MEANING OF STRATEGY AND POLICY Strategy and Policy Business organization is facing significant challenges.

Environmental changes are taking place due to globalization. Business organization cannot effectively cope with the emerging challenges through short term horizon. They need a strategic orientation for a long term future direction to achieve their objectives. Strategy is that set of managerial decisions and actions that determines the long run performance of a business. According to Alfred D. chandler, strategy is the determination of basic long term goals and objectives of an enterprise and the adoption of the course action and the allocation of resources necessary for carrying out these goals. Strategy represents managements game plan. It is broad action plan for achieving organizational objectives. Following are the features of strategy. It is concerned with long term direction and scope of an organization. Helps in finding out competitive advantages of the business. Strategy matches the resources and activities of an enterprise to the changing forces in the environment. Strategy is the bridge that relates the capabilities of the firm with its objectives. Business policy concerned with general management orientation and tends primarily to look inward with its concern for properly integrating the corporations many functional activities. According to L.M. Prasad, A policy is a statement of general understanding which provides guidance in decision making to members of an organization in respect to any course of action. Business policy is formulated by top management to carry out future decisions and actions which should support mission, objectives and strategies of an enterprise. Following are the features of business policy: Policy provides guidelines to members of the unit for deciding the course of action. Policy is required course of action at every level. Policy is formulated in the context of the objectives of the business which tries to contribute towards achieving of it. STRATEGIC PLANNING PROCESS Strategy is a broad action plan for achieving organizational goals. Its thrust is to search sustainable competitive advantages for the organization. Strategic planning is a systematic approach to analyze the opportunities and threats in the environment, assessing organizations strengths and weakness,

identifying opportunities of competitive advantages and matching them with organizations resource in a long term perspective. The strategic planning process involves the following steps: a. Define organizations mission, objectives and strategies: It is the basic step of every planning process. Missions are the reasons why organizations exist. It defines the nature and scope of organization. It provides direction for the long run survival of organization. Objectives are the expected results of organizational operation. Similarly, strategies are the broad action plans necessary for the sustainable existence. This is the preliminary step carried out on the basis of nature and expectation and organization. b. Analyze external environment: It is the step related to detection and creation of environmental scenarios. It involves assessment of different environmental forces such as political-legal, socio-cultural, technological, economic etc. Through SWOT analysis, an organization evaluates opportunities and threats assess its effects for it. c. Analyze internal environment: This step is carried out to identify strengths which can be capitalized to exploit business opportunities. It focuses on resource analysis. The availability and capability of various resources provide the base to measure the superiority in relation to competitors. Similarly the analysis of goals, policies, structure, culture etc. helps to develop superior skills for increasing customer value. d. Match resources and opportunities: The core competencies in different resource variables are matched with opportunities of competitive advantages to formulate strategic plan. This is done through proper scanning of environmental forces, detailed analysis and tabulation of data and adopting proper link approaches.

MAJOR KINDS OF STRATEGY AND POLICIES The typical business firm usually considers 3 types of strategy: Corporate Strategy Business Strategy Functional Strategy Business policy is concerned with general management orientation and tends primarily to look inward with its concern for properly integrating the corporations many functional activities

Corporate level strategy

Business level strategy

SBU - A

SBU - B

SBU - C

Production

Marketing

Finance

HRM

a. Corporate level strategy: Corporate strategy is the basic foundation of business strategy. It defines the shape of the business. It provides a broad direction of future business success of overall business units. Corporate level strategy is basically concerned with allocating resources and capabilities from one set of business to others. b. Business level strategy: Business strategies are supportive to the achievement of corporate strategy. These are required to improve the competitive position of the firms business units in the market. It aims at achieving the goal of corporate strategy through strengthening all business units. Business strategies are formulated to decide on how to transfer resource and capabilities from one business unit to another in order to achieve competitive advantage. All businesses are defined in terms of customer needs (What), customer groups (Who), and alternative technologies (How). The business strategies should consider these three dimensions. The what is related with the lower and higher needs of customers. Businesses aim at the satisfaction of these needs. They spend valuable time, resources and capabilities to identify and fulfill these needs. The who is related with the target group of customers. These groups enhance their competitive advantage by providing customer value in the form of product or choose to produce goods or to provide services to fulfill customers needs. Alternative technology is the basis for core competencies of the business so that a business can provide more qualitative or low cost products than others. In fact, business strategies are the basics in competing in the market by using the resources and skills in different business units.

c. Functional level strategy: Functional strategies are directed by the business unit strategy. The major functional areas of the business and the related strategies are as below: 1. Marketing strategy: Some main marketing strategies related to pricing, selling and distributing etc are: Market development strategy, formulated to capture a bigger market share through market saturation or market penetration or developing new market. Product development strategy, related to new product for the existing market or new product for new market. Push strategy, adopted to spend a large amount of money on trade promotion through discounts etc. Pull strategy, adopted to spend more money on customer advertising designed to build brand awareness so that shoppers will ask for the products. Skim pricing, for a new product to skim the cream due to high demand curve specially when the product is novel and competitors are few. 2. Financial strategy: It examines the implications of corporate and business strategic options and identifies the best possible financial course of action. These strategies are necessary to raise funds on lower costs and to raise capital to support the achievement of corporate and business strategies. Research in the past reveals that a firms financial strategy is influenced by its corporate diversification strategy (from present market and present product to new ones). 3. Production/ operations strategy: This strategy is required to decide how and where a product or service will manufacture and whether to make a vertical or horizontal integration in the production process. Production strategy also includes production plans to manage and allocate resources into various operations such as material supply, cost and quality management, maintenance of plants and equipments etc. The main objective of high strategy is to examine how efficiently resources are used and to decide the manner of day to day operations that leads to the achievements of overall objectives. Mass production strategy is useful to produce low cost products in large volume which generally tends to be of low quality. The mass customization strategy is followed to integrate people, process, units and technology and thus provide customers exactly what they need and when they need it. 4. HRM strategy: It deals with the strategy to acquire and use human potential cost effectively. The factors responsible for good human relations are employee attitudes, participation, communication, quality of work life, labour relations, job outcomes etc. The human side in small business emphasizes two aspects such as social context of workplace and interactions among people.

Human relations approach is concerned with the understanding of human attitudes, behavior and group dynamics. It focuses on employee capabilities and their satisfaction as key to determine performance. The owner manager generally performs HRM functions in small business. He is supposed to perform the following functions related to HRM. HRM functions, related to recruitment, selection, development and maintenance of employees. Liaison function, related to communication among employees in different department. Information function, related to dissemination of information inside and outside the organization as well as to keep record about HRM functions. Disturbance handler function, related to maintaining discipline, negotiating labour minors, handling grievances etc. Implementation function, related to ensure efficiency and effectiveness in training and development activities.

SUCCESSFUL IMPLEMENTATION OF STRATEGIES Strategy implementation is sum total of the activities and choices required for the execution of a strategic plan. It is process by which strategies and policies are put into action through the development of programs, budgets and procedures. To begin the implementation process, strategy makers must consider these questions: Who are the people who will carry out the strategic plan? What must be done to align the companys operations in the new intended direction? How is everyone going to work together to do what is needed?
Designing Organization Structure Allocation Resource Establishing management Systems Strategic Control

1) Designing organization structure: Strategic organization design is the process developing or changing structure to achieve strategic objectives. Structure is the way activities are organized. It defines levels and roles in an organization. It involves: Job design: contents of jobs required to implement strategy are defined. Grouping a job: jobs are grouped into departments. Establishing reporting relationship: authority and responsibility relationships are established. They specify who reports to whom. Organization structures for implementation of strategy can be: I. Simple structure: in simple structure, the organization is run by the personal control of an individual. The owner takes most of the responsibilities of management.

II.

Functional structure: it is based on functions of an organization. Function is primary activities, such as production, marketing, finance and human resource. Team based structure: a team is a group whose individual efforts results in positive synergy through coordinates efforts. Its characteristics are: Collective performance to achieve team objectives Shared leadership Outcome is positive synergy through coordination efforts

III.

2) Prepare resource plan: Resources are inputs to an organizations production process. They can be human, physical, financial and intellectual resources. Process of resource planning: i. Assess available resources ii. Forecast future resource needs iii. Identify resource needs iv. Determine and evaluate alternative future sources v. Select future sources of resources mobilization vi. Formulate resource action plan Method for resource allocation: 1. Strategic budgeting: it is based on assumptions about environmental changes and core competencies and their likely impact on implementation. Owners of the business prepare operational plans and targets. 2. Capital budgeting: this method is used to allocate resources for new capital projects. It uses the techniques of payback period, internal rate of return and discounted cash flow. 3. Programme budgeting: the resource allocation is made to various approval future programmes, objectives; costs and likely impact of each programme are carefully specified. 3) Management system for strategy: Strategy implementation requires establishment of effective and efficient management system. Management system consists of: i. Human resource management: it is concerned with the management of people with in the business. It consist of: a) Putting together a strong management team b) Acquiring competent employees c) Development of employees d) Retention of employees

ii.

iii. iv.

Information management: it is concerned with establishment of information, communication, and e-commerce systems that enable people to carry out their roles successfully and effectively. Leadership: leadership establishes direction, manages change and builds a team. It is essential to drive strategy implementation forward. Shaping organizational culture: organization culture refers to a set of values, beliefs, symbols and assumptions shared throughout the organization.

a. Strategic control: Control ensures right things are done in the right manner and at the right time. Strategic control continually assesses the changing environment to uncover events that may significantly affect the course of the strategy. Reexamination of assumptions Continuous evaluation of implementation Adjustment of strategy

STRATEGIC PLANNING FACTORS The following 15 points should be followed when drawing up a detailed business plan. Step 1: Determine the amount of income you want from the business and then develop a projected income statement. Step 2: Study the proposed market area to determine if the sales volume goal calculated in step 1 can be met. Step 3: Plan the pro forma balance sheet, first listing the assets to be used and how much they will cost. Step 4: Determine the sources of investment capital and funds for beginning operational expenses. Step 5: Choose the legal form of organizations. Step 6: Communication: The communication of strategic plan to all level of managers concerned study locations and sites with specific characteristics that will meet the needs of the firm. Step 7: Develop a sales and distribution plan for the firm. Step 8: Consider customer and customer behavior patterns while preparing a layout plan for operating space. Step 9: Decide upon a workable human resource policy and establish an ethical code. Step 10: Examine how operation will be managed and set productivity goals while acting its sociably responsible manner. Step 11: Establish adequate methods of control to ensure that plans are carries out. Step 12: Review whether consumer or business to business credit should be offered. Step 13: Establish an adequate system of accounting records. Step 14: Review the risks of operating a business and determine how to handle them. Step 15: Examine the laws and regulations affecting business (Dan Steinhoft and Tohn F, Burgess) Beside those primary, the following other considerations should also be noticed for successful strategic planning.

Communication: The communication of strategic plan to all level of managers is concerned with implementation. They should clearly understand their role, authority and responsibility for implementation. Information gap may create wrong circulation of messages. Participation: The responsible persons at different structure and positions should participate in the process of strategic plan formulation as well as implementation. Participation increases understanding about goals and programs. It provides the feeling of importance and satisfactions the implementers. It increases commitment for quality. Organizational structure: The structure should facilitate decision making. It should fit the needs. It should help to assign authority and responsibility for key result areas. Proper climate: Result and reward should be built up for the supportive roles of managers for successful implementation of plans. Resource availability: Successful implementation of strategic plan requires sufficient resource strength, human, physical, financial, information resource etc. should be available. Motivation: Encouragement and enthusiasm in workers is must for successful implementation. Both managers and employees should be motivated. Performance should be linked with reward. Timely evaluation provides the basis for reward and punishment. Environmental adaptation: periodical evaluation is necessary for environmental adaptation. Timely review provides the information about result achieved, problems faced, and reasons of problem changes seems and necessary programmes to combat changes. Leadership: Effective leadership is essential for effective implementation of strategic plan. Leaders should get influence and motivate people for implementation of strategic plan. They should create environment for implementation. Policies: Policies for implementation should be clear and comprehensive. They should be meaningful to understand and easy to follow. UNIT FOUR: BUSINESS PLAN AND DECISION MAKING

Small business starts with a business plan. Planning is predetermined future. It is the process of setting objectives and choosing the actions of achieve them. Planning serves as a guide for allocating resources in coordinated way it specifies way and means of implementing actions. They serve as standards for controlling performance. Planning the proposal business is the first major task of the potential entrepreneur. The business plan briefly describes the future as the potential entrepreneurs see it. Is the business on paper? A good plan, which is also known as the project feasibility study involves;

a) The collection of data which are relevant to all aspects of the proposed business. b) The analysis of the collected data, and c) The application of the result to minimize business risks.

ELEMENTS OF A BUSINESS PLAN The contents or elements of a business plan can be envisaged in general as follows: a. Executive summary: It is the summary of important business information. The top management develops the scenario and provides general overviews. It is synopsis of the plan. b. Business description: It is the historical profile of a business organization. It provides general information about past and present of the business through activities, objectives, resources, relationship with stakeholders etc. c. Product description: It is related to the identity of the business through product. The patent of product, its market position, special features, etc are described. It is identifying the symbol of existence. d. Market description: The target market, sales estimation, competitors position, pre & post sales services, market segmentation, market research, etc are included in the statement of market description. e. Technical aspects: Production planning and process methods used, technology used, effect of change of technology, technical collaboration, electronic of computerized business, etc are the matters of technical aspects. f. Operations aspects: The aspects related to physical facilities, location need to the source of supplies as well as users, systems of operation, policies of purchase, store and issue of inventory, capacity and degree of devotion of workers, etc are included in the operations aspects. g. Financial aspects: Capital required for commencement, expansion and modernization of business, cost of raising capital, alternative sources of capital, the volume of working capital needed, financial analysis tools, expected financial results and impacts, risk and return, etc are considered under this aspects. h. Management aspects: Design and structure of organization, selection of team of management, authority, responsibility, relationship, reward and punishment systems, commitment and motivation of workers towards organizational goals, etc are the subject matters of management aspects. i. Implementation: The schedule of implementation, the budgeting of time and resources, making time line and prescribing limit of resources through fixed duration, responsibility and power are included here.

j. Risks and their management: The risks are generally unseen and untold. The keeping keen eyes over changes and probable shift are the matters of risk management. k. Appendices: The supplementary documents, information and the details of research works are included here. BUSINESS PLAN DEVELOPMENT a. Analyze opportunities b. Set objectives c. Develop premises d. Determine and evaluate alternatives e. Select course of action f. Formulate action plans g. Prepare budgets

CONCEPT AND TYPES OF DECISION MAKING CONCEPT: Decision is a choice among alternatives. It is a course of action consciously chosen from acceptable alternatives to achieve objectives. Decision making is a future oriented activity. It involves forecasting and planning. It is the process of evaluating two or more alternatives leading t a final choice. Decision making is closely involved in planning for the future and is directed towards a specific objectives or goal. The decision making consists of the following characteristics; a. Objective orientation b. Dynamism c. Pervasiveness d. Continuity e. Problem solving f. Choice making g. Commitment Rationale of decision making Problem solving: Decision making is the process of solving problems. Problem solving is essential for achieving objectives. Rational choice: Decision making indentifies and evaluates available alternatives for making a choice. It is based on logical facts together with judgment of the decision making. Pervasive in managerial functions: Decision making is pervasive in all functions of management. Owner manager make strategic decisions, middle managers, make tactical decision and lower managers make operational decisions. Performance evaluation: All decisions influence performance. Effective decisions are needed for business effectiveness.

Types of Decision Making The short run decision making can be classified into different types. The genesis of decision making lies on the operational needs. Drop or continue product line: If there is a range of products one of which is demand to unprofitable, it may consider dropping the item from its range. This type of decision is very much related to profitability. An important factor in the decision to drop or continue a product line is whether it will increase or decrease the future income of the business. If the profit increases by dropping the product, that product should be dropped. But if the profit decreases by dropping then that product should be continued. Decision to accept or reject special order: Special order arises when a company has excess of idle production capacity. If there is no spare capacity, the question of special offer does not arise. Fixed cost does not increase generally by accepting the special order, only the variables cost increase. If the price offered is more than the managerial cost, that proposal may be accepted and vice-versa. Make or buy: Management sometimes may have to face with the decision whether to make a part of production or buying them from outside. Such as decision arises when a company has idle plant capacity and technical capability of manufacturing the component. Whether to make or buy a part depends upon the total cost. If the total cost for making is greater than buying, in that case certainly the company should buy the part. But if the total cost for making is lower than buying the obviously the company hold make the part. Replace or retain of equipment: It is a decision for equipment. Whether the existing equipment should be retained of not is depends upon different types of costs. By bringing the new machine inside the company, if the annual cost increases then new machine should not be purchased. But by using new machine, if the profit is maximizing on one hand and cost increase in other. In this case the new machine should be acquired. Thus, this type of decision depends upon cost as well as profit.

Types of Decisions: Types of managerial decisions can be follows: 1. Programmed and non programmed 2. Strategic, tactical, operational 3. Individual and group 1. Programmed and non programmed:

a) Programmed decision: They are routine and repetitive decisions. Deals with low risk decisions. Policies, rules and procedures are laid down to handle them. Middle and lower level managers deal with such decisions. For example: payroll procedures, processing admission application. b) Non programmed decisions: They are unstructured. They deal with complex and non routine problems. Each problem is new and different from those experienced in the past. Managers apply their judgment, intuition and creativity to solve problems. There are no standard operating procedures. Top- level managers deal with such situations. Examples are: introduction of new product, construction of new building, computerization. etc 2. Strategic, tactical, operational: a) Strategic decisions: They prescribe corporate policy, strategic goals and environmental positioning in long term perspective. They deal with non-programmed situations. Such decisions are made by top management. b) Tactical decisions: They prescribe short term goals for departments such as production, marketing, finance, and personnel. They are made by middle management. c) Operational decisions: They tend to be routine and repetitive programmed decisions. Authority is delegated to lower management to make such decisions. 3. Individual and group: a) Individual decisions: They are made by individuals. They can be for complex or routine problems. They are generally prevalent in small organizations. b) Group decisions: Such decisions are taken collectively by a group of people. Examples are decisions by board of directors, teams, committees. Interdepartmental decisions generally taken by groups.

DECISION MAKING PROCESS

Recognize and define the problem Identify appropriate alternatives

Evaluating selected alternatives

Choose the best alternative

Implement decision

Evaluation and follow - up

1. Recognize and define the problem: Decision making begins with the existence of the problem. A problem is a gap between the existing situation and the desired outcome. The problem should be properly defined. 2. Identify appropriate alternatives: Appropriate alternatives course of actions to solve the problem should be identified. Owner of the business should be creative and innovative to identified alternatives. They should be based in information collection and analysis. The source of alternatives can be: Discussion with subordinates, customers, sales forecast, etc Opinions of experts Management information system Brainstorming, electronic meeting, etc 3. Evaluate selected alternatives: Each selected alternatives should be evaluated in terms of decision criteria. Key consideration is: Feasibility of the alternative in terms of costs, time, legal constraints, human and other resources. Affordability and satisfactoriness of the alternatives. 4. Choosing the best alternative: This is the choice phase for choosing the best alternative. The approach for making the choice can be: Experience: Decision making is not only a rational process but also a judgmental process. Experience can be a useful basis for choosing a course of action. Experimentation: It is pre-testing the alternative. Market testing of new products is an example. Research and analysis: A model is built to simulate the problem. 5. Implement the selected alternative: Implementation is putting a decision into action. The selected alternative should be effectively implemented into action. It should be accepted by the people willingly. 6. Evaluation and follow-up: This step is essential to evaluate the decision effectiveness in solving the problem. Its progress is monitored and its success is evaluated.

THE PROCESS OF SETTING UP A SMALL SCALE INDUSTRY To start a new business it demands new idea, new location, new plant, new machinery, new inventory and new personnel. The steps in setting up a small business are: a) Selection of idea: It is selecting idea for a product line that satisfies customer need a small business is born with an idea. A small business owner should have the ability to generate a number of ideas. Such ideas should have potential to make profit the most promising be selected for establishing small business. b) Business plan: It deals with the approach to exploit the new ideas. It covers; Marketing aspects: About market potentials, competition, customers, price, quality or service. Production aspects: It is about technology, processes, methods, location. Organization and management aspects: it is about form of business, its organization and management. Financial aspects: Capital needs, sources, financial projections, records. c) Location selection: In this step the appropriate site is selected. Location affects accessibility of small business to customers, suppliers, employees, infrastructures and transportation. Various factors that should be considered while selecting location is; proximity to suppliers, proximity to market, availability of transport facility, availability of labour, environmental factors, etc. d) Form of ownership: The legal form f ownership is decided and registered. The choice of forms depends upon needs of the owner, nature and size of the business, personal responsibility for debts, etc. It could be sole proprietorship, partnership, public and private limited company. e) Formalities: Environmental and other clearance is obtained. Licenses are obtained. Other procedural formalities have to be fulfilled. f) Finance: Financial resources are acquired. It small business owner is supposed to carefully estimate initial capital requirements for start-up of business. It could saving, borrowed money and loan from bank. This is done by estimating the following: Fixed assets requirements Current assets requirements Business promotion cost requirements Personal living expenses of the owner 1. Assets: Fixed assets are acquired. Plant and machinery have to be installed.

2. Employees: Right type of employees is hired. It could be unskilled, semi-skilled and skilled employees. 3. Production: In this step, technology is selected. It can be labour or capital based. Raw material is procured. Products are produced for marketing. 4. Clearances: In this step, license and permits, if needed, are obtained, taxation matters are handled. UNIT FIVE: FORMING THE BUSINESS Concept and formation of Sole Proprietorship. It is the oldest form of business ownership. In a sole proprietorship the enterprise is owned and controlled by one person. Proprietorship is a master of his show. He manages the business in his own. If necessary he may take the help of his family members, relatives and employ some employees. In this form of business an individual makes all the investments, bears all risks, takes all profits, manages and controls the business himself. Features of sole proprietorship: One man ownership: only one-man is the owner of the business. No separation between ownership and management: management rests with the proprietor himself. The proprietor is a manager also. Unlimited liability: unlimited liability means that in case the enterprise incurs losses, the private property of the proprietor can also be utilized for meeting the business obligations. All profits and losses to the proprietor: the proprietor enjoys all the profits earned and bears all the losses incurred by enterprise. Less formalities: there is less legal formalities in sole proprietorship. Advantages of sole proprietorship: Simple form of organization: sole proprietor is the simplest form of organization. There is no legal restriction. Owners freedom to take decisions: the owner is free to make all decisions. There is no other person who can interfere in his business. High secrecy: secrecy is another major advantage of sole proprietorship. This is because the whole business is handled by the proprietor himself and as such the business secrets are known to him only. Added to it, the proprietor is not bound to reveal or punish his accounts. Flexible: if any change is required he can do it immediately without consulting anyone. Easy dissolution: this form of business can be dissolved easily.

Disadvantages of sole proprietorship: Limited resources: a proprietor has limited resources. The proprietor mainly relies on his/her funds and savings and to a limited extent, borrowings from relatives and friends. Limited ability: one man may be expert in one or two areas, but not in all areas like production, finance, marketing, personnel, etc. due to lack of adequate and relevant knowledge, the decisions taken by him be imbalanced. Unlimited liability: liability is unlimited. It means that in case of loss, the private property of the proprietor will also be used to clear the business obligations. Limited life of enterprise form: the life of the business depends solely upon the owner. When he dies or become insolvent there is likelihood of closure enterprise. Formation of sole proprietorship In Nepal sole proprietorship is registered under private firm registration act, 2014. PARTNERSHIP It is an association of two or more persons. They carry on business as co-owners for profit. The partners bear all the risks. We can define partnership as an association of two or more persons who have agreed to share the profits of a business which they run together. This business may be carried on by all or any one of them acting for all. The persons who own the partnership business are individually called partners and collectively they are called as partnership firm. Features of partnership More persons: there should be at least two persons to start partnership firm. Profit and losses sharing: there is an agreement among the partners to share the profits earned and losses incurred in partnership business. Utmost good faith and honesty: a partnership business solely rests in utmost good faith and trust among the partners. Unlimited liability: each partner has unlimited liability in the firm. Principal-agent relationship: the partnership firm may in carry in by all partners or any of them acting for all. ADVANTAGES OF PARTNERSHIP Easy formulation: it is a contractual agreement between partners to run an enterprise. Hence it is relatively easy to form. Legal formalities associated with formation are minimal. Though the registration of the partnership is desirable. More capital available: there is more than one person to invest in capital. There is a larger pool of capital. The personal assets of the partners support larger borrowing capacity. More credit can be raised. Decision making: decision making is collective. There are more heads to make better decision. Combined talents, judgment and skill are present. Flexibility: partnership firms are flexible in terms of adaptation to the changing environment of the business.

Secrecy: the business affairs and accounts do not require publicity. DISADVANTAGES OF PARTNERSHIP Unlimited liability: each partner has unlimited liability in the firm. Managerial conflicts: interference in each other responsibility creates managerial conflicts. Partners may become incompatible. There are risks of disagreement. Late decision: decisions have to be taken by the consent of all partners which may cause delay in decision making. Partnership Deed It is a written agreement between the partners. It must be duly signed by the partners, stamped and registered. It contains the terms and conditions of the partnership. It generally contains the following: Name of the firm Nature of the business Name of the partners Place of the business Amount of capital contributed by each partner Profit sharing ratio between the partners Arrangements in case any partner becomes insolvent, etc. Formation of partnership In Nepal to form partnership it should be registered under partnership Act, 2020 LIMITED AND PRIVATE COMPANIES A company is a voluntary association of persons formed to carry in business in its own name under common sea with the capital divided into shares. It is recognized by law as an artificial person having perpetual, continuous and uninterrupted existence.

Features Artificial person: a company is an artificial person created by law. It enjoys almost all the privileges natural person doing business. Legal entity: a company is created by law. It has the separate legal entity apart from its shareholders. Limited liability: liability of its owners is limited to the value of shares they purchased. Transferable shares: the shares of the company are freely transferable expect in case of private company. Perpetual existence: the company has a permanent existence. The death of its members does not affect its existence. Separation of ownership and management: there is separation of ownership and management. Private company A private company can be formed with one member but maximum number of shareholders cannot exceed fifty. Shares and debentures are sold among its members. Some of the features are:

Restricts the right to transfer its shares. Limits the number of shareholders to fifty only Prohibits public subscription for shares Public company A minimum of seven numbers is required to constitute and register a public company, no restriction on maximum number of shareholders. The shareholders are free to sell their shares in the market. Public company must issue a prospectus for inviting people to purchase their shares. Advantages Huge financial resources Limited liability Perpetual existence Transferability of shares Credit facility Disadvantages Difficulty in formation Separation of ownership and management Speculation in shares Lack of secrecy Delay in decision A private company can commence business immediately after the incorporation. However, a public company cannot commence business unless it obtains certificate to commence business. CO-OPERATIVES Co-operative organization is a voluntary association of persons with limited means to safeguard their interests. It is started with the aim of service to members Features of co-operative Voluntary association: it implies that every individual is free to join it and share its advantages Equal voting rights: it is based on democratic principles. There is equality of status between members of a co-operative. Service motive: the primary objective of co-operative is to provide to its members. Legal status: it has to be registered and get legal status. Cash transaction: all the transaction of co-operative organizations should be carried on cash only. Formation of co-operative Preliminary meeting Apply for registration Receive the certificate of registration

In presence of at least 25 persons under one chairman among them, preliminary meeting must be conducted in order to decide on the following: Concerning name, address and objectives of the society Concerning election Concerning work area Others

WAYS OF EXPLOITING BUSINESS IDEAS A. BUYING AN EXISTING BUSINESS: EVALUATING OPPORTUNITIES, DETERMINE BUSINESS WORTH There are many options for starting small business. It can be totally a new creation or the continually one of the existing business in same or modified form. The options available for buying an existing business, inherence of the parental business, starting a new business and buying a franchise are available. This section deals with the first option i.e. to buy an existing business. It can take place in different forms such as acquisition of total ownership, acquiring assets and number acquiring part of business. The opportunities of buying an existing business should be evaluated for the following factors have to be considered. a. Motive for sale b. Condition of assets c. Human resources d. Competition e. Financial performance f. Price of the business The price to be paid or the value of the business can be determined on the various bases. According to Longenecker and others, the methods of valuation of worth of the existing business are as following: 1. Asset based valuation: assets are revaluated under this method. Assets can be revalued on value, market value or liquidation value. Book value is determined by deducting depreciation the cost of assets. Market value is the replacement value which would be required to install similar systems and services. Similarly liquidation value is the disposal value received the auction sale. 2. Market based valuation: the market value of the similar type of business is taken as the bases determine the price of the business. The price earnings ratio can be used as the indicator. 3. Earning based valuation: the current earning as well as future return can be used as the basis expected rate of return on investment, dividend per share or net earnings are determined. 4. Cash flow based valuation: the present value of the future cash flow is determined. The cash is discounted by suitable discounting rate. ADVANTAGES: Low risk No start up headaches Relationships Desirable location Fair price through negotiation

DISADVANTAGES: Old facilities Obsolete inventory Overdue account receivables Bad reputation Incompetent employees Undesirable clientele (group of customers) High price Problematic B. STARTING A NEW BUSINESS OF FRANCHISE: EVALUATING START UP BUSINESS OPPORTUNITIES, MERITS AND DEMERITS OF FRANCHISES FRANCHISE Franchising is a marketing system. It is an arrangement made by the manufacturer or sole distributor in which the right of distribution is granted to an independent local retailer. The local retailer, in return, has to pay royalty under certain mutually agreed conditions. Franchising can be defined as a form of contractual arrangement in which a franchisee enters into an arrangement with a franchisor to sell the producers goods or services for a specified fee or commission. It is an agreement, which grants the right to use a brand name for specific activity in return for a royalty. Definitions of franchise According to David H. Holt a business system created by a contract between a parent company, called franchisor, and the acquiring business owner called the franchisee, giving the acquiring owner the right to sell goods or services. To use certain products, name or brand or to manufacture certain brands. According to William Megginson and others, Franchise is a marketing system whereby an individual owner conducts business according to the terms and conditions set by the franchisor. According to Longencker, Moore and Petty, franchising is a marketing system revolving around a two party legal agreement, whereby the franchisee conducts business according to terms specified by the franchisor.

FEATURES It is a marketing system for well-known brands or trademarks It involves two parties franchisor and franchisee It involves payment of royalty by the franchisee to franchisor The franchisee is the owner of local business but it is planned, directed and controlled by the franchisor.

Franchisor provides marketing and operating system as well as training to the employees.

A franchise can be of three types as: - Product franchise in which an agreement is done to distribute the products of one or many manufacturers. - Service franchise in which a franchisee receives license to use the established names to sell particular services. - Business franchise in which a common trade name is used and the standard systems are followed to maintain quality assurance. The franchisor provides the support systems. Franchisors support services to franchisee: - Business plan - Site selection - Financial help - Staffing needs - Training - Operating system - National advertising - Legal services Franchisees obligations to franchisor: - Initial fees payment - Royalty payment - Inventory costs - Leasing and rental fees - Investment - Advertising fees - Control of quality - Maintain relationship EVALUATING OPPORTUNITIES: A careful evaluation of franchise opportunities is essential or void to fraud and to protect investment. The following factors should be considered for this; 1. Type of opportunity 2. Reliability of franchisor 3. Financial stability of franchisor 4. Profit potential 5. Service support 6. Costs of franchise 7. Professional help 8. Needs of buyer MERITS OF FRANCHISE A. TO FRANCHISEE - Proved or tested product

Quick start up Ongoing assistance Clear market Standardization Lower operating costs Low risk

B. TO FRANCHISOR - Better resource utilization - Multiple revenue sources - Motivation to succeed - Bulk purchasing - Expansion DEMERITS OF FRANCHISE A. TO FRANCHISEE - High start up costs - Long term obligations - Lack of independence - Unfulfilled promise - High price - Termination and renewal B. TO FRANCHISOR - Reduction of control - Disputes - Profit sharing - Costs of assistance

UNIT SIX: FINANCE FOR SMALL BUSINESS 1. CONCEPT OF CAPITAL STRUCTURE AND WORKING CAPITAL Capital regarded as the life blood of business. It plays an important role in business from the stage of its promotion to its end. We cannot imagine any form or existence of business without capital. The capital required for a business can be collected in two basic ways or from two sources. The one is owners capital and the other is borrowed capital. The owners capital is either managed from the personal properties or from friends and relatives or by way of issue of shares. It seems more appropriate for business organization to have owners capital. But in some situations, it becomes necessary to borrow from others. The borrowing can be collected from banks and

finance institutions or trade credit or issue of debentures and bonds or through specialized agencies. The capital structure refers to the composition of firms total capital from different sources. It is the mix of capital from different sources especially for long term. Very specially, it refers to the ratio of equity (owners) capital to the debt (borrowed) capital. Heavier the debt capital over equity capital higher is the risk and the chances of profitability. In other words, high debt means high leverage. So the selection of appropriate capital structure depends upon the attitude of financial manager towards risk and profitability. The selection of capital structure affects cost of capital the cost that is required to raise the capital. The capital structure decision involves two risks i.e. business risk and financial risk. Any operational problems can be defined business risk whereas the risk associated with the uncertainty to the future return to firms owners is financial risk. The business risk does not arise due to the use of debt in capital structure but financial risk results from the debt capital. The capital is needed for every business for two basic purposes. The first is for long term purpose. It is called fixed capital. It is required to create production facility that means to invest in long term assets. Another is for short run purpose. It is called short term capital or working capital. The working capital is the fund required to purchase raw materials, pay wages and other day to day expenses. Similarly the investment required for work in progress, raw materials, finished goods, sundry debtors, receivables etc also comes under working capital. To conclude working capital is concerned with current assets and current liabilities. It can also be called as circulating or revolving or floating capital as such investment can be converted into cash within a short period generally within a year. According to John J. Hampton, working capital is defined as all the short term assets used in daily operations. They consist primarily of cash, marketable securities, account receivable and inventories. J.S. Mill defines working capital simply as the sum of the current assets of a business. From the above definition, there are two concepts of working capital a. Gross concept: According to this concept, the working capital refers to that part of capital which is required for financing short term or current assets. A total current asset is the working capital. b. Net concept: According to this concept, working capital is the difference of current assets and current liabilities. It is excess of current assets over current liabilities. This concept is commonly accepted and popularly followed.

2. INSTITUTIONS ASSISTING SMALL BUSINESS A. ADVISORY BODIES 1. Industrial enterprise development institute small business promotion centre. 2. Cottage and small industries development board (CSIDB) 3. Industrial district management ltd. (IDML) 4. National productivity and economic development centre (NPEDC)

5. Trade promotion centre (TPC) etc. B. GOVERNMENT INSTITUTIONS 1. Ministry of industry, commerce and supplies 2. Department of cottage and small industries 3. Office of the registrar of companies 4. Department of standards and measurement 5. Department of commerce, etc. C. CORPORATE INSTITUTIONS 1. Federation of Nepalese chamber of commerce and industries (FNCCI) 2. Confederation of Nepalese industries (CNI)

3. INSTITUTIONAL FINANCE FOR SMALL BUSINESS A. DEVELOPMENT BANKS: The development banks like Agricultural Development Bank, Industrial Development Bank, Nepal Industrial Development Corporation, etc provide loans to small businesses. B. COMMERCIAL BANKS: All commercial banks at national or regional level provide loans to small business. Actually they are the major suppliers of loan to small business. They basically provide short term loan on the basis of collateral. Sometimes they provide long term loan also against fixed assets i.e. secured loan. Finance companies also provide loan for lease or hire purchase or to acquire assets. C. RURAL DEVELOPMENT BANK: The rural development bank has the primary objectives of strengthening small businessmen through financial as well as advisory support. These banks focus on the needs of small user groups. They launch programmes of lending by keeping the needs and capacity of weaker economy groups at rural level. For small businessmen at rural level access to commercial banks is either impossible or the cost of service is out of the capacity of them. High interest rate, lengthy lending process, difficult terms etc discourage the small businessmen to start any business of their capacity and interest. The compound interest of landlords and feuds is expensive and very much torturous to local people. The rural development bank aims at serving farmers, labourers, craft, workers, etc. It provides loan to them in simple terms and at cheaper interest rates. The rural development banks are established on the total investment and initiation of the government. They are fully government controlled. Profit is their secondary target. They are protecting small users from the exploitation of feudal lords and businessmen who compound the interest and make difficult terms for non-payment or delayed payment for any reason. In contrary, rural development banks keeps kind attitude to the users who are unable to pay loan as per the schedule.

4. PROBLEM FACED IN RAISING FINANCE

Inadequate finance the killing problem of small business. In the context of our country the burning problem to small business growth is the lack of sufficient fund and the support of funding agencies. Some of the major problems faced by small business in raising capital or funds are as follows: 1. Limited personal funds: The responsible person or the person to endeavor for small business is generally a single person. A single person can hardly manage the fund sufficiently and in time. He has to depend on the family members, relatives or friends. But there is rare chance of getting expected support in financial terms from them due to the unwillingness or lack direct benefit. Many small businesses face the early death due to limited personal funds and the persons failure to manage it. 2. Low credit worthiness: Small businesses have insufficient assets to provide guarantee to the lending agencies. Financial institutions prefer the businesses with higher success history and strong support of personal funds. Small businessmen also may lack professional skills to present the financial date in more convincing way. So they generally do not get the priority and credibility to obtain finance from them. 3. Red tapes: Advisory bodies as well as government agencies meant for the support of small business are plagued by delay and too many formalities. They require heavy documentation, compliance with rules and regulations & lengthy follow up. So small businessmen cannot wait for the financial support to come from government mechanism.

4. Inadequate exposure: The exposure or the personality of small businessmen may not strongly appealing to the lending agencies to provide loan due to impression.

5. Low profits: Naturally the volume of profit and the target for future returns of small business are smaller. The rate of return is negligible. The firms may fail to maintain retained earnings for plough back. The risk of losing investment is high against small return. So investors do not find it profitable and safe to invest in small business. UNIT SEVEN: SMALL BUSINESS IN NEPAL A. REASONS FOR SURVIVAL OF SMALL BUSINESS IN NEPAL Small business is the significant elements of the Nepalese economy. They are significant because they create employment, they are established in small investment, they develop entrepreneurship and make people self employed, they base their production and supply on the availability of local resources and so on. Since the ancient age small business has been flourishing in Nepal. About 90% of the manufacturing establishments are small businesses. Similarly they occupy the 60% of the industrial employment. They create both seasonal as well as regular employment. They are the life lines for poor, backward and minority groups of society. These are some of the reasons why small businesses survive in Nepal. The other important reasons can be described as below; 1. Large number: small businesses are not bound to any territory or fixed location. They are scattered everywhere in Nepal. They dominate Nepalese economy in terms of number.

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However we should not forget their short life cycle which is often a challenge for sustainable economic development. Simplicity: by name and nature, small businesses are easy to start, operate and close. The bureaucratic hassles are limited. The amount of capital, technical skill and managerial requirements are also limited. They are mostly family run businesses. So decision making is short, simple and person specific. Market: they focus on small demands or the demands of the small group of market or the society. They have person to person relationship. They have built up mechanism or channel to cater the needs of the uses in the most advantageous way. So they do not have market problem. Actually, readily available market is the competitive of small business. Flexibility: innovativeness, faster decision making, independence and freedom of choice, small risks and pro-activeness are the features of small businesses which make them adapt with environmental changes. Quality: As already stated and many times repeated, small businesses are innovative. They are demand based. Their focus is to cater the specific needs of capital user groups. They concentrate in quality aspects. Since the production system is simple, the quality attributes can be easily accommodated. Inter relationships: Though they have got the name as small business, even large businesses cannot survive and sustain without them. They provide both forward and backward linkages. They provide raw materials and components to almost all manufacturing industries of Nepal. Similarly, large businesses reach to customers through them. State patronage: The government of Nepal has recognized small businesses as integrated parts of Nepalese economy. The resources and skills diversely distributed to different sectors can be put into valuable use only through them. So the government provides them support in financial, technical, educational as well as managerial matters so that they continue to survive and grow. Low operating costs: Since family members are involved in business operation, the business is free from outside liability.

B. CHALLENGES OF SMALL BUSINESS IN NEPAL Challenges are the problems posed to the business by internal as well as external environment. They are related to the inefficiency of the firm to utilize the resources. Problems, if not addressed properly, may become the cause of business failure. Some of the major challenges or problems of small business in context of Nepal are as follows: 1. Management: Inadequate management is a chronic problem of small business in Nepal. Centralized decision making, improper job design, lack of power delegation, and decisions are common. 2. Employees: Most of the small businesses are single person controlled or family controlled. The employees are family members, relatives or friends who may not have the professional skills and knowledge to run the business in competent way. 3. Technology: Most of the small businesses depend upon indigenous technologies. They use second hand technology from Indian markets which are out dated in the competitive market. The efficiency or productivity of the technology is low resulting higher operating costs.

4. Market: All small businesses have focus on the small market. They use customized practices to reach to the customers. But they do have the knowledge or idea to develop customer orientation. They do not have any schemes to make the users use the things which they offer. Rather they sell what users want. So they have limited market. The market problem for small business is a big challenge also because of large businesses and network electronic business. 5. Finance: Inadequate financing, heavy cost of capital, lack of credit worthiness, lack of support from government authorities etc are also the burning problems of small business in Nepal. 6. Information: Close environment, relationship limited to the family members or friends, dependence over local means and resources etc keep small business less informed with what is and what will be about the business in total. They fail to adapt with environmental dynamism. 7. Strategic alliances: The small businesses in Nepal are generally isolated from the chain of marketing or distribution. They are indifferent to the ways and techniques that are meant for maximum sales and maximum profit. They fail to make alliance with other businesses to develop strategic or competitive advantage. 8. Government policies: Small businesses get priority from government in words but not in action. The policies and procedures are not friendly to small businessmen. Government is failing to make proper environment for conservation of small entrepreneurs. Frequently changing government rules are also the problems for small business. 9. Personal problems: Being single person owned many small businesses have short life. The untimely death or shut down of them is common. The events of opening and closing of small business is almost parallel. 10. Limited capital: Small capital cannot always fulfill the demand of heavy investment in small business which is necessitated by increasing competition. C. OVER - COMING EXISTING PROBLEMS OF SMALL BUSINESS IN NEPAL Small businesses are indispensable for the growth of the economy of all times and all places. Their role cannot be minimized in any way. There is no alternative for strengthening small business for sustainable development of economy of the country. The importance of small business is high for our infant economy for many reasons. However, the problems are also many. Small businesses are facing serious threats over their existence due to many factors; the remedy to these problems is immediately needed to improve their role in the countrys economy. Some of the ways or solutions to over - come the problems of small business in Nepal can be highlighted as below: a. Improve management skill through training and regular feedback b. Improve policy related problems through effective regulations c. Improve professionalism on small business through skill development and support services. d. Improve financial crisis of small business through soft and long term lending policies. e. Develop infrastructure for small business so that they have viability in all times and situations.

D. ROLE PLAYED BY DEPARTMENT OF INDUSTRY OF INDUSTRY IN FOSTERING SMALL BUSINESS IN NEPAL --- consult the book E. ROLE OF FNCCI ---- consult the book F. INDUSTRIAL ENTERPRISE ACT --- consult the book

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QUESTIONS FOR PRACTICE A. Long Answers Questions: 1. Give your arguments how small businesses are important for the economic development of any country. 2. Write in brief about strategic planning factors. 3. What is franchising? What are the factors to be considered for evaluating opportunities?

B. Short Answers Questions: 1. 2. 3. 4. 5. 6. 7. 8. Define business plan and briefly explain about its components. Discuss about the phases of small business growth. Introduce small business person with his/her any six features. Give a brief account of the process of setting up a small business. Differentiate small and large business. Write about the marketing strategies for small business. Write in brief about the indicators for measuring small business success. Explain the strategic planning process.