportunity into reality. One should have one’s credibility in place while approaching potential partners and should settle and define terms and conditions clearly. It is always desirable to sign agreements to keep one’s discussions confidential to the principals. Early execution of such ‘non-disclosure agreements’ amongst partners demonstrates care and attention to detail. Wherever required, it is desirable to engage such development partners in the beginning phase of the venture itself. These partners add a lot of value by way of technical and business expertise to the venture.

5.8.8  Identifying Resources Required and Sources to Acquire Every business requires proper identification and acquisition of resources to give shape to the venture. A new venture should have some unique resource capabilities including technology to have an edge over existing competitors. Ultimately, it is the venture having unique skills and technology that survives in the market. The greatest asset that an entrepreneur needs to have is a skill to build personal contacts and develop networking with vendors, customers, business organizations, government and others. Keeping a time for networking is a daily routine that fetches high priority on the part of founders and key employees. A clear understanding of financial requirements and utilization of funds need to be chalked out. A venture should ensure good margins and flow of cash on a continuous basis, so that cash

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crunch situations do not arise in the execution of an idea. After the project starts delivering expected cash flows and returns, the entrepreneur looking at the future growth prospects may approach investors for further infusion of capital. A successful implementation of a project idea requires a great knack and technical and human skills on the part of the venture team. In case required, founders of the venture should induct right people having these skills to ensure smooth implementation.

 5 .8.9  Managing the Venture  Managing a venture requires a management structure and style in place, to be duly filled up with a right set of people to respond to challenges, difficulties and blocks that may come on the way of implementation. To fetch returns on the investments made, the entrepreneur needs to invest on people—build team, operating procedures and practices, and information technology to make quick and good decisions. Entrepreneurs should always under-promise and over-deliver to the customer, to ensure building customer good will. It is always desirable to provide a complete and total solution to customer needs, rather than a piecemeal solution. In the present business world, the customer will always love to deal with one supplier who takes care of all aspects of their particular need. A successful marketing of a product or a service is a major milestone in the life of a venture. However, long-term sustainable growth as seen earlier requires continuous innovation to market multiple offerings. The growth of the venture depends much upon developing several types of products around core competence and related themes. The concern is to provide customer experience as they are looking for by building a strong bond with them. As such, when more and more people develop and use the technology, other related applications keep emerging to provide new opportunities. Development requires more research and experimentation, and the unending cycle continues. Thus, innovation is a constant challenge for any venture and vital to retaining competitive advantage in the long term.

 Check Your Progress   10 Steps to Convincing Yourself Your Idea Will Work 

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Before writing your business plan, you need to check that you are on the right track. This is the right time to turn back if you have nagging doubts. Here is a final 10-step, pre-start-up checklist to help you decide if your idea is really going to work. 1. Will it last? A business is like a dog; it will demand your attention several times a day until you sell it or it dies. It has to excite you or you will not find the energy to succeed. 2. Will my partner approve? A business cannot be cited as the ‘other party’ in a divorce; your life partners may become jealous of your new passion. Make sure yours do not. 3. Do parents like it? Parents like to be consulted; it makes them feel wanted. Remember that if they approve of your enterprise, they may be able to help in some way. 4. Do you have deep pockets? Are you going to run out of cash before the business gets off the ground? Before you read about business plans, listen to your instinct.

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5. What does bad look like? We all have different pain barriers and it is good to imagine what apocalypse looks like to you. Are you hooked on the good things in life or are you prepared to put it all on the line? 6. How good are your fallback skills? Do not get too depressed; but, if the proverbial stuff hits the fan, how would you earn a crust? Everyone has baseline skills (driving, cooking or selling). Imagine doing it for a living. That is your worst-case scenario. 7. What exactly do you want to achieve? Ask yourself again whether money motivates you. Do you want to change lives? You may be happier starting a social enterprise. 8. Are you a self-starter? You are going to experience ups and downs. Do you have the resilience to bounce back when someone or something has knocked you for a six? 9. Do you like surprises? Entrepreneurs who do not get surprised live with their eyes closed. If you want an orderly, predictable life, do not start or buy a business. 10. Read Kipling: Take a moment to look up that famous poem ‘If’. If you can read the poem and see yourself having the strength to succeed—read on! KEY CONCEPTS  Opportunity: Is an idea that can be converted into a profitable opportunity and needs to be thoroughly explored and doubly ensured.  Opportunity Analysis and Assessment: Requires thorough screening of ideas to clearly understand their business potential, in the backdrop of an entrepreneur’s competencies to execute an idea well.  Opportunity Recognition: Is perceiving a possibility for new profit through founding and formation of a new venture, or the significant improvement of an existing venture.  Opportunity Process: Requires a clear perspective on: what is; what could be; what is possible— understanding and anticipating customer needs.  Idea Stage: Individual finds great potential for the idea in their mental frame of reference and their mind therefore becomes obsessed and occupied with an idea, which keeps growing.  Concept Stage: Attempts to predict the probability of success of a new product idea before it is taken to the next phase of investment. This mainly involves seeking consumer’s reactions to various statements that describe the basic idea of the product to either further develop it on the basis of responses received or abandon it.  Product Development: Is a process focused on developing systematic methods for guiding all the steps involved in and associated with getting a new product to market.  Test Marketing: Provides actual sales outcomes in terms of turnover and specific preferences revealed by the customers from a promotion and distribution point of view revealing the acceptance level on the part of the consumers.  Seizing an Opportunity: Implies defining a set of criteria that would give confidence to an entrepreneur that an opportunity is worthwhile to pursue.

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 Opportunity Evaluation: Attempts to have a concrete evidence backed up by customer responses to a proposed solution and its acceptance by the customer.  Opportunity Cost: Is defined as the cost related to the next-best choice available to someone who has picked from among several mutually exclusive choices.  Managing a Venture: Requires a management structure and style in place to be duly filled up with a right set of people to respond to challenges, difficulties and blocks that may come on the way of implementation. ENDNOTES 1. books.google.co.in/books?isbn=1402073585 2. faculty.weatherhead.case.edu/…/Openness%20to%20Experience%20and%20Opportunity%20 Recognition.pdf 3. Dellabarca, R. 2002. ‘Understanding the “Opportunity Recognition Process” in Entrepreneurship, and Consideration of Whether Serial Entrepreneurs Undertake Opportunity Recognition Better Than Novice Entrepreneurs,’ MBA Dissertation, http://www.scribd.com/doc/2407758/ Opportunity-Recognition 4. www.ewasteglobal.blogspot.com 5. Economic Times, 6 September 2010, articles.economictimes.indiatimes.com/…/27570842_1_ e-waste-electronic-waste-second-hand-computers 6. Michael J. Roberts and Mary Tripsas, ‘Radical Change, Entrepreneurial Opportunity’, Working Knowledge, Harvard Business School, July 2004, http://hbswk.hbs.edu/item/4238.html 7. www.accenture.com/…/PDF/OutlookPDF_DeepSpecialization_01.pdf 8. Start-up’s Life Cycle—IDEA Stage, http://www.jordipuigdellivol.cat/index.php/en/blog/127el-cicle-de-vida-de-lstart-up-fase-idea, accessed on 8 July 2010. 9. Vivek, A. ‘Are You Ready for VC Investment?’, Entrepreneur’s Corner, http://m.citizenmatters.in/blogs/show_entry/109-caselet-are 10. Market Navigation Inc., http://mnav.com/contest.htm; mnav.com/focus-group-center/contesthtm/4/11. Berglund, F. 2007. ‘Cross-functional Product Development Education-Experiences from a Decade of Student Projects in Collaboration with Industry’, http://publications.lib.Chalmers. se/cpl/record/index.xsql?Pubid=41367, accessed on 29 June 2009. 12. An interview with Anand Deshpande appeared in NASSCOM Web site; http://www.nasscom. in/Nasscom/templates/NormalPage.aspx?id=56190 13. Investopedia.com, ‘Opportunity Cost’, http://www.investopedia.com/terms/o/opportunitycost. asp#axzz1dHnjRE8o 14. The Economist’s definition of Opportunity Cost. 15. Spaeder, K. E. ‘How to Research Your Business Idea’, Entrepreneur; http://www.entrepreneur. com/startingabusiness/businessideas/evaluatingyouridea/article70518.html 16. Newman, D. K. 2009. ‘Managing Urinary Incontinence With Undergarments, Adult Diapers & Pads’, http://www.seekwellness.com/incontinence/managing incontinence_with_pads.htm, accessed on 23 October 2008.

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17. Knowles, D. K. 2001. ‘Information’, http://health.allrefer.com/health/urinary-incontinenceprodutsinfo.html, accessed on 17 February 2009. REFRENCES Baron, R. A. 2007. ‘Behavioral and Cognitive Factors in Entrepreneurship’, Strategic Entrepreneurship Journal, 1: 167–82. Bosma, N. and R. Harding. 2006. Global Entrepreneurship Monitor, Summary Results. USA: Babson College & UK: London Business School. www.gemconsortium.org/download.asp?fid=532. Brindley, B. 2008. Business Studies. Harlow: Pearson Education, Singapore PTE Ltd. Casson, M. 1995. Entrepreneurship and Business Culture. Cheltenham, UK: Edward Elgar. Christensen, P. S., O. O. Madsen, and R. Peterson. 1989. Opportunity Identification: The Contribution of Entrepreneurship to Strategic Management. Denmark: Aarhus University Institute of Management. Delmer, F. and S. Shane. 2004. ‘Legitimating First: Organizing Activities and the Survival of New Ventures’. Journal of Business Venturing, 19(3): 385–410. Evans, P. and T. Wurster. 2000. Blown to Bits: How the New Economics of Information Transforms Strategy. Cambridge, MA: Harvard Business School Press. Gaglio, C. M. and J. A. Katz. 2001. ‘The Psychological Basis of Opportunity Identification: Entrepreneurial Alertness’, Small Business Economics, 16(2): 95–111. Gedimen, L. 1965. ‘How to Screen New Product Ideas More Effectively’, Printer’s Ink, 291(4): 63–4. Grove, G. L., M. J. Grove, N. T. Bates, L. M. Wagman, and J. J. Leyden. 2002. ‘Scrotal Temperature Does Not Differ Among Young Boys Wearing Disposable or Reusable Diapers’, Skin Research and Technology, 8(4): 260–70. Isenberg, D. 2010. ‘The Two Minute Opportunity Checklist for Entrepreneurs’, Harvard Business Review, March 4. Jiambalvo, J. 2007 Managerial Accounting. New York: John Wiley & Sons, 9. Pham, N. T. and E. W. Brown. 2009. Diapers and the Environment. www.nearta.com, accessed on 17 February 2008. Regan, C., D. Kinkade, and G. Sheldon. 1998. ‘The Applicability of the Engineering Design Process Theory in the Apparel Design Process’, Clothing and Textiles Research Journal, 16(1): 36–46. Shane, S. 2003. A General Theory of Entrepreneurship. Cheltenham: Edward Elgar. Singh, R., G. E. Hills, and G. T. Lumpkin. 1999. ‘New Venture Ideas and Entrepreneurial Opportunities: Understanding the Process of Opportunity Recognition’. Proceedings of the United States Association for Small Business and Entrepreneurship Annual Meeting, San Diego, CA, 657–71. Smith, A. 1904. An Inquiry into the Nature and Causes of the Wealth of Nations. Fifth ed. E. Cannan, ed. London: Methuen and Co., Ltd. Storey, D. J. 1994. Understanding the Small Business Sector. London/New York: Routledge. Venkataraman, S. 1997. ‘The Distinctive Domain of Entrepreneurship Research’, in Advances in Entrepreneurship, Firm Emergence and Growth. J. Katz, ed. Vol. 3, JAI Press, 119–38. Verheul, I., S. Wennekers, D. Audretsch, and R. Thurik. 2001. ‘An Eclectic Theory of Entrepreneurship: Policies, Institutions & Culture’. Paper Presented at the Timbergen Institute Papers, EIM Small Business Research and Consultancy, Zoetermeer, The Netherlands, 22.

CONCEPTUAL QUESTIONS 1. Differentiate between an idea and an opportunity. 2. ‘The fundamental question that needs to be answered is whether an idea has a business model in place.’ What is the implication of this statement for identification of opportunities? 3. What does an entrepreneurial opportunity consist of ? 4. What is meant by opportunity recognition? Define the process of opportunity recognition. 5. What are the key sources of identifying opportunities?

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6. What are the broad areas of changes that keep taking place in an environment resulting in new opportunities for entrepreneurs? Explain with examples. 7. Differentiate between enhancement and extension in product ideas leading to creation of entrepreneurial opportunities with examples. 8. Specialization leads to cost economics and in turn creation of competitive advantage leading to entrepreneurial opportunity. Explain with an example. 9. It is said that Indian economy provides a large number of entrepreneurial opportunities. What is the rationale behind this statement? Explain. 10. Differentiate between the idea stage and the concept stage of an idea. 11. ‘Product development is a process focused on developing systematic methods for guiding all the steps involved in and associated with getting a new product to market’. Explain the salient aspects that need to be taken care of at the product development stage. 12. What is the difference between the waterfall model and the agile model for product development particularly with reference to Web-based ventures. 13. What is the key dilemma faced by start-ups in the area of product development? 14. What are the key decisions to be made in the test marketing stage? 15. What are the key disadvantages of test markets? 16. Explain the steps involved in tapping an opportunity. 17. What is the meaning of managing a venture? CRITICAL THINKING QUESTIONS 1. It is said that Indian economy is poised for accelerated growth and especially provides a large number of opportunities suited for young population in the age group of 15 to 25 years. What is the rationale behind this statement? Identify an opportunity for this segment of the population and justify with facts and figures reasons for treating it to be an opportunity. 2. The following are some hypothetical statements pertaining to customer needs. Identify the solutions to fulfil these needs by recognizing an opportunity behind each situation. i. A going out of business signboard placed in a local store. ii. 10 new working couples with young children in the age group of three to eight years have just shifted to your locality. iii. 4,000 students in a residential college not liking their mess food. iv. A campus wherein faculty members are not finding gardeners to maintain their garden. 3. Small and medium industries catering to local demand and are not able to afford advertising and sales promotion. What specific opportunity can be recognized to satisfy their need?  CASE 5.1:  REUSABLE DIAPER  A diaper is a sponge-like garment used by individuals who are incapable of controlling their bladder or bowel movement or are unable to use a toilet facility. Once it becomes soiled, the parents or the caregiver needs to change it, as failure to do so at regular intervals may cause (Continued)

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diaper rash. Diapers are usually composed of layers of fabric such as cotton, hemp, bamboo or microfiber and can be washed and reused multiple times. However, disposable diapers containing chemicals are thrown away after use. The decision to use cloth or disposable diapers is a controversial one, owing to issues ranging from convenience, health, cost and their effect on the environment. At present, disposable diapers with brand names such as Huggies and Pampers are commonly used. The major users of diapers are children who have not been potty trained as yet. The other market segment consists of elderly people having physical disabilities or people working in extreme conditions such as astronauts and in labs created in an environment that cannot provide for toilet facility who use diapers. The crucial issue that is being debated is the huge waste that is getting created as a result of disposal of used diapers, which is causing environmental hazard. It is estimated that in the United States alone, around 27.4 billion disposable diapers are used every year that results in a possible 3.4 million tonnes of used diapers adding to landfills every year. Hence, a need for using technoeconomically viable cum environmental friendly reusable diapers. An American study of 6,000 new and expectant mothers last year found that 81 per cent were concerned about the environment and 70 per cent said that they planned to change their purchasing behaviour this year in order to protect the environment. It is rightly said that money spent on disposable diapers is literally thrown in the waste basket and it is worth investing money for college education of your child. Slowly, consumers have started realizing the importance of reusable diapers. The newer, high-tech cloth diapers are userfriendly and far less harmful from an environmental impacts point of view. Although it takes time to change habit, once one gets used to them, one realizes that it is not at all difficult to use them compared to disposable diapers and that they also serve the purpose well. It has also been said by some researchers that the environmental impact that the manufacture and the washing of cloth diapers have is equal to that of disposable diapers. However, the fundamental question that remains is disposable diapers and wipes end up in landfills causing a great damage. Further, inside those plastic diapers is human waste which should not be dumped in landfills. As against this, cloth diapers can be reused, recycled, donated or even sold. As such, cloth diapers are becoming latest craze in parenting. High-tech cloth diapers are userfriendly and easy to use. It is just a question of time that parents would change their habits, once dependable, reasonably priced and environment-friendly diapers are available. Product development involves multi-disciplinary expertise that can result in providing a good bridge between a problem or need and a solution. Gerontology has been a neglected area of concern worldwide; however, redress of elderly issues is now a centre of social issues worldwide. Incontinence is the physiological malfunctioning of the excretory organs that result in the leakage of urine and stools from individuals. Incontinent products, which include adult diapers, incontinent garments and pads, help protect self-esteem, comfort and independence of individuals. There are a number of products on the market that can be classified under disposable and reusable products. Disposable incontinent products generally consist of a plastic outer layer, a super-absorbent polymer or chemical and an inner layer. The more recent disposables are biodegradable ones, which use a non-chemical absorption method and they are broken down over time in landfills. They are a convenience but more expensive than non-biodegradable ones and reusable ones, and their disposal adds to environmental pollution. Although some consumers say that disposable diapers are

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efficient on water usage, this may not be proved conclusively. This is due to increased efficiencies of toilets and washers on the amount of water needed for reusable diapers. Concerns of disposable products have ramifications on municipal solid waste management. According to Pham and Brown (2009) in an article titled Diapers and Municipal Government, disposable nappies are the third largest contributor to municipal solid waste (MSW) in the United States of America accounting for 1.5 per cent–4 per cent of the total waste. It might be initially cheaper to buy disposable nappies, but disposal costs do impact on consumers later through high municipal charges of disposal. Other countries such as Canada have instituted a disposable diaper tax or pay as you throw to mitigate the MSW and encourage consumers to recycle or use reusable products. Reusable diapers, on the other hand, tend to have a waterproof outer layer that does not breathe, which makes them unappealing to most women who are users of the products. Otherwise, the piled 100 per cent cotton cloth that makes up a reusable diaper breathes and is comfortable to wear. If an individual is irritated by or sensitive to the nappy pile, a nappy liner is used. Contrary to the negative perceptions (Grove et al. 2002), when they looked at differences in skin temperature of boys wearing disposable and reusable diapers, found no difference in scrotal temperature. The temperature was only lower for boys who used reusable diapers without the protective plastic outer cover, which was rare to find in practice. The key benefits as stated by Pham and Brown (2009) are that reusable diapers are less expensive and healthier to use. There is no best type of product; what matters is the severity of incontinence, product quality, cost and personal preference of caregivers.1,2 The specific choice of a product depends on several factors that include amount of urine loss, durability, ease of use, comfort, cost, pattern of urine loss and odour control ability.3 Environmental pollution concerns have given the impetus to the utilization of eco-friendly products. The Eureka Institute (2009) reported that the smart eco nappy in the United Kingdom is a stylish solution to the billions of US disposable diapers that are thrown away every year. Furthermore, the market share of washable diapers has grown from 4 per cent of total nappy sales in 2004 to more than 15 per cent of parents using reusable nappies. Even maternity wards in the United Kingdom are being supplied with reusable nappies. Keeping the opportunity for reusable diapers in the market, various studies have been undertaken for product development in the area. The key objectives, assumption and methodological framework used in the study by Pinkie E. Zwane, Head of Consumer Sciences Department, University of Swaziland (UNISWA), are as follows:

 Objectives  The following objectives guided the study: i. To design and develop a prototype for a reusable diaper for geriatrics. ii. To determine water repellency characteristics of selected cover fabrics for the product. iii. To evaluate the acceptance of the prototype diaper for end use by the target group.

 Assumption  The terry cloth made from 100 per cent cotton was selected as a suitable fabric to facilitate the absorption of body fluids towards the outer water-repellent fabric of the diaper. (Continued)

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 Methodological Framework  A quasi-experimental design was used to assess the performance of the water-repellent fabrics for the prototype, and a qualitative approach was deemed appropriate to evaluate the product’s acceptance by end users. The creative design process was used as a methodological framework for prototype development. It involves problem identification, exploration of the problem, defining parameters or critical factors around the problem, generating design ideas, selecting the relatively best option, prototype development and prototype evaluation (Regan, Kinkade and Sheldon 1998). In exploring the problem, the aim was examined through literature search to identify crucial principles to be utilized in the product development phase. The major principles involved were absorbency, water retention within a micro-ambience and comfort in terms of moisture levels and fabric feel on the human skin. Market and garment analyses were done to determine what was on offer and to gather key garment features in the market.4 Critical factors that were considered were in terms of the target group for the product to be developed, and functional requirements needed to design and develop a quality product. Standard test methods to use in assessing fabric characteristics were identified. A decision was made on fabric types to select and test based on the generated design sketches of product, price and performance, stitch and seam types to explore, types of closure systems and colours to choose for the prototype. Selection of appropriate fabrication and colour were decided on the basis of - seam and stitch type, and closure system based on comfort and functionality of the product. Product development then ensued from the results of the tests that were conducted. During the production phase of the prototype, assessments were done to settle for the most efficient assembly methods, and suitable methods of fastenings to be used to address fit-related concerns. After the prototype development phase, the user trial appraisals were done to evaluate the aesthetics, functionality, safety, comfort and fit of the prototype on the user. On the basis of the responses received, they were incorporated in refining the prototype.5

 Materials and Methods  Fabric Selection—A double-sided pile terry cloth was purposively selected to harness the absorptive property of the 100 per cent fibre content on the terry cloth. The absorbency of the terry cloth was not tested because of the established knowledge that it is highly absorbent and comfortable on the skin. The fibrefill interlining was used to aid in the wicking of absorbed excreted body fluids away from skin towards the outer layer of fabric. An outer water-repellant layer was used to stop fluid seepage to the exterior and to help keep the bedding and immediate environment of individuals dry, comfortable and sanitary. Fabric Tests—Three water-repellent fabrics were purposively selected from the shops, on the basis of availability and fabric characteristics. They were subjected to an AATCC 2201980 waterrepellent test and an AATCC 3-1989 chlorine bleach test. Machine-washed water-repellent fabrics were later assessed for appearance. All the three were tested for water penetration and colour retention when exposed to a chlorine bleaching solution using 5 per cent of 3.5 per cent chlorine bleach concentration. After the selection of a suitable water-repellent fabric, a prototype was developed, which went through a normal washing cycle using an automatic washing machine to evaluate the product appearance qualities after washing. All the selected fabrics were white or close to white in colour for hygienic reasons and for no effect on colour change when bleached.

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User Trials—Permission was sought from the Board of Directors of Hospice at Home (a non-governmental organization dealing with HIV/AIDS cases) to conduct the end user trials. Confidentiality of patients was maintained through distribution of the product by community health workers to conduct the trials. The collected data were analysed mostly qualitatively.

 Results and Discussion  Fabric Tests—A comparison of tested fabrics with the standard ratings on the water repellency test showed 100, which stood for no water penetration on all the three fabric types. Hence, all the waterrepellent fabrics were suitable for end use on the basis of this test, as shown in the table that follow. The colour fastness to chlorine bleach had an effect only on fabric B that was plain white in colour but changed to a yellowish colour within two minutes. This was a clear indication that the chlorine bleach had no adverse effects on fabrics A and C but was detrimental to fabric B. Therefore, the latter was not suitable for the prototype development because the product had to be bleached in the laundering process for hygienic purposes. The response of fabrics to a normal washing cycle using a washing machine revealed that fabric C sustained a few tears after the laundering process. On the other hand, fabrics A and B were water repellent and were not altered in appearance by the washing process.

Performance Test on Tested Fabrics Fabric Type

Fabric Test

Results

ABC

Water repellency test

ABC

Chlorine bleaching test

ABC

Appearance test after washing

No wetting No wetting No wetting White Yellow Cream white Same as before Same as before Had few holes

 Description of Prototype  The design was made after the consideration of the purpose of the product. It was eventually made using a double-sided pile terry cloth, half the thickness of fibrefill for sewability reasons, and using fabric A. The inner leg edges and back edge were elasticized for retention of body fluids within the diaper. Velcro fasteners were selected for easy dressing and undressing of the garment, and to achieve fit. They were sewn in the vertical direction initially. It was observed that there was no seepage of fluids to the exterior, but the fit around the legs was imperfect.

 Customer Responses to Prototype  Responses received from the user trials indicated that the nappy was comfortable. This could be attributed to the use of towelling fabric, which has a soft feel on the skin. Furthermore, terry cloth (Continued)

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was highly absorbent and facilitated the removal of fluids from the skin to the fibrefill fabric. The batting made from polyester, sandwiched between two layers of terry cloth, wicks or adsorbs the fluids from the inner layer of terry cloth to the outer layer of the same fabric, and provides a cushioning effect for comfort purposes. The outer, water-repellent fabric acted as a stopper to the seepage of fluids to the exterior. The respondents further reported that the nappy was reusable and very good if the user had only urinated. The highlighted limitations by the end user included a lengthy period in drying the product on the line due to layers used in the construction and the water repellent layer, which may hinder rapid evaporation of the water used in the washing process. There was also staining of the nappy after being soiled with faecal material, and thus, it was referred to as ‘good if user has only urinated’. Users were later made aware that fabrics used were bleachable for hygienic and aesthetic purposes. The suggestions on improvement on the use of the product included the following: the use of durable household gloves when using the product to probably lessen the viral transmission to caregivers and the use of nappy liners for ease in discarding the stools. Emphasis was given on soaking the nappy in a chlorine bleach solution for 20 minutes to destroy any virus present in the excreted material. The cost benefit of reusable diapers was evident from the expenditure for a new born baby being $864.00 on reusable diapers as against $6,976.00 on disposable diapers over a three-month period. A prototype was successfully designed and made for geriatrics. The developed product has long-term economic benefits, from six months to a one-year lifespan, given its serviceability for intended use. The water-repellent fabric A was best in performance when subjected to the fabric tests that were conducted. Generally, the prototype was accepted, appreciated and patented with number AP/P/2002/002613.6  Questions  

1. What are the advantages and disadvantages of using disposable and reusable diapers? 2. What are the factors that have led to research in the area of coming up with reusable diapers? 3. What are the salient features and characteristics of reusable diapers produced by existing manufacturers and what are their main drawbacks? 4. What litmus test can ensure opportunity recognition in the diaper industry? 5. What are the steps involved in product development in general and diapers in particular? 6. What key inputs have been received from customers on the new reusable diapers developed? In what way can their input be further used to improvise on the product? 7. Do you think great opportunity exists for reusable diapers across the globe? If so, can it be turned into a venture? What are the key risks involved in this industry?  Endnotes  

1. Newman, D. K. 2009. ‘Managing Urinary Incontinence With Undergarments, Adult Diapers & Pads’, http://www.seekwellness.com/incontinence/managing incontinence_ with_pads.htm, accessed on 23 October 2008.

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2. www.autexrj.com/cms/zalaczone_pliki/6_332.pdf 3. Knowles, D. K. 2001. ‘Information’, http://health.allrefer.com/health/urinary-incontinenceprodutsinfo.html, accessed on 17 February 2009. 4. www.autexrj.com/cms/zalaczone_pliki/6_332.pdf 5. www.autexrj.com/cms/zalaczone_pliki/6_332.pdf 6. Zwane, P. E. 2010. ‘Product Development: Reusable Diaper’, AUTEX Research Journal, 10 (1), March 2010, © AUTEX, http://www.autexrj.org/cms/zalaczone_pliki/6_332.pdf

 CASE 5.2:  OPPORTUNITY—EARTHMOVING INDUSTRY  Indian economy has been growing at a rate of 8 to 9 per cent per annum for the past few years and is the second fastest-growing economy in the world. The Indian construction industry has been contributing significantly to the overall economic development of the country. The construction industry has been growing at a compound average growth rate of around 20 per cent for the past five years. In 2005, the industry created around 31 million jobs. However, just around 3 per cent of the jobs were created in the organized sector and the rest were in the unorganized sector. This industry in India is highly fragmented and has about 300,000 construction companies operating nationwide. The government has allowed 100 per cent foreign equity in the construction industry. Among the major infrastructure projects are the $7–$8 billion India–Iran gas pipeline, the $2.8 billion construction of two power plants and the $2.3 billion power project in Tamil Nadu. The momentum in the overall growth of Indian economy is likely to continue with the growing quantum of domestic and international capital inflow in this industry. This would give a further boost to the demand for infrastructure. Equipment rental business in the country is at a nascent stage and is just 2 per cent of the total equipment market. This has grown by around 25 per cent in 2010, mainly on account of increasing demand for machinery from the infrastructure sector. Infrastructure is the backbone of any economy and India is no exception. The construction industry employs more than 30 million people. This sector, which covers rural and urban infrastructure, roads, airports, sea-ports and commercial and residential establishments, got a major boost during the last five years mainly because of a large number of government schemes and projects such as Bharat Nirman, Pradhan Mantri Grameen Sadak Yojana and airport modernization, and also because of boost to the housing sector. It is expected that the total investment in the infrastructure sector is going to touch 9 per cent of GDP by the end of 2012, as against 5 per cent of GDP in 2006–07. On the basis of this projection, it is estimated that investment in physical infrastructure alone is likely to touch $500 billion between 2007and 2012. Massive construction projects would translate into multiple downstream opportunities for several other sectors, such as cement, steel and construction equipment. As a result, the construction equipment industry is likely to grow from $2.3billion to $12–$13 billion by 2015, that is, a compound average annual growth rate of around 24 per cent. The major operators in the construction equipment rental business are Quippo and Sanghvi Movers. (Continued)

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 The Rental Business  Large construction projects require deployment of heavy equipment such as cranes, bulldozers, loaders and dumpers. Purchasing such equipment only adds to the costs of construction companies, who are already battling soaring commodity prices, particularly those of cement and steel. Some of the vital categories in which the construction industry related equipment can be classified are as follows:       

earthmoving equipment concrete equipment material-handling equipment material preparation road construction equipment construction vehicles dumpers tunnelling and drilling equipment

Because of heavy investment required to acquire these pieces of equipment, particularly small and medium operators in the construction industry look at acquiring these equipment items on lease. This has helped in the growth of construction equipment banks, which provide machinery on rent and make it easier for developers to contain project costs. Two companies dominate India’s equipment rental business—Quippo, promoted by SREI, an infrastructure finance company, and Saghvi Movers. However, there are several smaller players in the unorganized sector. The launch of Quippo, the country’s largest infrastructure equipment bank, in 2002, coincided with the start of the Tenth Five Year Plan period. The company made the most of the big opportunities in renting equipment not only with the construction sector but also with power, mining, ports, telecom, and oil and gas. Besides, Quippo also provides value-added services such as trained manpower and maintenance facilities. Sanghvi Movers is another major player in the business with special focus on cranes. Operating with a fleet of 300 medium to large cranes, the company boasts an impressive line-up of clients such as Suzlon, Reliance, Enercon, BHEL and L&T. Global players in the earthmoving equipment industry are Caterpillar, Deers and Terex from the United States, Komatsu and Hitachi from Japan, Volvo from Sweden and Liebherr Inti from Switzerland. The major construction equipment manufacturers in India are Bharat Earth Movers, L&T Case, L&T Komatsu, Ingersoll-Rand India, Tractors India, Telco Construction Equipment, Godrej & Boyce Mfg., Escorts Construction Equipment and Action Construction Equipment. According to ‘ECE Vision 2015: Scaling new heights in the Indian Earthmoving and Construction Equipment Industry’, a study conducted by McKinsey for CII and the Indian Earthmoving and Construction Industry Association (IECIAL), construction equipment rental is one of the emerging growth areas of the Indian construction equipment industry, besides exports, and refurbishing of used equipment and services. ‘The services segment in the construction equipment business is still nascent and presents good opportunities for growth,’ says a study carried out by the India Brand Equity foundation (IBEF) and KPMG. Currently, equipment rentals contribute just about 2 per cent of the market. This was expected to grow to about 25 per cent by 2010, the study said. In the United States, the rental market is 65 per cent of the total construction equipment market. The global demand for construction machinery has increased from $97.7 billion in 2006 to around $130 billion in 2011. The study says that China, India, Mexico and Russia will register

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some of the largest sales increases, with China alone accounting for 31 per cent of all additional construction machinery demand through 2011. The demand will be fuelled by healthy economic growth, ongoing industrialization efforts, rising population and higher standards of living in a developing world leading to increase in spending on construction. While India and China are on an upswing, the United States, however, could see a slump in its construction equipment rental business. This is because of the fears of recession looming large over the world’s largest economy and the ongoing trouble in its housing market. Lesser construction of houses translates into lesser demand for cranes and dumper trucks among other earthmoving machinery.1  Questions  

1. What is the nature of the construction industry in India and what contribution does it have to the growth of the economy? 2. What logical reasoning provides a clue for the earthmoving equipment industry in India to be a great opportunity? 3. What specific business models could be effectively deployed to tap this opportunity in the Indian market? 4. If you choose to enter into rental business in this industry, which market segment would you prefer to enter and why?  Endnote 

1. Bajpai, V. ‘An Earthmoving Opportunity’, DARE-Because Entrepreneurs Do, 1 April 2008; http://www.dare.co.in/opportunities/services/an-earthmoving-opportunity.htm

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6

Legal Aspects of Business  LEARNING OBJECTIVES    To understand the importance of the legal aspects of doing a business.  To know about different forms of businesses and their characteristics.  To know about the key criteria and considerations for forming a particular type of business entity.  To learn about the different steps involved in setting up a venture.  To know about the significance of Memorandum of Association and Articles of Association for a company.

 To know about the key aspects of board meetings and the role of the board of directors.  To know about the important steps involved in setting up a company in India.  To know about various legal and regulatory acts governing business in India.  To know about the legal way of winding-up a company.  To know about the basis for availing legal services from a professional.

B. N. Kalyani, Kalyani, Chairman, Kalyani Group Innovation has always been a driving force at Kalyani. It is something that has always been inherent in our corporate culture, our processes and our values. This spirit will now be reflected through our new identity—a constant, unending commitment to excellence and innovation. —B. N. Kalyani

B. N. Kalyani, Chairman of the $2.5 billion Kalyani Group, is the principal driving force behind the growth and success of the Kalyani Group of Companies. He did his BE in Mechanical Engineering from the erstwhile Birla College of Engineering, Pilani, India, and MS from Massachusetts Institute of Technology, USA. The group’s business interests are Specialty Steel, Forging, Auto Components, Infrastructure and Specialty Chemicals. The group comprises companies that include Bharat Forge Limited, Kalyani Steels Ltd, Kalyani Carpenter Special Steels Ltd, Automotive Axles Ltd, Kalyani Lemmerz Ltd, BF Utilities, Hikal Ltd, CDP Bharat Forge GmbH (Germany), Bharat Forge Aluminiumtechnik GmbH (Germany), Bharat Forge America, Inc. (United States), Bharat Forge Kilsta AB (Sweden), Bharat Forge Scottish Stampings Ltd and FAW Bharat Forge (Changchun) Co. Ltd (China). Since its incorporation in 1961, Bharat Forge Limited has emerged as one of the major global players in the forging industry. With the largest of facilities and a good track record of innovations, it emerged as the leader in the Indian forging industry. Kalyani also serves on the Boards of many prestigious companies and represents the industry on several government committees. Kalyani is the Founder Chairman of Pratham Pune Education Foundation, an NGO engaged in providing primary education to children belonging to the underprivileged sections of the local community in Pune.

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Kalyani’s significant contributions to both the industry and the community have been recognized through various prestigious awards that he has received. He has been conferred ‘Businessman of the Year 2006’ by Business India Magazine; ‘Entrepreneur of the Year 2005 for Manufacturing’ by Ernst & Young; and ‘CEO of the Year 2004’ by the Business Standard group. He is also the recipient of several other awards, including ‘Leader of Quality [Gold Award]’ by the Qimpro Foundation; ‘The CEO of the Year 2006’ by the Indian Institute of Materials Management; ‘Baroda Sun Award’ by the Bank of Baroda; ‘V. Krishnamurthy Award for Excellence—2006’ from the Centre for Organization Development, Hyderabad; FIE Foundation’s ‘Rashtrabhushan Award’ for outstanding contribution in Industrial Globalization ; and ‘Global Entrepreneur of the Year 2006’ by the Jagatik Marathi Chamber of Commerce and Industries. Kalyani was conferred DLitt by Symbiosis International University, Pune, in 2006; in addition, he is a Fellow of the Indian National Academy of Engineering. He was honoured by the Government of India with the prestigious Padma Bhushan Award in 2008, one of the highest civilian awards in India, for his distinguished contributions of a high order to the trade-and-industry sector. The award is a testimony to his relentless struggle to make Bharat Forge the no. 1 company in the forging industry in the world.

 6.1  INTRODUCTION  Legal aspects, including the regulatory mechanism of a country, act as the key to the operations of any business. Any business has to ensure the bare minimum compliance to the legal and regulatory mechanism and, as such, has to put in operation beyond stipulated legal and regulatory measures. The legal environment reflects the policy framework and the mindset of the government that governs business operations in any country. The regulatory mechanism translates the operationalization of a policy framework to ensure that businesses comply with and function within the statutory framework. Every company, while chalking out its goals and objectives, must take into account the prescribed legal framework. This becomes a guiding framework for the efficient and healthy operation of the organization. An entrepreneur’s journey starts with the registration of the business with the stipulated authorities, progresses to complying with labour laws and other regulations, in addition to complying with the taxation laws and the statutory environmental stipulations. The basic step involving registration of a legal entity is required for the purpose of government approval—local, state, and central or federal—which differs from country to country and serves both to keep track of similar businesses for extending support and incentives, if required, and to collect various government dues from them. Another vital dimension related to legal aspects relates to intellectual property rights, which provides a negative right to the company and entrepreneur or innovator to take advantage in a knowledge economy, of the businesses that thrive on the strength of IPRs.

 6.2  FORMATION OF A BUSINESS ENTITY  The first step in the initiation of a business is to give form to a legal entity that can operate as a business entity in the given economic environment. Fundamentally, there are three basic legal forms of business entities. Certain new developments have led to the creation of a few more forms. The three vital forms of business entities are proprietorship firms, partnership firms and corporations—private limited, public limited and deemed public limited companies (Fig. 6.1).

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Proprietorship

• One Owner and No Stock Issued, with Unlimited Liability

Partnership

• More Than One Owner, with Partnership Deed, No Stock Issued and Unlimited Liability

Corporation

• Private Limited (Stock Issued) • Public Limited (Limited Liability) • Deemed Public Limited

Figure 6.1 Forms of Business Entities A corporation, that is, a public limited or a private limited company, is formed by shares of ownership issued to the shareholders. Shareholders have a limited liability but are subject to double taxation. In India, we have another type of entity called deemed-to-be-public-limited company, which, although not issuing shares to the public, is treated as a public limited company because of its fulfilment of other criteria. There is no bar on the number of owners in a public limited company. There can be a minimum of two and a maximum of as many shareholders as possible in a public limited company, whereas a private limited company can have a minimum of one and a maximum of 50 shareholders. A sole proprietorship concern has a single owner and no stock is issued. The owner of the company faces unlimited liability but only single taxation. Business is owned, financed and controlled by one individual; however, the owner can employ other staff. A partnership concern is similar to a sole proprietorship, except that there is more than one owner. Terms of Partnership, agreed through a contract or deed of partnership, are bound by the terms of the Partnership Act (1932) of India. Thus, the broadly different forms of business entities have different advantages and disadvantages, which need to be assessed well before deciding about the form of a business one should start with. Some of the key considerations and criteria that need to be taken care of at the time of forming a business entity are as follows:        

ownership cost of incorporation minimum number of promoters limit of liability record keeping and statutory requirements continuity of a business capital requirements management control

One needs to have a great clarity about business, its growth prospects, nature and so on within the aforementioned criteria to decide how and which form of a business to start with. Let us examine the relevance of the aforementioned criteria to business formation.

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6.2.1  Ownership Proprietorship In a proprietorship concern, the individual who starts the business is the owner of the business. They own the whole responsibility of running the business. This type of business is usually common among local building firms, small shops, restaurants, butchers and so on. It provides a great flexibility to operate and have full control in the hands of the owner; it requires the owner to make all the key decisions and whatever is earned or lost belongs to the owner. Partnership  A partnership concern belongs to the partners who have formed it. As per Section 4 of the Partnership Act of 1932, which applies in India, ‘Partnership is defined as the relation between two or more persons who have agreed to share the profits and losses according to their ratio of business run by all or any one of them acting for all.’ This definition added the concept of mutual agency. Thus, ownership in a partnership concern is shared among the partners. Basically, it provides scope for more than one to discuss and make decisions having inherent risk. In the words of Solomon, ‘Two can accomplish more than twice as much as one. If one fails, the other pulls him up; but if a man falls when he is alone, he is in trouble. And, one standing alone can be attacked and defeated, but two can stand back-to-back and conquer. Three is even better, for a triplebraided cord is not easily broken.’ There can be two broad categories of partners, namely, general partners and limited-partnership owners (Fig. 6.2). General partnership: Each of the two or more partners have unlimited liability for the debts of the business. The income and the expense are reported on separate returns for tax purposes, but each partner then reports his or her pro rata share of the profit or loss from the business as one line on their personal tax returns. Limited partnership: Each of the limited partner’s exposure to the debts of the partnership is limited to the contribution each has made to the partnership. Limited  Liability  Partnership  A law to allow ‘Limited Liability Partnership’ (LLP) in India, the LLP Act 2008, has recently been enacted by the Parliament of India. The main advantage of LLP as an alternative corporate business entity lies in the arrangement that provides the benefits of limited liability of a company but allows its owners the great flexibility of organizing their internal management on the basis of a mutually arrived agreement, similar to a partnership firm. This form of a business is especially useful for small and medium enterprises, in general, and for the enterprises in the services sector, in particular, including professionals and knowledge-based enterprises. As per the proposed Bill, LLP shall be a body corporate and a legal entity separate from its partners. Types of Partnerships

General Partnership— Each of the Two or More Partners Will Have Unlimited Liability for the Debts of the Business.

Limited Partnership— Each of Limited Partner’s Exposure to the Debts of the Partnership Is Limited to the Contribution Each Has Made to the Partnership.

Figure 6.2 Types of Partnerships

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It will have perpetual succession. Although the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Above all, no partner would be liable on account of the independent or unauthorized actions of other partners. This provides due protection to the individual partners from the joint liability created by another partner’s wrongful business decisions, misconduct or misappropriation of funds. Corporation  A corporation is an institution that is granted a charter recognizing it as a separate legal entity having its own privileges and liabilities distinct from those of its members.1 There are many different forms of corporations, most of which are used to conduct business. Corporations exist as a product of corporate law, and their rules balance the interests of the management who operate the corporation, in addition to those of the creditors, shareholders and employees who contribute their labour (Easterbrook and Fischel 1996). Ownership in the corporation is governed by voting rights in proportion to the number of shares held. As stated earlier, in public limited companies, there is no limit to the number of shareholders, whereas it is restricted to 50 in the case of private limited companies.

6.2.2  Cost of Incorporation The cost of incorporation directly varies with the complexity of the organization. The cost of incorporating a business could be as low as a few hundred rupees or as high as thousands of rupees, depending on whether the business is incorporated on your own (which can even be done online in a few countries) or you use the services of an attorney for the purpose. The only advantage that one gets by using the services of an attorney is the guarantee that all the paperwork and the necessary steps have been taken correctly. In general, the cost of legal expertise and accounting is quite low for incorporation, which keeps increasing over time to run the business. The easiest and least costly option to start a venture is by means of a proprietorship concern, where only a small cost is incurred for filing for a business or trade name and getting a permanent account number and a sales tax number, in addition to registering with the appropriate district bodies. The partnership form of a business requires cost to be incurred mainly on getting a trade name and entering into a partnership deed that could be registered or notarized. The partnership deed requires legal expertise to explicitly specify the responsibilities, rights, duties, induction of money and sharing of profits, in addition to including clauses regarding the continuity of a business, or otherwise, in the eventuality of the death of a partner(s). Defining these clauses for general partners may be relatively simple when compared to defining it for a limited partnership, because general partners have to necessarily adhere to the statutory stipulations and requirements. Other than the attorney fee for drafting a partnership deed, cost is incurred for getting the necessary registration numbers and trade name. Thus, the cost of incorporation of a partnership concern is marginally higher than that of a proprietorship concern. The incorporation of a corporation can only be undertaken by statute. This implies that owners need to register the name and articles of incorporation and have to comply with all statutory requirements. This need, coupled with the fee to be paid for the stipulated authorized capital to the registrar of companies (ROCs), further escalate the cost of incorporation. Thus, it may necessarily require legal expertise and fees to be paid for various statutory registrations required, such as registration with the sales tax office, and for taxation compliances—at the local, state and central government levels. This, in turn, would require a far higher quantum of cost as compared to the cost of incorporation required for proprietorship and partnership concerns. The minimum paid-up capital at the time of incorporation of a private limited company has to be ` 0.1 million. However, there is no upper limit for the authorized and the paid-up capitals.

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6.2.3  Minimum Number of Promoters A sole proprietorship concern, as the word indicates, has to be started by a single promoter, whereas a partnership firm has to have more than two partners and the upper number of partners has to be reasonable, depending on the business. Private limited companies can have a minimum of one and a maximum of 50 shareholders in India. In the case of public limited companies, this number varies from a minimum of two to as many as possible. In the case of private limited companies, no invitation can be made to the public for subscription of shares or debentures. These companies cannot accept deposits from the public, and there are certain restrictions on the transfer of shares.

6.2.4  Limit of Liability The nature of the liability that may devolve on the promoters is a critical criterion for deciding the form of a business. The fundamental reason for forming a corporation lies on the impact of limited liability that can only devolve on promoters. Both sole proprietors and general partners are fully liable for all the aspects of a business and, therefore, have an unlimited liability. The sole-proprietor entities are personally liable for all the liabilities and obligations arising as a result of the business, which extends not only to liabilities in excess of the amounts invested in the business but also to their personal and business assets. In case of partnership firms too, as the partners have a personal liability, jointly and severally, for the partnership debts and obligations, the liabilities of general partners are similar to those of a sole proprietor. A general partner’s liability extends not only to that partner’s percentage interest in the partnership, but also to the partner’s other personal assets as well. However, a limited partnership does provide a benefit to the promoters by way of limiting their liabilities to the extent of investments made in the business and any obligations for subsequent contributions. There is no difference between the business entity and the owner(s) of the business in the cases of proprietorship and partnership concerns, and, therefore, the whole liability lies on them. This implies that if creditors and government have any dues to be recovered from such businesses, they can seize all assets, including those outside the business, such as land, house, deposits and investments and proceed legally against the owners. In case of limited partnership, liability is restricted to the extent of a partner’s capital contribution in the business. However, by registering this amount with a local courthouse, it needs to be made public. As against this, because a corporation is a legal entity in itself, which is being taxed and absorbs liability, the promoters are liable only to the extent of their investment amount in a firm.

6.2.5  Record Keeping and Statutory Requirements The maintenance of complete, accurate and reliable records of business transactions is a basic prerequisite for both self-discipline and to ensure regulatory compliances. Record keeping includes the maintenance of proper books of accounts and the establishment and operation of record-keeping systems. Although any business requires a meticulous maintenance of accounts and other records, from the regulatory point of view, there are certain stipulations that increase the responsibility of business managers and promoters with reference to maintaining records, especially for corporations—both private and public limited companies. These are statutory compliances pertaining to the Companies Act to be submitted to the ROC, government stipulations for running the business to be submitted to different government bodies, stipulations of stock exchanges pertaining to the listing of shares on

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stock exchanges, the stipulations of the Securities and Exchange Board of India (SEBI) to be met or documents that entail a legal contractual binding as the business entity enters into certain contracts with government agencies, banks, financial institutions and so on.

6.2.6  Continuity of a Business One of the vital concerns for any venture is what happens in case of a death or withdrawal of some of the promoters from the business. Continuity of a business proposition differs from business to business depending on the type of legal business entity. In the case of a sole proprietorship, the business entity ceases to exist and is automatically terminated on the death of the owner. Therefore, these business entities are not perpetual and there is no fixed term or duration for their existence. The continuity of a partnership firm depends on two vital criteria, namely, whether it is a limited or general partnership concern, and the stipulated terms in the partnership agreement or deed. In the case of a limited partnership, nothing happens to the continuance of a business on the death or withdrawal of a partner. Without the presence of a limited partner, the business entity can continue or the exiting partner can even be replaced by another limited partner. However, in case a general partner in a limited partnership dies or withdraws from the business, the limited partnership ceases to exist, unless and until the agreement specifies otherwise or all the remaining partners decide unanimously to continue the business. In a general partnership, the death or withdrawal of a partner(s) results in the termination of the partnership agreement and the business ceases to exist, unless and until the partnership agreement provides otherwise. In general, for continuing with the goodwill of the business, the existing partners buy out the deceased or withdrawn partner’s share at a predetermined price based on the valuation of the business. Even the deceased partner’s family members can step into the shoes of the partner and start sharing the profits. However, all these possibilities of continuing with the business depend on the agreement terms and the consent of the existing partners. Corporations are a separate entity from the people associated with them as promoters or shareholders and, therefore, continue to exist even in the eventuality of the death or withdrawal of promoters. In case of private limited companies, shareholding is transferred to the legal heirs or the respective shares are purchased by the remaining shareholders. However, in case of public limited companies, there would be no such issue.

6.2.7  Capital Requirements Starting any business venture requires capital for the fixed assets and the working-capital needs of the business operations. The quantum of investment required depends very much upon the business activity, the nature of business and the type of business entity. The opportunity and the capability for raising capital for the business venture depend on the entrepreneur and the form of the business. For a proprietorship concern, the capital can come from the personal resources of an entrepreneur; his or her friends and relatives may pump in money into the business; or the entrepreneur can borrow money from a bank or other investors. However, normally, because of the lack of a track record, such loans may be available only against some collateral security. Further, at times, attracting loans may require dilution of the interest of the proprietor in the business. Irrespective of the source of funding, failure on the part of the proprietor to repay loans as per commitments may invite liquidation of business through legal proceedings. Above all, the requirements of funds for a proprietorship business may not be as high as those for partnership concerns or corporations.

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In case of partnership concerns, any additional induction of funds by partners or borrowing money from outside sources would require change in the partnership agreement. The repayment commitment remains with the partners, with unlimited liability in the case of general partnership and limited liability in the case of limited partnership. The capital requirements, in general, are more for partnership concerns as against proprietorship due to the nature of the business. The scope for raising capital and the induction of the same has the greatest flexibility in the case of corporations. Money can be raised through multiple channels, such as by issuance of shares, bonds and debentures; through fixed deposits; and from venture capitalists, banks and many other sources, although one may have to carefully examine the feasibility of raising money for the venture at a reasonable cost. The greatest advantage is that the borrowed money in the case of corporations is in the name of the company and, therefore, does not pose any liability for the promoters, unless and until they have consciously put some of their assets at stake at the time of borrowing.

6.2.8  Management Control Every entrepreneur would usually like to exercise as much control as is feasible over the business. However, management control depends much on the legal form of a business, the requirement for funds, the sources from which funds are raised, and the terms and conditions at which funds are raised. Broadly, a proprietorship business provides the greatest flexibility in making decisions because the ownership and the management control fully rest with the sole proprietor. Being a lone owner of the company, the entrepreneur holds total responsibility and has all authority over all aspects of running the business. The partnership concern poses certain problems pertaining to management control and business decisions that need to be clearly threshed out in the beginning itself. Normally, decisions are made by consensus or majority, unless and until the agreement explicitly provides otherwise. Some of the contentious issues pertain to the operation of the bank account, which requires a lot of trust among the partners. The success of a partnership venture depends much on trust, faith and understanding among the partners in relation to all matters of business operations. All sensitive decisions and the mechanism to adopt should be spelled out in the agreement. In the case of a limited partnership, the advantage derived by way of ownership and management is similar to that of the corporation. Usually, limited partners do not have control over business decisions. The limited partners in a partnership venture are not allowed to participate in the management decisions of the partnership and, in the eventuality of their participation, they will lose their limitedpartnership status. Therefore, a limited partnership restricts the rights of the limited partners. They do have the power to vote and remove the general partner(s) in the eventuality of the general partners having committed fraud. However, such removal in all other possibilities is not practicable because of the specific structuring of the partnership agreement. In the case of corporations, both public and private limited, usually, the control of day-to-day business lies with the management of the company, which is separated from the ownership of the company. The management of the company may or may not have major, or even any, shares. Thus, the management control is separated, depending on the nature and type of decisions. In a private limited company, particularly a new venture, owners of the company having major shareholding are fully involved in the business decisions because of their associated risk and their inability to induct professionals at times. However, as the company’s operations expand, the management and ownership are separated to manage the venture on a professional footing and ensure its smooth growth.

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In public limited companies, usually, the management and ownership are separated. The shareholders participate in making vital decisions, such as appointment of the board of directors (BODs), the marking of authorized capital, defining the borrowing limits of the company and so on. The appointment of a board of directors helps in the appointment of top management personnel, who in turn influence the day-to-day operations and management of the company.

6.3  TAXATION MATTERS FOR DIFFERENT FORMS OF VENTURES The type of venture creation has a lot to do with the taxation mechanism and its implications on the business. Therefore, a prudent entrepreneur starting a new business should always learn the implications of taxation laws on their business and decide which form of business would be most suitable to be formed. Tax implications have a great impact on business decisions, especially from the points of view of both the owners of the business and the accrual of profit for deciding about capital structuring. Depending on the projected turnover and profits of a venture, it is advisable to work out the tax implications and decide about the form of the business from both immediate and long-term perspectives. It is important to maintain a balance between the tax advantages to be derived and the commitment towards repayment loans/liabilities. Sole proprietorship comprises a single owner of the venture and there is no difference between them and their business entities. Therefore, all income earned by way of profits becomes the sole proprietor’s income and has to be a part of the personal income tax return of the owner. For all practical purposes, taxation laws do not treat sole proprietorship concerns as separate entities. Therefore, all expenses incurred by the owner in the business are treated as if they were incurred by the owner and not the business. Sole proprietors are entitled to certain tax benefits as there is no double taxation. They are taxed at the progressive natural personal income tax rates of between 10 and 30 per cent in India. Partnership firms enjoy tax advantages similar to those applicable for sole proprietorship firms, particularly regarding income distribution, dividends and capital gains or losses. Both proprietorship and partnership forms of businesses have a legal identity that differs from the owners and partners, respectively, but this is restricted to accounting purposes only. Partnership concerns have to necessarily report their profits, which becomes the basis for sharing among the partners or even having a stake in the company when it is redeployed for the further growth of the company. The distribution of profits is determined based on the partnership agreement and may not be necessarily based on the proportion of investment made. The realized profits become part of the personal income of the partner and are to be reported for taxation purposes. In India, the concept of LLP has been introduced pursuant to the LLP Act, 2008. Subsequently, as per the budget for 2009–10, LLP is treated as a partnership firm for the purpose of income tax and is taxed similar to a partnership firm, providing a great advantage and encouraging the new generation to take up entrepreneurship. The budget also changed the definition requiring the term ‘firms’ to have a meaning assigned to it as per the India Partnership Act, 1932, and includes an LLP as defined in the LLP Act, 2008. The applicable tax rate for them is 30 per cent flat, plus 3 per cent education cess, and no surcharge. However, as per Section 184 of the Income Tax Act, it has to satisfy the criteria of having a written LLP agreement, the individual shares of the partners are to be clearly defined in the deed and a certified copy of the LLP agreement is to accompany the return of income of the LLP of the previous year in which the partnership was formed. If during a previous year, a change takes place in the constitution of the LLP or in the profit-sharing ratio of the partners, a certified copy of the revised LLP agreement shall be submitted along with the return of income of the previous years in question. An LLP is eligible to claim deductions towards interest paid to partners, provided such

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interest is authorized by the LLP agreement; any salary, bonus, commission or remuneration (referred to by any name) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual; the remuneration paid to such a working partner must be authorized by the LLP agreement and the amount of remuneration must not exceed the given limits. However, in the eventuality of noncompliance of Section 184, no deduction towards interest and remuneration is allowed. As a corporation is a separate legal entity, it can enjoy certain advantages by way of deductions and expenses that are not allowed to proprietorship or partnership concerns. The disadvantage arises by way of taxation of dividends twice—once as an income to the company and then as an income to the shareholder. However, in certain countries, including India, at present, the dividends in the hands of shareholders are not taxed. In India, earlier, dividends in the hands of the shareholders were taxed as is prevalent in a number of other countries. However, from 1 June 1997, all domestic companies were liable to pay a dividend distribution tax on the profits distributed as dividends, resulting in a smaller net dividend to the recipients. The rate of taxation alternated between 10 and 20 per cent, until the tax was abolished with effect from 31 March 2002.2 The dividend-distribution tax was also extended to dividends distributed since 1 June 1999 by domestic mutual funds, with the rate alternating between 10 and 20 per cent, in line with the rate for companies, up to 31 March 2002. The dividends at the hands of the recipients, received from domestic companies and mutual funds since 1 April 2003, were again made non-taxable. Corporations in India are taxed based on the origins of the companies, in terms of their legal status. Indian companies, incorporated as per the Indian system, are taxed in India, whereas international companies are levied tax on their earnings from their Indian operations. For international companies having their operations in India, royalty, interest, gains from the sale of capital assets within India, dividends from Indian companies and fees for technical services are all treated as income arising in India. With reference to the tax on dividends declared by domestic companies, the profits distributed by way of dividends—be it interim or final—are taxable for such a company on or after June 1997. The present rate for such a tax payable is 10 per cent of the amount so distributed. Even if the company does not fall in the category of payment of corporate tax, an additional tax on the declared dividends has still to be paid. Joint ventures in India are subjected to taxation under the provisions of the Income Tax Act, 1961. Fundamentally, taxation in the case of joint ventures depends on the agreement entered into between the parties forming the joint venture. If the joint venture is established in the form of a partnership firm or as a company, it is taxed accordingly, that is, as a partnership or as a company, respectively. However, in all other cases, a joint venture is treated as an association of persons (AOPs). The term ‘person’ includes any company or association or body of individuals, whether incorporated or not. The association need not be on the basis of a contract. Therefore, if two or more persons join hands to carry on a business but do not constitute a partnership, they may be assessed as an AOP. It is important to note that an AOP becomes eligible for taxation as a joint venture only when people join hands for an income-producing activity.

Private Limited Company: An Example Ernst & Young, a New York–based company, is one of the Big Four accounting firms. It was formed in  1989 by the merger of the following two firms: (1) A. C. Young and (2) Ernst & Whinney. The company  earned a revenue of more than $25 billion and had an employee strength of more than 1.35 lakhs  in  2007.  The  company  provides  audit,  tax,  business  risk,  technology  and  security-risk  services,  in  addition to human capital services, in more than 140 countries. In 2005, Ernst & Young announced  (Continued)

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its re-entry into the business advisory-services market, five years after selling its former practice to  CapGemini. The name Ernst & Young has its origins in Scotsman Arthur Young and American Alwin  Ernst. The two founded their separate companies in 1906 and 1903, respectively. Koch Industries, Wichita, is a company chemical field, with major diversification in the areas of  technology and energy. It owns companies involved in refining and chemicals; pollution control;  minerals;  fertilizers;  fibres  and  polymers;  commodity  and  financial  trading;  forest  and  consumer  products; ranching and business development. Significant divisions include Flint Hills Resources,  which  operates  refineries  in  Alaska  (North  Pole),  Minnesota  (Rosemount)  and  Texas  (Corpus  Christi),  with  a  combined  crude  oil-processing  capacity  of  more  than  8,00,000  barrels  per  day.  The Koch Chemical Technology Group designs, manufactures, sells and installs pollution-control  equipment, in addition to providing engineering services for industries and municipalities worldwide.  The company’s turnover in 2007 was more than $98 billion, with employee strength of more than  80,000. Both these companies are among the top 10 private limited companies as per the Forbes list in  2007. The turnover of these companies clearly reflects the size of their operations, in billions of dollars  of turnover, which can be carried out by private limited companies having equity stakes in the hands  of a countable number of shareholders.3

Private Limited Company Becoming Public Limited Company: An Example  Puravankara Projects Limited is a Bangalore-based real estate developer company, with more than  30  years  of  presence  in  Mumbai,  Bangalore,  Kochi,  Chennai,  Coimbatore,  Hyderabad,  Mysore,  Colombo  and  the  United  Arab  Emirates.  Its  public  issue  opened  on  31  July  2007  and  closed  on  3 August 2007. The  company  is  in  the  business  of  identification  and  acquisition  of  land,  planning,  executing  and marketing of residential and commercial projects. The company was originally incorporated as  Puravankara Constructions Private Limited on 3 June 1986 at Mumbai. The company has entered  into a joint venture (Keppel–Puravankara Projects Private Limited) with Keppel Investment Mauritius  Private  Limited,  a  subsidiary  of  the  Singapore-based  Keppel  Land  Limited.  The  company  owns  49 per cent of the shares of the joint venture. The majority of the ownership, control and management  of  the  joint  venture  vests  with  Keppel.  The  name  of  the  company  was  changed  to  Puravankara  Projects Limited and the status of the company underwent a change to a public limited company  by a special resolution of the members passed at an extraordinary general meeting held on 10 July  1992. A fresh certificate of incorporation consequent to the change of name and status was granted  on 19 August 1992 by the ROC, Mumbai, Maharashtra. The  company’s  real  estate  development  is  concentrated  primarily  in  southern  India,  that  is,  Bangalore,  Chennai  and  Kochi.  It  has  also  acquired  roughly  1.06  million  square  feet  of  land  in  Colombo for luxury-oriented residential projects consisting of independent villas and town houses. The company came out with an initial public offer (IPO) in July 2007. The objects of the issue  are  to  finance  land  acquisition,  repay  certain  loans,  fund  expenditures  for  general  corporate  purposes and achieve the benefits of listing on the stock exchanges. The main object clause of  the Memorandum of Association and the objects incidental to the main objects of the company  enable  it  to  undertake  the  activities  for  which  funds  were  raised  by  the  IPO.  The  company  had  planned to mobilize ` 1,125 crores at the upper price band of ` 525, which was to be broadly used 

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for the repayment of a loan of ` 420 crores, with ` 351 crores earmarked for acquiring 43.56 million  square  feet  of  land  in  and  around  Sriperumbudur  and  Kancheepuram  near  Chennai.  After  the  IPO, the promoters shall have 89.95 per cent stake in the company. The estimated expenses on  the issue were worked out to be 6.53 per cent of the issue size, which included, among others,  underwriting and management fees, printing and distribution expenses, legal fees, advertisement  expenses  and  listing  fees.  The  company’s  board  will  monitor  the  utilization  of  the  net  proceeds  from the issue. The company had undertaken at the time of public issue that it will disclose the  details  of  utilization  of  the  issue  proceeds,  including  any  interim  use,  under  a  separate  head  in  the financial statements for the fiscal years 2007 and 2008, specifying the purpose for which such  proceeds  have  been  utilized  or  otherwise  disclosed  as  per  the  disclosure  requirements  of  the  listing agreements with the stock exchanges, and in particular, Clause 49 of the Listing Agreement:  ‘No part of the proceeds from the issue will be paid by us as consideration to our promoter, our  directors, promoter group companies or key managerial employees, except in the normal course  of our business.’4

6.4  MEANING OF HOLDING COMPANY As per the Companies Act, 1956, a holding company and its subsidiary would be the one in which a parent company or some other company controls the composition of the BODs and holds more than half in nominal value of its equity share capital. Thus, if company B is a subsidiary of company A, and company C is a subsidiary of company B, company C will be a subsidiary of company A. Similarly, in case company D is a subsidiary of company C, company D will be a subsidiary of company B and, consequently, also of company A. Further, if a corporate body is incorporated outside India, a subsidiary or holding company of the corporate body under the law of such country shall be deemed a subsidiary or holding company of the corporate body. Similarly, for a private company, being a subsidiary of a corporate body incorporated outside India, which, if incorporated in India, would be a public company within the Companies Act, shall be deemed for the purposes of this act to be a subsidiary of the said public company if the entire share of capital in that private company is not held by that corporate body, whether alone or together with one or more corporate bodies incorporated outside India.

6.5  DEEMED PUBLIC LIMITED COMPANY The concept of a deemed-to-be-public-limited company was prevalent up to the year 2000 in India. A private limited company was said to be a deemed public limited company if 25 per cent or more equity was held by a public limited company or one or more corporate bodies, or if its turnover was above ` 25 crores. However, subsequently, the concept of a deemed public company was done away with. The deeming Section S43A of the Indian Companies Act provided that in case not less than 25 per cent of the paid-up share capital of a private company is held by one or more corporate bodies, the private company shall be deemed by virtue of this section to be a public company. However, subsequently, the Companies (Amendment) Act, 2000, was enacted, resulting in the withdrawal of the provisions relating to a deemed public company.

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Deemed Public Limited Company: An Example On  becoming  a  deemed  public  limited  company,  many  provisions  of  the  Companies  Act,  1956,  related to the companies that had exemption as a private limited company would become applicable.  Patni Computer Systems Limited was incorporated as Patni Computer Systems Private Limited on   10 February 1978 under the Companies Act, 1956. In 1988, by virtue of Section 43A of the Companies  Act, the company became a ‘deemed public company’ and, subsequently, on 15 April 1991, it was  converted  into  a  private  limited  company.  By  virtue  of  its  turnover  exceeding  the  prescribed  limits  under the then-applicable Section 43A of the Companies Act, on 1 July 1995, the company became  a deemed public company and consequent to the deletion of Section 43A from the Companies Act,  1956, the company was converted to a private limited company on 27 June 2002. The company was  again converted to a public limited company on 18 September 2003. In 2004, Patni came out with an IPO of 1,87,24,000 equity shares, in the price band of ` 230 per share  for a face value of ` 2 each. In 2004, Patni acquired Fremont (California)-based Cymbal Corporation for  $60 million. The practices acquired are now part of Patni’s Telecom Vertical business. The acquisition  also allowed Patni to spread its non-general electric business and to add a development centre in  Hyderabad, India.

6.6  REQUIREMENTS FOR INCORPORATION OF A PRIVATE/PUBLIC  LIMITED COMPANY The incorporation of a company becomes inevitable from a long-term perspective, so that the business entity is taken seriously by customers, suppliers and other important stakeholders. Unincorporated businesses tend to create doubt and suspicion in the minds of different stakeholders as they are associated with the term ‘here today, gone tomorrow’. Even if stakeholders do not have much suspicion about your integrity, there would be questions about the degree of professionalism of such a business entity. Therefore, one may start with a proprietorship or partnership concern; but there has to be a concrete plan to translate it soon into a corporation. The message here is this: set up a corporation or LLC for everything but a short-term business, whose existence will be numbered in months rather than in years. Some of the key steps to be ensured for incorporation of a company are as listed in the following (Fig. 6.3):  Registered Business Name—The first step is to name the company by taking appropriate steps with the concerned authorities. An entrepreneur needs to submit three or more names to the ROC with a paragraph of explanation. The ROC ensures that no similar name is already registered by undertaking a search all over India. It is advisable to have a non-dictionary name, because its chances of approval automatically improve. One should also avoid naming a company with generic terms, such as Information Technology Ltd, Engineering and Technology Institute and so on. Generally, the name of the company is approved before incorporation and is reserved for a period of three months. The name of the company is followed by the word ‘Ltd’ or ‘Limited’. The registration office does not consider the use of offensive or illegal words, and general words, such as ‘Institute’, ‘National’ and so on, can only be used under typical conditions and circumstances. Some of the key factors that can be taken care of during selection of the name of a company, which can lead to building a good brand image are as follows: it should suggest something about the product and its benefits; it should be easy to remember and pronounce; it should be short and crisp, for example, Coke, Nike, Lux, Intel; it should be attractive to read, for example, Nestle, Cadbury, Tata Tea; it should

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Registered Business Name Registered Office Shareholders and Share Capital Company Incorporation

Memorandum of Association Articles of Association Certificate of Incorporation Auditors, Accounts, Registers and Company Seal Board of Directors

Figure 6.3 Steps for Incorporation of Company

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have easy acceptability in different cultures and countries, such as HP and HCL; and it should become identified with the product and service categories, such as trousers, sport goods, hospitals and so on. Registered Office—This need not necessarily be the same address as that from where the business is conducted. Normally, it is the address given at the time of registration of a company as the registered address and all official—government and other—correspondences take place at this address. Shareholders—There must be a minimum of two shareholders (also described as ‘members’ or ‘subscribers’) for a private limited company and a minimum of five for a public limited company. A private company can have up to 50 shareholders, and there is no upper limit for public limited companies. The shareholders are the owners of the company and participate in all vital decisions pertaining to the company. Share Capital—A company must be formed with a stated, nominal share capital divided into shares of fixed amounts. Small companies are frequently formed with a nominal share capital of ` 100. At the time of formation of the company, an authorized share capital has to be specified, which acts as the outer bound for induction of capital into the company. A fee proportionate to the authorized capital is payable to the ROC. Therefore, one should fix it reasonably well to ensure that there is no excessive payment required by way of fee and that the authorized capital does not come in the way of the growth of the company. The authorized capital can be increased by passing a resolution in an extraordinary general body meeting, with the consent of more than three-fourths of the shareholders with voting rights. The paid-up capital at any given point of time should not exceed the authorized capital. Memorandum of Association—The memorandum of association is the charter of the company. It states the company’s name; the location of its registered office; its share capital; the fact that liability is limited; and, most importantly, the object for which the company has been formed. As such, the company can only operate in the areas mentioned in the object’s clause. However, these clauses are kept broad enough to cover as wide an area as possible. Further, a 75 per cent majority of the shareholders having voting rights in the company can change the objects, as and when required, by appropriately filing it with the ROC. It is pertinent to note that the directors of the company will incur personal liability if the company engages in a type of business that is not authorized by the

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object’s clause. Thus, the main aspects covered in the memorandum of association of the company are as listed as follows: • name of the company • registered office of the company • main objects of the company • the objects that are incidental or ancillary to the attainment of the main objects • other objects not included • limited liability of the members • authorized share capital of the company • subscribers to the memorandum of association

Reliance Industries Ltd: Objects—Main and Incidental The  main  objects  and  the  objects  incidental  or  ancillary  to  the  attainment  of  main  objects  on  incorporation of the company Reliance Industries Limited are as listed in the following:5

Main Objects i.   To  carry  on  the  business  as  manufacturers,  dealers,  agents,  factors,  importers,  exporters,  merchants and financiers of all kinds of man-made fibres; man-made fibre yarns, man-made fibre  cords and man-made fibre fabrics of all kinds, with or without mixing; materials such as woollen,  cotton, metallic or any other fibres of vegetable, mineral or animal origin; and manufacturing such  man-made fibres and man-made fibre products of all descriptions and kinds with or without mixing,  in addition to fibres of other origins, as described above, by any process using petrochemicals  of all descriptions or by using vegetable or mineral oils or products of all descriptions required to  produce such man-made fibres. ii.   To carry on the business as manufacturers, dealers, importers and exporters, merchants, agents,  factors and financiers, and particularly manufacturers or dealers of all types of petrochemicals such  as  naphtha,  methane,  ethylene,  propylene,  butenes,  naphthalene,  cyclohexane,  cyclohexanone,  benzene,  phenol,  acetic  acid,  cellulose  acetate,  vinyl  acetates,  ammonia,  caprolactam,  adipic  acid, hexamethylene, diamine nylon, nylon-6, nylon 6.6, nylon 6.10, nylon 6.11, nylon 7, their fibres,  castings, mouldings, sheets, rods, orthoxylene, phthalic anhydride, alkyd resins, polyester fibres and  films, mixed xylenes, paraxylene, meta-xylene, toluene, cumene, phenol, styrene, synthetic rubbers,  butenes, butadiene, methacrolein, maleic anhydride, methacrylates, urea, methanol, formaldehyde,  urea-,  phenol-  and  melamine-formaldehyde  resins,  hydrogen  cyanide,  polymethyl  methacrylate,  acetylene,  polyvinyl  chloride,  polyethylene,  ethylene  dichloride,  ethylene  oxide,  ethyleneglycol,  polyglycols,  polyurethanes,  polystyrenes,  polypropylene,  isopropanol,  acetone,  propylene  oxide,  propylene  glycol,  acrylonitrile,  acrolein,  acylic  esters,  acrylic  fibres,  allyl  chloride,  epichlorhydrin  epoxy resins and all other petrochemical products and polymers in all their forms such as resins,  fibres, sheets, mouldings or castings. iii.   To  carry  on  the  business  of  manufacturing,  buying,  selling,  exchanging,  converting,  altering,  importing, exporting, processing, twisting or otherwise handling or dealing in or using or advising  users in the proper use of cotton yarn, pure silk yarn and artificial silk yarn; staple fibre and such  other fibres; fibres and fibrous materials, or allied products, by-products, substances or substitutes  for all or any of them; or yarn or yarns, for textile or other use, as may be practicable. iv.   To  manufacture  or  help  in  the  manufacture  of  any  spare  parts,  accessories,  or  anything  else  necessary for the above-mentioned businesses.

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Objects Incidental or Ancillary to the Attainment of the Main Objects To do or perform all or any of the following operations, acts or things that are necessary or incidental  to carry on the above-mentioned objects: i.   To  enter  into  agreements  and  contracts  with  Indian  or  foreign  individuals,  companies  or  other  organizations  for  technical,  financial  or  any  other  assistance  for  carrying  out  all  or  any  of  the  objects of the company. ii.   To establish and maintain any agencies in India or any part of the world for the conduct of the  business of the company or for the sale of any materials for the time being at the disposal of the  company for sale. iii.   To advertise and adopt means of making known the business activities of the company or any  articles or goods traded in or dealt with by the company in any way as may be expedient, including  the posting of bills in relation thereto and the issue of circulars, books, pamphlets and price lists;  the conducting of competitions and exhibitions; and the giving of prizes, rewards and donations. iv.   To  apply  for,  purchase  or  otherwise  acquire  and  protect,  prolong  and  renew  trademarks,  trade names, designs, secret processes, patent rights, ‘Brevets D’Invention’ (patent) licences,  protections  and  concessions,  which  may  appear  likely  to  be  advantageous  or  useful  for  the  company; and to spend money in experimenting, testing and improving, or seeking to improve  any patents, inventions or rights, which the company may acquire, propose to acquire or develop. (a)   To expend money on research, experimentation, development, testing, improving or seeking to  improve existing products, patents, rights and so on in connection with any of its activities in  pursuance of the aforesaid objects; and to expend money to invent, develop or seek any new  products allied to and in the course of pursuing the objects as detailed in this clause. (b)   To work, develop, license, sell or otherwise deal with any inventions in which the company is  interested whether as owner, licensee or otherwise; and to make, levy or hire any machinery  required for making or desirable to be used as machines included in such inventions. v.   To enter into partnership or into any arrangement for sharing profits, union of interest, cooperation,  joint venture, reciprocal concession or otherwise with any person, firm or company carrying on,  engaged in or about to carry on or engage in any business or transaction that this company is  authorized to carry on or engage in; or any business, undertaking or transaction that may seem  capable of being carried on or conducted to directly or indirectly benefit the company; to lend  money; to guarantee the contracts of or otherwise assist any person, firm or company; to take or  otherwise acquire and hold shares or securities of any such person, firm or company; and to sell,  hold, re-issue—with or without guarantees—or otherwise deal with such shares and securities. vi.   To enter into any arrangement with any government or state, municipal, local authority or otherwise,  that may seem conducive to the company’s objects; and to obtain from any such government or  state authority any rights, privileges and concessions that may seem conducive to the company’s  objects. vii.   To purchase or otherwise acquire and undertake the whole or any part of the business property,  rights and liabilities of any person, firm or company carrying on any business that this company is  authorized to carry on; to purchase, acquire, apply for, hold, sell and deal in shares, stock, debentures  or debenture stock of any such person, firm or company; and to conduct, make or carry into effect  any arrangement in regard to the winding-up of the business of any such person, firm or company. viii.   To  construct,  acquire,  establish,  provide,  maintain  and  administer  factories,  estates,  railways,  buildings,  water  reservoirs,  sheds,  channels,  pumping  installations,  generating  installations,  pipelines,  garages,  storages  and  accommodation  of  all  descriptions  in  connection  with  the  business of the company. (Continued)

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ix.   To apply for tender, purchase or otherwise acquire any contracts and concessions for or in relation  to the construction, erection, equipment, improvement, management, administration or control of  works and conveniences; and to undertake, execute, carry out, dispose of or otherwise turn to  account the same. x.   To buy, lease or otherwise acquire lands, buildings and other immovable properties; and to sell,  mortgage,  hypothecate  or  otherwise  dispose  of  all  or  any  of  the  properties  and  assets  of  the  company on such terms and conditions as the company may think fit. xi.   To amalgamate with any company or companies having objects altogether or in part similar to  those of this company. xii.   To pay all costs, charges and expenses of and incidental to the formation, promotion, registration  and establishment of the company and issue of its capital, including any underwriting or other  commission,  broker’s  fee  and  charges  in  connection  therewith,  including  costs,  charges  of  negotiations, and contracts and arrangements made prior to and in anticipation of the formation  and incorporation of the company. xiii.   To remunerate or make donations (by cash or other assets or by the allotment of fully or partly  paid shares or by calls on shares, debenture stocks or securities of this or any other company or  in any other manner) whether out of the company’s capital, profits or otherwise to any person or  firm or company for services rendered or to be rendered in introducing any property or business  to  the  company;  placing  or  assisting  to  place;  guaranteeing  the  subscription  of  any  shares,  debentures, debenture stock or other securities of the company; or for any other reason that the  company may think proper. xiv.   To  undertake  and  execute  any  trust,  the  undertaking  whereof  may  seem  desirable  either  gratuitously or otherwise. xv.   To draw, make, issue, accept and to endorse, discount and negotiate promissory notes, hundies,  bills of exchange, bills of lading, delivery orders, warrants, warehouse keeper’s certificates and other  negotiable, commercial or mercantile instruments connected with the business of the company. xvi.   To open accounts with any individual, firm or company, or with any bank or banks; and to pay into  and to withdraw moneys from such account or accounts. xvii.   Subject to the provisions of the Companies Act, 1956, to invest, apply for and acquire or otherwise  employ moneys belonging to, entrusted to or at the disposal of the company upon securities and  shares, with or without security, upon such terms as may be thought proper and from time to time  vary such transactions in such a manner as the company may think fit. xviii.   To lend or deposit moneys belonging to, entrusted to or at the disposal of the company to such  person or company and, in particular, to customers and others having dealings with the company  with or without security, upon terms as may be thought proper and guarantee the performance  of contracts by such person or company but not to do the business of banking as defined in the  Banking Regulation Act. xix.   To make advances upon or for the purchase of materials, goods, machinery, stores and other  articles required for the purpose of the company, and to receive money on deposit at interest or  otherwise subject to the rules, if any prescribed by the Reserve Bank of India (RBI). xx.   To  borrow  or  raise  money,  with  or  without  security,  or  to  receive  money  on  deposit  at  interest  or  otherwise,  in  such  a  manner  as  the  company  may  think  fit  and,  in  particular,  by  the  issue  of  debentures  or  debenture  stock—perpetual  or  otherwise—including  debenture  or  debenture  stock convertible into shares of this or any other company; and in security of any such money  to be borrowed, raised or received, to mortgage, pledge or charge the whole or any part of the  property, assets or revenue of the company, present or future, including its uncalled capital, and  to purchase, redeem or pay off any such securities.

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xxi.   To  sell,  mortgage,  assign  or  lease  and  in  any  other  manner  deal  with  or  dispose  of  the  undertakings or properties of the company or any part thereof, whether movable or immovable,  for such consideration as the company may think fit and, in particular, for shares, debentures  or other securities of any other company having objects altogether or in part similar to those  of this company. xxii.   To  improve,  manage,  work,  develop,  alter,  exchange,  lease,  mortgage,  turn  to  account,  abandon or otherwise deal with all or any part of the properties, rights and concessions of the   company. xxiii.   To  provide  for  the  welfare  of  the  employees  or  ex-employees  of  the  company  and  the  wives,  widows,  families,  dependants  or  connections  of  such  persons  by  building  or  contributing  to  the building of houses and dwellings; or by grant of money, pensions, gratuity, bonus payment  towards insurance or other payment; or by creating from time to time, subscribing or contributing  to,  adding  or  supporting  provident  funds,  trusts  or  conveniences;  and  by  providing  provident  funds, trusts or conveniences; and by providing, subscribing to or contributing towards places  of instruction or recreation, hospitals and dispensaries, medical and other attendance, and other  assistance as the company shall think fit. xxiv.   Subject to the provisions of the Companies Act, 1956, to subscribe to, contribute or otherwise  to assist or to guarantee money to charitable, benevolent, religious, scientific, national or other  institutions, objects or any public, general or useful objects. xxv.   To distribute any of the properties of the company among the members, in species or kind, upon  the winding-up of the company. xxvi.   To  fabricate,  purchase,  construct,  take  on  lease/rent,  erect  and  maintain  machineries,  plants,  equipments, structurals and carriages related to the business activities of the company; and to  take on lease, purchase or otherwise acquire lands and other places, including offshore areas,  which seem capable of affording a supply of natural gas and mineral oils. xxvii.   To deal in or engage in the manufacture of materials required for the packing, preservation and  despatch of finished and unfinished goods, raw materials and articles required for the company  or produced by the company. It is obvious from the above memorandum that the company has retained a wide flexibility to enter  into a variety of businesses.

 Articles of Association—The rules and regulations framed for the internal management of the company for achievement of the objects as laid down in the Memorandum of Association are set out in the Article of Association of the company. It basically contains the internal regulations of the company, the relationship of the company to its shareholders and the relationship between the individual shareholders. It is the supplementary document to the memorandum. The articles of association cannot contain anything contrary to the Companies Act or the memorandum. Subscribers to the memorandum must sign the articles in the presence of at least one witness. Some of the vital contents covered in the article of association of a company are as described in the following: • the amount of share capital issued, different types of shares, calls on shares, forfeiture of shares, transfer and transmission of shares and rights, and privileges of different categories of shareholders • powers to both alter and reduce share capital • the appointment of directors and their powers, duties and remuneration • the appointment of managers, managing directors and so on

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• the procedure for holding and conducting of various meetings • matters relating to maintenance of accounts, declaration of dividends or keeping of reserves

Articles of association can be changed by a special resolution passed in the general body meeting. However, certain restrictions regarding the nature and extent of alterations that can be made do exist. Any proposed change should not violate the provisions of the Companies Act.  Certificate of Incorporation—After the ROC approves the name of the company and the memorandum of association, the ROC issues a certificate of incorporation. After receiving this certificate, a company is legally formed and is ready to trade. The date specified in the incorporation certificate is technically the date that the company comes into existence. Usually, it takes around two to three weeks from the date of filing the Memorandum of Association and Articles of Association to receive a certificate of incorporation. A private limited company can commence business on receipt of its certificate of incorporation, whereas a public limited company has the option of inviting the public to subscribe to its share capital. This would require the issuance of a prospectus, which provides information about the company to potential investors. The Companies Act specifies the information to be contained in the prospectus. The prospectus has to be filed with the ROC and approval has to be taken from the SEBI before it can be issued to the public. In case the company obtains the required capital privately by placing its equity, it has to file a statement in lieu of the prospectus with the ROC/SEBI. After complying with these requirements, the ROC issues a certificate of commencement of business to the public company. The company can commence business immediately after receipt of this certificate.  Auditors—Every company must appoint a qualified statutory auditor. The auditors go through the books of accounts and certify whether the books of the company have been properly maintained and whether the balance sheet and profit-and-loss account presents (or does not present) a true and fair view of the company’s affairs and complies with the Companies Act. The appointment and re-appointment of auditors for a specified term, as per the Companies Act, is done at general meetings at which annual accounts are presented, and they hold office from the conclusion of the meeting until the next general meeting.  Accounts—The Companies Act lays down strict rules and guidelines on accounting. Every company must maintain a set of records, which show the financial position at any point of time with reasonable accuracy. The accounts comprise a profit-and-loss account and a balance sheet, along with the appending of the ‘Notes to the Accounts’ by the auditors and the directors’ reports covering the qualifying remarks on the ‘Notes to Accounts’ and other aspects of the business. The annual accounts of the company are to be placed within three months from the closure of the year, that is, 31 March, before the BODs and, thereafter, before the shareholders in the Annual General Body meeting. Within 10 months of the end of an accounting reference period, an audited set of accounts must be laid before the shareholders at a general meeting, and a copy is to be filed with the ROC and bodies such as stock exchanges and so on.  Registers—In addition to the accounts books, companies are required to have a register of members and a share ledger, a register of directors and secretaries, a register of share transfers, a register of charges, and a register of debenture holders. A book can be purchased to hold all of the above. These registers are to be maintained by the secretary of the company at the registered office of the company.  Company Seal—A company seal is an official seal used by a company. The significance of using a company seal is to give legal authenticity to the documents executed on behalf of the company. The signatory on the seal of the company has to be a person authorized by the board of the company. Especially, the documents on behalf of the company which need to be executed as deeds, as against

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simple contracts, require execution under the company’s common seal. Even the share certificates, which at present are dematerialized, used to be issued under the company seal. All companies are required to have an engraved seal of the company.  Board of Directors (BOD)—Every corporate organization is required to mandatorily have a BOD. The key function of the board is to manage the business in the best interests of the shareholders. This can be best achieved by simultaneously taking care of the interests of all the direct and indirect stakeholders. Thus, the primary duty of the BOD is to add value to the business by improving profitability. This key function of taking care of the interest of the shareholders is embedded in most company laws under the director’s duty of skill and care. The three key functions of the BODs are to improve shareholders’ value, establish all operating policies for the corporation, hire a competent managing director/ chief executive officer for the corporation and oversee the management of the corporation to ensure that the organization is being run within the framework of the existing law and statutory compliances in the best interests of its stockholders. Some of the key aspects of board meetings and BOD are as follows: • The BOD is appointed to act on behalf of the shareholders to run the day-to-day affairs of the business. It is accountable to the shareholders. In the annual general meeting (AGM), it must provide a report to shareholders on the performance of the company, its future plans and strategies, and also submit themselves for re-election to the board. • In addition to overseeing business and financial issues, the BOD must have a strategy in place to deal with challenges and issues relating to corporate governance, corporate social responsibility and corporate ethics. • A BOD delegates their authority to the management of the company and monitors the implementation of policies. It needs to ensure that internal controls are effective, as the ultimate responsibility lies with them. • Board meetings should be held periodically as per the statutory requirement laid down in the Companies Act. One meeting in each quarter is the minimum; there is no limit to the maximum number of meetings, as that would depend upon the business to be transacted and need for holding the board meetings. Each board meeting should have a chair to ensure that business is transacted properly. The chair will also very often decide upon the agenda and might sign off the minutes on his or her authority. Minutes of the meeting should be duly circulated among all the directors by the company secretary. Articles of association of the company provide for the election of a chairperson of the board. The directors decide to appoint a chairperson and agree to the term for which he or she would be chairing the meetings. The chairperson usually has a second or casting vote in the case of equality of votes. Unless the articles confer such a vote upon them, however, a chairperson has no casting vote merely by virtue of his or her office. Selection of a chairperson should be done in an appropriate manner, as per the stipulations in the articles of association and it should be unambiguously minuted. The articles empower the board to remove the chairperson from office at any time. Proper and clear minutes are to be recorded to avoid any disputes in future. The chairperson’s role includes managing the board’s meetings and facilitating discussions for the smooth transaction of business. This can include the following: – Determining board composition and organization. – Defining and clearly laying down board and management responsibilities. – Putting a system in place to plan and manage board meetings and board committee meetings. – Executing board proceedings effectively. – The chairperson of the board normally acts as the spokesperson for the board and the company. – The directors are responsible for ensuring that proper books of accounts are maintained.

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– Under certain circumstances, a director may be required to pay the debts of the company, although the company is a separate legal entity. Particularly, in case the directors misappropriate money or are found guilty of ‘wrongful trading’, they can be held personally liable. Directors are especially vulnerable if they have acted in a way that has resulted in personal gains at the cost of the company.

Appointment of Directors—The ultimate decision regarding the number and composition of the BOD rests with the shareholders. However, compliance of the provisions related to corporate governance has to be ensured. Shareholders have the final right to appoint, and at times dismiss, a director. The shareholders can also fix the minimum and maximum number of directors. However, it is important to note that the board can usually appoint (but not dismiss) a director to his or her office. A director may be dismissed from office by a majority vote of the shareholders, provided that a special procedure is followed. The procedure is complicated and may require legal advice for proceeding in the matter. BODs’ Meeting—Normally, on the advice from the chairperson of the board, a directors’ meeting is called by the secretary to the board. A secretary may not call a meeting unless requested to do so by a director or directors. Normally, a reasonable—say, a seven-day period—notice is given to all directors, along with the agenda papers being sent to them in advance.

6.7  BOARD OF DIRECTORS—ROLES AND RESPONSIBILITIES The BOD is appointed to act on behalf of the shareholders to ensure the day-to-day running of the business. The BOD is responsible and accountable to the shareholders within the overall framework of the statutory and regulatory compliances. Directors must provide a report on the affairs of the company, including future plans and strategies, in the AGM to the shareholders. Over and above the business and financial issues, the BOD must deal with various other challenges and issues relating to corporate governance, corporate social responsibility and corporate ethics.

6.7.1  Role of the BOD A BOD has to establish the vision, mission and values for the company. It has to put a system in place to review the performance of the top management, including the chief executive officer (CEO), develop the company’s policies within which the top management should operate, and contribute towards predetermined goals and objectives. The BOD should clearly set a strategy and structure for the growth of the organization. This would, inter alia, require a review and evaluation of existing and future opportunities, threats and associated risks. It should also identify alternative strategic options to achieve goals, select the best strategies and put a system in place to implement and support the same. The board also needs to ensure that the required organizational structure and capabilities are in place for implementation of the selected strategies.

6.7.2  Responsibilities of the Directors The legal system and law impose a number of duties and responsibilities upon directors to prevent the abuse of their powers. The legal aspects related to the operations of the company strike a balance between allowing the directors to manage the company’s business to work for the cause of shareholders while simultaneously preventing them from abusing this freedom. The BOD has the responsibility of ensuring the maintenance of proper books of accounts.

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6.8  PROCEDURE FOR SETTING UP A BUSINESS IN INDIA A company is a voluntary AOP formed for undertaking a business, having a distinct name and limited liability. It is a separate legal entity different from the people who come together to constitute it. The Companies Act, 1956, states that a ‘company’ includes a company formed and registered under the act or an existing company, that is, a company formed or registered under any of the previous company laws. The formation of a private limited company involves the selection of a name for the proposed company, applying for directors’ identification numbers and digital signatures, drafting the memorandum and the articles of association of the company, stamping (applying to the superintendent of stamps or an authorized bank, requesting for stamping of the memorandum of association and articles of association), digitally signing and e-filing the various documents to the ROC, paying the required fee, obtaining a certificate of incorporation, preparing and filing a prospectus/statement in lieu of the prospectus and e-form 19/20 (in case of public companies) for obtaining the certificate of commencement of business, and obtaining the certificate of commencement of business (in case of public limited companies). These steps can be completed in a maximum of 35–40 days or earlier. However, with online processes in place, it may be finished within 15–20 days. A company needs to do the following for its running:  Obtain a company seal and apply for UTI Infrastructure Technology and Services Limited/National Securities Depository Ltd to obtain a permanent account number (PAN).  Obtain a tax account number (TAN) for income taxes deducted at source from the assessing office in the income tax department.  Register under the Shops and Establishment Act.  Register for value-added tax (VAT) before the sales tax officer of the ward in which the company is located.  Register for profession tax.  Register with the Employees’ Provident Fund Organization.  Register with the Employees’ State Insurance Corporation (ESIC; medical insurance).  File for government approval before the RBI/Foreign Investment Promotion Board for foreigners and NRIs.

6.9  LEGAL ACTS GOVERNING BUSINESSES IN INDIA Companies Act, 1956: Important Provisions In India, the most important law that regulates all aspects relating to a company is the Companies Act,  1956. It contains provisions relating to the formation of a company; the powers and responsibilities  of  the  directors  and  managers;  the  raising  of  capital;  the  holding  of  company  meetings;  the  maintenance  and  auditing  of  company  accounts;  the  powers  of  inspection  and  investigation  of  company  affairs;  the  reconstruction  and  amalgamation  of  a  company  and  even  winding-up  of  a  company. The  Indian  Contract  Act,  1872,  is  another  vital  legislation  that  facilitates  and  regulates  by  providing appropriate legal protection to all the transactions of a company. It lays down the basic  principles and doctrines relating to the formation and enforceability of contracts; rules governing  the  provisions  of  an  agreement  and  offer;  the  various  types  of  contracts,  including  those  of  indemnity and guarantee, bailment and pledge, and agency. It also contains remedies available  to the parties involved in the contract, in the eventuality of breach of a contract by either of the  parties involved.6

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Acts and laws such as the Industries (Development and Regulation) Act, 1951; the Trade Unions Act, 1926; the Competition Act, 2002; the Arbitration and Conciliation Act, 1996; the Foreign Exchange Management Act, 1999; laws relating to intellectual property rights; and laws relating to labour welfare are other important acts that govern the operations of a business entity from different perspectives. Some of the important acts about which an entrepreneur needs to be fully conversant in terms of their implications to a business are the following:               

Factories Act Contract Labour (R&A) Act Payment of Wages Act Minimum Wages Act Payment of Bonus Act Employment Exchanges Act Provident Fund Act Profession Tax Act Workmen’s Compensation Act Maternity Benefit Act Industrial Employment (Standing Orders) Act Payment of Gratuity Act Bombay Shops and Establishments Act Industrial Disputes Act Employees’ State Insurance Act

6.9.1  Factories Act The Factories Act, 1948, extends throughout the whole of India and became applicable from 1 April 1949. It is applicable to all premises, including the precincts thereof where 10 or more workers are working or were working on any day of the preceding 12 months and in any part of which a manufacturing process is being carried on with the aid of power. In case manufacturing process is being carried out without the aid of power, the act becomes applicable only if 20 or more workers are working or were working on any day of the preceding 12 months. The major purpose of this act is to regulate the labour force in factories. This act provides for major tenants and lists the basic rules and regulations for starting a new factory and maintaining it consistently under the conditions prescribed in the act for the safety, health and welfare of the employees. The act also prohibits the appointment of young persons at dangerous machines without (1) fully instructing them regarding the dangers arising in connection with the machine and the precautions to be observed, (2) giving them sufficient training to work at the machine or (3) putting them under the adequate supervision of a person with a thorough knowledge and experience of the machine.

6.9.2  Contract Labour (R&A) Act Recognizing the need for protecting the interest of contract labour, the Contract Labour (Regulation and Abolition) Act, 1970, was brought on the Statute Book, so as to regulate the employment of Contract Labour in certain establishments and to provide for its abolition in certain circumstances and for matters connected therewith. This act came into force on 10 February 1971. It applies to every establishment/ contractor in which 20 or more workmen are employed or were employed on any day in the preceding 12 months as contract labour and to every contractor who employs or who employed on any day

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of the preceding 12 months, 20 or more workmen. It does not apply to establishments where the work performed is of intermittent or seasonal nature. For an establishment wherein work is of an intermittent and seasonal nature, the act would be applicable if the work performed is more than 120 days and 60 days in a year, respectively. The act also applies to establishments of the government and the local authorities as well.

6.9.3  Payment of Wages Act This act applies to every factory as defined in the Factories Act. The main objective of the act is to ensure the regular and prompt payment of wages, in addition to preventing the exploitation of a wage earner by prohibiting arbitrary fines and deductions from their wages. This act covers various rules regarding payment of wages, such as date of payment, place of payment, mode of payment, verification by the principal employer and records thereof. It also describes the eligible deduction from wages and related procedures. The scope of the act extends to the due payment of wages to persons employed in any factory. The term ‘wages’ includes all remuneration, bonus or sums payable for termination of service but does not include house-rent reimbursement, light-vehicle charges, medical expenses, travelling allowance and so on. Its provisions include the responsibility of the employer for payment of wages and fixing the wage period; the procedures and time period for wage payment; payment of wages to discharged workers; permissible deductions from wages; penalties for contravention of the act and equal remuneration for both men and women.

6.9.4  Minimum Wages Act This act provides for fixing of the minimum rates of wages in certain employments. The Minimum Wages Bill was passed by the Indian Dominion Legislature and came into force on 15 March 1948. Under the act, both state and central government are ‘appropriate governments’ for fixation/revision of minimum rates of wages for employments covered by the Schedule to the Act. It covers the rules and regulations regarding minimum wages applicable to the nature of industry, which is decided based on the process carried out. It also covers the index for dearness allowance and the house-rent allowance rules.

6.9.5  Payment of Bonus Act The Payment of Bonus Act, 1965, provides for payment of bonus to employees as defined under the act. According to the act, an ‘employee’ is any person (other than an apprentice) employed on a salary or wage not exceeding ` 3,500 per mensem in any industry to do any skilled or unskilled, manual, supervisory, managerial, administrative, technical or clerical work for hire or reward. The act is applicable to every factory and every other establishment in which 20 or more persons are employed on any day during an accounting year. This act provides for the payment of bonus to the persons employed on the basis of profits or on the basis of production or productivity and provides for matters connected therewith. This act applies to all factories or establishments that have completed five years or to the year in which it earns profits, whichever is earlier. A register is to be maintained and returns are to be submitted regarding the applicability of this act.

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6.9.6  Employment Exchanges Act The Employment Exchanges (Compulsory Notification of Vacancies) Act was enacted in 1959 to provide for the compulsory notification of vacancies to the Employment Exchanges and for the rendition of returns relating to the employment situation by the employers. This act came into force with effect from 1 May 1960. It is applicable to all establishments employing 25 or more persons. Organizations to which it is applicable need to submit the returns both quarterly and biannually.

6.9.7  Provident Fund Act Employee Provident Fund Act, 1952, is applicable to all establishments that can be termed a factory, as specified in Schedule I, and where 20 or more persons are employed. The scope of the act is to provide for the institution of provident funds (PFs) for employees in factories and other establishments. As per the amendment to the act dated 22 September 1997, both the employees and the employers contribute to the fund at the rate of 12 per cent of the basic wages, dearness allowance and retaining allowance, if any, payable to the employees per mensem. The rate of contribution is 10 per cent in the case of establishments with less than 20 employees, any sick industrial company, as defined in clause O of Sub-section 1 of Section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985, and which has been declared as such by the Board for Industrial and Financial Reconstruction, and any establishment engaged in the manufacture of jute, breed, coir and guar gum. The rate of interest is fixed by the central government in consultation with the Central Board of Trustees, Employees’ Provident Fund, every year during March/April. All factories and establishments falling under the act have to register. The principal employer is responsible for the deductions and remittance of PF contributions under this act, even for contract employees. Monthly and annual returns are required to be submitted in the prescribed format.

6.9.8  Profession Tax Act Registration under this act is mandatory for all. The principal employer is responsible for the deductions and remittance of Profession Tax under this act, even for contract employees. Monthly and annual returns are required to be submitted in the prescribed format. This tax is levied by the state government, and the rates differ from state to state in India. Some states in India do not have a profession tax. The tax payable under this act to each state government, wherever applicable, is to be deducted by the employer from the salary or wage and such employer shall, irrespective of whether such deduction has been made or not, deposit the same with the appropriate authority.

6.9.9  Workmen’s Compensation Act This act was formulated in 1923 and came into force on 1 July 1924. It extends to the whole of India. The act provides for the payment of due compensation by certain classes of employers to their workers for injury by accident. If personal injury is caused to a worker by an accident arising out of and in the course of his or her employment, the employer shall be liable to pay compensation in accordance with the provisions of this act. However, this act would not be applicable in case the worker had been under the influence of drinks or drugs at the time of the accident; or does not obey an order expressly given, or follow a rule expressly framed, for the purpose of securing the safety of workers; or wilfully removes or disregards any safety guard or other device which he or she knew has been provided for the

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purpose of securing the safety of the workers. The Employees’ State Insurance (ESI) scheme can be substituted by having an insurance policy under the act to take care of the compensation payable, if any.

6.9.10  Maternity Benefit Act The objective of the Maternity Benefit Act, 1961, is to regulate the employment of women in certain establishments for certain periods before and after childbirth and to provide for maternity and certain other benefits. It extends to the whole of India and applies to every factory, mine and plantation; to every establishment for the exhibition of equestrian, acrobatic and other performances; to every shop or establishment defined under any law applicable to such establishments in a state in which 10 or more persons are employed on any day of the preceding 12 months or where the ESI Act is applicable for the time being. This act clearly describes the maternity benefits available to working women in certain establishments by way of pay and other associated benefits.

6.9.11  Industrial Employment (Standing Orders) Act This act of 1946 is applicable to every industrial establishment wherein 50 or more workers are employed on any day of the preceding 12 months. It requires employers in industrial establishments to formally define the conditions of employment with sufficient precision and make the said conditions known to the workers employed by them. Thus, it regulates the basic terms and conditions of employment. The employer can get its rules and regulations certified from a competent authority, or The Model Standing Orders described in the act are applied to the establishment.

6.9.12  Payment of Gratuity Act The Payment of Gratuity Act, 1972, is applicable to every shop and establishment in which 10 or more persons are employed or were employed on any day of the preceding 12 months. This act provides for a scheme for the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops and other establishments, and for matters connected therewith or incidental thereto. Gratuity is payable to an employee on the termination of his or her employment after he or she has rendered continuous service for not less than five years on their superannuation, on their retirement or resignation, or on their death or disablement due to accident or disease. The continuous service for a period of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement. In such an eventuality, the gratuity payable to an employee shall be paid to their nominee or, if no nomination has been made, to their heirs, and where any such nominees or heirs is a minor, the share of such a minor, shall be deposited with the controlling authority, who shall invest the same for the benefit of the minor in a bank or any other financial institution, as may be prescribed, until he or she attains the age of majority.

6.9.13  Bombay Shops and Establishments Act The Bombay Shops and Establishments Act, 1948, was brought into force on 11 January 1949. This act is applicable to every shop and establishment, such as shops, commercial establishments, residential hotels, restaurants, eateries, theatres and other places of public amusement or entertainment, which are not covered under the Factories Act. This act is a legislation of the state government enacted to take care of the interests of labourers of the unorganized sector and to regulate their conditions of work and

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employment. The Shops and Establishments Department is headed by the Chief Inspector, Shops and Establishments. The employer has to obtain a licence from the authority under the act and renew it regularly before the expiry.

6.9.14  Industrial Disputes Act The Industrial Disputes Act, 1947, came into force on 1 April 1947. It extends to the whole of India. The act relates to situations arising as a result of any employer discharging, dismissing, retrenching or otherwise terminating the services of an individual worker; or any dispute or difference between that worker and the employer connected with, or arising out of, such discharge, dismissal, retrenchment or termination, notwithstanding that no other worker or any union of workers is a party to the dispute. The specific provisions of the act enable the investigation and settlement of industrial disputes. The act describes the meaning, legality and rules regarding strikes, lockouts, lay-offs and retrenchments. It also describes the procedure of making complaints to the competent authority and the settlement thereof.

6.9.15  Employees’ State Insurance Act Employees’ State Insurance Act, 1948, is applicable to the whole of India and applies to all factories, including factories belonging to the government, other than seasonal factories, provided that nothing contained in this sub-section shall apply to a factory or establishment belonging to or under the control of the government, whose employees are otherwise in receipt of benefits substantially similar or superior to the benefits provided under this act. This act provides for certain benefits to employees in case of sickness, maternity and employment injury, in addition to providing for certain other matters in relation thereto. It covers all the rules and regulations related to the safety and health issues of employees. The respective authorities under the various labour laws for the different acts discussed above are given in Table 6.1. Table 6.1 Authorities for Different Acts Act y y y y y y y y y y y

The Factories Act The Minimum Wages Act The Payment of Wages Act The Payment of Bonus Act The Contract Labour Act The Pollution Control Act The ESI Act The Employment Exchanges Act The Shops and Establishments Act The Workmen’s Compensation Act The Provident Fund Act

Authority Joint Director, Industrial Safety and Health Joint Commissioner of Labour Joint Commissioner of Labour Joint Commissioner of Labour Joint Commissioner of Labour The Sub-regional Officer, Maharashtra Pollution Control Board The Sub-regional Officer, Employees’ State Insurance Corporation The Sub-regional Officer The Assistant Commissioner Joint Director, Industrial Safety and Health Commissioner, Provident Fund

Thus, an entrepreneur entering into a business needs to be conversant with the applicability of various acts to their business and take appropriate steps to ensure compliance of the terms as prescribed in these acts. They need to take appropriate professional assistance to take care of these aspects. It is here that

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professional input, including legal expertise, contributes to the smooth running of the business. An entrepreneur needs to be aware of the legal aspects related to the business and can avail the services of legal experts on an assignment or retainer basis or employ full-time legal experts, depending upon the nature and size of the business.

6.10  WINDING UP A REGISTERED COMPANY Winding up of a company is defined as a process that results in ending the life of the company and to use its property for the benefit of its members and creditors as per the stipulated provisions of the Companies Act. Once the formal legal process for winding-up the company is adhered to, an administrator, called the liquidator, is appointed, who takes possession of the company, collects its assets, pays debts and finally distributes any surplus among the members in accordance to their rights. After completion of the winding-up process, the company will not have any assets or liabilities and, accordingly, the dissolution of the company takes place. On dissolution, the company’s name disappears from the register of companies and its legal existence as a company comes to an end. The process of winding-up differs for registered and unregistered businesses. Any company formed by registration under the Companies Act, 1956, is called a registered company. As per the Companies Act, 1956, a registered company can be wound up by two vital modes, namely, a compulsory winding-up or a voluntary winding-up. Some of the important reasons that lead to compulsory winding-up through a tribunal are as follows:7  If through a special resolution, the company resolves that it be wound up by the Tribunal.  If the company defaults in the production of statutory reports, such as the balance sheet and the profitand-loss account, to the ROC for five consecutive years or fails to hold statutory meetings as stipulated by law. A petition on this ground may be filed by the ROC.  If the company fails to start its business within one year of its incorporation or suspends its business for a whole year.  If the company fails to meet its obligations towards debts.  For sick companies referred to the Board for Industrial and Financial Reconstruction, if the board observes that there is no possibility of rehabilitation, it may pass an order to wind up the company in public interest and refer the matter to the concerned high court for appointment of liquidator.  If the company acts 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.

6.10.1  Voluntary Winding Up of a Registered Company In case a company is wound up by a member or the creditors without the intervention of a tribunal, it is called voluntary winding-up. This may happen through the following acts:  by passing an ordinary resolution in the general meeting in case the period fixed for the duration of the company by the articles has expired, or some event has occurred on the happening of which the company is to be dissolved  by passing a special resolution to wind up voluntarily for any reason whatsoever

Under such an eventuality, it should be advertised in the Official Gazette and also in important newspapers circulating in the district of the registered office of the company within 14 days of passing a resolution—ordinary or special.

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Some of the important provisions applicable to members’ voluntary winding-up are as follows:  appointment of liquidator and fixation of their remuneration by convening a general meeting  ceasing the powers of the board on appointment of liquidator, except insofar as may have been sanctioned by the general meeting or the liquidator  to fill up vacancies, which may arise on the death, resignation or otherwise, in the office of the liquidator by convening a general meeting, subject to an arrangement with the creditors  sending the notice of appointment of liquidator to the ROC  liquidator to call a creditors’ meeting in case of insolvency of the company and to place before them the details of assets and liabilities of the company and take up the process of liquidation in a transparent manner  liquidator to convene a general meeting at the end of each year  liquidator to make an account of the winding-up process and place the same before the final meeting

6.10.2  Creditors’ Voluntary Winding-up Creditors can initiate the winding-up process, in case a company becomes insolvent and fails to meet creditors’ obligations. Some of the important provisions applicable to creditors’ voluntary winding-up are as stated in the following:8  The BODs shall convene a meeting of creditors on the same day or the next day after the meeting at which the winding-up resolution is to be proposed. Notice of the meeting shall be sent by post to the creditors simultaneously while sending the notice to members. It shall also be advertised in the official gazette and in two newspapers circulating in the place of the registered office.  A statement of assets and liabilities of the company, along with a list of creditors and their claims, should be placed before the meeting of creditors.  A copy of the resolution passed at the creditors’ meeting should be filed with the ROC within 30 days of its passing.  A five-member committee of inspection is appointed by creditors to oversee the work of the liquidator.  Fixation of remuneration of liquidator by the creditors or the committee of inspection.  Ceasing the board’s powers on appointment of the liquidator.

6.11  NEED FOR AND SELECTION OF A LAWYER As business in any economic environment is regulated by law, an entrepreneur needs to be aware of the laws and regulations that affect the launching and operation of their business. An entrepreneur requires legal advice at the time of formation of a company or giving a legal entity to the business, in the context of issues arising as a result of the day-to-day operations that may be associated with employees, taxation matters, suppliers of raw materials, suppliers of plant and machinery, buying of land and registering it, taking premises on rent or lease, sales of goods on cash or credit, starting a business involving intellectual property rights, or deriving profits from intellectual property developed by the business entity. The legal expertise required varies a lot from business to business—whether it involves consumer goods or industrial goods; the stage of growth of business; type of venture in terms of being a franchise, an independent start-up or a buyout; and whether the business involves any imports and exports requiring foreign-exchange transactions and clearances from requisite authorities.

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A lawyer is needed to deal with and effectively handle the complex issues in business, which are either time consuming or involve liability issues in the context of default or compliance. Some of these issues fall under the following categories:  formation of a company  suits filed by existing or former employees suing the company on grounds of discrimination during hiring and firing or being exposed to a hostile work environment  environmental issues arising as a result of the business, which require pollution-control clearances or defence of the company against any violations  buying or selling of land or other property of the partnership concern or a private/public limited company  issues related to the sale of a company or mergers and acquisition  intellectual property-related issues, such as filing for patents and negotiating the terms for commercialization of technologies

An attorney’s fee is quite high, which start-up ventures may not be able to afford. Therefore, start-up ventures with limited funds at their disposal vis-à-vis their requirements usually hire an attorney in the area of concern, as and when faced with a serious legal problem, such as suits filed by customers, suits to be filed against suppliers of machinery for violation of performance-guarantee terms and so on. Business lawyers are professionals in their area of expertise and, in turn, based on their experience, have knowledge of issues pertaining to incorporating, launching and running of a business. The legal experts deal with wide-ranging issues, from copyright and trademark to taxation and employment law. However, large professional legal firms employ attorneys who specialize in particular areas. A judicious decision needs to be made by an entrepreneur as to whether to avail the services of legal experts at every step of running a business. Although large legal firms are very expensive to hire, they provide significant advantage in terms of having varied expert services under the same roof. Further, getting connected with well-established firms also provides a number of intangible benefits by way of networking with the right people for finding opportunities for customer development and so on. Above all, getting associated with professional legal firms in the initial stages of growth of a business helps a lot at a later stage when the company would like to go public. A lawyer’s services can be hired on varied terms and modes, such as those shown in Fig. 6.4: Hourly Basis Flat Fee Basis for Availing Legal Services

Monthly Retainership Charges Contingent Fee Employing Legal Professionals

Figure 6.4 Basis for Availing Legal Services

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 Hourly Basis—There are attorneys who charge on an hourly basis, along with other actual costs on travel and so on. One may have to be very clear in terms of the advantages and disadvantages of hiring a lawyer’s services on an hourly basis vis-à-vis the other terms of payment for availing services.  Flat Fee—Attorneys may stipulate a flat fee for certain routine matters, such as reviewing a contract, devising the terms of a contract, dealing with a suit, getting certain government approvals and so on.  Monthly Retainership Charges—Businesses that involve handling of many routine legal issues prefer to have such services on a monthly retainership-fee basis, which enables them to have legal advice as and when required.  Contingent Fee—This involves lawyers charging a part of the gain that would accrue to the company in case they win the lawsuits in complex legal matters. However, if they fail, they are paid just the out-of-pocket expenses.  Employing Legal Professionals—As the company’s operations expand in size, it repeatedly gets entrenched in a number of legal issues or may even require day-to-day advice from legal experts to adopt due preventive measures. Under such circumstances, it becomes more desirable for the company to permanently employ legal experts and opt for legal counsel only under crucial circumstances.

Thus, choosing of a lawyer by a company is just like the choosing of a doctor by a patient, which requires a lot of trust and clarity in terms of someone with whom one can personally relate to. The entrepreneur should ensure due compatibility with a lawyer to share the concerned problem and seek professional advice on which he or she can depend. An entrepreneur develops a lot of confidence in the lawyer and the business moves forward by getting the right professional legal advice at the right time. In certain technology-driven ventures or technologies owned by an entrepreneur, even a proposition to offer stocks to a lawyer in lieu of legal services becomes a worthwhile proposition. This may attract greater involvement and commitment on the part of a lawyer in handling legal issues related to the venture. However, such a decision needs to be carried out with due caution in terms of not getting adversely affected in the long term as regards the stakes in the business.

 Check Your Progress   10 Ways That Every Entrepreneur Is Different 

  

Not everyone wants to make a million—Many simply want to spend time doing what they love. It is rarely black or white, but here are some opposites that will help you think where you sit between them. 1. Rich or poor? If your household income doubled, what would you do differently? For some people, sudden wealth erodes personal values and brings misery. How much more would make you happy? 2. Indoors or outdoors? Do you like fresh air? If so, pay someone else to do the office work and spend your time out doing something you enjoy. 3. Home or away? Travelling to far-flung destinations is an enjoyable part of business life for some people. Others prefer to sleep in their own bed every night. Do you want to travel, or can you find the business you need close to home?

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4. Head or hands? Thinking suits some people, craftsmanship others. You must choose how your time will be spent. As a craft business grows, its founder often leaves the workshop for the office but this need not be the case. You make the rules. 5. Night or day? Are you a lark or an owl? Few newsagents or bakers dislike early mornings and you will not find an early bird running a night club. Match your enterprise to your body’s natural rhythms. 6. Alone or in a crowd? Gregarious people like to work with people; others are more reclusive. Which are you? 7. Fast or slow? Some business people thrive on short deadlines, surprise orders and multitasking (for example, distribution). Others prefer a more sedate style of work where time to reflect and think is valued (for example, law). 8. Dirty or clean? Like little boys and puddles, some entrepreneurs love cleaning blocked drains or rendering abattoir waste. Others prefer to import and distribute scented candles and incense sticks from mystical places. 9. Healthy or harmful? Selling cigarettes, guns or booze gives some people a problem. If you are not comfy making money through encouraging people to damage their health, or that of others, leave nasty products to others. Only do what you feel comfortable with. 10. Fat or thin? Believe it or not, some businesses strike most of their deals over large lunches and dinners. If you are a closet gourmet, you will relish the opportunity to munch your way to success. If you are a weightwatcher, this will be less attractive.

KEY CONCEPTS  Corporation: A public limited or a private limited company; gets formed by shares of ownership to the shareholders.  Sole Proprietorship: Is a concern with one owner, where no stock has been issued having unlimited liability.  Partnership Concern: Is just like sole proprietorship, except that there is more than one owner.  General Partnership: Each of the two or more partners would have unlimited liability for the debts of the business.  Limited Partnership: Each limited partner’s exposure to debts of partnership is limited to the contribution each has made to the partnership.  Limited Liability Partnership (LLP): Provides the benefits of limited liability of a company but allows its owners great flexibility in organizing their internal management on the basis of a mutually arrived agreement, similar to the partnership firm.  Capital Requirements: Funds required to start a business for fixed assets and working capital needs of business operations.

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 Holding Company: A company and subsidiary would be the one in which the parent company or some other company controls the composition of the Board of Directors and holds more than half in nominal value of its equity share capital.  Deemed Public Limited Company: Whose 25 per cent or more equity is held by a public limited company, one or more corporate bodies, or its turnover is above ` 250 million.  Memorandum of Association: Is the charter of the company. It states the company’s name; the location of its registered office; its share capital; the fact that liability is limited; and, most importantly, the object for which the company has been formed.  Articles of Association: The rules and regulations framed for the internal management of the company for achievement of the objects as laid down in the Memorandum of Association as set out in the Article of Association of the company.  Certificate of Incorporation: Registrar of companies issues certificate of incorporation after approval of the name of the company and the Memorandum of Association.  Auditors: Go through the books of accounts and certify whether the books of the company have been properly kept, and that the balance sheet and profit and loss account present (or do not present) a true and fair view of the company’s affairs and complies with the Companies Act.  Company Seal: Is an official seal used by a company that gives legal authenticity to the documents executed on behalf of the company.  Board of Directors: Is appointed to act on behalf of the shareholders to ensure day-to-day running of the business. ENDNOTES 1. Dictionary.com, http://dictionary.reference.com/ 2. Section 115-O of the Income Tax Act in India as of 2002, added by the Finance Act 1997, modified by the Finance Acts 2000, 2001 and 2002. 3. Forbes.com, http://www.forbes.com/2008/11/03/largest-private-companies-biz-privates08-cx_ sr_1103private_land.html 4. 67.202.27.161/2007/07/puravankara-projects-ipo-india-street.html; http://www.sebi.gov.in/dp/ puravfinal.pdf and http://www.puravankara.com/ 5. Memorandum of Association and Articles of Association of Reliance Industries Limited, http:// www.ril.com/downloads/pdf/MOA.pdf 6. business.gov.in/legal_aspects/index.php 7. Winding Up a Registered Company and an Unregistered Company, http://business.gov.in/ closing_business/windingup_company.php 8. See Note 4. REFERENCES Battelle, J. 2005. ‘The Birth of Google’. Wired Magazine, http://www.wired.com/wired/archive/13.08/ battelle.html?, accessed on 11 November 2011. Easterbrook, F. H. and D. R. Fischel. 1996. The Economic Structure of Corporate Law. Cambridge, MA: Harvard University Press.

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Page, L. 1997. ‘PageRank: Bringing Order to the Web’. Stanford Digital Library Technologies Project, talk, http://en.wikipedia.org/wiki/PageRank, 18 August 1997, archived 2002.

CONCEPTUAL QUESTIONS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

Define and differentiate between the three basic legal forms of business entities. Differentiate between private limited and public limited companies. Differentiate between general partnership and limited partnership business ventures. What is the purpose and relevance of record keeping in the operations of a company? What characteristics make it possible for a corporation to exist even in the eventuality of death or withdrawal of its promoters? What are the tax implications for joint ventures in India? Explain. Define the concept of a holding company. Define a deemed public limited company. What are the requirements for incorporating a private/public limited company in India? What is the significance of an authorized capital in the growth of a company? How can authorized capital be increased for a company? What is the difference between authorized and paid-up capitals? Differentiate between Memorandum of Association and Articles of Association. What are the roles and responsibilities of a Board of Directors? Define the relevance of the Factories Act and the Contract Labour (R&A) Act for the operation of a company in India. What is the purpose of the Bombay Shops and Establishment Act? What types of companies are covered under this act? What is the purpose of the Industrial Employment (Standing Orders) Act? When did it become operative in India? What are the critical and complex issues in a business, which require the professional involvement of a lawyer? What are the different bases for availing legal services? Which mode of service would be appropriate for which type or size of business? CRITICAL THINKING QUESTIONS

1. A limited liability partnership (LLP) is an innovation to promote entrepreneurship in India. What is the purpose of introducing this form of business in India? Critically examine whether this would encourage the coming up of a greater number of start-ups by first-generation entrepreneurs and youth in India. 2. Why is it said that starting a business by forming a proprietorship concern is the easiest, and the toughest is to have a public limited company? Explain with the help of concrete examples from either the manufacturing or the information technology industry. 3. Is it possible to initiate a business without issuing shares? Explain your answer by giving concrete examples.

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4. In general, it is said that Indian companies do not grow to a macro size mainly because of the excessive obsession of the promoters to retain control over the company. Do you agree or disagree with this statement. Explain giving examples. 5. ‘Management and ownership of a company are two sides of a coin. Usually management and ownership are separated to manage the venture on a professional footing and ensure its smooth growth.’ Critically examine the statement with the help of examples. 6. Under what conditions, if any, can the board of a company be completely dismissed in the case of a running company having prospects for growth? Explain giving concrete examples from the corporate world. 7. A prudent entrepreneur starting a new business should always learn the implications of taxation laws on their business and decide which form of business would be most suitable to be formed. What is the relevance of tax planning to the formation of a business? Explain. 8. ‘A judicious decision needs to be made by an entrepreneur as to whether to avail the services of legal experts at every step of running a business.’ Critically examine the statement with the help of examples. 9. ‘Choosing a lawyer by a company is just like choosing a doctor by a patient, which requires lot of trust and clarity.’ What is the significance of this statement to business ventures?

 CASE 6.1:  GOOGLE  Google began its operations in January 1996 as a research project by Larry Page and Sergey Brin during their PhD programme at the Stanford University in California. They theorized about a better search engine that analysed the relationships between Web sites. They called this new technology Page Rank, whereby a Web site’s relevance was determined by the number of pages, and the importance of those pages, that linked back to the original site (Page 1997).1 Page and Brin originally gave the nickname ‘BackRub’ to their new search engine, because the system checked backlinks to estimate the importance of a site (Battelle 2005–2008).2 Finally they changed the name to Google, that is, the number one followed by one hundred zeroes, which was meant to signify the amount of information the search engine was able to handle. The domain google. com was registered on 15 September 1997, and the company was incorporated on 4 September 1998. It was based in a friend’s (Susan Wojcicki) garage in Menlo Park, California. Craig Silverstein, a fellow PhD student at Stanford, was hired as the first employee. PC Magazine reported in December 1998 that Google ‘has an uncanny knack for returning extremely relevant results’ and recognized Google as the search engine of choice among the Top 100 Web sites for 1998. The first funding for Google took place in August 1998, with a contribution of $1,00,000 from Andy Bechtolsheim, co-founder of Sun Microsystems. This initial funding took place even before Google was incorporated. On 7 June 1999, a $25 million round of funding was announced, with the major investors including the two venture capital firms Kleiner, Perkins, Caufield and Byers and Sequoia Capital. The company shifted its offices to Palo Alto, California, in March 1999. The next year, against Page and Brin’s initial resistance to an advertising-funded search engine, Google began selling advertisements associated with search keywords. In 2000, on April Fool’s Day, Google announced

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the MentalPlex: Google’s ability to read your mind as you visualize the search results you look for. In June 2000, Google forged a partnership with Yahoo! to act as their default search provider. The company announced the first billion-URL index and became the world’s largest search engine. In June 2000, Google started offering search results in Chinese, Japanese and Korean languages, taking the total number of supported languages to 15. This had further increased to 26 languages in March 2001. In August 2001, Eric Schmidt became the CEO of the company, with Larry and Sergey being named the presidents of products and technology, respectively. Pyra Labs, the company that created Blogger, was acquired by Google in February 2003. The Google search index touched a new height of six billion items, including 4.28 billion web pages and 880 million images in February 2004. Google’s IPO took place on 19 August 2004. The company offered 1,96,05,052 shares, at a price of $85 per share. A unique process of sale was adopted through the online-auction format using a system built by Morgan Stanley and Credit Suisse, underwriters for the deal. This public offering resulted in a market capitalization of more than $23 billion to the company. After the public offering, 271 million shares remained under the control of Google, and many Google employees became instant paper millionaires. Yahoo too gained from the public offering, as it owned 8.4 million shares of Google before the IPO took place. The stock’s performance after the IPO was impressive as evident from the stock price touching $700 for the first time on 31 October 2007, mainly because of strong sales and earnings in the online-advertising market. The company was listed on the National Association of Securities Dealers Automated Quotations or NASDAQ stock exchange under the ticker symbol GOOG; and on the Frankfurt Stock Exchange under the ticker symbol GGQ1. Since 2001, Google operated on the strategy of growth through acquisitions, that too mainly by focusing on small venture-capital companies. Google acquired Keyhole, Inc in 2004. The startup venture had developed a product called Earth Viewer that provides a 3-D view of the Earth. Subsequently, two years later, it bought the online video site YouTube for $1.65 billion in stock. Thereafter, it entered into an agreement to acquire DoubleClick for $3.1 billion. Then, it purchased Grand Central for $50 million. Google bought out its first public company, purchasing video software maker On2 Technologies for $106.5 million on 5 August 2009; it also acquired Aardvark, a social network search engine, for $50 million. Another major strategy of growth deployed by the company was to collaborate with other organizations, such as the Ames Research Centre of the National Aeronautics and Space Administration (NASA), Sun Microsystems, Microsoft, Nokia, Ericsson, News Corp., Myspace and so on, for everything from research to advertising. The company announced a partnership with China Mobile, the world’s largest mobile telecom carrier, to provide mobile and Internet search services in China in January 2007. Google developed a partnership with GeoEye to launch a satellite providing Google with highresolution (0.41 m monochrome, 1.65 m colour) imagery for Google Earth in 2008.3  Questions  

1. Google received its first dose of funding even before the formation of the company. What is the significance of this from both legal and business perspectives? 2. When did the company become a public limited company? In what way did it change the character and the future growth path for the company? (Continued)

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3. What were the key implications of making a decision to go public for Google? 4. What has been the strategic thrust adopted for the growth of the company?  Endnotes  

1. Google, Inc. ‘Technology Overview’, Corporate Information, http://www.google.com/ corporate/tech.html, accessed on 15 February 2010. 2. People, Places and Things that Changed their Names, Mental Floss, http://blogs.static. mentalfloss.com/blogs/archives/22707.html, accessed on 20 December 2009. 3. Adapted from Wikipedia, http://en.wikipedia.org/wiki/Google; http://www.google.com/ corporate/history.html

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 LEARNING OBJECTIVES    To understand the importance of patents in entrepreneurial ventures.  To understand the link between research and development (R&D) and intellectual property rights (IPRs).  To learn about the university system and its linkage with entrepreneurship through IPRs.  To understand the importance of IPRs.  To learn about and understand the implications of IPRs for start-ups.  To know about the basics of IPRs.  To learn about patents, the criteria for getting them and the procedure for filing patent applications.

 To understand the difference between utility, design and plant patents.  To understand the mechanism of filing international patent applications.  To know about trademarks, their filing and their advantages.  To learn about copyrights, their relevance and how to file applications for them.  To know about geographical indicators, biological diversity of IPRs and their relevance in the present context.  To learn about IPRs related to plant varieties and what it takes to protect them.

Kiran Mazumdar-Shaw, Founder, Biocon Success is about pursuing a vision with a sense of purpose and a spirit of challenge. There are no shortcuts to success and there is no substitute for hard work. I also believe success is about doing things in a differentiated way—dare to be different so that you stand out. —Kiran Mazumdar-Shaw

Kiran Mazumdar-Shaw, born on 23 March 1953, is a leading Indian businesswoman who has made unique contributions to put the Indian biotechnology industry on the world map. She is the chairperson and managing director of Biocon Limited and the chairperson of Syngene International Limited and Clinigene International Limited. She launched Biocon in 1978, a company that started off with pioneering contributions in the manufacturing of industrial enzymes, and has become a fully integrated biopharmaceutical company with a well-balanced business portfolio of products and a research focus on diabetes, oncology and auto-immune diseases. She founded two subsidiaries, namely, Syngene in 1994, which provides development support services for discovery research, and Clinigene in 2000, which caters to clinical development services. (Continued)

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Shaw completed her schooling from Bishop Cotton Girl’s High School, Bangalore, in 1968. She completed her BSc (Hons) in Zoology from Mount Carmel College, Bangalore University, in 1973. Later, she did her postgraduation in Malting and Brewing from Ballarat College, Melbourne University, in 1975. Shaw had to face insurmountable challenges in her ventures mainly because of her youth, gender and, particularly, her untested business model. However, with determination and focus, she was able to overcome such challenges. She did not give up easily and took up the challenges in her stride, so as to take Biocon to newer and greater heights. Shaw started Biocon in the garage of her rented house in Bangalore with a seed capital of just ` 10,000. Biocon’s mission is ‘To be a global Biopharmaceutical enterprise committed to delivering affordable products and services for patients, partners and health care systems across the world.’ The company’s average annual growth in turnover and profit after tax deduction for the past five years ended March 2010 have been 21 per cent and 20 per cent, respectively. Her leadership has taken Biocon on a trajectory of accelerated growth and innovation over the years. This is evident from Biocon becoming the first Indian company to manufacture and export enzymes to the United States and Europe in the very first year of its inception. Biocon was the first Indian biotech company that received US funding for its proprietary technologies in 1989. Shaw initiated her efforts in human health care through a dedicated manufacturing facility in 1997. Her pioneering contributions in the area of biotechnology earned her several prestigious awards, such as the Padma Shri in 1989 and the Padma Bhushan in 2005. She was recently named among the 100 most influential people in the world by TIME Magazine. She is also on the Forbes list of the world’s 100 most powerful women and on the Financial Times business list of the world’s top 50 women.

7.1  INTRODUCTION For nearly the last 200 years, neoclassical economics have recognized only two factors of production: labour and capital. However, this is changing now. Information and knowledge are replacing capital and energy, respectively, as the primary wealth-creating assets, just as the latter two replaced land and labour 200 years ago. In addition, in the 20th century, technological developments transformed the majority of wealth-creating work from physically based into ‘knowledge-based’ enterprises. Technology and knowledge are the key factors of production in the 21st century. With increased mobility of information and the global workforce, knowledge and expertise can be transported instantly around the world, and any advantage gained by one company can be eliminated by competitive improvements overnight. The only comparative aspect a company can perpetually take advantage of will be its ability to continuously innovate and protect such innovations, leading to technological developments through IPRs in its favour. The process of innovation involves combining market and technology know-how with creative human talents to solve a constant stream of competitive problems and its ability to derive value from information. The major challenge before budding entrepreneurs as well as organizations in the coming years would be to create a culture for the IPR regime, so that creative work and innovations get duly protected. Intellectual property (IP) plays an important role in an increasingly broad range of areas, ranging from the Internet to health care to nearly all aspects of science and technology, literature and the arts. Understanding the role of IP in these areas, with many of these areas still emerging, requires significant

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new research and studies. In the knowledge economy, where the economic power of a nation is determined by the IP it possesses, the informed discussion of the IP, education and awareness is becoming more and more important, particularly for entrepreneurs. The ability of an entrepreneur to create IP within knowledge-based, innovation-driven economies will be a dynamic tool for the success of technology-driven ventures. According to the IFI Patent Intelligence, which maintains US patent databases, IBM achieved an alltime high of 4,914 patents for any company. Samsung with 3,611 patents occupied the second position followed by Microsoft, which boosted its total patents to 2,906, which was followed by Cannon K. K. JP (2,206), Panasonic Corp. JP (1,829), Toshiba Corp. JP (1,696), Sony Corp. JP (1,680), Intel Corp. (1,537), Seiko Epson Corp. JP (1,330) and Hewelett–Packard Development Co. LP (1,273).1 As a whole, US companies received approximately 7 per cent more utility patents in 2009 than in 2008, compared with 6.5 per cent by foreign companies. The United States also received more than twice as many corporate patents than Japan (23 per cent), the country with the second-most US patents issued in 2009. South Korea (5.6 per cent) moved into the third place, displacing Germany (5.2 per cent) for the first time. It is interesting to note that the United States Patent and Trademark Office (USPTO) issued a total of 167,350 utility patents during 2009, which was 6.1 per cent more than the patents issued in 2008. This may indicate that the economic downturn during the past two years has not deterred the R&D efforts leading to the flow of US patent activity. ‘The US patent numbers reflect IBM’s continued leadership as the world’s premier innovative industrial organisation. IBM has a strong commitment to creating a collaborative and open environment in the patent and IP arena. IBM also announced that for the first time, it will offer its invention knowhow and patent portfolio management software to clients seeking to enhance their intellectual property management capabilities in support of innovation-based growth strategies.’2 Patents help in focusing on R&D efforts to come up with commercially viable innovations that can generate economic wealth through efficient channelization of resources on R&D. A study conducted annually by the Institute for Prospective Technological Studies (IPTS) revealed that the 2,000 leading and largest global companies had invested more than €430 billion in 2008 in their R&D departments. This clearly shows a growing interest shown by entrepreneurial ventures to come up with patents that can yield economic wealth. In India also, during the post-liberalization era, a number of initiatives were taken to simplify the process of granting patents by the national patent office, bringing about changes in its patent laws and strengthening the management of IPRs at the micro-organizational level in governmental R&D organizations, universities and industries. The office of the development commissioner (MSME) provides wide-ranging services, including training for entrepreneurship development, to the micro, small and medium industrial enterprises with a focus on building a culture for patenting. The importance of IP in India is well established at all levels—statutory, administrative and judicial. India ratified the agreement establishing the World Trade Organization (WTO). This agreement, inter alia, contains an agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), which came into force on 1 January 1995. It lays down the minimum standards for effective protection and enforcement of IPRs in member countries with a view to reducing distortions of and impediments to international trade. The obligations under the TRIPS Agreement relate to the provision of a minimum standard of protection within the member countries’ legal systems and practices. More and more organizations may have to provide at their cost not only the services of an IP management consulting firm for drafting or prosecution of IP application(s) but also adequate funds for making

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payments towards accessing the relevant IP databases for this purpose. Thus, to make economics of knowledge the greatest strength of the Indian economy, there is a need to create an ecosystem for the promotion of particularly knowledge-driven entrepreneurship with major emphasis on creating an environment and a system that provide due protection to IPs. This can be achieved by creating a stringent IPR regime.

7.2  UNIVERSITY RESEARCH LEADING TO ENTREPRENEURSHIP Although the culture for patenting is spreading fast across the globe, it is difficult to say how far it will result in entrepreneurial ventures emerging out of university research. The fundamental question that remains to be answered is whether university research leads to the creation of patents and, in turn, entrepreneurial ventures. The spin-off of ventures emanating from university research is expected to go through the cycle of disclosure of the innovation to the university, getting it patented and using the Technology Transfer Office (TTO) to spin-off the technologies or spin-out a venture with the help of its own funds or funds from venture capitalists (Fig. 7.1). However, some studies point out that this cycle does not operate in the case of a majority of the ventures that have been started by US academicians. This may imply that a major link to encourage entrepreneurship through university research is missing. The research done by Riccardo Fini, Nicola Lacetera and Scott Shane from Case Western Reserve University and the University of Bozen, Italy, suggests that ‘this isn’t how the majority of companies founded by US academics are actually started. The study surveyed over 11,000 professors, and of the 1948 who responded who had started businesses, only 682—about a third—had established them to exploit the patents obtained via the university intellectual-property systems. The remaining 1,266 respondents had started businesses based on non-patentable knowledge.’3 Further, the entrepreneurial ventures by social scientists and engineers were found to be an outcome without a patenting route. The study also says that universities’ TTOs are ‘failing to help’ a sizeable number of academic entrepreneurs. ‘If you aren’t measuring [the full range of activities] you can’t promote them,’ says Shane. ‘All the policies and approaches focus on the formal intellectual-property system, which means we are missing a big part of the iceberg that is under the water.’ However, the fact remains that a large number of fast-growing companies, such as Google, Apple and IBM, had their roots in the university system. The relevance and importance of businesses and universities is increasingly being recognized. The integration between universities and businesses can

University R&D

Disclosure of Innovation to University

Patenting

Technology Transfer Office to Spin-off Technology or Spin-out Ventures

Associate Venture Capitalists

Entrepreneurial Ventures

Figure 7.1 Link Between University R&D and Entrepreneurial Ventures

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Value to Business

University Research and Development

Collaborative Research Licensing of IPR Consultancy New Venture Creation

Business

Value to University

Figure 7.2 Need for Integration Between University R&D and Business go a long way in coming up with innovations that can be patented and, in turn, can get commercialized. These interactions have great potential for adding value to the growth of the economy. The interactions could be in multiple forms such as collaborative research, licensing of IP, consultancies that deliver value for solving live problems faced by businesses and, above all, in the area of new venture creation (Fig. 7.2). ‘The creation of a new business venture as a result of university knowledge may add value back to the university itself if the university has an equity stake in the new business and it has the opportunity to sell this equity stake at some point in time.’4 It would further extend multiple benefits to the economy by way of new products and services, new jobs, scope for export potential and taxation revenue for the government. Thus, the emphasis in the years to come has to be a directed and focused research on the part of the university system that can result in a spin-out of start-up ventures or in transferring the technology to existing entrepreneurs for the purpose of commercializing it. This can only be developed by creating a culture for protecting the IP generated by a university system coupled with developing an ecosystem through government support and incentives to encourage start-up ventures in the economy.

7.3  IPRs AND THEIR IMPORTANCE Intellectual property rights are the rights granted by the government to creators and owners of works that are the results of human intellectual creativity. These works may be of industrial, scientific, literary or artistic origin. The key importance of IPRs in the 21st century is depicted in Figure 7.3.  Encourage and Safeguard Innovation—IPRs help in providing due safety and security to the original work of an innovator by giving due respect to work, knowledge, talents and creation. They encourage technological innovation in organizations and help in improving IP awareness in the society. The owner derives multiple benefits of owning IP and of adding value to existing or future industrial ventures. IPRs provide incentives for private sector investment into their development.  Encourage Creation of a Public Pool of Data—An IPR depository with the patent offices of each country helps in channelizing research efforts by duly avoiding duplication. By conducting an appropriate search, one can know about the state of the knowledge pool that has been converted into patents and accordingly decide to optimally allocate research funds and efforts. The IPR depository available

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Provide Spur for Development

Encourage Creation of Public Pool of Data

IPRs

Strategic and Focal Tool for Planning—R&D and Economic

Promote Investments in R&D Encourage Transfer of Technology

Figure 7.3 Importance of IPRs

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to the public enables informed decisions to be made that deal with multiple transactions that aggregate into the use of IP throughout the production process. As such, in technology-driven markets for goods and services, this pool of information becomes a critical input. Act as a Strategic Tool for Planning R&D Activities—The IPR status in different industries contributing to innovations in different walks of life facilitates assessment of R&D status from the perspective of companies, consumers, customers, competition and technologies. It helps in understanding the availability of competitive technologies and practices and their implications to the new technologies that may emerge as an outcome of R&D. The proper assessment of R&D status can go a long way in the proper investment of limited funds for the R&D available with public and private institutions. Accelerate Development—The growth of the economy is linked to the IP available in the 21st century. As a result of the implications of IPR on economic development, the World Intellectual Property Organization (WIPO) was created in 1967 ‘to encourage creative activity, to promote the protection of IP throughout the world’.5 Encourage Further Investment in R&D—The investment in R&D is a crucial input for technological development. ‘Investment in R&D is required not only for introducing innovations, but also for adapting and absorbing technology from outside sources’ (Cohen and Daniel 1989). Further, in the present liberal economic environment, all firms are necessarily required to modernize their techniques to cut costs in order to retain their competitiveness. This would encourage greater investment on R&D on the part of ventures, particularly under regimes where the process for IPRs is simplified and the culture for the same is encouraged. Encourage Transfer of Technology for Entrepreneurial Ventures—The ultimate purpose of filing patents lies in the transfer of technology to the entrepreneurial ventures that can yield commercial gains to the patent holder. ‘Technology transfer and commercialization’ is becoming a buzz word for high value-added development. Universities, R&D institutions and industry-backed research efforts are the fulcrum around which innovations are steered. As such, the technologies developed by researchers can act as an incentive for them to start ventures in association with people who own capital. Otherwise, they can always look for transferring the technologies to fetch benefits by way of licensing. Thus, the IPR depository results in a professional effort to commercialize technology. Spin-out Entrepreneurial Ventures from Research Labs—Last but not least, the advantage of IPRs is that they have started spinning out entrepreneurial ventures from within research labs themselves. This has extended the chain of actions that is used to ultimately end in research outcomes to undertake entrepreneurial ventures completely on their own or in association with joint partners after duly identifying the synergies.

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7.4  IMPORTANCE OF IP FOR START-UPS Intellectual property is very useful for overall economic development. Usually, giant, well-established business entities are able to allocate a substantial portion of their revenue to R&D that comes up with patents and, thus, derive benefit from it. However, IPRs provide an edge to start-ups for building and developing successful ventures. When start-ups are in need of funding support in the initial phase, any potential investor looks at the strength of the team backing the plan coupled with the strength by way of registered patents that they may possess. They then try to evaluate the future worth of a venture based on IP assets; the extent of IP protection available in different markets across the globe; risk, if any, that these patents may get cancelled in future and, above all, to what extent the proposed venture would result in infringement of third-party IP rights (Fig. 7.4). What is the worth of new technologies and what is the existing or future goodwill that a venture may fetch, once they enter the market? Investors may like to assess by way of understanding what patent applications/registered patents currently protect technologies. The procedure of documenting a company’s know-how on development involves the risks inherent in concentrating all know-how with an individual founder.

7.4.1  Evaluate the Competitiveness of One’s Technology While making a decision to fund start-ups, funding agencies look for evaluation of impediments to the new technology that may be encountered while attempting to break into the market. They also analyse and evaluate existing and prospective competition for the product/service proposed to be introduced. In addition, they also try to understand how the proposed new technology can block the technology of competitors by giving due weightage the entrepreneurs’ ability to license or buy the necessary technology.

Future Value/ Worth of a Business

IP Assets

Start-ups Number of Patents IP Protection in Different Markets

Extent Would Result in Infringement of Third-party IP Rights

Figure 7.4 Value of Start-ups in a Knowledge-driven Economy

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Some of the key advantages that start-ups derive by patenting are as follows: restricting others from copying their products or services improving chances of getting seed funding and venture funding getting benefits by way of obtaining licensing revenues improving chances of growth by way of acquisitions and initial public offering (IPO) in a short time span  preventing patent infringement actions against the company  helping in creation of better negotiation terms for cross-licensing or takeover bids  building the company’s reputation/product image    

Thus, for start-ups, new technologies that are protected by IPRs provide a competitive edge vis-à-vis existing entrepreneurs. IPRs provide a unique advantage that can be encashed in the market, depending on the strength of the new technology. Above all, they provide a direct opportunity to start one’s own venture.

Example: Looking to Fend Off Patent Trolls, IBM and Cisco Support Startup RPX Intellectual Ventures co-founder Nathan Myhrvold’s patent portfolio has been growing so fast that it  has been scaring people in the technology business who believe that the former Microsoft CTO will  use that power as a hammer to win legal battles. Two of the former executives of Myhrvold’s Bellevue patent-licensing firm are venturing on their  own  with  support  from  IBM  and  Cisco  to  serve  as  a  counterweight  to  patent-holding  firms  such  as  Intellectual  Ventures.  RPX  Corp  has  launched  what  it  calls  ‘defensive  patent  aggregation’,  a  membership  club  of  sorts  where  large-  and  small-technology  companies  pool  capital  in  order  to  protect themselves from patent litigation. RPX  founders  John  Amster  and  Geoffrey  Barker  left  Intellectual  Ventures  on  account  of  certain  philosophical differences with the firm’s approach. Both RPX and Intellectual Ventures buy patents  from inventors, bankrupt companies and other entities; however, because of their own specialization,  both the firms are just ‘peripherally competitive’. RPX is designed to serve the basic interests and concerns of the operating companies that pay  its membership fees, to ensure that their patents do not fall into the hands of non-practising entities.  Also known as ‘patent trolls’, these organizations buy patents with the hope of licensing them to other  companies. They typically have no R&D, sales or other corporate functions; they instead make their  money through patent-licensing deals or litigation. If a non-practising entity happens to hold a patent related to one’s business, the corporation may  be forced to negotiate. ‘Companies are destroyed because of it,’ said Barker. ‘And I really thought it  was important to have a service that would give them a proactive defence response to really what is,  frankly, a huge escalating problem.’ Acting as a third-party buyer, RPX is attempting to gobble up threatening patents that could be  used against its corporate members. Amster said that the patents will be used only for ‘defensive’  purposes, meaning that RPX will not assert patents against other entities or its own members. ‘There is no fear on the part of companies that are dealing with us, in terms of us building a huge  portfolio and then turning around and asserting that against people,’ he said. Unlike Intellectual Ventures, RPX does not plan to make its money through licensing of the patents  it  acquires.  Instead,  it  plans  to  make  its  money  through  the  annual  fees  it  charges  its  members. 

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The fees range from $35,000 for start-ups up to $4.9 million for large companies, a pricing model   that Amster equates to directors’ and officers’ liability insurance. Since RPX was founded earlier this year, the company has acquired more than 200 US patents  and applications at a cost of about $40 million. These patents cover a wide range of technologies,  from Internet search to Radio Frequency Identification (RFID). The San Francisco-based company,  whose 15-person team has participated in IP transactions valued at $2 billion, is backed by Kleiner  Perkins Caufield & Byers and Charles River Ventures.6

The Animation Boy Who Grew Up Tapaas Chakravarti, the son of an employee with the Indian Railways, had to move from one town to  another every couple of years. Therefore, the next best thing he did was by creating his own unique  friends.  He  dreamed  up  characters  and  borrowed  liberally  from  his  collection  of  more  than  4,000  comic books. He played Peter Pan, the boy who never grew up. After 30 years of his entrepreneurial journey, Chakravarti is in his office in Hyderabad’s Banjara  Hills. He is encircled by pictures and models of Mickey Mouse, Iron Man, Mowgli and Casper. He  exclaims, ‘I’m living my dream!’ The dreamer-turned-entrepreneur has created a business out of his  heroes  and  fantasy  worlds.  Hyderabad-based  DQ  Entertainment  (DQE)  is  his  venture,  the  largest  animation company in India with more than 3,500 employees. DQE has remained relatively unknown outside the industry for the past 11 years of its existence. It  was only very recently that the company came to the limelight when they decided to raise ` 150 crore  through an IPO. The IPO was oversubscribed by more than 80 times. DQE, similar to others in the industry such as Crest Animation Studios and Toonz Entertainment,  started off creating content for global broadcasting majors such as BBC and studios such as Warner  Brothers and Walt Disney. At that time, India was considered the low-cost production destination for  animation. In the second phase of its growth, the company started by contributing to higher value  proposition by venturing into co-production. Instead of just creating content for others, the company  was also investing in projects to take minor rights over the ‘property’. In the recent past, the company took a further leap forward that was altogether new for the Indian  animation industry. The company identified an opportunity in patents on historic animation characters  that were expiring. He saw this as a great opportunity and started buying up patents. His first two  buys were Jungle Book and Peter Pan. Chakravarti’s version of Mowgli and his wild friends was slated  to hit global cartoon channels by the end of 2010. However, even before that, the entrepreneur had  managed to sell the ‘property’ in more than 130 countries.7 ‘We follow a pre-sale model, by which almost 80 per cent of the production costs are covered by  selling the property rights in various regions,’ says Chakravarti. DQE  is  the  first  from  the  country  to  start building an IP library. The company wants to make  $250 million from Jungle Book and Peter Pan alone. Industry executives whom Forbes India talked  to  agree  that  having  patents  can  be  a  boon  to  DQE.  Chakravarti  himself  is  most  enthusiastic  about  the  animation  movie  part,  something  that  he  has  consciously  stayed  away  from  till  now.  ‘I was creating the ability. Now we have that. Starting from 2011, we will be releasing one movie  each year meant for the global audience. Each of these movies will cost $25 million to $30 million,’  he says. At  that  budget,  the  movies  are  at  least  10  times  more  expensive  than  the  average  Bollywood  potboiler.  However,  unlike  the  earlier  Indian  animation  movies  that  targeted  the  local  market,  Chakravarti is eyeing the bigger, global pie. ‘And we will follow the same pre-sale model for movies  also. It will be completely risk-free for us,’ contends Chakravarti.8

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7.5  WHAT ARE IP RIGHTS? Intellectual property rights, in broad terms, are the rights granted to creators and owners of works that are results of human intellectual creativity. These works can be in the industrial, scientific, literary and artistic domains and can be in the form of an invention, a manuscript, a suite of software or a business name.

Areas of IP The laws and agreements among different countries provide for norms and standards with regard to  the following areas of IP:                

patents copyrights and related rights trademarks geographical indications (GIs) industrial designs layout designs of integrated circuits protection of undisclosed information (trade secrets) plant varieties9 

In India, various legislations covering IPRs are as follows:  Patents—The Patents Act, 1970 (as amended in 2005), and Patents Rules, 2003 (as amended in 2006).  Design—The Designs Act, 1911. A new Designs Act, 2000, has been enacted superseding the earlier Designs Act, 1911, and Design Rules, 2001.  Trademark—The Trade and Merchandise Marks Act, 1958. A new Trademarks Act, 1999, has been enacted superseding the earlier Trade and Merchandise Marks Act, 1958, and Trade Marks Rules, 2002.  Copyright—The Copyright Act, 1957, as amended in 1983, 1984, 1992, 1994 and 1999, and the Copyright Rules, 1958. The Department of Education covers it.  Layout Design of Integrated Circuits—The Semiconductor Integrated Circuit Layout Design Act, 2000 (Enforcement pending).  Protection of Undisclosed Information—No exclusive legislation exists, but the matter would be generally covered under the Contract Act, 1872.  GIs—The Geographical Indications of Goods (Registration and Protection) Act, 1999, and Geographical Indications of Goods Rules, 2002.  The Protection of Plant Varieties and Farmers’ Rights Act, 2001.

7.6  WHAT IS A PATENT? A patent is an exclusive right granted by a country to the owner of an invention to make, use, manufacture and market the invention, provided the invention satisfies certain conditions stipulated in the law. ‘Exclusivity of right’ implies that no one else can make, use, manufacture or market the invention without the consent of the patent holder. This right is available only for a stipulated time period. However, the use or exploitation of a patent may be affected by other laws of the country that has awarded the patent. These laws may relate to health, safety, food and security. Further, existing patents in a similar area may also come in the way. A patent in the law is a property right and, hence, can be gifted, inherited, assigned, sold or licensed. Since the right is conferred by the State, it can be revoked by the State under very special circumstances even if the patent has been sold, licensed, manufactured or marketed in the

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Figure 7.5 Conditionality for Getting Patents meantime. The patent right is territorial in nature, and inventors/their assignees will have to file separate patent applications in countries of their interest, along with necessary fees, for obtaining patents in those countries. An invention should meet the conditions of novelty, inventiveness and usefulness to be eligible for getting a patent (Fig. 7.5).  Novelty—An invention is said to be novel if it has not been disclosed in prior art, where ‘prior art’ means everything that has been published, presented or otherwise disclosed to the public on the date of the patent (prior art includes documents in foreign languages disclosed in any format in any country of the world). For an invention to be judged as novel, the disclosed information should not be available in the prior art.  Inventiveness (Non-obviousness)—It means that the proposed invention is not obvious to a person skilled in the art, that is, skilled in the subject matter of the patent application. The prior art should not point towards the invention, implying that the practitioner of the subject matter could not have thought about the invention before filing the patent application. Inventiveness cannot be decided based on the material contained in unpublished patents. The complexity or the simplicity of an inventive step does not have any bearing on the grant of a patent. In other words, a very simple invention can qualify for a patent.  Usefulness—An invention should possess utility for the grant of a patent. No valid patent can be granted for an invention devoid of utility.

Patentable Inventions Patentable  inventions  under  the  Patents  Act,  1970,  in  India  are  art,  process,  method  or  manner  of  manufacture;  machine,  apparatus  or  other  articles  or  substances  produced  by  manufacture,  which include any new and useful improvements in any of them and an alleged invention. However,  inventions claiming substances intended for use, or capable of being used, as food, medicine, drugs  or  relating  to  substances  prepared  or  produced  by  chemical  processes  (including  alloys,  optical  glass, semiconductors and inter-metallic compounds) are not patentable.10

The inventions fulfilling the criteria of novelty, inventiveness and usefulness but that are not patentable are inventions that are frivolous or that claim anything obviously contrary to well-established natural laws, for example, different types of perpetual motion machines, the primary or intended use of which would be contrary to law or morality or injurious to public health, for example, a process for the preparation of a beverage that involves use of a carcinogenic substance, although the beverage may have higher nourishment value; mere discovery of a scientific principle or formulation of an abstract theory, for example, Raman effect; mere discovery of any new property or new use of a known substance or the mere use of a known process, machine or apparatus unless such a known process results in a new product or employs

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at least one new reactant; a substance obtained by a mere admixture, resulting in only the aggregation of the properties of the components thereof or a process for producing such a substance; mere arrangement or rearrangement or duplication of features of known devices, each functioning independently of one another in a known way; a method or process of testing applicable during the process of manufacture for rendering the machine, apparatus or other equipment more efficient; a method of agriculture or horticulture; any process for medical, surgical, curative, prophylactic or other treatment of human beings, or any process for a similar treatment of animals or plants; and inventions relating to atomic energy. A patent can be obtained by the inventor or his assignee by filing an application with the patent office in the stipulated forms as required by the patent office. The term of a patent is five years from the date of sealing of the patent or seven years from the date of the patent (i.e., the date of filing the complete specification), whichever period is shorter, for an invention claiming the method or process of manufacture of a substance, where the substance is intended or capable of being used as a drug, medicine or food; and 20 years from the date of the patent in respect of any other patentable invention. A patent expires after living its full term or if a patentee fails to pay renewal fees or its validity gets successfully challenged by an opponent who files an opposition in the patent office or court of law.

Patent Specification There are two types of patent documents usually known as ‘patent specification’, namely provisional  specification  and  complete  specification.  A  provisional  specification  is  usually  filed  to  establish  priority of the invention in case the disclosed invention is at a conceptual stage, and it is likely to take  some  time  for  coming  out  with  a  specific  description  of  the  invention.  It  helps  in  establishing  the  earliest ownership of an invention. A complete specification should be submitted within 12 months  of filing the provisional specification. This period can be extended by three months. An application  with  complete  specification  can  also  be  filed  right  at  the  first  instance.  For  obtaining  a  patent,  complete  specifications  are  necessarily  submitted,  and  they  contain  title of the invention;  field  to  which the invention belongs; background of the invention including prior art giving drawbacks of the  known inventions’ practices; complete description of the invention along with experimental results;  drawings, diagrams and flow charts that are essential for understanding the invention; examples, if  any; specific embodiments, if any and abstracts, claims, which are statements that are related to  the invention on which legal proprietorship is being sought. Therefore, the claims have to be drafted  very carefully. As  regards  naming  inventors  in  the  patent  application,  all  persons  who  have  made  intellectual  contributions in achieving the final results of the research work leading to a patent should be named  as  inventor(s).  However,  any  person  who  has  not  contributed  intellectually  in  the  development  of  an invention is not entitled to be included as an inventor. At times, it becomes difficult to decide the  names of inventors. Therefore, it is essential that all scientists engaged in research keep a factual,  clear and accurate record of daily work done by them in the form of a diary. The pages in the diary  should be consecutively numbered, and the entries made should be signed by both the scientists  and the concerned leader.11

7.6.1  Scope and/or Ambit of the Invention This part of the specification should bring out the areas of application of the invention and the expected use of the invention. The applicant can corroborate the industrial applicability of the invention and call for the protection against duplication of the invention in the related fields by specifying the scope and

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Plant

Figure 7.6 Broad Categories of Patents ambit. The clear identification of the advantages of the invention can be described in detail in this part of the specification. Drafting claims is a special art while filing an application for a patent. It is this aspect of filing an application for a patent that requires specialized inputs from attorneys in the area. The description in the complete specification needs to clearly and succinctly state the ‘Claims’ proceeded by the prescribed preamble, ‘I claim’ or ‘We claim’, as the case may be. It will preferably start from the next page after the full description of the invention with the claims serially numbered. The purpose of the Statement of Claims is to highlight with conciseness, precision and accuracy as to how much of what is described in the specification has been sought to be protected, implying thereby that what is not claimed is open to public use. The claim or claims of a complete specification shall relate to a single invention, or to a group of inventions linked so as to form a single inventive concept. While submitting an application for a patent, one should thoroughly make a search of the existing state of the art in the area and draft claims to avoid future infringements. Above all, while drafting claims, it is important to understand the invention; identify the right embodiments; pick up the right words, terminology and sentences to describe the invention and imagine as to how competitors could avoid the claimed invention while still taking advantage of its teachings with an emerging future scenario in mind. There are basically three different categories of patents according to the USPTO. These are utility patents, design patents and plant patents (Fig. 7.6). Utility  Patents The general notion about patents in the minds of people is that of utility patents. Utility patents may be granted to any inventor who invents any new and useful process, article of manufacture, machine, composition of matter or any new and useful improvement. Examples of utility patents include electronic circuitry, automatic transmissions, methods of manufacturing things, chemical processes, vacuum cleaners and almost anything else that can be manufactured by a human being. The majority of patents issued by the patent office fall in this category. The utility patent term is 20 years from the date of filing with the USPTO. The utility patent grants a right to the owner of the patent from anybody else making, using or selling the invention. There is greater interest and awareness about design patents, specifically by jewellers, shoe manufacturers and plastic industries, that would like to protect moulded plastic parts and containers. Design Patents A design patent basically covers the unique specific look, shape, ornamental design and appearance of a product or related things. A design patent does not include functional items. It should have the basic characteristic of being aesthetic. Otherwise, it would fall in the category of utility

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patents and, if not, should go in the direction of a utility patent. The applications of design patents are mainly by way of drawings, as there are no functional features to be explained. Design patents usually have a single claim and, therefore, are easy to get by making simple changes in the existing designs. Design patents provide protection against ornamental design as against utility patents that provide protection against the way something works and is used. Therefore, it is possible to get both design and utility patents for the same invention because of exclusivity between the two. Design patents cannot be obtained for a subject matter that can be considered offensive to any ethnic group, nationality, religion, race or sex. The design patent term is 14 years in the United States. Plant Patents A plant patent is granted to an inventor who has invented by grafting or cutting an asexually reproduced, distinct and new variety of plant, other than a tuber-propagated plant or a plant found in an uncultivated state. For example, algae and macro fungi are regarded as plants, but bacteria are not. Plant patents are also subjected to similar legal requirements, as applicable to utility patents. These fall under the plant statutory class, but other than that they should meet the same criteria as a utility patent.

Examples Ford’s EcoBoost to Get 125 Patents, 4 October 2009, Daniel Patrascu Ford Motors recently announced that its latest developments in engines in the area of EcoBoost will  add  at  least  125  patents  to  the  existing  4,618  active  US patents  that  it  already  has.  ‘We  focus  on  getting high-quality patents that have the best breakthrough potential for the company,’ Bill Coughlin,  for Global Technologies, said. Christine Wren, business development director for the Patent Board,  said that Ford’s patented technologies are closer to the cutting edge than its competitors. EcoBoost  is  a  developed  engine  that  uses  a  gasoline  injection  and  turbocharging  to  increase  output, while at the same time trying to keep fuel consumption and emission to a minimum level. ‘The  secret of Ford’s EcoBoost system isn’t just the hardware—the key is in the Ford control system,’ Brett  Hinds,  Ford’s  Advanced  Engine  Design  and  Development  manager,  added.  ‘Our  engineers  have  the right “recipes” to integrate the various systems like engine, transmission and fuel management,  resulting in a seamless, exhilarating driving experience.’12

Adjustable Monitor Cart United States patent 7419170 to Krizan et al. dated 2 September 2008. Application No. 11/394289 filed on 31 March 2006. Abstract Size-altering  transportation  monitor  cart  whose  horizontal  width  can  be  expanded  or  retracted  by  pulling stopper pins and pulling or pushing the horizontal frame open, closed or to a varying degree  between opened and closed. Claims A  cart  for  storing,  moving  and  servicing  a  flat  panel  or  thin  monitor,  with  the  said  cart  comprising  a body including a first L-shaped frame and a second L-shaped frame, each said L-shaped frame  defined by a lower horizontal section and an upper vertical section, wherein said horizontal sections  of  said  L-shaped  frames  are  telescopingly  connected  to  each  other  defining  an  adjustable  beam,  said  beam  including  a  locking  assembly  including  a  plurality  of  locking  holes  and  a  locking  pin  for  engaging  said  locking  holes,  said  adjustable  beam  allowing  the  distance  between  the  vertical  sections of the L-shaped frames to be adjusted and locked in position by said locking means, a trio of  transverse platforms for supporting said monitor, each platform having a concave centre section and 

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flat sections on either side of said concave section, a first and second of said platforms being located  at each end of the beam and a third of said platforms being located in between said first and second  platforms,  a  transverse  wheel  support  on  the  lower  end  of  each  vertical  section  of  the  L-shaped  frames at a position above said adjustable beam, wherein each end of said transverse wheel supports  includes a wheel or caster for transporting the cart along a support surface, a transverse handle on  the upper end of each vertical section of the L-shaped frames, and a pivoting flag assembly on the  upper end of each vertical section of the L-shaped frames, each said pivoting flag assembly including  a pair of parallel flag members, each flag member pivotally mounted to flag mounts located on either  side of the vertical section of the L-shaped frames at a position below the handles, wherein said flag  members pivot between a vertical position in which the flag members engage an inside surface of the  handles, and a horizontal position in which the flag members engage a bottom side of the handles.13

Summary of the Invention In order to rectify the existing disadvantages of the conventional carts as described, the applicants  have  been  consistently  and  continuously  making  efforts  to  develop  and  improve  the  type  of  cart  required for this need. With the applicants’ accumulated experience and intelligent skills in the field,  the applicants finally devised an expandable cart capable of safely carrying a variety of thin, fragile  monitors of varying lengths, sizes and weights in an upright position. The objective of the present  invention is to provide an expandable cart that has the ability to safely carry a variety of thin, fragile  monitors of varying lengths, sizes and weights. Another objective of the present invention is to provide  an expandable cart that can be adjusted to size according to the dimensions of the monitor or object  to be loaded. The load stage size is adjusted by the operation of a set pin that can be released to allow  the stage made up of a horizontal telescoping slip fit tube to be expanded or contracted to the proper  size. An additional objective of the present invention is to provide an expandable, collapsible monitor  cart made of a strong enough and lightweight enough material to safely hold the load and minimize  cart weight while keeping assembly to a minimum to reduce production and shipping costs.14

Bajaj Gets Patent for ExhausTEC Bajaj has received a patent for a new technology that has been a bone of contention with its rival TVS  Motor Co. In 2004, Bajaj Auto Limited had applied for a patent of this technology. Later, TVS unveiled  a series of new products, which Bajaj alleged of patent infringement of its ExhausTEC technology,  and served notice to the Chennai-based firm in December 2007. ‘The Indian Patent Office granted Bajaj Auto a patent for its “ExhausTEC” invention vide Patent  No 231498 dated 5 March 2009. This grant was published in Patent Gazette, dated 27 March 2009,’  BAL, Vice-president (Business Development) S. Ravikumar said. Bajaj Auto claimed that ExhausTEC  significantly improves low- and mid-range torque (tendency of a force to rotate an object about an  axis) in a single-cylinder four-stroke engine, employing a chamber of predetermined volume attached  to the exhaust pipe.15

7.7  INTERNATIONAL PATENTS An Indian patent provides the owners with exclusionary rights for deriving benefits from the patent during its term in India. Thus, an Indian patent’s owner can preclude others from making, using or selling the claimed invention in India and its territories. However, the Indian patent does not grant rights outside India, nor does it curtail ‘infringing’ activities abroad. Protection of the invention outside the country of its origin requires the inventor to get patents in the foreign jurisdiction where protection is sought. Filing can be done directly with a national patent office or under the Patent Cooperation Treaty (PCT). If protection is sought

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only in Europe, one application can be filed with the European Patent Office (EPO). The PCT, which concluded in 1970, provides a unified procedure for filing patents to protect inventions in their contracting states. A patent application filed under the PCT is called an ‘international application’ or ‘PCT application’. The advantage is by way of submitting a single filing of an international application with a Receiving Office (RO) in one language. Subsequently, search is undertaken by an International Searching Authority (ISA), which gives a written opinion on the patentability of the invention. It is optionally followed by a preliminary examination performed by an International Preliminary Examining Authority (IPEA).16 Thereafter, the relevant national or regional authorities administer matters related to the examination of the application as per the national law and take the decision to issue a patent or act otherwise. The PCT does not provide for the grant of an ‘international patent’, as such a multinational patent does not exist, and the grant of a patent is a prerogative of each national or regional authority.17 Publication of the patent application is done after 18 months from the filing date or priority date. International applications are published by the International Bureau at the WIPO, based in Geneva, Switzerland, in one of the 10 languages of publication. Finally, at the end of the 30th month from the date of filing the international application, the phase ends and the international application enters the national and regional phase. However, laws of different countries may fix time limits that expire after 30 months. In case the entry into a national or regional phase does not take place within the prescribed time limit, the international application may cease to have the effect of a national or regional application. The main purpose of going through the PCT route for patents in foreign countries is advantageous in terms of priority in multiple countries, as it enables to postpone major costs and provides additional time to consider various patenting options, it helps in providing a logical and rational basis for patenting decisions and, above all, the process is being used by the world’s major corporations, universities and research institutions when they seek international patent protection.

7.8  TRADEMARKS Trademarks have been defined as any word, phrase, symbol or design, or combination of words, phrases, symbols or designs, sign or any combination of signs capable of distinguishing between the goods or services of one legal entity and those of another. A service mark is the same as a trademark, except that it is identified with a service that usually appears in advertising for the services as against the product or packaging used for products. Such distinguishing marks constitute protectable subject matter under the provisions of the TRIPS Agreement. Compulsory licensing of trademarks is not permitted. The Indian law of trademarks is covered under the Trade Marks Act, 1999. The act seeks to provide for the registration of trademarks relating to goods and services in India. The rights granted under the act are operative in the whole of India. Almost all jurisdictions, including India, employ a classification system in which goods and services are grouped into classes for registration. Most countries follow the same classification system, namely, the International Classification of Goods and Services, which consists of 34 classes of goods and 8 classes of services.

Trademark Registration The registration of a trademark confers to the registered entity of the trademark the exclusive right  to use the trademark in relation to the goods or services in respect of which the trademark is registered.  Although the registration of a trademark is not mandatory, it offers better legal protection, in case of  infringement.

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Before filing an application for the registration of a trademark, it is necessary to make an inspection  of  the  already  registered  trademarks  to  ensure  that  registration  may  not  be  denied  in  view  of  resemblance of the proposed mark to an existing legal entity.18

An application for a trademark is to be submitted in the prescribed Form TM-1 along with a prescribed fee of ` 2,500 at one of the five offices of the Trade Marks Registry located at Mumbai, Delhi, Kolkata, Chennai and Ahmedabad, depending on the place where the applicant resides or has his place of business. The examination of request is done to ensure that the trademark is distinctive, unique and does not clash with existing trademarks or pending trademark applications. After ensuring that the proposed trademark is not in conflict with any existing or pipeline requests, it is advertised in the Trade Marks Journal to allow others to oppose the registration. After ensuring that there is no objection to the proposed trademark or if the opposition, if any, is decided in favour of the applicant, the mark is registered, and a certificate of registration is issued. Otherwise, it would be refused by the Registrar of Trade marks. The applicant may then appeal to the Intellectual Property Appellate Board, an administrative tribunal. The term for a trademark registration is 10 years in India. The renewal is possible for a further period of 10 years each. These renewals can last indefinitely if the owner continues to use the mark. In case the mark is not renewed, it can be removed from the register of trademarks. A trademark holder can use the TM (trademark) or SM (service mark) designation along with the mark to alert the public of the claim. The registration symbol, ®, can be used when the mark is registered. In case the owner would like to seek protection of the trademark in foreign countries, they should register the trademark separately in that country under the relevant laws. There is no system yet to get international trademarks. However, the Paris Convention provides certain privileges to member countries in trademark registration by way of claiming priority of the first application called ‘Paris Convention priority right’, or ‘Convention priority right’. It is feasible to avail the advantage of multinational filing systems in certain regions to obtain trademark protection. For example, Belgium, the Netherlands and Luxembourg have a single trademark registry, commonly referred to as the ‘Benelux Trademark Register’. The European Union (EU), consisting of 15 countries, has adopted its own trademark system, known as the ‘Community Trademark’. The African Organization for Intellectual Property (OAPI), a group of African nations, has replaced its national trademark offices with a common trademark office that offers a single trademark registration valid in all member states.19

Examples Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc. TravelGuru™ Hotel Deals is a registered trademark for Travel Guru. Axis  Bank,  HDFC  Bank,  ICICI  Bank,  IndusInd  Bank,  ILFS  (Infrastructure  Leasing  &  Finance  Services), OBC (Oriental Bank of Commerce), RBI (Reserve Bank of India), SEBI (Stock Exchange  Board  of  India),  NSE  (National  Stock  Exchange  Ltd),  BSE  (Bombay  Stock  Exchange  Ltd),  MCX  (Multi-commodity  Exchange  Ltd),  NCDEX  (National  Commodity  and  Derivative  Exchange  Ltd),  ICX  (Indian  Commodity  Exchange  Ltd),  DGCX  (Dubai  Gold  and  Commodity  Exchange),  NMCE  (National  Multi-commodity  Exchange  Ltd),  BOISL  and  NSCCL  are  all  owned  by  their  respective  organizations.  NEAT,  NIFTY  and  NOW  are  owned  by  National  Stock  Exchange  Ltd.  BOLT,  IML,  (Continued)

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SENSEX, FASTRADE and DLOAD are owned by Bombay Stock Exchange Ltd. NEST and Omnesys  are owned by Omnesys Technologies Pvt. Ltd. Asian CERC is owned by Religare Technova Global  Solutions Ltd. GMAT™  and  GMAC™  are  registered  trademarks  of  the  Graduate  Management  Admission  Council™. Java and all Java-based trademarks and logos are trademarks or registered trademarks  of Sun Microsystems, Inc., in the United States and other countries.

Examples of Registered Logos Pearson and its imprints have logos and trademarks as below:

Supreme Court Seeks Reply from Montblanc in Trademark Infringement Case The  Supreme  Court  has  issued  a  notice  to  German  luxury  brand  Montblanc  Simple  GMBH  on  a  petition filed by a Mumbai-based firm that has been charged of infringing on the former’s trademark.  Add  Corporation  Ltd,  which  sells  its  pens  under  the  brand  ‘ADD’,  has  challenged  the  Delhi  High  Court order, which restrained it from selling and manufacturing pens under the trademark ‘Add Gel  Spacewalker’ and ‘Add Gel Goldtop’. The High Court’s order came after the German major alleged  that Add Corp. had infringed on its registered trademarks in India—‘Starwalker’, ‘Miesterstruck’ and  ‘three-ring device’. A  bench  headed  by  Justice  Markandey  Katju  sought  a  reply  from  Montblanc  after  Add  Corp.  approached the apex court for a stay on the High Court order on the ground that it was the prior  user of its trademark Spacewalker, and there was a vast difference between the products of the two  companies. Stating that Montblanc cannot claim its three-ring device as a trademark so as to hold it  back from manufacturing and selling its pens under the ‘ADD’ brand. Add Corp. said that its range  of pens sold were priced at ` 200 and ` 340, whereas the Montblanc’s Starwalker range sold under  the  trademark  Meisterstick  and  cost  around  ` 14,250.  Even  the  mode  of  payment  and  packaging,  appearance of the pens and the customers were different, and there was absolutely no likelihood of  any confusion between the two products.20

Bharatmatrimony Vs Google: Real Web War or Publicity Gimmick? It is not only film stars or TV serial producers who indulge in self-created controversy and/or a petition  filed thereon because media tends to jump on it and the initiators get nothing but publicity. A similar  strategy seems to have been paying good results as Chennai-based Consim India Pvt Ltd, which  owns bharatmatrimony.com, approached the Madras High Court against Google.com for ‘infringing’  its trademark. In its petition, the company alleged that Google ads are used in BharatMatrimony’s  platform to sell space to its (BharatMatrimony’s) competitors.

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The company also asked Google and other respondents, including People Interactive Pvt. Ltd,  Jeevansathi Internet Services Pvt. Ltd and Times Business Solutions Ltd, to surrender all compact  discs, master copies, advertising materials, pamphlets and brochures that bear Consim’s trademarks  and/or any other variants to the company. Consim has also asked for ` 10.05 lakh of damages for  infringing and/or passing off and/or for enabling others to infringe its trademarks and domain names. This issue has also initiated a serious debate as to whether a linguistic word or a part of it can be  trademarked or patented. However, the simple answer seems ‘NO!’. In  its  petition,  Consim  said  that  it  had  ‘trademarked’  marathimatrymony.com,  tamilmatrimony. com,  telegumatrimony.com,  bharatrimony.com,  bengalimatrimony.com  and  muslimmatrimony.com  and, thus, Google should not allow ads on those trademarks. If a user types ‘Tamil matrimony’, for  instance,  in  the  Google  search  field  on  the  site,  the  resultant  advertisements  or  Web  sites  shown  include  shaadi.com  and  simplymarry.com.  Consim  says  this  shows  that  Google  is  allowing  its  competition to bid on the trademarks of BharatMatrimony. The company has asked the court to ‘give  a permanent injunction restraining Google from infringing and/or enabling others to infringe plaintiff’s  registered trademarks. Google should not allow competition to bid on trademarks of BharatMatrimony  and should not allow company’s competition to use trademark as their heading.’ If  a  user  types  ‘BharatMatrimony’  in  the  Google  search  field,  the  advertisements  also  show  links  of  Web  sites  such  as  shaadi.com  and/or  jeevansaathi.com.  The  company  has  approached  the  court,  saying  that  Google  should  not  allow  its  competition  to  be  linked  to  the  trademarks  of  BharatMatrimony or use the trademark as their heading.21

7.9  COPYRIGHT The Copyright Act in India was enacted in 1957. It has been subsequently amended in 1982, 1984, 1992, 1994 and 1999. Though the amendment in 1994 was quite comprehensive, only minor changes were introduced through the amendment made in 1999 to bring the act in conformity with the TRIPS Agreement. A copyright protects the expression of ideas. For a work to get copyright protection, it has to be original and should be expressed in material form. A copyright covers the following original works:  literary, dramatic and musical works—computer programs/software are covered within the definition of literary works  artistic works  cinematographic films, which include sound track and video films  record—any disc, tape, perforated roll or other device

A work qualifies for copyright protection if  it is of a type protected by copyright under the act  it is recorded in some form, for example, in writing, by a sound recording, on a computer disc or in printed form  the work meets the requisite degree of originality—a work is considered original if adequate skill, labour and judgment are spent in creating it

A ‘computer program’ for the purpose of copyright means a set of instructions expressed in words, codes, schemes or any other form, including a machine-readable medium, that is capable of causing a computer to perform a particular task or achieve a particular result.

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A copyright grants certain rights that are exclusive to its owner. Based on these rights, the copyright owner     

can copy the work issue copies of the work to the public rent or lend the work to the public perform, show or play the work in public communicate the work to the public—this includes broadcasting of a work, electronic transmission, making an adaptation of the work or doing any of the things just mentioned in relation to an adaptation

Copyright ownership can arise automatically or by means of transfer of ownership through an assignment, assignation or license. The owner of the copyright in an existing work or the prospective owner of the copyright in a future work may assign to any person the copyright, either wholly or partially, for the entire world or for a specific country or territory; for the full term of copyright or a part thereof or relating to all the rights comprising the copyright or only a part of such rights. The duration of copyright is dependent on the type of work in question. The following are examples of some works:  Literary, Dramatic, Musical and Artistic Works—The lifetime of the author plus a period of 60 years from the end of the year in which the author dies.  Computer-generated Works—Fifty years from the date of creation of the work. A work is deemed to be computer generated when there is ‘no human author’.  Sound Recordings—Fifty years from the end of the year in which the recording is made or published.  Broadcasts—Fifty years from the end of the year of broadcast.  Typographical Arrangement of Published Editions—Twenty-five years from the year of first publication.

An application for copyright on Form IV accompanied by four copies of the original work is to be made on Form IV (including Statement of Particulars and Statement of Further Particulars) together with the prescribed fee at the Copyright Office of the Department of Education, Human Resource Ministry, Government of India, New Delhi. The Copyright Office on submission of the application provides a filing number and filing date and issues a filing receipt. Subsequently, the application is formally examined by the Office and issues, if any, get communicated to the applicant. Once the application is found to be in order, it is accepted and the Copyright Office issues the registration certificate. Anyone who claims copyrights on an original work that falls within the copyright law can use copyright notice to alert the public of the claim. Copyright, as such, is automatically available without people even having registered to use the copyright symbol. However, it is advisable to incorporate a copyright notice such as the symbol, letter © in a circle, or the word ‘Copyright’ followed by name of the copyright owner and the year of first publication. For example, © ipfirmsdirectory 1999, Copyright © 2010 by John Wiley & Sons, Inc. A copyright is said to be infringed when one of the exclusive rights of an author is performed by a party without the consent or authorization of the author. This infringement is called ‘primary infringement’. Providing accessories for infringing the exclusive rights or assisting in the making or distribution of infringing copies is also treated as an infringement and is referred to as ‘secondary infringement’.

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7.10  GEOGRAPHICAL INDICATORS AND BIOLOGICAL DIVERSITY The TRIPS Agreement contains a general obligation that parties shall provide the legal means for interested parties to prevent the use of any means in the designation or presentation of a good that indicates or suggests that the good in question originates in a geographical area other than the true place of origin in a manner which misleads the public as to the geographical origin of the good. There is no obligation under the agreement to protect GIs that are not protected in their country of origin or which have fallen into disuse in that country. A new law for the protection of GIs, namely the Geographical Indications of Goods (Registration and the Protection) Act, 1999, was passed by the Parliament and notified on 30 December 1999, and the rules made there under were notified on 8 March 2002. IPRs under geographical indicators cover any association of persons, producers, organizations or authorities established by or under the law that can apply for a GI provided the applicant represents the interests of the producers. The Biological Diversity Act, 2002, is an act that provides for conservation of biological diversity, sustainable use of its components and fair and equitable sharing of the benefits arising out of the use of biological resources, knowledge and for matters connected therewith or incidental thereto. The bio diversity legislation regulates access to genetic resources and associated knowledge by individuals and institutions and ensures equitable sharing of benefits arising out of the use of resources and knowledge with the country and its people. This act provides protection to the interests of local people, growers and cultivators of biological diversity, as well as Indian researchers through a new National Bio-diversity Authority (NBA), supported by state-level boards and management committees that regulate access to plant and animal genetic resources. An appropriate approval of the authority is required before obtaining any form of IPRs on an invention that is based on a biological resource from India or on traditional knowledge including cases of access by foreigners. Indian citizens and companies are usually allowed free access to biological resources within the country for research purposes but now need prior approval of the NBA for transferring findings to foreign entities. An application for registration of a GI is to be submitted along with fees to the ‘Registrar of Geographical Indications’. It should contain the relevant information and details on the class of goods; territory; particulars of appearance; particulars of producers; an affidavit certifying the applicants’ claims; standard benchmarks or other characteristics of the GI; special characteristics; textual description of the proposed boundary; growth attributes in relation to the GI pertinent to the application; certified copies of the map of the territory; special human skills involved, if any; and the number of producers and particulars of inspection structures, if any, to regulate the use of GI. An application is to be made in writing using a replica of the official application Form GI-1 for the registration of a GI in Part A of the Register by an Indian applicant; Form GI-2, for a convention application; an application for goods falling in different classes by an Indian applicant in Form GI-3 and an application for registration of goods falling in different classes from a convention country in Form GI-4 along with the prescribed fee, and should be addressed to the Registrar of Geographical Indications. A number gets allotted on receipt of the application. Thereafter, the application is examined to check whether it meets the requirements of the act and rules. Applicants’ submissions are considered and examined by the examiner appointed by the registrar. After receipt of satisfactory clarifications on the objections, if any, the application is accepted and advertised in the Geographical Indications Journal. Anybody can raise opposition in writing within a maximum period of four months from the date of publication. In case the opposition does not stand the test of legal scrutiny and is dismissed, the application will proceed to registration in Part A of the Register unless the Central Government directs otherwise.

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Examples IPRs—Controversy over Basmati Rice Basmati rice can be used as an example of indigenous knowledge that was patented elsewhere due  to lack of registered GIs. For instance, in the United States, the trademark ‘Jasmati’ was registered  in November 1993 and ‘kasmati’ was registered in June 1996. A patent (US Patent 5663404) titled  ‘basmati rice lines and grains’ having 20 claims was also granted to RiceTec. In June 2000, Agriculture  and Processed Food Products Export Development Authority (APEDA), India, challenged this patent  at  the  USPTO.  As  a  result,  in  September  2000,  RiceTec  withdrew  4  (of  the  20)  claims  that  dealt  with  the  starch  content,  grain  length,  chalkiness,  2-acetyl-  1-pyroline  content  and  burst  index.  On  27 March 2001, the USPTO informed RiceTec that only 3 of the 20 claims (pertaining to three specific  rice plants, namely BAS867, RT1117 and RT1121, that are not cultivated in India) were allowed, thus  suggesting that the ‘basmati’ battle was, at least, partly won by India.22

Tirupati Laddoo Gets Geographical Copyright ‘Tirupati  Laddoo’  offered  to  devotees  at  the  Lord  Venkateswara  Temple  in  Andhra  Pradesh  has  been awarded a geographical copyright that prohibits others from naming or marketing any sweet  preparation under the same name. The Tirumala-Tirupati Devasthanams (TTD), a trust that administers  the Venkateswara Temple in the Tirumala Hills in the state of Andhara Pradesh, had applied for a GI  with the Chennai-based Geographical Indication Registry in March 2008. Having registered under GI certificate, the Laddoo is now protected under law and nobody can  copy it. Under GI, the right to marketing a product is tied to a definite geographical territory, and the  manufactured goods should be produced, processed or prepared in that territory. Popular items that have been granted GI tag worldwide include Champagne and Tequilla, and the  procedure helps in preventing others from clandestinely using and exploiting a brand name that has  evolved over a period of time. The GI status provides legal protection and facilitates for action in case  of infringement. The GIs are covered as an element of IPRs. ‘Tirupati Laddoo’ is the popular name  for  ‘Sri  Vari  Laddu’  that  is  offered  as  ‘prasadam’—sacred  food  to  the  devotees  after  they  worship  Lord Venkateswara. It has distinct characteristics by way of size and flavour. ‘Tirupati Laddoos are  not  produced  anywhere  in  the  world  and  are  very  unique  in  terms  of  quality,  reputation  and  other  characteristics, which go into its making,’ TTD had claimed in its application. In  the  past,  the  GI  tag  has  been  awarded  to  a  number  of  Indian  products  or  goods  including  Darjeeling Tea, Madhubani Paintings and Goa Feni.23

India Beats Back US Firm’s Bid to Patent Ashwagandha Formulations India  has  foiled  a  major  bio-piracy  bid  on  the  use  of  Ashwagandha,  India’s  wonder  plant,  in  the  treatment of a range of illnesses including depression, diabetes, insomnia, convulsions and gastritis. On 25 March 2010 the EPO decided to withdraw American multinational company Natreon Inc’s  patent applications on the plant’s medicinal properties after India had submitted documented proof  confirming how medicinal formulations using Ashwagandha were being used in India as far back as  in the 12th century. Called the ‘Indian ginseng’, Ashwagandha is extensively used in Ayurveda, Siddha and Unani— India’s traditional systems of medicine. However, Natreon on 27 July 2006 filed patent applications  with  the  EPO  on  Ashwagandha’s  (Withania somnifera)  ability  to  treat  or  manage  anxiety-induced  stress, depression, insomnia, gastric ulcers and convulsions. Shocked, V. K. Gupta, head of India’s Traditional Knowledge Digital Library (TKDL), shot off a letter  to the EPO on 6 July 2009, submitting evidence to confirm that Ashwagandha’s medicinal properties  against the mentioned conditions were long known.

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Interestingly,  India’s  protest  letter  also  contained  15  pieces  of  evidence  and  documents  dating  back to the 12th century. Excerpts from age-old texts of Ayurveda, Unani and Siddha where such  formulations were mentioned were also attached. Council of Scientific and Industrial Research’s letter to the EPO in 2009 said, ‘The patent application  number EP 1906980 titled “method of treatment or management of stress” may kindly be referred to  wherein treatment of anxiety induced stress, depression induced stress, sleep deprivation induced  stress, thermic change induced stress and gastric ulcer induced stress with Withania somnifera has  been claimed to be as novel.’ The letter added, ‘But in TKDL, several references are there, wherein Withania somnifera is used for  treatment of depression, insomnia, gastritis, gastric ulcer and convulsions since long. Hence, there  does not seem to be any novelty or inventive step involved in the claims made in the above patent  application.’ As a result of this ‘third party submission’, a notice was issued to the American company concerning  the patentability of the invention and it was directed to comment on it. Along with this came a European Search report regarding the application on 9 November 2009, in  which TKDL’s evidences were highly appreciated. Natreon was asked to reply within two months of that search report, failing which its application  would be considered withdrawn. ‘As was expected, in presence of strong TKDL evidence, the applicant did not reply and withdrew  its claims,’ an Indian official said. TKDL is a collaborative project between CSIR, Ministry of Science  and  Technology  and  the  Health  Ministry’s  Department  of  AYUSH.  A  few  months  ago,  TKDL  had  helped  EPO  cancel  its  ‘earlier  intent  to  grant  patent  order’  to  a  Spanish  company  on  the  use  of  melon extract to cure Vitiligo, a disease that causes skin de-pigmentation in almost 65 million people  globally. Interestingly, under India’s ancient Unani system, hakeems have been using melon extract  to cure this disease for hundreds of years. It took eight years to create the TKDL.24

7.11  INDUSTRIAL DESIGN An industrial design is an ornamental, aesthetic value or shape of design that can be applied to a utility article and is mainly concerned with the appearance of a product. The design as per European Community Directive dated 13 October 1998 is defined in the following manner: ‘design means the appearance of the whole or a part of a product resulting from the features of, in particular, the lines, contours, colours, shape, texture and/or materials of the product itself and/or its ornamentation’. Businesses and other organizations having equipments that have novel unique and distinct patterns, appearance and designs can get the shape or appearance of equipments registered under the Indian Design Act, so that nobody else uses the design as applied to products. The registered owner of the design shall have the exclusive right to apply the design to any item in the class in which the design is registered. The right accruing to the right holder is the right to prevent third parties from not having their consent to making, selling or importing articles or embodying a design that is a copy or substantially a copy of the protected design when such acts are undertaken for commercial purposes. The duration of protection is to be not less than 10 years. Registration of designs under the Design Act protects the aesthetic features of an innovation. However, it does not help in protecting the technical features of an innovation that fall under the category of patents and distinguishing features that fall under the category of trademarks. A new Designs Law repealing and replacing the Designs Act, 1911, has been passed by Parliament in the Budget Session, 2000. This act has come into force on 11 May 2001.

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The documents required for obtaining protection under industrial design are a signed Power of Attorney in front of two witnesses: sets of figures or photographs in colour or black and white, preferably of various views of the complete article, and a certified copy of the priority document showing the filing date, number and country, if priority is to be claimed. The process of filing involves finding out whether any registration already exists; preparing a representation of the design; identifying the class of design; providing a statement of novelty; including a disclaimer; claiming a priority date and determining the fee to be paid. The registered designs can only be cancelled in India, in case a petition for cancellation in Form 8 is submitted with a requisite fee to the Controller of Designs giving due proof and reasons such as the design has been previously registered in India; it has been published in India or elsewhere before the date of registration; the design is not new or original and the design is not registerable, as it does not fall under the design category under Clause (d) of Section 2.

7.12  LAYOUT DESIGN OF INTEGRATED CIRCUITS Semiconductor integrated circuits are products containing transistors and other circuitry elements that are inseparably formed on a semiconductor material or an insulating material or inside the semiconductor material and are designed to execute an electronic circuitry purpose. In India, the Semiconductor Integrated Circuits Layout—Design Act, 2000 (hereinafter known as the ‘Act’), along with the Semiconductor Integrated Circuits—Layout Design Rules, 2001, governs the protection of such circuits by law. Registering the layout design under this Act provides the exclusive rights to the holder to obtain relief in respect of infringement. Layout designs cannot be registered under the Act if they are not original; have been commercially exploited anywhere in India or in a Convention country, that is, any country that the Government of India notifies in the Official Gazette for the fulfilment of a treaty, convention or an arrangement with any country outside India and which affords to citizens of India similar privileges as are granted to its own citizens; are not distinctive and are not capable of being distinguishable from any other registered layout design. Inventors of layout design of integrated circuits have to apply in writing to the Registrar. The Registrar may refuse the application or may accept it fully or subject to amendments. The Registrar will advertise for seeking objections, if any, within 14 days from the date of acceptance. Anybody can oppose the application within three months from the date of the advertisement of the application by providing written notice and a fee to the Registrar. After hearing the parties and examining the evidence, the Registrar will decide the opposition. Any infringement of a layout design is considered a criminal offence in India. A person infringing on the rights of a holder is liable to be punished by imprisonment for a term, which may extend to three years or by a fine of more than ` 50,000.

7.13  PLANT VARIETIES Plant breeding as an area of development particularly related to the agriculture sector has been on the threshold of a major change in the 21st century, mainly due to prospects provided by biotechnological approaches, and second, due to recent emphasis on ‘participatory plant breeding’. This trend is likely to get further intensified and will have a major influence and impact on plant breeding. As such, in certain countries, including India, new plant varieties are not subject to protection at present. However, India is under an obligation to introduce a system for protecting new plant varieties. The protection

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of plant varieties could be extended through patents or a sui generis system or a combination of these two systems. It is likely that India may prefer the sui generis route. A plant grouping within a single botanical taxon of the lowest known rank, which irrespective of whether the conditions for the grant of a Breeders Right are fully met, can be defined by the expression of the characteristics resulting from a given genotype or a combination of genotypes distinguished from any other plant grouping, by the expression of at least one of the said characteristics, and considered as units with regard to its suitability for being propagated without change. The Indian Parliament has finally passed the Plant Variety Protection and Farmers Rights Act, 2001. India has put in place a law to grant Plant Breeders Rights on new varieties of seeds for the very first time. It has simultaneously provided a Farmers Right. This legislation was necessitated by the commitments that India made in the TRIPS Agreement when it ratified the Uruguay GATT Round in 1994. Article 27.3(b) of TRIPS, which deals with the protection of new plant varieties, offers three options. Protection will have to be granted by a patent, an effective sui generis system or by a combination of the two. The ‘sui generis system’ refers to the grant of Plant Breeders Rights, of what kind is not defined, except to say that it should be ‘effective’. India ultimately opted for the sui generis option but not without a determined struggle by civil society to stop seed patents. There are five main criteria—distinctiveness, uniformity, stability, novelty and appropriate denomination—which are used to determine whether a plant variety is really new or not. These have remained unchanged distinctiveness—clearly distinguishable from any other variety; uniformity—a variety should be sufficiently uniform in its relevant characteristics; stability—relevant characteristic should remain unchanged after repeated propagation or, in the case of a particular cycle of propagation, at the end of each such cycle; novelty—a new variety not being available freely otherwise requires a precondition that it has not been sold or otherwise disposed off to others, by or with the consent of the breeder for the purpose of exploitation of the variety; and appropriate denomination—a variety shall be designated by a denomination, which will be its generic designation.  Check Your Progress   10 Pertinent Points about Business Structure 

  

Your financial adviser may advise you to structure your business solely to reduce tax. There are other equally important things to be taken into account. Here are 10 of them. 1. Risk: If your business operates in fields where financial risks are high, then it will be better to protect yourself by setting up a ‘limited liability’ company. This literally limits your personal liability, unless you can be proved to have acted wrongfully. 2. Reward: How much money do you expect, or want, to make? If your business is going to remain modest, then it may be better to simply be self-employed. 3. People: The shared ownership of a business can be very tax efficient. Equally, giving shares to people not involved from day to day (e.g., your family) can be a problem if the relationship sours. Sometimes, it is best to own the business outright and pay more tax! 4. For sale: Limited companies, since their accounting is reported to Companies House, are easier to sell, because trading is more transparent.

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5. Socially motivated: If you are establishing a UK social enterprise, then you might set up as a ‘Community Interest Company’. This gives you the flexibility of a limited company and the transparency of the purpose of a charity. 6. Do not divorce: Not a pleasant thought, but if you put half of your business in your partner’s name to save tax, then you will have a problem if you separate. 7. Selling up: The tax treatment of the proceeds from the sale of business shares and assets often makes creating a company a good move. Take advice before you start. 8. Customer perception: In some marketplaces, you are not taken seriously unless you have a limited company. This is perhaps rather silly but true all the same. You should decide whether you are going to make a stand or follow the herd. 9. Trading name: Even if you decide not to set up a limited company, you can still use a memorable trading name. Even if the name you want is not registerable, you may still be able to be ABC Ltd, trading as letters of the Alphabet. One is the business, and the other is the brand. 10. Reputation: Just to remind you that what you do, and how others see your business, is actually more important than how you set up the business.

KEY CONCEPTS  IPRs: Are the rights granted to creators and owners of works that are the results of human intellectual creativity.  Patent: Is an exclusive right granted by a country to the owner of an invention to make, use, manufacture and market the invention, provided the invention satisfies certain conditions stipulated in the law.  Novelty: An invention is said to be novel if it has not been disclosed in the prior art, where ‘prior art’ means everything that has been published, presented or otherwise disclosed to the public on the date of the patent.  Inventiveness: Means that the proposed invention is not obvious to a person skilled in the art, that is, skilled in the subject matter of the patent application.  Usefulness: An invention should possess utility for the grant of a patent.  Scope and/or Ambit of the Invention: Brings out the areas of application of the invention and expected use of the invention.  Utility Patents: Are granted to any inventor who invents any new and useful process, article of manufacture, machine, composition of matter or any new and useful improvement.  Design Patents: Basically cover the unique specific look, shape, ornamental design, appearance of a product and related things.  Plant Patents: Are granted to any inventor who has invented by grafting or cutting an asexually reproduced, distinct and new variety of plant, other than a tuber-propagated plant or a plant found in an uncultivated state.

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 PCT: Provides for a unified procedure for filing patents to protect inventions in their contracting states. A patent application filed under the PCT is called an ‘international application’ or ‘PCT application’.  Trademarks: Are any word, phrase, symbol or design, or combination of words, phrases, symbols or designs, sign or any combination of signs that are capable of distinguishing between the goods or services of one legal entity and those of another.  Copyright: Protects the expression of ideas. It has to be original and should be expressed in material form.  Biological Diversity Act, 2002: An act that provides for conservation of biological diversity, sustainable use of its components, and fair and equitable sharing of the benefits arising out of the use of biological resources, knowledge and for matters connected therewith or incidental thereto.  GIs of Goods: Cover any association of persons, producers, organizations or authorities established by or under the law that can apply for a GI provided the applicant represents the interests of the producers.  Industrial Design: Is an ornamental, aesthetic value or shape of design that can be applied to a utility article and is mainly concerned with the appearance of a product.  Semiconductor Integrated Circuits: Are products containing transistors and other circuitry elements that are inseparably formed on a semiconductor material or an insulating material or inside the semiconductor material and are designed to execute an electronic circuitry purpose. ENDNOTES 1. American Companies Capture Less Than Majority of 2009 U.S. Patent Pool, Wolters Kluwer Health, http://www.ificlaims.com/IFI%202009%20patents%20011210%20final.htm 2. IBM gets highest number of US patents, The Economic Times, 10 January 2010. http://articles. economictimes.indiatimes.com/2010-01-14/news/28409467_1_total-patents-patent-numbersguruduth-banavar 3. Start ups and University Research: Too Much Emphasis on Patents, Audrey Watters, 1:02 PM, http://www.readwriteweb.com/start/2010/07/startups-and-university-resear.php, accessed on 15 July 2010. 4. Performance of New Business Ventures from the University of Cambridge by Peter Hiscocks, August 2005, http://www.ifm.eng.cam.ac.uk/ctm/teg/documents/PGHpaperv40805.pdf 5. Convention Establishing the World Intellectual Property Organization, [1] signed at Stockholm on 14 July 1967, Preamble, second paragraph. 6. http://www.techflash.com/seattle/2008/11IBM_support_RPZ_in_defensive_patents3495985; techflash 7. business.in.com/printcontent/14512 8. http://business.in.com/article/work-in-progress/the-animation-boy-who-grew-up/14512/1; business.in.com/printcontent/14512 9. www.jisclegal.ac.uk/LegalAreas/CopyrightIPR/IPREssentials.aspx 10. www.parkerip.com/patentfaqs.aspx 11. www.ebioinfogen.com/patent.htm

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12. http://www.autoevolution.com/news/ford-s-ecoboost-to-get-125-patents-11608.html 13. www.google.pl/patents/about?id=EEOtAAAAEBAJ 14. USPTO—Patent Full Text and Images database; http://patft.uspto.gov/netacgi/nph-Parser? Sect1= PTO2&Sect2=HITOFF&u=%2Fnetahtml%2FPTO%2Fsearch-adv.htm&r=1&p=1&f= G&l=50&d=PTXT& S1=7419170.PN.&OS=pn/7419170&RS=PN/7419170; patents.com/us7419170.html 15. Fresh News Theme; http://www.motorbeam.com/bikes/bajaj-bikes/bajaj-gets-patent-for-exhaustec/; www.autobhp.com/tag/gets/page/2/ 16. Article 32 PCT. 17. Oxonica Energy Ltd v Neuftec Ltd. 2008. EWHC 2127 (Pat), item 45. 18. HYPERLINK “http://www.trademarkindia.in/faq.htm” www.trademarkindia.in/faq.htm 19. P. M. George Kutty Attorney at Law of http://www.pmgip.com 20. TM India, http://www.tm-india.com/trademark-news.php; legum.in/sc.html; Business Standard, T E Narasimhan, 19 September 2009; http://www.businessstandard.co.in/india/news/googlesued-for-shaadibharatmatrimony/13/05/370591/ 21. Know Your Law, http://www.knowyourlaw.com/articles/details.asp?id=46 22. http://www.molecular-plant-biotechnology.info/biotechnology-intellectual-property-rightsIPR-Intellectual-property-protection-IPP/intellectual-property-rights-iprs-for-plant-breeding/ neem-turmeric-and-basmati-patents.html 23. Daily News Analysis, New Delhi, 15 September 2009; http://www.dnaindia.com/india/report_ tirupati-laddoo-gets-geographical-copyright_1290371 24. Sinha, K., Times of India, 27 March 2010. REFERENCE Cohen, W. M. and A. L. Daniel. 1989. ‘Innovation and Learning: The Two Faces of R&D’, The Economic Journal, 99: 569–96.

CONCEPTUAL QUESTIONS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

What is type relevance of IPRs in the present era? What is the key importance that IPRs derive in the 21st century? Why has it been said that IP can help a great deal in the entrepreneurial journey of start-ups? Define IPRs. What are the criteria used to determine whether an invention would qualify for getting a patent? What are the different ways in which a patent may expire? Explain. Is there an international patent? If so, how can it be filed? What is the relevance of drafting claims in the patent application? What is the difference between provisional patent application and complete application? Why has it been said that universities could act as a catalytic agent for rolling out entrepreneurial ventures? 11. Patent documentation helps a lot in R&D endeavour. Explain. 12. What is included in the Scope and/or Ambit of the Invention?

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13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.

What are all the needs to be included in complete specifications for filing a patent application? Differentiate between utility, design and plant patents by giving examples. Define trademarks. What trademarks can be registered and what cannot be registered? Can ownership of trademarks be assigned or transferred? If so, how? What is meant by ‘design’ under the Design Act, 2000, in India? What is the duration of the registration of a design? Can it be extended? What is meant by piracy of a design? Define GIs. What does a copyright protect? Is it compulsory to register for getting a copyright? What advantage may be derived by registering for the copyright? 24. What is the tenure of a copyright? CRITICAL THINKING QUESTIONS 1. How can an inventor find out whether they need a patent, trademark and/or copyright protection? Explain by giving concrete examples. 2. Is it possible for a foreign corporation to license a trademark in India against royalty payment in foreign currency? Explain. 3. ‘Indian economy because of its rich heritage has lot of scope to protect its property under various geographical indicators and biological diversity.’ What are the main problems that are faced in protecting such property? Give a few examples wherein India has contested and succeeded in protecting some of the property under GIs. 4. In Western economies, more and more ventures are emanating from the university system, as an outcome of R&D efforts leading to patents. However, this kind of a momentum is yet to be picked up in the Indian economy. How can this process be accelerated in India? 5. Are IPRs the greatest strength in a knowledge economy for start-up ventures? Consider a few examples from Indian start-ups that have reached the level of IPO based on their strength of IPRs. Analyse their strengths and weaknesses. 6. It is said that patents involve a series of litigations that start-ups may find difficult to defend, because they involve high cost. What areas in start-ups should go in for patenting as a conscious and informed decision as against areas where it is not advisable for them to go in for patents?  CASE 7.1:  TATA MOTORS—NANO  Tata Nano, a car priced at around $2,500, has created a history in the local market as being the most inexpensive car in the world. The cost of a Nano is roughly equivalent to the price of a DVD player that is installed in a luxury Western car. The obvious question that arises in everybody’s mind is the secret behind successfully bringing a car in the market at such a low price. Some describe it as a ‘Gandhian engineering principle’— deep frugality with a willingness to challenge conventional wisdom. A lot of features that Western (Continued)

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consumers take for granted—air conditioning, power brakes and radios—are missing from the entry-level model. The involved team of engineers have worked hard with least possible resources to achieve predetermined results. The car is smaller in overall dimensions than the Maruti, but it offers about 20 per cent more seating capacity. The car meets all Indian emission, pollution and safety standards. However, it has just a small limitation of attaining a maximum speed of about 65 mph. The fuel efficiency is quite attractive: 50 miles to the gallon. Looking at all this, many Western executives associated with the car industry fundamentally doubt that this new car represents any real innovation. As for them, a ‘real innovation’ means a focus on product innovation through breakthrough technologies based on patents. As against General Motors having roughly 280 patents, Tata Motors has filed for just 34 patents associated with the design of the Nano. Therefore, in case innovation is measured in terms of number of patents, then the Nano would not be of much interest to Western executives. As such, even Tata Motors did not draw a lot of attention to what is perhaps the most innovative aspect of the Nano: its modular design. The Nano is built up of components that can be built and shipped separately to be assembled in a variety of locations. In effect, the Nano is being sold in kits that are distributed, assembled and serviced by local entrepreneurs. As Ratan Tata, chairman of the Tata Group of Companies, observed in an interview with The Times of London, ‘A bunch of entrepreneurs could establish an assembly operation and Tata Motors would train their people, would oversee their quality assurance and they would become satellite assembly operations for us. So we would create entrepreneurs across the country that would produce the car. We would produce the mass items and ship it to them as kits. That is my idea of dispersing wealth. The service person would be like an insurance agent who would be trained, have a cell phone and scooter and would be assigned to a set of customers.’ In fact, Tata envisions going even further by providing the tools for local mechanics to assemble the car in existing auto shops or even in new garages created to cater to remote rural customers. This is part of a broader pattern of innovation emerging in India in a variety of markets, ranging from diesel engines and agricultural products to financial services. Although most of the companies pursuing this type of innovation are Indian, the US engineering firm, Cummins, demonstrates that Western companies can also harness this approach and apply it effectively.1 The company describes it as an ‘open distribution’ innovation wherein three innovations in products and processes come together to support open distribution, namely increased modularity in products and processes; aggressive leveraging of existing third-party, often non-commercial, institutions in rural areas to more effectively reach target customers and creative use of information technology, carefully integrated with social institutions, to encourage use and deliver even greater value. Modular designs combined with creative leverage of local third-party institutions help participants to get better faster. Companies such as Tata and Cummins are going far beyond ‘customer co-creation’ in the narrow sense of soliciting isolated ideas from customers. Such innovations are quite different from those in the retail distribution systems pioneered by companies such as Dell and the leading big-box retailers. The techniques initially developed to reach poor and rural customers may have even greater potential when used to reach highly demanding, affluent, urban customers in Western economies.

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The days of customizing cars to personalize them and push their performance limits are rapidly receding into distant memory for the average customer. However, as Kathleen Franz makes clear in her wonderful book, Tinkering: Consumers Reinvent the Early Automobile, it was the open design of early automobile models that blurred the lines between consumption and invention and led to a wave of innovations that were later embraced by the auto industry.2  Questions 

1. What is modular approach to innovation for adding value to the customer? 2. What is meant by creative use of information technology in the instant case? Explain with examples. 3. ‘It is said that the approach of Tata’s has been to build long-term personal relationships with customers, enriched by the specialized capabilities of broad networks of third parties that generate much deeper insight into customer needs and afford opportunities to tailor value.’ Explain. 4. What are the broader lessons that Western executives should learn from this innovation story? 5. ‘Measuring progress solely by patent creation misses a key dimension of innovation.’ Do you agree with this statement? Justify your answer. Endnotes

1. worldisgreen.com/2009/03/23/learning-from-tatas-nano/ 2. Business Week Online, 27 March 2008, http://www.nextbillion.net/news/4-lessonsto-learn-from-tatas-nano

 CASE 7.2:  INFORMATICA  Informatica Corporation is the leading provider of business analytics software that helps global companies monitor and manage the performance of key business operations across the enterprise. Informatica was formed in 1993 with its headquarters in California. The company has around 1,900 employees and provides high-value services to more than 4,100 customers across the globe. Informatica’s business analytics products span the entire ‘build to buy’ spectrum, enabling customers to buy packaged analytic applications or build their own best-of-breed data warehousing solutions—whichever approach best suits their requirements and resources. More than 1,500 companies worldwide are using Informatica data integration software to build and manage data warehouses. Leading technology innovators, including Motorola, ConAgra, Brunswick, Brocade, Hewlett-Packard and GE, are using Informatica packaged analytic applications to successfully monitor and optimize business performance.1 Informatica is reported to be the most recognized data-integration tools brand, and as having a strong leadership position.2 (Continued)

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Informatica’s leadership team is singularly focused on developing and delivering data integration software and services that help enterprises improve operational efficiency, acquire and retain customers and enhance competitive advantages.3 More than 4,100 leading companies and government organizations worldwide rely on Informatica’s software and services to access, integrate and trust all their information assets to help them reduce costs, improve operational efficiency and enhance their competitive advantages.4 The company through its continuous innovations has developed great strength to provide unique value propositions to its customers. It has developed technology solutions—Application ILM, B2B Data Exchange, Cloud Data Integration, Complex Event Processing, Data Aggregation, Data Governance, Data Integration for Salesforce CRM, Data Migration, Data Quality, Data Synchronization, Data Warehousing and many more; business solutions—Governance, Risk and Compliance, Mergers and Acquisitions, Customer Acquisition and Retention; and industry solutions—Energy and Utilities, Financial Services, Healthcare, Manufacturing, Public Sector, Retail, Telecommunications and Transportation. A dedicated team of people possessing extraordinary expertise is always on the move to come out with unique business and technology solutions for its existing and prospective customers. Informatica has invested significant time, money and resources since the company’s inception in 1993, developing innovative solutions used for data integration, data warehouse management and business analytics. The company’s strong focus on and commitment to R&D has netted the company a solid and growing patent portfolio. As with any other valuable asset of the company, Informatica has an obligation to its shareholders to protect the value of its patented IP to the fullest extent of the law. The company’s IPO was 2.75 million shares at $16 each in 1999. The shares within a few months of listing were traded as high as $29.875. The shares traded on the Nasdaq market under the symbol ‘INFA’ were sold through an underwriting group managed by Credit Suisse First Boston Corp., BancBoston Robertson Stephens Inc, SoundView Technology Group Inc. and First Albany Corp. Similar to Microsoft, Informatica too has been engaged in a number of patent-related litigations involving the company as plaintiff or defendant. As per the Stanford Litigation Clearinghouse, Microsoft appears in the title of 103 patent litigation trials—12 times as plaintiff and 91 times as defendant. Microsoft, a leader in IT software developments, has been the most profitable company. The company has been receiving substantial damages on account of patents. This does not include the number of times Microsoft has faced trial as ‘et al’—one of the numerous parties being sued and not the first party listed. An example of a Microsoft patent infringement train wreck is the long-running Microsoft vs Eolas battle. In 1994, Eolas received a patent for a browser that supports plugins. Microsoft refused to pay a royalty with evidence that this functionality had already been invented. In 2003, Eolas sued Microsoft for patent infringement in a district court and won $520 million even though Microsoft earned no revenue from its browser. In 2004, the US patent office re-examined and rejected the patent; in addition, in 2004, Microsoft appealed to a court of appeals who remanded it back to the district court; in 2005, the patent office reinstated the patent and, in addition, in 2005, the Supreme Court refused to hear Microsoft’s appeal. In 2007, the patent office re-issued

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Microsoft a patent that was the same as the Eolas patent. The patent office then ruled that the Eolas patent stood even though Microsoft had a near identical patent. Microsoft still had not had a re-trial in a district court but gave up and settled with Eolas for an undisclosed but substantial amount.5 The company has been steadily growing as evident from the sales and net profits between 2006 and 2009. Its turnover has increased from $32.46 million in 2006 to $50.07 million in 2009, resulting in an average annual growth in turnover of 15.54 per cent. The net margins increased in the corresponding period from 11.15 per cent to 12.82 per cent. The company has been growing through a combination of organic growth and growth through acquisition.6

 Patent Litigations on Infringements  Informatica was awarded $25 million as compensation for patent infringement by Business Objects (NSDQ:BOBJ), as an outcome of a law suit that Informatica had filed more than four years ago against its business intelligence software rival.7 Informatica’s patents relate to methods of transforming data in a data-warehousing application, the core technology powering ETL (extract, transform, load) software. The presiding judge, Elizabeth Laporte, ruled that Informatica had legally proved that Business Objects infringed Informatica’s patents in certain instances, according to court documents. The California Jury ruled that Business Objects infringed Informatica’s patents by selling its Data Integrator Software, based on the ActaWorks technology it had acquired in August 2002. The jury unanimously determined that the patents are valid and that business objects’ infringement on Informatica’s patents was done wilfully. However, Business Objects, based in Paris and San Jose, California, plans to appeal the decision and emphasized that the legal process is still ongoing. Business Objects is seeking to have the patents invalidated by showing prior art preceding Informatica’s 1997 patent applications. ‘The court will consider that issue,’ Stine said in an interview. Unearthing prior art is a common method for invalidating patents and derailing lawsuits. The case will have broad ramifications for ETL software makers, who could face similar claims from Informatica if its patents stand. Some of the solution providers have been analysing the case in blogs. Australian consultant Vincent McBurney is analysing the twists and turns in what he has dubbed ‘the ETL trial of the century’, such as Business Objects’ subpoena of IBM to provide prior art evidence. Informatica has been filing suits for infringements against various companies for the various patents owned by it.8  Questions  

1. Is it advisable for Informatica to file patents and enter into litigations involving huge cost or derive market benefits from its innovations and move over to the next innovation by the time competitors start entering into the same market by copying or developing similar products? Justify your answer. 2. What is the similarity in the business of Microsoft and Informatica? 3. What might have been the major reasons for accelerated growth of Informatica? What could have been the secrets of having come out with an IPO within 9 to 10 years of its formation? (Continued)

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Endnotes

1. http://www.informatica.com 2. Magic Quadrant for Data Integration Tools, Gartner, 25 November 2009, http://www. gartner.com/technology/media-products/reprints/informatica/volume4/article2/article2. html, accessed on 15 May 2010. 3. http://www.informatica.com/company/leadership/Pages/index.aspx 4. http://www.informatica.com/customers/Pages/innovation_awards.aspx 5. IBM, Microsoft, Informatica and Business Objects Left to Fight Data Integration Patent Vincent McBurney, http://it.toolbox.com/blogs/infosphere/ibm-microsoft-informaticaand-business-objects-left-to-fight-data-integration-patent-31628, accessed on 13 May 2009. 6. Magic Quadrant for Data Integration Tools, Gartner, 25 November 2009, http://www. gartner.com/ technology/media-products/reprints/informatica/volume4/article2/article2. html, accessed on 15 May 2010. 7. Jury Slams Business Objects for $25 Million in Informatica Patent Suit by Stacy Cowley, CRN, http://www.crn.com/news/applications-os/198701964/jury-slams-business-objectsfor-25-million-in-informatica-patent-suit.htm;jsessionid=GD7ZnHBVtdxpZKKZwdw PzA**. ecappj02 8. Jury Slams Business Objects for $25 Million in Informatica Patent Suit by Stacy Cowley, CRN; http://www.crn.com/news/applications-os/198701964/jury-slams-business-objects-for25-million-in-informatica-patent-suit.htm;jsessionid=EhdsdXNwB-l0oGc7NXfjYA**. ecappj01; http://www.iformatica.com

 CASE 7.3:  RANBAXY LABORATORIES LTD—A CASE STUDY  The Indian industry, in general, has neglected investment in R&D. Its focus used to be mainly the domain of research laboratories and institutes promoted by the government. However, some pharmaceutical firms in India have been giving due importance to R&D. The successes enjoyed by a few companies such as Ranbaxy and Reddy’s in the R&D field have paved the way for other players in the market to follow suit. Several Indian pharmaceutical companies, including Cipla, Lupin, Wockhardt, Nicholas Piramal and Torrent, are now actively engaged in R&D activities, so as to come out with direct contributions to their value chain. The year 1994–95 was the turning point for the Indian pharmaceutical industry due to the enforcement of WTO restrictions and norms. The industry was forced to reorient itself from looking inwards to being a player in the global market. This has resulted in increased thrust on R&D by the Indian pharmaceutical industry, as is evident from the increased proportion of R&D expenditure to both investment and turnover.

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Investment in pharmaceutical R&D has increased from ` 220 crore in 1997–98 to ` 260 crore in 1998–99 and further to ` 320 crore in 1999–2000. This figure is estimated to touch more than ` 1,500 crore by the end of 2005. At present, R&D investment constitutes around 5 per cent of the pharmaceutical industry’s turnover. Most Indian companies have realized that it will be difficult for them to compete and commercialize their discoveries on an international basis on their own. Therefore, they are entering into licensing deals and strategic alliances with international companies. This would help them in sharing their development cost that is relatively low in India and will be helpful in fast accrual of returns. The Indian pharmaceutical industry is mounting up the value chain. From its earlier focus on the domestic market, the industry is moving towards basic research, export orientation and providing a wide range of value-added quality products and services to the global markets. Government policies will play a crucial role as regards growth of this knowledge-driven industry. The product patent regime, which has come into effect from January 2005, will lead to long-term growth. The key factors for profitable growth and survival of the Indian pharmaceutical industry in the present business environment will be focus on knowledge engineering techniques and their efficient use, continuous drive for innovation, authentic documentation, new knowledge and its protection through a systematic approach towards IPRs and, above all, to evolve a cooperative and collaborative approach for sharing benefits. Ranbaxy Laboratories Limited (RLL) was set up in 1961. The company exports its various products to more than 70 countries with ground operations in 25 and manufacturing facilities in 7 countries. It entered the United States—the world’s largest pharmaceutical market—in 1998. Most of the exports are off-patent drugs that are manufactured and distributed without licensing from the original manufacturer, as the patents on such drugs have expired. The company’s total income increased from ` 3017.54 crore in the year ending December 2001 to ` 5847.15 crore for the year ending December 2004, thus resulting in a compound average annual growth of 24.66 per cent. In the corresponding period, its net profit increased from ` 198.26 crore to ` 728.18 crore, thus resulting in an average annual growth rate of 54.28 per cent. The company’s earnings per share increased from ` 22.48 in 2001 to ` 35.21 in 2004. Thus, its financial position has been getting stronger over the years. RLL has been giving great emphasis to R&D efforts so as to maintain and develop a competitive edge in the global market. It believes that quality and innovation basically require a strong R&D effort. The company’s R&D facilities are located at Gurgaon. The company in its mission to become a research international pharmaceutical company has been continuously building expertise in chemical research, pharmaceutical research, fermentation research, novel drug delivery systems research (NDDS) and new drug discovery research (NDDR). The company is committed to spend around 6 per cent of its global sales for R&D and is accelerating its initiatives in NDDS and NDDR. A dedicated team of more than 900 professionals is committed to keep coming out with research outcomes that directly contribute to its bottom line by way of profits. The therapeutic focus of R&D efforts is on urology, respiratory, anti-infectives, antiinflammatory and metabolic disorder segments. Breakthrough BPH, anti-asthma and anti-bacterial new chemical entities developed by their scientists are at different stages of drug discovery. The company believes that the creation of intellectual wealth would be the key and critical input in their business to move on a value chain. (Continued)

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The overall research endeavours are adequately backed up and supported by world-class infrastructure facilities capable of undertaking analytical research, clinical research, international regulatory affairs and introduction of IPRs. The company’s strategic R&D efforts, which are value-centric, get reflected in their achievements in 2003 that includes three to five molecules in late discovery stage and two molecules in Phase II Clinical Stage, four Platform Technologies— Aerogel, Gastric Retention, PH Independent, Micro Encapsulation and Particle Coating. The company has developed and launched five new products in the domestic market, in the area of Oral Controlled Release Systems, using its patented ‘Platform Technologies’. The company could successfully deliver 39 new products and line extensions in domestic markets. It has filed 26 ANDAs in the United States, laying a clear emphasis on first-to-file ANDAs with Para IV certification. In Europe, 77 filings, comprising 27 products, have been completed. This includes filings of 5 products in 44 countries through the Mutual Recognition Procedure. The Pharmaceutical Research and Regulatory Affairs Group of the company is strongly geared up to meet the requirements of the European accession countries and extend the current files of the EU to the newly included countries of Central and Eastern Europe in May 2004. In the BRIC countries [Brazil, Russia (including Ukraine), India and China], a total number of 85 products were filed. These included 21 products for Brazil, 21 for Russia (including Ukraine), 35 for India and 8 for China. Additionally, one product was also developed for Japan. During the year, the team filed 44 patents in this area. The company’s R&D efforts in the chemical area continue to focus on developing innovative, environment-friendly and cost-effective technologies for high-value Active Pharmaceutical Ingredients (APIs). As a result, in 2003, process development work was undertaken for 15 new APIs, including support for Para IV filings for 10 products. The company has successfully commercialized technologies for another 10 APIs. Its chemical research team’s efforts have resulted in the filing of 41 patents during 2003. Keeping in view the heavy investments required for successfully coming out with New Drug Delivery System (NDDS), the company has been working on the strategy of research networking both in India and abroad. Two collaborative research projects are in progress in NDDS in the United Kingdom, and another collaborative project on similar lines has been taken up with National Institute of Pharmaceutical Education and Research (NIPER) in India. The company has been conferred the status of a ‘Five Star Export House’ by the Directorate General of Foreign Trade (DGFT), India. This is the highest recognition for the outstanding track record of exports given to a company in India. This special status enables the company to avail a number of privileges, such as fast track clearance procedures and 100 per cent retention of foreign exchange in EEFC (Exchange Earners’ Foreign Currency) account. The Star Export House certification has five categories based on the cumulative value of exports by the company during the current and the previous three years. For the Five Star category, companies with exports exceeding ` 5000 crore are judged. Ranbaxy’s revenue through exports has increased consistently over the years, thus clearly establishing that foreign exchange earnings continue to be the mainstay of the company’s growth strategy. The company, with its competitive and strategic thrust on R&D, has become a multinational with substantial stake in the global market. One of the key reasons for its success has been the emphasis it has laid on value-based R&D investment and evolving systems to duly protect its new knowledge under the IPR regime.

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 Questions  

1. What might have been the reason for the Indian pharma industry having neglected investment on R&D in the past? Explain. 2. ‘It has been said that under the changed regime of WTO, the pharma industry cannot make its presence felt without focusing its efforts on patents through R&D’. Critically examine this statement. 3. RLL has undergone a major transformation during the last few years. What are the significant strategic changes that have taken place in their growth trajectory? 4. ‘RLL has set up a wonderful example of commercializing technologies developed through patents’. What have been the salient features of its IPR policy? Examine them. 5. Consider three leading pharma companies in India and analyse their strengths and weaknesses related to IPR policy vis-à-vis growth.

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8

Business Plan  LEARNING OBJECTIVES    Tounderstandtheneedandimportanceofa businessplanforthesuccessofaventure.  Tolearnaboutthechallengesthatstart-ups face.  Toknowaboutthecharacteristicsofhighgrowth-potentialventures.  Todefinebusinessplan,itsingredientsand differentperspectivesthatitshouldhave.  Tounderstandbusinessplandrivers.  Tolearnaboutthebasicsofabusinessplan, whatneedstobeemphasizedunderdifferent

sectionsandthekeyaspectstobetakencare ofwhilewritingabusinessplan.  Tolearnaboutthestepsinvolvedinlaunchingabusinessandmeasuringtheprogress oftheplan.  Toknowtheimportanceandartofpitching abusinessplan.  Toknowaboutthereasonsforfailureofa businessplan.

Pleasant Rowland, Founder, Pleasant Company We are not the first doll company. There have always been dolls out there for girls. We are not the first publishing company that publishes for girl children…. We are unique for one thing. We have targeted little girls as intelligent, important people, and we talk to them that way. And their parents appreciate that. And that’s what matters here. And that’s why we’re successful. —Pleasant Rowland

Pleasant Rowland was born in the Chicago area and grew up in Bannockburn, a suburb north of Chicago. Edward Thiele, her father, was an advertising executive who became president of the Leo Burnett Advertising Agency. She graduated from Wells College in 1962 and served as a school teacher between 1962 and 1968. Subsequently, she served as a news reporter and anchor for ABC affiliate station KGO-TV between 1968 and 1971. Thereafter, for several years, she was involved in writing and publishing children’s textbooks. It was only in 1986 that she took up an entrepreneurial challenge by founding the Pleasant Company, which manufactures the ‘American Girl’ dolls, books and accessories. The innovation introduced was that each doll is designed with a story that places it in a specific historical time period. All accessories such as books, clothing and other items are marketed separately for each doll. The marketing strategy used led her company to create stores in major cities, events and films planned around the dolls and their accessories. She sold Pleasant Company to Mattel for $700 million in 1998. In 2008, it was the second largest company next to Barbie Doll in the dolls industry. Rowland purchased MacKenzie-Childs, a bankrupt company based in Aurora, NY, in 2001. She turned around the company by restructuring her management team after this acquisition. The company was sold to Lee Feldman and Howard Cohen, part owners of Twin Lakes Capital, in 2008.

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She was awarded an Honorary Doctoral Degree of Humane Letters from Edgewood College in Madison, Wisconsin, in September 2010. Her entrepreneurial zeal is evident from her statements such as ‘We haven’t done obvious things, but less obvious things’; ‘Do things with a sense of urgency’; ‘The customer is always hungry for something different’ and ‘Have catchy one liner for advertisement’.

 8.1  INTRODUCTION   avinganideaandcrystallizingitinrealityissimilartothecostofapaperandthecostofasteel H sheet.Translatingagoodideaintoaneffectivebusinessrequiresmeticulousplanning.Abusinessplan conceivesafuturerollingplanbyvisualizingallthechallengesthatmayemanateonthewayandhow theywouldbedealtwith.Inreality,actionwithoutthinkingleadstoawaste.Attimes,entrepreneurs havinggreatconfidenceoroverconfidencerelyalotontheircompetence,takeactionwithoutdetailed planningandlendthemselvesintoteethingproblemsthatultimatelyresultinfailure.Asagainstthis, detailedplanninghelpsinimprovingtheirchancesofsuccessandpreparesthemwellinadvanceto respondtothechallengesthatmaycomeontheway. As such, taking up an entrepreneurial journey is certainly a risky proposition as is evident from therelativelyhighfailureratesofnewbusinessventures.Startinganewbusinessorlaunchinganew productorserviceisariskyundertaking.Anyonewhohasgiventhissomethoughtiswellawareof thetypicallyhighfailureratesofnewbusinessventures.Theimportanceofplanninghasbeenrightly emphasizedinthestatement,‘Ihave12hourstochopabigstrongtree;Iwillspend10hoursinplanningand2hoursinexecutingtheplantocutit.’Systematicplanningisoftenconsideredameansof increasingthechancesofsuccess.Itisrelativelyeasyforexistingandmaturebusinessestousehistoricalinformationasabasisfortheirplans.However,start-upsgenerallydonothaveanypasthistoryto dependonand,therefore,poseagreaterchallengeinplanning,particularlywithregardtomakinga rangeofuntestedassumptionsandguesstimates,including1 :      

thetake-uprateofone’sproductorservice thepriceonecharges distributionchannelsandthetimerequiredtomarket costofproduction staffing accesstocapital

I ncaseassumptionsmadedonotturnouttobetruewithminorvariations,thentheywouldmakethe planunworkable,especiallyifkeyassumptionsonpricingbecomeoverestimated,andcostingbecomes underestimated.Theventurewouldresultinquickcashshortagesandwillbecomenon-viable.Financiers wouldlosetheircapital,andnobodywouldbewillingtoextendanyfurtherfinancialsupport,evenifthe companyisingenuineneedandhashopeofturningaroundinthelongterm.Ontheotherhand,ahighgrowth-potentialbusinessplanwouldresultinafavourablechangeinbusinessassumptionintermsof underestimationofpricingandoverestimationofcost,sothat,asawhole,favourablechangesinactual profitsemergevis-à-visestimatedprofits.Thebusinessplanforsuccessfulventuresthatcouldhavea highgrowthpotentialshouldhavethefollowingcharacteristics(Fig.8.1):  ahigh-valuepropositionforthecustomer,whichprovidesanedgetotheentrepreneurinfixingprice  asolutiontotheneedorpain,forwhichthecustomerwouldwillinglypayapremium

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Customer Needs

Innovative Solution for Which Customer Will Willingly Pay Premium Over a Period of Time

WellIdentified Target Market for Sustained Moneymaking

Figure 8.1 Characteristics of High-growth-potential Ventures

 awell-identifiedtargetmarketthatwouldprovidegoodmarginandscopeforsustainablemoney-making  agoodfitbetweentheteambackingthebusinessandthemarketpotential

Thus,therealvalueofwritingabusinessplanisnotthatmuchinhavingthefinishedproductinhand, butmoreintheprocessofthinkingandanalysingthedatarelatedtotheventureinasystematicwayto arriveatlogicalconclusions.Theplanningprocesshelpsinthinkingthoroughly,studyingandresearching,soastocriticallyexamineone’sideas.Inthebeginning,ittakestime;however,ithelpsinavoiding costly,perhapsdisastrous,mistakeslater.

8.2  ENTREPRENEURIAL OPPORTUNITIES AND BUSINESS PLAN Businessesareeverywhere.Whatisneededistoseethingsdifferentlyandcomeupwithbusinessesthat canhavehighgrowthpotential.Wide-rangingopportunitiesareemergingintheareasofnanotechnologyandbiotechnology,energy,water,increasingenvironmentalhazardsfromdifferenttypesofpollution,high-technologymedicalsolutionstodifferentailments,softwaresolutionstovariousproblems, real-estatedevelopments,ingeneral,andhousingissues,inparticular,andproblemsassociatedwith financialmarkets. Some of the important areas attracting great minds to come up with innovative businesses are discussedinthefollowing:  Energy—Technology,includingnuclear,renewable,hydrogen,solarandwindenergy,thatresponds to energy challenges of the 21st century faced across the globe.Alternative fuels/energies both for automobilesandinotherapplications.  Water—Increasingscarcityofwaterandneedforsolutionstodrinking,irrigationandotherusesof water.  Environment—Increasingimpactofpollutantsandneedforcomingoutwithenvironment-friendly andgreentechnologiesforvariousapplications.  Biotechnology—Thisisafieldofappliedbiologythatinvolvestheuseoflivingorganismsandbioprocessesinengineering,technology,medicineandotherbio-productfields.Othertermsusedare‘cell’ and‘tissueculturetechnologies’.Thus,thisconcepthasbeenprovidingsolutionsformodifyingliving organismstosuithumanpurposes—goingbacktodomesticationofanimals,cultivationofplantsand ‘improvements’tothesethroughartificialandhybridizationprogrammes.Thisfieldalsoencompasses developments—technologyaswellasprocessdriven—intheareaofblood-screeningtests,genetic

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engineering,bionicpartsandartificialorgans,bio-electronicproducts,animaldrugs,grassthatdoes notrequirecutting,implantableanimalmicrochipsandmanymore. Internet—Internettechnologyhaschangedthewaybusinessesarebeingrunandhascreatedmany opportunitiesintheareasofWebdesigning,Internetmarketing,officesupplies,small-businessequipment,gamingandadd-onproducts,videogamesandmultimediatechniquesforvariousapplications, andbooksandmagazines. Health—According to McKinsey & Company, studying mobile health (m-health) opportunities in 2010couldcost$20billionintheUnitedStatesalone.Findingsoftheirstudyinsixcountriesreveal thatalargeproportionofthefourbillionpeopleusingmobilephonestodayfinditdifficulttogain accesstogood-qualityandaffordablehealthcareservices.Alargenumberofopportunitiesareavailableinthehealthsector,suchasorganicfood;healthyfood;door-to-doorhealthservices;alternate healingtechniques;holistichealing;traditionalhealthpractices—yoga,ayurvedaandunani;cosmetic surgery; health clubs; exercise machines; home health care providers; mobile medical services and stress-managementtechniques. Childcare and Old Age Care—Workingcouplesandnuclearfamilieshaveledtotheneedforextending child care and making it seem similar to the care provided by parents. This has resulted in a numberofbusinesspropositionssuchaschildcarecentres,rent-a-grandparentservices,oldagecare and consulting services, senior travel clubs, senior spiritual clubs, independent living centres and grouplivingcentres. Specialty and Extravagance Goods—Ice creams and other desert specialties with a unique taste; naturalgoodswithoutbeingprocessedandcultivatedunderdistinctconditions;vitaminsupplements; naturalwaterproducts;frozenfoods;specialtybreads;exoticmeatssuchasofbuffalo,elk,venison andostrich;adulttoyssuchasgames,laptopsandCDplayers;designerbabyclothes;beautyparlour servicesandaromatherapyfallintothiscategory. Children’s Products and Services—Theneedforwide-rangingchildren’sproductsacrossdifferent incomegroupsisfastexpanding.Thishasresultedininnovationscomingupwithbusinessesinareas such as juvenile safety products, children’s fitness centres, kiddie’s golf, furniture for schools and homes,healthcarefornewborns,softwareforlearningmathsandscience,tuitions,teachingmultiple languages, classes in art and music, multimedia computers, CD-ROM encyclopaedias, educational toys,games,puzzles,learningcentresforchildrenwithdisabilitiesandchildren’sbooks. Home and Office Products—Modernization,ontheonehand,andspaceconstraintsinmetropolitan citiesontheother,haveresultedinwide-ranginginnovationscateringtohomeandofficeproducts suchashomedecorsandfurnishings,safetyandsecuritygadgetsanddevices,home-officefurniture andtechnicalequipment,repairservicesforhomeofficesandhomedeliveryservicesforcomputers. Ethnic Products—Culturalheritagecoupledwithmodernizationresultinamarketforethnicproducts such as hair-care devices, ethnic grocery stores and cookbooks, ethnic food mail-order catalogues, ethniccafes,restaurantsandfoodcourts. Stylish, Elegant and Smart Appliances—Thevariationsandincorporatinginbuiltmultiplefeatures in products such as digital cellular phones, radios, interactive television, digital-imaging products, electronic notepads, multisensory robotics, smart homes, voice-recognition products and electronic camerashaveledtothecreationofawiderangeofproductsandservicesandcontinuousinnovations forentrepreneurialopportunities. Professional Development—Increasing complexities in the management of different organizations and the fast-changing pace with which existing knowledge is becoming obsolete result in widerangingopportunitiesincustomizedon-sitecomputertraining,computerliteracy,executivecoaches, on-lineandmultimediacontentconsultants,videoconferencingorganizers,electronicdatainterchange consultantsandknowledgeinputsinvariedareas.

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 Pet Pampering—Increasingtrendstokeepvarioustypesofpetsresultinopportunitiesintheareasof pethotels,petgroomingandtravellingvans,pethome-carevisits,emergencyclinics,pettelevision andradioshows,doggiebakeries,catfurniture,clothingstoresandseatbeltsforpets.  One-of-a-Kind Retail Boutiques—Uniquespecialtyinclothing,jewellery,CDstores,bakerycafes, travel-relatedoutlets,paintingandcreatingone’sownpotteryitems,customizedbreweries,fruitjuices withadifferenttasteandflavour,andspecialtyshoestoresareincludedunderthiscategory.  Internet-related Businesses—Internetisfastbecomingapartandparcelofthelifeofindividualsin office,athomeorforrecreationalpurposes.ThishasresultedintheapplicationofInternetservicesin differentdomainsofworkingindividualsandhascreatedopportunitiesforWebsitedesigning,Internet marketingservices,videogamesandmultimediaapplications,ande-booksandmagazines.

Whatitwouldtaketocrystallizetheseopportunitiesintobusinesspropositionsisinnovationand givingacompleteshapetosuchinnovationintheformofabusinessplan.Thisnecessitatestheunderstandingofwhatabusinessplanis.

8.3  WHAT IS A BUSINESS PLAN? Abusinessplanisdefinedinthefollowing(seealsoFig.8.2):  Abusinessplanistheformalwrittenexpressionoftheentrepreneurialvision,describingthestrategy andoperationsoftheproposedventure.  Abusinessplanisawrittendocumentdescribingallrelevantinternalandexternalelementsandstrategiesforstartinganewventure.  Abusinessplanisanyplanthatworksforabusinesstolookahead,allocateresources,focusonkey points,andprepareforproblemsandopportunities.  Abusinessplancommunicatesthefounder’svisionaboutthebusinessandgivesablueprintaboutthe strategy,resourcesandpeoplerequirementsforaventure.  Abusinessplanisadocumentthatbringstogetherthekeyelementsofabusinessthatincludedetails aboutproductsandservices,thecost,salesandexpectedprofits.Themostimportantaspectisthatthe planwillhelponeseehowalltheinterrelatedelementsofone’sbusinessrelatetoeachother,andthe necessarychangesthatwouldberequiredtomaximizeone’sbusinesspotentialtoturnaprofit.  Abusinessplanshouldreassureonethatthebusinessideaisagoodone,andthatprimafaciebusinesswouldbesustainable.Itshoulddescribethefundamentalsofthebusinessideasubstantiatedwith financialcalculationstoshowthatitwillmakegoodmoney.

P

It Is a . . .

That Provides . . . Justification That Are . . . Resulting in a . . . That . . .

r

o

c

e

s

s

Evidence

Reasons

Clear

Verifiable

Convincing

Blueprint

Feasibility Study

Operating Plan

Increases the Probability of Success

Figure 8.2 What Is a Business Plan?

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In short, a business plan can be defined as a process that provides justification, rationale and has a purposethatisexplicit,clear,verifiableandconvincing,resultingintheblueprintofaplantoincrease chancesofsuccess. A business plan should address both short-term and long-term decision making for the first few years,andparticularlyforthebeginningmonths,inarigorousway.Anyfaultcommittedintheinitial phasecouldbedisastrousforthesuccessofaventure,andtherefore,meticulousplanningneedstobe donebeforegettingstarted. Thus,abusinessplanisacomprehensivedocumentthathelpstheentrepreneuranalysethemarket and plan the business strategy required. It allows one to make costly mistakes on paper rather than inrealityandprovidesgreatinsightintotheplanningprocess.Ithelpsanentrepreneurtolookatthe businessinanobjectiveandcriticalmanner.Theexercisehelpsidentifythefeasibilityofthebusiness’ chancesforsuccessandgrowth;isanoperationaltoolthatdefinesthecompany’spresentstatusand futureprospects;effectivelymanagesthebusiness;actsasastrongcommunicationtooltothedifferent stakeholders;definesone’spurpose,competition,managementandpersonneland,aboveall,provides thebasisforone’sfinancingproposal. Planningisessentialifabusinesshastosurviveandgrow.Ithelpsinidentifyingareasofstrengths and weaknesses and in identifying problems sufficiently in advance so as to take corrective actions before they escalate and cause greater damage. Thus, planning acts as a powerful communication, analyticalandoperatingtoolthatgivesshapetoabusinessidea,turnsitintorealityandimprovesthe chancesofsuccess(Fig.8.3). Abusinessplanisoftenpreparedbyanexistingcompany/newcompanytoensurethatfuturegrowth isproperlymanaged.Whentheplanispreparedforastart-up,ithelpstheentrepreneuravoidcostly mistakesthattheymayrepentonbynotplanning.Inadditiontobeingusefulasaplanningdocument, thebusinessplanisoftennecessaryforobtainingfinancing.Banks,venturecapitalistsandinvestors usuallyrequireabusinessplaninordertohelpthemmaketheirinvestmentdecisions.Awell-written businessplanprovidesevidenceoftheentrepreneur’sabilitytoplanandmanagethecompany. Unfortunately,manypeoplethinkofbusinessplansonlywhenstartinganewbusinessorapplying forbusinessloans.However,thesearealsovitalreasonsforpreparingabusinessplan,whetherornot thebusinessneedsnewloansornewinvestments.Businessesneedplanstooptimizegrowthanddevelopmentaccordingtopriorities.Newentrepreneursalsoconfuseabusinessplanasastrong,appealing andattractivedocumentthatwouldautomaticallyleadtothesuccessandgrowthofabusiness.Itis importanttorememberthatsomeofthebestbusinessplansthathavewonbusinessplancompetitions turnouttobebigfailuresinreality.Asagainstthis,attimes,weakbusinessplansresultinsuccessful businesses.Thiswouldmeanthatonecancertainlyreducethechancesoffailuretoagreatextentby meticulousplanning.However,itisnotnecessarythatgoodplansleadtothesuccessofabusiness.

Communication Tool Operating Tool

Analytical Tool

Figure 8.3 Why Write a Business Plan?

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8.4  WHEN AND FOR WHOM IS A BUSINESS PLAN NECESSARY? A business plan is written for multiple purposes. However, it is mainly required for the following reasons(seealsoFig.8.4):  When an Individual Has an Idea of Having a Business Opportunity—Havinganideaandconvertingitintoabusinessaretwodifferentballgamesaltogether.Theanalysisofanideatocheckwhether itisanopportunityatagivenpointoftimethatcanbebackedupbyuniqueresourcestocreateabusinessrequireswritingdownindetailabusinessplanforthesmoothtranslationoftheideaintoreality.  When an Entrepreneur Is Looking for a Partner to Strengthen the Management Team or Induct Funds—Abusinessplanisrequiredwhenanexistingventureislookingforstrengtheningthemanagementteambyinductingpeopleforovercomingexistingmanagerialchallengesorwhenitisinaneed offundsupportfromtheinvestorsforlaunchingorgrowthofthebusiness.  When an Existing Venture Is in Trouble and Has to Be Revitalized/Rehabilitated—Businesses thathavecertainstrengthsbuthavebeendwindling,asisevidentfromtheirmakingofcashlosses forafewyears,mayrequireaconcretebusinessplanforrehabilitation.Usually,businessessuffera setbackbecauseofinternalcausessuchaslackofamanagementteam,dissentionamongmanagement, needfortechnologicalup-gradation,lackoffinancesand,inparticular,workingcapital,diversionof funds, ineffective production planning and control, bad maintenance of plant and machinery, inappropriateselectionoflocation,wrongdemandprojections,inappropriateproductmix,inadequateand ineffectivesalesforce,andinappropriatepersonnelselectionandmanagement.Attimes,theoperationsofacompanyareadverselyaffectedbecauseofexternalcausessuchasachangeingovernment policies,technologicaldevelopmentsleadingtoobsolescenceintheexistingtechnology,andachange intastesandpreferencesofthecustomers.Thesesignalsintheadverseperformanceofthecompany arevisiblethroughirregularityincashcreditaccounts,lowcapacityutilization,defaultinpayment ofstatutoryliabilities,rapidturnoverofkeyemployeesandanincreaseinthenumberoflegalsuits againstthecompany.Abusinessplanidentifiesthecausesoftherotsufficientlyinadvanceandidentifieswhetherlong-termoperationsofthecompanywouldbeviableornot,byappropriatelyhandling therootcausesofadverseperformance.Abusinessplanrequirestoseekduesupportfromtherelevant stakeholdersfortherehabilitationoftheventure.  When a Venture Is Looking for Funding—Oneofthemostimportantreasonsgenerallyperceived forpreparingabusinessplanisforraisingfunds.Abusinessplanshouldincorporatewhatallinvestorslookforwhileevaluatinganinvestmentopportunity.Itshouldbewritteninsuchawaythatit convincestheprospectiveinvestorstogetassociatedwiththebusinessbycommittingtoinvestinit.

A Business in Search of Capital A Company C Facing Rapid p Change nge

An Entrepreneur Looking for Partners ners A Company in Trouble

An Individual with an Idea

Figure 8.4 When and for Whom Is a Business Plan Necessary?

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 When a Company Faces Rapid Changes—Assuch,abusinessplanneedstobeupdatedatregular intervalsandcloselymonitored.However,itmaybeessentialtoincorporatemajorchangesintheplanif thecompanyfacesrapidchangesinthetechnology,marketandcompetitionthatleadtoquestioningmajor assumptionsmadeandtheirimplicationsinprofitandcashflowvis-à-visinvestments.

8.5  BUSINESS PLAN DRIVERS

External Factors

Internal Factors

Agoodandeffectivebusinessplanpossessesaclearvisionandpurposefortheventure,asperceived bytheentrepreneur.Abusinessidealeadingtoanopportunityneedstobehighlyfocused.Itshould becost-effectiveandavalue-providerandshouldbedistinctfromitscompetitorsintermsofhaving acompetitiveedge.Asuccessfulbusinessplanhastohaveaprovisionofvaluevis-à-visminimum possiblecostscalled‘valuedrivers’.Thevaluedriversofsuccessfulcompaniesdifferentiatethemfrom their competitors. Reputation and cost control are always key ingredients of a successful business. However,otherimportantfactorsmayvaryfrombusinesstobusinessasinthecaseofhotels—their reputationforgoodfoodandagooddinnerisknown.Itistheultimateexperienceofacustomerthat decides customer loyalty. Cost drivers for a successful restaurant are location, concept, menu, food quality, taste and servers and, above all, systems and procedures for cost control.As against these, whatmattersmostfortechnologycompaniesisacoreproduct/technologyorknow-howthatsolvesa customer’sproblem.Keyvaluedriverswouldbeahighlyskilledandprofessionalworkforce,quality andcostcontrolmeasuresandR&D(researchanddevelopment).Similarly,forprofessionalconsultingservices,whatmattersmostisthenameandfamethathavebeenbuilt,andthekeyvaluedrivers arepersonalrelationships,highlyqualifiedandcompetentpersonnel,ingenuitytosolveproblemsand, aboveall,deliverycosts. Toidentifykeyvaluedriversforone’scompany,itisbesttoconductaSWOT(strengths,weaknesses, opportunities and threats) analysis (Fig. 8.5). This will help one identify the key ‘value drivers for Favourable Strengths (S) Strong and Loyal Customer Base Second-largest Market Share Low Cost of Production Skilled Manpower Higher Operational Efficiency Capability to Compete Internationally Opportunities (O) International Market Opportunities Increasing Acquisition Opportunities

Unfavourable Weaknesses (W) No Global Presence Product Needs Enhancement Low Investment in R&D Poor Infrastructure Inadequate Systems and Procedures

Threats (T) Global Competition Increasing Raw Material Cost Rising Appreciation of Rupee Excise Rates Going to Increase

SO—How to Use Strengths to Take Advantage of Opportunities? ST—How to Use Strengths to Minimize Likelihood and Impact of Threats? WO—How to Overcome Weaknesses to Take Advantage of Opportunities? WT—How to Overcome Weaknesses to Better Prepare to Respond to Threats?

Figure 8.5 SWOT Analysis for Identifying Value Drivers and Developing Strategies

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one’s company’. For the value and profitability of one’s business, one needs to focus on these key valuedrivers,whichmaybeintangible—talent,competenceandemployeeskills—aswellastangible— technologysuperiority,up-to-datesystems. Someofthekeybusinessplandriversarementionedinthefollowingsub-sections(seealsoFig.8.6).

8.5.1  Clear Vision of Purpose Aclearvisionstatementdescribesadirectionandpurposethatthebusinessventurewantstoachieve andfulfil.Avisiondefinesthedesiredorintendedfuturestateofanorganizationorenterpriseinterms ofitsfundamentalobjectiveand/orstrategicdirection.Avisionisalong-termview,sometimesdescribinghowtheorganizationwouldliketheworldinwhichitoperatestobe.2Forexample,asocialventure workingwiththepoormighthaveavisionstatementthatreads‘Aworldwithoutpoverty.’Amission definesthefundamentalpurposeofanorganizationoranenterprise,succinctlydescribingwhyitexists andwhatitdoestoachieveitsvision.Amissionfocuseson‘Whatdowedo?’Forexample,forasocial venture,workingwiththepoormayhaveamissionas‘vocationaltrainingtounemployedforproviding jobs’.Aclearvisionactsasastrongkeydriverforthebusinessandpromotersandemployeesassociated withthebusiness.

8.5.2  Satisfy Real Customer Needs and Serve Real Customers Customersatisfactionisacriticalcomponentofbusinessgrowthandprofitability.Itistheexceptional customerservicethatresultsintheloyaltyofcustomers,repeatpurchasesbythemandgreatercustomer retention.Satisfiedcustomersactasambassadorstothecompanyinrecruitingnewcustomers. Customer loyalty is a major contributor to perpetual and sustainable growth of the venture. Afaultlessandflawlessintegrationofallcomponentsintheservice-profitchainactsasamajorpillar ofvaluecreationthroughcustomersatisfactionandcustomerloyalty,which,inturn,contributetothe profitandgrowthoftheventure.Acustomer-centricbusinessmodel,actingasakeydriver,ensuresthat itautomaticallygeneratesprofits.However,attimes,maturecompanieslosetrackofthisandexperienceadownfallbyover-focusingonprofitsandquarterlyresults.Thesecompaniesstartlookingfor waysandmeanstocutcostsorincreasesales,oftenatthecostofcustomerservice.Theylosetrackof oneofthekeybusinessdrivers—satisfyingcustomerneedsandcontinuousvalueinnovationthatactas

Clear Vision of Purpose

Satisfy Real Customer Needs and Serve Real Customers Business Plan Drivers

Differentiate from Competitors

Resource Focus, Organization and Commitment to Satisfy Customer Needs

Figure 8.6 Business Plan Drivers

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acatalyticagentforsustainablegrowthandprofit.Thus,itisimportanttorememberthatacustomer willbeattractedtoone’sproductorservicejustasabeewouldbeattractedtoaflower;ifone’sbusiness delivers more than promised, they would willingly take a step beyond to help the customer, inspire confidenceinthem,treatcustomerswithahumanetouchand,aboveall,ensurethatthecustomersfind themselvesateasetodobusiness.

8.5.3  Differentiate From Competitors Competition is part and parcel of any business. Therefore, entrepreneurs need to differentiate their offeringstothecustomersbyappropriatelypositioninguniquedifferentiatingfactorsvis-à-viscompetitors. Differentiating one’s business means defining one’s company in relation to the competition. It meansthatoneunderstandsandisabletocommunicateone’spointorpointsofdifferenceandwhy oneisbetter,ordifferent,thanone’scompetitors.Italsomeanscontinuouslymakingimprovementsto sustainaleadershipposition.3 Differentiationcouldbeattemptedthroughhavinganextraordinaryedgeovercost,quality,performance,productavailability,technology,leadership,timelydelivery,service,durabilityandpost-sales customersupport.ThisisalsoreferredtoasdevelopingaUniqueSellingProposition(USP),whichcan provideanedgetotheentrepreneurandtheirventuresascomparedwiththeircompetitors.Thisactsas aprominentbusinessdriver,asithelpsinprovidinguniquebenefitsandvaluepropositionstocustomers thatothercompetitorsarenotabletoprovide.

8.5.4  Resource Focus, Organization and Commitment  to Satisfy  C ustomer Needs Resources deployed by the venture for creating a product or service should be optimally utilized to ensurethatmaximumpossiblevaluegetsaddedtothemtosatisfycustomerneeds.Innovativecapabilityandingenuityofanentrepreneurhelpsintheorganizationofresourcesthroughtechnology,soasto createaproduct/servicethatsatisfiesthecustomertothemaximumextentpossible. An organizational structure matters a lot in delivering customer value and, therefore, many businessventuresfocustheirinnovationsonorganizationalstructuretoensuresmoothandefficientflow ofproductsandservicestothedoorstepofthecustomer.Innovation,inthisaspect,helpsorganizations tofocustheireffortsonproductionanddeliverymechanisms,soastoensuregreatervalueaddition. Thecruxliesindescriptionofthetypesofcoordinationusedtoorganizetheactionsofindividualsand departmentsthatcontributetoachievingorganizationalgoals.Someorganizationsachievethisthrough makingthestructureflat,whereasothersmayhaveahierarchicalstructure. Forexample,Zappos’taglineis‘PoweredbyCustomerService’.Withthecompanybeingsoldto Amazonforalmostabilliondollars,thereisnodenyingthatcustomerservicecanbuildcompanies. ZapposprovedthatitcouldmakemoneybysellingshoesovertheInternetbyofferingfreeshipping both ways.Amazon and Zappos are companies that really just do not sell products, but a customer servicechanneltosellanyproduct.4 Forexample,Atento’scommitmenttocustomersisevidentfromitsintentas‘wishestobecomea strategicallyofitscontractingcustomersthroughitsproximityandalignmentwithitsendcustomers, increasing their satisfaction by improving service experience.’5 Similarly, ECS fostering a sense of commitmentisevidentfromits‘endeavourstosatisfyallitscustomersbyofferingthehigheststandards ofservicesthatcanbringgenuinevalue-addtotheirITsystems.Byensuringreliabilityandefficiency, ECSbuildslastingpartnershipswithitscustomers.Ouraim:customersatisfaction.’6

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Thus,anentrepreneurshouldpreciselyidentifybusinessplandrivers,soastofocustheireffortsby channelizingvariousresourcestoachieveorganizationalgoals.Thesedriverscaneithermakeorbreak abusiness.

Examples Wal-Mart Wal-Mart Stores is the largest retail chain in the world. The company offers a wide range of merchandise  at  least  possible  prices  compared  with  its  competitors.  It  also  offers  its  products  through  various  e-commerce Web sites, including walmart.com and samsclub.com. Wal-Mart  operates  three  major  business  segments,  namely,  Wal-Mart  US,  the  international  segment and Sam’s Club. Wal-Mart US has retail operations in all the 50 states in the United States.  It operates 803 discount stores, each with an average store size of 108,000 sq. ft, in 47 states. The  company  also  operates  2,747  supercenters  in  48  US  states  and  158  neighbourhood  markets  in  16 US states. The  stores  operated  by  Wal-Mart  US  have  a  specialty  in  offering  branded  and  private  label  merchandise  in  various  product  categories  such  as  grocery,  entertainment,  electronics,  apparel,  health  and  wellness,  and  home  furnishing  and  house  wear.  In  addition,  Wal-Mart  stores  also  offer  financial services such as money-order sales, wire transfers, check cashing and bill payment. The retail supply chain support system of Wal-Mart US includes 120 distribution facilities across  the  United  States,  of  which  the  company  owns  105;  the  remaining  are  owned  and  operated  by  third parties. During the financial year (FY) 2010, these distribution centres shipped approximately  79  per  cent  of  the  merchandize  sold  by  Wal-Mart  US.  The  remaining  merchandise  was  shipped  directly by the suppliers to the company’s stores. The company has grown in leaps and bounds by expanding its international operations in other  countries  as  well  as  by  strategic  purchase  of  interest  in  leading  stores  of  other  countries  such  as  purchase of a 35 per cent interest in Bounteous Company, which operated hypermarkets in China  under the Trust-Mart banner in 2007. The  company  had  completed  its  final  phase  of  Site-to-Store  national  roll-out  to  more  than    3,300  stores  across  the  country  in  2007.  This  has  enabled  its  customers  to  order  products  online  at  Walmart.com,  most  of  which  were  also  available  in  its  stores.  It  had  entered  into  a  50:50  joint  venture  agreement  with  Bharti  Enterprises,  India,  to  establish  Bharti  Wal-Mart  (Private  Limited)  in  2007. The joint venture was mainly meant to create wholesale cash-and-carry and back-end supply  chain management operations in India. If  we  do  a  SWOT  analysis  of  Wal-Mart,  we  will  find  the  following  key  features  under  different  categories: Strengths   A market leader with cost advantage on account of the scale of operations gives a competitive  edge.   Low-cost leadership in delivering a wide range of merchandise to customers.   Strategy to expand internationally. Weaknesses   Labour intensive and, hence, causes labour-related disputes and litigations.   Time lost in litigations that also cause labour relations.   Huge premises required at strategic locations that may be very costly.

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  A  company  may  have  to  vacate  premises,  if  taken  on  lease  termination,  which  may  affect  business in case it requires to shift to another premise. Opportunities   Emerging business potential for retail sectors in emerging markets.   Internet marketing can give a big boost to the business.   Focus on grocery and food will be beneficial; because of a shift in the trend in favour of eating  at home, health emerges.   Increasing working couples having less and less time for shopping prefer Wal-Mart-type of outlets. Threats        

Increasing demand requires increasing warehousing facilities at strategic locations. Volatility in commodity prices and inflation will squeeze profit margins. Affiliation of the labour force with recognized unions bring in interference from trade unions. Local retailers apply utmost resistance for the opening of Wal-Mart-type of outlets.

A  quick  analysis  reveals  that  the  company’s  business  plan  drivers  have  to  possess  low-cost  leadership on account of logistics efficiency and scale of operations. The company has to focus its  efforts in building harmonious labour relations to provide service commitment to customers. It has  to focus more and more on Internet marketing and delivery at home to create value to its customers. For example, if we consider the case of Nokia phones and do a SWOT analysis for the same, some  of the key distinct facts that will emerge are as given as follows:

SWOT Analysis Nokia Strengths                

More than 142 years of history. Largest network of sales and distribution. High-quality and professional team. Economies of scale. Strong financials having many other profitable businesses. User-friendly products. Leader in mobile phone sales in the world. Wide range of products for different classes.

Weaknesses              

Relatively higher price charged. Some products lack user-friendly features. Promotion efforts not directed to bottom of the pyramid. After-sales service not good in a few countries having huge potential. Sustaining growth at current rates is a great challenge. Lack of customization for different regions. Decrease in sales in the United States.

Opportunities   Huge potential for growth.   Provides Internet-based services to capture growing market. (Continued)

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  Entrepreneurship   Captures greater market share in the United States.   Brand dilution may happen by entering into Internet services.

Threats   Competition from Apple, Google and Research in Motion, all of which are investing heavily in  the mobile phone industry in an attempt to gain dominance.   Government policies in certain countries may adversely affect the operations, as it is a regulated  industry in many countries.   International security issues may cause problems for operations. Given  this  SWOT  analysis,  one  can  chalk  out  the  strategies  for  growth  as  well  as  business  plan  drivers. Business plan drivers in the case of Nokia would be the low cost of production because  of economies of scale and innovations that cater to the bottom of the pyramid market across the  globe.

8.6  THINGS TO REMEMBER WHILE PREPARING A BUSINESS PLAN Whiledevelopingabusinessplan,someofthefundamentalquestionsthataretoberememberedare asfollows:  One’sbusinessshouldgetalignedwithone’sskillsandstrengths.Oneshouldstartabusinessthatone passionatelylikesandloves.Adedicatedanddeterminedfoundingteamcanmakeaventuresuccessful.  Doesone’sideahaveabusinessmodelinplace?  Canwereallymakemoneywiththisbusinessconcept?  Canwebefocusedaboutwhoone’scustomersareandhowonewouldreachthem?  Willthefinishedproductreflectwellontheinvestorandtheentrepreneurtocreateanimage?  Willtheideabereallyaddingvalueforallthestakeholders?

8.7  BUSINESS FAILURES Businessfailurestatisticsshowthatabout96percentofsmallbusinessesthatenterthemarketplace surviveforonefullyear,85percentsurviveforthreeyearsand70percentsurviveforfiveyears(Key Small Business Statistics—January 2009,IndustryCanada).7 AsperthedatareleasedbyStatisticsCanadaeachyear,about145,000newbusinessesstartevery year,andaround137,000declarethemselvesbankrupteveryyear,therebyimplyingalmostonefailure foreachstart-up.8 This rate of failure necessitates identifying the causes for business failures.As per the extensiveresearchundertakenbytheWhartonSchoolofBusiness,thecausesofbusinessfailureareas follows:9      

32percentbecauseofinadequateresearchanddevelopment 23percentwerebadideas(re-productsand/orservicesoffered) 14percentduetouncontrolledcosts 13percentbecauseofweakmarketingstrategies 10percenterredwithbadtiming 8percentsuccumbedtocompetitoractivities

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Thesecausesclearlyrevealthatitislackofplanningthatcausesamajorityofbusinessestofailas againstpurelyexternalreasonsleadingtobusinessfailure. A similar study conducted by Inc. Magazine and the National Business Incubator Association (NBIA)revealedthat80percentofnewbusinessesfailwithinthefirstfiveyears.‘DatafromStatistics NewZealandindicatesthat53percentofsmalltomedium-sizedenterprises(SME)failwithinthefirst threeyears.Researchsuggeststhattwo-thirdsofbusinesscollapseisduetofinancialdifficultiesassociatedwithpoorfinancialmanagement.’ According to Dun and Bradstreet Reports, ‘Businesses with fewer than 20 employees have only a37percentchanceofsurvivingfouryears(ofbusiness)andonlya9percentchanceofsurviving 10years.’Restaurantshaveonlya20percentchanceofsurvivingtwoyears.Ofthesefailedbusinesses, only10percentofthemclosedinvoluntarilyduetobankruptcy,andtheremaining90percentclosed, becausethebusinesswasnotsuccessful,didnotprovidethelevelofincomedesiredorwastoomuch ofworkfortheirefforts.10Theoldadage,‘Peopledon’tplantofail,theyfailtoplan’certainlyholds truewhenitcomestosmallbusinesssuccess.Thefailureratefornewbusinessesseemstobearound 70to80percentinthefirstyear,andonlyabouthalfofthosewhosurvivethefirstyearwillremainin businessthenextfiveyears.11 Everyyear,470,000newbusinessesopeninBrazil,but43percentwillclosetheirdoorsbeforetheir thirdanniversary.HalfofallsmallbusinessesinBrazilclosetheirdoorsinthefirsttwoyearsoftheir operation.AccordingtoSilvanoGianni,headoftheSebrae(ServiçoBrasileirodeApoioàsMicroe PequenasEmpresas—SmallBusinessAdministration),Brazilhasoneofthehighestbusinessmortality ratesintheworld.Thesurveyshowedthatoutof1.3millionnewbusinessesopenedbetween2000and 2002,atotalof552,700ofthemcloseddownbeforetheywerethreeyearsold,withthevastmajority (49 per cent) closing before they reached two years of operation.The remaining 772,600 generated 2.4millionjobsandinvestmentstotalling$6.5billion(19.8billionreais).12 AsperthestudybyBrianHeadd,CenterforEconomicStudies,USBureauoftheCensus,two-thirds ofnewemployerfirmssurviveatleasttwoyears,andabouthalfsurviveatleastfouryears.Owners ofaboutone-thirdofthefirmsthathadclosedsaidtheirfirmsweresuccessfulatclosure.Thestudy alsorevealsthatthefactorscontributingtothesuccessofbusinessventuresincludeanamplesupply ofcapital,thefactthatafirmislargeenoughtohaveemployees,theowner’seducationlevelandthe owner’sreasonforstartingthefirminthefirstplace,suchasfreedomforfamilylifeorwantingtobe one’sownboss.13 ItisinterestingtonotethefactsasperMIT Guidebookonentrepreneurship,accordingtowhichonly 1 in 6,000,000 high-technology business ideas wind up in an initial public offering (IPO); less than 1percentofbusinessplansreceivedbyventurecapitalistsgetfunded;founderCEOstypicallyownless than4percentoftheirhigh-techcompaniesafteranIPO;60percentofhigh-techcompaniesthatare fundedbyVCsgobankruptandmosthigh-techcompaniesthatsucceedinhavinganIPOtakebetween threeandfiveyearstogetthere.14Thisimpliesthatitisnoteasytobecomeasuccessfultechnologyentrepreneur.Evenafterachievingsuccessatsomestageofabusinessventure,manyhavefailedatonepoint oranother.Themajorityoftechnologyentrepreneursexperienceahealthydoseoffrustration,burnoutand sorrowalongtheway.However,buddingentrepreneurscontinuetotakeupentrepreneurshipwhileknowingabouttheoddsoffailure,becausetheyhaveabiggerpurposeinlifeofcreatingsomethingnoveland useful.‘Tobeonthecuttingedge’isanecessarymantra.Atechnologyentrepreneurleadingtohottechnologycompaniesfocusestheirattentiononsolvingaproblemthatexistsinthemarket.Theyarecalled ‘hottechnologycompanies’,becausetheyseektosolveaproblem.Thosethatimitateanddonotinnovate withoutidentifyingasolutionforaspecificproblemsimplyfindanewtrendthattheywishtofollow.

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Itisfundamentallytheabilitytomaintainasustainablecompetitiveadvantageoverothersthatbrings rewardstotheentrepreneur.Risk-takingisfundamentallyassociatedtothisconcept.Thisisthecritical reasonforanentrepreneurbeingonthecuttingedge. Keeping in mind the facts just mentioned about business failures, it becomes important for an entrepreneur to prepare a business plan that could be a good instrument for them to improve the chancesofsuccess.Itisforthisreasonthatinthefast-changingbusinessenvironment,oneshould not overdepend on hunch or intuition but rather on a scientific and analytical basis for taking up entrepreneurship.

8.8  PERSPECTIVES TO BE CONSIDERED IN BUSINESS PLAN   PREPARATION There are different perspectives on business planning, because it has to cater to the needs and requirementsofdifferentstakeholders.Therewillalwaysbedifferentviewsbydifferentstakeholders,aseachlooksfromtheirperspectivetoseewhathasbeenstoredfortheminthebusinessplan. Thisbringsauniqueperspectivetothebusinessplanfromeachvitalstakeholder.Thebusinessplan iswrittenforvariousstakeholderswhowillbeinterestedinreadingittofindoutwhatexactlyisin storeforthem.Someofthekeystakeholderswhowouldbeinterestedinthebusinessplanaregiven asunder(Fig.8.7). A business plan is a valuable instrument for entrepreneurs and potential investors because of the following:  Determiningtheviabilityoftheventure.  Providing guidance and the basis to the entrepreneur for channelizing resources and organizing activities.  Servingasanimportantinstrumenttoobtainfinancialresources.

Founders and Their Families

Venture Capital Firms

Firms with a Related Product

Communities Activist Groups

Investors

Government Suppliers

Employees

Time Perspective

Figure 8.7 Who Sees Business Plans?

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Threekeyperspectivesthatneedtobekeptinmindwhilepreparingabusinessplanaretheperspective from the point of view of the entrepreneur, marketing agent and an investor (Fig. 8.8).These three pillarsbasicallydecidethesuccessorfailureofabusiness.

8.8.1  Perspective of the Entrepreneur Themainconcernofanentrepreneuristosuccessfullytranslatetheirideasintorealitythatwouldgive risetosustainablegrowth.Theentrepreneurwouldliketoseethebusinessgrowingtogreaterheights. Themainconcernremainstodevelopcompetitiveadvantageintheirfavourandtobecomeleadersin their business. Therefore, their main concern becomes a greater focus on processes and operational issues,asthiswouldtakeamajorchunkoftheirtime.Theywouldalsoliketoseetoitthattheirexpertise,competenceandskillprofilematcheswiththerequirementsofthebusinessand,ifnot,thenhow toinducttherightpeopleforsailingthroughthebusinesssmoothly.Anentrepreneurispreparedtoput theirheartandsoulintotheirbusiness.Theydonotmindputtinginalltheirlifesavingstoseetoitthat theirbusinesssucceeds.Theygetdisturbedwhensomeonetriestoequatetheirsweatandloveoflabour withcashtobuyinastake.Anentrepreneurwouldliketoseetoitthattheirplaniscomprehensive andtakescareofvariouseventualities,soastoensuresuccess.Therefore,theywouldliketochallenge Murphy’sLawbyensuringthattheirplanisfoolproof.Murphysaid,‘Whatevercangowrongwillgo wrong.’It’sacuteexpression,butitdoesn’tapplytome.Amongmyintelligence,thequalityofmy team,andthequalityofourbusinessplan,wewon’tbecaughtoffguard.Murphy’sLawonlyappliesto peoplewhoaren’tprepared.Weareprepared. Anentrepreneurshouldalsoassesstheirskillsetvis-à-visrequirementstoprepareandtranslatethe planintoreality.Itisalwaysdesirableforthemtoratetheirskillsprofileonascaleof1to10toidentify theirstrongandweakareasunderbasiccategoriessuchasaccounting,planning,forecasting,marketingresearch,sales,humanresourcemanagement,productdesignanddevelopment,legalaspectsand organizingabilities.Thiswouldhelpthemfindouttheneedforinductionofpeoplewithspecialized knowledgeandcompetencetobuildagoodteam. Marketing  Perspective  The marketing perspective of a business plan focuses on who is one’s customer.Whatisspecialaboutthecustomerandtheirrequirements?Howfarwouldthecustomer’s requirementsbemetbytheofferthatonewillmaketohim?Thishastoclearlyexplaintheprocess throughwhichonewillmakeone’scustomerbuyone’sproducts/services.Thisperspectivehastoclearly

Entrepreneur’s Perspective

Investor’s Perspective

Marketing Perspective

Figure 8.8 Perspectives to Be Considered While Preparing a Plan

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incorporatetheuniqueproduct/servicepropositionsthatonehasandone’suniquesellingproposition. Atwhatpriceisoneofferingitandwhywoulditappealtothebuyer?Whatisone’ssales/distribution plan,andadvertisingandpromotionplan?Keyemphasisneedstobelaidonthebenefitsthatacustomer wouldderivefromone’sofferings.Basically,thisperspectivehastocoveraspectssuchasthefollowing:  Featuresandtraitsofone’sproductorservice.  Physicalattributesofone’sproductorservice,andtheutilityitprovidesvis-à-viscompetitiveproducts andservices.  Benefits—tangibleandintangible—thatitprovidestocustomers  Aboveall,whatsetsone’sproduct/serviceapartfromothers?

Thisaspecthastoclearlydelineatewhatisimportantforcustomersatisfactionandhowoneisgoing toprovideit.Whatarethekeyconcernsofthecustomer?Isthecustomermoreconcernedaboutdelivery schedule,productioncycletime,conformancetoqualitystandards,warrantyclaims,wayoftreatment andbehaviourofsalespersonnel?Manyproducts/servicesrequiremorehand-holdingbefore,duringand afterthesaleand,therefore,havetoassurethesame.Othersmayrequireacustomizationtotakecareof specificneedsofcustomersbelongingtodifferentmarketsegments.Theseaspectsareextremelyimportantwhileplanningtomarketproductsorservicestothecustomers.Neverevershouldoneover-promise andunder-delivertothecustomerifonewouldliketobuildalong-lastingrelationshipwiththem. Inshort,thisperspectiveinabusinessplanrequiresprecisecommunicationabouttheofferingoneis makingtothecustomerandwhyitissuperiortoothers. Investor’s Perspective  Investorsbasicallylookforprofit-generatingcapacityofanideainabusiness plan. Some investors prefer to take a higher risk if they are convinced about the possibility of abnormal profit-generating capacity in the long run. Investors are usually more aggressive and less conformistand,therefore,paymoreattentiontothenoveltyoftheideaandtheteam’sabilitytoexecute theprojectthatcanmakethebusinessasuccess. Investors view investments in early-stage companies as more lucrative, as these ventures are high-risk,high-returnbased.Therefore,thechancesofrecoveringsubstantialreturnsfromsuccessful investmentsareenormous.Further,withthedepthoftheirexperience,theycanreallycontributeto thesuccessofstart-upventures.Forinvestors,morethaninvestmentbywayofmoney,whatmatters most is their expertise to contribute to the success of a venture. They have great networking and connectionsthatcanplayamaterialroleinrecruitingkeyemployeesattherighttime.‘Asaninvestor, IsubscribetoSchwartz’Law.Schwartzsaid,“Murphyisanoptimist.”Timeaftertime,unanticipated eventsoccurthatthreatentheveryviabilityofafragileearlystagecompany.Itsresiliencytosurvive thosebodyblowsandemergethestrongerforit,oftendeterminestheonesthatultimatelysucceedin asignificantway.’ Alender’sperspectivediffersslightlyfromaninvestor’sperspective,astheylookatstablereturns. Theywouldliketoexaminetheviabilityofthebusiness.Thelenderprefersabusinessplanthatisgeared moretowardsensuringthattherewouldbeadequatecashflowstotakecareofrepaymentcommitments andinterestonloans. Other than the three critical perspectives just mentioned, it is the time perspective and focus in the business plan about other stakeholders such as government, suppliers, community around, and employeesforwhomtheirinterestneedstobeincorporatedtoensurethatthebusinessgetsduesupport fromallstakeholders(Fig.8.9).  Governments—Governments’concernwouldbetogettaxrevenueutilizedforacommoncauseand improvetheinfrastructure.Theirconcernislocaldevelopmentandthebenefitstothecommunityby

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Activist Groups

Time Perspective

Suppliers

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er nm

Employees

Investors

Marketing

Communities

Entrepreneurs

Figure 8.9 Business Plan Perspectives

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wayofjobsandotheralliedbenefits.Theyalsowouldliketoensurethatthebusinessactivityresults insocialimprovement. Communities—Communitieslookforwardtogreateremploymentprospectsforlocalresidents.Their other concern is to ensure that the local environment is protected and no harm to the environment takesplaceasanoutcomeofbusinessactivity.Aboveall,theywouldliketoensurethatthelocalarea developsasaresultofenhancedeconomicactivity. Activist Groups—Thesegroupsmonitorbusinessactivitiesfromthepointofviewofcomplianceto legalandethicalstandardsandalsoprotectpublicsafety.Businessesthataresensitivetotheconsumer andcommunityinterestaremorecloselymonitoredbytheactivistgroups. Suppliers—Suppliersofrawmaterialsandotherinputsmainlylookforwardtogettingtheirdueson time.Theirinterestmainlyliesincontinuousordersandgettingremunerativepricesfortheirsupplies madeontime. Employees—Employees are the main asset around whom a business activity revolves in terms of satisfyingitscustomers.Theylookforwardtostableemployment,comfortableworkingconditions andfairpayfortheworkperformed.Anothervitalconcernforemployeesistheircareerprogression andrewardsfortheirmeritocraticperformance.Everyprospectiveemployeewouldliketogothrough thecompanyprofilefromtheemployee’sperspective.

Time  Perspective  An all-pervasive perspective demands dynamic operations to be incorporated basedonacontinuousmonitoringoftheenvironment.Italsoincludesthepastperspectivebyexamining anddulyincorporatingindustryhistory.Marketresearchisundertakentofindoutwhatideasworked wellinthepastandwhatdidnot,andlessonsarelearnedfromthese.Afutureperspectiveincludesbasic skillsinforecastingthatareusedtoprepareabusinessplan.Anentrepreneurhastonecessarilymake estimatesoffuturesales,costsandotherfactorstobeabletoplanahead.Thiswoulddramaticallyinfluencehowabusinessplaniseventuallyshaped.Finally,theentrepreneurhastoputtheplanintoaction. Theimplementationandmeasuringofactualperformanceagainstwhatwasestimated/forecastedare done,sothattimelycorrectiveactionscanbetakentoimprovefutureperformanceandrewardscanbe sharedforgoodperformance. Thus, there are various perspectives other than the key perspectives that revolve around an entrepreneur,marketingagentandinvestor/lenderthatneedtobedulytakencareofforthesuccessofa businessplan.Thisalsoemphasizesthevariouswaysinwhichoneneedstolookatbusinessplanning.

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8.9  WHO SHOULD PREPARE A PLAN? A business plan should necessarily be prepared by the entrepreneur, as they are the ones who have conceivedanideaintoanopportunityandhavethegreatestclarityaboutit,asalsowouldbeplunging intotheimplementationofthesame.Beingtheownerofthebusiness,allstakeholdersexpecttheentrepreneurtohavethefullpictureofthebusiness,criticalsuccessfactorsforitssuccessandaboveall,look forwardfortheentrepreneur’sfullcommitmenttotheplanthatcanonlybereflectediftheentrepreneur writestheplan. Ithardlymatterswhetherthebusinessplanistobeusedforseekingfinancialassistanceortoevaluatefuturegrowth,defineamissionorprovideguidanceforrunningone’sbusiness;itistheentrepreneur whounderstandsandknowsthemostaboutthebusinessanditsvariousdimensions. Thereareanumberofsoftwarepackagesthatcanassistanentrepreneurinthepreparationandformattingprocess,suchasBusinessPlanProandPaloAltoSoftware,whichcanbehelpfulinpreparingaplan. However,afterdulyassessingtheirownskills,anentrepreneurmayconsultprofessionalssuchas lawyers, accountants, marketing research organizations, engineers, technologists and others having expertiseintheareatoenrichthebusinessplan.Althoughmajorworkneedstobedonebytheentrepreneur,consultantscanbehiredtohelpoutwithspecificissuesintheprocessofformulatingabusiness plan.Entrepreneursontheirownhavetobasicallycomeupwiththefinancialdata,thepurposeofthe business,theemployeeprofilerequiredtoexecutetheplanandmanagementstyles.Aplanwrittenby theentrepreneurisownedbythemandobviouslyensurestheircommitment,whichmattersthemostfor thesuccessofabusiness.Whilewritingaplan,oneshouldhaveadepthofdataanalysistosupportthe argumentsandpresumptionsmadeintheplan.Eachstatementmadeintheplanshouldbebackedupby factsandfiguresthatarefromreliableanddependablesources.Someofthekeyaspectstobetakencare ofwhilewritingaplanareasgivenasfollows:         

Abusinessplanshouldbewritteninasimplelanguagebyavoidingunnecessaryjargon. Itshouldbepreciseandtothepoint. Bulletpointsshouldbeusedtoattracttheattentionofthereader. Itshouldbeerror-freeinlanguage. Itshouldlaygreatemphasisonrelevantandsignificantissuessuchascompetition,market,marketing strategy,innovationandfeasibilityoftheproduct. Lengthytextshouldbebrokenintoparagraphsandsections. Alldetailsincludingdata,contracts,sanctionsreceivedandcommitmentfromcustomersshouldbe placedintheappendices. Anintroductorypagehighlightingthenon-disclosureagreementisincluded,andatableofcontents indicatingpagenumbersisinserted. Theexecutivesummaryiswrittenattheendandplacedatthebeginning.

8.10  BASICS OF A BUSINESS PLAN Thefoundationofabusinessplanrevolvesaroundanideaandthevisionofanentrepreneur.Itisthe entrepreneur’sdreamandvisionthathastobepursuedinthelightofvariousideasthatcanbesaidas havingmarketpotentialatagivenpointoftimethatgivesshapetothebusinessplan. Abusinessplanincludesthefollowingmajortopicheadings(Fig.8.10):  introductorypage  executivesummary

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vision/missionstatement businessenvironmentandcompetitiveanalysis marketresearchandanalysis marketingplan financialplanandfundingneeds technology,manufacturingandoperationalplan intellectualproperty legalconsiderationsandinsurancerequirements managementteam risks,problemsandassumptions launchingabusinessandmeasuringplanprogress growthandexitstrategy appendices

Acompletebusinessplanwithastrongfoundationneedstobepreparedbywayofclarityonthe aspectsjustmentioned,whichneedtobealignedwiththevisionandmissionoftheentrepreneurfor thebusinessidea.Further,itisnotenoughtoprepareagoodplan,butitshouldalsohaveaneffective implementationstrategyinplace.Aboveall,whatmattersmostistoeffectivelycommunicatetheplanto differentstakeholders,whichrequiresaknackofmakingelevatorpitch,briefpresentationsanddetailed presentationskills.

8.10.1  Introduction The‘Introduction’toaplanneedstobepresentedinaroundapageandshouldbrieflycoverdetailsofthe legalformofthebusinessentity—company,partnershipandsoletrader.Oneshouldpreciselyexplainin oneortwosentenceswhatthebusinessdoesorplanstodoandwhatisthepurposeoftheplan.

Vision/ Mission

Elevator Pitch

Executive Summary

Brief Presentation

Full Business Plan

Detailed Presentation

Executive Summary, Vision/Mission, Business Environment and Competitive Analysis, Market Research and Analysis, Financial Plan, Marketing Plan, Technology, Manufacturing and Operational Plan, Intellectual Property, Legal Considerations, Insurance Requirements, Management Team, Suppliers, Risks, Problems and Assumptions, Proposed Venture Offerings, Launching a Business, Growth and Exit Strategy, Appendices

Figure 8.10 Basics of Business Plan

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Example This business plan relates to Anka India Ltd, established in 1994, and is engaged in manufacturing a  special variety of soles used by leading brands such as Bata, Holyfield, La Belle, Lee Cooper, Lotus  Bawa, Nike, Welcome and Woodland. The company also supplies full footwear. The purpose of this plan is to help the management raise `10 crore in equity and loans to help  finance company’s expansion plans and R&D on new variety of soles. Outline the scope and general structure of the plan by setting out the sequence of main sections  as short bullet points, namely This plan contains the followings:   Section 2 contains executive summary of the plan.   Sections 3 and 4 review the background, development of the business and current product  service/offerings, respectively.   And so on…. Indicate that the plan is confidential. For example, include a paragraph as follows: This document is confidential and has been made available to the individual to whom it is  addressed strictly on the understanding that its contents will not be disclosed or discussed  with any third parties except for the individual’s own professional advisers. Incorporate  contact  details  (name,  position,  address,  phone,  fax  and  email)  of  the  key  person  dealing with the plan.

8.10.2  Executive Summary Lasttobewrittenandfirsttobepresentedistheexecutivesummaryofabusinessplan.Aprecisely  ell-writtenexecutivesummaryactsasacriticalfactortothesuccessofabusinessplan.Thissection w oftheplanshouldbesocatchyandpowerfulthatitattractstheattentionandinterestofthereadertoget compelledtoreadthefullplan.Itisimportanttonotethateachandeverywordusedintheexecutive summaryshouldbecarefullyselectedandpresented.Thissectionshouldaccuratelydefinethenatureof thebusinessventure,includingthecustomerneedthatthebusinessproposestofulfilthroughinnovative productsorservices.Itshouldemphasizeonwhypeoplewouldneedit,highlightingabriefanalysis of the characteristics of potential market. It provides a precise and attractive gist and highlights the keypointsrelatedtotheproduct/service,fundsrequired,returnsexpected,marketpotential,theteam backingitandtheircommitment.Itshoulddistinctlyhighlighttotheprospectiveinvestorthesizeand scopeofthemarketopportunity,theventure’sbusinessandprofitabilitymodelandhowtheresources/ skills/strategicpositioningofthecompany’smanagementteammakeituniquelyqualifiedtoexecute theplan.Theexecutivesummaryisapowerfultoolthatattractstheattentionofstakeholdersingeneral andinvestorsinparticularandshouldnotbepresentedinmorethan203pages.Itshouldincludethe following(Fig.8.11):     

Abriefdescriptionoftheventure Theobjectivesofthebusiness Abriefdescriptionofthecompany’sproductsorservicesinrelationtotheidentifiedcustomerneeds Targetmarketandcompetition Competitiveadvantageofthebusinessandrationaleforwhythebusinesswouldsucceed

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Executive Summary Precise, Catchy and Powerful Define Nature of Business Target Market and Competition Competitive Advantage Growth Prospects Funding Requirements Strength of Management Team

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Last to Be Written

Figure 8.11 Key Aspects of Executive Summary  Growthprospects  Strengthofthemanagementteam  Fundingrequirements,includingproposedscheduleforfunddeployment

Theexecutivesummaryshouldbebriefinnotmorethanonetotwopagesandwritteninpowerful wordstogenerateinterestonthepartofstakeholdersintheventure.Itbrieflycoversthefundamentalsoftheproposedbusiness:Whatwillone’sproductbe?Whowillone’scustomersbe?Whoarethe owners?Whatdoesonethinkthefutureholdsforone’sbusinessandone’sindustry?Whatwouldbe thefundrequirementsatdifferentpointsoftimeandhowwouldoneusethem?Whatwouldbethe returnsonequity?Itshouldbemadeinteresting,fascinating,professional,concise,completeandhighly communicativeinsimplelanguage.

Example: Pet Grandma Executive Summary Pet Grandma offers on-site pet sitting services for dogs and cats, providing personal, loving pet care  that the owners themselves would provide if they were there. Our clients are dog and cat owners who choose to leave their pets at home when they travel or  who want their pets to have company when their owners are at work. Pet Grandma offers a variety of  pet care services from day visits through 24-hour care over a period of weeks—all in the pet’s home  environment. Across Canada the pet care business has seen an explosion of growth over the last three years.  West Vancouver is an affluent area with a high pet density. Our market research has shown that 9 out  of  10  pet  owners  polled  in  West  Vancouver  would  prefer  to  have  their  pets  cared  for  in  their  own  homes when they travel rather than be kenneled, and 6 out of 10 would consider having a pet sitter  provide company for their dog when they were at work. While  there  are  currently  eight  businesses  offering  pet  sitting  in  West  Vancouver,  only  three  of  these offer on-site pet care and none offers ‘pet visit’ services for working pet owners. Pet Grandma’s marketing strategy is to emphasize the quality of pet care we provide (‘a Grandma  for  your  pet!’)  and  the  availability  of  our  services.  Dog  owners  who  work,  for  instance,  will  come  home to find happy, friendly companions who have already been exercised and walked rather than  demanding whiny animals. (Continued)

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All pet services will be provided by staff trained in animal care. On start-up we will have six trained  staff to provide pet services and expect to hire four more this year once financing is secured. To begin  with, co-owner Pat Simpson will be scheduling appointments and coordinating services, but we plan  to hire a full-time receptionist this year as well. The management of Pet Grandma consists of co-owners Pat Simpson and Terry Estelle. Pat has  extensive experience in animal care while Terry has worked in sales and marketing for 15 years. Both  partners will be taking hands-on management roles in the company. In addition, we have assembled  a  board  of  advisors  to  provide  management  expertise.  The  advisors  are:  Juliette  LeCroix,  partner  at  LeCroix  Accounting,  Carey  Boniface,  veterinarian  and  partner  at  Little  Tree  Animal  Care  Clinic,  John Toms, president of Toms Communications Ltd. Based on the size of our market and our defined market area, our sales projections for the first year  are $340,000. The salary for each of the co-owners will be $40,000. We are seeking an operating line  of $150,000 to finance our first year growth. Together, the co-owners have invested $62,000 to meet  working capital requirements. Already we have service commitments from over 40 clients and plan to aggressively build our client  base through newspaper, local television and direct mail advertising. The loving on-site professional  care  that  Pet  Grandma  will  provide  is  sure  to  appeal  to  cat  and  dog  owners  throughout  the  West  Vancouver area.15

8.10.3  Vision/Mission Statement Everysuccessfulentrepreneurhasadream.Itisthisdreamthattheentrepreneurattemptstotranslate intoreality.Thebasicpurposeofexistenceofabusinessentityandwhatitdoesneedstobeclearly definedinsimpletermsbytheentrepreneur.Entrepreneurialleadership,asdiscussedearlier,requiresa clearvision,thatis,apotentialthatanentrepreneurwantstounfoldanabilitytoclearlycommunicate thevisiontoallthosewhomatterinordertorealizethesame,andanabilitytoinspireandmotivateall thosepeoplewhowouldhappilyandwillinglycontributetheirbestofresourcestoenabletherealization ofthevision. Thevisionstatementfortheventurebasicallyreferstothelong-termvisionofacompany,highlightingwhereitwouldliketobeinanother10,20,30oreven50yearsfromnow.Itpresentsapicture thatissimilartoadreamfortheorganization.Itchartsastrategicpathforthefutureasto‘Whereare wegoing?’andsteerstheenergiesofemployeestowardsagreaterpurposeforwhichtheorganization exists.Ithastobechallenging.Itshouldprovideadirectionfortheventurethatneedstobefocused, flexibleandfeasibletoachieve.

Examples Wells Fargo’s vision statement is, ‘We want to satisfy all of our customers’ financial needs, help them  succeed financially, be the premier provider of financial services in every one of our markets, and be  known as one of America’s great companies.’ Kingfisher’s vision statement is, ‘The Kingfisher Airlines  family will consistently deliver a safe, value-based and enjoyable travel experience to all our guests.’  L&T’s vision is, ‘To be a professionally managed Indian multinational, committed to total customer  satisfaction and enhancing customer value.’ Intel’s vision statement is, ‘Getting to a billion connected  computers worldwide, millions of servers and trillions of dollars of e-commerce. Intel’s core mission  is being the building block supplier to the Internet economy and spurring efforts to make the Internet 

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more useful. Being connected is now at the centre of people’s computing experience. We are helping  to expand the capabilities of the PC platform and the Internet. We have seen only the early stages of  deployment of digital technologies.’

A mission statement should clearly define what the business wants to do mainly for customers, employeesandowners.A‘mantra’isasinglephrasethatdefinesabusiness.GuyKawasaki,authorof Art of the Start,recommendsamantrainsteadofamission.Amissionstatementhighlights,‘Whatdoes thebusinessdo?’;‘Whatbusinessareyouin?’.Itbasicallyprovidesapurposeforitsexistencebyway ofwhatitdoes.Itgivesthecorepurposefortheexistenceofabusinessanditsidentitybyfocusing oncurrentproductandserviceofferings,customerneedsbeingserved,andtechnologicalandbusiness capabilities.Aneffectivemissionstatementcanbedevelopedbygettinginputsfromallmembersof theorganization.Itshouldbeprecisewithintwotothreesentences.Aboveall,anentrepreneurshould necessarilybelieveinamissionstatement;ifonedoesnot,thenotherstakeholdersincludingcustomers wouldsoonrealizeit.

Examples KC Hub’s mission is to transform the Kansas City region into a world-renowned centre for research,  development and innovation empowering innovators, researchers and visionaries. YourBusinessPal.com was created to help regular everyday people start their own business on the  Internet and beyond—‘We want to help you build success for your business.’ The  American  Heart  Association’s  mission  is,  ‘Building  healthier  lives,  free  of  cardiovascular  diseases and stroke.’ Applied  Materials’  mission  is  to  be  the  leading  supplier  of  semiconductor  fabrication  solutions  worldwide  through  innovation  and  the  enhancement  of  customer  productivity  with  systems  and  service solutions. Dow Chemical Company’s mission statement is, ‘To constantly improve what is essential to human  progress by mastering science and technology.’

8.10.4  Business Environment and Competitive Analysis Business environmental analysis is the first step towards getting the broad clarity about a business environment into which an entrepreneur would like to plunge. It is also called ‘PEST’ (political, economic,socioculturalandtechnological).Assuch,twoothervitalcomponentsofPESTincludelegal andecologicalones.Thisanalysishelpsalotinchalkingoutstrategiestotakeadvantageofopportunities andtomakecontingencyplansforminimizingtheadverseimpactofthreats. PESTanalysishelpsinidentifyingkeypoliticalfactorsorlegislativechangesthatcouldaffectthe business.Incaseaventureisspreadovermultiplecountries,thenoneneedstoexaminetheimplicationsofthepoliticalsystemandpoliciesineachcountry.Thepoliticalfactorsincludeaspectssuchas licensing,flowofcapital-relatedpolicies,lawsonmaternityrights,dataprotectionandenvironmental policy. Althoughtaxratesaregenerallydecidedbypoliticians,taxdecisionsgenerallyincludeeconomic considerationssuchasgrowthrates,povertyandindustrialscenario.Othereconomicfactorsthatneed tobeconsideredareexchangerates,inflationlevels,incomegrowth,debtandsaving,andconsumer

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andbusinessconfidence.Forcertainindustrialactivities,onemayhavetofocusonnarrowindustry measuresthatbecomeimportant,suchastheavailabilityofskilledlabourforce,labourlawsorrawmaterialcoststhatwouldhavedifferentbusinessimplications. Certainbusinessventureshaveagreatimplicationarisingoutoftechnologicaldevelopmentsand, hence,ifsuchbusinessesfailtokeeppacewithnewtechnologies,thenthismayresultinthemgoingout ofbusiness.Technologicaldevelopmentsalsoinfluencepoliticalandeconomicfactors,andplayapart inhowpeopleviewtheirworld.Forexample,Internettechnologyhasmadeamajorimpactontheway consumersmaketheirdecisionstomarketandbusinessesundertakemarketingresearchandpurchase rawmaterials.Assuch,evenasmallbusinesscannowserveaglobalmarketandcanevenundertake businesses that may not require an office space or a distribution network. Environmental factors to beexamined,particularlyforcertainbusinessesthatareenvironmentallymoresensitive,includethe impactofclimatechange. Thechangesinthesocioculturalprofileandfactorscreatebusinessopportunities,ontheonehand, andmakesomeoftheexistingbusinessesredundant,ontheother.Socialfactorsinfluenceandmanipulatepeople’schoicesandincludesocietalbeliefs,valuesandattitudes.Oneneedstoexaminedemographicchangesandalsoconsumerviewsonone’sproductandindustry,lifestylechangesandattitudes tohealth,wealth,age,gender,workandleisure. Agoodenvironmentalanalysishelpsinabetterunderstandingabouttheindustryinwhichthebusinesswouldfall.Industryanalysisexaminesandevaluatestheplayingfieldinwhichthecompanyis competing,andattemptstogetaclearerpictureaboutthesizeofthemarket.Italsohelpsinidentifying genuinemarketneedstoassessthemarketpotentialbyclearlyidentifyingrelevantmarketsize.Someof thefundamentalquestionsthatindustryanalysishelpsinansweringaregivenasfollows:      

Whatarethesizesofthetargetrelevantmarketsegments? Whathavebeenthepastandemergingtrendsfortheindustryasawhole? Whoarethecompetitorswithwhomone’sproducts/serviceshavetocompete? Istheproduct/serviceunderconsiderationjustafadorwillitprovidealong-termsustainablemarket? Arewetalkingaboutaseasonalmarket?Ifso,whatisitsperiodandintensity? Istheindustrygrowingatanaccelerated,constantordecreasingrate?Or,doesitjustgrowwiththe growthofthepopulation?  Whatarethekeyfactorsthatwouldinfluencethegrowthofthemarketandofmarketshares?  Whoarethepotentialcustomersforthebusinessproductorservice?

Industry analysis also helps in identifying profit margins that vary a lot from industry to industry. Forexample,marginsmaybeashighas24percentinminingandcrudeoilproduction,around15to 17 per cent in pharmaceuticals, 6 to 7 per cent in food and consumer products and as low as 1 to 1.5percentinautomotiveretailingservices. Competitive  Analysis  Thispartofthebusinessplancapturesthecompetitivelandscapeofone’s business.Itidentifiesdirectandindirectcompetitorsandassessestheirstrengthsandweaknesses.This helpsinidentifyingthekeycompetitiveadvantagesofone’sbusinessthatneedtobefocusedon.In caseoneobservesthatexistingplayersinthemarketarestrugglinghard,thenoneneedstoidentify the reasons, so as to consciously decide whether it would be advantageous to enter the business or toavoidcommittingthesamemistakes.Ifexistingplayersinthemarketaredoingexceedinglywell, then one may have to justify the rationale for another player to enter the market.Thus, competitive analysisistheprocessofidentifyingbusinessmodels,productprofiles,customerbase,performance

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andmarketingstrategyofcompetitorsinthemarketplace.Thishelpsindevisinganeffectivemarketing strategyencompassingproductfeatures,packaging,prices,distributionchannels,qualityandserviceso astoderivecompetitiveadvantage.Oneshouldanalyseallclosecompetitorsonparameterssuchasthe competitor’sobjectives,products/servicesandcompetitiveadvantagesbywayoftheircapabilitiesand strategiesthattheyoperateinthemarket. Thespecificaspectsthatneedtobecoveredinthissectionofanalysisaredescribedasfollows:  Identify one’s closest competitors. What are their key strengths and weaknesses? Where are they located?Whataretheirrevenues?Howlonghavetheybeeninbusiness?  Definetheirtargetmarket.  Howistheirbusinessdoing?Isitgrowing?Isitscalingback?  Whatistheirshareoffmarket?  Howisonegoingtobedifferentwhencomparedwithone’sclosecompetitors?  Whataretheareasofimprovementthatcanprovideanextraedgetooneinthemarket?  Inwhatwaysisone’sbusinesssuperiortothecompetition?  Howaretheiroperationssimilartoone’sbusinessandhowdotheydiffer?  Aretherecertainareasofthebusinesswherethecompetitionsurpassesone?Ifso,whatarethoseareas andhowdoesoneplanoncompensating?

Competitive analysis keeps customer needs and wants at the centre of analysis.An entrepreneur, afterdiagnosingtheofferingsmadebycompetitors,shouldkeepcustomerprioritiesasone’sbusiness’ priorities.Theentrepreneur’swholeconcernbecomestodevelopinnovativeproductsandservicesthat areaprerequisitetobusinesssuccessinanyindustry.Itbecomesthedutyofanentrepreneurtoanticipatefuturecustomerneedsandwants,sothattheykeeppacewithchangingcustomerneedsbyappropriatelydevelopingandimprovingproductofferings. Abrams(1993)citedseveralcommonbarrierstoentryfornewcompetition:  Patents—Theseprovidesomeprotectionfornewproductsorprocesses.  High Start-up Costs—Inmanycases,thisbarrieristhemostdauntingoneforsmallbusinesses.  Knowledge—Lackoftechnical,manufacturing,marketingorengineeringexpertisecanbesignificant obstaclestosuccessfulmarketentry.  Market Saturation—Itisabasicrealitythatitismoredifficulttocarveoutanicheinacrowded marketthanitistoestablishapresenceinamarketmarkedbyrelativelylightcompetition.

‘Realistically, few barriers to entry last very long, particularly in newer industries,’ concluded Abrams.‘Evenpatentsdonotprovidenearlyasmuchprotectionasisgenerallyassumed.Thus,you needtorealisticallyprojecttheperiodoftimebywhichnewcompetitorswillbreachthesebarriers.’ On the quality front, one may undertake a detailed analysis on various parameters of quality for different competitors to identify others’ areas of weaknesses, so as to create a distinct niche. The characteristics could be performance-related, feature-related, durability, adherence to pre-established standards,easeandspeedofservice,packagingandaesthetic-related.Servicequalityparameterscould betimeliness,courtesy,convenience,accuracyandconsistency.Anotherwayinwhichonecanprecisely work out competitiveness is by rating on a scale of 0 to 10 the various attributes of one’s product vis-à-viscompetitors.Ifneeded,variousattributescanbegivendifferentweightage,dependingontheir importanceinthemindofcustomers.Thiswouldhelpingettingoverallattractivenessorunattractivenessofone’sproductincomparisontocompetitorsandwillalsobehelpfulinidentifyingkeyattributes thatwouldrequiregreaterfocustoexcelinthemarket(Fig.8.12).

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Your Company Competitor #1 Competitor #2

Companycentric

Market Share

x

x

x

Cost

x

x

x

Key Product Attributes

x

x

Brand Image and Reputation Leverage With Suppliers

x

Technology

x

x

Company Z

Marketcentric

# Quality

Company Y Company X

Better

Affordability of Service

Figure 8.12 Examples of Competition Graphics Thisapproachiscalled‘company-centric’.Onecanworkoutcompetitivenessfromthepointofview ofthemarket-centricapproachondifferentparameterstoidentifyone’scompany’snicheincomparison tothecompetitors.Itisgenerallyadvisabletobemarket-centrictoidentifykeystrategiesthatwould helpone’sventuresucceed. In spite of having scientific tools and techniques undertake competitive analysis, it is important to remember that understanding and predicting competitors’ actions is a complex phenomenon. Competitors, as such, do not always behave in a rational manner and would like to always retain suspenseanduncertaintiesabouttheirstrategiesandactions.Thiscomplicatestheprocessofcompetitiveanalysisandmakesitdifficulttoforecastrivals’actions.Thisrequiresbuildingalternatestrategies tocountercompetitors’moves,therebyresultinginscenariobuilding. Analysisofone’scompetitorsshouldbeacontinuousprocess,soastoavoidanysuddenshocks. Having a clear understanding about competitors helps one in becoming more motivated to succeed, efficientandeffectiveinthemarketplace. High-technology-drivenventuresthatchangethewholeprofileofanindustrymayleadtodriving first-moveradvantageand,inturn,theleastofcompetitiontobeginwith.However,eventheseventures haveariskofcompetitionemergingoveratimeperiodorwiththealliedsubstituteproducts/services. Mostlyresearchanddevelopmenteffortsemergingoutofuniversitiesandresearchcentresmayresult inbreakthroughtechnologies,therebygivingrisetocompetitiveadvantages.

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Examples SiOnyx SiOnyx, a start-up of the Harvard University Office of Technology Development, was formed in 2006  through technology development resulting in a new type of material that absorbs light very efficiently  and that can be used in a variety of applications. Shallow junction photonics is a patented semiconductor process that exploits unique atomic-level  alterations  that  occur  in  materials  irradiated  by  high-intensity  lasers.  The  SiOnyx  process  employs  a powerful, femto-second laser that exposes the target semiconductor to a series of high-intensity  pulses as short as one billionth of a millionth of a second in duration. Crystalline materials subject to these intense, localized energy events undergo a transformative  change;  the  atomic  structure  becomes  instantaneously  disordered,  and  new  compounds  are    ‘locked in’ as the substrate re-crystallizes. When applied to silicon, the result is an N- or P-type    doped,  shallow  photo  junction  that  through  black  silicon  exhibits  several  unique  physical  characteristics that offer important advantages in photonic device architecture. The unique atomic  configuration  established  in  the  SiOnyx  process  produces  a  thin-film,  broad-spectrum  detector  that  delivers  an  astonishingly  high  response  in  comparison  to  typical  semiconductor  devices.  These  attributes  enable  SiOnyx  to  address  critical  design  limitations  found  in  previous  device  methodologies  with  innovative,  cost-effective  architectures  that  minimize  processing  complexity  and material costs.  The material has wide-ranging applications in the areas of detectors, arrays and customs. The SiOnyx patented laser process produces silicon photodetectors with extraordinary performance  at  visible  and  infrared  wavelengths  from  400  to  1,300  nm.  The  measured  optical  responsivity  of  100 A/W at 950 nm demonstrates a 100-fold increase in sensitivity compared with traditional detection  methodologies. This equates to an external quantum efficiency of 10,000 per cent. Remarkably, this  performance is achieved at a mere 5 V of operational bias, thereby enabling direct integration with  hybrid and digital circuitry. The  image  sensor  technology  roadmap  is  rapidly  approaching  a  fundamental  limit  as  state-  of-the-art pixel dimensions reach 1 µm. At these dimensions, the active photodiode area of each pixel  approach, the wavelength of visible light and signal strength are greatly diminished. SiOnyx’s shallow junction photonics technology is poised to redefine silicon-based imaging. The  SiOnyx  laser  process  dramatically  enhances  the  silicon’s  detector  response,  by  enabling  1 µm of SiOnyx’s black silicon pixels that produce more signals than 36 µm traditional silicon pixels.16 CDWorld.com A  competitive  analysis  was  undertaken  for  the  development  of  CDWorld.com,  a  one-stop  online  shopping destination for music CDs. The analysis focused on three competitors: CDNow.com, CD  Universe  and  World  Café  CDs.  The  presence  of  three  players  in  the  market  indicates  the  market  potential for selling music online. Out of the three players, two competitors have been extending their  offerings beyond music. Both offer movies and other related accessories for sale, and one also offers  console games. This indicates that there exists a possibility for CDWorld.com to extend its product  offerings beyond CDs to other types of entertainment. All three competitors use different labelling and organization schemes for browsing their product  offerings. Further analysis and examination of these schemes will likely prove helpful in determining  the optional organization of content for CDWorld.com. (Continued)

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Strengths of Different Players CDNow (http://www.cdnow. com)

CD Universe (http://www. cduniverse.com)

World Café CDs (http://www. worldcafecds.com)

Thegreateststrengthofthis siteistherichcross-linking betweenproductsandrelated information,madepossible becauseofthedatabase-driven natureoftheWebsiteand (presumably)theuseofgood metadata.

Thegreateststrengthsofthe CDUniverseWebsiteareits consistencyandsimplicity. Theconsistencyisinitslayout, horizontalglobalnavigationbarand right-handnavigationcolumn.The simplicitystemsfromthetabbed approachtothetoplevelofthesite andthecleardivisionofcontent intothreedomains:music,movies andgames.

ThisisasimpleandsmallWeb site,withminimalgraphics,so pagesloadquickly.Thesmall sizeoftheWebsiteprevents usersfromgettinglost.

Certain  content  and  functionality  that  appear  to  be  standard  in  this  industry  and  should  be  included in the CDWorld Web site are selling of accessories and other entertainment media, wish  lists,  scoped  search  and  separate  classical  music  search;  providing  audio  clips  from  albums;  including a recommender system for related purchases; allowing users to review and rate products,  gift  certificates;  offering  an  affiliate  programme;  supporting  online  order-status  tracking;  creating  partnerships or linking with external Web sites. Additional content and functionality that are specific to one of the competitors but which merit further  examination, and possible inclusion in CDWorld.com, include CDWorld-generated news, reviews and  interviews, express checkout, an educational resource related to music, music downloads, message  boards, wireless access and personalization.17

8.10.5  Market Research and Analysis Themainpurposeofmarketresearchandanalysisistoassessthevariouscustomersegmentsthatthe venturewouldserve.Thissectionclearlyincludesthecustomerneedsthatabusinessventureproposes tosatisfy.Itshouldalsojustifythevaluepropositionvis-à-visthepricethatacustomerwillwillingly payfortheproduct/service.Themainpurposeofconductingmarketresearchandanalysisistoprioritizetargetmarketsandgetaclearerpictureaboutcustomersandmarketsegments.Oneneedstodwell onissuessuchasdemographicandpsychographiccharacteristicsofone’stargetcustomers.Whatcanbe thebestmodetoapproachandreachthem?Whataretheirmainconcerns?Whatapproachwouldthey liketoreachthemthemost? Itisimportanttoconsiderthepotentialmarketforone’sproduct/serviceandnottheactualmarket capturedorservedatpresent.Atargetmarketprovidesonewithapictureaboutthescopeofthemarket that can be captured and that one needs to be concerned with as an entrepreneur. For example, the marketofalocalcluborataxioperatorincludesnotonlythecustomerswhoareavailingtheservice restaurantandthepeoplewhoareregularlyavailingtheseservicesbutalsoallthosewhocouldavail theseservices.Similarly,acollegehaving10degreeprogrammeswithacapacityof500students’intake eachyearandthatislookingforimprovingthequalityofstudentintakemayhavetolookatallthose studentswhoareeligibleforsecuringadmissioninthecollege,butwhodonotapplyatpresent,as targetmarket.Similarly,themarketfordownloadablee-booksovertheInternetincludesallthosewho

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haveInternetconnectivity.Themarketforlaptopsincludeshomes,schools,businessesandgovernment organizations. Analysingthemarketfromachronologicalperspectiveisalsodesirable,thushighlightingahistoricalmarketsurveygivingdetailsaboutproductsalesandcompetitors,presentmarketstatus,andtrends andforecastsforthefuturefromagrowthperspective. Marketresearchandanalysisshouldfundamentallyenableonetoanswerquestionssuchas:What isbreak-evensalesandwhenwillitbeachieved?Isthemarketpotentialhighandgoodforsustainablegrowth?Doesonehavesomethingrareanddistincttooffer,sothatonecanderivecompetitive advantage? AssuggestedbyMalcolmMcDonald,thekeyaspectstobecoveredundermarketingresearchand analysisaredescribedinthefollowing(Fig.8.13):  Understanding Marketing Environment—Astudyofmarkets,customers,competitorsandtheoverall economic,political,culturalandtechnicalenvironmentcoveringemergingtrendsandpresentsituations isanalysedindetailtounderstandmarketprospectsfortheproduct/serviceinagivenidentifiedindustry.  Develop a Detailed Marketing Mix—The term ‘marketing mix’ was coined and first used by NeilBordenin1953inhisAmericanMarketingAssociationpresidentialaddress.McCarthy,aprominentmarketer,proposedafour-Pclassificationin1960,whichhasseenwide-rangingapplicationsin themarketingliterature.18ThefourPsconceptofmarketingmixareasfollows: • Product—Atangibleobjectoranintangibleservicewithitskeyingredientsandfeaturesthatare producedtocatertocustomerneeds.Intangiblesconstituteservicessuchashotelsandthetourism industry,teachers,doctorsandlawyers,whereastangiblesconstituteproductssuchascellphones, televisions,cars,furniture,loadandcredits.Itisimportanttorememberthateveryproductissubject toalifecyclecomprisingintroduction,growth,maturityanddeclinephases.Toremaincompetitive, an entrepreneur needs to differentiate their products and keep innovating new products to introducethembeforethedecliningphasefortheexistingproductsbegins. • Price—Entrepreneurialventuresrequireakeydecisionwithregardstothefixationofprice,which depends on a number of factors such as market share, competition, cost of production, product imageandidentityand,aboveall,thecustomer’sperceivedvalueproposition.

Understanding Marketing Environment

Marketing Research and Analysis

Developing a Detailed Marketing Mix

Developing the Marketing System

Information Sources For Marketing Research—Primary and Secondary

Figure 8.13 Aspects of Marketing Research and Analysis

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• Place—Thisfocusesonthelocationatwhichaproductorserviceismadeavailabletobeboughtbythe customer.Itiscalledthe‘distributionchannel’usedbythecompanytoeasetheprocessofbuying.It couldbeaphysicalaswellasavirtualprocesstomaketheproduct/serviceavailabletothecustomer. • Promotion—Thisprocessreferstothecommunicationchannels,toolsandtechniquesusedbythe companyinthemarketplaceformakingaproductknowntothetargetcustomers.Itincludesadvertising,publicrelations,personalsellingandsalespromotion.Anyorganization,beforeintroducing itsproductsorservicesintothemarket,conductsamarketsurvey.ThesequenceofallPs,asjust mentioned,isveryimportantineverystageofproductlifecycle:introduction,growth,maturity anddecline. Subsequently,threemorePshavebeenaddedtothemarketingmix,namely,people,processand packaging. • People—Itisimportanttounderstandwellallthosewhoareinvolvedinproducingandconsuming, suchascustomers,employees,managementand,attimes,eventhecommunity,intermsoftheir relevanceforrelationbuilding.Thisaspectofamarketingmixalsofacilitatestheproperidentificationofmarketsegments,thatis,aclassofpeoplefromdemographic,economic,socialandpsychologicalpointofviewforwhomtheproductorserviceistobemadeavailable. • Process—Theprocedure,mechanismandflowofactivitiesthroughwhichacustomerisreached bythemanufacturer. • Packaging—Thisfocusesonhowaproductisprotectedandpresentedandthemannerinwhicha serviceorproductisdeliveredtothecustomer—thetangibleoneshelptocommunicate,andthe intangibleistheknowledgeofthepeoplearoundus.  Developing the Marketing System—A study of the marketing organizations, marketing research systemsandthecurrentmarketingobjectivesandstrategies.Thelastoftheseistoofrequentlyignored. Themarketingsystemitselfneedstoberegularlyquestioned,becausethevalidityofthewholemarketingplanisreliantontheaccuracyoftheinputfromthissystem,and‘garbagein,garbageout’applies withavengeance.  Information Sources for Market Research—There are two broad categories through which information for market research can be collected, namely, primary sources and secondary sources. Primarydataarecollectedfromtheoriginalsourcesbyfirst-handaccountsservingasbuildingblocks for market research purpose. These are called ‘primary sources’, as they are the first evidence of something happening and are collected directly from the source when the event is happening or immediatelyaftertheeventhashappened.Someoftheexamplesofprimarydatasourcesarediaries, letters,interviews,questionnaires,video/films,newspapersandoutcomeofexperiments.Secondary datasourcesaretheinformationcollectedfromsecondarysources,astheyarecreatedafterprimary sources,andtheyoftenuseortalkaboutprimarysources.Forexample,datacollectedfromthechamberofcommerce,governmentreports,journals,researchpapersandtheInternet.Secondarysources oftenhavemanycopiesthatarefoundinlibraries,schoolsorhomes;forexample,datacollectedfrom textbooks, biographies, published sources and government reports. The broad distinction between primarysourcesandsecondarysourcesisgivennext.

8.10.6  Marketing Plan Investorslookformanagementteamswhopossessaclearunderstandingandknowledgeabouttheir targetmarket.Whilelaunchinganewventure,amarketingplanbasedonmarketingresearchshouldbe developed.Incaseofaventurehavingexistingcustomers,theentrepreneurshouldprovideananalysis ofwhoone’scustomersare,theirpurchasinghabitsandtheirbuyingcycle.Amarketingplanbased on marketing research and analysis describes sales projections and the mechanism to achieve them.

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It attempts to develop concrete estimates for sales and a strategy that will enable the entrepreneur to avail the opportunity in the light of specific competitive advantages. The whole purpose is to convertanestimatedphysicalquantumofsalesandthecorrespondingsalesrevenuethatisexpected tobeachieved.Itisimportanttounderstandthataneffectivemarketingplanmaynotrequirealarge sum of money, but it certainly requires creativity and ingenuity to work out effective strategies that woulddeliverexpectedresults.Anetworkofconnectionshelpsalotintheentrepreneurialjourneyasa wholeand,inparticular,forstart-upventures.Asoundandrobustmarketingplanwouldreflectabetter understandingofcustomerneeds,anditrecognizesthatbusinesssuccessrevolvesaroundsatisfying customersandtheirneeds.Ithelpsindevelopingastrategyforsuccess,purelyfromcustomers’perspectives.Amarketingplanhastoclearlydescribewhatistobedonetoachievesalestargets,thestrategy todothis,whendifferentactivitiesunderthemarketingplanwillberequiredtobeundertakenandwho willdowhat,includingreviewandnecessarycorrectiveactions.Someofthekeyaspectstobecovered inthemarketingplanaregivenasfollows:  Descriptionofone’stargetmarket.  Focusofone’sbusinessinthegiventargetmarketfromthenicheoneproposestocreateforcapitalizingonamarket.  Realisticassessmentofthenichemarketwithabasisforestimation.  Documentstosupportwhyonebelievesthereisaneedforone’sproductorofferinginthismarket.  Percentageofmarketsharethatoneproposestocaptureanditsrationale.  Estimatedgrowthpotentialofthemarket.  Expectedincreaseordecreaseinone’smarketsharewithexpectedgrowthintheoverallmarket.  Thestepsthatarerequiredtobeundertakentoretainorincreaseone’smarketshareintheoverall growthofthemarket.  Mechanismtosetpricesfortheproductsinthegrowingcompetitivemarket.

Amarketingplanhavingotherthanthedetailsjustmentionedshouldalsocovertheentrybarriersin theindustrysuchashighcapitalcosts,highmarketingcosts,brandrecognition,humanresourcecompetence,uniquetechnologyandpatents,tariffbarriersandquotasthatwouldgiveone’sventureaunique advantageagainstcompetitors.

8.10.7  Financial Plan and Funding Needs A financial plan assesses the financial implications of various strategies proposed in other sections toquantifytheflowofprofitandcashvis-à-visinvestmentsrequired.Allotheraspectsgetconverted intofinancialprojectionsintermsofbothfundingrequirementsandincome-generatingcapacityofthe venturetogenerateadequatereturnoninvestments.Abusinessplanshouldbeabletoconvertvarious numbersintothefinancialplanandfundingneedsoftheventureforone’sfirm.Oneofthekeypurposes ofwritingabusinessplanisforinvestorstoraisefunds.Therefore,itnecessarilyrequiresanestimationoffundrequirementsandsourcesfromwherefundsareproposedtoberaised.Thebusinessplan effectivelycommunicatestheproposedroadmaplaidoutbyonetopotentialinvestorsandotherfunding agenciesaboutone’sbusiness. Thebroadsourcesoffundingcouldbeacombinationofthepromoter’sequity,equitycontributions fromotherowners,retainedearningsploughedbackintotheventure,subsidyandgrantsreceivedand different types of loans—short-term as well as long-term loans.Thus, the three broad categories of fundingcouldbedebt,equity,andgrantsandsubsidies(Fig.8.14).Asabusinessgrows,itmaynecessitatetheneedforadditionalfunds.Theventuremaylookforprivateequityfunding,venturecapital funding,IPO,privatelenders,banksandfinancialinstitutions.

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Debt

Equity

Combination of Debt and Equity

Grants and Subsidies

Figure 8.14 Categories of Funding for Ventures Anyinvestorwouldbekeentoknowaboutandunderstandthevariouscomponentsofone’sbusiness plan, namely, the marketing strategies proposed to be used, the operational plans, human resource strategiesandmanagementteam.Aboveall,investorswouldbeinterestedinunderstandingthebottom line,aswouldbeevidentfromthebusinessfinancialplan,asthatwouldbethekeyindicatorofthe health of one’s venture.This requires making realistic assumptions to work out the projected profit andlossaccount,balancesheet,fundflowandcashflow.Anentrepreneurshouldforecastsalesand expensesexpectedatleastwithinthecomingthreeyearsoftheprojectedprofitandlossaccountwith monthlyprojectionsforthefirstyear.Salesforecast,costofgoodssoldandotherfixedexpensessuchas administrative,depreciationandinterestarerequiredtoarriveatprofitbeforetaxes.Netprofitcouldbe arrivedatbyprojectingtaxespayable.Thesecondkeyinformationneedediscashflowprojectionsfor threeyears,withthefirst-yearprojectionsbeingmonthly.Sinceabusinesshastopayitsbillsontime, whichisessentialforitssurvivalandgrowth,oneshouldpreciselyestimatetherequirementsoffundsat differentpointsoftime.Itisimportanttorememberthatone’sproductsorservicesshouldhaveapower overcustomerstogetthepaymenteitherinadvanceoratthetimeofdelivery,sothattheestimationof salesrealizationmaynotposeacriticalproblem.Usually,whenaventuredoesnothaveanextraordinaryedgeinthecompetitivemarketscenario,therealizationofsalesmayrequireprovidingsomecredit termsthatresultinirregularreceiptpatternsfromcustomers,necessitatingborrowingorinductionof fundsbytheentrepreneurtomanagepaymentoffixedexpensesandsalariesontime.Havingprepared aprojectedprofitandlossaccountandcashflow,oneneedstoprepareabalancesheetofthecompany thathighlightsthefinancialpositionofthecompanyatagivenpointoftime.Abalancesheetbasically givestheassetsposition—thatis,whatisownedbythecompany,andliabilities,whatisowedtoothers, includinginvestmentbytheentrepreneurandotherequityholdersandretainedearningsorcumulativelosses.Anykeyassumptionsmadeinthefinancialplanpertainingtoworkingouttheprojected balancesheetshouldbelistedseparatelyforthebenefitofunderstandingbydifferentstakeholdersand, inparticular,forthebenefitofinvestors.

8.10.8  Technology, Manufacturing and Operational Plan Abusinessplanforproductsorservicesshouldnecessarilyincludeanoperationalplanhighlightingkey aspectssuchasproductorservicecharacteristics;production,planningandcontrolaspects;location, equipment,people,processesandsurroundingenvironment.Itisimportanttokeepinmindthefundamental difference between tangible products and intangible services. Thus, in case of services, the featuressuchastaste,touch,feelandhearingmatteralot.Forexample,hotels,lawyer’sservices,car

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rentalsandhospitalsrelyalotonintangiblesforthesuccessoftheirventures.Theprocessofdelivering theservicesbasicallydistinguishesoneventurefromanotherinadomainofsimilarservices. The description of products and services includes features, content, and usefulness of products andservicesfromacustomer’sperspective.Anentrepreneurshoulddescribespecificandimportant featuresandspecialaspectsabouttheproductsandservicesofferedbythemandtheirbenefitstothe customers. Thissectioncoversthemethodsusedforproducingproductsandserviceshighlightingproduction techniques and costs; quality control; customer care and service; inventory control and product development aspects. It should also cover locational aspects of the venture, highlighting specific requirementsthattheventurewouldrequirefromalocationaladvantagepointofviewbygivingdetails ofspacerequired,typeofbuilding,availabilityofpowerandotherutilities.Accessibilityofalocation fromthepointofviewoftransportation,suppliersandcustomershastobeespeciallyexamined.Ifthere areanyspecificrequirementsfromparkingandproximitytofreeways,airports,railroadsandshipping centres,thenthesameshouldgetdulyexaminedandtakencareofwhileselectingallocation.Onehasto takecareoftheaspectsrelatedtodrawingandlayoutoftheproposedfacility.Itisadvisableforstart-ups nottoinvestheavilyinbuildingconstructionandmanagetheinitialphasebytakingbuildingsonrent orlease,unlessanduntilitishighlyessentialfortheventuretoownabuilding.Briefly,thissectionof thebusinessplanshouldfocusonthefollowingkeyaspects:  Isone’sproductorservicealreadyonthemarkethavingcompetitorsorisitstillintheresearchand developmentstage?  Incaseone’sproductorserviceisstillinthedevelopmentstage,whatistheroll-outstrategyortimeframetobringtheproducttothemarket?  Whataretheuniqueaspectsofone’sproductorservice?Whatarethekeycompetitiveadvantagesthat one’sproductorservicehasoveritsrivals?  Isitpossibleforonetopricetheproductorservicecompetitivelyandmaintainahealthyprofitmargin?  Whatmethodsareproposedtomanufacture/produceorprovideservicesforthemarket?  Whattechnologieswillberequiredandwhatisthestatusoftheiradvancement?  Atwhatpacearenewtechnologiesintheareaemergingthatresultinmakingexistingtechnologies obsolete?  Whatproduction,planningandcontrolsystemsdoesoneproposetointroduceandwhataretheproblemsanticipated?  What critical factors are associated with the success of one’s production/manufacturing/servicing operations?  Whatisthecriticalityofdifferentfactorsofproductionandprocesses?  Howdoesoneproposetohandlethesecriticalfactors?

8.10.9  Intellectual Property Start-upventureshavinggreatpotentialinraisingventurecapitalhaveawealthbywayofproprietary intellectualproperty(IP).Assuch,twokeyaspectslookedintobyinvestorsarethemanagementteam andthequalityoftheIPthatcangiverisetoauniqueadvantagetotheventure.Inabusinessplan, togetherwiththedescriptionofthekeyfeaturesofone’sproduct,anentrepreneurshouldspecifically highlight the patents acquired in different countries vis-à-vis market potential in those countries in whichthepatentshavebeenacquired.Abusinessplanshouldfocusitsattentionmoreonthebenefitsof andapplicationsoftheIPratherthantheconfidentialaspectsoftheIP.Itisimportanttorememberthat

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eventhemostinnovativetechnologiesmaynotattractinvestors’attentionunlessanduntiltheyhave tangiblebenefitstoofferthecustomers. ThebusinessplanshouldappropriatelyhighlighttheprocessofintegrationoftheIPwiththeproposed productsandservicesoffered.Itmaybeadvisableattimestoincludenon-confidentialdrawingsand backupmaterialsoftheproductsandservicesintheAppendix. InvestorscanbelieveintheworthofanIPwhilereviewingthebusinessplanincaseanentrepreneur isabletoconvincetheprospectiveinvestorabouthowtheIPisintegratedintoaproduct/servicethat yields real customer benefits in a large market. It is at this stage that an entrepreneur may discuss thematterregardingthesigningofanon-disclosureagreementwiththeinvestor.Whilehighlighting the importance of IP, an entrepreneur should do a good search through country-specific patent and trademarkofficeWebsites,leadingcompanieshavingIPstrengthsinthealliedareasandtheWorld IntellectualPropertyOrganization(WIPO)toensuretherelativeadvantagesthatone’sIPhasoverthe existingIPsinthearea.Someofthekeyaspectstobehighlightedinthebusiness-plan-relatedIPmatters arethesignificanceofIPownedinthesuccessofventurescoveringthefollowingpoints:  Theextentofcurrentuseofone’sIPassetsandthepotentialbenefitsthatcanbederived.  TypeofIPassetsandtheirrelevancetoone’sventure.  Doesone’sventuregreatlydependforitscommercialsuccessonIPassets?Ifyes,thenistheIPowned orlicensed?  WhileusingIP,doesonealsohavenewproductsorprocessesthatwillprovideauniquecompetitive advantageinthemarket?Arethesegoingtogiveaturningpointtotheindustry?Howlongdoesittake toderivesuchanadvantagefromIP?  Whatarethekeycompetitiveadvantagesthatone’sIPassetswouldprovidetoone’sventure?  ExplainhowIPaddsvaluetoone’scustomersandcontributestodevelopingasustainablecompetitive edge.  Mentionaboutaplan,ifany,thatonehasforgatheringcompetitiveintelligence.  DoesonegatherIPinformation/databasesforobtainingcompetitiveintelligenceonone’scompetitors?  ArethereanyIP-relatedbarrierstoenteringone’scompetitor’smarket;ifso,clearlyidentifythoseand workoutone’sstrategiestoattractcustomersfromcompetitors.  DoesIPhelponeinprotectingthoseaspectsofone’sbusinessthatdetermineone’sbusinesssuccess?

8.10.10  Legal Considerations and Insurance Requirements Abusinessplanshouldvisualizeandclearlyunderstandtheimplicationsofvariouslegalrequirements andcompliancethereofforthesmoothrunningofthebusiness.Otherwise,atalaterdate,anentrepreneur maywastetheirproductivetimeindealingwiththelegalhasslescreatedbecauseofunawareness,thereby resultinginnon-complianceoflegalprovisionsapplicabletothebusiness.Asanentrepreneur,oneshould beawareofone’slegalresponsibilitiesandplanfortakingnecessarystepstoensurethatoneisalwayson therightsideofthelawand,assuch,bydoingthingsbeyondlegalcompliancetosetanexample. Thefirstandforemostaspectistheformationofacompanythatgivesalegalentitytothebusiness. Thelegalstructurethatanentrepreneurchooseswillhavesignificantlong-termimplicationsforthe runningandgrowthofthebusiness.Anentrepreneurshouldalsobeclearaboutwhetherthebusiness oneproposestoenterintorequiresanygovernmentlicenseorapproval;ifso,aplanofactionforthe sameshouldbeindicatedinthebusinessplan.Anentrepreneurassumesarangeofimportanthealth-and safety-relatedresponsibilitiesthatrequireduecomplianceoftherelatedprovisionsoflaw.Anyimplicationsoftaxstructuretobecompliedwithhavetobedulytakencareofwhileplanning,asthesearean importantconsiderationswhendoingbusinessanywhere.Potentialinvestorsshouldconsiderincome tax,capitalgainstaxandgoodsandservices/transactiontaxesintheregionandindustryofoperations.

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Abusinessplanshouldalsoenvisagetheimplicationsofemployment,propertyacquisition,environmental,foreigninvestmentandindustry-specificlawstothebusiness,andplanfortakingnecessary stepsattheappropriatetimesothatimplementationoftheplangetssmoothened. Abusinessplanshouldalsotakecareofnecessaryinsurancesrequiredsuchasemployers’liability insurance,publicliability,andprofessionalindemnityandinsurancetoprotectthefixedassetsofthe company.Publicliabilityandprofessionalindemnitymaynotbealegalrequirementbuthelpinprotectingthebusinessfromcompensationclaims,especiallyifsomethinggoeswrong.

8.10.11  Management Team and Organizational Structure Amanagementteamwithcomplimentaryskills,competencyandknowledgeisthemostcrucialaspect of a business plan that investors look for more minutely.The management team makes or breaks a business.Thesuccessofimplantationofabusinessplandependsonthemanagementteamwithaclear demarcationofrolesandresponsibilities,andthesameclearunderstandingabouttheinterdependency intherolesandresponsibilities. The Management Team section should include the profiles of promoters, biographies of the company’sadvisoryboardand/orboardofdirectors,andkeyexecutiveswhomattermostintheimplementationofaplan.Thepresenceofwell-knownadvisors/boardmembersaddsalotofcredibilityto thebusinessplan.Itisimportanttodescribehowthepresenceoftheseadvisorswilldirectlyimpact the company through strategic advice and/or providing networking with key clients, partners and suppliers. Inshort,thissectionhelpsinestablishingandgeneratingconfidenceininvestorsabouttheavailabilityofnecessarytalenttosucceed.Thissectionshouldbeusedtoexplainpreciselyhowtheteamis uniquelyqualifiedandexperiencedtoeffectivelyexecutetheventureinitspresentstate.Thedetailsof someoftheprominentmembersofthemanagementteamcanbeplacedintheAppendix. Thesectionshouldcoverthedetailsoftheteaminsuchamannerthatitreinforcesalotofconfidence inthemindsofinvestorsthatthemanagementteamknowsitsmarket,productsandhastheabilityto successfullyimplementtheproposedplan.Inshort,thebusinessplanshouldbeabletocommunicate themanagement’scapabilitiessynchronizedwiththeobjectiveslaiddownintheplanforthebusiness. Incasetherearedeficienciesinone’steam,particularlyinacriticalarea,theentrepreneurshouldclearly highlightthestrategytofillupthevoidsattheappropriatetime. Thekeyaspectsofthemanagementteamthatneedtobefocusedoninthebusinessaregivenas follows:  Briefaboutpromoters,boardmembers,advisorsandkeyexecutiveswhilegivingsalientaspectsof theirresumevis-à-visrolesandresponsibilities,hierarchyanddecision-makingprocessandprojected hiring.  Organizationalstructurehighlightingthehierarchy,staffandlinefunctions,keyrolesandpeople.  Management team section should go over skill sets and track records of people. This section also presents details about key employees, pointing out qualifications, experience or outstanding skills; availablecompetencies,knowledgeandaskillsetthatwilladdacompetitiveedgetotheimageofthe business.Amentionisalsotobemadeaboutspecialknowledgeofbudgetcontrol,personnelmanagement,publicrelationsandstrategicplanning.  Inthepersonnelplan,one’spersonnelstructureandlong-termplansforstaffandtheirfinancialimplicationsaredescribed.

Thus,anorganizationalplandescribestheformofownershipaswellasanorganizationalchart,indicatinglineofauthorityandresponsibilitiesofmembersoftheorganization,andthepromoterteamdetails

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astowhowouldbetakingarisktobackuptheprojectinreality.Inshort,abusinessplanshouldprove whyaparticularteamisanoutstandingonebydulyhighlightingthecomplimentarycompetencies,past trackrecordsandspecificskillspossessedthatareessentialforthesuccessofthebusinessplan,and achievementsintermsofwinningcontests.Itisimportanttohighlightwhethertheteamhadworked together earlier and the achievements it had in record sales, introduction of new products and any majorbreakthroughs,ifany.Ateammembershouldbedescribed‘generically’byhighlightingtheirpast credentials.Forexample,‘MrX…hasbeenemployedbyamajorsemiconductormanufacturerforthe past6years….HeispresentlyservingasPresident,Innovation,Research&Development,withateam of500professionalsreportingtohim.Hisgrouphascontributed100patentsonanaverageforeverysix monthsresultinginintroductionofinnovationsthatarebeingcontinuouslygettingcommercializedby thecompanyforthepastfiveyearsresultinginmakingthemaleaderinthesemiconductorindustry.’

8.10.12  Risks, Problems and Assumptions Thedevelopmentofabusinessisassociatedwithinherentrisks.Everyplaninvariablycontainssome implicitassumptionsaboutvariousissuessuchassales,cost,raisingmoney,hiringpeople,developing productsandatimeframeforthesame.Anentrepreneurshouldidentifythevariousassociatedrisksin thebusinessandtheimplicationsandassociatedcostofadverseoutcomesrelatingtoone’sindustry, one’scompanyanditspeople,aproduct’smarketappeal,andthetimingandfinancingofone’sstart-up. Itisimportanttoclearlydefinethecriticalassumptionsconcerningsalesprojections,customerorders, thecostofrawmaterials,thecostofraisingfundsandsoforth.Abusinessplanshouldcomprehend risksandthestrategiestomanageorcombatthoserisks.Incaseaninvestoridentifiessomecritical riskfactorsthatdonotdulygettakencareofbyanentrepreneur,thismayjeopardizethechancesof raisingfunds.ItshouldberememberedthataftergoingthroughtheExecutiveSummary,observingthe managementteamandproduct/servicecharacteristics,everyinvestorlooksattheriskfactorstodecide abouttheirassociationwiththeventureorotherwise. Major risks for a start-up venture may emanate from the competitor’s responses and reactions, adversevariationsinsalesresultingfrommarketresponse,production-relatedhasslesmoresointerms ofefficiencyandquality,implicationsofnewtechnologiesintheindustryandlackofunderstanding andclarityamongthemanagementteamthatmayresultinmakinganewproductorservicenotacceptabletothemarket.Therefore,variousriskfactorsneedtobeproperlyanalysed,andpossiblecourseof actionstomanagethemshouldbewellcomprehendedinthebusinessplan. IthasbeenrightlyhighlightedbyJohnMullinsthat‘themostcommontypeofbusinessplan,and theonethatgoesmostquicklyintothetrash,istheoneinwhichthewritercan’tfindanythingbutgood thingstosayabouttheopportunityandplanstopursueit’. Experienced entrepreneurs know better than to assert that everything is wonderful about their opportunity.Theyknowtherearepotentialpitfallsintheirmarketorindustry.Thefactsarethatmost opportunitiesarehighlyuncertain.Mostnewventureswillfail.Ofthefewthatdosucceed—winning capital,customersandpositivecashflow—it’susuallynotbecauseoftheoriginalplan,‘PlanA’,about whichthebusinessplaniswritten,butbecauseofanas-yet-unknown‘PlanB’.19

8.10.13  Launching a Business and Measuring Plan Progress Havingplannedvariousaspectsofthebusinesstoensureitssuccess,therealtestliesinconceiving strategiestolaunchabusinesssystematicallywithoutanytoleranceforinefficiencyorineffectiveness. Ithasbeensaidthatthefirstfortnightandfirst100daysofbusinessunfoldmentshouldbeundertaken

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verycarefullywithmeticulousplanning.Allthosemilestonesthathavetouchedthebusinessatdifferent pointsoftimeshouldbeclearlyhighlighted,andthemechanismtoachievethesameshouldbeidentified. Usually,agoodplanhavingpitfallsinlaunchingcanyieldtofailure. Launchingabusinessrequiresastrongmanagementteamcoupledwithadequatecapitalinflowatthe appropriatetime.Poormanagementhasbeenamajorcauseofbusinessfailuresand,therefore,should fetchagooddealofattentionindevelopingateamthatcansuccessfullylaunchthebusiness.Theteam hastobesolutionfocusedandhastohandleallchallengesonthewayveryeffectively.Asystemneeds tobedevisedandplacedforchecksandbalancestoregularlystudy,organize,planandcontrolallthe activitiesofitsoperations.Thisincludesthecontinuingstudyofmarketresearchandcustomerdata,an areathatismostsensitiveforthesuccessofthebusiness. An entrepreneur should chalk out various steps in sequence, highlighting the importance to be undertakenforsmoothunfoldmentofbusiness.Anentrepreneurshouldclearlyhighlightthepoints atwhichcertainvitaldecisionshavetobetakensoastoensuretheprogressiontowardsgoalsand objectivesismovingasscheduledfromtimeandresourcespointofview.Theentrepreneurneedsto developamanagementinformationsystemformonitoringandcontrolthatisusedonadaily,weekly, fortnightly,monthly,quarterly,halfyearlyandyearlytimespan.Theyshouldidentifytheitemsfrom biglistssuchasprofitandlossstatements,cashflows,inventorymanagement,production,quality, sales,receivables,payables,urgencyofpaymentandmanpowertobemonitoredvis-à-visprojections/ budget.Theyshouldenablekeyteammemberstogetfeedbackontime,soastoenablethemtotake corrective steps. The whole purpose to monitor the progress in implementation is to continuously updatetheplanonvitalassumptionsandmeasuretheimplicationsthereof.Itisimportanttoremember that an excellent business plan can become out of date with a crucial change in the conditions that were not visualized.The changes in a plan are inevitable on account of external factors, such as economic, market and technological developments, competition, political changes, and internal factors,suchaskeyemployeeturnoveranddissentionamongpromoters.Therefore,venturesneedto besensitivetoindustry,companyandmarketchangesthatmayexertamajorimpactonthebusiness planassumptions.

8.10.14  Growth and Exit Strategy Many start-up ventures get lost in the growth phase of the venture when opportunities are before themandtheylacktherequiredpreparationtoavailthem.Therefore,abusinessplanneedstovisualize the growth prospects of the existing venture or how new introductions through innovations wouldbecontinuouslymadeonagrowthpath.Theventureteamshouldhaveaclearvisionabout thescalabilityoftheventureandtheemergingchallengesthatthegrowthwouldpose,soastoplan inadvancethestrategiesforgrowth.Theimminentchallengethatthegrowthphaseposesisdecentralization,gettingtherighttrustworthypeople,focusingonsystems,proceduresandprocessesas againstpeople. Thelastportionoftheplanhastoexplicitlystatetheexitstrategyofone’sbusiness.Goodbusiness plans have inbuilt provisions for exiting from the existing business for personal, financial or opportunistic reasons. The most successful business plans develop contingency plans for multiple situations and enable promoters and investors to realize returns along with allowing the business to growandexpand. Although at times it looks awkward to think of an exit, investors and, at times, entrepreneurs themselveswouldliketoexitattherighttimebyeithersubstantiallygainingintheprocessorlosing bareminimum.Thisrequireslong-termplanningwithaclearideaabouttheexpectedvaluationofone’s

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businessasitgrowsinfuture.Theentrepreneurshouldbeveryclearabouttheexitplan,asithasadirect bearingonthewaythebusinessisrun. Forexample,iftheentrepreneurhasdecidedtogetlistedonstockexchangeswithinsayfivetoseven yearsofstartingthebusiness,theywillhavetonecessarilythinkofintroducingstandardaccounting practicesacceptedinternationallyfromdayoneonwards.Similarly,iftheentrepreneurisclearthatthey wouldliketopassoverthebusinesstothenextgenerationattheearliest,theywillberequiredtoinduct theirchildrenandtrainthemwellsufficientlyinadvancetohaveasmoothtransition.Theentrepreneur maydecideinadvancetohandoverthebusinesstoprofessionalsataparticularstageofgrowthwhen theywouldliketoconcentratetheirenergiesonnewbusinesses.Thiswouldrequirethemtoidentifythe rightprofessionalswhocanbefullyreliedupon. Ifoneplanstopassonthebusinesstoone’schildren,onewillneedtostarttrainingthematacertain point. Attimes,inthelongrun,theentrepreneurwouldliketoexitbysellingtheirshareholding,inducting investorsanddilutingtheirstakeinthebusinessorthroughliquidation.Ontheotherhand,theentrepreneurmayplantheirexitstrategybygoingtothepublic,mergerswithexistingstrongplayersorby sellingoutrightly.

8.10.15  Appendices Thedetailstosupportandreinforcethecredibilityoftheassumptionsmadeinthebusinessplanare incorporatedintheappendix,whichisthelaststringinthewholeplan.Itcontainscertainconfidential information that could be useful to stakeholders to strengthen their confidence in the business plan. Someofthevitalinformationthatisincorporatedintheappendixistheresumeofkeymanagers;design andpicturesofproducts;professionalreferencestobuildcredibility;marketresearchstudydatasources and outcomes; patents; significant contracts—lease, sales, purchase partnership deed and insurance; productliability;director’sliability;generalliability;financialprojectionsandassumptions;operation scheduleandorganizationalcharts. Thekeypurposeofitemsandinformationgivenintheappendixistoenhancethecredibilityofthe businessplanintheeyesofdifferentstakeholdersand,inparticular,investors. In short, a business plan should be able to highlight the key strengths such as ‘urgency’ to avail anopportunitythatmaynotrecurorremainafterawhile;clearlyshowentrepreneurialstrengthand masteryoverthesubject;buildonlogic,rationale,factsandfiguresand,aboveall,showaclearunderstandingoftherealenvironment—existingandfuture.

8.11  WHAT IS MOST IMPORTANT IN A PLAN? Assuch,themostcrucialandimportantaspectsofabusinessplandependonthenatureofthebusiness opportunity,butusually,itistheopportunityteam,cashanalysisandspecificimplementationdetails.  Cashflowistheheartofabusinessplanthatisvitalfortheexistence,sustenanceandgrowthofthe business.Itisveryhardtobefollowedinreality,asitdependsontheproductandcustomers’willingnesstopayfortheproductupfront,inadvanceoratthestipulatedtimedependingonthecredit period. Cash is at times misunderstood as profits. Both cash and profits are two different things. Itisnecessaryforabusinesstomakeprofit,butearningprofitwithoutensuringthatthebusiness generatessufficientcashatthetimewhenitisneededwillnotensuresuccess.Sinceprofitsdonot

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guarantee cash in the bank, lots of profitable companies go down the drain because of cash flow problems.  Implementationacumendetailsofthemanagementteamarewhatmakethingshappen.One’sbrilliant strategies and beautifully formatted planning documents are just paper exercise unless one assigns responsibilities,withdatesandbudgets,andfollowuptothosewhomresponsibilitiesaregiventoand trackresults.Businessplansarereallyaboutgettingresultsasenvisagedandimprovingone’sventure onacontinuousbasis.

8.12  PITCHING A BUSINESS PLAN Preparing a business plan is a great art and science to develop a clear path for the unfoldment of a business.However,itisnotenoughtoprepareagoodplan;whatmattersmostishavingclarityabout thewholeplanandhowbestthepromoterteamcanpresentittovariousstakeholdersand,inparticular, toinvestorsforraisingrequiredfunds.Pitchingaplaneffectivelyimpliesthattheplanauthorsandthe managementteamshouldbeoneandthesame,evenifsomeorallaspectsoftranslatingthevisionofan entrepreneurintowritinghasbeen‘outsourced’.Notonlyisthecontentofthebusinessplanthoroughly examinedbythevariousstakeholders,includinginvestors,butthecapabilitiesofthemanagementteam are also assessed based on their ability to deliver a presentation in a clear, concise and convincing manner.Investorstakeadecisiontocommittheirfundsonthebasisofthecapabilityofthemanagement toexecuteandimplementthebusiness.Theirmainconcernisnotthedocumentbutanideaandtheteam thatproposestodelivertheidea.Therearedifferenttimeslotsforpitchinganideathathavetheirown relevance,suchaspitchingin      

10secondsfocusesongutfeelabouttheopportunity. 100secondsiscalled‘elevatorpitch’. 10minutesfocusesongistofthepresentation. 20to25minutesdealswithconcisepresentation. 45minutesdepictsfullpresentation. 90minutespresentsawholestorywithdetailedquestionsandanswers.

Elevator pitchistheshortestpossibletimeinwhichoneneedstocatchtheattentionofinvestors forgeneratingfurtherinterestinfindingoutmoredetails.Elevatorpitchisa60-secondprocessthatis aprettyshortpieceofinformationwhichpeopleexpecttocontainsomesignificantfoundations,soas tocapturetheimaginationoflistenersandmakethemattractedtothebusinessproposition.Anentrepreneurshouldbeabletoexpresstheirbusinessproposition,whyitwouldsucceedinthemarketand whatfundsupporttheyarelookingforfrominvestors.Onehastohaveaclearstrategytoexpressone’s thoughtswithoutjumblingthemandusingpowerfulwordsandpictures;itmaybeproposedtouseafew slidesalongwiththeexpressionofthoughts. ‘Elevatorpitch’meansquickandcleardescriptionofabusinessthatonecoulddointhetimethat onegetstoshareone’sthoughtswithastrangerinanelevator.Thistermisbecomingmoreandmore popularamongentrepreneurs,venturecapitalistsandtheteachingofentrepreneurship.Greatskillneeds tobeinculcatedbyanentrepreneur.Thewholeessenceliesinbeingclear,precise,simple,focusedand powerful,soastogeteasilybondedwithprospectiveinvestors.Itisalsosaidtobetheprecisecondensationattheheartofthebusinessplan. Oneshouldstartone’sexperienceintheelevatorwithabusinesssituationandbynarratingastory or incident; for example, personalize one’s presentation by clearly identifying with the audience.

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Forexample,abusinessplanonbiomassenergymayhighlighttheincreasingpressureandconstraint ontheexistingnon-renewablesourcesofenergythatwouldposeagreatthreattohumanexistenceand development,ifnothandledtimelybythegenerationofenergythroughalternatesourcesofenergy, moresorenewable. Inthenextpartofyourelevatorpitchhighlightwiththestrengthofyoursolutiontotheproblem of energy crisis, Why one? Why one’s business? What is special about one that makes my offering or solution interesting to solve the problem for the identified target market?At this stage, the entrepreneur needs to bring into the picture the background, core competence and track record of hismanagementteam.Forexample,X,acertainco-founder,inventedthebestpossiblesolutiontoa problemthathasbeenprovedwellintermsoftechnicalandcommercialviabilityasevidentfromthe patentsinfavourofthepromotersandrecognitiongotfrombusinessplancompetitionsorganizedby leadingorganizationssuchasFounderXbeingoneofthemostrenownedexpertsinthefieldhaving international acclaims from leading energy organizations. Financial expertise lies withY, who is a co-founderhavingexperienceinraisingfundsandmanagingfundusesfor15yearswithleadingorganizationssuchas….Onefocusesonthecompetenceoftheteamandthekeydifferentiatingfactorsthat willresultinthesuccessoftheventure.Further,oneshouldbrieflycoverthemoneyrequirementand purposetherefor,valuationoftheventurerightnow,expectedreturnsandexitstrategy.Oneshould bepreparedwiththehelpoffactsandfigurestologicallyanswerthequestionsthatwouldemanate

Be Clear About Your Audience Practise the Presentation

Tell a Story or Incident

Presenting Business Plan

Make Realistic Assumptions and Be Clear About Numbers

Use PowerPoint Judiciously

Be Positive, Optimistic and Winning Attitude

Be Clear About Details and Basis of Assumptions

Figure 8.15 Key Tips to Effectively Present a Business Plan

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fromapresentation.Whatshouldberememberedisthatthefactshavetobepresentedwithapower ofwordsthatcatchesfireinthemindsofinvestorstogetfurtherinterestedintheopportunityandthat hastobedonequickly. Ifanentrepreneurisabletoconvincetheirstakeholdersthroughanelevatorpitch,theygetachance topresenttheirideain15to20minutestime.Whilepresentingadetailedplan,oneshouldremember thefollowingkeytips(Fig.8.15):20  Be Clear About Who Your Audience Are—Knowingandengagingwithaudiencesatapersonallevel bydevelopingarapportisagreatart.Internetresourcescanbeoptimallyandwiselyusedtoresearch moreeffectivelyasalsotodevelopapresentationtargetedtoaspecificaudience.Keepinginviewthe investors’motivesandunderstandingtheirbackgroundareimportanttodevelopaneffectivepresentation.Pitchisusedforvariousaudiencessuchas: • investors • keyhires/co-founders • creditors/suppliers • possiblepartnercompanies • initialcustomers

Theemphasisandstyleofpitchinghastogetadaptedtothetargetaudience.Eachaudiencehasdifferent expectationsastowhatisstoredfortheminthebusinessplan.Therefore,theywouldbekeentolook fortheirinterest.  Tell a Story or Incident—Placinganinvestmentopportunityincontexttoastoryorincidentisvery helpfulinreinforcingtheimportanceofasolutiontotheproblem.Incaseaninvestorisabletorelate wellwiththeproblemandproposedsolution,thenthechancesoftheirassociationbywayofinvestmentbecomehigh.Anentrepreneurshouldbeabletohighlightthemagnitudeofthemarketpotential andtheassociatedprofitsthatcouldbegeneratedbytimelyavailingofopportunity.  Be Positive, Optimistic and Possess a Winning Attitude While Preparing—Pitchingtoaninvestor isanoutcomeofhardworkputinforweeks,monthsand,attimes,yearsofplanning.Mostly,forinvestors,itistheapproachofanentrepreneurthatfocusesontheirwinningattitudeandoptimismcoupled withgreatclarityabouttheexecutionofbusiness,asreflectedthroughthepresentationofanexecutive summarythatresultsininvestorsgoingthroughthefullbusinessplan. However, one should not exaggerate things to unnecessarily attract attention. For example, it is wrongtosaythat‘marketiscatchingawildfireandisboundtogrowmultifold’.However,itmaybe righttosaythat‘mostanalystsagreewiththemarketresearchoutcomesvis-à-visavailablestudiesthat themarketwillgrowatanaverage40percentperannumforthenextfiveyears’. Whilepresentingateam,itisnotrighttosay,‘NowIwouldliketointroduceourexcellentChief ExecutiveOfficer(CEO)who’sgoingtorockyourworld.’However,itwouldbeappropriatetosay, ‘We’rereallyexcitedandfortunatetohaveaCEOwhowasaFulbrightScholar,andhasjustsoldhis lastcompanyfor$10billion.’  Be Clear About Details and Basis of Assumptions Made—Investors would like to see a clear reinforcementbetweenthepresentationandtheplan.Therefore,investorswouldposedirectquestions toensurethattheentrepreneurhasdetailswiththemanddoesnotlendthemselvesintocontradictions. Withoutfumblinginanymannerwhatsoever,theentrepreneurshouldbeabletosupporttheirassumptionsmadewithfactsandfiguresduringthepresentation. Oneshouldnotmakeanyunsubstantiatedclaimsinone’spresentation.Forexample,‘ourdrugwill getUSFADAapprovalsoon’iswrong;whereasifthepresenterissure,thentheyshouldsay,‘we’re wellinadvancestageofgettingUSFADAapproval,assuchourteamofscientistshavelast30years experienceingettingdrugsapproved,’whichsoundswell.

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 Use PowerPoint Judiciously—Although a powerpoint presentation provides lot of aesthetics and easetodevelopaneffectivepresentation,oneshouldbeverycarefulnottooverdependonitandatthe sametimeuseitjudiciously.Thenumberofslidesshouldbekepttothebareminimum,say15to20 forahalf-an-hourpresentationwithverylittlecontentoneachslide.Thecontentshouldberigorously analysedtoensurethatrelevance,clarityandtimearemanagedcarefully.  Make Realistic Assumptions and Be Clear About Numbers—Investorsminutelyanalyseandwould liketounderstandnumbers,production,marketpotential,fundsrequiredandreturnoninvestment. Therefore,allfactsshouldbeaccurateandrealistic.Anentrepreneurpresentingtheplanshouldbe wellpreparedtorespondtothequestionsrelatedtofinancialprojections.Demandprojectionsmade foraproduct/serviceshouldbejustifiablewithfactsandfigures.Itisimportanttorealizethatinvestorshavealternatechoicestoinvesttheirfunds;therefore,anentrepreneurneedstoselltheirbusiness planeffectivelyandprovesuperiorityoverotheroptionsthatinvestorsmayhavebeensimultaneously evaluating.  Practise the Presentation—Overconfidenceinhavingpreparedandunderstoodwelldoesnotserve thepurpose.Itissimilartoagoodteacherwhoperformswellinclassevenwhentheyareteaching thesamecourseforthenthtimeandisrequiredtodevoteequal(saytwotothreehours)timeoreven moretoreallydeliverandgenerateinterestinthestudentsaboutthesubjectmatter.Previouspreparationbywayofmockpresentationsorinsidetheteamhelpsalot.Itmaybedesirabletosubmitanentry inaleadingbusinessplancompetitionthatalsoprovidesagoodopportunitytopresenttheplan.An entrepreneurshouldseekfeedbackandreviewtheirearlierpresentationstoimproveonacontinuous basis.Acreditablebusinessplanandskillstopersuasivelypresentitgoalongwayinsecuringfunding.

Inshort,pitchingandpresentinghasaspecificpurposeofsellingtheideatotheinvestorsandother stakeholders.Theultimatepurposeistoconvinceinvestorsandgettheirfavourableresponse.Further, ifonesucceedsingettingtheirconsentforinvestment,thentheentrepreneurshouldhaveafullunderstandingaboutthetermsofferedvis-à-visotheroptionsavailableandtheknackofnegotiatingtheterms wellforthegoodofthebusiness. Keeping in view the aspects just referred to, an executive pitch deck lasting for around 20 to 25minutesshouldfocusonthefollowingaspectsinapresentationof15to20slides:  Shouldclearlyarticulatevisionandcreateexcitement  Shouldhavethreesections • Firsttwoorthreeslides:executivesummaryhighlightingpainpoint,uniquesolutiontothepain pointandsizeoftheopportunity • Approximately10moreslides:detailsandfurtherdiscussion • Appendix:supportingresearchandassumptionsmade  Bepreparedtojumparound,changeorder  Highlightteamconstitution  Includeaslideon: • Technology,market,businessmodel,finance,marketing,competition,tactical/strategicmilestones withtimelineandrisks

8.12.1  Dos and Don’ts for Pitching DosandDon’tswhilepitchingone’sbusinessplanbeforedifferentstakeholdersaregiveninthenext fewpoints:  Involveallpeoplefromtheteaminthepresentationbyassigningappropriateroles.Beclearabout one’saudiencesandwhattheyarelookingatinone’splan.

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 Keep a hard copy of one’s presentation, but do not hand it over beforehand or send it in advance. Ifrequired,whilepresenting,onecanpartwithahardcopywiththeaudience.  Bepreparedtofaceaudio-visualproblems.Keepanalternatecourseofactionreadyratherthangetting panickyaboutwhytechnologyisnotworking.  Rehearseanumberoftimesbyusingthecomputerthatoneislikelytouseduringone’spresentation.  Itisnotatalladvisabletoreadfromtheslides,soensurethatthereisminimaltextonthem.Multi-media presentationscanbeused,providedtheyreallyaddvaluetotheoverallpresentation.  Numberthepagesintheplanaswellasthehardcopyofthepresentation.  Usetheexecutivesummaryratherthanloadingthepresentationwithbigtables.  Makethegraphicscrispandreflective.  Nevereverhaveoverconfidence.Rehearsewithfriendsanumberoftimesbeforeone’sfinalpresentation.  Bealertandawareofthecontentonthescreenwhilerespondingtoquestionsandanswers.  Evenifoneisattheendofthepresentation,stillitisagreatchallengetoenthuseaudiences.Show completeinvolvementandcommitmenttoone’splanwhilepresenting.  Carefullyusehumour,ifitcanaddvaluetothewholepresentation.Usehumourortrytocutthrough theinvisiblewall,butbecareful,anddonotsoundsimilartoaused-carsalesman.

8.13  REASONS FOR FAILURE OF BUSINESS PLANS Thefailureofabusinesshasalottodowithpoorlyresearchedandpreparedbusinessplans.Further,a lackofclarityaboutimplementationdetailsandtheteamrequiredforthesamecancauseabigsetback eveniftheopportunityisgoodtobetapped.Someofthecommonlyidentifiedreasonsforthefailureof businessplansaregivenasfollows:  Lack of Well-defined Vision—Aleader’svisionisascriptedunderstandingofwhatacompanywants todoandhowtheywanttoaccomplishit.Thisprovidesacommonpurposetoallmembersofthe organizationtoworkforandfocustheirenergiesonasingulargoal.Therefore,ill-conceivedvisionor nothavingavisionbecomesacauseforthefailureofbusinesses,aspeopleworkforcrosspurposes, intheabsenceofasingulardirection.  Unreasonable and Unpractical Goals—Being over-enthusiastic to set unreasonable targets not backedupbyproperresourcesandmarketanalysiscancausethefailureofabusiness.Itisimportantforstart-upventurestobereasonableandgetatasteofsuccessgraduallywithsmallstepstobe climbedinthebeginningtogainexperienceasalsoensurethatassumptionsmadearemoreorless workingouttobecorrect.  Lack of Quantification of Goals and Objectives—It is very important to quantify objectives in termsofsales,profits,costs,physicalresourcesrequiredintermsofnumberofemployeesatdifferent tiersandrawmaterials.Eventheintangiblesshouldbequantifiedbyusingcertaintechniquesandby developingappropriateindicators.Forexample,customersatisfactioncanbemeasuredthroughthe numberofcomplaints,amountandtimespentinhandlingcomplaintsinrelationtothetotalnumberof customerswhohavebeenusingcompanyproducts/services.  Starting a Business for the Wrong Reasons—At times, plunging into an entrepreneurial journey withthewrongreasonssuchasmakingalotofmoney,gettingalotoftimetospendwiththefamily andnotbeingaccountableoranswerabletoanybodyresultsinabusinessfailure.Onehastobevery clearinone’smindaboutthereasonandrationalebehindtakingupthebusinessanditsimplications fromtheprofessionalandpersonallifepointofview.  Poor Management and Lack of Commitment—If leadership does not have the aggressive and ‘drivenambition’tosucceeditcankillthebusinesssoon.Itisimportanttohavecrazyandenergetic leaderswhowillteartheworldaparttogetthesupport,resourcesandtechnologyneeded.Manystudies

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havecitedpoormanagementasthenumberonereasonforthefailureofbusinesses.Especiallystart-up teamsfrequentlylackrelevantbusinessandmanagementexpertiseinsomeofthevitalareassuchas finance, purchasing, selling, production, and hiring and managing employees. Further, not getting completelyinvolvedandcommittedtothebusinesscouldalsoresultinitsdownfall.Appropriatecare shouldbetakentoregularlystudyandanalyse,organize,planandcontrolvariousactivitiesofoperationsintheorderoftheirpriority.  Inadequate Capital—Acommonmistakethatkillsmanybusinessesishavinginsufficientoperating funds.Businessownersusuallyunderestimatetheirmoneyrequirementsandareforcedtoclosedown beforetheyhaveevenhadafairchancetosucceed.Remember,usuallyinthemidstofanentrepreneurialjourneywhenoneisbadlyinneedoffundsupport,onewillnotgetit.Oneshouldalsonothave antheunrealisticexpectationofincomingrevenuesfromsalesandfindthemselvesintroubletomeet commitmentsbecauseofnon-receiptordelayedreceiptofsalesrevenuefromcustomers.

Therefore,itisveryimportanttoestimatewithagreaterdegreeofcertaintytherequirementof fundsforthebusinessatdifferentpointsoftimetowardsthecostofstartingandrunningabusinessaswellasthecostsofstayinginthebusiness.Itisimportanttotakeintoconsiderationthat manybusinessestakealongerperiodoftimetoreachabreakevenlevel,therebyimplyingthe needforenoughfundstocoverallcostsuntilsalescaneventuallypayforallcostsofproduction andgenerateprofits.  Lack of Relevant Experience and Knowledge of the Business—Attimes,lackofrelevantknowledge ofthebusinessmarketandrelevantexperienceposesagreatthreatforthesurvivalofthebusiness, unlessthesegapsgetprofessionallyfilledupbyinductionofappropriatepersonnel.Itisnecessarythat thecoreteamofmanagementdoesthoroughhomeworktogainadeepunderstandingaboutthefactors thatareessentialforthesuccessofabusiness.Lackofproperunderstandingandperspectiveaboutthe businesscanleadtofailureofthebusiness.  Government Regulatory Measures—Theownerofabusinessshouldhaveagoodgraspoverthe rulesandregulationsgoverningtheirsectoroftheeconomy;thisincludeshavingaclearunderstanding ofthetaxstructureandotherstatutorycompliances.Otherwise,theentrepreneurgetsintounwanted legalhasslesandgetsforcedtowastealotoftheirproductivetimeinsortingoutunproductivelegal and regulatory issues. Not knowing the extent of government interference and the applicability of regulatorymechanismscanmeanthedifferencebetweenthesuccessandfailureofabusiness.  Lack of Strategies and Preparedness to Respond to Potential Threats—Businessventuresthatget caught because external threats emanating from change in government policies, natural calamities, technologicaldevelopmentsandintroductionofbetter-qualityandlower-costsubstitutesbycompetitorsandthatarenotpreparedtorespondtothesechallengesbyhavingintrinsicstrengthsorinnovative strategiestorevitalizethebusinessmodelmayfaceasetback.Entrepreneurswithalong-terminsight willalwayskeepresourcesforfacingsucheventualitiesandrespondtosuchchallenges,soastocome upwithgreaterstrengths.  Lack of Clarity About Target Market and Customer Needs—Thesuccessorfailureofabusiness greatly depends on better clarity about market and customer needs. Understanding the market and customerneedswellthroughdeeperanalysisandresearchpavesthewayforofferingwhatthemarket andcustomerwantandwouldbewillingtopaywhattheentrepreneurexpects.Newventures,attimes, lendthemselvesintoagreatproblembyofferingsomethingthatthemarketisnotpreparedtoacceptat agivenpointoftime.Thisgivesrisetoabigjolttotheexistenceoftheventure.  Unreliable Suppliers—Thedeliveryofaproduct/serviceontimetothecustomercreatesalotofgoodwillandbrandbuilding.Thecustomeralwayslooksforwardtoreceivingtheproductbeforeorexactly atthetimecommittedbytheentrepreneur.Toensuretimelydelivery,theentrepreneurshouldtie-upfor buyingresourcesfromthesupplierswhowoulddelivertothemontime.Anydependencyonsuppliers whoarenotlikelytomeettheirdeadlinescancausealotofproblemtotheentrepreneur.Therefore,the

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entrepreneurshouldonlyputupordersanddeveloprelationshipswiththesupplierswhowouldnotonly supplyontimebutalsohelpentrepreneursinmeetingsuddenvaluablecommitments.Itisrightlysaid that‘Youcan’tsellwhatyoudon’thave.Yourabilitytomaintainproperlevelsofinventorymattersthe most“insuccessofabusiness”.Maintainingrequiredinventorydependsonthequalityofentrepreneurs’ relationshipswithreliablesuppliers.Developingeffectivesupplychannelsdoestaketimeandinvestment bywayofefforts.Incaseanentrepreneurhasanyproblemwiththesupplier,itisadvisablenottodrag thingsbuttotakeaction!Lookfornewdependableandreliablesupplierandswitchoverattheearliest.

 Check Your Progress   10 Things Every Business Plan Should Contain 

  

 veryenterpriseshouldhaveabusinessplan.Itdoesnotneedtobelengthyorfilledwithjargon. E Focusshouldinsteadbeonmakingitshort,simple,specificand,aboveall,realistic.Oneshould rememberthatanoverambitiousbusinessplanmayfoolothers,butyou’rethefoolleftholding thecanifitdoesnotworkout.Hereare10thingsyourplanshouldcontain. 1. Vision: Captureinasentencewhatisitthatmakesthisbusinessexcitingandutterlyirresistible tocustomers,suppliersand,mostimportantly,toyou. 2. Background: Describehowyoucametoconcludethatthisistherightbusinesstobeinright now.Whatarethecircumstancesthatarecoincidingtocreateyouropportunity? 3. Goals: Whatarethespecificshort-,medium-andlong-termgoalsbywhichsuccesswillbe measured? 4. People: Whoisinyourteamandhowaretheyperfectforthejob? 5. Products/Services: Whatareyougoingtosellandwhatarethemainbenefitstheyofferover whatyouknowisavailableelsewhere? 6. Competition: Whoisalreadyoutthereandhowwillyoubedifferent?Thedifferencesare cruciallyimportant—withoutknowingthem,youwillnotsucceed. 7. Marketing: Howareyougoingtocommunicatethebenefitsyouoffertothoseyouseekas customers?Howwillyoumeasuretheresponseandimprovemarketingeffectiveness? 8. Funding: Howwillyoupayforitallandwhatcaninvestors(ifany)expectinreturn? 9. Risk: Showthatyouhaveassessedtheriskstoyoursuccessandhavethemcovered. 10. Jumping Ship: Abusiness,similartoanythingelse,hasanaturallifespan.Youneedtoplan foryourexitbeforeyoustart.Willyousell?Giveittoyourkids?What? KEY ConCEPts  Planning:Isaprocessthathelpsalotinimprovingthechancesofsuccessandprepareswellin advancetorespondtothechallengesthatmayemergeontheway.  Business Plan: Is the formal written expression of the entrepreneurial vision, describing the strategyandoperationsoftheproposedventure.

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 Business Plan Drivers: Differentiate the business from their competitors by creating value vis-à-visminimumpossiblecost.  Vision:Definesthedesiredorintendedfuturestateofanorganizationorenterpriseintermsof itsfundamentalobjectivesand/orstrategicdirection.  Perspective of the Entrepreneur: The main concern of an entrepreneur is to successfully translatetheirideasintoarealitythatwouldgiverisetosustainablegrowth.  Marketing Perspective:Hastoclearlyexplaintheprocessthroughwhichanentrepreneurwill make their customers buy their products/services.This perspective has to clearly incorporate uniqueproduct/servicepropositionsthatonehasandone’suniquesellingproposition.  Investor’s Perspective: Basically looks for the profit-generating capacity of an idea in the businessplan.  Executive Summary:Providesapreciseandattractivegistandhighlightsthekeypointsrelated toaproduct/service,fundsrequired,returnsexpected,marketpotential,theteambackingitand theircommitment.  Competitive Analysis:Capturesthecompetitivelandscapeofabusinessbyidentifyingdirect andindirectcompetitorsandassessingtheirstrengthsandweaknesses.  Market Research and Analysis:Assessvariouscustomersegmentsthattheventurewouldserve byclearlyidentifyingtheneedsofthecustomersthatabusinessventureproposestosatisfy.  Marketing Plan: Develops concrete estimates for sales and the strategy that will enable the entrepreneurtoavailtheopportunityinthelightofspecificcompetitiveadvantages.  Financial Plan: Assesses the financial implications of various strategies proposed in other sectionstoquantifyflowofprofit,cashvis-à-visinvestmentsrequired.  Operational Plan:Highlightskeyaspectssuchasproductorservicecharacteristics;production,planningandcontrolaspects;location,equipment,people,processesandthesurrounding environment.  Organizational Plan: Describes form of ownership, organizational chart, indicating line of authorityandresponsibilitiesofmembersoftheorganization,andthedetailsofthepromoter teamwhowouldbetakingarisktobackuptheprojectinreality.  Exit Strategy: Provides an inbuilt provision for exiting the existing business for personal, financialoropportunisticreasons.  Elevator Pitch:Istheshortestpossibletimeinwhichoneneedstocatchtheattentionofinvestors forgeneratingfurtherinterestinfindingoutmoredetails. EndnotEs 1. Mapping out a smart start-up by Marc Peskett, http://www.startupsmart.com.au/planning/ business-planning/2010-10-13/low-risk-planning-on-the-run-for-start-ups.html 2. Wikipedia,http://en.wikipedia.org/wiki/Strategic_planning 3. Hill, T. H. ‘How to Differentiate Yourself from Your Competitors’, American Salesman, http://www.allbusiness.com/company-activities-management/operations-qualitycontrol/6197318-1.html,accessedon1December2007.

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4. The 10 Customer Service Trends for 2010, http://smallbiztrends.com/2009/12/customerservice-trends-2010.html 5. http://www.atento.com/content/our_commitment_with_customers.mmp 6. http://www.ecs-group.com/uk/m12445-e12189-fostering,sense,commitment.html 7. Ward,S.‘ThinkingofStartingaSmallBusiness?Part4:AvoidingBusinessFailure’,About. com Guide,http://sbinfocanada.about.com/cs/startup/a/startownbiz_4.htm 8. Bareham, S. Planning to Fail Can Spell Success. http://www.canadaone.com/ezine/sept99/ business_success.html 9. SeeNote8. 10. ‘Some of the Reasons Why Business Fail and How toAvoid Them’, Entrepreneur Weekly, Issue36,3October1996. 11. http://cpa.utk.edu/pdffiles/adc24.pdf 12. http://www.brazzil.com/2004/html/articles/aug04/p121aug04.htm 13. Headd,B.Business Success: Factors Leading to Surviving and Closing Successfully,Centerfor EconomicStudies,U.S.BureauoftheCensus,WorkingPaper#CES-WP-01-01,January2001; Advocacy-fundedresearchbyRichardJ.Boden(ResearchSummary#204) 14. http://entrepreneurship.mit.edu/15975/resources/Guidebook.pdf 15. http://sbinfocanada.about.com/od/businessplans/a/execsumexample.htm 16. SiOnyx’s,http://www.sionyx.com/architecture.html 17. Withrow, J. ‘Competitive Analysis’, CDWorld.com, 4 January 2002, http://courses.wccnet. edu/~jwithrow/competitive-analysis/competitive_analysis1.pdf 18. Wikipedia,MarketingMix,http://en.wikipedia.org/wiki/Marketing_mix 19. Mullins, J. W. ‘Why Business Plans Don’t Deliver’, Entrepreneurship, http://sloanreview.mit. edu/executive-adviser/articles/2009/2/5121/why-business-plans-dont-deliver/,accessedon22June 2009. 20. MurphyandSchwartz,An Exchange of Values (sixthofaseries)byFrankDemmier,Professor of Entrepreneurship at the Donald H Jones Center for Entrepreneurship at Carnegie Mellon University;http://www.andrew.cmu.edu/user/fd0n/6%20An%20Exchange%20of%20Values.htm 21. Alan Gleeson, Managing Director; Palo Alto Software UK, http://bplans.typepad.com/ blog/2007/04/delivering_a_wi.html REFEREnCE Abrams,R.M.1993.The Successful Business Plan: Secrets and Strategies.Rev.ed.GrantsPass:OasisPress, Mediford.

ConCEPtUAL QUEstIons 1. It is been said that ‘entrepreneurial journey is certainly a risky proposition’. Explain the meaningandimplicationofthisstatement. 2. Whataresomeoftheimportantareasattractinggreatmindstocomeupwithinnovativebusinessopportunities?

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3. Defineabusinessplan. 4. Whatisthepurposeofpreparingabusinessplan? 5. Whenandforwhomisabusinessplannecessary? 6. Whatarebusinessplandrivers? 7. Whatismeantbydevelopingauniquesellingproposition(USP)?Explain. 8. Whataretheimportantpointstoberememberedwhilepreparingabusinessplan? 9. Whatarethedifferentperspectivestobeconsideredwhilepreparingabusinessplan?Whatare thethreekeyperspectivesthatmatterthemost?Explain. 10. Whoshouldprepareabusinessplanandwhy?Whyismissionstatementessentialforastart-up? 11. Define ‘vision’ and ‘mission’. What is the purpose of writing a vision and a mission for a start-upbusiness? 12. Whatisthepurposeofundertakingcompetitiveanalysis?Whatarethetoolsandtechniques usedtoundertakecompetitiveanalysis? 13. WhataretheimportantcommonbarrierstoentryfornewcompetitionhighlightedbyAbrams? 14. Differentiatebetweencompany-centricandmarket-centricapproachtoanalysecompetition. 15. What are the important sources of information for undertaking marketing research? Which sourcesshouldbetappedandwhy? 16. Whataretheimportantaspectscoveredinthefinancialplanandfundingneedsofaventure? 17. Whatisthesignificanceofthemanagementteaminthesuccessofaventure?Whatareallthe aspectsincludedinthissectionofabusinessplan? 18. Whatisincludedinthegrowthandexitstrategysectionofabusinessplan? 19. Whatismostimportantinabusinessplanthatdecidesthesuccessorfailureofthebusiness? 20. Whatismeantbyelevatorpitch? 21. What are the important aspects that need to be taken care of for an effective business plan presentation? CRItICAL tHInKInG QUEstIons 1. ‘Start-upsgenerallydonothaveanypasthistorytodependuponandthereforeposeagreater challengeinplanning,particularlyinregardtomakingarangeofuntestedassumptionsand guesstimates.’Criticallyexamine. 2. InwhatwaydoesSWOTanalysishelpintheidentificationofkeydriversforone’sbusiness? Explainwiththehelpofanexample. 3. Variousstudiesshowthatchancesofthefailureofabusinessarefarhigherthanthechancesof success.Still,entrepreneursplungeintotherealmundertakingbusiness.Whatarethereasonsthat resultinthefailureofabusinessandhowcantheybeovercome?Explainbycitingconcreteexamples. 4. Theexecutivesummaryisthemostcrucialaspectofabusinessplanthatiswrittenattheend.Write an executive summary for electronic waste management and another one for an old age home. Compareandcontrastthebusinessmodelandkeybusinessdriversinthesetwoexecutivesummaries. 5. The most crucial aspect of a business plan is to scientifically undertake ‘Market Research and Analysis’. Businesses fail because of a lack of understanding about market analysis. Explainthesignificanceofmarketingmixvariablesinmarketanalysisbygivinganexample

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ofasuccessfulandafailedventurebecauseofalackofmarketanalysisand,inturn,lackof aneffectivemarketingmixplan. 6. Whatarethekeyaspectstobehighlightedinthebusiness-plan-relatedIPmatters? 7. Agoodbusinessplanshouldclearlyhighlighttheexitstrategy.Whatisthesignificanceofthe exitstrategyforinvestors?Explainbygivingconcreteexamples. 8. Thebustlebeginsassoonastheclockstrikesseven.Carsstopbyalmosteveryminute,with hungrycustomerseagerlyorderingfortheirchoiceofhotparanthas.Theycomesooften,they nolongerevenhavetoglanceatthelargemenuthatispositionedonthetrunkofatree.Asthey placetheirorders,ateamofaboutsevenmenworksunderadimlight,stuffingtheparanthas andtossingitontothesteaminghotpan.Withinafewseconds,theparanthasarereadyand onecanseethecustomershappilygorgingonthemanddrivingaway.ShravanKumaristhe ownerofthebusinessandproposestoexpanditbysettinguparestaurant. WriteanexecutivesummaryforthebusinessplanthatcanenableShravanKumartosuccessfullystarthisrestaurant.  CASE 8.1:  EXECUTIVE SUMMARY—YuMe NETWORKS 

 Promoter Jayan Ramankutty  J ayan Ramankutty graduated from BITS, Pilani, in 1980 with a BE (Hons) (Electronics). He subsequentlyworkedinIndiatill1983,Singaporeforalittlemorethanthreeyearsbeforemoving to the Silicon Valley in January 1987. He has more than 20 years of extensive experience in designinganddevelopinglarge,multi-processorcomputersystems,complexASICsandSoCsin thefieldofnetworking,telecommunicationandmultimediamarkets.Duringthelasttwodecades, Ramankuttyhasfoundedfourcompaniesandsuccessfullyexitedthree.Mostrecently,hefounded YuMenetworks,acompanyfocusedon‘real-timeonlinevideoAdinsertion’.Herecentlyclosed a series financing of approximately $7 million from three premier venture capitalists, Khosla Ventures,Accel Partners and BV Capital. Ramankutty holds an MS in Computer Engineering fromSanJoseStateUniversity.

 Introduction About YuMe Networks   uMeNetworksisanexcitingearly-stage,richmediacompanythataddressesoneofthemost Y fundamental challenges of advertising today. YuMe’s technology enables advertisers to fully customize video and rich media advertisements on a continual basis, while cost-effectively reachingalargeanduntappedconsumermarketwithdynamictargetingalongallrelevantdimensions.YuMealsooffersWebsitesandotherpublishersofallsizestheopportunitytodrivesignificantlymorevalueinmonetizingtheirWebproperties.

 Working of YuMe Networks   uMeNetworks,adedicatedadvertisingnetworkcreatedandoptimizedforbroadbandvideo,offers Y advertiserstheabilitytotargetmessagingtoonlinevideocontentinthewaytheydowithkeyword placements.Itisdesignedtobringmoreflexibility,addressabilityandmeasurabilitytotheprocess. (Continued)

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‘Ournetworkisgoingtobringrealordertothecurrentstateofchaosinonlinevideoadvertising,’ saidJayantKadambi,co-founderandCEOofYuMeNetworks.Thesystemhasbeenworkingwith ahandfulofadvertisersinbeta.YuMeusesaproprietarycontextualmappingtechnologytoscan onlinevideocontentandthencategorizeitintochannelssuchasauto,finance,entertainmentand family-friendlyunits. YuMeattachesadvertisingtotheselectedcontentfordeliverytoanydevice—whetherdownloadedorstreamed. YuMestreamlinesthevideoadvertisingprocessbyprovidingaone-stopsolutiontoplacement andconsistentreportingacrossallvideodistributionplatformsandchannels. YuMeisalsodesignedtoaddresstheinabilityofadvertiserstoruntheiradsagainstappropriate content—for both taste and category appeal. It can also separate the ‘brand safe’ opportunities in consumer-generated media to remove advertiser risk and allow targeting to specific content withinCGM. In addition,YuMe’s technology offers real-time reporting capabilities.This targeting ability couldappealtoautomotiveadvertiserslookingtoshowcaselocaldealersindifferentmarkets,or airlinesorrestaurantswantingtorundifferentpricepromotionsindifferentlocations. ForHouseValues,areal-estatemarketer,YuMetooktwoTVcommercialsandturnedtheminto 104differentonlinevideoexecutiveswithdistinctZIP-code-targetedcallstoaction.Itwasalso abletoreportwhichtimesofthedayweregeneratingthemostresponse. YuMestreamlinesthevideoadvertisingprocessbyprovidingplacementandconsistentreportingacrossallvideodistributionplatformsandchannels.

 Investors and Future Prospects of YuMe   uMehasreceived$7millioninventurefundingfromKhoslaVentures,AccelPartnersandBV Y Capital.Thesystemhasbeenworkingwithahandfulofadvertisersinbeta. ‘As the popularity of online video content continues to explode, it’s clear that smarter and more effective approaches to advertising are needed than what’s available,’ saidTim Hanlon, seniorvicepresidentofDenuo,themedia’sfutureunitofagencyholdingthecompanyPublicis Groupe.

 Unique Features of YuMe   uMescoursdigitalvideobyseparatingthesafebrandfromtheinappropriatebrand,organizing Y theexplodingonlinevideocategoryintochannelsofad-readyinventory—automotive,financial services,entertainment,family-friendlyandmore. YuMesuccessfullytiesbrandmessagingtovideocontent—nomorebeautyadsinvideoabout football. YuMe delivers a brand-safe, monitored and measured experience across all digital media platforms—Web (pre-rolls, mid-rolls, post-rolls, watermark sponsorships and in-banners), downloads,mobilesandIPTV. YuMe’s proprietary creative customization engine takes one creative asset and in real-time, turnsitintomultiple,customizedandtargetedexecutions. It enables advertisers to precisely target their video ads within one’s content, increasing the valueofone’sinventoryandCPMs.Onecannowoffermorethanjustrun-off-sitecampaigns.

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Itsyndicatesvideoassetswithconfidence—YuMe’sproprietarytrackingtechnologyallowsone totrack,monitorandcontrolthedistributionandmonetizationofone’svideos. Deliversrichexperiencestocustomersandcommunitiesbytyingbrandmessagingtopositioning.Nomorebrandsassociatedwithcontentthatisinappropriateornotcontextuallyrelevantto theadvertiser. Strikestherightbalanceofadvertisingandcontent.YuMeseparatestheservingofcontentfrom theservingofads,therebyallowingonetodeterminethebestmixofadtypesacrossone’schannels ofcontent. YuMe delivers a brand-safe, monitored and measured experience across all digital media platforms—Web,downloads,mobilesandIPTV.

 Conclusion   uMeisanothercompanystartedbyJayanRamankuttythatisbasedonaninnovativeidea.Ifwe Y seehispastcareerandexperiencealongwiththeidea,itsapplicationanditsfuture,itseemsthat thisventurewillgoveryhighinitsfield.Innovation,inanyorganization,isaverysignificanttool thatgivestheorganizationacompetitivegainoverothers.  Questions  

1. IsJayanjustanotherentrepreneur?Ifno,thenhowishedifferent? 2. Inthepresentscenario,whentheInternetisgrowingsofast,howcantheideaofYuMe beseen? 3. HowbigistheexpectedcustomerbaseofYuMeNetworks? 4. Itistoughtoenterintoabusinesswhereonealreadyhascompetitionifonedoesnothave finance.Whataretheadvantagesofbringinganinnovativeideaintoabusiness? 5. HowisYuMeusingmostofthetechnologiesavailabletodayinitsbusiness?

 CASE 8.2:  EXECUTIVE SUMMARIES FOR EVALUATION   setofthreetofourexecutivesummariesisgivennext.Oneisfirstindividuallyandthereafter A inagroupandsupposedtoanalysetheseandidentifypositivesandnegativesineachsummary basedonobjectivecriteriaandtocomeupwithratingoftheminadescendingorderofpriority. Eachgrouphastopresenttheirrationaleandjustificationbeforetheclass.Afeedbackbyother groupmembersandfacultyistobegiventoeachgroup.

 VeriSanct Solutions LTD   Vision  

 ur vision is to become the market leader in employee credential verification and validation O servicesonagloballevel. (Continued)

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 Mission  

 eriSanctSolutionsprovidesanopportunityfororganizationstoverifythecredibilityofprospecV tive employees before their joining the organization. It helps the organization as well as the employeestarttherelationshipataleveloftrust,whichisconcreteandverifiable.

 Market Scenario—Big Opportunity   heknowledgeindustryhasbeenfacingatalentcrunchinrecentyears.Thisscarcityisonlygoing T tointensifyfurther.Inthisscenario,itisverydifficulttorecruitandretaintalent.Alotofresources arespentonHRefforts.Hence,itisallthemoreimportantthatthetalentrecruitedbeworthyof sucheffort,thatis,theyactuallyhavealltheskillstheyclaimtohave.TheHRdepartmentsusually dosomereferencechecksbeforehiringanindividual,butthisusuallyinvolvesaphonecalloran email—bothofwhichareeasytofake.Moreover,sometimesitisjustdoneforthesakeofitand notinaprofessionalway.Hence,aneedarisesforanentitythatcandothisverificationprocess easilyandcheaply.Wearelookingattappingintothismarket. AccordingtoNASSCOMreports,itisestimatedthattheITandBPOindustrieswillhaveto employapproximately1.6millionnewpeopleinthenearfuture.Forothersectors,itislessbut comparable.Inaddition,consideringtheattritionratesandassumingthatemployeesleavingone organizationandjoininganotheronewillneedcredentialverificationservices,themarketpotentialishuge.Atleast60,000ofthe171,000workforcechangejobseveryyear.Thesamesituation existsintheaviationandhospitalityindustriesrightnow.Demandis7to10timeshigherthan the availability of skilled personnel. In addition, in these industries, attrition rate, especially at thejuniorlevels,isabout25percent.So,thereisaconstantdemandforprofessionallyqualified personnelintheseindustries,and,hence,thedemandforverification.  Target Segments  

Initially,ourtargetcustomerswouldincludeorganizationsfromthefollowingsectors:

   

IT/ITES/BPO Aviation Automobile Pharma

 Marketing Strategy  

 hefirststepofourmarketingstrategywouldmainlyinvolvelink-upswith(i)Thetop-notchIT/ T ITES,automobile,airlineandpharmacompaniesinIndia(ii)Variousuniversitiesandcolleges (For verification of higher secondary and other school/college related information). The initial strategyistocrackthetop10companiesineachsectorfirst.Oncetheleadershavecollaborations withVeriSanctSolutions,thentheothercompanieswillfollow.Thesamestrategywouldworkfor educationalinstitutionstoo.  Collaboration Strategy  

Thecollaborationwiththeorganizationcanbeintwopossibleways,namely:

i. The company shares its basic employee information with VeriSanct. The database resides with VeriSanct. On receiving any query for any candidate, VeriSanct queries

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thedatabase,notifiesthepreviousemployerofthequeryandsubmitstheresultstothe prospectiveemployer.Ifthepreviousemployerisnotinthedatabase,thenVeriSanct adds that company to the list of prospective clients to have tie-ups with. The same processwouldworkforeducationalinstitutionsanduniversities. ii. Thecompanydoesnotshareitsbasicinformationbutagreestorespondtoanyqueryabout itsex-employeeswithinapre-decidedperiod.Inthatcase,onreceivinganyquery,VeriSanct forwardsittothepreviousemployerandwhateverresultsitgets,forwardsittotheprospectiveemployer.Thesameprocesswouldworkforeducationalinstitutionsanduniversities. Goingforwardwiththeconceptinthenextfewyears,wewouldtrytoexpandthereachofour databaseaccess/retrievaltotheorganizationsinothersectorswhereattritionratesareconsiderably highandtheproblemofverifyingemployeecredentialspersists. ThescopewouldbeinitiallyPANIndia.Then,wewouldtrytoexpandourpresenceinBRIC (Brazil,Russia,IndiaandChina)countries,astheyareonadevelopmentspree.Finally,wewould targettherestoftheworld.Theexpansionintothenextstagewouldtakeplaceafterabreakeven hasbeenachievedintheexistingmarket.  Ethical and Security Issues  

 mployeeinformationintheknowledgeindustryisextremelyconfidentialandaverysensitive E area. Moreover, for this industry, the entire existence and its future performance depend on its employees.Hence,itwouldnotbeeasytoconvincefirmstopartwiththeirdata.However,there aresomemeasureswecantakethatwillmakefirmslessparanoidaboutsharingthisinformation.

 Affiliationwithnon-politicalandneutralbodiessuchasNASSCOMforITsectorand MinistryforAviation.  SinceallcompetitorstrustVeriSanct,everybodytrustsVeriSanct.Forinstance,ifWipro andTCSarealreadyaccessingVeriSanctservices,Infosyswillalsobelesswaryofsharingitsdata.  Inaddition,wheneveracompanycomestoVeriSanctforverificationofonecandidate,a promotionaloffercanbegiventoittohaveatie-upwiththecompany.Forinstance,we canofferfreeverificationservicesforafixednumberofcandidatestoInfosysifithasa tie-upwithVeriSanct.Hence,thiswillhelpimprovethetie-upnetworkofVeriSanctand alsopromotetrustamongdifferentcompanies.Regardingethicalissues,alotofcompaniescanmisusethisinformationtopoachemployees.Thisissuecanbetackledbyhaving astrictpolicyofverifyingcandidatesonlyatthelaststageoftheinterviewprocessfor anycompany.Itmaybepossibletodictatetermswithacompany,becauseultimatelythis policywillbethesameforallcompanies,thusbenefitingeverybodyintheendandcreatingarelationshipofmutualtrust.  Revenue Model  

 ewillfollowaflexiblepricingmodeltoaccommodatethevaryingneedsofalltypesofclients. W Itwilldependonthedifferentkindsofrequirementsofacompany. (Continued)

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 Query-based Pricing  

 he pricing will depend on the number of queries asked by the organization for basic data T verificationsuchasname,surnameanddateofbirth.Advancedinformationsuchastheirprevious workprofileoreducationalbackgroundwillrequireadditionalcost.  Fixed-cost Subscription Model  

 ere,thepricingwillbefixedonamonthly(oranyotherperiodic)basis.Thecompanycanrun H anyreasonablenumberofqueriesforbasicinformationduringtheperiodofsubscription.Thisis usefulfororganizationsthathavelargequeryrequirements.  Infrastructure Needed  

 he physical infrastructure would not be very high. It would involve a small office and a few T computers.Therequirementwouldbesignificantintermsofmanpowercosts.Theinitialteam wouldbeasfollows:

    

Relationshipteam(12) Marketingteam(tie-upsandpromotions)(6) Verificationteam(6) ITdepartment(2) Alegalperson(1)

Theinitialteamwouldconsistof15memberswiththebreakupasjustgiven.Theinitialinvestment wouldbe

   

Costofhiring15members Costofmakingthedatabasesoftwareholdcompanyinformation Asmalloffice Threecomputers

 Expenditures for Marketing and Verifi cation Teams   heinitialestablishmentwouldcostaround20lakhsincludingworkingcapitalforthreemonths T forsettingupofficesinfourmajorcities.

 retaildeals.com    Introduction to business opportunity  

 itharisingrateoforganizedretailacrossthecountryandthecompetitionsbetweenthem,the W nextbigchallengewillbetoattractthecustomerstotheirrespectiveoutletsgiventhatmostofthem willbesellingthesamesetofproducts(homefurnishings,consumerdurables,foodandgrocery, FMCG,jewelleryandwatches)atalmostthesimilarprices.Thus,salespromotionstrategywill playavitalroleinprofitabilityandsustainability.Toovercomethischallenge,weproposetostart thebusinessofonlinesalespromotionatasitenamedretaildeals.com.Wewillbeoperatingasan infomediary,forB2BandB2CsalespromotionofWebsitesthatwillhaveservicessuchasprintable

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discountcoupons,onlinecoupons,trialoffers,rebates,cents-offdealsandspecialdailysavings opportunitiesfromvariousretailoutletsandmanufacturersfortheirrespectiveproducts/servicesto beofferedtocustomers.Onceacustomerbeginshavinganinclinationtowardsaparticularoutlet orbrand,theywillthenbecomealoyalcustomer.Wemakemoneyfromtheretailoutletsbydirectingthecustomerstothemthroughoursite,fromthemanufacturersbypromotingcustomerstobuy theirproductsbyusingmanufacturercouponsandadvertisementsofvariouspromotionaloffers. Thesuccessofthismodeldependsontheonlinesalespromotiontechniquesusedindeveloped countriesfortheirretailchains.ExtremelypopularWebsitessuchascoolsavings.comofferexactly similarservices.Customerscanclickoncoolsavings.com,whichhasamemberbaseof17million, selectandprintcouponsoftheirchoiceredeemableatlocalstores.Morethan3,000manufacturers offernearly330billioncouponseveryyearworthabout$280billion,andconsumersredeemabout 8billionofthosecoupons,about$4.7billionworthofwhichshowthehugedevelopedmarket.  Marketing Highlights  

 urWebportalwillbethecentralizedconsortiumfortheorganizedretailchainsandthemanufacO turerswhocanofferthefollowingservicestothecustomers:

 Printable Discount Coupons—Thesiteprovidescouponsonlineforspecificproducts. Thecustomerprintsthemoutandusesthematthespecificstoreforproducts.  Post-purchase Product Coupons—One can print out a page of offers from one’s preferred grocery store(s), take that page to the store, have it scanned at checkout afterbuyingproductsand,ifoneboughtanyoftheitemsonthepage,onewillreceive coupon(s)forone’snextpurchaseoftheproduct.  Manufacturer-direct Coupons—Product manufacturers can offer product discount couponsthatcanberedeemedatanystore.  Local Store Coupons—Basedonthezipcodeoftheuseraddress,localstorecoupons willbeissuedtomembers.  Referrals— Linksthatrefersitestoaparticularretailstoreormanufacturerhelpone findcouponsandpromotionsatonlinemerchants.  Cash Refund Offers (Rebates)—Provideapricereductionafterpurchaseratherthanat theretailshop:aconsumersendsthespecified‘proofofpurchase’tothemanufacturer who‘refunds’apartofthepurchasepricebymail.  Price Packs (Cents-off Deals)—Offerstoconsumersofsavingsofftheregularpriceof aproduct.  Premium Coupons—Merchandiseofferedatarelativelylowcostorfreeasanincentive topurchasetheparticularproduct.  Frequency Programmes—Programmes providing rewards related to the consumers’ frequencyandintensityinpurchasingthecompany’s/retailstores’productsorservices.  Patronage Awards—Values in cash or in other forms that are proportional to the patronageofacertainvendororgroupofvendors.  Product Warranties—Explicit or implicit promises by sellers that the product will performasspecified.  Tie-in Promotions—Two or more brands/companies team up on coupons, refunds to increasepullingpower. (Continued)

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 My Price—Customersareabletostatewhatpricerangetheywishtospendandthen selectfromitemsatthatpricerangeasandwhenitisoffered.  Target Market Summary  

 anylargebusinessgroupsinIndiahaveannouncedtheirintentionstocumulativelyinvestmore M than$10billionoverthenextfiveyearsinorganizedretail.Reliancehasa$3.4billionplanto establishachainof1,575storesbyMarch2007(Reliancehas28currently),HypercityRetailplans toopen55hypermarketsby2015,Pantaloonhasmorethan100outlets.BhartiEnterpriseshas signedanMoUwiththeUS-based$312billionretailmonolithWal-MartandtheIndiangovernmentallows51percentFDIinvestmentsinsingle-brandretailers.IthasbeenestimatedthatIndia’s organizedretailmarketislikelytogrowfromthecurrent$4billionto64billioninthenextfive years.Thisisaclearindicationofthemarketpotentialandthestrongneedforsalespromotion owingtothecompetitionandthestrongcustomerbasethatoursitecandevelopwiththeemerging organizedretailsector.  Key Marketing Strategies  

 heonlinemarketingwillincludepayperclick(PPC)advertising,bannerads,e-mailmarketing, T affiliatemarketing,interactiveadvertising,searchenginemarketing(includingsearchengineoptimization),blogmarketing,articlemarketing,bloggingandPPCads.Wewillalsobeaggressive onGoogleadwords,YahooSM,biddingthekeywordssuchas‘coupon’,‘discount’,‘bargain’, ‘retail’,‘rebate’andthenamesoftheretailchainswithwhomweareassociated.  Risks    Consumer Behaviour Risk  

 Consumerswouldliketotouchandfeeltheproductphysicallybeforetheybuyit.So,our conceptofonlinesalespromotionwillbeeffectiveforproductsalreadyusedortriedby ourcustomersandnotfornewlylaunchedproducts.  The sales promotion will be effective and reach only the educated consumer who is computer/Internetliterate.  ConsumersmaynotwanttospendtimeontheInternetbeforevisitingthestore.  Themodelisnotsuitableforimpulsivebuyingbehaviour.  Operational Risk  

AstudyoftopB2CcompaniesbyMcKinseyfoundthat:

 Topperformershadmorethanthriceasmanyuniquevisitorspermonththanthemedian. Inaddition,thetopperformerhad2,500timesmorevisitorsthantheworstperformer.  Topperformershadan18percentconversionrateofnewvisitors,twicethatofthemedian.  Topperformershadarevenuepertransactionof2.5timesthemedian.  Topperformershadanaveragegrossmarginthricethemedian.  Therewasnosignificantdifferenceinthenumberoftransactionspercustomerandthe visitoracquisitioncost.

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 Management Team Overview  

 heteamconsistsofexpertsfromthefinance,retailandmarketingareaswithexperienceranging T betweenfiveandeightyearseachandhavingmadeamarkintheirprofessionalassignments.

 DhanaX   Business Idea and Concept  

 heideaistobuildaWeb-basedplatformthatfacilitatesindividualstogiveunsecuredloanstoa T groupofborrowers(SHG/JLGs)withthehelpofmicrofinanceinstitutions(MFIs).Theplatform connectsneedyborrowerswiththeinterestedretailinvestorsandgiveseveryoneanopportunity tobethechange.TheinterestoftheMFIsectorintheideaisgreat,andtwooftheleadingIndian MFIs(SKSIndiaandGrameenKoota)areinterestedtopilotwithus.  Problem  

 icrofinanceiswidelyacceptedasatooltoeradicatepovertyandimprovetheincomegeneration M capabilitiesofthepeople.However,theWorldBankreportsthatmicrofinanceactivityinIndia reachesonly4percentofthepoor.Themismatchbetweendemandandsupplyformicrocreditis estimatedtobeintherangeof$45to93billion.Thereachofmicrofinanceactivityisconcentrated inruralareasasopposedtourbanareasandinSouthIndiaasopposedtoNorthIndia.Inspiteof havinghugeinterest,retailinvestorsdonothaveavenuestojoininthemicrofinancemovement. Thus,thereisaclearneedforasystemthatincreasesthesupplyofcapitaltoneedyborrowersby connectingthemwiththeinterestedretailinvestors.  Solution  

 solutiontothisproblemwillbetointroduceindividualinvestorsthatlendmoneydirectlyto A needyborrowersthroughMFIs.Thiswillincreasethecreditsupplyandbridgethegapbetween availableretailinvestorsandtheneedyborrowers.TheroleofMFIsistooriginate,monitorand recoverloansandchargeaservicefeetotheSHG/JLGaccordingly.TheInternet,asamedium,is averyeffectivemeansofreachingalargenumberofindividualinvestorsandborrowers.Thiswill ensureawiderexposureandresultinhighervolumesofinvestment. ‘DhanaXisaloanauctionportalthatallowsindividualstoinvestinruralentrepreneurswho needcapital.’ DhanaXwillconnectindividuallenderstoSHG/JLGsthroughMFIsbyaWebplatform,aportal.  How DhanaX Works  

 MFIs identify needy SHG/JLGs and post their profiles and requirements on the Web site.Thesedetailswillincludeneedfortheloan,requiredamount,maximumaffordable interestrateandpastcredithistoryoftheSHG/JLG.  Individuallenderswilllogintothesystem(fromacrosstheglobe)andselecttheloan theywanttofund.Lenderscanmakeadecisiontofundthecompleteloanorapartof (Continued)

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theloanbasedontheneedoftheborrower,amountrequiredandtherepaymenthistory oftheMFIs.Lenderswillthenspecifytheirtermsofinterestandtherepaymentperiod.  Oncealenderhasdecidedtofundaloan,theywillpaytheamountthroughapayment gateway.TheamountwillbecreditedtotheMFIaccountandcanbedisbursedtothe borrowerthroughtheMFI.  MFIscollectrepaymentsfromtheborrowers,andtheamountwillbecreditedbacktothe lenders’accountonamonthlybasis.MFIsalsoregularlysendupdatestotheindividual lendersabouttheprogressofSHG/JLGbusinesses.  Oncetheloanisreturned,thelendersmaywanttofundanotherSHG/JLGorwithdraw theirmoneyfromthesystem.  Market Analysis  

 icrofinanceindustryisgoingthrougharapidgrowthphaseinIndia,andconservativefigures M ofcreditsupplyfromtheformalsectorareestimatedtobe$1.3billionby2005–06.Ofthecredit supply,75percentcomesfromSHG-BanklinkageroutelargelyfinancedbyNABARD,andthe restcomesfromtheGrameenmodelMFIs,largelybackedbycommercialbanks.Intherecent years,themarketshareofMFIsinthetotalcreditsupplyisoutgrowingthatofNABARD.Our initialfocusisongrouplendingthroughMFIs,andthenwewillexpandtogroupscurrentlyfunded byNABARD.Forborrowers,ourtargetmarketisgrouplendingratherthanindividuallending, becausegrouploansaccountfor93percentofmicrofinanceactivityinIndia.ByMarch2006, therearecloseto2.2millionSHGsrepresenting33millionpoorfamiliesor165millionpeople. ThetotalnumberofSHGsisexpectedtogrowmorethan30percentinthenextoneyear.DhanaX willtargetthecreditneedsoftheexistingandnewSHGs.Onthelenders’side,tobeginwith,we wanttotargettheSEC-ApopulationofactiveInternetusersinIndia(13.5million)andNRIsliving intheUnitedStates(3.3million),thatis,atotalpopulationof1.68crore.Later,wewillexpandthe targettotheSEC-BpopulationofactiveInternetusersinIndia(11.2million)andNRIsoutsidethe UnitedStates(16.7million),thatis,atargetof2.79croresofprospectivelenders.  Value to Society  

 hemainpurposeofthisventureistoincreasethecapitalaccessibilityfortheneedypeopleand T helpthemtobefinanciallyindependent.Thekeybenefitsoftheventureareasfollows:

 To Borrowers—Withthecreditprovided,borrowerscanearnareturnbetween25and 200percentandenhancetheirstandardofliving.Inaddition,sincelendersbidforthe loan,theygetagooddealontheinterestrate.  To MFI—TheventureintroducesanewsourceoffundsintotheMFIandbridgesthe credit supply gap. By targeting a large and affluent lender base (close to 4.5 crore), theplatformcaneasilygeneratealargeamountoffundsforonlinelending.  To Individual Lenders—Individuals now have an opportunity to participate in the microfinance revolution and get the satisfaction of changing the lives of disadvantaged members. If desired, individuals can get returns that are higher than their bank investments. Toreducetheriskofdefaultersandincreaseconfidenceamonglenders,wearedevelopinga frameworktosharetheriskofnon-performingassetsbetweenlendersandtherelevantMFIs.

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 Current Stage and Future Prospects  

 urvisionistodeveloptechnologytoolsthatwillincreasetheaccessibilityofcapitaltotheneedy O people.Throughthisventure,wearetargetinganunsecuredmicro-loanmarketforthepoor.Currently, weareinthestageofdevelopingaprototypefortheWebportal.OurprototypewillbereadybymidFebruary2007.Wearesimultaneouslyworkingtoevaluateandremoveoperationalandregulatory constraints.WeareaimingatlaunchingthisservicebytheendofJune2007.Wearereceivingexcellentinterestintheidea,andtwooftheleadingMFIs(GrameenKootaandSKSIndia)areinterested topilotthisideawiththeirorganization.ToquoteSitaramaRao,directorofSKSIndia,‘Theideais great.WeatSKShavebeenthinkingaboutitforquitesometime.Ireallylookforwardtotheday whenapoorwomangoestothenearestInternetkioskandappliesforaloanherself.Initiallywewill pilotwithafewspecificMFIstofinetunethebusinessmodelandprocess.Inthelaterstageswe’ll collaboratewithMFIsacrossthecountryandlaunchnationwideoperations.’ Currently,wearealsolookingforseedfundingfromangelinvestorsandfinancialinstitutions tostartoperations.Interestedinvestorsaremostwelcometocontactus.  Management Team  

 hisideawasconceivedwhileSivawasworkingonasocialdevelopmentprojectduringhisMBA. T His interactions with MFIs and observations on the new peer-to-peer lending models evolving globally gave shape to the whole venture.The current team then worked on giving it its presentmodel.Webelievethatarightteamisthekeytoasuccessfulventure.Thecurrentteamisa compositionofpeoplewithdiverseandcomplimentarybackgrounds.

 Siva Prasad—Sivacurrentlyworksasaproduct-marketinganalystwithanenterprise softwareproductcompanyinBangalore.Withmorethanfouryearsofsoftwaredevelopmentandmarketingexperience,Sivabringstotheteamhisunderstandingofsolving businessproblemsusingtechnology,marketingandorganizingskills.Siva’seducation qualificationsincludeaBE(Hons)fromBITS,Pilani,andanMBAfromIIM,Kozhikode.  David Stokar—David, an M.Sc. (CS) student from ETH, Zürich, is currently at IIT, Madras,onastudentexchangeprogramme.HeisverykeenonutilizinghistimeinIndia workingonthisventureandisdevelopingtheWebportal.Hecontributestotheteam withhissoundknowledgeandexperienceindevelopingWebapplications.  Abhishek Nayak—AbhishekiscurrentlyanundergraduatestudentatBITS,Pilani.He isavicepresidentattheCentreofEntrepreneurialLeadership(CEL)atBITS,Pilani.He hasliveexperienceindealingwithSHGsandwasinstrumentalinthestartingofanSHG inruralPilani.HecontributestotheteamwithhisknowledgeofWebtechnologyand creativeinputsondevelopingthesolution.  Mentors and Advisors  

 partfromthecoreteam,wearealsobuildingasoundlistofmentorswhocanhelpusinthis A venture.WehaveestablishedcontactswithMFIexpertsattheCentreforMicroFinance(CMF), IFMR,Chennai,andalsopeoplecurrentlyworkingintherenownedMFIs.Theyareprovidingus withconstantsupportanddatatohelpusinmakingthisideaareality.Asamentorfromanother competition,wealsohaveanattorneyfromtheChughFirm,Chennai,whoisadvisingusonthe regulationsandlawsinvolved.

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Marketing Plan  LEARNING OBJECTIVES    To understand the importance of marketing and a market plan for start-ups.  To learn and know about, understand and apply the marketing research tools while undertaking a venture.  To know about the benefits of undertaking marketing research and applying them in the real context.  To know about the factors affecting decisions to undertake marketing research.  To understand the acceptance and potential for the introduction of a new product in the market.

 To learn about the different pricing strategies and their relevance in entrepreneurial ventures.  To learn about and understand the marketing mix variables and their relevance while preparing a market plan.  To learn about the critical factors utilized in developing a marketing strategy.

Karsanbhai Patel, Founder, Nirma Group The lack of any such precedent in my family made the venture fraught with fear of failure. But farmers from North Gujarat are known for their spirit of enterprise. —Karsanbhai Patel

Karsanbhai Patel was born in a farmer’s family in Ruppur, Mehsana District, Gujarat, India, in 1945. He completed his BSc in Chemistry at the age of 21 and initially worked as a lab technician in the New Cotton Mills, Ahmedabad, and thereafter at the Geology and Mining Department of the State Government. In 1969, he set up Nirma, a detergent powder for sale, which has transformed the whole detergent industry in India. The venture was launched as an after-office business—the one-man company used to go from door to door selling handmade detergent at one third of the market price of other detergents. His entrepreneurial journey was an outcome of his learning from the toughest times in his life. He could create a new history by defining new marketing rules. The secret of the success of Nirma basically lies in understanding the customer and responding to their needs by operating an appropriate strategy. His presence in the market forced leading players such as Unilever and Procter & Gamble to launch cheaper clones. In 2004, he expanded his business by acquiring an IV fluid factory in Ahmedabad. He also acquired US-based Searles Valley Minerals and became one of the top producers of soda ash in the world. He is a befitting example of a self-made man who has rewritten the history of Indian entrepreneurship.

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Nirma, the proverbial ‘Rags to Riches’ saga of Patel, is a classic example of the success of Indian entrepreneurship in the face of stiff competition. Patel was awarded an Honorary Doctorate by Florida Atlantic University, Florida, USA, in 2001 in recognition of his exceptional accomplishments as a philanthropist and businessman. He has been conferred with the Padma Shri Award in 2010. Starting as a one-man operation in 1969, today, he has about 14,000 employee bases and an annual turnover of more than ` 2,500 crore. He started Nirma Institute of Technology in Ahmedabad in 1995, which has become one of the leading engineering colleges in Gujarat and was subsequently incorporated as Nirma University of Science and Technology in 2003. The Nirmalabs, which was launched in 2004, is another initiative that provides incubation facilities along with seed funding support to budding entrepreneurs.

 9.1  INTRODUCTION  The success or failure of a business plan depends a lot on clarity about the market and marketing plan. A marketing plan attempts to understand and identify the market conditions for the given product and service characteristics, detailed profiles of customers, potential for penetrating into the target market, different pricing strategies, promotion and distribution efforts required to build awareness and brand image, and the resources required to successfully achieve sales and profit targets. The most crucial challenge that an entrepreneur faces is to precisely define customer profile within the target market for the innovative product or service developed, estimate the sales potential and recruit good employees to deliver customer value. Start-ups should be very careful in defining the marketing skills that employees should possess and should ensure that they touch the hearts of customers, which should help in developing a permanent relationship with them to keep enlarging the set of loyal customers to the products and services. Having developed a product or service is one side of the coin that does not help in delivering ultimate results unless and until it is backed up by an appropriate marketing strategy to create highly satisfied customers. The two vital aspects of marketing strategy are how to address the competitive marketplace and how to implement the strategy to achieve results. In a highly competitive business environment, a marketing strategy needs to be so developed that it ensures a process and a system in place with an inbuilt feedback mechanism that offers a product or service in a unique way that is far more superior to its competitors. It is also important to have not only a clear marketing strategy in place but more so a process that facilitates day-to-day implementation of the broad strategy. An entrepreneur has to realize that it is of no use to have an excellent strategy on paper that is not backed up by the required resources—human and physical—which ensure its effective implementation. It is important to remember that for every business, there is a specific strategy that works well which has been already tested and proved by some competitors or market leaders. Start-up ventures can get a good insight from the experience of successful competitors in understanding their marketing plans, selling tools and techniques, pricing decisions and promotion methods. Studying existing businesses in the same domain is desirable, as they can be compared well with one’s own business to make realistic assumptions while preparing a marketing plan. A marketing plan should be developed after detailed learning about the customers and their needs. One has to especially develop a feedback system to continuously gain greater insight about the customers and their needs, so as to incorporate these needs while delivering a product or service. For example, a customer who is dissatisfied with a doctor’s service may never come back to the same doctor or hospital and may prefer to shift the patient

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to some other nursing home rather than entering into an argument with the doctor concerned or the administration of the nursing home. Similarly, if we do not like a food stuff in a restaurant tried for the first time, we will never dare go there again. An entrepreneur needs to be sensitive to the critical factors that a customer is looking for in a product or service such as convenience, pricing, quality and service delivery. Identification of critical factors matters the most to the customer, as they need to be incorporated in developing a sound marketing plan. At times, entrepreneurs overemphasize on financials and pay little attention to what matters the most in achieving financial targets, that is, customers. As a result, they land themselves in trouble by investing a lot of their time and effort in combining capital, people and other resources to push their products/services in the market without adequate understanding as to what matters the most in attracting and retaining profitable customers. At times, even start-up ventures land themselves in deep trouble, because they are not aware of the existence of a profitable customer base. A sound business plan should have a strong marketing plan in place that should yield a sound financial plan. The marketing plan concentrates on the customer, who is the hallmark for the success or failure of the business. In short, the marketing plan clearly identifies the customers in the target market and works out the strategy to attract and retain the customers within the business. The key focus is to develop and maintain a competitive edge for the business. This chapter focuses on the aspects of building a marketing plan.

9.2  UNDERTAKING MARKETING RESEARCH Marketing research is the first step in developing a marketing plan for launching a new business, so as to improve the odds of success. Marketing research basically involves a collection of data about customers, competitors and effectiveness of marketing strategies, so as to develop a framework for the implementation of strategies that would yield expected results. New ventures use this as an effective tool to work out the feasibility of a venture, by appropriately identifying the target market, the customers who would be interested and willing to buy the product/service proposed to be offered, the price that customers will be willing to pay and the effective promotion strategy that reaches potential customers in the target market. Overall, the purpose is to chalk out a strategy to market the product or service that would give rise to a competitive advantage. Small-business owners use market research to determine the feasibility of a new business, test interest in new products or services, improve aspects of their businesses, such as customer service or distribution channels, and develop competitive strategies. Thus, marketing research provides objective information to an entrepreneur about prospective customers, their competitors and the overall industry. It is used to confirm the feasibility of offering a product/service by appropriately identifying marketing problems and opportunities, as well as to develop and evaluate the effectiveness of marketing strategies. As such, entrepreneurs will not be able to deploy marketing strategies based on market segmentation and product differentiation without undertaking marketing research. The fundamental questions that need to be answered before making a decision to undertake marketing research are given as follows:     

Why should an entrepreneur undertake research? What specific aspects need to be researched? Is it worthwhile doing the research? How should the research be designed so as to achieve the research objectives? What will be the exact utility of the research?

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Marketing research is not only crucial for start-up ventures but also very important for ongoing businesses to ensure continuous growth. New ventures, particularly small ones, have a greater need for adequate, accurate and timely information that can help them in making decisions. Small-business owners, because of their usually limited financial resources, have a particular need for adequate, accurate and current information that aids them in making decisions. Accurate and relevant information about customers and competitors enables the development of a successful marketing plan. Undertaking marketing research is a costly affair, but it is essential to avoid erroneous mistakes that could result in heavy losses. For start-ups, it may not be workable to undertake detailed marketing research in-house, as it is a professional job that requires a clear understanding of the problem to be addressed, the potential market, and the use of research tools and techniques. Therefore, depending on the competency available in-house, it can be undertaken by the entrepreneur or may require the help of professional marketing research organizations, including consultants specialized in the given area. Intelligent and sharp entrepreneurs entering into an entrepreneurial venture for the first time may rightly identify the sources of relevant information or know where to look for the information required for undertaking marketing research.

9.3  BENEFITS OF UNDERTAKING MARKETING RESEARCH Undertaking marketing research and generating new and relevant information for making a decision is relatively easier than ensuring that the decisions made result in success. Many research studies have failed to understand consumer needs, in spite of using the best of their abilities. For example, Coca-Cola conducted numerous studies before introducing New Coke, yet the product failed in the marketplace because of the consumers’ strong emotional loyalty/attachment to the original Coke (Gelb and Gelb 1986). Similarly, LML launched its new modified scooter with thorough market research, but the sale did not pick up anywhere near estimation because of a change in the taste of customers in favour of motorcycles as against scooters. Similarly, IBM PC Jr had a different architecture. However, soft and no-impact keyboards that came to be known as chiclet keyboards made the users feel as if they were typing on chiclets. The market simply rejected the product in spite of it having a superior architecture. Kellogg in its hurry to enter into the Indian market could not visualize the critical factor that Indians like hot milk with cornflakes instead of cold milk. The American concept of having cold milk in which Kellogg’s Cornflakes remain crisp did not work in the Indian market, as cornflakes turned into a mess as soon as put into hot milk. Further, marketing research could not gauge the pricing strategy well for the Indian market. The Kellogg’s pack of 500 g initially cost around ` 40, which was 80 per cent more expensive than the Mohan Meakin’s pack. Both these factors gave an initial jolt to Kellogg in spite of it having experts to do its market research. As against the examples of failure just mentioned, in spite of having undertaken research, marketing research for entrepreneurs remains highly valuable because of the key benefits that it provides and as it helps in minimizing the risk of failure. It is highly valuable, especially to start-up ventures and, in particular, to small businesses. Some of the benefits that accrue from marketing research are given next (Fig. 9.1)1:  Good marketing research and quality decision making increase the chances of success and ensure the survival of the businesses in the market.  With quality marketing research inputs, entrepreneurs can identify opportunities well and safeguard themselves from adverse market responses by taking timely corrective actions.

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Increase Chances of Success of a Venture Help in Identification of Opportunities and Prepare Against Adverse Market Responses Benefits of Marketing Research to Entrepreneur

Continuously Learning About Outcome of Marketing Strategies Decrease Risks About New Products Introduction in the Markets Help in Constantly Improving Overall Marketing Strategy

Figure 9.1 Benefits of Marketing Research  Marketing research helps in continuously knowing and learning about the customers, competitors and outcomes of marketing strategies.  Entrepreneurs can decrease risks about new products or services that they plan to introduce in a specific market.  Marketing research gives basic marketing benchmarks that an entrepreneur should act on to compete in the market. It helps in evaluating the outcomes of marketing efforts undertaken and in constantly improving the overall marketing strategy of the business.

Thus, keeping in view the benefits of marketing research, it is more important for an entrepreneur not to lose objectivity at the cost of being passionate about their ideas.

Is Marketing Research Relevant to Entrepreneurs? Nancy A. Shenker, president of the ONswitch LLC, a full-service marketing firm in New York, says,  ‘Rather  than  taking  the  time  to  thoroughly  plan  and  research,  they  sometimes  plow  ahead  with  execution, only to spend valuable dollars on unfocused or untargeted activities.’2,3

9.4  FACTORS AFFECTING THE DECISION TO UNDERTAKE   MARKETING RESEARCH Marketing research is not a panacea for all ills in a start-up or ongoing venture. One needs to examine several factors before deciding whether to proceed or not with marketing research. It is important to realize the changing circumstances, ongoing information flow and the benefit that can arise from undertaking marketing research. The fundamental issue that would govern the need or otherwise of taking up research is the nature of information required to make a decision. In case the nature of information required can be procured from other available sources or is available within the organization in the form of talent, experience and earlier studies undertaken, then one may not go in for undertaking marketing research. For example, an entrepreneur who has launched their product in one state and has complete information on the outcomes of launching in terms of success or failure need not undertake another study to enter into another state with more or less similar characteristics. Similarly, in case an

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Criticality and Nature of Information Required for Decision Making

Factors Affecting Marketing Research Decision

Time Frame Available as per Planning for Different Events Pertaining to the Opportunity Availability of Financial and Human Resources Required Cost–Benefit Analysis of Decision Making

Figure 9.2 Factors Affecting Decision to Undertake Marketing Research existing study undertaken a few years ago had covered a broader geographical area than is proposed to be covered now, then one may get an insight from the earlier study coupled with the outcomes of the already covered areas, rather than going in for another study (Fig. 9.2). The second important factor that governs the decision about taking up or otherwise of marketing research is the timing. Research decisions depend on the time frame available as per planning for different events pertaining to the opportunity under consideration. Basically, decisions related to the venture opportunity need to be made at specified timings based on available information, and going in for marketing research study may pose a constraint. Suppose a product is to be launched within six months from zero date, then all decisions regarding price, promotion and product formulation have to proceed within a given time frame, and the entrepreneur may not have sufficient time to undertake or get detailed marketing research done by a consultant. However, there may be situations wherein the timings of decisions depend a lot on the outcome of marketing research study and, therefore, may necessitate undertaking such research. The third factor that governs an entrepreneur’s choice for undertaking marketing research is the availability of financial and human resources required for the research. Financial constraints may ultimately result in undertaking a marketing research which may yield inaccurate or inappropriate information that may not serve any purpose whatsoever. Similarly, if professionals lacking experience or education are deployed in-house or hired from outside, it would result in unimpressive results which may not serve any purpose. Above all, what matters most is the cost–benefit analysis of decision making based on the value of information sought versus the decision without that information. It would depend on the entrepreneur’s perception about incremental quality and the value of information in relation to the cost incurred and the time it would take to get the results.

9.5  SCOPE AND STEPS INVOLVED IN MARKETING RESEARCH Marketing research encompasses different aspects of understanding the market in detail and the characteristics of the potential customers in it. Its focus has to always be the specific target market, which would have different characteristics from market to market and, therefore, different information

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Existing Products

Identifying Target Market and Customers

New Product

Identifying Market Characteristics

Measurement of Marketing Potential

Competitors Analysis

Pricing Strategies and Studies

Estimated Market Share and Sales Analysis

Long-range Forecasting of Marketing Mix Variables

Sales Forecasting

Figure 9.3 Scope and Steps Involved in Marketing Research requirements for making informed and objective decisions. Some of the vital areas of concern for an entrepreneur that require marketing research are given next (Fig. 9.3):  Identifying Target Market and Customers—One should identify the existing or prospective customers for a product/service. It is necessary to divide customers into homogenous groups having common characteristics. This section would also cover major purchasers in each identified market segment in national, international or regional markets. One should also clearly identify the purchasing process adopted by the customers, including the criteria in terms of price, quality, timing, service and personal contacts that are used by the customers.  Identifying Market Characteristics—The market characteristics analysis helps in identifying dynamics of the customer base that helps to understand and get greater insights about the market— type, size, players and growth prospects. It is part of a broader market opportunity scan. Market characteristics, together with assessment of the external forces, enable the entrepreneur to discover key implications for smartly fashioning the value chain into a competitive market. Therefore, the identification of market characteristics becomes crucial and critical for all entrepreneurs.  Measurement of Marketing Potential—It helps in projecting the demand for a product. An entrepreneur needs to understand the size of the total current and future market along with the share they propose to capture of the market segment, region and country, in physical as well as financial terms. Analysis should also project, at least for the next three years, the annual growth in total size of the market expected for different customer groups, regions or countries, as applicable.

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 Competitors Analysis—Identifying existing and prospective competitors and their strengths and weaknesses to get an understanding about the severity or the otherwise of competition. An entrepreneur should also assess alternative products/services available in the market as well as their relative advantages and disadvantages. Competitor analysis attempts to compare competing and substitute products/services based on market share, quality, performance, delivery, post-sales service and other critical features. After having done these, the entrepreneur should clearly state the value that their offering, in terms of economic and psychological terms, would provide them an extra edge. This analysis will also provide an insight to the entrepreneur that could lead to coming up with a new or improved product in the market. It is also advisable to find out from this analysis the vulnerability that competitors have in the market that can help them in capturing the market.  Estimated Market Share and Sales Analysis—The purpose here is to estimate the potential of an entrepreneur’s product or service in terms of sales in the context of an existing and future competitive environment. It is also necessary to identify major customers in national and international markets, as the case may be, who would contribute to a major chunk of total sales, say 70 to 80 per cent. It is important to identify them and give them special care to ensure that this group remains loyal to the product/service. In this section, an attempt is made to assess the existing and future sales trends based on market size, customer profile, competition and their products. It is also important to understand the growth of the company’s sales and market share vis-à-vis growth of the industry. While estimating future market share and sales, the assumptions made need to be clearly highlighted, as it is the fulfilment of those assumptions alone that can ensure the achievement of estimated sales and market share. Above all, a system needs to be developed that evaluates target markets, assesses customer needs, pricing and its implications on sales, new product programmes as a feedback from customers and expansion plans.  Identify and Forecast Business Trends—An entrepreneur needs to have a knack of forecasting and identifying emerging business trends, particularly with a view to finding out their implications in their business. Companies that develop an intelligence system to monitor information coming from different sources, such as government, trade associations, competitors, experts’ views in the news channels and business magazines, get a better insight about the future trends of the overall economy and their business. These entrepreneurs try to develop a better grip over the internal and external environment by continuously monitoring it and relating change in the financial performance of their business to these factors. The art of forecasting business trends enables entrepreneurs to mitigate the risk of competitors taking away the business. What matters most is to monitor the relevant data required on a continuous basis that should be done in a reliable and timely manner.  Sales Forecasting—Any business entity needs to forecast its sales level in different time horizons to plan for its investments, launch new products and withdraw existing products from the market. There are two broad categories of forecasting, namely, macro, which is concerned with markets in totality for the industry, and micro, which is concerned with detailed unit sales forecasts in specific regions for the company. The process starts with estimating market demand, that is, the total volume that would be bought by a defined customer group, in a defined geographical area, in a defined time period, in a given marketing environment. Company demand is the company’s share of market demand. For example, if the total demand for two wheelers in India is 5 lakh per year and the company’s market share is 20 per cent, then company demand would be 1 lakh two wheelers per year. Sales forecast relates to the expected level of company sales in monetary as well as physical units based on a well-conceived marketing plan and assumptions about the marketing environment. It is important to understand that sales forecast is not the same as sales target. • For market demand estimation, an entrepreneur needs to know the actual industry sales taking place in the market. This can be estimated based on competitors’ sales. Forecasting sales involves three steps, namely, macroeconomic forecast, industry sales and company sales. This would require

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Projected Demand for the New Product Limited Moderate Significant

information mainly on what customers say about their intentions to continue buying products in the industry, what customers are actually doing in the market and what they have done in the past as regards their buying behaviour.  New Product/Service Acceptance and Potential—This aspect attempts to verify the performance of the product in the market. The purpose is to ensure that the product specifications satisfy market expectations. In this phase, the review team stays completely involved with the customers to find out their responses to acceptability of the product. The entrepreneur tries to identify whether their estimates are being realized and, if not, what are the implications of these with regard to the future prospect of business. New product development and its acceptance in the market involve a number of challenges such as clearly describing the new product concept to the production people as understood by customers. Any gap between the two would result in problems at a later stage. Misunderstanding between market research personnel and consumers arises mainly on account of the respondent’s inability to clearly express the experience and features they are looking at and the interviewer’s inability to comprehend well the responses of prospective customers. As a result, the actual product produced may differ from the needs of the customers, thereby resulting in overestimation of demand. At times, projections are not able to capture the viral effect in marketing and, therefore, may result in an underestimation of demand. Both overestimation and underestimation pose problems to the entrepreneur (Fig. 9.4).  Long-range Forecasting of Marketing Mix Variables—The successful introduction of new products or services into the market is vital for the long-term growth of a company (Kotler and Keller 2006). Before a new product launch, marketers create marketing programmes to maximize the chance of success. It is a great challenge to the entrepreneur to make managerial decisions in advance about the appropriate pricing levels as well as advertising and promotion budgets. Entrepreneurs need to forecast the market responsiveness to various marketing mix variables—product, place, price and promotion— in the absence of any actual sales data. It becomes a strategic decision to appropriately forecast the

Product Failure

Accurate Estimates

Missed Opportunity

Slow Sales

Moderate Sales Customer Responses

Accelerated Sales

Figure 9.4 Customer Responses to New Product

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marketing mix variables for the new products/services, as the success or failure of the new product would depend on these variables and availing them without compromising on these aspects.  Pricing Strategies and Studies—Pricing a product is the key decision that governs the margin to the entrepreneur and value to the customer. Pricing decision and strategies get more determined by the value that a customer attaches to the product than the cost of inputs. In highly competitive market conditions, a price war in an industry can create havoc and may force many to quit the market. For example, from 2005 onwards, the aviation industry in India saw a massive cut in fares leading to a majority of them making losses and even some of them exiting from the industry. To gain control over the prices, an entrepreneur needs to be innovative and maintain an exclusivity to their product and service in the eyes of the customer; keep adding value to the business so as to stand distinct among competitors and keep building on goodwill and branding by retaining quality.  Some of the vital strategies that come handy in fixing prices are given next (Fig. 9.5): • Price Skimming—If an entrepreneur has brought out a new product or new technologies in the market for the first time, price skimming strategy can be the best choice. This method opts for fixing a high price for the product at the time of its introduction to fetch good margins and recover the investment made on research and development (R&D). Some of the key examples are mobile sets, DVD players, LED television sets and flat televisions. • Penetration Pricing—This strategy works well in a competitive market, especially for new products in a well-established market. An entrepreneur attempts to seek an entry in the market to acquire some market share so as to attract new customers. Penetration pricing is typically used for products that are new to a well-established market. Such a method involves pricing the product very low in order to gain market share and attract customers. News magazines use this pricing strategy. After gaining the loyalty of customers, the entrepreneur may decide to raise the prices when customers start realizing the comparative benefit they are drawing compared with competitors’ offerings. • Premium Pricing—In case there are no competitors in the market and the product provides significant advantages to the customer because of location, time and intense need, the product may be priced artificially high in order to maximize profits. For example, a bottle of water at a height of 15,000 feet with no other shopkeeper selling water or a taxi at midnight at a place where no other mode of transport is available and when the customer has to reach their destination for attending an interview at 8 am in the morning, providing helicopter services at a deep forest range or mountains having precious natural resources and that are not connected by any other mode of transportation.

Six key steps involved in undertaking marketing research are given here: i. Defining the Problem—This phase involves a clear and precise definition of the problem. The problem needs to be defined in its entirety and understood well by the whole team that is involved in undertaking marketing research. The problem definition is the foundation step for undertaking

Price Skimming

Penetration Pricing

Premium Pricing

Pricing Strategies

Figure 9.5 Different Pricing Strategies

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research, as it would affect all the subsequent steps related to undertaking research. Defining the problem also depends on the available internal and external data in the area of study. Some of the relevant questions that need to be incorporated while defining the problem are given as follows: • Ask people what they think of the product or service and collect some background demographics and attitudes of these individuals. • How many potential customers would be willing to pay for the product or service? • Where would potential customers prefer to purchase product or service? • Where would customers expect to hear or learn about such a product or service?

Having defined the problem, in the backdrop of business opportunity, an entrepreneur should find out whether the benefits that accrue from additional information as a result of research would offset the cost or not (Fig. 9.6) to take a view for going ahead or not with the research. The value of the information from marketing research depends a lot on the importance and implications of the decision, the degree of uncertainty associated and the effect of information on the decision. Having taken a view to go ahead with marketing research, the objectives need to be precisely defined as to the specific information that is needed, so that the obtained information serves and satisfies the purpose. ii. Designing a Proper Approach—The next step involves coming up with an approach that would help solve the problem. This step would involve the research team analysing and examining different factors related to the company’ targets, goals and objectives, financial resources, skill sets, manpower, industry environment and changing business trends. This step involves discussions between the research team, experts from the industry and company officials to enable the research team to methodically design a proper approach that pursues the solution to the problem with a wider perspective. iii. Developing the Actual Research Design and Strategy—The research design is the fulcrum of the marketing research process. The success or failure of research effort depends a lot on research design. Therefore, the design needs to be carefully thought out and well executed. It is a detailed blueprint of research that guides the implementation of a research study towards the realization of its objectives. The key activities involved in this process are qualitative and quantitative analysis, preparing questionnaires, sampling of data and processes and feedback analysis. The researcher should specify the specific criteria or variables to be measured, sampling plan and techniques to be used, methods proposed to be used for analysis, cost and time involved in undertaking the study.

Define Business Opportunities and Research Objectives

Estimate the Value of Information From Research

Benefits Greater Than Cost Undertake It

Benefits Less than Cost Do Not Undertake It

Figure 9.6 Decision to Undertake Marketing Research

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iv. Data Collection—This process involves the collection of data from primary and secondary sources. Secondary data sources can help in solving the problem on hand on their own; give the lead to new ideas and other sources of information; help in defining the problem more clearly and, above all, give vital clues about designing the primary data collection process. The main advantages of secondary data are low cost, less effort, time and energy taken to collect them, and at times, they work out to be more accurate and may be the only data source. However, they also have certain limitations such as being collected for some other purpose, may not be very accurate, may not be specifically the information the researcher is looking at, and may be old and outdated.

The research team should first collect the required data from secondary sources such as government reports, economic surveys, Reserve Bank of India Bulletin, World Bank Reports, reports from various ministries, study reports from the Confederation of Indian Industry (CII) and Federation of Indian Chambers of Commerce and Industry (FICCI). Thereafter, depending on the need, the data should be collected from primary sources. This would require a lot of field-related work such as outdoor interviews, survey campaigns and feedback sessions from the selected sample based on predetermined criteria. This gets done by data collecting agents who might be specifically employed for this purpose. Data collection through primary sources is a great art and requires special skills to ensure that reliable data get collected that help in the findings of the study. This exercise may also be undertaken through Internet surveys—online data collection through scientifically developed questionnaires, focus groups, discreet surveys, mail surveys, experimentation and networking. This is a more informal method of gathering in-depth information. A focus group is a sample of 10 to 12 potential customers who are invited to participate in a discussion relating to the entrepreneur’s research objectives. The entrepreneur should exhaust all possible secondary data sources, observations and networking before beginning any more costly primary data research. v. Analysis and Interpretation of Data—Having collected the required data, they should be organized well and analysed. Data may be processed through certain techniques after being tabulated. The purpose of organizing the data and their analysis is to come up with interpretations that would facilitate decision-making. This would mostly involve activities such as data mining, clustering of data, preparing statistical graphs and curves and the use of typical statistical techniques that can help in analysis and interpretation. vi. Interpretation and Presentation of Findings—The final outcome of the four steps just mentioned is to present the findings and results of the research in the backdrop of objectives. The whole process involving various steps needs to be documented well for the benefit of users, say the entrepreneur or departmental head that it concerns. The whole purpose is to enable the top management to make informed and objective decisions that will enable the achievement of predetermined objectives. Therefore, it is important to present research findings accurately, clearly and relevantly.

Example An entrepreneur who is a dentist by profession and who is successfully operating their single clinic in  Munirka locality in New Delhi proposes to start a chain of dental clinics with a new concept of charging  a  fixed  nominal  amount  per  month  from  all  their  members  and  of  providing  dental  care  to  all  their  members. Keeping this in view, the specific advantages and disadvantages are given as follows:

Advantages   The total annual cost of dental services to an individual is lower than for group insurance plans.   A flat fee charged every month would discourage doctors from hospitalizing patients for longer  periods than necessary, or from prescribing multiple tests for the sake of doing them. (Continued)

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Disadvantages   There would be a restriction on the choice of dentists to those affiliated with the dental chain.   Having  identified  the  advantages  and  disadvantages,  marketing  research  would  focus  on  identifying the estimated number of households that would be interested in the specific localities  in which to avail such a service. Having found out the number and monthly fee chargeable, a  decision  can  be  made  about  the  associated  investment  in  setting  up  each  dental  clinic  in  specific localities wherein the returns on investment will be commensurate with the investment.

9.6  CATEGORIES AND TYPES OF MARKET RESEARCH There are three vital categories of marketing research, namely, exploratory, descriptive and causal (Fig. 9.7). The exploratory research technique is used when a problem requires seeking insights into the broader and general nature, the possible decision alternatives and the identification of relevant variables that need to be considered/examined. Descriptive research provides an accurate snapshot and a detailed view of the specific aspects of the market environment, such as the proportion of the adult literate population in the state of Rajasthan, consumer responses to the features and attributes of a product under consideration versus competing products and the socioeconomic and demographic characteristics of the readership of a Business Today magazine. The causal research technique is used when it is necessary to show that one variable causes or determines the values of other variables. Here, a researcher is looking at the cause-effect relationships between variables. For example, the sale of coolers or air conditioners is a function of weather conditions resulting in the temperature shooting beyond 40 degree Celsius in a particular district. Thus, descriptive and causal approaches narrow the possible causes, whereas exploratory research helps in generating all possible reasons for the problem. Marketing research is of various types and mainly focuses on the specific aspects to be studied. Some of the vital types of marketing research that entrepreneurs use in their decision-making are given here.  Audience Research—For certain marketing strategic decisions, it becomes important for an entrepreneur to know about and understand as to who listen to the radio, watch television or read printed publications. This information is also pertinent for advertising agencies who would like to reach a certain target audience with their message. The marketing research about audience research Exploratory

Research Techniques

Probable Causes

Descriptive Probable Causes Causal

Figure 9.7 Research Techniques

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facilitates promotion decision and the budget that an organization should provide to meet its objective of reaching prospective customers through mass media. Product Research—Product research helps in knowing about the reactions of customers to the product characteristics and taste. The main objectives of undertaking product research are to introduce change in the taste/characteristics of an existing product or to introduce an altogether new product and measure the consumers’ reactions to see whether there is room in the market for a variation or introduction of a new product with different taste and characteristics. However, at times, a product research may have a danger of paying much attention to the things that may not be worthwhile from the market perspective. For example, as stated earlier, the introduction of New Coke was based on the outcome of taste tests that revealed that the public would appreciate and like the introduction of a sweeter product. However, later the company realized, based on the response of the angry public, that the public would not like to change Coke’s familiar formula. This forced the company to discard its market research outcomes and leave the original Coke on the market. Psychological Research—It is quite challenging and difficult to undertake psychological research, because it is difficult to understand and measure human behaviour. The focus of psychological research is to find out why people like and buy certain products and dislike others. The emphasis is on dividing the population into certain homogeneous classifications based on the lifestyle of people, their previous buying habits and the cultural background that influences their decision to buy or not to buy a product/ service. It attempts to measure the attitude of the people and relate it to their buying behaviour, which is not an easy task. This is evident from a research study in which researchers asked people entering into a departmental store as to what they had been planning to buy before entering into the store. However, it was found on their coming out that hardly 30 per cent of the respondents bought what they had said they planned to buy just half an hour earlier. Database Research—Database research is gaining more and more ground and popularity among marketing researchers, because the raw data are contributed by the purchaser in departmental stores, shopping centres, railway booking counters, while applying for admissions and at an umpteen number of other places while making a decision. Marketing researchers intelligently collate these data by developing a computer programme that understands common buying patterns and behaviour. This gets utilized very effectively in market segmentation research. For example, from the municipal corporation territory database, one can identify where the affluent section of the society lives. This can be collated with licensed drivers and owners of cars of a certain make that are older than a certain number of years. These data may help in identifying prospective buyers for the new luxury car proposed to be introduced in the market soon. The potential buyers could be contacted to demonstrate trial runs of the car. Scanner Research—Scanner research focuses on collecting data from a particular group of respondents by continuously monitoring the advertisement campaigns, promotion and pricing that they are exposed to and their buying decisions. The data available at the counters of departmental stores and supermarkets reflecting the actual purchases done by customers are valuable information used in marketing research. This information can be effectively used by an advertiser to plan for an ongoing marketing strategy.

9.6.1  Research Methods for Data Collection Three commonly used methods for data collection are given next (Fig. 9.8):  Closed-ended Questionnaire—This approach collects information through closed-ended questions that require an answer such as ‘Yes’ or ‘No’ or picking up an answer from multiple choices given such as ‘Strongly Agree’ to ‘Do not Agree’. This type of marketing research is generally undertaken to elicit answers from customers or the general public or target population. It is generally undertaken to determine awareness about a product or service and how awareness could be increased. The fundamental

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Closed-ended Questionnaire

Open-ended Questionnaire

Focus Group

Research Methods

Figure 9.8 Different Research Methods problem with multiple-choice questionnaires that ask for answers among the specific choices requires respondents to be very clear in their mind; however, many people do not think in a clear-cut fashion. The questionnaire needs to be prepared with a lot of caution, else it may not provide a clear view of the person being surveyed. It is important to ensure that the questions be so framed that a true picture emerges of what is happening in a market.  Open-ended Questionnaire—Knowing very well that people often have opinions that do not fit into a multiple-choice questionnaire, the need arises to pose questions that provide a flexibility to the respondents to express what they feel, without constraining them to choose a specific answer. To get these opinions which may help a researcher get a wide variety of responses that may not fit into a straightjacket, researchers are shifting towards open-ended research, thereby allowing people to express whatever is in their minds related to the question under consideration. For example, asking a customer after their having stayed in one’s hotel, what they liked and what they did not like. At times, it becomes more desirable to have a combination of open-ended and closed-ended questions in a research study. For example, a response such as ‘strongly agree’ to a statement that ‘I enjoy my job and like the organization I work for’ may trigger a question as to the reasons for strongly agreeing with this statement. The fundamental challenge lies in eliciting honest answers as applicable to the respondent rather than the response that a researcher or organization would like to have.  Focus Group—In this method, discussions around a table with groups of consumers, would-be consumers, never-buyers or any other demographic group that a company wishes to bring together are called ‘focus groups’. The purpose is to get feedback on specific issues such as price, quality, convenience and service. It is a special skill to elicit information from a focus group by having a free conversation without taking sides. It involves a special listening skill on the part of the moderator to comprehend the views from the focus group for identifying new marketing opportunities. It is always desirable to supplement research outcomes from a focus group with other marketing research techniques, as opinions expressed among a group of unknown members may not always reflect the way people would react in reality.

9.7  MARKETING RESEARCH ON THE INTERNET The number of Internet users across the globe is growing at an accelerated rate. As of June 2010, there were 1,966.5 million users, which accounted for 28.7 per cent of the world population.

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Between 2000 and 2010, the growth in Internet users was 44.5 per cent. North America kept on dominating with around 78 per cent of its population using the Internet in 2010 followed by Oceania/ Australia (61.35 per cent); Europe (58.4 per cent); Latin America/Caribbean (34.5 per cent); the Middle East (29.8 per cent); Asia (21.5 per cent) and Africa (10.9 per cent). However, it is interesting to note that 42 per cent of the total Internet users are from Asia followed by Europe (24.2 per cent), North America (13.5 per cent), Latin America/Caribbean (10.4 per cent), Africa (5.6 per cent), the Middle East (3.2 per cent) and Oceania/Australia (91.1 per cent). E-commerce sales by different merchandise lines in the United States alone had touched a figure of $88,915 million, constituting 45 per cent of the total sales in 2007, which has been increasing at an accelerated rate. With penetration of the Internet in other countries and regions of the world, the Internet would become a potentially very important tool for marketing research as well as to devise marketing strategies. The Internet is a worldwide network of communication channels. There are alternate channels such as World Wide Web (WWW), e-mail, USENET, which offers more than 10,000 different discussion areas, called ‘newsgroups’, File Transfer Protocal (FTP) and TELNET (a programme that enables users to log in to a remote host site. Internet users have typical characteristics such as being less computer savvy, less affluent to even afford it; more and more women are becoming Internet users, 80 to 90 per cent of Internet users are below the age of 50 and around 40 per cent of Internet users are college graduates. Some of the vital WWW information sources for marketing decisions are CyberAtlas, a division of I/PRO that compiles and publishes public domain information about the Internet market size, growth, forecast and demographics. Forester Research from Cambridge, Massachusetts, offers a service called ‘new media research’. One component of this includes media and technology strategies that focus on new business media models for publishers, broadcasters and information service providers. AdCount by NetCount is a tracking service of Web users that attempts to measure the effect of Web ads. HERMES and Project 2000 are two academic endeavours on the activities of the Internet (Aaker, Kumar and Day 2002). The Web has almost been redefined as ‘marketing communications, altering distribution channels and sales models, modifying consumer behavior, and mediating the relationship not only between businesses and individual consumers, but on the business-to-business level as well’.4 The Internet tool can be effectively used to undertake primary research through e-mail surveys, Web-based surveys and online focus groups. This facilitates the collection of first-hand information at a greater speed of delivery, cost-saving benefits, no involvement of intermediaries and the respondent being able to reply at their own ease and convenience. Secondary research through the Internet can be undertaken through custom search service, which provides information on the payment of fees. These services are available on a one-time search basis as also tracking and forwarding the information at regular intervals. Agents are another source of getting secondary information. They operate and function in different ways such as they are programmed for a particular search task. Free information providers enable availability and access to current and archived information through various news agencies such as CNN and Reuters. Some of the negative aspects of Internet marketing that need to be carefully taken care of while developing a marketing strategy are the assumption that customers need not read the manual or other relevant material; overdepending on search engines without being very clear about one’s goals as an entrepreneur; not thinking of other alternate better sources to reach customers in specific contexts and not knowing about the ins and outs of search engines.

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9.8  INDUSTRY ANALYSIS The first step in the process of preparation of a marketing plan is to undertake industry analysis. This carries a prominent place in the business plan. The main purpose of undertaking industry analysis is to elicit adequate knowledge about the environment—global, regional, national and local—that will have a bearing on business prospects and, in turn, decisions related to marketing strategy. It is a market assessment tool that helps in providing the complexity involved in the business. It helps in gauging the economic, political, social and technological factors that affect the operations in the industry. The exercise starts from a broad perspective and narrows down to a local level to identify industry trends. The industry is a set of firms involved in producing similar products or services that can be called ‘substitutes’ such as soft drinks, natural fruit juices, electronic durables or just TV manufacturers depending on the product range of the entrepreneur under consideration, air travel, higher education or institutions providing professional education in engineering. Industry analysis attempts to diagnose and understand the potential of an industry from the business development point of view. After identifying prima facie feasibility and the potential of a business in an industry vis-à-vis specific market, a deeper industry analysis is undertaken to understand the ins and outs of the industry to get well prepared to respond to challenges. This would enable an entrepreneur to identify the niche markets that would provide great opportunity from the point of view of entry of the firm. Some of the fundamental questions that industry analysis should enable one to answer are as follows:    

Is it a worthwhile market for a new venture to enter? Does the industry provide scope for innovations or does it have untapped market potential? Can a new entrant occupy a position that would circumvent adverse attributes of the industry? Does the industry provide good scope for the accelerated growth of a venture?

An entrepreneur can depend a lot on secondary information to undertake industry analysis. In addition, they may visualize a need for undertaking market research to get more pinpointed and specific information related to customer needs, competitive strengths and weaknesses, pricing strategies operated in the market and the distribution system vis-à-vis cost advantages in relation to the specific benefits that the product/service provides. The primary data on these parameters would be very useful to the entrepreneur in devising an effective market position, chalking out goals and objectives of the venture and action plans that would enable the achievement of goals and objectives. For example, an entrepreneur manufacturing a clutch in the Indian market; if they have developed a technically superior clutch plate for two and four wheelers (cars) and are interested in undertaking industry analysis, then they may get a lot of information from secondary sources on a number of two wheelers and car manufacturers, their production capacity, their capacity utilization and new projects, if any, in the pipeline and work out derived demand for clutch plates by original equipment manufacturers (OEM) and replacement demand on account of existing vehicle owners. However, to get a deeper insight, one may have to collect primary data or undertake a specific research study on clutch manufacturers in India. A specific study or primary data collection alone can provide a clearer picture to analyse the industry vis-à-vis the proposed products’ advantages and disadvantages. The greatest advantage that an entrepreneur gets by undertaking industry analysis is the development of a clear perspective about competition and key competitors’ strengths and weaknesses, which would provide a deeper insight on positioning their product/service.

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Example: Training and Education Industry The  training  and  education  industry  in  India  is  undergoing  a  major  change  in  the  preferences  of  the  customers.  This  has  necessitated  training  institutions  to  develop  new  strategies  to  create  and  capture markets. Other than preference towards globally recognized certifications, particularly in the  area of software industry, distance education has started attracting more preference as compared  with higher-degree full-time programmes of studies. Further, the preference has shifted in favour of   short-term training programmes as against long-term ones. The industry’s focus has shifted in favour of improving processes and enhancing efficiency and  quality levels. This has posed a distinct challenge to the existing and new players in the market. Due to the existing shift in preferences as emanating from market forces, a majority of the existing  players in the market were forced to explore newer training areas to survive. Many have adapted to  changed preferences by developing new strategies, some had to quit from the market and some new  players have entered with innovative offerings. A new paradigm shift has emerged wherein existing players as also new entrants are entering into  tie-ups and alliances for their credibility. Some educational institutions have started offering courses  and programmes of studies jointly with foreign universities to offer globally recognized programmes.  Some institutions are developing customized training modules specific to an organization’s needs. Metro cities contribute a major share of revenue for the education and training industry followed by  semi-urban and rural areas. This is mainly on account of the low incomes as also low literacy levels  in rural areas. Some of the management education and engineering education players have even  expanded their wings outside India. Despite the present bleak business prospects for training institutions in general, it is expected  that IT and vocational and professional training institutions as also institutions offering professional  degree  programmes  have  a  good  potential  for  existing  and  new  institutes  to  survive  and  grow.  There  will  continue  to  be  a  big  gap  between  the  demand  and  supply  of  skilled  professionals  in  the next 5 to 10 years. As the Indian economy is strengthening its efforts to become a ‘knowledge  economy’, it is becoming important for it to channelize its resources and focus its efforts on the  advancement of skills that are relevant in the emerging economic environment. In the twenty-first  century,  as  science  progresses  towards  a  better  understanding  of  the  miniscule,  that  is,  genes,  nano-particles, bits and bytes and neurons, knowledge domains and skill domains also multiply and  become more and more complex. To respond to emerging challenges, the Eleventh Five Year Plan  has given a very high priority to higher education through its initiatives such as establishing 30 new  Central universities, 5 new IISERs, 8 IITs, 7 IIMs and 20 IIITs for bridging the gap between the supply  and demand of required skills. The Eleventh Plan aims at launching a National Skill Development  Mission, which will bring about a paradigm change in the handling of ‘skill development’ programmes  and initiatives. The unorganized sector in the Indian economy constituting around 93 per cent of  the workforce is not supported by any structural skill development system and provides the muchneeded opportunities in the industry. Training needs of the unorganized sector are highly diverse  and distinct. The existing efforts for imparting training through Swarnjayanti Gram Swarojgar Yojana  (SGSY), Prime Minister Rojgar Yojna (PMRY), Khadi Village and Industry Commission (KVIC), Krishi  Vigyan Kendra (KVK) and Jan Shiksha Sansthan (JSS) have not at all been commensurate with the  level of investment being made and, thus, provide an opportunity to revamp these programmes as  well as to come up with new and innovative programmes to take care of the need. A basic problem  with the skill development system is that the system is non-responsive to the labour market, due to  a demand-supply mismatch on several counts: numbers, quality and skill types. (Continued)

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The  quantitative  dimensions  of  the  skill  development  challenge  in  India  are  evident  from  the  following points:   80  per  cent  of  new  entrants  to  the  workforce  have  no  opportunity  for  skill  training.  Against  12.8  million  new  entrants  to  the  workforce  per  annum,  the  existing  training  capacity  is  for  3.1 million per annum.   About  2  per  cent  of  the  existing  workforce  has  skill  training  against  96  per  cent  in  Korea,  75 per cent in Germany, 80 per cent in Japan and 68 per cent in the United Kingdom. There will be an increased demand for courses offering a long-term potential and those that help  students find employment. New  emerging  areas  such  as  vocational  training  programmes  and  courses  in  the  area  of  bioinformatics and verticals such as banking and insurance are expected to provide great opportunities  for domain-specific training. Another niche area that would provide growth prospects for existing and  new  entrants  would  be  developing  customized  training  programmes  for  corporates,  coupled  with  e-learning courses. Although e-learning has been much talked about, it has remained dormant from  its effectiveness point of view to give a momentum to the industry. However, market research studies  point out that increasing Internet usage will cause a paradigm shift in the mode of training delivery,  with e-learning being the gainer. On the whole, three large training segments can be seen emerging—degree programmes under  distance education, call centre training and international certification education—mainly in hardware  and networking. Of course, the drive for basic IT literacy programmes can only intensify.5

9.9  COMPETITOR ANALYSIS To prepare a marketing plan, an entrepreneur should analyse the existing and prospective competitors, their strengths and weaknesses to derive a competitive advantage. In industries having a large number of players having their own niche, the actions of one may not affect much the other player in the market, especially for the offerings that have some specialty which can be characterized as a differentiating factor. However, in the case of concentrated industries offering almost a similar product in a similar price range, it becomes very vital to understand the competitors and their moves to capture the market share. Competitor analysis has the following key objectives:    

gathering information about competitors to analyse their strengths and weaknesses analysing the information to work out superior strategies to respond to the competitors’ offerings working out the competitors’ possible moves preparing a dynamic and proactive move to respond to the challenges posed by competitors

The purpose of competitor analysis is to clearly identify who are the probable competitors to compete with, the competitors’ strategies to increase their market share vis-à-vis planned strategies by the entrepreneur and how to remain ahead of competitors in increasing the market share by a higher growth in sales. Michael Porter (1980) has given a wonderful framework to analyse competition and competitors with a focus on competitors’ objectives, their assumptions, strategies and capabilities. The competitors’ objectives and assumptions drive their moves and strategies and help in identifying what they do and what they are capable of doing. It is not enough to identify existing competitors but more

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so, new entrants who would be potential competitors over and above the existing ones. Information on competitors could be obtained from public sources to begin with that can be fine-tuned with marketing research studies to gather pinpointed information. Certain information can be collated and analysed based on what a competitor says through annual reports, press releases, interviews with analysts and statements made by managers. However, more authentic and relevant information could be obtained through a competitor’s actions as evident from recruitment, R&D initiatives, capital investment projects undertaken and in the pipeline, strategic alliances and partnerships entered into. Having obtained relevant information from different sources, the entrepreneur should assess different key competitors’ strengths and weaknesses vis-à-vis their marketing strategies. Competitors’ assumptions about their firm and their industry help in identifying their moves and actions. It is due to their resource capability vis-à-vis opportunities that the industry provides results in their strategies to achieve their objectives. In case a new product introduced in the industry has failed, then the existing players in the market may assume there is a lack of opportunity in the market. However, it may not be necessary that such assumptions are always true. If not true, they provide a good opportunity to the new players as also existing ones. Honda entered the Indian market with small bikes to capture the market from young and middle-aged customers in middle- and above-middle-income groups, mainly because the existing players did not have a mobike with 100cc. Competitors’ assumptions are mainly based on their belief about competitive position, previous outcomes and responses from the market, industry trends and, above, all their gut feelings. Further, one needs to diagnose the capabilities of different competitors that govern their ability to effectively respond and provide a clear indication about their competitive strength as also what needs to be done by an entrepreneur to develop a competitive advantage. This can be done with the help of SWOT analysis, as highlighted in Chapter 8 (‘Business Plan’). The analysis of competitors’ strengths and weaknesses needs to be further stretched to evaluate the competitors’ ability to increase their capabilities in future. The sum total of competitor analysis can be comprehended as described in Figure 9.9 to get a greater clarity about the competitors’ capabilities. This analysis can be effectively

Strategies

Strengths

Weaknesses

1. Product/Service Characteristics 2. Pricing 3. Promotion 4. Place 5. People, Processes and Packaging

Figure 9.9 Competitor Analysis

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utilized to develop a market positioning strategy for the venture under consideration with a key focus on availing the opportunity by encashing on competitors’ key strengths and using some of their weaknesses to fill up the gap in the market. This analysis also provides a clear direction as to whether a venture would respond to the needs of the customers that are not being catered to by any competitor or whether the entrepreneur will try to create an extra edge to attract customers towards their product/service. As such, the analysis will provide a solid base and strength to develop a marketing plan for the venture. The whole purpose of undertaking a detailed competitor analysis is to understand the present scope for entering into the market to capture an expected share that can lead to accelerated sustainable growth for the company under consideration by influencing and proactively responding to competitor’s strategies for the firm’s advantage.

9.10  DEFINE TARGET MARKET An entrepreneur needs to develop a clear perspective about their target market, which is defined as a ‘specific group of consumers at which a company aims its products and services’. Target market analysis enables in a scientific way to identify people and the organizations that a venture would like to serve. It also helps in determining the most effective and efficient way of serving the prospective customers from the target market. Target customers are a set of potential customers who are most likely going to buy one’s product or service. The entrepreneur would like to focus on this specific group of customers for marketing their goods and services. This group allows an entrepreneur to focus the marketing budget and brand message on a specific well-defined market that is more likely to buy from them. The whole purpose becomes to reach the customer in a far more efficient, affordable and effective manner. Target market analysis attempts to provide concrete information on the following issues (Hair Jr, Bush and Ortinau):    

opportunities for new products and services demographics and attitudinal characteristics of customers user profiles, usage patterns and attitudes effectiveness of a firm’s current marketing strategy

For example, an ethnic furniture manufacturer in Gurgaon (India) may identify his target market as the National Capital Region (NCR) constituting Delhi, Gurgoan, Faridabad and Noida to sell furniture to young couples in the age group of 30 to 35 years with incomes of ` 50,000 and more per month. This market could be further divided into just married couples who are in the process of setting up their homes or couples married for the last three years and more. It is important to remember that a clearly defined target market by way of identification of prospective customers helps a lot in chalking out a plan of action as to where and how to market one’s product/service. For identifying one’s target market, it is advisable to identify the common characteristics and interests of the prospective customers who would be interested in one’s product/service. One’s competitors and the target market that they are catering or propose to cater to should also be analysed. It is always better to look at the niche market that is not being catered to by the competitors by suitably altering one’s product or service characteristics. It is always advisable to list out the features of one’s product or service. For identifying one’s target market, it is advisable to list the benefits that these features provide. For example, advertising agencies create high impact-driven advertisements that result in enhancing the company’s image and boosting its sales. Building a professional image helps in strengthening the customer base, because existing and prospective customers see the company as professional and trustworthy. One should specifically define the target market in terms of factors such as age, location, gender, family status, occupation, religious background, if it matters, education and income.

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The characteristics of a target market need to be identified under various heads such as the following:  Demographics—Age, gender, race, income, religion, occupation, family size and geographic location.  Psychographics—Consumers’ interests and opinions, personalities, attitudes, values, interests, hobbies, lifestyles and behaviour. An entrepreneur needs to find out a match between the product or service offered and the target market’s people, their lifestyle, interests and attitudes.  Product Usage—When do the customers use the product or service? Specify the occasion, situation, climate, time, place and usage context.  Brand Preferences—Do the customers have any strict brand loyalty or brand awareness that plays a role in their buying the product and the typical attributes that get identified with the brand?

One should try to describe a customer profile in as much detail as one can, keeping in mind the knowledge of the product or service that one proposes to offer. One should include a diversified set of people in visualization exercises. The purpose is to clearly identify a customer who would be interested in one’s product/service offering.

9.10.1  Analyse Target Market It is advisable for an entrepreneur to have a clearer perspective about the target market by focusing on the following questions—Who are the customers? What are they looking for? When do they need the product/service? Who all are involved in buying the product/service? Why do they need the product? How does the process of buying get made? Doing research in these aspects will give an idea about certain key questions such as occupation, services used, occasions when demand arises, organizations involved in decision making, objectives for which the product or service is being purchased and the operation involved. Answering these questions about the target market facilitates chalking out marketing strategies to capture the target market (Fig. 9.10). Having identified the target market, the entrepreneur should assess the potential for their product or service by considering the answers to the following questions:  Do we have a sufficient number of people who will be interested in the product/service?  Will the customers in the market see their need fulfilled with a greater value proposition compared with existing offerings?  Do we understand well the drivers that would help prospective customers make decisions in favour of our offerings?  Is the product/service affordable to the people in the target market?

Earlier, when the choices before customers and their degree of sophistication was limited, it was enough to say that one’s product or service would be marketed to people in the age group of 20 to 30 years residing at such and such location. However, that approach does not work at all in the present context, as Occupants Services Occasion Organization Objectives Operation

Who What When Who Is Involved Why How

Figure 9.10 Analyse Target Market

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the consumer marketplace has become highly differentiated and specialized. It would not be workable to define a marketplace in a general way. As an entrepreneur, one has to be clear about marketing to a particular socioeconomic status, a gender, a region, a lifestyle or a technological sophistication. There are multiple directions in which focus could be laid. What matters the most is the clarity about which parameters would really help in defining the target market more precisely. Further, the criteria of age itself is undergoing a big change, as a 30-year-old might be still staying with one’s parents; a 65-year-old might have retired and be enjoying retired life through spiritual pursuit; another person might be still very active professionally and a fourth person might have remarried to start a second stretch of married life. Therefore, generational marketing, which helps in better defining consumers on the basis of multiple factors such as age, social, economic, demographic and psychological factors, helps in a more accurate identification of the target market.

9.10.2  Cohort Marketing This is another approach that identifies the target market. The emphasis in this approach is to study groups of people who go through particular experiences, irrespective of age. Cohort marketing goes one step further. A ‘cohort’ is defined as a group of individuals experiencing the same significant events during the same time interval, undergoing a sequence of roles from birth to death and exhibiting common characteristics due to accumulated knowledge and shared experiences. This results in the formation of certain bonds that result in them behaving differently from the people in other cohorts, even though they belong to a similar age profile. Thus, identifying target market demand fundamentally requires aggregating consumers with similar needs who are divided into certain clusters. Marketing professionals classify demand patterns into three broad categories, namely (Fig. 9.11).  Homogeneous Demand—This demand is uniform, as everyone demands the product for the same reason(s), thus implying a greater degree of control in the estimation of aggregate demand.  Clustered Demand—Consumer demand is classified in two or more well-defined clusters such as for automobiles—luxury vehicles, cheap vehicles, mid-segment vehicles, sports utility vehicles and spacious vehicles.  Diffused Demand—This involves a wide range of choices on the part of customers, thus resulting in product differentiation that works out to be a costly and more difficult process for the entrepreneur. For example, the cosmetic market that requires hundreds of shades of lipstick; children’s books with a wide range of choices that children like and furniture designs suited to individual tastes.

Demand Patterns

Homogeneous Demand

Clustered Demand

Diffused Demand

Figure 9.11 Different Demand Patterns

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On the other hand, there are market conditions that require an undifferentiated approach to deal with market demand. Entrepreneurs prefer to operate with a single marketing mix strategy for the entire market, as all customers have more or less similar needs for a specific kind of product. As such, a homogeneous market or demand is so diffused that it is not worthwhile to differentiate. The entrepreneur operates with a unique pricing strategy, a single promotional programme aimed at everybody, more or less the same product with no variations and a distribution system that caters to the entire market. Thus, the elements of the marketing mix remain unchanged for different consumers, and whatever elements are developed are applicable to all the consumers. A few examples are staple foods—sugar, salt, wheat and farm produce. This strategy works well for large-scale uniform production when sophistication of consumers is limited. It is not so popular now due to competition, improved marketing research capabilities and total production and scope for reduction in marketing costs by segmentation. However, here too, one may find, in real market conditions, a certain degree of variation in prices depending on the quality or branding attempted by the entrepreneur.

Example Sugar Industry The ` 5,200 crore Murugappa Group heralded its entry into the branded sugar segment in the country  with the launch of its Parry’s pure refined sugar. ‘It is processed hygienically from first grade cane and  has a longer shelf life of 18 months.’ Shagun is a superior quality product of Triveni Engineering & Industries Ltd, a pioneer in the sugar  industry  since  1932.  One  of  the  largest  manufacturers  of  sugar,  Triveni  introduced  branded  sugar  that has been manufactured with state-of-the-art technology imported from the United Kingdom and  Australia. Shagun is made from the juiciest sugarcanes and is processed in a completely hands-free  and sterile environment. In addition, the unique, double micro-filtration process removes the minutest  of foreign particles, to give one unparalleled purity. Shagun is packed in moisture-free packs, giving  one free-flowing and healthy crystal sugar. Mawana Sugars Limited has launched a premium range of refined sugar under the brand name  Mawana Sugars SELECT. The variants launched under this brand name are Mawana Sugars SELECT  double-refined sugar, Mawana Sugars SELECT sugar cubes and Mawana Sugars SELECT sachets.

9.10.3  Demand Estimation The main purpose of undertaking marketing research is to identify market opportunities that can help in clearly estimating market demand for the product/service. After having identified market opportunities, the key task becomes to estimate the size, growth, market share, profit prospects and potential of each of the market opportunities. The sales forecast enables the entrepreneur to arrange for the required funds for investment in fixed assets and operations. Demand estimation has to be within reasonable tolerance so that the situation of shortages or excessive inventory does not arise. An entrepreneur can prepare at least 60 different types of demand estimates as shown in Figure 9.12. The degree of sophistication and depth in the estimation of demand would demand on the market potential that the entrepreneur is trying to capture during different time frames at different space levels with the degree of depth in which the product level is defined as stated in Figure 9.12. Each estimate has its relevance to marketing strategies and decisions that the entrepreneur has to make. For example, short-term estimates of demand help in production planning and control, so as to order an adequate amount of raw materials and other resources to ensure the requisite production in the market. Customer demand helps in

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Product Level Product Variety Product Line Company Industry Short

Medium Time Frame

Long

Figure 9.12 Different Demand Estimates identifying key customers who contribute to say 70 to 80 per cent of the sales and, therefore, the approach to handle and satisfy them on a continuous basis. Similarly, the regional sales level may help in deciding the distribution strategy used by agents, sales force or the need for setting up distribution offices in the region. Another way of scientifically dividing the market could be to break down the market into separate categories such as potential market, available market, target market and penetrated market that can facilitate decision-making.  Potential Market—This consists of a set of customers who envisage a sufficient level of interest in the product offer being made in the market. However, what matters the most is their ability, backed up by income, to purchase and their access to the product offer. Demand that is backed up by income to purchase is called ‘effective demand’.  Available Market—This market consists of a group of consumers who envisage an interest in the product being offered in the market that is backed up by income and access. However, one may have to keep in mind the restrictions that statutory bodies may stipulate on the consumption of such products, which may result in having the interest but not being able to consume it. For example, movies certified by the censor board as for ‘Adults’ cannot be seen by children below the age of 18. Similarly, if a driving license is issued to only adults above 18 years, then a group of children below that age who may be interested in and know how to ride a mobike cannot buy it or use it.  Target Market—It consists of a part of a qualified available market to the entrepreneur that they decide to capture. For example, the entrepreneur may decide to capture a market in the city of Mumbai, although the available market for the product is present in all cities. Having decided about the target market, the entrepreneur will end up selling the product to a particular number of buyers from the target market.  Penetrated Market—It consists of the actual number of customers from among the target market who buy a company’s product.

This classification of demand helps an entrepreneur in market planning. Depending on the feedback from the existing market, the entrepreneur can change their offerings, try for new customers in new

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markets and expand the distribution network for well-accepted products in a given market or new markets. ‘Market demand for a product is the total volume that would be bought by a defined customer group in a defined geographical area in a defined time period in a defined marketing environment under a defined marketing programme (Kotler and Keller 2006:107).’ Thus, market demand depends on the underlying assumptions of various factors that contribute to the demand for the product. Having identified the market demand, the entrepreneur has to estimate the market share that they propose to capture and cater to under specified assumptions as used for defining market demand. A company’s demand is the estimated share of the market demand that the company proposes to cater to under an alternative level of the company’s marketing strategy and assumptions in a given time period. It would greatly depend on its marketing strategy vis-à-vis the competitors competing for the market demand. These strategies would mainly relate to the products, services, pricing, delivery and communication used by the company in relation to its competitors. Having estimated company demand, the entrepreneur needs to work out the company sales forecast, which is the estimated level of sales forecast for the company based on the selected marketing plan and the assumed marketing environment. The company sales potential is the sales limit approached by the company demand as the company marketing effort increases relative to that of its competitors (Ibid. 109).

Example A new study shows that when consumers understand what plugin hybrids are, they want them. The  vehicles,  which  have  large  onboard  batteries,  can  be  recharged  overnight  by  plugging  them  in,  thereby storing enough electricity to power daily commutes. For longer distances, a gasoline engine  kicks in, thus assisting the electric motor and recharging the battery. The major automakers are not  yet offering plugin hybrids, but several are developing them. For those consumers who cannot wait,  a handful of companies offer conversion kits for conventional hybrids. Of the more than 3,000 consumers asked whether they would consider buying a ‘grid-connected  hybrid’, the term used for plugin hybrids in the survey, only 24 per cent said that they would, according  to the survey by Synovate Motoresearch. However, when they were told what such a car could do,  that  figure  nearly  tripled  to  64  per  cent.  That  is  well  above  the  percentage  of  people  who  would  consider  buying  an  ordinary  hybrid,  such  as  the  Toyota  Prius,  which  does  not  have  an  extended  battery-powered  range.  Scott  Miller,  the  CEO  of  Synovate  Motoresearch,  presented  the  survey’s  results in mid-May 2007 at the Advanced Automotive Battery Conference in Long Beach, CA. The results suggest that consumers like the idea of the plugin hybrid but that so far, car companies  are doing a lousy job of getting the word out. However, that is not the case with flex-fuel vehicles.  These cars, which can burn either gasoline or a mixture of 85 per cent ethanol, scored high on the  desirability charts, that is, until the consumers were told more about them. Flex-fuel vehicles have  been  the  subject  of  heavy  promotion  by  automakers.  However,  according  to  Miller,  the  marketing  campaigns have fallen short of providing all the details: Consumers thought that flex-fuel improved the  fuel economy. Actually, the opposite is true. Ethanol contains much less energy than gasoline does,  so the miles per gallon will be significantly lower, as will range on a tank of gas. When consumers were  told this, the percentage of people who considered buying the cars dropped from 52 to 33 per cent. It remains to be seen whether the desirability of plugins is enough to overcome their steep price  tag.  They  could  cost  thousands  of  dollars  more  than  a  conventional  hybrid,  which  already  comes  at a premium. Still, consumers are willing to shell out thousands of dollars more for SUVs than for  minivans because of their perceived advantages. So, if the word gets out and the cars get built, then  plugins might just be the next big thing.6

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Example Japan has been the largest and most developed market for platinum jewellery, whereas China and  America are among the fastest growing ones. India is also emerging as a potential market for the  ‘other white metal’. Platinum Guild International (PGI), worldwide marketers for the platinum industry,  had recently announced their plans for marketing the metal in India—the country that had consumed  800  lakh  tonnes  of  gold  last  year.  The  Guild is  planning  to capture  at least 1 to 2 per cent of this  market, which, in volume terms, would touch around 10 to 15 tonnes over the next three to five years. The very expensive price tags, however, basically mean a niche market for platinum jewellery, as  this  is  more  than  thrice  costly  than  gold.  A  centrifugal  casting  machine  used  for  platinum  casting  costs between ` 40 and 80 lakh, and then this business involves a substantial expenditure on training  manpower, because platinum cutting requires special skills. Despite the uncertainties associated with  the challenges in the industry, the Indian market will be considered in the area of jewellery design at  par with international trends of sleek and contemporary pieces including eternity rings, solitaire rings,  accent stones and baguette jewellery.7

9.11  MARKET SEGMENTATION Market segmentation is a process that helps in dividing a target market into subsets of homogenous consumers who have common needs and applications for the goods and services offered in the market. It is the process of dividing a total target market into homogeneous groups consisting of customers who have relatively similar product needs. Having identified the target market, the entrepreneur needs to do market segmentation, so that the marketing strategy and programme are focused on the customers who are ‘most likely’ to purchase one’s offering. In case it gets done scientifically, then it would insure the highest return for marketing expenditures. There are specific parameters that govern market segmentation decisions for consumers and industrial products. This stratification of customers into homogenous groups helps an entrepreneur effectively respond to the specific needs of customers in each group by devising an alternate strategy that is the most suitable by reaching them in the most effective manner. The process of segmenting the market involves different steps as discussed in the following sub-sections.

9.11.1  Define and Identify the Broad Target Market The target market should be divided into homogenous groups based on geographic, demographic, psychographic, economic, social and cultural factors, religion, the need for quality, durability, accessibility or lack of accessibility to competitive products, customization, avocation (people who like products for hunting, fishing, golf, art work and knitting) and special interests (pet lovers, science fiction readers and jazz music collectors). In case of industrial products, segmentation can be undertaken by the industrial classification of goods, size of revenue, climate, language, time-related factors such as tax planners and air conditioners; products having applications to business functions such as data processing, accounting, human resources and plant maintenance. Buying situations enable customers to be categorized in terms of the desired benefits they are looking for versus the ‘must’ part of features and benefits, their usage rate, their awareness about the product and their degree of intent to buy the product.

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Having done the classification of customers just mentioned, the market should be categorized into the segments that one would like to target. Having decided the market segment, one should devise a marketing plan in terms of marketing mix variables to capture the market.

9.12  MARKET POSITIONING After an entrepreneur has identified their target market and undertaken market segmentation, the next crucial decision that needs to be made is to position oneself within that chosen segment. Positioning is the act of designing the company’s offering and image to occupy a distinctive place in the mind of the target market (Philip et al.). The purpose is to ingrain a distinctive image in the mind of a target market, so as to maximize the potential benefits to the company. ‘Positioning refers to “how organizations want their consumers to see their product”? What message about the product or service is the company trying to put across? Car manufacturer Daewoo in the UK has successfully positioned them as the family value model. The UK car Skoda brand which has been taken over by Volkswagen has been re-positioned as a vehicle, which had negative brand associations, to one which regularly wins car of the year awards.’8 ‘Its objective is to occupy a clear, unique, and advantageous “position” in the consumers’ mind such as “the best driving car”, “the most economical car” or “the safest car”’.9 The fundamental purpose of positioning is to ensure the perception that one would like one’s customers to have about one’s product or service and the specific strategies that one would like to utilize to ensure the achievement of that perceptual goal. ‘Positioning starts with a product. A piece of merchandise, a service, a company, an institution, or even a person…. But positioning is not what you do to a product. Positioning is what you do to the mind of the prospect. That is, you position the product in the mind of the prospect (Ries and Trout 1982).’ Thus, positioning is the exercise and manipulation of a brand to create a positive perception and image in the minds of the consumers in the target market. A well-positioned product fetches good sales through loyal customers. On the other hand, poor positioning can result in damaging the reputation of the product and, in turn, reduce sales.

9.13  BUILDING A MARKETING PLAN All entrepreneurs, irrespective of being start-ups or in different phases of growth, require systematically developing a marketing plan. A good marketing plan for any venture focuses on key issues such as the who, what, where, when and how that are much related to the product/service under consideration related to marketing and sales for the next one to five years. A marketing plan specifies the expenditure to be incurred on advertising and distribution that enable the customers to achieve different levels of sales. ‘Marketing’ is defined as a process of creating and delivering a product/service to the customer so as to recruit, retain and retrieve customers from the target market and keep creating a group of loyal customers to the organization. Marketing starts from the identification of opportunities by identifying unmet needs; coming up with innovative products and services to respond to those unmet customer needs; developing a pricing strategy to attract customers and distributing and promoting products and services to generate profit. ‘Marketing’, as defined by The Chartered Institute of Marketing, means ‘the management process responsible for identifying, anticipating and satisfying customer requirements profitably’. Thus, it becomes an entrepreneur’s responsibility to develop marketing plans and ensure their implementation by the induction of people having appropriate skills to translate that into a reality.

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Philip Kotler defines marketing as ‘satisfying needs and wants through an exchange process’. It is obvious that customers will enter into an exchange transaction only if they value the product or service that provides benefits far more than the price they are paying. P. Tailor of www.learnmarketing.net suggests: ‘Marketing is not about providing products or services. It is essentially about providing changing benefits to the changing needs and demands of the customer.’ This reflects a dynamic perspective that an entrepreneur should have, to keep changing their offerings to meet the ever-changing needs and demands. A marketing plan should be so devised that it      

provides a strategy for accomplishing the company’s goals and missions is based on facts, valid and verifiable assumptions provides for continuity so that future plans can be built to achieve long-term goals should be simple, straightforward and short should be flexible to accommodate dynamic changes to build ‘what if’ scenarios should specify the performance measurement criteria that will be monitored and controlled

Thus, the secret of marketing is to understand well the needs of customers in the target market and work out a strategy to fulfil those in a superior way than achieved by one’s competitors in the market. The purpose is to extend it in a way that is convenient and adds lucrative value to the customer, so that they will keep getting attracted to the entrepreneur. The importance of developing a marketing plan for start-ups is evident from the study by Dun and Bradstreet, which reveals that ‘just one in five small business owners creates a strategic marketing plan and that the most common sales approach is to react to customer orders rather than to proactively seek them out. The study also revealed that word-of-mouth promotion and referrals comprise the typical small company’s marketing efforts.’10 A strong marketing plan would reflect the entrepreneur’s and their company’s ability to understand the customer from various angles—economic, social, cultural and psychological—and develop a plan of action backed up by concrete strategies to satisfy customer needs. The key objective remains to develop a strategy of success for the business mainly from the customer’s perspective. The key objectives of the marketing plan are given in the following points:    

identify and define a pinpointed and specific target market identify specific customer needs backed up by marketing research develop a marketing strategy, so as to have a competitive advantage clearly develop a marketing mix that responds to customer needs

These objectives have to be achieved in the backdrop of objectives of the business vis-à-vis the products and services offered. These objectives need to focus on the specific aims that a company would like to achieve over a period of time. A powerful way of setting objectives is called ‘SMART objectives’. ‘SMART’ stands for  Specific—Clearly defined without any ambiguity or confusion.  Measurable—Well-defined yardsticks, parameters and criteria that measure the progress in terms of identification of the magnitude of deviation, if any.  Achievable—Setting objectives that are achievable and attainable.  Realistic—The objectives set should be realistic enough to be achieved within the given resources.  Time—Clearly defined time frame at which the objectives are to be achieved.

Some of the areas in which the entrepreneur may like to set objectives are by increasing sales by 25 per cent, increasing the profit level from ` 50 to 150 lakh in one year and enhancing the brand image

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in the next one year. It may be noted that as regards the enhancement of brand image, one needs to work out concrete measure to do so.

9.14  MARKETING MIX The key to developing a marketing plan revolves around the strategic decisions regarding marketing mix variables, namely, product, price, promotion, place, people, process and packaging (Fig. 9.13). The entrepreneur has to make these decisions in an integrated perspective so as to achieve the predetermined goals and objectives set for the venture. In the marketing plan, the entrepreneur should endeavour to follow the best practice to maximize the competitive advantage through marketing mix variables. The strategy and action plan on these issues concretize the approach to achieve the goals. Some of the important aspects related to marketing mix variables are given in the following sub-sections.

9.14.1  Product The entrepreneur from a third eye, implying taking an outsider’s help, if required, should pose critical questions such as ‘Will your product with given aspects will be suitable for the market and target customers?’ In case an entrepreneur finds it difficult to sell the estimated number of units to the prospective customers, then the question to be posed to oneself is whether the given product or service is the right one for the customers at present. ‘Is there any product or service you’re offering today that, knowing what you now know, you would not bring out again today? Compared to your competitors, is your product or service superior in some significant way to anything else available? If so, what is it? If not, could you develop an area of superiority? Should you be offering this product or service at all in the current marketplace?’11 The product has to satisfy the customers in different markets as per their needs and tastes. In each market, a customer evaluates a product in the context of their overall requirements. Therefore, product Marketing Mix

Product Features Design Quality Durability Safety Size Brand Warranties

People Customer Employees Management Community

Price Premium Charged Discounts Payment Terms On Cash/Credit

Industry Analysis Competitor Analysis Target Market and Company Demand

Packaging Presenting Protecting Delivering

Place Channels Coverage Locations Logistics Inventory

Promotion Sales Promotion Advertising Public Relations Personal Selling Direct Marketing

Figure 9.13 Marketing Mix Strategy

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management in the new age of marketing in the twenty-first century has to design, develop and have quality features that differ from market to market. For example, the Toyota car that is sold in Yemen is not the same as the one sold in the Gulf countries, Indian market or, for that matter, in the United States. The reason lies in considering the needs of customers according to their contexts. Similarly, when as a graduate student in computer sciences, one is looking for a job, one’s resume has to be so made that it fits into the job profile one is applying for and appeals to the prospective employer. Therefore, invariably, one will be required to make different resumes for the different jobs that one applies for. Therefore, the product aspects of a marketing mix involve a clear description of the product in terms of its features, design, utility, quality, durability, safety, size, brand and warranties to take care of what the customer is looking for in the product in different markets.

9.14.2  Price Understanding pricing is the most crucial aspect of an entrepreneurial journey. One pays a price for everything, starting from tuition fees for one’s schooling, rent for the house, fare to the taxi driver, consultation fee to the doctor, tuition fee to the tutor, food eaten in a restaurant, vegetables bought from the market and provisions for household consumption purchased from a supermarket. The entrepreneur uses a variety of techniques to arrive at a reasonable price that gets fixed for the product or service. In a small venture, pricing decision is made by the entrepreneurs themselves. However, as the venture size increases, pricing decisions get made by a separate division in the backdrop of pricing objectives and policies set by the top management. The importance of pricing decisions is evident from the study conducted by McKinsey & Company in 1992. ‘Examining 2,400 companies, McKinsey concluded that one percent improvement in price created an improvement in operating profit of 11.1 per cent. By contrast, 1 per cent improvements in variable cost, volume, and fixed cost produced profit improvements, respectively, of only 7.8 per cent, 3.3 per cent, and 2.3 per cent.’ At times, a lower price tag also gets identified as lower or unacceptable quality that needs to be strategically taken care of while making a pricing decision. Consumers make purchase decisions based on their perceptions of prices in relation to what they consider the current actual price, which may not be the price quoted by the marketer. One of the key psychological parameter that works in their minds is a price signal that may indicate an inferior quality or an upper ceiling that indicates too high a price that they may not be able to afford. Therefore, understanding customer perceptions becomes an important priority for the entrepreneurs when fixing prices. Price  Fixation  Decision  Fixing a price for a newly developed product requires positioning the product on both the quality and price front. Some markets have a wide range of products, resulting in a wide variation in prices, whereas others do not provide much variation and flexibility in fixing the price. On the other hand, consulting services, professional services and products and services brought out for the first time in the market, as a result of innovations, give a greater degree of flexibility to the entrepreneur about price fixation. The entrepreneur has to ‘consider many factors in setting its pricing policy (Dutta, Zbaracki and Bergen 2000)’. The vital probable objectives of an entrepreneur for the fixation of price are given as follows:  Survival Strategy—In a market having intense competition, an entrepreneur would be happy to cover variable and fixed costs as well as a meagre margin to remain in the market. This strategy works well for survival in the short run and prepares to create a value proposition for the customer, so as to make their offering distinct from others in the market.  Maximize Profit—An entrepreneur for a given estimated demand for the product attempts to maximize profit, cash flows and return on investment. At times, this strategy may jeopardize the long-term performance at the cost of exploiting the situation in the short term.

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 Maximise Market Share—An entrepreneur attempts to gain from economies of scale and attempts to fix a price that can maximize their market share. This enables them to reduce unit cost of production and get advantage from it in terms of realizing margins when compared with competitors. This works well in market conditions wherein customers are highly sensitive to price changes, and low prices give rise to accelerated growth in sales.  Pricing for Innovative Products—An entrepreneur coming up with products based on innovations as an outcome of new technology fixes a high price to maximize profits, so as to recover initial R&D investment. This works well, if there is an adequate number of buyers having a high intensity need for the product and it is not easy for competitors to enter into the market that easily, and high price is considered a sign of quality. A ‘price skimming strategy’ is one by which an entrepreneur charges the highest initial price that customers will pay. As the demand of the top segment of customers gets satisfied, the firm lowers the price to attract another, more price-sensitive segment.  Predatory Pricing—This strategy is usually not used by start-ups. However, the existing strong players in the market may use this strategy to force new competitors to quit the market. It is called an ‘anti-competitive strategy’, wherein the entrepreneur fixes a price below the cost of production to drive out competition. This may lead to conditions where one company has a monopoly in a certain product or industry.  Price Sensitivity—The pricing decision also depends a lot on the demand curve for the product, that is, the quantities that customers will buy at alternate prices, keeping all other factors affecting demand as a constant called ‘ceteris paribus’. Customers are generally more sensitive to products that cost a lot and are bought frequently as against products that cost less and bought occasionally. Companies will prefer customers who are less price-sensitive, as this provides them with greater control over their profit panning. Sensitivity to price is measured through the concept of elasticity. Price elasticity of demand provides a measure of the responsiveness of the quantity that will be bought by the customers to the changes in the price of a good or service, for a given demand curve. In case customers are not very sensitive to the price changes, then an increase in the price of the product will result in an increase in the total expenditure on the product, whereas the price decrease will cause the total expenditure to fall. The price elasticity of demand is measured by the percentage change in the quantity demanded, by the percentage change in the price, for a movement on the given demand curve. The key factors that influence the elasticity of demand are the availability of good substitutes for the product under consideration, the number of uses to which the product can be put and price of the product relative to the total customers’ buying power. Cross-elasticity of demand is a very helpful concept for the entrepreneurs, as it provides a degree of relatedness between the commodities. For two commodities X and Y, the cross-elasticity of demand for X with regard to Y is defined as a percentage change in the quantity of X demanded divided by the percentage of change in the price of Y. A positive cross-elasticity of demand implies that goods are substitutes for each other, whereas a negative sign indicates that goods are complementary to each other.

Entrepreneurs prefer to innovate and come up with less price-sensitive products in the market. This can be achieved through the following means:        

coming up with a distinct and unique product operating in the markets wherein buyers are unable to reach other markets providing similar products buyers less or not aware about the substitutes available buyers finding it difficult to compare the quality of substitutes product cost is small or insignificant compared with the overall total cost of the end product the product is used along with another product that has been already bought by the customer it is not possible to store the product the product is associated with brand, quality and prestige

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Thus, the pricing of a product or service has to be done very carefully while considering numerous things such as quality, prospective demand, margins, competitors’ prices, discounts, market segmentation and price sensitivity on the part of customers.

9.14.3  Promotion The promotion plan is a sort of mini-marketing plan, more so in the case of consumer products. However, in the case of start-ups having either industrial customers or a few customers, the whole approach for promotion would be more from personal selling and direct marketing. Promotion deals with informing potential customers about the product offering, its availability, education to the customers and the use of advertisements to reach the customers through an appropriate mode. The purpose is to communicate to the customers about the benefits of the product to motivate them to purchase it. The entrepreneur’s promotional strategy revolves around the following points:  Advertising—This is reaching potential customers in the target market through any form of mass media that is paid for. It is an effective as well as expensive method. The procedure to be followed for advertising includes setting specific objectives such as sales growth, increasing market share; deciding advertising strategy in terms of budget, media choice and geographical profile; targeting the audience—market segment, demographic profile and income strata; deciding the advertising content as well as the execution and style for advertisements.  Public Relations—It involves developing positive relationships between the organization and customers, media and the public. It is an important component of the marketing mix of an organization. Public relations assumes a great significance in bringing a well-conceived marketing effort to fruition, especially in the service industry. The art of good public relations is not only to get favourable publicity for the venture and its products within the media, but it also involves the ability to successfully handle any crisis situation arising about the company in the media. Some of the basic principles that one needs to take care of for effective press releases are that the information is as newsworthy as possible; one needs to inform the audience that the information is intended for them and state why it is necessary to read it; connect well with target customers; the first few words should be catchy and impressive to generate interest in it; provide facts and not the impressions and, above all, give contact information: person, address, phone, fax, e-mail and Web site address. For example, an entrepreneur having a local business will have only local customers. One may be interested in reaching them through local media—newspapers and pamphlets inserted in newspapers. The simplest approach that can be appropriately pitched would have a great chance of getting picked up by the local journalist. Similarly, if one is operating in the business-to-business environment, the local newspapers carry business sections of some description and, hence, people would be interested in local business stories.  Sales Promotion—It is used to push the sales of the company by using techniques such as doorto-door campaign, discounts, coupons, special offers and gifts. It is also considered a brand differentiator by many big players such as Coca-Cola, Pepsi, McDonald and Pizza Hut. It is considered a marketing technique that adds value to a product in order to achieve specific marketing goals. The primary objective of sales promotion is to induce the customer to make a quick buying decision. The three main categories of sales promotion that target consumers, traders and industries are called ‘consumer sales promotion’, ‘trade sales promotion’, and ‘business to business and industrial sales promotion’, respectively.  Personal Selling—This involves selling a product service one to one. It involves the delivery of a specially designed message to a prospective customer by a seller, usually in the form of face-to-face communication, personal correspondence or a personal telephone conversation. It works well for specific products and more so, in the beginning phase of a start-up venture.

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 Direct Mail—It involves sending publicity material directly to a named person who as an individual or an organization would be interested in the product. Direct mail may constitute around 10 to 15 per cent of the advertising budget and, thus, is becoming one of the prominent sources of sales promotion. There has been massive growth in direct mail campaigns over the last five years. There are organizations that can be accessed on a payment basis to collect databases, which contain the names and addresses of potential customers. It allows an organization to use their resources more effectively by allowing them to send publicity material to a named person within their target segment. It helps in increasing the response rate because of its personalized approach and, thus, helps in pushing sales.

9.14.4  Place This refers to the mechanism through which goods/services are delivered to the consumers or users of the product/service. This basically focuses on the distribution plan by covering aspects such as channels, coverage, locations, logistics and inventory-related decisions to reach the customer. It should get synchronized and integrated with other elements of the marketing mix, so as to maintain the differentiation and focus of the company. For example, if the product is of the highest quality, with price and promotion to match, it should be made available in the major quality stores. The choice of distribution channel can make a major difference in effectively reaching one’s target group of customers. Intermediaries in the chain of distribution may be of different types such as wholesalers, agents, retailers, the Internet, overseas distributors and direct marketing. Some of the critical decisions that the distribution process involves are given as follows:    

Which channel, direct or indirect, would be more effective and why? Is it advisable to use single or multiple channels? What should be the cumulative length of the multiple channels? Who all would be a part of the intermediaries and how many intermediaries would be required at each point?

9.14.5  People People have become the fifth and another most important ingredient of the marketing mix. The final ingredient in the marketing plan jigsaw are quality people in all the aspects of production and distribution, as they contribute the utmost value to the end customer. The people input of one’s organization should be consistently able to maintain one’s marketing differentiation. The purpose is to induct people with required expertise and skills in the organization and place them in the right roles, so as to set one’s company and products apart from those of one’s competitors. It is important for the entrepreneur to realize that an inspired, enthusiastic and motivated employee acts as the eyes and ears of the company in the competitive market and provides the much needed information for marketing research that can lead to the continuous development and growth of the company.

9.15  CRITICAL FACTORS FOR DEVISING A MARKET STRATEGY A large number of individuals have the vision and determination to start a venture; however, many of them ultimately do not start a venture, and it remains a paper exercise. A very small number of them start promising firms that make a mark in the market. Successful firms differ in their ‘entrepreneurial style which comprises cognitions and behaviours which had been put forward independently in entrepreneurship, management and social cognition study as secluded predictors of individual success

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in challenging surroundings (e.g., risk, high uncertainty, urgency, inadequate personal resources and surprise threats and opportunities’).12 According to Porter, start-up ventures need to first focus on the small niche market. Many studies suggest that start-up ventures ought to first focus on the small niche market (Porter 1980). Particularly, establishing the niche market during the early phase can make good profits and enhance the success chances of small start-up ventures (Bird 1989). Competitive marketing strategies in the chosen market should also be influential to the success rates and performance of start-ups. Some empirical researches indicated that the cost-leadership strategy is negatively correlated with the technology-performance-based start-ups (Bird 1989). The cost-leadership strategy may not be perfect for technology-based start-ups, as they mainly come up with innovative products that are the outcome of R&D resulting in high-tech technology products. These products fulfil a specific need of the customer in a superior way compared with any other existing product in the market. Similarly, too aggressive a marketing strategy also may not be very helpful, particularly as start-ups are not well equipped professionally as also financially with enough resources needed to implement this strategy. Every business while chalking out a market strategy has to face a choice to be made from a wide range of issues and action areas. However, what matters the most is identifying and managing critical issues and areas for achieving competitive advantage. The effort can help organizations construct consistent sets of actions or strategies to maximize their competitive potential. In a fastchanging, intense competitive environment, it is particularly important for start-ups to devise effective strategies for responding to the changing business environment for staying ahead of competition. As per the study undertaken by A. M. Shah for formulating appropriate strategies and responding to the changing environment quickly and creatively, organizations need to strengthen their competitiveness by building capabilities that provide enduring sources of competitive advantage. As per his study, there are 11 critical factors that all organizations should build/improve for competing successfully in the Indian market. These factors, in a descending order of priority, are product/service quality, relative product cost, good people, innovativeness, advanced technology, strategic alliances, market knowledge, flexibility, business reputation, distribution network and information system. Above all, quality matters the most in developing a winning marketing strategy. While developing a market strategy, the first step to be undertaken is to clearly define the overall objective of one’s venture, which falls under four broad categories: i. Market opportunity is highly attractive and one’s product/service offering is the strongest in the industry—this would require investing the best of one’s resources to avail the opportunity. ii. Market opportunity is highly attractive and one’s product/service offering is relatively weak in the industry—this would require developing requisite strengths so as to improve one’s standing in the industry. iii. Market opportunity is not very attractive and one’s product/service offering is the strongest in the industry—this would require an effective marketing and sales effort to generate short-term profits aligned to generating long-term profits. iv. Market opportunity is not very attractive and one’s product/service offering is the strongest in the industry—this would require an effective marketing and sales effort to generate short-term profits and assess the long-term prospects. If not found to be a viable proposition, the existing offering may need to be abandoned and an innovative offering will have to be introduced to suit the market opportunity at that point of time.

After becoming clear about the direction that would be most suitable for the venture in the light of critical factors, one has to precisely assess the strengths and weaknesses of the venture and its team to

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pick up the most effective strategy for offering the product/service to potential customers in the target market. Some of the generic strategies as described by Porter are given as follows (Fig. 9.14):  Cost Leadership Strategy—This strategy focuses its attention on making the given quality product or service at a relatively lower cost when compared with one’s competitors. The lower costs should result in higher profit margins compared with the industry average. Cost leadership could be achieved through technology development, excellent process engineering skills, economies of scale, product design for the ease of manufacturing, enhanced labour productivity and advantages through the distribution system reaching the target market at a far lower cost per unit. An entrepreneur either strategically creates a cost leadership or tries to maintain it or strategically get forced to do so under difficult times. It has been rightly said that innovations are obvious outcomes for struggle to exist and excel in the competitive environment. For example, during recessionary phases, companies such as Johnson & Johnson, General Electric and many others could improve their profitability, productivity and incentives based on performance, with the rigorous, systematic and efficient use of business process analysis, efficient costing, availability of inexpensive capital and cycle time reduction. The test and challenge for top leaders lies in their excelling under tough times. For working on this strategy, a business venture needs to be uniquely positioned in terms of market share advantage and control over resources that cannot be easily replicated by its competitors.  Differentiation Strategy—Differentiation strategy helps an entrepreneur to develop a product or service that is perceived by customers as being unique and different ‘throughout the industry’ and that is able to serve a specific need of the customer. This could be achieved through coming up with an altogether new product that answers the existing needs, which does not exist in the market as yet, by focusing on building a brand. It could be an outcome of patented technology with special features coupled with providing superior service, a strong distribution network or other aspects that are specific to the industry under consideration. It is important that the unique features of the product/ service get translated into higher margins and higher sales compared with one’s competitors in the industry. Some of the prominent conditions that enable the differentiation strategy to be effective are • superior marketing abilities • creative and talented human resources • strengths of R&D • effective product engineering  Focused Strategy—It is the most sophisticated strategy from among the generic strategies, as it is a far stronger form of either the cost leadership or differentiation strategy. It is devised to address a particular market segment of the target market, product form or cost management process and is usually employed when it is not appropriate to attempt an ‘across the board’ application of cost leadership or differentiation. It involves ‘an integrated set of actions taken to produce goods or services that serve the

Product Offering Strategies

Cost Leadership Strategy

Differentiation Strategy

Focused Strategy

Figure 9.14 Strategies to Offer Products to Potential Customers

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needs of a particular competitive segment (Hitt, Ireland and Hoskisson 2005)’. It requires exceptional competence on the part of an entrepreneur to deliver a product or service that others cannot compete with. Profit margins could be very high because of minimal competition and unique offering in a unique way extended by the entrepreneur. The value creation for customers in a specific target market gets created by an entrepreneur through a focused cost-leadership strategy or a focused differentiation strategy. Some of the key examples that would enable us to understand the power of focused strategy are luxury automobiles by Rolls Royce. An automobile Phantom designed without compromise is the result of complete creative and engineering freedom. This has been created by Rolls Royce with the aim of building the best car in the world. It has not only redefined Rolls Royce but also the luxury car market segment. Each model has a personality of its own with a unique niche. However, all share the same powerful presence. It is said that when a Phantom drives by, the world stands still. It is a car with genuine presence, created by its classic Rolls Royce proportion combined with contemporary design and unrivalled engineering. Similarly, Deccan Airlines, a low-cost, air-travel concept introduced in India by Captain Gopinath, created a unique, low-cost leadership model and transformed the whole industry by focusing on unique features to provide air travel to the middle class population. Another example is of McDonald entering into the Indian market in 1996 as a joint venture with Connaught Plaza Restaurants and Hard Castle Restaurants. Connaught Plaza Restaurants manage operations in North India, whereas Hard Castle Restaurants operate restaurants in Western India. Beginning with opening outlets in major metros, the company has expanded its wings to Tier two cities such as Pune and Jaipur. It responded to the challenges faced in the Indian market by re-engineering the menu suited to customer tastes, value systems, lifestyle, language and perception. To capture the Indian market, the company introduced chicken, lamb and fish burgers for non-vegetarians and McVeggie burger and McAlooTikki for vegetarians. The company used the demographic segmentation strategy with age as the parameter. The main target segments are children, youth and the young urban family. The outlet ambience and mild background music highlight the comfort that McDonald’s promises in slogans such as ‘You deserve a Break Today’ and ‘Feed your inner child’. This commitment of quality of food and service in a clean, hygienic and relaxing atmosphere has ensured that McDonald’s maintains a positive relationship with its customers.

9.16  WILSON HARRELL’S ‘MARKETING FOR THE AMATEUR’ Here is a simple yet powerful six-step process given by Wilson Harrell’s ‘Marketing for the Amateur’, which can be applied by start-up ventures while making certain vital decisions related to marketing and more so, product pricing. These are given next (Boyett and Boyett):  Conduct the ‘Well, I’ll Be Damned!’ Test—Create a sample of one’s product or service; in case a sample is very costly to create, build a sketch or describe it explicitly. This can be shown to 20 objective people who are not related to one in any way whatsoever. ‘If most of them don’t say, “Well, I’ll be damned!” or “Why didn’t I think of that?” writes Harrell, “stop right there….” If most of the people you ask say the magic words, you’re on the right track.’ Ask 20 objective people the following questions: • What would you be willing to pay for this product if it were on the shelf of a local store? Insist that they give you a specific price. • If this product were available at the price you suggested, would you – Buy it for sure? – May be buy it? – Not buy it?

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• If you would buy the product, how many times a year would you buy it? • What similar product are you using now? • Are you happy with your present product?

An entrepreneur while undertaking this tool should make careful notes on the answer given by each person to these questions. Finish by obtaining the age, occupation, income level and marital status of each person. This would help in segmenting the market.  Determine What One Can Charge for One’s Product or Service—Put in descending order the answers to the question, ‘What would you be willing to pay for this product?’ Eliminate the top and bottom 10 per cent of answers. By taking the average of remaining prices quoted by customers, one can come up with the ‘perceived value’ of one’s product. From the price arrived at as the perceived value for the product, subtract the approximate amount the retail store or other distributors will want to make for its markup. There are broad margins for different industries that can be utilized to work out further details. As per Harrell, one should plan on a 25 per cent markup if one’s product is something one eats, drinks or cleans one’s house with; 35 per cent if it is a household item such as an appliance or something one puts on one’s face, hair or body. These markups vary from country to country. However, more or less, these would be accurate for each industry within a certain range. Then, says Harrell, subtract 15 per cent for what it will cost one to sell the product to one’s distributor, 15 per cent for advertising, 10 per cent for warehousing and transportation, 5 per cent for administration and 5 per cent for miscellaneous things such as one’s salary. The remainder, if any, is one’s profit.  Determine the Market for One’s Product—By tabulating responses to the question, ‘Would you buy this product?’ one can estimate the demand potential. Consider 100 per cent of the ‘for sure’ answer and 50 per cent of the ‘maybe’ answer. According to Harrell, if that total is over 50 per cent of all the answers, one has fighting chance; 65 per cent is okay; over 85 per cent is great. One can go on to the next step. If one’s total is below 50 per cent, advises Harrell, then one should stop there. One is wasting time.  Conduct the Rube Goldberg Test—Once one is clear about taking it through for launching, then one can have a sufficient number of finished and packaged copies of one’s product to be displayed in five or more retail outlets. By visiting independently owned stores, one can check up with the owner to allow one to display one’s product in their store. One can promise to set up and maintain the display oneself and not to charge the store owner for the product during the period of the test. The store owner has an advantage of getting 100 per cent of the sales proceeds realized from the display for allowing one run one’s test in the store. The selling price charged from prospective customers in the target market will be the perceived value calculated in step two. The basic purpose is not to make money from the sales of one’s product at this stage but rather to get some idea of how many customers out of every 100 who buy products similar to one’s own will opt for buying one’s product. Harrell himself had noted that this test will not be easy to arrange, because most store owners will think one has gone nuts. He insists that one should still keep trying until one gets at least five or more store owners to agree to go along with one’s crazy scheme.  At the conclusion of the test run undertaken by one, one should seek the views of the store owners to compare one’s product sales with the sales of the slowest-selling competing product. ‘If your product didn’t sell as well as the slowest-selling competitors,’ declares Harrell, ‘you do not have any chance of success.’ It is obvious that no stores owner is ever going to agree to stock a new product that sells worse than his or her slower-moving product. On the other hand, if one’s product sells better than the slowest-selling competitor, then one has a fighting chance. One should ask the store owners whether they would consider continuing to stock one’s product given the volume of sales they have seen. According to Harrell, ‘if three out of five agree, you have a chance to succeed.’

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 Play the ‘What if’ Game—At this stage, after having got green signals from the earlier steps taken, the entrepreneur can contact the appropriate national association of producers of the type of product one will be selling and request information on the total annual sales for products of that type nationally. According to Harrell, advertising agencies and people who sell that type of product locally can also be contacted to arrive at an annual sales figure. At this stage, one’s share of the product sales in one’s market test should be worked out. For example, if a total of 100 products were sold during one’s test in the five retail stores and one’s product accounted for 10 of those, then one’s market share in the test was 10 per cent. If one’s product accounted for only 1 of the 100 sales, then one’s market share was only 1 per cent. Next, if the national sales figure provided by the national association/regional association was multiplied by the percentage market share one obtained in one’s test to come up with an estimate of one’s dollar volume of sales, should one take one’s product nationally. Finally, some of the percentages discussed in step two are applied to see what profit one might make and how much one would have available for advertising, to support a sales force and so on. For example, one needs roughly 15 per cent for advertising for certain categories of markets. If annual national sales is $200 million and one’s estimated market share from one’s test is 10 per cent, then one could expect $20 million in annual sales. 15 per cent of that or $3 million would be available for advertising. Ask oneself, or experts in the field, whether $3 million is enough to support a national advertising campaign. One has to keep playing with the numbers and running different calculations until one gets a good feeling for the sales and profit on one’s produce.  Design a Marketing Plan—At this point, Harrell recommends that one seeks professional help of someone experienced in marketing products such as one’s own. He ideally advises that one should seek a retired marketing executive from a company that produces products similar to one’s own. Harrell suggests that one consult the national association one had approached earlier, advertising agencies and even the local telephone yellow pages to find an individual to help one. Once one has found the expert, then one should negotiate a fixed price for their help in developing a marketing plan. Give one’s expert the result of one’s ‘Well, I’II be damned!’ test, one’s ‘Rube Goldberg’ test and all of one’s calculation. Ask one’s expert to study all the data and tell one how much money they feel one will require to launch one’s product, how slowly or quickly one can roll out one’s marketing campaign, whether one should go national right away or whether one can roll out one’s product market by market and so on. One’s expert should help one put together a rollout plan that will include the level and types of media advertising that one will need and the financing one will require.

 Check Your Progress   10 Ways That People Could Buy from You 

  

The easier you make it for people to find you and do business with you, the more business you will do. Marketing is only one aspect of that challenge. Here are 10 opportunities you might create for your potential customers. 1. Retail: Some people will prefer to buy direct. This is true even if you supply a wide range of outlets. That is why many who make consumer goods also have a ‘factory shop’. 2. Wholesale: When you sell into the trade, the trade becomes your customer and the user of your product, the consumer. You can sell a higher volume, albeit at a lower margin. Economies of scale, however, may mean that your cost per unit is lower so you are better off overall.

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3. Mail order: You post information to people who might be interested and they either accept your offer or throw your mailing in the bin. Make sure your list contains people with a high probability of being interested in your offer. 4. From an agent: Agents sell products and services from a range of suppliers. You pay commission but, unlike a sales team, agents cost you only when successful. 5. Online: Anyone in the world can buy from you if you have a Web site. People can pay online using their credit card and then download or be mailed your product or service. 6. By recommendation: A satisfied customer recommends you to their friends. 7. Networking: Some people sell only through networking. Good networkers pop up everywhere, attending business breakfasts and other organized networking events. 8. At an event: If there is a conference or a fair that you think will attract your target audience, why not take a stand and let people meet you or see what you produce? 9. Multi-level: Multi-level marketing is where each customer is encouraged to become a distributor, recruiting more customers. It is tightly regulated but very effective. 10. As a package: Sometimes, others have products or services that complement your own. Collaborating to develop a package can generate both interest and business for you.

KEY CONCEPTS  Marketing Research: This involves collection of data about customers, competitors and the effectiveness of marketing strategies, so as to develop a framework for the implementation of strategies that would yield expected results.  Market Characteristics: This analysis helps in identifying dynamics of the customer base that helps to understand and get greater insights about the market—type, size, players and growth prospects.  Competitors’ Analysis: Identifying existing and prospective competitors and their strengths and weaknesses is undertaken to get an understanding about the severity or otherwise of competition.  Market Demand: This is the total volume that would be bought by a defined customer group, in a defined geographical area, in a defined time period, in a given marketing environment.  Price Skimming: This is a method for fixing a high price for the product at the time of introduction to fetch good margins and recover investments made in R&D.  Penetration Pricing: This is a pricing strategy used to seek an entry in the market to acquire some market share so as to attract new customers. Penetration pricing is typically used for products that are new to a well-established market.  Premium Pricing: This is used for products that provide significant advantages to the customer because of location, time and intense need and, therefore, products are priced artificially high in order to maximize profits.

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 Exploratory Research: This helps in getting insights into the broader and general nature, the possible decision alternatives and the identification of relevant variables that need to be considered/examined.  Descriptive Research: This provides an accurate snapshot and a detailed view of the specific aspects of the market environment.  Causal Research: This technique is used when it is necessary to show that one variable causes or determines the values of other variables. Here, the researcher is looking at the cause-effect relationships between variables.  Product Research: Product research helps in knowing about the reactions of customers to the product characteristics and taste.  Psychological Research: It is used to find out why people like and buy certain products and dislike others.  Scanner Research: Scanner research focuses on collecting data from a particular group of respondents by continuously monitoring the advertisement campaigns, promotion and pricing that they are exposed to and their buying decisions.  Closed-ended Questionnaire: This is an approach that collects information through closedended questions that require an answer such as ‘Yes’ or ‘No’ or picking up an answer from the multiple choices given.  Open-ended Questionnaire: This allows people to express whatever they have in their minds that is related to the question under consideration.  Competitor Analysis: This is used to clearly identify who are the probable competitors to compete with, competitors’ strategies to increase their market share vis-à-vis planned strategies by the entrepreneur and how to remain ahead of competitors in increasing the market share.  Target Market: This is defined as a specific group of consumers at whom a company aims its products and services.  Generational Marketing: This helps in better defining consumers on the basis of multiple factors such as age, social, economic, demographic and psychological factors.  Cohort Marketing: This is defined as a group of individuals experiencing the same significant events during the same time interval, undergoing a sequence of roles from birth to death and exhibiting common characteristics due to accumulated knowledge and shared experiences.  Potential Market: This consists of a set of customers who envisage a sufficient level of interest in the product being offered in the market.  Available Market: This consists of a group of consumers who envisage interest in the product offering in the market that is backed up by income and access.  Penetrated Market: It consists of the actual number of customers from among the target market who buy a company’s product.  Market Segmentation: This process helps in dividing a target market into subsets of homogenous consumers who have common needs and applications for the goods and services offered in the market.  Market Positioning: This refers to ‘how organizations want their consumers to see their product’.

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 Marketing Mix: This involves key decisions on marketing mix variables, namely, product, price, promotion, place, people, process and packaging.  Price Elasticity of Demand: This provides a measure of the responsiveness of the quantity that will be bought by the customers to the changes in the price of a good or service, for a given demand curve.  Public Relations: This involves developing positive relationships between the organization and the customers, media and the public.  Cost Leadership Strategy: This focuses attention on making a given quality product or service at a relatively lower cost when compared with that of one’s competitors.  Differentiation Strategy: This helps in developing a product or service that is perceived by customers as unique and different ‘throughout the industry’ and that will be able to serve a specific need of the customer.  Focused Strategy: This is the most sophisticated strategy from among the generic strategies, as it is a far stronger form of either the cost leadership strategy or differentiation strategy. ENdNOTES 1. Dragan, ‘Market Research—What Is It, Benefits, Process & Information Sources’, Marketing, 13 July 2009; http://www.entrepreneurshipinabox.com/80/market-research-what-is-it-benefitsprocess-and-information-sources/ 2. Spaeder, K. E. ‘How to Research Your Business Idea’, http://www.entrepreneur.com/startinga business/businessideas/evaluatingyouridea/article70518.html 3. www.enterprisestlucia.com/how-to-research-your-business-idea.html 4. Zimmerman, J. ‘Marketing on the Internet’, Chapter 1, P. 1, http://www.ipgbook.com/excerpts/ 1885068808.pdf 5. http://dqindia.ciol.com/content/dqtop202K3/analysis/103080404.asp and http://planningcom mission.gov.in/plans/planrel/fiveyr/11th/11_v1/11v1_ch5.pdf 6. Bullis, K. ‘Potential Market for Plug-in Hybrids, Consumers Want Them Once They Know What They Are’, Technology Review, 17 May 2007; http://www.technologyreview.com/blog/ editors/17605/, accessed on 7 November 2010. 7. Neha Kapoor. ‘India Seen Potential Market for Platinum’, Business Line, 30 September 2000, http://www.hindu.com/businessline/2000/09/30/stories/083015b2.htm 8. Learn Marketing.net; http://www.learnmarketing.net/positioning.htm 9. http://www.businessdictionary.com/definition/market-positioning.html#ixzz17DMkk3zW 10. Hwenricks, A. Soft Sells, September 1998, pp. 139–144; DiBernado, N. D&B Survey Finds the Smaller the Business, the Less Marketing Savy, http://dnb.com/newsview/ 0898news1.htm 11. Tracy, B. ‘The 7 Ps of Marketing’, 17 May 2004; http://www.entrepreneur.com/marketing/ article70824.html 12. Robert, S. ‘Common Sources of Success or Failure of Start-up Firms’; http://www. articlesnatch.com/Article/Common-Sources-Of-Success-Or-Failure-Of-Start-upFirms/997024#ixzz15ozor8eU

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REfERENCES Aaker, D. A., V. Kumar and G. S. Day. 2002. Marketing Research. 7th ed. New York: John Wiley & Sons, Inc., 160–2. Bird, B. 1989. Entrepreneurial Behaviour. Glenview, IL: Scott Forseman. Boyett, J. H. and J. T. Boyett. 2000. The Guru Guide to Entrepreneurship. New York: John Wiley & Sons, 150–2. Dutta, S., M. J. Zbaracki, and M. Bergen. 2000. ‘Pricing Process as a Capability: A Resource Based Perspective’, Strategic Manage J, 24(7): 615–30. Gelb, B. D. and G. M. Gelb. 1986. ‘Coke’s Lesson to the Rest of Us’, Sloan Management Review, 28(1): 71–76. Hair Jr., J. F., R. P. Bush, and D. J. Ortinau. 2003. Marketing Research, 2nd ed. New Delhi: Tata McGraw-Hill Publishing Company Ltd, 9–10. Hitt, M. A., R. D. Ireland, and R. E. Hoskisson. 2005. Strategic Management, 6th ed. Thomson South-Western, United States (edition for sale in India). Ibid., 107. Ibid., 109. Kotler, P. and K. L. Keller. 2006. Marketing Management. 12th ed. Upper Saddle River, NJ: Pearson Prentice Hall. Philip, K., K. L. Keller, K. Abraham, and J. Mithileshwar. 2009. Marketing Management. 12th ed. New Delhi: Pearson, 288–9. Porter, M. E. 1980. Competitive Strategy. New York: The Free Press, 49. Porter, M. E. 1980. Competitive Advantage. New York: The Free Press. Ries, A. and J. Trout. 1982. Positioning: The Battle for your Mind. New York: Warner Books. Shah, A. M. ‘Critical Success Factors and Effective Strategies in the New Environment’, Vikalpa, 25(2), April– June 2000.

CONCEPTUAL QUESTIONS 1. The success or failure of a business plan depends a lot on clarity about the market and marketing plan. Explain the implications of this statement in start-up ventures. 2. What are the two vital aspects of a marketing strategy? 3. What is the purpose of undertaking marketing research? 4. What are the fundamental questions that need to be answered before making a decision to undertake marketing research? 5. ‘Marketing research is not only crucial for startup ventures but also very important for ongoing businesses to ensure continuous growth.’ In what way does the relevance of marketing research differ for new ventures as against well-established ventures? 6. What are the key benefits that accrue by undertaking marketing research? 7. What are the four important factors that affect the decision to undertake marketing research? 8. Explain the scope and steps involved in undertaking marketing research. 9. What are the steps involved in sales forecasting for a product? Explain by providing a concrete example. 10. Explain three vital strategies that come handy in fixing prices for products/services. 11. Explain five key steps involved in undertaking marketing research. 12. Explain three different types of marketing research techniques, by highlighting their relevance to the specific objectives and problems that need research investigation. 13. What are the different dimensions that need to be captured under competitor analysis? 14. Differentiate between industry analysis and competitors’ analysis.

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15. Differentiate between potential, available, target and penetrated markets by giving an example. 16. Differentiate between market segmentation and market positioning and the relevance of these two concepts to an entrepreneur. 17. What are the important characteristics of an effective marketing plan? 18. ‘While analysing the target market it’s important to explicitly identify who makes the buying decision?’ Who are the five agents that need to be analysed to find out who makes the decision? 19. What are the key objectives of building a marketing plan? 20. What are the key marketing mix variables? Define these variables and their relevance in building a marketing strategy. 21. Define three generic strategies as described by Michael Porter for offering new products in the market. 22. It is said that ‘Marketing plans are ineffective in meeting goals for different reasons.’ What are the common reasons for the failure of plans in the case of start-up ventures? 23. As per Wilson Harrell’s model, what method can be used to determine the price that can be charged for a product or service? 24. The test for the success of any venture ultimately lies in marketing the product or service. What are the important characteristics that an effective marketing plan should have? CRITICAL THINKING QUESTIONS 1. ‘Entrepreneurs at times overemphasize on financials and pay little attention to what matters the most in achieving financial targets, i.e., customer.’ What is the relevance of this statement in developing a marketing plan? Explain by considering a concrete example. 2. ‘Many research studies have failed to understand consumer needs, in spite of the best of their abilities.’ This statement creates a fundamental doubt about the value of undertaking marketing research. Explain the implications of this statement for an entrepreneur who is interested in taking up a detailed marketing research for their product before making a decision to take it up or otherwise. 3. ‘At times projections are not able to capture viral effect in marketing and therefore may result in underestimation of demand.’ Analyse this statement with the help of two distinct examples by giving reasons that have led to an underestimation or overestimation of the acceptance and potential for the new product in the market. 4. It is said that in the twenty-first century, marketing research on the Internet is the best tool to be used. However, Internet-based research has many advantages as well as disadvantages. Consider a specific venture and identify the areas of research that can be undertaken on the Internet and what aspects of diagnosis would have a limitation, if research on the Internet is used to analyse the data and arrive at decisions. 5. Identify important marketing control variables for a new venture that markets baby toys. Discuss how this venture might control each of these variables. 6. What kind of information should be provided in the industry analysis of the business plan? Considering the sugar industry, identify the various sources that might be used to provide industry information and data. Which source might provide relevant information on industry sales growth? 7. What market information is required to be collected for commencing a bicycles business? How would one do the industry analysis for the same?

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8. As a part of a team of three entrepreneurs who are in the process of preparing a business plan for their company that has identified software business solutions towards a training system of IT companies contributing in the area of banking solutions, one has been assigned the task of undertaking a thorough marketing research. What are the key areas that would govern the scope of marketing research? 9. What issues would need to attract greater attention while undertaking marketing research? What are the steps involved in marketing research for a new venture that would provide healthrelated services to old age pensioners in a metropolitan city?

 CASE 9.1:  HOUSEKEEPING BUSINESS—PRICING DECISION 

 From the Entrepreneurs’ Perspective  Multinationals emerging in the major cities of India, namely, Bangalore, Hyderabad, Pune and Gurgoan, have been provided with a good opportunity to enter into housekeeping services. A commercial cleaning business opportunity is another niche area requiring a clear identification of the market segment one would like to enter into. This business is actually economy proof, because offices will always get dirty on a daily basis. This business does not require extraordinary trade skills. All it takes is to build a team of committed people, a bit of determination and willingness to get a job well done. One does not even need huge investment, but for certain mechanized equipments. It is a minimal investment for great future earnings! The only major challenge for a commercial cleaning business is that one has to fetch a contract from one’s potential clients, as it ensures that one has steady clients, not just one-shot ones who may or may not call one back; as long as one is able to satisfy them on a continuing basis. As such, goodwill created with a few clients on account of good service helps one in getting new clients. One can even enlarge one’s clientele base by entering into cleaning home owners, apartment renters, hotels and any place that needs someone to do their cleaning for them. One will never run out of potential clients with this business. Think of a niche that no one wants to clean; one may find oneself to be the only one out there willing to do those dirty jobs. The word ‘commercial’ can be scary and daunting. However, it is not as hard as the word implies. Contrary to popular belief, one does not need expensive cleaning solutions or equipment to start off with. One can start this business with the items that one uses around one’s home. Clients will generally tell one whether they want specific cleaning solvents or things used, and they can provide these. One can bring along one’s standard cleaning equipment: cloths, brooms, vacuums and one’s trusty solution. ‘Commercial’ does not mean full-time. If one is looking for a way out of one’s mundane job, or wants to become one’s own boss, then this is a great way to test the waters of the business world. Cleaning services have great potential for major earnings in the future. All one needs is a good team equipped with basic cleaning skills.

 From Clients’ Perspective  While choosing the right business cleaning service for a company, one needs to clearly assess the cleaning service needs of the organization. This would require a basic understanding of cleaning services.

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A commercial cleaning service provider extends services such as disposal of garbage, washing the interior windows, sweeping debris, vacuuming and mopping floors and aisles, cleaning and dusting tables and desktops and cleaning the toilets or bathrooms. Toilet cleaning is a specialized service, as it involves multiple activities such as mopping floors, scrubbing the sinks and stalls and replenishing the consumables such as tissue and liquid soaps or soap bars for hand washing. Cleaning companies extend all or specific tasks related to toilet cleaning. The cleaning service requirements differ a lot from company to company depending on the nature of business and the area to be cleaned. For example, a company having just 25 employees may require a cleaning service limited to trash disposal thrice a week, and an occasional vacuuming. If company size in terms of the number of employees is larger than that, then one may opt for a daily cleaning service as against three to four times a week. There are corporate offices that lay a special emphasis on cleanliness and, therefore, may choose to have multiple cleanings each day, that is, in the morning and in the evening after work. A commercial cleaning business in the present context needs to have a specialty in cleaning all types of commercial facilities. On the other hand, there are typical industries such as hospitals that need highly specialized cleaning services. In such type of industries, entrepreneurs should ensure that one’s business cleaning service provider is well trained in cleaning one’s workplace. Apart from taking care of the usual cleaning requirements, a good commercial cleaning business needs to provide highly specialized cleaning services such as stripping and waxing the tile floors, dusting the office furniture and pressure washing outside the building. It may also include dusting ceilings and lights that require this type of cleaning. As a customer, one should clearly define their cleaning requirements before signing the contract with service providers. The service provider should also adhere to a timing schedule so that it does not come in the way of performing duty by the employees of the company. This industry has become highly competitive and, therefore, a company would come across umpteen number of responses, whenever they float tenders for this. While screening or choosing a particular service provider, one should make sure to choose the cleaning company that has well-trained employees and the needed cleaning equipment. The company’s reputation plays an important role while considering prospective service providers for the purpose. A reputed cleaning company takes an extra mile to ensure that their employees do not just provide cleaning services but also love cleaning offices and facilities as if they were their own properties. Customer satisfaction and building relationships should be their top priority in developing the business. The company’s authenticity is important and a paramount matter of consideration as well. There are deceptive companies that operate illegally in the business and one should be very careful about them. Even if they are able to provide quality service, but as long as they do not conform to the State laws, hiring them for cleaning services could be a risky proposition. It is important to ensure that they possess a business license for the same to safeguard the companies’ interests in case any accidental liability occurs while they clean premises. It is advisable to count on references in choosing the right business cleaning service agency. Testimonials, reviews and customer references can be very helpful to ensure reliability and dependability of service providers. In agreement with service providers, it is always advisable to incorporate a ‘right to cure’ clause. This would enable one to have a right to demand a review of the cleaning work, in case one is dissatisfied with the cleaning service. One can issue a notice or even revoke the contract with the cleaning service.1 (Continued)

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 Questions 

1. What are the variables that one would use for doing market segmentation for cleaning business? 2. What is the difference between home cleaning business and corporate cleaning business? 3. Why has it been said that cleaning business provides a perpetual opportunity? 4. What price fixation strategy can work the best in this type of business? 5. Undertake industry and competitor analysis for corporate cleaning business with a focus on software companies in Bangalore. 6. Prepare a marketing plan for starting a housekeeping business for the three leading software companies in Bangalore.  Endnote 

1. http://cleaningbusinessplan.net/headlines/commercial-cleaning-business.html and http:// cleaningbusinessplan.net/…/how-to-choose-a-business-cleaning-service.html, accessed on 10 December 2010.

 CASE 9.2:  FOOD INDUSTRY IN INDIA 

 Demand-supply  According to a Mckinsey-CII report, the size of the Indian foods market is ` 250,000 crore. The average Indian spends the highest proportion of their expenditure on food. Although with development, the share of expenses on food should relatively come down, however, in the Indian scenario, no major change in this proportion is likely to take place, keeping in view the relatively backward status of the economy. Despite the fact that food accounts for a major share of the average Indian’s overall spending, the processed food industry in India has been incessantly facing a number of constraints on the demand as well as supply side. As a result, value-added foods are estimated to account for just 32 per cent of the food industry. Some of the major constraints that emerge to provide a momentum to the growth of the processed food industry in India are given as follows:  A majority of the population cannot afford processed/branded foods because of their economic condition.  The development of the processed foods industry is highly related to the proportion of working women in the economy. This proportion continues to be relatively low in India.  Indian culture and habits traditionally encourage a preference for homemade and freshly cooked foods, which adversely affects the growth prospects of packaged foods.  India being a labour-surplus economy, middle- and higher-income consumers are being able to afford employing servants/cooks to prepare homemade food. As such, there is no particular incentive to buy convenience foods.

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 Unorganized players have been mainly dominating the foods sector, which has led to a perception that purchased foods may be detrimental to health, as a majority of the players in the unorganized sector do not happen to invest adequately in maintaining quality/ hygiene standards. As regards the supply side of the processed food industry in India, the market is characterized by small, regional players, most of them belonging to the unorganized sector, along with the presence of a few national-level entities. The unorganized sector accounts for around 70 per cent of the industry. Popular, traditional foods such as namkeens, sakharpara, fried dal, samosa, cutlet, vada, kachori, bhaji, tomato chips, banana chips, extruded snacks, cereals, flour and starch are made by small local players who have created their own market niche. These items are sold through local grocery/small food shops. The urban fast food market is estimated to be to the tune of `5,000 crore. This is growing at the rate of 20 to 25 per cent per annum.1 This market too is mainly dominated by the unorganized sector, which delivers these products to customers on roadside stalls in the cities and on highways. The market share of MNCs such as Kentucky Fried Chicken and McDonald’s in India continues to be negligible, despite the considerable media hype created around their emergence. There are also a few strong local chains that have come up over the years, such as the Nirula’s chain in Delhi and Haldiram. Some of the major supply-side constraints that emerge on the way of the growth of the food processing industry in India are given here:  Poor infrastructure facilities including cold storage and transport facilities that hamper efficient handling of perishable food items.  Small-scale local players do not have adequate required capital to invest in marketing and distribution, which poses a constraint in their geographical expansion.  Small shops lack the required finances and other resources to invest in adequate storage facilities, as processed foods dominate the retail industry in India. In spite of the above-mentioned demand and supply constraints, India has great potential to emerge as a major player in the exports market for foods. Although rice and marine products accounted for 70 per cent of the processed food exports of ` 11,000 crore in 1997–98,2 there exists substantial scope to give a big boost to the exports of processed fruits and vegetables. The required investments in processing technology and improving quality perception among customers can help in giving this push to substantially raise processed fruits and vegetables exports well above the 1997–98 levels of ` 390 crore. As per market research agencies, the annual growth rate of the industry has been pegged to 9 to 12 per cent per annum. According to McKinsey, packaged atta will expand into a $4 billion industry, packaged milk ($10 billion), bakery products ($3 billion), and poultry into an $8.3 billion business by 2005. Increasing urbanization trends, personal income growth and the emergence of retailing as an industry will contribute a great deal to support these growth rates in the coming years. Thus, from an objective analysis, it is evident that the Indian market is capable of registering significantly higher growth in the processed food industry in the coming years. For example, India is the world’s second largest producer of fruits and vegetables; however; only 2 per cent of these fruits and vegetables are processed, as against 40 to 80 per cent in other developing countries such as Thailand and Malaysia.3 In brief, there exists exponential potential for the growth of this industry, but for infrastructural and socioeconomic constraints. (Continued)

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 Competition   The foods processing sector is multi-segmented, with each segment being highly fragmented. Some multinational companies, and a few local players such as MTR and Vadilal, enjoy nationwide recognition in specific product segments. The industry may be segmented in the following manner: food grain/pulse milling fruit and vegetable processing milk and milk products beverages fish, poultry products (eggs) meat and meat products aerated water/soft drinks beer/alcoholic beverages breakfast cereals; bread, biscuits, confectioneries, malt protein, weaning, extruded food products  edible oil/ fats

        

The unorganized sector dominates each of these segments, although market leadership may be vested with large, organized manufacturers. For example, Nestle and Cadbury are major players in the milk product and beverage segments, whereas Britannia and Parle lead the organized sector in the bakery segment. The high level of fragmentation in the industry is reflected in the large number of food processing units in the organized sector alone.4

 Number of Food Processing Units in the Organized Sector   Flour mills Fish processing units Fruit and vegetable processing units Meat processing units Sweetened and aerated water units Milk product units Sugar mills Solvent extraction units

800 412 4920 114 656 90 429 725

This sector is dominated by small, regional players, a few of whom have successfully created a distinct market niche in their respective segments. Margins in the industry are certainly low, but profit levels greatly depend on sales turnover. Market leaders in the industry have created their distinction primarily through brand promotion and distribution strengths. The huge size of the Indian market, coupled with the gradual liberalization of the sector, has led to investments to the tune of ` 60,000 crore5 by multinationals such as Kelloggs and Heinz over the last five years. However, keeping in view the prevailing food habits and relatively poor economic conditions of the Indian consumer, the growth in the immediate future is likely to be largely restricted to the top end of the market. The serious volumes in the food business are found at the lower end, and in traditional foods. This has prompted companies such as Britannia and Hindustan Lever to look with renewed interest at niches such as glucose biscuits and packaged wheat flour, respectively.

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 Prices  Prices of processed foods as in other cases are mainly determined by the market’s capacity to absorb. Prevailing competition does not allow any substantial price hikes, which usually reflect changes in the cost of raw materials such as cereals, sugar, oils and milk. The raw materials constitute the major cost of production and, therefore, prices are set so as to maintain some margin to allow for cost fluctuation. Leading players in the industry operate on very thin margins, and the most profitable companies are those with the highest working capital turnover. For example, even for a market leader such as Britannia, gross margins are just 5 to 6 per cent. However, the high volumes achieved, with low capital spending, enable them to have overall better returns on investment.6  Questions 

1. Why do you think entrepreneurial zeal has not caught the attention of the great opportunity that the food processing industry provides in India? 2. Why it is that the unorganized sector continues to play an important role in the industry, in spite of the scope for new ventures to enter the market through innovations leading to value propositions? 3. What could be some of the vital areas providing market demand for the food processing industry in India? Explain with the help of examples. 4. What innovations can help in overcoming infrastructural constraints that, if tackled effectively, can give a big boost to the industry? 5. What have been the broad findings of market research in the food processing industry in India? What key aspects of marketing research need to be investigated more deeply to establish market opportunities in specific areas of the industry? 6. Identify some of the key market segments in the industry. Analyse and justify with facts and figures which segment for which product line is likely to provide the greatest opportunity. 7. What is the market development strategy that comes up with some major ventures such as the multinationals in India in this sector? 8. What kind of margins exist in this industry? What pricing strategy works well in the sector? Explain by giving concrete examples.  Endnotes 

1. 2. 3. 4. 5. 6.

Probity Research. Ministry of Agriculture. Economic Times, 15 September 1998. Probity Research. Probity Research. www.indiamarkets.com/..../foodprocessing/market.asp?

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 CASE 9.3:  MAHINDRA & MAHINDRA  In 1945, Mahindra and Mohammed established their first venture, which has fructified into a great empire over the years. The company was renamed Mahindra & Mahindra Limited (M&M) in 1948. Steel trading business also commenced, in association with suppliers in the United Kingdom, in 1949 with a jeep assembly business. In 1953, the group established Otis Elevator Company. Technical and financial collaboration commenced with Willys Overland Corporation that assembled jeep type vehicles and which came into the picture in 1954. The company’s shares were listed on the Bombay Stock Exchange in 1956. The Mahindra Group’s Automotive Sector is in the business of manufacturing and marketing utility vehicles and light commercial vehicles, including three wheelers. It is the market leader in utility vehicles in India since its inception, and currently accounts for about half of India’s market for utility vehicles. Although created in 1994 after an organizational restructuring, the Automotive Sector can trace its antecedents back to 1954. The iconic jeep that led the American GIs to victory in World War II is the very same vehicle that drove the Mahindra Group to success in the Automotive Sector. Mahindra & Mahindra Limited, the flagship company of the Group, was set up as a franchise for assembling general-purpose utility vehicles from Willys, USA. The Mahindra Group exports its different products to several countries in Europe, Africa, South America, South Asia and the Middle East. Over the years, the Group has been able to develop a large product portfolio catering to a diverse customer base such as rural and semi-urban customers, defence requirements and luxurious urban utility vehicles. In 2002, the company launched an indigenously engineered and developed world-class sports utility vehicle, Scorpio, which bridges the gap between style and adventure, luxury and ruggedness, and performance and economy. The company continues to be a leader in the utility vehicle segment with a highly diverse portfolio including mass transport as well as new generation vehicles such as Scorpio, Bolero and the recently launched Xylo. Mahindra & Mahindra’s entry into the three-wheeler segment with the Alpha and Champion has also enabled it to occupy a leadership position in its category. The international operations of the Automotive Sector focus and contribute to the promotion of the international business. Mahindra Renault (MRPL) launched Logan, India’s first wide body car, sporting a host of class-defying features at an aggressive price against competitors. The Logan has helped in redefining its segment in terms of spaciousness as well as performance and technology with the latest generation. The product has been specially designed for the Indian market by incorporating contemporary styling features and a design suited to Indian road conditions. Mahindra Navistar Automotives Ltd (MNAL), a joint venture between Mahindra & Mahindra Limited and International Truck and Engine Corporation, will manufacture trucks and buses for India as well as export markets. It will also provide component sourcing and engineering services to International Truck and Engine Corporation. Mahindra Navistar (MNEPL) is a second joint venture agreement with Mahindra & Mahindra Ltd that focuses on producing diesel engines for medium and heavy commercial vehicles in India. In 2010, SsangYong Motors of South Korea, which has competencies in sports utility vehicles (SUVs), has picked Mahindra & Mahindra as its preferred buyer. This is not the first time that Mahindra & Mahindra has tried to acquire a marquee global SUV brand. It was also in the race to acquire Jaguar-Land Rover, but was beaten to the post by Tata Motors. SsangYong may be a small player in South Korea with a market share of just 2 per cent, but it has in its portfolio SUVs such

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as the Rexton, Actyon and Kyron. It has 138 dealers in its home country and another 1,300 spread across 98 countries. This is something that would have taken Mahindra & Mahindra about five years. It is important to note that SsangYong was neck deep in debt—$640 million long-term paper as on 31 December 2009—but Mahindra & Mahindra feels the situation has not gone out of control. The bid price has not been disclosed. Mahindra & Mahindra has cash reserves of ` 2,500 crore on its books, and its debt is less than a third of its equity capital, which leaves a lot of headroom to raise money. ‘We can almost double the debt without affecting our credit rating,’ says Mahindra & Mahindra President (finance, legal and financial services sector) Uday Phadke. There can be no room for error. SsangYong, after all, is critical in Mahindra & Mahindra’s strategy to become a global player in utility vehicles (SUVs, multi-purpose vehicles and pick-up trucks).

 Global Footprint  Mahindra & Mahindra is the largest player with almost 60 per cent market share in the Indian market for utility vehicles. It is not only difficult but also quite challenging to grow the share any further, and, therefore, the company will be more than happy to at least protect it. Moreover, utility vehicle sales as a proportion of the car market had remained around 17 to 18 per cent for some years. However, in the other countries, the uptake of utility vehicles happens to be much larger in its share. Therefore, the strategy to grow in this segment of the market lies in expanding export potential. The current prevailing trends in the global automobile market, according to Goenka, are favourable for such a strategic move. Buyers look forward to utility vehicles at low prices but with high fuel efficiency. Above all, there has been a basic shift in favour of growing demand for environment-friendly vehicles (hybrid and electrical). The automobile exports from India in the days to come, by both multinational corporations and Indian companies such as Tata Motors and Mahindra, is likely to grow substantially in the coming years. Therefore, the company is working on a diesel hybrid (the budget is ` 200 crore) to improve its brand equity in the clean technology space. The acquisition of Bangalore-based Reva Electric Car Company has added an advantage to the company’s capabilities in the field of electric engines: ‘We want to develop new products, and have a range that is as wide as, if not bigger than, any player in the world,’ says Goenka. However, their rivals have an opinion that Mahindra & Mahindra’s pace of new launches has not been too inspiring so far. This is evident from the company taking almost seven years after the Scorpio to launch the Xylo in 2009. Mahindra & Mahindra’s Chief Executive (technology, product development and sourcing) Rajan Wadhera says that as many as seven new platforms are in the works, which will all be rolled out by 2016. This may lead to expediting the pace of coming up with new launches in the coming years for both Indian and global markets. Price continues to be the USP of Mahindra & Mahindra, though not the only one, insist Goenka and his men. ‘The idea is to leverage the dominance in the Indian market for global opportunities,’ adds Mahindra & Mahindra Chief Executive (automotive division) Rajesh Jejurikar. On the issue of selling at a loss to gain market share, Goenka says, ‘We are very focused on financial results. We will not do anything that is not financially prudent.’ However, for overall portfolio, there will always be some loss leaders, and there will be some cash cows. The company will attempt to have a right balance between the two. (Continued)

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At present, overseas sales account for just 5 to 6 per cent of Mahindra & Mahindra’s total volume of sales. It has an export presence in the Indian subcontinent, Africa, South America and Europe. However, in case a company wants to give it a jump to export sales, it has to enter into the United States, which accounts for almost 47 per cent of global car (utility vehicles included) sales. For this, the company had signed an agreement with Georgia-based Global Vehicles in 2006 to distribute its vehicles there. However, Global Vehicles has gone to court, saying that Mahindra & Mahindra has still not delivered its vehicles, which has, in turn, jeopardized the $35 million it has invested to sign on 350 dealers. These dealers, the company has alleged, have invested another $60 million in Mahindra & Mahindra for the purpose. The company has also made an appeal to seek protection from the courts against any attempt by Mahindra & Mahindra to drop the 10-year agreement and appoint a new distributor. Mahindra & Mahindra’s automotive and tractor businesses were brought together and placed under Goenka in April 2010. The purpose was to drive maximum gains through synergies between the two. The company has also merged its development and sourcing functions, as the technical expertise required for both the product categories is the same. By bringing it under one umbrella, there could be osmosis of ideas and innovation between the two. A similar advantage would accrue in terms of raw material purchase, as more than half the 500-odd vendors for the two lines are the same. Combined orders will certainly help the company in bringing down prices. In overseas markets, the same office now takes care of tractor as well as utility vehicles sales. Similarly, in the domestic market too, the 1,300-strong dealer network for tractors will also become touch points as well as service centres for utility vehicles. Club Mahindra Resorts will also help in promoting sales by showcasing the company’s SUVs. Films made by the group will help in promoting these vehicles. Its IT companies, Tech Mahindra and Mahindra Satyam, will help in providing software solutions. Above all, Mahindra Finance finances almost a third of all Mahindra vehicles sold in the country, which provides an added edge in the market. All these efforts, according to Goenka, are likely to result in saving up to 1.5 per cent of its costs through the various synergies that would further push the bottom line. All these efforts will also give a push to the sales as well. The present company’s sales of utility vehicles in India is around 200,000 per year. The company realizes that high volumes in the domestic market are an important prerequisite for the success in overseas markets. It would help the company in recovering the development cost. ‘We can’t develop a product unless we sell in large volumes in India. Otherwise, the development cost is not justified. We cannot recover it by selling a few hundred,’ says Goenka. Therefore, strategically, the company has laid a distinct emphasis on dealer development in India. The company promises 25 to 30 per cent return on investment (excluding real estate) to the dealers. Most of the dealers recover their investments within three to four years. The company has also launched a new programme called ‘Gurukul’, under which its experts help their dealers to work out ways and means to improve their profitability. At the same time, the company plans to expand its network of service stations that would provide easy accessibility to customers for getting their vehicles serviced within a vicinity of 50 km. The company has already achieved this target for 85 per cent of the country. Mahindra & Mahindra wants to become a leading player in the small commercial vehicle segment (0.5 tonnes to 0.75 tonnes) in India along with utility vehicles. Although it does not have any global ambitions for the same, it does have interest in some pockets outside the country.

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The company has four products in this category (three-wheelers Alpha and Champion and four-wheelers Gio and Maximo) and is the fourth-largest player after Bajaj Auto, Tata Motors and Piaggio. The greatest strength of the company lies in it possessing indigenous technology. This has enabled the company to develop the Gio for as little as ` 25 crore of investment. However, such a strategy could be played by others also in the market, particularly in view of the fact that this segment is growing much faster than the 12 to 13 per cent annual growth. For example, General Motors has plans to use the expertise of its Chinese partner, Shanghai Automobiles, to launch a similar vehicle in India. The technology is the driving force in the industry, and there are really no entry barriers as such. The company is confident that it can grow its market share from 15 per cent now to 25 per cent or even 30 per cent in the coming years. However, the fact remains that there will also be intense competition. The company’s share at present in different Indian automotive markets is as follows: Segment

Market Share

Utility vehicles Small commercial vehicles Scooters Cars (overall market)

60% 15% 6% 0.34%

 Commercial Plans of the Company  Mahindra & Mahindra has also plans to capture a slice of the large commercial vehicle market (3.5 tonnes and above) in India to begin with and subsequently in the overseas market. This segment of the market has grown by 6 to 7 per cent per year during the last 10 to 15 years. Although not a very high growth, this is certainly a consistent one. India has the third-largest truck market in the world. The company has formed a 51:49 joint venture with Navistar of the United States. Other than North and South America, this company is free to sell its products anywhere in the world. The company has opted for a joint venture route, as it did not have a technology for large trucks. The joint venture does not have plans to procure Navistar products to India. It is in the process of developing new products from scratch on its own. The first truck priced at ` 14.99 lakh is expected to hit the market soon. Although the cost of the truck is costlier than current products in the market, the company is clear that their product is distinct with a different value proposition, as it would provide more engine power, better fuel efficiency and better cabin space. It is interesting to note that at the time when Mahindra & Mahindra got into the joint venture, there were only two others to contend, namely Tata Motors and Ashok Leyland. However, now the market is crowded with Volvo and Mercedes Benz also in the race, thus implying the market potential in this segment. There is going to be a similar push in the buses segment also in the coming years. The company has even entered into the market of scooters that could be a precursor for motorcycles. India is the largest motorcycle market in the world. However, the two-wheeler market is very tough to enter into because of intense competition and strong players such as Hero Honda, Bajaj Auto, TVS, Honda, Suzuki and Yamaha operating for the last very many years. The market has been very thinly shared by the existing players, which poses a great challenge for differentiation. (Continued)

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It is certainly not easy to enter. Informed sources in the company say that although Mahindra & Mahindra will sell scooters in the top dozen or so cities, its motorcycles will be mass marketed. The company is planning to come up with a complete product range from ` 35,000 to ` 100,000. The issue that arises is about the Logan with Renault exiting the venture. It would be fully owned by Mahindra & Mahindra. The company was not in core business of car manufacturing and, therefore, its portfolio will not be expanded in the near future. However, the company appears to be clear in its strategy when it says that the Logan will get a new model every two years or so, although the rights for the Logan hatchback are with Renault. The company proposes to reposition Logan as a fuel-efficient car through two new television campaigns in the near future. The company is clear that greater emphasis on cars would spread its resources too thin, which would not be a worthwhile proposition. However, a question arises as to whether the company has examined the possibilities and potential in the car segment. As such, the car market in India is growing fast, and it is becoming one of the most exciting markets for small cars. The management of the company says that the car market is not in their immediate priority, although they are not saying that they will never do cars. The financial performance of the company as per the director’s report for the year ended 31 March 2010 reveals that the company on a total sales of 236,759 vehicles and 45,360 three wheelers as compared with 161,882 vehicles and 44,806 three wheelers in the previous year had registered a growth of 46.3 per cent and 1.2 per cent in vehicles sales and three-wheeler sales, respectively. The company had sold 227,114 vehicles in all constituting 214,128 multi-utility vehicles (MUVs), 3,722 small four wheelers 0.75 Ton cargo and 9,264 mini four wheelers 0.5 Ton cargo in the domestic market. This has resulted in a growth of 47.8 per cent over the previous year’s volume of 153,654 vehicles including 153,653 MUVs and 1 Light Commercial Vehicle (LCV). However, a sales volume of 44,438 three wheelers was lower by 0.2 per cent as compared with the previous year’s volume of 44,533 three wheelers in the domestic market. The company’s MUV sales volumes grew by 39.4 per cent as against the industry MUV sales growth of 26 per cent in the domestic market. The company strengthened its position in the domestic MUV segment by increasing its market share to 63.3 per cent compared with the previous year’s market share of 57.2 per cent. Xylo been very well accepted in the market ever since it was launched in January 2009, as evident from a total sales of 27,978 Xylos during 2009–10. In spite of difficult overseas market conditions on account of the overall downturn, the company achieved superior growth by selling 10,567 vehicles including 1,323 vehicles sourced from MNAL and 922 three wheelers in the overseas market during 2009–10 as compared with 8,501 vehicles including 693 vehicles sourced from MNAL and 273 three wheelers in the previous year registering a growth of 24.3 per cent. Spare parts sales stood at ` 514.96 crore (including exports of ` 22.4 crore) during 2009–10 as compared with ` 362.75 crore including exports of ` 27 crore in the previous year, thereby registering a growth of 42 per cent.1  Questions 

1. What is the market niche that Mahindra & Mahindra is focusing on? Does it make sense to continue with the same niche market? Critically comment. 2. What market segmentation and positioning strategy is being operated by Mahindra & Mahindra? Comment on the marketing strategy of Mahindra & Mahindra.

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3. What are the future plans of Mahindra & Mahindra to expand its market? Is it prepared for the same? 4. Prepare a market plan for the expansion of the business for a company. 5. What specific strategies would be effective in achieving predetermined goals and objectives as identified by one? 6. What has gone wrong strategically with the launching of Logan in association with Renault?  Endnote 

1. Bhandari, B., S. Baggonkar, and A. Barman, ‘Local Edge, Global Plans’, Business Standard, 23 August 2010, New Delhi, economictimes.indiatimes.com/mahindra-&-mahindra…/ companyid-11898.cms; Company’s Web site, http://www.mahindra.com/OurBusinesses/ automobile-manufacturer.html www.business-standard.com/india/news/local.../405380/www.ev-information.com/gt/view/id-14340

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 LEARNING OBJECTIVES    To understand the importance of production and operations management (POM) in a business plan.  To learn about the purpose of the product design and development plan in a business plan.  To identify and understand the key factors related to design decisions.  To understand the importance of location and project layout decisions in the success of a business.  To learn about the factors to be considered while drafting a project layout plan.

 To learn about the factors to be considered for plant and technology choices.  To learn how to deal with matters related to technology transfer.  To learn about the important factors to be considered by the production and operations team to ensure salability of the products.  To learn about the key aspects that influence production planning and control decisions.  To understand the aspects related to commercialization of technologies.

William Henry ‘Bill’ Gates III, Chairman Chairman, Microsoft Microsoft has had its success by doing low-cost products and constantly improving those products and we’ve really redefined the IT industry to be something that’s about a tool for individuals. —Bill Gates

William Henry ‘Bill’ Gates III (born 28 October 1955 in Seattle, Washington) is a prolific American businessman, investor, philanthropist, author and former CEO and current chairman of Microsoft, the software company that has transformed the way people live. He belonged to an upper middle class family and his father was a prominent lawyer. Gates’ family atmosphere was warm and open where children were encouraged to be competitive and to endeavour for excellence. He had been deeply interested in programming since his school days. He graduated from Lakeside School in 1973 and enrolled at Harvard College in the autumn of 1973. His passion for computer programming began at the age of 13 at Lakeside School. He became engrossed with what a computer could do and spent much of his free time working on the terminal. He wrote a tic-tac-toe program in the BASIC computer language that allowed users to play against the computer. While at Harvard, he was acquainted with Steve Ballmer, who subsequently succeeded Gates as CEO of Microsoft.

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He established a venture called Traf-O-Data along with Allen, at the age of 17, to make traffic counters based on the Intel 8008 processor. He developed a world of computers to transform the way people do things—one cannot think of life without computers, especially Windows, in the present era. He is a co-founder of Microsoft Corporation and has served as Chairman of the company since its incorporation in 1981. It is a global leader in software, services and solutions that help people and businesses realize their full potential. Microsoft Corporation is engaged in developing, licensing and supporting a range of software products and services. It also designs and sells hardware, and delivers online advertising to customers. Gates retired as an employee with effect from 1 July 2008, but continues to serve as the company’s Chairman and an advisor on key development projects. Gates served as Chief Executive Officer from 1981 until January 2000, when he resigned as Chief Executive Officer and assumed the position of Chief Software Architect. As Chairman and Chief Executive Officer of the Company from its incorporation in 1981 to 2000, he developed Microsoft from a fledgling business into the world’s leading software company, creating one of the world’s most powerful brands. Microsoft’s chain of innovations introduced are evident from IBM’s introduction of its personal computer with Microsoft’s 16-bit operating system; MS-DOS 1.0 in August 1981; Microsoft Windows 3.0 in May 1990; Windows 95 in August 1995; Windows 98 in June 1998; Microsoft Office XP in May 2001; Microsoft and partners Tablet PC in November 2002; Microsoft Windows Server 2003 in April 2003; Microsoft Xbox 360 in November 2005; Microsoft Windows Vista and the 2007 Microsoft Office System to consumers worldwide in January 2007; Windows Server 2008, SQL Server 2008 and Visual Studio in February 2008; Windows 7 in October 2009 and Kinect for Xbox 360 in November 2010. The company’s market capitalization stood at $227.55 billion in October 2011 with a net revenue of $69.94 billion and a net income of $23.15 billion, employing 90,819 employees worldwide. In the later part of his corporate journey, Gates has been pursuing a number of philanthropic endeavours, donating large amounts of money to various charitable organizations and scientific research programmes through the Bill & Melinda Gates Foundation, established in 2000. In June 2006, Gates announced that he would be transitioning from full-time work at Microsoft to part-time work, and work full-time at the Bill & Melinda Gates Foundation.

 10.1  INTRODUCTION  Having done detailed marketing research to make the final decision about how, where and when to enter into the market, an entrepreneur should prepare a detailed operational plan. ‘In the world of business there are many essential parts to a successful operation. Some may say that marketing, production and/or sales are the most important phases of any business, but after studying the process of operation management, it is found to be the backbone of any business process. Operation management embodies all aspects of a business process and unites them to create an efficient resourceful procedure….’1 The operations aspects of a venture have undergone major changes over time. The emphasis shifted from the cost focus approach, which used to dominate from 1776 to 1980, to quality as the key focus during 1980–95, and thereafter, the major emphasis shifted to mass customization during the period 1995–2010. Accordingly, entrepreneurs in their approach to operation management were required to have a distinct strategic focus. In the era of cost focus, it was labour specialization that took deep roots coupled with scientific management practices as highlighted by Gantt charts (Gantt), motion and

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time studies (Gilbreth), process analysis (Taylor) and queuing theory (Erlang). A Gantt chart is a type of bar diagram that illustrates a project schedule. It depicts the start and finish dates of the terminal elements and summary elements of a project. Frank Bunker Gilbreth (1868–1924) was an early advocate of scientific management practices and a pioneer of motion and time study in production systems. Frederick Winslow Taylor (1856–1915) is regarded as the father of scientific management, who sought to improve industrial efficiency (Taylor 1915).2 He was one of the intellectual leaders of the efficiency movement and his ideas, broadly conceived, were highly influential in the subsequent period in the field of management. During the mass production era that continued between 1910 and 1980, the focus was on cost management through techniques such as moving assembly line (Ford), statistical sampling (Shewhart), linear programming (Dupont) and material requirement planning. Shewhart (1891–1967) was a prominent scientist with the Western Electric Engineering Department back during the 1920s. In 1924, Shewhart devised a framework for the first application of the statistical method to the problem of quality control. According to his findings, ‘The application of statistical methods in mass production makes possible the most efficient use of raw materials and manufacturing processes, economical production and the highest standards of quality for manufactured goods. In this classic volume, based on a series of groundbreaking lectures given to the Graduate School of the Department of Agriculture in 1938, Shewhart illuminates the fundamental principles and techniques basic to the efficient use of statistical method in attaining statistical control, establishing tolerance limits, presenting data and specifying accuracy and precision.’ Linear programming consists in optimizing linear functions under a number of constraints reflected by linear inequalities. The use of this technique to optimize resource allocation became a vital tool in industrial applications. As against this, during 1980–95, the emphasis in production and operation management shifted to quality focus by use of techniques such as just in time, computer-aided design and total quality management (TQM). The present era in operations is characterized by customization focus as a result of globalization, Internet uses, enterprise resource planning, supply chain management and build to order. Production and operations management (POM) is about the transformation of inputs into required outputs; and these outputs, when they reach customers in the target market, meet their needs. In business and engineering, new product development (NPD) is the term used to describe the complete process of bringing a new product or service to market.2 It mainly involves product design and detailed engineering and market research and market analysis. The operations management aspects of a business plan help in identifying physical inputs such as the physical location, facilities in terms of power and water, raw material availability and equipment. Further, it also has to cover other aspects such as inventory requirements and suppliers, and a detailed description of the manufacturing process. This exercise helps a lot not only in ensuring the technical viability of the business but also in estimating investment requirements and working capital requirements of the business on a day-to-day basis. In case the business requires any agreements, licensing or otherwise, to procure technology from some source, it needs to be handled appropriately in advance, so that problems do not surface later on at the time of starting production. Fundamentally, it is the entrepreneur’s preparedness and readiness that reflects their clear understanding of the manufacturing or delivery process of producing the product or service. It would be easy to operationalize the various aspects related to the operations plan, if the entrepreneur clearly identifies the various stages of product development. While writing this part of the business plan, it is important to explain what has been done so far to get the business operational and what more needs to be done so that it would become completely functional.

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It is advisable to identify risks associated with production, planning and control and the steps that an entrepreneur proposes to take to mitigate them. While preparing an operational plan, an entrepreneur should be fully conversant with the industry’s standards and regulations that apply to the product/ service and the steps taken to comply with the laws and regulations that apply to the proposed venture.

10.2  TYPES OF PRODUCTION SYSTEMS As economies move from underdevelopment to developing to the developed world, the entrepreneurial opportunities keep shifting from agriculture and mining, to construction to manufacturing to the service sector. The service sector has started dominating with a contribution as high as 60–75 per cent of gross domestic product. This implies increased opportunities in activities such as education, legal, medical, trade, transportation, utilities, professional and business services, finance, information and real estate, food, hotel and entertainment. It is important to understand that production of most of goods contains a service component and creation of most of the services contains a good component. The only difference is that products have a small component of services, and services have a small component of goods. The fundamental difference between goods and services is by way of being tangible and intangible, respectively. Services are usually produced and consumed simultaneously while goods are produced and then supplied to users through a distribution chain. Services are usually unique to the consumer while products are usually standardized. Above all, services have a lot of customer interaction, which is not so in the case of goods. Thus, the fundamental differences between goods and services are as follows:

Goods

Services

• Tangible • Can Be Resold • Can Be Stored • Selling Is Usually Separate • Easy to Automate • Product Can Be Transported

• Intangible • Reselling Is Usually Not Possible • Most of the Services Cannot Be Stored • Selling Is Part and Parcel of Service • Difficult to Automate • Provider of Service Can Be Transported

The production system of a company uses various facilities, equipment and operating methods to produce goods and services that satisfy customer needs. This depends mainly on the type of the product or service produced by the entrepreneurial venture and the strategy that an entrepreneur uses to serve the customers. Production systems can be classified on the basis of the type of output, type of flow involved in production and type of specification under service. According to the type of the output of production, production systems are classified as production of products or providing services. For example,

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manufacturing furniture, mobiles, refrigerators, television, lathe machines and automobiles fall under the category of products, while health services, telecom services, screening movies, hotels and banking fall under the category of services. According to the type of flow, production systems are classified as projects, job shop, flow shop and continuous process. The project refers to the process involving a set of interdependent activities requiring a set of resources to perform well-defined tasks to create a product or service required by the customer. Examples of projects are road construction, hospital building construction and project execution for setting up a turnkey project to manufacture yarn. Examples of job shop are auto repair shop, television repair shop and furniture company. Examples of flow shop are TV manufacturing companies and automobile manufacturing companies. Companies such as oil refineries, chemical plants and power generation and distribution are in the continuous process industry. According to the type of specification under the service category, there could be customized services such as that offered by legal professionals and chartered accountants or standardized services such as banking, insurance and wholesale stores. Entrepreneurs, while preparing a business plan, should meticulously take care of the production system that would best suit their requirements to deliver a final outcome by appropriately using facilities and equipment and operating methods. While making a decision to deploy resources, entrepreneurs should clearly weigh the productivity implications. Productivity refers to the relationship between the output and the input in a business system. The entrepreneur should deploy the systems that can yield the highest output for a given input, maintaining the quality of production. This could be achieved by increasing output for a given input, decrease in input for a specified output, proportionate increase in output being far higher than proportionate increase in inputs and proportionate decrease in the input being more than the proportionate decrease in the output. Productivity variables mainly consist of labour, capital and entrepreneurship. Human productivity is attributed mainly to improvement in the quality of workforce arising as a result of improved education opportunities, better dietary habits and availability of labour on account of greater mobility. Entrepreneurs face greatest challenges to induct competent people and utilize them well with stronger commitment by providing training to enhance their skills and inspire and motivate them by appropriate motivators. Capital investment is the tools that human beings use to convert inputs into value-added outputs. Entrepreneurs face challenges to have an appropriate mix of capital and investment. Above all, it is entrepreneurship by way of expertise in managing the factors of production and economic resources that contributes to the enhancement of productivity.

10.3  PRODUCT DESIGN AND ANALYSIS The purpose of the product design and development plan section in a business plan is to provide a complete description of the product’s design, and specify the stages of development within the context of production, planning and control. In case product development would require prototype development or certain research and development efforts, these along with available competencies, timeframe and investment required, need to be highlighted.

10.3.1  Goals for Product Design and Development Product design is the first step in proceeding with any business venture. This requires clear conceptualization of the product and its ingredients. The goals for product development should focus on the technical aspects, given the marketing research outcomes as prerequisites. However, there are ventures

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Design the Product

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Ensure Ease and Convenience to Manufacture

Ensure Strength, Safety, Security and Wear Ability of the Product

Produce a Product That Gives Greater Utility to Consumers

Figure 10.1 Product Design Issues that come up with an altogether new product and then look forward for marketing aspects of the product to create market. For example, a goal for product development of natural flavoured ice creams could be to ‘produce recipe for premium natural flavoured ice creams’. Product design directly affects the plant layout and the flow of materials in the production process. While designing the product, it is essential to critically analyse alternative design features in relation to product uses and to substitute raw materials and alternative equipment that can be used to manufacture it. Thus, the key purpose of product design and analysis is to come up with products that would give greater utility to the consumer by way of satisfying their needs through ease and convenience of use and low cost compared with alternative options available and will be profitable for the entrepreneur (Fig. 10.1). Some of the important aspects of product design include a design for function, making and selling. Design for function means that the product should be able to perform the function that customer expects it to do. The key factors to be considered are strength, safety, security and wearability of product and its components.

iPod—Integrated Product System: An Example The iPod, when launched in the market by Apple, was never sold on technical merits but was designed  for function focused on marketing a cool new way of music getting integrated in one’s life. It did not  appeal to the customers as a ‘standalone’ device but rather as a piece of integrated and thought  through product system with the Music Store and iTunes as ‘missing pieces’ for anything you could  possibly do with your music—listening, ripping, mixing, collecting, burning CDs, archiving, shopping,  gifting, subscribing—and taking it with you on the go, to a party or in the car. In the Windows world,  you  had  all  these  functionalities  spread  over  different  applications  and  hardware  from  different  vendors—which often requires mere luck to get everything to work without problems.3

The design of the product needs to focus on ease and convenience to manufacture the product. A product design that may have functionality for the customer but is difficult to manufacture and repair will be of no use. Special care needs to be given to aspects such as the materials used and

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ease in fabrication, dismantling and repair while designing the product. Above all, a product that has been designed well to manufacture as well as takes care of the functionality aspects from a customer’s perspective, but is not required or wanted by anyone, is of no use. The ultimate purpose of coming up with a product is to get it sold like hot cakes. Therefore, engineers, designers, market experts and psychologists should work in an integrated manner by keeping the customer in focus to design and develop better and improved products that have great market potential.

Car Fuel—Innovative Way: An Example Researchers from the south west of England are working on a £1.4 million project that could take  carbon dioxide from the air and turn it into car fuel. Scientists and engineers from the University of  the West of England are collaborating with colleagues from the University of Bath, who are leading  the research, and colleagues from the University of Bristol in the project to come up with innovative  solutions to global warming as well as cheap fuel for cars. The project aims at developing porous  materials  that  can  absorb  the  gas  that  causes  global  warming  and  convert  it  into  chemicals  that  can  be  used  to  make  car  fuel  or  plastics  in  a  process  powered  by  renewable  solar  energy.  The  researchers hope that in the future, the porous materials could be used to line factory chimneys to  take carbon dioxide pollutants from air, reducing the effects on climate change.4

10.4  NEW PRODUCT DEVELOPMENT In the process of human development, the number of inventions leading to more and more innovations useful to society is ever increasing at an accelerated rate. Every innovation leading to NPD has a phase of growth leading to a maturity and a decline phase. Entrepreneurs, for their very survival, have to keep coming up with new and new innovations to overcome the effect of the declining phase in the existing products (Fig. 10.2). Each product has a different lifecycle in terms of approaching the maturity and the declining phases, which mainly depends on technology developments, intensity of competition, Monopoly

Competition

Idea Mass Development Competition Production

Decline

Maturity

Growth

Introduction

Development

Sales

Decline of Production Time

Stage1

Stage 2

Stage 3

Stage 4

Stage 5

Figure 10.2 Product Life Cycle

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obsolescence rate, changing tastes and preferences and economic well-being of the people, in general, leading to the next level of consumption pattern. The product design strategy works for the development of existing products to improve operational efficiency and widens product usages by developing completely a new product resulting in catering to the existing needs or new needs. Any new idea requires a good deal of time, effort and investment to give it a concrete shape—the idea development stage. In this phase, there is only an outgo of money and, therefore, the company incurs losses. Every venture would like to minimize the timeframe of this phase and come up with a concrete product that can recover the initial investment made to break-even at the earliest possible time. After this, an introduction stage begins when the entrepreneur is ready with the product to be launched in the market. At this stage, the entrepreneur attempts to build product awareness and develop a market for the product. The major emphasis is on obtaining patents and trademarks and establishing product branding and quality in the market. Here either the entrepreneur operates on high skim pricing to take advantage of monopoly to recover development costs or the product is distributed selectively to ensure its acceptance in the market. The promotion strategy focuses on early adopters and innovators. The next phase is called introduction, where competitors start entering in large numbers, depending on the profit potential in the market and their ability to produce similar products. Therefore, the focus of the entrepreneur gets shifted to building brand preferences, loyalty towards the product and increase in the market share. The entrepreneur attempts to achieve it by maintaining product quality and adding new features in the product. Pricing is more or less maintained, as awareness about the product would yield enhanced market with some competition. The promotion strategy focuses on creation of a broader customer base. In the maturity stage of growth, the momentum of growth in sales starts diminishing, as a result of greater competition. Therefore, the entrepreneur attempts to differentiate the features of the product from those of their competitors. The pricing strategy gets shifted to reducing the prices, if the competitors come up with a wide range of similar products at similar prices or lower prices. The distribution strategy becomes intensive and promotion emphasizes on differentiation. In the declining stage, the entrepreneur has to get ready to coming up with a new product to avoid the adverse effect emerging from the decline in sales and profits. The best strategy becomes to discontinue with the product. In case they are not ready with introduction of a new product, the entrepreneur may work on the strategy of harvesting the product by reducing the cost of production and serving the niche market of loyal customers. They may also prefer to work on maintaining the product by adding new features to it or finding new uses for the product. Design decisions related to existing or new products are strategic in nature, which affect the interrelated functions of the company in many ways. These are guided mainly by corporate goals of the company, including emphasis the company places on quality aspects. It is the product design that affects the company’s image and reputation in the eyes of employees customers and the public in general. Some of the key factors related to design decisions are as follows (Fig. 10.3):    

Appearance of the product. Internal components that affect performance in terms of durability and reliability. Components used that affect the production process and in turn the investment required. Design decision that affects the number of components that would go into the manufacture of the product that need to be acquired from outside sources or manufactured within. This affects supply chain management in terms of linkages with suppliers, on the one hand, and availability of spare parts for the customers, on the other.

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Design Decisions— Key Factors

Components That Affect Performance Components Affecting Production Process and Investment Required Supply Chain Management and Availability of Spare Parts

Figure 10.3 Key Factors Related to Design Decisions Therefore, the designer has to be careful about the consequence of the design decisions on various interrelated aspects from manufacturing to marketing of the product. The endeavour has to be on simplification, standardization and systematization to add great value to the manufacturing process as well as to the customer in terms of value coupled with ease of use.

10.5  LOCATION AND LAYOUT DECISIONS The decision on the location of a business entity is critical to the success of a business. A bad location choice can kill a business that is best managed otherwise, while a good location choice for the business may enable a struggling business to thrive ultimately. The choice of location is governed by the demand potential of the product, conditions required for operations and input requirements. ‘Location’ relates to broad areas such as city, town, industrial estate and coastal region, while ‘site’ refers to a specific piece of land where an entrepreneur proposes to set up the manufacturing facility. The entrepreneur needs to answer some of the vital questions, such as the following, while making a decision on the location of the business:  Does the business location need convenient transportation facilities, especially to suppliers?  Does it require easy access?  Does the business have any additional important requirements, such as parking and proximity to freeway and accessibility to airports, railroads and ports?  Is there a plan to construct a building? Most start-up companies cannot afford to put capital into construction. However, if there is a plan, the costs and specifications of the building need to be included in the plan.

Location choice differs from business to business. For example, home-based business requires different criteria compared with manufacturing or warehousing or, for that matter, retail business. Similarly, service industries such as hotels, schools, colleges and hospitals have different criteria to be satisfied before making a choice of location.

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Near Target Market Near Source of Raw Material Supply Accessibility and Other Facilities Location Decisions— Key Factors

Location of Competitors and Rationale for Their Choice Security and Safety of Building Government Incentive Programs Community Receptiveness

Figure 10.4 Key Factors Affecting Location Decision Some of the key factors to be considered while making a decision on the location of a business are as follows (Fig. 10.4): proximity to the target market where customers are thickly concentrated proximity to the source of the raw materials issues regarding traffic, accessibility, parking and lighting location of competitors and rationale for their choice security and safety location advantage of government incentive programmes in specific targeted areas and industrial estates  community receptiveness to a new business at the prospective site      

It is important to assess the long-term prospects of factors such as availability of power, transportation, water and communication before making a decision on the location of the business. Over and above the availability of power and transportation, availability of water becomes a key criterion for a given technology and manufacturing process vis-à-vis the industry. Other criteria may be related to coping with environmental pollution in the case of specific industries that are more prone to contributing to the pollution in the form of gaseous emissions, liquid or solid discharges, noise and heat and vibrations. Location choice needs to assess the cost of mitigating pollution at alternative locations. For certain labour-intensive industries—unskilled, semi-skilled or skilled—the availability of the industryrelated climate in the area may have to be assessed well. For certain industrial operations, climatic conditions such as temperature, humidity, sunshine, rainfall and dust earthquake may influence the choice of location. Other infrastructural facilities such as housing, education, recreation and medical care need to be assessed well before making a location choice. It is important to realize that location decision is a one-time decision and, once decided, it is a kind of irreversible decision, as the cost of changing the location would be prohibitive to think about it. Location decisions become more important for manufacturing concerns or certain service facilities such as hotels, hospitals, amusement parks and picnic spots where substantial investment on land and building needs to be committed and after making this investment, it is not possible to easily shift the location.

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Having decided on the location, the entrepreneur needs to decide about the site selection for the business. Within the given location, alternative sites should be identified and evaluated in respect of land cost and site preparation and development cost. The cost of site development depends on the physical features of the site, work related to utilities and obtaining utility connections and cost related to demolishing existing structures to make it suitable for the purpose. For example, for a cement project, the locational considerations would include availability of raw materials such as limestone mines, kinker and coal. Most big cement manufacturing plants would also prefer to have their own captive power generation to take care of power requirements. However, coupled with availability of raw materials near the site on a long-term basis, if the coastal area has its own jetty and a conveyor belt system to load and unload, this may dramatically reduce the cost of transportation of finished goods—cement to certain markets within the country—and facilitate export handling. The sea coast with owned facilities for loading and unloading may also help in getting better quality of imported coal at cheaper rates compared with buying from within the country. Gujarat Cement Works located in Kovya in the Amreli district of Gujarat is a good example to learn from the locational aspects of a project, from the long-term viability and competitiveness point of view.

10.6  PROJECT LAYOUT Keeping ready the data on the important aspects of the project such as market size, plant capacity, technology, equipment required, civil works, specific conditions required in the plant and raw material sourcing and storing requirements, an entrepreneur needs to get the plant layout. The plant layout helps in defining the scope of the project and provides a basis for project engineering, investment required on plant, machinery and equipment and production costs. A plant layout has various facets such as general functional layout, which focuses on the general relationships between equipment, building and civil works. The purpose is to ensure smooth and cost-effective flow of raw materials for the work in progress. The material flow part of the layout takes care of flow of materials, utilities, intermediate products, final products, by-products and emission. Material flow should also take care of the quantity of flow of different materials. Production layout should take care of input flow along with main equipment—description, location, dimension, foundation, spacer equipment, and power and other utilities requirement. It should also have a balance in different sections in terms of capacities. Other aspects of a layout are utility consumption layout, communication layout and plant layout. Plant layouts take care of the physical layout of the factory. In case of process industries, plant layout is governed by the production process. Manufacturing industries provide for greater degree of flexibility in plant layout. Plant layout decisions are based on production technology, smooth flow of materials, optimum utilization of space, cost minimization and safety.

10.7  PLANT AND TECHNOLOGY CHOICES A plant constitutes bulk of investment on fixed assets. It is affected by the type of project and production technology proposed to be used. An entrepreneur must consider some of the following vital factors for selecting a particular plant from among the available alternatives:  future demand for the product in the short, medium and long terms of volume and time  proposed design and layout of factory, equipment, offices and space for utilities, capacity, efficiency and reliability of plant and machinery  associated maintenance requirements and equipment required for the same, in case it is to be undertaken in-house

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 safety aspects related to plant and machinery  suppliers and their credibility in delivering and maintenance  environmental aspects related to plant and machinery

For process-driven industries, plant and machinery has to take care of matching the capacities available at various stages of production process. The choice of machinery, in the case of the manufacturing industry, provides a wider flexibility, as alternative machines available could perform same operations with a varying degree of accuracy. Broadly, plant and machinery can be classified into categories such as plant, mechanical equipment, electrical equipment, instruments, control panels, internal transportation system and other plant and machinery. Some of the important constraints that need to be kept in mind while selecting plant and machinery are non-availability of adequate power, difficulty in transporting heavy plant and machinery to remote places, non-availability of workers and import restrictions, if any, put up by the government. Technology is about tools, systems and techniques used to transform inputs into outputs. The use of technology has become inevitable in any production system as it makes tasks easier and saves time, effort and money and in turn helps in making the most of opportunities. Technology is an important component of all businesses, be it small or big, or technology driven or human capital driven. Because technology is an integral part of every business, entrepreneurs need to plan what technology they are going to use, where and how to procure it and how to use it. While deciding on the technology for the business, entrepreneurs should keep in mind the way the company might grow or change. It is advisable to choose a technology that is flexible enough to grow and change with changing times. One should pick up a technology that is simpler to understand and use, and serves business requirements effectively. In companies where technology is key and the core business component, potential investors would be looking for detailed information about the nature of the technology. It should cover the basic concept and features of your technology with a level of detail geared to the expertise of the potential reader. However, whether it is a technology driven or other business, the application of technology in certain areas is becoming all pervasive. It is important to identify the areas that can get a greater benefit compared with the cost of deployment of technology. Some of the common areas wherein technology can be deployed are as follows (Abrams 2000):              

accounting, taxes and finances order taking and tracking order fulfilment/shipping inventory management database management: customer, product, supplier and inventory mailing lists communication with customers internal communication presentations desktop publishing/graphics personnel/human resources management production: design, cost-tracking and supply management Internet marketing/Web site/e-mail Internet sales

While choosing a technology, the key issues that need to be diagnosed well are functions it would perform; ease of use of the technology; cost implications and benefits; security issues to ensure that

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Input

Technology Tools Systems Techniques

Output

Criteria for Selection • Functions It Would Perform • Ease in Use of Technology • Cost-benefit Implications • Security Issues to Ensure That Operations Remain Highly Secured and Protected • Scope for Upgradation and Modernization

Figure 10.5 Technology—Selection Criteria operations remain highly secured and protected and scope for further upgradation and modernization of the technology in use, without making the existing technology completely redundant (Fig. 10.5). Some points that can help in making an appropriate choice of technology are (Abrams 2000) as follows: Features of the technology that must be incorporated in the production system. Features that would be helpful and useful but not absolutely necessary. How fast new technologies are coming in the area, which make the existing ones obsolete. Compatibility between the new technology and the existing plant and equipment. Source and ready availability of consumables required for use of technology at appropriate prices. Training of personnel and how it would be taken care of. Whether there will be a permanent dependency on suppliers or adaptation of technology by in-house personnel will be easy.  Whether the outsourced technology will be compatible with the local raw materials.       

Technology transfer is the process of sharing skills, knowledge, technologies, methods of manufacturing, samples of manufacturing and facilities among governments and other institutions to ensure that scientific and technological developments are used further for development and exploitation of the technology into new products, processes, applications, materials or services. It is closely related to knowledge transfer.5 The commercial exploitation of technology developments can be through licensing agreements or setting up joint ventures and partnerships to share both the risks and rewards of bringing new technologies to market. Other approaches could be spin-outs, where the host organization does not have the necessary will, resources or skills to develop a new technology. These approaches are linked to raising venture capital (VC) as a means of funding the development process, a practice more common in the United States, compared with the European Union.6 Research efforts from universities produce new technologies through ground-breaking inventions every year. Entrepreneurs can derive much benefit by gaining a deeper insight into the nature and process of university technology transfer. The process of technology transfer from universities starts when an inventor—faculty or student or jointly—submits an invention disclosure to the university system for filing a patent. The intellectual

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property (IP) office that may also be dealing with technology transfer typically evaluates the invention’s economic prospects and decides whether to protect the IP by securing a patent, copyright, trademark or trade secret. As the inventions made using university resources are owned by the university, the inventors assign the rights to their IP to their university, and the university is free to license the technology for commercial applications. After protecting the IP, the university attempts to identify prospective users to license it. The university and the identified companies may proceed to negotiate licensing terms. At this stage, the university typically requires the prospective licensee to submit a development plan and a corresponding letter of intent. After a due diligent process and the execution of a licensing agreement, both the licensor—the university—and the licensee—company(s)—may start earning income from the transferred technology. Entrepreneurs are in constant touch with the university system where researches in an area of interest are going on or find out from patent searches the available technologies for transfer. At times, industries fund research and enter into an agreement to have joint rights to IP with other terms and conditions for its utilization on an exclusive or a non-exclusive basis. As all inventions coming from the university system may not have great commercial potential, an entrepreneur has to be creative in seeking out inventions that would have direct relevance to their product development endeavours and can be smoothly implemented and associated with their business plan. In addition to the common licensing agreement, a company may negotiate an industrial contract after reviewing the invention disclosure. This could be in the form of a material transfer agreement,7 a collaboration agreement, a master agreement or a sponsored research agreement during the early stages of research (Fig. 10.6). The amount of licensing fee or royalty differs from case to case and is governed by factors such as the type of technology; its stage of development; the size of the potential market; the profit margin for the anticipated product; the strength of the patents; the estimated investment that has led to the discovery; the projected cost of development needed to complete the product; the scope of the license, such as nonexclusive vs exclusive, country specific vs worldwide and narrow vs multiple fields of use; royalty rates for similar products and the expected cost of bringing the product to the market.8

Technology Transfer— Licensing Agreement

Common Licensing Agreement on Exclusive or Nonexclusive Basis

Material Transfer Agreement

Collaboration Agreement Industrial Contract Master Agreement

Sponsored Research Agreement

Figure 10.6 Technology Transfer—Licensing Agreements

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10.7.1  Long-term Vs Short-term Licensing Agreement In the case of a long-term license, the terms of use of technology involve a longer duration, say five years and above, which is usually more beneficial for companies with limited cash. The initial payment involved to the licensor is small followed by subsequent royalty payments forming a greater part of the financial compensation, as the company starts earning more and more money from the use of technology. On the other hand, a short-term agreement may involve higher down payment followed by a small proportion of sales as the royalty.

10.7.2  Exclusive Vs Non-exclusive Agreements License Agreements A non-exclusive agreement is one where more than one company can utilize the licensed technology,  as against an exclusive agreement, which allows only one company to license the invention. A nonexclusive agreement is much beneficial to the university and the company, as it reduces the chances  of potential conflicts that might arise, and reduces the risks for involved parties. The licensing fee and  royalty fee in the case of a non-exclusive agreement is relatively low and, therefore, helps in reducing  the cost of the product and in creating a wider market opportunity. The licensor derives an advantage  of not being over-dependent on the success of one particular product or particular licensee. An exclusive license generally involves an agreement with stipulations that are more rigorous and  stringent. This in turn helps the company in securing a unique technology as part of its enterprise.  This provides a great advantage to the licensee by way of exploiting the whole market by avoiding  competition. Even the licensor may restrict the application of the technology or a method of producing  any products that result from the technology to a specific territory. This could be even conditional, for  a limited timeframe, subject to the continued employment of certain key technical staff of the licensee. Some of the key areas of terms and conditions that need to be explicitly covered in the licensing  agreements are as follows (Fig. 10.7):9,10

Licensing Period and Its Renewal Stipulation of Performance Standards Payments to the Licensor Licensing Agreement— Terms Conditions to Be Covered

Quality Control and Assurance Accounting, Reports and Audits Conditions to Preserve and Protect Intellectual Property (IP) Technical Assistance, Training and Support Warranties Infringements

Figure 10.7 Licensing Agreement Terms and Conditions to Be Covered

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 Licensing Period and Its Renewal—The date of commencement, duration, renewal and extension provisions and conditions, grounds for termination of agreement, obligations upon termination and licensor’s reversionary rights in the technology should be included under this section.  Stipulation of Performance Standards—The licensor may be interested in imposing certain minimum levels of performance in terms of sales, advertising, promotional expenditure and human resources to be devoted to the exploitation of the technology. The royalty fee may be accordingly decided. On the other hand, the licensor may want to insist on a minimum level of royalties that will be paid irrespective of the licensee’s actual performance.  Payments to the Licensor—Normally, payments involve some initial fixed amount coupled with ongoing royalty to the licensor. Royalty computation varies widely according to gross sales, net sales, net profits, fixed amount per unit of product sold or a minimum payment for a fixed period, irrespective of sales. Royalty payment may be proportionately reduced with increase in sales to provide an incentive to the licensee.  Quality Control and Assurance—This would provide for production, marketing and distribution specifications that would ensure quality of the product to be made part of the license agreement. The licensor may also set specific procedures to achieve those standards.  Accounting, Reports and Audits—The licensor imposes certain reporting and record-keeping procedures on the licensee to ensure an accurate accounting for periodic royalty payments.  Conditions to Preserve and Protect IP—This section would include specific obligations on the part of the licensee, its agents and employees to preserve and protect the confidential nature of the technology and to acknowledge its ownership. This also would include any required notices or legends that must be included on products or materials distributed under the license agreement.  Technical Assistance, Training and Support—This section provides for any obligation of the licensor to assist the licensee in the development or exploitation of the technology being licensed.  Warranty—Are assurances by one party to the other party that certain facts or conditions are true or will happen; the other party is permitted to rely on this assurance and seek some type of remedy if it is not true or followed. A prospective licensee may be particularly interested in certain representations and warranties in the license agreement. These would include aspects such as the ownership of the IP, such as absence of any known infringements of patents or restrictions on the owner’s ability to license the IP, or a guarantee that the technology has the features, capabilities and characteristics previously presented in the negotiations.  Infringements—The license agreement should also provide for procedures for notifying the licensor of any known or suspected direct or indirect infringements of rights of the licensee. The responsibility for the cost of protecting and defending the technology also gets specified in this section.

Above all, in all licensing agreements, adequate reporting and record-keeping by the licensee has to be ensured, so that the licensor receives all royalty payments as and when they fall due. Record-keeping matters will include the details of the licensee’s actual use of the technology; research studies or market tests that have directly or indirectly used the technology; marketing, advertising or public relations strategies planned or implemented that involve the technology; progress in meeting the established performance objectives and timetables; threatened or actual infringement or misappropriation of the licensor’s technology and requests for sublicenses or cross-licenses that have been made to the licensee by third parties.

10.8  PRODUCT SPECIFICATIONS AND CUSTOMER NEEDS It is key that the entrepreneur produces a product that gets sold with least of effort by the marketing team. This can be done by producing products that are needed by the customers. The production and operations team has to make the required products in accordance with the plan. The production and operations team has to focus on the following aspect.

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10.8.1  Performance Products, depending on consumer or industrial, will have different parameters to measure their performance that can ultimately give rise to quality standards. Although performance criteria differ a lot from industry to industry and product to product, some of the key criteria from competitive framework are as follows:        

customer looking for shorter lead time for manufacturing reduction of manufacturing cost to compete well in the market improvement of return on investment reduction of inventory cost building in order to customize improvement of manufacturing flexibility/agility defining quality benchmarks raw materials to be used and their specifications

For example, light-emitting diode (LED) performance parameters may include optical properties mainly related to the spectrum, such as brightness and colour performance requirements. According to the new industry standard ‘semiconductor light-emitting diode test methods’, mainly the peak emission wavelength, spectral radiation bandwidth, axial luminous intensity, beam angle of half intensity, luminous flux, radiant flux, luminous efficiency, colour coordinates, correlated colour temperature, colour purity and dominant wavelength, colour rendering index and other parameters are included. The two major parameters of LEDs include the lighting effect of the atmosphere and dominant wavelength. One may specify parameters in terms of electrical properties. PN junction LED’s electrical characteristics determine the LED lighting applications in the electrical characteristics different from those of traditional light sources, namely, one-way non-linear electrical properties, low-voltage drive and the characteristics of static sensitive. Thermal performance—lighting LED luminous efficiency and improved power LED industry is currently one of the key issues, at the same time, LED the PN junction temperature and shell heat dissipation is particularly important for general use thermal resistance, case temperature and junction temperature.

Radiation—Need for Safety and Reliability Radiation Safety—LEDs being a narrow beam having high-brightness light-emitting devices, taking  into  account  the  radiation,  may  be  harmful  to  the  human  retina.  Therefore,  international  standard  specifies the limits of their effective radiation requirements and test methods for their application. Reliability and Lifetime—LED  indicator  is  the  measure  of  reliability  to  work  in  all  environments.  For example, in lighting applications, the effective life of an LED is at rated power conditions, the flux  attenuation to the provisions of the initial value of the percentage of the duration of the time.11

10.8.2  Aesthetics Aesthetic experience is restricted to the pleasure that results from sensory perception from the appearance of the product. Product design should be guided by environmental patterns and features that are beneficial for the senses. Entrepreneurs in certain lines of activities especially focus on providing a unique experience. The experience mainly constitutes the unity of sensuous delight, meaningful

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interpretation and emotional involvement, which an entrepreneur should consciously incorporate into the product design or service they are providing. Product Appearance—Shape, colour and fragrance have an immediate impact on consumers’ perception about a product called visual cue. Consumers, in general, prefer laundry powders containing coloured speckles and bright, fresh perfumes. The Coca-Cola bottle, for instance, ‘even when wet and cold, its twin-sphere body offers a delightful valley for the friendly fold of one’s hand, a feel that is cozy and luscious’ (Loewy 1951).

10.8.3  Quality The word ‘quality’ is widely used by companies, irrespective of the industry—manufacturing or service. Customers always weigh the value of a product or service with price and quality. Quality is defined as the ability to achieve target operational goals. The ISO 8402-94 standard defines quality as ‘the set of characteristics of an entity that give that entity the ability to satisfy expressed and implicit needs’. The ISO 9000:2000 standard defines quality as ‘the ability of a set of intrinsic characteristics to satisfy requirements’. Fundamentally, there are two broad types of quality, namely, external quality, which refers to the satisfaction of clients. Thus, achieving external quality requires offering a product or service with stipulated characteristics that meet client expectations to establish customer loyalty to improve market share. On the other hand, internal quality refers to the improvement of a company’s internal processes, to achieve defect-free, pre-specified standards in the product or service (Fig. 10.8). The main purpose of internal quality measures is to implement the means that enable the company to best describe the organization, and to identify, at appropriate stages of production, any aberrations in the output vis-à-vis pre-determined standards. The entrepreneur’s challenge lies in continuous improvement in quality without escalation in the cost of production to meet customer’s expectations better than the competitors. Therefore, the production system should be so designed as to eliminate quality defects as much as possible to earn a good degree of customer satisfaction and customer loyalty and make profits, with least cost of production. Fundamentally, the entrepreneur has to always aspire to continuous improvement in the quality, implying that quality is a never-ending project whose goal is to identify any deviation from standards as quickly as possible after it occurs and to take corrective steps. According to Deming cycle, continuous External Quality—Refers to the satisfaction of clients Types of quality aspects Internal Quality—Refers to the improvement of a company’s internal processes, to achieve defect free, pre-specified standards

Figure 10.8 Broad Aspects of Quality

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Act

Check

Plan

Do

Figure 10.9 Deming Cycle improvement can be achieved by a PDCA (Plan, Do, Check and Act) model, which focuses on the following aspects (Fig. 10.9):    

Plan—Define the goals to be achieved and plan the steps involved in implementation. Do—Develop a system to implement the corrective actions. Check—Have a mechanism to confirm that the set goals are achieved. Act—Having identified deviations, if any, that occurred in the previous step, take preventative measures.

Continuous improvement in the quality enables a company to closely work with its customers in the best conditions, which helps in nurturing and developing long-lasting relationship of mutual trust, resulting in improved profits. Improving quality is a participative process that requires involvement and commitment of the entire company and most of the time, it leads to changes in work habits resulting in changed organizational culture. Therefore, a quality procedure is an organization-wide approach to continual improvement by taking appropriate steps to eliminate quality-related defects. The concept of TQM refers to the implementation of a business plan that is based on a quality procedure that involves all the employees, that is, a comprehensive strategy by which an entire company uses all possible means to satisfy its customers in terms of quality, cost and deadline. According to the Juran Institute, Inc., TQM ‘is the set of management processes and systems that create delighted customers through empowered employees, leading to higher revenue and lower cost’. The goal is to seek business excellence and competitive leadership to satisfy customer expectations. A ‘quality spirit’ must be inculcated, developed and shared by one and all in the organization for TQM to succeed. It requires top management commitment, effective management of the cost of quality, key focus on customers, continuous improvement in all the aspects of operations and complete involvement and commitment of all the members of the organization. Figure 10.10 shows the TQM components. Deming, in his writing on TQM, highlights that 94 per cent of quality-driven problems arise because of management while just 6 per cent are contributed by workers, and therefore, quality issues should be given prime importance. According to him, handling quality issues on TQM philosophy helps in higher productivity of people, lowers the cost of production, increases market share because of customer concern for quality and gives rise to long-term stability to the business. According to Crosby, five absolutely essential aspects of quality are as follows:  Conformance, not goodness or elegance.  There is no such thing as quality problem; it has to become the philosophy of business.  It is always cheaper to do a job right at the very first attempt.

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People

TQM

Strategies

Customers

Figure 10.10 TQM Components  Cost is to be the measure of performance for quality.  Zero defect in whatever is done in the production or the service industry is the only performance standard.

According to him, there is a 14-point process for achieving TQM leadership, which are as follows:              

top management commitment quality improvement team quality measurement system in place cost of quality quality awareness amongst one and all in the organization timely detection of deviations, if any, and taking corrective actions zero defects—no tolerance for defects goal setting quality training to employees—a continuous process observing zero defects day errors cause removal recognition for people making extraordinary contributions in quality adherence having quality councils to review the system at regular intervals do it over again

Crosby philosophy of TQM focuses mostly on statistics to ensure that systems are in place to achieve goals and timely signals for deviations are captured by the production system.

10.9  PRODUCTION, PLANNING AND CONTROL There are many different ways of manufacturing a product. The management must choose the best production process or series of processes that duly take care of the fundamental aspects such as proper matching of capacities in different sections for optimum utilization of plant and machinery and people skills so that the available plant can be optimally used; proper layout of plant, as seen in the earlier section; proper maintenance requirements and, above all, minimization of the cost of production. A production planning and control (PPC) system is concerned with planning and controlling and managing all aspects of manufacturing, including materials, setting up and scheduling machines, making available adequate number of people with requisite skills and coordinating suppliers and customers.

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Globalization

Changing Role of the Customer

Information Technology

Figure 10.11 Key Aspects That Influence Production Planning and Control Decisions

An effective PPC system is important to the success of any company. A PPC system’s design is not a one-off undertaking; it should be adaptive to changes in the competitive arena, customer requirements, strategy, supply chain and other possible problems (Fig. 10.11) (Vollmann 2005: 1). Three key aspects that influence PPC decisions are (Fig. 10.11) (Ibid. 2–3):  Globalization—The interdependence between nations resulting in growth in the international markets has had a crucial impact on PPC decisions. Global markets and acquiring raw materials, including outsourcing international suppliers, have become a reality. The composition of supply chains change according to opportunities. This has necessitated international, transparent and effective PPC systems.  Changing the Role of the Customer—Meeting customer requirements and service demands is crucial. Hence, both product and process flexibility are needed to produce customized products at a variable volume.  Information Technology—Responding to global coordination and communication requirements calls for the deployment of information systems to link functionally disparate, geographically dispersed and culturally diverse organizational units.

A production system consists of a number of processes, starting from acquiring different raw materials to the delivery of final goods and services to the customer. It is important to ensure that the steps involved in different processes are well documented. Checks and balances to ensure adherence to quality standards should also be in place to make sure that the products remain consistent. A PPC system has to be geared up to the needs of market as revealed by the marketing department. A proper balancing act between supply and demand needs to be ensured so that the entrepreneur neither misses on meeting the deadlines to make goods available to the consumer on time nor lands up with excessive inventories, resulting in increased cost of production and adversely affecting cash flows. Therefore, it becomes essential to study the production volume capacity of the production set-up and match it with the requirements of the market. It becomes still more important not to produce more than the required goods, especially when goods are perishable. Also, care should be taken not to overproduce, especially if the goods are perishable. Therefore, some of the essential questions that a PPC system has to answer are as follows:     

How many units per day/week/month/year can be made? Can this meet the requirements of the market? What is the maximum stretchable demand that can be met by the PPC system? Where would excess production get stored and what would it cost? How much inventory can the company afford to keep and for how long?

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10.10  COMMERCIALIZING TECHNOLOGIES As in the past, manufacturing excellence is key to competitiveness. Commercialization of technologies will be the key to success in the twenty-first century. According to the study undertaken by McKinsey & Company, to understand the difference between leaders and laggards in commercialization undertaken in the United States, Japan and Europe, it was found that leading companies have the following characteristics (Nevens, Summe and Uttal 1990).  Commercialize two to three times the number of new products and processes as do their competitors of comparable size.  Incorporate two to three times as many technologies in their products.  Bring their products to market in less than half the time.  Compete in twice as many products and geographic markets.

The aforementioned characteristics are found to be sustainable over a period in leading companies. Thus, in the present business environment, it is the ability of a company to come up with product concepts that can be taken to markets efficiently and quickly that would govern the prospects for their success. Another major factor that would govern successful commercialization of new technologies is the capability of ventures to fragment the markets, particularly on the basis of their incomes and sophistication in terms of requirements. The process of commercialization of new technologies can be an outcome of research endeavours of the entrepreneur in the company or research outcomes of universities and research and development institutions. As such, the ultimate goal of research and development has to revolve around commercialization and profit-making through competitive edge. The research outcomes are commercialized in two ways, namely, formation of new ventures by the owners of the IP and providing access to the new technology to the existing companies or new companies formed by entrepreneurs who do not own IP. Providing access of new technology to the existing or new ventures undertaken by entrepreneurs who do not own it would involve commercial licensing of research work. This normally involves entering into a technology transfer agreement, which should take care of the following aspects (Fig. 10.12):  Nature of the IPR involved.  Method of the transfer being assignment or license. Assignment gives the assignee greater freedom in relation to the technology, as it involves very few controls on the assignee by the assignor. On the Technology Transfer Agreement— Key Aspects to Be Considered

Nature of the IPR Involved

Method of the Transfer

Consideration for the Transfer of Technology

Other Rights and Obligations

IPR Infringements

Figure 10.12 Key Aspects to Be Taken Care of in a Technology Transfer Agreement

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other hand, licensing gives the parties a greater feeling of control and also the ability to participate in any successful commercialization of the technology through royalty streams, as well as the ability to participate in the growth of the spin-out business as a shareholder.  Consideration for the transfer of technology can be made up of equity, upfront payments, royalties or a mixture of all the three.  Other rights and obligations specifying continuing rights, if any, to the parties involved, tenure, any prosecution and other protection of the transferred rights costs.  IPR infringements address issues pertaining to who holds the primary responsibility for dealing with any IPR infringement of the transferred technology.

Research-driven universities and other institutions in the emerging frontiers of knowledge will be the repositories of new technologies and investors, and entrepreneurs will be the promoters of new technologies that will shape the future of growing economies. Thus, business plans depending on entrepreneur venturing into providing products or services have to meticulously focus on various aspects of operation and production plan constituting the design of goods and services to provide ease of use at least possible cost coupled with outstanding quality and customer value proposition; clarity about the stages of the product life cycle and the phase in which the product is operating at a given point of time vis-à-vis competition in the industry; location and layout of the production facilities based on specific criteria that provide competitive advantage; plant and technology choices; issues related to technology transfer; characteristics and quality aspects and PPC aspects with an emphasis on supply chain management, so as to collaborate with suppliers to develop innovative products from stable, effective and efficient suppliers; human resources required to ensure their outstanding contribution at all levels; inventory management to ensure lowest cost of inventory coupled with high customer service; scheduling to ensure high levels of throughput and timely delivery to customers and maintenance of plant and machinery to ensure high utilization of facilities by effective preventive maintenance and timely repair of plant and machinery.  Check Your Progress   10 Reasons Why People Will Buy from a Company 

  

People do not buy things for what they are, but for what they will do for them. They need to be convinced that the value of the benefits will outweigh the cost. It does not matter what the product or service is, or if it is sold to businesses or consumers. People buy products, not features. The focus will inevitably be on features as this is where the costs are incurred. When talking to the customers though, the focus should always be on the features. Here are 10 good reasons why someone might buy a product or service. 1. Meets a need: The greater the need, the easier the sale. For example, one will be keen to find a glazier if one has a broken window. 2. Highly desirable: One does not need it all the time, but right now it is really appealing and readily available. This is why ice cream sells well on the beach in summer. 3. Affordable: The customer has the money, or the company has broken the cost down into manageable instalments. 4. Safe: The product is reliable and perhaps reduces a risk that worries the customer.

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5. Performance: It does what it says on the box. Reputation and evidence of performance, perhaps testimonials, will reassure the customers and have them say yes. 6. Appearance: It looks good. Given the choice, no one would buy an ugly product if one that looked more appealing was available. Also, it makes the customer look good. 7. Convenience: It is easy to use, easy to find and easy to dispose of later. 8. Economy: Once bought, it is cheap to run it. A more concentrated product might cost more but be cheaper to use as only less of it is needed each time. 9. Durability: The lifespan of a product often dictates its value for money. The cheapest often does not last as long as the most expensive. This should be spelt out to the customers. 10. Peer pressure: Nobody likes to feel left behind. This applies to business purchases such as PDAs, where people buy them to be fashionable and not because they need one.

KEY CONCEPTS  New Product Development: The term used to describe the complete process of bringing a new product or service to market.  Product Design and Development: Provide a complete description of the product’s design and specify the stages of development within the context of production, planning and control.  Plant Layout: Helps in defining the scope of the project and provides a basis for project engineering, investment required on plant, machinery and equipment and production costs.  Material Flow: Takes care of flow of materials, utilities, intermediate products, final products, by-products and emission along with quantity flow of different materials.  Production Layout: Takes care of input flow along with the main equipment—description, location, dimension, foundation, spacer equipment, and power and other utilities requirement.  Technology: It is about tools, systems and techniques used to transform inputs into outputs.  Technology Transfer: The process of sharing of skills, knowledge, technologies, methods of manufacturing, samples of manufacturing and facilities among governments and other institutions to ensure that scientific and technological developments are used for further development and exploitation of the technology.  Licensing Fee or Royalty: A consideration paid by the user of technology to the owner of technology.  Exclusive Vs Non-exclusive Agreement: A non-exclusive agreement involves more than one company to utilize the licensed technology, as against an exclusive agreement, which allows only one company to license the invention.  Quality: The ability to achieve target operational goals.  External Quality: Refers to the satisfaction of clients.  Internal Quality: Refers to the improvement of a company’s internal processes to achieve defect-free, pre-specified standards in the product or service.

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 Total Quality Management: Refers to the implementation of a business plan that is based on a quality procedure that involves all the employees, that is, a comprehensive strategy by which the entire company uses all possible means to satisfy its customers in terms of quality, cost and deadline.  Production Planning and Control: Concerned with planning, controlling and managing all aspects of manufacturing, including materials, setting up and scheduling machines and making available adequate number of people with requisite skills.  Project: Refers to the process involving a set of interdependent activities requiring a set of resources to perform well-defined tasks to create a product or service required by the customer at a given point of time.  IPR Infringements: The infringement or violation of an IP right.  Patent Infringement: The commission of a prohibited act with respect to a patented invention without permission from the owner of the patent.  Warranties: Are assurances by one party to the other party that certain facts or conditions are true or will happen; the other party is permitted to rely on that assurance and seek some type of remedy if it is not true or followed. ENDNOTES 1. The Importance of Operation Management, http://www.writework.com/essay/importanceoperation-management 2. Wikipedia, http://en.wikipedia.org/wiki/New_product_development 3. Wrede, O. 2006. The rediscovery of function in product design. Details of Global Brain, 28 February 2006, http://wrede.interfacedesign.org/archives/1126.html 4. Product Design and Development, Making Car Fuel from Thin Air, by The University of the West of England, http://www.pddnet.com/news-university-of-west-england-making-carfuel-from-thin-air-032910/ 5. http://en.wikipedia.org/wiki/Technology_transfer 6. EU Report on EU/global comparisons in the commercialization of new technologies. 7. Stanford University Industrial Contracts Office, Types of Contracts, http://www.stanford.edu/ group/ICO/agmts/index.php 8. Bastani, B., E. Mintarno, and D. Fernandez. Technology Transfer: Licensing Intellectual Property from Universities to Industry, http://angelinvestornews.com/ART_TT.htm 9. Adapted from Technology Licensing II–Key Elements of Agreement, http://www.entrepre neurship.org/en/resource-center/technology-licensing-ii-key-elements-of-an-agreement.aspx 10. www.angel-investor-news.com/ART_TT.htm 11. www.articlecell.com/…LED…LED--Standard…lighting…/566949 REFERENCES Abrams, R. 2000. The Successful Business Plan: Secrets and Strategies. Palo Alto, CA: Running ‘R’ Media, www.RhondaOnline.com. Ibid., 2–3.

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Loewy, R. 1951. Never Leave Well Enough Alone. New York: Simon and Schuster. Nevens, M. T., G. L. Summe, and B. Uttal. 1990. ‘Commercializing Technology—What the Best Companies Do’, Harvard Business Review on Entrepreneurship, United States, May–June Issue 154–163. Taylor, F. W. 1915. ‘Expert in Efficiency, Dies’, New York Times, 22 March 1915, http://www.nytimes.com/learning/ general/onthisday/bday/0320.html Vollmann, T. E., W. L. Berry, and D. Clay. 2005. Management, 1. http://www.ehow.com/about_5142109_productionplanning-control-definition.html#ixzz19FkUQ8Je

CONCEPTUAL QUESTIONS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

Why is it said that operation management is the backbone of a business process? Define production and operation management. Define the three broad categories of production systems. What are the goals for product design and development? Explain. What are the key aspects to be taken care of while designing the product? What are the different stages of growth in the life cycle of a product? What pricing and production strategies are usually adopted in different stages of growth? What are the key criteria that need to be examined well while making a decision on the location of a business? What are the different facets of a project layout? In what way does the project layout of plant facilities affects the competitiveness of a business? What are the key aspects that need to be taken care of while choosing a plant for producing a product? What are the key areas in which technology can be deployed for improving the efficiency of operations in the business? What are the key criteria that need to be used for selecting technology for a business? Define technology transfer and its significance for business development. What are the key aspects of industrial contract in the process of technology transfer? What are the key factors that govern licensing fee in the process of technology transfer? Differentiate between exclusive and non-exclusive licensing agreement by giving an example. What are the key terms and conditions that need to be explicitly incorporated in the licensing agreement? What are the two broad types of quality aspects? Explain. Define total quality management (TQM) and its significance to start-up ventures. What is the fourteen-point process to achieve TQM leadership? What are the three key aspects and their relevance that affect production, planning and control decision? CRITICAL THINKING QUESTIONS

1. Considering an example of a product and service-based business, analyse critically the importance of production systems for the success or failure of a business by identifying the critical factors of the production system that lead to the success or failure.

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2. Identify a business that could not survive long mainly because of lack of planning about operation management in general and product design aspects in particular. Clearly identify the factors pertaining to product design that could have been taken care of to improve the chances of the said business. 3. ‘LED TVs and lights have come into the market and are being produced by a large number of business houses.’ Which stage of growth can these two products be said to be in? Take two business houses for each product and analyse the differences in their pricing and promotion strategies. 4. Consider three different high carbon steel producers and identify one of their plant locations each. Classify these plants in a descending order of priority as per cost of production, considering location strengths and weaknesses. 5. Identify the various technologies and plants that are available in the global market for Green Houses required for setting up floriculture plant. In India between 1995 and 2003, more than 200 floriculture businesses were set up, of which more than 70 per cent became sick. Identify the main reasons for their failure. 6. Of late, more and more ventures are getting spin-off from the university system. Which are some of the key universities in the world that have contributed to this new trend? What have been the reasons for their success?  CASE 10.1:  SHOEMONEY  ShoeMoney is the fifth highest trafficked Web marketing site according to Adage. The company has grown into a multi-million dollar business ever since it was launched in 2004. It was described by 35,000 daily readers as the Best Affiliate Marketing Blog and featured in Technorati’s top 50 blogs for three years continuously. The company is based in Lincoln, Nebraska, and is not from Silicon Valley or New York. Jeremy Schoemaker was born on 31 March 1974 and spent his initial childhood in Moline, Illinois. He struggled a lot with poor health, most notably weight-related issues, during his childhood. He was more than 300 pounds at the age of 14 years. His solution to constant teasing and the hostility that comes with this was typical of Schoemaker/ShoeMoney: ‘work that much harder to be that much better than my competitors’. He started as a Web entrepreneur, founder of ShoeMoney Media and co-founder of the AuctionAds service. ShoeMoney’s blog was described as the Best Affiliate Marketing Blog of 2006 by Search Engine Journal. He claimed that his blog was generating $10,000 monthly with the sale of direct ads in 2007. While studying at Western Illinois University, Schoemaker founded his first business, making Macintosh gaming sites, and later created ShoeMoney Media Group (SMG). His special talents leading to innovations in Internet marketing area led him from a stage of unemployment to earning eight-figure incomes within a period of few years. It is said that Jeremy ‘ShoeMoney’ Schoemaker is one of the most successful Internet marketers of the present era.1

 ShoeMoney Timeline  Jeremy Schoemaker started ShoeMoney.com in 2003 and expanded his ring tone community company, called Next Pimp. The site was originally called googleninja.com, on which he shares

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information on his life, Web marketing and new projects, such as The ShoeMoney System. It has a very distinct design, especially the logo, which is featured on all ShoeMoney products, marketing and T-shirts. The site is 100 per cent free to read. The advertisement feature was added only in 2007 and before that, the revenue model had nothing to do with advertisement. In 2003, the company discovered Google AdSense, resulting in a single check for $130,000, one month earnings from Google AdSense, which is the most linked to pages on his blog. He became ‘famous’ in the Web world after this check showed his Google AdSense earnings. This established him as an authority on affiliate marketing and online subscriptions business models. Some detractors did question these earnings by him and highlighted that it was a manipulated income and not the real one. In 2006, ShoeMoney, with Aaron Wall, Lee Dodd and Dave Taylor, started a conference called the Elite Retreat. This was limited to 30 people and cost $5,000 per person. In five yearly events over four years (20 events), it sold out every event. That’s $100,000 for 20 days’ work. In March 2007, Schoemaker and his business partner David Dellanave launched AuctionAds, an eBay affiliate marketing service that serves eBay auction ads on contextually relevant sites. The service won an eBay Star Developer Award (it was named the ‘eBay Most Innovative Application—Buyer’) at the eBay Developers Conference. In July 2007, performance marketing company MediaWhiz purchased Schoemaker’s majority ownership in AuctionAds[1]. ShoeMoney won the SEOLogs.com-sponsored SEO contest that ran from 1 January 2006 to 1 March 2006 and carried the term ‘redscowl bluesingsky’. He donated the prize money to the number two winner. The company won a series of awards and within four months, marketing company Media Whiz purchased a majority stake in it. When sold, it had 25,000 active publishers generating over $2,000,000 a month in revenue. That’s $24 million per year. In 2008, it launched ShoeMoney Tools—an advanced suite of PPC (Pay Per Click) and SEO tools. This resulted in having reputed companies such as Intel, Microsoft, MTV and Google becoming its clients. It launched ShoeMoneyx.com in 2008, which was a free 12-week course on Internet marketing. In the subsequent year, it launched The ShoeMoney System, which was a step-by-step guide on making money on the Internet using their site as a platform to run a real Web business. During 2009–10, ShoeMoney.com generated $1 million from multiple income streams. The ShoeMoney System teaches different ways, means and techniques to make money online. It starts from the very basics of Internet marketing such as applying for and creating an account in various affiliate networks to creating advertising campaigns. It is interesting to note that two new video-training modules are released every three–four days. He responds to questions of trainees via webinar every other week. As a member, each participant to the programme gets $2,000 worth of free coupons to advertise his business. The coupons gradually become active when relevant video modules are released each week. In the getting started section, there are a bunch of short videos where Jeremy explains fundamental topics and concepts related to Internet marketing. They are like a video glossary of Internet terms. Topics covered include—What Is Video Marketing? What Is the Link between Buying and Selling? What Is Pay per Click? What Is Crowd Sourcing? What Is Link Building? What Are Web site Analytics? What Is Media Buying? What Is Web Hosting? What Is Link Cloaking? What Is a Call to Action? and many more such topics that make participants conversant with the basics of Internet marketing in an interesting manner. (Continued)

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The first couple of weeks’ video trainings are just sailing members through how to apply and create accounts from different Web site services. Some of the accounts and services covered in SMS are creating a Google AdWords account; Google analytics account; Google Web site optimizer account; YouTube account; StumbleUpon account; Sponsored Tweets account and PayPal account. Each one of these accounts helps in growing and expanding some aspect of online business whether it’s for advertising, sales processing, campaign tracking or outsource management. ShoeMoney System Core Training covered in the first month and half include—Introduction to Affiliate Marketing; ClickBank 101; Create AZN Network Account; Behind the Scenes at Epic Advertising/AZN Network; Completing an Affiliate Offer; Finding Your Audience; Forums; What is Arbitrage? Getting Started with PayPal; Getting Started with eBay; Introduction to Social Media; Getting Started with Facebook; The Art of the Deal and Setting Up the Client. In summary, if one wants a well-rounded Internet marketing education where one can look over somebody’s shoulder and follow step by step to do things, then the ShoeMoney system is definitely a worthy investment if one’s budget is not too tight. It would shorten the learning curve a lot. The customer support is great and there is a 60-day money-back guarantee. One will reap the full benefits of advertising coupons as long as one takes action after becoming active. The SMS free coupons add a lot of value to the learning and online business and they are not available with other programmes.

 How ShoeMoney Really Got Started  In 1987, Schoemaker’s mother bought him an Apple computer. The journey began from there. He started with his first IT job at a local Internet Service Provider in 1995. He made one dollar more than he had made in Sears. The pay was irrelevant. This was a chance to work—every day and all day—with all types of technologies. At the ISP, he was thrown in at the deep end and soon learnt how to use servers, program systems and build Web sites. Then, while returning to college, he started to get calls from companies wanting to advertise on his sites. The penny dropped! He could make money doing what he loved. Like many successful IT entrepreneurs, Schoemaker knows how things work ‘under the hood’. Instead of getting other people to teach them, they make deep dives into the technology, figure out how it works and then get people to teach them how it works. Essentially, that is it. It is important to find out the technical reasons for the success of ShoeMoney, which does not click with everybody in the Internet marketing. As such, Google Adwords trick was totally new on multiple fronts such as high-impact articles that generate incredible traffic, backlinks, live long on the Web and drive subscription rates through the roof. Therefore, the secret lies in not writing content that has been discussed 1,000 times elsewhere in one form or the other but create something that really makes the readers go WOW! This will have a huge impact on the subscription rates and drive repeat traffic to the site, especially if the network is on StumbleUpon or Facebook. Follow Seth Godin’s suggestion: develop content that is remarkable–something that others can remark on. The dotcom crash in 2002–03 hit his business very hard wiping out most of his savings. At 28, he was 420 lbs, $50k in debt and struggling for direction. Luckily, he met his future wife, who, in his own words, ‘showed me that you can get whatever you want if you are willing to work for it’. ShoeMoney’s business model was based on Google Adwords and other types of advertising. While these business models can be lucrative in boom times, when the economy takes a

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hit, advertising budgets get cut almost immediately. Therefore, keeping other streams of revenue becomes a critical factor for success, which The ShoeMoney System wisely followed. ShoeMoney’s philosophy centres on three key areas:  Embrace New Trends and Exploit Opportunities—ShoeMoney’s ‘Coke Theory’ best sums up his approach. He gives this example: ‘SMG entered the ring tone market early, captured traffic and has monetized it. Finding angles and exploiting them for profit is a key aspect of SMG. Maximum and diverse revenue streams are built on fairly narrow marketing concepts that are then diversified.’ With the ‘The Coke Theory’, you take an existing product, give it a new twist and then find ways to leverage its position to generate parallel, non-competitive income streams. It is the same approach Coke uses with Diet Coke, Cherry Coke and Coke Zero—at the end of the day, it is just Coke. The beauty lies in positioning the product to create insatiable demand for its new features—this is what matters.  Focus on Core Strengths—ShoeMoney’s focus is on product development, marketing and site design in that order. Unlike others who have invested in expensive site designs (and re-designs) first, he ‘built his sites on those natural marketing principles while running the backend. Web design was a secondary skill, so he focused on the marketing of the sites, which then built revenue’. Once these were running successfully, he invested in a professional-looking Web design. Since then, he has launched other sites, all of which ‘expand their income potential by building a network of sites centred on a central theme’.  Small Changes Create Big Revenue—ShoeMoney loves to experiment and this comes through in many articles. The purpose here is to look for ways to fine-tune small areas that, when optimized, generate higher returns. ‘Once the traffic is there, small changes in design and structure can make big changes in revenue. Ad placement, recurring subscriptions and affiliate marketing can add value to a site without disrupting the base of revenue.’ What he is doing here is classic process improvement. He (and his team) looks at areas of the site, makes adjustments, performs split tests and then compares the results. Most of us do not reach our goals as we do not do the comparisons, testing and analysis. So, for example, while your AdSense campaigns may be ‘successful’, the hard data are not there to refine the campaigns. If you are interested in this type of in-depth analysis, get his free newsletter. And, if that impresses you (and it will!), try out The ShoeMoney System. Schoemaker talks about his business failures to enable people to see his progression over the years. He has been passionately pursuing his journey and is determined to stay in the business for the long haul. This gives a distinct confidence to the customers, in particular, and stakeholders, in general. This provides a comfort level to customers to continue with him. There are a number of other Web marketing sites such as the About Us page, which, as such, is not about anyone, just generic marketing guff. As customers, most of us will empathize with a personality like Nebraska—overweight, with health issues and some other disadvantages. This is but natural from a psychological perspective. The majority of us would make a buying choice, given similar quality, with someone having come through a difficult path in his journey towards entrepreneurship, which may be because of personal disability, poor family background and one who has come up against all odds on their own strengths. (Continued)

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From a marketing perspective, ShoeMoney.com is an interesting mix. Scanning through the comments on his blog/forum, his followers are made up of newbies (asking, ‘how do I type questions?’) and experienced Web marketers looking for very detailed tactics, hacks and marketing strategies. While he caters to both, the long-term fans are the hard-core marketers and developers whom he offers the most value. These offer detailed information on Pay Per Click (PPC), Click Through Rates (CTR), advertising strategies and Split Testing. If you have seen the T-shirt, you will recognize the brand. ShoeMoney has invested in developing a strong brand, great logo with nice clean artwork and some very sharp packaging. Look at the polished quality you see in his videos here and compare it with most other blog sites that come to mind. Do not be fooled by the ‘Home Grown in Lincoln, NE’ folksy feel. ShoeMoney and his team work hard to make this look easy. New Product Launches—Brian Clark (CopyBlogger) released the very successful Thesis Theme last year. Part of the success was due to the select band of A List Blogger recommending this very slick WordPress Theme and pushing it in their marketing campaigns. Chris Brogan has had it on his home page since it started. Others have drip-fed the recommendations to readers since launch. For ShoeMoney, linking up with fellow Web marketers in his space, for example, John Chow, may be on the cards. Both of these are high-trafficked sites with similar audience profiles and demographics. John Chow’s revenue streams are mostly based on advertising (which he is very successful at) so there may be tools that complement his books—I do not see why he will not publish a book as he has the traffic and following. Most of his peers, such as Chris Brogan, Brian Solis and Darren Rowse, have done so with great success. I would assume this is in the pipeline. However, one reason why he may not do this (for now) is that it could cannibalize his ShoeMoney site and distract prospect customers from signing up. ShoeMoney System 2.0 is a training programme that assists in each and every step when it comes to affiliate marketing, Pay Per Click (or PPC) campaigns, Web site creation and other Internet marketing strategies. It is important in any business such as ShoeMoney to focus on product development as a core theme to business strategy. Remember that developing a set of tools insulates you from the everchanging fortunes (and budgets) that undermine advertising-based models. It is important from a long-term success perspective to build a brand by investing a particular percentage of revenue that works both online and offline. The T-shirts are a good example to be learnt from ShoeMoney that can cross the divide between off and online. ShoeMoney has developed a cult following of sorts; their site is slightly counter-culture, geeky (see their Theme Song competition) and not trying to please the mainstream while engaging personally with existing and prospective customers. The rewards would be obvious. It is important to make a distinction between a business and a blog–ShoeMoney runs a Web business; it is not a blog. This is a real business, with real employees, offices and a defined business strategy. The blog is the axis around which the business is built–but it is important to see the difference between the two.2,3

 Questions   1. Why did he build these products? 2. What pricing strategy has he adopted? 3. What was the key strategy used for product development by ShoeMoney?

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4. What are the key lessons from the case of ShoeMoney for a start-up venture in Web marketing? 5. Who helped him get to this place?  Endnotes  

1. www.ivanwalsh.com/business…shoemoney-million-dollar-internet…marketing 2. Developed based on Ivan Walsh article posted on 10 April 2010 on; http://www.ivanwalsh. com/web-business-plan/case-study-shoemoney-million-dollar-internet-empire-marketingstrategy/4307/; http://EzineArticles.com/?expert=Milton_Cai 3. Nick Gonzalez (27 July 2007), Media Whiz Buys Another Ad Startup Atction Ads, TechhCrunch.com, retrieved on November 2007.

 CASE 10.2:  UKIAH SOFTWARE, INC. 

 Background  Ukiah Software, Inc., a privately held company based in Campbell (USA), is a developer of Internet and intranet software security products. The company’s mission is to develop and deliver easily managed solutions for secure information access over the Internet and intranet in environments requiring multi-platform and multi-protocol support. Ukiah is the only company offering advanced firewall products for heterogeneous Transmission Control Protocol/Internet Protocol (TCP/IP) and Internetwork Packet Exchange (IPX) environments, running on NetWare and on Windows NT. NetRoad FireWALL is National Center for Supercomputing Applications, Urbana-Champaign (NCSA), IL, certified. TCP/IP standard Internet communications protocols allow digital computers to communicate over long distances. The Internet is a packet-switched network, in which information is broken down into small packets, sent individually over many different routes at the same time and then reassembled at the receiving end. TCP is the component that collects and reassembles the packets of data, while IP is responsible for making sure that the packets are sent to the right destination. TCP/IP was developed in the 1970s and adopted as the protocol standard for ARPANET (the predecessor to the Internet) in 1983.

 Promoter of Ukiah Software  Naveen Bisht, promoter of Ukiah Software, holds an MS from Texas Tech University and B.E. from Birla Institute of Technology and Science, Pilani. He also attended a Ph.D. programme at the University of California, Santa Barbara. He has to his credit a number of patents in the area of quality-of-service and security management in IP networks. He has published a number of papers on the trends and issues in the networking industry in leading journals. He is also a co-founder of and managing partner for Luxmi Ventures. As a successful technology entrepreneur in Silicon Valley, he brings expertise in launching, developing and investing in high-technology companies (Continued)

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across multiple industries. He has over 18 years of rich and diversified experience in the area of high-growth technology and services sectors, including cross-border team building and management, operations, business/product development, mergers and acquisitions, turnarounds, start-ups strategic advisory services and strategic planning and negotiation skills. Luxmi Ventures, LLC, is a seed-stage angel fund that focuses on funding in the areas of networking, Internet, software and services market. Recently, he founded another company, Nayna Networks, Inc., a networking solutions and service provider company, where he was responsible for the overall strategic direction for the company. He founded Ukiah Software, Inc., a company which is a leader in policy-based bandwidth and security management software systems for service provider and enterprise networks. He occupied the position of President and CEO of Ukiah since its inception till its acquisition by Novell, Inc., in 1999. Ukiah received a large number of awards, including ‘Top 10 Companies to Watch’ given in 1999 by Network World; ‘Top 25 Hot Start-ups of 1998’ given by Data Communications Magazine in 1999; ‘Hot Product Awards’ given by Data Communications Magazine in 1998; ‘Product of the Month Award’ given by Telecommunications Magazine; and ‘Network World’s Blue Ribbon Award’ in 1999. Earlier, he was the founder and president of NeoGlobal, Inc., a software consulting services company that has a specialty in the area of Internet, enterprise software and networking market.

 Product Development Cycle  The product development cycle in such an industry as Ukiah Software, Inc. involved an initial idea to build a gateway product to provide Internet access to a huge installbase of Novell Netware (approx. 60M users; 4–5M servers (1995–96 timeframe)). An idea was evolved using the same technology, feedback from customers and VCs. The company had developed a hot product of the year, Hot Start-up in 1998, which was sold to Novell, Inc. (1999). The key ingredients in such an industry are a smart and talented technical lean team that needs to be backed up by very good marketing team efforts, private investors to have confidence in the future prospects of the products and good timing to come up with new products in the market compared with competitors. This is evident from Ukiah Software’s efforts for developing a new product in nine months from the start of the company and coming up with new products every year in the domain expertise of the company to cater to customer needs. This has resulted in internal strengths of the company that led to it being sold at a premium within three years of inception. The company raised bootstrap funding without depending on any other outside money. The fundamental strategy of the venture revolved around customers to attract good projects and deploy appropriate talented engineers, to ensure delivery of the solutions within typical timeframe. The revenue stream started immediately after starting or so to say from the initial phase of launching the venture itself.

 Key Features of NetRoad Firewall  This product is two products in one: an IP firewall and an IPX/IP gateway. Therefore, it allows providing secure Internet or intranet access to both IP and IPX networks (or any combination of the two). Some of the key features are full application-level security for all the key IP protocols, such as HTTP, Telnet, FTP, SMTP and more! No one can hack into your Web server with NetRoad Firewall standing guard! It provides full bi-directional control over network traffic, both inbound

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and outbound. This enables you not only to keep hackers out but also to keep your users from checking out some of those information ‘resources’ on the network you would rather they stayed away from! The product provides a full support for IP clients, irrespective of their operating system. With its integrated support for NAT (network address translation), there is no need for making any changes in the network address. The company provides full support to its IPX clients as by using the IPX/ IP gateway component, users can run any TCP or UDP application on IPX clients. Above all, the product is integrated with Novell Directory Services (NDS): NetRoad Firewall and thus appears as just another object in users NDS tree, and is configured and managed through an NWADMIN snap-in. Thus, users can take full advantage of their NDS database and groups without having to re-enter all this information again. Security events are logged with NDS. User authentication is handled through NDS.

 NetRoad NewsServer  This is a product that allows you to provide full NNTP-compliant news service to your users. And on NetWare! Therefore, instead of having to go out to the Internet to access newsgroup messages, the network administrator configures your own private NetWare-based NewsServer to download the newsgroups that you and your organization’s users are interested in. As these newsgroups are stored locally on your LAN, access to this information is much faster than over slow WAN links. You can also maintain purely private newsgroups. Therefore, it is a secured as well as fast way to disseminate information. As it is NNTP compliant, this works with any standard newsreader, such as Netscape Navigator or Internet Explorer. It enables access to both selective newsfeeds and comprehensive newsfeeds. Thus, it enables the user to get the newsgroups that your organization needs. It can be configured to delete old messages, which ensures that the disk space requirement stays under control. Above all, it is the fastest news server on the market because of high-performance implementation. NetRoad TrafficWare is a software-based bandwidth management solution that enables administrators to control network services on the basis of priorities, user-definable bandwidth levels and rules for admitting network sessions. TrafficWare is a tool that prioritizes various network traffic using different variables, including source and destination, network application, time of the day and URLs. The outcome ensures that important traffic goes where it needs to go more quickly than less important traffic. According to Gordon Smith, Ukiah vice president (marketing), a major problem and performance bottleneck occurs when users combine private LANs or enterprise networks, which are pretty fast, with that of slower Internet. As such, when you cannot increase the throughput, you have to manage the bandwidth you can get most effectively, which is the approach used here. It is a software-based bandwidth management solution that enables administrators to control network services on the basis of priorities, user-definable bandwidth levels and rules for admitting network sessions. Novell, Inc. (NASDAQ: NOVL) announced its acquisition of Ukiah Software, Inc., a privately held developer of policy-based network management software based in Campbell, California, in June 1999. Ukiah’s technology has been interwoven and works with directory software such as Novell Directory Services (NDS) to enable businesses to establish rules, or ‘policies’, to automate (Continued)

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the management of traffic and quality-of-service across information networks. This enables businesses to optimize their investment in network infrastructure such as routers and switches by allocating bandwidth to critical applications or users involved in critical tasks. Novell, because of its market reach and technology, has the resources to bring Ukiah’s policy management technology to an even broader community of customers. Novell also has a great advantage in terms of worldwide channel, consulting, developer, education and technical support programmes that are the most extensive in the network computing industry.1,2

 Questions   1. What have been the key success factors for Ukiah Software, Inc.? 2. What is the importance of research and development efforts in developing network solutions? 3. What are the key entry barriers to development of high-technology new products, in general, and Internet and intranet software security products, in particular? 4. Was it right on the part of Naveen Bisht to sell Ukiah Software, Inc. to Novell, Inc.? Justify your answer.  Endnotes  1. http://www.ukiahsoft.com; http://findarticles.com/p/articles/mi_m0FOX/is_18_2/ai_5945 0837/; http://www.kirusa.com/about_board_bisht.html; http://www.novell.com/news/press/ archive/1999/06/pr99073.html; findarticles.com/p/articles/mi_m0FOX/is_18_2/ai_594 50837/ 2. www.bitsembryo.org/lecturedetails.php?id=70lists.w3.org/Archives/Public/wwwproxy/msg00380.html

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11

 LEARNING OBJECTIVES    To understand the importance of a venture team for the success of a venture.  To understand the meaning of effective team management.  To know about the precautions that need to be taken for team building for a venture.  To learn about the factors that result in lack of understanding among the co-founders of a venture and how to take care of those factors.  To learn about the common attributes of an effective venture team.

 To understand the process of developing a venture team.  To learn about the importance of managing people to build effective teams.  To learn about different types of organizational structures and their relevance to different types of ventures during different stages of growth.  To learn about the importance of organizational structure and systems and procedures for managing a venture.

N. R. Narayana Murthy, Co-founder, Infosys Technologies Ltd The only way countries like India can solve the problem of poverty is entrepreneurship. By and large, we have recruited very smart people. They learn pretty quickly, adapt very quickly and think of innovations. —N. R. Narayana Murthy

Narayana Murthy was born on 20 August 1946 in Karnataka, India. He obtained his Bachelor of Electrical Engineering (BE) from the University of Mysore in 1967 and his Master of Technology (MTech) from the Indian Institute of Technology (IIT), Kanpur, in 1969. In 1981, Narayana Murthy founded Infosys with six other software professionals. He is credited with the creation of the biggest IT Empire in India, which has put India on the world’s IT maps. He is the brains behind Infosys, which is considered to be the jewel of India’s IT crown. He always states that successful leaders are those who are in touch with ground reality, not those who sit in their ivory towers. As one of the pioneers in strategic offshore outsourcing of software services, Infosys has leveraged the global trend of offshore outsourcing. Today, Infosys is acknowledged by customers, employees, investors and the general public as a highly respected, dynamic and innovative company. In March 1999, Infosys Technologies became the first Indian registered company to be listed on an American stock exchange. Their approach focuses on new ways of business combining IT (Continued)

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innovation and adoption while also leveraging an organization’s current IT assets. Infosys was ranked No. 1 in the ‘Best Employers in India 2002’ survey conducted by Hewitt and in the Business World’s survey of ‘India’s Most Respected Company’ conducted in 2002. Narayana Murthy was featured in the list of Asia’s 50 Most Powerful People by Asiaweek Magazine in June 2000 for his rare contributions in the IT industry. He was described by TIME/CNN as one of the 25 most influential global executives in 2001. He was the first recipient of the Indo-French Forum Medal in 2003 and was voted the World Entrepreneur of the Year—2003 by Ernst & Young. The Economist ranked Narayana Murthy eighth on the list of the 15 most admired global leaders (2005) and he also topped the Economic Times Corporate Dossier list of India’s most powerful CEOs for two consecutive years—2004 and 2005. He is at present the non-executive Chairman and Chief Mentor of Infosys Technologies Limited. He is a living legend and personification of the fact that honesty, transparency and moral integrity are the essence of business acumen. He set new standards in corporate governance and morality by stepping down as the Executive Chairman of Infosys at the age of 60.

11.1  INTRODUCTION It is rightly said that what matters more than an idea is the effective, harmonious, trustworthy, competent team that leads to success in an entrepreneurial venture. Various research studies have suggested that sole entrepreneurs can more easily meet with failure than an entrepreneurial team in a new venture creation (Watson et al. 1995). According to Timmons’ (1999) model of the entrepreneurial process, an entrepreneurial team with an entrepreneurial leader and quality of the team is a key ingredient in the higher potential venture. Systems approach to management clearly pinpoints that the whole is indeed greater than the sum of the parts, implying thereby the power of team spirit in making the ‘impossible’ a ‘possible’. Building a top-notch winning team is the crux behind the majority of successful and sustainable businesses. Most research studies show that the team-building process coupled with the overall effectiveness of the management goes a long way in the journey towards successful entrepreneurship. The team-building process starts with an objective and honest assessment of the strengths and weaknesses of the team members to identify the gaps to be filled by inducting new people in the team as employees or co-founders. It is said that the core team should consist of complementary competencies and knowledge coupled with a process where everyone knows a little bit about what everyone else does for the achievement of goals. The entrepreneurial team can converge members’ creativity into great power, which cannot exist in a single entrepreneur (Chen et al. 2004). Several studies have shown that team factors are positively related to creative outcomes of the team, which contribute the most to the success of entrepreneurial ventures, as the creative factors of the team contribute to maintaining the relationships among the team members and tapping the creative potential of the team members to improve the performance of the venture. A venture team consists of two or more individuals who come together to jointly set up a venture by actively participating in a business in which they share ownership (Timmons 1999). These individuals come together at the pre-start-up stage itself, that is, before the company starts making its goods and services available to customers. Team building starts from the idea phase of a venture to honestly assess the strengths and weaknesses of the team, which has to be done in the light of an idea per se and the growth plans of the venture

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under consideration. The success of a start-up and the early growth stage of a venture depend much on availability of right collective team members’ resources—knowledge, skills and financial backing. However, large ventures require professionals in an organization to be employed for specific jobs to be performed as against getting centred around the start-up team.

11.2  VENTURE SUCCESS—IMPORTANCE OF A TEAM Venture success depends much on an effective team. The founding members of a venture need to have a clear goal and a worthwhile idea. All of them jointly need to combine their efforts and energies in pursuit of the predetermined goal. The chances of accomplishment of the goal, that is, the chances of success, increase if the tasks ahead are backed by everybody’s initiatives and efforts directed cohesively for achievement of the goal. ‘Impossible’ becomes ‘possible’ if backed by collective wisdom and efforts. Although each team member has a unique role and contribution, it needs to be synergized with the role of the others. The difference between start-ups that just provide employment to the founder and a few family members and others and high-potential ventures mainly lies in the quality management team. It is those entrepreneurs who believe in the beauty of team building who create a perpetually growing organization that keeps increasing its wealth and provides more and more employment opportunities. Building highpotential ventures without the backing of a strong and cohesive team is well-nigh impossible. Take, for example, the case of a start-up, which has created a niche for providing banking solutions and has grown steadily from a turnover of ` 1 lakh to ` 200 lakhs in 10 years, that comes at a crossroads where the venture capitalist identifies software security as an area for further growth and is prepared to extend a funding of ` 100 lakhs to the company. The offer of funding was backed by a conditionality of owning around 60 per cent of the equity in the company, which the founder refused, as he was not prepared to dilute his equity stake in the company to that extent. On the other hand, his competitor agreed to the terms, developed new security solutions, created a further niche and captured a business that has taken his company from a turnover of ` 200 lakhs to a turnover of ` 2,000 lakhs in three years. He had the ability to develop a good team and expand his business operations and therefore could expand while the other one remained stagnant in the business world and subsequently collapsed. It is true in all walks of life and more so in a venture creation that ‘united we stand, divided we fall’. The importance of teamwork gets doubly highlighted in the realm of businesses. The fundamental reason for the success of a venture revolves around teamwork among the partners and staff or employees. Building a professionally backed winning team goes a long way in achieving dynamism and success. The fact remains that funding organizations—banks, financial institutions, venture capitalists and seed funders—give greatest weightage to the management team backing the business plan—starting with the CEO, co-founders and top management team. Clearly, the CEO as a leader is critical to a new venture’s success. As such ‘investors do not just bet on the horse (the business plan), they bet on the management team led by the CEO’ (Fig. 11.1). The entrepreneurial team is at the heart of any new venture (Cooper and Daily 1997), and it is fundamental to a new venture’s success (Birley and Stockley 2000). One of the key reasons for this is the fact that creating and building a new venture is a challenging task that requires the backing of a strong team to translate an idea into reality. There are ventures that are started by individuals and thereafter promoters look for professional help to manage the various aspects of the venture creation. On the other hand, there are ventures that are initiated by a venture team, which makes it a collective endeavour from the beginning (Ruef et al. 2003).

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Board of Directors High Growth Successful Ventures

Chief Executive Officer Effective Management Team

Banks, Seed Funders, Venture Capitalists and Financial Institutions

Figure 11.1 Effective Management Team—Key to Venture Success An entrepreneurial team is defined by Schenkel and Garrison as ‘a group of two or more individuals who are actively engaged in innovative efforts designed to launch or extend the value generated by a venture’. However, Mueller and Gemünden say that an entrepreneurial team consists of a group of venture founders who interact in developing new ventures. As regards the composition of venture team members, Schjoedt and Kraus have stressed the importance of balancing heterogeneity and homogeneity in both surface and deep-level individual differences within entrepreneurial teams.1 Thus, a valuable role is played by the right partners in the growth of the venture. However, in businesses which remain small, an entrepreneur faces loneliness and other pressures as they single-handedly attempt to expand the business, which takes away most of their time in petty and unproductive matters. Therefore, identifying right partners and working with them as a cohesive team, although it involves dealing with some critical issues, take the venture to great heights. Thus, entrepreneurial team is the basic foundation of higher-potential ventures, and investors get captivated ‘by the creative brilliance of a company’s head entrepreneur: a Mitch Kapor, a Steve Jobs, a Fred Smith…and bet on the superb track record of the management team working in a group’ (Bygrave and Timmons 1992). There are plenty of ideas, new technologies, money-chasing ventures and many entrepreneurs and venture capitalists, but what lacks is the great winning teams, which matter the most in the success of a venture. Therefore, venture capitalists need to give the greatest importance to this factor and would love to marry an A-grade team with a B-grade idea rather than marrying a B-grade team and an A-grade idea.

11.3  TEAM BUILDING FOR VENTURE—VITAL PRECAUTIONS In the present era, where entrepreneurship has become a buzzword, a lot of enthusiastic students come together during their college studies and get inspired by leading first-generation entrepreneurs such as Bill Gates, Steve Jobs, Michael Dell and Narayana Murthy to plunge into a journey of entrepreneurship.

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It is surprising to hear people say that not many business plan contest winners make it big or even get large venture capital (VC) funding. This seems to be largely a PR and brand-building exercise for the institutions and they do not really mean business. But then is it not true that Travelguru was a Harvard Business School business plan product? (Kumar and Tekawade 2008).

Business Plan Competitions? A  quick  look  at  the  recent  winners  of  business  plan  contests  (BPCs)  organized  by  different  undergraduate  schools  in  India  may  suggest  that  winning  BPCs  these  days  has  become  more  a  fashion about great presentations and executive summaries and less about real productive, creative,  innovative and mind-blowing ideas. This may mean that business plans are written more for winning  big prize money and less for translating innovative ideas into reality. Many winners could be cited  acknowledging that they have no ambitions to translate their ideas into reality. This aspect needs to  be seriously analysed by the Business Plan Competition organizers and the entrepreneurs, venture  capitalists  and  others  who  are  associated  with  the  screening  and  mentoring  process  of  business  plans. BPCs  might  sound  sophisticated,  hyped-up  events,  but  the  bottom  line  lies  in  inspiring  and  motivating new generations to think and act differently. If there is a big prize luring students without  any loss on their part whatsoever, there might easily be a new creed of students dreaming of being  the next Steve Jobs or Narayana Murthy! It might be that participants might just try out their hand at  writing business plans for the sake of winning, but the unexpected success coupled with a favourable  ecosystem on campuses might just make them give their idea a second thought (Ibid.)2

This brings us to the crux of team building for successfully launching a start-up. At times, a decision made at the college-going stage in haste may lead to a team backing a plan that is not committed to doing business but pretends to be. It is very important to ensure that genuinely interested team members, having diversified competencies, skills and other resources at their command, come together with a clear purpose and goal to pursue entrepreneurship as a business career (Fig. 11.2). The same is true when a team gets formed after gaining certain professional experience and the team members come together to plunge into an entrepreneurial journey. It is important to realize that the business of business

Genuinely Committed Team Members

Having Diversified Competencies, Skills and Other Resources

Business Plan Success

Figure 11.2 The Success of a Business Plan Depends Upon How Committed the Team Is

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is business and therefore any money, time and effort put into it has to be viewed on business lines rather than charity. The majority of start-ups fail mainly on account of lack of team spirit rather than on account of a wrong idea at a wrong time into the market. A business venture fails on account of lack of understanding among the co-founders of a venture on account of lack of or no documentation on the following key aspects of business (Fig. 11.3):  Goals/Objectives—Knowing very well the uncertainties and complexities involved during the initial phase of launching a business, the founding members of the venture need to be absolutely clear about the goals and objectives of the business and the time it would take to see light at the end of the tunnel. Lack of clarity among partners can result in disastrous consequences. As such, the wisest team would consider the early stage of a venture as a period of mutual discovery and trust building by extending all possible cooperation to one another, unless and until there is a genuine reason to doubt the integrity of the partners. As such, building a foundation based on mutual trust is critical to creating conducive conditions for the success of a venture. Trust, according to Faulkner (1995), basically means ‘having sufficient confidence in a partner to commit valuable know-how and other resources to the venture despite the risk of the partner taking advantage of this commitment’. Therefore, developing a shared purpose and goal becomes a basic prerequisite to have mutual cooperation leading to trust building. It may be helpful to even pen down Memoranda of Understanding (MoU) between the founding team members wherever necessary to build trusting relationships and provide a framework for action.  Participation—Participation in the decision-making process or in dealing with critical issues faced by the venture helps in involvement of team members, which in turn leads to diffusing rational as well as irrational fears related to the venture. It is essential that the founding members make critical decisions by involving everybody, so that the apprehensions, if any, get sorted out on the spot. It is a proven fact that an organization that encourages team members to openly communicate and participate in problem-solving has far greater chances of success than an organization where people just listen and obey directions. A fully interactive environment among the founding team members goes a long way in a successful implementation of decisions. To achieve active participation of team members, it may be highly desirable to use short icebreakers or team-building exercises at the beginning of the meetings, which creates an informal setting and puts the team members at ease.  Roles and Responsibilities—The foundation of building an effective team lies in defining very clearly and thoughtfully the roles and responsibilities of the founding members of a venture. In many ventures, lack of thought and clarity about functional roles and structure leads to misunderstandings, resulting

Lack of Understanding Among Co-founders on Account of Lack of or No Documentation

Goals/ Objectives

Participation

Roles and Sharing Loss/ Responsibilities Gain

Process to Deal with Differences

Figure 11.3 Reasons for Business Failures

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in conflict among the founding members. It is important to clearly define the needs of the business and who can perform which role most effectively. Consider the United States Olympic basketball teams in 2004 and 2008. The 2004 team was essentially an assembly of individual stars who did not play effectively as a team because of lack of understanding of their roles and responsibilities and nondeployment of players having specific skills to perform specific jobs that were required for winning. By contrast, the 2008 ‘Redeem Team’ performed more like a true high-performance team, and as a result easily won gold, mainly because of better deployment of players for specific roles as well as defining clearly the roles and responsibilities of each for achieving the ultimate goal of winning. Among the co-founding members of the team and other professionals, appropriate roles need to be earmarked with designated responsibility. It is important to identify right number of roles—neither too many, which may result in communication and coordination problems, nor too few, which may result in making the task impossible to be achieved by over-burdening few people.  Sharing Loss/Gain—To strengthen the understanding among the founding members of the venture and build trusting relations, it is important to clearly set the terms and conditions regarding the sharing of gains or losses. Any doubt about or deviation from well-set ground rules can create hassles at a later stage, leading to breaking up of the team. The basic purpose of coming together is to share the risks of the venture and expertise available. Therefore, the process of sharing gains or losses and expertise should be made very explicit at the beginning itself.  Process to Deal with Differences—It is always in the best of interests to build a better understanding for long-lasting relationship among founders to define clearly the process to sort out the differences as and when they arise. At times, dragging the issues without handling them at an appropriate time with an appropriate process can cause a lot of misunderstanding, which may later become difficult to resolve, if not handled properly in the initial stage itself. In many cases, lack of well-defined processes results in the litigation stage, which drains a lot of energy and productive time of the promoters.

11.4  BUILDING AN EFFECTIVE VENTURE TEAM Building an effective team for the venture is like a marriage, which is a bit unscientific, usually unpredictable and often a surprising exercise. Decisions are partly guided by emotions such as admiration, respect, concern and often fierce loyalty rather than purely objective criteria. At times, it is just a hunch that chemistry with such and such person(s) would work well and one decides on the spot to wed a person. In a business or in personal life, what matters most is to work with a right partner or partners and not to make wrong assumptions that your best friend or brother-in-law will be the right person to contribute in the given venture. Visionary leaders have the capability of articulating their philosophy to inspire others. They are excellent with words as well as action that help them in getting connected with the right partners to translate their vision into a reality. It is their heartfelt commitment to the bigger purpose in life that brings people with the right attitude to become part of their team. They are committed to their values and do not get corrupted by power. They embody a deeply caring approach to people, seeing them as their greatest asset. Aaron Feuerstein, CEO of Malden Mills, kept all his employees on the payroll when a fire destroyed 75 per cent of his factories. His employees were so grateful that they helped him rebuild, and within a year the company was more profitable than ever.3 Successful entrepreneurs have a vision, mission and an entrepreneurial philosophy with which they are able to inspire team members to join them and work for a bigger cause and purpose. The heart and soul of the founder’s and co-founders’ vision is unwritten ground rules that provide a purpose for the team members to work together to achieve success. It is the ‘capacity of the lead entrepreneur to craft a vision and then to lead, inspire, persuade and cajole key people to sign up for and deliver the dream

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that makes an enormous difference between success and failure, between loss and profit and between substantial harvest and “turning over the keys” to get out from under large personal guarantee of debt’ (Timmons and Stephen 2009).

Great Leaders Instill Inspiration in Team Members Gandhi’s dream to get independence for India could inspire millions and millions of people to join  him  and  work  for  succeeding  in  their  mission.  Similarly,  it  was  Henry  Ford’s  (30  July  1863–7  April  1947) vision of coming up with a low-cost car that led to the setting up of Ford Motor Company. He  was the pioneer of the assembly line technique of mass production. His introduction of the Model  T  automobile  completely  revolutionized  transportation  and  American  industry.  Henry  Ford  did  not  invent the automobile. Indeed, he began as a race driver of other people’s cars. He was, however,  more  influential  than  any  other  single  person  in  changing  the  paradigm  of  the  automobile  from  a  very  expensive,  heavy,  hand-built  toy  for  rich  people  into  a  lightweight,  reliable,  affordable,  massproduced mode of transportation for working-class people. All this was possible for him because of  the inspired team that was working with him to translate his vision into reality. Many successful leaders  in business, such as Jeffrey Swartz of Timberland Shoes, have demonstrated the power of living their  values. Swartz pays employees to volunteer in the community and honours the ‘double bottom line— profit and values’. Tom Chappell, CEO of Tom’s of Maine, found that he could ‘do well by doing good’.  Doing good—embodying his values—has made his company very profitable. Tom’s of Maine uses all  natural ingredients in their products to protect consumers and the environment.

The importance of team-building is evident from the quote by Jon R. Katzenbach: ‘Teams outperform individuals, especially when performance requires multiple skills, judgments and experiences.’ The teams of ventures that succeed in taking the business to greater heights have some common threads and attributes such as the following, which unite them and energize them to work and give their best for the greater purpose of the organization (Fig. 11.4):  Clear Expectation and Context—The main challenge that building an effective team poses lies in defining the goal that should be shared by everybody. The sharing process of the goal mainly demands expectations from each and every team member for achieving overall team performance. The entrepreneur should clearly communicate these expectations to their partners as well as to the team members. The team members should clearly understand the purpose of creating a team, which should be consistently visible in actions on the part of different team members. The entrepreneur’s task is to ensure availability of resources in the form of people, time and money as agreed to. The context of expectations mainly requires the overall direction and objectives of the venture that get crafted out on the basis of the vision of the leader. Every team member should have an important role to play and realize that without them collective success will not be possible. The company should have an inbuilt process for goal setting, evaluation, feedback and accountability that provides performance measurement to employees vis-à-vis their roles. The process should provide scope for employees’ professional development and give a sense of pride to them, being part of the team.  Commitment to Purpose and Values—It is the commitment to the purpose that provides a clear sense of direction to each and every team member of the venture and more so the founding members. ‘An engaged employee will stop and pick up a piece of trash in the hallway, a disengaged employee will walk by the piece of trash and leave it, and an actively disengaged employee will throw the trash on the floor,’ says Measley (Jackson 2009). Thus, it is the key role of a leader to inspire their team members to get committed to their assigned roles and responsibilities. They should provide an environment that builds a culture to promote commitment of team members from within. Further, they themselves

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Clear Expectation and Context Commitment to Purpose and Values

Cultural Change

Control

Attributes of Effective Teams

Competence

Communication, Coordination and Collaboration

Consequence Sharing Innovation

Figure 11.4 Common Attributes of Effective Teams should set an example of sticking to deep-rooted values and build certain core values for the business, which at no cost should be compromised by anyone in the organization. Character and integrity of the leader should be above board and should get reflected in all their actions. In turn, they should set such ground rules as promote these values among all the team members.  Competence—The entrepreneur should ensure that their founding partners have a positive attitude and possess complementary knowledge and skills, which provide great synergy. Further, as regards induction of employees, job roles and competencies required should be clearly identified and objective criteria should be followed to build a team around the task. While recruiting people, the only priority should be to the task and the right fit of people with required knowledge, skills and attitude, who would effectively perform the task. Any deviation from the objective criteria can have serious repercussions on the performance of people and in turn on the organizational performance.  Communication, Coordination and Collaboration—Communication, coordination and collaboration are key to team building. It is important to be transparent among team members and share the concerns and anxieties with them. Founding members and other team members should necessarily have a free exchange of thoughts related to problem solving. The best way to communicate with people is to come down to their level and talk to them in their language. At times, things are not performed as expected mainly because of lack of communication or wrong communication. It is important to give people what they need, and different people need different communication approaches.

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One should never assume things, as it does not work well for developing good communication among team members. As such, good team builders devote a lot of time to understand and observe team members to find out about their needs and motivation levels before deciding on a communication strategy with them. It is always better to consult people to confirm your understanding about them. This helps in gaining the trust of the members in a venture. Open and transparent organizations always gain from developing appropriate approaches and channels of communication to build effective teams. Leaders in successful organizations work hard to build a team that is collaborative and possesses diverse competencies, which help them in complementing the roles of different members. A leader acts as an emotional guide to the members of the team and provides them with a homely feeling in times of ups and downs. Leaders at different tiers in the organization strive hard to build social relationships and networks among the team members to foster cooperation, coordination and collaboration. Structured methods of collaboration encourage introspection of behaviour and communication (Spence and Muneera 2006). The methods and processes used in a structured way specifically aim at increasing the success of teams as they engage in collaborative problem solving. It is akin to a surgeon performing a critical surgery on a patient along with his colleagues, nurses, anaesthesia expert and other support staff that maintain equipment and accessories required for the operation in the operation theatre. Each one of them should have excellent proficiency in their job role coupled with collaboration through excellent communication skills to successfully achieve the objective of the surgery. This should be backed up by ethical conduct that needs to be embodied in their belief system and values. It is the better coordination and collaboration across the venture team that leads to better productivity and superior quality. Business ventures that are able to eliminate waste and miscommunication between team members become efficient, accurate and timely. This in turn results in improved quality and dramatically reduces production and distribution cycle time.

Team Building: A Challenge to Achieve Coordination and Collaboration Achieving coordination and collaboration may be a tough task in organizations having disparate and  siloed teams participating in software development for a client abroad with the help of team members  separated by geography, by process or by department or function, outsourcing, joint ventures and  other factors. This makes the task highly complicated. Building teams under such problem-solving  situations requires a single platform that can bridge the functional disciplines of software development  as well as supporting a distributed development organization. The crux of team building under such  circumstances  depends  much  on  early,  accurate  and  complete  capturing  of  requirements  in  the  development cycle; clearly communicating the changes required to the upstream, downstream and  across  locations;  and  above  all,  improving  team  collaboration  and  communication  with  a  single  source of truth.

 Creative Innovation—Starting, establishing and growing a venture in today’s context require harnessing the potential of a team to continuously come up with innovations. To respond to tomorrow’s customer needs, yesterday’s solutions would no more work. The problem-solving approach demands radical thinking to come up with creative solutions much ahead of others by collaboration among team members. Entrepreneurs build teams that see, think and do things differently, which enables them to unfold their creative potential for the benefit of the venture. It is imperative for an entrepreneur to build an organization that challenges the thinking of its people so as to come up with new and better ways of solving problems for their long-term survival. Thus, innovative leaders create a climate in the organization where creativity and innovation are encouraged and are treated as an asset for all the individuals. For example, Nike encourages and promotes people who work hard and make things happen against all odds rather than those who have extensive qualifications. Some of their employees may not at all qualify for their jobs in other organizations. But at Nike, it is passion, creativity, hard work and

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healthy criticism that are rewarded. Therefore, the company is at its best when it creates trends rather than capitalizing on them. These trends come from those whose dissenting voice says, ‘Look beyond the horizon!’ and not from those parts of the management team that are in favour of conservatism and efficiency. This philosophy is also embedded in Microsoft, which is known for its innovations and successful organization.  Consequences Sharing—Successful entrepreneurs always blame themselves for failure and extend whole hug credit to the team for success. After having built an excellent team, the fruits of success get shared by all in multiple ways, including stock options to employees. Although there may not be any legal or ethical obligation to share, successful entrepreneurs invariably look for opportunity or create opportunity to share the gains that accrue to the venture with the team members, irrespective of their financial stake.  Control—Entrepreneurs in an organization should have built-in checks and balances to assess the performance and contribution of team members in the venture. This helps a lot in sharing with the team member facts and figures to convince them of their deviations from expectations and extraordinary contributions that have been made by some in the organization. The purpose of control is mainly undertaking performance coaching discussions so as to align the performance of the team members with the organizational goals. Team members need to own their contribution to the organizational goals and work hard and creatively to contribute their best. Above all, while building a team, it is very important for the entrepreneur not to linger on a decision to remove a person from the team if they are found to be not suitable or whose integrity is in doubt or who lacks values aligned with the organizational values.  Cultural Change—The main purpose of building an effective team is to build an organizational culture that inspires and motivates team members to contribute their best from within. Entrepreneurs need to keep reinforcing basic values among team members to create a team work culture so as to develop an overall sense of team work. The purpose is to create value-based organization where stated values permeate all levels of the organization to build a vibrant organization that results in consistently achieving high performance standards. The conscious efforts put in by the top leadership help in building an adaptive culture that is capable of achieving extraordinary performance under a variety of constraints and unexpected stresses. Leaders should necessarily ensure fairness and objectivity in dealing with people as far as their positive or negative contributions to the team are concerned, leading to rewards or punishment. Group dynamics get adversely affected if fairness is not ensured in letter and spirit in an organization. Fairness in a workplace gives confidence to an employee, which gets reinforced in their getting engaged in a behaviour that helps the other team members to complete an assigned task on time. They themselves would be inspired to spend out of office hours or sit late to ensure completion of assigned tasks on time. Fairness requires great courage on the part of the top leadership to explain why certain things are done the way they have been done. In case team members have any clarifications or doubts, leaders should be able to face it boldly in a transparent manner and justify their stand or be open enough to correct their stand on the basis of additional information received from the team members. When there is nothing to hide, the team could be transparent and honest, and honesty leads to fairness.

Examples—Team Building Culture—Key to Effective Team Building   H   aldiram started as a small shop in Bikaner, the land as famed for its savouries as for its leatherfaced  pipe  players  and  fierce  warriors.  By  1982,  Haldiram’s  had  set  up  shop  in  Delhi,  and  the  (Continued)

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  Entrepreneurship people in Delhi got interested in its products. Their business started growing mainly through word  of mouth over the next decade till Haldiram’s came to stand for a food company that got identified  with taste, hygiene and innovation. The company started by exporting its products to the United  States, where a large Indian population resides. What began as a small-town enterprise in India is today a global phenomenon. Started  as  a  humble  Mithai  shop  in  Bikaner  by  Haldiram  in  1937,  the  company  has  spread  its wings to different parts of the country and abroad. Haldiram products can be seen in some   40 countries on the shelves of chains such as Tesco, Carrefour, Somerfield and Spinney’s. They  are made with the recipes conceived seven decades ago, albeit at different factories across the  country. It operates under three separate entities with clearly defined territories in India that do not  compete with one another. While Haldiram’s elder sons Shiv Kishen and Shiv Ratan took care of the Nagpur and Bikaner  businesses, respectively, the younger two Manohar Lal Agarwal and Madhu Sudan Agarwal took  charge of the Delhi operations. Calcutta was taken care of by their relatives. Today, Agarwal is the  chairman of the northern operations. The four promoters are helped by their sons, with some of  them possessing management degrees from abroad. Pankaj Agarwal is the eldest son of Agarwal  and is helped by his younger brothers. Haldiram’s  is  a  way  of  life  for  Indians  no  matter  which  country  they  live  in.  The  success  of  Haldiram’s is backed by a strong team of committed employees and promoters, where employees  in different departments—inventory, manufacturing, servicing and billing—communicate effectively  with one another and especially customers. Every team member is confident of performing their  assigned roles and is a competent communicator. The culture built in the organization emphasizes  effective  communication,  which  is  the  hallmark  of  their  success.  The  leadership  approach  deployed in various outlets is the key value used, which allows an individual to be on their own  as inspired and motivated to serve the bigger purpose that is set as goal for the organization.4

Ken Morse—Leader with a Difference   Ken  Morse  had  a  real  distinction  of  being  a  co-founder  of  six  high-tech  companies,  together  with  his  MIT  friends  and  classmates.  Five  of  these  ventures  have  successfully  gone  up  to  the  stage of IPOs or mergers; however, one was a major failure. They are 3Com Corporation, Aspen  Technology, Inc., a China Trade Company, a biotech venture and an expert systems company.  Ken’s  responsibility  in  these  ventures  was  either  being  a  CEO  or  taking  care  of  part  or  all  of  the  sales  organization  in  each  of  these  new  enterprises.  During  his  more  than  four  years  as  Managing Director of AspenTech (AZPN) Europe SA/NV, Ken built an effective team, which could  be successful during 18 consecutive quarters of on-target performance by building close strategic  relationships with the leading chemical and pharma companies throughout the region. He could  successfully expand the AspenTech EMEA organization from 22 to 200+ employees by recruiting star performers—with almost zero staff turnover—and  expanded  sales  revenue  by  600–900  per  cent with key client relationships. Ken had a talent to attract motivated employees and build a work  environment to retain new team members for offices in Belgium, France, Germany, Italy, Kuwait,  the Netherlands, South Africa, Switzerland and the United Kingdom. Ken’s interest in international high-tech ventures began at MIT itself, from where he graduated  with a Bachelor of Science (BS) in Political Science in 1968 followed by an MBA from Harvard  Business School in 1977. After graduation, he joined Schroders, the UK-based merchant bank,  where he served as personal assistant to Jim Wolfensohn, former President of the World Banks. Ken formed a trading advisory company under the aegis of Chase Manhattan Bank in 1975  to  help  and  assist  US  technology-based  companies  such  as  IBM,  General  Motors,  Gillette, 

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Hughes  Aircraft,  Mine  Safety  Appliances,  Waters  Associates  and  others  to  enter  the  Chinese  market. He had spent five years during the latter half of the Cultural Revolution in Beijing, which  provided him with much-needed insight to extend services to leading players on how to enter the  Chinese market. Morse relocated to Silicon Valley in 1980 as a founding member of 3Com Corporation. After he  joined the MIT Entrepreneurship Center in 1996, the number of students taking entrepreneurship  courses increased from 220 to 1,600 per year while the number of professors grew from 3 to over  30. Ken was accredited with ‘Education All Star’ by the magazine Mass High Tech. Ken Morse had a rare and distinct leadership style that enabled him to build strong winning teams  in whatever he ventured into but for one failure, which was basically on account of external factors.6

Enron Failure   Enron stands out as one of the most spectacular failures in business history. Most of the studies  focus on their weak corporate governance, leading to weak accountancy practices that perpetrated  great fraud in the history of the corporate world. However more crucial reason has been the internal  culture  and  the  leadership  practices  that  its  top  management  encouraged.  These  included  a  particular  emphasis  on  charismatic  leadership,  particularly  in  the  persons  of  Kenneth  Lay  and  Jeffrey Skilling; the promotion of a compelling vision by these leaders of a totalistic nature; individual  consideration at the cost of organizational consideration, weak and subjective recruitment system  designed to activate a process analogous to conversion and for selfish motives; and the promotion  of a culture characterized by conformity and the penalizing of dissent. All these factors weakened  the basic fabric and foundation of the company, which led to the people at the top management  and other tiers indulging in selfish motives at the cost of the company.

11.5  VENTURE TEAM DEVELOPMENT There are multiple ways that lead to formation of a right combination of people and a right opportunity at the right time. However, it is not easy to land into this kind of an outcome easily. It requires a lot of effort, initiative, capability in an entrepreneur and, above all, luck. It has been rightly said that even if the venture survives, the turnover because of differences and dissention among promoters is usually very high. There are no tailor-made rules of the game that can enable the formation of an effective venture team. It is a tedious process involving many ups and downs like cyclonic waves in a sea that ultimately, after resulting in certain disaster, may calm down and lead to achievement of its ultimate goal. Venture team formation involves great chemistry of human interaction, cooperation, coordination and collaboration against all odds. For many years, emphasis in the area of entrepreneurship research continued to be on the individual entrepreneur. This era was characterized by the trait theory, as evident from studies by McClelland. Of late, emphasis got shifted to the entrepreneurial team, which is a group of people involved in the creation and management of a new venture. This was mainly an outcome of experience gained by funding agencies, in general, and venture capitalists, in particular, who attached greatest importance to team quality as a critical funding criterion. The decision to identify and add another member as part of the core team becomes critical and a matter of trial and error. Normally, the entrepreneur identifies the critical perceived needs of the venture from the point of view of induction of additional team members and attempts to search for a person with a competency-driven approach. In the process of search, personal relationships do play an important

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  Entrepreneurship Need for Partners Where to Find Partners? How to Choose the Best One(s)? How to Convince Them to Become a Part of the Core Team? Issues to Be Resolved for Inducting Partners

Figure 11.5 Venture Team Development role, but what has to be given greater weightage is predetermined strategic criteria vis-à-vis the person who can fill those gaps. Once the need for partners in the venture is established, the related questions that the entrepreneur needs to answer are ‘where to find partners?’, ‘how to choose the best one(s)?’ and ‘how to convince them to become part of the core team?’ (Fig. 11.5). These decisions are likely to be related to one another. Identifying them and their motivations, keeping in view the gaps to be filled in the venture for its success, becomes crucial. Fundamentally, teams should attract individual members to strengthen the team by inducting people who have the capacity to generate returns or to procure resources—tangible and intangible—required by the venture. The desire to induct like-minded members emanate from building/maintaining the existing or building upon the existing culture to reinforce the views and values of the founding members, so as to maintain control over the organization. However, this may not serve the vital purpose of fulfilling the resource gaps that exist in the organization. Many entrepreneurial ventures start with or prefer to induct team members consisting of school or college classmates, friends from the social circle, relatives or colleagues from existing or former employers, implying thereby that venture teams emanate from existing relationships, and mostly without much thinking about members’ capabilities to contribute to the successful launch or growth of a business. However, there are also teams that may have small numbers of members that want to move beyond familiar sources to find partners. Usually, the venture capital industry has been contributing a lot in marrying new partners in the process of team formation for new existing ventures. The response of entrepreneurs to the question of how they decided who would make a good new venture partner or team member has usually been ‘It’s like a marriage’. We believe, therefore, that the ‘chemistry’ of forming entrepreneurial teams may be a practical application of the interpersonal attraction theory (Bird 1989) and of Duck and Gilmour (1981). This clearly reveals that ultimately it is more a matter of luck to get right partners for business ventures. However, what matters most is the clarity in filling up the gaps in resources—tangible or intangible—that should guide the decision on whether or not to induct a prospective partner.

11.6  PEOPLE MANAGEMENT—KEY TO VENTURE SUCCESS The greatest challenge that an entrepreneur faces to achieve success in an entrepreneurial venture is the art and skills to manage people to get the best out of them, whether the venture is technology driven or otherwise. The art of recruiting, retaining, getting the best out of them and firing in time, if required, is

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the toughest and hardest task in a business venture. Some of the fundamental and well-tested principles of managing people that go a long way in the success of a venture are as follows (Fig. 11.6):  Employees Are the Fulcrum of the Business—Employees are the most valuable resources that contribute the greatest value to the business. Most successful entrepreneurs agree that the fundamental difference for the success of a venture is made by employees. Richard Branson argues that based on his experience he is absolutely certain that no company can be successful unless it hires the right kind of people and motivates them in the right way (Kets de Vries 1998). Mary Kay Ash (1915–2001), a US business executive, has rightly said that ‘people are definitely a company’s greatest asset. It doesn’t make any difference whether the product is cars or cosmetics. A company is only as good as the people it keeps.’ The difference between success and failure in a venture lies mainly in the entrepreneur’s inducting the right people whose talent and energy need to be rightly deployed in doing the right jobs at the right time. Although it is well understood by entrepreneurs, finding the right people, keeping the right people and getting people to perform at their highest levels are perennial challenges for business owners at all levels. Arthur Blank has rightly emphasized this aspect by saying ‘your employees are the spinal cord of your company. They are what holds it upright’ (Marcus and Blank).  Hire People with Adaptability and Attitude—For start-ups in a growing phase, it becomes difficult to precisely define the job profile and look for hiring a person possessing the knowledge and competency to perform the job. The requirements become more dynamic to respond to customer requirements. By the time a person gets inducted, the job role might have completely undergone a change. Therefore, start-ups have to basically look for a person who is open, flexible, willing to learn and prepared to respond to sudden and ambiguous requirements. It basically boils down to having a person who is smart and adaptable with a positive attitude. It is rightly said that ‘hire for attitude, train for skills.’ Attitude in this context means adaptability, openness to learning, taking feedback, ability to handle ambiguity, diligence, honesty, being a team player, and willingness and ability to get their hands dirty and so on.7 Thus, hiring a person with the right attitude and giving them required training to equip

Employees Are the Fulcrum of the Business Hire People with Adaptability and Attitude Inspire, Motivate and Enable Them to Deliver Excellence Principles of Managing People

Be Transparent and Open with Your Employees Respect and Treat Employees as Equals Encourage Employees to Take Initiative Remove Employees, As and When Becomes Necessary

Figure 11.6 People Management—Key to Venture Success

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them with the desired skills and competencies on a continuous basis goes a long way in getting the best from them for the benefit of the venture. Karan Bilimoria on hiring says ‘We always, always hire for will rather than skill. It is the attitude that matters.’  Inspire, Motivate and Enable Them to Deliver Excellence—Entrepreneurs having inducted people have to ensure to get the best out of them by motivating and inspiring them. Employees contribute their best when they are motivated, inspired and become self-directed from within. They become goal focused and start taking extra care in doing things rightly and delivering on time. The art of motivating and inspiring revolves around tangibles, such as pay, bonus, stocks and promotions, and intangibles, such as respect, care and concern. This gives a sense of pride to the employees of being part of a venture team where their identity is respected and honoured. The role of an entrepreneur is to inspire by one’s own example—to passionately motivate others to achieve with integrity, uprightness and accountability their greatest potential, for both personal and professional progress. They must have the ability in them to understand the passions of people and to integrate these passions in a collective organizational goal. They have to very clearly draw a line between when to lead and when to guide, when to support, when to cajole and when to fire, so as to get excellent output from their employees that contribute to achievement of organizational goals. This requires an entrepreneur to clearly diagnose their team members to understand them well; indentify what the top priority in life is for each one of them; identify a common ground to get associated and identified with them; build trust and confidence with them; and create opportunities aligned with their priorities along with achievement of organizational goals.

Examples—How to Motivate and Inspire Team Members?   A   n entrepreneur operating in the area of software development in the area of security systems  is running an organization with a team of around 50 employees, which he has built over the last  three years. Although their job is challenging as well as highly demanding, the entrepreneur has  not been able to give them competitive compensation. He has been facing a major dilemma as to  the way he should inspire and motivate his team to keep working with him. After a lot of pondering over the matter, within the financial constraint, which does not permit  him to raise compensation, the entrepreneur has been able to identify as his No. 1 goal making  their work meaningful to them and that they should have a sense of purpose and value. He has  decided  to  pursue  a  strategy  of  making  them  feel  important  and  valuable:  that  they  are  doing  something very important in the organization that has a positive impact on someone else, and  that by doing a good job they are creating success for themselves and others. The entrepreneur  realized  that  people  want  to  have  something  bigger  than  them  to  believe  in,  to  work  for  and  to  prove  their  worth.  It  is  the  vision  of  an  entrepreneur  that  will  make  them  believe  in  you.  The  employees start believing in the entrepreneur and his venture by realizing that they are valuable in  the whole process of developing software. The entrepreneur soon realized that bondage with employees, making them proud in doing a  job, providing a meaning and purpose to them, having a concern for their well-being from the core  of the heart go a long way in motivating the team. The entrepreneur continued to have hardly any  exodus, in spite of a relatively lower compensation to the employees.   T   hree labourers were engaged in building a temple in the industrial complex of a company that  had good brand image. One day, a management consultant to the company was on the company  premises  and  took  a  round  to  the  temple  site  under  construction.  These  three  labourers  were  carving sculptures of gods and goddesses. The management consultant inquired the first labourer  what he was doing. The labourer said, ‘Don’t you see that I am working to earn a daily wage, my 

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livelihood?’ The same question was posed to the second labourer, who said, ‘I am enjoying my  work and getting my salary in return for the work that I do for the company.’ The response of the  third  labourer  to  same  question  was  ‘I  am  putting  my  heart  and  soul  in  making  this  sculpture.    I may not be here, but this sculpture would remain here forever in this temple.’ Visitors to the temple  after seeing the sculpture would remember me forever because of the beauty and perfection that  ‘I  would  like  to  put  into  building  this  sculpture.’  Although  the  three  labourers  are  earning  their  livelihood by the same labour, their individual perceptions of work are all completely different. The  challenge for an entrepreneur lies in hiring people and inspiring them to work for the organization  by putting in their heart and soul.

 Be Transparent and Open with Your Employees—If you want to win the hearts of your employees, be open, transparent, frank and truthful to them about your expectations from them and whatever is happening in the company. This requires constant communication with them about all aspects that have some bearing on their work or rewards. It is necessary to share all the required information with employees if you want them to give their best to the company. At times, entrepreneurs develop a preconceived notion that sharing information may lead to greater demand by the employees or they will take advantage of such information by sharing it with their competitors. However, the fact remains that advantages would far exceed potential disadvantages. The more an entrepreneur shares with their employees, the better they would know about the expectations from them and the more they would contribute to the company. Leadership has to be transparent with employees by exposing details on all major business and financial metrics. This helps a lot in building employee trust. Even if the company is passing through bad times, sharing information with employees may lead them to come up with creative solutions to the company’s problems that the entrepreneur may not ever imagine. As such, lack of communication with employees results in creating unwanted grapevines in the organization and breeds fear in their minds. The best strategy to overcome insecurity, fear and speculations in the organization is to continuously communicate with the team members. Above all, while communicating, the management team needs to be specific, to the point and businesslike, so that there is no room for manipulation of information. Wal-Mart’s success lies in regularly sharing with employees their store’s purchases, sales, profits and markdowns. In the Southwest, Apple and Microsoft are known for their being very secretive on product development and code. However, Google selectively picks and chooses what is to be made open and transparent and what is not to be made transparent. Google.com is very secretive and nontransparent, while Google Android—Smart Phone Operating Systems is highly transparent as an open sources operating system that helps different contributors to add value in the process of developing their products’ functionality and reach. And the world knows that Google is a big winner in the process because they know what to keep transparent and non-transparent.  Respect and Treat Employees as Equals—Everybody in an organization, irrespective of their positions, deserves respect and dignity. Treating them as equals and human beings goes a long way in developing a partnership between the employees and the management. Everybody looks for respect and can easily differentiate between a respectful treatment given to them and a disrespectful one. Respect and equality to employees in an organization can be practised and demonstrated in simple ways, yet firm actions can be taken when so demanded. Always treat people with courtesy and kindness. Always make your employees comfortable and encourage them to share their ideas and opinions. It is always good to give a patient listening to employees before expressing your viewpoint on the matter. Above all, believe in the fact that innovative ideas are always there with everybody, and it is not the proprietary of a select few. Your job as an entrepreneur is to solicit ideas and implement worthwhile

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ideas to improve the work output. If you are considerate, kind, caring and courteous in treating your employees, as if they were your friends, partners or clients, they would treat your business as theirs.

Scott Clark (2001) has rightly experienced and pointed out: ‘When I started my first company three decades ago, my banker advised me to treat my employees as my most important asset if I wanted to reap rich benefits.’ Walt Disney, on importance of people in business, has highlighted: ‘You can design and create, and build the most wonderful place in the world. But it takes people to make the dream a reality.’ Larry Ellison on creating a work environment as a prerequisite to success has stated, ‘When I started Oracle, what I wanted to do was to create an environment where I would enjoy working. That was my primary goal. Sure, I wanted to make a living. I certainly never expected to become rich, certainly not this rich. I mean, rich does not even describe this. This is surreal.’ The Guru Guide to Entrepreneurship by Boyett and Boyett (2001) based on the advice from leading entrepreneurs has proposed three ways to treat employees as equals:  Get rid of executive limos and executive parking spaces.  Eliminate executive dining rooms, executive bathrooms and exclusive executive offices.  Do not employ receptionists, executive secretaries, personal assistants or other support staff.

Thus, building a culture in the organization to respect employees and treat them as human beings with a humane touch brings back a lot of reward to the organization. Always ensure to discuss concerns individually and never in public. Be focused on inappropriate behaviour or the problem and never on the person. Always start and end with admiration to them about their positive aspects in the work performance. This makes them realize their worth and value in the organization.  Encourage Employees to Take Initiative—Richard Branson on empowering employees has stated: ‘The credit for Virgin’s enduring and varied success is often attributed to me, but it’s actually due to the people who piloted those businesses. My decision to give them autonomy and encourage them to take risks has allowed us to grow while keeping costs down.’ He says that he used to give his managers deliberately and consciously the space and authority to make their own decisions.8 Allowing employees to take risk and experiment by empowering them goes a long way in their doing the right things and innovating solutions to improve productivity. A sense of responsibility and a sense of job ownership in an employee enable them to make better business decisions that go a long way in improving the bottom line of the business. An entrepreneur who shows support and encouragement to employees cultivates a highly productive environment in the organization. Nokia’s CEO Olli-Pekka Kallasvuo, in one of his key note speeches, focused on people, their needs and Nokia’s solutions to those needs. The key theme was to focus on people and use connectivity to ‘empower people to take care of themselves’. Mihaly Csikszentmihalyi on empowering people has highlighted: ‘Today many American corporations spend a great deal of money and time trying to increase the originality of their employees, hoping thereby to get a competitive edge in the marketplace. But such programmes make no difference unless the management also learns to recognize the valuable ideas among the many novel ones, and then finds ways of implementing them.’ Similarly, Theodore Roosevelt said, ‘The best executive is one who has sense enough to pick good men to do what he wants done, and self-restraint enough to keep from meddling with them while they do it.’ Stephen Covey has said, ‘An empowered organization is one in which individuals have the knowledge, skill, desire and opportunity to personally succeed in a way that leads to collective organizational success.’  Remove Employees As and When Necessary—There is no point in allowing cancerous growth in an organization. It is always better, if a situation so arises, to fire an employee in a dignified manner without getting into legal hassles. It is a very hard and difficult thing to do, but one should do it timely, without the situation getting precipitated. Firing employees can be best avoided by taking appropriate

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precautions at the time of hiring people. Firing of staff arises basically as a result of some fundamental mistakes made at the time of recruiting itself or certain pertinent incidences that occurred in the life of an individual leading them to behave abnormally. The procedure for firing employees should have a verbal followed by a written warning, except where there are grounds for instant dismissal. One should carefully document all the information regarding the employee’s behaviour. The company’s disciplinary procedure should clearly show that the employer has informed the employee, on more than one occasion, of any unsatisfactory performance; explained time and again, if required in writing, the organizational expectations from them; and given them opportunities to correct themselves within a given time frame. Build a case in writing to establish that the company has been very fair to resolve the matter. Firing employees is the hardest and the most difficult part of managing people.

Examples of Building Organizational Culture The  chairman  of  Wipro  Azim  Premji  took  an  unprecedented  decision  on  21  January  2011,  when  he decided to remove two top officials. The decision was made when India’s third largest software  exporter was trying to stave off challenges while closing a widening gap with market leaders TCS and  Infosys. Premji appointed T. K. Kurien, a company veteran, as CEO of Wipro’s IT division and junked the  joint-CEO model in which the company had been led by Suresh Vaswani and Girish Paranjpe, who  were asked to resign. The ouster of the joint CEOs, both of whom are company veterans who took  over in 2007, is an unusual occurrence in the history of corporate India, where exits tend to be gentle.  Wipro tried to soften the blow by claiming that the joint-CEO model was not working well and that  the company needed a single, more decisive leader. However, this argument was not acceptable to  many in the IT world. The writing has been clear on the wall for these two top executives, ever since  India’s  over-$60-billion  outsourcing  sector  started  recovering  last  year,  led  by  double-digit  growth  rates regained by TCS and Infosys, while Wipro failed to match its peers. The return of the good times  highlighted the limitations of Wipro’s joint-CEO model and accentuated the need to have a simpler  leadership structure. The problem, according to billionaire founder chairman Azim Premji, was the structure and had  nothing to do with the capabilities of Vaswani and Paranjpe. The reason why the joint-CEO model  is  now  being  replaced  by  one  CEO  under  T.  K.  Kurien  is  that  the  company  found  that  it  was  the  inappropriate  model.  According  to  the  company,  the  market  opportunity  is  again  exploding  and  the company necessarily needs a faster, leaner structure and different leadership to respond to the  challenges. ‘While we welcome the Wipro board’s decision to effect changes in the leadership to address its  financial underperformance, we remain worried that these changes could be distracting, especially in  a year when demand remains strong,’ CLSA analysts said in their note.9 ‘As  per  recent  research  studies,  CEOs  have  cited  high-quality  staff  as  the  top  factor  that  has  contributed  the  most  to  the  extraordinary  growth  of  their  companies.  Interestingly,  finding,  hiring  and retaining qualified employees have also become one of their biggest operational challenges in  managing their companies’ rapid growth.’10 The  most  difficult  job  for  an  entrepreneur  is  to  manage  people  in  nurturing  and  developing  a  venture.  Inducting  right  people  with  desired  knowledge,  skills  and  attitude;  placing  them  for  performing the right job aligned with the organizational goals; and getting them fully involved in the  venture as if it were their own require great skill in building and managing relationships with people.  This, indeed, is an art that a successful entrepreneur needs to consciously perfect with experience  over  a  period  of  time.  The  basic  fact  remains  that  the  most  crucial  resource  for  the  growth  of  a  (Continued)

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venture cannot be left to chance, and this necessarily requires a lot of time, effort and investment on  the part of an entrepreneur and their top management team. An entrepreneur, without losing sight  of organizational goals, has to keep focusing their efforts and energies on continuously improving  through and by the people. All activities and programmes to achieve this have to be considered as  means and interdependent rather than independent. The aforementioned tools are the tested ones  by leading successful entrepreneurs and need to be used judiciously and cautiously, because these  are being applied to human beings who are highly sensitive with their own needs profile and feelings.  An entrepreneur has to build a culture in an organization where employees should love to come and  enjoy working because their contributions are highly valuable to the overall growth of the organization.  Their morale is boosted when they are given greater responsibility, autonomy and freedom to work in  light of the overall organizational goals. They would be happy to contribute their best ideas to keep  the organization growing continuously. An entrepreneur should build an organization where work is  fun for the employees within the framework of challenges and opportunities of the business so that  the employees keep contributing their best to the company.11 

11.7  ORGANIZATIONAL STRUCTURE AND SYSTEMS Having built the right core team of management and employees who possess the right attitude, aptitude and complementary competencies to build an organization conducive to the growth of the business, the entrepreneur needs to carefully develop an organizational structure and systems. It has been said that during the early stages of growth of a venture, flexibility of the organizational structure, processes and systems may adversely affect the probability of survival. Basically, resource scarcity in the initial stage requires tight and judicious use, which may not permit the entrepreneur to build in great flexibility in general. However, the entrepreneur may have incorporated flexibility in the system in dealing with their employees, so that they come up with innovative solutions to the problems confronted by the venture. However, over time, the entrepreneur has to necessarily build in a formal organization structure with inbuilt systems and processes so as to move towards growth and maturity. In other words, the initial flexibility of a new venture’s structure, processes and systems should promote the discovery of a pattern of organizational alignment that best suits its particular strategic needs. However, once that pattern is found, it is essential that any advantage it endows becomes institutionalized through standard routines and reporting relationships.12 The need for formal structure, system and processes increases as the organization grows in size, number of people and business. The transition process of change management needs to be very carefully guided so that the emerging structure is well suited to its strategy of growth. An organizational structure consisting of people, structure, and systems and processes should continuously get aligned with the changing business environment and the growth plans of the company (Fig. 11.7). Normally, in start-ups with one or few founding partners, decisions are made collectively by them or with clear demarcation of areas of operations, where each one, with others’ knowledge, decides on certain matters to build business. Therefore, start-ups hardly think about an organizational structure unless and until the business venture has grown to a certain level in terms of revenue, profit, employees and investment. Even within the founding team, it would usually be a single boss, designated as Chief Executive Officer, making most of the decisions. This process continues until the business grows and inducts employees who need to be put into appropriate levels and places to achieve the organizational goals. It is at this stage that the need for a proper hierarchy emerges.

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nt

A systematic and well-defined organizational structure and design is required for ensuring effective people management, keeping in view the needs that would arise for expanding the business. The word ‘organization’ has a very wide scope. It can relate to a business venture, school, university and voluntary groups working for specific causes. A small business will require a simple, lean and flexible organizational structure, while large companies having operations within the country or globally, universities with a large number of affiliated colleges and chains of multi-specialty hospitals would require a formal, large and complex organizational structure (Fig. 11.8). Whether the organization is small or large, the process of forming an organization begins with having a management team that will supervise the working of the entire organization. The management team includes the founders of the organization, board of directors and a non-executive chairman. The mission and the vision of the organization should be well comprehended and defined by the management.

Bu

sin

ess

En

vir

on

me

People

Structure

Systems and Processes

Growth Plans of the Company

Figure 11.7 Organizational Structure

Small Business

Simple, Lean and Flexible Organizational Structure

Large Companies

Formal, Large and Complex Organizational Structure

Organization

Figure 11.8 Nature of Organizational Structure

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The setting up of a limited liability partnership concern or a private limited company is a good example of a simple organizational structure. Usually, other than the top management team, such organizations have a limited number of employees compared with big organizations. The greatest advantage of such organizational structures lies in its simplicity in executing day-to-day activities. The owner(s) of a small business entity can effectively handle and solve its employees’ problems immediately and can personally deal with them for performance-related issues. Like large organizations, small companies do have similar functions to perform such as human resources management, marketing department, production and operations department, and legal services and accounts department. However, most of these functions are handled by the owner or a few persons. As such, small organizations require multifarious talent, knowledge and experience on the part of its employees or owner(s). Usually, start-ups are said to be less bureaucratic and promote innovation in an open and flexible environment. Therefore, they operate a flat organizational structure with the least of hierarchy. These are also called horizontal organizations with few or no intervening hierarchies between staff and managers. The idea is that well-trained workers will be more productive when they are more directly involved in the decision-making process rather than when closely supervised by many layers of management.13 This type of structure implies that the chain of command from top to bottom is short and the span of control is wide. Because of the small number of layers in the organization, these types of organizations are usually small. Some of the key advantages of flat organizations are as follows:       

open communication between employees close relationships with one another less bureaucratic quick decision-making better to build teams less cost on account of higher productivity up to a particular point of production highly innovative

This is workable only either when the organization is small with few employees or in departments within the large organization to promote innovation. As the organization grows in size, it has to necessarily formalize hierarchy, else it would have an adverse impact on production and productivity. The greatest advantage of a flat organization structure lies in employees getting more involved and committed through a decentralized decision-making process. There is an inbuilt advantage that occurs because of personal relationships among employees who interact more frequently. For example, Idealab kind of start-ups have a physical layout that reflects its organizational structure. Its employees work in an open space of 50,000-square-feet, one-level building with very few walls. Bill Gross’, the CEO, office is at the centre of the premises with concentric circles around it. The innermost circles constitute earlyphase start-ups. There is a democratic and open environment, with people actively interacting with one another. As a business grows and reaches a size of around 70 employees, it is moved to another building.

11.8  DESIGNING AN EFFECTIVE ORGANIZATIONAL STRUCTURE An organizational structure consists of arrangement of jobs and groups of jobs within an organization. This relates to reporting, functional and operational relationships to ensure achievement of some degree of permanence (Fig. 11.9). Phyllis and Leonard Schlesinger (1993) termed (1) departments or divisions; (2) management hierarchy; (3) rules, procedures and goals as ‘organizational building blocks’ and (4) task forces or committees as ‘temporary building blocks’.

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Reporting Relationships

Arrangements of Jobs or Group of Jobs Functional Relationships

Operational Relationships

Achievement of Organizational Goals in Most Effective and Efficient Manner

Figure 11.9 Designing Organizational Structure

The key purpose of designing an effective organizational structure is to achieve organizational goals in the most effective and efficient manner. As such, the long-term success of any organization depends on putting up a suitable organizational structure in place. But as Gibson, Ivancevich and Donnelly noted in Organizations: Behavior, Structure, Processes, ‘It is entirely reasonable to acknowledge that in many instances, organizational structures do not contribute positively to organizational performance because managers are unable, by training or intellect, to design a structure that guides the behaviour of individuals and groups to achieve high levels of production, efficiency, satisfaction, quality, flexibility and development’ (Gibson et al. 1994). Therefore, it is very important, especially for start-ups, to recognize that the process of developing an organizational structure is a complex one that requires meticulous planning and execution capabilities. Designing an effective organizational structure aligned with business needs requires extraordinary management skills, dedication and perseverance. The fundamental step involved in designing an organizational structure involves identifying specific vital tasks/functions, identifying the right people to perform those functions and explaining the roles to each and every employee. An organization cannot expect to get the best out of its employees unless they are clear about their job role and the expectations of the company from them. Secondly, an organization should develop objective criteria to measure the performance of its employees without being biased or unfair to any employee. Any favouritism towards some employees would be highly detrimental to the company’s future growth. There should not be concentration of power in the hands of a few executives, as this may lead to grouping and reduced quality output. Decide the number of employees needed in a particular department and recruit only those many employees. Recruiting employees more than required can adversely affect the financial position of the company, and shortage of staff may cause delay in production and marketing tasks, thus causing loss of revenue.14

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Transparency in all operations and, in particular, the promotion process is the hallmark of a good organizational structure and design. Promotions and any other incentives to employees should be made strictly on the basis of merit to keep the employees’ trust and faith in the organization alive. While developing an organizational structure from a long-term perspective, small business owners should make sure that the following factors are taken into consideration15: Relative strengths and weaknesses of various organizational forms. Legal advantages and disadvantages of organizational structure options. Advantages and drawbacks of departmentalization options. Likely growth patterns of the company. Reporting relationships that are currently in place. Reporting and authority relationships that the entrepreneur hopes will be implemented in future. Optimum ratios of supervisors/managers to subordinates. Suitable level of autonomy/empowerment to be granted to employees at various levels of the organization (while still recognizing individual capacities for independent work).  Structures that will produce greatest worker satisfaction.  Structures that will produce optimum operational efficiency.        

It is most desirable to have a functional organizational structure when the organization is small in terms of the number of employees as well as operations, geographically centralized and provides few goods and services. In this type of structure, employees within the functional divisions of an organization are supposed to perform a specialized set of tasks. For instance, the software development department would be provided only with software engineers. Thus, it helps in achieving operational efficiency within the group. The signal of having outgrown functional structure would be visible when it starts facing bottlenecks in decision-making and difficulties in coordination. It is at this stage that a divisional structure paves the way to overcome the problems associated with a relatively large size of employees and operations and geographically dispersed activity, and the company starts delivering a wide range of goods/services to the customers. This type of structure groups each organizational function into a division. Each division within a divisional structure contains all the necessary resources and functions within it. Start using lateral relations to overcome the problems associated with functional and divisional structures. Lateral organizational arrangements include individuals of different departments and groups. These relations among group members exist on the same organizational level and involve coordination and consultation. One may have to move over to a matrix structure when the organization needs constant coordination of its functional activities. Although there is no single answer to the right type of structure, some of the key advantages and disadvantages along with their suitability can be highlighted as follows: The matrix structure helps in grouping employees by both function and product. Thus, it attempts to derive the advantage of both structures. It uses teams of employees to accomplish work to take advantage of the strengths, as well as make up for the weaknesses, of functional and decentralized forms.

11.8.1  Informal Structure An informal structure with a lot of flexibility and openness is most suitable for start-up ventures having few people who are highly committed and self-directed to the organization. Thus, there is hardly any need for a formal structure to get the best out of associated people. The major disadvantages of this are that it is an unorganized way of doing things; focus on details may be missing and systems are not in place. Therefore, things work only in the presence of people.

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11.8.2  Functional Structure There is clear demarcation between different functions. The organization has hierarchy in place. People have accountability towards given responsibilities. There is a strong centralized command, which is usually there from the head office. This kind of structure is not geared up to market changes. Communication barriers are more in such a structure, which is mainly on account of compartmentalization, leading to having strong personalities attempting to build their own empires.

11.8.3  Decentralized Business Units with Delegated Powers Business units focus on the given mission to contribute to the overall achievement of goals of the organization. The involvement of the head office comes into the picture to manage critical and exceptional problems. It may become quite cumbersome and complex leading to conflicts between field functionaries and the head office.

11.8.4  Matrix This kind of structure becomes highly suitable where employees have to face a dual chain of command. There is need for a lot of interdependency between different functions, and a close association among people working for different functions is required. It provides flexibility to the organization to respond to multiple challenges emanating from the business environment. It becomes most suitable to business entities facing great uncertainty and business complexity. The major disadvantage of the matrix structure is the formation of power groups and certain degree of confusion and ambiguity about roles and responsibilities.

Founding Team—Prerequisites Many a times, start-ups with friends coming together have been found to land in problems because  of lack of clarity about the organizational structure. Business with friends or families can be rewarding  but is also likely to lead to headaches and heartaches. However, successful ventures have been built  by friends and family members coming together such as Paul Allen and Bill Gates, Bill Hewlett and  Dave Packard, and Larry Page and Sergey Brin. What is important is to develop an understanding to  accept and respect the hierarchy structure. In business, one needs to forget the friendship and put in  black and white as to who will do what with what authority and decision-making power. The name ‘Bean and Intellect’ may sound unusual, but it is well thought of, drawing its inspiration  from the magical fairytale of ‘Jack and the beanstalk’, where Jack turns a handful of magical beans  into a spiralling ladder that reaches up to the sky. Anshumaan Verma, the Jack, has also turned the  beans  of  opportunities  into  a  ladder  of  success  to  reach  the  zenith.  He  describes  himself  as  the  Jack of all trades and master of many. Building the right founding team, developing prototypes of  various offerings, raising money, getting next set of people for the venture, channelizing the sales and  marketing effort and, last but not least, building credibility were few typical early-stage challenges that  Beans and Intellect faced. The sophistication of the treasury business with its added glamour made it an alien domain for  the company to operate. Anshumaan was the first founder of Beans, overall viability of their business,  which in turn meant revenue generation, which seemed to put extra pressure on him. On  top  of  this,  a  wrong  founding  team  selection  in  the  first  few  months  of  operation  led  to  an  early disaster for the budding ideas. So the start was not good. One of the founders in the team did  not share the common goal and vision of Beans, which led to very early damage control exercises.  (Continued)

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He does not regret the decision and points out that it was the right thing by mending the team issue  quickly  and  focusing  on  the  business  thereon.  A  lesson  was  learnt  and  Anshumaan  realized  that  finding complementary skill-sets in the founding team is one of the most important steps of ensuring  success in a venture.16

11.8.5  Systems and Procedures For organizational effectiveness, it is not enough to manage people well and have a desired organizational structure; it also needs to be backed up by appropriate systems and procedures. These need to keep undergoing a change with change in the business environment and growth of the business. Some systems and procedures that had delivered very effective results sometime back may become redundant over time. The entrepreneur has to be alert to this and introduce desired systems and procedures from time to time. A system is a group of interrelated components working towards the attainment of a common goal requiring an input of people, resources and systems to facilitate the process of organized transformation of inputs into outputs. To manage their growth effectively, business ventures will need to continuously improve operational, financial and management-related systems and procedures to have inbuilt checks and balances to get sufficiently in advance a signal about deviations, if any, from the desired performance. As a venture grows in size, the systems and procedure enhancements and improvements will require significant investment to effectively manage resources to produce goods and services. The key purpose of systems and procedures is to ensure more efficient and productive use of resources to increase profit and profitability. Systems and procedures help a lot in undertaking various tasks with consistency. These result in many benefits, including optimum resource utilization and compliance to accounting, legal and other stipulations (Fig. 11.10). For example, establishing proper business and bookkeeping procedures helps to ensure a uniform and accurate system, preventing employees from overly depending upon their superiors in performing day-to-day tasks. Procedures are simply defined as processes employed to complete specific tasks.

Systems and Procedures—Advantages

Undertaking Various Tasks with Consistency

Optimum Resource Utilization

Compliance to Accounting, Legal and Other Stipulations

Backed by Appropriate Manuals and Forms

Figure 11.10 Systems and Procedures—Advantages

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In accounting and auditing, internal control through inbuilt systems and procedures is designed to help the organization accomplish specific goals or objectives. These are the means by which an organization’s resources are channelized, monitored and measured. These help in preventing misuse of resources, getting signals in advance about the possibility of frauds and protecting the organization’s resources—tangible and intangible. One should assess the systems well to ensure performance standards from people. It may necessarily require an entrepreneur to discriminate between good performers and bad performers. However, one needs to ensure accountability by introduction of appropriate systems. Performers need to be appropriately identified and rewarded by way of compensation, bonuses, recognition by inserting their pictures in the house magazine, promotions, giving autonomy and deputing them to business schools for training. People maintenance systems have to focus on recruitment policies, recruitment process, induction programmes, and appraisal system and training. The recruitment process should define job description, person specifications to match the defined job profile and how to go about searching for the right person to fill the gap. A clear framework needs to be put in place for a selection profile and the selection process. Systems and procedures in an organization need to be backed by appropriate manuals and forms to be brought out from time to time by expert consultants or operations and the management department.

Importance of Systems and Procedures For example, tour operators have to rely a lot on managerial autonomy and flexibility to react and  adapt within a constantly changing environment. However, it is the introduction of formal systems and  procedures that helps in providing a customer-friendly service coupled with ensuring that leakages in  income do not take place. The same is true for the restaurant business. The  systems  and  procedures  for  such  businesses  will  include  workplace  health  and  safety,  security, emergency procedures, maintenance of fleet in case of tour operators, and equipment and  accessories for restaurants, cash handling and audit requirements. The  extended  operating  hours  for  employees  in  such  businesses  make  it  impossible  for  the  senior level management to be always present in the workplace. Therefore, establishment of sound  operational systems and procedures becomes inevitable for smooth and effective operations, even  in the absence of top management. Similarly, successful management of dairy farm business requires not only committed employees  but also more work procedures that ensure end results. It requires well-written standard operating  procedures to provide direction for performing various tasks and improved communication. Proper  introduction  of  systems  and  procedures  enables  dairy  managers  and  owners  to  benefit  from  consistent work performance and predictable results. Workers gain from increased confidence and  a clear sense of achievement. The  basic  systems  shared  by  all  dairy  farm  businesses  are  milk  harvesting  system,  an  animal  feeding system and a waste management system. Dairy farm success depends upon how well these  systems work together to produce the maximum possible amount of high-quality milk from a given  number of cattle. Management systems are made up of different work procedures. For example, in  a dairy farm, milking is more than just cleaning and stimulating cows and attaching milking units to  them. As such, before milking can start, someone must keep ready the milking equipment system  after sanitizing and changing the configuration from wash mode to milking mode. After all the cows  have been milked, someone must change the equipment back to wash mode and clean the system.  These three activities—sanitizing and preparing to milk, milking and cleanup—are procedures that,  when put together, make up the milking man.17 

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 Check Your Progress   10 Ways to Motivate Employees 

  

Apart from formal goal setting, regular appraisals and training plans, you also need the people who work for you to really want to succeed. Remember that it is your business and not theirs— there is much more to motivating people than just paying cheques regularly. Consider adopting some of the following for your staff: 1. Bright and light: Banish brown paint and dirty windows. Make the work environment light and comfortable. Why not some comfy sofas for meetings instead of hard chairs? 2. Keep it clean: Nobody likes to come in to work and find the bin full and the toilets smelly. Invest in a good cleaner and everyone will be much happier. 3. Be flexible: Why not let people start early and go home early in the summer? Consider an annualized-hours scheme, which makes it easier to manage both your workload and their work–life balance. 4. Celebrate together: Birthdays, new business wins and even Fridays can be good reasons to buy cakes for everyone. 5. Nice drinks: It is amazing how awful some cheap coffees taste. Treat people to decent drinks at work and do not make them pay. Ask people what they would like and stock it. 6. Create competitions: Lighthearted prizes for hitting targets make winning a part of your workplace culture. Design some competitions to be won by junior team members. 7. Organize outings: Do your staff work in the same place all the time? Take them out to meet customers, to hear relevant speakers and see things that will shape their work. 8. Sports: Encourage fitness by subsidizing gym membership. People who are fit tend to enjoy better health and take less sick leave. Gym membership can be a good investment. 9. Support their cause: Everyone has a cause they feel strongly about. Your staff will welcome you taking an interest, and perhaps even helping them out. 10. Offer alternatives: Remember that some are extrovert, whereas others are shy. Be careful not to create a culture where people feel obliged to take part in things they would rather miss. KEY CONCEPTS  Entrepreneurial Team: Consists of a group of venture founders who interact in developing new ventures.  Visionary Leaders: Have an extraordinary quality to articulate their philosophy to inspire others.  Competence: Having knowledge, skills and attitude that is required for effectively performing a task.  Creative Innovation: The problem-solving approach that demands radical thinking to come up with creative solutions much ahead of others.

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 People Management: The art and skill to manage people to get the best out of them.  Empowered Organization: Is one in which individuals have the knowledge, skill, desire and opportunity to personally succeed in a way that leads to collective organizational success.  Organizational Structure: Consists of people, structures, and systems and processes aligned with the changing business environment and the growth plans of the company.  Management Team: Includes the founders of the organization, board of directors and the nonexecutive chairman.  Horizontal Organizations: Have few or no intervening hierarchies between the staff and the managers.  Span of Control: Is the number of people who report to one manager in a hierarchy. The more people under the control of one manager, the wider the span of control.  Functional Organizational Structure: Divides enterprises into relatively simple functions and activities such as production, marketing or personnel. This type of structure is simple to understand with clear lines of command, specified tasks and responsibilities.  Divisional Organizational Structure: Splits the organization into self-contained units that enable it to react to environmental changes as quickly as small companies. The divisions encourage team spirit and identification with a product or a region.  Matrix Organization: Is also called an early form of ‘network’ structure. It focuses on project teams, bringing skilled individuals together from different parts of the organization. Individuals are made responsible both to their line manager and to the project manager involved.  Informal Structure: Involves a lot of flexibility and openness among employees and is most suitable for start-up ventures having few people who are highly committed and self-directed to the organization.  Systems and Procedures: Ways and means of doing things in an organization to ensure more efficient and productive use of resources to increase profit and profitability.

ENDNOTES 1. Schjoedt, L. and S. Kraus. ‘The Heart of a New Venture: The Entrepreneurial Team’, Management Research News, 32(6). http://www.emeraldinsight.com/journals.htm?articleid=1793158& show=html 2. www.dare.co.in/strategy/business…/not-just-a-competition.htm 3. McLaughlin, C. ‘Visionary Leadership’. The Center for Visionary Leadership. http://www. visionarylead.org/articles/vislead.htm 4. http://www.haldiram.com 5. www.commonangels.com/members/ken-morse/ 6. Entrepreneurship Europe Network. http://www.entrepreneurshipeurope.com/pdf/brochure_18. pdf; www.commonangels.com/members/ken-morse/ 7. Anandaram, S. ‘What to Hire and Pay For?’, 2010. http://startupjourney.blogspot.com/ 8. Branson, R. ‘Empowering Employees, Richard Branson Shares His Best Tips to Keep Your Team Inspired and Effective’, Entrepreneur, 2011. http://www.entrepreneur.com/article/217880

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9. Economic Times, 22 January 2011. http://economictimes.indiatimes.com/news/news-by-company/ corporate-announcement/premji-makes-kurien-ceo-replaces-jt-ceos-of-wipro/articleshow/ 7338672.cms 10. Lai, G. ‘Art of Managing People’, Enterprise Innovation, 2009. http://www.enterpriseinnovation. net/content/art-managing-people 11. www.changeboard.com/…/how-to-master-the-art-of-managing-people/ 12. Chrisman, J. J., A. Bauerschmidt, and C. W. Hofer. ‘The Determinants of New Venture Performance: An Extended Model’, Entrepreneurship: Theory and Practice, Fall 1998, http:// findarticles.com/p/articles/mi_hb6648/is_1_23/ai_n28721602/pg_11/ 13. http://en.wikipedia.org/wiki/Flat_organization 14. http://www.buzzle.com/articles/organizational-structure-and-design.html 15. Organizational Structure—Disadvantages, ‘Keys to Erecting an Effective Organizational Structure’. http://www.referenceforbusiness.com/small/Op-Qu/Organizational-Structure.html#ixzz1C7DN6llw 16. http://www.techno-preneur.net/information-desk/sciencetech-magazine/2009/november09/ Beans.html 17. www.moneycontrol.com/company-facts/mphasis/…/MB02

REFERENCES Bird, B. J. 1989. Entrepreneurial Behavior. Glenview, IL: Scott, Foresman. Birley, S. and S. Stockley. 2000. ‘Entrepreneurial Teams and Venture Growth’, in The Blackwell Handbook of Entrepreneurship, ed. D. L. Sexton. Oxford: Blackwell Business, 287–307. Boyett Joseph, H. and T. Boyett Jimmie. 2001. The Guru Guide to Entrepreneurship. New York: John Wiley & Sons, 221. Bygrave W. D. and J. A Timmons. 1992. Venture Capital at Cossroads. Boston: Harvard Business Press, 2. Chen, M.-H, Y.-C. Chang and T.-M. Chen. 2004. ‘Entrepreneurial Leadership, Team Creativity, and New Venture Performance in Taiwan’s SME Start-ups’, in Innovation and Technology Program. Taiwan: Department of Business Administration, Yuan-Ze University. www.yzu.edu.tw/admin/rd/files/rdso/G04/93/G040(1).doc Clark, S. 2001.Treat employees like your most valuable asset, because they are! Houston Business Journal, 14 January 2001. Cooper, A. C. and C. M. Daily. 1997. ‘Entrepreneurial Teams’, in Entrepreneurship 2000, ed. D. L. Sexton and R. W. Smilor. Chicago, IL: Upstart, 127–150. Duck, S. and R. Gilmour. 1981. Personal Relationships, 2: Developing Personal Relationships. London: Academic Press. Faulkner, D. 1995. International Strategic Alliances: Cooperating to Compete. Maidenhead: McGrawHill. Gibson, J. L., J. M. Ivancevich and J. H. Donnelly Jr. 1994. Organizations: Behavior, Structure, Processes, 8th ed. Boston: Richard D. Irwin. Jackson, N. M. 2009. Team Building with a Purpose, Entrepreneur, 17 April 2009. www.entrepreneur.com/ article/201322 Kets de Vries, M. F. R. 1998. ‘Charisma in Action: The Transformational Abilities of Virgin’s Richard Branson and ABB’s Percy Barnevik’, Organisational Dynamics, 8. Kumar, A. and A. Tekawade. 2008. Not Just a Competition, Dare—Because Entrepreneurs Do, 1 May 2008. Marcus, B. and A. Blank. ‘Built from Scratch’, Entrepreneur, October 10, 2008. www.entrepreneur.com/ article/197614 Ruef, M., H. E. Aldrich and N. M. Carter. 2003. ‘The Structure of Founding Teams: Homophily, Strong Ties, and Isolation Among US Entrepreneurs’, American Sociological Review, 68:195–222.

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Schlesinger P. F. and L. A. Schlesinger. 1993. ‘Designing Effective Organizations’, in The Portable MBA in Management, ed. A. R. Cohen. New York: John Wiley & Sons. Spence U. Muneera. 2006. Graphic Design: Collaborative Processes = Understanding Self and Others. (lecture) Art 325: Collaborative Processes. Fairbanks Hall, Oregon State University, Corvallis, OR, 13 April 2006. Timmons, J. A. 1999. New Venture Creation: Entrepreneurship in the 21th Centuries, 6th ed. Homewood, IL: Irwin. Timmons J. A. and S. Stephen. 2009. New Venture Creation, 7th ed. New York: Tata McGraw Hill, 292. Watson, W. E., L. D. Ponthieu, and J. W. Critelli. 1995. ‘Team Interpersonal Process Effectiveness in Venture Partnerships and Its Connection to Perceived Success’, Journal of Business Venturing, 10:393–411.

CONCEPTUAL QUESTIONS 1. Define venture team and its significance for the success of a venture. 2. It is said that ‘investors do not just bet on the horse [the business plan], they bet on the management team led by the CEO’. What parameters may help investors to understand the strength of a team? 3. What constitutes an effective management team? 4. Define an entrepreneurial team. 5. Why is it usually said that business plans prepared by college going students or friends and relatives may usually cause many hindrances at the time of launching a business? Explain. 6. Explain the key factors that need to be documented well at the initial stage of a business itself, failure of which results in lack of understanding among the co-founders of the venture. 7. Why has it been said that building an effective team for the venture is like a marriage, which is a bit unscientific, usually unpredictable and frequently a surprising exercise? Explain. 8. What are the common attributes of effective teams? Explain with examples. 9. Define creative innovation. What is its significance in today’s context of venture growth? 10. What key criteria should be used while making decisions to induct partners in a venture team? 11. Define the important principles of managing people in a venture. Explain giving examples. 12. What is usually a basic difference in the organizational structure between a start-up and a wellestablished large company? Explain. 13. Define organizational structure and its importance for running a venture. 14. What are the different types of organizational structure? Explain. 15. What steps need to be taken while designing an organizational structure? 16. What are the key advantages of flat organizations? Explain. 17. Differentiate between functional, divisional and matrix organizational structures. 18. Define systems and procedures and their relevance to the effectiveness of an organization. CRITICAL THINKING QUESTIONS 1. ‘Most of the research studies show that the team-building process coupled with the overall effectiveness of the management goes a long way in the journey to successful entrepreneurship.’ Identify a venture that has succeeded well and another that has failed in the context of the aforementioned statement. Critically examine the reasons for the success or failure of these plans in the backdrop of the statement.

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2. ‘There are plenty of ideas, new technology, money-chasing ventures, entrepreneurs and venture capitalists, but what lacks is the great winning team, which matters the most in success of a venture.’ Critically examine the statement with the help of concrete examples. 3. ‘To strengthen the understanding among founding members of the venture and build trusting relations, it is very important to clearly set the terms and conditions about sharing gains or losses.’ What are the different ways in which entrepreneurs attempt to transparently share the gains and losses with their team members. Explain with examples. 4. A number of businesses die a natural death because of lack of values and code of ethics and conduct. What is the significance of values and ethics for growth of the business? Consider an example and explain the related values that might have led to failure of a business. 5. ‘Remove employees, as and when necessary.’ What is the significance of this statement to the success of a venture? Consider two examples where it was decided to remove people from the top management and analyse the subsequent impact of this vital decision on the performance of the company. 6. There are different types of organizational structures suited to different types and stages of the growth of an organization. Consider a company, its objectives, and goals and nature of business, and analyse whether the organizational structure operated by it is suitable for it or not. If not, suggest the changes you would like to introduce.

 CASE 11.1:  SUBHIKSHA  Subhiksha was a retail outlet launched by R. Subramanian, an alumnus of the Indian Institute of Management (IIM), Ahmedabad, and the Indian Institute of Technology (IIT), Chennai, with its first store at Thiruvanmiyur in Chennai and an investment of around ` 4–5 crores in 1997. Subramanian also planned to invest ` 500 crores to increase the number of outlets to 2,000 across the country by 2009. Ram Chandra Agarwal had set up Vishal Garments Store in 1994—three years before Biyani’s Pantaloon and seven years before setting up Vishal Retail. Both of them are discount stores at prices that are much lower than those offered by other retail outlets. Subhiksha had to necessarily come up with innovative concepts in retail because of its wellestablished predecessors who were already doing well in the market. To come up with a unique value proposition, Subhiksha did an extensive research on customer behaviour and found that offering branded goods at a lower price than their competitors could make a breakthrough to have a competitive advantage. Subhiksha Trading Services Ltd owns and operates a chain of retail discount departmental stores and pharmacies. The company offers mobile equipment, groceries, drugs and pharmaceuticals, and consumer products. R. Subramanian was clear that tough competition and long-term survival would require him to be different and at the top in the years to come. Therefore, he started with a theme concept ‘why pay more when you can get it for less at Subhiksha.’ To achieve his objective, he deliberately operated upon a cost-cutting strategy by opening a chain of stores without comforts in terms of air-conditioning, fancy lights and touchand-feel experience. One may have to remember the Indian customer psyche, which enjoys shopping by touching and twisting the product in multiple ways. He also ensured that shops are not located on main roads costing relatively higher per square foot, but a bit inside to derive advantage in terms of rentals.

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Subhiksha expanded its outlets fast within the given strategy. The numbers increased from 14 stores in 1999 to 50 stores by June 2000. By 2002, it had around 130 stores in the state of Tamil Nadu, from where it started its journey. After due market research for the future prospects of retail business, they decided in 2004–05 to open around 400 stores in Gujarat, Delhi, Mumbai, Andhra and Karnataka. Subsequent expansion plans ultimately resulted in their having around 1,600 stores across more than 100 cities selling food, groceries, drugs and telecom products across the country. This expansion could be achieved with the support of infusion of private equity capital by I-venture, the venture capital arm of ICICI. I-Venture took 24 per cent stake in the company’s equity, which until then was primarily held by Subramanian and his associates. Subhiksha was planning to go in for an Initial Public Offering (IPO) in 2007 but shelved it in view of ‘uncertain market conditions’. Maybe, if issues had come, they would have given some respite to the company in terms of capital to manage financial crisis. Subramanian never thought and dreamt too big when he started off with Subhiksha—a retail value chain in 1997. In fact, he never thought of entering into retail business when he passed out from IIM Ahmadabad in 1989. After spending a very short period with Citibank as an employee, he joined Enfield Industries. He could strategically contribute a great deal in professionalizing a family-run Enfield and could facilitate its takeover by Eicher. He had an entrepreneurial instinct, which led him to start his own venture called Vishwapriya after spending two years at Eicher. This venture enabled him to earn good profits to the tune of ` 25 crores before the share market collapsed in 1995. The company grew by leaps and bounds, as was evident from the increase in its turnover from ` 330 crores in 2005–06 to ` 833 crores in 2006–07, and then to ` 2,305 crores in 2007–08, that is, around seven times increase in two years. Similarly, its number of stores grew from 150 in September 2006 in Tamil Nadu to around 1,600-odd stores across the country by September 2008. It had plans to further increase the turnover to ` 4,300 crores by March 2009. It is important to remember that such an accelerated growth in turnover took place with a small net worth base of ` 250 crores having an equity component of ` 180 crores. A face value of equity of ` 32 crores was held by promoters, including Subramanian 59 per cent, ICICI Ventures 3 per cent, ICICI Prudential Mutual Fund 5 per cent, IT czar Azim Premji 10 per cent and the balance by an employees’ trust. Azim Premji, a well-known Indian business man, who had invested in Subhiksha through his private investment vehicle only a few months before its downfall in March 2010 had said that Subhiksha was the retail equivalent of Satyam—India’s largest corporate fraud. He said, ‘There was an overstatement of accounts, fake inventory, fake bills, fake companies that money was transferred to.’1 Inventory management and having a system in place to provide continuous information on logistics and supply chain management matter the most for a retail chain. The company had problems in managing its front-end and supply chain operations using its existing local enterprise resource solution (ERP). The company also needed a good solution to manage the payroll system. Although it did not have any HR issues at the ground level, sending the payroll to employees on time was becoming more and more difficult. Although the company had deployed the ERP system, it could not derive the required value from it to respond to the challenges of accelerated growth that took place in a short period. Another drawback that Subhiksha had was lack of dedicated people and cash management, which matters the most in such ventures. (Continued)

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As a result of problems on multiple fronts, Subhiksha faced an ultimate problem of being out of cash in late 2008, which jeopardized its operations and brought it to a standstill. The company faced a severe cash crunch, which resulted in defaults on its loans, vendor payments and staff salaries. Ultimately, the situation got precipitated to a level of closure of its stores. The cash crunch was so deep that it resulted in television channels propagating for not clearing advertising dues to the tune of ` 8 crores, defaults in payment towards goods—` 35 crores, wages—` 20 crores, lease rentals—` 20 crores and, above all, loans from different sources to the tune of ` 700 crores at an average rate of interest of around 12 per cent. Many suppliers stopped supplying to them in the wake of their financial crisis and uncertainty for getting their payments. Above all, lack of team spirit to face the crisis and lack of human resources policies led to exodus of talent from the company. ICICI Venture Funds Management Co. Ltd has been struggling to find a buyer for Subhiksha Trading Services Ltd even after seven months when the corporate debt restructuring (CDR) plan for Subhiksha hit a dead end, according to a person familiar with the development. ICICI Venture, which has a 23 per cent stake in Subhiksha, has been unable to find buyers for its stake and feels that Subhiksha cannot be revived. ‘The investment is already written off in a way. Its equity value has eroded,’ this person added, who wished to remain anonymous. ‘The firm can’t be revived now.’ ICICI Venture has the largest non-promoter stake in Subhiksha, but a senior executive at a consulting company said that the private equity (PE) firm would not face any loss from writing off its investment. ‘ICICI Venture rather made profit on (its) investment while selling 10 per cent stake to PremjiInvest,’ the consulting company executive said, requesting anonymity for himself and his firm citing business relations with ICICI. The person familiar with the matter said that ICICI Venture had approached strategic buyers to acquire the chain, but failed. ‘Buyers looked at the company on behest of ICICI Venture, but nothing worked out as they saw no value in buying it.’ A spokesperson for ICICI Venture said in an email reply that the firm ‘would prefer not to comment on the issue’, Mint reported. R. Subramanian, Subhiksha’s Managing Director, did not respond to an email seeking comment sent on 16 March. He did not answer phone calls or reply to text messages.2  Questions  

1. Was it right on the part of the company not to come up with an IPO in 2007? Justify your answer. 2. Comment critically on the promoter team and their expertise and experience in managing the retail business. 3. What has been the root cause behind the failure of Subhiksha? 4. In case you were managing the venture, what precautions would you take to ensure that the situation does not precipitate to a closure level. 5. What have been the key lessons that can be learnt from the Subhiksha example to manage entrepreneurial ventures? 6. Many businesses fail because of lack of focus in their approach towards business. Infosys, for example, has been highly focused on its business profile. Do you think in a retail chain such as Subhiksha, it would be desirable for the company to adopt a focused approach? If so, what strategy would you suggest and why? 

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 Endnotes  

1. http://economictimes.indiatimes.com/Opinion/Interviews/Localising-top-talentglobally-is-Azim-Premjis-new-mantra/articleshow/5669618.cms?curpg=3 2. http://trak.in/tags/business/2009/02/10/the-rise-and-fall-of-subhiksha/dia Blog Trackin; http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId= 22549251 

 CASE 11.2:  MPHASIS  The company was incorporated on 10 August 1992 and was promoted by Shreeniwas Bangur, Shreekant Bangur, Suraj Ratan Rathi, Partha Sarathi, Dutta Roy and V. K. Rungta. In 1993, the company issued 700 equity shares of ` 10 each which were fully subscribed and paid up. The company subsequently issued at par another 60 lakh shares of ` 10 each in July 1992, of which 1,500,000 shares were reserved and allotted to Indian directors, their friends and relatives. Of the remaining, 450,000 shares were offered to Indian mutual funds (none were taken up). The remaining 4,050,000 shares were issued to the public along with the 450,000 shares not taken up by Indian mutual funds. By 1995, the company had more than 100 projects under execution and it was classified under six technology focus groups, namely, System Software, Client Server Technology, Networking Technology, Tandem Technology, Reengineering Group and Emerging Technologies. In 1998, an international investment bank entered into an agreement with BFL Software (BFL) on 26 March for acquiring 1,504,800 shares (amounting to about 25.15 per cent of the company’s equity). In 2000, the company changed its name to MphasiS BFL and reorganized its operations. During the same year, Richard Braddock and Jose de la Torre were appointed as Additional Directors of the company. Holdings Ltd had acquired 6,500,000 shares of BFL Software Ltd aggregating 41.02 per cent. Rahul Bhasin, Chairman, resigned on 14 July 2000, and K. Sridharan was appointed as Director. MphasiS, a software architecture, integration and implementation company, had tied up with BEA System to build financial solutions on the BEA E-Commerce Transaction Plantform that aims at capturing a huge market in the financial sector in India and abroad. Idea2solutions (I2s), an incubator focused on healthcare-technology start-ups entered into an alliance with MphasiS. During the same year, the company appointed Ravi Ramu as Director—strategic initiatives. Ramu’s enriching experience and expertise reinforced MphasiS’ strong management team globally. Jerry Rao, Chairman—MphasiS BFL, was appointed to Nasscom’s Executive Council in 2002. MphasiS BFL secured the top slot in credit rating amidst 400 major companies during 2002–03. The company won the SecureSynergy Security Strategist 2005 award. During 2005 itself, the company acquired Princeton Consulting and set up a BPO facility in Noida. In 2006, MphasiS BFL Ltd informed that the name of the company had been changed to MphasiS Ltd with effect from 24 November 2006, which was approved by the Registrar of Companies, Karnataka. Subsequently, a number of prominent professionals in the field were appointed as Additional Director(s) on the Board of the company. (Continued)

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MphasiS Ltd (then, MphasiS BFL Ltd) was formed in June 2000 after the merger of the US-based IT consulting company MphasiS Corporation (founded in 1998) and the Indian IT services company BFL Software Limited (founded in 1993). The company was founded by Jerry Rao and Jeroen Tas, former Citibank employees. Starting out as a BPO and application services outsourcer in the BFSI segment, it subsequently moved into the telecom and health industries as well. The company’s global character was evident from an Indian CEO, a Dutch president and more than a dozen subsidiaries in Europe, the United States and Asia. Its global operations got further expanded and enhanced by its acquisition-cum-alliance-based strategy, making it among the top software exporters of the country within a couple of years of its coming into existence. It was acquired by software services firm EDS in 2006, which in turn was acquired by HP in 2008. MphasiS is a unit of Hewlett-Packard Co and is the sixth largest IT company in India with more than 38,000 employees as of 2010. The company has 29 offices in 14 countries with delivery centres in India, Sri Lanka, China, North America and Europe. MphasiS BPO, provides high-quality, value-added voice and transaction-based Contact Centre and Business Process Outsourcing (BPO) services to Fortune 500 companies worldwide. It has expertise to customize onshore, near-shore and offshore solutions. The company offers not only a differentiated service to its clients but also value enhancement to these offerings. It is a leader in providing end-to-end Business Process Outsourcing services and provides high-quality, valueadded voice and transaction-based services to Fortune 500 companies worldwide. It has an inbuilt advantage of having entered the BPO space in the early stages of the growth of the sector, which has enabled it to develop expertise and provide solutions and services to complex business issues and achieve results. The company’s growth strategy of acquisitions with alliances has worked well in enhancing its global character and orientation. MphasiS clients typically work with complex, highly distributed IT infrastructures that gives them an added advantage. The real challenge lies in identifying the source of problems in distributed IT infrastructures, which is an uncertain and time-consuming process because it is done without having a unified view of all the components. Through this partnership, MphasiS is forming a ‘center of excellence’ to apply Integrien Alive to solve related business problems. MphasiS’ Corporate Governance focuses on the enhancement of shareholder value, keeping in mind the interests of other stakeholders, namely, clients, employees, investors and regulatory bodies. The role and functions of the Board of Directors of the Company are well defined. The company has taken various steps, including setting up various sub-committees of the Board to oversee the functions of the management. MphasiS is committed in its philosophy to good corporate governance practices and has benchmarked its practices against best global practices.1  Questions  

1. What has been the reason for the success of MphasiS? 2. What has been the strategy of the company to build a team to have global operations and character? 3. ‘Venture team development, as a company expands and grows within the country and outside the country, requires a distinct emphasis on corporate governance policies.’ Comment critically on the steps that MphasiS took in this direction?

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Endnote

1. http://www.mphasis.com/Investors/Invest_Governance.html http://mpra.ub.unimuenchen.de/22832/1/MPRA_paper_22832.pdf; http://www.moneycontrol.com/companyfacts/mphasis/history/MB02 mpra.ub.uni-muenchen.de/22832/1/MPRA_paper_22832.pdf www.moneycontrol.com/company-facts/mphasis/.../MB02

 CASE 11.3:  TRONIX  Tronix India Ltd is a venture to manufacture, sell and provide services to regenerate the spent acid used for pickling. It is expected to revolutionize the iron and steel industry in India. The venture has developed a process called ‘Clean’ to recycle and use for productive purposes the acids used in the iron and steel industry during the different stages of processing. At present, the iron and steel industry completely discharges the spent acid used for pickling a batch of steel, which causes environmental hazards. The major costs in pickling are due to the acid used and its treatment before discharging it. Small and medium companies in the sector, because of very thin margins, prefer to dispose it of without treating it, thus contaminating the environment. At times, these units may be forced to close down because of regulatory pressures from environmental authorities. The company has developed a system called Clean, which involves a simple mechanical and chemical process to regenerate hydrochloric acid from the chemical waste at minimum operational cost. The process helps in minimizing waste treatment and helps in getting a value-added product—hydrochloric acid—while reducing dramatically the treatment cost along. It helps in reducing not only the treatment cost but also the requirement of hydrochloric acid by these companies to the extent of almost 80 per cent. This process is also producing ferric acid, which can be sold in the market. The team has won a number of business plan competitions in India, which has reinforced the confidence and courage in the team to take it to a scaleable level. The team involved has already filed a provisional application for seeking the patent, which gives it an edge over others in terms of priority. It is also confident of filing the complete specifications within four to five months. A full-scale design of the system will enable proper testing, ensuring that it delivers tested performance and output as envisaged. Market analysis reveals that the re-rolling sector mainly consists of small and medium units. A survey undertaken by the Development Commissioner for Iron & Steel (DCI&S) reveals that small-scale units with an average capacity of 11,550 tonnes per annum account for around 53 per cent share of the total capacity of the industry. A quick market research undertaken around the national capital region, including part of Delhi, with more than 35 companies, reveals that around 30 companies will be interested in buying it because of its inbuilt advantages. Clean promises to be cost effective and environment friendly compared with the present pickling method used. A majority of companies neutralize the spent liquor with lime and dispose of the neutralized waste to landfills. Clean can be set up onsite and thus will help even in reducing (Continued)

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transportation of waste. The associated benefits are reduction of the demand for virgin acids and elimination of chemicals to neutralize waste acid and energy and cost savings associated with transportation and disposal. Some of the key features and associated benefits are as follows: Features

 Continuous recovery and recycling of spent acids  Around 80 per cent of spent acid can be recovered and reused  Reduction in power consumption  80 per cent reduction in treatment facilities required  Automatic operation  Low maintenance cost

Benefits

 Pollution reduction  Resource optimization  Energy saving  Reduction of around 75 per cent of treatment cost  Increased productivity with better quality  Recurring cost reduction

The company will be mainly targeting small- and medium-scale industries having a processing capacity of less than 200 tonnes per day. The units that would benefit from the introduction of this technology include one involved in processing finished steel plates, HR sheets and HR coils. Although there is widespread market in different parts of the country, Tronix proposes to start with the national capital region mainly because of greater concentration of steel pickling factories in the region. The marketing strategy of Tronix would focus on personal selling, direct mailing, making business calls to targeted customers and showcasing the process in trade fairs. The Tronix team is a unique team with well-balanced technical, marketing and financial expertise. As such, the team came together from their college days when three of them, Tankit, Kritik and Gaurav, were studying together in one of the prestigious institutions. All of them have gone through certain professional experiences after completing their studies. The team has won a number of business plan competitions in India and abroad. As such, during presentations before venture capitalists, while participating in business plan competitions, the team got a favourable response from some venture capitalists in funding the venture after full proof of the process and the test stage was over. The team has the good fortune of having two mentors. One of them is K. K. Dhaiya, who has more than 30 years of teaching and research experience and has given consulting services to a number of metal processing industries. The provisional application for patent has been jointly filed by Dhaiya and Tankit. The team has also been getting mentoring support from K. K. Agarwal, Tankit’s uncle, one of the industrialists involved in running his own company in the national capital region, which is working in the iron and steel industry. The team proposes to undertake all its testing and development along with him at his company. Tankit has done his BE in Mechanical Engineering from IIT Delhi and MBA from FMS, Delhi. After completing his education, he served for more than three years in a medium-sized steel company, where he got an idea to take further his business plan that he had conceived along with his other friends who were studying with him at IIT Delhi. He is highly innovative, which was evident from his winning a number of awards and prizes in different innovative competitions

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organized by prestigious organizations. His team won a few business plan competitions organized by reputed institutions such as IIT Mumbai, IIIT Allahabad, SRM University and Rice University. He will be the Chief Executive Officer and would hold 62 per cent of the equity stake in the company. Kritik will be the Chief Financial Officer. He did his B.E. in Metallurgy from IIT Delhi and thereafter pursued his CA. He has served as Finance Officer with a large engineering company located in Kota having its corporate office in New Delhi. His experience in managing financial matters, including fund-raising and accounting aspects would be highly valuable for the venture. Kritik has agreed to have 20 per cent equity stake in the company. Gaurav also did his B.E. in Mechanical Engineering from IIT Delhi and was placed with Tata Motors during his campus placements. The company, keeping in view his profile, had deployed him in the marketing department and had associated him directly with the Assistant Vice President Marketing, where he gained five years of experience in marketing. He was always eager to start his own venture. Tankit, CEO, asked him to join his team for the venture and proposed to give him 8 per cent share in the equity. Gaurav readily agreed to become part of the team. The remaining equity is proposed to be given to K. K. Agarwal, mentor for the venture, who has been closely associated with Tronix from its conception, when the founders were studying in IIT Delhi, continuing into the subsequent phase, when they were deliberating on the idea while being in employment or engaged in further studies. Risks associated with the venture are the emergence of more advanced technologies that are more cost-effective. There are also intellectual property right risks that are associated with the venture. Other promoters having more money power may copy the process and with a subtle difference provide solutions to the iron and steel industry. Promoters are aware that it is not worth pursuing legal hassles, especially in an area where technological solution to a problem may keep coming up quickly. It is likely to face strong opposition from acid manufacturing companies who see that demand from these companies is likely to reduce dramatically. It is also important to keep in mind the fact that steel re-rolling mills operate on a very thin margin and therefore may have certain resistance in the beginning to accept new changes which would come in the way of promoting sales. A capital expenditure to the tune of ` 1.5 crores is required to take care of the start-up machinery cost, other fixed assets, lease rentals for plot in the industrial estate and the initial shed construction cost. An initial operating expenditure to the tune of ` 2.5 lakhs per month for the first three years is the additional requirement. The initial investment is proposed to be inducted by way of equity contribution by the promoters. At a conservative sales estimate, it is expected that break-even would be achieved in the 15th month from the date of launching the business.  Questions  

1. What do you think is the weak link in a venture based on the information given? 2. Comment critically on the strengths and weaknesses of the team to convert this venture into reality. 3. If you, as an angel investor, have to assess the team strength, in what areas, if any, would you like it to get further strengthened to have confidence for funding?

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12

 LEARNING OBJECTIVES    To understand the relevance of different financial statements.  To learn about how to analyse and use financial statements for making business decisions.  To understand the relevance of developing clarity among promoters of the business regarding financial matters.  To learn about the difference between fund flow and cash flow, and their relevance in business.

 To learn about the tools and techniques to manage cash.  To know about and use the concepts of break-even analysis and inventory management.  To learn about and apply ratio analysis and valuation ratios in business decisions.

Dhirubhai Ambani, Founder, Reliance Industries Think big, think fast, think ahead. Ideas are no one’s monopoly. Our dreams have to be bigger. Our ambitions higher. Our commitment deeper. And our efforts greater. This is my dream for Reliance and for India. —Dhirubhai Ambani

Dhirajlal Hirachand Ambani, famously known as Dhirubhai Ambani, the Indian business tycoon and the Founder of Reliance Industries, was born on 28 December 1932 into a Gujarati family in Chorward, Junagadh District, Gujarat, India. He wanted to pursue a bachelor’s degree, but could not do so because of his father’s illness and went to Aden (now a part of Yemen) at the age of 17 and worked for A. Besse & Co. Ltd, the sole selling distributor of Shell products. In 1958, he returned to Mumbai and started his first company, Reliance Commercial Corporation, a commodity trading and export house. He had great ambition in life. His fellow workers at the petrol station in Aden, Yemen, said that he had dreamt of starting a company such as Burmah Shell. He was overenthusiastic and impatient about earning money as soon as possible to achieve great heights. He started ‘Majin’ in partnership with his second cousin, Champaklal Damani in 1957. It was a business involving importing polyester yarn and exporting spices. Ambani started his own business in 1965, after ending his partnership with Damani. He was known for his risk-taking ability and believed in building inventories, anticipating a price rise and making profits. His vision for Reliance was far

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beyond the imagination of other industrialists. In 1966, as a first step in Reliance’s highly successful strategy of backward integration, he started a textile mill in Naroda, Ahmedabad. In 1975, a technical team from the World Bank certified that the Reliance textile plant was ‘excellent by developed country standards’. The company has the distinction of having introduced a number of financial innovations in the Indian capital markets. Today, the Reliance Group has one of the largest families of shareholders in the world with an investment of more than ` 36,000 crore ($9 billion) in petroleum refining, petrochemicals, power generation, telecommunication services and a port terminal. The Reliance Group has attained its current status as India’s leading textiles–petroleum–petrochemicals–power–telecom player. His contributions to industrial growth were recognized across the globe, as evident when he became the first Indian to receive the Wharton School Dean’s Medal for having set an excellent example of leadership in June 1998; featured among ‘Power 50—the most powerful people in Asia’ in the Asia Week Magazine for three alternate years—1996, 1998 and 2000; was named the ‘Man of 20th Century’ by the FCCI (Federation of Indian Chambers of Commerce and Industry) and received the Lifetime Achievement Award by Economic Times in August 2001. Although he could not formally study further, he built up a great business empire to reckon with in the history of industrial growth in India due to his courage, vision, determination and skills.

 12.1  INTRODUCTION  The ultimate aim of a business plan lies in putting into financial numbers the inflow as well as the outflow of money that it will generate. Although it is rightly said that a good idea having a good opportunity with good market potential is expected to result in good financials, the degree of financial strength or weakness can be measured only through financial statements (Fig. 12.1). The financial plan gives the entrepreneur clarity about the viability of a business idea vis-à-vis other ideas, if any, in hand. This component of the business plan also gives the entrepreneur clarity as to whether the idea would be able to attract any investments at reasonable terms and conditions acceptable to the entrepreneur.

Good Idea

Good Opportunity

Good Market Potential

Good Financials

Degree of Financial Strengths and Weaknesses Can Be Measured Through Financial Statements

Figure 12.1 Relevance of Financial Statements

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Different Financial Statements

Profit and Loss Account

Balance Sheet

Fund Flow

Cash Flow

Figure 12.2 Different Financial Statements The entrepreneur needs to understand the financial situation of their business, to know what is happening and why, so as to reasonably estimate and predict what is going to happen, which would enable them to make the right decisions. This part of the business plan consists of four important financial statements, namely: profit and loss account, balance sheet, fund flow statement and cash flow statement, as well as an explanation about these statements (Fig. 12.2). These financial statements are very important for understanding business dynamics, for taking corrective actions on time and, more so, for pitching ideas before investors—venture capitalists, seed funders, angel funders or banks. The entrepreneurial team needs to be very clear about the financial model that would lead the start-up to understand what it would resemble after three to five years ahead in the process of executing the profitable model that the venture has. As such, it is very important to translate various assumptions into financial terms, called the ‘financial model’, which enables the founders to understand the interrelationships between the variables that can make or break a business. Actually, a start-up searches for a scalable business model and its expected financial outcomes that would lead an entrepreneur to understand what the business would resemble after three to five years and whether it makes business sense to take a calculated risk from a long-term perspective. As a first-generation entrepreneur, one tests various hypotheses and assumptions about the business model in terms of answering vital questions such as Who are the customers? What is the distribution channel? How to price and position the product? How to create end-user demand? Who are our competitors? What have they to offer the customers? Where/how do we build the product? and How do we finance the company? The answers to these questions get built in the assumptions that are made to work out the financials of the venture. The majority of start-ups fail as a result of weak, inadequate or lack of financial planning and control. While undertaking financial planning, one needs to carefully review all the required start-up expenses— fixed and variable—and estimate the revenue likely to be generated, so as to arrive at profit margins, which matters the most in the financial strength of the venture (Fig. 12.3). Usually, start-up entrepreneurs have a tendency to be over-optimistic about their estimate of the financial performance of a business. However, in reality, there are always unforeseen expenses as also lack of or a shortfall in expected inflows that causes the derailment of a business. Further, at the initial phase of a business, the entrepreneur needs to manage their funds very carefully. It is always necessary to invest in absolutely necessary expenses in the beginning phase of a venture. This applies particularly to expenses such as

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Fixed Cost

481

Revenue Generation

Variable Cost

Profit Margin

Figure 12.3 Financial Model—Key to Business Success furnishings, payments to suppliers, overhead expenses on owning a vehicle and other such expenses. Investment on computers needs to be undertaken very judiciously, as such investment becomes obsolete in a short period of time. So, the entrepreneur should acquire only those items that would serve the business purpose at least for two to three years and which can be subsequently upgraded. The entrepreneur should emphasize on conserving capital, as this comes handy to manage unforeseen happenings, leading to periods of low revenue.

12.2  ISSUES TO BE SORTED IN ADVANCE For the smooth running of a business, it is important that clarity regarding financial matters is developed right from the beginning among the promoters of the business. This helps a lot in handling issues among the promoters smoothly as the business progresses. A lack of understanding about certain vital issues can lead to dissention among the promoters at a later stage and may jeopardize the growth of the business. Some of the vital matters on which a clear business agreement should be reached among the founders and subsequent promoters, as and when inducted, are given next (Fig. 12.4):  The mechanism and quantum of distribution of profit or loss arising out of the business.  Authority and responsibility of different founders as regards financial matters.  Management compensation to be provided to promoters for their whole-time involvement, which, if required because of pressing financial position, may be very small to take care of pressing household requirements till such time as the venture starts earning profits.  What would be the implications in the business if one of the promoters leaves or, for that matter, dies?  Will the company make any payments towards interest on unsecured loans inducted by the promoters in the business? If so, does it require any permission from the associated investors as per their terms or conditions stipulated for extending assistance?  Mechanism to reconcile disputes, if any, that may arise in future.  How can the decision to sell, if at all it arises, be made and what would be its implications as far as promoters are concerned?

While setting ground rules for resolving the issues just mentioned, as and when they arise, each promoter has to be clear about how much and what type of equity they would like to own in the venture. As a promoter of a business having small or big stake by way of equity, each promoter needs to be very clear about having sufficient liquidity in the form of cash, other financial assets or credit to meet the personal

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  Entrepreneurship Mechanism and Quantum of Distribution of Profit or Losses Authority and Responsibility About Financial Matters Vital Matters on Which Clear Business Agreement Amongst Promoters Is a Must

Management Compensation to Promoters Business Implications in the Eventuality of a Promoter Leaving or Dying Interest on Unsecured Loans by Promoters, If Any

Mechanism to Reconcile Disputes, If Any

Sale of Business and Their Implications to Promoters

Figure 12.4 Issues to Be Sorted Out Among Promoters and business requirements committed to by them. What are the likely implications of the business in one’s personal income growth and associated tax implications in the country of operations or other countries? Coupled with the financial matters just mentioned that pertain to each promoter, the business should be very clear in terms of managing intellectual-property (IP)-related issues, particularly in hightechnology and knowledge-driven ventures. This should encompass the issues related to the financial management of IP. The venture team should either have sufficient knowledge in the area or take the help of an attorney having specialized knowledge and skills who could help them in protecting IP in both India and other countries wherein the venture expects its market.

12.3  MEANING AND OBJECTIVES OF FINANCIAL STATEMENT A financial statement consolidates all the information related to a business in its different segments such as production, marketing, distribution, personnel and other administrative sections in financial terms. It quantifies all the assumptions and historical information concerning business operations (McMahon and Davies 1994). It is important to remember that an entrepreneur makes certain assumptions to arrive at the future financial operations of the company. It is based on these assumptions that future projections are worked out. Without making these assumptions, the numbers arrived at will be of no use. The validity of financial projections depends a lot on how realistically the assumptions have been made. As such, the strength of a financial plan depends a lot on the ability of an entrepreneur to make such assumptions that will unfold in reality with a greater degree of certainty. A financial statement is a written report of the financial position and condition of a business entity. The fundamental step of developing a financial management system for having effective control on the working of a business entity lies in developing financial statements. To proactively manage a business,

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Financial Condition/Position Indicates Present and Expected Financial Health of a Venture Tool Used for Financial Reporting to Different Stakeholders

Figure 12.5 Purpose of Financial Statements an entrepreneur should put in place a system that generates financial statements on a monthly basis; if need be, in the beginning phase of the venture, which is the most challenging one, financial statements could be prepared on a fortnightly basis. Financial statements are written reports that basically provide a gist of the venture’s accounting data and are used to understand the financial condition of a venture. Some of the key purposes of financial statements are as follows (Fig. 12.5):  A financial statement is a written document that provides a gist of the venture’s accounting data and indicates the venture’s financial condition/position.  It indicates the present and expected financial health of the venture.  It is a tool used for financial reporting of the business to different stakeholders.

These statements are not only required by the entrepreneur to review the progress of a venture but also used by different stakeholders, including investors, for granting loans or taking equity stake in the venture. The key objectives for preparing financial statements are to provide information in financial terms of all physical and financial activities for undertaking a review of the entity’s financial performance and position to enable them to make objective and rational economic decisions. These are primarily meant for assessing the financial position and performance vis-à-vis the competitors and to assess the cash flow of the enterprise that acts as the life blood of a venture.

12.3.1  Users of Financial Statements There are a large number of stakeholders for any venture. Each looks at the venture from their own perspective and goals. At times, there may be conflicting objectives and, therefore, figures or financial position get viewed differently by each stakeholder. A company’s stakeholders include shareholders, employees, trade unions, suppliers, government agencies, banks, venture capitalists, angel funders, customers and, above all, the community at large. Thus, financial statements are concise reports that reveal the way a company utilizes the funds that it has got from lenders and shareholders in fulfilling the goal set before it for the creation of value for

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Status of Assets— What the Company Owns Financial Position of a Company

Equal

Status of Liabilities— What the Company Owes to Others and Owners’ Equity

Quality and Quantity of Assets and Liabilities

Figure 12.6 Financial Position of a Company the shareholders and other stakeholders. It clearly depicts the present financial position of the company and where it is heading for in times to come. The financial position of a company mainly depicts relationships in terms of the status of assets—what the company owns, liabilities—what the company owes others and owners’ equity (Fig. 12.6). The three main financial statements are a balance sheet, which shows the company’s assets, liabilities and net worth as on a given date; profit and loss account, which shows the way the net income of a company is arrived at over a given period of time, say a month, quarter, half year or a year; and a cash flow statement, which shows the inflow and outflow of cash that happens in the process of the company undertaking various activities during a stated period of time.

12.4  ASSUMPTIONS UNDERLYING PREPARATION OF FINANCIAL  STATEMENTS Financial statements serve an important purpose in understanding the financial health of a business entity. What matters the most for their effectiveness is that these statements should have the following characteristics:      

simplicity understandability reliability comparability relevance true and fair representation of facts

For fulfilment of the characteristics just mentioned, what matters most is the assumptions that are used while preparing financial statements. These assumptions give meaning to financial statements.

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International Financial Reporting Standards (IFRS) are considered a ‘principles-based’ set of standards in that they establish broad rules as well as dictate-specific treatments. International Financial Reporting Standards comprise1  IFRS—standards issued after 2001  International Accounting Standards (IAS)—standards issued before 2001  interpretations originated from the International Financial Reporting Interpretations Committee (IFRIC)—issued after 2001  Standing Interpretations Committee (SIC)—issued before 2001  framework for the Preparation and Presentation of Financial Statements (1989)

According to the framework of IAS/IFRS, the underlying assumptions for the preparation of financial statements are as follows (Fig. 12.7):  Accrual Basis—Under the accrual basis of accounting, financial statements are prepared by considering the effects of transactions and other events as and when they occur and not when the cash is received or paid. Thus, the transactions are recorded in the books of accounts when they occur and not when the cash is received or paid. It is also said to be the opposite of cash basis of accounting. Under this method, tax payers include items when they are earned and claim deductions when expenses are incurred.  Going Concern Basis—Under going concern basis, financial statements are prepared by assuming that the enterprise will continue in operation for the foreseeable future, and the enterprise has neither the intention nor the need to liquidate or materially curtail the scale of its operations.2  Cash Basis—Under cash basis, an organization prepares all its financial statements by recognizing revenue and expenditure on the actual cash inflows and outflows basis. Thus, under cash basis, tax payers include income when it is received, and claim deductions when expenses are paid.

Accrual Basis Going Concern Basis

Cash Basis

Framework of IAS/IFRS Provides for Underlying Assumptions

Figure 12.7 Underlying Assumptions for Preparation of Financial Statements

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12.5  BALANCE SHEET—CONCEPTS AND UNDERSTANDING A balance sheet presents a summary of a company’s financial position on a given date, say 31 March or 31 December (Fig. 12.8). It presents the picture of what the organization owns (assets) and what it owes (liabilities) others. A balance sheet is often said to be a ‘snapshot’ of the company’s financial position on a given date. It is the only statement that refers to financial position at a single point in time, instead of over a period of time.

12.5.1  Assets Assets are items having economic value that are owned by or belong to an individual or business entity, particularly those items that could be productively used to convert into cash. To determine the value of an asset, the entrepreneur should clearly identify resources, compute the value of those resources and establish the degree of ownership in the resource. Examples of assets are cash and bank balance, share and debentures, accounts receivable or debtors, inventory, office equipment, real estate and vehicles. In the balance sheet, the total assets would be equal to the total liabilities constituting common stocks, preferred stocks and retained earnings. From an accounting point of view, assets are classified into current assets such as cash and other liquid items; long-term assets such as real estate, plant and equipment; prepaid and deferred assets such as expenditures incurred for future costs such as insurance, rent and interest and intangible assets such as trademarks, patents, copyrights and goodwill (Fig. 12.9). Current assets are those that are expected to be converted into cash within one year or less, whereas fixed assets are those that are utilized over a period of time, that being more than a year. These assets provide benefits for more than a year. Examples of fixed assets are land, buildings, and plant and equipment. Although intangible assets do not have a physical existence, they possess a value such as goodwill and brand. Liabilities are legal debts or obligations that a company owes others in the process of undertaking business operations. Liabilities are paid back within a year or over years, depending on their nature and the type of obligations, through the transfer of economic benefits generated in the process of having undertaken an economic activity by way of money, goods or services. Examples of liabilities are loans, accounts payable, mortgages, deferred revenues and accrued expenses. Liabilities are a vital component of doing a business effectively, as they are used to finance operations and pay for the expansion of a business.

• Current Assets Assets Balance Sheet— Snapshot on a Given Date Liabilities

• Fixed Assets

• Current Liabilities • Long-term Liabilities and Owners’ Equity

Figure 12.8 Broad Classification of Assets and Liabilities

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• Current Assets–Cash, Raw Materials, Work in Progress, Finished Goods etc. • Fixed Assets–Land, Building, Plant and Machinery etc.

Assets

• Intangible Assets–Patents, Good Will, Brand Equity etc. Total Assets − Outside Liabilities = Owners’ Equity

• Current Liabilities–Accounts Payable, Deferred Revenues, Taxes Payable, Short Term Loans etc.

Liabilities

• Long-term Liabilities and Owners’ Equity–Term Loans, Bonds, Share Capital, Free Reserves etc.

Figure 12.9 Owners’ Equity and Examples of Assets and Liabilities Liabilities also help a lot in making business transactions more efficient. Owners’ equity is the difference between a company’s total assets and other liabilities. It is the claim that owners of the company have on the assets of the company. In case a company incurs losses, its owners’ equity will fall, whereas if it keeps making profits, which get deployed back in the company, the owners’ equity will increase. Current liabilities are debts payable within one year, whereas long-term liabilities are debts payable over a longer period. Liabilities can be classified into two broad categories, namely current liabilities, which are payable within one year, and long-term liabilities and owner’s equity/share capital, which are available for a longer duration, that is, more than one year. The ‘contingent liabilities’, are the one, wherein the possibility of an obligation to a certain amount is conditional and depends on future events. For example, a company having filed a lawsuit against a demand made by income tax authorities is termed ‘contingent’, as the payment obligation, if any, would depend on the outcome of the lawsuit filed by the company.

Example Table 12.1 Balance Sheet Liabilities

` in Lakhs

Current liabilities 100

Accounts payable

150

Long-term liabilities

Cash

200

Accounts receivable

300

Stock

100

Fixed assets 2,000

Shareholders’ equity Equity shares

` in Lakhs

Current assets

Short-term loans

Bonds

Assets

Plant

1,500

Machinery

2,150

2,000 4,250

4,250

(Continued)

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 It  may  be  observed  that  the  total  assets  amounting  to  ` 4,250  lakhs  equal  the  total  l iabilities; therefore, it is called a ‘balance sheet’ (Table 12.1). The company’s current liabilities   amounting to ` 250 lakhs constitute around 5.88 per cent of the total liabilities, thus implying  that the company’s operations are managed more by depending on long-term liabilities. Of the  long-term liabilities, the money raised through bonds amounting to ` 2,000 lakhs is equal to the  shareholders’ equity. The current assets of the company amounting to ` 600 lakhs constitute  14.11 per cent of the total assets, whereas the remaining 85.89 per cent of the assets of the  company  are  tied  up  in  fi xed  assets.  This  also  reveals  that  a  part  of  the  company’s  current  assets are funded through long-term liabilities, whereas all the fi xed assets are funded through  long-term  liabilities.  A  mismatch  between  short-term  sources  and  short-term  uses  and  vice  versa could cause problems in cash fl ow management.   In  order  to  understand  the  different  components  of  a  balance  sheet,  let  us  consider  an  example  of  a  balance  sheet  of  Hindustan  Unilever  Ltd  year  ended  31  March  2009  and  31  March  2010,  as  given  in   Table  12.2.  The  sources  of  the  funds  of  the  company  stood  at  ` 2,483 crores at the end of 31 March 2009, which increased to ` 2,584 crores at the end of  31 March 2010, that is, an increase by 4.06 per cent in a one-year period. 

Table 12.2 Balance Sheet of Hindustan Unilever Ltd. ` in Crores

Hindustan Unilever Ltd Year

March 2010

March 2009

Sources of funds Share capital

218

218

Reserves total

2,366

1,844

2,584

2,062

Secured loans

0

145

Unsecured loans

0

277

0

422

2,584

2,483

3,582

2,882

1,420

1,275

Total shareholders’ funds

Total debt Total liabilities Application of funds Gross block Less: accumulated depreciation Less: impairment of assets Net block Capital work in progress Investments Current assets, loans and advances Inventories

0

0

2,162

1,607

274

472

1,264

333

2,180

2,529

Sundry debtors

678

537

Cash and bank

1,892

1,777

617

758

5,368

5,601

Loans and advances Total current assets

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` in Crores

Hindustan Unilever Ltd Year

March 2010

March 2009

5,292

4,256

1,442

1,528

6,733 −1,365

5,784 −183

Deferred tax assets

451

439

Deferred tax liability

202

184

Net deferred tax

249

255

2,584

2,484

468

474

Less: current liabilities and provisions Current liabilities Provisions Total current liabilities Net current assets

Total assets Contingent liabilities

489

Source: Capitaline Plus, Databases http://plus.capitaline.com/user/framepage.asp?id=1

Share Capital Unilever is a public limited company that has sold common stocks to its promoters and non-promoters. ComEon stocks provide an ownership in the company that gives a voting right to the holders of equity in contributing to vital decisions pertaining to the company such as issuance of further shareholding, appointment of directors and raising loans. Of the total number of stocks issued by the company, 52 per cent are owned by foreign promoters, institutions have subscribed to 30.2 per cent of the stocks and the remaining stocks are subscribed to by the public. The term ‘par value of shares’ has a legal implication, as it determines the legal capital of a company. For legal reasons, the par value of stocks is maintained in the accounting records, which do not have any direct relationship with the market value of stock. The capital of the company gets eaten away in case the company incurs losses year after year. Retained Earnings or Reserves The profits of the company that are not distributed to the shareholders and are ploughed back into the company are called ‘retained earnings’. This takes the shape of different types of reserves and mainly constitutes the free reserves that belong to the shareholders of the company. Thus, retained earnings are basically the accumulated net profits of the company generated over the life of the business till the date of the balance sheet. Unilever’s reserves increased from ` 1,844 crores as on 31 March 2009 to ` 2,365 crores as on 31 March 2010, thus implying an increase by 28.25 per cent in a one-year period. Thus, this amount increases every year by the quantum of net profits retained by the company and will be eaten away by the amount of losses incurred in a year that are shown under the accumulated losses on the assets side. Current Liabilities Current liabilities are what a company owes others and will become payable within a year or the operating cycle. Some of the common current liabilities are Accounts Payable, Note Payable, Taxes Payable and Loan Payable. Accounts payable arise on account of a payment towards goods or raw materials purchased for business purposes. For example, if a company purchases steel required for the business on the basis of net 20 days, then the bill for these 20 days will constitute accounts payable. Every business would like to extend this period within normal limits without getting adversely affected by time, quality and, at reasonable prices, the supply of raw materials. A note payable

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constitutes a promissory note given as a tangible acknowledgment for the claim made by a supplier, or a note given in recognition of acquisition of funds from the bank or other sources. Taxes payable are liabilities that a company owes the government—central, state or local. For a given period, the taxes that are due and yet to be paid would constitute the taxes payable in the balance sheet. A loan payable arises as a result of a short-term or that component of a long-term borrowing that is payable within the current year. For example, if a company has borrowed an amount of ` 5 crores in the month of June that is due for repayment in December of the same year, then it would constitute a current liability. Similarly, if a loan amounting to ` 5 crores is borrowed in the month of June 2010 that is repayable in five yearly equal instalments, then ` 1 crore that would fall due in June 2011 will constitute a current liability. In the case of Hindustan Unilever Ltd, current liabilities increased from ` 5,784 crores as on 31 March 2009 to ` 6,733 crores as on 31 March 2010, thus resulting in an increase by 16.40 per cent within a year. Long-term Liabilities Long-term liabilities are those that would fall due in more than a year and, therefore, would not lead to any obligation in the current operating cycle. These mostly constitute secured loans from banks and other sources and unsecured loans from promoters, friends or even, at times, banks. Term loans mainly taken for fixed assets are long-term liabilities. In the current case, secured loans were to the tune of ` 145 crores as on 31 March 2009, which were fully repaid in the next year, thus resulting in outstanding secured loans being zero as on 31 March 2010. Thus, Unilever has not raised any further secured loans and has repaid all outstanding amounts of secured loans during 2009–10. Current Assets Current assets are cash or liquid assets that can be converted into cash within a period of one year or used up during a normal operating cycle. Common current assets are inventories, sundry debtors, cash and bank balances, loans and advances recoverable within one year. Inventories constitute the major portion of current assets—raw materials, work in progress and finished goods inventory in manufacturing businesses. Inventory holding is required for any manufacturing business; however, it should not be excessive and cause a drain on the productive resources of the venture in terms of cost of inventory, storing cost, insurance and security cost. Cost of goods sold is arrived at by valuation of inventory as given next: Beginning raw materials + Purchase of raw materials − Ending raw materials = Raw materials used Beginning work in progress + Raw materials used + Direct labour + Indirect labour and other manufacturing overhead − Ending work in progress = Cost of goods manufactured Beginning FG + Cost of goods manufactured − Ending FG = Cost of goods sold Since inventories are a major cost component, an entrepreneur needs to systematically undertake inventory analysis and analyse its implications in the cost and performance of the company. Inventories in the case of Hindustan Unilever decreased from ` 2,529 crores as on 31 March 2009 to ` 2,180 crores as on 31 March 2010, thus implying a fall by around 13.79 per cent in a period of one year. This also implies that for an enhanced activity level, as reflected in the increased sales during the year, the company managed to reduce the inventory level. ‘Cash’ refers to money in hand, cheques in hand and bank balances. This is the most liquid form of current assets available with the company to manage day-to-day business transactions. Minimum cash in hand is always required to manage the day-to-day transactions of the business, including certain commitments that arise at fixed intervals such as salary and payments. A business needs to

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keep optimum cash, so as to ensure that all pressing payments related to the business are made on time. Excessive cash in hand is as good as dead assets; therefore, a company should not keep more than the required amount of cash in hand. Sundry Debtors/Accounts Receivable These constitute the claim of the business against customers to whom goods have been sold but from whom payment is yet to be received. This mainly arises for entrepreneurs who sell their goods/services on credit or with a clear understanding that payments would be received by the end of the month. Further, while computing the outstanding sundry debtors, the entrepreneur should also write off the debtors that are not likely to be realized, as the period for payment has stretched beyond a limit. For example, sundry debtors in the case of Hindustan Unilever have increased from ` 537 crores as on 31 March 2009 to ` 678 crores as on 31 March 2010, that is, by 26.25 per cent. If the management feels, based on facts and past data analysis, that 5 per cent of the debtors as on 31 March 2010, which have been continuing for the last three years, would not be realized, then they should write off the debtors to the tune of ` 33.9 crores. Loans and Advances The amount that is given to others in the form of loans or advances constitutes current assets, if these are recoverable within one year. Some examples of loans and advances are advance and loan to a subsidiary company, advance and loan to a partnership firm, bill of exchange/ bill receivables, advance expenses paid and advances given to employees. In the case of Hindustan Unilever Ltd, loans and advances have reduced from ` 758 crores as on 31 March 2009 to ` 617 crores as on 31 March 2010. Deferred Tax Assets or Liabilities Deferred taxes arise on a company’s balance sheet as a result of temporary differences between the company’s accounting and tax carrying values, the expected and enacted income tax rate and the estimated taxes payable for the current year. This liability or asset ultimately may or may not be realized during any given year, which makes the deferred status appropriate. Deferred tax liabilities generally arise when tax relief is provided in advance of an accounting expense, or income is accrued but not taxed until received. Examples of such situations are a company claiming tax depreciation at an accelerated rate relative to the accounting depreciation or a company making pension contributions for which tax relief is provided on a paid basis, whereas accounting entries are determined in accordance with actuarial valuations. Deferred tax assets generally arise when tax relief is provided after an expense is deducted for accounting purposes. For example, a company may accrue an accounting expense in relation to a provision such as bad debts, but tax relief may not be obtained until the provision is utilized.3 Fundamentally, a balance sheet always balances the assets and liabilities (Emigh 1999). Any happening on one side of the balance sheet, that is, the assets or liabilities get offset by something correspondingly happening on the other side. This is the reason that the balance sheet is shown by the following equation: Total assets = Outside liabilities + Owners’ equity For example, if a company takes a bank loan of ` 5 crores that enters into a long-term liability, if it is payable in more than a year, this would result in an entry under cash and a bank balance to the tune of ` 5 crores to balance it out. This money, if used for buying machinery, would result in gross fixed assets going up by ` 5 crores and cash getting reduced by the same amount. Similarly, if a company issues 5 lakh shares of the face value of ` 10 each, then the owners’ equity would go up by ` 500 lakhs and, correspondingly, the cash and bank balance will increase on the assets side by ` 500 lakhs to balance out the transaction. It is important to understand that in accounting terms, ‘debit’ and ‘credit’ relate to an

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increase and decrease in assets, liabilities and owners’ equity, which, for a specific type of transaction, can be shown as under: Transaction Involving Increase in Amount

Transaction Involving Decrease in Amount

Asset

Debit

Credit

Liability

Credit

Debit

Owners’ equity

Credit

Debit

Classification in Balance Sheet

12.6  PROFIT AND LOSS ACCOUNT/INCOME STATEMENT The profit and loss or income statement of a company provides a financial summary of a company’s operating results for a specified time period, say 15 days, a month, a quarter, six months or a year. It basically shows whether income has been more or less than expenses. This statement also provides information on the bottom line of the company’s operations in terms of arriving at the net profit or loss that the company earns or incurs during a particular time period, that is, income minus all expenses. The purpose of the profit and loss account as shown to the managers and investors is given next:  They see whether the company has made profit or loss over a given time period.  Understand the mechanism through which profit and loss arose, that is, to categorize costs between ‘cost of sales’ and operating costs.

The company derives revenue from the sale of goods and services, whereas expenses are incurred on creating goods and services by way of the cost of different resources required to create goods and services and market them to the end users. These costs would include cost of raw materials, salaries to employees, and promotional and marketing expenses. The first step in developing a profit and loss account is to prepare operating and capital budgets for the venture. The preparation of operating budget requires an estimation of the sales forecast on a monthly, quarterly, half yearly and yearly basis. The sales forecast should be derived based on realistic assumptions, based on an outcome of marketing research. Based on sales forecast, which gives the estimates for revenue generation, the entrepreneur needs to estimate the cost of sales. This would include all the costs to be incurred, including inventory holding costs towards raw materials, work in progress and finished goods inventory on account of working capital requirements. This would help in keeping track of the inventory required to take care of the fluctuations in demand, so that goods are supplied to customers as per their time requirements. This budget would take care of seasonal demand, if any, of the finished goods from the market. Operating cost would include all operating expenses to be incurred towards fixed expenses such as rent, utilities, salaries, interest, depreciation and insurance, which are required to be incurred irrespective of production. To this, one needs to add variable expenses that vary per unit of production such as raw materials, direct labour and other associated costs. The entrepreneur should anticipate these expenses based on their own experience, cost details of competitors and actual details obtained from the market to arrive at realistic cost assumptions. For example, finished goods production requirements for production, planning and control on a monthto-month basis have to be arrived at based on the projected sales on a monthly basis that can be aggregated to quarterly and yearly figures. The inventory that a company would like to hold is to be added to the projected sales, and the earlier available inventory is to be subtracted to arrive at the required production level.

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Sales Revenue (Price/Unit × Quantity)

−

Expenses (Fixed Cost + Variable Cost/Unit × Quantity)

=

493

Net Income or Profit and Loss

Figure 12.10 Profit and Loss Account Revenue is the gross revenue that a business entity makes during a particular period. It mainly depends on the sales turnover from the business. From the day a company’s goods get delivered, the company books the sales; however, realization may take some time, at times depending on the credit period and at times, the sales to some customers may not get realized, as they are not creditworthy. Expenses are the costs incurred in producing goods and services. This includes all fixed and variable expenses incurred, including promotional expenditure. It is important to remember that some expenses may have to be paid later, depending on the credit period that an entrepreneur gets from their suppliers. Net income is the difference between sales revenue and expenses incurred during a particular period (Fig. 12.10). Thus, the excess of revenue over all the expenses, including taxes, results in net profit, whereas the excess of all costs over the revenue results in net losses. Let us consider an estimated profit and loss account for XYZ Ltd, as given in Table 12.3, for a 12-month period between April 2009 and March 2010. It can be observed from the monthly pro forma profit and loss account that the company’s sales has increased by 10 per cent each month between April 2009 and July 2009. Thereafter, it declined to ` 115 lakhs in August and again further increased to ` 120 lakhs in September 2009 before becoming stabilized at ` 100 lakhs per month between October 2009 and March 2010 (Table 12.3). This may indicate some sort of seasonal nature of the industry in which sales prospects turn out to be best between April and July and more or less remain subdued and stagnant between October and March. The cost of sales, irrespective of the level of turnover, remains same at 60 per cent of the sales. Thus, the gross profit margin remains constant at 40 per cent. Among the important operating expenses, selling expenses constitute 8 per cent of the sales, and advertising expenses are around 3 per cent of the selling expenses. Salaries and wages are an important component of operating expenses that work out to be 15 per cent of the sales every month. Rental expenses remain constant at ` 5 lakhs per month, irrespective of the sales or production. The expenses on office supplies, although a small component of operational cost, however, do not have any fixed pattern, as they are ` 1 lakh between April and June when the sales is going up, which increases to ` 1.2 lakhs per month between July and September, and further increases to ` 1.4 lakhs per month between October 2009 and March 2010, when the sales remain stagnant. One may have to identify the reason for this increase when sales remain stagnant at ` 100 lakhs per month. One of

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40.0

Gross profit

4.0

2.8

0.8

1.9

Operating profit

Taxes at 30%

Net profit

4.0

37.2

3.0

Interest

Depreciation

3.0

0.2

Miscellaneous expenses

0.5

3.1

1.3

4.4

39.6

0.2

0.3

0.5

0.3

Utilities

5.0 1.0

5.0

1.0

Rent

Office supplies

Insurance

0.3 16.5

0.2

15.0

Advertising

Salaries and wages

44.0

66.0

8.8

Total operating expenses

June

4.4

1.9

6.3

42.1

4.0

3.0

0.2

0.3

0.5

1.0

5.0

18.2

0.3

9.7

48.4

72.6

110.0 121.0

May

8.0

Selling expenses

Operating expenses

60.0

100.0

April

4.9

2.1

7.0

46.2

4.0

4.0

0.2

0.4

0.5

1.2

5.0

20.0

0.3

10.6

53.2

79.9

133.1

July

2.8

1.2

4.0

42.0

4.0

4.0

0.2

0.4

0.5

1.2

5.0

17.3

0.3

9.2

46.0

69.0

115.0

3.2

1.4

4.6

43.4

4.0

4.0

0.2

0.4

0.7

1.2

5.0

18.0

0.3

9.6

48.0

72.0

120.0

0.7

0.3

1.0

39.0

4.0

4.0

0.2

0.5

0.7

1.4

5.0

15.0

0.2

8.0

40.0

60.0

100.0

August September October

0.7

0.3

1.0

39.0

4.0

4.0

0.2

0.5

0.7

1.4

5.0

15.0

0.2

8.0

40.0

60.0

100.0

November

0.7

0.3

1.0

39.0

4.0

4.0

0.2

0.5

0.7

1.4

5.0

15.0

0.2

8.0

40.0

60.0

100.0

December

0.7

0.3

1.0

39.0

4.0

4.0

0.2

0.5

0.7

1.4

5.0

15.0

0.2

8.0

40.0

60.0

100.0

0.7

0.3

1.0

39.0

4.0

4.0

0.2

0.5

0.7

1.4

5.0

15.0

0.2

8.0

40.0

60.0

100.0

January February

0.7

0.3

1.0

39.0

4.0

4.0

0.2

0.5

0.7

1.4

5.0

15.0

0.2

8.0

40.0

60.0

100.0

March

XYZ Ltd Pro Forma Profit and Loss Account from April 2009 to March 2010 (` in Lakhs)

Less cost of sales

Sales

Table 12.3

Insight from Financial Statements    

495

Table 12.4 XYZ Ltd Pro Forma Profit and Loss Account 2009–10 to 2011–12 ` in Lakhs

Sales Less cost of sales Gross profit Operating expenses Selling expenses Advertising Salaries and wages Rent Office supplies Utilities Insurance Miscellaneous expenses Interest Depreciation Total operating expenses Operating profit Taxes at 30% Net profit

2009–10

% Sales

2010–11

% Sales

2011–12

% Sales

1,299.1

100

1,429

100

1,643.4

100

779.5 519.6

60 40

857.4 571.6

60 40

986 657.3

60 40

103.9 3.1 194.9 60 15 7.4 5.1

8 0.2 15 4.6 1.2 0.6 0.4

114.3 3.4 214.4 60 16 8.1 5.6

8 0.2 15 4.2 1.1 0.6 0.4

115.3 3.4 246.5 60 18 9.4 6.5

7 0.2 15 3.7 1.1 0.6 0.4

2.4 45 48

0.2 3.5 3.7

2.6 45 52.8

0.2 3.1 3.7

3 50 60.7

0.2 3 3.7

484.8 34.8 10.4 24.4

37.3 2.7 0.8 1.9

522.2 49.4 14.8 34.6

36.5 3.5 1.1 2.4

572.8 84.5 25.4 59.1

34.9 5.1 1.5 3.6

the reasons could be that although it is a low cost compared with the total cost, it may be available at a relatively cheaper rate during off-season for the industry under consideration. The expenses on utilities, although a very small proportion of total cost, do not follow a specific pattern, as it was 0.5 lakhs per month between April and August, which has increased to 0.7 lakhs per month between September 2009 and March 2010. The other vital components of cost being interest expenses remained same at ` 3 lakhs between April and June 2009, and increased thereafter to ` 4 lakhs per month between July 2009 and March 2010. Depreciation expenses have worked out to be constant at ` 4 lakhs per month throughout, thus implying the total depreciation expenses as being staggered equally throughout during each month. By subtracting the total operating expenses from the gross profit earned, operating profit is arrived at. Operating profit has gone up from ` 37.2 lakhs in April 2009 to ` 46.2 lakhs in July 2009 and thereafter declined to ` 42 lakhs in August 2009 and to ` 43.4 lakhs in September 2009 before getting stabilized at ` 39 lakhs per month. To arrive at net profit, 30 per cent as the tax rate of operating profits is deducted from the operating profit. It can be observed from the pro forma profit and loss account just given that XYZ Ltd sales has grown by 10 per cent in 2010–11 as compared with 2009–10 and is expected to grow by 15 per cent in 2011–12 as compared with 2010–11 (Table 12.4). The proportion of various expenses as a percentage

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of sales reveals that major cost is incurred on account of the cost of sales, which works out to be 60 per cent of sales in 2009–10 and remains the same in subsequent years. Other major expenses are on account of salaries and wages being 1 per cent, selling expenses being 8 per cent of sales and rent being 4.6 per cent of sales followed by depreciation expenses at 3.7 per cent of sales and interest being 3.5 per cent of sales in 2009–10. Thus, these items constitute around 94.8 per cent of cost to selling expenses in 2009–10, which constitute around 97.4 per cent of the total cost. Thus, to manage cost, XYZ Ltd needs to focus its efforts in curtailing important cost items that can contribute much more to improve profits and profitability rather than focusing its efforts on insignificant cost items such as advertising, office supplies, utilities, insurance and miscellaneous expenses. However, over the years, XYZ Ltd’s operating profits are likely to increase as a percentage of sales from 2.7 per cent in 2009–10 to 5.1 per cent in 2011–12. This would mainly happen on account of increased sales with which the proportion of expenses incurred on selling, rent and interest would have fallen. Thus, scalability of a venture leads to cost cutting and thereby improvement in the profit and profitability level. For different ventures, different cost items and their importance differ a lot. For example, manufacturing companies, consumer durables, Web-based businesses, services in hospitality and hospital industry will have a wide variation in different cost components. The entrepreneur needs to gauge crucial cost components and control these costs to improve profits and profitability. Thus, for increasing profits, the entrepreneur should continuously endeavour to reduce the cost of vital items that constitute major costs. This requires a planned, systematic and organized effort on the part of the entrepreneur. This requires maintenance of a proper accounting system to make timely decisions to reduce costs. It is important to realize that cost cutting is not a unilateral exercise that cuts cost of any and all expenses as per an entrepreneur’s wish. It is not cost cutting that pays but the cost management that pays the benefit in terms of improving profit. The entrepreneur, similar to a doctor, needs to understand the nature of expenses and their interrelationships with sales, inventories, cost of goods sold, gross profits and net profits. Further, the entrepreneur can realize better results by efficient use of the expenses incurred, in terms of increasing the average sales per customer, by effectively using the advertising budget to increase sales volume, which would result in improvement in the internal methods and procedures used.

Examples Enhanced Sales—Does It Lead to Prosperity of a Business?  Generally,  entrepreneurs  think  that  increased  sales  would  automatically  result  in  enhanced  profit.  However, in reality, it may not always be so. What matters the most is sales enhancement along with  proper cost reduction per unit of sales. A young entrepreneur, Alok, learnt this through a tedious and  difficult path. Alok used to take great pride in stocking branded, stylish, well-assorted and costly lines  of merchandise. Each year, sales volume was fast increasing. This increase in sales was mainly on  account of good merchandise, which, Alok did realize, led to a steady rise in expenses. However,  he only realized the exact implications of enhanced sales on cost escalation when he approached a  banker for a bank loan to take care of his increasing sales turnover. A detailed discussion with Abhay,  a seasoned banker, on the financial statements of the company led Abhay to advise Alok to check  his expenses. At first, Alok was not prepared to accept Abhay’s advice. However, Abhay’s statement  that ‘A large and increasing sales volume often creates the appearance of prosperity while behindthe-scene expenses are eating up the profit’ led Alok to ponder over the matter, particularly as Abhay  quickly after analyzing the financial statements informed Alok that his proposal was not bankable, that  is, it was not worthy for extending bank finance.

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Nokia Profit Rises on Smartphone Sales and Cost-cutting Nokia, the world’s largest maker of mobile phones, said that its profit rose 60 per cent in the fourth  quarter ended December 2010, as cost-cutting measures and an increasing share of the smart phone  market had helped offset a decline in revenue. The company also said that it expected its industry  sales to climb 10 per cent this year, thereby signalling a budding recovery in one of the world’s main  technology sectors. The company said it was able to increase its share of the lucrative smart phone market despite stiff  competition from the iPhone and BlackBerry. The chief executive, Olli-Pekka Kallasvuo, promised new  phones with enhanced touch-screen abilities in 2011, and perhaps a tablet computer. The  financial  report  painted  an  upbeat  picture  for  Nokia,  the  embattled  global  industry  leader,  whose market share began to slip in 2009 amid gains by research in Motion and Apple, and pressure  from Asian rivals such as Samsung, LG and HTC. In the three months through December 2010, Nokia  said its profit rose to £882 million ($1.23 billion) from £551 million a year earlier. Nokia increased its  profit, as it more than doubled the size of its touch-screen smart phone portfolio. It began selling four  new touch-screen smart phones during the quarter in addition to three existing models. Neil  Mawston,  an  analyst  at  Strategy  Analytics  in  London,  said  the  earnings  report  suggested  ‘a  relatively  healthier  near-term  outlook  for  Nokia  and  the  overall  handset  market’.  Kallasvuo  said  Nokia was working to produce a line of more sophisticated touch-screen phones to compete with  the iPhone. He said it was possible that the phones would be introduced during 2011 along with new  versions of Nokia’s Symbian and Maemo smart phone operating systems, which offered improved  touch-screen capability. Kallasvuo said ‘We have a good portfolio but we are currently lagging in the high-end mind-share  product.’ ‘We are definitely working on that one and will come out with that one.’ He  also  said  that  Nokia  was  considering  making  its  own  tablet,  which  would  be  similar  to  a  computing device. Apple introduced its iPad tablet on 27 January 2010. He said ‘Apple continues  to be a great competitor, no doubt about that.’ ‘But we have our assets as well. Our strategy is in  democratizing the smart phone in a massive way.’ Nokia is increasingly having to respond to American competitors such as Apple and Google, the  search engine giant that last year became the first company to give away professional navigation  software on mobile devices that run its Android operating system. Last  week,  Nokia  announced  its  plans  to  give  away  turn-by-turn  professional  GPS  navigation  software on 10 of its smart phone models. The company, based in Finland, is waging its smart phone  offensive, as it reduces spending and eliminates jobs to counter the recession. During the fourth quarter, Nokia cut research and development spending by 9 per cent, to £1.6  billion, and sales and marketing expenses by 18 per cent, to £1.05 billion. The general administrative  expenses fell by 15 per cent, to £294 million. Nokia eliminated 2,276 jobs, or 1.8 per cent of its workforce, last year. The savings resulted in the  latest profit increase even as revenue fell to £12 billion, from 12.7 billion Euros in the previous quarter.  Nokia said that its leading share of the global smart phone market rose to 40 per cent in the quarter  from an estimated 35 per cent at the end of September. The company’s share of the overall cell phone  market rose to 39 per cent, from 38 per cent in September. Strong growth in China, Asia, Africa and the Middle East offset declines in North America, South  America and Europe. Nokia reported sales of 126.9 million phones in the fourth quarter, 12 per cent  more than a year earlier. The company said it sold 52.4 million smart phones in the quarter, up from 47 million a year earlier.  Sales of the more expensive devices, which combine features of a phone and a computer, helped lift  the average selling price for all Nokia handsets to £63, from £62 in September 2010.4

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Some of the simple tools that can be utilized to manage cost require simple analysis and control over the following information: actual cost and percentages to sales last year increase or decrease in cost under different items this year compared with last year budgeted figures for cost items and respective percentages for the coming year difference between proposed budgeted figures and actual figures this year with rationale and logic average cost figures for the industry in which one is operating with the figures for the leader in the industry  difference between a company’s actual and proposed annual percentages vis-à-vis industry ratios and percentages. One needs to understand the rationale and logic behind under or over figures and attempt to bring in improvement by properly managing the items wherein the company has over figures     

12.7  FUND FLOW AND CASH FLOW STATEMENTS It is important to understand that earning profit need not necessarily reveal a good financial strength of the business. Earning profit is not the same as cash flow from the business. Profit is the difference between income and all expenses incurred for generating income. Cash flow results only from actual cash receipts and cash payments, that is, it occurs only when cash is received or paid. We have already seen that sales may or may not always result in the actual receipt of cash, mainly when sales are made on credit. However, when sales are made on receipt of upfront or down payment before goods or services are handed over to the customer, then it results in an instant cash receipt. Similarly, an entrepreneur may not pay all bills immediately on account of various expenses and, therefore, may start using the items procured or services availed that may not have been paid for.  Fund Flow Statement—A fund flow statement keeps track of all inflow and outflow of funds that might have occurred through cash receipts and payments or otherwise. It captures all fund-based transactions that affect the amount of net working capital by affecting only some current asset or some current liabilities. It shows all the sources of funds and the uses of funds that have affected the business. It captures even transactions such as depreciation provided in the profit and loss account, which has been a part of the expenses but has not gone out of the system. Therefore, depreciation results in fund inflow, although no cash is received. As such, cash profits are arrived at by adding depreciation to the net profit, which acts as fund inflow. The fund flow statement shows the movement of funds and reports about the financial operations of the business during a particular time period. The fund flow statement is used for multiple purposes, for example, in answering questions such as: Why have low or no dividends been paid in spite of substantial profits being shown in the income statement? How have funds received from various sources been utilized? What has been the source of funds to acquire various assets?  Cash Flow Statement—The cash flow statement reports a company’s change in cash and cash equivalents from one balance sheet date to another. The cash flow statement classifies the amount of the change according to operating, investing and financing activities. It provides a brief summary of the cash inflows and outflows. For healthy business operations, what matters the most is continuous cash flows that take care of cash-related business obligations. As such, it may not be necessary that if a company is earning good profits, it will have good cash inflows too. However, survival and growth of a business requires good and continuous cash flows.

Thus, the difference between the two lies in basically considering non-cash inflow and outflow items as a part of fund flow, which does not find a place in the cash flow (Fig. 12.11). The cash flow statement

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Cash Flow Difference Between Cash Flow and Fund Flow

499

• Cash Flow Statement Reports a Company’s Change in Cash and Cash Equivalents from One Balance Sheet Date to Another

• All Inflow and Outflow of Fund Fund Flow

That Might Have Occurred Through Cash Receipt and Payment or Otherwise from One Balance Sheet Date to Another

Figure 12.11 Difference Between Cash Flow and Fund Flow allows investors to understand how a company’s operations are being run, where its money is coming from and how it is being spent. It is important to realize that a profitable business need not necessarily mean a cash-rich business. A profitable business with negative cash flows is of no use. This is called ‘timing difference’ in accounting terms. It implies the difference between the commitment to pay cash to suppliers and the time it takes for an entrepreneur to realize their cash proceeds from selling goods and services. This means that an entrepreneur, although they find a lot of sales in their profit and loss statement, has not been able to realize all that sales by way of cash, which is likely to result in lots of expenses that have not been paid for. Proper cash management, of course, does not mean that a business has excessive cash in its bank account all times. This would be as good as dead assets, as it does not generate any returns. Proper cash management means an entrepreneur’s confidence in the business and its customers that enough cash as required to fulfil commitments would inflow in future, as and when such commitments arise. Further, cash flows can come from various sources such as investments, bank loans and, of course, most important of all, from customers. Thus, an entrepreneur needs to understand very clearly from where cash is coming, when exactly they are likely to get it, where all the cash is going and when exactly it needs to be paid. This requires understanding and studying one’s business in relation to the movement of cash. Thus, proper cash management requires the following steps to be followed (Fig. 12.12):     

Meticulously analyse cash flows from the business. Prepare a working cash flow budget. Continuously monitor the cash flow budget. Find ways and means to improve cash flows. Use most efficiently the available cash flows.

Cash flow projections are made for a short-term period, say, weekly, fortnightly and monthly; a longterm period, say, one to three years and beyond, and a very long-term period, say, more than three years.

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Analyse Meticulously Cash Flows

Prepare a Working Cash Flow Budget

Monitor Continuously Cash Flow Budget

Find Ways and Means to Improve Cash Flows

Use Most Efficiently Available Cash Flows

Effective Cash Management Requires

Figure 12.12 Effective Cash Management The main purpose of short-term-period cash flows is to understand the short-term cash position, to find out the cash that can be deployed for a short-term period to earn some returns and to estimate the working capital requirements. The purpose of a long-term cash flow projection is to understand the requirement of cash needed to operate the business during one to three years, to find out where cash comes from, to understand seasonal variations in cash that would arise, to estimate annual money that needs to be borrowed from different sources and to estimate repayment capacity of the business. The purpose of making cash flow for a longer period such as beyond three years is to find out the requirement of funds for strategic growth initiatives, the need for raising equity, long-term borrowing requirements and to build in rational and supportive logic for raising equity.

Example: Cash Is Everything In start-ups, an entrepreneur especially needs to keep a strict vigil on cash flows. They should not  have the deception that the business is doing well because the idea is good, the people who team to  execute it are good, the strategy is in place and the business is generating profits. Many start-ups do  not realize the implications of cash crunch on time and land themselves in a vicious circle. It becomes  too late for many start-ups to realize that their business is floundering, as they are not in a position to  pay their suppliers, employees’ salaries and loans. Therefore, the question of paying oneself does  not arise! At first sight, the entrepreneur fails to understand the reason as to what went wrong. What has led  the business, which had great growth prospects, to face acute illiquidity problems that would result in  its insolvency or bankruptcy? It becomes too late for an entrepreneur to realize the mistake committed  in mismanaging or not managing the cash flow well.

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The success of a venture depends a lot on having an effective system in place to manage cash  flows or cash flow management. This is applicable to both small and big businesses and can spell  the difference between a successful business and a failed one. This is true irrespective of whether the  business is big or small. As such, cash is everything in a business.

12.7.1  Cash Flow Projections The cash flow projections indicate where cash comes from and where it goes, in case there is sufficient cash that is available for operating the business at the desired level of operation. There are two methods to work out projected cash flows, namely, an indirect method and a direct method. Usually, the popular method used by many is the indirect method. In this method, the main purpose is not to reproduce the details in the income statement but to mainly understand the need for making certain adjustments in the net income based on actual cash that may or may not have been actually received or paid for. For example, a hotel has provided services to 10 guests from a corporate entity whose bill is to be paid not by the guests but by the corporate entity. Thus, the hotel has raised a bill amounting to ` 150,000 for a single day of stay to the corporate entity, but the amount is yet to be received. Thus, sales have taken place but no cash as such has been received and, therefore, this transaction would not form a part of cash flow. The simplest approach used by an entrepreneur is to make a record of cash in minus cash out to understand the position of cash in the new venture. The entrepreneur needs to make fortnightly or monthly projections of cash flow to develop a better grip over the business. These are made based on the projected income statement entries with modifications to take care of timings in the changes of the cash. In case payment commitments work out to be more than the expected receipts, the entrepreneur needs to raise funds to take care of these excess commitments. On the other hand, excessive receipts compared with payment commitments need to be suitably invested in the short run to earn some returns and match the maturity of such investments with the expected disbursements that would arise in future periods. The simple approach to just work out cash flows accounts for all cash-in and cash-out flows during a particular given time period that would comprise entries such as         

opening cash balance cash in cash sales paid receivables interest cash out rent salaries taxes

      

inventory purchases utilities office supplies interest payment and loan repayment miscellaneous surplus or deficit cash during the period ending balance (opening cash balance + cash in − cash out)

If we observe the balance sheet of Hindustan Unilever Ltd, given in Table 12.5, we can see that a number of changes have taken place between March ended 2009 and March ended 2010. For example, reserves have increased by ` 522 crores and secured loans have reduced by ` 145 crores to become zero as on March 2010. Similarly, inventories have gone up by ` 349 crores during the year. It is important to understand which are the sources of cash and which ones are the use of cash during this one-year period. Common sense suggests that any increase in liabilities is a source of cash, whereas any increase in assets is a use of cash. Similarly, any decrease in liabilities is a use of cash, whereas any decrease in

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assets is a source of cash. Thus, to classify sources and uses of cash, the following method would be helpful: Sources of Cash

Uses of Cash

• Increase in outside liabilities and owners’ equity • Decrease in assets other than cash

• Decrease in liabilities and owners’ equity • Increase in assets other than cash

An illustrative example of a projected cash flow statement through the indirect method can be arrived at by the details in Table 12.6. Table 12.5 Changes in the Balance Sheet Items—Hindustan Unilever Ltd Year Sources of funds Share capital Reserves total Total shareholders’ funds Secured loans Unsecured loans Total debt Total liabilities Application of funds Gross block Less: accumulated depreciation Net block Capital work in progress Investments Current assets, loans and advances Inventories Sundry debtors Cash and bank Loans and advances Total current assets Less: current liabilities and provisions Current liabilities Provisions Total current liabilities Net current assets Miscellaneous expenses not written off Deferred tax assets Deferred tax liability Net deferred tax Total assets Contingent liabilities

March 2010

` in Crores March 2009 Increase

Decrease

218 2,366 2,584 0 0 0 2,584

218 1,844 2,062 145 277 422 2,484

0 522 522 0 0 0 100

0 0 0 145 277 422 0

3,582 1,420 2,162 274 1,264

2,882 1,275 1,607 472 333

700 145 555 0 931

0 0 0 198 0

2,180 678 1,894 617 5,368

2,529 537 1,777 758 5,601

0 141 117 0 0

349 0 0 141 233

5,292 1,442 6,734 −1,365 0 451 202 249 2,584 468

4,256 1,528 5,784 −183 0 439 184 255 2,484 474

1,036 0 949 0 0 12 0 0 100 0

0 86 0 1,182 0 0 18 6 0 6

Source: Capitaline Plus Databases, http://plus.capitaline.com/user/framepage.asp?id=1

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By using the data given in Table 12.6, we can prepare a cash flow highlighting the sources and uses of cash as given next. Table 12.6 Cash Flow Statement Sources of Cash

Uses of Cash

Increase in reserves and surplus Increase in secured loans Increase in current liabilities Decrease in inventories Decrease in capital work in progress Decrease in loans and advances Increase in net deferred taxes

522 0 1,036 349 198 141 6

Decrease in secured loans Decrease in unsecured loans Increase in net block Increase in investments Increase in sundry debtors Decrease in provisions Increase in cash and bank balance

Total sources

2,252

Total uses

145 277 555 931 141 86 117 2,252

It can be observed from Table 12.6 that the main source of cash inflow for the company has been from an increase in current liabilities that have increased by ` 1,036 and other major contributions in cash inflow that have come from increased reserves and surplus amounting to ` 522 crores. The company has been able to generate cash inflow by a better management of inventories, which has resulted in reduction of inventories to the tune of ` 349 crores. On the other hand, major cash uses or outflows have been on account of increase in investments to the tune of ` 931 crores, which may not have much to do with the operating performance of the company but may result in returns through dividends or appreciation of capital. The company has added to the net block by investing ` 555 crores in plant, machinery and buildings, which would yield better returns as also improved turnover in the coming years. The company has also repaid loans to the tune of ` 422 crores that constitutes ` 145 crores of secured loans and ` 277 crores of unsecured loans. An increase in sundry debtors to the tune of ` 141 crores may need to be examined from the point of view of whether this increase is normal with an increase in turnover or whether the credit period extended to debtors has gone up on an average. If it is on account of the longer credit period, then its long-term implications need to be studied well. Thus, the cash flow just mentioned reveals a lot of information about all that happened during a period of one year, but it does not uncover the whole picture. An increase in reserves and surplus constitutes the difference between net profit available for distribution of dividend and the money that has been used for distribution of dividend. Similarly, it is silent about the gross addition of fixed assets as also the depreciation benefit that the company has availed during the year. Inclusion of these details would further add value to the analysis of cash flow and, in turn, would be more helpful for decision-making purposes. Incorporating some of these details, we get a revised cash flow as shown in Table 12.7. Table 12.7 Revised Cash Flow Statement Sources of Cash Net profit Depreciation Increase in current liabilities

Uses of Cash 2,102 145 1,036

Payment of dividends Purchase of fixed assets Decrease in secured loans

1,580 700 145 (Continued)

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Sources of Cash Decrease in inventories Decrease in capital work in progress Decrease in loans and advances Increase in net deferred taxes

Total sources

Uses of Cash 349 198 141 6

3,977

Decrease in unsecured loans Increase in investments Increase in sundry debtors Decrease in provisions Increase in cash and bank balance Total uses

277 931 141 86 117 3,977

Table 12.7 certainly reveals much more than the cash flow presented in Table 12.6.

Example: Managing Receivables in Animal Feed Business The implications of managing debtors or receivables are very significant for any business. A business  of animal feed that relies quite heavily on capital can be ‘made’ or ‘broken’ depending on how well  the managers of the organization deal with accounts receivable. In the agriculture industry, the market  prices for commodities such as milk, meat, grain and vegetables greatly influence the animal feed  manufacturer who offers the essential daily sustenance to the end user, the cattle. As milk or cattle  costs plummet below the break-even point for the farmer or rancher, a shock wave is evident to the  businesses  dealing  in  animal  feed  manufacturing.  Dairy  farmers  spend  as  much  as  50  per  cent  or  more  of  their  revenue  on  the  procurement  of  feeds  for  their  cattle.  As  a  result  of  this  truth,  the  marketplace  prices  of  both  grain  and  a  dairy  farmer’s  primary  revenue  stream,  milk,  can  have  a  significant impact on not only the dairy producer’s bottom line but also that of their suppliers. The  tradition in the dairy industry, especially in the Northeast United States, has been for the feed supplier  to ‘carry’ the dairy producer when the all-too-common plight of rock-bottom milk costs and/or sky-high  feed prices hamper a dairy’s capability to break even. A far more sound understanding of accounts  receivable and the several spokes that ultimately make up this wheel has inevitably caused some  feed suppliers to ‘buck’ this tradition of ‘carrying’ unprofitable dairy farms by meticulously analysing  their accounts receivable. The importance of working capital management is very vital, especially for a feed manufacturer who  should continuously buy huge amounts of ingredients to keep their ‘pipeline’ full for the customers’  cattle that the business ultimately serves. This realization came more so to the feed manufacturers,  particularly  during  the  summer  of  2008,  when  corn  and  soyabean  costs  soared,  almost  doubling  the quantity of capital a feed manufacturer required just to keep the mill running and proportionally  growing  the  price  of  those  inputs  for  the  dairy  producer.  Some  feed  mills  found  that  their  poor  management of accounts receivable left them in such a poor monetary situation that continuing to  manufacture feed became impossible without having to restructure or sell out. The matching and correct evaluation of receivables can ultimately grow to be the component of  the monetary statements that may determine how well the management directs the business towards  profitability. The matching of receivables truly begins when the feed firm extends credit to clients in  order to allow them to buy the merchandise, in this case let us say the feed for the milking cows.  The minute this credit is extended, a prudent manager knows roughly how much is going to be paid  back and how timely these payments will be made. The highest performing managers may even take  into account the climate of the dairy business as a whole and adjust the firms’ collection practices  in an effort to insulate the mill from the aftershocks felt by volatile farm-level costs. The quantity that  will not be paid is known as ‘poor debt expense’, and top-notch managers take the needed steps to 

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minimize this loss and see that all debts are recovered in a reasonable amount of time. This valuation  adjustment is an estimate of the accounts that will go unpaid. For example, in the feed business, a  manager may possibly expect that for accounts that are 30 days past due date, 97 per cent of those  buyers will pay in full. As customers’ accounts reach 60 days past due date, only 90 per cent of those  buyers will pay their outstanding debt. By accounting for this bad debt expense within the accounting  period, feed manufacturers are employing the matching idea. The matching concept as applied in  this  example  makes  it  possible  for  managers  and  investors  to  more  accurately  state  net  income,  return on investment and return on equity.5

12.7.2  Drawbacks in Cash Flow Projections Some of the major precautions that need to be taken while projecting cash flows are given next:  Overestimation of sales forecast and sales realization.  Underestimation of different cost items.  Delays that would occur in receipts and pressure that would be faced for payments on time and their implications.  Not taking care of past trends as regards receipts from debtors.  Being overoptimistic about availability of bank loans and funds from other sources, including equity.  Lack of clear understanding about issues of strategic importance and their implications.

These drawbacks usually arise as a result of lack of knowledge and experience in handling business issues. These may result in underestimation of the cash and other resources required for smooth operation of the business and their dangerous business consequences.

12.8  INVENTORY MANAGEMENT Management of inventory matters the most in the smooth and efficient running of a business. Therefore, while analysing financial statements, one needs to carefully examine the past trends in terms of inventory—raw materials, debtors and finished goods. Inventory management is an important and integral part of successfully managing a business. Inventories typically consist of raw materials, work in progress and finished products. These inventories get translated into money for the business. The key to profitability lies in having an optimum inventory by systematically and carefully managing it. Too much of an inventory compared with customer demands can be a drain on productive cash resources. On the other hand, shortage of inventory can lead to lost sales or can create dissatisfied customers. Thus, inventory mismanagement can be damaging to a business in view of its vital importance in effectively managing the business. The main reasons for keeping optimum inventory stocks are the time lag that it takes to place an order and get it on the business premises, which is called the ‘lead time’. The entrepreneur would like to ensure that their production activity does not suffer on account of delays that may occur, thus resulting in increasing the lead time. Second, the entrepreneur keeps inventory to ensure that they have been able to effectively respond to uncertainties in demand and supply that may occur. The third major reason is the advantage that the entrepreneur may get by placing a bulk order for raw materials by way of discounts. One needs to develop effective inventory management systems to ensure optimum level of inventory. There are companies that use dedicated software to have control over the inventory by getting timely signals that get integrated with the production system and purchase department at one end and the production system and marketing department to get customer responses on demand at the other end.

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Inventory management software captures very many aspects such as item details, group-wise price list, godown-wise price list, stock status, opening and closing balance of an item for particular dates, and day book; displays the daily transaction entries with inventory details, stock ledger; displays the balance status of the item between two dates on the basis of godown, group and sale register; displays the sale entries with inventory details and purchase register; displays the purchase details between two dates and general ledger. These are effective tools for effective inventory management. These software can be tailor-made to the requirements of specific businesses or general ones. They provide early warning signals to decision makers to act promptly on the issues related to inventory management. The value of various inventories in books of accounts gets affected based on the accounting procedure used by the entrepreneur. This affects the cost of goods sold as also income and, in turn, the profits of the company. For example, if the entrepreneur has purchased raw materials four times, then, every time, they might have paid a different price and their stock inflow as also balance inventory might have undergone change, depending on usage rate. Accounting standards permit alternate inventory measurement methods, including last-in-first-out (LIFO), first-in-first-out (FIFO), weighted average and specific identification. The specific identification method is prominently used for inventories in which separate items are distinct and have a high cost, such as fine jewellery, because the benefit to be gained from tracking these individual items is high. For lower-cost items in an inventory, it may not be necessary to track the flow of inventory, as the cost of tracking may work out to be high, unless and until the company is able to track through the digital data base at an insignificant cost. As such, LIFO, FIFO and weighted average methods are simple techniques used for top-value inventory. Under the FIFO method, the company assumes that the first goods sold are the oldest, and the most recently acquired items remain in inventory on the balance sheet. Using LIFO, the costs of the oldest inventory are maintained on the balance sheet under the assumption that the most recently acquired inventory is sold first. The weighted average method uses average costs over the reporting period to calculate the inventory balance. The effect of these techniques on the profit and loss account and balance sheet is given in Table 12.8. Table 12.8 Inventory Measurement Methods and Their Financial Implications Method Used

Assumption Made

Effect on Profit and Loss

Effect on Balance Sheet

FIFO

Company sells or uses the oldest item first

If older inventory was cheap, lower cost of production and higher profit and vice versa

Inventory retained on balance sheet is the newest one. The cost of inventory shown would be higher and vice versa if prices of inventory fall over a period

LIFO

Company sells or uses the newest item first

If older inventory was cheap, higher cost of production and lower profit and vice versa

Inventory retained on balance sheet is the oldest one. The cost of inventory shown would be lower and vice versa if prices of inventory fall over a period

Average cost

Average cost is used for both cost sales and inventory

Valuation of inventory in Both cost of sales and balance sheet will be at inventory will be in between the LIFO and FIFO average cost methods. The profit levels would be the same

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Let us assume a petrol pump of a manufacturing company that gets petrol at different prices daily from suppliers and uses it for the production of power. Assume that a tanker truck delivers 2 lakh litres of petrol to a petrol pump of the manufacturing company on 1 April at ` 55 per litre. On 2 April, the supplier delivers another 2 lakh litres at ` 58 a litre. If the company uses 1.5 litres on 2 April for production power, it assigns a price of ` 58 per litre towards the cost of sales and shows in the balance sheet the stock of 2 lakh litres at ` 55 per litre and another 0.50 lakh litres at ` 58 per litre under the LIFO method. However, under the FIFO method, the company will use ` 55 per litre towards the cost of goods on 2 April and value inventory stock of 2 lakh litres at ` 58 per litre and the remaining 0.50 lakh litres at ` 55 per litre. However, under the average cost method, the company would compute the cost of sales at ` 55.5 per litre, and the same would be used for valuation of stock in the balance sheet. The advantage of FIFO is that inventory is measured at most recent costs, that is, stated at an approximate current cost figure. Its disadvantages are the reduced cash flow and overstatement of reported income. Thus, when prices are rising, FIFO not only gives a better indication of the value of ending inventory (on the balance sheet), but also increases net income, because inventory that might be several years old is used to value the cost of goods sold. An increase in profit level, although it sounds well from a shareholder’s perspective, would also entail higher taxes that the company will have to pay. The major advantages of the LIFO method in case of falling prices is that profit tends to rise due to the lower material cost. However, finished goods appear to be more competitive and are sold at market price. This helps in smoothening the fluctuations in profit over a period of time. When prices of raw materials are rising in an inflationary economy, LIFO will tend to show the correct profit and, thus, avoid paying undue taxes to some extent. The major disadvantages of the LIFO method is when multiple purchases are made at highly fluctuating rates that may result in wide variation in the cost of production for similar batches of production. Further, in times of falling prices, it may necessitate writing off stock value considerably to stick to the principle of stock valuation, that is, the cost or the market price, whichever is lower.

12.9  BREAK-EVEN ANALYSIS Start-ups have to necessarily work out a break-even point to know when profit would start accruing from the business. It is in this phase that the business would need additional funding support to take care of losses that would accrue from the business. Break-even analysis helps an entrepreneur to know how many units need to be sold, so as to achieve a break-even point, thus implying a point wherein the venture achieves a state of ‘no loss no profit’, that is, the sales is adequate enough to take care of the total cost of production. Thus, a break-even point indicates the volume of sales that would be required to cover the total variable cost of production as well as the fixed cost of production. Sales above the breakeven point result in earning profits as long as the sales price is more than the total cost of production— variable and fixed. Total cost = Fixed cost + Variable cost Total cost = Fixed cost + C × Q where C is per unit variable cost of production and Q is the number of units produced. At break-even point, total cost should be equal to total revenue, implying zero profit. Sales revenue = P × Q where P is the price per unit of product and Q is the number of units sold.

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Thus, at break-even point, P × Q = FC + C × Q (P × Q) − (C × Q) = Total fixed cost (FC) Q (P − C) = Total fixed cost (FC) FC Break-even quantity Q = _______ (P − C) where P is the sales price per unit and C is the variable cost per unit. The difference between P and C is called ‘contribution’. As long as the sales price per unit is greater than the variable cost per unit, there is a positive contribution that the company is making, which takes care of a part of the fixed cost of production. At some quantity, the total contribution takes care of the total fixed cost and, thereafter, each additional unit of production/sales results in the company making profits. The major difficulty that arises in applying this concept in case of start-up ventures arises on account of making a clear distinction between the fixed cost of production and the variable cost of production. This requires some degree of judgement in case of start-ups. However, certain costs such as depreciation, rent, insurance and salaries to administrative staff and expenses on overheads are clearly fixed cost of production. On the other hand, raw materials, sales commission and direct labour cost, which are incurred on each additional unit of production, are classified as variable cost of production. Let us take an example of a venture having ` 2 crores as fixed cost and sales price per unit is ` 10, whereas variable cost per unit is ` 5. Thus, contribution in this case will be ` 10 − ` 5, that is, ` 5 per unit. Now, break-even point can be computed by ` 20,000,000/5 = 4,000,000 units. In case a company produces and sells 100 lakh units, it would earn a sales revenue of ` 1,000 lakhs and would incur a variable cost to the tune of ` 500 lakhs. Thus, the company would be making profit to the tune of Profit = Sales revenue − Fixed cost − Total variable cost = ` 10,000 − ` 200 − ` 500 = ` 300 Lakhs As such, the company has achieved a break-even level of sales at 40 lakh units. Thus, an additional 60 lakh units would generate profit to the tune of 60 lakh units × ` 5 per unit = ` 300 lakhs. Table 12.9 Break-even Analysis with Linear Variable Cost (` in Lakhs) No. of Units

Fixed Cost

Variable Cost

10 20 30 40 50 60 70 80

200 200 200 200 200 200 200 200

50 100 150 200 250 300 350 400

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Sales Revenue 100 200 300 400 500 600 700 800

Contribution

Total Cost

Profit/ Loss

50 100 150 200 250 300 350 400

250 300 350 400 450 500 550 600

−150 −100 −50 0 50 100 150 200

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No. of Units

Fixed Cost

Variable Cost

Sales Revenue

Contribution

Total Cost

Profit/ Loss

90 100 110 120

200 200 200 200

450 500 550 600

900 1,000 1,100 1,200

450 500 550 600

650 700 750 800

250 300 350 400

509

It can be observed from Table 12.9 that the company incurs a loss of ` 150 lakhs on 10 lakh units of production/sales, which keeps getting reduced to a level of 0 profits or loss at 40 lakh units of sales/ production. This point is called ‘break-even point’. Thereafter, the company starts making a profit of ` 50 lakhs on 50 lakh units, which keeps increasing to ` 400 lakhs at 120 lakh units.

in Lakhs

Sales Revenue

Total Cost Variable Cost Fixed Cost

10

20

30

40

50 60 70 80 90 Number of Units in Lakhs

100

110

120

12.9.1  Break-even Analysis with Non-linear Variable Cost It can be observed from the data given in Table 12.10 that the variable cost of production per unit increases at a decreasing rate in the beginning, then increases at an increasing rate, and ultimately reaches a point where it increases at a constant rate of ` 40 per unit. Thus, it does not behave in a linear fashion. This happens in reality because of the realization of certain cost cuts for increased production levels in the initial stage with increased production, but soon, the per unit cost increases beyond a point of production and, thereafter, may remain stabilized. In the present case, the break-even level of production/sales occurs at five units and, thereafter, the company’s profit level keeps increasing with additional units of production/sales before reaching a level of 16 units of production/sales, from where the profit level remains the same at ` 480 lakhs.

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Table 12.10 Break-even Analysis with Non-linear Variable Cost (` in Lakhs) No. of Units

Fixed Cost

Variable Cost

Total Cost

Sales Revenue

Contribution

Profit/Loss

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200

40 70 85 96 100 112 118 122 130 138 148 160 180 205 240 280 340 400 460 550

240 270 285 296 300 312 318 322 330 338 348 360 380 405 440 480 540 600 660 720

60 120 180 240 300 360 420 480 540 600 660 720 780 840 900 960 1,020 1,080 1,140 1,200

20 50 95 144 200 248 302 358 410 462 512 560 600 635 660 680 680 680 680 650

−180 −150 −105 −56 0 48 102 158 210 262 312 360 400 435 460 480 480 480 480 480

1400 1200

in Lakhs

1000 800

nue

eve

R les

Sa

600

ost

lC

ta To

400

Va

200

ost

eC

bl ria

Fixed Cost

0 1

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2

3

4

5

6

7

8

9

10 11 12 13 14 15 16 17 18 19 20

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12.9.2  Break-even Sales Break-even sales level can be computed by multiplying the price by the break-even level of quantity. Thus, break-even sales revenue can be worked out by BE Q × Price, where Q is the break-even level of quantity. Another way to work it out is given by the following formula: TFC Total fixed cost ______ BE sales volume = ______________ = CMR 1 _V _____ P where TFC is the total fixed cost and CMR is the contribution margin ratio, which is given by (1 − V/P): 1 − V ______ P−V CMR = ______ P = P which is contribution margin per unit of price.

12.9.3  Payback Period Break-even analysis in terms of time frame can help in working out the payback period, that is, the number of months or years that would be required to break even. The earlier formula of total revenue (TR) = total cost (TC) may need to be expressed in terms of time. To calculate the payback period, the number of units sold, Q, needs to be defined as the number of units per month or per year. For working out the payback period, fixed costs are further divided into start-up costs (SC) and recurring fixed costs (RC), where start-up costs are the costs associated with development of the product, or build the very first unit of the product. However, recurring fixed costs are the costs paid monthly or annually but not directly related to the per unit of product produced/sold, such as Web-hosting fees, monthly advertising expenses, insurance premiums, security expenses and rental expenses. t = Payback period in months TFC = SC + ( RC × t ) TVC = V × Q × t where SC is the total start-up costs, RC the recurring costs per month and Q the number of units sold per month (Q/t) Payback period (t) is worked out as SC Payback period ( t ) = __________________ P × Q − V × Q − RC Break-even sales = P × Q × t

For example, the selling price of a new mobile is set at ` 4,000, and the company expects to sell 1,000 units per month. The development cost is ` 50 lakhs, and recurring monthly expenses (RC) are ` 2 lakhs per month. The variable cost is 50 per cent of the sales price, that is, ` 2,000 per unit in the current case. Thus, the break-even point in the number of months would work out to be 5,000,000 __________________________________ ( 4000 × 1000 − 2000 × 1000 − 200,000 )

5,000,000 = ______________________________ ( 4,000,000 − 2,000,000 − 200,000 )

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50,000,000 = _______________________ ( 2,000,000 − 200,000 ) 5,000,000 = ` _________ 1,800,000 = 2.777 months = 3 months (say) It is advisable to use the calculation just given as a broad estimate. This computation does not take care of the time value of money, risk, interest, financing and opportunity cost. Entrepreneurs need to realize that break-even analysis is not a panacea for all ills. It is one of the tools for taking wise business decisions. It can be judiciously used along with other tools to make timely decisions. However, it is a good tool with which to approach problems.

12.9.4  Some Shortcomings of Break-even Analysis Break-even analysis views the investment decisions in a bit of isolation, whereas, in reality, projects rarely exist in isolation. One has to look at the alternate uses of assets as also funds to have a comprehensive picture about the issue under consideration. The approach also does not focus on the analysis of cash flows, which is very vital for any business entity. In general, investment decisions are broadly governed by cash flows and not sales turnover. It is the positive net present value of all cash inflows and outflows that helps in comparing different investment opportunities coupled with internal rate of return (IRR). In fact, IRR is the rate of discount at which the present value of all future cash inflows and outflows is zero. Break-even analysis is a static technique and tool that analyses the sales level by assuming certain costs and prices, which keep changing in a dynamic situation. However, the fact remains that it is a simple and easy technique that screens investment decisions within a broader frame. It is a very helpful technique in estimating an unknown factor in making project decisions. As such, making a decision whether to take it or leave it requires multiple variables such as demand, costs, price and other factors to be considered. The most crucial factor that remains is regarding pricing decisions and demand estimates. It is quite difficult to estimate future demand for a product or service. Therefore, finding out a point of break-even, that is, zero profit level, indirectly helps in knowing the minimum quantity demanded that would make the project profitable. Thus, break-even point gives a forward push to handle business uncertainties with greater preparedness. It is a management decision-making tool that helps in finding a minimum level of sales that is required to cover all costs of production at a given level of production.

12.10  RATIO ANALYSIS—TOOL FOR ANALYSIS The analysis of various financial statements is carried out with the help of ratio analysis, which is used for making business decisions. Ratio analysis is a vital tool used by entrepreneurs and their teams to undertake a quantitative analysis of information from the existing and projected financial statements. Ratios are calculated from the information available in the company’s financial statements. A financial ratio can give a financial analyst an excellent picture of a company’s situation and the trends that are developing. The financial ratio is used as a relative measure that facilitates the evaluation of efficiency or the condition of a particular aspect of a firm’s operations and present position. Ratio analysis involves calculation and interpretation of various financial ratios so as to assess a firm’s working results and performance. Thus, the financial ratio is used as a relative measure that facilitates the evaluation of efficiency or the condition of a particular aspect of a firm’s operations, whereas status ratio

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analysis involves the methods of calculating and interpreting financial ratios in order to assess a firm’s performance and status.

12.10.1  Source of Information for Financial Analysis      

Financial statements Notes to financial statements Summary of accounting methods used Report on management discussion and analysis of financial statements An auditor’s report Comparative financial data for five to ten years

Financial ratio analysis can be grouped into different categories, which helps in the analysis of different facets of a company’s finances and operations. Some of the prominent categories in which different ratios can be classified are given in the next sub-sections (Fig. 12.13): Liquidity  Ratios  Liquidity ratios give a picture of a company’s short-term financial situation or solvency. They help in understanding the company’s ability to pay off its short-term commitments. These ratios indicate the ease of turning assets into cash. The higher the value of such ratios, the larger the margin of safety that the company possesses to cover short-term debts. However, too high a value of these ratios would also mean that the company is not using its current assets productively. A reasonable value of these ratios ensures that the company has sufficient liquidity to take care of its current commitments. These ratios are of particular importance to those extending short-term credit to the company, that is, banks and creditors. Two frequently used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio. The current ratio is the ratio of current assets to current liabilities: Current assets Current ratio = ________________ Current liabilities Creditors prefer a high current ratio towards raw material supply, as it helps in reducing their risk. However, shareholders’ interest lies in a lower current ratio, as it helps in channelizing a greater

Classification of Ratios Liquidity Ratios— Gives a Picture of a Company’s Short-term Financial Situation or Solvency

Leverage Ratios— Show the Extent of Debt Used in a Company’s Capital Structure

Solvency Ratios— Measure the Financial Soundness of a Business

Profitability Ratios— Indicate Company’s Ability to Generate Profits

Turnover Ratios— Help in Measuring an Asset’s Activity Level or Efficiency in Generating Turnover

Figure 12.13 Different Classification of Ratios

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quantum of the company’s assets for productive use and for the growth of business. There is no specific benchmark for a current ratio, as its value varies from industry to industry and the nature of business to business. For example, firms in cyclical industries such as sugar, cotton yarn manufacturers and woollen cloth manufacturers may maintain a higher current ratio in order to remain solvent during downturns. One of the major disadvantages of using the current ratio is that the company may have inventory that may include many items that are difficult to liquidate quickly at reasonable rates. Therefore, quick ratio is considered an alternate measure of liquidity that does not include inventory in the current assets. ‘Quick ratio’ is defined in the following manner: Quick ratio =

Current assets − inventory Current liabilities

Thus, the current assets that are included in the quick ratio are cash, debtors and notes receivable. These assets are essentially current assets less inventory. A test conducted to find out the liquidity position of a company is also called the ‘acid test’. The quick ratio is a more desirable measure of liquidity than the current ratio. By excluding inventories, it concentrates on the really liquid assets, with a value that is fairly certain to be realized within a short period. It helps answer the question, ‘If all sales revenues should disappear, could my business meet its current obligations with the readily convertible “quick” funds on hand?’ An acid test of 1:1 is considered satisfactory unless the majority of one’s ‘quick assets’ are in accounts receivable, and the pattern of the accounts receivable collection lags behind the schedule for paying current liabilities. Finally, the cash ratio is the most conservative liquidity ratio. It excludes all current assets except the most liquid ones, namely, cash and cash equivalents. The ‘cash ratio’ is defined in the following manner: Cash and bank balances + current investment Cash ratio = ______________________________________ Current liabilities This gives the company’s ability to pay its obligations that are immediately and instantly called for. Solvency  Ratios  Solvency ratios help in measuring the financial soundness of a business—the company’s ability to satisfy its short- and long-term obligations. This ratio basically measures the size of a company’s after-tax income, excluding non-cash depreciation expenses, as compared with its total debt obligations. It provides a yardstick to know about how best the company is in a position to meet its debt obligations. The measure is usually calculated in the following manner: After tax net profit + Depreciation Solvency ratio = _____________________________________ Long-term liabilities + Short-term liabilities The solvency of a business can also be assessed based on the current liabilities to net worth, fixed assets to net worth and inventory to net worth. Leverage Ratios  Leverage ratios show the extent that debt is used in a company’s capital structure. These ratios are used to understand a company’s ability to meet its long-term financial commitments. Unlike liquidity ratios, which are concerned with short-term assets and liabilities, financial leverage ratios measure the extent to which the firm uses long-term debts in its business operations and the company’s ability to meet long-term commitments. The three most widely used leverage ratios are the debt ratio, debt-to-equity ratio and interest coverage ratio.

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Total debt Debt ratio = ___________ Total assets Total debt Debt-to-equity ratio = ___________ Total equity Earnings before interest and taxes ( EBIT ) Interest coverage ratio = ___________________________________ Interest The debt ratio helps in understanding companies’ total liabilities in relation to their total assets. The higher the ratio, the more leverage the company uses and the greater is the risk it takes to ensure meeting fixed debt commitments in terms of payment of interest and repayment of principal. The debt-to-equity ratio is the most popular leverage ratio that helps in providing details about the amount of leverage, that is, the liabilities that a company has in relation to the monies provided by the interest coverage ratio. It helps in finding the company’s ability to pay interest expenses associated to the debts they have borrowed from different sources. The ratio is worked out by dividing EBIT by interest payable to find the capacity of the company to meet its interest commitment. Debt ratios depend on the long-term repayment commitments of the company that are likely to fall due in more than a one-year period. Generally, the higher this ratio, the more risky will be the proposition for creditors as regards their exposure in that business. Creditors would find it difficult to extend financial support to companies having higher debt to net worth ratio. Interest coverage ratio indicates how well the firm’s earnings can take care of the interest payments on its debt. The higher the ratio, the better it is. Generally, banks and institutions look for this ratio to be at least more than 2. In case a company is debt free, having no interest burden, this ratio would be infinite. A well-managed company should have a reasonable level of debt to take advantage of financial leverage. The main advantage of debt is that interest payments are tax deductible, whereas the servicing of equity can only be done from the net profit after the payment of tax, which is costly compared with servicing debt. The interest coverage ratio is calculated as given next. Profitability  Ratios  Profitability ratios indicate the company’s ability to generate profits from the business for a given product or service. These ratios help in assessing a business’ ability to generate earnings as compared with its expenses and other relevant costs incurred during a specific period of time. These ratios provide various perspectives for the company to generate profits at different levels of its operations, so that ultimately it generates the maximum possible net profits. ‘Profitability ratios’ can also be defined as the ratios that provide, in financial terms, the capacity of a business to produce yield against the various expenses incurred in the business over a period of time. If a company is able to have greater profit margins at different levels of its operation as compared with its competitor, then it can be concluded that the company is doing better than that particular competitor. Similarly, if the margin of profits goes up compared with the corresponding period in the past, then it also indicates that the company has performed better. The return on assets, profit margin and return on equity are examples of profitability ratios. It is important to compare profitability ratios with the relevant time period. The profitability ratios of the seasonal industries need to be compared more cautiously during the season and off season; for example, in the case of the woollen industry, companies usually earn higher revenue as well as profit margins during season (winter) when compared with off season. The gross profit margin is a measure of the gross profit earned on net sales. The gross profit margin is worked out on the cost of goods sold, and it does not include other costs that get incurred in the process of production or distribution. It is worked out as given next: Sales – Cost of goods sold Gross profit margin = _______________________ Sales

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Operating Profit Margin. Operating profit margin ratio analysis helps in understanding a company’s operating efficiency and pricing efficiency in relation to successful cost control. It gives important information about the company’s profitability, particularly in regard to overall cost control measures affected by the entrepreneur. It indicates how much cash is generated after meeting most of the expenses. A higher operating profit margin implies that a company has a lower fixed cost and a better gross margin or increasing sales faster than costs. This would provide a greater degree of flexibility to the entrepreneur in the fixation of price for a product. It also provides very useful information to the shareholders of the company in understanding the performance of the company based on the trends in operating margin over time as also by comparing it with competitors in the peer group. Operating income is often called ‘earnings before income’ and ‘taxes’ or ‘EBIT’. Actually, EBIT is the income that is left, on the income statement, after all operating expenses and overheads, such as selling costs and administration expenses, along with the cost of goods sold are accounted for. Operating margin is computed as given next: EBIT Operating margin = _________ Net sales Net Profit Margin. Net profit margin provides the ultimate bottom line by indicating how well the company converts sales into profits after accounting for all expenses. The net profit margins widely vary from industry to industry. Therefore, it would be only reasonable to compare companies in the same industry with a similar business mix. Comparing the trends over a period of time in terms of changes in the net profit margin provides a better insight into the improvement or deterioration in the business operations of the company. Companies that are able to generate greater profit per rupee of sales are supposed to be more efficient. Net profit margin is computed in the following manner: Net profit Net profit margin = _________ Net sales From the ratio just given, it is evident that net profits are affected by the company’s actions to reduce expenses, and the net sales are affected by the company’s actions to increase sales revenue. Either action without having any change in the other parameters or both actions together will increase the net profit margin. Return on Assets. Return on assets indicates how profitable a company’s business operations are in relation to its total assets. They give an idea as to how efficient the management is in using its different assets—fixed as well as working capital—in generating net profit or net earnings. It is important to note that return on assets measures a company’s net earning capacity in relation to all the resources at its disposal, that is, the shareholders’ capital as well as the short- and long-term borrowed funds. Therefore, this is said to be the most stringent test of return to its shareholders. Return on assets is defined as Net income Return on assets = ___________ Total assets Return on Equity. Return on equity measures a company’s profitability in terms of how much profit the company generates on the investments made by the shareholders in the company. Shareholders’ equity or their own funds in a business is equal to the total assets minus the total liabilities. It represents the assets in a business created by the retained earnings of the business and the paid-in capital of the owners. The higher the return on equity compared with competitors in the peer industry, the better it is.

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For example, if a company having ` 20 lakhs of owned funds or shareholders’ funds earns ` 4 lakhs of net profit, it would result in 20 per cent return on equity. If the net profit level rises to ` 5 lakhs, the return on equity will increase to 25 per cent. It provides the bottom line of the business in relation to the investments made by shareholders. It is also called ‘return on net worth of the company’. Return on equity is computed in the following manner: Net income Return on equity = _________________ Shareholder equity Return on Capital Employed. Return on capital employed (ROCE) is a measure of return that a company realizes from its capital employed. It is computed as a ratio between the profit before interest and taxes divided by the difference between total assets and current liabilities. This ratio indicates the efficiency with which the capital is being utilized to generate revenue in a business. In other words, it is the value of the assets that contributes to a company’s ability to generate revenue. Thus, ROCE is a ratio that indicates the efficiency and profitability of a company’s capital investments (stocks, shares and long-term liabilities). It is a useful tool that measures the relative profitability of different companies in the same industry. An entrepreneur should be concerned if their company’s profit margin is higher than that of its competitors, but its ability to get better return on its capital is lower. This is computed in the following manner: EBIT Return on capital employed = ___________ – Current liabilities Total assets Earning Power Ratio. Earning power ratio measures a company’s ability to generate profit before interest and taxes on the average total assets. It is computed in the following manner: PBIT Earning power = _________________ Average total assets Dividend Policy Ratios. Dividend policy ratios provide insight into the dividend policy of the company and the prospects for future growth. Two commonly used ratios related to dividend are the dividend yield and payout ratio. This ratio indicates how much a company pays out in dividends to its shareholders each year relative to its share price. In case there are no capital gains from the stock, the dividend yield would indicate the return on investment for the stock. The ‘dividend yield’ is defined in the following manner: Dividends per share Dividend yield = _________________ Share price It is important to understand that high dividend yield does not necessarily mean a high future rate of return. It is important to work out the prospects for continuing and increasing the dividend in the future. The dividend payout ratio is helpful in this regard and is defined in the following manner: Dividends per share Payout ratio = _________________ Earnings per share The part of the earnings not paid to investors by way of dividend is left out for investment in the company to provide for future earnings growth. Investors’ choices vary depending on their motive and purpose of investment and, therefore, there are investors who look for more dividend payout, whereas others look for capital appreciation that may accrue with the growth of the company arising as a result of ploughing back the surplus by way of investment in the company. Turnover Ratios  Turnover ratios help in measuring an asset’s activity level or efficiency in generating turnover or cash. These ratios could be in relation to sales to average assets or fixed assets or in

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relation to inventory levels. For example, inventory turnover ratio gives a picture about the cost of sales in a business per year in relation to the average level of inventory stocks. Turnover ratios show the relationship between the levels of different assets. They tell us how efficiently assets are deployed by the firm. The key turnover ratios are     

inventory turnover ratio average collection period receivables turnover ratio fixed assets turnover ratio total assets turnover ratio

Cost of goods sold Inventory turnover ratio = ________________ Inventory The numerator of this ratio is net sales for the year, and the denominator is the inventory balance at the end of the year. This ratio helps in finding out the efficiency of inventory management, which matters the most in reducing cost of production and ensuring that production and sales requirements are duly met. The inventory should be in line with sales, neither too high nor too low. It could also be calculated in relation to the net sales, thereby implying how many times the average inventory holding is turned into sales per year. In that case, the ratio would be worked out as Net sales Inventory turnover ratio = _________ Inventory

Receivables Average collection period = ___________________ Average sales per day This ratio helps in identifying the average collection period for the sales. The lower it is, the better it would be for the business, thus implying that the debtor’s proportion to total sales is low. For example, if receivables are ` 200 lakhs and sales for the year is ` 3,500 lakhs, then the average collection period can be worked out as 200 = _______________ ( 3,500/360 days ) = 20.57 days, say 21 days The average collection period reflects the efficiency of the debtor’s realization and the credit terms offered by the business to its customers. It should be as low as possible for a smooth business. Businesses that ask for down payment on sales, implying receivables being zero, will have this ratio as zero, thereby implying instant collection. Net credit sales Receivables turnover ratio = ______________ Average debtors This shows how many times the company is able to turn over its receivables. A high value of this ratio indicates a tight credit policy, and a low value indicates that there is a problem with the collections of debtors. Net sales Fixed assets turnover ratio = _____________________ Average net fixed assets This ratio shows how efficiently the fixed assets are used to generate as much sales as possible. A high value of this ratio indicates that the company is managing its fixed assets efficiently. This can be compared with the competitors in the peer group to find out how best the company is using its fixed assets to maximize its production and turnover.

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Net sales Total assets turnover ratio = _________________ Average total assets This ratio focuses on the utilization of total assets deployed in the business. It is the relation between the total assets and sales. The total assets include all types of assets: fixed and short term. The higher the ratio, the better it is from the point of view of efficiency of the business. It may be mentioned that it is desirable to compute the ratios just referred to by considering average fixed assets, average inventory and average debtors, thus implying the value of these in the beginning of the period and at the end of the period divided by two. This would give us a more realistic estimate, as the end-of-the period situation from the balance sheet may not be a representative figure while considering these turnover ratios.

Example: Excel Limited Let us consider, as an example, Excel Ltd, a public limited company for which working results and  balance sheet statements are given in Tables 12.11 and 12.12. It can be observed that the company’s  net sales has grown up from ` 779 lakhs in 2009–10 to ` 1,052 lakhs in 2010–11, that is, a growth of  35 per cent. However, this has resulted in an increase by just 21 per cent in the gross profit level,  which increased from ` 185 lakhs to ` 224 lakhs in the corresponding period. The operating profits  as such have increased by only around 8 per cent to have increased from ` 124 lakhs to ` 134 lakhs  in  the  corresponding  period.  It  is  also  evident from  the margin  at operating  levels having  fallen  to  12.74  per  cent  in  2010–11  from  15.92  per  cent  in  2009–10.  Thus,  with  an  increase  in  sales,  the  company’s gross margin as well as operating margin has fallen, thus indicating a matter of concern for  the entrepreneur. As such, net profit margin has fallen from 6.8 to 4.85 per cent in the corresponding  period.  This  working  result  comparison  reveals  that  the  company’s  working  performance  has  deteriorated with an increase in turnover, especially in terms of margins at different levels. This has  adversely affected the retained earnings per share, which has fallen from 2.8 in 2009–10 to 2.27 in  2010–11. Earnings per share have decreased from 2.02 per share in 2009–10 to 1.94 per share in  2010–11. Dividend per share has increased from 1.29 to 1.71 per cent in the corresponding period,  and the market price of the share of the company has increased from ` 20 per share to ` 24 per share.  The management of the company has increased the dividend per share in spite of the lower margin  on  profits, which,  in  turn,  has  resulted  in  lower retained earnings  for reinvestment in the company  amounting to just ` 6 lakhs. An increase in the market value in spite of deterioration in profit margins  may indicate investors’ expectations that the company is likely to do better in the coming years. This  could be analysed with the help of changes that have taken place in other ratios.

Table 12.11 Excel Ltd—Profit and Loss Account (` in Lakhs) March 2011 Net sales Cost of goods sold Stocks Wages and salaries Other manufacturing expenses Gross profit Operating expenses Depreciation General administration

1,052 828 632 102 95 224 90 45 18

100 78.71 60.07 9.69 9.03 21.29 8.56 4.28 1.71

March 2010 779 594 463 69 63 185 61 33 14

100 76.25 59.44 8.86 8.09 23.75 7.83 4.24 1.8 (Continued)

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Table 12.11 Excel Ltd—Profit and Loss Account (` in Lakhs) (Continued) March 2011 Selling Operating profit Non-operating surplus/deficit Profit before interest and tax Interest Profit before tax Tax Profit after tax Dividends Retained earnings Per share data (in `) Earnings per share Dividend per share Market price per share Book value per share

27 134 0 134 32 102 51 51 45 6

March 2010

2.57 12.74

15 124 8 131 28 104 51 53 34 19

12.74 3.04 9.7 4.85 4.85 3.99 0.85

1.94 1.71 24 17.45

1.92 15.92 1.03 16.82 3.9 13.35 6.55 6.8 4.36 2.44

2.02 1.29 20 17.03

Table 12.12 Excel Ltd—Balance Sheet (` in Lakhs)

I. Sources of funds 1. Shareholders’ funds (a) Share capital (26.3 lakh shares) (b) Reserves and surplus 2. Loan funds (a) Secured loans (i) Due after 1 year (ii) Due within 1 year (b) Unsecured loans (i) Due after 1 year (ii) Due within 1 year Total II. Application of funds 1. Fixed assets 2. Investments (a) Long-term investments (b) Current investments 3. Current assets, loans and advances (a) Inventories (b) Sundry debtors (c) Cash and bank balance (d) Loans and advances Less: current liabilities and provisions Net current assets Total

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March 2011

March 2010

459 263 196

448 263 186

250 189 61 121 51 70 830

229 51 70 44 18 26 721

578 26 21 5 410 184 200 18 9 184 226 830

564 26 21 5 273 126 119 11 18 142 131 721

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Table 12.13 Excel Ltd—Ratio Analysis 2011 Liquidity ratios Current ratio Acid test ratio Cash ratio Leverage ratios Debt equity ratio Debt asset ratio Interest coverage ratio Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on assets ratio (%) Return on equity (%) Return on capital employed (%) Earning power (%) Dividend policy ratios Dividend yield (%) Dividend payout ratio Turnover ratios Inventory turnover ratio Debtors turnover ratio Fixed asset turnover ratio Total asset turnover ratio Average collection period

2010

415/315 = 1.32 (415 − 184)/315 = 0.73 (18 + 50)/315 = 0.07

278/238 = 1.17 (278 − 126)/238 = 0.64 (11+ 5)/238 = 0.06

371/459 = 0.81 371/830 = 0.45 134/32 = 4.18

273/448 = 0.61 273/721 = 0.38 131/28 = 4.68

224/1,052 = 21.29 134/1,052 = 12.74 51/1,052 = 4.85 51/(830 + 721)/2 = 6.58 51/459 = 11.11 134/830 = 16.14 134/(830 + 721)/2 = 17.28 1.71/24 = 7.12 1.6/1.94 = 0.82 828/(184 + 126)/2 = 5.34 1,052/200 = 5.26 1,052/(578 + 562)/2 = 1.85 1,052/(830 + 721)/2 = 1.36 200/(1,052/360 ) = 68.44 days

185/779 = 23.75 124/779 = 15.92 53/779 = 6.80 53/448 = 11.83 131/721 = 18.12

1.29/20 = 6.45 2.26/3.53 = 0.64

779/119 = 6.54

119/(779/360) = 54.99 days

Liquidity ratios of the company have improved between 2009–10 and 2010–11, thus indicating the company’s better ability to meet its current liabilities. However, leverage ratio in terms of debt equity and debt to assets has deteriorated, which, in turn, implies that the company has borrowed more funds to manage its enhanced activity level. This, in turn, has led to deterioration in the interest coverage ratio from 4.68 per cent in 2009–10 to 4.18 per cent in 2010–11, thus implying the lower capacity of the company to meet its interest commitments (Table 12.13). The company’s net profits have gone down in absolute terms from ` 53 lakhs in 2009–10 to ` 51 lakhs in 2010–11. However, the company has not only maintained but also increased the payment of dividend, which resulted in increased dividend yield as also dividend payout. This is one of the reasons for better sentiments of investors in the market, which has resulted in increased market price of the share. Turnover ratio, especially in terms of debtors’ turnover and total asset turnover, has deteriorated, thus indicating a slow movement of debtors, which is not a good sign. As a whole, the company’s performance and working efficiency have suffered. However, investors’ sentiments continued to be favourable. This demands a greater challenge to the promoters of the company to improve the company’s results in the coming years. Further analysis of these ratios

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could be done by comparing the company’s performance in these two years with competitors to find whether this was general for all companies in the industry or was particular for the company under consideration. A greater insight through ratios can also be gauged by analysing the trend in different ratios for the past four to five years. Limitations of Ratio Analysis  Ratio analysis is certainly one of the very powerful tools that analyses the financial performance of companies. However, this technique has vital limitations that need to be kept in mind. Some of the critical limitations of ratio analysis are given in Figure 12.14.  Ratio analysis, being a quantitative analysis, ignores the qualitative aspects hidden behind financial figures. Thus, financial analysis in quantitative terms without looking into the qualitative features behind the data may pose great threats.  Inflation in the economy in general and its implications in different businesses results in distorting the ratios and their implications.  The lack of reliability of accounting data may give rise to misleading results by undertaking ratio analysis.  Future patterns may not necessarily be realistically projected by using past trends. However, ratio analysis may indicate that the future would be generally guided by past data.  Ratios would mislead investors if they are based on window-dressed accounting information.

In spite of the limitations of ratio analysis just mentioned, it is a highly valuable tool that provides great insight into a company’s financial performance, and it continues to be the key tool for analysts to dissect the company’s financial position. It is important to compare financial ratios of the company with certain benchmark ratios as applicable to that industry, or performance of the average or best competitors in the industry. Keeping in view certain limitations that ratio analysis has, one should use it cautiously and, in particular, to get better clues by asking relevant questions based on different ratios. While using ratio analysis, analysts should be well aware of, and conversant with, the tricks that are used by accountants to present sugar-coated financial results. It is very important to carefully read the auditors’ footnotes and notes to accounts as also the explanation on the performance of the company in

Limitations of Ratio Analysis as a Tool for Management Decisions

Ignores Qualitative Aspects Hidden Behind Financial Figures

Inflation and Its Implications to Different Businesses Results in Distorting the Ratios

Lack of Reliability of Accounting Data May Give Rise to Misleading Results

Future Pattern May Not Necessarily Be Projected by Using Past Trends

Ratios Would Mislead Investors If They Are Based on WindowDressed Accounting Information

Figure 12.14 Limitations of Ratio Analysis

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the light of the auditors’ notes given in the directors’ report. Ratio analysis is a combination of art and science that requires greater depth and experience to analyse and interpret.

12.11  VALUATION RATIOS AND VALUATION APPROACHES Any business venture at a given point of time, and more so at the time of raising further equity or entering into business deals to buy or sell the business, requires valuation of existing business to be able to scientifically and logically negotiate the terms for induction of equity or buy and sell decisions related to the company (Fig. 12.15). Business valuation, therefore, is a process involving a set of procedures that estimate the worth or value of the business at a given point of time. Thus, valuation enables to get the expected price the business would sell for. However, the real price of the business may vary a lot, depending on who determines the business value and who is selling it, at what point of time the sale of the business is proposed to be undertaken and, above all, in case of induction of new equity; it may depend a lot on the urgency of fund requirement and promoters’ ability to induct funds on their own. Although it may appear to be an easy task, getting business valuation or worth assessed involves a deeper thinking and complicated steps to come up with a realistic estimate of the worth of the business. Fundamentally, the most important aspect that governs the valuation of the business depends mainly on the assumptions that one makes for valuation. As such, the worth of the business means different things to different stakeholders. For example, for employees, business worth is linked to what they get paid as salary and bonuses, whereas for owners, it may mean shareholders’ worth or the business connection to the community it serves at large, and for investors, it may mean return on equity or the profit-generating ability of the business. There are several approaches that can be used for valuation of a business (Fig. 12.16). One of the most commonly used approaches in the case of publically held companies, whose shares are actively traded on the stock exchanges, is the price of its stocks in the market vis-à-vis the comparable publicly held companies. However, it may be difficult to exactly identify the comparables in terms of size of operations, product mix, economies of scale, potential for sales and growth, market share captured and territories. This method, although it is quite scientific in approach, may not help in case it is difficult to identify a truly comparable company from among the listed companies in the industry.

Need for Business Valuation Estimating the Worth of a Business Helps in Scientifically and Logically Negotiating the Terms for

Raising Further Equity

Buying Another Business

Selling the Existing Business

Figure 12.15 Need for Valuation of Business

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Market Value Approach Present Value of Future Cash Flow

Factor Approach Method

Earnings Multiples Method

Different Approaches to Business Valuation

Book Value Method

Replacement Value Method

Business Valuation by Direct Capitalization

Figure 12.16 Approach to Business Valuation

12.11.1  Market Value Approach As per market value approach to the valuation of a business, the value or worth of a business mainly depends on the price that a willing buyer will pay and a willing seller will accept for the business. It is presumed that the buyer and seller have full knowledge about all relevant factors that affect the price of the business. Thus, it is an approach to arrive at a fair value of the business, that is, a monetary consideration at which the buyer and the seller would be willing to enter into a transaction in their best interests. This approach also focuses on the market data to support one’s offer or asking price, as the ‘going rate’ by way of price of the stock provides a scientific and logical basis to both the buyer and the seller.

12.11.2  Present Value of Future Cash Flow or Income Approach The basis for this approach lies in looking and assessing the core reason for running a business, which is making money. Thus, the fundamental principle applied in this approach lies in the economic principle of expectation, implying ‘If I invest time, money and effort into business ownership, what economic benefits and the timings of accrual of those monetary benefits would accrue?’ This approach focuses on not only income generation prospects in future but also the risk associated with them. Thus, the valuation process involves computation of the present value of future cash flows from the business. It mainly attaches a value to the future earning capacity of the business. Thus, the method attempts to find out the present value of future net cash flows from the business by suitably adjusting for time value of the

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money and associated business and economic risks. This process of valuation gives better results to the extent that cash and cash equivalent are only considered. The discounted cash flow (DCF) method measures the value of a company by estimating the expected future cash flows and then ‘discounting’ those future cash flows by the required rate of return in order to determine their present value. The art lies in deciding the basis for discount rate and the residual value of a business beyond a short-term forecast period. The discount rate has taken care of the relative levels of business and financial risk. An appropriate discount rate is usually decided based on the ‘risk-free’ rate of return and some premium for investing in the risk of a business venture. Individuals who purchase businesses that have a high potential for success will usually look for opportunities with a minimum of 5 to 10 per cent premium over risk-free investments, as their cost of borrowing usually ranges between 2 and 3 per cent higher than risk-free rate. What an entrepreneur looks at is the spread between their cost of money and the required rate of return, keeping in view the associated risk in the business. Residual value of business assets is estimated by considering the potential sale price for the business at the end of the forecast period and discounting it by an appropriate discount rate to arrive at its present value. The value of the business, then, is the sum of the present values of the net cash flows in the forecast period plus the present value of the residual value at the end of the forecast period.

12.11.3  Replacement Value Method This method is usually used when a unique asset that the buyer really wants to acquire is involved. Thus, the valuation process attempts to estimate the money that would be required to replace that asset. Under this method, the replacement value of assets is estimated rather than the liquidation value of assets, which is usually higher than the book value of assets. Under this approach, liabilities of the business are subtracted from the replacement cost for arriving at the value of the business. This method is prominently used for asset-heavy businesses such as hotels, hospitals, mining business and manufacturing industries. The drawback of this method is that it does not take care of the future earning capacity of the business, which contributes a lot towards the value of the business. The method simply involves listing down all the productive assets and applicable liabilities of the business. The valuer attempts to find out the current cost to replace each asset with a functionally equivalent substitute as also the current value of each liability. Subtracting the estimated value of liabilities from the sum total of replacement values of all assets and adding the liquidation value of non-productive assets gives the valuation of the business.

12.11.4  Business Valuation by Direct Capitalization The direct capitalization approach to the valuation of a business basically requires dividing the expected earnings from the business by capitalization (CAP) rate. The basis lies in relating the capitalization rate in the business with business earnings. Thus, the method only involves dividing the annual net operating income (NOI) by the appropriate CAP rate. The CAP rate that differs from business to business can be determined in one of several ways, including market extraction, band of investments or a built-up method. When appraising complex property, or property that has a risk adjustment due to unusual factors (for example, contamination), a risk-adjusted CAP rate is appropriate (Mundy 1992). The fundamental assumption considered in this method is that the cash flow is perpetuity and the CAP

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rate is a constant. If either cash flows or risk levels are expected to change, then direct capitalization fails and a discounted cash flow method should be used.6 For example, if the capitalization rate is 50 per cent, then the business is about twice worth its annual earnings.

12.11.5  Book Value Method for Valuation The book value of a business is also called the ‘net worth’ of the company. It is arrived at by subtracting total liabilities from total assets, which gives a picture about the worth of the business as per the account books. This approach is simple, as it derives the valuation of a business based on the accounting books of the business. Assets less liabilities equal the owner’s equity, which is the ‘book value’ of the business. The major problem with this method is that accounting records of the business may not reflect a true and fair picture of assets. Further, this method does not give any weightage to the future earning capacity of those assets. The method is useful for start-ups that have just spent a year or two in the business. Adjusted book value method uses suitable adjustment techniques to make adjustments in the stated book value by considering depreciation or appreciation of plant and equipment and real estate, as also necessary adjustments in the inventory stocks that have resulted because of the accounting methods used. Tangible book value business valuation differs from the book value method, as it deducts from the asset value intangible assets such as goodwill, patents, capitalized start-up expenses and deferred financing costs. On the other hand, economic book value business valuation method allows for a book value analysis that adjusts the assets to their market value. This method allows the valuation of goodwill, real estate, inventories and other assets at their market value. Adjusted book value can be arrived at by adding to or subtracting from the book value adjustments made on account of appreciation or depreciation to arrive at fair market value. Intangible assets that cannot be sold are subtracted from fair market value to arrive at the adjusted book value of the business.

12.11.6  Multiple of Earnings Method A simple technique used for valuation is the multiple of earnings method. This method works out very well for companies having an established financial history. The price/earnings (P/E) ratio indicates the value of the business divided by its post-tax profits. Which particular P/E ratio to be used becomes the challenge, as P/E ratio differs from industry to industry and, within industry, from company to company? For example, the P/E ratio for IT and high-technology industry will be very high compared with the real-estate industry. The P/E ratios quoted for the listed companies and industries based on listed shares cannot justifiably be used for small businesses whose shares are not listed on stock exchanges. The general thumb rule is 5 to 10 times the annual post-tax profit as suggested by business advisers for valuation of business. Thus, if a company has an annual post-tax profit of ` 4 crores and 8 is considered a multiple factor, then its valuation would be ` 32 crores.

12.11.7  Factor Approach The factor approach combines three methods for the valuation of a business, namely, earnings approach, dividend paying capacity and book value. The approach requires the determination of appropriate weights with which the capitalized value under different methods gets multiplied to arrive at the overall

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weighted average value of the business. For example, the assessment of valuation through weighted average of these three methods will be as given next. The average valuation arrived at can be suitably used with some adjustments to discount this figure to arrive at per share valuation.  Approach Used ` in Lakhs Earnings method ` 200 × 10 Dividends ` 120 × 20 Book value ` 3,000 × 0.40 Average ` 1,960

Capitalized Value ` in Lakhs

Weight Attached

Weighted Value ` in Lakhs

2,000 2,400 1,200

0.5 0.3 0.2

1,000 720 240

 Check Your Progress   10 Things That Will Make You a Better Boss 

  

It is almost a cliché but it can never be said too many times—your people are the biggest investment your business will ever make. For most businesses, the wage bill is the biggest monthly cost. Here are 10 ways you can become a better boss. 1. Big ears: Good bosses not only listen, they also take a genuine interest in their staff. 2. Long legs: Be seen to be interested and involved. Walk around the place—be seen. 3. White teeth: Smiling bosses make people happy—do not be grumpy, as it can spread! 4. Dirty hands: In most small businesses, there are always grotty jobs such as unblocking toilets. Show that you are prepared to get your hands dirty. 5. An open door: At times, you need to be left alone. Not everything you do can be shared, but being accessible is the best way to know what is happening. 6. Clear vision: People follow leaders who know where they are going and who do not falter. 7. Tongue control: Emotional responses, such as shouting and ranting, have their place but not if it means humiliating your staff. Sometimes, it is best to hold your tongue. 8. Strong stomach: Remember how officers led their men to certain death in the battles of the Somme? Similar to them, if it is getting tough, you should not let your fear show. 9. Firm hand: You are the boss. You are expected to make unpopular decisions where necessary and to be firm with those who do not pull their weight. Do not be too soft. 10. Love: We are all humans. We all like to be loved—good bosses show true love and compassion. Being heartless and brutal will not make you rich.

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KEY CONCEPTS  Financial Statements: These are the written reports of the financial position and condition of a business entity.  Importance of Financial Statements: They are very important for understanding business dynamics, taking corrective actions on time and, more so, for pitching the idea before investors— venture capitalists, seed funders, angel funders or banks.  Dissention Among Promoters: Lack of a clear understanding about vital business matters among promoters may lead to dissension among them.  Accrual Basis of Accounting: Financial statements are prepared by considering the effects of transactions and other events as and when they occur and not when the cash is received or paid.  Going Concern Basis: Financial statements are prepared by assuming that the enterprise will continue in operation for the foreseeable future.  Cash Basis: An organization prepares all its financial statements by recognizing revenue and expenditure on actual cash inflows and outflows basis.  Balance Sheet: This presents a summary of a company’s financial position in terms of its assets and liabilities on a given date.  Assets: These are items having economic value that are owned by or that belong to an individual or business entity.  Current Assets: These are those assets that are expected to be converted into cash in one year or less.  Fixed Assets: These are those assets that are going to be utilized over a period of time—that being more than a year.  Liabilities: These are legal debts or obligations that a company owes others in the process of undertaking business operations.  Owners’ Equity: This is the difference between a company’s total assets and other liabilities. It is the claim that owners of the company have on the company’s assets.  Current Liabilities: These are debts payable within one year by the company.  Long-term Liabilities: These are available for a longer duration, that is, more than a year.  Retained Earnings or Reserves: These are the profits of the company that are not distributed to the shareholders and are ploughed back into the company.  Note Payable: This constitutes a promissory note given as a tangible acknowledgment for the claim made by a supplier, or a note given in recognition of the acquisition of funds from banks or other sources.  Inventories: These are the major portions of current assets constituting raw materials, work in progress and finished goods inventory in manufacturing businesses.  Sundry Debtors/Accounts Receivables: These constitute the claim of the business against customers to whom goods have been sold but payment is yet to be received.  Deferred Taxes: These arise on a company’s balance sheet as a result of temporary differences between the company’s accounting and tax carrying values, the expected and enacted income tax rate and the estimated taxes payable for the current year.

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 Profit and Loss or Income Statement: This provides a financial summary of a company’s operating results for a specified time period.  Operating Cost: This includes all operating expenses to be incurred towards fixed expenses such as rent, utilities, salaries, interest, depreciation and insurance, which are required to be incurred irrespective of production.  Fund Flow Statement: This keeps track of all inflow and outflow of funds that might occur through cash receipt and payment or otherwise.  Cash Flow: This statement reports a company’s change in cash and cash equivalents from one balance sheet date to another.  Break-even Point: This is a point wherein the venture achieves a state of no loss no profit, that is, the sales are adequate enough to take care of the total cost of production.  Ratio Analysis: This involves calculation and interpretation of various financial ratios so as to assess a firm’s working results and performance.  Leverage Ratio: This shows the extent that debt is used in a company’s capital structure.  Liquidity Ratio: This gives a picture of a company’s short-term financial situation or solvency.  Solvency Ratio: This helps in measuring the financial soundness of a business.  Profitability Ratio: This indicates the company’s ability to generate profits from the business for a given product or service.  Return on Assets: These indicate how profitable a company’s business operations are in relation to its total assets.  Return on Equity: This measures a company’s profitability in terms of how much profit the company generates on the investments made by shareholders in the company.  Return on Capital Employed (ROCE): This is a measure of returns that a company realizes from its capital employed.  Dividend Policy: This policy provides insight into the dividend policy of the company and its prospects for future growth.  Turnover Ratio: This helps in measuring an asset’s activity level or efficiency in generating turnover or cash.  Business Valuation: This is a process involving a set of procedures that estimate the worth or value of the business at a given point of time.  Market Value Approach to Valuation: The value or worth of a business mainly depends on the price that a willing buyer will pay and a willing seller will accept for the business.  Income Approach to Valuation: This process involves computation of the present value of future cash flows from the business.  Replacement Value Method: This process attempts to estimate the money that would be required to replace an asset.  Direct Capitalization Approach to Valuation: This approach of a business basically requires dividing the expected earnings from the business by CAP rate.  Book Value Method: This method is also called the ‘net worth’ of the company. It is arrived at by subtracting total liabilities from total assets and gives a picture about the worth of the business as per the account books.

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 Earnings Multiple Method: This simple technique is used for valuation as a multiple of earnings.  Factor Approach to Valuation: This combines three methods for the valuation of a business, namely, earnings approach, dividend paying capacity and book value. ENDNOTES 1. Wikipedia, International Financial Reporting Standards, http://en.wikipedia.org/wiki/ International_Financial_Reporting_Standards 2. Wikiversity, http://en.wikiversity.org/wiki/Underlying_assumptions_of_financial_statements 3. http://en.wikipedia.org/wiki/Deferred_tax 4. O’Brian, K. J., The New York Times, 28 January 2010, http://www.nytimes.com/2010/01/29/ technology/companies/29nokia.html 5. Agriculture Investment, http://www.sopreproc.org/managing-receivables-in-an-animal-feedbusiness.htm 6. Wikipedia, http://en.wikipedia.org/wiki/Income_approach REFERENCES Emigh, J. 1999. ‘Balance Sheet’, Computer World, 86, November 15. McMahon, R. G. P., and L. G. Davies. 1994. ‘Financial Reporting and Analysis Practices in Small Enterprises: Their Association With Growth Rate and Financial Performance’, Journal of Small Business Management, 34, 9–17. Mundy, B. 1992. ‘The Impact of Hazardous Property Material on Property Value’, The Appraisal Journal, LX(4), 463–471.

CONCEPTUAL QUESTIONS 1. What is the purpose and relevance of financial statements for a business? 2. What are the key issues related to financial matters that need to be sorted out in advance among promoters for the smooth running of a business? 3. What are the key characteristics that financial statements should possess for their effectiveness? 4. What is the difference between accrual, cash and going concern basis for accounting? 5. What is the difference between share capital and retained earnings? 6. What are contingent liabilities? How do contingent liabilities affect a business? 7. Differentiate between sundry debtors and sundry creditors. 8. Define deferred tax assets. What is their relevance to the business? How do deferred tax assets affect a business? 9. What are the key steps involved in the preparation of a profit and loss account? 10. What are the simple tools that can be utilized for managing cost? Explain. 11. Differentiate between cash flow and fund flow. What is a more significant tool for managing the financial position of a company and why?

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12. What are the major precautions that need to be taken care of while projecting cash flows? Explain. 13. Differentiate between LILO, FIFO and average cost method for the valuation of inventory with the help of an example. What are the advantages and disadvantages of each method? 14. Define break-even point. What is the significance of computing it? 15. What are the major shortcomings of break-even analysis? Explain. 16. What is the significance of undertaking ratio analysis to understand and anlayse financial statements? 17. What are the major sources of information that need to be kept in mind while using the ratio analysis technique? 18. Differentiate between leverage and liquidity ratios. If liquidity ratios are satisfactory compared with industry norms and leverage ratios that are adverse, what will be the implication in business? Explain. 19. Differentiate between gross, operating and net margins. In case gross margins are exceedingly better than the industry average and net margins are exceedingly worse than the industry average, what would be the implication for the business? 20. Differentiate between return on equity and return on capital employed. 21. What is the implication of turnover ratios in the financial position of a company? 22. What are the key limitations of ratio analysis? Explain. 23. What is the purpose behind undertaking business valuation? 24. Differentiate between earning multiple method and direct capitalization method for valuation. CRITICAL THINKING QUESTIONS 1. ‘The majority of start-ups that fail are the result of weak, inadequate or lack of financial planning and control.’ Identify two start-ups, one successful and the other a failure, and analyse their financial planning and control mechanisms. What lessons can be learnt from these two cases? 2. What is meant by financial management of intellectual property? In what type of businesses would this matter the most? Identify and analyse a business situation wherein a lack of understanding about financial management of IPR resulted in jeopardizing the business as a whole. 3. ‘It is usually said that first 100 days of operation of a business matter the most for its failure or success.’ What are the key aspects that an entrepreneur needs to effectively manage during this critical period? Explain with the help of an example. 4. For a company, if interest coverage ratio is less than one, what would be its implications in the business? In what type of classification will one place such a company? What specific measures will one suggest to improve the financial health of such a company? 5. Receivable management is key to the success of a business. As such, businesses that operate on down payment from customers for their products or services have least risk in business operations. However, invariably, most of the businesses are required to sell their goods and services

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on credit, which poses a great challenge to be managed. Identify two companies, analyse their receivable management periods for the last five years, and compare and interpret the results in terms of their financial position. 6. In case a break-even point for the business is reached only after five years of sales, what are the implications of such a business? Would one like to enter into such a business? Justify your answer by considering an example. 7. If a company continuously incurred cash losses for four years, which has resulted in the complete erosion of its net worth, what kind of measures can help in salvaging the financial position of the company? Identify such a company and analyse its financial position before suggesting measures for improving its financial health. 8. There are different methods to undertake business valuation. Each method has its own advantages and disadvantages. For a start-up having just a year or two of existence, which method would be most appropriate and why? Explain by giving an example. 

 CASE 12.1:  INFOSYS TECHNOLOGIES LTD  Infosys Technologies Ltd is a global technology services firm that provides IT-enabled business solutions to a wide range of clients. The company provides end-to-end business solutions that leverage technology for their clients, including technical consulting, design, development, product engineering, maintenance, systems integration, package-enabled consulting and implementation and infrastructure management services. The company also has developed expertise in providing software services to the banking industry. They have developed finacle, a universal banking solution to large- and mediumsized banks across India and overseas. Infosys BPO (business process outsourcing) is a majority-owned subsidiary of the company. Through Infosys BPO, the company provides business process management services, such as offsite customer relationship management, finance and accounting, and administration and sales order processing. The company has entered into marketing and technical alliance with FileNet, IBM, Intel, Microsoft, Oracle and System Application Products. Infosys Technologies Ltd is a public limited company. It is India’s second largest software exporter company. It was incorporated in 1981 as Infosys Consultants Pvt Ltd by N. R. Narayana Murthy in Bangalore, India. The company was started by seven people with an investment of $250. The company became a public limited company in 1992. It was the first Indian company that was listed on the NASDAQ in 1999. Continuously, in 2001, 2002 and 2003, the company won the national award for excellence in corporate governance conferred by the Government of India. The company is a multinational IT services company with offices in 22 countries and development centres in India, Japan, China, Australia, the United Kingdom and Canada, with headquarters in Bangalore, India. From a mere $250 company in 1981, Infosys Technologies Ltd has come a long way in becoming a global leader with revenues of more than $5 billion.

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In April 2002, Infosys BPO Ltd was incorporated in India to address opportunities in business process management. In 2004, the company acquired 100 per cent equity in Expert Information Services Pty Ltd, Australia, for $24.3 million. The acquired company was renamed as Infosys Technologies (Australia) Pty Ltd. On 2 October 2004, they set up a wholly owned subsidiary in the People’s Republic of China named Infosys Technologies (China) Co Ltd. In 2005, the company established Infosys Consulting Inc, a wholly owned subsidiary in Texas, USA, to add high-end consulting capabilities to their Global Delivery Model. The company was selected as the ‘Best Outsourcing Partner’ by the readers of Waters, a publication covering the needs of chief information officers in the capital market firms. In 2007, the company increased its stake value in Progeon to 98.9 per cent after acquiring shares from Citicorp International Financial Company. Infosys had taken over Philips’ finance and administration BPO centres spread across India, Poland and Thailand for $28 million.1 In 2008, the company established their first Latin American subsidiary, namely, Infosys Technologies S de R L de C V, in Mexico to improve proximity to their North American clients. They also opened a development centre and an office for the region in Monterrey, Mexico. In April 2008, the company acquired Internet Protocol (IP) from an Australian company to add more functionality to finacle. The IP provides a comprehensive set of financial tools to the company’s existing product line. In July 2008, the company launched ShoppingTrip360 to help retailers and consumer packaged goods (CPG) companies achieve visibility into in-store activity. ShoppingTrip360 is a platform that enables a suite of managed-information services to create a 360-degree view of realtime in-store shopper and shelf activity. The company was ranked among the top 50 most respected companies in the world by Reputation Institute’s Global Reputation Pulse 2009. They have been voted the ‘Most Admired Indian Company’ in The Wall Street Journal Asia 200 for 10 years in a row since 2000. The company was also listed in the Most Admired Knowledge Enterprises (MAKE) 2008 study and Forbes’ Asian Fabulous 50 for the fourth consecutive year. In March 2009, the company incorporated a wholly owned subsidiary in Sweden, namely, Infosys Technologies (Sweden) AB. In November 2009, the company opened their second Latin American IT Development Centre in Mexico offering global, near-shore and Latin American clients a full range of IT services, including Business and IT Consulting, BPO, Packaged Solutions Implementation and Infrastructure Management. On 12 November 2009, the company and NVIDIA Corp. entered into a partnership to develop Nvidia Cuda to compute unified device architecture and technology-enabled software solutions. In addition, the company signed a contract with Georgia-Pacific LLC (Georgia-Pacific), a forest and consumer products company, to implement its Supply Chain Visibility and Collaboration Suite. In December 2009, the company set up a wholly owned unit in the United States to tap the multibillion dollar opportunities from government projects. The subsidiary, called Infosys Technologies Inc, is headquartered in Dallas, Texas, where the company has most of their operations. On 14 December 2009, the company launched Flypp, an application platform that empowers mobile service providers to delight digital consumers through a host of ready-to-use experiential applications across the universe of devices, and on 15 December 2009, they launched Finacle (Continued)

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Advizor, an integrated platform that helps banks deliver products and services through a fully assisted self-service channel using existing Internet banking capabilities. In addition, in 2009, the company incorporated a wholly owned Brazilian subsidiary, namely, Infosys Technologia Do Brasil Ltd. Infosys Technologies Ltd.’s profit and loss account and balance sheet are given in Table 12.14 and Table 12.15 respectively. The sales and earnings of Infosys Technologies Ltd, since the listing on BSE till 2000, compounded over 70 per cent a year. In 2000, the then US President Bill Clinton praised India for its accomplishments in high-tech areas by referring to the example of Infosys.2 The present management of the company consists of the following professionals: Designation Chairman and Chief Mentor Managing Director and CEO Director and COO Director Director Director Director Director Director Director Director Whole-time Director Whole-time Director Company Secretary Additional Director

Name N. R. Narayana Murthy S. Gopalakrishnan S. D. Shibulal Deepak M. Satwalekar Marti G. Subrahmanyam Omkar Goswami Sridar A. Iyengar David L. Boyles Jeffrey S. Lehman K. V. Kamath K. Dinesh T. V. Mohandas Pai Srinath Batni K. Parvatheesam R. Seshasayee

Table 12.14 Infosys Technologies Ltd Profit and Loss Account (` in Crores)

Income Operating income Excise duty Net operating income Other income Total income

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March 2010 (12 months)

March 2009 (12 months)

March 2008 (12 months)

March 2007 (12 months)

March 2006 (12 months)

21,140 0

20,264 0

15,648 0

13,149 0

9,028 0

21,140 970 22,110

20,264 876 21,140

15,648 683 16,331

13,149 381 13,530

9,028 227 9,255

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Expenditure Operating expenses Employee cost Power/electricity charges Selling and administration expenses Miscellaneous expenses Total expenditure Operating profit Interest Gross profit Depreciation Profit before tax Tax Fringe benefit tax Deferred tax Reported net profit Extraordinary items Adjusted net profit Adjustment below net profit P and L balance brought forward Appropriations P and L balance carried down Dividend Equity dividend (%) Earnings per share Earnings per share (Adj) Book value

535

March 2010 (12 months)

March 2009 (12 months)

March 2008 (12 months)

March 2007 (12 months)

March 2006 (12 months)

1,913 10,340

1,576 9,960

1,295 7,791

1,163 6,293

717 4,257

122

125

106

88

62

1,363

1,556

1,363

1,299

967

43 13,781 8,329 2 8,327 807 7,520 1,696 0 21 5,803 48 5,755

513 13,730 7,410 2 7,408 694 6,714 898 0 −3 5,819 0 5,819

112 10,667 5,664 1 5,663 546 5,117 650 17 −20 4,470 0 4,470

65 8,908 4,622 1 4,621 469 4,152 375 17 −23 3,783 6 3,777

106 6,109 3,146 1 3,145 409 2,736 325 12 −22 2,421 0 2,421

0

−1

0

−1

0

10,305 2,302

6,642 2,155

4,844 2,672

2,195 1,133

1,428 1,654

13,806 1,434

10,305 1,345

6,642 1,902

4,844 649

2,195 1,238

500 97

470 98

665 73

230 64

900 81

384

311

236

195

250

Source: Capitaline Plus Databases, http://plus.capitaline.com/user/framepage.asp?id=1

(Continued)

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Table 12.15 Infosys Technologies Ltd Industry: Computers—Software—Large (` in Crores) March 2010

March 2009

March 2008

March 2007

March 2006

Sources of funds 287

286

286

286

138

Reserves total

Share capital

21,749

17,523

13,204

10,876

6,759

Total shareholders’ funds

22,036

17,809

13,490

11,162

6,897

Secured loans

0

0

0

0

0

Unsecured loans

0

0

0

0

0

Total debt

0

0

0

0

0

22,036

17,809

13,490

11,162

6,897

Gross block

6,357

5,986

4,508

3,889

2,837

Less: accumulated depreciation

2,578

2,187

1,837

1,739

1,275

Net block

3,779

3,799

2,671

2,150

1,562

409

615

1,260

957

571

4,636

1,005

964

839

876

Total liabilities Application of funds

Capital work in progress Investments

Current assets, loans and advances Inventories

0

0

0

0

0

Sundry debtors

3,244

3,390

3,093

2,292

1,518

Cash and bank

9,797

9,039

6,429

5,470

3,279

Loans and advances Total current assets

3,888

3,164

2,705

1,199

1,252

16,929

15,593

12,227

8,961

6,049

Less: current liabilities and provisions Current liabilities

1,388

1,126

1,095

881

642

Provisions

2,410

2,179

2,636

943

1,575

Total current liabilities

3,798

3,305

3,731

1,824

2,217

13,131

12,288

8,496

7,137

3,832

313

139

99

79

56

Net current assets Deferred tax assets Deferred tax liabilities

232

37

0

0

0

81

102

99

79

56

Total assets

22,036

17,809

13,490

11,162

6,897

Contingent liabilities

2,110

2,370

2,661

1,945

1,434

Net deferred tax

Source: Capitaline Plus Databases, http://plus.capitaline.com/user/framepage.asp?id=1

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 Questions  

1. Work out the cash flow and fund flow analysis for Infosys Technologies Ltd between 2007 and 2010 and critically comment on the cash position of the company. 2. What are the key financial strengths of the company? 3. Compute the different ratios and compare them with industry average for the large software industries. 4. What is the implication of total debt of the company being zero between 2005 and 2010? In what way would this affect the company’s tax planning? 5. Contingent liabilities have increased from ` 1,434 crores as on March 2006 to ` 2,370 crores as on March 2009 and then marginally fallen to ` 2,110 crores as on March 2010. What constitutes these contingent liabilities and what is their implication to the future working of the company?  Endnotes  

1. www.loewenstein.com/clients 2. www.edelweiss.in/market/Information.aspx?co_code=2806&tb…

 CASE 12.2:  JINDAL STRIPS LTD (JSL)  Jindal Strips Ltd (JSL) is an existing profit-making, dividend-paying company engaged in manufacturing steel strips, sheets, sponge iron, ferro chrome, steel ingots, industrial machinery and power generation. JSL was the flagship company of the Jindal Organization, promoted by late O. P. Jindal and associates in 1970 for setting up a plant for the manufacture of HR Steel Strips at Hisar in Haryana. The company, which started operations with a single plant at Hisar, has over the years grown into a well-diversified multi-locational company with plants at Hisar (Haryana), Vasind (Maharashtra) and Raipur and Raigarh (Madhya Pradesh). The group company, Jindal Ferro Chrome Ltd, having its plant at Vizag (AP), was merged with JSL with effect from 1 April 1995. JSL was at one time the largest private-sector manufacturer of stainless steel and CR steel strips in the country, catering to approximately 38 per cent market share of the Indian stainless steel market. JSL has a strong technical team and has mostly relied on in-house technical expertise for its expansion, diversification and new projects. As a result, the company has been constantly upgrading its plant and setting up projects at a much lower capital cost as compared with its competitors and is today among the leading stainless steel producers of the country. At Hisar, the company has the country’s only fully integrated and indigenous stainless steel plant. The company uses state-of-the-art Argon Oxygen Decarburization (AOD) technology developed in-house, which led to improved quality of stainless steel. In March 1997, the unit increased its production capacity from 100,000 to 250,000 tonnes per annum. The unit also undertook a modernization programme for its Steel Melting Shop and Steckel Mill. (Continued)

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In 1990, the company set up a 500,000 tonnes capacity sponge iron unit in Raigarh, which is India’s largest coal-based sponge iron unit and fully developed by the engineers of Jindal. This forms a supply base for the raw materials for the manufacture of steel. The unit also has captive 81.70 MW (effective capacity of 64 MW) power-generating capacity, which has made it self-reliant in the power front and consequently helped in reducing the power bill substantially. Further, the company embarked on an increase in captive power capacity by another 25 MW with assistance from UBI, which has been fully commissioned. The unit also supplies excess power to MPSEB. Other than this, the company also has a 15 MW submerged arc furnace with a capacity to manufacture 30,000 tpa of ferro chrome, two 50 tonne electric arc furnaces each of 180,000 tpa capacity to manufacture mild steel slabs and a coal washery with a capacity of 200 MT per hour. The ferro alloy unit at Kothavalasa near Visakhapatnam has expanded its production capacity from 40,000 MT to 60,000 MT of ferro chrome, an essential ingredient in the manufacture of stainless steel, which till recently was mostly imported. This has led to self-sufficiency and also opened the export market for the company. JSL’s Vasind unit in Maharashtra was the first among the private sector to master the technology of manufacturing quality cold rolled coils and strips of Deep Drawing (DD) and Extra Deep Drawing (EDD) grade. The company has ISO 9002 certifications for its plants at Hisar, Raigarh and Vasind. The Hisar and Vizag units were managed by Rattan Jindal. The sponge iron division, power unit at Raigarh and the machinery division at Raipur were under the control of Navin Jindal. The Vasind unit, which was within the premises of Jindal Iron & Steel Co Ltd, was managed by Sajjan Jindal. The company had undertaken an arrangement by restructuring the company in three entities, namely, Jindal Strips Ltd (JSL) with the Hisar and Vizag units, Jindal Steel and Power Ltd (JSPL) with the Raigarh and Raipur units, whereas the Vasind unit would be hived off to Jindal Iron & Steel Co Ltd. The company has approached the Hon’ble High Courts of Punjab and Haryana and Mumbai for approving the scheme of restructuring. The involved institutions have agreed, in principle, to the restructuring scheme. The purpose of restructuring was to benefit the three new entities to have a focused approach in their existing activities and consolidate their operations further. This would also enable them to join the world leaders in the respective spheres at a future date and have meaningful collaborations. The associate/group companies of JSL are Jindal Iron & Steel Co. Ltd, Saw Pipes Ltd, Jindal Vijaynagar Steel Ltd, Jindal Tractebel Power Co. Ltd and Jindal Praxair Oxygen Co. Ltd Line of activity. The capital structure of the company as on 31 March 1998 was as follows (Table 12.16): Authorized capital: ` 6,000 lakhs Issued, subscribed and paid up: ` 3,152.72 lakhs The equity share capital of JSL amonting to ` 3,152.72 lakhs as on 31 August 1998 was held by the following:

Table 12.16 Shareholding Pattern, 31 August 1998 No. of Shares in Lakhs of ` 10 Each Promoters, directors and associates Group companies

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Percentage

2.769

0.88

172.948

54.86

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Insight from Financial Statements    

No. of Shares in Lakhs of ` 10 Each

Percentage 0.34

1.062

FIs

18.355

5.82

110.489

35.04

NRI individual/companies

8.756

2.78

FIIs

0.33

0.10

Others

0.566

0.18

315.272

100.00

Banks/mutual funds Resident individuals/companies

Total

539

The shares of the company are listed in the stock exchanges of Delhi, Bombay and NSE, and the present quoting is ` 46/- in NSE with the last 52 weeks high and low of ` 97/- and ` 39/-, respectively. The equity share capital of JSL would be split in the ratio of 3:2 between JSL and JSPL subsequent to the restructuring of the activities in different companies as mentioned earlier. The shareholding pattern, on completion of the exercise, would remain unaltered.

 Past Working Result and Financial Position  Profitability analysis for four years (1995–96 and 1998–99 six months ended) is given in Table 12.17. Financial position and past profitability for the company are given in Tables 12.18 and 12.19. Balance sheet analysis may be seen in Table 12.20.

Table 12.17 Profitability of the Company as a Whole in ` /Crores Particulars

1995–96

1996–97

1997–98

1998–99, 6 months

Net sales

922

835

1,072

Total income

976

858

1,093

604

Gross profit

225

188

241

126

GP margin (%)

23.05

21.91

Interest and financial charges (gross)

94

95

126

3

3

Lease rent

22.05

20.86 62

Depreciation

50

60

74

43

Operating profit

81

30

38

21

Non-operational income

13

30

37

9

Expenses w/off

2

2

Profit before tax

92

58

75

30

4

2

54

73

Tax Profit after tax

92

30 (Continued)

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  Entrepreneurship

Table 12.18 Financial Position ` in Crores Particulars

31 March 1996

31 March 1997

31 March 1998

Net fixed assets

653

733

Capital WIP

159

303

54

Investments

199

210

245

Current assets

675

640

783

Less: current liabilities inc1. bank borrowing

427

445

558

Net working capital

248

195

225

5

3

2

1,265

1,444

1,647

20

31

31

Misc. expenditure Total Share capital

1,121

Share capital pending allotment

11

0

0

Reserves and surplus

519

561

627

Secured loans

409

656

718

Unsecured loans Total Net worth Unsecured loan as a percentage of net worth

306

196

271

1,265

1,444

1,647

545

589

656

52

35

46

Debt: equity ratioa

0.75

1.11

1.09

Debt: equity ratio

1.31

1.45

1.51

Current ratioc

1.58

1.44

1.40

b

Without considering unsecured loans. Considering unsecured loans as long-term debt. c Without considering unsecured loans as current liability. a

b

Table 12.19 Jindal Strips Ltd—Profit and Loss Account ` in Lakhs

` in Crores

31 March 1995

31 March 1996

31 March 1997

31 March 1998

Gross sales—total

77,889

92,169

83,468

1,072

Manufacturing

77,889

92,169

83,468

1,072

Year Ended

Less: excise duty

8,953

Net sales—total

68,936

92,169

83,468

1,072

Manufacturing

68,936

92,169

83,468

1,072

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Insight from Financial Statements    

` in Lakhs

Year Ended

31 March 1995

Operational income Total income Add/(deduct) Inc./(dec.) in stocks of WIP, FG Raw materials consumed

31 March 1996

` in Crores 31 March 1997

31 March 1998

2,810

5,456

2,313

21

71,746

97,625

85,781

1,093

4,082

20

865

64

75,828

97,645

84,916

1,157

41,897

45,744

39,473

574

Outside purchase and purchase of goods for resale

1,495

242

Consumable stores

5,012

6,367

5,675

82

Power, fuel and water

6,570

11,362

11,892

145

756

860

799

15

Salaries and wages

1,218

2,231

2,280

30

Admn. and misc. expenses

1,229

3,516

2,755

35

Commission and selling expense

1,627

2,173

2,114

16

Other expenses

4,115

2,619

1,098

17

Total cost

63,919

75,114

66,086

916

PBILD 1 (LBILD)

11,909

22,531

18,830

241

4,818

9,357

9,519

126

Repairs and maintenance

Interest

2

Lease

344

3

Depreciation

3,036

5,002

5,996

74

Operating profit/(loss)

4,055

8,172

2,971

38

Non-operational income

3,225

1,271

2,998

37

10

20

545

2

Net profit/(loss)

7,270

9,423

5,424

73

Dividend–equity

1,018

1,576

946

10

Taxation

Adjustments–total

8

541

(182)

[72]

Reserves

6,260

7,665

4,406

65

Cash accruals

9,295

12,849

10,173

137

Table 12.20 Analysis of Balance Sheet of the Company (` in Lakhs) Year Ended 31 March

1995

1996

1997

1998

Gross fixed assets

54,992

79,370

92,127

136,882

Less depreciation

9,511

14,023

18,877

24,792 (Continued)

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Table 12.20 Analysis of Balance Sheet of the Company (` in Lakhs) (Continued) Year Ended 31 March

1995

1996

1997

1998

Less revaluation

0

0

0

0

Net fixed assets

45,481

65,341

73,250

112,090

Capital work in progress

7,944

15,954

30,320

5,426

Investments

17,122

19,907

20,967

24,512

Current assets, loans and advances Inventories

24,597

22,142

20,638

28,209

Sundry debtors

13,152

17,422

14,445

27,791

683

687

1,471

1,089

35,675

27,277

22,744

21,222

74,101

61,528

59,298

78,311

Cash and bank balance Loans and advances Total current assets

Current liabilities and provisions Sundry creditors

11,378

14,322

13,643

23,368

Other liabilities

7,676

28,843

10,637

9,966

Provisions

1,041

1,665

1,619

1,657

Cash credit

9,962

16,059

14,419

22,879

Total current liabilities

61,224

42,703

39,669

66,780

Net working capital

22,883

24,826

19,629

22,632

601

639

365

210

94,031

126,572

144,531

164,770

2,035

2,040

3,153

3,153

Misc. expenditure Total Represented by Share capital Share capital pending allotment

0

1,113

0

0

Reserves and surplus

37,470

51,869

56,124

62,731

Secured loans

32,726

40,937

65,681

71,814

0

2,000

2,000

3,500

26,800

28,613

17,574

23,573

94,031

126,572

144,532

164,770

Unsecured short-term loans Unsecured loans-short-term Total

 The total income of the company decreased in 1996–97 on account of the modernization-cumupgradation scheme undertaken by JSL on the steckel mill in the Hisar Division, due to which the mill was partly shut down during 1996–97. The total income of JSL increased in 1997–98 with the commissioning of the expansion schemes. The PBILD declined in 1996–97 in line with the decline in total income, but the margins remained at a level of about 22 per cent during the period under review. The operating profits

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Insight from Financial Statements    

543

moved in line with PBILD. During 1996–97, the operating profits decreased due to a decrease in PBILD and an increase in interest burden. Overall, the performance of the company is considered satisfactory with regard to general recessionary trends in the steel industry at that point of time. The equity share capital increased to ` 31 crores in 1995–96 on account of the amalgamation of Jindal Ferro Alloys Ltd (JFAL) with JSL. The share exchange ratio for the amalgamation was 45 shares of JSL for every 100 shares of JFAL. As on 31 March 1998, JSL had investments aggregating to ` 245 crores, which comprised ` 162 crores in investment companies (of which ` 74 crores invested in JVSL), ` 78 crores in quoted equity (` 33 crores in JISCO and ` 38 crores in JVSL), ` 1.10 crores in unquoted preference shares, ` l.83 crores in quoted bonds/debentures and ` 2.62 crores in other unquoted investments. In 1993–94, JSL made a Euro issue of 4.25 per cent convertible bonds of $60 million. The bondholders had an option to convert the bonds just mentioned into an equity share of the company at a price of ` 352 per share. The offer was valid till 28 February 1997. Further, the bondholders had put an option to redeem the bonds at any time after 31 March 1997. As of 31 March 1995, ` 29.6 crores was converted into equity capital at a premium of ` 342 per share. Out of the balance amount aggregating to $50.5 million, which remained outstanding after the conversion, redemption option was exercised by the Euro bondholders, whereby bonds to the extent of $32 million (` 115 crores) were redeemed. The remaining amount of $18.5 million (` 71.9 crores) was outstanding as debt and was scheduled to be retired on 31 March 1999. As of 31 March 1998, secured loans of the company were mainly constituted of debentures amounting to ` 340.07 crores (previous year—` 391.47 crores) and term loans from various AIFIs including IIBI of ` 378.07 crores (` 264.69 crores). Unsecured loans included Euro convertible bonds (` 71.93 crores), privately placed NCDs with Amex Bank (` 21.33 crores), foreign currency loan from Barclays Bank PLC (` 27.91 crores), unsecured loan of ` 20 crores from IIBI, CPs (` 10 crores), fixed deposits (` 15.68 crores), short-term loans from FIs/banks (` 15 crores), security deposits (` 73.20 crores), inter-corporate loans (` 7.1 crores), SICOM incentive loans (` 0.13 crores) and loans under sales tax deferred scheme (` 8.31 crores). The loans and advances of ` 212.22 crores as on 31 March 1998 included loans extended to group companies at ROI of 15 per cent per annum and ICDs of ` 41.28 crores to GE Capital Services Ltd. The ICDs were since received by the company during the current year. The net worth of the company as on 31 March 1998 was satisfactory at ` 656.74 crores.

 Projected Performance  Projected profitability for the years 1998–99 and 1999–2000 for the Raigarh/Raipur divisions are given as follows: 1997–98 (Actual)

` in million 1998–99 (Projected)

1999–2000 (Projected)

Net sales

3,101

3,298

3,658

Gross profit

1,155

1,390

1,497

GP margin (%)

37.2

42.13

40.43 (Continued)

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1997–98 (Actual)

` in million 1998–99 (Projected)

1999–2000 (Projected)

Interest

663

677

574

Depreciation

299

334

337

Other income

73

PBT

266

Tax

−

PAT

266

−

−

382

571

40

60

342

511

Projected growth in net sales at 6.35 per cent in 1997–98 was quite conservative in comparison to average growth of over 25 per cent in the last two years, which, however, was on account of implementation of projects in both sponge iron and power. This is considered quite feasible, as the company had commissioned a new TG set of 25 MW with the financial assistance. The growth in sales during 1999–2000 was estimated at 10.91 per cent due to higher utilization in the mild steel slab plant and power plant. The increase in gross profits, in both absolute terms and percentagewise, was mainly due to higher utilization in the steel slab and power plants. Basic Information on the Company as on 31 March 1998

i. ii. iii. iv. v.

name of the company: Jindal Strips Limited (JSL) constitution: Public Limited Company sector: Private registered office: Post Box No.6, Delhi Road, Hisar–125 005, Haryana factories: Hisar (Haryana), Vasind (Maharashtra), Raigarh (M.P.), Raipur (M.P.) and Visakhapatnam (A.P.) vi. year of incorporation: 1970 vii. line of activities: Manufacture of HR and CR strips, sheets and rounds, ferro chrome, sponge iron and MS ingots viii. installed capacity: As on 31 March 1998 Hisar Plant

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Strip mill

150,000 MT

Plate/steekel mill

100,000 MT

Steel melting

250,000 MT

Cold rolling mill

30,000 MT

Blade steel

6,000 MT

Oxygen gas

20.82 M.Cum.

Argon gas

0.58 M.Cum.

Ferro chrome

5,000 MT

Industrial machinery

209 Nos.

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Insight from Financial Statements    

545

Raipur Plant Machinery

11,500 MT

Ingots and castings

30,000 MT

Vizag Plant High carbon ferro chrome

40,000 MT

Vasind Plant Rolling mill

150,000 MT

Raigarh Plant Sponge iron

500,000 MT

Ingot/slab

400,000 MT

Ferro chrome

30,000 MT

Oxygen gas

4.75 M. Cum.

Power

64 MW

 Questions  

1. Compute the different profit margins for the company between 1995 and 1998. Analyse their trends. Identify the key areas that need to be focused on for improvement in profit margins. 2. Critically comment on the projected profit and loss account of the company by examining the assumptions made. 3. Comment on the restructuring plan of the company. Will it yield favourable results in future? Justify your answer. 4. Compute different ratios and compare them with industry averages. 5. How is the cash flow position of the company? Comment after working out the cash flow for the year 1997–98.

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Financing Venture

13

 LEARNING OBJECTIVES    To learn about the need and importance of finance for an entrepreneurial venture.  To learn about the different financial requirements for starting a venture and their relevance.  To learn about what constitutes working capital requirements and the relevance of cash cycle in business.  To know about the difference between debt and equity and the different types of equity funding.  To know about the different exit options available to investors and their relevance.

 To understand the difference between seed funding, angel funding and venture funding.  To understand the criteria that angel funders and venture funders use to invest.  To learn about the criteria that banks use to invest in a venture.  To learn about the different fund-based and non-fund-based funding options that a bank extends.  To understand the importance and relevance of lease financing.  To know about and understand the funding opportunities for start-ups in India.

Robert Edward ‘Ted’ Turner III, American Media Mogul When you lose small businesses, you lose big ideas. People who own their own businesses are their own bosses. They are independent thinkers. They know they can’t compete by imitating the big guys; they have to innovate. So they are less obsessed with earnings than they are with ideas. —Ted Turner

Robert Edward Ted Turner was born on 19 November 1938 and is known for his entrepreneurial journey and as a philanthropist. He is one of the richest men in the world and is known as the founder of the Cable News Network (CNN), which was the first dedicated 24-hour cable news channel. It revolutionized news media, covering the Space Shuttle Challenger disaster in 1986. It pioneered the live broadcasting of breaking news from around the globe that enabled the whole world to experience the instant availability of happenings across the globe. He is the owner of the Superstation TBS, TNT, CNN, the Atlanta Braves, Hawks Sports organizations and other channels such as Cartoon Network. Turner is one of the top 50 wealthiest men in the world. He is a media mogul who pioneered the concept of the TV ‘Superstation’ broadcasting to cable systems nationwide via satellite. Later on, the system was dubbed TBS (Turner Broadcasting Station), which is viewed in more than 160 million homes in 200 countries and nearly 40 languages. Turner became Time Warner’s largest shareholder with 10 per cent of the company after TBS got ‘merged’ with Time Warner in 1996; Time Warner is the largest entertainment company in the world.

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3

Financing Venture    

547

Turner has been very vocal about ‘giving back’. As a philanthropist, he is known for his $1 billion gift to support UN (United Nations) causes, which led to the creation of the UN Foundation in 1998, a public charity that expands the support for the United Nations.

 13.1  INTRODUCTION  Every venture that introduces a new product or service into the market requires financial funding at different stages of its growth for giving a shape to the idea that is assessed as an opportunity. Fundamentally, the money the entrepreneur has or can arrange from different sources makes a difference in their ability to give a shape to the business and keep it running. All entrepreneurs learn about this aspect sooner or later, irrespective of their background—technical, financial or general. Generally, a professional with a technical background as an entrepreneur hates this job and has a notion that they cannot do this job. They are more obsessed with dealing with customers, inspiring employees, building a winning team and innovating rather than dealing with financial matters. However, this aspect is very crucial for the success of a venture and, therefore, sooner or later, the entrepreneur develops a knack of either dealing with these aspects or inducting a professional to look after these aspects. There are varieties of financial possibilities. What matters the most is the appropriate finances in terms of quantum, timings and other associated terms and conditions attached to getting funds for promoting ventures. The entrepreneur needs to assess well the requirement of funds and the purpose for which these are required, so as to work on the possibility of sourcing the funds from the most appropriate source from the point of view of its relevance and other associated terms and conditions. It is important to know whether funds are required for research on the idea, proof-of-concept stage of an idea, prototype development, product testing on a large scale or launching the venture. However, in general, the entrepreneur thinks that capital is required for starting the business and keeps it operating for a certain period of time. Thus, finance inputs and the finance department play a crucial and an integral role in helping the business arrange for the necessary funds to meet its financial requirements and raise money that would be paid back or rewarded by way of distributing dividends to shareholders. As such, if the start-up venture requires funds to be raised from the beginning, that is, over and above personal contributions, it is really a very tough job to raise capital in the financing valley of death, particularly as one may not have anything other than the idea and its worth in the eyes of funding organizations. It is also a phase for the start-up when there is no cash flow. In most cases, the start-up consists of little more than a person with an idea and a business plan. No one wants to invest at this stage unless the entrepreneur is a proven money maker for investors.1 From an investor’s point of view, putting in money in an unproven business idea is similar to putting good money into a pile and setting it ablaze. Generally, investors, from angels to venture capitalists and bankers, would like to back a venture that has sure chances of success, which implies that a start-up should show that it has customers who are willing to pay upfront or otherwise for buying its products or availing its services. Thus, the greatest challenge to an entrepreneur lies in creating sales without inducting requisite capital first. As shown in Figure 13.1, start-ups before growing into a gazelle’s stage go through tough times of ups and downs. The toughest phase usually lies in incurring cash losses in the beginning that persist far longer than expected (Company A). If a venture sustains this phase and has unique strengths, then it sees the light of the day while passing through a dark tunnel. Once it is able to come out of this phase, it either grows with certain minor ups and downs or keeps moving on the path of growth or passes through

M13_KUMA5784_01_SE_C13.indd 547

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548 

  Entrepreneurship

Company C

Cash Flow

Company A Company B

Downfall and Again a Rise Time Death Valley

Figure 13.1 Growth Trajectory of Gazelles a similar phase of major downfall (Company B). However, due to its financial reserves, a company is in a position to better respond to financial crisis at a later stage of its growth when compared with the initial phase. There are, of course, start-ups that do not undergo major financial challenges in the beginning and have a relatively better and smooth growth from the beginning, as in case of Company C in Figure 13.1. Timely raising of the required financial resources from the most desired sources to meet such eventualities over and above the company’s investment needs becomes the key to growth.

13.2  WHY DOES ONE NEED MONEY? It is easy to say that one needs ` 50 lakhs to start a business that one is looking forward to getting from bank loans or equity funding by self and others. One’s business plan, which might have been prepared in a professional way, may show that if this money comes from a loan, it would be repaid along with interest within three years. If it comes by way of share capital, then one would be able to provide excellent returns to equity holders both by way of worthy shares in terms of business valuation and dividend payments. However, the picture just created and as depicted in the business plan leaves many pertinent questions, as mentioned next, completely unanswered (Fig. 13.2). Pertinent Issues What Do You Need the Money For?

How Much Money Is Required?

What Type of Money Is Required by You?

When Exactly Do You Need Money?

What Is Stored for Investors in Offering You Money?

What Are the Exit Options Available to Investors?

Figure 13.2 Raising Finance-pertinent Issues

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Financing Venture    

     

549

What does one need money for? How much money is required? What type of money is required? When exactly does one need money? What is stored for investors in offering one money? What are the exit options available to investors?

13.2.1  What Does One Need Money For? An entrepreneur may have a clear perspective about their financial requirements and the purpose for which they need the money. However, unless and until the investor can appreciate the requirements and the uses of funds they are going to put in the business, it would be of no use. At times, entrepreneurs just have an instinct that this business would require, say, ` 5 lakhs, and they have ` 10 lakhs with them, so they can enter into a business. However, such instincts or quick ways of measuring the requirement of funds for different purposes may turn out to be a costly affair in reality. It is always prudent to be scientific in one’s approach to estimate fund requirements for the business (Fig. 13.3). 1. First of all, the entrepreneur needs to be realistic in their estimates about fund requirement. It is advisable for the entrepreneurial team to estimate their living expenses on food, housing, clothing, children’s education, utilities and entertainment by putting in all austerity measures. These estimates should help them in their minimum requirements, say for a period of 15 to 18 months, depending on the lead time for the venture to start generating positive cash flow. The involved team should ensure they have sufficient money by way of savings to take care of their livelihood requirements. It is, therefore, said that if one is not married, then may be one’s chances of success in a business may increase, because one may not have many requirements to take care of one’s day-to-day needs. 2. If one has sufficient money to take care of the requirements just stated, then one may have to estimate one’s fixed cost requirements, such as expenditure on plant and machinery, land and building, to begin with. Else, to begin with, it is always desirable to start from garage, home or rented premises, and arrange for fixed cost expenses on utilities and miscellaneous expenses and office equipment and furniture. Thus, the initial outlay on a business comprises fixed cost expenses that

Living Expenses

Fixed Cost

Working Capital

Living Expenses of Entrepreneurial Team by Putting in All Austerity Measures

Fixed Cost Requirements That Are a Must on Plant and Machinery, Land and Building

Working Capital Requirements to Operate the Business on Month-to-Month Basis

Estimate Fund Requirement for Business

Figure 13.3 Financial Requirements for Start-ups

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remain constant regardless of the level of production. These costs do not vary with the level of production activity and are been incurred whether one fully uses the capacity or underuses it or does not use it at all. Fixed cost per unit changes as the volume of business activity changes. This includes expenses on salaries of executives, interest expense, rent, depreciation and insurance expenses. They contrast with variable costs, that is, direct labour and raw materials costs that are distinguished from semi-variable costs. Semi-variable costs vary, but not necessarily in direct relation to sales. They may remain unchanged up to a particular level of sales and increase when sales enter a higher range. For example, the expenses associated with a delivery truck would be fixed up to the level of sales where a second truck is required. As such, no costs are purely fixed; the assumption, however, serves the purposes of cost accounting for limited planning periods. Cost accounting is also concerned with the allocation of portions of fixed costs to inventory costs, also called ‘indirect costs’, overhead, factory overhead and supplemental overhead. 3. After having taken care of one’s personal requirements and fixed expenses required for the venture, an entrepreneur needs to assess the money needed for working capital to operate the business on a month-to-month basis. This mainly consists of differences between the money that the venture would collect from selling the product/service and the money required to meet operating expenses. In the initial phase of the business, the difference between the two would be high. This difference keeps getting narrowed down as the business approaches break-even level of sales. As such, the entrepreneur may have to provide for meeting the cash losses that would be incurred till such time the venture starts generating profits. Thus, money requirements for working capital purpose and short-term financing (less than a year) are called ‘working capital management’. The purpose of working capital management is to make certain that the firm is able to continue its day-to-day operations as planned and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. Many ventures land up into problems after having invested in fixed assets but not having sufficient money to use those assets optimally. This could cause the business to bear the interest on money raised for creating fixed assets but having no inflow of money because of its inability to use those assets by feeding inputs—raw materials and labour. There are a number of businesses that have gone into liquidation because of lack of or non-availability of working capital. Therefore, the entrepreneur has to be extra vigilant and careful while estimating the requirement of working capital for various time periods. While estimating working capital, the entrepreneur needs to precisely estimate the current assets and current liabilities for the venture. The difference between the two gives the net amount of working capital. Thus, current assets constitute the following points:      

stock of raw materials work-in-progress inventory finished goods inventory debtors or receivables expenses paid in advance minimum estimated cash required

The current liabilities constitute the following:    

creditors for purchase of raw materials creditors for expenses advances received from customers dues payable to the statutory bodies

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From the current assets just indicated, the current liabilities are subtracted to arrive at a working capital gap that needs to be taken care of for running the business. Working Capital Gap = Current Assets - Current Liabilities Estimation of working capital requirement requires preparation of cash flow. One measure of cash flow can be determined by the cash conversion cycle, that is, the number of days from the outlay of cash required for raw materials to receiving payment from the customer. As a management tool in the hands of an entrepreneur, this provides the inter-relatedness of decisions relating to inventories—raw materials, work in capital and finished goods, accounts receivable and payable and cash. The entrepreneur needs to minimize it as it is cash that is tied up in the business operations and is unavailable for other activities. It is also called ‘cash cycle’, which is calculated as a sum of the inventory holding period in number of days plus the sales outstanding period in number of days minus the payable outstanding period in number of days. It is calculated in the following manner: Cash Cycle = Number of Days Inventory Outstanding + Number of Days Sales Outstanding Number of Days Payable Outstanding Thus, it accounts for the length of time between when a company pays for purchases of inventory and when it receives cash from its own customers who purchase the inventory. For example, a manufacturer orders for raw materials on 5 March with payment due on 25 March. The goods produced are sold on 10 April with payment received from customers on 30 April. The cash conversion cycle is 37 days: the difference between 25 March, when the company pays its suppliers, and 30 April, when the company receives payment from its own customers. A short cash conversion cycle allows a business to quickly acquire cash that can be used for additional purchases or debt repayment. Pollan and Levine (1990) have suggested a simple technique for start-up ventures to realistically estimate the following points:  Monthly Fixed Costs—Expenses that do not vary with volume of production such as rent, fees, advertising, water, electricity, insurance, depreciation and maintenance of premises.  Estimate Monthly Variable Cost—Costs that vary with volume of production such as raw materials, packaging charges, sales commission and other direct costs of production.  Estimate the Price That Can Be Charged for Products/Services—Estimate the price that a customer will be willing to pay in the backdrop of competitors, market conditions, industry norms, uniqueness of product/service and any legal stipulations on charging price.  Estimate Contribution Margin—Contribution margin is the difference between sales price and variable cost of production. For example, if the price is ` 10 per unit and the variable cost of production is ` 4 per unit, then the contribution margin will work out to be ` 6 per unit.  Estimate the Sales—Estimate the sales that would result in a break-even level.  Project Cash Flow—The difference between income and expenses each month will give rise to cash flow from the venture. These need to be estimated by considering customer payment terms, supplier payment terms, pay back terms for loans and requirement of funds for reinvestments in the business.  Estimate Working Capital Requirements—Working capital requirements for a start-up will be the shortfall in cash flow till break-even level and, thereafter, it would mainly depend on the working capital cycle.

The total fund requirement will be initial outlay plus the working capital requirements. It is better to keep an additional cushion of 15 to 20 per cent over and above the estimated requirements to take care of uncertainties and imponderables.

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One should remember the key lesson in financing a venture—that one will usually need more money than one has expected due to unexpected costs and/or delayed income. Therefore, it is always advisable to keep a financial reserve while planning by way of insurance, extra funding and personal sources of funds to manage uncertainties. Further, it is not always a good strategy to borrow all the money one can get, as one should manage funds very well, more so in the initial phase of launching a business and growth thereafter. Lack of ‘money’ can cause great problems for the business, as is true of having excessive money. It is easier to raise money when an entrepreneur owns funds. Basically, what is important is to make a meticulous plan about fund requirement and then look for appropriate sources.

13.2.2  What Type of Money Does One Require? Thus, broadly two types of capital are generally needed to start a business (Fig. 13.4)—permanent and working capital. Since they do not always come from the same sources, it is important to understand the difference between these two types of capital before attempting to obtain financing. Permanent and longterm capital includes funds for land, buildings, equipment, furniture and fixtures. Financing for meeting these expenses should come from long-term sources such as mortgages, owner’s capital sale of stocks, venture capitalists and long-term lease agreements. Working capital or short-term funds include capital for cash, inventory and accounts receivable. Financing for these items will come from commercial banks and other financial institutions in the form of note payable, accounts-receivable financing, inventory financing, lines of credit and personal loans; from trade credit, in the form of accounts payable; and from credit unions and life insurance companies, in the form of intermediate loans. Another way of differentiating sources of financing is by the way they are raised—by debt or by equity. Business ventures use debt and equity financing to leverage capital expenditures, project development and operational expansion. Without using financial leverage, a company’s financial growth is mainly constrained by internal surpluses leading to retained earnings. Thus, for availing growth opportunities, debt and equity financing are often considered vital to business expansion. Both debt and equity

Long-term Capital Includes Funds for Land, Buildings, Equipment, Furniture and Fixtures

Working Capital or Short-term Funds Include Capital for Cash, Inventory and Accounts Receivable

Financing from Longterm Funding Sources

Financing from Shortterm Funding Sources

Figure 13.4 Types of Funding Requirements

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financing have their own advantages and disadvantages. Keeping in view the associated advantages and disadvantages, an entrepreneur needs to decide about the appropriate mix between the two. Debt is borrowed money from different sources such as banks, organizations and individuals that needs to be repaid along with interest at regular stipulated intervals. The benefit of debt financing is that it is limited to the amount borrowed which an entrepreneur needs to repay over time to a zero sum balance without any further obligation to the lender. Debts for a short term that are less than a year are used for working capital, whereas long-term debts are used for purchase of plant and machinery, land and building, that is, fixed assets that give benefits spread over a long period (more than a year). Funds raised through debt should eventually be paid back, usually by a schedule stipulated by a contract. Individuals and financial institutions lending funds to a firm expect the funds to be repaid as principal and interest payments over the period for which the loan is outstanding. The timely and regular debt repayment is of utmost importance to the entrepreneur, as, in future, lending institutions will judge the loan applications on that basis. Traditional lenders usually evaluate a project by focusing on parameters such as how long the business has been in existence and prospects for income from business, and they look for collaterals for the loan. Bankers usually keep charge of all assets financed by them and ask for further securities to safeguard them by way of pledge of share and mortgage of land and building. Over and above, these bankers would ask one for personal guarantee for the repayment of a loan or at times may look for corporate guarantee of some other good company of one’s own. The greatest disadvantage of debt financing is a fixed obligation to repay interest and principal amount, which puts a burden on the cash flows of the company. Debt financing includes collateralized bonds, debentures, bank loans and lines of credit. Generally, debt financing comes with an interest rate somewhere between 8 and 13 per cent depending on the type of loan and the comfort level to the lenders in terms of risk of default. Debt financing is usually tax exempted, as interest payments are a part of expenses for the business, which get taken care of before arriving at pretax profits. For this reason, debt financing can be less expensive than equity financing. The benefit of equity financing or venture capital is that one receives money in exchange for equity in one’s business in the form of stock. A key benefit of this type of financing is that typically there is no monthly payment requirement to investors. Instead, one gives up one’s ownership interest in the company. Equity funds come from individuals and institutions that invest money without expecting a specific rate of return on that investment, or a specific date by which that money would be returned. Equity investors expect returns from the earnings of the company in the form of dividends and/or an increase in the value of the stock of the firm. Equity investors are thereby interested in the long-term profitability of the firm rather than the short-term cash flows. The shares issued by the company could be common or preferred. Common stock typically carries voting rights that can be exercised in corporate decisions. Preferred stock mainly differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of fixed dividend payments before any dividends can be paid to other shareholders. Convertible preferred stock is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date. Shares of such stock are called ‘convertible preferred shares’. Equity financing can also take the form of employee stock options, which replace direct pay in the form of corporate benefit. In the case of common and preferred shares, equity

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Common Stocks

• Have Voting Rights. • Dividends Subject to Making Profits May or May Not Be Declared by the Board of Directors.

Preferred Stocks

• Does Not Carry Voting Rights. • Carry Fixed Dividend Being Paid Before Any Dividends Can Be Paid to Other Shareholders.

Convertible Preferred Stocks/Bonds

• Convertible Preferred Stock Have an Option for the Holder to Convert the Preferred Shares Into a Fixed Number of Common Shares, Usually Anytime After a Predetermined Date.

Figure 13.5 Types of Equity Stocks financing can be variable based on stockholders’ expectations, that is, the higher the expectations, the higher the cost of financing (Fig. 13.5). There is a hybrid nature of fund raising that has the character of debt as well as equity called ‘convertible bonds/debentures’. These have a fixed interest payment commitment and part or full principal is convertible at some future date into equity, thus providing a mixed character to such funds.

13.2.3  When Exactly Does One Need Money? An entrepreneur taps money from different sources, for different durations with different quantum, depending on the purpose for which money is required. What is more important is to estimate the exact period when money is required, so that the venture does not suffer and, at the same time, there is hardly any excessive money that should lie with the entrepreneur. For example, money for renting a building or buying a land for construction of a building would be required far ahead of time than the money required for plant and machinery. Even the timings for the money required for plant and machinery depend on the machinery being imported or indigenously acquired and the terms and conditions for their repayment. Further, the money required for working capital would be required only after production facilities are ready for entering into the production phase. Even the quantum of working capital requirements will be different for different months during the initial phase of production till such time as production stabilizes to an optimum level.

13.2.4  What Is Stored for Investors in Offering Money to an   E ntrepreneur? Raising money for the venture requires offering terms that an investor should not be in a position to refuse. Each stage of funding and the purpose of funding require different sources of funds to be

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tapped by offering different terms and conditions. An entrepreneur should approach an investor after doing a thorough homework about their business and the alternate source of investments that can be tapped. The entrepreneur should be ready to face different questions from investors before they come to the conclusion of associating with the business and offer them term sheet. For example, a loan required under hire purchase scheme for buying a vehicle does not involve many complications, as it involves low risk and scheduled repayments. The entrepreneur may have just to approach someone who can expeditiously process their request and offer better terms in terms of repayment instalments and schedule. However, a term loan from a bank may involve complications in terms of handling interest issue, security matters, repayment schedule, terms of release of money and moratorium required for repayment to begin. Similarly, the process may get further complicated when an entrepreneur is looking for investment from a venture capital firm. The entrepreneur has to decide how much of equity stake is to be offered at what terms.

13.2.5  What Are the Exit Options Available to Investors? As an entrepreneur, one will have a long-term plan to grow the business and enjoy building it over the years, but an investor may not be much concerned about all this except for expecting reasonably good returns at the earliest. That is why a majority of investors look forward to a planned exit strategy that they work out at the time of making investments. Therefore, it is always advisable for the entrepreneur to work out the ideal exit strategy for potential investors before seeking funding. Investors basically look forward for a maximum return on their initial investment that should be commensurate with their risk. It is the well-thought-out exit strategy that provides them with the incentive to invest in one’s venture. Venture capitalists often have a number of investments with which they get associated, depending on their size of funds. They basically attempt to ‘hedge their bets’ by depending on one of the investments making it really big. Some of the exit routes that investors look forward to are as follows: disposal of business to a large company having synergy with the business share repurchase at some specified terms by the entrepreneur public share quotation in stock market and using the platform to exit plan for franchise business opportunity. It is a successful strategy for the large-scale growth potential of a business  using merger as a route that provides an opportunity to use combined resources of two businesses for growth, thereby leading to scope for the investor to receive increased worth for their investment    

13.3  DIFFERENT STAGES OF FINANCING The definitions of the types of start-up funding are divided into ‘early-stage’, ‘expansion’ and ‘acquisition/buyout’ financing (Kuratko and Hodgetts 2007) (Fig. 13.6).

13.3.1  Early-stage Financing Pre-seed stage funding involves a relatively small amount of capital provided to an entrepreneur to prove a specific concept having a potentially profitable business opportunity. The concept is yet to be developed and proved. However, it may have a lot of potential commercially, as and when it gets established. The funds are provided for product development purpose as against pure research. Seed-stage funding is provided to newly formed companies for use in completing the product development stage to take it to the test marketing stage and in initial marketing. These companies may

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Early-stage Financing/Seed Financing

Seed funding—provided for product development. Start-up financing—provided to companies completing productor service development and initial marketing.

Expansion Financing

Funds to support production activity requiring inventories and sales

Mezzanine Financing

Funds for expansion of activity required for production, marketing or additional product development, new technology or introduction of new product line.

Figure 13.6 Different Stages of Financing be in the process of being organized or may have been in business for a short while. As such, this funding is more prominent for the incubates associated with established incubators for the promotion of entrepreneurial ventures. As such, the product is yet to be taken to the commercial stage. Thus, ‘seed financing’ is a relatively small amount of capital provided to an inventor or entrepreneur to prove a concept and to qualify for ‘start-up’ capital. This may involve product or service development, market research, building a management team and developing a business plan. ‘Start-up financing’ is provided to companies for completing product or service development and initial marketing. These companies are generally in business for less than one year and have not yet sold their product or service commercially. Such firms have usually made market studies, assembled key management, developed a credible business plan and are ready to do business. ‘First-stage financing’ is provided to companies that have expanded their initial capital and require funds to initiate full-scale manufacturing or servicing. Thus, the purpose of funding at this stage is to the companies that have expended their initial capital and now require funds to initiate commercial-scale manufacturing and sales.

13.3.2  Expansion Financing ‘Second-stage financing’ is working capital for the initial expansion of a company that provides services, or produces and ships products, and has growing accounts receivable and inventories. A company needs funds to support its production activity requiring inventories, and sales might result in cash with some time gap, thus resulting in a need for financing receivables. The company might not be earning profits at this stage. However, a progressive company is expected to generate profits soon. ‘Third-stage financing’ or ‘mezzanine financing’ is required by the company whose sales volume is increasing and that has achieved its break-even level of sales or has even started earning profits. The required funds by the venture at this stage of funding are used for the expansion of activity requiring funds for production, marketing or additional product development, new technology or introduction of a new product line. ‘Bridge financing’ basically refers to short-term funding requirements pending the flow of funds expected from different anticipated and expected sources. This is mainly used to maintain the required liquidity in the system. It also helps IPO (initial public offering)-driven companies to obtain short-term financing that will be repaid when the IPO funds are received by the company. Usually, pending receipt of IPO funds, these funds are supplied by investment banks or the banks underwriting the public issue.

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Bridge financing is also extended by the banks underwriting an issue for raising money through bonds/ debentures. The job of underwriters is to subscribe to the issue in the eventuality of not getting full subscription from the public for shares or bonds. It can come in the form of stand-alone subordinated debt or by way of equity. Usually, pending receipt of IPO funds, it is obtained by way of subordinated debt. Bridge financing is also used when a restructuring is undertaken if there are early investors who want to reduce or liquidate their positions, or when the management has changed the stockholdings of the former management and are buying out former positions to relieve a potential oversupply of stock when becoming public. Bridge financing is of two types, namely, closed bridging and open bridging. Closed bridging finance is where one has a date for the exit of the bridging finance and is sure that the bridging finance can be repaid on that date. This is less risky for the lender and, thus, the interest rates charged are lower. As against this, in open bridging, the funds raised may not have a stipulated date for exit linked to the receipt of the funds by the company against which bridge financing is received. Usually, bridge financing is so structured that the arising obligations towards repayment are met from the proceeds of expected tied-up source. Bridge financing can also involve restructuring of major stockholder positions through secondary transactions. This is done if there are early investors who want to reduce or liquidate their positions. This might also be done following a management change so that the ownership of the former management (and relatives or associates) can be purchased before the company’s going public.2

13.3.3  Acquisition/Buyout Financing ‘Acquisition financing’ provides funds to finance an acquisition deal to expand a business by acquiring whole or part of another business entity. ‘Management/leveraged buyout financing’ enables an operating management group to acquire a product line or business from either a private or public company. The acquisition could also be related to the purchase of select assets or stock. A leveraged buyout (or LBO or ‘bootstrap’ transaction) occurs when an investor, typically a financial sponsor, acquires a major stake in a company’s equity and where a significant percentage of the purchase price is financed through borrowed funds. The assets of the acquired company are usually used as collateral for borrowing funds. Typically, leveraged buyout uses a combination of various debt instruments from banks and debt capital markets. The bonds or other papers issued for leveraged buyouts are commonly considered not to be of investment grade because of the significant risks involved.3

13.4  SOURCES OF FINANCE 13.4.1  Bootstrapping While thinking of starting a venture, the first and foremost way to raise money that should be considered is bootstrap financing, that is, using one’s own money to get one’s business off the ground. This is the simplest, easiest and the best form of internal funding, because it uses one’s own money or internal generations for meeting capital requirements to launch a venture, meet operational expenses or for expanding one’s business. It is a way of starting a venture or expanding one’s operations without depending on outside sources of funding. It is the best source, as the whole equity of the venture remains with the entrepreneur who need not get loaded with paying interest on borrowed money. Further, having pumped in one’s own money, the entrepreneur is bound to be far more creative in running the business to earn higher profits.

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13.4.2  Sources of Bootstrapping There are a number of sources of financing available through the bootstrapping method. Some of the prominent ones are given as in Figure 13.7. Trade Credit   Trade credit is a typical source of bootstrap financing. Many financers are willing to offer credit to a new business through the use of normal credit cards or through extended terms. To obtain credit from major suppliers, entrepreneurs should meet suppliers and give them a copy of the business plan highlighting what benefits they may draw from the business in the future. They should clearly state how much of credit would be required immediately and how much in the future. The suppliers would try to give extended terms of credit to secure the firm’s goodwill in the future without charging interest. However, when one starts a business and does not have any track record with the supplier, the supplier may ask one to pay in advance or cash or cheque on delivery. After having established a track record, one can negotiate the terms of payment and should attempt to get as long a credit period as the supplier can stretch. Despite its advantages and the incentive to stretch trade credit period, it is always advisable to use trade credit as a source of capital to meet relatively small, shortterm needs. It should not be used to finance long-term requirements of the business. It is important to remember that stretching the terms of payments to creditors may result in depriving the access to other, more competitive suppliers who might offer lower prices, a superior product, better discounts on prices and reliable deliveries. It is advisable for the entrepreneur to estimate the cost of trade credit and work out exact benefits, if any, that may accrue to the business by availing of trade credit or otherwise. For example, assume one makes a purchase from a supplier who is willing to extend credit to one. The supplier is willing to offer 3 per cent cash discount with 10 days and a net date of 30 days. As such, the suppliers are saying that if one pays within 10 days of delivery, then one gets 3 per cent discount on the purchase price. However, by forfeiting the 3 per cent discount, one is able to use one’s money for 20 more days. On an annualized basis, this actually costs one 54 per cent of the total cost of the items one purchases from this supplier!

Trade Credit

Customers

Manage Your Equipment Expenses Real Estate Suppliers and Cash Flow Well

Figure 13.7 Methods of Funding Through Bootstrapping

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Customers   Customers are also an excellent source of bootstrapping. One entrepreneur used this type of financing when installing a distribution system for their first customer. The entrepreneur designed and installed the system, but the customer purchased all the materials, thereby eliminating the need for more customers and the entrepreneur’s expense to purchase them. Another way of obtaining bootstrapping from customers is by having them pay the full amount in advance. It would be feasible to get it depending on the intense need for the product or service by the customer who does not have any other alternative to meet the same. Further, the entrepreneur may ask for partial or progressive payments on jobs that extend over a long period of time. This is typical of new firms, particularly in the contracting or construction business. Another way of customer financing is by asking the customer to write a Letter of Credit (LC) to the entrepreneur. For example, suppose one is starting a business manufacturing oxygen cylinders used in industries. A large number of industries place an order with one’s firm for a steady flow of these cylinders. The major supplier from whom one proposes to procure material for manufacturing cylinders is located in India. In this scenario, one obtains an LC from one’s customer when the order is placed, and the material for the cylinders is purchased using the LC as security. One will not be required to spend any money for the purchase of materials. Manage One’s Expenses and Cash Flow Well   An entrepreneur can improve their bootstrap financing dramatically by keeping a strict control and vigil over expenses. This would require one to only spend on items that are a must and productively contribute to business growth. Further, one should keep inflows high and outflows low. One has to always keep working for ways and means to persistently widen the gap between the two, so that surplus cash is generated. Cash flows are fundamentally the lifeblood of any business. For improving cash flows, the entrepreneur should monitor constantly to improve accounts receivable by collecting them quickly. The entrepreneur should shed any excess inventory and see whatever time one can buy for paying one’s creditors without straining the relations or inviting any penalties. Real  Estate   Owning real estate for running a business may be prohibitively expensive for the start-up. It is usually not possible to own the land or office space that is used to set up the firm in the initial phases itself. Hence, many ventures start their operations from garage or home. Another better way could be to take land and building on lease or rent to save the much-needed cash input. However, the judicious and better use of already owned capital can be an excellent source of bootstrapping. The entrepreneur may own real estate that has reasonably appreciated in value over time. Loans on commercial or residential property can be borrowed to the extent of 75 per cent of the appraised value and may be amortized for over a period of 10 to 25 years. For example, the entrepreneur may own a house that was purchased for ` 20 lakhs five years ago, and still has to repay about ` 5 lakhs on the mortgage. Now, the appreciated value of the house may be about ` 45 lakhs. The owner can obtain another loan on the part of the appreciated value of the house, the original mortgage interest remaining the same. The owner could also refinance the home, meaning that they could pay off the loan amount of the initial mortgage and obtain the difference in the value of the property as investment for their start-up. Unless and until it is a must from long-term growth prospects of the business and the requirement of owned land and building, it is always better to take such facilities on lease or rent. This helps in reducing start-up costs, because lease rentals have a greater flexibility and cost far less than owning land

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and building. Further, this also helps one in negotiating the terms of lease linked to seasonal peaks or growth patterns. Equipment Suppliers   If an entrepreneur spends a substantial sum of money on purchase of equipment, they may find it difficult to have sufficient working capital to keep their business going in the initial phase of growth. Therefore, instead of outright purchase of equipment out of one’s cash, it would be desirable to take it on lease. It is common for businesses to lease real property for retail facility, office space, production plant and farmland. There are multiple advantages that it offers to the small-business owner (lessee) as well as the property or equipment owner of that property or equipment (the lessor). The lessee is the party in a business transaction who enters into a contract to use the property or equipment for a specific period. The business transaction is regulated by the terms and conditions of lease agreement. In return for the privilege of using the equipment or property for the specific period as agreed to, the lessee agrees to pay the owner or lessor regular payments called ‘lease rentals’ which are in accordance with the terms specified in the lease agreement. The lessor enjoys all tax benefits and may gain from capital appreciation on the property, as also make profit from the lease. The lessee benefits by making smaller payments, retaining the right to walk away from the equipment at the end of the lease term and being able to negotiate built-in maintenance provided by the lessor. If provision of the lease agreement provides, the entrepreneur may also derive the advantage of terminating the lease before expiry of the period as per the specified terms. Lease terms can be modified by way of lower down payment, maintenance cost as built in the lease package, extension of the lease term to cover the entire economic life of the property and a purchase option, which can be added to the lease, thus allowing one to buy the property after the lease period has expired. Equipment can also be procured from suppliers by entering into two types of credit contracts to finance equipment purchases4: i. The conditional sales contract, in which the purchaser does not receive title to the equipment until it is fully paid for. ii. The chattel-mortgage contract, in which the equipment becomes the property of the purchaser on delivery, but the seller holds a mortgage claim against it until the amount specified in the contract is paid. By getting equipment suppliers to finance the purchase of required equipment for the business, the entrepreneur reduces the sum of money required upfront for starting the business. Banks and financial institutions also finance 75 to 80 per cent of the equipment value by hypothecating the equipment as security. Such loans are repayable in monthly instalments spread over three to five years, or the useful life of the equipment, whichever is earlier. Thus, bootstrapping is best applicable to small start-up firms that need low levels of investments in terms of office space and equipment, such as consultancies, construction firms, designers, architecture firms and general stores. Varied combinations of bootstrapping should also be considered while funding the start-up. Start-up ventures can benefit a lot by resourcing to bootstrapping. The availability of bootstrap funding depends on the entrepreneur’s ingenuity and the effectiveness of the business plan, goodwill of the entrepreneur and the entrepreneur’s ability to manage initial input costs. It is important to highlight in the business plan about the benefits that the creditors tend to gain in the long term. Above all, the entrepreneur should carefully plan the funding process with regard to what amount of credit would be required initially and what amount would be needed at later stages and how bootstrapping can help them in reducing the cost of funds.

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Example: Aldrich and the Yankee Candle Company—The Classic Bootstrapper5 Aldrich, who lives in Topsham, Maine, started his company in 1992 with $20 borrowed from a friend.  Applying  profuse  amounts  of  Yankee  ingenuity,  frugality  and  hard  work,  he  grew  his  business  to  $30 million in annual revenues after seven years. Seven timeless bootstrapping rules emerge from  his story: Rule 1: Defy adversity. Aldrich had been without steady employment for two years when he began, at  age 38, to indulge in a candle-making hobby at his kitchen table. His hot-tub distributorship, Heaven  on Earth Hot Tubs, had gone bankrupt in 1990, and Aldrich had applied for as many as 20 to 30 jobs  a week. ‘I was losing out to people with master’s degrees for menial management jobs,’ he recalls.  His wife, Sally, supported the family on her $50,000 nurse practitioner’s salary and moonlighted on  the second shift at a local hospital. To pursue his candle making, Aldrich borrowed $20 from a family  friend to buy wax, fragrance and dye. Rule 2: Know an opportunity when one sees it. ‘I would give the candles away to family and friends,  and they would ask for more,’ says the soft-spoken Aldrich. ‘I was so excited about making candles  that  sometimes  I’d  wake  up  at  3  a.m.  and  start  melting  wax.’  Yankee  Candle,  now  a  $185-million  company  in  South  Deerfield,  Mass.,  was  then  the  best-known  American  candle  maker.  Aldrich  differentiated his products from Yankee’s by using square, rather than round, containers and by fitting  his candles with two wicks instead of one. He began selling them at local crafts shows. Rule 3: Look for freebies everywhere. Similar to every good bootstrapper, Aldrich did not allow his  limited  resources  to  dissuade  him.  He  researched  glass  manufacturers  in  the  Thomas  Register,  a  directory  of  corporations  organized  by  products,  calling  only  those  with  800  numbers.  Identifying  himself as a candle manufacturer, he cajoled them into giving him free samples. ‘Every day the UPS  truck would drop off containers of glass,’ says Aldrich. Rule 4: Carpe diem. On a trip to Florida in December 1992, Aldrich acted on a whim. ‘I was driving  through the Poconos, and I saw billboards for a candle store,’ he recalls. ‘So I stopped in and told  the owner that I had a bunch of candles in apothecary jars that I was giving as Christmas gifts.’ The  owner trudged out to Aldrich’s Dodge Caravan, took one look at the candles and told Aldrich to call  him as soon as he returned to Maine. ‘He was my first customer,’ says Aldrich. ‘It was a 3,400 order.’ Rule 5: Draft one’s family and friends. Aldrich and his wife set up production in the kitchen of their threebedroom split-level home, enlisting weekend help from family and friends, who were ‘paid in candles.’  Even  Aldrich’s  seven-year-old  daughter  pitched  in,  as  did  his  two  older  daughters,  on  weekends.  ‘I’m sure we violated child-labor laws,’ Aldrich quips. Neighbours commented on the aromas wafting  from the Aldrich home, but few had any idea that the family was running a full-blown business in the  residential area. ‘I’d have to load the candles in my minivan and go meet the trailer truck at the edge of  the neighborhood,’ Aldrich relates. Once, he tried to sneak a truck into the neighbourhood; the driver  blew his air horn at 6 a.m., virtually blasting Aldrich and his neighbours out of bed. Rule 6: Think of cash as king. Similar to many entrepreneurs who are initially strapped for capital,  Aldrich never forgot his early cash-flow lessons. He has always ranked his customers as an A, B or C,  according to how quickly they paid him. In the peak season, he used to take care of his ‘A’ customers— those who paid him within 35 days—first, which lowered his average accounts-receivable turnaround  to 36 days. (Aldrich’s research revealed that the industry-wide figure at the time was 42 days.) That  speedy return, coupled with the 45-to-60-day payment terms that he negotiated with major suppliers,  secured a critical cash-flow edge in his favour. Rule 7: Remain true to one’s humble beginnings. Since Aldrich took on a manufacturer’s representative  to market his candles at gift stores throughout New England, Village Candle’s annual growth averaged  (Continued)

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more than 100 per cent. However, Aldrich remained cautious. ‘We only grew within our means,’ he says.  ‘I could have grown the company 200 per cent to 300 per cent a year if I had wanted to borrow money,  but then you lose quality control.’ Thoroughly committed to using internal financing, Aldrich has rejected  overtures from bankers wanting to lend the company money to fuel faster growth. ‘Our philosophy,’ he  explains, ‘has always been to build the business one brick at a time.’6

13.5  SEED FUNDING Seed funding is at times misunderstood with start-up capital, but as such, they are two different things. Seed funding is mainly meant for developing a business idea, creating the first product and test marketing the new product or service for the first time. Ventures eligible for seed funding are usually in their initial phase, and have never created a product or service for commercial sale. Seed funding is most commonly provided by government bodies, angel or other private investors with a basic motive of creating new entrepreneurs. While seeking seed funding support, one should make sure that there is a clear exit plan for the investor in place after a few years. In order to qualify for this sort of financing through an investor, it is important that there are substantial market prospects for one’s product or service.

13.5.1  Angel Investors Individual venture capitalists interested in providing budding entrepreneurs with seed and start-up financing are commonly called ‘angels’. An angel investor is an affluent individual who provides capital for a business start-up, and usually looks forward for an equity stake in the company. Unlike venture capitalists, angels typically do not manage the pooled money of others in a professionally managed fund. However, angel investors often organize themselves into angel networks or angel groups to share research and pool their own investment capital.7 Angel funders mainly fill up the gap between friends, family and fools and venture capitalists in fund requirement by the start-ups. This is also, therefore, called ‘second round of funding’ for high-technology and high-growth start-ups. Since they take a high risk through funding new ventures, they expect a high return on investment that may range between 10 and 20 times their investments within five years, with a well-defined exit strategy. Capital from angel investors is likely to cost no less than 10 per cent of a company’s equity and, for early-stage companies, perhaps more than 50 per cent. In addition, many angel investors charge a management fee in the form of a monthly retainership. Therefore, it is also called ‘high cost funding’, which start-ups may have to bear, because banks may not be keen on funding early-stage ventures. According to the Centre for Venture Research at the University of New Hampshire, these informal investors invest $10 to $20 billion in more than 30,000 ventures annually. Business angels, unlike other venture capital investors, prefer to invest their money in a new business as early as possible. They usually take a smaller share of one’s business than a venture capitalist and stay out of the day-to-day operations. They understand high risk and expect high return (Chandrakanth). The key advantages and the value that a venture receives by getting funds from angel investors are getting their advice based on experience in technology and marketing; networking with customers for sales; contacts for raising further money and, above all, they are relatively far less intrusive and interfering in business dealings and operations when compared with venture capitalists. They mainly assess the worth of a venture to get associated with based on enthusiasm of the entrepreneur and their team, trustworthiness, market potential for the venture/idea, niche market vis-à-vis competition, growth

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potential for the venture under consideration and, above all, the perceived financial gains that they can fetch. They also look for other aspects such as proved prototype, strategic alliances, if any, that the entrepreneur has entered into or plans to enter, sustainable competitive advantage, exit strategy and the pre-money valuation of the venture. The best way to find angel investors is through personal introductions. One could try to cold-call angel groups near one, but angels, similar to venture capitalists, (VCs) will pay more attention to deals recommended by someone they respect. Deal terms for funding from angels differ a lot. There are no broadly accepted standard terms and conditions. Sometimes, angels’ deal terms are as complicated and thought provoking as VCs. However, there are others who invest in the earliest stages, with simple terms in a two-page agreement. Angels who make occasional investments as individuals may not themselves know what to stipulate. Their main concern is just investment in a particular start-up. At times, an angel asks his lawyer to create a vanilla agreement, and the terms end up being whatever the lawyer considers suitable and reasonable. In practice, it may result in entering into an agreement that the lawyer finds lying around their firm in similar situations. However, there are instances wherein the term sheet is created professionally from scratch with the help of professionals. What is important for a start-up is to look for an angel who goes with a simple, understandable term sheet and is keen on getting associated with the venture by releasing funds in time. As such, the funding delays are a big distraction for founders, who are passionate about their venture and would spend maximum time in thinking about giving it a concrete shape rather than wasting their time and energy in worrying about investors. Therefore, it is always advisable for start-ups to create a competition for the investor by simultaneously lining up few genuinely interested investors. When an investor knows that there are other investors lined up, they will be serious enough to close the deal at the earliest, mainly because they would realize the worth of a venture, as other investors are also interested. A similar situation arises with acquisition deals. No one would be interested in acquiring one till someone else is equally and genuinely interested in one. Therefore, the key to closing deals lies in never stopping to pursue alternatives. The knack lies in confirming the seriousness on the part of investors or acquirers based on negotiations and the steps taken by them to reflect their seriousness. Angel investors fall in different categories, as depicted in Figure 13.8. Corporate  Angels  These are usually senior professionals at Fortune 1000 corporations who have been laid off with generous severances or have taken early retirement. In addition to their investment Corporate Angels

Entrepreneurial Angels

Enthusiast Angels

Micromanagement Angels

Professional Angels

Figure 13.8 Different Types of Angel Funders

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by way of cash, entrepreneurs may get advantage from them by way of networking for business development. They may also look for senior positions such as business development in the venture. Investments usually range from $200,000 to $1 million. Entrepreneurial  Angels  These are the most prevalent investors. Most of them own and operate highly successful businesses and are really looking for synergy with their current business, a way to diversify their portfolio or a way to prepare for life after their current business no longer requires their attention. These angels almost always take a seat on the board of directors but rarely get into day-to-day operations by accepting regular positions. They make fair-sized investments, typically from $200,000 to $500,000. Enthusiast  Angels  These angels are keen on entering into deals for funding start-up ventures. They are usually old and independently wealthy from success in a business that they started and have an abbreviated work schedule. For them, investing and encouraging new start-ups is a hobby and, thus, they generally do not seek a role in management or a place on the board. They tend to invest in technologies that can bring out a major change in markets in future as also in people and ideas. Their investments tend to be small, from $10,000 to $200,000. Micromanagement Angels  These are very serious investors. Some are born wealthy, but the vast majority attain their wealth through their own efforts. They look forward to having a controlling position in the company they invest in. Though they generally do not seek an active role in company management, they usually demand a board seat and expect to play an active role in company strategy. They generally invest $25,000 to $200,000. Professional Angels  The term ‘professional’ in the context of angel investors refers to the investor’s occupation, such as doctor, lawyer and, in some instances, accountant. Professional angels like to invest in companies that offer products or services in which they have a rich professional background and are, thus, offering their sector expertise to the investee company without getting deeply involved in the business. Thus, their association helps a venture in getting an additional value through legal, accounting or financial advice for which one would otherwise have to pay a fee to receive. These angels generally invest between $25,000 and $200,000. Angel funding is most appropriate for early-stage companies with no revenues. Thus, ventures looking for equity capital from angel investors should welcome the outside ownership and perhaps be willing to relinquish some control. To successfully accommodate the interest of angel investors, entrepreneurs should also be able to provide an exit to these investors in the form of an eventual public offering or buyout from a larger firm. Typical companies seeking angel funding range from companies developing a product to those with an established product or service for which they need additional funding to execute a marketing program. In addition, angel investors are appropriate for companies that have increasing product or service sales and need additional capital to bridge the gap between the sale and the receipt of funds from the customer.

13.5.2  Where to Look for Angel Funding Angel investors are difficult and also easy to find. The situation is similar to searching for gold. Generally, it is difficult to find, but once one hits a vein, all one’s hard work pays off in a big way. Here are the places angels might be hiding: Universities According to Bob Tosterud, Freeman Chair for Entrepreneurial Studies at the University of South Dakota, angel investors tend to hover near university programmes because of the high level of

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new business activity they generate through research in developing new technologies. Therefore, it is advisable for ventures to get associated with universities having strong entrepreneurship development programmes. A liaison and association with such centres can be very helpful in getting links to angel investors. Business Incubators A business incubator is a facility designed to assist business ventures to become established and sustainable during their start-up phase. For this, incubators provide various services, including shared premises, business advice, business services, access to investor, market and international networks, mentoring and a fulltime, hands-on management team. According to the National Business Incubation Association (NBIA), there are about 1000 business incubators in North America. At first blush, incubators appear to be the mere bricks and mortar facilities that offer entrepreneurs reasonable rents, access to shared services, exposure to professional assistance and an atmosphere of entrepreneurial energy. However, according to NBIA President and CEO Dinah Adkins, many business incubators offer formal or informal access to angel investors. The Department of Science and Technology (DST), Government of India, promotes entrepreneurship and has extended financial support to around 45 incubators spread across every nook and corner of the country. According to the latest data from AngelSoft, which pairs entrepreneurs with angel groups in a particular city or ZIP code, only 1 per cent of the companies that approach for angel funding manage to secure the capital. The top 10 action items for those looking to land angel funding are given next8:          

First incorporate one’s business. Have a harmonious and experienced team. Launch a Web site. Defend real intellectual property, if any. Build a prototype product. Be clear about one’s business model and hit the high notes. Prepare an investment-grade business plan. Finalize one’s financial model. Close at least one customer. Network should be ahead of time.

Above all, while accepting money from angel investors, one should be clear in one’s mind that one is inducting another partner in the business. Therefore, one should ensure that their vision, values and expectations align with one and one’s team. One should try to look for an angel investor who can offer one— more than money—their expertise in industry, entrepreneurial experience and networking opportunities.

13.5.3  Seed Support System—Technology Development Board (TDB) The purpose of the seed fund is to provide a technology-driven start-up with the much-needed early-stage financial support for deserving ideas/technologies requiring up-scaling and related work. The financial assistance to technology start-ups is basically extended to take care of early-stage support requiring upscaling of innovations and related work. It should be used for commercializing innovations. The total upper ceiling of financial assistance to be disbursed to an incubate is limited to ` 25 lakhs for the entire project. The disbursement of funds is usually tied up to certain milestones. The broad areas covered under the financial assistance are product development, testing and trials, test marketing, mentoring, professional consultancy to engage professors/experts with small firms and filing of Indian/ international patents.

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The TDB seed fund is meant for start-up ventures in high-technology areas for development, tests and evaluation necessary for establishing proof of applicability of a product, process or application; costs of a capital—including cost of acquisition of technology of foreign origin, which is a ‘proof-of-concept’ or design stage requiring substantial indigenous technology development; fabrication, testing and trial of prototypes; setting up a pilot/demonstration plant including testing and trials; industrial product design; field trials (including limited market development, except as stand-alone activity); setting up the first or demonstrator commercial-scale manufacturing unit using the innovative technology; cost of studies, surveys and blue or grey-collar training necessary or incidental to what has been just mentioned; R&D/ engineering consultancy for prototype/pilot plant/trials and testing. Fund support is extended by way of loans, or equity or grants or a combination of the three.

13.6  VENTURE CAPITAL FUNDING Start-ups and growing businesses need capital. There are a number of alternative sources to tap it. Venture capital is a means of equity financing for rapidly growing private companies having high growth prospects. The fund support by such ventures may be required for alternate uses such as startups, development/expansion or purchase of a company. Venture capital firms invest funds on a professional basis, often focusing on a limited sector of specialization (e.g., IT, infrastructure, health/life sciences and clean technology).9 Venture capitalists are often viewed by start-up ventures as deep-pocketed financial gurus who are keen to invest their money in new ventures. However, the fact remains that they most often look forward to three- to five-year-old companies with high growth potential to become major national or global players and who would return higher-than-average profits to their shareholders. It is important for an entrepreneur to realize that getting a positive nod from venture capitalists is not easy, as they may scrutinize thousands of potential investment opportunities every year, but only invest in a handful. The long-run possibility of an IPO by the company is one of the key considerations for them, as it improves their worth of investment and provides a good scope for exit. They too focus on the team and the management backing the venture and the niche that a venture would have because of its competitive or innovative advantage. Venture capitalists have different approaches to management of the business in which they take a stake. Their general approach is to passively influence a business, but will react when a business does not perform as expected and may insist on changes in management or strategy. Therefore, to keep the doors open, they enter into terms of equity that provide them with such leverage. The venture capitalist acquires an agreed proportion of the equity of the company in lieu for the funding. The fundamental advantage that the entrepreneur gets is having funding that has no timely obligation for payment of interest and principal, as equity capital funded by venture capitalists is a ‘patient’ capital that seeks a high return through long-term capital gain. They take the whole hog risk of failure of the venture and losing their equity in the company. Therefore, the venture capitalist has to necessarily look to investment opportunities in companies that have the ability to grow fast and provide extraordinary returns to compensate for the ventures that fail in the process. Venture capital firms are willing to invest in companies that have more risk than most individuals are willing to take. Managers of venture capital firms are capable of evaluating risky proportions and judging the growth prospects of start-ups. Usually, the purpose of a venture capital firm is to help a company grow very rapidly and then sell out. This means that the firm accepting venture capital should be willing to go public or be acquired by a larger firm in the future. VC funding may be used for everything from financing product development to expansion of a proven and profitable product or service. It is most

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Purchase Equity

Have a Long-term Orientation

Take Higher Risks for Higher Returns

Assist in Product Development

VC’s Characteristics

Add Value to the Company Through Participation

Figure 13.9 Key Characteristic of Venture Capitalists appropriate for high-growth companies that are capable of reaching at least $25 million (or around ` 50 crores) in sales in a span of five years. Thus, venture capitalists have the following key characteristics to fund ventures (Fig. 13.9):     

Purchase equity securities. Assist in the development of new products or services. Add value to the company through active participation. Take higher risks with the expectation of higher rewards. Have a long-term orientation.

They follow a basic philosophy of investment as given here:  Invest in high-risk projects with anticipation of high returns.  These funds are then invested in several fledging enterprises, which require funding, but are unable to access them through the conventional sources such as banks and financial institutions.  Venture capital funding may be done by way of investment in the equity of the new enterprise or a combination of debt and equity, though equity is the most preferred route.

The investment process followed by them contains the following criteria (Fig. 13.10): Stages of financing. Due diligence. Investment valuation. Pricing and structuring the deal—Reasonable reward, given the level of risk, sufficient influence on the management of the company through board representation, minimization of taxes and ease in achieving future liquidity on the investment.  Value addition and monitoring.  Exit—The precise timing of exit depends on several factors, such as nature of the venture, the extent and type of financial stake, the state of actual and potential competition, market conditions, the style of functioning, perception of VCIs and so on. The disinvestment channels that venture capitalists look for are going public, sale of shares to entrepreneurs/employees, trade sales/sales to another company, selling to a new investor and liquidation/receivership.    

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Stages of Financing

Due Diligence

Investment Valuation Investment Process Followed by VCs

Pricing and Structuring the Deal

Value Addition and Monitoring

Exit

Figure 13.10 Investment Process Followed by VCs

13.6.1  Advantages of Venture Capital Funding Venture capital funding provides the following advantages:  It provides long-term funding in a way that acts as a base for attracting further equity for growth from other sources.  It acts as a business partner who shares associated risks and rewards from the venture. It mainly gains through enhanced valuation of business arising as a result of business success by way of capital gains.  Venture capitalists are a great strength in terms of advice, networking and mentoring to the company based on their past experience with other companies.  The association of a venture capitalist provides access to other sources of funding for growth.  It acts as an instrument in developing strategic partnerships for growth of the business.  Having taken a risk to associate with the venture, venture capitalists usually provide a second round of funding, if badly needed for stabilizing the business.

13.6.2  Selecting a Venture Capitalist Before approaching a particular venture capitalist, the entrepreneur should understand their financial and other needs very well and particularly how far their needs match with investment preferences set down by the venture capital firm. Usually, venture capitalists have specific preferences for particular stages of investment, quantum of investment depending on the size of their investment funds, industry/ sectors specialization and geographical location. For start-ups, the minimum time horizon may last between four and five years for really seeing the fruits of the venture and, therefore, it is necessary for the entrepreneur to look forward to a venture capitalist who would have patience as also develop a good working relationship with the entrepreneur. Due to very many imponderables and uncertainties that arise in the implementation phase, usually start-ups fall short of their projections about cash inflows as projected, and, therefore, would badly need additional doses of funding to come out from a tough initial phase of business. The entrepreneur should ensure from the past dealings of the venture capitalists

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whether they have been supporting genuine cases of second round of funding during the initial phase of the business. Using a ‘shotgun approach’ means that one sends one’s business plan or some derivative thereof to as many venture capitalists as possible and hopes that the numbers alone will strike someone who has been looking for a deal such as one’s own. The shotgun approach has its proponents and its critics. Gordon Baty, a partner with Cambridge, Massachusetts-based venture outfit Zero-stage Capital, says, ‘Of every 100 plans that we get, 90 are completely irrelevant because they do not match our investment criteria regarding the industry, stage of development, geographic location, or the amount of capital we typically invest.’ Of this misguided bunch Baty says, ‘our receptionist can weed out their business plans.’ However, the shotgun approach has one significant advantage over the rifle method. The latter relies on intensive research that is based on a venture fund’s past investment patterns. What one’s research will fail to turn up is all the available venture capital funds that have now decided to focus their energies on restaurant deals, business service companies, publishing companies or Internet-content businesses. In many cases, one’s mail will be well off the mark, and one’s letter will be weeded out by the receptionist or the college intern sorting the mail. For instance, some venture capital firms might specialize in wireless communication companies from the so-called ‘first stage’ onwards, whereas one’s company, which makes disposable medical devices, is in the development stage. A more reasonable approach might be to take at least one pass through one’s institutional venture capital sources and weed out the obvious misses for one’s particular line of business. Even a quick screen prevents many obvious misses. Of course, such an effort, although seemingly logical, undermines one of the chief benefits of the shotgun approach to begin with. That is, it lets one reach investors who may have changed their historical investment criteria and are now looking for companies similar to one’s own. If one can mail one’s letter, business plan summary and business reply card for 50 cents each, then it is worth going after the 1,200 to 1,800 traditional sources of institutional venture capital. The rifle approach, which favours limiting one’s search to 15 to 20 well-researched targets, is the one favoured by most attorneys, accountants, consultants and other assorted experts. Venture capitalists seem to favour it because a highly targeted approach by entrepreneurs replaces an abundance of irrelevant opportunities with a manageable number of interesting ones. The rifle approach is simple but time consuming. Basically, one searches by five variables and then ranks one’s candidates by how well they meet these criteria. The five key search variables are given in Figure 13.11.

Searching by Line of Business Searching by Deal Size

Searching by Leadership Status

Selecting a VC

Searching by Geographic Preference

Searching by Stage of Development

Figure 13.11 Selecting a Venture Capitalist

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Rifle Approach for Selecting a Venture Capitalist Searching  by  Line  of  Business—Most  venture  capitalists  specialize  in  one  or  more  industries.  The focus on a particular technology, industry or business supposedly lets them pick winners in their  formative stages. This specialization is good news, because it allows one to easily identify venture  capitalists who would be interested and those who probably will not be. Searching  by  Geographic  Preference—The  very  hands-on  approach  of  institutional  venture  capital investing makes distance a factor. That is, to be a board member, and perhaps be intimately  involved in a company’s development, a venture capitalist would find it difficult to invest in companies  that are 2,000 or 3,000 miles away. Many do, mind you. However, more venture capitalists stick to  well-defined  geographic  regions.  One  should  search  one’s  source  material  and  weed  out  venture  capital investors who do not look at deals in one’s area. Searching by Stage of Development—In the same way that venture capital investors specialize  in  one  industry  or  another,  they  also  specialize  in  different  stages  of  development.  That  is,  some  companies invest in early-stage companies, whereas others invest in more mature companies. This  intuitively makes sense. After all, from a venture capitalist’s standpoint, a company that is trying to  make a better mousetrap requires much different care and feeding than one that has already figured  this out and is on the brink of national distribution. Searching by Leadership Status—In the world of venture capital investing, there are leaders and  followers. The leaders, also known as ‘lead’ firms, are those that have recognized expertise and who  conduct extensive due diligence on their prospective portfolio companies. The followers, known as  ‘follow-on’ investors, are more passive. They simply invest alongside the lead firms. Lead firms can be  helpful when one is trying to raise one’s second, third or fourth round of venture capital, because their  presence alone can attract other investors for these later rounds. However, they are of no help when  one is trying to raise one’s first round of venture capital. One should review one’s source material and  weed out the firms that do not act as the lead investors in deals.10 Searching  by  Deal  Size—Institutional  venture  capitalists  generally  place  upper  and  lower  limits  on the sizes of their investments. These limits are closely related to the overall size of the fund the  venture capitalist is managing. VCs with $250 million to invest typically do not want to look at one’s  $500,000 deal. Why? This is because to invest the entire fund in $500,000 increments means that the  firm would have to invest in 1,000 deals. Consider this number in the context of venture capitalist John  Martinson’s experience. Specifically, Martinson looks at 2,000 business plans each year to invest in  an average of 10 companies. To do 1,000 deals, he would have to look at 200,000 business plans.11

Above all, while choosing a venture capitalist, the entrepreneur should consider not just the amount and terms of investments, but also the additional value that the venture capitalist can bring to the company in different ways such as industry expertise, fund raising, strategic planning, identification and recruitment of key personnel, mergers and acquisitions and access to international markets and technology.12 In India too, VC funding has been picking up momentum over the last few years. Some of the prominent industries funded by VCs in India are IT and IT-enabled services, software products (mainly enterprise-focused), wireless/telecom/semiconductor, banking, media/entertainment, bio-technology/ bio-informatics, pharmaceuticals, contract manufacturing and retail. Some of the key lessons that need to be taken care of while looking for funding from venture capitalists highlighted by Boyett and Boyett (2001) are as follows:  Venture capital is a rough game.  Unless one has an introduction from someone they know, most venture capital firms will not even talk to one.

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Venture capitalists do not invest in financial projection; they invest in people. Expert pre-money valuation is a major stumbling block. Venture capital presentations are gruelling. Venture capitalists will drag the process out. Venture capitalists drive a tough bargain. If a venture capitalist suggests a party, they will stick one with the bill.

13.7  FUNDING FROM BANKS Banks have a variety of schemes to extend support for promotion of industries. Usually, banks fund promoters having a well-established business or launching a business having a well-established product in the market. Some banks do have specific schemes to promote start-up ventures or extend venture capital assistance by their subsidiaries. It is important to realize that more than the project, a lender would like to examine about the entrepreneur, their team and commitment that they have towards the entrepreneurial venture. Banking institutions have a set of credit standards or guidelines for different schemes to appraise requests for financial assistance. The purpose of these guidelines, coupled with the expertise of the credit team analysing the proposal, is to help in constructive credit decisions to help customers achieve their financial goals, coupled with ensuring that bank funds are protected in terms of getting due returns on them. Credit appraisal exercise focuses on the strengths and weaknesses of the proposal in the light of various key criteria used. The weight given to different criteria varies depending on the uniqueness of the proposal and the circumstances of the loan request. Here is some insight into the criteria used by bankers while making lending decisions (Fig. 13.12)13:  Character—The character of an entrepreneur relates to their past track record, credit history, if any, educational background, work experience and achievement therein and experience, if any, in running a business. As stated earlier, even the best business ideas cannot succeed if not backed up by strong management and a committed team with values in management.

Character

Collateral Criteria for Lending Decisions by Banks Conditions

Competence and Commitment

Capacity

Capital

Figure 13.12 Criteria Used by Bankers for Lending Decisions

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Thus, the character of a lending decision is basically understood and examined to ensure the customer’s willingness and determination to repay the loan, regardless of unforeseen adversity. Character basically includes values and traits such as honesty, openness, integrity and self-discipline. Any business involves growing pains, liquidity problems, losses and adverse market conditions that a customer should be able to withstand and effectively respond to.  Competence and Commitment—The entrepreneur’s competence, as can be found out from their past experience and track record of managing ventures coupled with knowledge in the area, becomes an important aspect of the bank’s appraisal. Their ability to negotiate various aspects with different stakeholders such as bankers, customers, government agencies, employees and partners becomes an important skill to be evaluated. Above all, the entrepreneur’s commitment to the venture as evident from their deeper involvement in various aspects and working to see to it that the venture becomes successful in spite of all imponderables and uncertainties is an important aspect to be examined.  Capacity—Capacity refers to the customer’s ability to generate more than sufficient cash flow from the business to ensure timely repayment of principal and interest on loan. Thus, the banker is required to realistically examine the various assumptions and arrive at future expected cash flows from the business vis-à-vis the loan burden. This would require an expertise to appraise from market perspective and arrive at demand and prices for the product or service. The entrepreneur should be able to thoroughly test their business model and revenue model to ensure making realistic assumptions about demand and pricing. Estimating the capacity for repayment is relatively easy for the existing businesses looking for expansion or diversification when compared with new businesses. However, industry norms and averages help bankers in evaluating new businesses and their potential for repayment.  Capital—It includes the entrepreneur’s personal and corporate net worth, that is, the amount they are prepared to contribute in the business from their personal financial resources. Here, the banker would also like to examine the entrepreneur’s resourcefulness in accessing financial reserves from other sources—friends, relatives and angel funders. The banker’s main concern is to ensure that the entrepreneur has sufficient capital to launch and grow their business and to effectively handle any unexpected eventualities. In reality, when the entrepreneur badly needs money, it does readily come to them and, therefore, it is only adequate availability of capital that can help in sailing through difficult times in the business. The ability of a customer to withstand or overcome adverse economic business conditions through financial controls and timely induction of money is assessed to ensure that they have sufficient capital to take care of business uncertainties.  Conditions—The banker needs to carefully assess the business environment in which the entrepreneur is going to launch their business. This requires ability and insight, coupled with experience on the part of the banker, to understand the market and conditions in which the venture is going to operate. The banker should assess the nature of the industry and what phase of business the life cycle industry is passing through. What are the current political, environmental, social and technological issues affecting the industry? To gain insight, the banker analyses data from industry associations and government and regulatory bodies, as also from consulting and marketing research firms.

After having analysed the business environment and agreed, in principle, to lend money, the banker has to judiciously sort out by negotiating with the entrepreneur the stipulation of terms and conditions for the loan. The credit factor called ‘conditions’ has to clearly specify the purpose, loan amount, use of funds, interest rates and terms of repayment. The amount and purpose of the loan should be constructive, and the repayment terms should be realistic for the customer to repay the loan, along with the timely interest. It is important to sanction adequate loan to complete the project along with the entrepreneur’s own contribution. In addition to the loan agreement, the terms and conditions may need to be supported by a letter of understanding, loan agreement, additional collaterals and guarantees—personal and corporate, appropriate insurance coverage and other special conditions as deemed fit.

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 Collateral—Keeping in view the risk involved, the banker looks for taking collateral to protect their interest in the eventuality of the loan becoming non-performing. As such, bankers get a first charge on all assets financed by them and look for additional charge on assets to protect their loan further. The lesser the debt equity ratio and the greater the security coverage available to the banker, the better it is for them.

While looking for collateral, the banker either should have in-house expertise or use the expertise of others to value the assets to be mortgaged or charged against the loan as collateral. All valuations of real estate should be undertaken based on market value, keeping in view the property’s intended use, and contain sufficient details to reflect the complexity of the property and market. Real-estate valuations are usually carried out by chartered registered valuers in conformance with the Uniform Standards of Professional Appraisal Practice and other regulatory requirements. Therefore, before accepting collateral for a loan, it is necessary to get it valued by qualified experts. Similarly, one may have to have an expertise for accepting pledge of shares or gold, fixed deposit receipts and bonds as collateral for loan.

13.7.1  Bank Loans Banks mainly extend two type of facilities, namely, fund-based and non-fund-based facilities, depending on the nature of business. Fund-based limits involve money given to the company in the form of cash, whereas non-fund-based limits involve a commitment without outflow of cash unless and until such a facility devolves on to the bank. The need of term loans and working capital funding are the basic vanilla commercial loans that are extended by banks. The term loans typically carry fixed interest rates and monthly or quarterly repayment schedules and include a set maturity date. The working capital limits are segregated into cash credit, bills, pledge and receivables that are of rolling nature with an upper ceiling limit sanctioned and carry a stipulated interest that is payable on a monthly or quarterly basis. The bank’s primary role is to lend money. After all, the only way it makes an above-average return is by lending what customers deposit. However, since a bank lends other people’s money, it operates in what is known as an ‘abundance of caution’ mode. That is, banks by design are only allowed to make loans in situations of absolute safety. Working with emerging growth companies means a few instances of absolute safety; hence, the challenge of loan financing. Bankers tend to classify loans into two categories: Long-term loans fund capital expenditure for setting up new units, expansion and modernization projects, under infrastructure and non-infrastructure sectors. These loans are commonly set for more than three years. Most are between three and seven years, and some may run for as long as 10 years and above. Long-term loans are collateralized by a business’ assets and typically require quarterly or monthly payments derived from profits or cash flow. These loans usually carry a clause that limits the amount of additional financial commitments the business may take on (including other debts but also dividends or principals’ salaries), and they sometimes require that a certain amount of profit be set aside to repay the loan. These loans are well suited for the established small businesses that can leverage sound financial statements and substantial down payments to minimize monthly payments and total loan costs. Repayment is typically linked to future earning capacity. Term loans require collateral and a relatively rigorous approval process because of inherent long-term risk involved in extending such loans. Before deciding to finance equipment, borrowers should be sure they can make full use of ownership-related benefits, such as depreciation, and should compare the cost with that of other modes of funding such as leasing and hire purchase. Loans of this type are best used for firms involved in construction, major capital improvements, large capital investments, such as machinery, working capital and purchases of existing businesses.

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The degree of financial strength required to receive loan approval can vary tremendously from bank to bank, depending on the level of risk the bank is willing to take on. These could be relatively inexpensive provided the borrower can pass the financial litmus tests for the sanction of such loans. Working Capital Finance to Units in Various Sectors in the Form of Fund-based Limits Banks extend cash credit limits to meet the working capital requirements of the company against hypothecation of stock and debtors. While extending cash credit limits, banks use different methods to arrive at a requirement mainly by deducting trade creditors and asking for a part of the working capital gap to be met by the company by way of margin money. A company opens a cash credit account with the bank that allows it to withdraw up to the limit sanctioned at any given point of time. Working Capital Term Loan (WCTL) At times, a borrower may fail to immediately induct their margin commitment, which may necessitate the bank to sanction WCTL, which is expected to be adjusted as soon as possible. At times, when the normal cash credit account of the company becomes irregular and finds it difficult to continue with optimum production operations, then a bank may convert an irregular portion of the account into WCTL. Usually, a working capital term loan carries a higher rate of interest. Factoring This is a financial transaction whereby a business entity sells its accounts receivables to a third party called ‘factor’ at a discount in exchange for immediate money with which to finance continued business. Factoring services by the banks offer a comprehensive receivables and payables management solution that includes transaction financing, credit protection, sales ledger administration and payment collection. Factoring is very helpful in expanding the business when there are slow paying invoices, although certain to be received. It helps particularly small and medium enterprises to have instant money against their sales to expand, take on new work, meet payroll and pay bills. It eliminates the entrepreneur’s collections worries and allows valuable time to be spent on core business instead of chasing money!! It involves the selling of a company’s accounts receivables at a discount to a factor who, in turn, assumes the risk of collection. Factoring services are available for international factoring, domestic factoring, channel financing and import factoring. There are specialized institutions such as SBI factors, global trade finance and IFCI factors which provide factoring services for domestic as well as international sales. Ad Hoc Limits Ad hoc limits are extended by bankers to their existing clients having a satisfactory track record to meet sudden spurt in bulk orders that would require additional working capital facilities or pending renewal or enhancement of existing limits to accommodate expansion in activity. Ad hoc limits are also sanctioned for such other genuine needs of the borrower to temporarily accommodate their need by extending fund-based limits. Overdraft (OD) A bank overdraft is a limit on borrowing on a bank current account. The word ‘overdraft’ means the act of overdrawing from a bank account. In other words, the account holder withdraws more money from a bank account than has been deposited in it. With an overdraft, the amount of borrowing may vary on a daily basis. The overdraft facility provides flexibility to the borrower within limits, and the borrower is required to pay higher interest for the same. However, the bank can change the limit at any time and ask repayment of the money even earlier than expected. Overdraft is allowed against securities such as financial instruments like shares, units of mutual funds and surrender value of LIC policy and debentures. Some overdrafts are even granted against the perceived ‘worth’ of an individual. Such overdrafts are called ‘clean overdrafts’.

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Bill Discounting Under this type of lending, a bank takes the bill drawn by a borrower on their customer and pays them immediately after deducting some amount as discount/commission. The bank then presents the bill to the borrower’s customer on the due date of the bill and collects the total amount. It becomes the responsibility of the seller’s bank to send documents and bill of exchange to the buyer’s bank for onward forwarding to the buyer for the acceptance and collection of dues. The buyer’s bank gets the signed bill of exchange from the buyer as guarantee, releases payment to the seller’s bank and waits for the time span within which the buyer will pay the bank against that bill of exchange. If the bill is delayed, the borrower or their customer pays the bank a predetermined interest depending on the terms of the transaction. The major advantages of bill discounting facility for the bank are that it is a self-liquidating mode of financing; it is easy to monitor the genuineness of transactions; the quality of receivables can be ascertained; the banks have recourse to the drawer as well as the drawee; the bank earns a fee-based income; facility of rediscounting and a relatively far higher disciplined way of lending. One of the problems faced by banks in bill discounting is the discipline on the part of the buyers to pay against the bills on time, which adversely affects the banking system. For improving the payment discipline, the clients can back up their credit availments from banks with post-dated cheques from the respective debtors. Banker’s Acceptance Banker’s acceptance is a time draft or bill of exchange drawn on and accepted by a bank as its commitment to pay a third party. The parties involved in the banker’s acceptance are the drawer (the bank’s customer—importer or exporter), the acceptor (a bank or an acceptance house), the discounter (a bank that could be the accepting bank itself or a different banker at a discount house) and the re-discounter (another bank, discount house or central bank).14 Banker’s acceptance is the only accepted mode after the bank writes on the draft agreement to pay it on maturity. In turn, the bank becomes the principal obligator of the bill or draft of exchange drawn on and accepted by it. Line of Credit It is an arrangement between the bank and the borrower that enables the borrower to draw up to a specified limit loan from the bank. The advantage that the borrower gets is that they can draw down on a line of credit at any time, as long as it does not exceed the specified sanctioned limit. Another advantage is that the bank usually does not charge any interest on the unused part of the line of credit. The line of credit, depending on the nature of agreement, can be classified as a demand loan, implying that the outstanding balance has to be paid immediately at the request of the bank. Packing Credit This is a loan or advance granted by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods before shipment, on the basis of an LC opened in their favour or in favour of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from the producing country or any other evidence of an order for export from that country having been placed on the exporter or some other person, unless lodgement of export orders or LC with the bank has been waived. Packing credit basically provides the exporters with working capital during the intermittent period between the time of the receipt of the order and the time of shipment to arrange for the production or procurement of goods. It is especially important for small-scale manufacturers and exporters who do not possess sufficient financial resources to meet the expenditure involved in the production of goods for export. The bank appraises the proposal for packing credit based on a number of factors such as honesty, integrity and capital of the borrower, exporter’s experience in the line, security offered, the margin of interest and the bank’s experience about the exporter to ensure that their name does not appear on the caution list of the Reserve Bank.

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The security for the packing credit may be provided in the following forms:    

letter of credit (LC) confirmed order as evidence of having received an order relevant policy issued by the Export Credit Guarantee Corporation personal bond in the case of party(ies) already known to the banker

Banks also lend packing credit in foreign currency so as to make export credit available at internationally competitive rates. Such credit facility is extended at rates linked to LIBOR (London Inter-bank Offer Rates).

13.7.2  Non-fund-based Limits Banks provide a variety of non-fund limits to business ventures for their smooth business operations. Non-fund-based limits involve credit facilities extended by the banks where actual bank funds are not involved. Keeping in view the overall requirement to operate at the optimum level, banks sanction fund-based and non-fund-based limits together and monitor the account to see to it that working capital management is being handled well. Banks get income by way of commission for extending non-fund-based limits and only in the eventuality of an unforeseen devolvement, these may get converted into fund-based limits. Some of the important non-fund-based limits sanctioned by banks are given next. Bank Guarantee for Purchase of Machinery or Goods on Credit This facility is usually extended to existing customers of the bank having past dealings that are found to be satisfactory. A company seeks this type of a facility when it desires to purchase machinery or goods on credit from inland. The Deferred Payment Guarantee (DPG) contains an undertaking on the part of the bank to guarantee due payment of the deferred instalments by the customers on the due date and declare that in the event of default in payment, the bank would make the payment. The bank usually extends this facility for a period up to five years. In exceptional cases, it may be extended for a maximum period up to 10 years on merits of each case. The customer is expected to maintain a cash margin of 25 per cent on the cost of machinery/equipment to be acquired less initial advance paid to the supplier plus interest portion, that is, on the DPG amount. This facility is usually extended against security in the form of deposits or other acceptable tangible security, insurance policies having adequate surrender value and easily marketable shares or mortgage of immovable property. Issuance of Bank Guarantee in Lieu of Security Deposit/EMD/Performance Guarantees Banks extend guarantees in favour of government departments, such as railways and PWD, who may require guarantees from their contractors in lieu of tender money or performance of contracts to supply goods; sales tax/income tax authorities in respect of payment of taxes; companies of repute towards payments in respect of supply of materials; suppliers of machinery and plants on deferred payments basis require bank guarantees in respect of instalments and interest payable by their purchasers. Besides these, several other commercial transactions involve execution of bank guarantees. These guarantees are also secured by securities as just mentioned, along with margin requirements to be fulfilled by the customers. Deferred Payment Guarantee Deferred payment guarantee is used when buyer and seller have a close working relationship, which, in turn, results in the seller financing purchase by allowing the buyer a

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grace period for payment of the amount. Thus, under DPG, an affixed time period is allowed after shipment or presentation of prescribed documents. The main purpose of DPG facility is  to protect the seller of a business who has been required by the buyer to agree to a deferred consideration on completion, whereby the buyer defers paying some of the sale price over an agreed period of time  to provide a guarantee to the seller that they will receive the full deferred amount, whether the new owner of the business succeeds or not, thus providing financial security for the seller

It is mainly utilized by the entrepreneurs for acquisition of capital goods (plant/machinery including generators) and where there is provision for suppliers credit by the manufacturer/supplier in tune with the credit extended by the manufacturer. Banks usually have a first charge on fixed assets financed by them under DPG and look for collateral security and personal/third-party guarantee, wherever found necessary. Letter of Credit (LC) Letter of credit is usually opened for customers who enjoy credit facilities with the bank. Banks may fix a regular limit towards LC for consumption of items to be procured through LC from within the country (inland) or other countries (foreign). These could be of different types as suited to meet the customer needs, such as clean, documentary, revocable, irrevocable, with recourse, without recourse and revolving. Inland letters of credit are usually opened for periods ranging between three and six months, and in case these are to be opened for longer periods, then there should be justifiable grounds. In international trade, the buyer and the seller who are located in different countries may not know each other and, hence, the fundamental problem that arises is of the buyer’s creditworthiness that may come in the way of trade between the buyer and the seller. To mitigate this problem, the seller always requests the buyer to arrange for an LC to be issued by the buyer’s bank. On issuance of an LC, the buyer’s bank replaces its own creditworthiness with that of the buyer; it undertakes to reimburse the seller for the value of the LC ‘irrevocably’, provided two underlined conditions are fulfilled by the seller, namely, all the documents stated in the LC are presented and all the terms and conditions of the LC are complied with. The key advantage of the LC is that if the two conditions just mentioned are fulfilled, then the issuing bank will effect payment to the beneficiary, irrespective of whether the applicant reimburses to the issuing bank or not. In the process, there is an applicant involved who arranges for the LC to be issued; beneficiary is the party named in the LC in whose favour the LC is issued; issuing bank is the applicant’s bank that issues or opens the LC in favour of the beneficiary and substitutes its creditworthiness for that of the applicant; an advising bank may be named in the LC to advise the beneficiary that the LC was issued; the paying bank is the bank nominated in the LC that makes payment to the beneficiary, after determining that documents conform, and on receipt of funds from the issuing bank or another intermediary bank nominated by the issuing bank, and the confirming bank, which, under instruction from the issuing bank, substitutes its creditworthiness for that of the issuing bank. It ultimately assumes the issuing bank’s commitment to pay. The LC should be ‘sight’ LC or ‘usance’ LC. In case of ‘sight’ LC, the payment is made immediately to the beneficiary on the presentation of required documents within the stipulated time frame. However, ‘usance’ LC payments are made on a specified future date on presentation of the required documents. Some of the general criteria that an entrepreneur can apply before associating with a bank for funding are as follows:  Check up from friends and closely known people about where they bank and how they find services of the bank.

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 Develop relationships with the bank long before one actually approaches them for a loan. This helps in understanding their approach in dealing with customers.  Look out for alternative sources by doing proper spadework to find out who would be in a better position to meet one’s needs at competitive rates.  Always approach multiple organizations to meet one’s financial requirements. There is no harm in sharing that one has been negotiating with alternate organizations.  Negotiate for a complete package and attempt one’s best to get the most favourable terms.

Example: Arthur Lipper and the British Far East Holdings Company on Loan  Guarantee According to Arthur Lipper III, chair of British Far East Holdings in Del Mar, California, which provides  and arranges financing as well as advisory services, ‘To get such a deal done, entrepreneurs need  three ingredients: two banks and one guarantor.’ Providing loan guarantees to high-octane growth  companies  is  a  subjective  undertaking,  Lipper  says,  and  there  are  many  ways  a  deal  might  be  structured.  However,  a  typical  one-year  loan  for  $1  million  might  be  put  together  in  the  following  manner: First, the investor purchases an LC from their bank. It stipulates that the investor’s bank will pay  the entrepreneur’s bank $1 million on a certain date within one year in the future. Lipper says that to  issue such a letter, the bank charges 1 to 2 per cent of the amount of funds being guaranteed—in  this case, $10,000 to $20,000 as a fee. Since it is a bank, and banks tend to avoid risks, it will also  require the investor to deposit $1 million in government securities or $2 million in marginal securities  (so-called marginable securities are those that can be borrowed against a determination that is made  by the Federal Reserve). These assets collateralize the LC that the bank issues. Now, with a rock-solid LC for $1 million protecting it, Lipper says, the entrepreneur’s bank will then  lend them the $1 million needed to grow the business. Following are some of the costs the entrepreneur is expected to pay in such a transaction: i.  First, there is the guarantee fee. Remember, the investor has to pay their bank a fee to get it to  issue the LC, in addition to depositing funds into the bank. ‘The way the investor tends to think,’  Lipper says, ‘is that it’s the entrepreneur’s loan that is being guaranteed, not mine; therefore, the  entrepreneur should pay the fees.’ ii.  Next, Lipper says, the investor typically collects 5 per cent of the loan as a fee for putting the deal  together. For our hypothetical $1 million deal, that is another $50,000. iii.  Then, there is the interest to the bank. For deals such as this, banks typically charge the prime rate,  plus 1 per cent, says Lipper. ‘It’s absolutely outrageous for them to charge a premium like that,’  he maintains, ‘since there is no risk to the bank whatsoever.’ Moreover, to avoid any possibility of  default, the bank issuing the LC will probably stipulate that the interest on the loan be taken out  of the proceeds upfront, as shown in the example just cited. The only positive thing one can say  about all these fees is that they generally do not come out of one’s pocket. In most deals, they  come out of the loan fees, so one as the borrower ends up paying them in the form of a higher  effective interest rate.15

13.8  LEASE FINANCING Lease Financing—Advantages The major advantage that accrues to the lessor is that they need not pay the cost of the asset at the time  of signing the contract of leases. Lease contracts are more flexible, allow lessees to negotiate the terms  of lease and structure the leasing contracts according to their needs for finance. They also provide an 

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advantage by way of not incurring a massive amount on assets in the beginning of the venture itself  and also safeguard the lessee from high technological obsolescence of plant and machinery. The major advantages of leasing as a way of funding start-ups or well-established businesses are  as follows:   Minimizing Initial Capital Investment—The full cost of plant and machinery gets funded by  the lessor, and, thus, the lessee saves initial capital investment on a venture. It does not involve  any  margin  requirement  or  down  payment  on  the  part  of  the  lessee.  Thus,  saved  financial  resources can be channelized by an entrepreneur for more productive uses such as inventories  and other day-to-day expenses on production.   Flexibility  in  Availing  Funding—A lease agreement providing for lease rentals, periodicity  of  payment  of  lease  rental  and  other  terms  and  conditions  could  be  negotiated  as  per  the  convenience and requirements of all lessees.   Better Cash Flow Planning—It enables the lessee to have a better control over cash flows.  They can pay the lease rentals from the income generated by use of lease assets.   Provides  Greater  Liquidity—Leasing  opportunity  to  the  lessee  improves  their  liquidity  position by adopting the sale and lease-back technique.17

Equipment leasing is basically a loan in which the lender buys and owns equipment and then ‘rents’ it to a business at a flat monthly rate for a specified number of months. At the end of the lease, the business may purchase the equipment for its fair market value (or a fixed or predetermined amount), continue leasing, lease new equipment or return it. Leasing has been a vital industry over the years in the United States and the United Kingdom and spread to other countries during the present century. In India, the concept was pioneered in 1973 when the First Leasing Company was set up in Madras, and the eighties have seen a rapid growth of this business. Lease finance involves a contract whereby the ownership, financing and risk taking of any equipment or asset are separated and shared by two or more parties. Thus, the lessor may finance, and the lessee may accept the risk through the use of it, whereas a third party may own it. Alternatively, the lessor may finance and own it, whereas the lessee enjoys the use of it and bears the risk. There are various combinations in which the characteristics just mentioned are shared by the lessor and lessee.16 Thus, lease finance involves a contract between the lessor, an owner of an asset and the lessee—the user of the asset for the right to use the asset during a specified period and, in return, the lessee pays a specified lease rental periodically. Lease finance is suitable for any business at any stage of development and, more particularly, to the start-up ventures. For start-up businesses with no revenues, ‘small ticket’ leases are a feasible option on the personal credit of the founders or owners who are willing to make monthly payments as lease rentals. This type of financing is most suitable for financing equipment purchases or specific machinery items commonly required for a variety of businesses such as generators. With more and more money flowing into the markets, numbers of leasing companies are increasing to assist entrepreneurial ventures. Although lease financing is relatively more expensive than bank financing, in most instances, it is more easily obtained and provides inbuilt flexibilities to the user, which offsets the additional cost that they have to bear.

Example: Venture Leasing Ed Bartlett brought his Harvard Business School training to his new job as president of a start-up  company. He had eight years of experience with big-company finance. However, he did not bring  any illusions. He knew the long list of financing options available to an established company would  (Continued)

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be quite a bit shorter at Nationwide Remittance Centres Inc. (NRC). He just did not realize what living  with a short list would be like. Talking to one financier, he remembers, ‘was like dealing with a hit man  at the end of the dock.’ A  few  start-ups  will  escape  the  ‘give-up-an-arm-and-a-leg’  school  of  finance.  They  are  just  too  risky.  However,  lately,  some  have  been  discovering  that  the  list  of  alternatives  is  growing.  Bartlett,  a 42-year-old convert to small-company life, is using a new, little-known financing technique called  ‘venture leasing’. Venture lessors rent equipment to brand-new companies in return for a low rental  rates  along  with  a  slice  of  the  company’s  equity.  Banks  and  traditional  leasing  companies  do  not  usually deal with start-ups, or they look for a large cash deposit to the tune of 30 to70 per cent of the  price of the equipment from the customers. This, in turn, raises the cost of leasing enormously. More  important, it ties up capital that is almost always desperately needed someplace else in the business  by the start-up ventures. In contrast, venture lessors’ charges are relatively painless: A buried interest  rate at least two percentage points higher than an established, creditworthy company would pay and  an equity stake that is usually less than 2 per cent of the company. There is a catch, though. Most  venture lessors will lease only to companies that have already been financed by venture capitalists.  That way, they figure, they are more likely to get a customer who is well funded and well managed.  However, some will make exceptions, and their number may increase as the industry grows. Back in early 1987, when Bartlett was looking for lease financing, NRC had two venture backers  and a business plan, but not much else. Getting some kind of leasing arrangement was critical. First,  Bartlett wanted to hold onto the precious $2 million of venture capital cash he had raised. At a total  cost of about $500,000, the equipment he needed would chew up a quarter of it. Second,  NRC’s  entire  operation  depended  in  a  large  part  on  its  equipment—25  data  general  minicomputers.  NRC’s  business  is  to  collect  money  for  companies  faster  than  they  can  collect  it  themselves.  For  example,  to  help  an  insurance  company  gather  the  premium  payments  that  its  customers send in from all over the country, NRC accelerates two processes: the time that a cheque  spends  travelling  through  the mail  and  the time it takes to clear through the banking system. The  minicomputers,  to  be  installed  in  25  banks  around  the  country,  were  essential  to  the  second  part  of NRC’s service. Of course, the equipment had to be in place before NRC could begin to take on  customers. Initially,  Bartlett  tried  to  get  Data  General  (DG)  Computers  to  finance  the  computers.  After  all,  who would be better motivated to make a deal? To do its analysis, DG Computers used a Citibank  programme that evaluates potential lessors on their cash flow. NRC, of course, had none. The next stop was venture lessors. Of the handful of companies doing venture leasing at the time,  Bartlett liked San Francisco-based Dominion Ventures Inc. best. Geoffrey Woolley, managing general  partner at Dominion, describes himself as an 80 per cent venture capitalist. ‘You don’t take the risk on  the leasing side of the business. You take the exactly same approach that a venture capitalist does,’  he says. Not that the equipment in question does not matter. Dominion did not turn cartwheels over NRC’s  choice  of  DG  Computers,  for  example.  ‘Although  DG  is  known  as  a  good  hardware  company,  its  reputation is weak when it comes to software and service,’ Bartlett explains. DG Computers is likely to  be worth less at the end of NRC’s lease. So, Dominion forecast a lower ‘residual value’ for the gear,  which raised the cost of the lease financing. NRC’s total leasing costs were also higher than they had to be, because, eager to get the business  started, it had bought the computers before it struck a deal with Dominion. This meant that it had to  sell the computers to Dominion before it could lease them. This sale/lease-back feature required NRC  to pay the sales tax on the computers twice—a $25,000 expense—and to take a $78,000 loss on the  sale of the equipment to Dominion. It would have been cheaper and less of a paperwork nightmare  to let Dominion buy the machines in the first place.

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Here is how the deal worked: Dominion offered NRC a $750,000 lease line, which could be drawn  on during a four-month period. After four months, the $500,000 that NRC used turned into a loan, to  be repaid over the course of three years.18

Table 13.1 helps evaluate the sources in a brief way and shortlist the source for evaluation using the model. Though there can be a few sources that appear to be most relevant to the venture, it would be advisable to evaluate with regard to all the sources, as in the example just mentioned, in order to get more appropriate information for planning the financing mix. Table 13.1 Alternate Sources of Funding Ventures at Different Stages of Growth Source of Funding

Range of Funds Available

Bootstrapping

` 5 to 10 lakhs

Venture capital

Wide range

Angel investors

` 10 lakhs to ` 3 to 4 crores

Bank loans

` 2 to 3 lakhs and greater

Lease financing

Wide range

Royalty financing

` 3 lakhs upwards

Best Use

Availability

Seed stage; small firms involving low capital and operational costs— construction firms, architecture, designing and consultancies Growth stage; firms that have a proven product or service Seed or start-up funding; early-stage firms with no revenues Start-up or growth phase; small and established business Start-up phase; companies that involve a large number of equipment with long economic life

Plenty—depends on the factors such as real estate owned and creditor goodwill

Growth phase; generally involves an established service to be provided in the future

Limited—convincing VC firms involves an effective business plan Abundant but expensive; can be difficult to negotiate Inexpensive and plenty

Abundant supply; depends on a good purchase option at the end of the lease period in the lease agreement Substantial supply; product or service to be offered in the future should be a proven one and should be of importance to the investor

13.9  FUNDING OPPORTUNITIES FOR START-UPS IN INDIA 13.9.1  Department of Scientific and Industrial Research (DSIR) This extends funding support up to ` 75,000 with a ceiling of 90 per cent of the approved project cost by way of grant for creating a lab model/computer model for technology development purpose to encourage budding entrepreneurs. This grant can be availed by students or entrepreneurs involved in developing

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technologies to promote ventures. Under another scheme of DSIR, funds are available for technology scale-up and validation purpose through conversion of invention into working prototypes. The ceiling on funding amount is ` 1,500,000 subject to 90 per cent of total project cost under the scheme. It also has another scheme that encourages protection of patents and scaling up of technologies under which the grant is mainly available for carrying out value-added work such as product features, protection by patenting and aesthetic design. DSIR extends fund support to the tune of ` 750,000 subject to 90 per cent of total project cost under the scheme. DSIR also has provision under international technology transfer programmes to fund up to ` 1 crore by way of a grant to promote international technology transfer and trade including exports of technologies, projects, services and technology-intensive products. Thus, there is a range of schemes by DSIR that promotes technology venture-related investments for different purposes to encourage budding entrepreneurs, professional and students to contribute in entrepreneurship development.

Example: DSIR—Seed Money for Product Development Reetesh  Kumar  Singh  and  Rajiv  Shankar  Sinha,  students  at  IIT-Kanpur,  were  beset  by  the  classic  start-up conundrum—surfeit of ideas and lack of capital. The duo, who wanted to set up their own  product development company, finally turned to the DSIR for seed money to roll out their venture. Sinha  designed  a  machine  that  detects  fake  currency  notes,  which  received  ` 15  lakhs  from  DSIR’s  Technopreneur  Entrepreneurship  Programme  (TePP),  whereas  ` 20  lakhs  came  in  as  seed  funding from IIT-Kanpur’s incubation centre—SIDBI Innovation and Incubation Centre (SIIC). Soon  after, Singh also got a TePP grant of ` 6 lakhs for a product called the ‘Nano-positioner’, a device that  holds and positions devices used in microscopy.19

13.9.2  Ministry of Micro Small Medium Enterprises (MoMSMEs) ‘Support for Entrepreneurial and Managerial Development of SMEs: Through Incubators’ provides a grant to technology start-ups for prototyping and getting mentoring to build their companies. The main objective of the scheme is to promote emerging technological and knowledge-based innovative ventures that seek the nurturing of ideas from professionals beyond the traditional activities of micro, small and medium enterprises (MSMEs). Such entrepreneurial ideas have to be fostered and developed in a supportive environment before they become attractive for venture capital. Hence, the need arises for incubation centres to promote and support the untapped creativity of individual innovators and to assist them in becoming technology-based entrepreneurs. It also seeks to promote networking and forging of linkages with other constituents of the innovation chain for commercialization of their developments. This initiative is now being taken up by the ministry of MSME—the nodal ministry for the development of entrepreneurship and creation of self-employment and more employment avenues.20 The cost may vary between ` 4 and 8 lakhs for each incubate/idea, subject to the overall ceiling of ` 62.5 lakhs for each business incubator. The scheme covers the cost on items such as technology fee, telephone, fax, computer facility, electricity and accommodation charges, machinery hiring or leasing from outside and guidance fee per annum for mentors/handholding persons. Implementing agencies for this scheme have been identified as Indian institutes of technology (IITs); national institutes of technology (NITs); engineering colleges; technology development centres, tool rooms and other recognized R&D and/or technical institutes/centres; development institutes of Department of Industrial Policy and Promotion (DIP&P) in the field of paper, rubber and machine tools.

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MSMEs also have a scheme to encourage small and medium enterprises to participate in exhibitions for marketing their products and extends a grant support up to ` 5 lakhs for attending domestic and international exhibitions.

13.9.3  Department of Science and Technology Instrumentation is one of the major areas of science and technology that makes a great impact on vital sectors of national activities such as education, scientific research, industry, agriculture and medicine and health. The DST has been promoting the area of instrumentation through its Instrumentation Development Programme (IDP).21 The objectives of the DST programme are to focus on strengthening the indigenous capability for research, design, development and production of instruments in the country leading to indigenous development and production of instruments; continuous updating of the technology of instruments and innovations in the area of instrumentation. To develop analytical, environmental monitoring, laser-based, medical, food processing, geoscientific, agri-electronic instruments and sensors, in particular, the scheme provides fund support to scientists/technologists/entrepreneurs. DST has sanctioned up to ` 35 lakhs in recent projects, grant for technologists in academic institutions/soft loans or equity partnership with entrepreneurs under the scheme to promote development of instruments leading to promotion of ventures. DST’s programme on ‘water technology initiative’ is another major initiative that promotes R&D activities to provide safe drinking water at affordable cost and in adequate quantity using appropriate science and technology interventions. The scheme focuses on developing holistic solutions to the problem of water contamination and water scarcity through development of indigenous systems/devices to provide safe and adequate drinking water to households. The main objective of the scheme is to come up with the development of simple, cost-effective and easy-to-operate-and-maintain technologies in the area of safe, neat and clean drinking water to households at large. The scheme provides funding support to scientists, technologists and R&D laboratories for the purpose. DST has sanctioned up to ` 1 crore grants for technologists in academic institutions. The grant covers 50 per cent cost of consumables for industry–institution partnerships to develop low-cost domestic purification technologies, options for disposal of scientific waste and initiating applications of nano-technology.

Technology Development Board (TDB) TDB aims at accelerating the development and commercialization of indigenous technology or adapting  imported technology to wider domestic applications. The board provides financial assistance in the  form of equity, soft loans or grants. For the development and application of indigenous technology  in a dynamic economic environment, the Government of India enabled the placing of proceeds of  the R&D cess on the import of technology into a fund called the ‘fund for technology development  and  application’.  To  administer  the  fund,  the  government  also  constituted  a  TDB  on  1  September  1996, under the provisions of the Technology Development Board Act, 1995. The TDB funds industry,  entrepreneurs, institutions and incubators to extend assistance by way of loans, equity or grants. The  loan carries a nominal interest at 5 to 6 per cent. The board also extends assistance under equity  scheme or grants depending on the proposal and its needs. The financial assistance extended is in  lakhs of rupees per project, depending on the requirements.22

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Examples Eicher Motors Limited, Pithampur The introduction of the four-cylinder E483 engine has been a landmark in terms of innovative new  design, concepts related to planning and manufacturing, experimentation and validation achieving  the various targets set forth in the beginning of the projects. The engine developed is among the best  of its class in naturally aspirated engines producing 18.5 kw/l meeting India 2000 emission norms.

Shantha Biotechnics Pvt. Ltd, Hyderabad The  company  has  pioneered  the  development  of  recombinant  DNA-based  Hepatitis-B  vaccine,  a  healthcare  product.  The  company  has  pioneered  this  development  in  India  using  innovative  technology that has resulted in a successful product that is much cheaper and, therefore, available  to a wider section of the society. Shantha  Biotechnics  Pvt.  Ltd  got  the  first  ever  National  Technology  Award  1999,  instituted  by  the  TDB,  Government  of  India,  for  successful  development  and  commercialization  of  indigenous  technology. The  award  was  presented  by  the  Honourable  Prime  Minister  of  India,  Atal  Behari  Vajpayee,  in  recognition of the company’s success in commercializing the production of recombinant DNA-based  Hepatitis-B vaccine.23

13.9.4  SIDBI Venture SME Growth Fund To meet the venture capital needs of SME units and enable them to achieve rapid growth by taking advantage of opportunities in the emerging sectors, SIDBI Venture Capital Ltd has set up SME Growth Fund. The fund has a targeted corpus of ` 500 crores with a life of eight years. The fund seeks to achieve attractive risk-adjusted returns for its contributors through long-term capital appreciation by investing in SMEs. The main focus of the fund is to invest in unlisted entities in the small and medium enterprises in manufacturing as well as services sector, as also businesses providing infrastructure or other support to SMEs. The fund also has a provision to invest in listed companies on a highly selective basis to avail of the attractive opportunities in growing companies. The fund mainly invests in companies at an early stage as well as in the second-round financing for those with a track record of proven technology or business model and opportunities for growth and earnings. SME Growth Fund provides financial assistance primarily by way of equity or equity-linked capital investment. It also endeavours to provide mentoring support and other value addition to enable the funded companies achieve rapid growth and achieve/maintain their competitive edge in domestic and international markets. The scheme provides for funding in the range of ` 2 to ` 25 crores by way of equity investment in a wide range of growth sectors, such as life sciences, retailing, light engineering, food processing, IT, infrastructure-related services, healthcare, and logistics and distribution.

13.9.5  Department of Bio-technology The Department of bio-technology has initiated a scheme called ‘Small Business Innovation Business Research Initiative’ (SBIRI) phase 1 and phase 2 to promote entrepreneurship in the area of biotechnology. Under phase 1, the provision exists for extending ` 1 crore, of which ` 50 lakhs can be given by way of grant and the remaining by way of soft loan for early-stage funding for high-risk, innovative

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ideas/products for commercialization. The provision exists for extending soft loan up to ` 10 crores in phase 2 for early-stage funding for high-risk, innovative ideas/products for commercialization. The unique features of the scheme are that it assists small and medium business units, including new enterprises, with not more than 500 employees in R&D; offers phase 1 funding for early stage, pre–proof-ofconcept innovative research and provide phase 2 funding towards commercialization of research leads. Pharma, biotech companies and any other enterprises focusing on scientific innovations are eligible to apply. The eligibility for funding requires the submission of an application by an Indian company/ies solely or jointly with a public partner (universities or national institutes); more than 51 per cent of the shares of the company are to be held by Indian citizens; the industry should have a DSIR- recognized in-house R&D unit or have IP related to the proposed activity and joint ventures and limited partnerships would be eligible for SBIRI support, where the entity created meets the requirements just mentioned.

13.9.6  National Research Development Corporation (NRDC) NRDC has a number of schemes that promote technology-driven entrepreneurship. It promotes, through flexible funding schemes, the development of marketable technologies in close association with industry and national R&D institutions. It evaluates the technological merits and commercial potential of incipient or mature technologies by conducting techno-economic surveys; technology and business forecasts and investment appraisals; pre-emptively protects intellectual property rights (IPR) worldwide; designs and engineers manufacturing plants of commercial scale; shapes and manages technology contracts that are fair and equitable; tests market products; assists in obtaining certifications for products and their quality, where these are prerequisites for entering commerce. NRDC takes care of all expenses for protecting technologies and innovations through IPR under their scheme of financial and technical support for patenting of inventions. It also has a scheme to extend awards under different categories in the range of ` 1 to ` 5 lakhs for stimulating the spirit of inventiveness. More than financial assistance, entrepreneurs can get multiple help by way of information on the latest technologies developed around the world and particularly in India; an objective assessment of the commercial potential of inventions; national and international patenting; identification of potential manufacturers for new technologies; negotiation of licensing agreements to provide worthwhile value for the patents; legal backup for royalty collection and share in license income and other unexpected gains.

13.9.7  Department of Information Technology (DIT) DIT’s main objective is promoting e-governance in the country, and it encourages R&D efforts in the area to promote these. It facilitates by different means the promotion of providing e-infrastructure for delivery of e-services; promotion of electronics hardware manufacturing and IT/ITES industry; support for creation of innovation infrastructure in emerging areas of technology; support for development of e-skills and knowledge network and securing India’s cyber space. The Indian Information Technology-Information Technology-Enabled Services (IT/ITES) industry has been performing a key role as the most consistent growth driver for the economy. Service, software exports and BPO remain the mainstay of the sector. The IT/ITES exports have grown to a staggering $46.3 billion in 2008–09. The IT sector currently employs 2.2 million professionals directly and another 8 million people indirectly and accounts for more than 5 per cent of GDP. A majority of the Fortune 500 and Global 2000 corporations are sourcing IT/ITeS from India, and it is the premier destination for the global sourcing of IT/ITES, accounting for 55 per cent of the global market in off-shore IT services and garnering 35 per cent of the ITES/BPO market.24

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DIT assists by funding to industry and industry–R&D institution partnership projects to encourage R&D projects in the fields of ICT and to create indigenous products/packages. It has funded projects in the areas of Bio-informatics; Nanotechnology Initiative Division Projects; Microelectronics Development Division Projects; Industrial and Electronics Application Development Division Projects; Electronic Components and Materials Division Projects; Photonics Development Division Projects; Semiconductor ICs Layout Design Division Projects and Medical Electronics and Telemedicine Division Projects.

13.9.8  Risk Capital and Technology Finance Corporation Limited  (RCTC) The IFCI Venture was originally set up as a society by the name of Risk Capital Foundation (RCF) in 1975. The society provided institutional support to first-generation professionals and technocrats for setting up their own ventures in the medium-scale sector. In 1988, RCF was converted into a company, Risk Capital and Technology Finance Corporation Ltd (RCTC). To reflect the shift in the company’s activities, RCTC’s name was changed to IFCI Venture Capital Funds Ltd (IFCI Venture) in February 2000. Over the years, the IFCI Venture acquired expertise and experience of investing in technologyoriented and innovative projects. Since its inception, it has provided finance to more than 350 ventures and supported commercialization of more than 50 new technologies. It has pioneered efforts for widening its entrepreneurial base in the country and has catalyzed the introduction of venture capital activity in India.25

13.9.9  Angel Capital to Start-ups Angel funding to start-ups comes by way of equity and/or debt for promoting technological advancement through new technologies and innovative products. Angels also promote successful commercial exploitation of the technologies by providing financial support to entrepreneurs. Angel fund provides a great advantage to both entrepreneurs and investors by extending seed funding support to budding entrepreneurs. The climate for angel funding in India is improving, as is evident from their investments to the tune of $3.1 million in five deals in 2008, which have increased to $7.3 million in nine deals in 2010. The three key factors that have set Angel investors apart are smaller investments in the range of $250,000 to $1.5 million, fast route to funding and relatively smaller stake in the equity being in the range of 10 to 25 per cent. The angel investing formula is simple: invest in multiple companies (most super-angel funds have more than 50 investments), invest small amounts, take small stakes and work closely with the company. In most cases, the start-up turns ripe in two or three years for another round of funding or an acquisition, and the super-angel fund exits. This vibrant ecosystem has also attracted the attention of established venture funds. Big names such as Reliance Venture Asset Management and Sequoia Capital swoop down on early-stage deals when an opportunity arises (Syal 2011). Some of the prominent angel investors in India are the Mumbai Angels, Indian Angel Network, Emergic Ventures, Factorial Software and Chennai Angels.

13.9.10  Venture Capital Funding in India At the emerging opportunities for funding in knowledge economy, venture capital is taking deeper roots in India. The venture capital funding started in 1988 with the formation of Technology Development

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and Investment Corporation of India (TDICI) and regional funds. GVFL Limited (formerly Gujarat Venture Finance Limited) is widely regarded as a pioneer of venture capital in India. It is an independent, autonomous board-managed venture finance company based in Ahmedabad, Gujarat, India. GVFL ushered in the dawn of venture capital in India. Founded in 1990 at the initiative of the World Bank, GVFL has supported ventures working on cutting-edge technology as well as encouraged entrepreneurs with innovative ideas. During 1995–99, a number of foreign venture capital funds entered into India to promote technology-driven enterprises. Subsequently, a number of global venture capitalists started actively participating in funding ventures in India. At present, there are around 150 active venture capital funds—government, foreign and corporate—operating in India. In 2006, $7.5 billion was invested by venture capital funds in 299 deals across sectors. However, ITES remained the most favoured sector, and a majority of the deals in number as well as the amount of funding was in favour of late-stage funding as against early-stage and growth-stage funding. Some of the venture capital firms operating in India are 2i Capital (India) Pvt. Ltd; Ambit Pragma Ventures Pvt. Ltd; Ascent Venture; Canaan Advisors Pvt. Ltd; Canbank Venture Capital Fund Ltd; Global Technology Ventures Ltd; Helion Ventures Pvt. Ltd; ICICI Ventures; IDFC Pvt. Equity; iD Ventures America, LLC; iLabs Group; Caspian Advisors Private Limited; Gujarat Venture Capital Fund Limited; HSBC Private Equity Management (Mauritius) Ltd; IDFC Private Equity Co. Ltd; IFCI Venture Capital Funds Ltd; IL&FS Venture; Providence Equity; Reliance Technology Venture Pvt. Ltd; Standard Chartered Private Equity Advisory India Pvt. Ltd; VentureEast Fund Advisors and Walden India Advisors Pvt. Ltd. Venture capital funds in India are governed by the Securities and Exchange Board of India (SEBI). SEBI is the nodal agency for registration and regulation of both domestic and overseas venture capital funds. Accordingly, it has made the following regulations, namely, Securities and Exchange Board of India (Venture Capital Funds) Regulations 1996 and Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations 2000. These regulations provide broad guidelines and procedures for the establishment of venture capital funds both within India and outside it; their management structure and set-up as well as size and investment criteria of the funds.

13.9.11  Banks and Financial Institutions Funding Ventures The major post-independence institutional innovations of relevance to long- and medium-term finance for the industry can be grouped into four major categories: 1. 2. 3. 4.

National Level Industrial Development Banks. Specialized Financial Institutions. Investment Institutions. Other Banks Offering Financial Assistance.

13.9.12  National Level Industrial Development Banks Development banks (DB) are those banks that were established to finance and nurture industrial development in the country during the post-independence era. The main purpose was to promote entrepreneurship in the country. These banks differ from the other banks, mainly in terms of their main involvement in creating a climate for entrepreneurial ventures. Their main function involves the funding of medium- and long-term loans to the industries, subscription to the share and debenture of the industries, and underwriting of the new issues. They have their network of presence across the country that caters to the widespread effect of funding industrialization.

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The various DB set up are SIDBI, NIDC (established in 1954), IDBI, ICICI (Industrial Credit and Investment Corporation of India) and IFCI (Industrial Finance Corporation of India). There are various institutions such as SCBs, SIDC and SIIC that look after needs at the state levels.

13.9.13  Industrial Finance Corporation of India The first development bank in India was incorporated immediately after independence in 1948 under the Industrial Finance Corporation Act as a statutory corporation to pioneer institutional credit to medium- and large-scale industries. It is a 50 per cent subsidiary of IDBI, and the rest of the shares are held by banks and insurance corporations. It provides assistance in all forms, such as loans, underwriting and subscribing to the share and debentures. Its lending suffered from the high rate of defaults. The newly established DFI was provided access to low-cost funds through the Central Bank’s Statutory Liquidity Ratio (SLR), which, in turn, enabled it to provide loans and advances to corporate borrowers at concessional rates. By 1991, it was recognized that there was a need for greater flexibility to respond to the changing financial system. It was also felt that IFCI should directly access the capital markets for its funds’ needs. It is with this objective that the constitution of IFCI was changed in 1993 from a statutory corporation to a company under the Indian Companies Act, 1956. Subsequently, the company’s name was also changed to ‘IFCI Limited’ with effect from October 1999.

13.9.14  Industrial Development Bank of India Established in 1964 by an Act of Parliament to meet the credit demands for the industries, this was wholly owned by RBI. It was an apex institute to finance the industries, and it also coordinates with other banks for financing. In 1976, it was converted to an autonomous body. It provides finance to look after the export or import needs of the industries. It also provides the facility of refinancing by subscribing to the term finance of the SCBs, ICFI against the loan provided by them, thus refinancing the loans. It mainly provides short-term and long-term loans to the industries. It served a great purpose of developing industrialization in the country during the post-independence era. Some of the institutions built by IDBI are National Stock Exchange of India (NSE); National Securities Depository Services Ltd (NSDL); Stock Holding Corporation of India (SHCIL); Credit Analysis & Research Ltd; Export-Import Bank of India (Exam Bank); Small Industries Development Bank of India (SIDBI); Entrepreneurship Development Institute of India and IDBI Bank, which is now owned by the Indian Government, though for a brief period it was a private scheduled bank. Keeping in view the changing role of development banks and the need for converting these institutions into commercial banks, the IDBI (Transfer of Undertaking and Repeal) Act 2003 was passed by Parliament in December 2003. The Act provides for repeal of IDBI Act, corporatization of IDBI (with majority government holding) and its transformation into a commercial bank. The notification facilitated formation, incorporation and registration of Industrial Development Bank of India Ltd as a company under the Companies Act, 1956, and a deemed banking company under the Banking Regulation Act, 1949, and helped in obtaining requisite regulatory and statutory clearances, including those from RBI. IDBI Bank, with which the parent IDBI was merged, was a vibrant new generation bank. The bank was the fastest-growing banking company in India and was a pioneer in adapting to the policy of the first mover in tier two-cities. IDBI Bank Ltd is a universal bank with its operations driven by a cutting-edge core banking IT platform. The bank offers personalized banking and financial solutions to its clients in the retail and corporate banking arenas through its large network of branches and ATMs, spread across the length and

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breadth of India. The bank also set up an overseas branch at Dubai and has plans to open representative offices in various other parts of the globe for encashing emerging global opportunities.

13.9.15  Industrial Credit and Investment Corporation of India (ICICI) It was established in 1955 as a private sector development financial institution under the Companies Act of 1913 to provide finance to the large private enterprises and industries. It basically issues money by the underwriting of the new securities and subscribing to the stocks and debentures of the company. As a result of high growth in operations and with the development of the capital market, ICICI increased its equity, as well as domestic and international borrowing, and changed its shareholding pattern. ICICI’s operational activities mainly consist of extending funding support in different ways by way of mediumand long-term loans in local and foreign currencies to assist in the creation, expansion and modernization of medium and large industrial enterprises, predominantly in the private sector. ICICI has played a critical role for a number of years in extending foreign exchange financing. It also makes equity investments, underwrites new shares and debenture issues and guarantees loans from other investment sources. From 1983, ICICI diversified its activities to cover financial services, such as leasing and deferred credit. However, after liberalization of the economy since 1991, ICICI strategically pursued the path of becoming a financial supermarket by offering a wide range of financial services to cope with growing opportunities and competition. ICICI set up in the post-liberalized era specialized subsidiaries for the following activities: investment banking, commercial banking, fund management, investor services and broking. In addition, ICICI has diversified its own range of activities into several fee-based services, including custodial services to cater to the needs of foreign and domestic institutional investors. ICICI also provides technology financing for development and commercialization of technology. ICICI is now considering the financing of infrastructure projects in line with the government’s efforts to develop infrastructure in the country. In 2002, the board of directors of ICICI and ICICI Bank approved the reverse merger of ICICI, ICICI Personal Financial Services Limited and ICICI Capital Services Limited into ICICI Bank. After receiving all necessary regulatory approvals, ICICI integrated the group’s financing and banking operations, both wholesale and retail, into a single entity. It is the second largest bank in India and the largest private sector bank in India by market capitalization. It provides almost all facilities as a universal bank to meet the requirements of small, medium and large entrepreneurs.

13.9.16  Industrial Reconstruction Bank of India The Industrial Reconstruction Corporation of India Ltd, was set up in 1971 for the rehabilitation of sick industrial companies in the private sector, mainly with a view to nurse and rehabilitate sick industries that were pre dominantly present in the state of West Bengal. It was reconstituted as Industrial Reconstruction Bank of India in 1985 under the IRBI Act, 1984. It became a government-owned undertaking with shareholding with IDBI, UTI and LIC. It mainly performed the role of rehabilitation of sick units across the country to salvage capital that had become unproductive and were identified as viable units from a long-term perspective. With a view to converting the institution into a fullfledged development financial institution, IRBI was incorporated under the Companies Act, 1956, as Industrial Investment Bank of India Ltd (IIBI) in March 1997. IIBI offered a wide range of products and services, including term-loan assistance for project finance, short-duration non-project asset-backed financing, working capital/other short-term loans to companies, equity subscription, asset credit, equipment finance and investments in capital market and money market instruments. Subsequently, from

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2003 onwards, its operations were curtailed a lot, and the government slowly sold off its assets to different banks and institutions as its own viability for existence was being questioned.

13.9.17  Shipping Credit and Investment Company of India (SCICI) The SCICI is a special financial institution catering particularly to the deep-sea fishing sector providing term loans in rupees and foreign currencies for such purposes. Besides this, SCICI also provides financial guarantees, buyers/sellers lines of credit, leasing finance and merchant banking services for raising funds in the capital market. In selected cases, it also offers participation in equity. The rates of interest charged by SCICI are 18 to 20 per cent per annum on rupee loans. On foreign currency loans, the rates are 11 to 12 per cent per annum on fixed-rate loans and 2.5 to 3.5 per cent over LIBOR on floating-rate loans. The promoters’ contribution is expected to be 20 per cent of project cost and the debt/equity ratio required is 2:1. SCICI takes up financing of larger projects in the range of over ` 5 million. Subsequently, SCICI was merged into ICICI with effect from 1 April 1996. The merger resulted in the largest amalgamation of two financial institutions in the subcontinent. As a result, ICICI has grown in size to build an asset base of almost ` 1 trillion, largely through its strategy of aggressive mergers and acquisitions. The main purpose of the merger was consolidation resulting in mega-sized institutions that can compete well in the globalized markets. The need for a giant financial institution was particularly evident in the emerging fully convertible rupee era when India would come closer to the global financial world, as the country’s real interest rates will also level out with international norms.

13.9.18  Small Industries Development Bank of India (SIDBI) Small Industries Development Bank of India is an all-India financial institution working for the cause of growth and development of micro-, small- and medium-scale enterprises in India. It was set up on 2 April 1990 through an act of the Parliament. It was incorporated in the beginning as a wholly owned subsidiary of Industrial Development Bank of India. Its shareholding is widely spread amongst various state-owned banks, insurance companies and financial institutions. SIDBI is an apex institution for formulating, coordinating and monitoring policies and programmes for the development of small-scale industries. It initially acted as a refinancing agency to banks and state-level financial institutions for meeting their credit needs to small industries. However, subsequently, it has expanded its activities in direct lending to small and medium enterprises through its branches spread all over the country. It is also playing a key developmental role in supporting micro-finance institutions for capacity building.26 It mainly focuses its efforts on funding small-scale industrial units, which contribute significantly to the national economy in terms of production, employment and exports. Small-scale industries are the industrial units in which the investment in plant and machinery does not exceed ` 10 million. In addition, SIDBI’s assistance flows to the transport, healthcare and tourism sectors and also to the professional and self-employed people setting up small-sized professional ventures. It extends finance assistance by way of direct loans, bills finance, refinancing to the banks, international finance and handles government subsidy schemes for promotion of small and medium enterprises in the country. SIDBI has a number of schemes that extend financial and other support to the new entrepreneurs. Its promotional and development scheme for new entrepreneurs aims at development of the small industries by partnering with NGOs, associate financial institutions, corporate bodies, R&D laboratories and marketing agencies for national-level programmes. Its Rural Industries Programme (RIP) aims at development of viable and self-sustaining tiny/small enterprises in rural and semi-urban India

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by harnessing local entrepreneurial talent. The Programme attempts to address problems such as rural unemployment, urban migration and under-utilization of local skills and resources, and is designed as a comprehensive business development services programme. Its Technology Upgradation Programme (TUP) for new entrepreneurs focuses on creation of awareness on new product/process technologies, skill upgradation, development of technology-related common facilities for the cluster, provision of unit-specific modernization package, energy conservation and introduction of environment friendly technologies. SIDBI has launched SIDBI Foundation for micro credit with a mission to create a national network of strong, viable and sustainable Micro Finance Institutions (MFIs) to provide financial support to micro enterprises. It provides financial assistance to the manufacturing sector involving investment in plant and machinery (original cost excluding land and building and the items specified by Ministry of MSME, the then Ministry of Small-Scale Industries, vide its notification No. S.O. 1722 (E) dated 5 October 2006) for micro enterprises up to ` 25 lakhs, small enterprises in the range from ` 25 lakhs to ` 5 crores and medium enterprises in the range from ` 5 crores to ` 10 crores. While in the service sector, investment limit in equipments for micro enterprises is up to ` 10 lakhs; in small enterprises, in the range from ` 10 lakhs to ` 2 crores and in medium enterprises, in the range from ` 2 to ` 5 crores.27

13.9.19  Tourism Finance Corporation of India (TFCI) The Government of India, pursuant to the recommendations of the National Committee on Tourism, namely, Yunus Committee, set up a separate All-India Financial Institution for providing financial assistance to tourism-related activities/projects in 1988. Accordingly, Tourism Finance Corporation of India Ltd (TFCI) came into existence to function as a specialized All-India Development Financial Institution to cater to the financial needs of the tourism industry. The main objectives of the institution are to provide financial assistance to enterprises for setting up and/or development of tourism-related projects, facilities and services, such as hotels, restaurants, holiday resorts, amusement parks, safari parks, ropeways, cultural centres, and travel and tour operating agencies. It provides financial and non-financial assistance through rupee loan, underwriting of public issues of shares/debentures and direct subscription to such securities, guarantee of deferred payments and credit raised abroad, equipment finance, equipment leasing, assistance under suppliers’ credit, working capital financing, takeover financing and advances against credit-card receivables. TFCI provides financial assistance to projects with a capital cost of ` 3 crores and above. In respect of projects costing between ` 1 crore and ` 3 crores, TFCI considers financial assistance to the extent of unavoidable gap, if any, remaining after taking into account the assistance from state-level institutions/banks. Unique projects, which are important from the tourism point of view and for which assistance from state-level institutions/banks is not available, may be considered on an exceptional basis even though their capital cost is below ` 1 crore. Financial assistance is considered on similar lines for heritage and restaurant projects. Projects with high capital cost may be financed along with other All-India Financial/Investment Institutions. TFCI considers assistance even if the total cost is less than ` 3 crores for existing concerns with satisfactory performance and for renovation/ upgradation. Financial assistance is extended against first charge on movable and immovable fixed assets, personal guarantees of the promoters and corporate guarantee of the group concerns and, if necessary, pledge of the promoters’ shareholding. The loans are usually repayable depending on the cash flows from the project in eight years with a moratorium of two years.

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13.9.20  State Financial Corporations (SFCs) and State  I ndustrial  Development Corporations (SIDC) In pursuance of the SFCs Act, 1951, SFCs were set up mainly to finance small- and medium-scale units. Their area of operation in general is restricted to the concerned states. SFCs also assist small-scale units for their modernization and technology upgradation programmes by providing soft loans, restructuring the sick small-scale units through rehabilitation schemes and through equity-type assistance under SIDBI’s seed capital scheme. State Financial Corporations (SFCs), operating at the state level, form an integral part of the development financing system in the country. They function with the objective of financing and promoting small and medium enterprises for achieving balanced regional socioeconomic growth, catalyzing higher investment, generating greater employment opportunities and widening the ownership base of industry. At present, there are around 18 SFCs (including TIIC, which was set up as a company) in existence for more than 40 years and operating as Regional Development Banks. The SFCs have played an important role in the evolution and growth of small- and medium-scale industries in their respective states in the country ever since 1951. They provide financial assistance to industrial units by way of term loans, direct subscription to equity and guarantees. Over the years, SFCs have expanded their activities and coverage of assistance. The general conditions for getting loans from SFCs are governed by their eligibility criteria; technical/ economic viability of the proposed project; promoters’ contribution; capacity to repay loans and collateral securities and guarantee. Loans are also offered under some special schemes, such as Prime Minister’s Rozgar Yojana (PMRY). This scheme is mainly meant for the purpose of generating self-employment. The SFCs operate a number of schemes and equity-type assistance on behalf of IDBI/SIDBI, in addition to the schemes for artisans, and special target groups such as SC/ST, women, ex-servicemen and physically handicapped. The SFCs (Amendment) Act, 2000, which became effective in 2000, provides greater flexibility to the SFCs to cope with the challenges posed by the deregulated financial system.28 The state industrial development corporations (SIDCs) were set up under the Companies Act, 1956, as wholly owned undertakings of the state governments with the specific objectives of promoting and developing large industries in their respective states/union territories. These corporations extend financial assistance in the form of rupee loans, underwriting subscriptions to shares/debentures, guarantees and also open letters of credit on behalf of their borrowers. SIDCs undertake promotional activities including preparation of feasibility reports, conducting industrial potential, survey entrepreneurship training and development programmes, and developing industrial areas/estates. Some SIDCs also offer a package of developmental services that include technical guidance, assistance in plant location and co-ordination with other agencies. With a view to providing infrastructural facilities for the establishment of industrial units, SIDCs are involved in the setting up of industrial growth centres. To keep pace with the changing economic environment, SIDCs have initiated various measures to expand the scope of their activities and have entered into various fee-based activities. Of the various SIDCs in the country, those in Andaman and Nicobar, Arunachal Pradesh, Daman and Diu, Dadra and Nagar Haveli, Goa, Manipur, Meghalaya, Mizoram, Nagaland, Tripura, Pondicherry and Sikkim also act as SFCs that provide assistance to small and medium enterprises and act as promotional agencies for this sector.

13.9.21  Commercial Banks Funding to Entrepreneurs The commercial banking industry encompasses 28 public sector banks, 29 private banks and 31 foreign banks. Together, they operate a network of more than 65,000 branches and 17,000 ATMs. Governmentowned banks are thriving since the two waves of nationalization occurred in 1969 and 1980 and have

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contributed a lot to the overall development of the country in general and industrial development in particular. The era between 1969 and 1991 is also characterized by developmental banking with a greater focus on the priority sector lending, including small-scale industries and agriculture. However, the character of many banks has undergone a change in the liberalized environment by coming up with IPOs and, in turn, inviting public equity. In 1993, an amendment to the Banking Regulation Act introduced additional liberal policies that permit new private competitors to enter more easily into the banking industry. Regarding SME financing, enhancing regulation has recently been issued by the RBI— the banking system regulator—in compliance with the 2006 Micro, Small and Medium Enterprises Development Act. In particular, state-owned banks have been requested to ensure a 20 per cent year-on-year increase in the amount lent to SMEs.29 The biggest commercial bank continues to be the State Bank of India Group, whose assets amount to more than $100 billion. In the private sector, the major player is ICICI Bank, which has assets in excess of $50 billion. In the private sector, ICICI Bank is one of the leading players contributing to the SMEs’ funding needs. Thus, there are multiple sources for funding a venture. What matters the most is the nature of business, expected cash flows and prospects for growth of the venture and the stage at which funding is sought. The best and the easiest source of funding a venture is bootstrapping, that is, to fund one’s start-up on one’s own. Accumulation of income through earnings provides a good leverage to take risks, as money belongs to one. Most of the highly successful ventures started small with their own funding and got outside funding as they grew in size and operations. The fundamental ‘principles behind bootstrapping—watching every penny, weighing spending options versus return on investment, doing more with less—have merit regardless of your funding situation. Companies that raise lots of money tend to overspend (and spend poorly); they forget about running lean & mean’.30 The second vital source of money is friends and relatives. The key advantage of raising money from friends and family is that it is a relatively easy source to get from, because they trust one and will have confidence in one’s venture. The major disadvantage of this source that should be remembered is mixing up one’s business and personal life. They may not be that well connected as angels or venture firms, and they may not be accredited investors, which may have some adverse bearing from the business point of view. The size of funding and number of ventures that get funded by friends and relatives is large as evident from ‘…$100 billion ‘friends and family’ money is used annually to fund 3 million start-ups. This compares to only $25 billion through venture capitalists. The average amount invested by friends and family is between $20,000 and $25,000, and further, 58 per cent of the fastest-growing companies in the US started with $20,000 or less.’31

Valuation  Advantages  by  Funding  through  Angel  Investors  and  Venture  Capitalists Another better way to fund a venture is through consulting. A consulting project is one in which one  can build whatever software one wants to sell as a start-up. Then, one can gradually transform oneself  from a consulting company into a product company, and have one’s clients pay one’s development  expenses. This process minimizes the risk of entering into a venture, as it becomes a gradual process  to enter into a venture after having earned income through consulting and knowing one’s customer well. Angel investors are the next best source. Angels are individuals who have made money through  technology ventures, and they understand start-ups well in terms of their strengths and weaknesses  and have good networking. Their contacts and advice can be far more valuable and important for the  (Continued)

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start-ups, as compared with the money. Association with angels helps in getting networked with the  right people and to give a boost to the business.   The association with angels or, for that matter, venture capitalists helps in viewing the venture from  its valuation point of view, as they look for exit to fetch better returns on their funds invested. As such,  someone buys shares in a company that implicitly establishes a value for it. If someone pays $20,000  for 10 per cent of a company, the company is, in theory, worth $200,000. We say ‘in theory’, because  in early-stage investing, valuations are voodoo. As a company gets more established, its valuation  gets closer to an actual market value. However, in a newly founded start-up, the valuation number is  just an artifact of the respective contributions of everyone involved.  32,33 

Some of the venture capital firms have also started moving into developing early-stage programmes such as Y Combinator, which turned the entire early-stage funding market on its head. It was followed by a similar programme called ‘Tech Stars’ and many others. In between Y Combinator and VCs, one can see angel funds pop up similar to Montreal Start-up, which attempts to blend the VC and angel worlds into one. Jeff Clavier’s new SoftTech VC II fund is another good example of this— a $12 million fund dedicated to seed funding between $100,000 and $500,000.34 Seed firms are similar to angels, but they invest relatively small amounts at early stages of the venture, but more similar to organized VCs, as they do it as a business rather than individuals making occasional investments on the side. The number of incubators in different countries is rising fast, and they contribute a great deal in seed funding support to start-ups. The fact that seed firms are more organized in their approach implies that their investment process is more standardized. Seed firms through incubators or otherwise usually have set deal terms they use for every start-up they fund. The fact that the deal terms are standard does not mean that they are favourable to one, but if other start-ups have signed the same agreements and things went well for them, then they provide a degree of confidence to the entrepreneur to accept them. Seed firms mainly differ from angels and VCs in respect of their making exclusive investments in the earliest phases and often when the company is still just an idea. Angels and even VC firms occasionally participate in this phase too, but they mainly invest at later stages. Thus, an appropriate funding decision with appropriate terms and conditions suited to a particular stage of growth of a venture is fundamentally a make-or-break question that an entrepreneur needs to decide at different stages of growth of a venture. This decision not only determines how much money one has as capital for one’s start-up venture but also one’s role in the venture and the way one works and lot more. It is a crucial question that needs serious thought before deciding and moving ahead.  Check Your Progress   10 Things to Avoid at All Costs 

  

This book is all about growing your successful business. However, it is a fact that many small businesses go bust and you need to know the warning signs to watch for. Occasionally though, it is really better to throw in the towel and start again. 1. No Cash: You never seem to have any money in the bank when you need it. Check your costings to see whether you are selling too cheap. You may be a ‘busy fool’.

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2. Paying Late: Stretching payments to suppliers gives only temporary relief to what is usually an underlying lack of profitability. If you should pay late, negotiate the terms. 3. Falling Sales: If demand falls, find out why quickly and either sell more or cut overhead costs. Delaying cost reduction is usually fatal. It is tough, but grasp the nettle! 4. Tail Wagging Dog: You have unwittingly become reliant on one or two large customers and they are starting to screw you down too tightly. You need more customers. 5. Cash Deals: Perhaps you are not drawing a salary and the odd cash deal looks tempting. However, this can damage your reputation and get you into trouble too. 6. Avoiding the Postman: You would be surprised how quickly people get used to those nasty letters from angry creditors. Some check the post for cheques and then leave the bills in a pile unopened. Always open the post and face up to what is happening. 7. Permanent Overdraft: The bank balance, such as a cold snap in winter, never rises above zero. Was it always like this? Ask your accountant to look at the figures with you. 8. The Cleaner Leaves: Keeping the place tidy has become a luxury you feel you can do without. The workplace becomes depressing and oppressive. It is a downward spiral. 9. Rumours Start: People talk. If you are struggling, it will show and no one wants to trade with a failing company. Quash rumours if you can and try not to behave as if desperate. 10. The Bailiff’s Calling: This is the final nail in the coffin lid on your ambition. An aggrieved creditor has the approval of the court to seize your assets. At this point, the game is usually over.

KEY CONCEPTS  Fixed Costs: These costs are incurred on plant and machinery and land and building and remain constant in total regardless of the level of production.  Variable Costs: These are incurred on direct labour and raw materials costs, which vary directly with the level of production.  Semi-variable Costs: These costs vary, but not necessarily, in direct relation to sales. They may remain unchanged up to a particular level of sales and increase when sales enter a higher range.  Working Capital Gap: This is the difference between current assets and current liabilities.  Cash Cycle: This is a sum of inventory holding period in number of days plus sales outstanding period in number of days minus payable outstanding period in number of days.  Contribution Margin: This is the difference between sales price and variable cost of production.  Debt: This is borrowed money from different sources such as banks, organizations and individuals that need to be repaid along with interest at regular stipulated intervals.  Equity: This is stock or any other security representing an ownership interest in the venture.

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 Preferred Stocks: This is ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a fixed dividend that should be paid out before dividends to common stockholders, and the shares usually do not have voting rights.  Common Stocks: These represent an ownership in a company, and holders of common stock exercise control by electing a board of directors and voting on corporate policy.  Convertible Preferred Stocks: These involve fixed dividend payment commitment, and part or full principal is convertible at some future date into equity, thus providing a mixed character to such funds.  Conditional Sales Contract: In this one, the purchaser does not receive title to the equipment until it is fully paid for.  Chattel-mortgage Contract: In this one, the equipment becomes the property of the purchaser on delivery, but the seller holds a mortgage claim against it until the amount specified in the contract is paid.  Seed Funding: This is mainly meant for developing a business idea, creating the first product and test marketing the new product or service for the first time.  Angel Investor: This is an affluent individual who provides capital for a business start-up, and usually looks forward for an equity stake in the company.  Business Incubator: This is a facility designed to assist business ventures to become established and sustainable during their start-up phase.  Venture Capital: This is a means of equity financing for rapidly growing private companies having high growth prospects.  Shotgun Approach: This means that one sends one’s business plan or some derivative thereof to as many venture capitalists as possible and hopes that the numbers alone will strike someone who has been looking for a deal such as one’s own.  Factoring: This is a financial transaction whereby a business entity sells its accounts receivables to a third party called ‘factor’ at a discount in exchange for immediate money with which to finance continued business.  Ad Hoc Limits: Ad hoc limits are extended by the bankers to their existing clients having a satisfactory track record to meet a sudden spurt in bulk orders that would require additional working capital facilities or pending renewal or enhancement of existing limits, to accommodate expansion in activity.  Overdraft (OD): ‘Overdraft’ means the act of overdrawing from a bank account.  Bill Discounting: The bank takes the bill drawn by a borrower on their customer and pays them immediately after deducting some amount as discount/commission.  Bankers’ Acceptance: It is a time draft or bill of exchange drawn on and accepted by a bank as its commitment to pay a third party.  Line of Credit: This is an arrangement between the bank and the borrower that enables the borrower to draw up to a specified loan limit from the bank.  Non-fund-based Limits: These involve credit facilities extended by the banks and where actual bank funds are not involved.

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ENDNOTES 1. Will You Get Your Start-up Through the Financing Valley of Death? http://www. antiventurecapital.com/ 2. http://www.1000ventures.com/venture_financing/venture_funding_stages.html 3. http://www.lbo-advisers.com/LBO.asp 4. Sources of Bootstrap Financing, Entrepreneur, http://www.entrepreneur.com/money/financing/ selffinancingandbootstrapping/article80204.html# 5. The Classic Bootstrapper, Inc. By Donna Fenn|@donnafenn|1 August 2000, http://www.inc. com/articles/2000/08/16285.html# 6. See Note 5. 7. Angel Investors, Albinet LLC, http://albinet.com/articles/financing/angel-investors 8. Zwilling, M. ‘Ten Ways to Attract Angel Funding’, Forbes.com, http://www.forbes. com/2009/10/27/raising-angel-funding-entrepreneurs-finance-zwilling.html 9. About Venture Capital, Indian Private Equity & Venture Capital Association, http://www. indiavca.org/ven_about.aspx 10. http://www.paulgraham.com/start.html 11. www.entrepreneur.com/money/howtoguide/article52832.html 12. Indian Private Equity & Venture Capital Association, http://www.indiavca.org/ven_investors. aspx 13. http://www.roadahead.biz/application-documents/The-Five-Cs-of-Lending.pdf 14. Report of the Working Group on Discounting of Bills by Banks, http://rbidocs.rbi.org.in/rdocs/ PublicationReport/Pdfs/16081.pdf 15. Entrepreneur, http://www.entrepreneur.com/money/howtoguide/article52732.html 16. Rani, R. Lease Financing, Hire Purchase and Factoring, http://www.du.ac.in/fileadmin/DU/ Academics/course_material/EP_15.pdf 17. geosourcecapital.com/leasing%20services.html 18. Gearing Up by Ellyn E. Spragins, 1 October 1989, http://www.inc.com/magazine/19891001/ 5848.html# 19. Budding Entrepreneurs Have a Variety of Funding Options, Economic Times, 4 February 2011, http://articles.economictimes.indiatimes.com/2011-02-04/news/28426472_1_incubationcentre-funding-risk-capital 20. Scheme of Support for Entrepreneurial and Managerial Development of SMEs: Through Incubators, http://research.sgei.org/msme-incubators.pdf 21. Instrumentation Development Programme, Department of Science & Technology, Govt of India, http://www.dst.gov.in/scientific-programme/t-d-idp.htm#1 22. 210.212.115.113:81/…/The%20Role%20of%20Business%20Incubator.pdf 23. Success Stories, http://www.tdb.gov.in/ 24. Department of Information Technology, Ministry of Communication and Information Technology, Govt of India, http://www.mit.gov.in/content/it-software-services-and-bpo 25. http://www.ifcifactors.com/group-company.html

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30. 31. 32. 33. 34.

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http://www.sidbi.com/history.asp See Note 26. exim.indiamart.com/…finance/state-financial-corporation.html Financing Technology Entrepreneurs & SME’s in Developing Countries: Challenges and Opportunities, India Country Study, An infoDev Publication, www.infodev.org/en/ Document.545.pdf An Introductory Guide to Start-up Funding, http://www.instigatorblog.com/an-introductoryguide-to-startup-funding/2007/10/17/# See Note 20. http://www.paulgraham.com/startupfunding.html bizzbangbuzz.blogspot.com/…/technology-startup-funding-in-nutshell.html See Note 30. REFERENCES

Boyett, J. H. and J. T. Boyett. 2001. The Guru Guide to Entrepreneurship. San Francisco: John Wiley & Sons. Chandrakanth, P. M. 2006. Entrepreneurship Development and Small Business Enterprises. New Delhi: Pearson. Kuratko, D. F. and R. M. Hodgetts. 2007. Entrepreneurship: A Contemporary Approach. London: Thomson Learning. Pollan, M. S. and M. Levine. 1990. The Field Guide to Starting a Business. New York: Fireside. Syal, S. 2011. ‘Rising Tide of Angels Boosts Seed Capital Flow’, Economic Times, 25 February 2011.

CONCEPTUAL QUESTIONS 1. What is meant by ‘valley of death’ from financing of the venture point of view? Explain. 2. What are the pertinent issues that need to be precisely answered to explain the need for money for a start-up? 3. While estimating financial requirements of a venture, what are the three broad categories in which they need to be estimated? 4. What is the difference between fixed cost and working capital requirements for the venture? Explain. 5. Define ‘working capital management’. 6. What are the key components of current assets? Explain. 7. Define cash cycle and its significance for the business. 8. Differentiate between debt and equity and preference stocks and common stocks. 9. What are the different exit options that are available to investors? 10. Differentiate between the three stages of financing. 11. Explain the meaning of bridge financing with the help of an example. 12. What are the key sources of funding through bootstrapping? 13. What are the major differences in getting a venture funded through angel investors or venture capitalists?

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14. Differentiate between the five different types of angel funders. 15. What is meant by seed funding? Which are the important organizations in India that extend seed funding support to ventures? 16. What are the key characteristics of venture capitalists? Explain. 17. What is the process followed by venture capitalists? 18. What criteria should be used while selecting a venture capitalist? 19. What are the criteria that bankers use for lending decisions? Explain. 20. Differentiate between fund-based and non-fund-based facilities that banks extend to ventures with the help of examples. 21. What are the options available for entrepreneurs to avail seed funding support for their ventures in the Indian economy? CRITICAL THINKING QUESTIONS 1. It is said that there should be a perfect balance between availability of funds for fixed cost and working capital. One without the other may jeopardize the growth prospects of the business. Explain by critically examining this statement with the help of examples. 2. The most critical phase is the duration and quantum of cash losses that are incurred till such time that the venture reaches its break-even level. The entrepreneur should ensure to tie up funds for all productive purposes and to meet cash losses in the initial phase of the business. What could be the key sources for funding cash losses and how can the magnitude of cash losses be minimized during the initial phase of business? 3. Why is it necessary for an entrepreneur to raise funds from long-term sources for meeting capital expenditure requirements on land, building and plant and machinery while raising short-term funds for working capital requirements? Explain by giving concrete examples of the rationale for this. 4. Why has it been said that the best source for financing a start-up is bootstrapping? Collect two cases each of businesses that borrowed heavily in the initial phase and another two businesses that started their business with bootstrap funding and analyse their paths for growth. 5. Identify two businesses that were started by funding through customers. Analyse the advantages or disadvantages that they faced through such funding. Is it advisable for the long-term growth of a business to depend on customer funding? 6. ‘It has been said that the venture capital industry is yet to take roots in India and venture capitalist funding should only be taken after clear signals emerge about accelerated growth of the business.’ Critically examine this statement. 7. What is meant by lease financing? Under what circumstances and what type of business, would lease financing be the best option for a start-up business? 8. Industrial Development Bank of India and Industrial Credit and Investment Corporation of India could not sustain their efforts in financing industrial ventures in the Indian economy and were converted into commercial banks by mergers. What have been the lacunae in their funding approach or otherwise that necessitated the merger of these two institutions into their subsidiary banks?

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 CASE 13.1:  GO GOLD: HOW AND WHERE TO APPROACH FOR FINANCE?  ‘Go Gold’, an initiative by Lucky, had been self-funded so far to come to a proof-of-concept stage. Lucky was working out the possibility of raising some angel investment so as to continue further with his efforts in the area of coming up with a Search Engine that was expected to have great opportunity. The emergent need for raising money to take the idea to the next stage was critical, as the proof of concept was far from what the final Go Gold was supposed to be. Lucky needed more people to work on the idea further and improved infrastructure facilities, so as to successfully come up with a product that could tap the potential market looking for effective search engines. Lucky had decided, based on interactions with his other friends who had successfully launched their start-up ventures, that it may not be a worthwhile and desirable option to approach bankers or venture capitalists for funds at this stage of their product development. Therefore, he was basically planning to approach angel investors who would understand his technology-intensive venture and were likely to appreciate the prospects of future potential to approach angel investors. Lucky had done his homework and prepared a small demo and presentation to pitch on the idea before his prospective angel investors. In his presentation, the focus was the possibilities, technicalities involved, prospects for success and potential users. Above all, emphasis was laid on the reason as to why natural language-based search could still be an effective tool. He also attempted to work out future financial projections that could show the possibility of increasing revenue and profit over the years based on some assumptions about advertising as a major source of revenue. His own assessment of some of the presentations that he had pitched revealed the following shortcomings: i. Go Gold gives better results for certain keywords and bad results for certain others. However, this was not duly taken care of in the demo presentation. Lucky was not fully prepared to respond to wide-ranging queries that could have resulted from demo and presentation on the product. He did not realize that the strong points of the demo matter the most and possibly areas that need further effort to come up with workable solutions need to be suppressed, especially before prospective financiers. His presentation was more focused on technicalities rather than on the business model as an outcome of technology application. ii. The presentation emphasized the prospects and possibilities of Go Gold with regard to user friendliness and the financial projections. However, the business model was completely missing. He realized that it would have been desirable for him to substantiate user experiences and responses to his search engine or to gather responses in writing from some of the prominent users who had the power to influence others. iii. Above all, his proposal lacked competitive analysis as also strategic thrust. He seemed to be completely in the dark as regards competitors and their competitive advantages as also revenue models were concerned.

 Questions  

1. After going through the case just mentioned, identify the many mistakes that were committed by Lucky, particularly from the point of view of pitching one’s idea to fetch finances. Identify specific areas of improvement that can lead him to succeed in getting finances.

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2. Do you think his decision to pursue angel investors was a right one? If not, suggest what could have been the other options to raise finance. 3. Is it advisable for a guy such as Lucky to seek financial support at this stage of product development? If yes, why, and if no, why? Justify your answer.

 CASE 13.2:  DEALS IN INDIAN ENVIRONMENT  Around 1995, entrepreneurs in Silicon Valley were mostly 23 to 30 years old. There was a trend mentioned by Sramana Mitra that during her generation, she was just 24 years old when she started her first venture, 27 when the second one was launched and 29 at the time of launching the third venture. Mitra has been an entrepreneur and a strategy consultant in Silicon Valley since 1994. Her fields of experience span from hard core technology disciplines such as semiconductors to sophisticated consumer marketing industries including fashion and education. As an entrepreneur CEO, Mitra founded three companies: Dais (off-shore software services), Intarka (sales lead generation and qualification Software; VC: NEA) and Uuma (online personalized store for selling clothes using Expert Systems software; VC: Redwood). Two of these were acquired, whereas the third received an acquisition offer from Ralph Lauren, which the company did not accept. In 2010, Mitra founded the One Million by One Million initiative to help a million entrepreneurs globally to reach a million dollars in annual revenue, build $1 trillion in global GDP and create 10 million jobs. In 1M/1M, she teaches the Entrepreneur Journeys (EJ) methodology to entrepreneurs around the world. Similarly, Marc Andreessen was 23 years old when he started Netscape. Andreessen was born on 9 July 1971 and is an American entrepreneur, investor, software engineer and multi-millionaire best known as the co-author of ‘Mosaic’, the first widely used Web browser, and co-founder of Netscape Communications Corporation. He founded and later sold the software company Opsware to Hewlett–Packard. He sits on the board of directors of Facebook, eBay and HP, among others. Erasmic Venture Fund was launched by three partners, namely, Subrata Mitra, Prashanth Prakash and Mahendran Balachandran. Mitra, before launching the Erasmic Venture Fund (EVF) in 2006, founded Erasmic Consulting to work with, mentor and invest personal time and capital into early-stage US/India cross-border companies along with his partner, Prashanth Prakash. Mitra was the chairman of Small-device (www.small-device.com), now a part of Digital Chocolate (www.digitalchocolate.com). He is also on the board of Mu Sigma (www.mu-sigma. com), a statistical modelling and analytics company with huge customer traction across multiple verticals. Prakash has more than 16 years of experience in the IT industry, Internet product development and consulting services. He started his fulltime career at S3 Technologies, a division of GSE Systems. Working for them in various capacities, he led a team that was responsible for building the next-generation case tools for real-time simulations (GemCase). Prakash also widely consulted for various companies in the United States before moving to Bangalore to set up NetKraft in 1998. Balachandran has more than 17 years of experience in the IT industry and was most recently the country manager of Apple Computers in India. He was instrumental in establishing a strong channel and retail presence for Apple as well as their success in the video (Continued)

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and corporate segments. Under his leadership, the Indian operations became a high growth and profitable subsidiary of Apple in the Asia-Pacific region. As per EVF, new technology and technology-led service businesses will emerge from India in the near future as evident from the buzz around start-ups in India. Therefore, many US VCs are getting interested in investing in Indian start-ups. Availability of money for high-tech start-ups will not be a constraint in the Indian economy in the coming years. What would matter the most is where the deals are. The bigger/well-known companies have already been picked up with huge investments; for example, Indiatimes, MakeMyTrip, Yatra and Tejas Networks. There are a few more that people are running after, but nowhere close to the deal flows that can absorb $2 billion in capital. In addition, most VCs would like to invest in the order of $2 to $10 million per deal (even as initial commitment) at a time. Most India-focused funds also have larger corpus ($100 + million in size), and are, therefore, usually unable to invest less than $1 million at a time either. The two Erasmic guys have looked at about 80 to 90 deals in the last 12 months. Not absolute zero-stage deals, but those with a little bit of validation, those that have already been set up with $10,000 to $20,000 of friends and family money. Of these, 20 qualified as worthy of further investigation, with only a few being fundable. Erasmic claims to be the first of its breed of mentor capitalists in India, with a focus on moving ventures to the next level with extreme hands-on involvement. Their team has experience of running full-scale India operations, as well as of founding and existing companies in the United States and in India. They bring substantial contacts to the table, both in the venture community and on the field, in India. Helion VC, another firm, is going to focus on early-stage deals in India (probably not seed stage, because $100 million is too large a fund to do seed-stage deals in India). Helion Ventures Partners is a $350 million India-focused, stage-independent venture fund, investing in technology-powered and consumer service businesses in sectors such as outsourcing, Internet, mobile, technology products, retail services, education and financial services. Their mission is ‘Partnering with entrepreneurs to build world-class companies’. They have an access to world-class executives who can add a lot of value to the ventures and bring value to their portfolio companies. Their expertise also lies in building a high-quality board of directors/advisors. They also help in managing rapid growth by participating in future rounds of financing in syndication with other venture partners. Their previous experience in mergers and acquisitions (M&A) is also available to entrepreneurs in driving inorganic growth.1  Questions  

1. ‘Sramana Mitra and Marc Andreessen provide a distinct example of a particular category of entrepreneurs.’ What are the distinct aspects of entrepreneurship that can be learnt from them? 2. What was the purpose of launching EVF by the three promoters in India? 3. In the Indian market, what particular gap exists in terms of funding start-up ventures? How can that be bridged? 4. What are the reasons for lack of deals for funding in the Indian market? How could it be overcome?

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5. What is the difference between EVF and Helion Ventures Partners? Which approach, according to one, would be more suitable for what kind of ventures? Explain.  Endnote  

1. Too Much Money, Too Few Deals, http://www.sramanamitra.com/2006/07/01/too-muchmoney-too-few-deals/; http://www.erasmic.com/investment_indian_landscape.html; http://www.helionvc.com/ aboutus.htm

 CASE 13.3:  PHYZOK  Our present-day education system is a place where marks, grades and report card antics take precedence to a child’s creative and inherent skills. The formative years spent in schools are the most conducive for a student in terms of the learning that takes place and gets ingrained in the child’s memory. This sets the direction in which the child’s acumen gets sculpted, and it is our responsibility as teachers, parents and mentors to provide a dynamic learning environment. This change can only be brought about by encouraging students not only to move away from rote learning but also to see things in a logical, rational and analytical way. The entire Indian education system now believes in providing education that does not burden the student and relies more on experiential learning. The focus is on moulding individuals into wholesome personalities. One widely held perception which requires attention is that children experiment less and memorize more. Especially, in an environment where we are exposed to a lot of information and facts, we tend to assimilate and reflect others’ opinions and ideas and in the long run lose out on the cognitive ability to think independently. There is a need to provide an environment and introduce methodologies where every child does not just quietly accept the things being taught but is urged to question and think. Given that there is a growing demand for such educational services and the vast market remains untapped, we believe that there is potential to build a profitable business due to economies of scale. We, at Phyzok™, firmly believe that the better way of learning and nurturing one’s thought process is by being analytical. The analytical thought process boosts scientific temper; it brings students to a state of mind where, before accepting anything new, they question the objective behind the thought being invoked, seeking knowledge and being satisfied only when things are proved with substantial evidence. Phyzok aims at providing comprehensive educational solutions that can complement the existing framework of the school educational system by introducing technological innovations for content delivery to make the learning experience an enjoyable one. It transforms the way education is delivered. Technology application from the point of view of content delivery has so far been very limited in the Indian educational system. The traditional classroom setting with a predominantly lecturebased method of delivery together with an evaluation system based on memory testing and a bit of analytical ability continues to be a common phenomenon. NASSCOM report of 2005 reveals that ‘Only one in four engineering graduates in India is employable, based on their technical skills and (Continued)

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practical abilities.’ In this backdrop, a perception that exists is that children experiment less and memorize more. Especially, in an environment where students are exposed to a lot of information and facts, they tend to assimilate and reflect on the limited framework that their teachers provide by way of reproduction from texts and, in turn, focus gets lost in children in developing a cognitive ability to think independently. There is a need for an environment where every child participates actively in the classroom, interacts constantly and is urged to question, analyse and involve oneself in wholesome learning. Phyzok is a venture that addresses the issue of developing cognitive ability to think and contribute in developing an analytical frame of mind. The solution lies in having a comprehensive approach coupled with an effective technology-based delivery system that can address the issue. Phyzok aims at a comprehensive school package integrated with the school’s regular system to revolutionize the education delivery system. The package includes Phyzok’s experimental and simulation kits, that is, hands-on activity kits associated to the curriculum that allows students to explore, experiment and innovate. These kits are composed of separable structures that can be assembled as per the instructions to create the required design for different concepts of learning. For example, if oscillations and the simple pendulum is being taught, the students would be required to create a pendulum using the rods, string and bob. This would be the first step towards engaging the student, but only physically. The next step is to engage them mentally, which is executed through the content and instruction manual for the teachers. For example, the teacher then explains oscillations using the design, which every student in the class has, and then the teacher demonstrates the change in the time period by changing the length of the string, by changing the weight of the bob and by oscillating it inside a tub of water. The teacher, then, reveals the required formula to the students and relates it to the activity they just did. Not just this, once the students have understood the whole phenomenon, the teacher goes a step beyond and creates different scenarios in the class such as taking a hollow bob, filling water in it and then asking the student to predict the change in time period; pricking a hole in the bob, letting the water drip out and then asking the student to predict the change in the time period. These contents and thought-provoking scenarios are provided to the teachers by teacher’s training and a manual that guides them for each class. The venture also provides a comprehensive and continuous evaluation mechanism to test the acquired knowledge and skill sets by the students and a feedback mechanism to improve on their performance by using the modules. A technology innovation, personal response system, a handheld portable device with keypads and sensor tags, which integrates the entire teaching program, will provide an engaging and inviting learning environment and maximize active learning for students, will improve teaching effectiveness as immediate feedback on the class’ performance is available and will greatly reduce paperwork and faculty labour associated with attendance, test administration, grade recording and analysis. It will act as a single source of information for students— school updates and notices. A comprehensive school management system will be provided which integrates all that has been just mentioned to facilitate smooth operation that can also automate a school’s diverse operations. Pedagogy of teaching-learning would be developed depending on the subject matter to be taught by using appropriate methods and techniques. The team consists of Lohit Sahu, who studied mechanical engineering at BITS-Pilani. He was a member of the Centre for Entrepreneurial Leadership (CEL) and co-ordinated the Business Plan Workshop series. He was the president of Madhyansh (cultural association) at BITS and a member

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of the music club. Sahu has worked with the Department of Education, Government of Chhattisgarh, to implement a unique education delivery system in rural areas. He had won numerous national and international business plan competitions. On his graduation, the business plan was incubated under TBI by DST, Government of India, at BITS-Pilani. Since his graduation, Sahu has been working with the current students at BITS to develop an efficient education delivery for schools. He has been getting mentoring support from two of the professors of the institute having an expertise in the area of software development, educational technology and market research, respectively. Sourabh, co-founder of the company, is pursuing a dual degree course of M.Sc. (Hons.) Chemistry with BE (Hons.) Chemical at BITS-Pilani, Pilani campus. Sourabh has leadership qualities as evident from having played important roles in the Students’ Union and in organizing some of the prominent activities on the campus. He has worked with NSS in improving the quality of education in rural areas. Sourabh is associated with Phyzok as a Team Lead for iSpire wing, and he has decided to pursue his career at Phyzok fulltime after his graduation. Akshay, another co-founder of Phyzok, is a dual degree student at BITS-Pilani, Pilani campus, pursuing M.Sc. (Hons) Mathematics with BE (Hons.) Mechanical. Akshay has been associated with Phyzok for the past one and a half years. He has won various business plan competitions and intends to work with Phyzok fulltime on his graduation to develop the Phyzok lab kits. Phyzok is to come up with this technology for improving the effectiveness of learning and making it a more enjoyable experience. It is expected that accelerated spread effect in terms of demand would occur with the benefits realized by the strategically selected schools in the beginning. The target classes to begin with have been identified as classes VII to X of schools in tier-2 and tier-3 cities, where the schools have realized the need to improve the delivery system and find it too difficult to attract good teachers. The proposed solution being more impactful and cost-effective is expected to find a better launch pad in this segment of the market, as the demand is high, and there is not a single player in the market that provides the solutions at this price. Some of the leading boards in the country such as Central Board for Secondary Education (CBSE) have initiated certain innovations during 2009–11, which are likely to be further intensified. As the first steps, the students at class X have an option to skip the board examination. The policy changes suggest that very soon the traditional examination system will be replaced by continuous comprehensive evaluation (CCE). The CCE guidelines have been released and the schools, at this point of time, are finding it difficult to introduce the same. Though CBSE has put programmes in place to channelize the schools during the transition period, the overhauling in the coming years provides a huge market for Phyzok to offer its services, similar to the case with state boards in Chhattisgarh, Madhya Pradesh and Uttar Pradesh. The venture team has done successful pilot projects for Phyzok in the schools of Rajasthan, Madhya Pradesh and Punjab and is looking forward to further expanding the programme to states such as Uttaranchal and Delhi. In the last one year, the Phyzok sample kits have been demonstrated to more than 28,000 students in 30 schools, and the response has been overwhelming, as evident from their further enquiries and having paid a fee per student after the workshop. The schools were highly impressed by the performance and have already renewed the contract. In the North, certain prominent brands with chains of schools are in the process of negotiation to avail the services. The company is incubating under TBI by the Department of Science and Technology (Government of India) at one of the prominent and leading institutions in the country. (Continued)

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Phyzok envisions the classroom of tomorrow—a perfect mix of existing traditional methods infused with advancement in technology that can provide a dynamic learning environment for students. ‘Phyzok classroom programme’, which can be integrated with the regular curriculum in the form of workshop sessions or year-long programmes with exclusively designed content, would expose students to varied concepts in science, social sciences, economics and real-life scenarios through live concept demonstrations (Phyzok labs), simulations, activities (group and individual) and interactive sessions that nurture the analytical thought process, promote scientific temper and make students think beyond the textbooks, explore and understand the concepts taught in the classroom in a better way. Phyzok labs will be installed in schools for engaging students with the concepts through models, kits, simulations and experiments powered by PDCs (Phyzok development centres). Interactive questioning is facilitated through response systems. Comprehensive and continuous evaluation will be conducted by exposing students to multiple, different and higher-order thinking platforms that provide continuous feedback for improvement. Customized supplementary content and evaluation materials aligned to the curriculum will be delivered as modules, which would consist of topic-wise case studies that evoke critical thinking and hands-on activity kits that allow the students to explore and experiment. The Phyzok classroom programme will deploy ‘Phyzok classroom response systems’ (keypads or input devices) that can also be integrated in the school’s regular teaching environment. The response systems would provide an engaging and inviting learning environment and maximize active learning for students, improve teaching effectiveness as immediate feedback on the class’s performance is available and greatly reduce paperwork and faculty labour associated with attendance, test administration, grade recording and analysis. Phyzok school package would also include a complete school management system that would cater to the school’s diverse operations (administration tasks). Phyzok package includes an exclusively designed content that nurtures the analytical thought process and stresses on a case-study-based approach rather than lectures and provides a comprehensive evaluation system that tests students on different platforms that is stress free, thereby letting a student think beyond textbooks and exams and allowing them to explore, experiment and apply their learning in real life. Apart from exclusive content, Phyzok’s innovative delivery mechanism that employ workshops, hands-on kits, case studies and the use of student response systems would engage every child in the classroom, democratizing learning, thereby providing a dynamic environment with improved teacher–student interaction. The student response system can also be used for test administration, grading and attendance, which will greatly reduce the school’s paperwork and faculty labour. Phyzok™ is the only programme that pioneers a unique classroom programme based on ATP (Analytical Thought Process) delivery across India. The emphasis is on moving away from rote learning while, at the same time, promoting higher-order thinking skills. The delivery model is unique and ensures the physical and mental engagement of students using the inquiry-based approach. Novel experiments, kits, models and simulations are introduced to the children rather than merely employing visual aids. This facilitates hands-on and minds-on learning. Phyzok’s evaluation system comprises a mixture of methods from activity based to paper and pencil that do not stress a student. By utilizing student response systems, Phyzok will pioneer in technology introduction in the academic evaluation market. Phyzok also aims at providing a comprehensive school management solution system that automates the diverse operations of the school. Overall, Phyzok is a comprehensive solution

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for education delivery, evaluation and general management of the educational institutions, directed with an experiential- and enquiry-based approach. There are a few companies that are working in the domain, but with a different product, such as Educomp, Edurite and NIIT. Phyzok differentiates from their products in terms of highly customized products with multiple-times more impact on the end users at a cheaper cost. The team has undertaken a detailed market research to identify their niche areas and have found that there is no player in the market operating with the concept and product that Phyzok is offering. Phyzok aims at utilizing the funding to expand the R&D wing for product development and move into mass production of Phyzok lab kits (experiments, models, simulations—both physical and audio/visual). It will consist of content research, instructional designing, prototype modelling, testing and revisions. In addition, the funding will be used to initiate research and prototype modeling of student response system hardware and software. The venture in this phase of development is in need of ` 65 lakhs to be incurred as follows: on initial technology perfection—` 20 lakhs; for pilot runs taking care of development models, prototypes, software developments—` 15 lakhs; for final prototype manufacture and hardware and software integration—` 15 lakhs; for marketing initiatives mainly involving personal selling and some advertisement in the media—` 15 lakhs. The major hardware and software expenses would be incurred on workstations, motion graphics software, imaging software, engineering designing software and materials to manufacture the kits’ prototype.  Questions  

1. What would be the best strategy from the long-term perspective to unfold the Phyzok venture? Explain. 2. Which stage of growth would one identify Phyzok with at present? Explain. 3. Viewing oneself as a funding organization, what are the information gaps that one would like to get filled in for taking a view to fund the proposal? 4. Which source of funding would one recommend to Phyzok and why at this stage of development? Critically examine different sources and their advantages and disadvantages to recommend a source of funding. 5. Would it be advisable for Phyzok to seek venture capital funding? Justify your answer by giving concrete reasons and rationale for your decision. 6. Would it be advisable for Phyzok to raise funding through equity or debt at this stage of their growth?

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 LEARNING OBJECTIVES    To know about and understand the importance of implementation strategy for a venture.  To learn about and apply the important steps involved in launching a business.  To understand the relevance of incorporation, issuance of stocks and stock agreement among founders.  To understand technology trends and their relevance at the time of launching a business.

 To learn about how to manage sales and cash in a business.  To learn about the need and importance of raising various resources required for launching a business.  To learn about how to monitor and control the business in its initial phase of launching.  To understand the importance of recruitment, how to go about it and motivating employees for developing a winning team.

Sunil Bharti Mittal, Chairman and Managing Director, Bharti Group When faced with a choice between perfection and speed, choose speed; perfection will follow. —Sunil Bharti Mittal

Sunil Bharti Mittal is the creator and developer of an industrial empire. Starting from making bicycle parts as a teenager, he has come a long way in becoming the chairman and group managing director of Bharti Enterprises. He can be called the ‘originator’ of the cellular phone revolution in India. He is the founder, chairman and managing director of the Bharti Group and runs India’s largest GSM-based mobile phone service. His father was a Member of Parliament. However, he did not go into politics. After graduating from Punjab University in 1976, he set up a small bicycle business in Ludhiana in partnership with his friend with a meagre borrowed capital of ` 20,000. He soon realized that his ambitions would not be fulfilled in Ludhiana, and, therefore, he shifted to Mumbai in 1979. He set up his first company, Bharti Healthcare, which involved making capsules, from 1983 to 1984. However, his big break of entering into the telecom sector happened by accident. In 1983, imports of several products were banned, including portable generators that Mittal used to import. So, he tied up with Siemens to manufacture push-button telephones for a German company. Mittal’s track record shows a string of firsts in many areas, of which he is immensely proud: the first push-button telephone handset in India; the first answering machine; the first fax machine and the first cordless phone. He never compromises on anything. That is the image he would like to have. However, he wants to put an entrepreneurial soul in it. He is behind India’s leading telecom conglomerate that is at the forefront of technology and has revolutionized telecommunications with its world-class brands,

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products and services. The company has grown by leaps and bounds from its humble beginnings since 1976. The mantra that he has been following is ‘Work is love, not stress’. Mittal has been honoured with several awards. He was chosen as one of the top entrepreneurs in the world for the year 2000 and among ‘Stars of Asia’, by Business Week. He also received IT Man of the Year Award 2002 from Dataquest and CEO of the Year 2002 Award (World HRD Congress).

 14.1  INTRODUCTION  Having identified the opportunity and undertaken all steps to come up with a business plan, the real challenge to become an entrepreneur starts with developing an effective implementation strategy and translating it into action by taking sequential steps. An implementation strategy makes a real difference in terms of driving the business to greater heights. It has been rightly said that a weak plan with a good implementation strategy and action plan has a far higher probability of success compared with a strong plan with a weak implementation strategy and action plan (Fig. 14.1). A properly devised launching strategy clearly helps in prioritizing different action steps to identify what to do first, what to do next and so on a daily, weekly and monthly time frame. It is said that what matters the most is running a business effectively for the first 100 days, which gives rise to developing a clear perspective and the required confidence and courage to smoothly handle the challenges on the path of an entrepreneurial journey. A number of business failures have clearly revealed that the wrong way of doing things, more so in the initial phase of implementation, costs a lot of time and money as against the right way of doing things and can develop assets accretion and

Weak Business Plan

Good Implementation Strategy and Action Plan

Higher Probability of Success

Strong Plan

Weak Implementation Strategy and Action Plan

Lower Probability of Success

Figure 14.1 Importance of Good Implementation Strategy and Action Plan

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income generation on a continuing basis. It has been found that many entrepreneurs have not been able to realize a good chunk of 60 to 80 per cent of sales because of the lack of clarity in launching an effective business process. The mistakes committed during the launching stage cost heavily. In the whole of the launching process, the entrepreneur and the entrepreneurial team act as fulcrums—as a leader and a leadership team, respectively. ‘Management skill and strong team building abilities are essential leadership attributes for successful entrepreneurs.’ Scholar Robert B. Reich considers leadership, management ability and team building as the essential qualities of an entrepreneur. This concept has its origins in the work of Richard Cantillon in his Essai sur la Nature du Commerce en General (1755) and Jean-Baptiste Say (1803 or 1834) in his Treatise on Political Economy.1 As such, deciding to take up the entrepreneurial career option is one thing, but doing it is altogether different. Undertaking a business involves pooling up of various resources—informational, human and financial. Acquisition and putting these resources to the most appropriate use at the right time is the crucial step in the implementation of a business plan. After having acquired the requisite resources on time, the entrepreneur needs to take various steps to give a legal form to the business entity, developing a new product/service, clearly defining the roles and responsibilities of top management, middle management and other personnel in the organization, irrespective of its being big or small. It is lack of understanding on the part of an entrepreneur about different complexities involved in launching a business that results in a number of problems in the entrepreneurial journey that could have been effectively avoided.

14.2  STEPS INVOLVED IN LAUNCHING A BUSINESS The three key aspects involved in launching a business around which all other implementation strategies revolve are (1) legal status to the business for creation of customer value; (2) implementation of entrepreneurial strategy related to various dimensions and (3) aspects of business and planning for growth (Fig. 14.2). The formation of a business entity has to be developed in such a way that it helps in minimizing the risks and maximizing the gains. Entrepreneurial strategy has to revolve around marketing, operations, finance and, most importantly, people. Above all, while plunging into an entrepreneurial journey, the entrepreneur needs to have a vision as to where they would like to go in the long run.

Key Aspects—Launching a Business

To Give a Legal Status

Implementation of Entrepreneurial Strategy

Planning for Growth

Figure 14.2 Key Aspects Involved in Launching a Business

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14.3  INCORPORATION AND ISSUANCE OF STOCKS The steps required to incorporate the company to give it a legal entity should be undertaken first. This may require the help of a professional chartered accountant who could facilitate the whole process in the least number of days. The stocks should be issued to the founders as soon as the company takes a legal form, especially before the company assumes a significant value based on its expected cash flows in future. As such, the moment the company is through with prototype development and reaches the stage of market testing, it should be able to have customers under its fold. This would substantially raise the value of the company and, in turn, the stock price. The entrepreneur should ensure the issuance of stocks within the legal framework at the initial stage before the stock price rises. This would enable them to attract capital at a later stage at substantially higher rates per share to meet increasing fund requirements in future.

14.4  EXECUTE A STOCKHOLDERS’ AGREEMENT It is always prudent to enter into a firm stockholders’ agreement between the founding team members of the venture in the beginning itself, if there are two or more founders. This helps in sorting out the issues that arise as the business grows. The agreement should cover clauses pertaining to voting rights and obligations and veto rights and rights of first refusal that would help in smoothly handling significant business issues. Many ventures, in spite of having good business prospects, fail to take off because of teething troubles arising as a result of dissention among the promoters because of a lack of clear understanding. However, it is needless to say that the closer the company is to a venture capitalist (VC) financing, the less important would be a shareholders’ agreement, as it would get superseded with the terms and conditions that would get stipulated by a VC. It is necessary that as a start-up entrepreneur, one does not land oneself into making a mistake of not complying with applicable securities laws of the country. For example, allotment of shares to ‘friends and family’ who are not ‘accredited investors’ without proper disclosure documents or employing a consultant who is not a registered ‘broker-dealer’ to sell company stock for a commission can cause problems in future. Non-compliance of legal and statutory provisions pertaining to allotment of shares could cause severe consequences, including a right of paying back their money with interest to the security holders, injunctive relief, fines and penalties, and possible criminal prosecution.

14.5  RAISE DIFFERENT RESOURCES INCLUDING FINANCE ON TIME Start-ups face this problem of raising finance in the initial phase of their business itself when they take up a venture that requires outside funding. They soon realize the difficulties that come in the way of raising money and how any delays can derail the whole venture implementation process. It is important for entrepreneurs to understand that it usually takes far longer time than an entrepreneur thinks to raise money. As one proceeds, one keeps getting signals that one is not reaching anywhere in one’s journey to fix up the deals. Thus, at times, an entrepreneur, because of their overenthusiasm, enters into an entrepreneurial journey without money, involving a phase in which none believes in them except closest friends and family members. They may either depend on them to contribute to the business or may start with a credit card to borrow money. It is desirable to marginally overestimate how much money one will need from the beginning, because it is easier to raise money before the launch than it is after one has failed to meet projections. If one’s credit history is very short, then friends and family would be the best source of funding to depend on. However, even funding from friends and relatives needs to be taken on a professional basis, with a clear understanding about when it will be repaid.

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An entrepreneur should undertake a previous analysis of alternate sources of funding and which source would work out to be the best for a given venture. This analysis would also help in deciding whether it would be advisable to look for outside funding or not. We have earlier discussed in detail about the pros and cons of various funding sources such as self-funding, bootstrap funding, seed funding, angel funding, venture capital funding and bank funding. The clarity of fund requirement, point of time that it is required and terms and conditions of different sources of funding determine the appropriate source of funding for the venture. Remember, looking at the challenges that entrepreneurs face in raising money, it is always desirable to start small by putting in personal savings and assets, if any, that one has. It is better to use one’s stocks, bonds, life insurance policies and real estate to raise the needed capital in the beginning. The next best source of funding is to depend on one’s family members, dependable and close friends who have a great trust in one’s idea and would like to see one succeeding. If one necessarily needs funding from angels, venture capitalists or banks, one needs to be very realistic in the first tie-up of the funds without entering into a risk of raising other resources, including human resources. Otherwise, it would turn out to be disappointing in not having been able to meet the commitments with employees and other suppliers.

Example: Funding Issues—Two Types of People   It almost invariably means being dismissed by arrogant investors who show up half an hour  late, totally unprepared and then instead of saying ‘no’ give one non-committal rejection such  as ‘we invest at later-stage companies’. It means looking prospective employees in the eyes  and convincing them to leave safe jobs, quit everything and throw their lot in with one.   It means having pundits in the press and blogs who have never built anything to criticize one.  It means lying awake at night worrying about running out of cash and having a constant knot  in one’s stomach during the day fearing that one will disappoint the few people who believe in  one and validate one’s smug doubters.   It means not being bothered whether one succeeds or fails, whether one is Bill Gates or an  unknown entrepreneur who gave everything to make it work but did not manage to pull through.  The  important  distinction  is  whether  one  risked  everything,  put  one’s  life  on  the  line,  made  commitments to investors, employees, customers and friends and tried—against all the forces  in the world that try to keep new ideas down—to make something new.   It is not about optimizing the round; it is about whether one can raise the round at all.2

How to Fund Service Business? There is a general thinking in Silicon Valley mainly propagated by the VC industry that looks forward  for high margins and a greater scope for scalability of business that one should enter into product  businesses  rather  than  services  businesses.  It  is  usually  very  challenging  and  difficult  to  get  a  services company funded by VCs. As a result, even a successful service company attempts to spin  out product business to attract funding. Some  of  the  important  reasons  for  the  service  industry  not  opting  for  VC  funding  are  given  as  follows:   One does not have access to their actual financial statements but one needs to make some  reasonable assumptions. It would not be a big stretch to imagine a well-run service business 

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similar to this making 15 to 25 per cent net profit margins. Early in a services business, there is  usually no profit as the company reinvests in hiring people to grow, but by $20 million in sales,  the company should at least be pulling in 10 per cent profit (if not more) depending on how  much is reinvested. So, assume that in 2012, the company would do $20 million in sales and $2 million in profits  (10 per cent); in 2013, they would do sales of $25 million and $4 million in profits (16 per cent  net  margin);  and  then,  slow  growth  in  2014  to  $30  million  in  sales  and  $6  million  in  profits  (20 per cent profit), that is, $12 million in profits over three years. The founders could reinvest this in growth (0 per cent tax, focus on future equity growth) or take  the profit of $12 million and divide it among the founding partners. Assuming there are three  founders and they own an equal amount (33 per cent) than they have just taken $4 million each  in profits and note that this is at a qualified dividend tax rate (currently 15 per cent) versus an  income tax rate (35 per cent). True, the 15 per cent rates are likely to go up in the future, but  I doubt they will approach the income tax percentage level. The thing is—even if one’s services business is on a smaller scale than this—one should have  complete control over the decisions about where to take the business. There is no shame in  making a few million dollars in profit and paying oneself dividends while still owning a large  percentage (if not all) of one’s business. It is how things are done across the country outside  Silicon Valley. The minute one raises VC, one has an option—grow and try to become big. No VC is interested  in dividends—they want growth. That is the right answer for VCs. It may be the right answer for  one, but it might not. Trying to turn a successful services business into a product business is getting the cart before  the horse. If one really wants to do a product business, then one should hire a professional  manager for one’s service company, quit that job and focus 100 per cent on one’s product  company.

Therefore, it would be desirable to grow a service business through vendor financing, if one can  prove the worth of one’s service to them. Another option could be angel financing—who would be  happy to fund in case one can show a few million in sales and the ability to return dividends in the  near term. Still, the next option could be bank financing, which was earlier relatively difficult because  of its security orientation. There  are  tech  banks,  i.e.,  banks  using  sophisticated  technology  to  serve  customers  such  as  Silicon Valley Bank or Square1 Bank, that are in the business of financing start-ups. If a company can  show a past trend of regular cash flow and an intention to put one’s profits into their bank, then one  can look for funding by banks. It is important to understand that in service business, the entrepreneur should be careful enough  not to let fixed costs get too high, particularly in the initial phase of the business. The service companies  that have a largely variable cost base and make the tough decisions survive during the tough phase  of downturn in the economy.3

14.6  LEVERAGE OF INTELLECTUAL PROPERTY High-tech ventures usually have scope for protecting future cash flows from the venture by suitably protecting the intellectual property (IP) by way of patents, copyrights and trademarks. This helps in gaining a competitive advantage and attracting investor interest in the venture (Jelinek and Literer 1994). It is advisable to identify market potential for the idea and clearly define what needs to be protected by

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the entrepreneur. Thereafter, help of a professional legal firm having expertise in the area can be taken to file for safeguarding IP in all those countries wherein good market prospects for the product exist. Having obtained a patent in the initial stage of a business gives a lot of leverage to the entrepreneur to cash on the idea or in raising funds from VCs and other sources.

Example: Issues in IP Ownership? At  times,  start-ups  commit  a  big  mistake  of  creating  IP  for  their  upcoming  venture  while  working  as  an  employee  with  leading  corporates.  After  having  created  IP,  while  in  job,  they  decide  to  quit  and start their own venture. They commit a mistake of not understanding and realizing that the IP is  actually owned by their previous employer, as a part of their contract with them. One should carefully  review the terms and conditions of employment before signing any such agreement to clearly find  out  whether  there  are  any  terms  that  may  come  in  the  way  of  one’s  venture,  particularly  from  the  point of IP issues. If so, this may jeopardize one’s venture in future. Therefore, it is advisable to take  professional legal help before launching a business involving IP issues with the erstwhile employer.

14.7  BUILD A WINNING TEAM Recruitment and hiring of suitable employees for the business is the greatest challenge that an entrepreneur faces. The success of a business depends on building a winning team that requires the induction of people who get wedded to the philosophy of an entrepreneur and work as if it were their own business. The entrepreneur should build in the right procedures to hire people at different levels in an objective manner. Any compromise, if made at the time of hiring, could turn out to be fatal in a subsequent stage. Recruitment can be done through alternative modes such as advertisement, campus selection and selection through referrals received from friends and business associates. For senior-level requirements, it is desirable to go through the strategy of networking with business associates, friends, bankers, venture capitalists and private investors. There are professional recruiting agencies for personnel selection that are relatively costly and, therefore, may not be appropriate, especially for start-ups. Inducting right people is the most crucial aspect of launching a business. Most business owners realize during their early phase of implementation itself the consequences of bad recruitment, as it becomes evident from employees’ interest in every other thing during office hours than the assigned job and the purpose for which they have been inducted. Whether one’s is a small business starting out or a multi-million pound company, every business makes recruitment errors. However, employees are usually a business’ biggest cost: In fact, a survey from a leadership organization, the Chartered Institute of Personnel and Development (CIPD), found that, in 2009, the average cost of filling a vacancy could be as much as £ 6125. If one has to fork out twice because one has made a bad decision, it could seriously damage one’s business.4 The fact remains that haste makes waste, implying a mistake made in a recruitment decision without deeply getting involved in it by thinking through it deeply may lead to substantial wastage of premium money resources that start-ups cannot afford to waste. Remember that having made a mistake in recruitment, one should act fast to rectify it without losing time, the moment one realizes the mistake. It is better to frankly share one’s views with the employees; else, they would keep thinking that they are doing well, which could be disastrous to one’s business. It is like having one bad fish in a pond spoiling

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the whole lot of fishes and, therefore, one has to be alert to watch and assess people before developing confidence in them and their expertise. One should be realistic about the time frame that it takes to complete the recruitment process for hiring people at different levels. Particularly, hiring at senior levels is a difficult task, as it involves substantial investment, and repercussions of inducting a wrong person can be huge. The time frame for recruitment, particularly at senior levels, depends on various factors such as the employer and their employment brand; urgency of need; response and decision making; availability of right profile; time required for negotiations and rounds of negotiation that may take place. For example, while hiring an employee, a start-up should necessarily ensure to get two documents executed—an offer letter and a confidentiality and IP/invention assignment agreement. The offer letter will clearly stipulate the conditions related to the employee’s rights and obligations, including designation in an organization; compensation offered including stock options and/or other incentive, if any; benefits and, most importantly, whether the relationship is ‘at will’. The confidentiality and IP assignment agreement ensures that the employee is prevented from disclosure of the company’s trade secrets and other confidential information and that any IP developed by the employee is legally owned by the company. For example, a company spent a huge sum of money to provide a leadership position to its venture in its growth phase with the help of Boyden global executive search. The whole process took almost 8 to 10 months and, thereafter, a person was selected keeping in view all requirements and expected commitment. The selected person who headed the organization as executive director was given a handsome package of around ` 5 million per annum along with perks—car, house and servants. After having spent a huge sum of money, the organization was looking at the person to provide leadership to a team of around 50 employees, mostly knowledge based at middle and senior positions. However, the person just quit the assignment after eight months of service, during which the company had invested in him by deputing him twice for training abroad for a period of 10 days each. IDEO Founder David Kelley, a California-based entrepreneur, educator, engineer and venture capitalist, suggests avoiding conventional approaches for hiring employees and building teams. On hiring, especially for start-up ventures, his key suggestions are hiring individuals or non-conformists to stimulate the organization; hiring a diverse range of experts and generalists from different fields and forming ‘hot groups’ of 8 to 12 people for maximum impact. Kelley also encourages building close ties with universities to source potential staff. According to him, an ideal hire interacts well with the established staff and demonstrates an ‘attitude of wisdom’ that strikes a balance between the ability to promote ideas and the ability to consider feedback. Jen-Hsun Huang co-founded NVIDIA Corporation in April 1993 and has served as president, CEO and a member of the board of directors since its inception. He has emphasized that while hiring employees, the choice basically comes down to the personalities and motivations of the candidates. What matters most according to him is that each employee should become part of a larger team and should mesh with the company culture.

14.8  MOTIVATING AND INSPIRING THE TEAM The entrepreneur as a leader has to set an example in whatever traits they expect in their team members. One’s actions should radiate energy and vibrations that would motivate one’s team members to get wedded to one’s philosophy and get charged and inspired to contribute their best in the growth of the business. They should start thinking of it as if it were their own business and get involved in working for the achievement of the overall goals within the framework of their assigned roles. One has to be a role model for others in the organization. One should inculcate good work ethics in terms of being

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organized, being well prepared for meetings, habit of being on time, developing transparency by timely communicating with employees and recognizing the contribution made by employees through open praise. It will lead to contributing a lot in the achievement of goals set. The moment employees get the feel that the entrepreneur is not involved and committed to the business, they will lose faith in the entrepreneur and start looking for alternate jobs. It may be desirable to offer stock options and provide incentives for performance to retain good employees and ensure their engagement and involvement in the organization. Leadership does not just mean taking risks and responsibility but more so influencing and inspiring people to give their best in contributing to the achievement of organizational goals. As an entrepreneur, one has to play a critical role as a leader. One has to get self-motivated and directed from one’s own passion in pursuit of one’s ideal of life. Each leader has their own unique style to realize their dreams and vision. A leader’s vision provides a purpose and inspires and motivates them to work for the achievement of extraordinary results. It is all about influencing people to act, behave and perform as desired by the leader. Good leaders survive in adverse conditions while bad leaders can lose even in favourable conditions. A leader should remember and keep reminding oneself that:  One cannot do business with yesterday’s tools, techniques and methods and be in business tomorrow.  Effective leadership is the hallmark to take the company to the top.  Leadership is a psychodrama in which a brilliant lonely person gains control of oneself for controlling others.

Leadership basically requires using power to influence the thoughts and actions of other people, that is, to motivate them to respond to the wider call of the organization. This requires the following to be done (Fig. 14.3):  Develop trust and belief in one’s potential by having firm belief in oneself and one’s capabilities. ‘We get what we believe in.’  Identify and work on one’s failures—the mistakes leading to failure in the past act as learning lessons and stepping stones for success in future.  Be competitive with oneself through co-operation—create an environment of mutual trust and faith whereby everyone involved in the process produces some kind of harmony. Develop Trust and Belief Develop Fresh Approaches to Problems

Power to Influence Others

Develop Team Virtues

Identify and Work on Your Failures

Be Competitive with Oneself Through Co-operation

Character

Figure 14.3 What It Takes to Be a Leader in Launching a Business

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 Character—a leader’s character makes a major difference between performing, less performing and non-performing organizations. The three most important constituents of character are drive, competence and integrity.  Develop team virtues—a leader’s ideas get translated into reality by a group of people who necessarily work in and as a team. A team works under Andh Pangu Nayay—blind leading the cripple.  A leader develops fresh approaches to long-standing problems and open issues to new options.

Setting clear goals for the founding team of the venture and the employees as team members for both short term and long term are vital for the success of a business venture. Without setting goals, chances would be that the whole team would get adrift with nothing to strive for and no clear direction and path to follow. The fundamental prerequisite for motivating oneself and one’s employees is to have a clear direction for one’s company. There are multiple approaches and strategies to motivate one’s employees, which include monetary and non-monetary incentives. Each strategy has different implications and works differently at different tiers of employees. Praise and recognition is a powerful technique and the easiest one. It is important to ensure that people love what they do. This will help a lot in their consistently performing at their top level. Successful companies have highly energized, inspired and motivated employees (Fig. 14.4). Successful entrepreneurs have identified public recognition, praise and a pat on the back for their accomplishments. Praise fills emotional tanks, giving one’s team the fuel to perform to its peak potential. This has been well focused by Jack Welch, former CEO of General Electric (GE) and current Business Week columnist, who once said ‘No company, large or small, can succeed over the long run without energized employees who believe in the mission and understand how to achieve it’. The CEO of Dominos Pizza India, Ajay Kaul, says the company’s mission should be simple enough to be understood by all 4,000 of his employees. Once it has been set, it is up to one to communicate constantly how well the company is performing against the objective.5 Entrepreneurs have realized through their own venture experiences that to keep employees’ spirits high and charged, they need to be provided with proper hygiene factors such as a supportive and comfortable workplace along with a good cafeteria providing free snacks and lunches. Flexibility and a balance between work and other Balance Depending Upon Different Tiers Monetary Incentives

Non-monetary Incentives

To Have Highly Energized, Inspired and Motivated Employees

Figure 14.4 Strategies to Motivate One’s Employees

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dimensions of life go a long way in motivating employees. Flexibility in working hours, if feasible, without compromising in any way on the work output, also contributes to the enhancement of motivation level among employees.

14.9  UNDERSTAND CLEARLY THE TECHNOLOGY TRENDS Although a lot of spadework gets done about understanding the technology trends to understand the changing requirements from the environment while preparing the business plan, it requires a meticulous effort at the time of launching a business to once again make sure which particular technology in the field will capture the market in future. At times, between the period when technology development was initiated and the time when the entrepreneur proposes to launch the business, a number of changes, including developments from competitors, emerge in the market that need to be suitably taken care of before plunging into action. One needs to evaluate the business environment and understand how fast it is changing in that particular technology domain to ensure sustainable growth of the business before a new technology breakthrough comes out in the market. A quick feasibility study needs to be undertaken before investing in technology to decide whether to proceed with the project at the time of implementation.

14.10  PREPARE PILOT TESTING While launching their business, an entrepreneur should be clear about how to go about pilot testing the product or service in the market. They should be clear about the customers proposed to be contacted, the mechanism for giving the demonstration about the product, or service and testing groups that are willing to purchase it. A test market, in the field of business and marketing, is undertaken in a specific geographic region or among specific demographic groups to understand the viability of a product or service in the target market before a commercial roll-put plan. The process of test marketing involves duplicating ‘everything’—promotion and distribution as well as a ‘product’—on a smaller scale. It involves testing the outcome in one representative area that is proposed to be taken at complete launch. The results of test marketing are carefully monitored, so as to extrapolate the same at a larger level when the company proposes to launch it at a commercial scale. There are two broad categories of market testing called ‘alpha pilot testing’ and ‘beta pilot testing’ for product testing. Alpha testing takes around six weeks to test the prototype of a product or service in a controlled environment. It is usually undertaken in a laboratory setting wherein customers are asked to pre-test it free of cost. It attempts to identify customer preferences and responses to different aspects of the product or service for improvements and to come up with pricing and advertising strategies. In case of software development, the alpha test is carried out among the software developer team to confirm that the product works as anticipated. It is also called the ‘first stage of testing’ in a software development process and includes unit testing, component testing and system testing. The beta market test involves testing the product or service in a selected market to identify particular aspects, ingredients and conditions that would satisfy customers. A complete test marketing involves a trial of the new product to a controlled group of customers and is a pilot of the full marketing launch. Beta market testing reveals product acceptance, concerns and time cycles (Kaplan 2004). In the software development industry, a beta test relates to the second phase of software testing in which a sample of audiences tries out the product. This is also considered ‘pre-release testing’.

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Based on the market test, the entrepreneur needs to create a marketing strategy based on the inputs received from test marketing before going the whole hog for commercial launching of a product or service. Typically, such an analysis specifies in some detail the particular segments being targeted, the patterns that shape the market, the strength of competition and the overall dynamics of the marketplace (Nesheim 1997).

14.11  MANAGE SALES BY A CLEAR UNDERSTANDING—MARKET,  MARKETING STRATEGIES AND POSITIONING Depending on the nature of the business, the entrepreneur should develop a clear knowledge and perspective about the customers in terms of potential for physical unit of sales and turnover. For example, if one is in a publishing business, then one will have to precisely estimate one’s sales that would come by way of bulk purchases by libraries and retail sales from individual buyers. Similarly, if one started a specialty hospital, one needs to clearly estimate the expected occupancy of beds across departments and the average number of days for which a patient is expected to be admitted. Similarly, for a cement business, the entrepreneur will be required to estimate average sales turnover from different territories by suitably estimating the requirement of sales by major builders requiring a wholesale quantity and retail sales by individuals. On the other hand, for a retail departmental store, the entrepreneur would be required to estimate the average number of purchasers visiting the retail outlet per month and average purchase, in order to arrive at turnover. There are businesses that require knowing about customers’ buying history vis-à-vis consumer behaviour by dividing the consumers into certain broad categories depending on the market segmentation criteria. This information can be utilized after having launched the business to segregate the market and confirm whether the assumptions made are working out to be true in reality. Otherwise, the entrepreneur would be required to make timely changes in their earlier assumptions and work their implications in sales and managing sales. It is important for an entrepreneur to decide about sales strategy, particularly in terms of giving a credit period or not, depending on the nature of business, the intensity and urgency of need for the product or service, the ability for payment on the spot and in advance or after some time. Managing sales requires building reliable records about customer payments, particularly in terms of quantum of sales and the period that they take to make the payments, so as to track incoming cash quantum vis-à-vis the required cash to meet payment commitments. The entrepreneur needs to develop an appropriate management information system to track payment patterns and likely availability of cash at different periods in future. Different techniques such as specialized software, card file system operated manually by customers who have paid and who have yet to pay along with payment history in terms of payment on time or delayed payments, being classified under a different period of delays, need to be meticulously monitored for a follow-up mechanism. If payments get delayed beyond a point, then the entrepreneur may have to use specialized services of collection agencies and, in worst eventuality, may have to write off sales that may become unrealizable.

14.12  RECORD KEEPING OF EXPENSES It is relatively easy to systematize keeping a record of expenses incurred in business by making maximum possible payments by way of cheque. It helps in proper accounting as well as building proper authentic records. Wherever it becomes essential to pay by way of cash a small sum of money, the

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entrepreneur should immediately take a receipt, which should be filed for future accounting purpose after having made the due entry in various accounting ledgers. In business, invoices that are yet to be paid for should be sorted out by due dates. The entrepreneur should ensure to release payments on time by way of cheques. Especially in the initial stage of business, it is absolutely necessary to make payments as per commitments. This helps a lot in building a trustful relationship with suppliers and ensuring timely receipt of materials from suppliers. Thus, it is essential for an entrepreneur to keep proper records of financial and non-financial transactions by developing and putting appropriate systems in place. This helps a lot in making decisions by getting timely signals about cash, inventory, costing, sales and marketing outcomes.

14.13  TO-DO CHECKLIST—DAILY, WEEKLY AND MONTHLY A proper record keeping about different business activities related to sales and costing helps in prioritizing tasks that can find a proper place in ‘To-do List’ for different time frames. A proper management information system from the initial stage of business itself provides a great insight to the entrepreneur about certain critical managerial skills that they should equip themselves with, such as a Daily ‘To-do List’ in a descending order of priority and sees what has been completed at the end of the day and what would be the priority for the remaining items the next day.

14.14  MANAGING CASH Managing cash is a very important skill that an entrepreneur should possess to effectively implement the business. Any loose ends in this respect can sabotage the whole business. Having effective control over cash management can result in accelerated growth of the business. Managing the growth of a business requires cost control and cash management (Fig. 14.5). As the business starts to grow, the requirements of working capital increase coupled with fixed cost. The entrepreneur cannot afford to lose track of fully utilizing the cash available in the business itself. Usually, entrepreneurs focus more of their attention on revenue and margins rather than the balance sheet wherein lies the scope of managing the sources and uses of cash. As such, fast-growing companies can grow on their strength of internally generated sources without running out of cash. Mullins and Churchill (2004) have focused on two tools, namely, cash day’s analysis and hidden cash analysis, to identify where cash for growth of the company might be found.

Cost Control

Business Growth

Cash Management

Figure 14.5 Managing Growth of Business

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Let us consider XYZ Ltd’s income statement for 2010–11 and balance sheet for the period ended 31 March 2011 as given next: XYZ Ltd’s Financial Statements 2010–11 ` in Lakhs Income Statement Sales Less cost of sales Gross profit Operating profit Taxes at 30% Net profit Balance sheet as on 31 March 2011 Cash Accounts receivables Inventory Total current assets Fixed assets: plant and equipment Total assets Creditors Bank loan payable Owners’ equity Capital Retained earnings Total owners’ equity

2010–11 1,643.4 986.0 657.3 84.5 25.4 59.1

% of Sales 100 60 40 5.1 1.5 3.6

20.0 270.2 189.1

Daily Rate 4.502 2.701

60 Days 70 Days 479.3 35.0 514.3

94.5 50.0

35 Days

200 169.8 514.3

Cash day’s analysis to be undertaken, both historically over a period of time and comparative to competitors, provides lot of insight on cash management and in identification of hidden cash. It mainly revolves around analysis of accounts receivables in number of days, creditors’ level in terms of number of days and inventory level again in terms of number of days that would support future sales. Receivables of a company depend on the pace at which it generates revenues and the speed with which customers make the payments towards sales. For example, daily sales in case of XYZ Ltd can be computed by dividing aggregate sales of ` 1,643.4 lakhs by 365, that is, ` 4.502 lakhs per day. Similarly, the cost of sales per day works out to be ` 701 lakhs per day. If we divide accounts receivables amounting to ` 270.2 lakhs by sales per day, then we get the number of days it takes to realize receivables, which in the present case would be ` 270.2 divided by ` 4.502 lakhs, that is, 60 days. Similarly, if we divide creditors amounting to ` 94.5 lakhs by the cost of sales per day being ` 2.701 lakhs, we get creditors in the number of days as 35, implying that the entrepreneur pays for the creditors in 35 days of receipt of supplies from them. Similarly, if we divide the inventory level of ` 189.1 lakhs by the cost of sales per day being ` 2.701, we get the average number of the day’s inventory held, being 70 days. One can analyse the data just given in terms of how the month’s cash days are compared with earlier months. Is it that accounts receivables are too long compared with industry norms or deteriorating over

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a period of time? If they are deteriorating, then the entrepreneur needs to set a system in place to follow up by reminding customers who are delaying their payments. This would also give an insight to employees dealing with receivable collections to take certain preventive steps as regards sales in future as far as specific customers are concerned. As such, having a system in place to analyse the order processing, fulfilment and billing processes from order receipt date to mailing the invoice can help in saving many days that usually get wasted through inefficient clerical practices and management processes. Cash days need to be compared with competitors in the industry too, so as to find out wherein one slackens when compared with one’s competitors. This tool is very powerful, even compared with ratio analysis, because of its simplicity in understanding and the scope that it provides to the venture team to identify hidden cash. Suppose XYZ Ltd needs cash for its growth plans pertaining to expansion of production activity or hiring some professionals, opening an export house office abroad or effort put in by an internal research team to come up with patents. It is easy to look for outside funding from VCs or banks, but it may not be desirable to tap these sources unless and until the company has exhausted all its internal sources to raise money for meeting its requirements of cash for growth plans. The company can look for alternate ways to raise cash from within the company by better managing its working capital or cash cycle. For example, if the company can reduce its receivables by 10 days, that is, one sixth of the outstanding receivables from 60 days to 50 days by intensive follow-up with customers, raising invoices on time and ensuring that invoices reach customers on time, it will be able to release ` 45.02 lakhs (` 4.502 × 10) of cash locked up in receivables. This effort on the part of the management will enable the company to reduce receivables from ` 270.2 lakhs to ` 225.18 lakhs. Similarly, if the company can negotiate better terms for payment to creditors by stretching the number of days of creditors from 35 days to 40 days, that is, by stretching payments to creditors by five days, then it would be able to further generate ` 13.51 lakhs by way of cash. This would mean that stretching the creditors by one seventh times will have an extra benefit to the extent of ` 13.51 lakhs. Coupled with both the measures just mentioned, if the management of the company can better manage its inventory holding without hampering production in any way, say by reducing the number of days of inventory by 10 days from 70 days to 60 days, it would be able to further release cash to the tune of ` 27.01 lakhs. If we club all the three measures taken by the company to better manage its cash cycle, it would be able to unlock hidden cash to the tune of ` 67.53 lakhs, that is, 6.85 per cent of cost of sales and 4.11 per cent of sales. Thus, in a highly competitive business world, the entrepreneur should learn the art of managing cash in such a way that without adversely impacting its sales or profitability, the company should be able to manage cash better as long as its relationship with customers and suppliers does not get adversely impacted. It is very important for start-ups not to overload the company by outside liabilities that have a fixed commitment towards payment of interest and principal without having to introspect to better manage the cash cycle.

14.15  DUE DILIGENCE Before launching and plunging into business risk, the entrepreneur should undertake due diligence of people on the other side of the table or stakeholders in their business. Indeed, irrespective of whether a start-up is raising funds for the business, entering into a joint agreement, partnering for certain key aspects of the business or any other vital transaction having a business implication, it should investigate and reassure itself about the credibility of the other party or parties involved. This basically

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means finding out credentials and reputation of prospective parties with whom business transactions are proposed to be entered into. The fundamental purpose of undertaking due diligence is to ensure whether parties can be trusted for business deals. Will they meet their commitments as committed? Will it really add great value to the business by getting associated with them? Remember, in business deals, usually a long-lasting relationship needs to be built and, therefore, before taking the first step, one should take all possible precautions to ensure whether it will be worthwhile to do so from a business point of view.

14.16  SCHEDULING—IMPLEMENTATION PLAN A business venture is a set of interdependent activities that, if taken up effectively, leads to the accomplishment of a predetermined goal or outcome involving non-routine tasks, distinct start and finish dates for various activities and resource constraints by way of physical, finance and human resources. The entrepreneur needs to chalk out an implementation plan meticulously to achieve their end result of launching the venture with least possible financial resources and within the expected time frame. Every venture involves undertaking specific tasks that need to be completed to achieve the end result. These tasks need to be well identified and defined to ensure achievement of end results, as they are highly interdependent, and non-completion of one may jeopardize the whole venture. Each task has start and end points that have a significant bearing on the overall venture. The entrepreneur needs to clearly define different milestones that act as major check points to ensure that intermittent objectives are being achieved as envisaged to contribute to the overall goal. The overall plan of launching, after precisely defining the whole venture in terms of tasks and milestones, needs to be flexible enough to accommodate changes on a regular basis. As such, certain developments that are not envisaged earlier, having a direct bearing on the overall venture, need to be incorporated then and there with their implications on all other tasks. Gantt charts are a good tool for the execution of ventures that represent the timing of various tasks required to be completed by defining initiating date and ending date. Since the Gantt chart is simple to prepare and understand, it is being used as an important tool to execute projects. In a Gantt chart, each task takes up on row. Dates run along the top in increments of days, weeks or months, depending on the total length of the top project. The expected time for each task is represented by a horizontal bar whose left end marks the expected beginning of the task and whose right end marks the expected completion date. A number of tasks may run sequentially, in a parallel or overlapping manner, depending on their interdependency with other tasks. As the implementation of a venture progresses, the chart is updated by filling in the bars to a length proportional to the fraction of work that has been accomplished on the task, so as to find out whether it would be completed on time and whether it will have any adverse implication to other tasks dependent on it. This also helps in getting progress in launching a venture at any given point of time. It is desirable to divide the whole implementation plan into not more than 15 to 20 manageable tasks so that the chart fits on a single page. In case venture implementation involves greater complications, one may require subordinate charts that detail the timing of all the subtasks which make up one of the main tasks. For team projects, it often helps to have an additional column containing numbers or initials that identify who on the team is responsible for the task. Each venture has important events that the entrepreneur would like to show separately on the project timeline. For example, the entrepreneur may wish to highlight when a prototype is complete or the date for review of the design. Such important events are entered on a Gantt chart as ‘milestone’ events and marked with a special symbol, often an upside-down triangle.

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 Check Your Progress   10 Surprises Employees Spring and How to Overcome Them 

  

It is true to say that taking on your first employee is one of the most demanding steps you have to take as you grow a business. Employees enable you to scale up your business to a point where, ultimately, it will not need you at all. Then, you have the option to sell it. If you are hesitant about employing people, or already do and are worried about what could go wrong, here are 10 common surprises and how to avoid them. 1. Coming in late every day: What has changed at home to make mornings difficult? Partying every night? Find out and offer to help. 2. Private phone calls: Remember the importance of ‘give and take’. Is enough extra being done to justify latitude? If so, say nothing. 3. Pilfering: Always make it clear what you consider to be reasonable in this respect. This is more of an issue in a sweet shop than at steelworks. Do not make rules and then break them yourself. 4. Fraud: If someone is robbing you or your business, call the police. Never compromise. 5. BO: It sounds trivial but a worker with a personal hygiene problem is one of the stickiest issues most bosses have to face. Encourage workforce peers to hint or help. 6. Moonlighting: Some specialists, for example graphic designers, take it as read that they can work for you in the day and themselves in the evening. Make your policy clear when you hire people. Avoid misunderstanding. 7. Overfamiliarity: As your business grows, so too should the distance between you and your staff. There will simply be more things you cannot share. Manage the gap. 8. Sickies: It is always useful to record sick leave and check for patterns. Is it on the increase? Remember that workplace stress is a major cause of sick leave. 9. Different values: We all have to be tolerant of employees’ views. However, when every last yoghurt carton has to be recycled and skimmed organic milk is all they will put in their fair trade coffee, your tolerance might be challenged. Negotiate a fair compromise. 10. Faith: We live in a multicultural society, and some people will decide not to undertake certain duties for religious reasons. Respect faith requirements and adapt accordingly.

KEY CONCEPTS  Stockholders’ Agreement: It defines stock-related terms and conditions between founding team members of the venture in the beginning itself, if there are two or more founders.  Test Market: In the field of business, marketing is undertaken in a specific geographic region or among specific demographic groups to understand the viability of a product or service in the target market before the commercial roll-put plan.

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 Alpha Testing: It is usually undertaken in a laboratory setting wherein customers are asked to pre-test it free of cost.  Beta Market Test: It involves testing the product or service in a selected market to identify particular aspects, ingredients and conditions that would satisfy customers.  Managing Sales: This requires building good records about customer payments, particularly in terms of quantum of sales and period that they take to make the payments, so as to track incoming cash quantum vis-à-vis the required cash to meet payment commitments.  Due Diligence: Investigate and reassure oneself about the credibility of the other party or parties involved.  Gantt Charts: This tool is used for the execution of ventures that represent the timing of various tasks required to be completed by defining the initiating date and ending date. ENDNOTES 1. ‘Entrepreneur’, Wikipedia, http://en.wikipedia.org/wiki/Entrepreneur 2. http://cdixon.org/; alistairmilne.com/2011/…/there-are-two-kinds-of-people-in-the-world/ 3. ‘What Should You Do with Your Crappy Little Services Business?’, Mark Suster, on 25 April 2011; http://www.bothsidesofthetable.com/ 4. ‘Fixing Recruitment Mistakes’, Growing Business, http://www.growingbusiness.co.uk/ managing-people_2 5. ‘Motivate Your Employees Like Jack Welch’, Carmine Gallo, Bloomberg Businessweek, 23 May 2008, http://www.businessweek.com/smallbiz/content/may2008/sb20080523_761806. htm REFERENCES Jelinek, M. and J. Literer. 1994. ‘Organising for Technology and Innovation’. In Managing New Technology Development, ed. W. Souder and J. Sherman, McGraw-Hill, New York. Kaplan, J. M. 2004. Patterns of Entrepreneurship. JohnWiley & Sons, Singapore. 389. Mullins, J. W. and N. C. Churchill. 2004. Managing Cash: What a Difference the Days Make?, Business Horizons 47/6, November–December 2004. 79–82. Nesheim, J. L. 1997. High Tech Start-Up. Simon and Schuster: New York. 91–92.

CONCEPTUAL QUESTIONS 1. What is the importance and relevance of implementation strategy in launching a business? 2. What are the key aspects involved in launching a business around which all other implementation strategies revolve? 3. What are the key aspects that a stockholders’ agreement should necessarily cover? Why has it been said that it is important to understand technology trends before launching a business? For which kind of industries is it more important? Explain by giving examples. 4. Differentiate between alpha pilot testing and beta pilot testing.

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5. What are the key factors that govern sales strategy, particularly in terms of giving or not giving a credit period? 6. What are the key aspects that need to be taken care of while maintaining effective records? 7. Why it is desirable to marginally overestimate how much money would be needed for the business? 8. Why is leverage IP essential for technology-driven start-up ventures? 9. Which mode of recruitment would usually be most effective for start-up ventures requiring hardly two to four employees with specialized skills? 10. What are the two prominent documents that start-ups should necessarily ensure they get executed with employees? What is the relevance of these two documents for future growth of the business? 11. What does it take to be a leader in launching a business? 12. ‘Managing cash is a very important skill that an entrepreneur should possess to effectively implement the business. Any loose ends in this respect can kill the whole business.’ What tools can be best used to manage cash in a business? Explain. 13. What is the relevance of undertaking due diligence? How can it be undertaken? 14. ‘Gantt charts is a good tool for execution of ventures.’ What is a Gantt chart? How can it be used in implementing a venture? Explain with the help of an example. CRITICAL THINKING QUESTIONS 1. ‘A number of business failures have clearly revealed that a wrong way of doing things, more so in initial phase of implementation, costs a lot of time and money, and a right way of doing things can develop assets accretion and income generation on a continuing basis for life long.’ Identify two start-up ventures in the light of the statement just made, one having failed and another having succeeded. Analyse both ventures in the light of the statement in terms of their launching strategy. 2. ‘The stocks should be issued to the founders as soon as a company takes legal form, especially before it assumes a significant value based on its expected cash flows in future.’ Why is this statement valuable especially for start-up ventures? Examine this statement’s relevance by considering two examples of start-up ventures. 3. ‘It is always prudent to enter into a firm stockholders’ agreement between founding team members of the venture in the beginning itself, if there are two or more founders.’ What can be the consequences of not doing so? 4. ‘Entrepreneurs need to manage sales by clear understanding of the market, marketing strategies and positioning.’ Analyse the relevance of this statement for a manufacturing and software industry by considering a concrete example. 5. ‘Entrepreneurs should undertake prior analysis of alternate sources of funding and which source would work out best for a given venture.’ Identify two ventures wherein the entrepreneur has availed funding from a relatively wrong source that became a cause for their failure. Which source would have been more apt in each of these cases? 6. As a wrong diagnosis by a doctor leads to disastrous implications for the patient, the induction of wrong personnel by an entrepreneur in their venture could be disastrous. Consider an example of a venture wherein the entrepreneur committed such a mistake. Identify the consequences that had to be faced as a result of such a mistake.

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7. ‘Leadership basically requires using power to influence the thoughts and actions of other people to motivate them to respond to the wider call of the organization’. The success of a venture depends a lot on its leader. Consider five companies and identify the salient characteristics of their leaders in executing and running their businesses. 8. It has been said that as an employee rises in a hierarchy, the relevance of non-monetary benefits keeps increasing to motivate the employee. Do you agree with this statement? Explain giving concrete reasons.

 CASE 14.1:  DAY CARE BUSINESS 

 Shelley Frost  The day care industry has been a big boon that takes care of the increasing need of working couples who work outside the home. Starting a day care centre requires an inventory of one’s skills and resources—physical and human—to ensure one can provide quality service. Irrespective of starting it at home or in a separate building, the time commitment is a crucial factor to be considered. Further, one needs to create a distinction in childcare whereby parents get a feeling that their child would be cared for as well or better than they themselves would have done. A clear perspective and direction for the type of day care centre helps one in evaluating the need and viability of business. A home day care is a flexible option for those who want to start a smallerscale business. One does have to search for a usable location or pay extra rent for the facilities. The drawback is that one is limited on the number of clients and one’s entire home may feel similar to it being taken over. A day care centre not only requires a larger investment and greater management due to the size, but also allows for a larger client base. Finding a building that will work for the day care is often challenging, depending on the local real estate market. The location plays a critical role in the clientele development for the day care centre. One may need to be fully knowledgeable or need to take an expert’s help for the regulatory permissions required, if any, depending on the country and state. There are countries that require a license to start a day care centre. Specific steps are required to keep the license secure. As an entrepreneur, one should be sure that one will be able to meet all regulatory requirements. All other resource requirements for starting a day care centre depend on the size of the business. As the number of children grows, so would the requirement of staff and the other physical infrastructure. The secret of retaining and attracting new clients depends on having experienced, enthusiastic and child-caring staff who not only have expertise in communication but also can inculcate a value system in the children. The major investment in a day care centre is required upfront and to that extent it involves a greater risk, if the expected clientele development does not take place as envisaged. For an actual centre, the building costs and furnishings that take care of the different age groups of children can eat up a large part of the budget. The monthly payment either on a loan for constructing it or lease rentals, if the building is taken on lease, affects the profitability to a great extent. In some cases, changes are necessary to get the facilities up to date. Once the building is finished, one needs to fill it with furniture, baby gear, toys, books and other activity supplies. Monthly expenses include utilities, food, supplies and insurance. If one has staff members, one has the expense of the wages (Continued)

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and benefits one offers. One should consider all the costs necessary and the amount one will bring in from clients to evaluate the financial success of the business. Management skills and experience with children are key in successfully operating a day care centre. One needs an understanding of child development to create a safe and stimulating environment for the kids. A regular schedule and activities that support child development are also a part of the operation. Advertising is crucial to find clients to fill all one’s open spots for maximum income. One also needs to develop policies and communicate with parents to keep the business running smoothly.1  Questions  

1. What are the key location issues that need to be taken care of while setting up a day care centre? 2. What are the key considerations for entering into such a business? 3. In case one would like to start a day care centre, indicate in priority the steps that one would take to ensure its success. 4. Collect the information on two day care centres in one of the metropolitan cities and identify reasons for their success or failure.  Endnote 

1. Shelley Frost, eHow, Things to Consider When Starting a Daycare Business | eHow.com http:// www.ehow.com/info_7933516_things-starting-day-care-business.html#ixzz1KDlwvqD9

 CASE 14.2:  HUMAN RESOURCE CONSULTING FIRM  Aviral after having graduated in engineering took up his postgraduate diploma in management from IIM, Ahmedabad, and subsequently after serving for three years in a multinational organization, wherein he was looking after human resource (HR) development matters, decided to pursue his Ph.D. from Harvard Business School. It took him three years to complete his Ph.D. in the area of Training Effectiveness. He was associated with William during his Ph.D., who inspired him to start a consulting firm in the area of Human Resources after coming to India. He prepared a detailed business plan by collecting the HR needs of more than 50 medium- and large-scale units including some multinational corporations and identified the need for extending HR consulting in the area of recruitment, training and developing performance appraisal systems. His assessment in the very first year was on the basis of the linkages that he had developed during the preparation of a business plan, he would be able to have a consulting assignment worth ` 92 lakhs, which would be undertaken by him and one of the employees who would be an MBA with specialization in the area of HR. As per his assessment, he would be able to get the right person within one month at a pay package of ` 5 lakhs per annum along with the stock option as an added incentive. He had estimated that his consulting business would grow from ` 92 lakhs with one staff member to ` 900 lakhs with a team of eight staff members (all management degree holders after

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having done their graduation in engineering from different reputed institutions in India) within a period of four years. He had planned to have his own rented office space of 4,000 square feet in Goregaon market in the third year of his operations at a lease rental of ` 50,000 per month with an advance payment of ` 5 lakhs. The office space would comprise chambers for employees with modern facilities on the desk, including hardware and software pertaining to HR consulting work, interview chambers, conference rooms, audio and video conferencing facilities, data storage, security and wide networking. The firm will create a niche in recruitment at the middle and upper-middle levels in terms of evaluating candidates through hierarchical interviews, and finally train them with new competencies required for making them effective on the job roles of their clients from day one. He has also planned to extend his consulting services to cater to the individual needs of professionals, managers and executives affected by job elimination, dismissal, resignation and relocation after completing two years in the business. The firm needs to clearly identify and source the following to achieve its goals during the first three years of its operations:  Starting from a home in the first year to securing office space in Goregaon in the third year of operations within the given budget  Recruiting one professional MBA in the first month of operations, and the team is to be enlarged gradually to 10 by the third year of operations  Sign three clients within the first three months of operations, which needs to increase to 10 clients within the first year and 50 clients by the end of the third year

Aviral has plans to specifically describe the tasks to be undertaken to meet the ultimate goal of setting up a successful HR firm. This part of his planning will focus on working out the details of what should be accomplished to achieve end results. This would include defining roles of people in the organization clearly, so as to ensure accountability as the consulting business grows. He has described the tasks and roles plainly and generally without getting into a step-by-step, micromanaged explanation of how the tasks will be carried out. The emphasis would be on describing the expected results associated with these tasks rather than enumerating all possible details of the job assignments, so that the team could creatively operate and deliver value proposition to its clients. During the first three to six months, Aviral himself will bring the consulting assignments and undertake them along with his single employee. However, subsequently, the task of mobilization of assignments would be delegated to employees, and emphasis would be placed on soliciting referrals from clients. Aviral is clear in pairing each assignment with an appropriate time frame for completion, which should ensure delivering the end results to clients before the promised date. He proposes to inculcate a culture in the organization to focus on meeting time dead lines along with competent and quality delivery of work output. He would like to create Gantt charts for each assignment along with his team and clients’ requests to monitor the progress achieved at different stages of the completion of projects. He would like to focus his energies, after training his team members well over the years, on monitoring each project’s progress and the completion percentage of each objective. For any delays in any of the projects, he proposes to go into the root cause of delay, so as to take timely corrective action. (Continued)

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Aviral is clear that the early days of a start-up would be most critical for the future growth of the business. Therefore, he would like to inculcate a culture with a clear emphasis on setting good management patterns and practices along with remaining as lean as possible, till such time that regular revenue flows start accruing. His greatest concern would be to induct the right people, provide them with an environment to excel by having team spirit and trust as paramount aspects of building a conducive culture. He is also clear about extending stock options to his team members, so that they own the venture and get rewards as the venture grows. Another key aspect he would like to inculcate in the venture is transparency in operations and effective communication across the organization on a continuous basis.  Questions  

1. Identify the salient strong and weak points in the strategy for launching a consulting business by Aviral. 2. In case one were in the place of Aviral, what change in strategy for launching a business would one have operated? 3. What would be the greatest challenge for Aviral to succeed in this business? Justify your answer by giving examples of other similar ventures. 4. Identify four companies in the area of consulting that have operated on building a professional team through stock options. Analyse their growth patterns and implications of stock options on the success or failure of their businesses. What lessons need to be learnt from these cases that one has analysed?

 CASE 14.3:   KOZMO.COM   Think about all the errands you run on a regular basis, to the video store, the bookstore, the convenience store, the office supply store…. We eliminate all those errands. Being part of your lifestyle is what Kozmo is, where you depend on us for all your various basic needs. —Joseph Park Co-founder, Kozmo.com

Kozmo.com was a VC-driven online company that promised a free one-hour delivery of ‘videos, games, dvds, music, mags, books, food, basics and more’ and Starbucks coffee in several major cities in the United States. The company was founded by investment bankers Joseph Park and Yong Kang in March 1998 in New York City. It so happened that the company was out of business within a three-year period, that is, by April 2001. Kozmo.com delivered videos, DVDs, CDs, books and convenience items (snacks, magazines, toiletries, household products, flowers and beer) to consumers within an hour, with no delivery charge and no order minimum. The service was available in nine cities (Atlanta, Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Portland and Washington DC). It had a plan to expand into more than 35 cities in the United States by the end of 2002. In 1999, the number

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of customers registered on the Web site grew at a compounded monthly rate of approximately 30 per cent. However, the total number of users remained steady in 2000. Park and Kang left their jobs on Wall Street to form Kozmo in 1997, when Park first ordered a book from Amazon.com and found that it did not fulfil his desire to have the book on the same day. Park and Yong had been close college friends since they were roommates as undergraduates at New York University. Park served as an analyst in the corporate finance division of Goldman, Sachs & Co., where he was involved in public equity, hybrid and investment-grade debt offerings, mergers and acquisitions, and financial advisory work. From June 1994 to June 1996, Park served as an analyst in the investment research department at Goldman, Sachs & Co., covering the consumer durable goods and packaging industries. Kang was an assistant vice president at Societe Generale in the media and communications group, specializing in senior bank financing, high-yield debt and private equity transactions for companies in the broadcasting, cable and entertainment industries. From July 1994 to July 1996, Kang was a senior analyst in the mergers and acquisitions group of the Toronto-Dominion Bank, specializing in acquisition advisory, private equity and high-yield debt transactions for cable, cellular/PCS, paging and broadcasting companies. With a handful of bike couriers delivering goods ordered online by New Yorkers, Kozmo had grown into an army of ‘Kozmonauts’ that served major cities. In 1999, Kozmo hired several experienced executives from AT&T, Coca-Cola, FedEx and UPS to round out its senior management team. The directors, executive officers and senior management of Kozmo.com and their positions were as given next: Name

Age

Position

Joseph Park

28

Yong Kang Gerardo Burdo

27 34

Kenneth Trevathan

53

Christopher Shimojima

44

William Herald

49

Larry Johnson

48

Scott Evans James Alt

32 33

Andrew Resnick

42

CEO and Chairman of the Board of Directors President and Director Senior Vice President and Chief Financial Officer Senior Vice President and Chief Operating Officer Senior Vice President and Chief Marketing Officer Senior Vice President and Chief Technology Officer Senior Vice President of International Franchise Markets Vice President of Logistics Vice President of Supply Chain Management Vice President of Corporate Development (Continued)

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Jack Chen (2) 33 Hugh Evans (1) 31 Gerald Gallagher (2) 58 Seth Goldstein (1) 29 Robert Greene (1)(2) 39 (1) Member of Audit Committee (2) Member of Compensation Committee

Director Director Director Director Director

 Business Model  The business model of Kozmo ensured to deliver small goods free of charge within an hour by bicycle, car, truck or public transportation.1 The model was criticized by some business analysts, who pointed out that one-hour point-to-point delivery of small objects is extremely expensive and were sceptical that Kozmo could make a profit as long as it refused to charge delivery fees.2 The company countered, in part, that in their target markets, savings due to not needing to rent space for retail stores would exceed the costs of delivery. Kozmo.com focused on selling frequently purchased high-margin items with well-known brand names. Additionally, it had initiated a business-to-business service to enable select retailers to provide their customers with an expedited delivery option on a fee-for-service basis through Kozmo’s distribution networks. Kozmo served each of its markets from one or more distribution centres (DCs). DCs were approximately 10,000 square feet in size and were located primarily in low-rent areas with access to key thoroughfares. The size of DCs provided the capacity to expand product offerings in existing markets. Kozmo.com’s solution combined the convenience, time savings, large selection of high-quality product information, personalization of catalogue and Internet shopping with the immediate gratification of in-store shopping, quality customer service, efficient logistics process and low-cost distribution model. Kozmo.com’s growth strategy had two main objectives: to be the leading online provider of entertainment, food and convenience products with free delivery in less than one hour, and to further enhance the usage of distribution infrastructure by providing select retailers an expedited delivery option. In 1999, Kozmo lost $27 million on $3.5 million in revenues, with delivery costs running at $3.3 million. Its revenues for the financial year 2000 were $30 million with a net loss of $120 million with delivery costs of $35 million. Its customer acquisition cost had gone down dramatically from $72 per customer in early 1999 to around $50 in late 2000, which subsequently turned out to be at $25 per customer. From a model of 100 per cent revenues coming from B2C clients in 2000, Kozmo expected revenue diversification—75 per cent from retailers, 25 per cent from its B2B operations and 2 per cent from advertising—in 2001 to help its overall gross margins. The B2B categories were in the areas of office supplies (consumables, software, printer cartridges and digital cameras), travel as well as logistics pertaining to distributors and manufacturers. The company closed a $28 million first round with Flatiron Partners in 1999. It had also raised more than $130 million from institutional investors, including Chase Capital Partners and Softbank Ventures. In March 2000, Amazon.com invested $60 million in Kozmo.com and became the largest stakeholder in Kozmo

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with a 31 per cent stake on a fully loaded basis (including warrants). As part of the deal, Amazon. com had struck a non-exclusive, three-year alliance to offer its customers a one-hour delivery option, powered by Kozmo.com. The company had filed to go public in late May 2000 for an expected valuation of $1.2 billion to $1.5 billion. ‘Convenience stores command a premium for providing quick access to last-minute purchases, so why charge a discount for the ultimate convenience of home delivery?’ asked Evie Black Dykema, an analyst with Forrester Research. The company withdrew its IPO in August 2000 and trimmed its workforce. Kozmo.com shut down its Houston and San Diego operations in 2001, citing lack of demand. Kozmo has announced three layoff’s trimming around 10 per cent of its workforce and considerably trimmed its operating and acquisition costs. The company’s product pricing on food items, videos, drugs and other items compared well with convenience stores and discount pharmaceuticals, that is, CVS, Rite-Aid and Blockbuster. In December 2000, Kozmo introduced a $2 delivery charge on all orders after 3 P.M. and imposed a minimum order of size of $5 as of summer 2000. With Gerardo Burdo replacing Joseph Park as the CEO in 2000, Kozmo had shifted its focus from building a strong brand to maximizing operational efficiency to help attract and retain B2B and B2C customers at a lower cost.

 Competition  Although no company currently does exactly what Kozmo did, there were several current and potential competitors in the race to own the so-called ‘last mile’—the final distribution leg linking e-commerce to the customer’s doorstep. Some of the prominent among them are Urbanfetch; Webvan (Nasdaq: WBVN); Sameday.com (formerly Shipper.com); PDQuick.com (formerly Pink Dot.com); and Homedelivery.com

 Partnerships  In order to increase distribution, build its brand and expand into the B2B market, Kozmo.com had aggressively pursued two types of partnerships marketing/co-branding and financial: Some of the key partnerships include Financial—Amazon.com (March 2000), DreamWorks International Distribution L.L.C., Twentieth-Century Fox Home Entertainment and Universal Studios Home Video (September 2000); Marketing—Starbucks, Ticketmaster Online-CitySearch, Balducci Pasta (August 2000) and Zagat Survey (October 2000).

 Amazon.com  (Nasdaq: AMZN)  On 20 March 2000, Kozmo.com announced a three-year deal to deliver some of Amazon’s books, music and toys ordered online to customers in the cities that it serves. Amazon customers will have a Kozmo-branded same-day delivery option for many of its most popular items. The sameday service will be priced at an average of $10 per order, comparable with next-day delivery by FedEx or UPS. Kozmo would keep the entire delivery fee, whereas Amazon would earn the entire revenue from the order. As part of this deal, Amazon invested $60 million in Kozmo and received the option to buy more shares. This deal catapulted Kozmo into the B2B market space. Kozmo had said it expected to do more deals of this kind. It forecasted that as much as 20 per cent of its revenues would be from its B2B business. (Continued)

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 Universal Studios ( www.universalstudios.com )  On 21 September 2000, Kozmo.com, announced an agreement with Universal Studios Home Video to purchase DVD and VHS films directly from Universal. Kozmo and Universal Studios Home Video would also work jointly to promote Universal home video releases to Kozmo’s 300,000 customers.

 Starbucks Coffee Company (Nasdaq: SBUX)  In February 2000, Kozmo announced an agreement with Starbucks, under which Kozmo will pay Starbucks $150 million over five years to place video drop-off boxes in Starbucks stores within Kozmo’s coverage area. Starbucks will also place Kozmo’s logo on its cups and napkins and train its service staff to handle questions about and promote Kozmo. This deal marked the first time that Starbucks allowed another brand to be promoted inside its stores. With 2,500 stores throughout the United States, Starbucks would have helped Kozmo expand its service into new cities.

 Ticketmaster Online-citysearch (Nasdaq: TMCS)  Under this deal announced in January 2000, Kozmo would be the sole under-one-hour delivery service for the CitySearch network of city guides. In return, Ticketmaster Online-CitySearch would become the exclusive provider of local arts and entertainment content on a co-branded site, where users can order from Kozmo. CitySearch currently offers guides to 47 US and international cities.

 Investors  Some of the prominent investors who reposed confidence by taking stake in the company were Amazon.com, Chase Venture Capital Associates, Columbia TriStar, DreamWorks SKG, Flatiron Partners, Liberty Media, Oak Investment Partners, Softbank Capital Partners, Starbucks Coffee, Twentieth-Century Fox, Universal Studios and Warner Bros. Kozmo.com’s aura helped it raise more than $250 million, but the company was unable to generate enough revenue to cover costs. In 1999, it had $3.5 million in revenue, compared with $26.4 million in net losses. Basic problems with its business model included offering a costly home-delivery service for free, even on very small orders on which it was impossible to earn a profit. Last-ditch efforts to boost orders and stop the delivery losses by charging $1.99 for orders less than $30 helped, but could not deliver the company. Mounting losses led to Park’s ouster in 2000. The new leadership could not turns things around or pull off the long-delayed IPO. In April 2001, the company ran out of money, shut down operations and laid off its employees. ‘We built out a delivery system that worked,’ recalls former Chief Operating Officer Skip Trevathan, who came to the job with experience as managing director of logistics for delivery goliath FedEx. ‘We were profitable in four of our cities. But we had seven more that we couldn’t make profitable, and then the funding dried up.’3

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 Questions 

1. What had basically gone wrong with the business model of Kozmo.com? 2. Kozmo had very many satisfied and loyal customers; however, it could not take advantage of that in terms of generating profits. What are the key issues and strategies that could have helped Kozmo become profitable? 3. Extract the company’s working results between 1998 and 2000. Analyse these results to identify key mistakes that the company had made in launching the business. 4. What precautions do you think the company should have necessarily taken before launching and during launching of the business to ensure its success?  Endnotes 

1. Wu, J. C. 2001. ‘Anatomy of a Dot-Com’. Supply Chain Management Review. Archived from the original on 21 August 2004. http://web.archive.org/web/20040821125230/http://www. manufacturing.net/scm/index.asp?layout=articleWebzine&articleid=CA184173, accessed on 17 July 2007. 2. Dukcevich, D. 2000. ‘Kozmo.com Pedaling to the Precipice?’. Forbes. http://www. forbes.com/2000/06/22/mu3.html, accessed on 16 April 2010. 3. Kozmo.com; http://en.wikipedia.org/wiki/Kozmo.com, ‘Kozmo to announce layoffs, brick-and-mortar strategy’ by Greg Sandoval, ZDNET (23 February 2001) http://www. zdnet.com/zdnn/stories/news/0,4586,2689343,00.html; ‘Symbolic Gestures’ by Bruce and Marge Brown, ZDNET (15 February 2001); http://www.zdnet.com/pcmag/stories/ reviews/0,6755,2684550,00.html, ‘Kozmo postpones IPO, lays off 24 employees’ by Greg Sandoval, ZDNET (19 June 2000); http://news.cnet.com/news/0-1007-2002111054. html; ‘Web quick-delivery companies hit bumps’ by Julie Landry, Red Herring (23 May 2000); http:// www.redherring.com/index.asp?layout=story&channel=50000005 &doc_id=890010489; web.mit.edu/course/15/15.823/attach/Kozmo.doc

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 LEARNING OBJECTIVES    To understand the significance of the challenges that an entrepreneur faces for the growth of a business.  To know about different sources and their relevance for the growth of a business.  To know about and understand the venture development stages and their implications for growth.  To learn about and apply the technique of operating cash cycle (OCC) to assess the self-financeable growth (SFG) rate of a business.

 To understand the implications of four managerial factors that are crucial for the growth of a business.  To learn about the importance of leadership and time management for the growth of a business.  To understand the reasons as to ‘Why entrepreneurs do not scale up?’  To know about and understand the different strategies and their relevance to the growth of a venture.

Aditya Jha, Canadian Entrepreneur, Philanthropist and Philosopher In life, you always get more than what you deserve or less than what you deserve—you never quite get just the right amount. If you get less you must work harder and smarter, and if you get more then you must give back. —Aditya Jha

Aditya Jha is an entrepreneur to reckon with as well as a philanthropist with deep involvement in Canadian public affairs. Jha was born in the state of Bihar in India. His father practised law in a district court in Sitamarhi, India. He completed his B.Sc. from Hans Raj College, and received his M.Sc. in Mathematical Statistics from Kurukshetra University and PG Diploma in Computer Science from the same university. He shifted to Canada in 1994, after having worked in different countries—India, France, Singapore and Australia—to join Bell Canada. After having served in Bell Canada, he co-founded a software company, Isopia Inc., which was subsequently acquired by Sun Microsystems for a consideration of more than $100 million. Thereafter, he founded Osellus Inc., another software company having offices in Toronto and Bangkok. He has to his credit the turning around of a number of ailing units. He expanded his business portfolio through the acquisition of several companies, including a business from Allan Candy—Cadbury Adams Canada. He also runs several philanthropic initiatives to promote education and nurture entrepreneurship among youth. He takes keen interest in nurturing prosperity and financial independence among Canadian aboriginal communities and individuals by contributing to their education and a project named Project Beyshick, which promotes entrepreneurship. This project has transformed the life of

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many by putting them on an accelerated path of personal growth. He has great recognitions and laurels to his credit, such as Winner of the Top 25 Canadian Immigrants, 2010; Honorary Doctor of Laws (LLD), Ted Rogers School of Management, Ryerson University, Toronto, Canada; Chair, India HIV/ AIDS Campaign, UNICEF Canada; Technology Achievement Award (2004), Indo Canada Chamber of Commerce (ICCC); CEO Award (1998), BCE Inc. and President’s Club (1998), Bell Canada.

 15.1  INTRODUCTION  In the present turbulent business environment where changes are taking place at a very fast pace, anticipating what lies ahead is not an easy task. Therefore, the best of plans, while getting implemented, need to be flexible to take care of or respond to changes in the business environment. The fundamental challenge for a start-up looking for growth is to keep a step ahead of the changing market conditions and other important variables such as new technologies. In today’s technology-driven world, business lifecycles have accelerated, but good management principles still—and always will—apply.1 Every entrepreneur has the vision to keep growing endlessly in their pursuit of an entrepreneurial journey. However, it is a highly challenging and difficult task to sustain growth or, so to say, fast growth amid a highly competitive business environment. This involves a challenge of spotting opportunities timely, having adequate cash to avail opportunities and keeping the team motivated and charged in spite of all odds. The ingenuity of an entrepreneur lies in planning far ahead and in preparing oneself and one’s team to respond to the challenges ahead, so as to minimize the future adverse impact on the business. If growth is inevitable because of a market opportunity that has been assessed well in advance, then it does not pose a great challenge. However, when a growth opportunity exists and the entrepreneur is not prepared to respond to it, then it causes a problem (Fig. 15.1). Similarly, when the external environment becomes highly competitive and challenging, the growth of a business would involve multiple issues and challenges. The obvious question that an entrepreneur needs to be clear about is ‘Why do I want to grow my business?’ There can be multiple reasons other than profit while looking for the growth of a venture

Assessed Well in Advance Does Not Pose Challenge

Growth Inevitable Because of Market Opportunity Not Assessed and Entrepreneur Not Prepared to Respond

Causes Problems

Figure 15.1 Growth Challenges—Perspective

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that motivate an entrepreneur to grow. These could be by way of realization of economies of scale, to overtake competitors and availability and potential to service new markets.

15.2  GROWTH SOURCES The growth of a business can be due to various modes and sources to which the entrepreneur should remain alert. It can be due to multiple sources, including      

expanding the range of products and services expanding the customer profile snatching competitors’ customers to increase market share expanding the business to cater to more customers entering into new markets merging and acquisition of interrelated businesses or non-related businesses

It is important for an entrepreneur to understand and analyse each source of growth and its implications in terms of resources—human, capital and time requirements. A proper assessment and diagnosis alone can help the entrepreneur choose a path that would be most suitable to them, given their strengths and weaknesses. In the growth phase, the entrepreneur needs to clearly identify from where the new customers would come. Would they be existing customers who would be consuming more? Would they be attracted into one’s fold from another business’ customers? Are they not consuming the product or service produced by one and would one like to bring them into one’s fold? The survival and growth of a start-up requires both strategic and tactical planning and associated skills. Strategic planning is a management tool that helps an entrepreneur channelize organizational energies, efforts and time to achieve a predetermined goal and to adjust and adapt to the changing environment in the long term. The process involved is called ‘strategic’, because it involves identifying the best way to respond to the circumstances of the organization’s environment and effectively implement the same. As against this, tactical planning emphasizes the current operations of various parts of the organization that achieve goals in the short term, say less than a year. Both are interrelated and complement each other. Tactical planning emphasizes what to do in the short term to help the organization achieve goals and objectives, whereas strategic planning determines the long-term goals and objectives (Fig. 15.2). The specific set of skills depends on the nature of the business and the stage in which venture growth lies.

Survival and Growth of a Start-up Requires

Tactical Planning

Strategic Planning

• Helps in Channelizing Organizational Energies, Efforts and Time • Short-term Focus

• Emphasizes on the Current Operations of Various Parts of the Organization’s Long-term Focus

Achievement of Predetermined Goals

Figure 15.2 Tactical and Strategic Planning for Survival and Growth of a Venture

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15.3  VENTURE DEVELOPMENT STAGES A typical business venture undergoes five stages of growth over a period of time. These are launching a new venture, activities related to a start-up, growth phase, stabilization or a maturity phase and a decline phase that need to be associated with innovation if the venture would like to continue to grow. These phases of growth are shown in Figure 15.3. The first stage of a venture involves launching a new venture. This involves activities related to the formation and production of goods and services to create initial customer response as envisaged in the market research. This requires a lot of ingenuity and creativity to solve initial teething problems that a venture encounters on the way to strengthen the foundation at the fastest possible pace. In this phase, the entrepreneur needs to consciously expand the networking with the people who can help them in multiple ways such as resource acquisition and customer linkages. The initial stage, more accurately the inception state of the development of a venture, focusing on the initiation of the venture is generally known as the ‘(venture) embryonic stage’. This stage is characterized by the focus on the development of the product technology dimension of the vision innovation space.2 This phase is said to be the most critical one, as it involves a challenge of having a product or service that is acceptable to customers, giving a concrete shape to the business by establishing procedures and practices on which the foundation of the business would rest. The venture mission and direction get shaped in this phase. Start-up activities are the second phase of growth that involves raising capital, undertaking marketing activities and building an entrepreneurial team to carry out the business. These efforts require an aggressive entrepreneurial strategy with a key focus on establishing a venture. It is characterized by ‘strategic and operational planning steps designed to identify the firm’s competitive advantage and to uncover funding sources’. Marketing and financial considerations tend to be paramount during this stage (Covin, Slevin, and Heeley 2000). It is also called an ‘execution phase’ of the start-up, laying key focus on marketing the company’s products within the initial target market segment, creating repeat customers Revenue Profit

Launching

Start-up

Growth

Stabilization/Maturity

Decline/ Innovation

Time

Figure 15.3 Phases of Venture Growth

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and achieving a break-even level of sales at the earliest so that the venture can start generating profits. This phase is crucial for the entrepreneur, as it is the phase in which a majority of ventures fail. The growth phase of a venture involves strategic planning to respond to the intense competition. It involves the expansion of a business aligned to the existing products and services through capacity build-up at the same locale or multiple locales. The entrepreneur also starts introducing multiple variants of the product to customize the product for the target market. This phase typically involves developing systems, processes and structures to meet increasing demands. It also involves a definite shift from a single-person-focused approach to a collaborative approach in decision making. The extent of relevant administrative and managerial changes depends on the way the organization grows. It has been found, in general, that highly creative entrepreneurs may not be able to comfortably respond to the challenge of growth and, thus, may not grow their business. Business stabilization is a stage wherein intense competition leads to maturity in the market coupled with customer indifference to the product/service as a result of getting other better options in the market to satisfy similar needs. Thus, in this stage, the entrepreneur faces a swing in the sales and gets forced to think about new ways of doing things. Business ventures that fail to innovate to avail business opportunities face a natural death. However, innovative ventures either by coming out with innovations on their own or by acquiring highly innovative firms remain in business on a long-term basis. If an entrepreneur is innovative enough, it would result in a swing upward with an introduction of new products or entering into new business, whereas if they remain an observer to the stabilization and maturity phase of a business, then the situation would result in a decline of the business. Each stage requires a different strategy on the part of an entrepreneur, particularly keeping in view the product or service under consideration and the type of market conditions that prevail. We would like to focus here on the growth phase of a venture.

15.4  HOW FAST CAN A VENTURE GROW? Running and growing a business basically requires cash for working capital and fixed assets. However, entrepreneurs may not realize, in general, that growing too fast can result in going out of cash, even though there is a good acceptance of a product or service in the market. The greatest challenge, therefore, to an entrepreneur to manage growth is to strike a balance between generating cash and using cash. An SFG rate as described by Churchill and Mullins (2001) is the rate at which a company can sustain its growth through the revenues it generates without hat in hand to financiers. They have focused on three levers of growth, namely, speeding cash flow, reducing cost and raising prices. According to these authors, SFG depends on OCC, which indicates the length of time for which cash is blocked in working capital before it comes back when customers pay for the products sold. This duration would be longer wherein it takes a long duration to collect the money from customers after making sales, whereas it would be short when customers pay immediately or in a short duration for the product bought. Let us consider an example of ABC Ltd having the following details on OCC worked out based on the profit and loss account and balance sheet. Assuming that ABC Ltd decides to invest the entire 20 paise in working capital and operating expenses to fund its enhanced sales, since it has a market potential for the product, adding an additional 20 paise to the existing 60.4 paise tied up would increase the company’s investment by 33.33 per cent in every cycle of 120 days, which would result in increased sales by 33.33 per cent in its next cycle, implying 100.68 per cent growth in sales in a year from the money generated internally (Table 15.1). As such, in each subsequent cycle, there will be a compounding effect as shown in Table 15.1 resulting

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Table 15.1 Sustainable Venture Growth through Operating Cash Cycle (OCC) Management ABC Ltd Duration cash is blocked in no. of days Debtors/account receivables Inventory

80 40

OCC Creditors/account payable Cost of sales

120 20 100

Operating expenses

70

Profit/loss statement Sales

` 1.00

Cost of sales

` 0.55

Operating expenses

` 0.25

Total cost

` 0.80

Profit (cash)

` 0.20

Amount of cash blocked per rupee of sales Cost of sales

` 0.55 × (100/120) = ` 0.458

Operations

` 0.25 × (70/120) = ` 0.146

Cash required for each OCC

` 0.604

Cash generated per rupee of sales

` 0.20

SFG calculation OCC SFG rate

` 0.20/ ` 0.604 = 33.11%

OCCs per year

365/120 = 3.041

annual SFG rate

33.11% × 3.041 = 100.68%

Compound annual SFG rate

(1 + 0.3311) 3.041 − 1 = 1.386 = 138.6%

in freeing up additional cash from operations and resulting in a compound average annual SFG rate of 138.6 per cent per year. This implies that in case ABC Ltd wants to grow faster than 138.6 per cent in a year, then it would be required to release more cash from within or raise funds from outside sources. We can work out the implications of SFG speeding cash flow from 120 days to say 110 days; or reducing cost per Rupee of sales from 55 paise to say 50 paise or raising the price from ` 1 to say ` 1.10. Further, one can think of simultaneously applying more than one lever or all the three levers and find out their implications in SFG. If we consider an example to apply different levers for growth as propounded by Churchill and Mullins, we will observe the following (Table 15.2): It may be observed that by reducing the OCC by 10 days, that is, a reduction from 120 days to 110 days, and operating expenses by 10 days from 70 to 60, ABC Ltd can have an annual SFG growth rate of 113.22 per cent, as against 100.68 per cent in the earlier situation, by deploying completely the internal cash generated (Table 15.2). This, on account of the compounding effect, would further go up to 164.86 per cent. Similarly, if we apply a lever of reduction in the cost of sales and operating expenses by 5 paise each, resulting in an increase in profit by 10 paise from ` 0.20 to ` 0.30 per rupee of sales, then the SFG would increase to 170.84 per cent as against 100.68 per cent in the base case. An increase in sales

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Table 15.2 Sustainable Venture Growth Through Speeding Cash Flow, Cost Reduction and Price Increase ABC Ltd Duration cash is blocked in no. of days Debtors/account receivables

Speeding Cash Flow

Cost Reduction

Price Increase

75

80

80

Inventory

35

40

40

Operating cash cycle

110

120

120

Creditors/account payable

20

20

20

Cost of sales

90

100

100

Operating expenses

60

70

70

` 1.00

` 1.00

` 1.05

` 0.55 ` 0.25 ` 0.80 ` 0.20

` 0.50 ` 0.20 ` 0.70 ` 0.30

` 0.55 ` 0.25 ` 0.80 ` 0.25

` 0.55 × (90/110) = ` 0.450 ` 0.25 × (60/110) = ` 0.136 ` 0.586

` 0.50 × (100/120) = ` 0.417 ` 0.20 × (70/120) = ` 0.117 ` 0.534

` 0.55 × (100/120) = ` 0.458 ` 0.25 × (70/120) = ` 0.146 ` 0.604

` 0.20

` 0.30

` 0.25

` 0.20/ ` 0.586 = 34.12% 365/110 = 3.318 34.12% × 3.318 = 113.22% (1 + 0.3412) 3.318 − 1 = 164.86%

` 0.30/ ` 0.534 = 56.18% 365/120 = 3.041 56.18% × 3.041 = 170.84% (1 + 0.5618) 3.041 − 1 = 287.98%

` 0.25/ ` 0.604 = 41.39% 365120 = 3.041 41.39% × 3.041 = 125.86% (1 + 0.4139) 3.041 − 1 = 186.7%

Profit/loss statement Sales Cost of sales Operating expenses Total cost Profit (cash) Amount of cash blocked per rupee of sales Cost of sales Operations Cash required for each OCC Cash generated per rupee of sales SFG calculation OCC SFG rate (%) OCCs per year annual SFG rate Compound annual SFG rate

price by 5 paise retaining all the other conditions as same would result in an SFG of 125.86 per cent with a compound annual SFG rate of 186.7 per cent. Thus, the example illustrates that companies can manage their growth to a great extent even by deploying internally generated cash. The example in Table 15.2 can also be modified by considering a part of the profits being deployed back for the growth of the company and remaining a part as dividend to shareholders. In Table 15.2, we did not explicitly consider the treatment of taxes. This could be included by considering tax rates and payment of taxes being made every quarter, implying that if we treat uniform payment of taxes, then taxes will be tied up for 45 days and will accrue for 45 days. Similarly, one needs to provide for depreciation allowance to maintain the asset base, so that productivity and production do not suffer. Depreciation allowance is tax deductible and in case a company does not incur it, then its capacity to grow would go up.

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We can further complicate the whole analysis by considering that ABC Ltd incurs expenditure on the creation of fixed assets for expansion or on research and development (R&D) to increase the efficiency of operations or to enlarge the product range. Assuming ABC Ltd needs to incur a sum of ` 4 crores on fixed assets for expansion purpose, in case a company’s sales are ` 40 crores per annum, it will be required to keep separately 10 per cent of the sales to be incurred on fixed assets, that is, 10 paise from every rupee worth of sales in 120 days of an OCC. Assuming it has to incur another 1 per cent of sales on depreciation, it would mean a total sum of 11 paise gets eaten away from the profits. Thus, the profit left out for reinvestment will be a mere 9 paise per rupee of sales. This would reduce the SFG growth to 14.90 per cent for a cycle of 120 days, implying an annual SFG of 45.31 per cent. Thus, the annual SFG will fall to 45.31 per cent from 100.68 per cent. However, the growth would increase once the new facilities are in place after completion of the capital expenditure programme. In case new investments result in increasing the efficiency of operations and reducing the cost of sales, the profit level in future will go up and, as a result, SFG will also increase. Similarly, one can compute the implication of incurring money on R&D or introduction of new product lines. One can also find the implications of funding growth partly through internal accruals and partly through loans or lease financing.

15.5  MANAGEMENT—KEY FACTORS FOR GROWTH From a managerial perspective, the entrepreneur should clearly understand and duly operationalize four key factors to manage growth, namely, control, responsibility, tolerance to failure and change management (Fig. 15.4).

15.5.1  Control The growth of the company has to be duly balanced in terms of a managerial approach of command, control and the freedom to be given for taking initiatives. The policy and systems should be so geared that policies and actions get synchronized, so that people who make day-to-day decisions contribute to the founders’ goals and stability and growth of the business. Policy formulation should be guided by the implications on short- and long-term revenue and profits. As the company starts growing to avail market opportunities, the process of management starts shifting away from founders to professionals employed in a hierarchical organization. The top management personnel, say chief executive officer (CEO) or directors, report to the owners of a firm; in large corporations, the chairman of the board. The need for a scientific decision-making process becomes inevitable and requires appropriate control mechanisms. As long as systems and procedures introduced in the organization retain trust among the whole team, the venture keeps moving ahead

Management—Key Factors for Growth

Control

Responsibility

Tolerance to Failure

Change Management

Figure 15.4 Management—Key Factors for Growth

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with an appropriate blend of control and collaboration among the employees. However, in case control causes distrust among employees, then the entrepreneur needs to identify concrete reasons for the same and take corrective measures; else, growth will get hampered. For introducing effective control mechanisms that are going to be conducive for managing the growth of the enterprise, it is necessary to put an effective management information system in place before an explosive growth phase to manage growth. Most emerging firms get into trouble because the management team either does not have the information it needs to make the right decisions or chooses to ignore the information that is available.3

15.5.2  Responsibility The growth of an organization requires designing an organization that has the ability to be market driven, adaptive, innovative and, above all, has the ability to compete effectively. Organization design has to take care of human dynamics so that it integrates well with structure, processes, people, culture, systems and technology. Organizational design in the growth phase of an entrepreneurial organization should be driven by, and supportive of, overall strategy. The test of a good design lies in having clarity and accountability coupled with giving due responsibility to the people in the organization. Organization growth requires people to know what to do for the growth of the organization, and they should be held accountable for their doings. Therefore, the entrepreneur should be able to define and manage activities and responsibilities so that they gel smoothly with the overall goal, at the right time and place. A clear defining of the roles, responsibilities and authority coupled with delegation becomes inevitable for the growth of the organization. It is important to create a sense of responsibility among the team members at different tiers in the organization. It helps in creating flexibility, innovation and a supportive environment that goes a long way in achieving long-term goals. The growth stage requires an inbuilt environment for innovation and shared responsibility. For example, the importance of making employees’ roles crystal clear for creating a scalable organization, Lucas Skoczkowski has rightly stated, ‘I empower all employees by encouraging them to better understand their importance and role within Redknee and rely less on me to provide guidance. A company has to be bigger than any one employee. This is the only way to create a scaleable organization.’4 Similarly, Jasuja has rightly focused on the importance of critical success factors for achieving growth as ‘For each department, we determined the critical success factors required to meet the company objectives. Those became the foundation of the parameters that I monitored on an ongoing basis and thus held my managers accountable for.’5

15.5.3  Tolerance to Failure Growth requires innovation—a zeal among employees to experiment and come up with new and better ways of solving problems. Freedom to innovate has to be complemented with freedom to fail. According to Deepak Sethi of AT&T, the organization of tomorrow will demand mistakes and failures. It is only by trying lots of initiatives that we can improve our chances that one of them will be a star. According to Mahatma Gandhi, ‘freedom is not worth having if it does not include the freedom to make mistakes’. Similarly, Soichiro Honda has stated that ‘many people dream of success. To me success can only be achieved through repeated failure and introspection. In fact, success represents the 1 per cent of your work that results from the 99 per cent that is called failure.’ Therefore, tolerance to failure is an essential quality that the entrepreneur needs to ingrain in the organization. Although no venture knowingly works

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for failure but after having made earnest attempts, the organization needs to give due tolerance to failure if they would like to encourage people to experiment and innovate. Kuratko and Hodgetts have distinguished failure into three broad categories: moral failure that arises as a result of violation of internal trust which can result in negative consequences; personal failure arising as a result of lack of knowledge, skill and applications that needs to be handled by remedial measures; and uncontrollable failure that is caused by external causes and which is most difficult to deal with. This needs to be analysed well so that recurrence of the same can be avoided.

15.5.4  Change Management The growth of a venture requires an entrepreneur to be continuously on their toes from the point of view of responding, adapting and taking advantage from changes in the business environment. Growth requires innovation, which, in turn, requires building an organization that is proactive and interactive to the changes and variations from standard practices. Change would invariably entail implications on people, resources and organizational structure that need to be well conceived by an entrepreneur and, accordingly, a plan needs to be developed. It is the responsibility of the founding team to manage change in such a way that the employees welcome it and are able to cope with it well. The entrepreneur needs to understand the situation from the objective perspective and develop an action plan that helps people understand reasons and develop competencies to respond to the challenges of change. Managing change requires meticulous planning, a sensitive implementation strategy and a consultative approach to especially involve people who would be affected by change. Change should not be thrust on people. Above all, it should be realistic and measurable to convince employees in the organization.

15.6  MANAGERIAL ISSUES—GROWTH OF A VENTURE Start-ups differ a lot from the established businesses that are structured well over the years. The number of managerial concerns becomes important and is an inevitable input to the growth of the business. Managing the growth phase and taking a venture to great heights requires entrepreneurs having requisite competencies and zeal to continuously grow the business. Some of the stumbling blocks in the path to growth are normally cited as lack of education, experience, moral and financial support and, above all, managerial competencies (Fig. 15.5). As per the study by Rose, Kumar and Yen (2006), ‘a large number of entrepreneurs affirmed personal initiative as one of the major key to success’. It has Lack of Education Blocks to Growth of a Venture

Lack of Experience Lack of Moral and Financial Support Lack of Managerial Competencies

Figure 15.5 Stumbling Blocks to Growth

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also illustrated that entrepreneurs with ‘high personal initiative will further enhance their management, improve business operation skills, and embark in a continuous learning and development attitude’. The attitude to persist and the spirit of ‘we can’ and ‘we will’ take these entrepreneurs to the path of success, and help them raise the required resources—human and financial. Among the competencies that pave the way for growth, research studies have found that human areas of HR significantly affect the venture growth. This mainly includes skills and competencies in recruiting and retaining employees, HR policies and compensation plan, training and development of staff, delegating and relinquishing control, performance appraisal systems and employee motivation. Founding entrepreneurs should develop a strategic plan for the venture encompassing various aspects, including competition and markets, as this ensures the future growth and the survival of the company.

15.6.1  Leadership A critical factor that contributes most to the success of a venture is the ability of its initial leadership to foresee and manage effectively new challenges as the business evolves. In the initial stage of launching a business, the founder assumes a charismatic role in which they and their position are tightly coupled. As the venture grows, the leadership role undergoes a fundamental change from the need to shift from personally directing and controlling many of the activities of the organization to providing a direction to others who are responsible for the actual operations (Kimberly 1980). As such, altogether different sets of skills are needed to effectively manage the entrepreneurial challenges of a start-up versus the administrative challenges of an established firm (Stevenson and Jarillo 1990). The leadership of a venture needs to have great wisdom to understand that the ventures that grow rapidly require to proactively adjust their managerial capabilities and timely induction of new top management talent. Growth entails information overload for the individual managers, which requires appropriate delegation to manage effectively. Higher rates of growth also challenge the ability of any individual manager to adapt, leading to an increased need to change the team rather than to rely on adaptation (Rubenson and Gupta 1992). Therefore, fast-growing ventures require more changes in their top management teams (Fig. 15.6). Growth requires diversification by way of entering into new product areas that would entail a top management team with a wider variety of skills and capabilities. Openness to new ideas and providing a platform to experiment with new ideas is the hallmark of leadership that ensures the growth of ventures. To Proactively Adjust Their Managerial Capabilities

Leadership for Growth Management

Timely Induction of New Top Management Talent Appropriate Delegation to Manage Effectively More Changes in Their Top Management Teams

Figure 15.6 Effective Leadership to Manage Growth

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Effective leaders leave the management to professionals, giving key roles and responsibilities of managing the business, including employee satisfaction, and devote their valuable time to strategic thinking.

15.6.2  Time Management If business growth is to be achieved when opportunities exist, what matters the most is how best the founding team allocates their time and energy to routine matters versus growth-driven matters. It is relatively easy to respond to a time-management challenge when the venture is small and has a small team of employees. As the venture grows, the entrepreneur should find time for doing all that falls under the category of ‘Must’ to be done. The entrepreneur should learn the art of using time as a resource to get the best value addition from each minute invested in the venture. The time available with each individual is constant—86,400 seconds per day are irreversible. Nothing can be substituted for time. It is a precious resource that once wasted can never be regained. Keeping in view the value of time resource, it needs to be effectively managed to achieve the utmost in the shortest possible time. On the other hand, becoming overobsessed with time management, one can become such a time fanatic convert—by building time management spreadsheets, priority folders and lists, colour coding tasks and separating paperwork into priority piles—that they may waste more time by trying to manage it. In addition, the time-management technique can become so complex that one soon gives up and returns to their old time-wasting methods. Business empires could be built only by judicious and optimum use of time. Some of the vital tips to entrepreneurs for managing time are given in Figure 15.7.

Delegate Do the Right Thing Right at the Right Time

Use a ‘ToDo List’

Prioritize

Effective Time Management Strategies for Entrepreneurs

Set Goals

Consider Your Prime Time

Be Flexible Invest Time in Planning and Organizing

Figure 15.7 Effective Time-management Strategies for Entrepreneurs

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 Invest Time in Planning and Organizing—It is rightly said that if cutting a tree requires an hour, it is backed up by meticulous planning of at least another nine hours. Therefore, using time to think and plan is well spent. In fact, if one fails to take time for planning, then one is, in effect, planning to fail. One should organize the whole effort in such a way that it makes sense to one and one’s team. If need be, one should have a secretary who can help one in organizing one’s time by appropriately responding to calls and pass over to one the calls that really need one’s attention. Some people need to have papers filed away; others get their creative energy from their piles. So, one should forget the ‘shoulds’ and organize one’s way.  Set Goals—Goals give purpose and meaning to one’s venture direction and life. When asked the secret of amassing such a fortune, one of the famous Hunt brothers from Texas replied, ‘First you’ve got to decide what you want.’ One should set goals that are specific, measurable, realistic and achievable. One’s optimum goals are those that cause one to ‘stretch’ but not ‘break’ as one strives for achievement. Goals can give creative people the much-needed sense of direction. Without setting goals, it is well nigh impossible to see one’s business growing.  Prioritize—Use the 80–20 rule originally stated by the Italian economist Vilfredo Pareto, who noted that 80 per cent of the reward comes from 20 per cent of the effort. The trick and essence of prioritizing lies in isolating and identifying those valuable 20 per cent items that can add 80 per cent value to the growth of one’s business. Once identified, prioritize time to concentrate one’s work on those 20 per cent to achieve the greatest reward. Prioritize by colour, number or letter—whichever method makes the most sense to one. It is not advisable to overdepend on one’s memory. Flagging items with a deadline is another idea that helps one stick to one’s priorities.  Use a ‘To Do’ List—Some people thrive using a daily ‘To Do’ list, which they make either the last thing the previous day or the first thing in the morning. Such entrepreneurs usually combine a ‘To Do’ list with a calendar or schedule. Others prefer a ‘running To Do’ list, which is continuously being updated. Otherwise, one may prefer a combination of the two previously described ‘To Do’ lists. Whatever method works is best for one. One should not be afraid to try a new system—one just might find a system that works even better than one’s present one! The entrepreneur should be able to clearly differentiate between urgent and important tasks. The urgent tasks have short-term consequences, whereas the important tasks are those with long-term, goal-related implications. Therefore, successful entrepreneurs with their experience have been able to reduce the urgent things from their ‘To Do’ list so that they are able to focus more on important priorities from the business growth point of view. It is very important for entrepreneurs who aspire to build empires to completely eliminate trivial tasks that do not have long-term consequences for the business. It is very essential that the entrepreneur should focus their attention only on those tasks that they or their core team of founders alone can do.  Be Flexible—In an entrepreneurial journey that is full of challenges, the only thing that is constant is change. Therefore, successful entrepreneurs invariably allow time for interruptions and distractions. Time-management experts often suggest planning for just 70 per cent or less of one’s effective time. With only 70 per cent of one’s time planned, one will have the flexibility to handle interruptions and the unplanned ‘emergencies’. One should ensure to save a larger portion of one’s effective time for major priorities. When interrupted, one should ask Alan Lakein’s crucial question, ‘What is the most important thing I can be doing with my time right now?’ This would help one to get back on track fast.  Consider One’s Prime Time—Each individual, because of the way they gear up their biological system, has prime time when their productivity, clarity, balance and objectivity works to the best of their potential. It is this time that most successful entrepreneurs focus on pondering over critical issues and make their vital decisions related to the business. One has to identify whether one is a ‘morning person’, a ‘night owl’ or a late afternoon ‘whiz’. Knowing when one’s best time is and planning to use that time of the day for one’s priorities would lead to effective time management.

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 Do the Right Thing Right at the Right Time—Noted management expert, Peter Drucker, says, ‘doing the right thing is more important than doing things right.’ Doing the right thing is effectiveness— being on the right path and direction; doing things right is efficiency—maximizing output input ratio. One should focus first on effectiveness (identifying what is the right thing to do), then concentrate on efficiency (doing it right). Above all, the time clock keeps running; therefore, it is important that decisions are made on time, else it becomes futile to even make a decision. Entrepreneurs are usually very clear about deciding ‘Yes’ or ‘No’ rather than plunging into ‘Yes But’ or ‘No But’ situations.  Delegate—It is a must for an entrepreneur to have a highly competent and dependable team around them. One can always find stars around highly successful entrepreneurs, who would get things done in spite of all odds. Delegation requires setting up a procedure and a system in place for undertaking various jobs. It is a critical skill that an entrepreneur needs to develop for the smooth running of an ongoing business, so that more productive time of the entrepreneur can be devoted for meeting growth challenges of the business or unforeseen challenges of the business.

15.6.3  Effective Delegation Effective delegation is a prerequisite for the growth of a business. It saves the precious time of the entrepreneur to focus their efforts on strategic and more productive issues of growth. Effective delegating also helps an entrepreneur develop people by expanding their expertise, their independence and their areas of responsibility. Thus, it helps in developing a successor and motivating employees to excel in their assigned job roles. However, while delegating, the entrepreneur should ensure that responsibility still lies with them, and the job delegated will be done better than what they would have done. The entrepreneur should remember that it is better not to delegate a task if there are chances of its getting done wrongly, or poorly or not at all. Effective delegation entails defining precisely the task and its boundaries; identifying the right person who is capable and competent to undertake it; clearly specifying the expected outcomes and the process to measure the outcomes; identifying with mutual discussions the resources that would be required and ensuring to make them available; defining deadlines to achieve end results; informing others who would matter in performing the delegated task and, above all, having a feedback system in place, so as to provide clear signals about achievement or deviations, if any, on time. Thus, effective delegation requires the following things to be done:  careful planning of what is to be achieved and the most suitable person to do it  clear communication highlighting the importance of the task, the expected outcomes and the time frame to achieve it  feedback mechanisms that can help in knowing what worked and what did not work and rewarding good performance

Delegation fundamentally relates to delegate the responsibility of the work and not the work per se. ‘Too many cooks spoil the broth’, so does delegation of the same work to too many people. What matters are the results accomplished through delegation and not the process followed. The failure to delegate can quickly become a downward spiral; one’s remaining staff—the less ambitious and able—will not give one the type of return on investment that one needs and will not respond well to greater levels of autonomy. Therefore, attempts at delegation will probably fail and their shortcomings will justify a more hands-on approach. This, in turn, will only persuade the better staff to go elsewhere and so the cycle continues.6 There are a large number of start-ups having excellent business opportunities to grow their businesses multifold but are unable to do so. An individual-driven business suffers in the eventuality of an owner not being able to take care of the business because of pressing demands from the family, say the illness

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of near or dear ones, aged parents in hospital and women entrepreneurs having multiple responsibilities while being pregnant. These eventualities may give a jolt to the business operations and may resist an entrepreneur from availing growth opportunities. Such eventualities and more so the aspiration of an entrepreneur to grow require having reliable, trustworthy and very capable staff. There are ventures that have grown by 500 per cent in less than three years. The secret has been effective delegation. Natalie Massenet, founder of Net-a-Porter, is a great example of juggling both loads. Working up to the launch of what was to become the world’s most successful online fashion shopping site, she had her new baby in a cradle at her feet. And she has recently sold her business in a deal that valued Net-a-Porter at £ 350 million.

Leaders’ Role in Team Building Through Effective Delegation Abdul Kalam was the mission director for India’s first satellite launch vehicle project. However, the  project was a failure in its first attempt. Satish Dhawan of ISRO (Indian Space Research Organization)  organized a press meet and announced, ‘Friends, today we had our first Satellite launch vehicle to  put satellite in the orbit, we could not succeed. It is our first mission of proving multiple technologies  in satellite and satellite launch vehicles. In many technologies, we have succeeded and in a few more  we  have  to  succeed,  above  all  I  realize  my  team  members  have  to  be  given  all  the  technological  support. I am going to do that and the next mission will succeed.’ After the success of the mission in the second attempt, a similar press conference was organized  wherein  Kalam  addressed  the  conference  to  announce  the  mission’s  success.  Kalam  rightly  highlighted, ‘When success comes in after hard work the leader should give the credit for the success  to the team members. When failure comes the leaders should absorb the failures and protect the  team members.’ ‘There will be failure in a system, failure in a project, failure in the procurement action or failure in  the administrative action, even failure in the political system. It is vital to protect the team immediately  after a failure from the onslaught effect of failures. We should celebrate the success of individuals and  team equally.’ This clearly highlights that while delegating, the responsibility lies with the one who has  delegated and not on the delegate. Therefore, one has to identify very carefully the person to whom  the specific task can be delegated.

Thus, the process of delegation requires an entrepreneur to understand its need and importance and master the art of developing it through conscious efforts. Through effective delegation, entrepreneurs can cultivate a work environment that facilitates developing future leaders, ensuring availability of time essential for execution of critical tasks and for planning of new initiatives for growth. Above all, it creates inspired and motivated employees.

Examples $20 Million Machine, Tool and Moulding Manufacturers Customer satisfaction and gross margins at this company had been falling for several quarters. The  firm employed an antiquated ERP system delivering inaccurate data to senior management leading  to poor utilization of facilities and equipment. The current system underreported the cost of quality,  and the management was unable to take corrective action. Without basic business measurement  indicators,  the  firm  suffered  from  low  throughput,  incorrect  tooling  and  fluctuating  inventory  levels. Compounding the managerial issues faced by this company was an unclear management  succession plan.

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With the help of consulting firm MAC Venture Group (MVG), it was identified that the client’s current  systems and operations were misaligned. To correct this problem, MVG updated the ERP system and  implemented  policies  and  procedures  to  provide  the  management  with  timely  and  accurate  data.  Facilities were updated or redeveloped to increase utilization and efficiency. Quality-control issues  were addressed by developing and implementing key ISO elements. The firm is on track to save more  than $300,000 in cost-of-quality issues, customer rejects have been reduced by 70 per cent and a  formal inventory programme has generated more than $150,000 year-to-date. MVG further assisted  the company with a management succession plan ensuring that the company will continue to grow  under new leadership. A leadership team with proper succession planning enabled the company to  come out of the mess with the help of consulting firms’ advice.7

Window Manufacturer A  family-owned  window  manufacturer  had  successfully  grown  under  the  family’s  leadership  but  was suffering as a result of the firm failing to cultivate a new generation of top-quality management.  Lacking key human capital, the firm failed to develop and implement procedural disciplines as well  as a culture of responsibility and accountability. The company landed into a situation of excessive  inventories, high levels of waste and poorly assigned assets. The company also had problems by way  of poor data accuracy, extended lead times and on-time deliveries below 60 per cent. Consulting advice by the MAC Venture Consulting team led to hiring a successor in the capacity of Chief  Operating Officer (COO) to eventually lead the company when the owner retires. A core management  team was built consisting of a Vice President Operations and a Director of Material. Job descriptions  and  quantifiable  measures  were  established  for  individual  job  assessment.  The  existing  ERP  system  was cleaned up and new formal systems were implemented to maintain all demand requirements and  replenishment planning. A multi-pronged effort resulted in a more fluid workflow and increased customer  delivery times to greater than 95 per cent, whereas lead times were reduced by 30 per cent.8

15.7  WHY ENTREPRENEURS DO NOT SCALE UP Scaling up the business to great heights is the wish of all entrepreneurs. However, very few such as Microsoft, Dell and Wal-Mart have been able to succeed. Scalability issues are typical and the most difficult to be anticipated, and if anticipated, are most difficult to handle. There are start-ups that grow far beyond anticipated by the founders, whereas a majority, in spite of making efforts, do not succeed in their mission to scale up. A study by John Hamm has identified four major tendencies that work well when the venture is small but is on the way to scaling up. These are loyalty, task orientation, single-mindedness and working in isolation (Hamm 2002). Loyalty plays a critical role in a small business organization that gets developed quickly by working one to one in an entrepreneurial mode. However, blind loyalty in a large organization jeopardizes the whole business. Giving shelter to non-performance in the name of loyalty can lead to paying a heavy price. The excessive emphasis on task orientation by way of going into details can cause derailment of the business. Single-mindedness helps a lot in the initial phase of a business; however, this tendency can harden into tunnel vision if the leader cannot become more expensive as the company grows. Above all, working in isolation similar to a researcher cannot deliver results, especially in the growth phase of a business wherein the entrepreneur needs to be constantly in touch with customers, investors, suppliers, media and the community at large. It has been found that leaders who scale their businesses are able to overcome these tendencies through continuous learning and

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self-discipline. They develop a tendency to honestly deal with problems and weed out non-performers before it becomes too late. They inculcate skills to work on a wide spectrum by way of communicating with a diverse range of employees, customers and external organizations. Capable leaders consciously take steps to overcome their weaknesses, become entrepreneurial leaders that their organizations need and cultivate leadership at different tiers in the organization. In the scaling process, the entrepreneur should understand that customers are not the same as users. The whole dynamics of business growth changes by viewing users more intricately. For example, low-cost airline Ryan Air’s growth was the recognition that airports, not passengers, were the real customers. Ryan Air was the first airline to realize that municipal airports could be tapped as a large market potential. By shifting its strategic emphasis on smaller, less-known airports typically owned by a municipality, they could enlarge their business manifold, as bringing lots of users to the airports stimulated side benefits: more spending in cafes, more taxis and buses, more store revenues and more business for the locality. It is also important for an entrepreneur to realize that the first customer is not the same as customers in the scaling of a business and the first product is not the same as scaling products. For example, hand mobile sets that came in the beginning could get away with customers even though these sets were heavy, with clunky and quirky features, but mass market users would have rejected those sets completely, as they would be looking forward for user-friendly, robust attributes. Above all, a majority of start-ups do not have that real urge from within to grow. After getting the initial round of success, they feel contented and find it difficult to develop trustworthy teams to depend on. Further, suddenly some entrepreneurs who fail to live a holistic life and get single-track driven to the venture for 20 hours out of 24 hours a day realize that enough is enough, and it is not worth it to expand at the cost of living a healthy life.

15.8  TIPS FOR GROWTH OF A VENTURE Growing a venture is difficult and challenging but always an aspiration of all entrepreneurs, irrespective of whether or not they are equipped with tools and talent to grow. Some of the key steps that can help in ensuring the growth of a venture are given in Figure 15.8.

Focus Your Energies

Open to Continuous Learning

Establish Credit Lines That Grow

Steps for Growth of a Venture

Systems and Procedure in Place

Return on Investment Criteria

Figure 15.8 Key Steps for Growth of a Venture

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 Open to Continuous Learning—Entrepreneurs should realize that growth demands a different set of skills and capabilities than the one that ensures success in the initial stage of a start-up. It requires a great art to adapt to changing circumstances that only entrepreneurs who grow into leaders— acceptable, influential and inspirational—are able to do. They have a vision with a big picture in mind and effective control over day-to-day operations. They keep learning by improving on their leadership styles as the business grows. They are able to create nurturing environments that encourage learning and maximize return on investment of both economic and human capital. For them, learning is a continuous process of growth. They develop an art of learning how to learn so that their work experiences become a learning lab to continuously equip themselves with skills, virtues and talents to respond to the changing demands of a business.  Focus One’s Energies—As an entrepreneur, all one’s investment by way of money, effort and time should go toward perfecting one’s product and building a long-term relationship with customers. One should be focused and directed with utmost clarity in one’s mind about one’s business and its future growth.  Establish Credit Lines That Grow—Although the capital requirements are modest in the initial phase, an entrepreneur needs to keep an eye on financial requirements from a long-term growth perspective and accordingly build relationships with investors. It is always desirable to establish credit lines that will grow along with the business. For example, while seeking credit lines from banks, link them to the business growth rather than a constant, static amount. It is always desirable to have flexibility while seeking credit lines. Above all, always have alternate plans in place to meet the financial requirements of growth.  Systems and Procedure in Place—Growth necessarily requires delegation and decentralization that entail a need for strong systems and procedures which need to be updated over time. As the business grows, the entrepreneur will not be able to spend as much time personally checking over details as they did initially. These should encompass all vital areas of business operations such as production, quality, purchase and inventory management. It is relatively easy to achieve higher growth with systems in place, so that corrective steps can be taken on time.  Return on Investment Criteria—A growth-oriented business has invariably a number of profitable opportunities to invest in than it has money. Therefore, the company needs to objectively decide which options are to be pursued. One of the simplest criteria that can be used is to find out the return on investment for each opportunity and pick up the one with the highest returns for almost a similar period of risk-taking. For example, a retail chain looking after two product lines has to choose which product line out of the two is to be offered when both give the same profit margin. One may observe that the product line that rolls out faster would have a higher return on investment, because money blocked in inventory would be tied up for a shorter period of time, giving a higher return on the investment.

Above all, remember that it is the wise leader who senses at the right time about what is enough, so as to hold back from continuing unrestrained growth to ensure that the company maintains its professional commitments and keeps delivering quality products with due value proposition to customers. Stretching beyond a level that does not get backed up by adequate resources—physical and financial—can lead to disastrous implications. Thus, the entrepreneur should analyse their business in detail to come up with concrete strategies for growth that differ from business to business and entrepreneur to entrepreneur.

Tanla Solutions Ltd The three key drivers of dynamism, innovation and vision, and a sharp focus on quality, with ongoing  investments  in  R&D,  have  made  Tanla  a  leading  Telecom  Infrastructure  Solutions  powerhouse  in  India. Founded in 1999 by a multi-talented group of professionals, Tanla today is a rapidly growing,  profitable company that has 500 employees globally. (Continued)

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Tanla  offers  end-to-end  mobile  commerce,  mobile  entertainment,  mobile  Internet  and  mobile  advertising solutions. The company is a global provider of mobile commerce, mobile entertainment,  mobile  marketing  and  advertising  solutions  to  the  telecommunications,  media  and  digital  content  industries.  The  company  is  engaged  in  providing  global  technology  services  and  solutions  in  the  wireless  communications  industry.  Tanla’s  range  of  services  are  products  development  and  implementations  in  wireless  industry,  aggregator  services  and  offshore  development  services.  Its  subsidiaries include MufiThumb Entertainment Private Ltd, Tanla Mobile Asia Pacific Pte Ltd, Tanla  Mobile Ireland Pvt Ltd, Tanla Mobile Middle East FZ LLC, Tanla Mobile Inc. Tanla Mobile Malaysia Sdn  Bhd and Tanla Mobile Australia Pty Ltd. In April 2010, the company acquired additional 15 per cent  interest in Tanla Oy, Finland, thereby increasing the total shareholding to 100 per cent. The  company’s  total  income  has  increased  from  `91.14  crores  for  the  year  ended  31  March  2007 to ` 178.79 crores for the year ended 31 March 2009, indicating a compound growth rate of  40 per cent per annum. The company’s net profits have gone up from `57.65 crores to ` 88.78 crores  in  the  corresponding  period.  As  per  the  Deloitte  Technology  Fast  50  India  2009  Programme  conducted  by  Deloitte,  Tanla  Solutions  Ltd  was  ranked  at  the  top  of  the  list  with  a  spectacular  2,997 per cent growth over the last three financial years. The company is a provider of integrated  solutions and products for telephone companies in the wireless telecom sector and is also making  its presence felt in providing solutions for value-added services. However, it is important to note that  the company’s net profit fell to incurred net loss of ` 17.85 crores on an income of ` 29.24 crores  for the year ended 31 March 2011. Consequently, earning per share fell from ` 17.47 in 2007–08 to  `1.76 in 2009–10.9

15.9  GROWTH STRATEGIES FOR VENTURES Every entrepreneur needs to have a plan in place to respond to growth challenges. Many business enterprises remain small, lifestyle companies taking care of family needs because either entrepreneurs are contented or they were never prepared to face growth challenges. Simple strategies that need to be worked on to come up with innovations that can provide a competitive edge are given in Figure 15.9. Market penetration and market development are the approaches to the growth of a business that help in the expansion of a venture with an existing product profile. For example, when an entrepreneur taps greater sales in the existing markets through intensive marketing efforts, it leads to market penetration. This may be an outcome of either tapping new customers within the same markets or the increased usage of a product or service by the existing customers. This strategy is very helpful in the initial stage of the growth of a market when it is growing at an accelerated rate. The best way to focus on this is a proactive approach to competitors’ strategies and the reduction of cost per unit of production through economies of scale or economies of scope. For example, Deccan Airlines introduced a concept of low airfares that resulted in increased clientele from existing or new customers within the existing markets. Subsequently, the airline industry, as a whole, kept on coming up with alternate marketing strategies such as accumulation of miles, no frills on the board and different fares for booking on different days before the departure of a flight. However, when an entrepreneur attempts to expand the market in new territories or different geographical areas not covered so far, it requires a market development strategy to push the sales volume. This basically means selling existing products in new markets, a slight modification of product offerings in different new markets and the use of alternate distribution and sales strategy. This greatly helps an entrepreneur when existing markets

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Existing Products New Products

People, Organizational and Finance Strategies

Product Development

Diversification

Market Penetration

Market Development

Existing Markets

New Markets

Figure 15.9 Venture Growth Strategies start saturating and show a growth at a decreasing rate. This also requires understanding consumer behaviour in different markets and the need for adapting to their requirements. Above all, proactive action to competitors’ reactions becomes a paramount input. For example, Wal-mart’s or Nike’s entry into India and China has led its entry into new locations with slightly different store type concepts suited to local needs. Market penetration and market development strategies revolve around the following points:  Analyse the entrepreneur’s assumptions, perceptions and predispositions about the market and diagnose with the help of facts as to the degree and extent to which they are valid.  Use improved marketing materials, advertising techniques and public relations approaches.  Motivate and inspire one’s sales force by appropriate training on the product/service and the customers’ knowledge and incentives.  Expand business into new geographical territories—local as well as international.  Always keep innovating to be ahead of competitors for deriving a competitive advantage from the market perspective.  Evaluate new opportunities in the market—in terms of acquisitions, new products/services and collaborations with others.  Encash on one’s key strengths by suitably incorporating them in marketing and sales efforts.

A product development strategy focuses on coming up with improved versions of the product to cater to customer needs. This requires an improved version of the product that can add a greater value proposition with no or less incremental cost implication. This works very well when the customer has a different need or a problem with the existing product. The entrepreneur should clearly analyse the implications of the product development strategy from market size, competitors’ reactions, implications on existing products and resources that would be required to successfully deliver new products in the market. The diversification strategy requires tapping growth opportunities outside the current

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business and, therefore, may require an altogether different customer base as well as different markets called ‘new products for new markets’. This should only be attempted when the entrepreneur finds that the distinctive competencies required are available with them and their team. This requires a greater degree of risk, resources and marketing research efforts to understand new markets. For example, to attract more tourists in the country, the government may take initiatives to develop pilgrimage places, adventure sports facilities and ayurveda-based medical treatment destinations. Product development strategies in the automobile industry may include introduction of sports utility vehicles that became a big hit in the market at one point of time. Similarly, in the banking industry, a shift from face-to-face branch-driven banking to Internet banking; in the telecom industry, the use of Skype as free against an earlier approach of pay per use and in the music library at home, which morphs into a mobile music library anywhere and anytime, are product development strategies. Starbucks approach that offers health-conscious consumers more drink options is also a product development strategy. Product development strategies revolve around the following points:  technological developments leading to coming up with new product/service concepts suitable to customer needs  developing a product or service to cater to specific psychological needs of the client/customer, so that it provides a greater value proposition by way of enjoyment, security or educational value  technology developments and enhancements to reduce the cost of production  automation of office that could enhance the quality of product offerings  being alert and fully knowledgeable about all new emerging technologies that have implications on our product offerings and may make our products obsolete  introduction of new products or services by closely getting associated with vendors and sales force  understanding the unique strengths of one’s business and incorporating the same in an endeavour to develop new products or services

Coupled with market development and product development strategies, in order to ensure the growth of a business, an entrepreneur has to focus their efforts on organizational- , people- and finance-related strategies. Some of the key areas in which the entrepreneur needs to focus their efforts are given as follows:  inducting employees and executives who are creative and innovative  undertaking a diagnosis of the organization at regular intervals to identify ways to increase speed, reduce cost and improve quality  introducing systems and procedures, so that things just move with inbuilt cheques and balances  analysing the effectiveness and efficiency of important systems—accounting, budgeting, personnel and information—from the point of view of their speed, personnel requirements, quality of work and cost of operations and bringing in desirable changes from time to time  developing strong values and ethics in the organization, so that people become self-inspired and motivated  introducing innovations in systems and procedures for bringing in desirable improvements  linking compensation directly with the performance with an objective system in place and introducing profit-sharing or stock-option schemes  getting personally involved with employees to get their best for the achievement of organizational goals  providing continuous feedback to employees on their performance and on ways and means to enable them improve their performance  putting in place a system to ensure the utilization of financial information as a positive instrument for tracking and monitoring performance on key activities

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 identifying all possible ways and means to save money by improving performance to become more cost competitive without compromising on quality  innovating by coming up with financial products that suit one’s business requirements the most in association with investors

15.9.1  Franchising Franchising is becoming a more and more stronger tool for business growth. This strategy works very well when the company has a method of doing business or a system of operations that is unique and provides a distinct brand image which can be easily reproduced and can be easily adopted by others through training. It is essential that the existing business should have a proven track record of economic success with a unique trademark, with a distinct identity—the ‘brand’. Indeed, many business owners begin to consider franchising when customers begin to ask about other locations and business opportunities with the brand.10 Franchising is ‘an arrangement whereby the manufacturer or sole distributor of a trademarked product or service gives exclusive rights of local distribution to independent retailers in return for their payment of royalties and conformance to standardized operating procedures’ (Seltz 1982). The person offering the franchise is called ‘franchisor’, whereas the person purchasing the franchise for availing the business opportunity is called ‘franchisee’. The key advantage by way of the franchise model for growth to an entrepreneur comes by way of retaining an intellectual and artistic control over the product and/or service while achieving growth and keeping one’s cost base—capital as well as recurring expenses—in check, which is the key to a successful franchise launch. However, it is essential to identify well, after analysing whether an entrepreneur is ready for the ‘franchise’ model for growth. North America is said to be the ‘hub’ of the franchise model of business growth in the world, mainly because the entrepreneurial spirit of its business community has understood well the rationale and reasons for business through the franchise. Advantages of Buying a Franchise  Some of the key advantages that accrue to a franchisee are given as follows:  Well-established Product and Market—The business proposition to a start-up reduces the risk of undertaking a business to a great extent on account of a well-accepted product/service under consideration in the market that has a good market potential because of established brands in other markets. The credibility for the product or service automatically exists and, therefore, the franchisee is not required to incur initial expenses to build credibility in the market for creating a demand for the product/service. The greatest challenge in any business that the entrepreneur faces is to get customers who, to a great extent, get taken care of because of the associated brand backing the franchisee.  Patented Formula or Design or Trademark—A business gets duly protected because of the patent protection that does not provide any scope for a third party to copy and take advantage of a similar product/service business. The business advantage automatically comes to a franchisee because of a well-accepted trademark in the market.  Low Risk of Failure—Since a franchisee buys a well-established concept that has proved its worth in the market, the risk of failure automatically gets minimized. Various studies related to the franchise model clearly reveal that franchisees stand a much better chance of success when compared with starting an independent business.  Management Expertise to Control Finances—The franchisee gets an advantage by way of assistance that gets extended to them by the franchisor for running the business and especially controlling finances. Usually, the franchisor would provide training programmes to the employees of the franchisee

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on accounting, production and marketing aspects of the business. This aspect should be especially considered while accepting a franchisee status, as usually otherwise, the cost of learning through one’s own experiences in a business and providing required training and education is substantial. Inbuilt help comes spontaneously from the franchisor to start and run the business. As such, many franchises are in a business of turnkey operations and, thus, automatically get the required equipment, supplies and instruction or training needed to start the business. Start-ups generally face several problems in establishing effective managerial control. However, franchisors come handy in extending managerial processes coupled with help in identifying the right people for the franchisee in taking effective financial decisions related to costs, quality, inventory, cash management and HR management.  Capital Requirements—Starting a business requires substantial capital coupled with time to tie up the resources required. However, the franchise model provides upfront support—both managerial as well as capital based. The franchisor helps in undertaking marketing research, identification of location, procurement of plant and equipment from standard sources at reasonable prices and, above all, capital support by way of equity participation or, at times, part by way of loan.  Buying Power—As a franchisee, an entrepreneur gets all the associated benefits from the collective buying power of the parent company, as the franchisor can afford to buy in bulk and share the associated savings with the franchisees. Even procurement of inventories and other supplies will cost less as compared with getting the same while running an independent business.

On the other hand, the franchisor mainly gets an advantage in terms of expanding their business fast by minimizing the risk of expansion coupled with lower capital requirements and an advantage in terms of extensive buying power that reduces the cost of production. For example, the Strategy Academy is all set for Pan-India expansion via a franchise route and for this, the company has joined hands with Franchise India Brands Limited. The company is India’s first Live Digital Academy that delivers ‘Serious Professional Education’ in the field of leadership, innovation, strategy, execution, entrepreneurship and general management. Disadvantages  of  Buying  a  Franchise  Since there are multiple advantages of growing a business through the franchise mode, certain disadvantages also exist that need to be carefully examined to ensure that this is the right choice to be made when a venture is at a crossroads for expansion. The greatest problem mainly arises as an outcome of differences between the franchisor and franchisee in terms of certain formal and informal commitments that do not get operationalized. Some of the key disadvantages of this mode of expansion are given next:  Rigid and the Only Way of Doing Things—Entering into a franchise contract limits the degree of freedom for the franchisee. As such, one gets an overguided and overinfluenced degree of control exerted by the franchisor. This results in losing the freedom to innovate to some extent.  Continuing Cost Implication—Over and above the original franchise fee, royalties, a percentage of revenue gets shared perpetually with the franchisor. The franchisor may also charge additional amounts towards sharing the cost for services provided such as for advertising and training. As such, entering into franchise contracts with a well-known franchisor becomes a very expensive proposition because of a tendency on their part to exploit the franchisee.  Risk of Franchisor Getting Bought—The franchisee faces serious problems and difficulties when the franchisor either fails or gets bought out by another company.

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

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Example: Big Brands Make Beeline for Franchising The big corporate houses that have opted for a franchise route believe in franchising as an easy mode  of expansion and commitment level of the franchisor and the franchisees. This mode for the growth of  a business has become a powerful and ideal way to expand a business, in case the company does  not have the capital, manpower and time to build the network of company-owned outlets and also in  case the company wishes to grow its business presence sensibly yet rapidly. However, Dabur is not the first big established brand that has taken up franchising for expansion.  There are various other corporate houses that have been into franchising for quite some time now and  have marked their presence not just Pan-India but also across the globe. Raymond  Ltd,  a  company  started  in  1925  as  a  woollen  and  readymade  garment  industry,  has  achieved phenomenal success with more than 500 stores. As Anirudh Deshmukh, president, Raymond  Ltd, says, ‘Raymond can be called the “absolute leaders” in the fabric industry as consumers have  faith on us since the last 50 years and still we are growing stronger. We basically opted for franchise  model  for  expanding  in  smaller  towns  as  these  are  not  affected  by  recession  and  the  franchised  stores can be driven by local entrepreneurs who are aware of the preferences of the local customers.’ NIIT,  a  well-known  name  in  the  IT  education  industry,  has  a  franchising  network  of  more  than    12,500 centres spread over in more than 40 countries worldwide, apart from India. As per G. Raghavan,  president, Global Learning Solutions, NIIT, ‘A large part of this success has been possible due to our  business partners, who have been a crucial element of our fabric. The Business Partner network not  only helped NIIT expand its presence across India and reach the unreached; it also fuelled the fire of  entrepreneurship in the country.’ JSW Steel Ltd, the third-largest steel manufacturer in India, operates through 174 JSW Shoppe  outlets that work on the franchise model. Now, the company is planning to take the count of its JSW  Shoppe outlets to 340 by 2011. Mahindra & Mahindra Ltd, a part of the Indian industrial conglomerate Mahindra Group, has taken  the franchise route to expand its 100 per cent subsidiary, Mahindra First Choice, a multi-brand carservicing company. The company is planning to take the count of its outlets to 450 in the next four  years. The new outlets will be a mix of both company-owned and franchised outlets.11

15.9.2  Licensing Licensing is a strategy for growth that makes sense when the owner of a valuable technical know-how or patent having great commercial applications does not possess internal organizational capability as well as resources to take a risk to produce and market the product. It also helps in overcoming the risks associated with the commitment of resources, particularly to enter into foreign markets that are unfamiliar, politically volatile and economically unstable. This strategy works very well for entering into foreign markets to expand business. By licensing the technology or the production rights to foreignbased firms, the firm does not have to bear the costs and risks of entering foreign markets on its own, yet it is able to generate income from royalties (Thompson et al. 2006). Even many growing companies may have a portfolio of patents, technologies and brands that can be licensed in non-competing ways to augment existing initiatives and core businesses. Further, small and medium companies may not have sufficient resources to conduct R&D and, therefore, look forward for access to technologies and brands that are already established or readily available on an off-the-shelf basis along with training support. As discussed in earlier chapters, one should examine the critical components of the licensing agreement, as the licensor would always look forward to incorporating all sorts of provisions that are beneficial to them.

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15.9.3  Export Strategy for Growth Using domestic plants to produce for availing cost advantage and exporting to enter into foreign markets is a good strategy to increase one’s business multifold. It is the best way to first try out and test the international markets. The capital requirements may not be very high, as existing capacities in the domestic market are getting utilized. At times, the entrepreneur may limit their exposure by just contracting with foreign wholesale buyers, who, in turn, would take the risk of distribution and marketing in their countries. The long-term sustainability would depend on the relative cost competitiveness of the home country production base. The key advantage that may come is by way of realization of economies of scale as also learning curve advantage. For entering into foreign markets, the key success factor will be the credibility, cost advantage and uniqueness that one’s product or service enjoys. One needs to present oneself in the international markets as a solid and reliable partner. Therefore, an export strategy should be integrated with one’s company’s overall business plan. The entrepreneur should align their export activities with daily operations and avoid any conflicts between domestic and international activities. This basically would require understanding the areas of one’s strong competitive advantage. These areas may include one’s technology, personnel competence vis-à-vis salaries and business systems. Above all, before entering into exports, the entrepreneur should learn about export/import regulations and terms of trade. One needs to get in touch with the relevant industry association and export authority and find out whether there are special requirements for one’s products to be exported, such as need of a licence, export permit, veterinary or fito-sanitary certificate or have to meet some other export requirements.

15.9.4  Joint Ventures Joint ventures involve a contractual agreement between two or more than two parties joining together for the purpose of executing a particular business undertaking. The involved parties agree to share in the profits and losses of the enterprise. A joint venture involves a contractual business undertaking between two or more parties. It is similar to a business partnership, but for a major difference in terms of a single business transaction, as against an ongoing long-term sustainable business relationship. Joint ventures can be distinct business units (a new business entity may be created for the joint venture) or collaborations between businesses. In a collaboration, for example, a high-technology firm may contract with a manufacturer to bring its idea for a product to the market; the former provides the know-how, the latter provides the means.12 Thus, a joint venture has the following characteristics:  It involves two or more parties—individuals or companies—that form a business entity. The business of one party is transferred to the other company and as consideration for such a transfer, the shares are issued by the company and subscribed by that party. The other party subscribes for the shares in cash.  The involved parties subscribe to the shares of the joint venture company in agreed proportion, in cash, and start a new business.  The promoter shareholder of an existing Indian company and a third party, who/which may be an individual/company, one of them non-resident or both residents, collaborate to jointly carry on the business of that company, and its shares are taken by the said third party through payment in cash.

All the joint ventures to be operated in India require governmental approvals, if a foreign partner or an NRI partner is involved. The approval can be taken from either the Reserve Bank of India (RBI) or Foreign Investment Promotion Board (FIPB). For joint ventures falling under automatic route, the approval of RBI is enough, whereas in the case of special cases that are not covered under the automatic

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route, a special approval of FIPB is required. The Government has identified 37 high-priority areas covering most of the industrial sectors wherein investment proposals up to 74 per cent foreign equity receive automatic approval within two weeks. For formalizing a joint venture, A Memorandum of Understanding and a Joint Venture Agreement should be signed after consulting lawyers who have expertise in dealing with international laws and multi-jurisdictional laws and procedures. It is necessary to thoroughly discuss and negotiate the terms and conditions, so as to avoid any misunderstanding at a later stage, before signing a joint venture agreement. A joint venture agreement should include terms and conditions pertaining to dispute resolution and modalities involved, applicable law, holding shares, procedure and conditions for transfer of shares, board of directors—number and appointments, general meeting, appointment of CEO/MD and management committee—constituents and roles, vital decisions that can be made with the consent of partners, dividend policy, funding, change of control, clauses on non-competition, confidentiality, indemnity, assignment and termination. Above all, it should be subject to obtaining all necessary governmental approvals and licenses within a specified period. A majority of the businesses may lose an opportunity to grow through joint ventures, which helps in not only saving years of work but also in accelerating growth in revenue and margins. Joint ventures not only help in growth through lower capital but may also lead to risk of control. The strategy helps in taking advantage of synergies between two companies’ operations to fetch projects that would not be feasible to take individually and may involve a substantial investment to acquire adequate capability. It has been seen that many small-business owners may not like the idea of joint ventures, as they do not like the idea of splitting revenues. They prefer to individually retain their identity in selling their own products, because they get to keep 100 per cent of the revenues. However, this approach of theirs turns out to be short-sighted. The joint venture, if executed well, adds a lot to the business growth in the long run. There are alternate approaches to undertaking joint ventures. However, for growth-driven small businesses, the most lucrative type of joint venture usually involves at least two of three key elements: a product, a promotion and a market. For example, in 2001, Katie Yeakle, the president of American Writers and Artists Inc. (AWAI), decided she wanted to sell her products in Germany. One option was to set up a branch office in Bonn and hire a local manager who would then hire translators and find service bureaus to publish AWAI’s products in that country. The other option was to locate a German publisher who was already marketing to the kind of customers AWAI favoured and make a joint venture deal. Sony Ericsson is a joint venture between the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones. The stated reason for this venture is to combine Sony’s consumer electronics expertise with Ericsson’s technological leadership in the communications sector. Both companies have stopped making their own mobile phones. Virgin Mobile India Limited is a cellular telephone service provider company that is a joint venture between Tata Tele Service and Richard Branson’s Service Group. Currently, the company uses Tata’s CDMA network to offer its services under the brand name ‘Virgin Mobile’, and it has also started GSM services in some states. Advantages of Joint Ventures  The following are some of the key advantages of forming a joint venture for foreign investors13:  taking advantage of already established marketing and distribution channels for the product under consideration  available financial and non-financial resources at the disposal of an Indian partner to promote business in India  established networking and contacts of the Indian partners that help in taking necessary approvals and developing linkages with stakeholders

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 an opportunity to jointly manage the risks associated with new ventures. The terms of agreement can help in limiting individual exposure by sharing the liabilities  scope for availing diversified business opportunities in the partner country  taking advantage of each other’s strengths that yields synergy in business development and operations  providing a scope for foreign investment in certain sectors wherein regulations may not permit exclusive entry

Types of Joint Ventures  There are different forms and types of joint ventures. Before deciding about entering into a particular type of joint venture, it is necessary to understand and analyse the requirements for operating the business. For example, one needs to identify whether business requirements can be fulfilled through the partnership agreement, by means of a trading agreement or through a company with shareholders having a degree of control over the company’s activities before deciding about the mode of the joint venture agreement. It all depends on factors such as the nature and purpose of the venture, size of the organization, number of people involved, the tax considerations and the requirement of capital. For example, if the size of the organization is small and involves only two people, then it would be desirable to enter into a partnership, limited liability partnership or simple trading agreement. In case of substantial investment and large size involving higher risks, it would be prudent to choose the joint venture operation through a company. For example, in the Indian context, Nissan Motors signed a joint venture deal to make commercial vehicles, engine and components in India in the name of ‘Ashok Leyland Nissan Vehicles’, the 50:50 joint venture between ALL and Nissan Motors. Volvo has invested $375 million in a joint venture with Eicher Motors, the third-largest commercial vehicle manufacturer in India. The world’s largest retailer, Wal-Mart, entered into a 50:50 joint venture with Bharti Enterprises for the wholesale cash-and-carry business in India that will roll out 10 to 15 such outlets over seven years. This also covers a supply chain and back-end logistics. The success of joint ventures depends, to a great extent, on proper and accurate assessment of needs of the involved partners and the best modality that can help in managing the new entity in the backdrop of relationships among partners and the degree of understanding among the partners without getting obsessed with personal gains. There has to be a clear understanding about the goals and objectives and the resources that would be contributed by each in the process. The success depends on the trust between the management team working together for the overall good of a business in its entirety.

15.9.5  Growth Through Mergers and Acquisitions (M&A) Mergers and Acquisitions (M&As) is a potential strategy for ensuring the accelerated growth of a business. There are various reasons that firms may choose to grow through M&A instead of expanding internally (Trautwein 1990). The growth process is accelerated by acquiring a target in a line of business in which the bidding company wants to enlarge when compared with internal expansion, because the company already exists in place, with its own production capacity, distribution network and clientele. This saves a lot of time and investment for the growing company. Above all, growing through M&A may usually turn out to be less expensive compared with internal expansion, particularly when the replacement cost of assets is higher than the market value of target assets. Further, as against organic growth, M&As can be partly paid for with stock. Especially during booming stock markets, bidding companies tend to pay for M&As with stock (Faccio and Masulis 2005). A merger is a process when two or more firms decide to come together to become a single new legal entity and new company stock is issued. As against this, an acquisition or takeover is when one company buys another, and then the target company ceases to exist any more. This does not involve any

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exchange of stock. Thus, in case of acquisition, the target company no more exists; the buyer ‘swallows’ the business of the acquired company, and the buyer’s stocks continue to be traded. In pure sense, a merger is a process in which two companies, usually of about the same size, agree to go forward as a single new company rather than remaining separately owned and operated. This is also called ‘merger of equals’. For example, both Daimler-Benz and Chrysler ceased to exist when these two companies merged, resulting in a new company called ‘DaimlerChrysler’. However, in practice, it is difficult to come across mergers of equals, as usually, one company will buy another and, as part of the deal’s terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. A purchase deal is also referred to as a ‘merger’ when both the CEOs agree to the process of joining together in the best interests of both of their companies. However, when the deal is unfriendly, it is referred to as an ‘acquisition’. The purchase decision is considered a merger or an acquisition mainly on whether the purchase is friendly or hostile. Thus, the real difference between a merger and an acquisition lies in how the purchase is communicated to and received by the target company’s management, employees and shareholders. The motivation behind the merger decision may vary from survival to protection to diversification to growth. For example, in case an entrepreneur is facing a situation of technical obsolescence, dramatic fall in market share or depletion of capital structure, then the merger may be the best option to survive. It can also help against market encroachment or takeover. It can also add a lot of strength to diversify the business into new areas as also growth in the business by strengthening financial and technology capabilities. Synergy  Synergy is the key criteria that enables for cost efficiencies of the new business through economies of scale or economies of scope. Synergy in operations after a merger leads to growth in revenue through increased turnover and reduction in per unit production and distribution cost. Some of the prominent benefits that arise as a result of a merger are given next:  Reduced Staff Strength—A merger decision usually leads to job lay-off, unless specifically highlighted otherwise in the terms of the merger. Job cuts in the process usually involve the former CEO, who leaves with a compensation package.  Economies of Scale—This refers to the cost advantages derived by the producer as a result of expansion in operations. Basically, when inputs are increased by a particular proportion, the output increases by a greater proportion as a result of realization of economies of scale and, thus, results in per unit cost reduction. Specific factors such as division of labour, specialization, technological factors and administrative costs come down and result in a reduction in the average cost per unit falling as the scale of output is increased. For example, by purchasing raw materials, stationery or a new corporate IT system, a bigger company placing the orders can save more on costs.  Economies of Scope—This refers to lowering the average cost of production, particularly in producing two or more products. Here, economies of scope make product diversification efficient if they are based on the common and recurrent use of proprietary know-how or on an indivisible physical asset (Teece 1980). Thus, economies of scope result in cost savings to companies operating in multiple products or businesses by successfully transferring some of their capabilities and competencies that were developed in one of their businesses to another of their businesses (Hitt, Ireland Duane and Hoslisson 2005).  Acquiring New Technologies—For retaining competitive advantage, companies need to continuously keep adopting new technologies. By buying a smaller company with unique technologies, the larger company derives a technological competitive advantage. For example, Cisco Systems purchased more than 75 technology companies that provided it a technological edge to become the world’s leader in supplying systems for building infrastructure for the Internet.

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 Enhanced Markets and Improved Visibility—One of the usual purposes of buying another company is to expand operations in new markets and grow revenues and earnings. A merger helps in expanding the company’s marketing and distribution channels, thus resulting in providing new sales opportunities.

Types of Mergers  Mergers can be classified under many categories depending on business structures and motives. However, based on the relationship between two companies that are merging, mergers can be classified into three broad categories as given in the following:  Horizontal Merger—This involves a merger of two or more than two companies that are in direct competition and share the same product lines and markets. This type of merger can result in having a very large effect or little to no effect on the market. When two extremely small companies get merged, the outcome of the merger will not be visible in the market. For example, if a small restaurant in a city is to merge with another restaurant in a different location, the effect of this merger on the restaurant market would not be significant. However, in case large players in the same industry are involved in the merger, the resulting impact would be felt throughout the industry.  Vertical Merger—This involves a company combining with a supplier, distributor or customer. Thus, it entails a merger between two companies producing different goods or services for one specific finished product; for example, a jam manufacturer combining its operations with a bottle manufacturer who is the supplier for packaging material to the jam manufacturer, or a car manufacturing company purchasing a steel sheet manufacturer. It is also called ‘anticompetitive’, because it can often rob supply business from its competition. If a contractor has been receiving material from two separate firms, and then decides to acquire the two supplying firms, the vertical merger could cause the contractor’s competitors to go out of business.  Conglomerate Merger—This involves a merger between companies that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, whereas mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.

Another way of defining types of mergers is the way mergers get financed. This would result in different implications for companies and investors involved in the process of mergers. As per this classification, mergers are classified into purchase mergers and consolidation mergers. In case of purchase mergers, a company purchases another company, and the consideration amount is paid through cash or by issuing some debt instrument. The sale is taxable. The company that purchases another company enjoys certain tax benefits, as acquired assets are booked at actual purchase price, and the difference between purchase price and book value of the assets becomes eligible for depreciation and, in turn, tax advantage. Under consolidation merger, a new company is formed under a new entity by combining both companies. The taxation terms remain the same, as applicable to a purchase merger.

15.9.6  Acquisitions Another usual way to expand a venture is to go for the acquisition of existing business. This helps in entering into new markets or new product areas. Acquisition involves purchasing whole or part of another company. Similar to mergers, acquisitions help the company in realization of economies of scale, efficiencies and enhanced market visibility. As against mergers, all acquisitions involve one company purchasing another or part thereof. Thus, there is no exchange of stock involved. At times, acquisitions are hostile. Acquisitions are often congenial, and all parties feel satisfied, whereas at times, there may be hostile ones. Some of the key advantages of the acquisition mode for the growth of a venture are given next:

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 established business, market, image and business track record  for entering into new business, the acquisition mode does not require compliance with regulatory permissions for licensing, pollution control, exports and imports of raw materials  cost advantages as compared with establishing a similar new business  having personnel expertise available  providing greater time to be allocated to innovation, as existing business may not require much day-to-day intervention by the entrepreneur

In an acquisition, similar to merger deals, a company can buy another company with cash, stock or a combination of both. For example, if company A buys all the assets of company B on a cash basis, it implies that company B is only left with cash and debt, if any, which usually gets paid from the cash receipts. This results in a situation of company B ultimately getting liquidated or probably entering into another business. Another type of acquisition is called a ‘reverse merger’, which involves a deal that enables a private company to acquire a publicly listed company in a relatively shorter time period implying a strength— financial and product uniqueness on the part of the private company. A reverse merger usually takes place when a private company having good growth prospects is eager to raise funds from the public. The resultant effect becomes a public company—an entirely new public corporation with tradable shares.

15.9.7  Leveraged Buyouts A leveraged buyout (LBO), or highly leveraged transaction (HLT), or ‘bootstrap’ transaction occurs when an investor acquires controlling rights in a company’s equity by using a major portion of funds required for such a deal through borrowing. The term ‘leveraged’ means a significant use of debt for financing the transaction. The main purpose of an LBO is to allow an acquirer to make large acquisitions without having to commit a significant amount of capital. The target company becomes private after an LBO. It is owned by a partnership of private investors who monitor performance and can act right away if something goes wrong. The private ownership is not intended and expected to be permanent. The most successful LBOs go public again as soon as sufficient debt gets paid off and improvements in operating performance have been visible in the target company. Thus, LBO is also called an ‘aggressive business practice’ wherein investors or a larger corporation mainly utilize borrowed funds, that is, debt to finance its acquisition for growth. Usually, for borrowing, the assets of the acquired company are used as collateral security coupled with assets of the acquiring company or corporate guarantee of acquiring a company or a group company. The leveraged buyout deals use a combination of various debt instruments from banks and debt capital markets. The bonds or other papers issued for leveraged buyouts are commonly considered not to be investment grade because of the associated risks involved.14 The major reason or rationale for an LBO is that the entrepreneur who purchases a venture has a firm belief that the company is available at reasonable consideration and they would be in a position to run it far more efficiently as compared with the existing owners. At times, it may be because the existing owners of the company are large conglomerates, and they feel that a particular division or business does not fit well with its strategic plans, and, hence, it would be better to dispose it off. The new debt in an LBO is not supposed to be for a long term, as LBO business plans call for generating extra cash by selling assets, cost saving and improving profit margins. The extra cash generated is used for paying the outstanding LBO debt. At times, executives and managers are given greater stake in the business by way of stock options or direct ownership of shares to ensure their greater commitment in improving the working of the company.

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The most common buyout agreement involves a management buyout called ‘MBO’. In this corporate arrangement, the company’s management teams agree to ‘buyout’ or acquire a large part of the company, subsidiary or divisions from the existing shareholders. Since the process involves a considerable amount of capital, the management team often employs the assistance of investors—venture capitalists and banks. Similar to an LBO, this results in corporate restructuring to effectively utilize the acquired assets. MBOs usually occur as a last recourse to save a company or a division of a company from permanent closure or replacement of existing management teams by an outside company. Many analysts strongly believe management buyouts greatly promote executive and shareholder interests as well as management loyalty and efficiency. The major advantage that accrues through an LBO is that poorly managed firms before their acquisition undergo valuable corporate restructuring after the deal in terms of modifying and replacing executive and management staff, terminating loss-making product lines or divisions and dramatically cutting down wasteful expenses. As a result, company assets become productive and get revitalized, so as to earn substantial profits. However, the counterargument is that an LBO usually results in an adverse impact on the existing employees by way of layoffs. This, in turn, may result in negative effects on the economic well-being of the overall community, thereby adversely affecting its economic prosperity and development. Some leveraged buyout deals may not be smooth and friendly, which are an outcome of hostile takeovers that are against the wishes of the existing senior management of the company. For example, in the Indian context, two of the largest LBOs were those of Flextronics Software Systems (renamed ‘Aricent’ after the LBO) and GECIS (renamed ‘Genpact’). In the Indian business environment, the attractive industry sectors for LBOs would be outsourcing companies, service companies and high-technology companies, as the companies in these industries are labour intensive, and their costs are globally competitive due to a low cost of labour in India. The labour intensity of these businesses makes the target company scalable for achieving the high growth required to make the LBO successful. Above all, the major source of earnings for these companies is through exports denominated in foreign currency, which mitigates foreign currency risk when the LBO is financed using foreign-currency-denominated debt raised from foreign markets. These companies have relatively low tax rates because of tax incentives offered to such companies operating from special economic zones and software technology parks. Although an LBO is a faster route for the growth of a venture, it requires different skills on the part of an entrepreneur to effectively utilize this channel for growth. The entrepreneur needs to rigorously evaluate the opportunity of growth through an LBO in terms of arriving at reasonable terms for entering into LBO deals. This requires a skill for identifying a right and reasonable purchase price for the deal and the ability of an entrepreneur to negotiate the price as also other terms and conditions that make business sense. Before entering into the negotiation stage, the entrepreneur should assess competitiveness of the industry, competitive position of a target company, uniqueness in product offerings of the company, product life cycle in which company operates and, above all, the managerial talent of the key personnel who would remain with the business. Further, a rigorous quantitative analysis of financial position by using price earning ratio, earning per share, profit margins, return on assets and return on equity of the target company needs to be undertaken vis-à-vis the industry norms and comparable companies to arrive at a fair price for the deal. The entrepreneur should realistically assess the debt paying capacity of the company after taking over through an LBO route. This is essential, as the investor would like to raise as much debt as possible for the deal that they would like to pay back at the earliest. It would all depend on the future risks associated with the business and the stability of future cash generations. Above all,

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the entrepreneur needs to develop an appropriate financial package that can meet the objectives of the fund provider, the company and the entrepreneur.  Check Your Progress   10 Signs That You Are Getting Stressed and How to Cope 

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Running any kind of organization can be pretty unforgiving. It is not surprising that stress is a common, although rarely talked about, problem. The truth is that as you grow your enterprise, you also grow yourself—that is one reason it can become stressful. Here are 10 common signs of stress and how to cope with them: 1. Frequent headaches: If you are reaching for the aspirin, almost without thinking, it might mean you are doing too much. Get some fresh air and reflect on your day. 2. Butterflies: They are important if you are to perform well in important meetings, but if you are stressed, then you can feel them far more often. Try to keep work in perspective. 3. Self-medicating: Increasing consumption of coffee, alcohol, nicotine and even sugar can be signs of stress. Be aware of your consumption and what it might be telling you. 4. Overreacting: You fly off the handle when the issue is really not that important. Switching off seems difficult and everything is coming at you too quickly. 5. Paranoia: You are beginning to feel oppressed. Is the world really plotting your downfall? Or are you imagining the worst? Step back and try to become objective. 6. In bed: You might notice that two things are the most difficult to manage. One is sleep, and the other mostly affects only men! Both are classic symptoms of stress. 7. Digestive problems: From indigestion to irritable bowels, your guts act as a barometer of your mood. Stress can cause digestive problems. Treat the cause and the symptoms. 8. Poor judgement: If you are stressed, then your ability to make decisions is hampered. The consequences can be stressful in themselves. Try to defer big decisions or involve others. 9. Escapism: When severely stressed, facing work can be difficult. If you feel the urge to take time off, or even run away, seek professional help. 10. Feedback: If you work with others, they will notice you becoming more stressed. They will probably also be astute enough to identify the cause. Be brave and ask them. KEY CONCEPTS  Strategic Planning: This is a management tool that helps an entrepreneur channelize organizational energies, efforts and time to achieve a predetermined goal and to adjust and adapt to the changing environment in a long term.  Tactical Planning: This emphasizes the current operations of various parts of the organization to achieve goals in a short term, say less than a year.

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 Launching Phase: This involves activities related to the formation and production of goods and services that create an initial customer response.  Start-up Phase: This involves raising capital, undertaking marketing activities and building an entrepreneurial team to carry out the business.  Growth Phase: This involves strategic planning to respond to the intense competition to expand the business.  Business Stabilization Phase: This involves intense competition that leads to maturity in the market coupled with customer indifference to the product/service.  Self-financeable Growth (SFG) Rate: This is the rate at which a company can sustain its growth through the revenues it generates without hat in hand to financiers.  Market Penetration: This occurs when an entrepreneur taps greater sales in the existing markets through intensive marketing efforts.  Market Development: This happens when an entrepreneur attempts to expand the market in new territories or different geographical areas to push sales volume.  Product Development: This focuses on coming up with improved versions of the product that cater to customer needs.  Diversification: This deals with tapping growth opportunities outside the current business by focusing efforts on an altogether different customer base as well as different markets—called ‘new products for new markets’.  Franchising: This is an arrangement whereby the manufacturer of a trademarked product or service gives exclusive rights of local distribution to independent retailers in return for their payment of royalties/fee and conformance to standardized operating procedures.  Licensing: This is an arrangement that allows a company having a portfolio of patents, technologies and brands to be utilized by others in consideration of payment of a licensing fee and other conditions deemed fit.  Joint Ventures: These involve a contractual agreement between two or more than two parties joining together for the purpose of executing a particular business undertaking.  Merger: This is a process where two or more firms decide to come together to become a single, new legal entity and new company stock is issued.  Acquisition or Takeover: This is when one company buys another and then, the target company ceases to exist anymore. This does not involve any exchange of stock.  Synergy: This involves the operations of two companies that enable cost efficiencies of the new business through economies of scale or economies of scope.  Horizontal Merger: This involves a merger of two or more than two companies that are in direct competition and share the same product lines and markets.  Vertical Merger: This involves a company combining with a supplier, distributor or customer.  Conglomerate Merger: This involves a merger between companies that are involved in totally unrelated business activities.  Acquisition: This involves purchasing whole or part of another company.  Reverse Merger: This involves a deal that enables a private company to acquire a publicly listed company in a relatively shorter time period.

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 LBO: A transaction occurs when an investor acquires controlling rights in a company’s equity by using a major portion of funds required for such a deal through borrowing. ENDNOTES 1. Managing the stages of business growth, http://www.pwc.com/nz/en/clever-companies/ managing-the-stages-of-business-growth.jhtml 2. GB Analysts Reports, http://www.gbanalysts.com/Reading%20Room/The%20Entreprenuer/ newVentureDev/venstartupstgs.html 3. Churchill, C. F. ACCION International. ‘Managing Growth: The Organizational Architecture of Microfinance Institutions’, May 1997, http://www.uncdf.org/mfdl/readings/ManageGrowth.pdf 4. Skoczkowski, L. ‘A Culture of Success Driven by Success’, Growth Connections, www. growth-connections.com 5. Jasuja, A. ‘The CEO’s Role in Managing Growth’, Growth Connections, www.growthconnections.com 6. Delegation, Growing Business, http://www.growingbusiness.co.uk/delegation.html 7. www.mac-venture.com/casehistories.htm 8. www.mac-venture.com/casehistories.htm; MAC Venture Group, http://www.mac-venture. com/casehistories.htm 9. www.tanlasolutions.com/company_overview.htm 10. Kreutzer, M. An attorney with Holland & Hart LLP in Las Vega. ‘Franchising as a Growth Strategy’, http://www.hollandhart.com/articles/FranchisingAsGrowthStrategy.pdf 11. Franchise India, http://www.franchiseindia.com/articles/Franchisor/Growth-and-Capital/BigBrands-Make-Beeline-For-Franchising-381/ 12. http://legal-dictionary.thefreedictionary.com/Joint+Venture 13. Establishing a Joint Venture in India, http://www.india-briefing.com/news/establishing-jointventure-india-4833.html 14. Wikipedia, http://en.wikipedia.org/wiki/Leveraged_buyout REFERENCES Churchill, N. C. and J. W. Mullins. 2001. ‘How Fast Can Your Company Afford to Grow?’, Tool KitHarvard Business Review, 79(5): 135–143. Covin, J. G., D. P. Slevin, and M. B. Heeley. 2000. ‘Pioneers and Followers: Competitive tactics, Environment, and Firm Growth’, Journal of Business Venturing, 15(2): 175–210. Faccio, M. and R. W. Masulis. 2005. ‘The Choice of Payment Method in European Mergers and Acquisitions’, The Journal of Finance, 60: 1345–1388. Hamm, J. 2002. ‘Why Entrepreneurs Don’t Scale’, Harvard Business Review, 80(12), 110–115. Hitt, M. A., R. Ireland Duane, and R. E. Hoslisson. 2005. Strategic Management. Thomson South-Western, 174–175. Kimberly, J. R. 1980. The Organizational Life Cycle: Issues in the Creation, Transformation, and Decline of Organizations, eds. J. R. Kimberly and R. H. Miles. San Francisco, CA: Jossey-Bass Publishers. Rose, R. C., N. Kumar, and L. L. Yen. 2006. ‘The Dynamics of Entrepreneurs’ Success Factors in Influencing Venture Growth’, Journal of Asia Entrepreneurship and Sustainability, 2(3): 2006.

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Rubenson, G. C. and A. K. Gupta. 1992. ‘Replacing the Founder: Exploding the Myth of the Entrepreneur’s Disease’, Business Horizons, 35(6): 53–59. Seltz, D. D. 1982. The Complete Handbook of Franchising. Reading, MA: Addison-Wesley Publishing Co., 1. Stevenson, H. H. and J. C. Jarillo. 1990. ‘A Paradigm of Entrepreneurship: Entrepreneurial Management’, Strategic Management Journal, 11(Special Issue): 17–27. Teece, D. J. 1980. ‘Economies of Scope and the Scope of the Enterprise’, Journal of Economic Behavior and Organization, 1(3): 223–247. Thompson Jr., A. A., A. J. Strickland III, J. E. Gamble, and A. K. Jain. 2006. Crafting and Executing Strategy. New Delhi: Tata McGraw Hill Publishing Company, 181. Trautwein, F. 1990. ‘Merger Motives and Merger Prescriptions’, Strategic Management Journal, 11: 283–295. Gaughan, P. A. 2002. Mergers, Acquisitions, and Corporate Restructurings, 3rd ed. John Wiley & Sons.

CONCEPTUAL QUESTIONS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26.

Describe growth challenge perspective. What are the prominent sources of growth? Describe them. Differentiate between strategic and tactical planning and their relevance for business growth. Differentiate between growth, stabilization/maturity and decline phase of growth. What is required to keep growing while a venture is passing through the decline phase of growth? Define SFG rate. Define four key management factors for growth with the help of examples. Define stumbling blocks to growth. What are the ingredients of effective leadership to manage the growth of a venture? Define effective time management strategies for an entrepreneur. What is the relevance of delegation in managing the growth of a venture? What are the preconditions to ensure effective delegation? Why do not entrepreneurs scale up in general? Explain. It has been said that an entrepreneur should be open to continuous learning. What is the relevance of this statement? Explain. Explain the difference between people and organizational strategies for the growth of a venture. What are the key market penetration and market development strategies for growth? Explain. Define franchise as a model for growth. What are the advantages and disadvantages of this model of growth? What are the key advantages that accrue to a franchisee? Explain. How does licensing differ from a franchise? What are the advantages and disadvantages of using exports as strategy for growth? What are the key characteristics of joint ventures? What are the key factors that determine the success of a joint venture? What are the major benefits that result from a merger? Differentiate between horizontal, vertical and conglomerate mergers by giving concrete examples. What are the key advantages of acquisition as a strategy of growth? Define LBO. What are the key advantages of LBO as a strategy of growth?

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CRITICAL THINKING QUESTIONS 1. ‘The ingenuity of an entrepreneur lies in planning far ahead and to prepare himself and his team to respond to the challenges ahead, so as to minimize the adverse impact on business in future.’ What is the relevance of this statement for an entrepreneur in their growth phase? Examine with the help of an example. 2. Identify two concrete examples—one being growth through entering into new markets and another being snatching competitors’ customers to increase market share. Find the difference in the approach for growth that these two entrepreneurs might have gone through. Which one is less challenging out of the two and why? Justify. 3. ‘Each stage requires a different strategy on the part of an entrepreneur, particularly keeping in view the product or service under consideration and the type of market conditions that prevail.’ Consider a company providing IT solutions to the healthcare industry. Identify concrete strategies for its growth in different phases of growth. 4. Consider an example of a company and assume relevant figures required for the computation of SFG rate. Apply the tools of speeding cash flow, cost reduction and price increase to find out their implications on SFG rate. If all the three strategies are applied together, what would be the implication on growth? Justify. 5. ‘A most critical factor that contributes most to the success of a venture is the ability of its initial leadership to foresee and manage effectively new challenges as the business evolves.’ Consider two concrete examples of start-up ventures and analyse the implication of leadership on their growth. 6. Consider a specific example of growth through a franchise in the Indian context. Collect the data related to its growth in terms of number of outlets, manpower, investment and royalty collected over the last five years. What precautions would the franchisor have taken to ensure relatively faster growth when compared with actual growth. Justify your rationale. 7. Consider an example of a merger as a strategy of growth. Analyse the outcome of a merger for three to four years after it took place. Evaluate the success or failure of a merger by identifying concrete reasons. What do you think could have been done differently to ensure better results?  CASE 15.1:  PILANI SOFT LABS PVT. LTD (redBus)  Three young BITSians who were pondering over starting a venture decided to leave their lucrative jobs and start a venture to facilitate booking bus tickets online. The idea had come from the pain point of a large number of youngsters who used to miss their Diwali or Holi with their families on account of non-availability of train reservations. They visualized a lot of scope for organizing the enormous and messy bus travel industry: a service to book bus tickets online or via telephone. Phanindra Sama struggled through Bangalore traffic, desperate to buy a bus ticket to his hometown to spend the holiday with his family. Bus agent after agent were sold out before he reached them. He never made it home. That was the beginning of redBus. Pilani Soft Labs Pvt. Ltd launched a venture named ‘redBus’. Sama decided to bring to those travelling by bus the same convenience that consumers enjoy while booking air travel online. He shared his idea with his BITSian college friends. Some of the (Continued)

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old friends not only agreed to join the venture but were also keen to help out with market research. They wanted to thoroughly check out the idea—with bus operators, consumers and potential investors. The more they learned, the more they saw the value in streamlining a very complicated and disconnected system. Sama explains, ‘Your travel agent may say that the last bus for Cochin today is at 8pm, because that’s the last bus of the operator he works with. That doesn’t mean there isn’t a bus for 10 or 11 pm from another operator. Also, the return ticket is something you’ll get only from the place where you visit.’ redBus provided the solution to all such hassles of booking bus tickets by allowing consumers to look at availability across all the operators and book in advance, even across state lines. ‘We even give a layout of the bus seating, and if you want a return ticket from the present destination, we update our inventory online at the final destination and you can get your ticket,’ says Sama. They basically took a clue for customer convenience from the highly disorganized bus travel industry in India, as bus operators, agents and state transport bus service make it difficult for consumers to purchase tickets with any ease. Until redBus, no company had focused on bringing the pieces together to make it easier for the traveller. On market segmentation, Sama explains, ‘Our customer is anyone who travels by bus, but we do focus on the middle class.’ In order to reach the non-English-speaking and non-Internet travellers, redBus is launching services such as mobile payment systems and call centre services in both English and local languages. Right now, redBus’ competition comes from the bus operators and online travel sites. The bus operators are unorganized, and although they can undercut redBus’ prices—and sometimes do—they do not and cannot offer the convenience. With travel sites not yet focused on this sector, Sama explains, ‘Our services are certainly better than these. And we’re the only ones who offer bus tickets at no extra cost.’ The Indian bus transport industry has long been a highly fragmented and unorganized sector. Some 2,000 private bus operators run about 20,000 buses on long-distance point-to-point routes. The buses are formally known as ‘contract carriages’, and tickets have to be bought in advance. Short-distance ‘stage carriages’ form the other category of buses in India; to ride these buses, commuters buy tickets on the vehicle itself and can get on and off at multiple points. redBus operates in the contract carriage space. Although a few contract carriage operators have large fleets of about 100 buses each, most are small players with 5 to 10 buses. Some firms operate with only one or two buses each. The bus operators are all regional players lacking a countrywide presence. Given the scale of their operations, the majority of them do not offer computerized ticketing or reservations. Instead, the company (redBus) relies on a network of travel agents that handle bookings. Agents are given quotas of seats from the bus operators; they inform the bus company by phone each time a seat is sold to a passenger. After understanding the business in totality, Sama and his two co-founders prepared a business plan that was submitted to a TiE (The Indus Entrepreneurs) mentorship competition. Their plan was appreciated by the experts, and their team was one among the three winners. With the initial seed funding and mentoring provided, the founders launched their portal and service. Once they started turning a profit, they attracted a further $1 million from Seed Fund, an early-stage venture capital (VC) firm. Sama says, ‘When we started raising funds, we had only one office in Bangalore and we had 60 destinations on our schedule. Post angel funds, the company expanded its operations from four more cities in India.’

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The three founders—Sama, Sudhakar Paspunuri and Charan Padmaraju—were classmates from BITS Pilani, and all held jobs at IT multinational companies in Bangalore. They quit to form a company—redBus. Today, redBus consists of more than 63 employees, with a leadership team of five. The company has recently increased the convenience of its services by introducing home delivery of tickets, pick-up points for tickets and mobile phone payment systems. Satyajit Majumdar, professor at the Tata Institute of Social Sciences (TISS), who has been studying redBus closely, is impressed by the problem-solving approach of the co-founders. ‘This industry has been a problematic sector for many years. [Sama] and his team are trying to address both the macro and the micro issues and improves the efficiencies from a holistic perspective.’ Pilani Soft Labs Pvt. Ltd, which runs India’s largest bus ticket booking Web site redBus.in, needs no introduction. The company, launched in 2006, has created an altogether new market only by connecting bus operators and travellers online, a service that was not available earlier. The news is that the company will be hitting the milestone of 3 million tickets sold and ` 150 crore in gross revenues by the end of fiscal year 2011. In addition, it is not just about setting up a Web site to sell tickets. The company is helping the traditional, old economy sector such as the transportation industry use technology in a big way. After achieving a major milestone of selling 30 lakh tickets, Pilani Soft Labs Pvt. Ltd has raised $6 million from Helion Venture Partners, Inventus Capital Partners and Seedfund. This is the third round of funding received by the five-year-old company. Earlier, it had raised $1 million in its angel round from Seed fund and an undisclosed sum from Inventus Capital Partners and Seed fund in July 2009. The latest round of funding was led by Helion Venture Partners, with Inventus and Seed fund participating. However, Helion remains the largest shareholder. Interestingly, Helion is a major investor in Nasdaq—a listed online travel company MakeMyTrip, which owns bus ticketing site Ticketvala.in. However, Ticketvala is not a significant revenue contributor to MMT today. MMT also had a strategic partnership with redBus before acquiring Ticketvala. Helion had previously backed Internet companies such as ad network Komli Media, PubMatic, Jivox and e-commerce firm Letsbuy.com. In the mobile space, it has funded payment gateway Ngpay, voice messaging company Kirusa and SMSGupshup. It is also behind 9.9Media and Getit YellowPages and outsourcing firms Hurix, UnitedLex, Mindworks Global Media Services and ZManda. redBus has increased its gross revenues from ` 30 crores in 2008 to ` 60 crores in the fiscal year ending March 2010, and was expected to reach ` 150 crores for the fiscal year ending 2011. Gross revenues include bus ticket revenues and not just commissions on tickets. In terms of absolute revenues, the redBus Web site brings in 90 per cent of the revenues. Of the remaining 10 per cent, the majority is through distribution system Seat Seller, and about 3 per cent comes from BOSS (Bus Operator Software Service). In terms of volumes, they do more seats in Seat Seller or BOSS, but value-add and revenue per seat are very less compared with what they get through a direct sale. Actually, 50 per cent of their bookings are done over the Internet, 30 per cent through call centres and 20 per cent through Seat Seller. The start-up is focused on scaling up its ticketing site and its software platform Seat Seller for bus operators. It also aids in the computerization of the transport industry. redBus is adding 100 more people in 2011, primarily to its call centre facility. It also runs offline distribution with 75,000 point-of-sale outlets and is expanding across the country. In the beginning of 2011, the company had 300 operators on their network of more than 700 plus. For operators in its network with their own computerized systems, redBus builds the required software interfaces and integrates their inventory of routes and seats into the redBus server. (Continued)

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Operators who use computers but cannot afford costly upfront IT upgrades can use a redBus software offering called ‘BOSS’ through which redBus gets real-time access to the operator’s inventory. In the case of operators who are not computerized at all, redBus acts in the same way as a travel agent: The firm is allocated a certain number of seats and uploads them on its server manually. Once these seats are sold, redBus informs the operators by phone. Currently, only 150 of redBus’ network of 700-plus operators have computerized reservation and route tracking systems. redBus sells seats directly to consumers via its Web site, company-owned call centres and mobile phones. The company also sells through a network of travel agents, post offices, mom-and-pop stores and others. The firm has about 75,000 point-of-sale outlets across the country. The redBus.in Web site features relevant details about fares, seat numbers, seat availability, routes, timings and pick-up points. The information is also available through redBus call centres and partner businesses. The company is aggressively working for pushing the software. Bus operators take it up as a function of the value they get out of it. As they realize its value, they go to Sama and they help them set it up. The company trains the operators to facilitate the process of computerized bookings. Sama says, ‘initially, we have to configure buses, routers, drop points, routes and convert offline data to online. Post that, we deliver central support over phone. Opting out of computerisation has not happened and we are only witnessing people signing up for it.’ The company has increased its bandwidth to sign on more operators. Sama is confident that in a matter of two to three years, every bus operator will be computerized, irrespective of which location they are in. According to him, the whole bus industry is growing fast. As per Volvo, Mercedes or other bus manufacturers, the industry is estimated to grow at the rate of 40 per cent per annum on a year-on-year basis. The growth is further expected to accelerate with roads getting better and better with additional investments taking place to come up with toll roads in association with private partners. redBus has already come a long way. The company launched in August 2006 with two bus operators and a daily inventory of 10 seats covering two routes. It now has a network of more than 700 operators and a daily inventory of 500,000 seats across 2,500 cities in 15 states. redBus also offers the added convenience of home ticket delivery and even accepts payment against delivery. However, convenience, according to Sama, is seen as a given in the redBus model. ‘What we are offering is information and transparency.’ According to Shaheen Qureshi, director of HKB Travels, which has a fleet of 12 buses, ‘redBus has introduced new concepts in our industry. It has freed us from the clutches of the agents and given us a great medium to reach our customers.’ He notes that with redBus, the smallest operator can have the same reach as the biggest one. Yogesh Krishna, proprietor of travel agency Radha Tours and Travels, which has been on the redBus network for the past three years, describes the service as an ‘excellent one-stop shop’. ‘There are a lot of inefficiencies in the bus industry in India and there is tremendous scope for improvements and value additions,’ says Aurvind Lama, co-founder of Travelyaari.com. Vasudevan Ramasamy, co-founder of Ticketgoose.com, another bus ticketing portal, agrees. ‘The Indian bus industry is still very immature and there is a lot more that can be done. Right now all of us are only scratching the surface.’ Travelyaari and Ticketgoose are among several businesses that have joined redBus on the bus ticketing bandwagon. Most have remained regional players, however. Travelyaari, which Mantis Technologies set up in 2008, has a network of 75 bus operators and operates primarily in Gujarat and Maharashtra. Ticketgoose was launched in August 2007 by software company Efficsys InfoTech India. It has a network of 150 operators and offers services only in Karnataka

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and Chennai. Ticketvala.com, set up by Travis Internet in June 2009 and funded by Footprint Ventures, was acquired by MakeMyTrip.com in February this year. ‘At a surface level, the redBus model seems to be easy to replicate but getting this scale of operations is very difficult. The aggregation capabilities and the operational efficiencies of the redBus team are their core competencies,’ notes Majumdar of the Tata Institute. JumpStartUp’s Anandaram suggests that the ‘key value’ of redBus is in the relationships it has built. ‘They have been able to successfully and respectfully negotiate with the bus operators and the agents. If the chemistry had not been there, the arithmetic would not have worked. That is the greatest entry barrier for anyone else.’ According to Bharati Jacob, managing partner at VC firm Seed fund—the first VC fund to invest in redBus—‘given the amount of capital it has used and the scale it has achieved, redBus is the most capital-efficient company in the Indian travel industry’. Jacob points out that redBus has built an ‘excellent brand’, but has spent only $250,000 on marketing till now. ‘That’s a fraction of the marketing spending of some of the other online travel brands,’ she says. Helion Ventures Partners and Inventus Capital Partners are the other investors in redBus. Out of the total VC funding of some $2.5 million, redBus still has $1.5 million left. Going ahead, the main areas of investment will be to scale up the current operations, says Sama. Plans include increasing the 200-plus employee pool, setting up regional hubs and increasing the number of call centres. Getting operators hooked into the company’s software offerings, strengthening marketing and brand building will also be key focus areas. Sama is also exploring endeavours including setting up bus lounges for passenger convenience and comfort. Although other players have entered the sector, the growth potential in the bus transport industry is enormous, Sama points out, ‘The per capita consumption [use] of air-conditioned [buses] in India is estimated to be one per 100,000. Compare this to 10 per 100,000 in China, 60 per 100,000 in America and 180 per 100,000 in South Korea. We have a long way to go.’ Jacob of Seed fund agrees, ‘With improvements in road infrastructure and increased Internet penetration, this industry will only grow.’ Jacob suggests that the redBus team now needs to focus strongly on increasing its geographical footprints, strengthening the brand and mining the existing customer base. ‘They need to get into customer analytics and come out with segmented products,’ she says. Anandaram of JumpStartUp notes that bus transportation is a very transaction-heavy business and ‘one big challenge is to ensure that the relentless focus on execution and service quality continues even as operations expand’. TISS’ Majumdar says that as redBus moves into the next orbit of growth, ‘its leadership capabilities and management bandwidth will determine its success’. Not everyone is convinced that the redBus model is viable in the long run. Travelyaari’s Lama says offline distribution is not a viable strategy, as ‘it increases the operational costs’. Sama agrees that managing offline services is challenging, but says that redBus is trying to serve a diverse consumer base. Pointing to the Nasdaq-listed Chinese travel company C-Trip, which has call centre operations with more than 4,000 people, Sama says, ‘as long as we can remain profitable we will offer the offline booking and home delivery service to customers. We want to rewrite the rules in the Indian bus industry.’  Questions  

1. What are the key challenges that Pilani Soft Labs Pvt. Ltd is going to face in the next 10 years? (Continued)

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2. What are the key strengths that have pushed the growth of the company so far? Analyse them. 3. Does one think the strategy to raise multiple rounds of funding was well thought out and prudent from the growth point of view? Justify your answer. 4. What would be the key strengths of redBus to grow in future? 5. Does one agree with Bharati Jacob’s, managing partner at VC firm Seed fund, suggestion to redBus for future growth? Analyse critically.  Endnote 

1. Developed based on articles from the following Web sites—http://www.vccircle.com/ 500/news/redBus-sells-3-million-bus-tickets-online-says-ceo-phanindra-sama; http://knowledge. wharton.upenn.edu/india/article.cfm?articleid=4526; http://www.nenonline.org/startup-profile/ pilani-soft-labs-pvt-ltd

 CASE 15.2:  ESSEL SHYAM COMMUNICATION LTD (ESCL)  Essel Shyam Communication Ltd provides telecom/IT and media broadcasting technology services for enterprises, broadcast and media companies, governments and security agencies. Its telecom services include shared hubs, customized telecom networks and broadband; broadcasting and media services include local or remote teleport facilities, satellite, origination and play out, MCPC platform and outdoor broadcasting. The company also provides knowledge process outsourcing services for multimedia, healthcare and pharmaceutical, biotech, genetic engineering, design and legal markets; BPO services in areas such as NOC support, managed IT, travel, healthcare, media and broadcasting, HR, legal and general marketing. In addition, it offers IT services, which include Internet and software support and development, as well as remote infrastructure management, technical support, enterprise resource planning, media technology, data centre, network management, e-governance and software design services. Further, the company provides RFID managed business, project management and system design and integration services for telecom, media broadcasting and call centre BPO projects in India and internationally. The company was founded in 1996 as Essel Spacelinks Limited and later on, its name was changed to Essel Shyam Communication Ltd in April 1997. The company is based in Noida, India. Essel Shyam Communication Ltd operates as a subsidiary of Essel Group and Shyam Telecom Ltd. The company was promoted by the Essel Group of companies through its group company Rama Associates Ltd (RAMA) and Shyam Group of Companies, through its group company Shyam Microsat Private Ltd (merged with Shyam Basic Infrastructure Projects Private Ltd) (SHYAM). Essel Shyam Communication Ltd is a 50:50 joint venture between Essel Group and Shyam Group. It had started commercial operations in March 1998 with pure play VSAT connectivity services, and it now offers a full range of VSAT/Telecom services along with Media Broadcast services and BPO/KPO services. The company is now a multi-faceted technology aggregator cum

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solutions provider. The company has a good client base spread across different industries such as print media, satellite channels, cable TV networks, manufacturing, stock brokers, PSUs and State Governments. It has developed a niche in this area by innovating new market segments in the areas of media and entertainment (video streaming) along with a variety of new innovative businesses around media, telecom and related IT. Subsequently, after 2006, the company diversified its operations into business, technical and knowledge process outsourcing. They obtained an Internet License (Category A) to establish, maintain and operate Internet services throughout the country. They also obtained a license from the Ministry of Information and Broadcasting for providing SNG/DSNG services to various broadcasters for live coverage of events. Today, they operate or manage DSNG van fleets for several premier Indian news channels. Recognizing the potential of ubiquitous broadband service in the growth of GDP and enhancement in quality of life through societal applications including tele-education, tele-medicine, e-governance, entertainment and employment generation by way of high-speed access to information and Web-based communication, the Government has finalized this policy to accelerate the growth of broadband services. Essel Shyam, a Telecom/IT and Media Broadcasting Technology service provider, has customized solutions for Internet and telecommunication using state-of-the-art technologies. The solutions are designed for the specific business needs of their customers in various segments, including enterprises, small, medium and large; broadcast and media companies; Government; security agencies and various other customers.

 Market  VSAT technology was used commercially for the first time in 1980 by Equatorial Communications, USA, for providing commodity news service on one VSAT. By 1984, more than 30,000 earth stations were installed for numerous data broadcasting networks all over the world. Interactive VSATs became commercial in 1984 when high-speed facsimile was introduced by Federal Express, USA. This resulted in extensive applications development using VSATs in ‘C’ Band, ‘KU’ Band by Equatorial Communications, AT&T, GTE Spacenet, Hughes Network, Scientific Atlanta and COMSAT STM Wireless. The average annual growth in the VSAT market in the European nations was 20 per cent in 1997 with higher growth rate being in developing countries. VSAT systems find applications in diverse fields such as banks and financial institutions, manufacturing industries, retail and distribution, government organizations, defence and security systems and oil and mining. In terms of market potential, India is one of the biggest markets for VSAT service providers. Huge geographical spread, low tele-density and a strong demand for reliable communication infrastructure will give a big push to the VSAT market in India. VSATs were first introduced in India in 1985 when district headquarters and state capitals were connected with New Delhi using NICNET, India’s first network that used VSATs. The real growth came in 1995, when the industry was opened to private players. However, a series of roadblocks resulted in the industry fighting for revenues, and it is only now that things are on the upswing once again for VSAT players. Looking at the emerging opportunity, ESCL entered into the market at the most opportune time, that is, 1998. The VSAT applications have demonstrated an unprecedented growth, especially from 2005 onwards in India. The industry is growing at a steady pace of 20,000 terminals on a year-to-year (Continued)

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basis, especially as an outcome of technological developments. India can see a penetration of more than 5 million VSATs in the next 10 to 15 years across enterprises, government, SMEs and consumer segments. The VSAT installations touched 123,807 in fiscal year 2009–10 from 101,773 in 2008–09, that is, a growth of 21.7 per cent. Bharti Airtel grew by 21 per cent with a market share of 31 per cent. Its nearest competitor Hughes showed 20 per cent growth and commands a market share of 29 per cent. Hughes also got some path-breaking assignments in the last fiscal year—a huge order for ` 40 crores with the Indian Navy. ISRO is planning to put satellites, especially for this. The deal is important given the fact that it will be connecting submarine aircrafts. In the field of distance education, Hughes dominated by securing orders with Edusat and Educom. Through 2,500 VSATs of Hughes, 19 movies per week were screened and live IPL matches were telecast. The launch of the DVB-S2 technology by Hughes in India with the latest ACM/AIS on its HX platform is an important technology breakthrough. This offers customers high QoS bandwidth to run their core applications.

 Financial Balance Sheet of ESCL  The company has grown fast as evident from the average annual growth in revenue of 49.5 per cent between 1998 and 2010. The company has been earning cash profit from the very first year of its operations. The compound average annual growth in cash profit has been at 90.1 per annum between 1998 and 2010 (Table 15.3). The company has been private limited and by not paying dividend has been conserving internal generations for growth purpose. It appears that the company was planning to come up with a public issue in the latter part of 2006, as evident from having declared dividends between 10 per cent and 25 per cent between 2001 and 2006. The company incurred net loss during the first two years of its operations. However, subsequently, it has been consistently earning profits. The company’s net margins were adversely affected in 2003 and 2009 but again could earn as high as 18.86 per cent net profit margin in 2010 (Table 15.5). Reserves and surpluses of the company have increased from ` 1,505 lakhs in 2001 to ` 11,528 lakhs in 2010. The company’s net block increased from 1,453.1 lakhs in 1998 to 6,786.7 lakhs in 2010, that is, an increase by 4.67 times within a period of 12 years (Table 15.4). The company’s growth has been driven by internal generations and loans, as evident from loans outstanding having increased from ` 846.15 lakhs in 2001 to ` 5,465.13 lakhs in 2009, and thereafter having come down to ` 4,502.7 lakhs in 2010. It appears that the company is likely to be debt free soon.

 Growth Strategy  Being a niche player in the technology and communication services, the company’s business strategy focuses on the following points:  providing value-added VSAT/RF telecom services, teleport services, SNG/DSNG, BPO, KPO and IT services using a mix of technologies with state-of-the-art equipments  servicing the high-end requirements of customers through direct interaction and tailor-made solutions to suit their specific requirements  providing end-to-end solutions on a turnkey basis to the media and entertainment sector  constantly innovating new technologies to ensure lowest downtime, quickest uptime and quality communication through satellites

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2010

Equipment sales 3,191 Service income 6,750 Other income 606 Total revenue 10,546 Direct costs 2,511 Gross margin 8,036 Opex 4,713 Ebitda 3,323 Finance cost 167 Cash profit 3,155 Depreciation incl misc exp W/off 868 Profit/loss before tax 2,289 Provision for tax 432 Deferred tax −132 Previousperiod expenses – Profit/(loss) after tax 1,989 Dividend Rate

Particulars

519 −195

−19

466 212

771

1,391

−8

1,717

1,449

–

174 8

631

790

1,020

1,210

565

3,755 77 7,553 2,778 4,775 2,562 2,213 437 1,775

4,718 170 9,756 3,516 6,240 3,487 2,752 405 2,348

6,453 288 12,962 5,568 7,394 4,750 2,644 405 2,239

3,721

2007

4,867

2008

6,221

2009

669 25%

25%

–

101 45

815

354

2,384 71 3,108 418 2,690 1,273 1,417 248 1,169

653

2005

618

39

98 −8

751

428

3,077 34 5,387 1,905 3,482 2,074 1,408 230 1,179

2,275

2006

20%

518

77 51

646

268

2,134 12 3,306 814 2,492 1,379 1,113 199 914

1,161

2004

15%

120

28 81

229

274

1,252 15 1,964 429 1,535 857 678 175 503

696

2003

For the Year Ended 31 March (` In Lakhs)

Table 15.3 Essel Shyam Communication Ltd—Financial Highlights

13%

262

20 –

282

194

1,088 8 1,824 447 1,377 777 600 124 476

729

2002

5

10%

222

–

227

156

994 15 1,468 346 1,122 571 551 168 383

459

2001

–

156

20 –

176

150

780 20 1,317 330 988 474 513 188 326

516

2000

–

−144

(Continued)

–

−11

– –

−11

−144 – –

12

39 9 85 45 40 33 6 5 1

37

1998

148

484 14 1,971 1,230 742 607 135 131 4

1,473

1999

Share capital Share application money Reserves and surplus Deferred tax liability Total shareholders’ fund Secured loan Unsecured loan Total loan fund Fixed assets Gross block Net block including WIP Investment Current assets Current liabilities Net current assets

Particulars

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8,995 184

12,036 1,899 3,566 5,465 9,953

6,788 85 14,414 3,823 10,591

172

14,757 2,000

2,503

4,503

9,996

6,787 85

14,014

3,247

10,767

–

–

11,528

2,857

2009

3,057

2010

4,526

4,578

9,104

5,516

8,145

4,686

2,694

5,516 1,992

3

3,562

204

1,746

2008

3,153

3,614

6,766

4,634

6,638

3,955

1,579

4,019 2,376

178

1,891

204

1,746

2007

1,913

2,930

4,843

3,163

4,601

2,448

840

2,807 1,608

171

1,463

300

873

2006

1,126

2,033

3,158

3,075

4,206

2,131

522

2,269 1,609

184

1,066

147

873

2005

642

2,194

2,837

2,505

3,592

1,590

458

1,777 1,132

140

646

119

873

2004

24

1,088

1,112

2,477

2,994

1,468

355

1,197 1,113

83

321

93

700

2003

97

825

922

1,946

2,232

1,186

382

1,123 805

–

408

15

700

2002

364 634

−418

998

1,194

1,504

1,123

–

811 1,123

–

1

280

530

2000

1,313

895

1,117

1,629

846

–

2,216 846

1

1,505

15

695

2001

380

544

924

1,339

1,500

1,066

–

810 1,066

–

–

280

530

1999

308

–

700 308

–

–

170

530

1998

−460

796

336

1,453

1,457

Table 15.4 Essel Shyam Communication Ltd—Financial Highlights Balance Sheet as on 31 March (` in Lakhs)

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3.6 1.6

–

4.1 −79.1

5.9

10.0

11.2

21.7

18.86

5.3 −2.0

6.1

8.2

14.3

17.6

6.5

100.0 36.0 64.0 35.7 28.2 4.1 24.1

100.0 43.0 57.0 20.4 47.5 3.1 17.3

100.0 23.8 76.2 44.7 31.5 1.6 29.9

2008

Total revenue Direct costs Gross margin Opex Ebitda Finance cost Cash profit Depreciation incl misc exp W/off Profit/loss before tax Provision for tax Deferred tax Previousperiod expenses Profit/loss after tax

2009

2010

Particulars

11.5

0.7

−0.1 13.5

1.8 −0.1

13.9

7.9

100.0 35.4 64.6 38.5 26.1 4.3 21.9

2006

14.4 0.1

16.0

7.5

100.0 36.8 63.2 53.7 29.3 5.8 23.5

2007

21.5

3.2 1.5

26.2

11.4

100.0 13.5 86.5 40.9 45.6 8.0 37.6

2005

15.7

0.0

11.9 1.5

19.5

8.1

100.0 24.6 75.4 41.7 33.7 6.0 27.6

2004

6.1

0.0

1.4 4.1

11.7

13.9

100.0 21.8 78.2 43.7 34.5 8.9 25.6

2003

14.3

1.1 –

15.5

10.7

100.0 24.5 75.5 42.6 32.9 6.8 26.1

2002

15.1

0.4 –

15.5

10.6

100.0 23.6 76.4 38.9 37.5 11.4 26.1

2001

11.8

11.5

13.4

11.4

100.0 25.0 75.0 36.0 39.0 14.2 24.7

2000

(Continued)

−12.9

−12.9

−7.3

−7.3

14.6

100.0 53.4 46.6 39.4 7.2 5.5 1.7

1998

7.5

100.0 62.4 37.6 30.8 6.8 6.6 0.2

1999

Table 15.5 Essel Shyam Communication Ltd—Percentage of Expenses and Margin to Revenue for the Year Ended 31 March (%)

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 Challenges  In spite of the accelerated growth, the industry is saddled with a number of challenges, such as the following:  Import equipments for importing VSATs require number of clearance from the government because of security concerns.  Private players in the industry are in a disadvantage, as USO funds get given to BSNL only. Private players feel that they do not have a level playing field, and, therefore, government subsidies should also be given to private players.  An industry expert feels that the dish size should be reduced to 50 per cent. The reason that the United States has the world’s maximum number of VSATs is because the dish sizes of the VSATs are comparatively smaller, which has subsequently allowed the penetration in houses as well. VSAT deployment needs to be made easy similar to set-top boxes.  Introduction of newer technologies such as 3G and BWA will pose an added challenge to existing operators. Overall, the regulatory environment remains the biggest hurdle. Other challenges that are looming large are capex for VSAT networks, poor infrastructure, providing better SLAs, visibility in terms of uptime and overall value for money. Fluctuating dollar price can also escalate the already existing pressure on the industry.

 Brief Profi le of Board of Directors  The company is managed by professionals since its inception. As per the Memorandum and Articles of Association, ESCL shall have a minimum of 3 and a maximum of 12 directors on its board. In terms of a joint venture agreement entered into between RAL and SMPL, the board of directors of ESCL will be on the basis of proportionate shareholding. However, a shareholder having less than 10 per cent of equity would not be entitled to the board-level representation. The chairman of the board of directors will be nominated by each of the SMPL and RAL on a rotating basis, for a tenure of two years at a time.

 Brief Profi le of the Directors  Lalit Jain, M, LLB, FICWA, has more than 25 years of extensive experience in various reputed Indian companies. He has been associated with multidisciplinary functions covering financial, costing, commercial, legal and administrative matters besides general management. Jain has been involved with the operations of ESCL from its inception and has been largely involved in liasioning with various government authorities and marketing of the services of the company. Mahendra Nath Vyas is an M.Tech. from Indian Institute of Technology (IIT), Mumbai, with specialization in Microwave and Satellite Communication. He has 25 years of experience in the field of Satellite Communication. Vyas started his career as a design engineer in ISRO, where he developed a sub-system for India’s first communication satellite transponder APPLE, which is in use now in the current INSAT Satellite. He was later on associated with various defence VSAT networks during his tenure with India’s leading electronic company, Bharat Electronics Limited. He had managed complex Digital SCPC VSAT Networks in India. He is also an RFID+ certified professional. Vyas has also been involved right from the inception of the company.

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Amitabh Kumar is currently the director (Corporate Technology) for the Essel Group. He is responsible for advising the Essel Group Companies, including Zee Telefilms, Siticable and other group companies on technology and new projects. He is also responsible for the Broadcast Network of Zee with broadcast centres at Noida and Singapore as well as its International Broadcasting Network. He was earlier with VSNL as director (Operations), acting chairman and managing director and was responsible for the growth of the Internet and the launch of Satellite Broadcasting from the Indian soil among other initiatives. Sanjeev Kumar Kakkar is an M.Tech from Delhi University and has rich experience of more than 15 years in Communication Technology. He was earlier working with Shyam Telecom Ltd, as vice president, R&D Department, and is currently working as vice president with Shyam ACeS India (P) Ltd. Subhash Chander Dhingra is an MBA and FICWA. He has more than 35 years of experience and has held positions at senior levels in leading PSUs, regulatory bodies and companies. He brings with him the knowledge and experience of operating in a vast canvas. Vinod Kumar Bakshi is a postgraduate in Public Administration and has rich experience of more than 30 years in domestic and overseas marketing, administration, advertising and public relations. He is a member of the Central Film Censor Board. He had been involved with various organizations in the business of broadcasting, such as BBC, and has also won several awards from various creative organizations.  Questions 

1. What have been the key secrets of the accelerated growth of Essel Shyam Communication Ltd? Analyse them. 2. Analyse the financial statements critically to identify the parameters that have resulted in accelerated growth of the company. 3. What would be the key challenges for the business growth of a company in the future? 4. What strategy is the most desirable to achieve accelerated growth in the coming years? Justify your answer.  Endnote 

1. Developed based on the information given in http://investing.businessweek.com/research/ stocks/private/snapshot.asp?privcapId=29694095; Bloomberg Businessweek; http://www. sebi.gov.in/dp/esseldraft.pdf

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16

Start-up to Going Public  LEARNING OBJECTIVES    To know about what an IPO (initial public offering) is.  To understand the relevance of when and why to go for an IPO.  To know about the steps involved in the issue of an IPO.  To learn about the advantages and disadvantages of issuing an IPO.

 To know about the different categories of investors in the market.  To know about the different criteria that are used for the selection of intermediaries to the IPO.  To learn about prominent marketing strategies for coming up with an IPO.

Gordon Earle Moore, Co-founder, Intel Corporation There is such a thing as a natural-born entrepreneur, for whom the entrepreneurial urge drives everything, and who can make a business out of almost anything. But the accidental entrepreneur like me has to fall into the opportunity or be pushed into it. Then the entrepreneurial spirit eventually catches on. —Gordon Earle Moore

Gordon Earle Moore was born on 3 January 1929 in San Francisco, California, USA. He is the co-founder and chairman emeritus of Intel Corporation and the author of Moore’s, which was published in Electronics  Magazine in April 1965. It has become the guiding principle for the industry to deliver ever-more-powerful semiconductor chips at a proportionately lower and lower cost. His computer chips are used in almost all computers across the globe. He received a BS degree in Chemistry from the University of California, Berkeley, in 1950 and a Ph.D. in Chemistry from the California Institute of Technology in 1954. He co-founded Intel in 1968, initially served as executive vice president, subsequently took over as president in 1975 and thereafter became the chairman of the board and chief executive officer (CEO) in 1979. He was designated as chairman emeritus of Intel Corporation in 1997. He is the recipient of the National Medal of Technology and the Presidential Medal of Freedom, United States’ highest civilian honour. Moore and his wife donated $600 million to Caltech, the largest gift ever in 2001, to keep Caltech at the forefront of research and technology. He received the Bower Award for Business Leadership in 2002. He was elected a Fellow of the American Association for the Advancement of Science in 2003. He was conferred with the IEEE Medal of Honour for ‘pioneering technical roles in integrated-circuit processing, and leadership in the development of MOS memory, the microprocessor computer and the semiconductor industry’ in 2008.

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Intel became a publicly traded company after coming up with an IPO in 1971, when it raised $7.2 million by selling 307,000 shares. Its present market worth is more than $123 billion. The company is nine times the size of its main rival—Advanced Micro Devices—and has consistently dominated the $30 billion computer microprocessor industry for many years. Its share qualifies as the top 40 dividendgrowth stock in the market.

 16.1  INTRODUCTION  Every start-up venture would like to reach the stage of becoming a gazelle and come up with public issue at the earliest to give a major boost to the venture. Every entrepreneur wishes and works for turning a small-seeded venture into a multi-million or -billion dollar enterprise such as Google, Yahoo, Apple, Microsoft, Biocon, I-flex and Twitter. However, very few achieve this excellence that takes them to this stage of venture development, as doing so is not an easy task. The fact is, even if start-ups have a good idea to bank on, they often lack vital resources, including finance and have to compete with well-established companies, and have little or no track record to attract customers and investors. Therefore, before these ventures succeed, they have to go through a tedious journey to reach a stage of public offering of equity that would spontaneously get subscribed by the public. Mukti Khaire believes that small companies can grow by developing intangible social resources such as legitimacy, status and reputation. ‘These social resources are acquired by mimicking the structures and activities of established firms, and by affiliating with high-status customers respectively.’1 Whatever we have discussed in the previous chapters focuses on having an idea, and making cash out of it is a difficult journey involving product development, having effective execution skills, handling well the marketing problems to create a market for the product and, above all, building credibility in the market in the minds of customers. It is this credibility in the minds of customers that leads them to purchase and use the product and helps in sailing through different stages of funding rounds from bootstrapping, to seed, to angel, to venture capital, to banks and, ultimately, to IPO (Fig. 16.1).

Good Idea

Credibility in the Market

Developing Intangible Social Resources

Helps in Sailing Through Different Funding Rounds Including IPO

Figure 16.1 A Successful IPO Requires Credibility in the Minds of Customers

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Raise Capital for Expansion of Business

Diversify the Business

Exploit Favourable Market Opportunity

Facilitate Acquisitions

Assess the Firm’s Market Value

Make the Firm’s Shares More Liquid

Place Company in a Greater Limelight in the Eyes of Different Stakeholders

Figure 16.2 Different Motives to Come Up with IPOs

The decision to go public is one of the most crucial decisions to be made by private firms. Deciding to go in for public issue could emanate from many motives such as to diversify the business, to raise capital for expansion of business, to exploit a favourable market opportunity, to facilitate acquisitions, to assess the firm’s market value, to make the firm’s shares more liquid and, above all, to place the company in a greater limelight in the eyes of different stakeholders (Fig. 16.2). One complicating factor in the IPO decision is that the private firm’s future cash flow is highly uncertain, which makes the firm’s valuation difficult.2 Therefore, going public to raise capital is not possible for all ventures. The choice is basically with a company that has established a good track record of financial strength over the years, duly backed up by cash flows. Above all, the company and its products/services should be well accepted in the market and have an image in the mind of the customer to reckon with against the competitors. The stringent requirements for IPOs leave out most companies, including those that do not have audited financials for the past several years, as well as those that operate in slow-growing or obscure industries such as car washes and paper clip manufacturing.3 Above all, one should remember that coming up with an IPO is a time-consuming process involving regulatory clearances and executing a plan to come up with it and, therefore, it is not a source capital, in case the entrepreneur needs it immediately.

16.2  WHAT IS AN IPO? The first-time sale of securities of a company under the regulations governing a public company is called ‘IPO’. Thus, it is called an ‘offering’ or ‘floatation’, when a company issues common stocks or shares to the public for the first time. They are usually issued by fast-growing small and young companies seeking capital to expand their operations or large privately owned companies looking for trading their shares publicly. It is the price at which a company offers to sell its stock for the first time when it shifts from being privately owned to publicly owned.

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First-time Sale of Securities of a Company Under the Regulations Governing a Public Company Is Called ‘IPO’ Money Collected Through Public Money Raised Is Requires Listing Offering Remains Not Required to with the of Shares on Be Repaid to Company to Be Stock Exchanges Investors Used for WellDefined Purposes

Figure 16.3 Salient Features of IPO When a company goes in for listing its shares in a public exchange for the first time, the money so collected from investors for the newly issued shares remains with the company to be used for specified well-defined purposes, as highlighted in the prospectus for a public offering (Fig. 16.3). As against this, when shares get traded on a stock exchange among investors, the money is exchanged between investors. Thus, an IPO allows a company to tap a wider pool of investors to tap capital for future growth by investing in fixed assets, repayment of debt or working capital requirements. A company having issued common shares to the public is never required to repay the capital to investors. It is important to remember that an IPO dilutes the equity stake of owners by offering the shares to the public. Coming up with an IPO is used both as a financing strategy to expand and grow the business as well as an exit strategy. IPOs generate lot of interest among the public because they have the potential to provide significant gains in future, although they are relatively riskier. They also provide a significant liquidity opportunity for early investors, including founders, privately placed equity holders and venture capital (VC) investors.

16.3  WHEN TO GO FOR AN IPO? Before taking a view to go in for an IPO, the company should ensure that it is ready to go in for an IPO. The company should be large enough as evident from its past performance of sales and profits or solid future prospects for growth in the earnings and sales. The present earning capacity of the company coupled with future earnings prospects also determine valuation of the company and, in turn, the price of the shares at which it should be floated to the public. Every company while going for an IPO would like to fetch as high a price as possible for its share, that is, premium. Above all, for successfully tapping, the public requires a good track record of performance as evident from the financial position of the company that investors weigh a lot before subscribing to the issue. Before going in for an IPO, the company should start making preparations at least one to two years in advance by preparing detailed financial statements with all details backed up by a good business plan giving past performance and future plans duly supported by projected working results, balance sheet and cash flow statements. Having decided to come up with an IPO, one needs to put in place an ‘IPO Team’ that would include an investment banker, a law firm and a chartered accountant firm that guide the company in complying with regulatory and other requirements (Fig. 16.4). Next, the

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Investment Banker ‘IPO Team’ to Guide the Company in Complying with Regulatory and Chartered Other Accountant Requirements Law Firm Firm

Figure 16.4 Constituents of Investment Team for IPO

IPO team convenes a meeting called ‘all hands’ meeting, which takes place about six to eight weeks before a company officially registers with the Securities and Exchange Board of India (SEBI). At this meeting, all members chalk out a time plan for going public and assign specific duties to each member of the team. Thereafter, the work on developing the prospectus begins, which is a business document that covers various details as stipulated by SEBI for the benefit of all stakeholders including investors, company law board and government. Other than the preparation on the part of the company to go public, depending on fund requirements for business growth, the entrepreneur needs to take care of the theory of ‘rational IPO waves’ of Pástor and Veronesi. As per this model, every entrepreneur observes time-varying market conditions before deciding when to go public, because it matters a lot for a public issue to get well subscribed—an indicator of an IPO’s success. The IPO waves arise, because many entrepreneurs find it optimal to go public after market conditions have improved. It may not be the right time for a venture to come up with an IPO when the economy is passing through a downturn or certain specific industries related to the firm under consideration are passing through a difficult phase. For example, the dot.com burst has cautioned, in general, high-profile tech start-ups while going in for an IPO as compared with raising funds through venture capitalists or private placements. It is evident from some of the leading ventures such as Yelp and Facebook who have gone in for raising capital through VCs and remaining private as against preferring a route of going public. The company should also assess clearly the urgency of fund requirements in terms of quantum, timings and cost vis-à-vis all other options available. The greater the profit-earning capacity of the company, the lesser would be the percentage of equity that existing promoters would be required to give up for each unit of proposed investment. Thus, it is important for an entrepreneur to assess urgency and the cost they have to pay for raising money from different sources before deciding about which would be the better option to take. Even from an exit perspective, some companies feel that publicly held companies have to go through a kind of scrutiny and market responses to different news items about them that may result in a far greater adverse impact. However, selling a company may be a better option than going in for an IPO, as

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is evident from Associated Content that was bought by Yahoo for $100 million; social gaming company Playdom, bought by Disney for $763 million, and marketing software company Aprimo, acquired by Teradata for $525 million, after pulling out its IPO in 2008 are some other good examples.

16.4  STEPS INVOLVED IN ISSUING AN IPO The first step is to develop a house team of professionals conversant with expertise in different areas of issuance of IPO and appoint a merchant banker. They should have valid SEBI registration to act as merchant banker. A merchant banker’s role can be accepted by any of the following people—lead manager, co-manager, underwriter or advisor to the issue. Certain guidelines are laid down in Section 30 of the SEBI Act, 1992, to be fulfilled for acting as merchant banker. The merchant/investment banker helps in getting underwriting commitment for the size of the issue from different investors, which is one of the key prerequisites for getting regulatory clearances. Underwriters act as financial intermediaries between companies and the investing public. The biggest underwriters are Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, Lehman Brothers and Morgan Stanley, State Bank of India, IDBI Bank and ICICI Bank. The company and the merchant banker hold a number of meetings to negotiate on various issues such as amount of money a company proposes to raise through IPO; the type of securities to be issued—debentures, convertible debentures, equity and all relevant terms and conditions pertaining to the underwriting agreement. The price of the issue is decided by the company along with lead managers to the issue. This requires a lot of market research to be undertaken along with road shows before arriving at the appropriate price for the IPO. This decision is very critical, as the company runs a high risk of IPO failure if the premium sought is far higher than the real worth of the stock.

Structuring of IPO Deals The IPO deals are structured in different ways depending on the company under consideration and  the associated risks. It could have a firm commitment under which the underwriter guarantees that  a certain amount will be raised by buying the entire offer and then reselling to the public. However,  under best efforts agreement, the underwriter agrees to sell securities for the company but does not  guarantee the amount to be raised. Above all, investment bankers do have their own apprehensions  to  accept  total  risk  of  an  offering  and,  therefore,  prefer  to  share  the  risk  by  involving  a  group  of  underwriters called ‘Syndicate’. One of underwriters takes a leading role, and the others accept a part  of the underwriting commitment, depending on their risk perception.4

After the involved parties agree to the deal and its terms and conditions, the investment bank prepares an offer document to be filed with the SEBI for its approval. This document provides all relevant details on the issue such as financial statements, management background, any legal problems, contingent liabilities, purpose of issue, future projected performance, shareholding pattern before and after the issue and firm allotments, if any. The SEBI takes a cooling off period, to find out and assure that all required material information is disclosed and is correct. Its main role is to validate the content of the prospectus. After doing so, the SEBI approves the offering, and an effective date is

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announced for coming up with an IPO when the stock will be offered to the public. The date of the issue is finalized by the company in consultation with the lead managers, registrar of the issue and stock exchanges. After approval of the draft document by the SEBI, it takes the shape of an ‘offer document’. It is submitted to the registrar of the issue and stock exchanges where the issuer company is willing to list. After getting clearance from stock exchanges, the issuer company adds issue size and price of the issue to the document and makes it available to the public. This document released for the public is called the ‘Red Herring Prospectus’. After the IPO issue is opened for the public, investors bid for it within a stipulated time frame for which the issue is kept open. The subscription list for public issues is kept open for at least 3 working days and not more than 10 working days. In case of book building issues, the minimum and maximum period for bidding will be open for three to seven working days extendable by three days in case of a revision in the price band. However, the public issue made by an infrastructure company, satisfying the requirements, may be kept open for a maximum period of 21 working days. Under book building public issue, the company decides a price band that contains an upper level and a lower level. It is a process undertaken by the company in which a demand for the securities proposed to be issued by the company is elicited and built up, and the price for the securities is decided based on the bids received for the quantum of securities offered for subscription by the issuer. This method helps in price discovery of the share, as it provides an opportunity to the market to discover the price for securities based on demand supply forces. Floor price is the minimum price at which bids can be made for an IPO. However, investors can bid for the book building IPO at any price in the price band decided by the company. In the book building process, retail investors have an additional option called ‘cut-off’ price for bidding. If the investor opts for a cut-off price, it implies that the investor is ready to pay whatever price is decided by the company at the end of the book building process. However, at the time of subscription, investors opting for it have to pay the highest price in the stipulated price band. If the company decides that the final price is lower than the highest price asked for the IPO, then the remaining amount is refunded to the retail investor. Depending on the bids received, the lead manager evaluates the final issue price and sends it to SEBI and stock exchanges. After allotment of the shares, the lead manager, with the help of the stock exchange, decides the issue listing date, and the shares get listed on stock exchanges. The registrar of a public issue is the prime body that takes all crucial steps for processing IPO applications, allocating shares to the applicants based on SEBI guidelines and processing refund orders. They are an independent financial institution registered with SEBI and stock exchanges. A company coming up with IPO can reserve some shares on ‘allotment on firm basis’ for some distinct categories of investors as defined in Disclosures and Investor Protection (DIP) guidelines. It implies that a certain proportion of total issue size can be allotted on firm basis to a specified category of investors. The shares to be allotted on ‘firm allotment category’ can be issued at a price different from the price at which the net offer to the public is made. However, the price at which the security is being offered to the applicants in the firm allotment category has to be higher than the price at which securities are offered to the public. Lead managers are an independent financial institution appointed by the company for issuance of an IPO. Depending on the size of the issue, more than one lead manager can be appointed as per the guidelines of SEBI. Their main role includes road shows that market the issue, creating a draft offer

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document and getting it approved by SEBI and stock exchanges and helping the company to list shares in the stock market. There are four broad categories of investors (Fig. 16.5), namely, retail individual investors (RIIs), high net worth individuals (HNIs), non-institutional investors (NIIs) and qualified institutional bidders (QIBs). A retail individual investor cannot apply for more than ` 1 lakh in an IPO. Retail individual investors have an allocation of 35 per cent of shares of the total issue size in book build IPOs. NRIs who apply with less than ` 100,000 are also considered as RII category. If a retail investor applies for more than ` 100,000 of shares in an IPO, they are considered as HNI. Individual investors, NRIs, companies and trusts who bid for more than ` 1 lakh are known as ‘noninstitutional bidders’. They need not register with SEBI such as RIIs. Non-institutional bidders have an allocation of 15 per cent of shares of the total issue size in book build IPOs. Financial institutions, banks, FIIs and mutual funds who are registered with SEBI are called ‘QIBs’. They usually apply in very high quantities. Coming up with an IPO provides certain advantages as also disadvantages that need to be weighed well before deciding to go in for it. Some of the key advantages and disadvantages of an IPO are given in Table 16.1.

High Net Worth Individuals (HNIs) Retail Individual Investors (RIIs)

Noninstitutional Investors (NIIs) Qualified Institutional Bidders (QIBs)

Different Categories of Investors

Figure 16.5 Categories of Investors

Table 16.1 Advantages and Disadvantages of Going Public Advantages Funding future needs of the company Provides liquidity to shareholders Enhances reputation and visibility of company Improves valuation of the company Improves personal wealth

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Disadvantages Loss of control Profit sharing with investors Greater transparency in information sharing Personal liability of promoters and executives increases Raising public equity is costly Requires separate professionals to manage post-IPO issues

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16.4.1  Advantages of Going Public Going public provides multiple advantages to the company, and the most crucial one is prospects for growth through public funding. Some of the key advantages of IPO are given here. Funding Future Needs of the Company This is a potential source of raising funds for meeting future needs of the company such as expansion, research & development (R&D), takeover and repayment of debts. Funds get raised on existing and future growth of the company by way of equity, which is not repayable. Shareholders become owners of the company, have voting rights in all vital decisions of the company and look forward for returns through dividends and appreciation in the capital. It provides a lot of flexibility to the promoters of the company, as it results in a fixed commitment towards returns or repayments such as term loans. Above all, a successful IPO becomes precedence for raising further money from the capital markets in future for the growth of the company. Provides Liquidity to Shareholders The IPO provides liquidity to the investment made by the public, as shares of the company get listed in the market and can be sold or bought at any time. However, liquidity in terms of reasonable price and volume of trading every day largely depends on present and future prospects of the company. Enhances Reputation and Visibility of the Company As long as the company does well and fulfils its promises, it gets an advantage of greater visibility in the market, which, in turn, may result in enhanced market share for its products and services. As such, during the IPO stage itself, the company has to spend lot of money on publicity in the media that too gives rise to enhanced visibility in the eyes of different stakeholders. It helps in projecting the company products to potential customers and investors. Improves Valuation of the Company Listing of the company provides an added yardstick for valuation of the company, which helps as a barometer for vital decisions such as sale of the company or merger decisions. VCs also use IPOs to cash in on successful companies that they had helped start. It provides them with the right opportunity to exit or look for greater valuation of the holdings they have subscribed to. Improves Personal Wealth After an IPO, based on price of the share in the market, promoters can keep assessing their personal wealth, which keeps growing with the growth and prosperity of the venture.

16.4.2  Disadvantages of Going Public Coupled with a number of advantages that accrue by going public, there are a number of disadvantages that need to be carefully evaluated before taking a decision to go public. There are certain entrepreneurs who consciously decide to retain their company’s private limited status, even though their company’s strength can enable them to raise substantial capital from the public. Some of the vital reasons for preferring to retain a company as a private limited company or a limited liability partnership company are given in the following sub-sections. Loss of Control There are entrepreneurs who would not like to lose control and ownership of the company and are prepared to even lose a growth opportunity for the same because of a lack of capital. Further, once a company gets listed, there may exist a possibility of hostile takeover by mopping up equity by the entrepreneurs who are interested in taking over. Thus, there exists a possibility of outsiders taking over the control of corporate management by entering into the shoes of the entrepreneur/company founder, which the entrepreneur may avoid by going public.

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Profit Sharing with Investors By Way of Dividends After a company becomes public, investors’ expectations emerge in terms of dividends and capital gains. This would necessitate the company to share profits with investors and, in the process, reduce the absolute quantum of profits that might have accrued to an entrepreneur otherwise, After the typical IPO, about 30 to 40 per cent of the shareholding remains with promoters, whereas the remaining goes into the hands of outsiders. This may even vary between as low as less than 5 per cent at one end and 80 per cent at the other extreme. However, the fact remains that a fast-growing company, which generates substantial profits as a result of infusion of public capital, has to necessarily share the gains with outsiders. Greater Transparency in Information Sharing After the company becomes public, it has to necessarily share requisite information as required by stock exchanges, SEBI, other bodies such as Company Law Board and, above all, with shareholders. This requires adherence to greater disclosure and corporate governance practices, as stipulated by regulatory bodies, become inevitable for the company after raising money from the public. This too becomes one of the major reasons for entrepreneurs not going in for public issue, as they would be required to share even some confidential and policy-related information. For example, a company may have to share the details of profit, profitability and, if warranted, technology up-gradation plans, which could be effectively used by competitors and may turn out to be detrimental to its growth. Personal Liability of Promoters and Executives Increases By going public, the company, its management and other participants would be subject to liability for any false or misleading statements and omissions and commissions made at the time of registration of the company or in the information submitted by the company to different regulatory bodies. Public limited companies are usually in greater media focus and, therefore, any damage that may take place to customers by using the product may also attract the immediate attention of the media and become a matter of legal hassles for the company. Above all, the company may have to face legal suits by the stockholders for breach of any fiduciary duty, self-dealing and other claims, whether or not true. Raising Public Equity Is Costly Going for a public issue involves costs on various accounts such as publicity, stationery, underwriting commission, fee towards appointment of a registrar, managers and bankers to the issue. Further, it requires a wholetime staff at the company level to monitor the process during IPO. All these costs work out to around 5 to 10 per cent of issue size depending on the size of the public issue. Thus, effectively, for raising ` 50 crores through an IPO, the company may effectively get ` 45 crores, if cost works out to be 10 per cent. The company tries to amortize this cost over a period of time in its balance sheet. Compared with other sources of raising funds, this source works out to be relatively costly, and, hence, promoters may at times avoid raising money through an IPO. Requires Separate Professionals to Manage Post-IPO Issues A post-IPO issue requires a number of compliances to be made to different regulatory bodies as also to shareholders. This also requires a permanent office to deal with all matters related to listed shares of the company. Thus, the company needs to be prepared to maintain a separate office with professional staff members to deal with all postIPO issues that would require additional expenses on a continuing basis.

16.5  SELECTION OF INTERMEDIARIES TO THE IPO Registrars, underwriters, lead managers, auditors, solicitors, advertising agencies and bankers to the issue play a critical role in the success of an IPO and, therefore, having decided to come up with an IPO, an entrepreneur should carefully select them.

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Lead Managers to the IPO A company appoints lead managers to market the IPO. Their main roles include drafting of prospectus, preparing overall budget for the IPO, helping the company decide about right timings for the issue and helping it take all steps required for successful marketing of the issue. Lead managers also help the company in the appointment of registrars, underwriters, brokers, bankers to the issue and advertising agencies/firms to cover the issues in the media. Their role also envisages appropriate direction to be given to other agencies involved in the IPO. Each leading Indian and foreign bank and financial institution has a separate subsidiary as a merchant banking division or may have a division within the existing setup of a bank. Some of the commonly known subsidiaries are SBI Capital Markets Ltd, BOB Capital Markets Ltd, Centbank Financial Services Ltd, DSP Financial Consultants Ltd, ICICI Securities, Allbank Finance Ltd, Barclays Bank plc, Citibank N. A. and Credit Suisse Securities (India) Pvt. Ltd. The track record of lead managers in handling past issues vis-à-vis specific requirements that the company has chalked out for itself need to be assessed well. It is always desirable to find out in confidence from other industrial associates about lead managers with whom the company is negotiating for appointment as lead managers. Registrar to the Issue Registrars to the issue are independent financial institutions registered with stock exchanges and appointed by the company that decide to come up with IPO. Their main role is to maintain records of the issue and ownership of company shares. A registrar to the issue is appointed in consultation with the lead manager to the issue. Usually, the company invites quotations in this regard from the market, clearly indicating the various functions they would be required to perform. Depending on the expertise, past track record and the quotation given, selection is made. Their main job is to receive share applications from different designated collection centres. They recommend the basis of allotment based on SEBI guidelines in consultation with the regional stock exchange for approval. Investors can approach them pre-IPO or post-IPO for any matters related to IPO, such as non-receipt of letters of allotment, credit of allotted shares in the respective beneficiary accounts and refund orders. Some of the examples of registrar to the issue available in the market are Karvy Computershare Private Ltd, Enam Securities Private Ltd, Cameo Corporate Services Ltd, Aarthi Consultants Pvt. Ltd and Mondkar Computers Private Ltd. Underwriters’ Selection Underwriting is a written contract in which financial intermediaries—banks, financial institutions and brokers—give a written commitment to the issuer to the effect that the former would subscribe to the securities offered to the public, in the event of non-subscription or part subscription. The party that gives such an assurance is called an ‘underwriter’. They give such commitment in lieu of getting commission for underwriting. For accepting an underwriting assignment, it is essential that the underwriter has a certificate of registration from SEBI which is granted under the Securities and Exchange Board of India (Underwriters) Regulations, 1993. These regulations primarily deal with issues such as registration, capital adequacy, obligation and responsibilities of the underwriters. Underwriting helps in building an investor’s confidence in the issue of securities. The association of reputed underwriters lends prestige to the company, and the investors get confidence that the issue is sound enough for profitable investment. The response from the public for subscription to issue is better, if reputed underwriters are associated with it. Some of the key benefits of getting an issue underwritten are given as follows:  The company is assured of the availability of funds. Thus, important projects can take off well and do not suffer on account of want of funds.

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Syndicate Underwriting— Two or More Underwriters Jointly Underwrite an Issue of Securities

Subunderwriting— Underwriter Gets a Part of the Issue Further Underwritten by Another Agency

Types of Underwriting

695

Firm Underwriting— Underwriter to Apply for a Block of Securities Along with Additional Underwriting Commitment

Figure 16.6 Different Categories of Underwriting  It dramatically reduces the risk and uncertainty of marketing the securities.  It helps the company take advantage of the underwriters’ specialized knowledge of the capital market.

There are two types of underwriters, namely, financial institutions, banks and brokers; and approved investment companies. Basically, the lead taken by public financial institutions has encouraged banks, insurance companies and stockbrokers to enter into the field of underwriting. Some of the prominent underwriters in the market are IFCI, IDBI Bank Ltd, ICICI Ltd, LIC, AXIS Bank, Bank of Baroda, Central Bank of India, State Bank of India and its subsidiaries and a large number of brokers. There are three broad categories of underwriting (see also Fig. 16.6), which are given below. Syndicate Underwriting This is an undertaking wherein two or more agencies or underwriters jointly underwrite an issue of securities. Such an arrangement is usually entered into in cases of large-sized issues wherein a single underwriter is either not in a position to give full commitment or does not want to take complete risk. This helps in involving multiple underwriters who share the risk of underwriting. Sub-underwriting This is one wherein the underwriter gets a part of the issue further underwritten by another agency. This is done to further pass over the risk involved in underwriting. The names of every underwriter, including sub-underwriters, are mentioned in the prospectus along with the amount of securities underwritten by them. Firm Underwriting This involves an underwriter applying for a block of securities along with an additional underwriting commitment. Under it, the underwriter agrees to take up and pay for this block of securities as ordinary subscribers, in addition to their commitment towards underwriting. However, the underwriter need not take up the whole of the securities underwritten by them. The company, after the subscription to the issue, communicates in writing to the underwriter the total number of shares/debentures undersubscribed. If the issue is fully subscribed, underwriters do not take any share in the IPO. However, to the extent it gets undersubscribed, underwriters are required

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to subscribe in proportion to their underwriting commitment. In case the underwriters fail to meet their commitment, the company is free to allot the shares to others and proceed legally against the underwriters to claim damages for any loss suffered by the company for their denial. Since the start-up going in for an IPO is usually not well known in the market, it is necessary to pick up an underwriter who has a good reputation of managing underwriter commitments, including identification of a strong syndicate team to tie up an underwriting full-issued size. It is essential that the lead underwriter provide confidence to investors for subscribing to the issue. This also helps in supporting the stock after it gets listed in the market. It is important that the selected underwriters are value based and ethically strong. Underwriters also help in providing financial advisory services, which can be an added advantage to the company. Bankers to Issue These facilitate movement of funds for the IPO. The main responsibility of bankers to the issue is to collect application money as specified in the prospectus along with the application. The money thus collected is transferred to the escrow accounts. The merchant banker to the issue needs to ensure that bankers to the issue are appointed as per the SEBI–DIP guidelines. The bankers to the issue should have collecting branches in the specified collection centres. In lieu of extending this service, they charge commission besides brokerage, if any. In case the size of the issue is big, more than one banker to the issue is appointed.

16.6  RATING OF IPOS IPOs are graded for the convenience of investors by rating agencies registered with SEBI. These are the grades assigned by a credit rating agency registered with SEBI to the IPO of equity shares or any other security that may be converted into or exchanged with equity shares at a future date. The purpose of rating is to assess the value of the issue in relation to other securities listed in the market. It has become mandatory to disclose IPO grades for the companies coming up with an issue. It helps the investors in understanding the financial position, strength and creditworthiness of the company going in for issuance of an IPO. The five-point scale used for grading of IPOs with a higher score indicating stronger fundamentals and vice versa is as follows: Grade 1—poor fundamentals Grade 2—below average fundamentals Grade 3—average fundamentals Grade 4—above average fundamentals Grade 5—strong fundamentals IPO grading can be obtained by the company either before filing the draft offer documents with SEBI or subsequently. However, the Prospectus/Red Herring Prospectus, as the case may be, has to necessarily contain the grade/s given to the IPO by all credit rating agencies whom the company had approached for grading the IPO. The cost for getting an IPO graded is to be borne by the company that desires to go in for an IPO. IPO grading is to be compulsorily obtained by any company that has filed the draft offer document for its IPO with SEBI, on or after 1 May 2007, from at least one CRA. Some of the important factors evaluated by rating agencies for grading an IPO are business prospects and competitive position—industry and company prospects; financial position; management; corporate governance practices; litigations against the company; and new projects with their associated risks and prospects.

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16.7  MARkETING STRATEGIES FOR IPO Marketing of an IPO is a great art involving a professional approach. It is essential to brand it well along with the appropriate positioning and correct pricing strategy. An IPO should generate a lot of interest among its customers to consume its products and investors to subscribe to the issue. The key ingredients such as branding, timing, pricing and effective communication to the target population are basic prerequisites for the success of an IPO. The IPO pricing decision has to strike a fine balance between optimally monetizing the issuer’s holdings and achieving high valuations for the stock, thereby making it highly attractive for the investors from the present as also future market performance point of view. The right marketing mix for promoting the IPO would have the right price combination for the stock, details about the company—product uniqueness, existing status and future prospects, strategies relating to press releases, industry or sector-specific presentations, road shows, direct meetings with group of investors in industry associations, investor clubs, portfolio and fund managers, and other ways of interacting with potential investors (Fig. 16.7). Another important aspect would be to effectively communicate the facts to prospective investors’ channels—the broking community and their sub-brokers and agents at almost the door-to-door level. While chalking out marketing strategies, it is essential to assess various risks having implications to the company and investors. For example, a risk associated with overpricing that may result in subsequent capital loss to the investors may shake their confidence in the company forever. Similarly under-pricing may result in reducing promoters’ wealth associated with their holdings in the company. A thorough risk-and-return analysis is a must for the successful sailing of the IPO. It is desirable for the company to make all relevant information available to the investors in a disclosure document to enable them to take informed decisions. The expenses made on marketing an IPO acts as an investment that reduces IPO under-pricing and gives a boost to the IPO trading in the stock market. Therefore, a planned strategy to market the IPO helps in fostering market-based intangibles for an improved fundamental outlook as may be evident from future cash flows. For example, LinkedIn’s stock more than doubled after listing on 19 May 2011, as a result of huge investor demand for the stock. The stock touched as high as $103 on 19 May 2011 and placed the company on track for one of the biggest first-day gains of 2011. The company had raised $353 million in an IPO that gave rise to its valuation at $4.3 billion, which was

Right Price for the Stock

Details About Company— Product Uniqueness

Marketing Mix for Promoting IPO Existing Status and Future Prospects

Strategies Related to Press Releases

Figure 16.7 Marketing Mix for Promoting IPO

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the highest valuation for any US-based Internet company ever since Google went public in 2004. The investors’ interest clearly reveals the potential of the Internet in social Web sites that connect people having common interests.

Example: LinkedIn IPO Prices At $45/Share, But Risks Real LinkedIn  sold  $352.8  million  worth  of  shares  to  the  public  on  Wednesday,  18  May  2011,  and  the  powerful demand for the stock clearly indicates the importance of ‘social networking’ in the twenty-first   century.  It  is  the  first  US  social  networking  company  that  has  become  public.  It  expected  that  a  few others including Facebook, Groupon, Twitter and Zynga would follow suit. Each has a different  business model. However, each taps social networks, and the valuations for each are skyrocketing. ‘Social networking is the most efficient customer acquisition strategy in the world,’ said Saad Khan, a  partner at a VC firm, CMEA Capital. ‘(It) is going to be a customer acquisition strategy in every industry,’  he said, explaining that social networks can help companies reach new customers more efficiently. LinkedIn allows people to create professional profiles and is widely used as a job-hunting tool. At  the $45 IPO price, the company has a market value of $4.25 billion. Its shares are expected to begin  trading on the New York Stock Exchange on 19 May 2011 under the symbol ‘LNKD’. Facebook, a social networking site geared more towards recreational use, has experienced even  bigger  increases  in  its  valuation.  When  Goldman  Sachs  arranged  a  private  share  sale  in  January  2011, the company’s implied valuation was $50 billion. The company is widely expected to go public  in April 2012. Groupon, which brings people together for deals, has had talks with bankers about an  IPO that could value it at $15 billion to $20 billion. However, even with all of the hype, there has not really been a test of how hungry public investors  are for these stocks. LinkedIn will be that test. One of LinkedIn’s biggest risks may be its courageous  move towards its future growth—combined with an admission that it does not expect to be profitable  in 2011 on a US generally accepted accounting principles (GAAP) basis.5

16.8  MISCONCEPTIONS ABOUT IPOs There are a number of misconceptions about raising money through an IPO. Some of the common misconceptions are given in Figure 16.8. IPOs Are a Safe Way to Make Money

Misconceptions About IPOs

IPOs Are Meant for Only High-tech Companies Company Need Not Be Highly Profitable to Get High Valuation Start-ups Are in the Limelight and Attract Greater Focus of Analysts

Figure 16.8 Misconceptions About IPOs

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16.8.1  IPOs Are a Safe Way to Make Money Investors feel that subscribing to an IPO is the self-sure way of getting higher returns on investment. As such, in reality, there are many IPOs that result in substantial losses to the investors. The prices of such issues dramatically fall on listing because of many reasons such as over-pricing, weak financials of the company, weak management of the company or a massive fall in the overall market that leads to a fall in the script price too. For example, Pritish Nandy Communications Ltd IPO that was issued between 4 and 11 September 2000 and was allotted a price of ` 155 per share had a price of just ` 49.6 per share on 27 October 2005. Similarly, another share of H T Media Ltd issued between 4 and 10 August 2005 at ` 530 per share had a market price of just ` 427.35 per share on 27 October 2005.

16.8.2  IPOs Are Meant for Only High-tech Companies Although a greater number of successful issues may come from high-tech innovative companies, even industries such as retail, soap manufacturers and cement manufacturers can raise money from the public. For example, VMS Industries Ltd with an issue size of ` 25.25 crores, Timbor Home Ltd with an issue size of ` 23.25 crores, came between 30 May 2011 and 2 June 2011, and Muthoot Finance Ltd IPO with an issue size of ` 901.25 crores came between 18 and 21 April 2011.

Example: Future Ventures India Ltd Future  Ventures  India  Ltd  was  incorporated  in  1996.  It  is  a  part  of  Future  Group  (led  by  Kishore  Biyani and owners of Future Bazaar, Pantaloons, Central, Big Bazaar, Food Bazaar, Home Town and   E-zone). Future  Ventures  India  Ltd  is  in  the  business  of  creating,  building,  acquiring,  investing  in,  and  operating  innovative  and  emerging  businesses  in  consumption-led  sectors  in  India.  Within  the  consumption-led  sectors,  Future  Ventures  have  primary  focus  on  opportunities  in  the  business  segments of Fashion, FMCG, Food Processing, Home Products, Rural Distribution and Vocational  Education. key Details of Issue Issue Open: 25 to 28 April 2011 Issue Type: 100 per cent Book Building Issue IPO Issue Size: 750,000,000 Equity Shares of ` 10 each Issue Size: ` 750.00 Crores Face Value: ` 10 Per Equity Share Issue Price: ` 10 to ` 11 Per Equity Share Market Lot: 600 Shares Minimum Order Quantity: 600 Shares Listing at: BSE, NSE CARE  has  assigned  an  IPO  Grade  3  to  Future  Ventures  IPO,  which  means  as  per  CARE,  the  company has ‘Average Fundamentals’. CARE assigns IPO grading on a scale of 5 to 1, with Grade 5  indicating strong fundamentals and Grade 1 indicating poor fundamentals.6

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 1 6.8.3  Company Needs to Be Highly Profitable to  Get High  Valuation  The valuation of a company depends on a number of factors such as future earning capacity, market size, market niche and management of the company. Present profitability is just one of the indicators that may influence valuation. Availability of money in the market with mutual funds, foreign institutional investors create a demand for script and, in turn, the valuation. However, the company should focus on real strength based on its fundamentals, that is, the present and future earning capacity of the company for achieving higher valuation.

 1 6.8.4  Start-ups Are in the Limelight and Attract Greater  Focus of  A nalysts  As such, young, entrepreneurial companies are not always in the spotlight among IPOs. However, factors such as the interest envisaged by the investors and the strength of the company in terms of product profile to cater to the customer needs would decide media attention for the company. Further, at a given point of time, depending on the market conditions and industry prospects, a particular group of companies related to that industry would be in the limelight. Above all, media focus on the company gets decided either by some extraordinary achievements or by mischievous acts performed by the top management of the company. As regards the focus of analysts, it catches the attention in case the company is not doing well or is doing extraordinary well. Therefore, the first few months after the shares get listed, the entrepreneur should be concerned about maintaining good performance and delivering the promised results consistently.

 Check Your Progress   10 Ways to Build Your Business by Helping Others 

  

Read any large company annual report and it will talk about ‘corporate social responsibility’. Read further and you will discover how this means they have been ‘doing good’ for others, partly because it enhances their reputation. Every organization, however small, can benefit from being more socially responsible. Here are 10 very practical ways of helping yourself by helping others. 1. Mentoring: Mentor someone managing a voluntary or community organization. They may face very different challenges from what you face, but both of you will learn from working together. 2. Donating products: If you make a consumer product, give away a redundant product to someone who would not usually be able to use it. Make sure you get news coverage. 3. Sharing knowledge: Share your experience and advice with groups where other volunteers might be potential customers. For example, the Prince’s Trust recruits business mentors for budding entrepreneurs from disadvantaged backgrounds.

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4. Offering work experience: It is not just kids that need work experience. People rebuilding their confidence after mental ill health also need reintroducing to the world of work. Providing work experience shows that you care. People prefer to trade with people who care. 5. Hosting visits: Allow others to see how you run your organization. The visit will inevitably be promoted to a wide audience, and many who come will be potential customers. 6. Sharing scrap: If you make things, your waste materials or packaging could be useful to a social enterprise that reuses materials. Reduce your costs and increase your profile. 7. Teaching kids: Explaining what you do and why to a group of 13-year-olds is a great experience. It will certainly make you think, because kids ask lots of questions and demand credible answers. It is good to have your basic assumptions challenged. 8. Raising money: If you employ people, get them to agree on a local good cause and help them raise funds as a team. There are lots of things to do. It really builds a team. 9. Putting a bench outside your shop: Make it possible for people to rest outside your shop. It makes it look busier and everyone will look in the window. 10. Sponsorship: Funding the youth football team’s shirts and printing your firm’s name on the back is perhaps the most obvious way of trading support for publicity.

KEY CONCEPTS  Initial Public Offerings: The first-time sale of the securities of a company under the regulations governing a public company is called an ‘IPO’.  IPO Team: An ‘IPO Team’ would include an investment banker, a law firm and a chartered accountant firm to guide the company in complying with regulatory and other requirements.  Merchant/Investment Banker: This person helps in getting underwriting commitment for the size of the issue from different investors, which is one of the key prerequisites for getting regulatory clearances.  Offer Document: This is a document giving details about issue and company after getting approval of the draft document by SEBI.  Red Herring Prospectus: After getting clearance from Stock Exchanges, the issuer company adds issue size and price of the issue to the document and makes it available to the public, which is called the ‘Red Herring Prospectus’.  Floor Price: This is called the ‘minimum price’ at which bids can be made for an IPO.  Book Building Public Issue: The company decides a price band that contains an upper level and a lower level.  Lead Managers: These are independent financial institutions appointed by the company for the issuance of an IPO.  Registrar of a Public Issue: This is the prime body that takes all crucial steps for processing IPO applications, allocating shares to the applicants based on SEBI guidelines and processing refund orders.

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 Underwriting: This is a written contract in which financial intermediaries—banks, financial institutions and brokers—give a written commitment to the issuer to the effect that the former would subscribe to the securities offered to the public, in the event of non-subscription or part subscription.  Bankers to Issue: These facilitate the movement of funds for the IPO by collecting application money as specified in the prospectus along with the application.  Rating of IPOs: IPOs are graded for the convenience of investors by rating agencies registered with the SEBI, which is mandatory. ENDNOTES 1. Sarah, J. G. How Can Start-up Grow, Harvard Business School Working Knowledge, http:// hbswk.hbs.edu/item/5089.html, accessed on 14 November 2005. 2. Luboˇ s, P., L. Taylor, and P. Veronesi. Entrepreneurial Learning, the IPO Decision, and the Post-IPO Drop in Firm Profitability, Graduate School of Business, University of Chicago, September 2007, http://faculty.chicagobooth.edu/lubos.pastor/research/ipoprofit5b.pdf 3. Initial Public Offering (IPO), Entrepreneur, http://www.entrepreneur.com/encyclopedia/term/ 82272.html 4. www.prabhatmittal.com/Learnings/ipo.pdf 5. Economic Times, 19 May 2011, http://economictimes.indiatimes.com/news/internationalbusiness/linkedin-ipo-prices-at-45/share-but-risks-real/articleshow/8429356.cms 6. http://www.chittorgarh.com/ipo/ipo_detail.asp?a=304 CONCEPTUAL QUESTIONS 1. The decision to go public is one of the most crucial and sought-after decisions that are made by private firms. Critically examine. 2. What are some of the stringent requirements for IPOs that leave out most companies that come up with an IPO? 3. What is meant by IPOs? Explain. 4. What are the important criteria that a company should fulfil before deciding to go for an IPO? 5. What is the role of the IPO team in coming up with an IPO? 6. What are the roles and responsibilities of the registrar to issue? Explain. 7. What precautions need to be taken while selecting underwriters to the issue? 8. What are the key steps involved in coming up with an IPO? Explain. 9. Who decides the size of the issue and the price at which shares are to be offered to the public? 10. Define the book building process of coming up with public issue. 11. What are the four different types of investors’ categories? 12. What are the key advantages and disadvantages of going public? 13. What are some of the key benefits of getting an issue underwritten by a reputed underwriter? 14. Differentiate between syndicate underwriting, firm underwriting and sub-underwriting. 15. What is the purpose of rating an IPO? Who does it? What are the grades in which an IPO gets graded? 16. What are the key considerations that need to be taken care of for the effective marketing of an IPO?

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CRITICAL THINKING QUESTIONS  1. ‘It is important for an entrepreneur to assess urgency and the cost he has to pay for raising money from different sources before deciding about which would be the better option to take.’ What is the relevance of this statement in the context of coming up with an IPO? Explain with an example. 2. ‘After a company becomes publicly held, it has to continuously respond to public scrutiny and market responses to different news items.’ Consider an example wherein the company’s working got adversely affected because of certain news items related to the company that affected their share price adversely in the market. How did the company manage to respond to such a crisis? 3. It is said that one of the key advantages of going public is improving the valuation of the company. Consider an example of a start-up having gone for an IPO; work out its valuation for three years after the IPO and compare it with its two competitors in the market. 4. Consider an example of a start-up having gone for an IPO whose share performance was not good continuously for more than a year after listing. Identify the reasons for its poor performance on the stock exchange. Did the company take some specific measures to overcome the problem? If so, analyse their impact. 5. Shares of MphasiS, the software firm owned by Hewlett Packard (HP), suffered their biggestever fall on Friday after outraged investors questioned the company’s corporate governance standards after it cut prices on contracts awarded to its parent. Bangalore-based MphasiS shares fell 28 per cent, the worst performance since its listing in 1994, to ` 449.30. The company unveiled its results showing a 20 per cent fall in net profit for the first quarter and an 8 per cent fall in sales. The results, according to many analysts, could be attributed to the price cuts given to its parent HP on select contracts. MphasiS’ performance is now peripheral to the central issue of the shocking collapse in its governance standards. Post this result, the harm done to not only MphasiS’ but also HP’s reputation is likely to be long lasting, CLSA analysts, Nimish Joshi, Bhavtosh Vajpayee and Arati Mishra said in a scathing report (Economic Times dated 26 February 2011). i. What has fundamentally gone wrong with governance practices in the company? ii. What was the performance of the company’s share price in the stock market during the period the news item came and subsequent to that for two to three months? iii. Was the company able to handle the crisis effectively? If so, what strategy was used?    CASE 16.1:  ORBIT CORPORATION LTD (OCL) 

 Background  The promoter Ravi Kiran Aggarwal initiated the real-estate activities in 1989 with the satellite township of Navi Mumbai. The entrepreneurial spirit in the organization can be traced to 1973 when Kiran Aggarwal established a steel trading firm, which was followed by a venture in packaged foods. The year 2000 was a special year in the history of Orbit, as it witnessed the genesis of Orbit Cybertech Ltd, later rechristened Orbit Corporation Ltd (OCL), in 2006. OCL aimed at tapping redevelopment opportunities in the island city of Mumbai, specifically in the premium locales of South Mumbai. (Continued)

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At present, Orbit is led by its chairman, Kiran Aggarwal, and MD and CEO, Pujit Aggarwal, who share a combined experience of more than two decades in the real-estate development industry. Under their dynamic leadership, Orbit Corporation has evolved as an enterprise worthy of emulation as regards corporate governance, financial disclosures and global best practices are concerned, and now ranks among Mumbai’s top luxury home developers.

 Brief About Promoters  Kiran Aggarwal, executive chairman, an alumnus of BITS Pilani and an MBA from Delhi University, has a rich experience in India’s steel industry. It was a masterstroke of his insight that Orbit started operations by developing properties only in South and South Central Mumbai, thereby lending it a distinctive advantage over similar developers. Under Kiran Aggarwal’s dynamic leadership, Orbit Corporation has now created a niche in the redevelopment sector. Pujit Aggarwal, managing director and CEO, is an alumnus of Harvard Business School. His lateral thinking and decision-making skills coupled with 16 years of hands-on experience give him an unmatched edge among his peers. Apart from his role as the Managing Director and CEO of Orbit Corporation, Pujit Aggarwal is also the general secretary and spokesperson for Property Redevelopers Association (PRA), a registered non-profit organization for educating tenants on the complicated procedures of redevelopment.

 Vision  Orbit’s vision is ‘to be the most sought after organization of the 21st century’.

 Mission  The company’s mission is to imbue all our operations with the motto of fair business practices, family values and high growth–high profitability. To be sought after by:      

customers for trust and deliverance our team for creditworthiness authorities for transparency environment for conscientiousness society for socio-economic transformation stakeholders for value enrichment

 Strategy  Company strategy for business development revolves around the following:  to be the most sought after provider of Realty Solutions in the niche segments of Mumbai Metropolitan Region (MMR) by leveraging our core competence, knowledge and expertise  fulfilling housing dreams of Mumbaiites, by using proprietary products, services, design and technology—thereby ensuring a high value quotient for Orbit Properties

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 making home-buying not only supremely satisfying, but also a truly unique international experience  thus enriching the value of stakeholders

The company’s four distinct pillars are quality, technology, innovation and people. These are not just a set of beliefs and mottos, but they are also tangible metrics that are used by the company to measure their patrons’ expectations and exceed one’s own.

 History of the Company   1989: Promoter group initiated real-estate activities. 2000: Orbit group was incorporated. 2007: Listed on the National Stock Exchange of India Ltd and Bombay Stock Exchange Ltd in April. 2010: Leading real-estate developer in the MMR, with significant operations in the island city of Mumbai. Primary focus on redevelopment, cluster development and gated townships. Focus on niche high-value segments, specializing in high-end residential and ‘built to suit’ commercial properties. State-of-the-art buildings designed by internationally acclaimed architects. Pujit Aggarwal, managing director and CEO, Orbit Corporation, has been featured in the INSPIRING 50 Entrepreneurs 2011 list in the DARE—Because Entrepreneurs Do. His lateral thinking and decision-making skills, along with 16 years of hands-on experience, give him an enormous edge among his peers. Apart from his role at Orbit Corporation, Aggarwal is the general secretary and spokesperson for Property Redevelopers Association, a registered non-profit organization that educates tenants on the complicated procedures of redevelopment. Orbit Corporation is known for its choice of strategic locations, its understanding of housing requirements and speedy execution of projects using state-of-the-art construction practices. Location, design and quality are the core differentiators of Orbit Corporation projects. Orbit is among the top 10 listed real-estate firms in India with a market capitalization of approximately 16,000 million ($355 million). Since its inception in 2000, Orbit Corporation has completed projects with a total saleable area of 253,772 square feet. The company has 12 projects under development, aggregating to approximately 1.84 million square feet of saleable area. In addition, it has a strong pipeline of around 5.4 million square feet of residential projects, including a gated community project in Mandwa, Maharashtra. Today, OCL has to its credit three prestigious awards: CNBC Awaaz CRISIL-CREDAI Real Estate Award for ‘Best Residential Property’, Accommodation Times Award for ‘Premium Residential Property of the Year’ and Realty Plus Excellence 2010 Award for ‘Developer of the Year—Residential’. Subsequently, as per media reporting, Orbit Corporation, Mumbai, an Indian-based real-estate developer, aims at listing its shares on the New York Stock Exchange (NYSE) as it seeks capital (Continued)

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for expansion, said managing director and CEO Pujit Aggarwal. The ` 6.79 billion ($145 million) market cap company is looking to raise about $1 billion through the overseas listing, said Aggarwal. Orbit, which is already listed on the BSE and NSE in India, could list on the NYSE in two to three years. The company would appoint financial and legal advisors six months before the proposed issue, said Aggarwal. Listing on the NYSE would give the company a considerable presence in the global market and would reach various strata of investors globally, he said. The company, which had sales of about ` 5 billion in the year ending March 2010, is targeting ` 45 billion in top line in the next four to five years, said Aggarwal. Most of the projects are under execution, and a few of them would be completed over the next five years. The company’s cash flow will increase substantially once projects move towards completion, claimed Aggarwal. The company is currently growing at 40 per cent CAGR, he added. Orbit’s one completed project had a 20 per cent premium on costs, whereas it is targeting 30 to 40 per cent profitability for its projects under development.

 Market Competition  The Union Budget 2011–12 has liberalized the existing scheme of interest subvention of 1 per cent on housing loans by extending it to housing loans upto ` 15 lakhs, where the cost of the house does not exceed ` 25 lakhs from the present limits of ` 10 lakhs and ` 20 lakhs, respectively. The government has also brought home loans upto ` 25 lakhs under priority lending, from about ` 20 lakhs hitherto. These two measures will help improve demand. The developers enjoyed tax incentive U/s 35AD of the Income Tax Act. This section provides for 100 per cent deduction in capital expenditure (other than land, goodwill and financial instruments) for developing and building a housing project under the scheme for slum redevelopment/ rehabilitation framed by the central/state government. This benefit has now been extended to an affordable housing scheme of central/state governments. This measure will bring down the tax incidence on approved affordable projects, boost their viability and lead to greater participation in such projects by the private sector. Players in the affordable housing sector such as Unitech, Indiabulls Real Estate and Ansal Properties will stand by all the measures just mentioned. The real-estate players were expecting an extension of sunset clause U/s 80IB. This provides for deduction in respect of projects approved by local authorities between 1 April 2008 and 31 March 2013, subject to various conditions. One such condition was that the project has to be completed within five years from the end of the financial year in which the housing project is approved by a local authority. The players were expecting an extension of time period for the completion of the project to six years, and an extension of date of approval of the project by local bodies beyond 31 March 2013. Neither of these demands has been accepted, as of now, in the Union Budget. Further, SEZ (Special Economic Zone) developer has been brought under the purview of MAT, which affects real-estate players in the business of development of multiproduct SEZ as well as Information Technology (IT) SEZ (ITSEZ). Similarly, non-extension of STPI exemption also added to the woes of commercial real estate. Fearing non-extension of STPI (Software Technology Park of India) benefits, the IT companies were moving to ITSEZ. Now with the tax benefits on both STPI and SEZ whittled down, this has affected the realty players in general and their commercial real-estate business in particular.

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 Competitors  A brief financial status of leading competitors in the reality development industry is given below. Sales, net profit and total assets relate to the year ended March 2010, whereas share prices are the latest as in May 2011.

Competition—Key Players in the Market1

DLF Oberoi Realty HDIL Godrej Proper Prestige Estate Indiabulls Real Sobha Developer Omaxe Puravankara Pro Sunteck Realty Orbit Corporation

Last Price May 2011

Market Capital (` in Crores)

Sales Turnover 2009–10

Net Profit 2009–10

Total Assets 2009–10

218.95 228.00 153.65 649.00 137.55 107.20 259.30 129.70 93.50 304.35 43.75

37,165.27 7,483.72 6,376.54 4,533.27 4,512.65 4,312.45 2,542.80 2,251.16 1,995.52 1,916.38 498.58

2,419.21 – 1,491.99 337.29 – 159.10 1,456.10 794.97 414.14 14.77 487.11

765.06 – 596.65 106.15 – 45.81 182.40 90.77 83.87 6.03 95.45

25,467.85 – 11,169.45 1,270.33 – 6,526.27 3,162.51 2,942.10 2,198.83 394.10 1,461.49

Industry—Key Financial Ratios2 Year Latest No. of companies Key ratios Debt–equity ratio Long-term debt–equity ratio Current ratio Turnover ratios Fixed assets Inventory Debtors Interest cover ratio PBIDTM (%) PBITM (%) PBDTM (%) APATM (%)

159

2009 78

1.66 1.45 1.78

0.81 0.72 3.21

3.82 1.03 5.89 4.28 29.93 28.69 23.23 16.41

3.22 0.48 3.71 2.16 34.3 32.91 19.03 16.16

(Continued)

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Financial Position of the Company Orbit Corporation Ltd—Balance Sheet Pre- and Post-IPO (` in Crores)3 March March March 2008 2007 2006 (12 months) (12 months) (12 months) Sources of funds Total share capital Equity share capital Share application money Preference share capital Reserves Revaluation reserves Networth Secured loans Unsecured loans Total debt Total liabilities Application of funds Gross block Less: accum. depreciation Net block Capital work in progress Investments Inventories Sundry debtors Cash and bank balance Total current assets Loans and advances Fixed deposits Total CA, loans and advances Deferred credit Current liabilities Provisions Total CL and provisions Net current assets Miscellaneous expenses Total assets Contingent liabilities Book value (`)

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March 2009 (12 months)

March 2010 (12 months)

21.6 21.6 2.3 0 77.01 0 100.91 0.25 1.32 1.57 102.48

27.17 27.17 100.1 0 126.59 0 253.86 20 1.37 21.37 275.23

36.42 36.27 0 0.15 410.34 0 446.76 301.4 31.46 332.86 779.62

36.43 36.27 0 0.16 512.13 0 548.56 393.47 22.91 416.38 964.94

55.14 54.98 9.49 0.16 787.15 0 851.78 599.02 10.68 609.7 1,461.48

0.69 0.26 0.43 4.77 28.51 4.73 5.51 1.93 12.17 65.94 0 78.11 0 8.95 0.5 9.45 68.66 0.12 102.49 0 45.66

1.18 0.44 0.74 0 28.51 101.23 5.44 166.14 272.81 132.06 0 404.87 0 158.51 1.72 160.23 244.64 1.34 275.23 0 56.59

14.43 2.88 11.55 0.02 11.17 168.16 298.62 13.76 480.54 358.33 0.67 839.54 0 58.97 30.02 88.99 750.55 6.34 779.63 0 123.13

27.95 6.19 21.76 0 1.08 444.2 262.15 0.31 706.66 488.79 0.41 1,195.86 0 202.23 51.51 253.74 942.12 0 964.96 0 151.2

30.93 10.34 20.59 2.7 12.43 363.14 462.99 31.93 858.06 843.14 5.46 1,706.66 0 202.02 78.87 280.89 1,425.77 0 1,461.49 0 153.17

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Orbit Corporation Ltd—Profit and Loss Account Pre- and Post-IPO (` in Crores)4 March March March 2008 2007 2006 (12 months) (12 months) (12 months) Income Sales turnover Excise duty Net sales Other income Stock adjustments Total income Expenditure Raw materials Power and fuel cost Employee cost Other manufacturing expenses Selling and admin. expenses Miscellaneous expenses Preoperative expenses capitalized Total expenses Operating profit PBDIT Interest PBDT Depreciation Other written off Profit before tax Extraordinary items PBT (post-extraordinary items) Tax Reported net profit Total value addition Preference dividend Equity dividend Corporate dividend tax Per share data (annualized) Shares in issue (lakhs) Earning per share (`) Equity dividend (%) Book value (`)

March 2009 (12 months)

March 2010 (12 months)

0.72 0 0.72 0.09 0 0.81

30.89 0 30.89 1.39 96.5 128.78

417.03 0 417.03 54.67 0.88 472.58

283.54 0 283.54 73.17 31.87 388.58

487.11 0 487.11 6.48 –81.06 412.53

0 0 0 0.59 0.01 0 0 0.6 0.12 0.21 0 0.21 0 0.03 0.18 0 0.18 0.08 0.09 0.6 0 0 0

0 0 0.29 105.89 0.01 12.94 0 119.13 8.26 9.65 0.18 9.47 0.2 0.34 8.93 0 8.93 1.17 7.77 119.13 0 0 0

0 0 12.23 165.84 10.9 9.97 0 198.94 218.97 273.64 32.69 240.95 1.69 1.68 237.58 0 237.58 21.47 166.63 198.94 0.02 19.95 3.39

0 0 7.62 189.33 15.04 12.55 0 224.54 90.87 164.04 33.8 130.24 3.31 0.43 126.5 0 126.5 18.81 37.66 224.55 0 0 0

0 0 8.94 201.78 23.93 16.55 0 251.2 154.85 161.33 53.95 107.38 4.15 0 103.23 0 103.23 7.26 95.97 251.2 0.02 13.55 2.31

215.96 0.04 0 45.66

271.71 2.86 0 56.59

362.71 45.94 55 123.13

362.71 10.38 0 151.2

549.81 17.45 25 153.17

(Continued)

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IPO Details (*documents filed with SEBI) Issue: 9,100,000 equity shares in the issue. Bid/issue opened on 20 March 2007 Bid/issue closed on 23 March 2007 Issue Price of ` 110 per share Dividend History Dividend payment track record of the company between 2007 and 2010 is given below: Dividend History of Orbit (`/share) 27 May 2010 11 November 2009 4 August 2008 6 February 2008 17 August 2007

1.5 1.0 2.5 1.5 1.5

Details on the company’s share performance on the stock exchange and price movement of the stock between February 2010 and May 2011 is given next. Price movement for last five years for the script in BSE5 530 430 330 230 130 30 10 2007

D

2007

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D

D

D

2008

2009

2008

2009

IIII

DB 2010

2010

2010

2010

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Comparison of Price Movement with BSE Index and Realty Sector Index6 Orbitco

Sensex

Realty

% Change [Price / Points]

50

0

50

100 Feb 10

May 10

Aug 10

Nov 10

Jan 11

May 11

 Questions  

1. Discuss the leadership team that is behind Orbit’s success and growth. 2. Was the year 2007 the right time for OCL to go for public issue? Explain and justify your answer. 3. Given the financials just mentioned, was it a prudent decision on the part of investors to invest in Orbit, if they wanted to invest in the reality sector? 4. Discuss and explain in detail the shareholder value before and after the issuance of public issue. 5. Will OCL be able to list its shares in NYSE in the next three years? Justify. 6. Can this company be placed in the successful category of going in for an IPO for achieving growth objectives? Justify.  Endnotes 

1. 2. 3. 4. 5. 6.

http://www.moneycontrol.com/competition/orbitcorporation/comparison/OC09 http://plus.capitaline.com/user/framepage.asp?id=1 http://www.moneycontrol.com/financials/orbitcorporation/balance-sheet/OC09 http://www.moneycontrol.com/financials/orbitcorporation/profit-loss/OC09 http://www.moneycontrol.com/stock-charts/orbitcorporation/charts/OC09 http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=532837

 CASE 16.2:  ECLERX SERVICES LTD 

 Background  eClerx was founded in 2000. It has currently more than 3,000 employees. At the end of 2007, the company became the first Knowledge Process’s Outsourcing (KPO) firm listed on the Bombay (Continued)

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Stock Exchange. It has five deployment centres in India and executive and sales offices located in London, New York, Austin, Dublin and Singapore. eClerx provides KPO and Business Process Outsourcing (BPO) services to global companies from their deployment centres in India. Their teams provide the level of manpower, expertise and technology necessary to continually innovate and improve the processes that drive the world’s most successful companies. As a result, their clients have a heightened degree of confidence that their critical processes are operating accurately and cost efficiently. eClerx teams are known to sales and marketing managers for their mastery of the processes and technologies related to pricing, all facets of online operations including content management, web analytics and social media; broader data heavy operations in the supply chain, CRM, channel and catalogue/SKU management spaces. The financial services teams of the company are highly appreciated for their domain expertise that enables them to improve and operate processes relating to risk management and reconciliation, trade validation, trade support, asset servicing, expense control and more. Unlike other BPO and KPO providers, eClerx excels at rapidly achieving value for its clients and smoothly scaling expert resources as needs fluctuate.

 Promoters  P. D. Mundhra is the co-founder and executive director of eClerx Services Ltd. Mundhra has more than 16 years of experience in the manufacturing and financial services industries and 10 years in capital markets and the KPO/BPO sector. Mundhra, along with Anjan Malik, founded eClerx in 2000, bringing with him a wealth of experience from his tenure in Lehman Brothers’ investment banking division and the corporate treasury at Citibank. Before his finance experience, he ran a number of entrepreneurial ventures including setting up a joint venture with Amco Veba of Italy for manufacturing and marketing mobile cranes in India, and a consumer products packaging plant for Unilever. He holds a Master of Business Administration degree in Finance from The Wharton School, University of Pennsylvania (USA), and a Bachelors of Commerce from St. Xavier’s College, Calcutta (India). Malik is the co-founder and director of eClerx Services Ltd and the executive director of its on-shore subsidiaries. He has more than 18 years of experience in investment banking, capital markets, consulting and technological solutions. Nine of those 18 years have been devoted to capital markets and the KPO/BPO sector. Before his involvement with eClerx, which he co-founded in 2000 along with Mundhra, Malik ran the credit trading department for Lehman Brothers in London. Before Lehman, he worked in Europe as a senior consultant with Accenture’s capital markets practice. Malik holds a Masters of Business Administration degree in Finance from The Wharton School, University of Pennsylvania (USA), and a first-class Bachelors of Science degree in Physics, with honours, from the Imperial College of Science and Technology, London (UK). eClerx Services Ltd (eCx), India’s first publicly listed KPO and a Forbes ‘200 Best Under a Billion’ company, has been named as one of the two best mid-cap companies in India, in an annual survey conducted by Finance Asia Magazine, one of the leading financial publications in the AsiaPacific region in 2011. Speaking on the ranking, Mundhra, executive director, eClerx Services Ltd, said, ‘We have always endeavoured to be the best at what we do, and have focused on building the maximum returns possible on all our efforts, so as to sustain the company’s steady profitability. This recognition from Finance Asia makes us even more confident of our efforts being on the right track, and should serve as a confidence builder for our investors as well. It is a mark of our expertise

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and strong business dynamics that we have been adjudged as one of the only two best mid-cap companies in India, in a survey of international stature. Going forward, we are confident that we will sustain this momentum and take the business even further, and retain our rank among the best Mid-Cap companies in the country.’ The Finance Asia survey is a part of an annual poll conducted by the publication to adjudge the region’s best-managed companies. The survey is based on votes from more than 300 investors and analysts across the region. Earlier, the company was selected as a finalist for the Most Admired Knowledge Enterprise (MAKE) India award for the second consecutive year 2010. eClerx has been named for the first time as a finalist in the much broader MAKE Asia list in 2010 as well. A total of 78 companies were nominated for the MAKE Asia list and 35 for the MAKE India list. A panel of Fortune 500 senior executives and internationally recognized knowledge management and intellectual capital experts has selected the 2010 MAKE finalists. The panel recognizes organizations against a framework of eight key knowledge performance dimensions that are the visible drivers of competitive advantage In 2008, Forbes Asia’s fourth annual Best under a Billion list focuses on Asia-Pacific companies with less than $1 billion in sales; eClerx was one of the only 22 Indian companies that made the cut, and the only one in the KPO/data analytics arena. The list includes companies many times their size, and many of them are much older than eClerx. In an interview with ET Now on 8 April 2011, speaking about the growth prospects of the company, Mundhra shared: ‘…from our perspective, the value proposition of moving these types of activities from high cost countries in the West to lower cost developing countries like India is very strong for our clients and that the trend will continue to play out over the next few years and service providers like us should benefit from that. So that is the secular trend that we see and if we can execute properly, we should be able to capture our fair share of that business especially keeping in mind the fact that we already have relationships with about 20 Fortune 500 companies. So that is what underlines our outlook for the future. We do not really give any formal quantitative guidance. So I cannot give you specific numbers but qualitatively, we continue to see good traction.’

 Market: Competition  The Indian IT-BPO industry was estimated to be around $88.1 billion in the fiscal year 2011, with the IT software and services (excluding hardware) accounting for $76.1 billion of revenues. Interestingly, the export revenues are estimated to be around $59 billion for the same period. Further, the IT services segment is growing by 22.7 per cent over the fiscal year 2010, aggregating export revenues of $33.5 billion accounting for 57 per cent of total exports according to a recent NASSCOM report. However, the BPO segment grew by 14 per cent and reached $14.1 billion for the fiscal year 2011 and is expected to transform itself to the next level moving to offer high-end value services. Further, the engineering design and products development segments are growing by 13.6 per cent to reach $9 billion on the back of the increasing use of electronics and localized products. In addition, the domestic market is expected to grow 16 per cent to reach ` 787 billion on the back of rapid advancement of technology infrastructure, increase in government spending on IT and increased competition among Indian players. The year was characterized by the consistent demand from the US market and increased contribution from the Asia-Pacific and the rest of the world. Incidentally, the growth has come from (Continued)

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across the verticals, that is, traditional verticals such as Banking, Financial Services (BFSI) and new verticals such as retail, healthcare, media and utilities.

Competition Some of the companies competing with eClerx Services and their performance for the year ended 31 March 2010 and May 2011 share performance are given below1:

Price May 2011

Company Core Projects eClerx Services Glodyne Techno KPIT Cummins OnMobile Global Vakrangee First Source Sol Zylog Systems Genesys Int Take Solutions

279.9 801.1 382.45 164.2 107.05 357.25 16.55 422.95 218.4 42.6

Market Capital (` in Crores) 3,090.68 2,286.87 1,671.60 1,434.04 1,262.22 891.04 712.71 695.6 651.87 521.42

Sales Turnover 2009–10

Net Profit 2009–10

Total Assets 2009–10

417.95 341.91 982.36 538.56 455.03 852.34 702.97 734.94 62.06 47

111.84 118.56 145.18 69.49 91.64 48.08 66.29 85.17 28.74 11.48

1,040.99 199.54 370.3 499.2 903.67 362.3 2,195.39 785.61 95.65 282.64

Industry—Key Financial Ratios2 Year

No. of companies Key ratios Debt–equity ratio Long-term debt–equity ratio Current ratio Turnover ratios Fixed assets Inventory Debtors Interest cover ratio PBIDTM (%) PBITM (%) PBDTM (%) CPM (%) APATM (%) ROCE (%) RONW (%)

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Latest

2009

33

25

0.27 0.22 1.59

0.48 0.41 1.86

2.14 89.25 5.39 12.98 23.25 15.5 22.06 20.26 12.51 20.23 24.6

1.74 150.29 3.63 2.15 26.26 20.76 16.6 13.49 7.99 13.24 7.53

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Financial Position of the Company3 eClerx Services Ltd—Balance Sheet Pre- and Post-IPO (` in Crores) March 2006 March 2007 March 2008 (12 months) (12 months) (12 months) Sources of funds Total share capital Equity share capital Share application money Preference share capital Reserves Revaluation reserves Net worth Secured loans Unsecured loans Total debt Total liabilities Application of funds Gross block Less: accum. depreciation Net block Capital work in progress Investments Inventories Sundry debtors Cash and bank balance Total current assets Loans and advances Fixed deposits Total CA, loans and advances Deferred credit Current liabilities Provisions Total CL and provisions Net current assets Miscellaneous expenses Total assets Contingent liabilities Book value (`)

March 2009 (12 months)

March 2010 (12 months)

1.01 1.01 0 0 11.74 0 12.75 0 0 0 12.75

1.01 1.01 0.02 0 28.32 0 29.35 0 0 0 29.35

18.87 18.87 0.09 0 113.31 0 132.27 4 0 4 136.27

18.93 18.93 0.1 0 146.22 0 165.25 0 0 0 165.25

19.03 19.03 0.25 0 180.25 0 199.53 0 0 0 199.53

11.52 3.43 8.09 0 1.26 0 6.64 5.79 12.43 4.36 0.12 16.91 0 0.45 13.06 13.51 3.4 0 12.75 0

14.29 6.64 7.65 0.04 0 0 11.92 7.23 19.15 8.58 0.12 27.85 0 2.31 3.89 6.2 21.65 0 29.34 0

22.32 11.08 11.24 6.89 78.77 0 24.57 12.25 36.82 27.55 0.2 64.57 0 13.73 11.48 25.21 39.36 0 136.26 4.98

37.74 17.94 19.8 0.03 98.47 0 45.06 9.12 54.18 30.83 9.8 94.81 0 23.42 24.44 47.86 46.95 0 165.25 1.17

43.34 24.3 19.04 2.21 90.86 0 39.23 30.21 69.44 50.43 15.12 134.99 0 22.66 24.9 47.56 87.43 0 199.54 6.81

125.96

289.69

70.05

87.26

104.71 (Continued)

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Profit and Loss Account4 eClerx Services Ltd—Profit and Loss Account Pre- and Post-IPO (` in Crores) March 2006 March 2007 March 2008 March 2009 (12 months) (12 months) (12 months) (12 months) Income Sales turnover 44.13 Excise duty 0 Net sales 44.13 Other income 3.55 Stock adjustments 0 Total income 47.68 Expenditure Raw materials 0 Power and fuel cost 0 Employee cost 12.45 Other manufacturing expenses 4.21 Selling and admin. expenses 2.26 Miscellaneous expenses 2.1 Preoperative expenses capitalized 0 Total expenses 21.02 Operating profit 23.11 PBDIT 26.66 Interest 0.49 PBDT 26.17 Depreciation 1.51 Other written off 0 Profit before tax 24.66 Extraordinary items 0 PBT (post-extraordinary items) 24.66 Tax 0.19 Reported net profit 24.46 Total value addition 21.02 Preference dividend 0 Equity dividend 16.2 Corporate dividend tax 2.27 Per share data (annualized) Shares in issue (lakhs) 10.13 Earnings per share (`) 241.6 Equity dividend (%) 1,600.00 Book value (`) 125.96

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March 2010 (12 months)

79.54 0 79.54 5.79 0 85.33

116.98 0 116.98 6.48 0 123.46

197.09 0 197.09 −4.23 0 192.86

257.02 0 257.02 −10.59 0 246.43

0 0 24.34 8.72 5.37 3.21 0 41.64 37.9 43.69 0.62 43.07 3.21 0 39.86 0.08 39.94 0.27 39.67 41.64 0 20.25 2.84

0 0 39.08 14.24 9.8 6.11 0 69.23 47.75 54.23 0.26 53.97 4.44 0 49.53 0 49.53 5.62 43.91 69.24 0 14.53 2.47

0 0 57.73 26.66 19.48 14.18 0 118.05 79.04 74.81 0.04 74.77 7.23 0 67.54 0 67.54 6.91 60.64 118.04 0 23.67 4.02

0 0 83.36 36.83 23.41 14.63 0 158.23 98.79 88.2 0 88.2 6.85 0 81.35 0 81.35 8.76 72.59 158.23 0 33.37 5.6

10.13 391.83 2,000.00 289.69

188.69 23.27 85 70.05

189.27 32.04 125 87.26

190.31 38.14 175 104.71

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IPO Details Issue: 101 million shares Bid/issue opened on 4 December 2007 Bid/issue closed on 7 December 2007 Issue Price of ` 315 per share  Price Movement for last five years for the script in BSE5 830

530

230

D

50 2007

D

D 2008

D

B D 2010

2011

Comparison of Price Movement with BSE Index6 Eclerx

Sensex

% Change [Price / Points]

200 150 100 50 0 50 Feb 10

May 10

Aug 10

Nov 10

Jan 11

May 11

(Continued)

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Mkt Cap

Net Sales

Net Profit

250 200 % Change

150 100 50 0 50

100 Dec 07

Dec 08

Dec 09

Dec 10

 Questions  

1. Discuss and explain whether it was the right time for eClerx to go for public issue in 2007. Justify your answer. 2. Discuss and explain in detail the shareholder value before and after the issuance of public issue. 3. Compare the financial ratios of the company with that of the industry and comment on the financial strength of the company. 4. Would one place this company in the successful category of IPOs? Justify your answer.  Endnotes 

1. 2. 3. 4. 5. 6.

http://www.moneycontrol.com/competition/eclerxservices/comparison/eS06 http://plus.capitaline.com/user/framepage.asp?id=1 http://www.moneycontrol.com/financials/eclerxservices/balance-sheet/eS06 http://www.moneycontrol.com/financials/eclerxservices/profit-loss/eS06 http://www.moneycontrol.com/stock-charts/eclerxservices/charts/eS06 http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=532927; http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=532927; http://www.eclerx.com/About_Rec_eClerx_in_Forbes.html http://articles.economictimes. indiatimes.com/2011-04-08/news/29396762_1_clients-medium-term-global-financial-crisis

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17

 LEARNING OBJECTIVES    To understand the reasons for failure of businesses and the precautions that need to be taken.  To learn about the categories into which businesses can be broadly classified.  To learn about the major criteria to identify a sick unit and the classification of sick/ weak companies.  To define micro, small and medium enterprises and large companies and their relevance.

 To understand what is meant by bankruptcy and liquidation.  To learn about the ways in which a company can be wound up.  To learn about the process of reviving a sick company.  To learn about exit strategies for an entrepreneur.

Henry Ford, Ford, Founder, Ford Motor Company, Pioneer in Automobile Manufacturing A market is never saturated with a good product, but it is very quickly saturated with a bad one. —Henry Ford

Henry Ford was a leading entrepreneur who made unique and far-reaching contribution to the automobile industry. He was born on 30 July 1863 in a township near Detroit, Michigan. He was founder of Ford Motor Company. His innovation transformed and revolutionized the transportation industry. He became one of the richest and best-known people in the world. His ingenuity was visible at the age of 15, when he dismantled a watch given as a gift by his father and reassembled the timepieces of friends and neighbours dozens of times. He left home to work as an apprentice machinist at the age of 16 in 1879 in the nearby city of Detroit. He ran a sawmill to support his family after he got married in 1888. Ford Motor Company was incorporated in 1903 after his two unsuccessful attempts to manufacture automobiles with the help of eleven partners and an investment of more than $28,000. (Continued)

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He worked for the realization of his dream of producing an automobile that was reasonably priced, reliable and efficient with the introduction of the Model T in 1908. This model led to initiation of a new era in personal transportation. It became a grand success mainly because of its ease of operation, maintenance and handling on rough roads. American market was dominated by Ford cars by 1918. The company introduced another Ford Model A in December 1927; producing more than 4 million cars by 1931. Thereafter, it strategically decided to come up with a new model every year to retain a competitive edge in the market. Ford was manufacturing one-third of the world’s total automobile production by 1932. He was the winner of the Car Entrepreneur of the Century award in 1999. The success of Ford Company started declining after Henry’s son’s death, in 1943. The company lost more than 240 million dollars in the next two years. Though President Roosevelt ordered a government bailout because the company helped in the war effort, things did not improve until his grandson, Henry Ford II, became president of the company after Henry’s second stroke.

17.1  INTRODUCTION Every entrepreneur who plunges into this challenging journey as a career option has intent to establish it as an entity that should keep growing and building up for a long time, even after their death. However, many uncertainties and problems may not let this happen in reality, as majority of the ventures by newgeneration entrepreneurs fail within the first five years of their inception. It is therefore important for an entrepreneur to foresee the inevitable in advance and understand the ways and means to either salvaging it or ending it—calling it a day. A bankruptcy declaration or liquidation of assets resulting in closure of a business is not an end in itself. It is evident from a large number of entrepreneurs who fail many times before seeing light at the end of the tunnel in terms of a venture success. Thus, as rightly pointed out—‘If you intend to start a full-time, incorporated business, the odds that the business will survive at least eight years with you as the owner are better than one in four; and the odds of its surviving at least eight years with a new owner are another one in four. So the eight-year survival rate for incorporated start-ups is about 50 percent’ (Bygrave 1997). However, one should not get surprised that failure rates for a career inside of a large company are also high as evident from their lay-offs. The competition to rise on the corporate ladder is severe because hierarchy is structured as a pyramid; at times an employee is fired for doing something that they did not do. Therefore, one need not get frightened with statistics on failure of small businesses, as equally tough may be the journey to rise on the corporate ladder by accepting a job rather than taking entrepreneurship as a career option. What is important is to understand the reasons for failure of businesses and what precautions can be taken to avoid such a happening. It is important to know that the vital reasons for failure of a business are mismanagement; starting a business for wrong reasons without having a passion, drive, determination, positive attitude and patience to persist backed up by an opportunity and at times lack of capital (Fig. 17.1). As an entrepreneur, having taken up a venture, one should know and learn from others about what should and should not be done to keep a new business afloat in the rough and high tides of the entrepreneurial sea. And above all, having made all-out efforts to salvage the business, knowing when to let go is among the most crucial traits an entrepreneur should possess to safeguard their and other equity holders’ interest.

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721

Ill-conceived Opportunity

Mismanagement

Lack of Capital Business Failure

Figure 17.1 Main Causes of Business Failure

Example In early 2006, online marketing analyst Jared Blank, a US national, decided to team up with an analyst  from  Jupiter  Research,  Vikram  Sehgal,  to  launch  Tripmela.com.  Their  objective  was  to  aggregate  all the travel deals available in India and send them out as weekly e-mail newsletters. However, in  December 2008, Tripmela was put up for sale on auction site Ebay, where it was sold for a paltry sum  of ` 112,000. What went wrong? Jared says, ‘We chose the Indian market because it was the largest Englishspeaking market in the world, and the travel market was booming. However, two fundamental things  went wrong. First, we realized that unlike in the United States, newsletters were not very popular with  the Indian user. Second, and most importantly, given the high occupancy of hotels, they just weren’t  as many hotels offering deals.’ Another similar case is My Dunia, an SMS services start-up based in Bangalore and started by  Kesava Reddy. On 17 October 2008, My Duniya brought down its servers citing the usage of a wrong  strategy. ‘My Dunia was concentrated more on individual users offering services such as the sending  of e-mail via SMS.’ ‘However, we found this model extremely difficult to scale up since it involved targeting individual  users rather than enterprises,’ says Reddy. He has transferred his learnings and has launched a new  start-up named Numo Solutions, which customizes SMS solutions for enterprises.1

17.2  BROAD CATEGORIES INTO WHICH   VENTURES CAN BE  CLASSIFIED 17.2.1  Growth Company A business venture that is able to generate significant cash flows or earnings that keep increasing over time is called a growth company. Such a venture has good opportunities on a continuing basis to invest in the business its own retained earnings and the funds raised from different sources suited to its requirements.

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Such ventures do have a firm policy on payment of dividends to investors and to ensure capital gains to them, so that they are able to plow back profits into business growth. These ventures are normally technology driven, having good scope to scale-up their operations to cater to local, national and global market needs. For example, Google has grown very fast as is evident from its growth in revenues and subsequent funds generated through an IPO. Every entrepreneur aspires to grow their venture to greater heights. However, in reality, it does not happen with all.

17.2.2  Weak and Sick Companies It is essential that an entrepreneur is alert to the performance of the company and is quite sensitive to the signals that they are receiving about adverse performance. These signals can help them to capture the problem sufficiently in advance and work on finding out the root cause of the problem and solving it before it becomes irreversible. Weak companies are ones that perform poorly and as result have eroded 50 per cent or more of their net worth. Sick industries are those units that perform far poorly against expected results, incur cash losses for consecutive years, resulting in a gradual erosion of their entire net worth and fail to pay off their debts (Fig. 17.2). The major criteria to identify a sick unit are as follows:      

continuous cash loss negative net worth excess of current liabilities over current assets, that is, a current ratio of less than 1 defaults in payment of principal and interest to lenders operation far below the break-even level of capacity utilization debt equity ratio worsening and far higher than industry norms

In Indian business environments, as defined by Reserve Bank of India, companies are basically classified into micro, small and medium enterprises and large companies as per the following definition2: 1. Enterprises engaged in the manufacture or production, processing or preservation of goods are classified as follows: a. A micro enterprise is an enterprise where investment in plant and machinery does not exceed ` 25 lakhs.

Growth Companies Different Categories of Ventures Weak/Sick Companies

• Ventures Which Are Able to Generate Significant Cash Flows That Keep Increasing Over a Period.

• Companies with Poor Financial Performance Resulting in Erosion of 50/100 per cent Net Worth and Fail to Service the Debt Obligations.

Figure 17.2 Categories into Which Ventures Can Be Classified Broadly

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b. A small enterprise is an enterprise where the investment in plant and machinery is more than ` 25 lakhs but does not exceed ` 5 crores. c. A medium enterprise is an enterprise where the investment in plant and machinery is more than ` 5 crores but does not exceed ` 10 crores.

The investment in plant and machinery in these enterprises is the original cost excluding land and building. 2. Enterprises engaged in providing or rendering services (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the Micro, Small and Medium Enterprises Development Act 2006 (MSMED)) are classified as follows: a. A micro enterprise is an enterprise where the investment in equipment does not exceed ` 10 lakhs. b. A small enterprise is an enterprise where the investment in equipment is more than ` 10 lakhs but does not exceed ` 2 crores. c. A medium enterprise is an enterprise where the investment in equipment is more than ` 2 crores but does not exceed ` 5 crores.

These include small road and water transport operators, small business, retail trade, professional and self-employed persons and all other service enterprises.

17.2.3  Definition of Sick Small Enterprises A small enterprise should be considered ‘sick’ in any of the following cases: 1. Any of the borrowal accounts of the unit remains substandard for more than six months, that is, the principal or interest, in respect of any of its borrowal accounts has remained overdue for a period exceeding one year. The requirement of overdue period exceeding one year will remain unchanged even if the present period for classification of an account as sub-standard is reduced in due course. 2. There is erosion in the net worth due to accumulated cash losses to the extent of 50 per cent of its net worth during the previous accounting year or 3. The unit has been in commercial production for at least two years. Keeping in view the late identification of a sick unit which depletes its possibility of revival, it is necessary to hasten the process of identification of a unit as sick by way of change in the definition of sickness as follows: A micro or small enterprise (as defined in the MSMED Act 2006) may be said to have become sick if 1. any of the borrowal account of the enterprise remains NPA for three months or more or 2. there is erosion in its net worth due to accumulated losses to the extent of 50 per cent of its net worth. Accounts where wilful default is identified or the borrower is absconding should not be classified as sick units and accordingly, are not eligible for any relief and concessions. According to Reserve Bank of India, non-SSI sick accounts and non-SSI weak accounts are defined as follows: 1. A non-SSI sick unit is a non-SSI industrial undertaking (regardless of the type of incorporation) whose accumulated losses, as at the end of the latest financial year, equal or exceed its entire net worth (viz. paid up capital and free reserves). 2. A non-SSI weak unit is a non-SSI industrial undertaking (regardless of type of incorporation) if a. any of its borrowal accounts (principal or interest) has remained overdue for a period exceeding one year or

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b. there is erosion in the net worth due to accumulated losses to the extent of 50 per cent of its net worth during the previous financial year. These definitions have been issued recently by RBI, after considering all factors, and therefore, we do not suggest any change in the definition of sickness in medium enterprises. However, for the sake of uniformity, we suggest change of the term ‘non-SSI weak unit’ to ‘non-SSI incipient sick unit’.

Weak or sick companies basically fall into three broad categories, namely, born weak/sick, become weak/sick and made weak/sick (Fig. 17.3). Born sick companies have fundamentally started the business with a wrong idea or an idea that does not have an opportunity in place. Therefore, from day one, these companies find it very hard to market their product/service. Because of fundamental reasons leading to lack of cash generation, such companies fall sick soon and may have to change the idea or call it a day soon without wasting any further resources. Made sick companies are those that lose an opportunity because of lack of management competence or non-availability of capital on time. The chances of revival of these companies are normally high by infusion of capital or change in management or streamlining the management processes in the company. Become sick companies are caused normally by external factors that were not visualized at the time of their start such as change in government policies on taxes, imports, priority of the sector and incentives associated with it. The other vital reasons for the sickness of companies falling under this category lie in up-gradation of technology available in the market in too short a period at far lesser cost, making it difficult for the existing businesses to survive. For example, in the late 1990s, in the floriculture industry, which was one of the industries that the Government of India had encouraged from an export potential point of view since the early 1990s, there were found to be better and cheaper Green House technologies 1996, which made most of the existing units non-viable.

17.2.4  Viability of Sick Small Enterprises 3 A unit may be regarded as potentially viable if it would be in a position, after implementing a relief package spread over a period not exceeding five years from the commencement of the package from

Born

Classification of Weak/Sick Companies

• Fundamentally Started the Business with a Wrong Idea

Become

• Internal Reasons Such as Mismanagement or Lack of Capital

Made

• External Reasons Not Visualized at the Time of Starting a Business Such as Government Policies

Figure 17.3 Classification of Weak/Sick Companies

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banks, financial institutions, the government (Central/State) and other concerned agencies, as may be necessary, to continue to fulfil its repayment obligations as agreed upon, including those forming part of the package, without the help of concessions after the aforesaid period. It is essential that the duration of repayment of restructured (past) debts should not exceed seven years from the date of implementation of the package. However, in the case of tiny/decentralized sector units, the period of reliefs/concessions and repayment period of restructured debts should not exceed five and seven years, respectively, as in the case of other small enterprises. Further, it is essential that a rehabilitation package gets fully implemented within six months from the date the unit is declared as ‘potentially viable’/‘viable’, so as to ensure rehabilitation of the unit on time. Banks are also expected to do ‘hand holding’ operations for a period of six months by allowing the unit to draw funds from the cash credit account at least to the extent of its deposit of sale proceeds, pending identification and implementation of the rehabilitation package by banks/FIs.

17.2.5  Bankruptcy Defined Bankruptcy is defined as a legal proceeding that involves a person or business that is not in a position to repay outstanding debts. The bankruptcy process is initiated with a petition commonly filed by the debtor or at times on behalf of creditors. The debtor files for bankruptcy to get relief from debt, which is accomplished either through a discharge of the debt or through a restructuring of the debt. Bankruptcy is usually an outcome of adverse implications on the business entity arising as a result of weak economy, severe competition that was not visualized by the entrepreneur and sudden spurt in cost of production because of increased inputs costs not getting absorbed in the price of the product that customer would willingly pay. These happenings adversely affect business operations and their ability to survive. However, bankruptcy may not be necessarily the end of a business, as it provides an entrepreneur the opportunity to relook into the root cause of the problem and come up with a reorganized plan to operate and come out of the situation on their own. At times, it may be more prudent to merge the company with another one to salvage the condition and safeguard the interests of the stakeholders involved. As a last recourse, it may even lead to a situation of liquidation of the company to realize funds by sale of assets of the company and pay as per the stipulated legal provisions to the stakeholders. Bankruptcy in the United States is a matter that falls under the Federal Jurisdiction by the constitution of the United States. That allows the Congress to enact ‘uniform laws on the subject of bankruptcies throughout the United States’. Federal law has been amplified by state law in some states where federal law fails to speak or expressly defers to state law. State law, therefore, plays a vital role in many bankruptcy cases, and it is therefore not possible to generalize bankruptcy law across states in the United States. Bankruptcy filings in the United States can fall under several categories such as chapters of the Bankruptcy Code, Chapter 7, which deals with liquidation of assets, Chapter 11 for reorganization of company or individual and Chapter 13 for debt repayment with lowered debt covenants. Bankruptcy filing specifications vary widely from country to country, leading to higher and lower filing rates depending on how easily a person or company can complete the process.4 Usually, a business entity files a bankruptcy case under Chapter 11 for reorganization when it has a past history of success but is undergoing severe cash-flow crunch or other economic hardships, and when its promoters are convinced that, if it can hold off against liquidation proceedings from its creditors for a while and can get some relief on its debt, it could come out of the financial distress and is having good prospects of emerging again as a profitable enterprise. That was what happened with leading companies such as United Airlines, Chrysler and General Motors, as these business entities

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could come out of a crisis through laws under bankruptcy. The provisions of this act are also applicable to limited liability companies, partnerships, limited partnerships and sole proprietorships. These provisions are applicable even to individuals, whether or not they have business interests, who have debts that are beyond their ability to repay as per stipulated terms. India as such does not have any clear law on corporate bankruptcy, although individual bankruptcy laws have been in existence since 1874. The current law in force called the Provincial Insolvency Act was enacted in 1920. As such, the legal meaning and implications of the terms such as bankruptcy, insolvency, liquidation and dissolution are contested in the Indian legal system. However, there exists the Sick Industrial Companies Act 1985 (SICA), which was enacted in public interest with the twin object of  securing the timely detection of sick and potentially sick companies  speedy determination and enforcement of remedial measures for such companies

BIFR and NCLAT This  act  is  mainly  a  remedial  process,  which  has  empowered  a  quasi-judicial  body,  the  Board  for  Industrial and Financial Reconstruction (BIFR), to take appropriate steps for revival and rehabilitation  of potentially sick industrial companies and to ensure timely liquidation of non-viable companies. SICA 1985 was amended twice, in 1991and 1998, before getting ultimately repealed and replaced  by Sick Industrial Companies (Special Provisions) Repeal Act, 2003. Subsequently, the task of revival  and rehabilitation of companies was entrusted to National Company Law Tribunal (NCLT), which was  incorporated under the Companies Act, 1956. Any  appeal  against  the  order  of  the  NCLT  will  have  to  be  made  to  the  National  Company  Law  Appellate  Tribunal  (India)  (NCLAT)  as  against  Appellate  Authority  for  industrial  and  financial  reconstruction (AAIFR). Prior to NCLT, appeals in case of BIFR cases were being made to AAIFR or,  at times, directly to High Courts also. The aim of introduction of NCLT is not only to combat industrial  sickness but also to reduce it by ensuring that companies do not view declaration of sickness as an  escapist route from legal provisions after the project failure and gaining access of various benefits/ concessions from the financial institutions.5,6

17.2.6  Liquidation When a company or any business entity is wound up on account of creditors suit for winding-up being filed, its assets are sold and the proceeds are paid to creditors as predefined priorities in the law (Fig. 17.4). If at all any amount is left out after taking care of all liabilities of all creditors, it is distributed to first preferred shareholders followed by common share holders. Thus, liquidation is a legal process that helps in converting assets of a business entity into cash, so as to pay its outstanding debts and distribute the balance amount left out, if any, to preferred shareholders followed by common shareholders and the company goes out of business. Bankruptcy and liquidation issues are covered in detail under the Indian Companies Act, 1956, the Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’), Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Indian Contract Act, 1872, the Indian Civil Procedure Code, 1908, and other substantive and procedural laws for recovery proceedings.

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Winding-up a Company

Liquidation

Assets Sold

727

Proceeds Paid to Creditors as per Defined Priority

Figure 17.4 Liquidation Defined

Voluntary Winding-up

• Process Initiated by Management

Winding-up by a Court of Law

• After Exhausting All Other Measures to Revive, Court Pronounces a Judgment to Wind-up a Company

Winding-up Ways

Figure 17.5 Ways in Which Winding-up Takes Place

Keeping in view the long-drawn-out process of recovery under the Civil Procedure Code, 1907, the Debts Due to Banks and Financial Institutions Act, 1993, and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, were enacted. The ‘winding up’ of a company or any business entity by a legal body as defined earlier on account of bankruptcy can be taken up in two different ways, namely (Fig. 17.5)  voluntary winding-up  winding-up by a court of law on a winding-up petition

Once a company is declared ‘bankrupt’ or ‘unable to be revived’, and in turn, judgment is pronounced to wind it up, a process is chalked out by the appropriate court to appoint a liquidator, who takes appropriate steps in a transparent and objective manner to realize the maximum possible proceeds by

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Wockhardt’s Liquidation Troubles Overburdened with debt, Wockhardt has been fighting hard with some of its creditors over the terms  of  repayment  of  a  foreign  currency  convertible  bond  issue  that  matured  in  October  2009  but  the  company was unable to fully repay. If the Mumbai High Court decides in favour of liquidation, Wockhardt will be left with only a few  weeks to settle with bondholders. Business analysts are of the opinion that the company’s shares are  expected to remain under pressure until a judge hears the case. Investors had placed a lot of confidence in Wockhardt’s efforts to resolve its legal dispute and  return  to  profitability.  After  underperforming  the  Sensex  by  between  22  per  cent  and  68  per  cent  from  2006  to  2009,  the  company’s  shares  jumped  by  112  per  cent  in  2010.  However,  the  latest  development is bound to adversely affect investor confidence. Wockhardt’s shares hit a one-month low of  `312.50 ($6.9) early Monday and were down 6.7 per  cent at `234.00 in the afternoon trade the same day, as against the benchmark Sensex that rose by  0.7 per cent. The company has been passing through legal troubles ever since it opted for a debt restructuring  exercise in April 2009 after becoming over burdened with debt raised for several overseas acquisitions,  including Esparma Gmbh in Germany and Pinewood Laboratories Ltd in Ireland. Further, the risk that  the company took on account of currency movements had put further pressure on the company’s  finances. The company for the first time appears to be very close to liquidation. On 11 March 2011, Wockhardt said that it would appeal against the winding-up petition but its  options appear to be limited. According to Supreme Court advocate H. P. Ranina, the case will go  before a judge for liquidation to be pronounced and Wockhardt would be left with just a few weeks  to pay off its lenders, failing which will lead to the court appointing a provisional liquidator and the  creditors will be paid according to preference, with the unsecured bond holders coming last. Kapadia, however, feels that the company will manage to avoid liquidation through a last-minute  deal with lenders.7

selling assets, which are used to meet the maximum possible liabilities of the company as per defined priorities in law. As of 30 November 2008, more than 950 companies were under liquidation under an official liquidator appointed by Mumbai High Court, including Bhojwani Hotels Pvt. Ltd, Mardia Samyoung Capillary, Tubes Co. Ltd, Priti Plastics Pvt. Ltd and Regent Chemicals Ltd.

17.2.7  Potential Opportunity in Reviving Sick Units The changed business environment, in which the number of sick units is increasing, provides a great opportunity to entrepreneurs to turn them around by mergers, takeovers and change in management, or even the existing promoters can take initiatives to turn them around. Some of the key reasons why sick units provide great business opportunities are as follows (Fig. 17.6):  Most of the sick units are very old having lands and buildings at prime places. The pace of urbanization has increased the price of land and building owned by them.  Plant and machinery in many sick companies are in good condition. The main reason for their sickness might have been mismanagement. Therefore, given the demand for the product, it would be a worthwhile challenge to turn around such companies.

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Potential Because of Land and Building Ready Availability of Plant and Machinery Does Not Require a Gestation Period to Set Up Facilities and Seek Approvals Relaxation of Foreign Exchange Restrictions Opportunity to Revive Companies

Availability of Cheap Labour Capital Market Reforms-easy Funds Raising Takeover, Mergers and Acquisitions Have Become Easy Foreign Companies Keen on Investing in India Government Incentives

Figure 17.6 Potential Opportunities in Reviving Sick Units

 Reviving a sick unit does not require a gestation period to set up facilities and take necessary approvals from government. Further, over the years, infrastructural constraints have been partly or fully taken care of with availability of water, power and so on.  With relaxation of foreign exchange restrictions, it has become relatively easy to import updated technology or enter into foreign collaborations that can help a lot in salvaging the existing assets of sick units, including entering into foreign markets.  Labour being relatively cheap in India, the potential for exports of products of such industries has dramatically increased. Further, government policies are far more conducive in promoting exports by extending multiple incentives. It is evident from the service sector growth in the economy after liberalization.  Capital market reforms have made it relatively easy for promoters to raise public equity. This has also facilitated banks and other financial institutions to convert their loans into equity, in case they see great potential in company’s future earning capacity under changed circumstances.  Takeover, mergers and acquisitions have become easier. Further, even the Board for Industrial and Financial Reconstructions helps in change in the management as a smooth process in case existing management is not able to deliver and take responsibility to pump in required funds.  Foreign companies are taking initiatives to invest in India, including availing opportunities to partner with Indian companies for taking advantage of Indian market or to promote the product in global markets.  The government provides a number of incentives to those working for the cause of revival of sick units.

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17.2.8  Signals of Sickness Some of the key signals that can be noticed in advance if an entrepreneur remains alert in to day-to-day business operations, are as follows:  irregularity in cash credit accounts or seeking continuous accommodation from banks to make payments or overly depending on the overdraft facility  excessive capacity as evident from gross under-utilization of capacity  downward trend in sales realization resulting in fluctuation or fall in profits  default in payment of statutory dues such as provident fund and employee state insurance  longer outstanding debtors from a time point of view resulting in excessive outstanding amounts under debtors  excessive inventories including large proportions of slow or non-moving inventories  lack of or no cooperation for getting concurrent audit done or stock checking by banks  longer duration of credit to buyers compared to industry norms  failure to meet institutional and bank commitments on time  delay in payment of matured liabilities on account of letter of credits or bank guarantees  diversion of funds to non-productive purposes  using capital expenditure funds for working capital and vice versa  non-submission of monthly and quarterly reports to banks  routing sale proceeds through other banks  recurrence of cheques and bills returns  increasing legal suits against company  exodus of personnel  diversification in multiple areas in too short a time  rapid expansion and too much diversification within a short time  any major change in the share holdings

Broad framework for identification of sickness and possible steps for rehabilitation are given in Figure 17.7.

17.2.9  Revival of Weak/Sick Companies There exists tremendous potential for growth of MSME sector because of its inherent strength to contribute in multifarious ways such as production, employment and exports to the gross domestic product (GDP). Although the growth of MSME has not been commensurate with the requirement for a variety of reasons, it is being given a definite impetus through different policy measures. Small and medium enterprises (SMEs) contribute substantially to the growth of the economy as evident from their contribution to GDP estimated at 40 per cent, contribution to exports estimated at 50 per cent and employment opportunities to nearly 4 crore persons. SMEs pave the way for entrepreneurial development in the economy. This is the sector that generates relatively far higher employment opportunities in relation to per unit of investments. With the services sector dominating the SME, and MNCs outsourcing their various requirements to Indian service providers, the role of SMEs is becoming more and more crucial for the overall growth of the economy. Similarly, small-scale industries (SSI) too contribute a great deal, as evident from 133.7 lakh units in 2007–08, resulting in production worth ` 695,126 crores at current prices, and providing employment to 322.3 lakh people. The SSI sector in India contributes around 40 per cent of its production as exports. Although the MSME contributes a great deal in the overall growth of the economy, the sector is saddled with sickness, implying substantial proportion of investment not yielding commensurate returns. At the end of March 2009, there were 0.103 million sick SSI/MSE

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Feedback Preventive Measures

Inventory Management, Debtors Management, Internal Controls, Production Management and So On

Symptoms

Industrial Sicknessalarming

Controllable

Nursingrehabilitation Package

Uncontrollable

Legal Action for Liquidation

Causes

Feedback

Figure 17.7 Identification of Sickness to Rehabilitate Sick Units units where ` 3,720 crores of scheduled commercial banks funds were locked in. The total amount of money locked in sick/weak units, including MSME and non-SSI units, was to the tune of ` 35,366 crores in 90 thousand units as at the end of March 2008. This reveals that the industrial sector as a whole is saddled with several internal and external factors that are putting undue pressure on companies to become sick. This situation of substantial funds locked up in sick units provides a great opportunity to turnaround these companies by converting their assets into productive use in response to market forces. The government’s and Reserve Bank of India’s policy initiatives as reflected in various policy documents, including the MSMED Act 2006, which came into effect from 2 October 2006, aim at removing the several bottlenecks faced by industrial enterprises that have become sick/weak. Some of the vital bottlenecks and issues that are getting addressed by these policy measures are as follows:        

overcoming competition from both domestic and multi-national companies availability of adequate access to finance providing an environment and ecosystem to improve access to private equity and venture capital assistance in overcoming marketing challenges—inter-state and international markets improved access to critical inputs as well as products at reasonable prices improved access to updated technology and product innovations improved awareness of global best practices overcoming the problem of delays in the settlement of dues/payment of bills by the large-scale buyers/ overseas buyers

Availing the opportunity to rehabilitate the existing sick units in both MSME and Non-SSI sectors, which problem is becoming alarming in India, requires a systematic diagnosis of reasons for sickness, which can be classified into two broad categories, namely, causes and symptoms. Causes of sickness could be controllable or uncontrollable. In case the root cause of the sickness is uncontrollable, it is desirable to take timely legal recourse and salvage the value of the assets to the extent it could be possible at the earliest. However, in case the cause is controllable, one needs to take nursing by a collective

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Table 17.1 Causes of Sickness Internal Causes y y y y y y y

Planning related Implementation causes Production management Labour management Marketing management issues Financial Administrative reasons

External Causes y y y y y y y y

Inability to respond to challenges of growing competition Infrastructural bottlenecks Financial bottlenecks Government policies Procedural delays in getting clearances and sanctions Recession in the market Political change resulting in change in policies Marketing constraints

effort of promoters, bankers, government, suppliers of inputs and so on. This takes the shape of working out a mechanism for reconstruction or rehabilitation of the company by extending appropriate concessions from different stakeholders, provided the unit is viable as reflected from its ability to meet its restructured liabilities including fresh induction of funds by way of loans, equity or subsidies. On the other hand, timely detection of future likely sickness of a unit, if it reveals that there are certain symptoms responsible for it, the entrepreneur should take preventive measures, sufficiently in advance to ensure that the company comes back to normalcy at the earliest.

17.2.10  Causes of Sickness There are many and varied reasons for sickness in the industrial sector. What it takes is to have wisdom and skills to identify these causes in advance, that is, before the situation becomes irreversible, and take appropriate action. As such, there are no readymade solutions to problems of sickness, as each case is unique and requires a unique handling as in the case of a patient and their doctor. Some of these causes broadly classified into internal causes and external causes are given in the following sub-sections (Table 17.1). Internal Causes  Internal causes leading to sickness are manageable by taking necessary corrective steps within the organization. A unit that faces sickness because of internal causes has far greater probability of revival, if timely actions are taken, so as not to allow the situation to precipitate to a level that it becomes irreversible.  planning related—technical feasibility • Inadequate technical know-how • Locational disadvantage and other infrastructural constraints • Poor, outdated and obsolete technology • Erratic power supply  planning related—economic viability • High cost of inputs • Problems related to availability of raw material • Break-even point being too high • Un-economic size of operations • Underestimation of financial requirements • Unduly large investment on project • Overestimation of demand  implementation causes • Cost overrun • Inadequate mobilization of resources

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 production management • Inappropriate product-mix • Poor quality control • Poor capacity utilization • High cost of production • Poor inventory management • Inadequate maintenance and replacement of plant and machinery  labour management • High wage structure and inappropriate mix of personnel at different tiers • Inefficient handling of labour • Excessive manpower • Low productivity • Poor labour relations • Untrained and unskilled labour  marketing management issues • Overdependence on few customers • Limited product range • Poor sales realization • Defective pricing policy • Weak market organization • Lack of market feedback and market research  financial • Poor resource management • Faulty costing • Adverse debt equity ratio • Inadequate working capital or lack of working capital management • Diversion of financial resources  administrative reasons • over-centralization in decision-making • lack of professionalism • lack of feedback mechanism • lack of timely diversification • excessive expenditure on research and development • dissension among promoters • incompetent management

External Causes  External causes leading to sickness are difficult to be handled, as they are in the hands of people and organizations outside the business entity. The revival chances automatically deplete, in case sickness is caused mainly by external causes. Some of the prominent external causes of sickness of an industry are as follows:  inability of the company to respond to the challenges of growing competition due to liberalization and globalization  infrastructural bottlenecks  financial bottlenecks resulting in non-availability of required funds  government policies regarding pollution, import duties, taxes, prices, licensing and so on leading to adverse effects on the operations of the company  procedural delays in getting clearances and sanctions resulting in missing opportunities  recession in the market resulting in lack of expected demand

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 political change resulting in change in policies affecting the business operations of an entity adversely  marketing constraints as an outcome of liberal licensing policies, restraint of purchase by bulk purchasers, changes in global marketing scenario, excessive tax policies by the government and so on

17.2.11  Rehabilitation Measures Having identified that the company that has fallen sick or is in the category of weak unit, but has potential viability to survive and grow, attempts are made by multifarious efforts jointly taken by banks, state governments, promoters, statutory dues collecting bodies and, at times, even customers to extend various reliefs and concessions to enable the company come out of financial distress, and safeguard the vital interest of employees, government and society at large. Reserve Bank of India has been issuing guidelines to banks for extending various reliefs and concessions with which, coupled with reliefs from other institutions involved, the company should be able to get revived, as assessed in terms of its future viability. It is observed that guidelines for extending reliefs and concessions, assessment of viability parameters and need for collective effort from banks and government agencies have been well laid out, but for the problems that are associated with implementation of guidelines. For becoming eligible for relief package, MSMEs should fulfil the following important criteria for viability assessment (Table 17.2). As stated earlier, during the period banks undertake viability assessment and take a final view regarding working out detailed rehabilitation package, in case the unit is found to be viable, holding operations are to be permitted by the banks for a maximum period of six months by the regional head concerned, for a period of six months. During this period, the unit is allowed to draw funds from the cash credit account to the extent of 100 per cent of sale proceeds credited into the account. Table 17.2 Key Rehabilitation Benchmark Criteria Used by Banks Ratio

Benchmarks

Debt service coverage ratio (DSCR)

Average DSCR of more than 1.15 and more than 1 each year is considered adequate.

Current ratio Long-term debt/TNW ratio (that is debt equity ratio) Holiday period for payment of instalments and interest

Above unity and progressively improving. 3:1. (Promoters to bring in additional funds in the form of capital only and not in the form of loans). Depending on the adequacy of cash surplus

Repayment period

i. Micro and small enterprises Entire restructured dues should be adjusted within a maximum period of seven years (including holiday period), but the interest concessions will be available only for a period of five years. ii. Medium enterprises Entire restructured dues should be adjusted within a maximum period of 10 years (including holiday period), but the interest concessions will be available only for a period of seven years Restructured dues with concessionary rates of interest/ inadequate security should get precedence in repayment. Repayment period of restructured dues of sick units will be governed by RBI guidelines in force from time to time.

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Viability study has to focus in detail about various aspects such as identification of causes, especially the root cause of sickness future market prospects by forecasting demand for products/services managerial competence of the borrowers to effectively implement the rehabilitation technical viability, including various aspects such as location, plant and machinery, and infrastructure, and need for technology upgradation, if any  financial viability by examining the assumptions in detail about future projections  any concessions available from the state government as per the rehabilitation policy of the state concerned and their implications on the future viability of a unit  ability of the borrowers to induct funds required—their worth and specific sources    

Viability study should clearly come up with four distinct possibilities, namely (Fig. 17.8):  company is viable and can come out of financial distress with additional dose of funding for capital expenditure or working capital  company is viable subject to additional funding and reliefs and concessions to restructure its liabilities and provide extra comfort to other stakeholders  company is viable but would mainly require change in management before any other measures are thought of  company is not viable at all and has to be liquidated at the earliest

Certain modifications to already existing guidelines for revival of MSME units have been introduced pursuant to the recommendations of the working Group on Rehabilitation of SMEs headed by K. C. Chakravorty to strengthen the system of timely detection and implementation of rehabilitation proposal. These reliefs and concessions, on a need basis in a selective way, can be extended by banks to help sick units to come out of sickness within a stipulated time (Table 17.3). Treatment of existing dues can be done on the following basis:  Interest Overdues on Cash Credit and Term Loan Account—If any penal rates of interest or damages have been charged in the account; such charges need to be waived from the accounting year of the unit in which it started incurring cash losses continuously. The remaining interest dues, if any,

Requires Additional Dose of Funding

Viable

Requires Additional Funding and Reliefs and Concessions

Viability Study Non-viable Requires Change in Management

Figure 17.8 Viability Study of Sick Units

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Table 17.3 Reliefs and Concessions That Can Be Extended to Sick/Weak Units by Banks Nature of Concessions

Medium Enterprises

Micro and Small Enterprises

1. Interest on fresh and existing Prevailing BPLR or 1% below the 1.5% below the prevailing BPLR (renewed) working capital applicable rate, whichever is lower or 1.5% below the applicable rates, whichever is lower 2. Interest on existing term loan Reduction by a maximum of 2% Reduction by a maximum of 2% from the applicable rate (3% for micro enterprises) from the applicable rate. 3. Interest on fresh rehabilitation term Prevailing BPLR or 1% below the 1.5% below the prevailing BPLR loan (RTL) (For small manufactur- applicable rate, whichever is lower or 1.5% below the applicable rate or as prescribed by SIDBI/ ing units for start-up expenses and NABARD where refinance is margin for working capital) obtained, whichever is the least At the concessional rate allowed 4. Interest on contingency loan assis- Not applicable for working capital assistance. tance to meet escalations in capital expenditure under the rehabilitation scheme 5. Interest on working capital term 1% below the prevailing BPLR 1.5% to 3% below the prevailing loan (WCTL) or 1% below the applicable rate, BPLR or 1% to 2% below the applicable rates, whichever is whichever is lower lower 6. Interest on funded interest term 2% below the prevailing BPLR NIL for a period of three years at loan (FITL) or 1% below the applicable rate, the discretion of the bank whichever is lower 7. Repayment period for funded Normally three to five years (Can interest term loan be prolonged to six to seven years in exceptional cases). As far as possible should get precedence over, or is spread over a shorter duration as the repayment of institutional loans.

To be repaid within 3 years from the date of commencement of implementation of rehabilitation programme

8. Repayment period for funded term The repayment period for restrucloan (FTL) tured debts may extend up to a maximum period of 10 years, but the interest concession will be available only for a period of seven years being the outer limit for rehabilitation

Should not normally exceed 7 years from the date of restructuring and 15 years from the date of first disbursement of original loan. For micro enterprises, the said period may be five and seven years, respectively. Staggered or ballooning repayment may also be permitted so that the installments are aligned to the cash flows -Do-

9. Repayment period for working -Docapital term loan (WCTL) 10. Waiver of penal interest Waiver of penal interest from the beginning of the accounting year in which the unit started incurring cash losses continuously

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Waiver of penal interest from the date of account becoming NPA or started incurring cash losses, whichever is earlier

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







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will be funded in the form of funded interest term loan. Similarly, unadjusted interest dues such as interest charged between the date up to which rehabilitation package was prepared and the date from which actually implemented will be funded on similar lines as mentioned earlier. Excess in Cash Credit and Term Loan Accounts—After making adjustment in the interest dues as mentioned earlier, the balance representing principal dues will be treated as irregular to the extent it exceeds drawing power in the cash credit account. This amount will get funded as working capital term loan. Treatment to Existing Term Loans—Existing term loans, after segregating the irregular portion of interest dues, will be restructured in line with projected cash flows. Maximum repayment period for term loans to be restructured shall not exceed seven years for micro and small enterprises and 10 years for medium enterprises. Cash Losses—The company is likely to continue incurring cash losses in the initial phase of rehabilitation until the unit reaches its break-even. The cash losses other than interest during nursing period may also be financed by the bank, if the bank is the only financier. If a bank and a financial institution are involved in the rehabilitation package, the financial institution concerned should finance such cash loss. Interest will be charged on the funded amount at the BPLR rate. However, interest due to the bank will be funded by the bank separately. Funds for Start-up and Margin Money Requirement for Working Capital—In certain cases, the company may require additional term loan for purchase of plant and equipment, certain start-up expenses such as payment of pressing creditors or margin money for working capital in the form of long-term loans. These costs are to be met by extending term loan assistance by banks/financial institutions. Promoters Contribution—The commitment of promoters has to be ensured through promoters’ contribution in the total funds required for rehabilitation. As per the guidelines, promoters’ contribution in a rehabilitation package has to be stipulated as under and the rehabilitating bank should ensure the ability of the promoters to induct it: • Micro and Small Enterprises—10 per cent (minimum) of additional long-term requirement for micro level II enterprises and 20 per cent for small enterprises. It need not be insisted upon for micro level I enterprises. It is essential to take care of the monetary value of the sacrifices from banks, financial institutions and the government, in addition to the long-term requirement of funds under the rehabilitation package while working out the total project cost and the required promoters’ contribution. At least 50 per cent of the promoters’ contribution has to be brought in immediately and the balance within six months. • Medium Enterprises—From existing promoters, 30 per cent of the long-term requirements of funds including the monetary value of sacrifice from banks/financial institutions/government, under rehabilitation package, and in case of new promoters being technocrats/professional managements or packages involving change of management, 30 per cent of the long-term requirements of funds excluding monetary value of sacrifice, of which 50 per cent of promoters’ contribution has to be brought in immediately and the remaining within six months as per the requirement of rehabilitation package.

Above all, reliefs as announced by state governments for rehabilitation packages need to be duly provided for. The MSME ventures interact with wide-ranging stakeholders such as labour, raw material suppliers, market, utilities, global competitors, customers, lenders, legal advisors, shareholders and other stakeholders whose support need to be ensured as per the law of the land. The state government policies in this respect differ a lot from state to state. It is essential for state governments to clearly state the relief and concessions available to potentially viable sick small and medium enterprises regarding power dues, sales tax and other statutory dues for smooth implementation of rehabilitation packages. Particularly, the

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state governments should not take any coercive recovery action if the lender starts rehabilitative action. Such a unit should be treated as a relief undertaking for the dues of the state government. However, implementation of rehabilitation packages need not be linked to such declaration and should be extended through a single window to avoid delays, which hamper the pace of implementation of the rehabilitation package. Rehabilitation Through the BIFR  The role of the BIFR as envisaged in the SICA (Sick Industrial Companies Act) was to formally identify timely sick and potentially sick companies; to make sure that speedy action is taken by the groups involved to salvage the situation either way and to ensure expeditious enforcement of necessary measures for the same. Process to Report to the BIFR  The board of directors of a sick industrial company or any other interested parties in the company are required, by law, to report the sickness to the BIFR within 60 days of finalization of audited accounts for the financial year at the end of which the company became sick. The interested parties in reporting to the BIFR could be company, financial institution/bank that has a financial stake in the company, the RBI and the central/state governments. However, subsequent to enactment of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where a reference is pending before the Board for Industrial and Financial Reconstruction, the reference will abate if secured creditors representing more than threefourths in value of the amount outstanding by such secured creditors have taken any measures to recover their secured debts under sub-section (4) of Sec. 13 of that Act. After reference of the case to the BIFR, the Registrar of the BIFR verifies as to whether the facts of the case make it eligible to file it with the BIFR within the provisions of the Sick Industrial (Special provisions) Act, 1985. After getting satisfied on that count, the BIFR accepts the case and notifies a date for hearing the case. By involving all the parties concerned, the BIFR makes an enquiry under Sec. 16 of the Act. It appoints an operating agency, normally the bank involved or the institution having major stake in the company. The enquiry is usually completed within 60 days to declare the unit as sick or otherwise. The operating agency prepares a suitable revival package in association with the company within the framework of reliefs and concessions as per RBI guidelines and other available reliefs from other stakeholders. The rehabilitation scheme differs from case to case, depending upon the nature of the problems that may include additional assistance; reliefs on existing assistance by banks, institutions and government organizations; change in management; amalgamation; sale of surplus assets to utilize proceeds for rehabilitation; lease of assets or any other required measures. After the revival package gets submitted to the BIFR by the operating agency, the BIFR circulates the draft package to all concerned to seek their views/suggestions on the revival package. On receipt of views/suggestions/objections on the draft revival package, the BIFR convenes a hearing of all concerned to express their consent or objections, if any, to the package, which gets suitably tackled. In case the agencies involved do not agree, for certain genuine reasons, to the proposed reliefs, the BIFR has no powers to force the agency to accord its consent. After getting consent from all concerned, the revival scheme becomes binding on the parties involved to implement the recommendations contained in the revival scheme. After getting consent from all concerned to the reliefs and concessions proposed from different stakeholders, the BIFR will sanction the revival scheme with or without any modifications and publish it in the newspapers. In case the parties involved do not agree to the proposed reliefs, the BIFR would not be left with any other option but to recommend winding up of the company and refer the matter

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to the official liquidator in the state concerned to take further necessary action. However, in case the company has any grievance to the orders passed by the BIFR, it can refer the matter to AAIFR. The provisions of the BIFR Act under Sec. 22(3) provide that in case any implementation of the scheme is under preparation or any scheme under this Act, any dues either from any party or from any agencies shall remain suspended and all or any rights, privileges, obligations and liabilities accruing or arising there under shall be enforceable with adaptations and in such a manner as may be specified by the board. It is also seen from the provisions of Sec. 22(4) that the declaration made by the board with respect to sick an industrial company shall have an overriding effect over anything contained in any other law. Section 22 also indicates that once the board has made a declaration and prepared a scheme in respect of sick industrial companies, that scheme will have an overriding effect over any other law for the time being in force, in respect of any dues from the said sick industrial company. As a result of these provisions, the Act has been misused by many industrialists to protect them from any legal action from any other body until the case is continuing with the BIFR. This has been one of the major weaknesses of the Act and in turn has resulted in poor performance in rehabilitation of sick companies by the BIFR/AAIF. As a result, the need for another legal body was visualized and the SICA Repeal Act 2003 was introduced. Pursuant to the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, the BIFR and AAIFR stand dissolved and these bodies were to take care of pending cases with them. The task of revival and rehabilitation of sick companies has been entrusted to the National Company Law Tribunal (NCLT) in place of the BIFR and any appeal against the order of the NCLT has to be made to the National Company Law Appellate Tribunal (NCLAT) instead of AAIFR as stated earlier. The institutional structure relating to the NCLT/NCLAT has been described in the Companies (Second) Amendment 2002. The act provides for the following:  The proposed NCLT shall continue the functions and powers presently being performed by the company Law Board, the BIFR and the High Courts in respect of liquidation, winding up, amalgamation and merger of a sick unit.  As per the act, the Board of Directors of a sick company shall be required to make a reference to the NCLT and prepare a scheme of its revival and rehabilitation which would be submitted to the Tribunal along with an application containing relevant particulars as may be prescribed, for determination of the measures for revival which may be adopted with respect to such a company. The application shall be duly accompanied with a certificate from a panel of auditors approved by the Tribunal that would indicate the reasons for the net worth of the company becoming 50 per cent or less or for default in repayment of its debt making such a company a sick industrial company, as the case may be.  If the Tribunal, after considering all the relevant facts and circumstances, is of the opinion that the sick industrial company is not likely to make its net worth exceed the accumulated losses within a reasonable time while meeting all its financial obligations and that the company is not likely to become viable in the future and that it is just and equitable that the company should be wound up, then it may order winding up of the company.

Corporate Debt Restructuring Scheme (CDR)  The objective of the Corporate Debt Restructuring Scheme is to provide a mechanism to ensure timely and transparent process for restructuring the corporate debts of viable companies undergoing genuine problems, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned. The purpose is to focus on viable corporate bodies that are adversely affected by certain internal and external factors, so as to minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme. CDR is a non-statutory mechanism that is initiated voluntarily on the basis of Debtor–Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA). The Debtor–Creditor Agreement (DCA) and

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the Inter-Creditor Agreement (ICA) provide a legal basis to the CDR mechanism. The debtors shall have to accede to the DCA, either at the time of original loan documentation or at the time of reference to Corporate Debt Restructuring Cell. As per the scheme, CDR Empowered Group is mandated to examine each case of debt restructuring from its future viability and rehabilitation potential point of view and approve the restructuring package within a specified time frame of 90 days, or at best within 180 days of reference to the Empowered Group. The CDR Empowered Group shall decide on the acceptable viability benchmark levels on the following illustrative parameters, which may be applied on a case-by-case basis, based on the merits of each case8:    

return on capital employed (ROCE) debt service coverage ratio (DSCR) gap between the internal rate of return (IRR) and the cost of fund (CoF) extent of sacrifice

The decisions of the CDR Empowered Group in respect of restructuring of debt in respect of viable companies shall be final. As regards eligibility criteria for rehabilitation through the CDR mechanism, only those companies are covered that have multiple banking accounts/syndication/consortium accounts of corporate borrowers with outstanding fund-based and non-fund-based exposure of `10 crores and above by banks and institutions. The Category 1 CDR system is relevant only to accounts that fall under the category of ‘standard’ and ‘sub-standard’. In certain situations, even if a small portion of debt by a particular consortium may be classified as doubtful, what is important is to ensure that the account has been classified as ‘standard’/ ‘substandard’ in the books of at least 90 per cent of creditors in outstanding amount terms for considering the case under CDR. Any company having a background of indulgence in frauds and malfeasance even in a single bank or classified as wilful defaulter by the banks will not be eligible for restructuring under the CDR mechanism. Further, companies where recovery suits have been filed by the creditors may only be considered eligible, provided, the initiative to resolve the case under the CDR system is taken by at least 75 per cent of the creditors (by value) and 60 per cent of creditors (by number). The category II CDR covers the cases where the accounts have been classified as ‘doubtful’ in the books of creditors, and if a minimum of 75 per cent of creditors (by value) and 60 per cent creditors (by number) satisfy themselves of the future viability of the accounts and consent to such restructuring, subject to no binding on the creditors to take up additional financing worked out under the debt restructuring package; and all other norms under the CDR mechanism such as the standstill clause would continue as prescribed under category I. The reference to Corporate Debt Restructuring System could be initiated by any or more of the creditors who have a minimum of 20 per cent share in either working capital or term finance, or even by the corporate concerned, duly supported by a bank or financial institution having 20 per cent stake in the total outstanding amount in the company. It is important that during the pendency of a case with CDR, a ‘stand still’ agreement would be binding for 90 days, or 180 days by both sides—debtors and creditors—that is, both the parties commit themselves not to take recourse to any other legal action during the ‘stand-still’ period. However, the stand-still clause will be applicable only to any civil action and will not debar from taking any criminal action, if warranted. Some of the key features of rehabilitation plan under CDR are as follows:  requires a minimum support of 60 per cent of creditors by number in addition to the 75 per cent of creditors by value

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 restricts the regulatory concession in asset classification and provisioning requirement to the first restructuring where the package also has to meet certain norms relating to turnaround period and minimum sacrifice and funds infusion by promoters  all the banks involved should have concurrence and convergence on the methodology for computation of economic sacrifice among banks and FIs  RBI’s role is limited to providing broad guidelines for the CDR system  the company should comply with enhanced balance sheet disclosures norms  the banks involved and institutions to share additional funding requirements on a pro-rata basis  providing for a provision to settle outstanding dues under OTS as part of the CDR scheme, so as to make the exit option more flexible  providing for certain discretion to the core group in dealing with wilful defaulters in certain specified cases

17.2.12  Rehabilitation Strategies—Preventive Measures When  Symptoms Are Visible When the company has banking involvement, it is relatively easy for the banker to keep track of typical symptoms of sickness and take preventive actions in the initial phase itself to handle the problem. Some of the typical signals that the banker may get in advance (and if timely handled well with the proposed preventive measures and actions mentioned in the following list) could help in safeguarding the interest of the entrepreneur as well as the banker (Table 17.4).  Frequent Cash Withdrawals—The banker needs to ascertain the reasons for frequent cash withdrawal and stop diversion of funds, if any. It is necessary to entertain only normal instruments related to business transactions. The banker should also keep themselves abreast of market practices of the industry and make market enquires about the company, especially to ensure that money is not being diverted. It is required that financial discipline be enforced by ascertaining cash withdrawal requirements, quantum and time for labour payment, petty cash and so on, and ceiling limit be fixed.

Table 17.4 Rehabilitation Strategies—Preventive Measures Symptoms

Suggested Actions

y

Frequent cash withdrawals

y y y

Stop diversion of funds if any Make market enquires about the company especially Enforce financial discipline

y

Irregularities in cash credit account

y

Dishonour of discoubted bills

y y y y y

Physical verification of stocks, invoices Irregularity temporary—exercise control Irregularity because of enhanced sales—raise limits Stop further purchases on them, if drawee’s inability If because of quality problems—take up with party

y

Banking with other bank/banks

y y y

Banker should secure all charges Stop operations after giving a prior warning Bring to the attention of other banker

y

Dispute among partners/directors

y y y

Discuss the matter with all concerned to assess the gravity Don’t allow operations till dispute is amicably resolved Secure all charges on the assets (Continued)

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Table 17.4 Rehabilitation Strategies—Preventive Measures (Continued) Symptoms

Suggested Actions

y

Inflating invoices

y y y

Make enquiries in the market and compare the prices Increase margin requirements Ensure realisation of full value of incoices

y

Operational losses and adverse financial ratios

y y y y

Identify areas of inefficiency being technical or administrative Adopt different process or modernize plant Cut overhead expenses Promoters to induct additional capital, if net worth negative and financial ratios adverse

y

Diversion/siphoning of funds

y

Demand recession and unprofitable product mix

y y y y y y

Strict monitoring of accounts Strict financial discipline to be enforced Entrepreneur should be asked to infuse funds Cut production Diversify Discontinue un-profitable product lines

y

Underutilization of capacity

y

Declining market share

y y y y y y

Technical reasons—adopt different process/modernize plant Financial reasons—seek assistance or lease out part of assets Switch on to complementary products Change of product mix Sale on thin profit margin Use alternate means to promote the product aggressively

 Irregularities in Cash Credit Account—The moment any signal leading to irregularity in cash credit account appears, the banker should physically verify stocks, invoices and arrival of correct drawing limits. It also becomes necessary to verify fixed assets of the company and collect production and sales data to clearly identify the cause of irregularities. If irregularity in account is a temporary phenomenon, continuous monitoring and follow-up would help to bring back the account to regular, while in case of irregularity on account of overtrading/diversion, control needs to be exercised over accounts. Irregularity arising as a result of enhanced sales may require revision in the bank limits.  Dishonour of Discounted Bills and Cheques Deposited—If bills and cheques are dishonoured because of drawees’ inability, the bank should stop further purchases on them. In case it is on account of quality of supplies, the matter may have to be taken up with the party. The banker should clearly identify a reason for dishonour and take appropriate action to salvage the situation.  Banking with Other Bank/Banks—In case the company starts banking with other banks, it would require immediate attention of the banker as to the likely problems. The banker should ensure to secure all charges in their favour, keep bank documents alive and enforceable and stop operations after giving a prior warning to the entrepreneur. The matter should be immediately brought to the attention of other bankers and the consequential risk that they may plunge into.  Dispute Among Partners/Directors—Dispute among promoters can lead to sharp deterioration in the performance of the company. The moment such a situation comes to the notice of a banker, they should discuss the matter with all concerned to assess the gravity of the situation and the company should not be allowed operations until the dispute has been resolved amicably. The banker should ensure to secure all charges on the assets of the company as stipulated in terms and conditions and inspect regularly the availability of securities.

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 Inflating Invoices—The moment the banker comes to know about this, they should enquire in the market and compare the prices with those of similar units. It would be necessary to increase the margin requirement against cash credit and bills purchased and the banker should ensure realization of full value of invoices towards the bills purchased.  Operational Losses and Adverse Financial Ratios—This would require detailed analysis of the cost of production to identify areas of inefficiency, technical or administrative. If technical reasons have led to escalation in the cost of production, the entrepreneur may have to adopt a different process or modernize their plant, else there will be a need for cutting overhead expenses. In case the company’s net worth has become negative, promoters may have to induct additional funds by way of equity/quasi-equity. In case the current ratio has been declining over a period, the company should put in vigorous efforts to quicken the turnover cycle and the banker should become cautious in releasing working capital funds.  Diversion/Siphoning of Funds—This happens in case of very few accounts where the entrepreneur has been identified wrongly by the bank for support. The banker should monitor the account frequently and should not allow frequent cash withdrawals. Diversion and siphoning of funds should not be tolerated as basic discipline of lending. The entrepreneur should be asked to infuse funds and assets acquired if any from diverted funds should be sold to realize the amount to be brought back to the system.  Demand Recession and Unprofitable Product Mix—The entrepreneur should cut down production as per demand and explore the possibility of diversification, retrenching surplus labour and discontinuing unprofitable product lines.  Underutilization of Capacity—Reasons for underutilization, technical, financial or other conditions, should be identified. If technical reasons have led to poor capacity utilization, the entrepreneur should adopt a different process/modernize the plant and for financial reasons, seek assistance from the banker or work out possibility of leasing out part of the capacity.  Declining Market Share—The cause of declining market share should be identified. If required, professional help should be asked for to undertake market study by duly comparing it with competitors’ performance. The entrepreneur should work out the possibility of switching on to complementary products, change of product mix, sale on thin profit margin adopting marginal costing approach and use alternative means to promote the product aggressively.

17.3  KEY STRATEGIES FOR TURNING AROUND A COMPANY The significance of turnaround strategies lies in rescuing a business having future potential as evident from viability and is passing through a crisis phase. The entrepreneur would like to check deterioration and reverse the process by quickly overcoming competitive and financial weaknesses of the venture. They should properly diagnose the problem to identify the root cause of the problem before formulating any strategy for turnaround. Fundamentally, understanding what has gone wrong with the business and the gravity of seriousness is essential for chalking out an effective turnaround strategy. There are four categories into which turnaround strategies can be classified broadly, as discussed in the following sub-sections (Fig. 17.9).

17.3.1  Entrepreneurial Turnaround The strategic response to a venture undergoing problems that can lead to its becoming a sick company are expected to differ for entrepreneurial firms for a number of reasons. A large number of studies have revealed that the vital reason for the sickness of a company lies in mis-management or lack of managerial competence. Managing a venture, especially under turbulent conditions, requires entrepreneurial

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Entrepreneurial Turnaround

Efficiency Turnaround Strategy

Entrepreneurial Leadership to Overcome Mismangement

Improving Operational Efficiency by Focusing on Quick Pay-off Projects

Turnaround Strategies Captive Company Strategy

Ability to Negotiate Better Terms or for Another Angel or Improve Product Line Through Research

Selling Surplus Assets Including Retrenchment of Surplus Labour

Sell Surplus Assets or Subsidiary or a Part of the Company

Figure 17.9 Strategies for Turnaround of a Company leadership as discussed in earlier chapters, coupled with professional approach to manage with capability and competence to negotiate well. As such, entrepreneurs tend to be leaders who are emotionally involved in a venture and therefore need to provide the inspiration for responding to challenges. According to the theory of disequilibrium and chaos, entrepreneurs periodically introduce innovations, thereby creating disequilibrium (Stevenson and Harmeling 1990). Therefore, usually, it has been found that in the decline stage, these entrepreneurs find difficulty in transitioning from the visionary and aggressive competitor role of founders to that of professional turnaround managers. A study by McCarthy (1990) suggested that the experience of crisis gave rise to a more rational, planned approach to the strategy-making process. The strategic choice on the part of an entrepreneur in case of declining ventures depends much upon past financial performance trends. In case the company has been operating near break-even, it may focus through centralized management approach to raise revenue or reduce costs. What matters the most is leadership coupled with internal management resources to put the strategies into action for turning around the company. The entrepreneur has to clearly identify the right people to be placed at right positions for translating strategy into action, and if people are not internally available, they may have to recruit on a war footing people with desired competence and required values. In case weak performance of the company is an outcome of a wrong or bad strategy, the entrepreneur needs to shift its competitive approach to create a separate market position, change the internal operations and functional strategies to complement the overall change in the overall strategy, merge it with another company and retrench certain products or operations to focus on core products and customers in alignment with the company’s strengths.

17.3.2  Efficiency Turnaround Strategy The purpose of efficiency strategy to turnaround revolves mainly around improving operational efficiency by focusing on quick pay-off projects. The entrepreneurs clearly identify projects or line of

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business that cannot be salvaged to quickly ‘stop the bleeding’ in terms of resource wastages. They focus completely on relatively better off business lines/projects, so as to improve revenue and profitability. The approach is to cut costs wherever feasible without compromising on quality to revitalize the firm’s performance. A directed effort is put to identify, evaluate and eliminate waste, redundancies and inefficiencies in the system. Cost-cutting efforts are taken on multiple footing such as  across the board—all areas of the organization  selective cuts—selected areas of the organization

On the other hand, aggressive efforts are made to increase revenue by generating sales volumes through alternative ways such as price cuts, promotional efforts, deployment of more sales force, introducing improvements in the product and extending added customer service features. This strategy works well when increased profit and profitability can be achieved through unutilized capacities which would be supported by market demand. On the other hand, in case products have specific niche and are not price sensitive in their demand, the entrepreneur may increase the prices to increase profit margins.

17.3.3  Captive Company Strategy This is applicable to companies whose performance depends on the large company on which they fully depend for their sales. There are also companies where viability may depend mainly upon exclusive supplies to a giant company. Even those business ventures whose competitive position is relatively very weak can be put in the same category. For such companies, the turnaround strategy depends mainly upon their ability to negotiate better terms regarding quantity demanded, prices and payment period. In case such a company’s performance is weak because of the parent company to which major supplies are made, the only option left out would be to look for another angle who can provide similar or better terms. Another option could be to improve the product line with in-house research and development efforts sufficiently in advance before such an eventuality arises. In case the company is not able to salvage its condition, it may have to go in for liquidation.

17.3.4  Selling Surplus Assets Including Retrenchment of   Surplus Labour In difficult times when cash flow becomes a critical consideration for continuing the business for reasons such as pressing demand from the creditors, payment of salaries and certain urgent expenses required for maintenance of plant and machinery, and if the company is not able to raise funds from debtors or bankers, friends and relatives and so on, the only practical approach left out could be to realize funds by liquidating some of the assets that can be easily liquidated. Even otherwise, it is desirable for the company to identify all those assets such as lands, buildings, old plant and machinery and equipment not in use and dispose of the same to utilize the funds so generated for rehabilitation of the unit. It is always desirable to dispose of the assets related to the non-core business area to utilize the sale proceeds for the turnaround strategy. At times, it may be prudent to sell a subsidiary or a part of the company comprising a division to work out the turnaround strategy for the company. The success in turnaround management lies in entrepreneurial leadership coupled with a professional team where decision-making is more centralized. The whole process requires development of strategies by developing clear financial and operational goals that are measurable and time bound. The plan of action needs to focus on functional details with clear responsibilities coupled with authority.

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The strategy should evolve from within with a greater consensual approach among stakeholders and more so employees. The entrepreneur should clearly communicate with their employees, shareholders, suppliers and lenders. Above all, the plan should be implemented as swiftly as possible without losing any time.

17.4  LIQUIDATION In case the company is found to be non-viable, the only option left out is to liquidate the company. The Companies Act, 1956, contains different provisions as to when a company is to be wound up, the procedure to be followed for initiating winding-up proceedings, the role of the management when the company is wound up by the Company Court, BIFR, and the appointment of a liquidator to proceed with the liquidation process. Liquidation (or ‘winding up’) is a process by which a company’s existence is brought to an end. From the date of liquidation, the liquidator takes possession and control of all the company’s assets. The assets are sold for the benefit of the company’s creditors (Fig. 17.10). After completion of the liquidation process, the company’s name is removed from the list of Registrar of Companies. Normally, the company faces winding-up proceedings when its financial position is in severe distress or it has become insolvent. In majority of cases, only insolvent companies are wound up in accordance with the provisions of the Companies Act, 1956. However, at times, a company may be wound up because of the serious dissension among promoters and it may be just and equitable to wind up the company. In case the company is healthy and not insolvent, dissension among promoters may result in approaching the Company Law Board under Sec. 397/398 of the Companies Act, 1956. The object of these sections is to provide protection to the minority shareholders in a company against the oppressive acts and mismanagement by the majority. In case there is oppression or mismanagement in the company, despite other remedies, the most preferred remedy is to approach the Company Law Board under Sec. 397/398 of the Companies Act, 1956. The Company Law Board, with certain express limitations, exercises all powers to set the things in the company right and to prevent the acts of oppression and mismanagement.

Winding-up of a Company

Liquidator Appointed

Takes Possession of Assets

Sells Assets and Realize Proceeds

Distributes to Creditors As Per Priority

Figure 17.10 Liquidation—Steps Involved

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17.4.1  Different Types of Liquidation The law classifies liquidations into two broad categories, namely, voluntary, that is, by a shareholders’ resolution and/or compulsory, that is, by a court order including quasi-judicial bodies like erstwhile BIFR. Another classification of liquidation is ‘solvent’ or ‘insolvent’ (Fig. 17.11). Solvent and Insolvent Liquidations  An insolvent company is one that is unable to pay its debts as they fall due or when its liabilities exceed its assets. This results in conflict, as there will be insufficient assets for all the creditors to be paid in full. The entrepreneur basically knows in advance as to when they would not be in a position to pay their debts and is just managing somehow to keep the business afloat by stretching payment of dues. The entrepreneur should meticulously monitor the company’s financial position by keeping up-to-date records and management accounts to ascertain sufficiently in advance when the company would become insolvent. Especially as a director, it is one’s duty to act in the best interests of the company and its shareholders. However, when the company is deemed to become insolvent, it becomes a legal duty of the directors to protect the interests of creditors instead of shareholders. The company operations should get geared up primarily to ensure the best return for the creditors. Thus, in the eventuality of liquidation, in case there are sufficient assets to meet the company’s liabilities, then a company is called solvent and voluntary liquidation will be the appropriate measure to follow. However, if the company’s liabilities exceed its assets, then either a creditors’ voluntary liquidation or compulsory liquidation will be the appropriate course of action. Voluntary Liquidation  It is the process whereby the shareholders appoint a liquidator, who in turn will be responsible for sale of assets in a transparent manner and would be answerable to the creditors and shareholders. It is not necessary to make any application to the court for liquidation. However, the liquidator may apply to the court for directions from time to time and the court, if it deems fit, can even remove a liquidator. Voluntary liquidation is classified into two categories, depending on whether or not the company is solvent. If the company is solvent, the shareholders can supervise the liquidation. However, if the company is insolvent, the creditors would have an upper hand in taking control of the liquidation process by applying to the court. The court will require proof of solvency or insolvency to determine this matter.

Voluntary Liquidation Solvent and Insolvent Liquidations

Compulsory Liquidation

Liquidation— Types

Figure 17.11 Different Types of Liquidation

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Compulsory Liquidation  Compulsory liquidation of a company takes place through a court order. The process is initiated by submitting an application to the court alleging that one or more of the required grounds as per the provisions of the Companies Act exist for liquidation. The application may be submitted by the company or by a majority of its directors, or by the Registrar of Companies, or by a creditor. Normally, such an application is submitted by creditors who fail to realize their dues in the normal course of a business of the company. The most important ground for such applications is that the company is unable to pay its debts. The court examines the application from different perspectives before deciding whether or not to make a compulsory liquidation order. It is up to the court to pass an order for liquidation, depending upon the gravity of the matter.

17.4.2  Appointment of Provisional Liquidator 9 After the admission of a petition for the winding up of a company by the court, upon the application of a creditor, a contributory or the company, and upon proof by affidavit of sufficient grounds for the appointment of a provisional liquidator, the court, if it deems fit, may appoint the official liquidator to be designated as provisional liquidator of the company pending final orders on the winding-up petition. The provisional liquidator is bound by the rules relating to official liquidators, so far as applicable, subject to such directions as the court may give in each case. All costs, charges and expenses incurred by the official liquidator as provisional liquidator shall be paid out of the assets of the company.

17.4.3  Winding-up Order After the court is satisfied with the grounds made in the application, it passes an order to wind up a company or for the appointment of a provisional liquidator. The winding up order by the court is sent to the official liquidator and others concerned. The court also, while passing a winding-up order or subsequent to that, gives directions as to the advertisement of the order and the persons if any on whom the order shall be served and the persons if any to whom notice shall be given of further proceedings in the liquidation, and such further directions as may be necessary. All winding-up orders given by the court are advertised by the petitioner in one issue each of a newspaper in the English language and a newspaper in the regional language circulating in the state or the union territory concerned and shall be served by the petitioner upon such a person, if any, and in such manner, as the judge may direct. An application for stay of proceedings in the winding up can be made upon notice to the parties to the winding-up petition and to such other persons as the court may direct, and where the application is made by any person other than the official liquidator, notice shall be given to the official liquidator. Where an order is issued staying the proceedings, the order shall direct that the applicant shall forthwith file a certified copy thereof with the Registrar of Companies.

17.4.4  Role of Official Liquidator After a winding-up order has been passed by the court, the official liquidator attached to the court takes into their custody or under their control all the property and assets and books and papers of the company. The role of the official liquidator will be to ensure protection of assets and sell them at the highest possible prices through a transparent and open process and discharge the liability of the company to the workmen, creditors, secured creditors, tax and other payments to the government and other organizations. The Companies Act, 1956, provides the details on provisions related to the priority of payments.

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While exercising jurisdiction under Sec. 529, the company court needs to adhere to wellestablished rules that regulate the affairs in insolvency proceedings. The norms that would apply for deciding whether a particular asset has vested in the official assignee for distribution among the general body of creditors would equally apply for determining whether the assets would vest in the official liquidator for distribution and payment of dividend pro rata without any claim for preferential payment. The Companies Act, 1956, provides for a preferential treatment to the secured creditor as regards payment of their dues is concerned. However, there do exist special laws such as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, that enable the secured creditors or financial institutions to proceed with their recovery process overriding other laws. In such an eventuality, it is the responsibility of the official liquidator to represent the company before the legal forums concerned. The priority as specified in the Companies Act for distribution of liquidation proceeds has to be strictly enforced by the courts. The first right on sale proceeds is of secured creditors before distribution of proceeds to other creditors. After these have been paid out, any remaining debts are paid in the following order of priority:     

the costs, charges and expenses involved in the liquidation wages and salaries payable to employees unsecured creditors any debt owed to shareholders of the company such as dividends or profits to preferred shareholders any left-out amount, after meeting all other commitments, is paid to the common shareholders of the company

17.4.5  Steps Involved in the Liquidation Process A liquidator is expected to submit regular reports to the Registrar of Companies, creditors and share holders throughout the liquidation. The first report to be prepared by the liquidator includes details on the statement of company’s affairs, plans and proposals for conducting the liquidation, estimated date of completion, alerting investors to their statutory rights by calling a meeting of creditors or shareholders and list of all known creditors. Subsequent to the first comprehensive report, the liquidator is to file six monthly reports covering the progress made in conducting liquidation proceedings during the last six months and further steps proposed to be taken to complete the liquidation. The official liquidator, according to the need, convenes creditors’ meetings for investigating the company’s affairs including the causes of insolvency. These meetings also help in identifying some assets owned by the company that were undiscovered previously. Further, such meetings help in providing a platform for discussing conflicting issues relating to the administration of the liquidation. In case a liquidator decides not to hold creditors’ meetings, they must advise creditors by giving written notice about it. After receipt of such a notice from the liquidator, in case creditors think that a meeting should be held, they have the right to call that meeting. In that eventuality, creditors must provide their written request to the liquidator within 10 working days of receipt of the notice from the liquidator.

17.5  EXIT STRATEGY FOR ENTREPRENEURS Every entrepreneur who enters into an entrepreneurial journey should necessarily think and work out an exit strategy, that is, the way the entrepreneur will end their involvement in it.

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A well-chalked-out exit strategy helps a lot in maximizing the value from the business by successfully marketing the business to potential buyers or investors. It also helps in providing a direction at the right time to come out of the business without losing much, in case the business has not picked up as planned. Further, a carefully planned exit strategy helps an entrepreneur by way of the following (Fig. 17.12):  give it a shape as envisaged for a chosen exit option, that is, to maximize the value that the entrepreneur can realize  nurture, groom and develop a successor, from within the business, family members or professionals from the team  strategically come out when business is doing well and would result in greatest advantages to the entrepreneur

As such, the exit strategy gets included in the initial business plan itself, which gets revised from time to time as the business progresses. Keeping in view the decided exit strategy, the business is steered in the direction that the entrepreneur’s exit option demands. There are multiple exit options, which the entrepreneur should carefully work out as far as their relevance to and implications for their venture are concerned. Some of the prominent exit strategies are in the next subsections.

17.5.1  Family Succession Various studies show that around 35 per cent of family businesses successfully enter into second generation, while approximately 10 to15 per cent make it to the third generation. The greatest challenge and threat for survival of family businesses lies in lack of meticulous planning to manage the succession process well, after comprehending multifarious issues, which differ from one business to another. The greatest challenge in family businesses is the mixing of issues between business and family. Family problems and decisions are mixed with business problems and decisions. Solutions to problems are rarely pure business or pure family in nature so attempts at complete separation are counterproductive.10

Give Shape as Envisaged for Chosen Exit Option

Planned Exit Helps Entrepreneur to Strategically Come Out of a Business

Nurture, Groom and Develop a Successor

Figure 17.12 Planned Exit Strategies

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Long-term business survival and growth of such businesses require transition from generation to generation. The crux would lie in timely transition so that business interests receive paramount importance. At times, parents may not be willing to pass over the authority and control of business to the next generation while next generation is keen to step into it. Similarly, there could be situations where next generation is not ready to assume the responsibility because of lack of experience, when the business needs their presence the most. Family businesses normally look for achieving three goals for the long-term sustainable growth of the business—continuing growth of the business leading to name and fame of the family as a business brand to reckon with; understanding among family members leading to family harmony and personal well-being and peace of the founder who has brought the business to a particular height (Fig. 17.13). Many new ventures are passed over to family members. In case there is none in the family to take care of it, the entrepreneur has to train some professional from within for succession. However, usually, the better option that most entrepreneurs find safe is to pass it over to the son, daughter or other family members. This helps an entrepreneur to maintain an involvement in the business and smoothly pass over the assets to legal heirs. In case the entrepreneur decides to pass it over to family members, they need to involve them and train them to develop in them business acumen and in-depth understanding at the earliest possible opportunity. At times, the entrepreneur would like family members to serve other similar organizations to get a different insight and experience, which can help in giving a new strategic thrust to the business. It is important to have clarity about succession from within the family or outside and work out a plan for smooth transition and to ensure the possibility of their pursuing any other option. At times, it would be advisable to take professional advice in the matter, so that objectivity becomes paramount as against emotions. Professional advice can help in looking at issues such as possibility of conflict within the family that may jeopardize the business growth; how far this option would ensure the entrepreneur’s own financial stability and well-being in the future; succession within family and tax implications, if any; and the distribution of shareholding between successor and other family members. The key elements of a successful succession of a family business and founder’s transition are  The founder needs to have clear direction and priorities in place for the future.  For preparing the next generation to take over the business, the founder should be a good teacher, guide, philosopher, mentor and doer.

Family Harmony Continuing Growth Leading to Name and Fame

Personal Wellbeing and Peace of the Founder Goals for Sustainable Growth

Figure 17.13 Family Business—Key Goals

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Approaches to Family Business Succession

Could Be Wellthoughtout and Smooth Process

Selecting Person(s) for Different Responsibilities

Developing and Implementing a Development Programme

Could Be Full of Crisis

Death or Disability of the Founder, Divorce, or Hiring of an Outside Manager

Figure 17.14 Family Business Succession  They should not overdepend on the business working as a source of their financial wealth for their future needs.  They should have a lot of maturity to detach themselves from the business and allow the next generation to experiment and innovate the way they feel it right for the future of business.

Successful management succession requires cooperation of all people on the management team and their preparedness for it. The succession steps involving planning, selection and preparation of the next generation could be well thought out. The process could be smooth, on the one hand, and on the other hand, could be full of crisis emanating from the death or disability of the founder, divorce or hiring of an outside manager in an attempt to ‘finally fix things that have gone wrong’. A smooth and well-thoughtout succession plan involves selecting person(s) for different responsibilities; developing and implementing a development programme involving formal training, self-study, mentoring and development of specific skills through providing opportunities for selected people; timely delegation of specific responsibilities and authority and above all, ensuring development of harmonious working relations among the family members in all generations (Fig. 17.14). Many family businesses have been ruined mainly because of strained relations among family members who make compromise very difficult, if not impossible.

17.5.2  Selling Business Selling a business may not be the last resort when business becomes bankrupt. There are a large number of entrepreneurs who carefully plan to sell their business, so as to switch over to new businesses. At times, the business reaches climax, requiring substantial push in investment to lift it to the next level,

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and, as the entrepreneur faces financial constraints to raise money or does not want to take the risk associated to give that big push, they decide to sell the business. A business can be sold to another big corporate/company, private investor or management or even to another member of family to sort out the conflict. A trade sale of a business takes place when the owner of a business sells the business or part of the business, say a division or a unit, to another company or party allied to the business under consideration. However, the entrepreneur should make the business attractive to a potential buyer by appropriately developing it and justifying the worth and value to the prospective buyer in the same field of business. Partnership concerns and proprietary businesses may find it difficult to achieve a trade sale as the value of the business is linked and associated to entrepreneurs’ skills or business relationships. Further, it may not provide certain tax advantages that may accrue to the prospective buyer in the case of private limited and public limited companies. Above all, such businesses, because of lack of growth, may appear to be less attractive to prospective buyers. Therefore, it may be advisable to convert the business into a private or public limited company as it grows to fetch a better value at the time of selling the business. This also enables easy merger deals, although it takes a long time for the business venture to reach out to these stages. However, highly successful ventures, even if owned by an individual, are in great demand by larger firms that attempt to expand and grow by acquisition mode. Such ventures can attract good value if the entrepreneur has the knack of valuation of business coupled with negotiation capability. Selling a business to fetch a lucrative price for it becomes easier under the following circumstances:  business’s past track record clearly shows year-on-year increasing profit and profitability  business is not dependent on an entrepreneur alone to operate and can be run effectively, even without the erstwhile owner  business creates high-quality products or services that provide a great value proposition to the customer  business has a market niche and owns a piece of intellectual property  business has a strong customer base who are loyal to the product or service rather than to the entrepreneur  business possesses high-quality management team and employees having unique skills and competencies  business has hidden value backed up by its fixed assets  business has a good brand value  business has locational advantages that are being weighed very high in the minds of the customers

17.5.3  Impediments in Selling Business Impediments to sale of business are business issues that will either reduce its sale price or make it difficult to sell. Entrepreneurial skills in negotiating help in proper identification and overcoming of hurdles and make a key difference between a successful exit and an unsuccessful exit strategy. Some of the common hurdles that come in the way to sell the business are having no management in place to provide desired stability and facilitate the transfer of business knowledge, resulting in difficulty to transfer the goodwill to the new owner. Some of the common difficulties that come in the way for sale of a business are as follows (Fig. 17.15):  expecting unreasonable and too high a price for the business  having unprofitable or poorly performing business compared to industry benchmarks  business where intangible worth by way of goodwill lies with the owner, which cannot be easily transferred

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Expecting Too High a Price

Dissension Amongst Promoters

Lack of Understanding Amongst Shareholders

Business Saddled with Multiple Litigations

Having Unprofitable Business

Goodwill Lies with the Owner

Accounting Practices Giving a Distorted Picture

Figure 17.15 Impediments to Sale of Business  accounting practices giving a distorted picture of the business and hence future buyers would be scary  business is saddled with multiple litigations and sorting them out would eat away a lot of productive energy of the prospective buyer  lack of understanding and consensus among the shareholders of the company  dissension among promoters may not allow a smooth sale transaction

Business sale may be facilitated well by brokers in some instances, as they possess special skills and have links with the prospective buyers. They are good at undertaking business intelligence and have a networking that provides them with extra edge in quoting prices. Above all, these intermediaries become responsible to ensure fulfilment of specified terms and conditions by both the parties. Brokers provide this service in lieu of commission that increases at a decreasing rate with increased value of the deal. While taking a route through brokers, it is desirable that the entrepreneur initiates the process by preparing a business plan for five years highlighting the future worth of the business vis-à-vis the existing strengths. Such a document becomes an easy tool to communicate to prospective buyers about different aspects of the business. New buyers normally also enter into an agreement to the effect that the seller will not enter into a similar business or join their competitor. As such, the buyer prefers to take on board the seller entrepreneur having proprietary knowledge to negotiate an employment contract with the buyer which specifies specific terms and conditions that should not jeopardize the interests of the buyer in any way whatsoever.

Example Manoj Saxena is a serial entrepreneur with a deep-rooted passion for innovation. He presently serves  as Vice President and Global Solutions Leader for IBM Global Business Services (GBS). He heads  IBM’s multi-billion dollar Global Solutions and Assets business.

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Saxena was born in Hyderabad, India, and spent his childhood in Hyderabad and thereafter spent  the initial years of growth in Mumbai. He was the first-generation entrepreneur in the family, as he  had  a  service  class  family  background.  His  father’s  generation  was  the  first  generation  that  had  undertaken service as means for a living. His entrepreneurial aspiration and journey started in Pilani,  where he studied for his graduation. He has all the credentials for getting seven promotions in eight years of his service with 3 M,  where  he  started  his  career.  He  decided  to  quit  the  job  to  pursue  his  inner  urge  to  take  up  an  entrepreneurial  journey  with  13  credit  cards  with  $200,000  of  credit  on  it.  His  first  venture  was  basically  a  business  collaboration  platform  called  Exterprise  that  was  launched  in  June  1998  and  subsequently  sold  in  March  2001  at  handsome  gains.  The  company  could  grow  from  bare  five employees initially to over 240 within a short span of 18 months. The venture was sold out for  $114 million to Commerce One. The greatest strength of Exterprise—his venture—was a strong customer base that included Bell  Canada, John Deere and Dell. One of the highlights of his business is evident from an incident when  Michael Dell stood up in a conference and demonstrated the Exterprise product as a way Dell was  going to do e-commerce in the future. With inbuilt innovation that led to the success of his venture,  the company could achieve a turnover of around $12 million or so in 2000. Although while selling his company he did not had any long-term commitments with Commerce  One, he stayed with them initially for six months to make sure that his team was well integrated in the  right jobs and the right positions. Subsequently, keeping in view the business interest of the company,  he continued with them for over a year. Another prominent venture started by Manoj was Webify, an emerging leader in industry-specific  Service-Oriented Architectures (SOA) middleware. Keeping in view the value of Webify, it was bought  by IBM in 2006.  It is an Austin,  TX-based,  privately held provider of industry-specific software and  services for building service-oriented architectures. Under the WebSphere brand, Webify technology  was  integrated  into  IBM  Software  Group.  IBM  ensured  to  provide  an  outlet  to  Manoj’s  innovative  thinking to take him along with IBM, where he is continuing.11

17.5.4  Buyouts An entrepreneur could also plan an exit strategy by way of selling the business to executives or employees—known as a management buyout. Buyouts take place when employees or executives come to know that their company/business is up for sale and would like to buy ownership or increase their existing stake in it. Under the employee stock option scheme, the business may be sold to them over a period. This period may stretch between two and four years or even more, depending upon the intention of the entrepreneur to stick to the business. It is also considered as a pension plan for the small companies that are not in a position to afford payment of pension to their employees. The main purpose is to appropriately reward employees and make the exit plan of the entrepreneur clear to the employees from the beginning to elicit their commitment. The process is regulated and involves creation of a trust fund where stock or cash for buying the owner’s interest in the venture is contributed on behalf of employees. Similar to leveraged buyouts as defined in the earlier chapter, a new legal entity called an employee stock ownership trust usually borrows the money against future earnings. The company provides the trust with the funds to pay back the loan. Over a period as loan gets repaid, the shares of the company are allotted—usually in proportion to employees’ salary—to each employee’s account. As regards setting the price for buyout by the employees under employees stock option (ESOP), it is done by an independent valuation expert at which the ESOP will buy out an owner. Employees gain a lot by having ownership of the company, if the venture succeeds.

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Different  Types  of  ESOPs  There are, broadly speaking, three types of ESOP options as follows (Fig. 17.16):  Incentive Stock Options (ISOs)—These are also called qualified stock options because they qualify for having special tax treatment. No income taxes become due at the time of granting or exercising such option, as the tax is deferred until the stock is sold.  Put Option—It is basically a financial contract between a buyer and a seller of the option. The buyer acquires a long position by purchasing the right to sell the underlying instrument to the seller of the option for a predetermined specified price called the strike price during a specified period of time. If the option buyer exercises their right, the seller has an obligation to buy the underlying stock from the buyer at an agreed strike price, irrespective of the ongoing current market price. In exchange for having the option, the buyer has to pay the seller a fee called the option premium.  Non-qualified Stock Options (NSOs)—These are options that do not qualify for the special treatment accorded to incentive stock options. ISOs are available only for employees and other related restrictions are imposed on such stocks. For regular tax purposes, ISO has an advantage that no income is reported when the option is exercised. NSO does not have any restrictions imposed on the buyer. An employee is liable to pay the tax at specified ordinary rates on gains that they realize at the time of selling the stock.  Sweat Equity Share—Is given to the employees on favourable terms in recognition of their work. It usually involves giving option to the employees to buy shares of the company, so that they become part owners and participate in the profits apart from earning salary.

The Indian corporate world has also adopted ESOP practice. The process was triggered in the info-tech sector and has subsequently spread across the services and manufacturing sectors. The regulatory system has brought in relevant changes in the laws to keep pace with ESOP developments. The legislation related to ESOP has become part and parcel of income tax and corporate laws in India like other countries. The definition of the term ‘Employee Stock Option’ is given in Sec. 2(15) of the Companies (Amendment) Act, 2000, which states that ‘Employee Stock Option means the option given to the employees, directors or officers of the company who are whole timers, which gives such employees, directors and officers the benefit or right to purchase or subscribe at a future date the securities offered by a company at a predetermined price.’

Nonqualified Stock Option

Put Option

Incentive Stock Options

Types of ESOP Options

Sweat Equity Share

Figure 17.16 Family Business—Key Goals

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Section 77(2) inter alia provides for the following exceptions to the general prohibition on a public limited company from providing, whether directly or indirectly, any financial assistance for the purpose of or in connection with the purchase or subscription made or to be made by any person for any shares in the company or its holding company. For example, McKay Nursery Co CFO Tim Jonas says that dollar figures may not match those racked up by Microsoft millionaires, but they are not chump change either. The ‘normal employees that have been with us for 20 years are probably going to have three-quarters of a million dollars’. On the other hand, there are examples of ESOP failures such as United Airlines’ parent UAL—majority-owned by an ESOP that entered into bankruptcy—a most tragic and the biggest collapse in recent times. Companies with ESOPs sometimes fail, and this option usually may not be highly remunerative for the entrepreneur, as employees may not be able to raise the necessary funds to buy the business, or they may get relatively far less amount as they fully understand, being a part of the business, the strengths and weaknesses of the business. Major advantages of ESOP lie in providing a unique opportunity and incentive to employees that can motivate them to give their best to the company. It gives a greater sense of belonging to employees as they feel that they are working for themselves, which inculcates in them a greater spirit of innovation. It also helps in rewarding employees who have greater loyalty to the organization, more so when the organization passes through difficulties and crisis. Above all, it is a good strategy for the founding entrepreneur to pass over business interests to employees under a planned process of written agreement. On the other hand, the major disadvantage of this lies in providing such an option to employees, which is usually complex to devise and establish. Deciding the terms of ESOP package requires complete valuation of the venture. Above all, it causes problems in handling taxes, payout ratio and amount of equity to be transferred per year at what terms against actual investment by employees’ related issues. Management  Buyout  (MBO)  Management buyout involves direct—lock, stock and barrel—sale of the venture to someone at predetermined prices. It is similar to selling one’s property, say land and house, which basically requires proper valuation by appraising the worth of all assets, including intangible assets. This strategy of exit releases the owner from the business relatively quickly and easily. This works very well for business entities having a good and committed management team working for the long-term success and sustainable growth of the business. Basically, the company is purchased under this option by the management team—either the existing one (MBO), an external new one called Management Buy-in (MBI), or a combination of the existing team and an external management called Buy-in Management Buy-out (BIMBO). MBO as an option is particularly useful for family firms that find it difficult to handle and manage succession issues and look for the following benefits:  Business gets handed over quickly to the buyers who already have a good knowledge of the company and its systems, procedures, prevailing culture and so on.  It provides a lot of confidence to the entrepreneur (seller) that the business would be run by trusted, experienced, knowledgeable and committed people, which would ensure its future growth.  The entrepreneur can confidently exit the business in a harmonious way without inviting any future hassles.

The major advantages of this strategy of exit lie in extracting the right value of the business immediately. However, the major disadvantages are that there is no natural leader in the buyout team to

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provide leadership like an owner, the management team may find it difficult to buy without funding from outside price deal may be either too high or too low but not a reasonable one. MBO strategy is especially suitable for ventures that have the following characteristics:      

good past record of working and profits good future potential for growth low debt equity ratio product having market niche and competitive advantage business not dependent upon one customer but having a diverse customer base or one product good short- to medium-term prospects in the future

Example The private equity firm Blackstone Group had agreed to buy an Indian back-office company, Intelenet  Global  Services  Ltd,  in  its  first  management  buyout  in  India.  Blackstone  will  own  80  per  cent  of  Intelenet, with the company’s management holding the remaining 20 per cent. It is likely that the deal  has been struck for around $200 million, which would result in valuing the company at more than  double its back-office rival, Allsec Technologies Ltd, which has a market capitalization of $77 million  and is 28 per cent owned by the Carlyle Group. Intelenet plans to expand its operations in Britain and begin services out of the Philippines and  Mauritius.12

17.5.5  Floating Business—Public Issue Getting shares listed through IPO implies floating your business, which can enable the company to have a yardstick for valuation and can be highly rewarding financially. It helps in knowing the worth of your investment, that is, equity in the business and provides an easy option to sell part of or your entire stake in the venture. However, unless and until there are complete takeover proposals for the venture, such a process of exit is likely to be partial, as potential investors will be suspicious if you plan to sell your total shareholding. Any float will also affect other existing shareholders or investors. The shareholders agreement may give existing shareholders pre-exemption or voting rights, which may make a float more difficult or reduce the amount you can realize. Relatively few businesses can realistically expect to float as they are unlikely to be able to finance the necessary growth to attract investors. Flotation is a good option only if the business is sufficiently large, as it requires a lot of hassle and planning to make the most of such an opportunity and the advisory costs in the process could be very high, especially for small and medium industries. The flotation strategy for exit requires certain prerequisites to be built into the business such as  a strong and competent management team  a forceful and vigorous business plan that should describe clear strategies for achievement of growth and profits in the future  incorporating a public limited company  operational, financial and management systems strong enough with proper systems in place so as to manage rapid growth and the additional legal requirements of a listed business  financial professionals who should be above board and highly competent in their field

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The major advantages of flotation strategy are  greater access to capital from public  cash out flotation may provide an opportunity for existing shareholders to realize part of their investment; however, this would depend much upon a particular case and market conditions  helps a lot in extracting market value of the business because of listed and traded shares  provides a higher public profile during and after the public issue  above all, a listed company gives greater assurance to customers and suppliers because of its financial strength coupled with regulatory and due diligence check necessary to come to market

On the other hand, major disadvantages of this strategy for exit are the extra cost involved in going to the public for raising money; ongoing cost to maintain listing by way of fees and other expenses; huge investment of time of senior management; and loss of privacy because it demands greater transparency from regulator to protect the interest of shareholders. Above all, the company has to continuously face the challenge of bull and bear markets although you and your company may not have any control on it but gets affected a lot in terms of its valuation from time to time. Thus, it could be the best route for entrepreneurs looking forward to achieving next major stage of growth requiring substantial investments.

Example Warburg  Pincus  is  part-exiting  from  its  three-year-old  investment  in  the  maiden  public  offer  of  the  coal beneficiation and power-generation firm ACB (India). ACB (formerly Aryan Coal Benefications  Pvt. Ltd) and is looking to raise ` 575 crores ($128 million) through a fresh issue of shares, along with  an offer for sale by a group of shareholders, led by Warburg Pincus among other promoter group  individuals, in one of the biggest proposed IPO in the past few months. Warburg  Pincus  had  invested  more  than  ` 320  crores  through  a  mix  of  preferential  allotment,  besides subscription to rights issue. Its ownership in ACB is around 21.9 per cent and it has offered to  sell a little over a third of its stake as part of offer for sale. The valuation that the company is looking for  and the returns that Warburg Pincus would be able to generate will become clear after the price band  of the issue is frozen. However, if the share price in the last transaction that had taken place within the  promoter group last month is considered as a benchmark, the private equity firm may realize around  ` 115 crores ($25 million) in the IPO. ACB is the largest coal beneficiation company in India with its operations spread in more than  15  key  locations  in  the  major  coal-bearing  states  such  as  Chhattisgarh,  Orissa,  Maharashtra  and  Andhra Pradesh. The company also owns the single largest coal beneficiation plant in the country,  which is located at Dipka, Chhattisgarh. The company has other vital business interests in the area  of logistics services to manage supply chain and delivery of raw coal from mines to its beneficiation  plants and customer sites, power generation through thermal and wind power.13

17.5.6  Closing Business Closing the business may not be considered a desirable exit option but may turn out to be necessarily an option to salvage the situation before it becomes too worse to realize anything. This usually gets forced upon because of financial difficulties and distress which get reflected in the company’s financial position.

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At times, the circumstances through which business are passing through may give a signal as the most practical, workable and desirable option being to close down the business. Some of the circumstances under which this option would be most desirable are as follows:  Unfavourable economic conditions, particularly for the business in question, that are likely to persist long.  Product line has become obsolete and there is no alternative plan in place to diversify because of lack of innovation.  Long-drawn ill health of the founder when they have not developed the business to a stage where other exit options could be worked out.  The entrepreneur’s inability to devote time while the business cannot spare the entrepreneur’s involvement because of particular skills possessed by them.  Natural calamities or incidents such as a major fire in the plant have resulted in substantial losses that cannot be recouped and the entrepreneur does not have funds to invest to revitalize the business.  Dissension among promoters, not allowing any other option to click than to close it down.

Although, no entrepreneur would like their business to get closed down, it may be the only worthwhile strategy at times to recover the maximum possible from the business.  Check Your Progress   10 Design Tips to Bring Your Idea to Life 

  

Many of us ‘think’ in pictures and everyone is strongly influenced by images—that is why advertising images can be so powerful. Your business, your product and the benefits you deliver will carry more weight if they are illustrated visually. You might choose to commission a graphic designer to help. Here are 10 design tips to help you. 1. Pictures save words: People like to see pictures of products. Even better is seeing people like them who are clearly benefiting from the experience. 2. Endorsements add weight: If you commission photography for your promotional material, why not try to feature a famous person. Their endorsement will add weight. 3. Sense of place: The setting for photography is vital. Choose unusual locations that will appeal to your target audience and emphasize the benefits you are offering. 4. Faces and hands: Make images human by showing faces and hands. Use happy people! 5. Words: Make sure you use a legible typeface and that the print is large enough to see. Avoid using capital letters as these are harder to read. 6. Colour counts: Green suggests environment, red aggression and blue cold. Look at ads for organic products, sports cars and refrigeration and you’ll see examples. Choose colours that suit the messages you are trying to convey. 7. Consistency: Once you have got a logo or style, use it everywhere—letterheads, Web site, clothing and vehicles. It may seem contrived to you but it will reassure your customers.

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8. Serifs: These are the little tails that appear on characters in some typefaces. Experts say that serifs make text easier to read, as they carry the eye from letter to letter. 9. Brevity: Promotional material should contain short passages of text made up of short sentences using simple words. Remember you are fighting to hold attention. 10. Be explicit: Do not beat about the bush; state the benefit argument clearly and simply.

KEY CONCEPTS  Growth Company: A business venture that is able to generate significant cash flows or earnings, which keeps increasing over a time.  Sick Industries: Perform far poorly against expected results, incur cash losses for consecutive years, resulting in gradual erosion of their entire net worth and fail to fulfil the debt obligations.  Micro Enterprise: Where investment in plant and machinery does not exceed ` 25 lakhs.  Small Enterprise: Where the investment in plant and machinery is more than ` 25 lakhs but does not exceed ` 5 crores.  Medium Enterprise: Where the investment in plant and machinery is more than ` 5 crores but does not exceed ` 10 crores.  Potentially Viable Unit: Is one that after implementing a relief package spread over a period not exceeding five years from the commencement of the package, will continue to fulfil its repayment obligations as agreed upon without the help of the concessions after the aforesaid period.  Bankruptcy: A legal proceeding that involves a person or business that is not in a position to repay outstanding debts.  Liquidation: Is a legal process that helps in converting assets of a business entity into cash, so as to pay its outstanding debt, and distribute the balance amount left out, if any, to preferred shareholders followed by common shareholders.  Corporate Debt Restructuring (CDR): Is a mechanism to ensure timely and transparent process for restructuring the corporate debts of viable companies undergoing genuine problems, outside the purview of the BIFR, DRT and other legal proceedings for companies involving multiple banks/institutions and having an fund- and non-fund-based exposure of ` 10 and above.  Insolvent Company: One that is unable to pay its debts as they fall due or when its liabilities exceed its assets.  Voluntary Liquidation: Is a process whereby the shareholders appoint a liquidator, who in turn is responsible for sale of assets in a transparent manner and is answerable to creditors and shareholders.  Compulsory Liquidation: Takes place through a court order and the process is initiated by submitting an application to the court alleging that one or more of the required grounds as per provisions of Companies Act exist for liquidation.  Buy-out: Involves selling the business to executives or employees.

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 Management Buyout: Involves direct sale of the venture to someone at predetermined prices.  Float Your Business: Involves getting shares listed through IPO, which can enable the company to have a yardstick for valuation and can be highly rewarding financially. ENDNOTES 1. Sudhir Syal, ET Bureau, Economic Times, 27 February 2009, http://articles.economictimes.indiatimes. com/2009-02-27/news/28451085_1_enterpreneurs-tech-tribe-rohit-agarwal 2. Master Circular - Lending to Micro, Small & Medium Enterprises (MSME) Sector; RPCD.SME & NFS. BC.No.9/06.02.31/2010-11, http://www.rbi.org.in/scripts/Bs_ViewMasCirculardetails.aspx?id=5817 3. Report on the Working Group of Rehabilitation of Sick Units, http://www.msmementor.in/SIDBI_ Publications/Rehabilitation%20of %20Sick%20SME-Working%20Group-Report.pdf 4. http://www.investopedia.com/terms/b/bankruptcy.asp 5. Purnima Mishra, M., Chartered Accountant, http://www.lawyersclubindia.com/forum/files/53_the%20 provisions%20of%20sica%20&%20companies%20act.pdf 6. mbaisherebyravali.blogspot.com/…/provisions-of-sica-companies-act.html 7. Sudeep Jain, ‘Wockhardt’s Liquidation Troubles’, The Wall Street Journal, 14 March 2011, http:// blogs.wsj.com/indiarealtime/2011/03/14/wockhardts-liquidation-troubles/ 8. Revised Guidelines on Corporate Debt Restructuring (CDR) Mechanism, RBI, http://rbi.org.in/upload/ notification/pdfs/67158.pdf 9. Office of the Official Liquidator, Delhi, http://www.companyliquidator.gov.in/12/Liquidation.htm 10. Bernard L.Erven, Professor and Extension Specialist Department of Agricultural Economics, Ohio State University, ‘Management Succession Issues in Family Business’, fambiz.com; http://www. fambiz.com/Orgs/Cornell/articles/real/erven.cfm 11. www.theracetowin.org/the-team.html 12. Blackstone Makes Its First Management Buyout in India, The New York Times, 19 June 2007, http:// www.nytimes.com/2007/06/19/business/worldbusiness/19blackstone.html 13. Vivek Sinha, VC CIRCLE, ‘ACB India Files for IPO’, http://www.vccircle.com/500/news/ acb-india-files-for-ipo-warburg-pincus-to-part-exit

REFERENCES Bygrave, W. D. 1997. The Portable MBA in Entrepreneurship. John Wiley & Sons, 2nd ed, New York, 10. McCarthy, B. 2003. ‘Strategy Is Personality-Driven, Strategy Is Crisis-Driven: Insights from Entrepreneurial Firms’, Management Decision, 41(4): 327–339. Stevenson, H., and S. Harmeling. 1990. ‘Entrepreneurial Management’s Need for a More “Chaotic” Theory’, Journal Business Venturing, 5: 1–14.

CONCEPTUAL QUESTIONS 1. What are the four vital reasons for failure of businesses? 2. Differentiate between a growth company and a weak/sick company. 3. What are the major criteria to identify a sick unit?

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4. 5. 6. 7. 8. 9. 10. 11.

12. 13. 14.

15. 16. 17. 18. 19. 20. 21. 22. 23.

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Differentiate between micro, small and medium enterprises. What is meant by viability of sick company? Explain. What is the difference between bankruptcy and liquidation? Explain. What are the key steps involved in the liquidation process? Explain. Mention some of the key potential opportunities in reviving sick units? Describe the framework for identification of sickness and possible broad steps for rehabilitation. What are the vital bottlenecks and issues that are getting addressed by the policy measures to overcome sickness in an industry? Differentiate between internal and external causes of sickness giving concrete examples. Why is it said that it is relatively difficult to revive sick companies that are sick mainly because of external causes? What are the key measures on viability study of a sick unit to focus on? What are the main reliefs and concessions that banks can extend for rehabilitation of sick companies? Why should promoter contribution be insisted upon in any relief package prepared by banks? What are the minimum stipulations for promoter contribution in case of small, micro and medium enterprises? What is corporate debt restructuring scheme and what are the eligibility conditions to submit a package under this scheme? What are the key features of rehabilitation plan under CDR? What are the four key strategies for turning around sick companies? Explain. Define and differentiate between the three different types of liquidation. What is the significance of working out exit options in the beginning? What are the key elements involved in a successful succession of family business and founder’s transition? Explain. What are the common difficulties that come in the way of sale of a business? Explain. Define management buyout. What are its advantages? Explain. What are the prerequisites that need to be built in the business to have effective flotation strategy for exit? CRITICAL THINKING QUESTIONS

1. Identify two sick companies as per the definition of non-SSI sick companies. Analyse their financials to identify the root cause of their sickness. Under which category of sickness, namely, born sick, becomes sick or made sick, would you classify these two companies. Justify your answer. 2. What was the role of the Board for Industrial and Financial Reconstruction (BIFR)? Why was the BIFR Act repealed in 2003? Discuss with respect to specific provisions of BIFR Act 1985. Rehabilitation of companies has been assigned after 2003 to National Company Law Tribunal (NCLT), which was incorporated under the Companies Act, 1956. In what way NCLT is having provisions that are superior to those of the BIFR to handle sickness effectively?

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3. Identify a company that was sick and taken over under change in management by the promoter which had succeeded under new management. Analyse the steps taken by the new management and what are the opportunities that they saw in the existing venture that have led them to revive it and take it on the growth path? 4. Identify a company where the major problem of sickness was on account of excessive labour force. Work out the financial position of the company under different scenarios of cutting down the wage bill by retrenchment of labour with or without compensation in terms of voluntary retirement benefits and implications of the same on the future viability of the company. 5. For small and medium enterprises, it is said that the floatation strategy may not be a good strategy for exit. Consider an example of exit with IPO and another without IPO and work out pros and cons by analysing facts and figures to justify or otherwise the strategy used for exit in each case.

CASE 17.1:  PRAKASH INDUSTRIES LIMITED Prakash Industries Limited (PIL) was set up in July 1980 as Prakash Pipes and Industries by B. D. Agarwal, the founder chairman of the company. His vision has taken the company to great heights and enabled it to respond to multiple challenges on its journey to excellence. His wellthoughtout, integrated approach, intellectual capabilities and business acumen have provided a strong foundation to the company to face business challenges. He has been bestowed with humane touch and unmatched qualities along with business acumen. He has also been honoured with being one of the most innovative industrialists in India. He is also winner of the prestigious UNCIY Award given to him by the Honourable President of India for innovating techniques in hilly areas. The company is well established and is known for its quality products at competitive prices. It has been aggressive in introducing innovations to cut cost and maintain high quality standards. Over the years, it has been focusing mainly on technology upgradation to set up plants with stateof-the-art technology. It is evident from its state-of-the-art technology integrated steel plant set up at Champa in the state of Chhattisgarh. The sponge iron Kilns installed at Champa are based on SL/RN technology of Lurgi, Germany, which is one of the most successful and renowned technologies in coal-based Sponge Iron manufacturing. The Sponge Iron manufactured in the Kilns is used in-house by the company in the Steel Melting Shop to produce high-quality Billets and Blooms. These are in turn used to manufacture highvalue-added finished steel products for a selective customer base. The company has also set up facilities to manufacture wire rod, HB wire, TMT bars and structurals, which have enabled it to go in for forward integration in the company to capture additional value addition that can extended to its customers. Thus, with appropriate forward and backward linkages coupled with deployment of the best available technology, company, and assured supply of raw material and power, the steel plant of the company can be said to be a fully integrated steel plant. The company has focused on ensuring uninterrupted supply of quality raw materials through captive coal mines of the Company at Chotia in the state of Chhattisgarh. These mines are operated through modern methods of mining, resulting in operational excellence and economy. It has been allotted three coal blocks at Chotia, Madanpur and Fatehpur in the State of Chhattisgarh.

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The company’s ability to execute projects is evident from starting operations of Chotia Coal mines in a record time of 33 months. The company also has its owns iron ore mines to take care of its Iron ore requirements for Sponge Iron manufacturing. It has installed a power plant to take care of its power requirements and self-reliant in power for the integrated steel plant and future expansion projects. This provides it with an extra edge in ensuring optimum capacity utilization and quality power supply without fluctuations at reasonable cost. Coupled with expansion plans in the steel sector, the company has chalked out strategic plans to focus on expansion in power generation with installation of boilers based on utilization of low-grade fuel and latest-technology turbines, which matters the most in power-intensive industries. Its product range includes coal mines, iron ore mines, sponge iron, power production for captive use, steel melting shop, ferro alloys, wire rod mill, rigid PVC pipes, wind power and TMT mill.

Management of the Company The present chairman and managing director of the company is V. P. Agarwal and the joint managing director is Vikram Agarwal. There are other eight directors representing various interests in the company. The size and composition of the board conforms to the stipulated requirements of the listing agreements with the stock exchanges. The board continues its pursuit for excellence by adopting appropriate corporate strategies and practical business plans. The company has in place adequate monitoring systems that are followed to safeguard against major risks and to ensure implementation of policies and procedures to ensure compliance to legal, social and ethical responsibilities.

Initial Public Offering The company came out with a public issue in November 1991 to part-finance the sponge iron project being set up at Champa, Madhya Pradesh, with an installed capacity of 1.5 lakhs tpa. In 1994–95, the company doubled the capacity of the sponge iron plant from 1.50 lakhs tpa to 3.30 lakhs tpa and also undertook a forward integration project to set up a stainless steel plant in Gujarat together with a rolling mill and a worsted woollen yarn EOU at Silvassa. It came out with a rights issue in January’96 to part-finance expansion of the iron-ore mining and crushing capacity and diversification project. The company successfully commissioned the stainless steel project at Bharuch in 1995–96. The shareholding pattern of the company shows that promoters holding increased from 55.2 per cent as of March 2001 to 70.25 per cent as of March 2006. However, subsequently, it decreased to 45.91 per cent as of March 2010. Foreign institutional investors (FIIs) holding decreased from 12.01 per cent as of March 2001 to 4.07 per cent as of March 2006 and again increased to 16.02 per cent as of March 2011, indicating FIIs interest in the company. Indian public holding has reduced over the years from 26.27 per cent as of March 2001 to 17.16 per cent as of March 2006 and further to 16.17 per cent as of March 2010. Banks, financial institutions and insurance companies almost liquidated their holdings in company between 2001 and 2010, indicating their lack of interest and confidence in the company (Table 17.5). (Continued)

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Table 17.5 Prakash Industries Limited Shareholding Pattern—Between March 2001 and March 2011 March 2001

Category

March 2006

March 2011

No. of Shares Held

% of Share Holding

No. of Shares Held

% of Share Holding

No.of Shares Held

% of Share Holding

37,709,632

55.2

69,064,998

70.25

61,740,503

45.91

Promoter’s holding Sub-total Institutional investors Mutual funds and UTI Banks, financial institutions and insurance companies FIIS

5,079,091

7.44

1,665,854

1.69

4,348,864

3.23

3,124,685

4.57

2,343,030

2.38

743,451

0.55

3,450

0.01

2,250

16,457,315

12.24

17,947,207

26.27

16,872,844

21,742,163

16.17

11,844

0.02

291,348

715,527

0.53

32.78

25,236,974

0

Others Indian public NRIs/OCBs Sub-total

22,396,248

Grand total

68,313,106

100

98,313,106

17.16 0.3 25.67 100

51,198,381 134,488,514

38.07 100

Prakash Industries Ltd. had been incurring losses upto the year ended March 2002. Accumulated losses had touched a figure of ` 1,017.74 crores for the year ended March 2003. The company had certain set back in total income for the years ended March 2006 and March 2007, respectively. However, in subsequent years, its total income increased from ` 1,263.91 crores in the year ended March 2008 to ` 1,596.56 crores for the year ended March 2010. It did not pay any dividend between 2001 and 2010. However, earnings per share increased from ` 7.07 in 2006 to ` 21.87 in 2010. The book value of the company, which was negative till the year ended 2004, increased in subsequent years from ` 23.86 in 2005 to ` 98.73 in 2010. The balance sheet position of the company indicates that share holders’ funds were negative to the tune of ` 430.57 as of March 2004 and thereafter became positive to touch a level of ` 1,430.80 crores as of March 2010. Although its financial performance was relatively weak until the year ended March 2004, contingent liabilities remained more or less in the range ` 15–` 26 crores. The net current assets of the company almost steadily increased from ` 142.67 crores as of March 2002 to ` 342.21 crores as of March 2010 but for a dip in the year ended March 2009 to a level of ` 230.26 crores. The fund flow position of the company indicates that it did not borrow any loans between 2005 and 2010. However, it was liquidating its secured loans during this period, which got reduced from ` 1,034.75 as of March 2004 to ` 102.98 crores as of March 2010 (Tables 17.6, 17.7 and 17.8).

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1,596.56

Total income

26.01

Miscellaneous expenses

Tax

7.09

273.25

56.79

Profit before tax

330.04

Depreciation

25.48

Gross profit

Interest

355.52

59.57

Selling and Adm. expenses

Operating profit

128.19

Other manufacturer expenses

1,241.04

65.24

Employee cost

Total expenditure

66.93

Power and fuel cost

Raw materials

895.1

4.49

Stock adjustments

Expenditure

24.42

1,567.65

123.11

1,690.76

March 2010

Other income

Net sales

Excise duty

Sales turnover

Income:

Year

0

204.77

42.48

247.25

60.5

307.75

1,233.03

9.71

47.03

107.17

52.46

54.69

961.97

1,540.78

−1.61

16.75

1,525.64

184.07

1,709.71

March 2009

0

199.16

47.68

246.84

41.46

288.3

975.61

18.4

38.14

97.32

43.44

51.64

726.67

1,263.91

6.79

3.77

1,253.35

166.18

1,419.53

March 2008

0

152.76

45.91

198.67

25.75

224.42

731

6.63

33.92

71.74

34.88

41.38

542.45

955.42

−3.27

25.77

932.92

116.53

1,049.45

March 2007

0

87.7

48.58

136.28

18.33

154.61

653.98

3.32

22.25

42.95

28.79

25.46

531.21

808.59

7.4

1.93

799.26

103.83

903.09

March 2006

0

551.18

51.19

602.37

20.77

623.14

636.18

3.88

13.65

41.49

24.75

15.92

536.49

1,259.32

7.26

521.53

730.53

68.97

799.5

March 2005

0

153.37

68.1

221.47

77.5

298.97

715.53

2.66

8.15

29.41

22.24

69.73

583.34

1,014.50

4.28

224.32

785.9

51.2

837.1

March 2004

0

145.58

46.88

192.46

85.93

278.39

593.29

2.49

10.11

23.94

20.64

66.82

469.29

871.68

−14.47

221.29

664.86

59.11

723.97

March 2003

Table 17.6 Prakash Industries Limited Profit and Loss Account 2001–10 (` in Crores)

Financials of the Company

(Continued)

0

−160.7

−130.03 0

62.34

−98.33

−74.17 55.86

122.98

24.65

461.52

2.56

14.01

20.06

15.46

46.03

363.4

486.17

−0.19

0.85

485.51

30.62

516.13

March 2001

121.55

47.38

531.57

2.72

12.84

21.03

16.84

51.82

426.32

578.95

4.58

11.94

562.43

35.44

597.87

March 2002

M17_KUMA5784_01_SE_C17.indd 768

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0 204.16 −5.32 209.48 0 100.44

297.6 7 0 0 17.68

73.65

−18.48

284.64 0 7

260 13.16 0 0 21.87

98.73

0.61

March 2009

0 266.16

0

March 2010

62.06

17.21

0 0

336.89 100.44

44.51

12.8

0 0

3.68 239.24

110.13

0

−0.63 239.24

114.06

18.73

19.53 132.79

0.44

March 2007

206.68

−7.96

0 198.72

0.44

March 2008

Source: Capital Line Data Base, http://plus.capitaline.com/user/framepage.asp?id=1

Deferred tax Reported net profit Extraordinary items Adjusted net profit Adjst. below net profit P&L balance brought forward Appropriations P & L Balance carried down Dividend Preference dividend Earnings per share-unit curr Earnings per share(adj)-unit curr Book value-unit curr

Fringe benefit tax

Year

30.93

7.07

0 0

0 110.13

38.66

0

70.54

0.93

15.88 71.47

0.35

March 2006

23.86

53.12

0 0

20.48

−85.36

−50.94

−105.84

0

0 0

0 −1,017.74

−92.66 −779.5 0 0

−887.71

−87.55

0

0 0

0 −887.7

−727

0

−160.7

−130.03 0

0

0 −160.7

0

March 2001

0

0 −130.03

0

March 2002

−1,017.74

0

145.58

0

0 145.58

0

March 2003

17.81

0 0

0 −626.13

−779.5

−626.13

0 38.66

0

153.37

0

0 153.37

0

March 2004

127.75

29.51

507.53

14.14 537.04

0

March 2005

Table 17.6 Prakash Industries Limited Profit and Loss Account 2001–10 (` in Crores) (Continued)

M17_KUMA5784_01_SE_C17.indd 769

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Total liabilities

1,074.67 0

Net block

Lease adjustment

Investments

2.22

302.62

887.2

0

Less: impairment of assets

Capital work in progress

0

708.18

Less: Accumulated depre.

2.22

241.28

0

636.97

1,782.85

1,524.17

1,309.82

1,660.94

Gross block

Application of funds

0 259.3

127.16

Unsecured loans

259.3

1,050.52

0

21.38

913.67

115.47

March 2009

230.14

102.98

Secured loans

Total debt

1,430.80

0

Equity application money

Total shareholders’ funds

65.19

Equity share warrants

121.69

1,243.92

Reserves total

March 2010

Share capital

Sources of funds

Year

0.1

175.97

0

776.9

0

606.74

1,383.64

1,307.03

363.13

7

356.13

943.9

0

34.15

794.28

115.47

March 2008

0

49.53

0

791.55

0

549.91

1,341.46

1,165.98

497.24

14.3

482.94

668.74

0

0

560.66

108.08

March 2007

0

11.48

0

811.4

0

496.45

1,307.85

1,136.81

604.08

14.95

589.13

532.73

0

0

423.63

109.1

March 2006

Table 17.7 Prakash Industries Limited—Balance Sheet

0

9.39

0

810.71

0

441.66

1,252.37

1,124.66

657.06

16

641.06

467.6

0

0

358.5

109.1

March 2005

16.69

0

6.53

0

427.33

0

538.5

965.83

620.87

1,051.44

0

1.07

0

244.62

0

689.53

934.15

409.06

1,008.00

16.98

991.02

−598.94

−430.57 1,034.75

0

0

0

0

79.1 −678.04

94.1

March 2003

−524.67

March 2004

0

0.8

0

279.44

0

642.79

922.23

424.04

1,168.56

27.11

1,141.45

−744.52

0

0

−823.62

79.1

March 2002

(Continued)

0

3.47

0

329.35

0

587.11

916.46

478.46

1,092.95

36.1

1,056.85

−614.49

0

0

−693.59

79.1

March 2001

M17_KUMA5784_01_SE_C17.indd 770

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101.78

236.96

Cash and bank

Loans and advances 415.27

193.45

83.15 −70.24

88.07

−77.18

36.78

Contingent liabilities 35.98

1,309.82

12.91

24.54

1,307.03

0.03

16.44

16.47

20.68

333.35

130.37

53.45

76.92

463.72

165.8

84.51

114.78

98.63

March 2008

24.65

1,165.98

78.21

0.43

78.64

23.26

223.43

56.12

6.85

49.27

279.55

83.63

9.44

92.94

93.54

March 2007

32.47

1,136.81

97.74

0

97.74

0

216.19

27.08

10.34

16.74

243.27

64.41

9.16

80.92

88.78

March 2006

Source: Capital Line Data Base, http://plus.capitaline.com/user/framepage.asp?id=1

1,660.94

Total assets

Net deferred tax

10.89

Deferred tax liability

19.1

16.4

Deferred tax assets

230.26

185.01

342.21

180.43

Total current liabilities

71.5

113.51

Miscellaneous expenses not written off

78.11

Provisions

Net current assets

102.32

Current liabilities

31.31

108.48

82.03

March 2009

Less: current liabilities and provisions

522.64

82.01

Total current assets

101.89

Sundry debtors

March 2010

Inventories

Current assets, loans and advances

Year

15.57

1,124.66

113.61

0.13

113.74

0

190.95

25.04

4.26

20.78

215.99

52.39

3.2

77.35

83.05

March 2005

Table 17.7 Prakash Industries Limited—Balance Sheet (Continued)

15.75

620.87

0

0

0

0.41

186.6

20.29

3.76

16.53

206.89

46.06

5.4

75.93

79.5

March 2004

24.83

409.06

0

0

0

0.78

162.59

24.78

3.38

21.4

187.37

40.85

4.75

66.35

75.42

March 2003

23.61

424.04

0

0

0

1.13

142.67

43.4

2.92

40.48

186.07

36.86

4.36

67.23

77.62

March 2002

26.63

478.46

0

0

0

1.49

144.15

51.59

2.53

49.06

195.74

36.02

3.36

87.78

68.58

March 2001

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234.39 0 0

0 0 0 173.36 1.58 409.33 0 83.04 103.83 205.84 2.12 0 0 14.5 409.33

6.22 122.37

0 0 0

0 2.7 468.66 0 0 29.16

320.02 0

105.01 0 14.47 468.66

March 2009

337.37

March 2010

31.74 0 13.7 348.27

0.1

168.62

134.11

0

0

0 2.58 348.27

0

0

0

11.7 78.44

255.55

March 2008

0 0 36.41 214.91

0

71.66

106.84

0

0

12.29 0 214.91

0

0

0

2.67 13.7

186.25

March 2007

9.37 0 6.34 126.26

0

57.57

52.98

0

0

0 0 126.26

0

0

0

0 0

126.26

March 2006

Source: Capital Line Data Base, http://plus.capitaline.com/user/framepage.asp?id=1

Increase in other networth Increase in loan funds Decrease in gross block Decrease in investments Decrease in working capital Others Total Inflow Application of funds Cash loss Decrease in networth Decrease in loan funds Increase in gross block Increase in investments Increase in working capital Dividend Others Total Outflow

Cash profit Increase in equity

Sources of funds

Year

Table 17.8 Prakash Industries Ltd Fund Flow Analysis 2001–10

117.96 0 0 731.39

0

219.05

394.38

0

0

0 0.41 731.39

0

0

0

15 127.75

588.23

March 2005

24.01 0 0 280.28

0

256.27

0

0

0

0 0.37 280.28

0

0

43.44

15 0

221.47

March 2004

19.92 0 0 192.67

0

12.19

160.56

0

0

0 0.35 192.67

0

0

0

0 0

192.32

March 2003

0 0 0 77.45

0

3.1

0

0

74.35

1.48 0.36 77.45

0

0

75.61

0 0

0

March 2002

0 0 0 105.95

0

7.54

0

0

98.41

3.25 0.35 105.95

0

0

102.35

0 0

0

March 2001

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  Entrepreneurship

Questions 1. Which year did the company fall sick? Justify your answer. 2. What were the possible reasons for the sickness of the company? Classify the identified reasons for sickness into internal and external factors and comment on the reasons that mainly led to the sickness of the company. 3. What does the changing shareholding pattern reveal about the financial position of the company? Comment. 4. Analyse the financial position of the company on the basis of different financial statements as given to come out with key weak areas of its operations between 2001 and 2005. What improvements happened in those areas in subsequent years? 5. What key strategies helped the company to get rehabilitated? Analyse the possible role played by bankers, management and employees in the rehabilitation process.

CASE 17.2:  MakeMyTrip MakeMyTrip is venture that was started with the main aim of empowering Indian travellers with instant booking along with providing a large number of choices to pick from. The venture has really transformed the way bookings in the travel industry take place. It was difficult to enter into this business particularly in India, because Indian customer psyche fundamentally trusted traditional modes of payment and had their own reservations about resorting to the online mode of payment. MakeMyTrip initiated its journey in the US-India travel market in 2000 and started its Indian operations only in 2005. Today, it is a name to reckon with in online reservations for travel. It provides a range of products, services and options to its customers by providing facilities for booking international and domestic airline tickets, Indian railways tickets, domestic bus tickets, international and domestic hotel reservations, car rentals, international and domestic holiday packages and much more. The company had the objective of providing a range of best-value products and services along with advanced and forward-looking technology and a dedicated 24-hour customer support system. The company is a dominant player in the travel-booking industry with a market share of around 50 per cent in the online travel market. It is one of the most sought after names in the industry with more than 8 per cent of Indian domestic flights booked via its portal. It has at present its offices in 20 cities in the country and two international offices in New York and San Francisco, and over and above these, it has a number of offices in franchise locations. It established itself gradually in India and the world over, and alongside nurtured the growth of its offline businesses through the business model of franchises and affiliates, which enabled it to further strengthen its brand value. MakeMyTrip at present is not only a travel portal or an important brand but also a one-stop travelshop that offers the broadest selection of travel products and services in India. It is one of the most reliable, efficient and technology-driven companies with key

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focus on customer-centricity, which enables it to better understand customer needs and provide products and services that cater to a highly diversified spectrum of customer needs and wants. The company has grown fast after the initial phase of teething troubles to become the market leader for US-India travel. It has created a new wave in the travel-booking industry and is among the leading players in the Indian travel industry. Soon with the convenience that it provided to customers, it has become the preferred choice of millions of travellers who were enchanted and thrilled to be empowered by a click of a mouse to take care of their travel needs. MakeMyTrip.com was felicitated with the Galileo Express Travel World’s ‘Best Online Travel Agency in India’ Award in 2007. This makes the company the first-ever recipient of the award for this category introduced during the same year. It was ranked second overall and first in the professional services industry in a ranking published on 21 June 2010, of ‘India’s Best Companies to Work For 2010’ by the Great Place to Work Institute, an independent global research and consulting firm, and The Economic Times, a daily business newspaper in India.

Products Offered by the Company     

international and domestic air tickets, holiday packages and hotels domestic bus and rail tickets private car and taxi rentals MICE (meetings, incentives, conferences and exhibitions) B2B and affiliate services

The company has a highly user-friendly Web site. It had an average of over 2.7 million visitors per month in the fiscal year 2011. During 2010, a total number of 2.0 million transactions were executed through the company Web sites, which accounted for around 94.5 per cent of their total transactions. This increased to 3.6 million transactions accounting for around 96.0 per cent of their total transactions in 2011. One of the unique features of the company’s operations backed up by technology is that their technology platform is scalable and can be upgraded to take care of increased traffic and complexity of products with limited additional investment. The key strengths of the company are being the largest travel company in India with a well-established brand name; a broad spectrum of services offered to customers; a wide distribution network; latest, secure and scalable technology; a customer-centric approach and a highly professional and experienced management team.

Founders and Co-founders of the Company Kalra obtained his Bachelor’s degree in Economics from St. Stephen’s College, Delhi, in 1990 and a postgraduate diploma in management from the Indian Institute of Management, Ahmedabad, in 1992. He has diversified interests ranging from adventure sports, swimming, yoga, quizzing and travelling to places off the beaten path. He is a member of the executive council of NASSCOM and chairs the NASSCOM Internet Working Group. He is also a charter member of TiE (The Indus Entrepreneurs) and serves on the (Continued)

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  Entrepreneurship

Board of TiE, New Delhi. He has also set up a non-governmental organization (NGO) called I Am Gurgaon that has a key focus on taking initiatives to improve the quality of life in Gurgaon. Keyur Joshi is co-founder and the chief operating officer of the company. He is deeply involved in the strategic planning for the company, along with his key responsibility for sales and business development in India and US market. MakeMyTrip’s hybrid retail model is also under his portfolio, which poses a great challenge before him to serve the fast-growing holiday market in India with a retail presence across locations. Before founding MakeMyTrip, he served in Around the World Travel (now called JustFares.com), and played a strategic role in transforming it into an online B2C travel company. Earlier to that he had served with Tata Motors, where he was involved in market research and product management. He has a Bachelor’s degree in Chemistry from Gujarat University and a MBA degree from the City University of New York, New York. Rajesh Magow, another co-founder of the company, is the chief financial officer. He also oversees outsourced operations, automation and quality function of the company. He has more than 18 years of functional expertise in the IT, ITES and Internet industries. Earlier, he served with ebookers/Cendant (now Travelport) as chief financial officer and was CEO for a year. He also served with Aptech Limited, Quantum and Voltas. He is a professional chartered accountant from the Institute of Chartered Accountants of India, New Delhi.

Investors in the Company MakeMyTrip (MMT) had a last round of funding prior to IPO amounting to a $15 million series C investment that closed in 2007. MMT had raised money from Tiger Fund ($8 million) and $7 million from existing investors SAIF Partners, Sierra Ventures and Helion Venture Partners. In December 2007, the company had raised $13 million from SAIF Partners, Sierra and Helion in series B and in 2005, SAIF Partners made the first major round of fund infusion of $10 million. That was the time MMT started its India operations. MMT, which had raised $1 million from eVentures, had initially focused on the travel between US and India route. eVentures stake was subsequently bought back by promoters led by Deep Kalra. In 2010, SAIF Partners with a largest shareholding in the company owned 51.32 per cent, while MD and CEO Kalra owned 14.45 per cent. Other leading investors such as Tiger Global owned 12.14 per cent, Helion Venture Partners 11.97 per cent and Sierra Ventures 7.98 per cent.

Financial Performance Revenue Model

The company generates its revenue mainly through commissions and incentive received from airlines, service fees charged to customers and fees from their global distribution system, or GDS, service provider. Travel agents utilize a GDS to book air tickets and receive fees for their use of such a system. In case of hotels and packages business, the revenue received by the company includes the total amount paid by customers for availing travel services and products and the cost of procuring the relevant services and products are classified as service cost. The total revenue less service cost incurred by the company increased from $16.5 million in the fiscal year 2008 to $61.1 million in the fiscal year 2011.

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The company, during the initial years of its operations, had invested a large sum of money on infrastructure and marketing and sales of its services to create awareness among target market. As a result, it kept on incurring losses during the completed fiscal years. It recorded a net loss of $18.9 million during 2008, that is, the second complete fiscal year since Indian operations were started. These looses were reduced to $7.3 million and $6.2 million in 2009 and 2010, respectively (Table 17.9). The company earned a net profit of $4.8 million in the fiscal year 2011.

Table 17.9 Fiscal Year Ended 31 March 2009

2010

2011

(in thousands, except per share data and number of shares) Consolidated statement of comprehensive income (loss) data: Revenue: Air ticketing

19,225.1

32,119.5

47,622.7

Hotels and packages

48,622.8

50,287.9

74,558.0

Other revenue Total revenue

703.8

1,152.8

2,540.7

68,551.7

83,560.2

124,721.4

(43,069.2)

(42,292.2)

(63,650.9)

(491.8)

(985.5)

(9,679.8)

(16,562.0)

(14,399.0)

(24,369.9)

(28,160.5)

(40,698.9)

(1,558.7)

(1,569.7)

(1,910.6)

(10,617.6)

(6,009.8)

3,244.1

(188.8)

(7,373.5)

(6,198.6)

2,138.0

25.3

(8.4)

2,691.7

(7,348.2)

(6,207.0)

4,829.7

Service cost: Procurement cost of hotels and packages services Purchase of air ticket coupons Personnel expenses Other operating expenses Depreciation and amortization Results from operating activities Net finance income (costs) Profit (Loss) before tax Income tax benefit (expense) Profit (Loss) for the year

—

4,061.9 (1,923.9)

Earnings (Loss) per ordinary share: Basic

(0.42)

(0.35)

0.17

Diluted

(0.55)

(0.35)

0.15

Basic

17,437,120

17,521,120

28,320,901

Diluted

20,403,420

17,521,120

34,950,246

Weighted average number of ordinary shares outstanding:

(Continued)

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Table 17.9 Fiscal Year Ended 31 March (Continued) 2009

2010

2011

(in thousands, except per share data and number of shares) Proforma earnings (loss) per ordinary Share (unaudited): Basic(1)

(0.38)

(0.18)

0.16

Diluted(1)

(0.38)

(0.18)

0.15

Basic(1)

29,761,580

29,845,580

32,993,361

Diluted(1)

29,761,580

29,845,580

34,929,282

Proforma weighted average number of ordinary shares outstanding (unaudited):

Note: (1) In December 2006, August 2007 and May 2008, we issued Series A, Series B and Series C preferred shares, respectively, that were converted into ordinary shares effective upon the completion of our initial public offering on 17 August 2010. Our proforma earnings (loss) per ordinary share (basic and diluted) and proforma weighted average number of ordinary shares outstanding (basic and diluted) have been calculated assuming that the conversion of all our outstanding preferred shares occurred on a ‘hypothetical basis’ on 1 April 2007 for our Series A and Series B preferred shares and 1 April 2008 for our Series C preferred shares. All our preferred shares were converted into ordinary shares effective upon the completion of our initial public offering on 17 August 2010. Source: Prospectus filed with SEC, USA, http://investors, makemytrip.com/secfiling.cfm?filingID=950123-1155159&CIK=1495153

Table 17.10 sets forth a summary of our consolidated statement of financial position as of 31 March 2008, 2009 and 2010.

Table 17.10 Consolidated Statement of Financial Position As of 31 March 2008

2009

2010

($ in thousands) Trade and other receivables

9,852.8

5,428.2

12,449.5

Term deposits

7,346.3

16,038.9

14,471.4

Cash and cash equivalents Total assets Total equity (deficit) attributable to equity holders of our company Loans and borrowings (1)

M17_KUMA5784_01_SE_C17.indd 776

3,775.5

5,471.6

9,341.5

33,226.6

37,898.2

50,633.5

(17,244.6)

(27,237.5)

(24,955.4)

24,198.1

39,712.5

40,966.9

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As of 31 March 2008

2009

2010

26,467.0

Trade and other payables

12,321.1

($ in thousands) 13,440.1

Total liabilities

50,468.1

65,131.6

75,584.5

Total equity (deficit) and liabilities

33,226.6

37,898.2

50,633.5

Note: (1) The preferred shares issued by us are compound financial instruments with equity, liability and embedded derivative components. Accordingly, the liability portion of our preferred shares amounting to $24.1 million, $39.6 million and $40.8 million for the fiscal years 2008, 2009 and 2010, respectively, has been included under our loans and borrowings. All our preferred shares will convert into ordinary shares effective upon the completion of this offering. Source: prospectus filed with SEC, USA, http://investors.makemytrip.com/secfiling. cfm?filingID=950123-11-55159&CIK=1495153

Proposed Utilization of IPO Proceeds The net proceeds to be received from the sale of the ordinary shares offered by the company will be around $33.5 million, after taking care of the underwriting discounts and commissions and estimated offering expenses payable by the company. The net proceeds are likely to be around $38.5 million, in case the underwriters exercise their option to purchase 786,600 additional ordinary shares in full. The company proposes to use the net proceeds from the IPO for expanding its operations by acquiring or investing in strategic businesses or assets that complement its service and product offerings, enhancements of technology, as well as for working capital and other general corporate purposes.

Dilution of Value for New Subscribers The new shareholders value of the shares allotted will get diluted to the extent of the difference between the public offering price per ordinary share and company’s net tangible book value per ordinary share after this offering. Dilution will be an outcome of the fact that the public offering price is substantially higher than the book value per ordinary share attributable to the existing shareholders on the outstanding ordinary shares. As on 31 March 2011, we had a net tangible book value of $73.48 million, or $2.09 per ordinary share outstanding as of that date. Our net tangible book value is determined by subtracting the value of our intangible assets and total liabilities from our total assets. Dilution is determined by subtracting the net tangible book value per ordinary share from the public offering price per ordinary share of $24.00, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. (Continued)

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Table 17.11 illustrates such dilution per ordinary share.

Table 17.11 Dilution of Net Tangible Book Value for New Investors Initial public offering price per ordinary share Net tangible book value per ordinary share as of 31 March 2010 after taking into account the 20-for-one split we effected on 22 July 2010.

$14.00

$(1.54)

Proforma net tangible book value per ordinary share after giving effect to the conversion of our preferred shares and the issuance of shares pursuant to the exercise of options for sale in this offering

$0.47

Proforma net tangible book value per ordinary share after giving effect to the conversion of our preferred shares, the issuance of shares pursuant to the exercise of options for sale in this offering, and this offering

$1.84

Amount of dilution in net tangible book value per ordinary share to new investors in the offering

$12.16 86.9%

Percentage dilution in net tangible book value per ordinary share to new investors in the offering

Table 17.12 Conversion of Preferred Shares into Ordinary Shares Ordinary Shares Purchased(1)

Existing shareholders New investors Total

Total Consideration

Average

Number

Per cent

Amount

Per cent

Price per Share

30,208,368

88.7

$54,259,842

50.2

$1.80

3,846,154

11.3

53,846,156

49.8

14.00

34,054,522

100.0

$108,105,998

100.0

$3.17

Note: (1) Assuming that the conversion of all outstanding preferred shares into ordinary shares occurred on 31 March 2010. Source: prospectus filed with SEC, USA, http://investors.makemytrip.com/secfiling.cfm?filingID=950123-1155159&CIK=1495153

On a proforma basis as of 31 March 2010 (assuming the conversion of all our outstanding preferred shares into ordinary shares and the exercise of share options by certain of company’s selling shareholders for sale in this offering occurred on such date). The differences between the number of ordinary shares purchased from the company, the total consideration paid to the company and the average price per ordinary share that existing shareholders paid for their shares and new investors paid, before deducting the underwriting discounts and commissions and estimated offering expenses payable by the company are given in Table 17.12. NASDAQ-listed online travel services provider MakeMyTrip Ltd is looking for raising further money through equity to the tune of $62 million through a fresh public issue of shares in the second quarter of 2011. It is understood that some management executives such as founder and CEO Deep

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Kalra and a few private equity investors, such as Helion Venture and SAIF Partners, are likely to sell part of their stake in the company worth around $109 million based on the latest traded market price of the share. This would result in a combined issue to the tune of around $171 million or nearly ` 770 crores, including the money coming from over-allotment option for as many as 900,000 shares. This would imply that within a period of one year, the company’s market value will get doubled after new issue. The company was valued at around $450 million at the IPO and the post-money valuation and after the proposed public issue, its market value will rise to around $930 million. This would result in the company becoming one of the top 250 most-valued Indian firms listed on any stock exchange, according to VCCircle estimates. In the prospectus filed with the Securities and Exchange Commission, USA, the company has indicated that the issue could comprise as many as 69 million shares including over-allotment portion for a maximum price of $26.22 per share. This may result in the total size of the issue going to around $180 million. It proposes to sell 16 million fresh shares and existing shareholders are likely to off load another 44 million shares. The issue to the extent of 6 million shares (not counting over-allotment portion) has been underwritten by Morgan Stanley & Co. International Plc., Deutsche Bank Securities Inc., Pacific Crest Securities LLC and Oppenheimer & Co. Inc. The purpose of proposed public issue within one year of an IPO is to expand operations by acquiring or investing in strategic businesses or assets that complement its service and product offerings. It also proposes to make investments in technology enhancements, increase working capital and utilize the money for other general corporate purposes. It came out with its IPO during August, 2010, at a price of $14 per share that resulted in raising around $70 million. Of the $70 million, about $54 million had been raised through the fresh issue while the remaining was secondary sale by its prominent investors such as SAIF Partners, Helion Ventures and Sierra Ventures, besides certain management executives, including founder Deep Kalra, who too had part exited. The average cost of purchase for Helion was around $5 per share as it co-invested in series B and C rounds of funding. The average cost was much lower for SAIF Partners’, as it had also participated in the first round of funding way back in 2005 at the time of company launching its operations in India. Thus, Helion is likely to make around 5X returns in this round by part exiting while SAIF’s returns will be far higher than this. The key founder of the company Kalra is likely to get around $12.3 million at current market price, and this would result in his reducing the holding in the company to 9.43 per cent. Kalra had also earned $5.16 million at the time of IPO. SAIF is likely to encash $75 million, while Helion will encash $17.5 million in the proposed public issue. However, SAIF will continue to be the largest shareholder with over 31 per cent stake, valued at $362 million. SAIF had sold shares worth $5.4 million in the IPO.1

Questions 1. What have been the major reasons for the success of the MakeMyTrip venture? 2. What led the company to raise substantial money through IPO in 2010, in spite of incurring continuous losses until the fiscal year ended 2010? 3. Was the IPO strategy for exit rational, timely and worthwhile for promoters and investors? Justify your answer with concrete examples. (Continued)

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4. Deep Kalra, the main promoter of the company, has been reducing his stake in the company over years. Is it a right strategy, if so, what is the rational strategy? 5. What are the main risk factors in such a venture that have been appropriately taken care of by the management, so as to provide an appropriate exit route to investors? Endnote

1. In $171m Share Sale, Founder, PEs, Eye Part Exit; VC CIRCLE; http://www. vccircle.com/500/news/makemytrip-in-171m-share-sale-founder-pes-eye-part-exit MakeMyTrip: From Barely Profitable to Soaring in One Day; 13 August 2010; http:// seekingalpha.com/article/220507-makemytrip-from-barely-profitable-to-soaring-inone-day http://investors.makemytrip.com/releases.cfm?Year=&ReleasesType=&Page Num=3

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