Small Business

UNIT III
LESSON 1
BUSINESS GROWTH
Structure
Seema Sabbarwal
1.0 Introduction
1.1 Objectives
1.2 Meaning of Business growth
1.3 Need for growth
1.4 Indicators of Business growth
1.5 Advantages of growth
1.6 Limitations of growth
1.7 Forms of growth
1.7.1 Organic growth
1.7.2 Inorganic growth
1.8 Summary
1.9 Self Assessment Questions
1.10 Further Readings
1.0 Introduction
Business growth is a natural process of adaptation and development that occurs under
favorable conditions. The growth of a business firm is similar to that of a human being who passes
through the stages of infancy, childhood, adulthood and maturity. Just like human beings, business
firms also pass through various stages in its life cycle. Introduction, growth, stability and decline are
the four phases of a business firm’s life cycle.
Business growth is the way to the survival and success of a business firm. No business firm
would like to remain at the same level of operations at which it started. A firm that doesn’t grow will
not be able to face the competition. Growth seems to be an almost necessary stimulant to most of the
business firma. Many business firms started small and have become big through continuous growth.
However, business growth is not a homogenous process. The rate and pattern of growth varies from
firm to firm. Some firms grow at a fast rate while others grow slowly. Also, not all enterprises
survive to grow big. This may be due either to the nature of the firm or the entrepreneur. Some
entrepreneurs do not want to grow their ventures, choosing instead to pursue other interest, spend
more time with family or develop other business activities.
1.1 Objectives
After going through the lesson you should be able to:

• Explain the meaning and need for growth
• Discuss the benefits and limitations of growth
• Identify various forms of growth
• Identify various indicators of growth
1.2 Meaning of Business Growth
Generally, the term ‘business growth’ is used to refer to various things such as rise in the total
sales volume per annum, an increase in the production capacity, employment of more workers, an
increase in physical output, an increase in the use of raw material and power. These factors indicate
growth but do not provide a specific meaning of growth. Simply stated, business growth means an
increase in the size or scale of operations of a firm usually accompanied by increase in its resources
and output.
Check your progress - 1
Write five indicators of growth.
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
1.3 Need for Growth
As we have already said that business enterprise is like a human being, growth is a necessary
stimulant to most of the business firms. As a matter of fact, growth is precondition for the survival of
a business firm. An enterprise that does not grow, may, in course of time have to be closed down
because of its obsolete products. The market is full of instances of very popular products
disappearing from the scene for lack of growth plans. For example, pagers vanished from the market
because better technology product i.e. cell phones were introduced. The reasons which drive business
enterprises toward growth are described below:
(i) Survival: In a competitive market no single enterprise can have monopoly. The competition
can be direct or indirect. Direct competition comes from other firms manufacturing the same
product. For example, there are many brands of shampoos available in the market. To survive
the competition the manufacturer of each brand of shampoo has to continuously bring new
versions of basic product to maintain an edge over his competitors. Indirect competition may
come from availability of cheaper substitutes. For example, the khadi industry faced a
problem when polyester emerged. Severe competition forces a firm to grow and gain
competitive strength. Any business firm that fails to grow can’t survive for long. A growing
concern will be an innovator and can easily face the risk of competition. Thus growth is
means of survival in a competitive and challenging business environment.
(ii) Economies of Scale: Growth of a firm may provide several economies in production,
purchasing, marketing, finance, management etc. A growing firm enjoys the advantages of
bulk purchase of materials, increased bargaining power, spreading of overheads, expert
management etc. This leads to low cost of production and higher margin of profit. This also
ensures full utilization of plant capacity.
(iii) Owners mandate: The owners of a company get the ultimate benefit of growth in the form
of higher profits. They may direct the management to reinvest a substantial portion of the
earnings in the business rather than paying them out. Capable management may on its own
like to take carefully calculated risk and expand the size of the company.
(iv) Expansion of the market – Increase in demand for goods and services leads business firms
to increase the supply also. Population explosion and transportation led to increase in the size
2
of markets which in turn resulted in mass production. Business firms grow to meet the
increasing demand. Expanding markets provide opportunity for business growth.
(v) Latest Technology – Some business firms invest in research and development activities to
create new products and new techniques, while others try to acquire latest technology from
the market. Rationalisation and automation results in more efficient use of resources and a
firm may grow to obtain them.
(vi) Prestige and Power – The more the size of the business firm increase the more is the
prestige and power of the firm. Businessmen satisfy their urge for power by increasing the
size of their business firm.
(vii) Government Policy – In a planned economy like India, business firms operate under a
plethora of rules and restrictions. A big firm is in a better position to carry out the various
legal formalities required to obtain licenses and quotas. Business firms may plan for growth
to make use of the incentives provided by the government. The government provides certain
subsidies and tax concessions to the new industrial units in the backward areas and those
producing goods for export only.
(viii) Self-sufficiency – Some firms grow to become independent in terms of marketing of raw
material or marketing of products. They integrate the various stages of industry or acquire
other firms to gain control over the supply of materials and marketing of finished products.
Activity A
List any three products that disappeared from the market for lack of growth plans.
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
1.4 Indicators of Business Growth
Growth is a measure of financial and non-financial improvement of a business firm. However,

there are no specific indicators of growth. Firms, producing different products, using different
techniques of production and operating in different environments are assessed by different indicators
of growth. However, there are some common indicators that can measure business growth, these
indicators are discussed below:
1. Assets: the increasing value of assets of a firm indicates growth. Inter-firm comparisons are
usually made on the basis of total assets value of the firms. Assets as a measure of growth
has following limitations:
a) The asset structure of different firms is different and, therefore, it cannot be a measure of
comparison. Some firms invest more in current assets while others invest more in capital
assets.
b) The assets are recorded in the firm’s financial statements at historical coat. Firms that
have bought assets at a later date will show higher value of assets while other firms may
actually be growing at a faster rate.
2. Labour: productivity of workers depends on their native ability, amount of raw labour they
bring to the market place, and the returns to their stock of human capital. Investments in the
latter include formal schooling, on-the-job-training, health care, and nutrition, and among
3
others. Intensity of effort also affects output, and in turn, is influenced by labour supply.
Thus, increase in the employment of skilled and trained workers help in making the firm’s
market more efficient and effective. A firm whose quality of labour is increasing over time is
said to be growing.
3. Technology: technology up gradation brings reduction in the average cost of production,
improvements in the quality of products and at the same time, efficiency of labour.
Improvements include changes in equipment, plant organization, changes in working capital
and soon- in fact, all essential requirements of business growth.
Technological progress can be capital-augmenting and labour-augmenting.
(a) Capital-augmenting technological progress results in more productive use of existing
capital goods.
(b) Labour-augmenting technological progress occurs when the quality or skills of the
labour force are upgraded.
4. Saving: undistributed profits are termed as saving. Saving is necessary for investment
because if the company utilizes all its profits, it would have to raise money from outside
sources for meeting its investment expenditures. Increasing savings or surplus, thus
strengthen the firm’s financial standing and improve its capacity to invest in profitable
investment projects. A firm whose savings are increasing is, thus, generally termed as a
growing firm.
5. Organization: it is not enough to say that growth is a function of land, capital, labour, and
technology. Some element or factor must combine these in the right proportion, and see to its
accomplishment and that is, organization. Thus, a firm whose organizational efficiency is
increasing is said to be a growing firm.
6. Output: both volume and value of output can be used as measure of business growth.
(a) Volume of output: increasing volume of output also indicates growth. This can be an
effective measure of assessing growth of a single firm over a period of time but inter-
firm comparison can be possible only if the firms are producing and selling same
type of product. Utilization of production capacity is a more appropriate measure of
growth where comparisons are made between firms who are producing different
products.
(b) Value of output: intra and inter-firm comparisons are facilitated by using value of
output as a measure of growth. A firm whose value of output (in monetary terms) is
growing over time is said to be a growing firm. Between two firms, the firm who is
selling a larger value of output is said to be agrowing at a faster rate. This is suitable
measure of growth when comparisons are made during stable price conditions. Such
indicators will be valuable when they are adjusted for suitable price level changes
through cost inflation indices.
7. Increase in the value of output accompanied by an increase in the value of sales, adjusted for
price level changes, is a suitable indicator for measuring gowth of a firm over a period of
time
1.5 Advantages of Growth
Business firms try to achieve growth in order to obtain the following advantages:
(i) For obtaining the economies of scale.

(ii) For exploitation of business opportunities.
(iii) For facing competition in the market by diversifying the product line.
(iv) For providing protection against adverse business conditions e.g. Depression.
(v) For gaining economic and market power
4
(vi) For raising profits and creating resources for further reinvestment into business.
(vii) For making optimum utilization of resources.
(viii) For securing subsidies, tax concessions and other incentives offered by the government
1.6 Limitations of Growth
Business firms cannot grow indefinitely. Growth has its own limitations which are:
(i) Finance: Growth, especially merger, requires additional capital investment which is
sometimes difficult for a small firm to arrange.
(ii) Market: Growth can be achieved to the extent that the size of market permits. If a firm grows
faster than increase in the size of the market, it is likely to face failure.
(iii) Human Relations Problems: In a big firm, management loses personal touch with
employees and customers. Motivation and morale tend to be low resulting in inefficiency.
(iv) Management: Growth increases the functions and complexities of operations. As the number
of functions and departments increase, coordination and control become very difficult. Unless
the organization and management structure is capable of accommodating them, growth may
be harmful.
(v) Lack of knowledge: Under conglomerate growth, a firm enters new industries and new
markets about which the managers know little. It becomes difficult to find and develop
managers who can quickly handle new units and improve their earning potential against
heavy odds. Many growing firms have had a downfall because their managers felt that they
could manage anything anywhere.
(vi) Social problems: Big firms may be undesirable from social point of view as they may lead to
concentration of economic power and creation of monopolies which exploit various sections
of the society. In their urge for growth firms indulge in combative advertising. The
quickening tempo or growth creates a cultural gap when society finds it difficult to cope with
technological change.
1.7 Forms of Growth
Once an entrepreneur understands some of the factors that influence growth and
development, he can choose a suitable way for achieving it. Business growth can take place in many
ways. Broadly, various types of growth can be divided into two broad categories – organic and
inorganic growth.
Organic Growth – It can also be termed as internal growth. It is growth from within. It is planned
and slow increase in the size and resources of the firm. A firm can grow internally by ploughing back
of its profits into the business every year. This leads to the growth of production and sales turnover
of the business. Internal growth may take place either through increase in the sales of existing
products or by adding new products. Internal growth is slow and involves comparatively little change
in the existing organization structure. It can be planned and managed easily as it is slow. The ways
used by the management for internal growth include: (i) intensification; (ii) diversification and (iii)
modernization.
Inorganic Growth – it can also be termed as external growth. It involves a merger of two or more
business firms. A firm may acquire another firm or firms may combine together to improve their
competitive strength. External growth has been attempted by the business houses through the two
strategies (a) mergers and acquisitions and (b) joint ventures. Merger again can be of two types: (i) a
firm merges with other firm in the same industry having similar or related products. This type of
5
merger leads to coordination problem between the two firms (ii) a firm merges with another firm in
altogether different lines of business and have little common in their products or proceses such a
merger is known as conglomerate merger.
Inorganic growth is fast and allows immediate utlization of acquired assets. Thiere is no risk of
overproduction as the capacity of the industry as whole remains unchanged. Merger leads to
combination of independent units to control competition, to gain economics of scale and also
sometimes, to modernize production facilities. But merger also leads to social problem of monopoly,
problem of coordination, strain on capital structure, etc. Thus, external growth involves problem of
reorganization.
1.8. Self – Assessment Questions
Q.1 What do you understand by ‘business growth’? State briefly its limitations.
Q.2 Discuss the various forms of business growth.
Q.3 Explain in detail the various indicators of business growth.
Q.4 Explain the motives of business growth. Discuss the problems of growth.
Q.5 Explain the meaning and forms of business growth.

1. Raw. N.G., ‘Entrepreneurship and Growth of enterprise in Industrial Estates’, Deep and
Deep, New Delhi 1986.
2. Singh N.P., ‘Emerging Trends in Entrepreneurship Development – Theories and Practices,
“IFDM, New Delhi, 1985.
3. Saxena A., ‘Entrepreneurship – Motivation. Performance. Rewards’. Deep & Deep, New
Delhi 2005.
4. Singh B.P. and Chhabra T.N., ‘Modern Business Organisation, Dhanpat Rai & Co., New
Delhi.
5. Gupta C.B., Modern Business Organisation’, Mayor Paperbacks, New Delhi 2001.
6. Ghosh B., ‘Entrepreneurship development in India’, National Publishing House, Jaipur &
New Delhi 2000.
7. Harward Business Review, July – Aug 1972, pg. 37 – 45.
6
LESSON 2
ALTERNATIVE GROWTH STRATEGIES
FOR SMALL BUSINESS
Seema Sabbarwal
Structure
2.0 Introduction
2.1 Objectives
2.2 Meaning of growth strategy
2.3 Types of growth strategies
2.3.1 Intensive Growth strategy
2.3.2 Diversification
2.3.3 Modernization
2.3.4 Merger
2.3.5 Joint Venture
2.4 Crisis in Business Growth
2.5 Summary
2.6 Glossary
2.7 Self Assessment Questions
2.0 Introduction
In the earlier unit we discussed the meaning of growth and understood its necessity for the
survival and success of business. In this lesson we shall discuss the various growth strategies
available for a business firms. Also we shall do a comparison of the various strategies.
2.1 Objectives
After going through the lesson you should be able to:

• Explain the meaning of growth strategy
• Identify the alternative strategies available for growth
• Discuss the pros and cons of different strategies
• Identify the crisis of business growth
2.2 Meaning of Growth Strategy
The concept of strategy has been derived from military administration wherein it implies
‘Grand’ military plan designed to defeat the enemy. As applied to business, strategy is a firm’s
planned course of action to fight competition and to increase its market share. The term strategy
means a well planned, deliberate and overall course of action to achieve specific objectives.
According to chandler, “strategy is the determination of the basic long term goals and objectives of
an enterprise and the adoption of courses of action and the allocation of resources necessary to carry
out these objectives”.
‘Growth Strategy’ refers to a strategic plan formulated and implemented for expanding firm’s
business. For smaller businesses, strategic plans are especially important because these businesses
7
are extremely at risk to the smallest changes in the marketplace. Changes in customers, new moves
by competitors, or changes in the overall business environment can directly affect their cash flow in
a very short span of time. Negative effect on cash flow, if not estimated and adjusted for, can force
them to shut down. That is why they need to plan for the future. Small entrepreneurs generally
believe that strategic planning is for large business houses; in reality it is very crucial for small and
medium enterprises. Strategic Planning is a process that involves change. It provides a proper
direction to the business. Strategic planning is essential to take care of the additional efforts and
resources required for faster growth.
Different type of growth strategies are available each having its own advantages and
disadvantages. A firm can adopt different strategies at different points of time. All firms need to
develop their own growth strategy according to their own characteristics and environment.
2.3 Types of growth strategies
Given below is a list of the main growth strategies available to firms:

1. Intensive Growth Strategy (Expansion)
2. Diversification
3. Modernization
4. External Growth Strategy
(a) Mergers
(b) Joint Ventures
GROWTH STRATEGIES
Internal / Organic Growth Strategy External / Inorganic Growth Strategy

Intensive growth Strategy Mergers
Diversification Joint Ventures
Modernization
2.3.1 Intensive Growth Strategy
Intensive growth strategy or expansion involves increasing the sales revenue, profit and
market share of the existing product line or services.The firm slowly but regularly expands its
production and so it is called internal growth strategy. The firms with smaller share of the market can
use this strategy in an effective manner. Three alternative strategies are available for expansion.
These are:
(a) Market Penetration – Under this strategy the firm aims at increasing the sale of present
product in the existing market through aggressive promotion. The firm penetrates deeper into
the market to capture a larger share of the market. For example, promoting the idea of cold
coffee during the summer season, the idea of instant coffee, instant tea and tea bags.
(b) Market Development – It implies increasing sales by selling present products in the new and
unexplored markets. For example selling electronic goods in rural areas or sale of chocolates
to middle aged and old persons. Market development leads to increase in sale of existing
products in unexplained markets.
8
(c) Product Development: In this, the firm tries to grow by developing improved products for
the present market. For example, Air conditioner with remote control, Refrigerator with
automatic defrost and flexible shelves.
Advantages of Intensive Growth Strategy

(1) Growth can be handled easily as it is natural and gradual.
(2) Firm's own funds can be used to finance expansion
(3) Organisation structure and management systems of business do not require any major
changes.
(4) Better utilisation of existing resources becomes possible.
(5) Expansion provides economics of large-scale operations.
(6) The expanding firm can better face competition in the market.
Limitations of Intensive Growth Strategy

(1) Growth is slow and therefore takes time.
(2) It is not always possible to grow in the present product market.
(3) A business firm may not be able to exploit many business opportunities by confining its
operations to the existing products and markets.
Practical Problems of Intensive Growth Strategy

When small business firms attempt to expand they have to face many problems. Some of
these problems are given below:
(i) Scarcity of Funds: For expansion a firm needs to invest more in both fixed assets and current
assets. Funds for fixed capital and working capital are not easily available. Many a times a
small firm has to borrow funds at high rates of interest.
(ii) Marketing: Expansion is possible and profitable only when the increased output can be sold
at remunerative prices. Small-scale units face difficulties in selling and distributing their
products as a result of competition from large-scale units.
(iii) Technology: For expansion, sometimes it is necessary to improve technology and replace
plant and machinery. Modernization of technology is a time-consuming and expensive
process. It becomes essential to recruit new staff or retrain the existing staff in the use and
operation of new technology.
(iv) Risk: Expansion involves additional risk. Few small-scale firms have the ability or will-
power to assume these risks particularly where the competition is acute and raw materials
have to be imported. Many small-scale owners continue to operate at the existing scale due to
the risks and difficulties involved in expansion.
Match the following

1. Expanding the sale of chocolate by Product Development
including old persons to children.
2. Hindustan Lever expanding the sale Market Penetration
of detergent powder in rural area
3. ‘Colgate’ expanding the sale by Market Development
introducing ‘Colgate-salt active’
9
Activity A
List the limitations involved in expansion
---------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
2.3.2 Diversification
Beyond a certain point, it is no longer possible for a firm to expand in the basic product
market. So the firm seeks to increase sales by developing new products. This strategy towards
growth is called diversification. Diversification does not simply involve adding variety in the
existing product line but adding completely different line of products. Products added may be
complementary. Diversification is a widely used strategy for growth. Many companies have opted
for diversification as a growth strategy. For example, LIC, an insurance corporation originally,
diversified into mutual funds. State Bank of India diversified into merchant banking and mutual
funds. Similarly, Larsen and Toubro, an engineering company diversified into cement.
Table 1: Product-Market Matrix and Growth Strategy

Products Present New
Markets
Present Market Penetration Product development
(Penetrate existing markets (Introduce new products in
with existing products) existing markets)
New Market Development (Enter Diversification
new markets with existing (Introduce new products in
Products) new markets)
Source: H.Igor Ansoff, Corporate Strategy (New york: McGraw-Hill, 1965), p.51
A firm may choose to grow by using diversification strategy under the following conditions:
(a) When the firm cannot attain its growth target by expansion alone.
(b) When diversification promises greater profitability than expansion.
(c) When the financial resources of the firm are much in excess of the requirements of
expansion.
The distinction between intensive growth strategy and diversification strategy must be
carefully noted. In the case of intensive growth, the firm increases the production and sale of its
existing products. But in case of diversification, new products and new markets are added.
Advantages of Diversification
Companies have increasingly adopted diversification strategy due to the following reasons:
(i) Diversification enables an enterprise to make better utilization of its existing resources. By
adding up related products to its existing product portfolio, a company can more effectively
utilise its managerial personnel, marketing network, research and development facilities, etc.
(ii) With more products, greater resources and higher profits, the diversified firm is more
competitive than a single product firm.
(iii) A company can use diversification strategy to minimize the decrease in sales of its present
product. By developing new products the sales revenue and earnings can be maintained or
even increased. For example, Bajaj Scooters India Ltd. entered in the field of mopeds.
10
(iv) A well-diversified company can use cash surplus of one business to finance another business
having good potential for growth.
(v) Diversification adds to size of business which improves the competitiveness of a firm. It
offers a lot of economy in operations because common facilities can be used for several
products. In other words, diversification can be used to capitalise on corporate strengths or to
minimise weaknesses.
(vi) Diversification helps to minimise risk. When one line of business faces recession, another
line may be in high growth stage. For example, a well-diversified engineering firm like
Larsen and Toubro did well even when the engineering industry was facing recession.
(vii) Diversification may be the only means of growth when government regulations have blocked
.growth in existing business, for example, multi-nationals like Hindustan Lever Limited
diversified in 1977 due to Foreign Exchange Regulations Act. Industrial licensing restricted
the capacity of firms in a given product thus forcing them to enter into new lines of business.
Also, financial sector reforms prompted Indian companies to diversify into financial services.
Limitations of Diversification
The limitations of diversification are as given below:
(i) Huge funds are required for diversification. The internal savings of the business may not be
sufficient to finance growth through diversification.
(ii) Diversification may lead to unfamiliar products and markets leading to greater degree of risk.
(iii) The tasks and responsibilities of top executives increase because of need to handle new
product, technology and markets. They may find problems in coordination which may lead to
inefficient operations.
(iv) Diversification may involve new technology and new markets. The existing staff may
experience problems in adapting to this growth pattern.
Types of Diversification:
1. Vertical Diversification (Integration)
2. Horizontal Diversification:
(a) Concentric Diversification and
(b) Conglomerate Diversification
Vertical Diversification (Integration)

In this type of growth strategy new products or services are added which are complementary
to the existing product or service line. New products serve the firm's own needs by either supplying
inputs or serve as a customer for its output. It involves moving backward or forward from the present
product or service. Thus vertical integration may be of two types—backward and forward.
Backward integration
It implies moving backword toward the source of raw materials. Firms integrate backwards to
produce their own inputs or raw materals. Rather than buying the inputs from outside sources, firms
manufacture their own inputs. Reliance Industries Ltd. has achieved remarkable growth through
backward integration. It started business with textiles and went for backward integration to produce
PFY and PSF, critical raw materials for textiles, then started producing PTA and MEG, raw materials
for PFY and PSF, then paraxylene, raw material for PTA and MEG, and finally naphtha for
producing paraxylene. Sugar mills having their own sugarcane farms are said to have diversified
through backward integation.
11
Advantages
Backward integration offers the following benefits:
(i) It helps to ensure regular supply of raw materials or components.
(ii) It improves or ensures quality control over imports for the final product.
(iii) It facilitates higher return on investment for the company as a whole through better use of
overhead facilities.
(iv) It improves the company's power of negotiation with suppliers on the basis of known costs.
(v) It saves indirect taxes payable on the purchase of inputs.
(vi) It improves the competitive power of the company. As it controls more elements of the
production process, it has advantages over the unintegrated firms in the form of lower costs,
lower prices and lower risks.
Figure: 1
Disadvantages
Backward integration suffers from the following limitations:
(a) The firm loses the opportunity of purchasing at a lower cost from technically more efficient
suppliers.
(b) If an existing input producing unit is taken over, it may require technological up gradation
which involves considerable investment.
12
(c) Heavy investment in the process of backward integration may hamper the development of the
final products. This in turn may lead to undue pressure on pricing and sales effort.
(d) When the divisions using the inputs do not have the freedom of comparing market conditions
of supply, the problem of transfer pricing may become acute.
(e) Changing economic conditions affecting the main product market may cause a magnified
effect on the production of inputs.
Forward integration
Forward integration involves the entry of a firm into the business of finishing, distributing or
selling its existing products. It refers to moving higher up in the production/distribution process
towards the ultimate consumer. It involves entry of the firm into distribution outlets to maintain
direct control with their customers. The firm develops outlets for the use/sale of its own products.
Rather than selling the product through middlemen firms that diversify through forward integration
maintain their own sales outlets. For example, many textile companies like DCM, Bombay Dyeing,
Reliance and Raymonds have set up their own retail distribution system to sell their fabrics.
Advantages
Forward integration offers the following benefits:
(i) It enables the firm to gain greater control over sales and prices of its products. This is very
useful in an oligopolistic market.
(ii) It improves the scope of quality control because the firm's own retail stores serve as better
source of customer feedback.
(iii) The firm can increase its profits by eliminating middlemen and by reducing the costs of
distribution.
(iv) The firm can secure the economies of integration. Handling and transportation costs can be
reduced.
Figure: 2
13
Disadvantages
Forward integration suffers form the following drawbacks:
(a) The proportion of fixed costs in the firm’s costs increases. As a result the firm is exposed to
greater cyclical changes in earnings. Moreover, the fortunes of business are tied to the in-
house distribution system. From this point of view, forward Integration increases business
risk.
(b) Since its processes are interdependent, a slight interruption in one process may dislocate the
entire production system.
(c) In the absence of proper balance between up-stream and down-stream units, the firm has to
buy from or sell in the open market. The firm may be competing with its own customers.
(d) It is very difficult to efficiently manage an integrated firm because every business has its own
structure, technology and problems.
Horizontal Diversification
It involves addition of parralel new products to the existing product line.
This may happen internally or externally.
(i) Internal Diversification: firms use their own resources to add new products to their existing line
of products. For example, Reliance industries have diversified into areas like textiles,
telecommunications, etc. Godrej manufactures steel almirahs, refrigerators and locks through its own
resources. This is internal diversification.
(ii) External Diversification: when new products and services are added through mergers and
acquisitions, it is known as external diversification.
Horizontal Diversification can be of two types i.e. concentric diversification and conglomerate
diversification
(a) Concentric Diversification

When a firm enters into some business which is related with its present business in terms of
technology, marketing or both, it is called concentric diversification.
In technology-related concentric diversification new product or service is provided with the help of
existing or similar technology. For example, Nestle as added 'Tomato Ketchup' and 'Maggi Noodles'
to its range of baby food. In marketing-related concentric diversification, the new product or service
is sold through the existing distribution system. For instance, a hire-purchase firm may start
providing lease finance for purchase of consumer durables.
Concentric diversification may be employed for the following purposes:

(a) To counteract cyclical fluctuations in the present products or services;
(b) To utilise the cash flows generated by the existing product or service;
(c) To face saturation of demand for present product or service;
(d) To gain managerial expertise in new field of business; and
(e) To capitalise on the reputation of present product or service.
(b) Conglomerate Diversification

In this growth strategy a firm enters into business which is unrelated to its existing business
both in terms of technology and marketing. Several Indian companies have adopted this strategy.
DCM, Essar group, ITC, Godrej, Hyderabad Allwyn, HMT are examples of conglomerate
diversification.
14
Conglomerate diversification strategy may be adopted for the following reasons:
(i) To achieve a growth rate higher than what can be realised through expansion;
(ii) To make better use of financial resources with retained profits exceeding immediate
investment needs;
(iii) To avail of potential opportunities for profitable investment;
(iv) To achieve distinctive competitive advantage and greater stability;
(v) To spread the risks; and
(vi) To improve the price earning ratio and market price of the company’s shares
Diversification strategies discussed above can be concised in the following matrix given by
“Ansoff”.
Table 2: Ansoff’s Diversification Matrix
New functions Related Technology New Products Unrelated Technology

Firm is its own Vertical
customer Integration
Same type of Horizontal
product Diversification
Similar type of Marketing and Technology Marketing related
product related concentric diversification concentric diversification
New type of Technology related concentric Congomerate
product diversification Diversification
Source: H.Igor Ansoff, Corporate Strategy (New york: McGraw-Hill, 1965), p.132
Check Your Progress - 2
Activity B
Give three examples of companies (other than those given in the previous section) which have
pursued Diversification and classify them with respect to the direction of their diversification.
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
2.3.3 Modernization
An existing business unit may plan to grow through Modernization of operations.

Modernization basically involves upgradation of technology to increase productivity, efficiency and
product quality and to reduce wastages and cost of production in the long-run. The worn-out and
obsolete machines and equipment are replaced by the modern machines and equipment.
Modernization plans can have the following implications:
(i) A firm may resort to Modernization to maintain its position in the market. Thus, the purpose
of Modernization would be stability in operations in the coming years.
(ii) Modernization may be pursued with full vigour to stimulate internal growth. Thus, it is used
as an internal growth strategy.
Advantages of Modernization
The benefits of Modernization are as under:
(i) Modernization increases the productivity and efficiency of the firm.
(ii) It makes available better products to the customers.
15
(iii) Because of increased efficiency and reduced wastages, the profitability of the firm goes up.
Thus, the owners of the business are also benefited.
(iv) The works acquire advanced skills because of which their wages go up.
(v) The competitive position of the firm in the long-run improves because of Modernization.
(vi) The growth is systematic and does not affect the normal functioning of the firm.
However, a Modernization plan .can be implemented only if the firm has adequate capital
through accumulated savings or is able to raise capital from different sources for the acquisition of
modern plant and machinery. The benefits of Modernization will actually accrue if the workers are
adequately trained in the new method of production.
Limitations of Modernization
The limitations of Modernization are as follows:
(i) The internal savings of the business may not be sufficient to finance Modernization of plant
and machinery.
(ii) The existing staff may experience problems in adapting to the new technology.
(iii) The responsibilities of top executives would increase because of need to handle new product,
technology and markets.
2.3.4 Merger
Merger is an external growth strategy. When different companies combine together into new
corporate organizations, such a process is known as mergers. Merger can occur in two ways: (a)
Acquisition or takeover and (b) amalgamation.
Takeover or acquisition takes place when a company offers cash or securities in exchange for
the majority shares of another company. It involves one company acquiring control over another.
Amalgamation takes place when two or more companies roughly of equal size or strength formally
submerge their corporate identities into a single one in a friendly atmosphere.
Advantages
The mergers take place with a number of motivations. Some of the benefits of merger are:
(i) A merger provides economies of large-scale operations.
(ii) Better utilisation of funds can be made to increase profits.
(iii) There is possibility of diversification.
(iv) More efficient use of resources can be made.
(v) Sick firms can be rehabilitated by merging them with strong and efficient concerns.
(vi) It is often cheaper to acquire an existing unit than to set up a new one.
(vii) It is possible to gain quick entry into new lines of business.
(viii) It can provide access to scarce raw materials and distribution network and managerial
expertise.
Disadvantages
Mergers are not always successful due to the following drawbacks:
(a) The combined enterprise may be unwieldy. Effective co-ordination and control becomes
difficult. As a result efficiency and profitability may decline.
(b) Mergers give rise to monopoly and concentration of economic power which often operate
against the interest of the society and the country.
16
Guidelines for Successful Mergers
Willard Rockwell, based on his experience, has given the following guidelines to make the
merger successful:
(i) Identify the merger objectives, especially economic objectives.
(ii) Specify gains for the shareholders of both the joining companies.
(iii) Be convinced that the acquired company's management is or can be
made competent.
(iv) Report the existence of important dovetailing resources; but do not
expect perfect compatibility.
(v) Start the process of merger with active involvement of the top executives.
(vi) Define clearly the business that the company is in.
(vii) Analyse and identify the strengths, weaknesses and key performance
factors for both the combining units,
(viii) Foresee possible problems and discuss them at the initial stage with the other company so as
to create a climate of trust.
(ix) Don't threaten the management to be acquired.
(x) Human considerations should be of prime importance in planning for merger and designing
the organisation structure for the new set up.
Find three key words from the above section. Write their meaning in your own words.
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
2.3.5 Joint Venture

When two or more firms mutually decide to establish a new enterprise by participating in
equity capital and in business operations, it is known as joint venture. A joint venture is a business
partnership between two or more companies for a specific business operation.
Joint venture can be with a firm in the same country or a foreign country. For example, Birla
Yamaha Ltd. is a joint venture of Birla and Yamaha Motor Co. of Japan, DCM and Daewoo
Corporation of Korea established DCM Daewoo Motors Ltd. Hindustan Computers Ltd. and Hewlett
- Packard of USA formed HCL-HP Ltd, a joint venture company.
Activity - C
Give five examples of the firms which have achieved joint venture in India.
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
“External Growth Strategies”, “Amalgamation”, “Joint Venture”, “merger”, “Absorption”. Rewrite

the above given key-words in their logical sequence.
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
17
2.4. Crisis of Business Growth
All organizations pass through various stages of growth and at each stage the organization is
required to solve some specific problems.
A very useful model of organizational growth has been developed by Greiner. He argues that
each organisation moves through five phases of development as it grows. There are five phases in
organizational growth – creativity, direction, delegation, coordination and collaboration followed by
a particular crisis and management problems.
1. Creativity Stage. Growth through creativity is the first phase. This phase is dominated by
the entrepreneurs of the organizations and the emphasis is on creating both a product and a
market. However, as the organization grows in size and complexity, the need for greater
efficiency cannot be achieved through informal channels of communication. Thus, many
managerial problems occur which the entrepreneur may not solve effectively because they
may not be suited for the kind of job or they may not be willing to handle such problems.
Thus, a crisis of leadership emerges and the first revolutionary period begins. Such questions
as ‘who is going to lead the organisation out of confusion and solve the management
problems confronting the organisation; who is acceptable to the entrepreneurs and who can
pull the organisation together arise. In order to solve the problems a new evolutionary phase –
growth through direction – begins.
2. Direction Stage. When leadership crisis leads to the entrepreneurs relinquishing some of
their power to a professional manager, organisational growth is achieved through direction.
During this phase, the professional manager and key staff take most of the responsibility for
instituting direction, while lower level supervisors are treated more as functional specialists
than autonomous decision making managers. Thus, directive management techniques enable
the organisation to grow, but they may become ineffective as the organisation becomes more
complex and diverse. Since lower level supervisors are most knowledgeable and demand
more autonomy in decision making, a next period of crisis – crisis for autonomy begins. In
order to overcome this crisis, the third phase of growth – growth through delegation –
emerges.
3. Delegation Stage. Resolution of crisis for autonomy may be through powerful top managers
relinquishing some of their authority and a certain amount of power equalisation. However,
with decentralisation of authoirty to managers, top executives may sense that they are losing
control over a highly diversified operation. Field managers want to run their own show
without coordinating plans, money, technology or manpower with the rest of the organisation
and a crisis of control emerges. This crisis can be draft with the next evolutionary phase – the
coordination stage.
4. Coordination Stage. Coordination becomes the effective method for overcoming crisis of
control. The coordination phase is characterised by the use of formal systems for achieving
grater coordination with top management as the watch dog. The new coordination system
proves useful for achieving growth and more coordinated efforts by line managers, but result
in a task of conflict between line and staff, between head quarters and field. Line becomes
resentful to staff, staff complains about unco-operative line managers, and everyone gets
bogged down in the bureaucratic paper system. Procedure takes precedence over problem
solving; the organisation becomes too large and complex to be managed through formal
programmes and rigid systems. Thus, crisis of red – tape begins. In order to overcome the
18
crisis of red-tape, the organisation must move to the next evolutionary stage – the
collaboration stage.
5. Collaboration Stage. The Collaboration stage involves more flexible and behavioural
approaches to the problems of managing a large organisation. While the coordination stage
was managed through formal systems and procedures, the collaboration stage emphasizes
greater spontaneity in management action through teams and skilful confrontation of
interpersonal differences. Social control and self – discipline take over from formal control.
Though Greiner is not certain what will be the next crisis because of collaboration stage, he
feels that some problems may emerge as it will centre round the psychological saturation of
employees who grow emotionally and physically exhausted by the intensity of team work and
of the heavy pressure for innovating solutions.
2.5 Summary
In the unit we have discussed what strategic alternatives a firm could consider for growth.
Once a firm has identified the various strategic possibilities, it has to make a selection from
among these alternatives. And this would depend upon its growth objectives, attitude towards risk,
the present nature of business and the technology in use, resources at its command, its own internal
strengths and weakness, Government policy etc. There are several managerial factors which
moderate the ultimate choice of a strategy. For a firm desiring immediate growth and quick returns,
mergers and takeovers afford attractive opportunities as they obviate the necessity of starting from
scratch. However, identifying the right candidate for merger or acquisition is an art at which only a
few managements can really excel. Establishing joint venture, especially in the international arena, is
a low risk alternative. Many firms prefer this approach.
2.6 Glossary
1. Red Tape - Too much attention to rules and regulations.

2. Obsolete Technology - Technology which is no longer used as it
is out of date.
3. Automation - Use of methods and machines to save labour.
4. Monopoly - Possession of the sole right to supply which
is not or cannot be shared by others.
5. Overheads - Those expenses which are needed for
carrying on a business e.g., rent, advertising, salaries, light, not
manufacturing costs.
6. Mass Production - Production in large quantities.
7. Subsidy - Money granted by a govt. to an industry
to keep prices at a low level.
8. Unexplored sector - Those sectors of the economy which are
hitherto not served.
19
2.7 Self – Assessment Questions
Q.1 What do you understand by ‘business growth’? State briefly its limitations.
Q.2 Explain the term ‘growth strategy’. Why does a firm seek to grow?
Q.3 Distinguish between horizontal integration and vertical integration.
Q.4 What is Modernization? Describe its advantages as a growth strategy.
Q.5 Distinguish between backward and forward integration.
Q.6 What is Merger? State the benefits and limitations of Merger.
Q.7 Write a note on joint ventures as a business growth strategy.
Q.8 ‘Growth is most frequently used corporate strategy’. Discuss the reasons why a firm must
grow? Under what circumstances a firm may not consider growth a desirable strategy?
Q.9 Do you know of any mergers or take-overs which have taken place recently? What were the
motivations behind such mergers or take-overs?

8. H.Igor Ansoff, ‘Corporation Strategy’, McGraw Hill, New York, 1965, p.51.
9. William F.Glueck and Lawrence R. Jauch, ‘Business Policy and Strategic Management’,
McGraw Hill, New Delhi, 1984, p.220
10. Raw. N.G., ‘Entrepreneurship and Growth of enterprise in Industrial Estates’, Deep and
Deep, New Delhi 1986.
11. Singh N.P., ‘Emerging Trends in Entrepreneurship Development – Theories and Practices,
“IFDM, New Delhi, 1985.
12. Charles A. Scharf, “Acquisitions, Mergers, Sales and Takeovers’, Prentice Hall N.J. 1981.
13. Saxena A., ‘Entrepreneurship – Motivation. Performance. Rewards’. Deep & Deep, New
Delhi 2005.
14. Singh B.P. and Chhabra T.N., ‘Modern Business Organisation, Dhanpat Rai & Co., New
Delhi.
15. Gupta C.B., Modern Business Organisation’, Mayor Paperbacks, New Delhi 2001.
16. Ghosh B., ‘Entrepreneurship development in India’, National Publishing House, Jaipur &
New Delhi 2000.
17. Dollinger M.J., ‘Entrepreneurship strategies and Resources’, 3rd edition, Pearson Education,
New Delhi 2006.
18. Harward Business Review, July – Aug 1972, pg. 37 – 45.
20
LESSON 3
ENTREPRENEURSHIP AND ENVIRONMENT
Pawan Kumar Jain
Business environment refers to the factors external to a business enterprise which influence its
operations and determine its effectiveness. Business environment may be healthy or unhealthy.
Healthy business environment means the conditions are favourable to the growth of business
whereas unhealthy environment implies conditions hostile or unfavourable to business operations.
Business and its environment interact with each other. Economic system and other conditions in the
environment determine the success of business enterprises. The firm and its management have to
adjust to the conditions prevalent around it. However, business enterprises try to influence and shape
the environment. Successful working of business concerns improves the economic and social condi-
tions in the country.
No business concern can ignore the environment around it except at its own peril. “The penalty of
environ mental disregard is heavy. It not only reduces profit margins and makes opportunities for
expansion slip, but it also arouses social hostility and makes social environment growingly
inhospitable to business operations.”
A study of business environment offers the following benefits:
1. It provides information about environment which is essential for successful operation of

business firms.
2. It opens up fresh avenues for the expansion of new entrepreneurial operations. The
entrepreneurs may come forward with new ideas and with new ventures when they find
environment suitable to their enterprises.
3. Knowledge about changing environment enables businessmen to adopt a dynamic approach

and maintain harmony of business operations with the environment.
4. By studying the environment entrepreneurs can make it hospitable to the growth of business
and thereby earn popular support.
Thus, the entrepreneur should continuously study the nature of environment and its influence on
business. However, mere study is not enough. Attempts must be made to influence the environment
in order to make it congenial and favourable to entrepreneurial activities. The most successful
entrepreneur is one who not only adjusts to the environment but also modifies the environment to
suit his requirements through the direct and indirect influences he can exercise over the system.
PHASES OF BUSINESS ENVIRONMENT
Business environment may be classified into four broad categories; namely (i) economic, (ii) legal,
(iii) political; and (iv) socio-cultural.
Economic Environment
Economic environment is of multidimensional nature. It consists of the structure of the economy, the
industrial, agricultural, trade and transport policies of the country, the growth and pattern of national
income and its distribution, the conditions prevailing in industrial, agricultural and other sectors, the
21
position relating to balance of trade and balance of payments, and other miscellaneous conditions of
the economy.
There is a close relationship between a business firm and the economic environment around it. The
success of a business enterprise depends considerably upon the State and growth of the economy.
Commenting on the Indian economic environment and its impact on Indian business houses, Dr.
Surinder P.S. Pruthi wrote: "The face of the Indian business has altered considerably during the last
few years as a series of legislative enactments and other environmental features. The abolition of the
managing agency system, the birth of the concept of joint sector, the promulgation of the Monopolies
and Restrictive Trade Practices Act, the growing role of financial institutions in the management of
private sector undertakings, the emergence of a professionally trained class of managers, growing
internationalisation of business, etc., have all combined to change the face of Indian business in
recent years."
An economy comprises public and private sector and the relative role of the two sectors in the
economy makes a lot of difference to business. In a privately owned and controlled economy (free
economy), the primary goal of a business firm is to earn profit and profitability is the main criterion
of judging the efficiency of business. On the other hand, in a society owned and controlled
economy (closed economy), the primary goal of business is social benefit and social responsibility
is the main criterion of judging its efficiency.
In a mixed economy like India, business enterprises work for both profitability and social interest.
In this age of planning, business enterprises work within the framework of a planned business
environment. Private sector has to function within the conditions largely created by the State. The
private and public sectors must function as parts of a single organism rather than as two separate
entities.
The Industrial Policy of 1956 stressed the need for proper direction and regulation of the private
sector as well as the increasing role of the State to achieve rapid growth in national wealth. In the
words of the planners, "It (private sector) has to visualise for itself a new role and accept in the
larger interest of the country a new code of discipline. Private enterprises, like any other institution,
will endure and justify itself only to the extent to which it proves to be an agent for promoting the
public good."
Some changes were made in the Industrial Policy in 1970 and 1973. Restrictions on large industrial
houses, preferential treatment to small scale sector, boost to joint sector, etc., are some of these
changes. In recent years there has been a trend towards liberalisation, simplification and
rationalisation of industrial policy.
Legal Environment
Business must function within the framework of legal structure. Therefore, an adequate knowledge
of laws and rules is necessary for efficient managerial performance. When new laws are made and
controls exercised through legal enactments, the first reaction of the business community is to
oppose them and disobey them. Management should try to understand what should be the right laws
and strictly obey them when so made. In addition, it can influence the government to change and
improve the law and make it useful to the business community.
22
There are several business laws in our country. These relate to development of corn panics, foreign
collaboration, foreign exchange, labour management, industrial disputes, social security benefits, and
other such allied problems. A working knowledge of these laws is very helpful for the entrepreneur
and the business executive. Such knowledge will keep them away from innocent breaches and
resultant penalties. Some laws differ from Slate to State and amendments arc made from time to
time. Therefore, the entrepreneur must always keep in touch with those who know the latest position
in law. In addition, an entrepreneur should:
(a) read the books that enlighten on the legal side of business
(b) consult government agencies concerned with the implementation of business laws.
(c) retain labour law consultants.
Political Environment
In a democratic country like India, politics cannot be ignored. Managers and entrepreneurs should
understand the working of the political system. Such understanding and concern for national
problems will help them in the long run in discharging their responsibilities to the satisfaction of the
public.
Public opinion is very important and today's public opinion becomes tomorrow's legislation.
Businessmen should, therefore, learn to take public opinion into account in the decision-making
process. If business does not learn how to deal adequately with public opinion, it will face a disaster.
This does not mean that business should surrender itself to public opinion. Rather, it implies in-
telligent response in order to change wherever necessary and a constructive approach to problems.
There exists an interacting relationship between business and politics. Business cannot develop
without the understanding and support of the politicians. Similarly, business strategy and business
activities influence politics and the Government. It is, therefore, in the interest of businessman to
ensure that the Government is stable and helpful to business. Government should also take the
business community into confidence while preparing and implementing plans for the country's
development.
It is commonly observed that business community and the Government are hostile to each other and
there is lack of trust among the two. Businessmen should establish a cordial relationship and proper
communication with the people in power and win their confidence. They should try to study and
understand the political processes and the working of the Government departments and agencies.
As regards relationship of businessmen with politicians there are two opposite approaches. The
traditional approach is that businessmen should not align themselves with any political party and
should keep themselves away from the political bosses. The modern view is that businessmen should
take keen interest in the political affairs of the local, State and Central Governments. They should
have their representatives on various Government bodies at all levels of policy formulation and
planning.
Socio-Cultural Environment
Traditional culture should be protected in so far as it is not a hindrance to innovation, motivation,

and development. In under developed countries a great deal of superstition exists and people believe
that success or failure depends upon the God's mercy. Much time is wasted when activities like
laying down the foundation of a building or a project are postponed for auspicious days recom-
23
mended by Pandits. As a result lime and cost overruns occur frequently. Certain occupations are not
considered fit for particular castes or communities. Social position or status is linked with ownership
of land and house rather than with ownership of an enterprise. All this results in considerable
immobility and inflexibility and thus wasted labour.
Work is done in a customary way and experimentation is resented. Incentive to hard work and more
earnings is reduced because one has to share his income with the members of the joint family.
Savings and investment are left to the household who is usually an old person devoted to traditions
and static customs. In such an economic culture carrot and stick approach is used to motivate people.
On the other hand, the modern view is that employees should be treated as human beings. Unless a
healthy work environment and modern attitudes towards work are developed, entrepreneurship
cannot flourish. Depressing social conditions and conservative attitudes hamper innovations. It is not
easy to maintain and create the required quantity and quality of entrepreneurship.
SOCIO-ECONOMIC ORIGINS OF ENTREPRENEURSHIP
The entrepreneurial activity at any time is dependent upon a complex and varying combination of
socio-economic, psychological and other factors. The various environmental factors exercise a
strong influence on the personality or personal backgrounds of the entrepreneurs. Therefore, any
attempt to understand the entrepreneurial spirit among people should include an examination of the
socio-economic origins of the entrepreneurs. The process of interaction and adaptation between the
individual and his environment goes on continuously.
A few empirical studies have been conducted to examine the socio-economic origins of
entrepreneurs. In one such study of 40 enterprises in two districts of Andhra Pradesh, the following
socio-economic factors were analysed.
1. Caste origins: To begin with some social groups produce a larger and more capable body of
entrepreneurs than other groups. This is due to the influence of prevailing social factors. It
has often been suggested to at certain religions and castes encourage the growth of
entrepreneurial talent. The caste system has been found to be exercising its own influence on
the occupational mobility. Some religious communities like the Parsees, Marwaris and
Sindhees seem to have an affinity for industrial activity. It is true that certain castes have
imbibed in themselves a particular culture that fosters entrepreneurship. It was mainly the
people hailing from Kamma, Kapu, Vysya, Brahmin and Kshatriya communities who
dominated the entrepreneurship in the two industrial estates. The study of Hadimani also
revealed that entrepreneurs from the trading castes (Marwaris) succeeded better in the initial
stages. Caste system in India led to rigid traditions and customs and economic activity was
rigidly stratified by the caste system. Therefore, a few ethnical communities engaged in trade
and industry for centuries in India. Marwaris, Parsees, Jains, Baniyas, Sindhis, Vaishyas, and
Khatris have been the dominant sources oi' entrepreneurs hip. Dominance of certain ethnical
groups in entrepreneurship is a global phenomenon. The protestant ethics in the west, the
Summurai in Japan, the trading classes in U.S.A. and the family business concerns of France
have distinguished themselves as entrepreneurs.
Hadimani found that caste attachment was high in both weavers and non-weavers. In case of
the former such attachment hindered entrepreneurship while in the latter it promoted
entrepreneurship. A holistic approach to the problems of caste dualism revealed that
Marwaris succeeded better because they had entrepreneurial traits. Enduring qualities of
business men such as hardwork, devotion to work, honesty and quality control were more
24
pronounced among Marwaris. However, entrepreneurship is no more confined to the
traditionally known communities.
2. Entry into entrepreneurship: The time and age at which the entry is made into
entrepreneurship are important factors. The Kamma community entered the field of
entrepreneurship earliest of all other communities. It reveals the resourcefulness and
enterprising quality of Kamma entrepreneurs. In comparison with Kamma and Kshatriya
entrepreneurs, Kapu and Brahmin entrepreneurs entered into entrepreneurship at a younger
age and Vysya entrepreneurs at an older age.
3. Family background: This factor includes size of family, type of family

and economic status of family. Hadimani's study revealed that Zamindar family
helped to gain access to political power and exhibited higher level of entrepreneurship. To
some extent, joint family provided family property to invest and
expand the family firm. Background of a family in manufacturing provided a
source of industrial entrepreneurship. Occupational and social status of the family
influenced mobility.
The average annual income of the entrepreneurs from different sources a: the time of
commencement was found to be around Rs. 19,000. This does not suggest that economic
status greatly influences the emergence and performance of entrepreneurship. About 57.8 per
cent entrepreneurs had an urban background and others had a rural background. Obviously,
rural background is not a handicap for the exercise of entrepreneurship though urban
background may prove to be an added advantage.
4. Religious background: Religion exercises a strong influence on attitudes towards material

gains relatively to efforts. Max Weber propounded the theory that the 'protestant ethic' among
Christians fosters the right attitude for entrepreneurship. On the other hand, Islam and Hindu
religions do not foster such an attitude. However, subsequent researchers have questioned
Weber's theory. Several empirical studies reveal that religions in India do not inhibit
entrepreneurial spirit. Hadimani suggests that mo re than the form of religion practised the
type of interpretation given to different religious values determine entrepreneurial success.
For example, Marwaris dharma (Moral duty), artha (wealth) and kama (desire) were inner
worldly while Moksha (salvation) was outer worldly and that too at the end. On the other
hand, weaving caste entrepreneurs considered moksha as the ultimate goal of life.
5. Education and technical know how: Education, entrepreneurship and development are
interrelated. Education is the best means of developing man's resourcefulness which
encompasses different dimensions of entrepreneurship. Ashok Kumar found in his study that
majority of the entrepreneurs were graduates and post-graduates particularly in engineering
and other technical disciplines. Kamma and Brahmin entrepreneurs were relatively more
educated than others. It may be expected that the high level of education may enable the
entrepreneurs to exercise their entrepreneurial talent more efficiently and effectively.
6. Occupational Background: Employed people were more attracted towards entrepreneurship

than those engaged in agriculture or business. A sizeable number of entrepreneurs were the
unemployed youth prior to starting the industrial units. Entrepreneurship is thus not
confined to any particular occupation. What is required is the presence of entrepreneurial
spirit and zeal. Most of the entrepreneurs came from families where the pa rental occupation
was agriculture or employment.
25
7. Migratory character: As much as four - fifths of the entrepreneurs were immigrants having
come from different places within the State or from outside.
8. Type of Industry started: Nearly two-thirds of the entrepreneurs started industrial units in
engineering works. A little more than one–tenth preferred to start units in non- metallic
products while 7.5 percent started units belonging to plastic works industry. A few other
entrepreneurs started units belonging to food products, aluminium products and other
miscellaneous products.
9. Type of ownership preferred: More than one-half of the units were partnership firms, nearly
one-third were sole trading concerns and about one-tenth were private limited companies.
Most of the entrepreneurs preferred partnership to avoid legal formalities involved in starting
a company.
Another study of 334 entrepreneurs in the Anakapalle and Gudivada districts of Andhra
Pradesh revealed that more than 90 percent of entrepreneurs at both the towns were Hindus.
Gavaras and Kammas were the two dominant castes and they belonged to land owning and
land tilling class. This shows that the bold of the caste structure on occupations in India is
getting loosened. Entrepreneurial opportunities are now open to people who are willing to
take risks irrespective of their caste origins.
About two-thirds of the entrepreneurs entered into entrepreneurs hip before the age of 25 years.
People from the mercantile communities entered comparatively at a younger age due to their early
orientation and guidance by their parents. Non-traditional merchants entered into the merchant
activities on a large scale only after 1960s. However, the degree of occupational mobility of these
farming castes was greater than traditional merchant castes. Occupational mobility was found to be
tow but growth rate was high.
Formal education helps to develop entrepreneurial skills like resourcefulness, initiative and
entrepreneurs. However, the lack of higher education is not a limiting factor. The study revealed that
majority of the entrepreneurs lacked higher education, most of the young persons with higher
education prefer white collar jobs in the Government. However, technicians, engineers and other
professionals are now coming forward as entrepreneurs. This is an encouraging trend. The
entrepreneurs were well informed, widely travelled and experienced. Most of them entered business
neither casually nor accidentally but after preparation.
Structure and economic status of the family are important because these determine the support which
an entrepreneur gets from his family. Such support influences the success of an entrepreneur.
"Membership of a resourceful family or community facilitates entrepreneurship. Joint family system
is supposed to inhibit individual is in and accumulation of control. But once a beginning is made the
family become the breeding ground for more entrepreneurs. The same family members who are a
drag on resources prove to be strength in adversity. About half of the entrepreneurs were living
independently and the other half in joint families.
The average annual earnings increased from grandfather to father and from father to the entrepreneur
himself. This improvement in economic status must have had a positive impact on entrepreneurs'
activities. The financial soundness of the past generation creates a sense of security and thereby
encourages the spread of entrepreneurship. The magnitude of entrepreneurial activity also depends
upon the economic status or financial origins of the entrepreneur. Most of them show initiative in
26
consolidating and building up on the base provided by the father and the grandfather. Few of them
start from a scratch and thus become selfmade entrepreneurs.
About 44 percent of the entrepreneurs were proprietary concerns. About 55 percent were
partnerships and the rest were companies. Greater number of entrepreneurs originating from nuclear
families organised themselves into family partnerships. This shows that family bond has been
strengthened by business bond.
A look into the place of activity and nature of market revealed that about 84 percent of the
entrepreneurs operated from the local area and 90 percent of the entrepreneurs had local or regional
markets. However, the markets for trading, manufacturing and other services were widely spread
than those for fanning and professional services.
N. Gangadhar Rao conducted a study of 87 entrepreneurs operating in 13 industrial estates of

Andhra Pradesh. He found
1. Enterprises of Vaisyas constitute the single largest group but Kammas account for more than
l/4th of the total units.
2. Most of the entrepreneurs entered enterprises at the age of 30-40 years.
3. Quite contrary to the popular belief that entrepreneurs are drawn mostly from merchant classes,
white collar workmen emerged as the single largest group.
4. Half of the entrepreneurs were either graduates or post-graduates but the other half were non-
graduates.
5. Average annual earnings of all the entrepreneurs and their fathers at the time of starting the
enterprise were found to be Rs 27,000.
6. Migration was very low and the pull of the place where they lived initially was very high. More
than two-thirds of them were sons of the soil.
7. Partnership is the most popular form of organisation.
8. Entrepreneurs' family members played a useful role in shaping the entrepreneurial ambitions.
9. All but two entrepreneurs expected financial assistance from the nationalised banks and other
State agencies. Ancillary relations with large firms, dependable partners, allotment of plot/shed,
assistance from Government in importing machinery or materials were other expectations.
10. Availability of technical knowhow, ease of setting up, lack of competition and previous
employment in industry were the main reasons for choice of industry.
Sharma investigated the economic, social and geographic origins of the entrepreneurs who promoted
220 public limited non-government manufacturing companies during April, 1961 to March 31,
1963.
1. Occupational origins: An overwhelming majority (134 out of 198) of the individual

entrepreneurs came from the mercantile background. However, a shift in favour of newer
occupations, e.g., technicians, real estate owners, etc., was noticed. The entrepreneurs are
now drawn from diverse backgrounds which suggests that the base of entrepreneurship is
getting widened.
2. Educational backgrounds: About 30 per cent of the entrepreneurs were graduates, 10

percent postgraduates, 10 percent undergraduates. About 28 percent had professional
qualifications in engineering and technology and about 11 percent in law. Rest had
professional education in medicine, accounting and management.
27
3. Social and geographic origins: The traditionally trading castes of Banias-- Hindu and Jain,
Chettiars, etc. constituted 47% of all enterprising families and 49% of all promotions.
However, the share of these castes was going down as more people from other communities
(Brahmins, Patels, Loharas, Khatris, Sikhs, Aroras, etc.) joined the ranks of industrialists.
4. Nature of enterprise: Well-established business houses and professionally qualified

entrepreneurs have by and large preferred the modern sector (engineering, metals, chemicals
and electricals). On the other band, newer entrepreneurs have floated enterprises in the
traditional sector (textiles). In general individuals having technical knowledge entered related
industries in the modern sector. But a slightly lower proportion of new entrepreneurs than the
old ones possessing education unrelated to specific nature of industry went into the traditional
sector. The traditionally trading communities relied more on the modem sector while the
South Indian entrepreneurs preferred their floatations in the traditional sector.
The socio-economic background exerts significant influence on the level of entrepreneurial

motivation, access to resources, risk-bearing capacity, etc. which in turn influence significantly the
growth of entrepreneurs. In his study, H. Sadoak evaluated the socio-economic origins of 'First
Generation Entrepreneurs' who were defined as those who have first time taken entrepreneurship
after independence. He used 'Survey Interview Method'.
The main findings of his study are as follows:
1. Out of 100 units, 61 were located in backward districts.

2. 55 units were proprietorships, 27 partnerships and 18 private limited companies.
3. 60 units were having project costs up to Rs 5 lakhs and 40 units employed up to 10 persons.
4. 72 entrepreneurs were below 41 years of age.
5. About 70 percent of the entrepreneurs were graduates or postgraduates.
6. About 32 percent had experience in the same line, 40 percent in other lines and 28 percent had no
past experience. More persons without and with experience in the same line started industries in
notified backward areas.
7. In backward regions. 70 to 90 percent of project costs came from Government agencies. Most of
the first-generation entrepreneurs could not start their own projects without financial support
from the financial institutions.
8. Average investment per unit and average employment were lower in backward areas than in non-
backward areas. There is a tendency among the entrepreneurs to promote capital-intensive
industries in backward areas clue to the availability of central subsidy based on capital
investment. In order to create more employment opportunities in backward areas employment
subsidy rather than capital subsidy should be used. However, the policy of incentives and
institutional efforts have helped to create income and employment opportunities through the
promotion of new industries.
ENVIRONMENTAL FACTORS AFFECTING ENTREPRENEURSHIP
A complex and varying combination of financial, institutional, cultural and personality factors
determines the nature and degree of entrepreneurial activity at any time. The personal backgrounds
of the entrepreneurs are determined mainly by the environment in which they are born and brought
up and work. A multitude of environmental factors determine the entrepreneurial spirit among
people. The entrepreneurs in turn create on impact on the environment. The interaction between the
entrepreneur and his environment is an ongoing process. At any given point of time, the
28
entrepreneurs derive meanings from the environment prevailing at that time and try to adapt and/or
change the environment to suit their needs.
The environment, particularly the external environment is dynamic. It keeps on environment on the
organisation depends largely on the degree to which the organisation depends (immediate or remote)
on the environment and organizational response to environmental changes. All the factors outside
and inside (Individual, groups, machinery, equipment, procedures, rules, policies, etc.) an
organisation interact and affect the performance of the organisation. Some of the environmental
factors which hinder entrepreneurial growth are given below:
1. Sudden changes in Government policy.

2. Sudden political upsurge.
3. Outbreak of war or regional conflicts, e.g. ‘sons of the soil’ call.
4. Political instability or hostile Government attitude towards industry.
5. Excessive red-tapism and corruption among Government agencies.
6. Ideological and social conflicts.
7. Unreliable supply of power, materials, finance, labour and other inputs.
8. Rise in the cost of inputs.
9. Unfavourable market fluctuations.
10. Non-co operative attitude of banks and financial institutions.
Entrepreneurship is environmentally determined. The most important essential for entrepreneurial

growth is the presence of a favourable business environment. A healthy business environment
requires active social and cultural behaviour of the people, efficient economic conditions, helpful
motivating Government policies, etc. When environment mitigates entrepreneurship it must be
modified.
STATE AND THE ENTREPRENEUR
State plays now a vital role in the sphere of entrepreneurship. This role may be classified into three
categories:
1. Supporting role
2. Regulating role
3. Participative role
Support: The Government of India has launched several schemes for the growth of entrepreneurship
so as to ensure the rapid economic development of the country. It has created a vast network of
institutions and agencies which provide several types of assistance to new and established
entrepreneurs. Public financial institutions or development banks are one part of this institutional
framework. These banks at the national and State level provide financial, managerial and
promotional assistance.
At the national level Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment
Corporation of India (ICICI), Industrial Development Bank of India (IDBI), Small Industries
Development Bank of India (SIDBI) are the major institutions. Every State has its own-State
financial corporation and/ or State industrial development corporation. These agencies provide
industrial finance through term loans, underwriting and direct subscription to industrial securities.
They also render assistance in the identification and promotion of industrial projects. They have set
29
up several institutes for undertaking training and research in different fields of management. They
have sponsored technical consultancy organisations (TCOs) for providing necessary facilities and
guidance to new enterprises. 'Seed capital' is provided to new entrepreneurs on soft terms. In
addition a directory of industrial, technical and management consultants has been prepared so that
entrepreneurs can take their help in the formulation and implementation of projects. Special schemes
are available for backward areas, women entrepreneurs, sick units and technical graduates, industrial
Reconstruction Bank of India (IRCBI), and Bureau of Industrial and Financial Reconstruction
(BIFR) have been set up to prevent and correct sickness in industry. National Small Industries
Corporation (NSIC) and other bodies are operating to promote small scale entrepreneurs.
In addition to institutional framework, the Government has developed industrial infrastructure in the
form of transportation, communications, power, etc. It provides incentives and subsidies of various
types to deserving entrepreneurs. But for the assistance and facilities provided by the Government,
entrepreneurial base in India would have remained narrow.
Regulation: In order to achieve the objective of socialist pattern of society, Government of India
has enacted innumerable regulations and controls. These regulations are designed to set priorities of
industrial development, to regulate the pattern of production and distribution, to check the growth of
monopolies and concentration of economic power, etc. Some of the more important ways in which
Government regulates business activities are given below:
(i) Industrial Policy Resolutions

(ii) Industrial licensing under the Industries Development and Regulation Act, 1951
(iii) Capital Issues Control
(iv) The Companies Act, 1956
(v) Control over Monopolies and Restrictive Trade Practices
(vi) Fiscal and monetary controls
(vii) Controls over exports and imports
(viii) Foreign exchange regulations
(ix) Commodity controls
Private industrialists in India often complain that there are too many controls and these controls have
failed to achieve the intended objectives. In recent years there has been a trend towards liberalisation
of economic activities. The control and regulatory mechanism is a dynamic process and has to be
viewed against the environmental situation existing at a point of time. Different degrees of control
may be necessary at different stages of economic growth.
Participation: In India, Government has emerged as the single largest entrepreneur through the
public sector. The top ten companies in India in terms of size are all in the public sector. Key and
basic industries like iron and steel, coal mining, aeronautics, power, railways, communications,
cement, etc. are mostly owned and controlled by the Government. All major commercial banks and
insurance companies have been nationalised.
Government began to participate in industry and trade because it felt that private sector alone will
not be able to industrialise the country at the desired pace and scale. Government enterprises seek to
achieve economic (planned growth, rapid industrialisation, generation of surplus), social
(employment generation, balanced regional development, egalitarian society), and political (self-
reliance, national defence, etc.) objectives.
30
ENVIRONMENT IN UNDERDEVELOPED COUNTRIES
Development of a healthy business environment is an essential condition for growth of

entrepreneurs. New enterprises can flourish and grow only under favourable economic, social and
political conditions. Unfortunately, economic and social conditions in underdeveloped countries are
unfavourable and even prohibitive. There is lack of adequate infrastructure and capital. Social
institutions are hopelessly traditional and social attitudes inhibit entrepreneurial behaviour. People in
general are conservative and do not initiate and appreciate changes. Obviously entrepreneurship
cannot flourish under such conditions. Therefore, it is very difficult lo create and maintain the
required quantity and quality of entrepreneurship in underdeveloped countries.
Business environment in underdeveloped countries is such that entrepreneurship can be organised on

a small scale. Shortage of capital and imperfect market restricts large scale enterprises. Most of the
entrepreneurs can imitate but few can innovate. That is why these countries place emphasis on the
small scale sector as an instrument of economic planning and development. Political ideology also
requires the development of a decentralised industrial structure where ownership and economic
power are mostly distributed. The State in these countries provides preferential treatment to small
scale enterprises lo generate employment, to mobilise local capital and skills and to ensure a more
equitable distribution of income and wealth.
In order to supplement the efforts of private entrepreneurs the Government in underdeveloped

countries has become an important entrepreneur. Active participation of the Slate in business helps to
spread innovating and imitating entrepreneurship throughout the country. In addition the
Government takes various physical and financial measures to stimulate the growth of
entrepreneurship.
31
LESSON 4
GENERATION OF BUSINESS IDEA

Pawan Kumar Jain
The foremost task of a dynamic entrepreneur is the generation of an idea that is new and appears to
be worthwhile for further use. This involves a lot of creativity on the part of the entrepreneur. The
business idea arises from an opportunity in the market. It originates from real demand for any
product or service that an entrepreneur should have a keen and open mind to look for opportunities
and generate business ideas.
While selecting a business idea, the following points need adequate consideration:
(i) The business idea should enable the entrepreneur to utilise his technical and professional
skills. If an entrepreneur has knowledge of some special manufacturing techniques, because
of previous experience or otherwise, it would be easier for the entrepreneur to manage such
techniques effectively.
(ii) It should enable the use of locally available raw materials for product or service. As
compared to imported materials/ local materials are easy to procure.
(iii) It should ensure making products that have a demand, but are not freely available in the
market. It is potentially a good idea to start with a product that could be sold.
(iv) It should enable the entrepreneur to solve a current problem existing in the market. Products
may be available in the market but they do not meet the demand fully or in a satisfactory
manner. Sometimes, an existing product is used in combination with another, which is not
available. Attempts to solve such market problems do give rise to business ideas.
Sources of Information for Business Ideas
As said earlier, generation of project idea is the starting point in product development. For this, an
entrepreneur can refer to potential studies prepared by different organisations. There are a number of
potential studies conducted by several organisations like the National Council of Applied Economic
Research (NCAER), financial institutions and other promotional organisations such as Confederation
of Indian Industries (CII), etc. These may include the following:
(a) Area studies which identify development potential of particular areas like a backward
area or a district.
(b) Subsectoral studies which identify opportunities in specified subsectors (such as food
processing).
(c) Resource-based studies which identify opportunities based on utilisation of natural or
industrial resources such as forest-based industries, marine-based industries, industries using
rubber as the main raw material, etc.
(d) Studies of the product consumption pattern of the country.
(e) Surveys of existing industrial establishments.
(f) Import and export possibilities.
(g) Demand forecasts made by Industrial Chambers such as CII, FICC1, ASSOCHAM, etc.
Approaches to Generating Ideas
While exploring different sources of business ideas, an entrepreneur can use the following
approaches to generate ideas:
32
(i) Brainstorming. It helps in generating a large number of product ideas. It should be
conducted by an expert and none of the ideas mentioned should be evaluated or judged. At
this stage one should not worry if the ideas are suitable or not.
(ii) New ways of doing old things. A large number of products are being made and provided in
the market using traditional methods and practices. One approaches can be to examine if
these could be made by a different and newer method that would give the entrepreneur an
advantage over the older methods.
(iii) Converting hobby into business. Some people are adept at doing something or the other as
a hobby or for use in the house only. It is possible to use such skills to set up an enterprise.
Hobbies like photography, interior decoration, fashion designing etc. are often developed as
business ventures.
(iv) Improving an existing product. An existing product can be improved by using old
techniques with more care or using newly developed technology.
(v) Utilising waste material. Conservation and environment protections are presently getting a
lot of attention. Recycling waste or turning them into useful products are good product ideas.
Presently, energy conservation products also have good potential.
Selection of Project Idea
At this stage, all the project ideas are screened on the basis of well defined criteria to eliminate ideas
which are not promising and select the best idea. While selecting the idea, the following facts should
be considered:
(i) The project should be compatible with the objectives and resources of the entrepreneur. It
should also match his capabilities and skills.
(ii) The resources required for the project such as capital requirements, technical know-how, raw
materials, power supply etc. must be reasonably assured.
(iii) The cost structure of the proposed project must enable it to realise reasonable returns on
investment.
(iv) The effect of external environmental factors such as technological changes, state of economy,
competition, etc. should be considered.
(v) The project idea should be consistent with the government policies, licensing requirements,
environmental regulations, foreign exchange regulations, etc.
ROLE OF CREATIVITY AND INNOVATION
Entrepreneurship is the ability to create and build something from practically nothing.
Fundamentally, it is creative activity manifested by initiating and building an enterprise or an
organisation. It is knack of sensing an opportunity where others see chaos, contradiction, and
confusion. Entrepreneurship can be viewed as n creative and innovative response to the environment
and an ability to recognise, initiate mid exploit an economic opportunity.
Creativity and Innovation
There is a popular notion that creativity is a mysterious process performed by gifted or brilliant
mind. It is largely a product of sweaty trial and error. To be creative a person must work hard to
33
generate multiple solutions. Creativity is a prerequisite for innovation and it can be developed in any
individual especially when there is concern for excellence. It is an accepted fact that concern for
excellence is a common trait of most of the entrepreneurs. Hence, to become an entrepreneur one
should develop creativity in oneself. Creativity is defined as the ability to bring something new into
existence. The emphasis is on the "ability" and not the activity of bringing something new into
existence. A creative person must conceive of something new and envision how it will be useful to
the society. The action for putting the conceived idea to use is another issue. Even if no effort is
made to follow up the conceived new idea, the person is a creative person.
Innovation is the process of doing new things or doing old things through new techniques.
While creativity relates to the ability to conceive, innovation means doing new things. Ideas have
little value until they are converted into useful products or services. Innovation transforms creative
ideas into useful applications. Hence, creativity is a pre-requisite to innovation.
Stages in Creativity
According to Schumpeter : "Entrepreneurs need ideas to pursue but ideas hardly materialise
accidentally." Ideas normally pass through a long evolutionary process. In other words, ideas evolve
through a creative process whereby a person with imagination germinates ideas, nurtures them and
develops them successfully. A simple model of how the creative process works is shown in Fig. This
model reveals that there are five stage of the creative process: (a) idea germination, (b) preparation,
(c) incubation, (d) illumination and (e) verification. It should be noted that these stages are different
but interrelated. In fact, in each stage a creative individual behaves differently to move an idea from
the initial stage of germination to the last stage, i.e., verification.
Fig.: The Creative Process
An overview of the stages in creativity is given below:
34
1. Idea Germination. The germination stage is the sowing stage of the process. History
reveals that most creative ideas can be traced to an individual's interest in or curiosity
about a specific problem or area of enquiry.
2. Preparation. Once a seed of curiosity has taken the shape of a focused idea, the creative
person will make a thorough search for appropriate answers. If it is a problem that has to be
solved, he would begin by seeking information about the problem and by looking at how
others have tried to solve the same problem in the past. If it is an idea for a new product or
service there is need to carry out appropriate market research. While scientists will carry out
laboratory experiments, designers will start engineering new product ideas and marketeers
will study consumer buying habits. An individual with an idea will thereafter think about it
and concentrate his energies on rational extensions of the idea and how this can be converted
into a saleable product or service.
3. Incubation. Creative people and people with vision often concentrate intensely on an idea,
but, in most cases, they simply allow ideas time to grow without international effort. Most
ideas evolve in the minds of people with imagination and foresight while they go about other
activities. The idea once sown and given substance through preparation is put on back-burner.
This means that the subconscious mind is given enough time to assimilate information
collected from diverse sources.
Incubation is a stage of mulling it over while the subconscious intellect controls the whole
creative process. This is, no doubt, a crucial aspect of creativity because when imaginative
people consciously focus on a problem, they behave rationally in their search for systematic
solutions. In this context, one may refer to the art of synectics which means a joining together
of different and often unrelated ideas. This means that when a person has consciously worked
to resolve a problem without success, allowing it to incubate in the subconscious mind will
often lead to a resolution.
4. Illumination. Illumination occurs when a certain idea resurfaces as a realistic creation. Most
creative people normally pass through numerous cycles of preparation and incubation,
searching fur full meaning of the idea. When a cycle of creative behaviour fails to result in a
catalytic event, the cycle is repeated until the idea takes shape or disappears. This stage is
most crucial for entrepreneurs because ideas by themselves carry little practical living in a
world of illusion from creative people who find a way to creative value.
5. Verification. An idea illuminated in the mind of an individual still has little meaning until
verified as realistic and useful. The significance of entrepreneurial effort lies in the fact that it
is essential to translate an illuminated idea into a verified, realistic and useful application. In
fact, verification refers to the development stage of refining knowledge into application.
During this stage, many ideas will be rejected as they do not appear to be fruit-bearing or
having practical relevance. It is often found that a good idea has already been developed or
the eager entrepreneur finds that competitors already exist in the market. Inventors often face
such a situation when they seek patent protection only to discover similar inventions already
registered.
Innovation and Invention
Innovation implies doing new things or doing things that are already being done in new ways. It may
occur in the following forms:
35
(i) Introducing a new manufacturing process that has not yet been tested and commercially
exploited.
(ii) Introduction of a new product with which the consumers are not familiar or
introducing a new quality in an existing product.
(iii) Locating a new source of raw material or semi-finished product that was not exploited
earlier.
(iv) Opening a new market, hitherto unexploited, where the company products were not
sold earlier.
(v) Developing a new combination of means of production.
Shumpeter has made a distinction between ‘an innovator’ and ‘an inventor’. An inventor discovers
new methods and new materials. On the other hand, an innovator is one who utilises or applies
inventions and discoveries to produce newer and better quality goods that give greater satisfaction to
tin- consumers and higher profits to the entrepreneur. An inventor produces ideas and an innovator
implements them for economic gain. An inventor adds to the knowledge of the society while an
innovator adds to their satisfaction by means of newer and better products and services. It is an
innovator who commercially exploits an invention. The difference between invention and innovation
has been shown in Fig.
Fig.: Invention versus Innovation
FEASIBILITY STUDY
The feasibility study provides a basis for investment decision on an industrial project – a project of a
defined production capacity at a selected location, using a particular technology or technologies in
relation to defined materials and inputs at identified investment and production costs, and sales
revenues yielding a defined return on investment. The purpose of feasibility study is to examine the
viability of a project. A feasibility study presented in the form of a project report is needed to get
sanction for the project from the concerned authorities, including financial institutions. The various
aspects of the viability of a project are evaluated by the concerned authorities on the basis of the
feasibility study.
The feasibility study should contain an analysis of the following aspects:

(1) Technical
(2) Commercial
(3) Financial
(4) Socio-economic.
Besides these, a project report should also contain general information, including description of the
project, the status of the project in the national priority and the government policies supporting the
project, information about the promoters of the project, etc.
36
(1) Technical Aspect: The importance of technical appraisal in project evaluation is quite
obvious. Technical appraisal of a project broadly involves a critical study of the following
parameters:
(a) Location. An industrial feasibility study should define the location and site suitable
for the project. Selection of location refers to the selection of geographical area where
the project is to be located like a backward district or an industrial area and the site
refers to the exact plot in the geographical area where the project is to be put up. The
first step, therefore, is the selection of the location and site selection comes only after
the geographical location is finalised. However, the required site characteristics
should also be kept in mind while selecting the location.
(b) Plant Capacity or Size. The size of the plant or scale of operation is an important
factor that determines the economic and financial viability of a project. In many
industries, there are certain technological sizes which are economical. If the size is
sub-optimal, there are bound to be diseconomies of scale. The uneconomic size is one
of the important reasons for the poor performance of many industrial units in India.
The uneconomic size results in high cost and makes survival in a competitive market,
particularly in the international market, very difficult.
(c) Plant and Equipment. The feasibility study should define the technology required
for a particular project, evaluate technological alternatives and select the most
appropriate technology in terms of optimum combination of project components. The
various implications of the acquisition of such technology should be assessed,
including contractual aspects of technology licensing, when applicable.
The feasibility study should consider the adequacy and suitability of the plant and
equipment and their specifications, plant layout, balancing of different sections of the
plant, proposed arrangements for procurement of plants and equipments, reputation of
the equipment suppliers, etc.
(d) Infrastructure. Proper functioning of a project depends a lot on the sufficiency and
efficiency of infrastructure like facilities to transport raw materials and other inputs,
facilities to transport and distribute the output, power and fuel supply, water supply,
storage and warehousing facilities, etc.
(e) Effluent Treatment and Discharge. Disposal of effluents is a major problem for a
number of industries like chemical industry, paper industry, etc. Projects which
produce effluents should have proper facilities and arrangements for the treatment and
disposal of the effluents without causing harm to the environment. The feasibility
report should provide relevant details about the plan for effluent treatment and
disposal. It may be mentioned here that while evaluating the application for industrial
licence, government considers the arrangements proposed to ensure the safe disposal
of effluents and gases into air, water and soil.
(f) Foreign Collaboration. The project report of a project involving foreign

collaboration should contain the relevant details about the collaboration. The terms of
collaboration should strictly adhere to the government policies and guidelines in this
regard.
37
(2) Commercial Aspect: The commercial viability of a project depends on the size of the market
and demand for the products and services to be produced by the proposed project. A project
is considered commercially viable if it is able to market its products competitively in the
domestic or international market at a reasonable margin of profit.
One of the crucial factors that determines the commercial viability of an industrial project is
the market for the product(s) proposed to be manufactured by the project. Several factors like
recession, industrial sickness, technological changes, changing nature of competition, etc.,
make it all the more imperative that a detailed market survey and a thorough appraisal thereof
are carried out to assess the commercial viability of the project.
(3) Financial Aspect: Scrutiny of the financial aspects involves an analysis of the working
results, balance sheets, and cash flow for the last few years in the case of an existing concern
and also an examination of the following aspects in existing as well as new projects :
(i) The estimated cost of the project.

(ii) Financing of project with reference to the capital structure, promoter's contribution to
the total project cost, debt-equity ratio and the availability of anticipated resources.
(iii) Critical examination of the applicant's existing investment, if any, in other concerns or
any trading activities other than normal industrial activities.
(iv) Projection of future profitability.
(v) Projection of cash flow, both during the construction and operation periods, of the
project.
(vi) Internal rate of return, debt service coverage, domestic resources cost, both in respect
of import substitution and export promotion aspects, etc.
(4) Socio-Economic Aspect: In case of private sector projects, evaluation is done in terms of the
commercial profitability of a project. But in the case of public projects like irrigation
projects, power projects, transport projects or other infrastructural projects or social overhead
projects, national profitability (i.e., the net socio-economic benefits) is as important as
commercial profitability and sometimes more important than commercial profitability. Even
in respect of projects sponsored by private entrepreneurs, national profitability analysis is
important, particularly in developing countries because of the need to optimise the utilisation
of scarce resources. The national profitability of a project is measured by assessing the extent
to which it makes a net contribution to meeting the socio-economic objectives of
development.
National profitability analysis essentially involves social cost-benefit analysis (SCBA). Every
project entails some costs to the nation and produces certain benefits. The contribution of the
project to social objectives such as employment, health delivery system, transport,
communication, earning of foreign exchange, import substitution, etc. are evaluated. In the
Indian context, the socio-economic viability of a project may be judged on the basis of its net
contribution to the following objectives:
(i) Generation of employment.

(ii) Income distribution.
(iii) Foreign exchange earnings/savings.
(iv) Self-reliance.
(v) Development of backward regions.
(vi) Development of small-scale and ancillary industries.
38
(vii) Development of infrastructure.
(viii) Development of technology.
(ix) Improvement of quality of life of the general public.
Project Appraisal
Project appraisal is an indepth analytical study of the project after the feasibility study has been
completed. Project appraisal is carried out before the project is implemented. It involves a systematic
procedure for weaving the technical and financial information about the project with relevant data
about its economic environment, together into one or a few criteria on the basis of which the project
is recommended for selection or rejection. It may be noted that project preparation and its partial or
initial economic evaluation are carried out simultaneously and are closely related. However, an
overall economic evaluation is carried out only on the basis of data provided at the end of the project
formulation stage.
Project Report
A report regarding the project of a new establishment or the expansion of an already existing unit is
prepared in all its aspects by the entrepreneur or his consultant for further investigation and analysis.
The project report is useful for applying for loans from financial institutions and for getting clearance
from the government.
The project report should comprise the following information:
1. Name, address, history and other details of the entrepreneur.

2. Brief summary of the project.
3. Inputs for the proposed project such as land, building, location, plant and machinery,
water, materials, power, etc.
4. Financial aspects-cost of fixed assets, working capital, sources of finance, assets and
liabilities.
5. Cost of production and marketability.
6. Total income, operative net profit, etc.
7. Technological feasibility, licensing regulations, foreign exchange requirements, etc.
8. Information regarding marketing, present demand, new market likely to be available, foreign
exchange market, competition, marketing strategic, availability of substitutes, etc.
9. Importance of project to national economy, availability of government support, if any.
Productivity management is considered to be one of the important and difficult tasks of management.
It is also one of the more frequently discussed topics in seminars and management circles. In spite of
the attention, only a few organisations will admit having a satisfactory level of productivity. The
other areas which require adequate attention in Indian Industries are quality control and logistics
management quality management (TQM).
PRODUCTIVITY
The Concept of Productivity
In a broad sense, the term 'productivity' represents goods and services produced in relation to the
resources utilised in their production. It may be defined as the ratio of firm's total output to total
39
input, adjusted for inflation for a specified period of time. Higher productivity means efficient
use of inputs and vice versa. According to Peter Drucker, productivity represents the balance
between all factors of production that will give greater output at the smallest effort. In technical
terms, productivity may be defined as the relationship between total output and total input of a firm.
Output
Productivity = ,
Inputs
Goods and services produced

=
Labour, capital, material, machines and energy
Productivity measures the efficiency of the entire production system in the use of all inputs. The
efficiency with which resources are utilised is called productive efficiency. Higher productivity
means producing more from a given amount of inputs or producing a given amount with lesser
inputs. This yardstick of productive efficiency is very useful for comparison of productivity of
different firms in the same industry.
Measurement of Productivity of Different Factors
Productivity may be measured either on aggregate basis or on individual basis. In the first case,
output is compared with all the input factors taken together.
This is known as total productivity. In the second case, output is compared with any one of the input
factors and this is called factor productivity.
According to the International Labour Office, "The ratio between output and one of the factors of
input is generally known as productivity of the factor considered." Thus, productivity means the ratio
between output and any of the factors of production, say, labour, machines, capital, materials, land,
etc.
Productivity (in general terms) = Output / input
Productivity of Labour = Output / Number of man-hours
Productivity of Machines = Output / Number of machine-hours worked
Productivity of Capital = Output / Net capital employed
Productivity of Material = Output / Weight, volume, number or length of
raw material used
Productivity of Land = Total production of land /Area of land used.
Production and Productivity
There is a difference between the two terms, namely, production and productivity. If inputs are
increased and a large production is obtained, it does not necessarily result in increased productivity.
But if production is increased with the use of the same inputs or the same output or production is
obtained with smaller inputs, productivity is said to have increased. Production is concerned with the
end results of the contribution of various factors of production in the share of volume, value or
quantity of goods and services turned out by a plant, whereas productivity views the volume, value
of quantity of production in relation to the resources utilised in the production of such goods and
services. Thus, productivity shows the efficiency of the production unit whereas production
represents the total volume of output produced or manufactured.
40
Productivity is always concerned with the efficiency of the production unit. For example, if greater
output is achieved by the use of more inputs, it does not necessary result in increased productivity.
But if production is increased with the use of the same inputs of the same output or production is
obtained with the end result of the contribution of various factors of production where productivity
measures the relative efficiency of the various factors of production.
Productivity and Efficiency
Productivity represents the ratio between output and input. There are two broad ways of improving
upon the level of productivity : (a) increasing the output with the same amount of input, and (b)
reducing the inputs for the existing level of output. In the first case, better utilisation of resources
will help in improving the level of productivity, while in the second, economy in the use of resources
will increase productivity. When higher productivity is the outcome of better utilisation of resources,
this is referred to as 'increase in efficiency'. And when saving and conservation of resources result in
higher productivity, this is described by the term 'economy'.
Both efficiency and economy in the utilisation of resources are desirable to increase productivity. As
a matter of fact, economy and efficiency are the two sides of the same coin, i.e., productivity. The
term 'effectiveness' represents the extent to which the business objectives are achieved with the given
resources of inputs. As a matter of fact, it incorporates productivity, efficiency and economy.
Productivity and Quality
Productivity is the ratio of output to input under a given set of circumstances. But 'quality' is "the
degree to which the specifications for a product or service are appropriate to its function and use, and
the degree to which a product or service conforms to its design specifications." There is a clear
relationship between productivity and quality. In general, when quality increases, productivity is
likely to increase; because wastage is eliminated. The amount of inputs (the denominator of the
productivity ratio) required to produce outputs (the numerator) is reduced and, thus, productivity
increases whenever there is an increase in quality. But in certain cases, increase in productivity might
lead to decrease of quality. This happens when wages are linked to productivity and not quality.
Significance of Productivity
The relation between productivity and economic growth in a nation is almost self explanatory.
Productivity is an important element in the process of economic growth. When the productivity in an
industry is increased, the rate of economic growth increases automatically. Increase in productivity
in an industry leads to higher production with the most economical use of the available resources. In
other words, the cost of production is decreased. This benefits the customers by reducing the prices,
the workers by increasing their wages, and the entrepreneurs by increasing profits. Since the income
of the people increases, their demand is also increased. Increase in demand makes it possible to start
new industrial units and generate more employment. Thus, it is obvious that higher productivity is
instrumental in the economic growth of any nation.
The drive for higher productivity makes the entrepreneurs conscious about the most economical use
of the available factors of production. The productivity drive has higher significance in case of
developing countries which are facing the problems of inadequacy of capital, raw material personnel
etc.
41
The advantages of higher productivity are as follows:
(i) Increase in the efficiency of various factors of production.
(ii) Economical use of various factors of production. This decreases the total cost of production
per unit.
(iii) Decrease in overhead cost.
(iv) Better quality of goods at lower price. This has the impact of increasing the standard of living
of the people.
(v) Increase in wages and salaries to the workers. The workers also get better working conditions
and higher bonus.
(vi) Profits are increased and this facilitates internal financing of expansion programmes.
(vii) Better economic strength and stability of the enterprise. (viii) Overall growth of the economy
leading to increase in national income.
Factors Influencing Industrial Productivity (Determinants of Productivity)
The factors affecting industrial productivity are inter-related and inter-dependent and it is a difficult
task to evaluate the influence of each individual factor on the overall productivity of industrial units.
The impact of certain important factors is briefly examined below :
(i) Technological Advancement. The technological factors include degree of mechanisation,

technical know-how, product design, etc. Improvement in any of the technological factors
will contribute towards the increase in industrial productivity. In India, application of
mechanical power, introduction of semi-automatic and automatic machines, improvements in
the production processes, better integration of production processes and higher degree of
specialisation have contributed a lot towards the increase in industrial productivity.
(ii) Quality of Human Resources. The human resources play a significant role in raising
industrial productivity in most of the industries. If the employees are not adequately qualified
and/or not properly motivated, all the steps taken to increase the industrial productivity will
have no result. The employees' performance and attitudes have an immense effect on the
productivity of any industrial unit. Three important factors which influence the productivity
of labour are : (a) ability of the worker (b) willingness of the worker, and (c) the environment
under which he has to work,
The ability of the worker to perform well on his job is a very important factor in productivity.
It depends upon his inherent and acquired skills, general education, training, experience,
intelligence, aptitude, capacity, etc.
The willingness of the worker to work (i.e. motivation) depends upon a number of factors. In
many cases, system of wage payment and provision of other incentives acts as an important
motivating factor. An incentive system linked with productivity will motivate the workers to
show higher productivity. The other motivational factors are of non-financial nature. These
factors include delegation of authority, participative management, feeling of responsibility,
opportunity for innovation, etc.
Lastly, the physical conditions of work under which the worker has to do his job also affects
the job performance of the worker. Thus, better lighting, better ventilation, improved safety
devices, safe drinking water, rest rooms, etc. should be provided to the workers so that they
are able to maintain their physical health and contribute to higher productivity.
42
(iii) Availability of Finance. The ambitious plans of an industrial unit for increasing the
productivity will remain mere dreams if adequate financial resources are not available to
introduce new technical improvements and give appropriate training to the workers. The
greater the degree of mechanisation to be introduced, the greater is the need for capital.
Capital will also be required for investment in research and development activities, upkeep of
plant and machinery, etc.
(iv) Managerial Talent. The significance of managerial talent has increased with the
advancement in technology. Professional managers are required to make better use of the
new technological development. Since the modern enterprises are run on a large scale, the
managers must possess imagination, judgement and willingness to take initiative. The
managers should be devoted towards their profession and they should understand their social
responsibilities towards the owners of the business, workers, customers, suppliers,
Government and the society. This is essential if the managers want to manage their
organisations effectively. The managers should have conceptual, human relations and
technical skills in order to increase the productivity of the enterprise.
(v) Government Policy. The economic and industrial policies of the Government have an
important impact on the industrial productivity. The Government should frame and
implement such policies which create favourable conditions for saving, investment, flow of
capital from one industrial sector to another and conservation of national resources. The
Government policies should encourage investment in modern plant and machinery so as to
ensure higher productivity. It is also the duty of the Government to check the growth of
monopolistic enterprises so that the interests of the consumers and the workers are not
jeopardised.
(vi) Natural Factors. The natural factors such as physical, geographical and climatic exert
considerable impact on the industrial productivity. The relative importance of these factors
depends upon the nature of the industry, goods and services produced and the extent to which
physical conditions controlled. The geological and physical factors play a very dominant role
in determining the productivity of extractive industries like coal mining in which the physical
output per head is greatly influenced by the depth of the coal-mines, the thickness of the coal
seams, the topography of the region and the quality of coal available.
Steps to Increase Productivity
The following measures should be taken to increase productivity :
(i) Better Technology. Latest machines and equipment should be procured by the industrial
units as they are more efficient and economical. The industrial units using old machines have
low productivity and so can't complete with those units using new technology.
(ii) Improved Raw Materials. Raw materials of right quality should be procured by every
industrial unit. This will reduce wastage and increase the productivity of workers and
machines.
(iii) Scientific Selection of Workers. In order to handle various positions in the organisation,
right type of employees should be appointed. They should also be provided adequate training
in the use of raw materials, machines, etc.
43
(iv) Good Working Conditions. There should be proper arrangements of lighting, ventilation,
cleanliness, cooling and heating of work-place. If these arrangements are not proper,
productivity is likely to be low.
(v) Provision of Incentives. Workers should be offered incentives to increase their productivity.
Workers with good record of productivity should be recognised and suitably rewarded.
Productivity linked bonus plan may be introduced to get good response from the workers.
(vi) Harmonious Relations. There should be industrial peace in the organisation. Cordial
relations between the workers and the management are key to higher productivity. Higher
production targets can be achieved if there are minimum possible conflicts between the
workers and the management.
(vii) Quality and Cost Consciousness. Both the workers and the management should be
conscious about cost and quality. This will reduce unnecessary wastages in the production
process.
(viii) Industrial Research. The government should encourage industrial research by the industrial
units and research institutions. New methods and techniques of production will increase
industrial productivity in the country.
44
LESSON 5
QUALITY
Pawan Kumar Jain
The Concept of Total Quality Management (TQM)
Quality is a dynamic concept and so is its management. Total Quality Management (TQM) has been
accepted throughout the world these days. It calls for continuous improvement of quality with the
cooperation of workers through innovation in product and technology so as to meet the changing
requirements of the customer. The launching of ISO: 9000 series standards by the International
Standards Organisation is an attempt to help the industrial organisations in adopting Total Quality
Management to improve their quality and productivity and to serve their customers efficiently.
According to International Organisation for Standardisation (ISO), "Quality means the totality of
features and characteristics of a product or service that bear on its ability to satisfy stated or implied
needs". While earlier quality meant product specifications and test reports, today it refers to the
entire organisation—its systems, strengths and ability to deliver cost effective and consistently good
products or services. In simple words, quality means meeting the customer or client needs everytime.
Total Quality Management (TQM) refers to meeting the requirements of customers consistently by
continuous improvement in the quality of work of all employees. For achieving total quality, three
things are essential:
(i) Meeting customers' requirement;

(ii) Continuous improvement through management process;
(iii) Involvement of all employees.
Total Quality Management is a dynamic concept as the quality standards do not remain the same
forever. They are to be modified or changed to meet the requirements of customers and to make use
of new technology. Even the ISO : 9000 series standards have a provision of revision, modification
or deletion of quality standards after every five years. Total Quality Management also calls for
involvement of employees in this programme. Without the active involvement of employees, high
quality standards can't be achieved. Further, the whole concept of TQM is directed towards meeting
the requirements of customers.
Elements of TQM
There are three essential elements of TQM which are discussed below :
(i) Meeting Customers' Requirements. Under TQM, the term 'customer' means every user of a
product or service and not only the end-user. This is a very broad meaning of 'customer'. For
example, a product that passes through a number of stages, every next stage is a customer for
the preceding stage.
TQM aims at satisfying the requirements of customers which never remain constant, but keep
on changing with the change in time, environments, circumstances, needs, fashion, etc. Thus,
meeting the changed requirements of customers is a continuous goal of the producer.
(ii) Continuous Improvement. The change in customer requirements may be in terms of desire
for better quality product/services, bigger size, reduced cost, etc. So a producer has to cope
up with new requirements. A new process may have to be developed, or it may require a new
45
design. The production process has thus to be attuned and accelerated to meet these changing
requirements. The management has also to take care of competition in the market so that
customers do not shift to other producers- For instance, introduction of 300 ml. cold drink
bottles by one producer led other producers to shift to bottling of 300 ml. of their brands.
(iii) Involvement of Employees. As said above, TQM requires a continuous improvement in

quality of products. This calls for the improvement in the quality of work of employees
through training and development. The enhancement of skills of employees will not only
improve quality, but also bring down the cost of products through efficient use of machines
and materials and reduction of wastages. The employees must also be conscious about the
need for improvement in the quality of work. Quality circle is an outstanding example in this
regard. It is because of employees' involvement in improvement of quality that TQM is
referred to as people's process.
(iv) Managerial Commitment. TQM should be the concern of nil managers and workers in the
organisation if it is to serve its purpose fully. No doubt, TQM is planned by the top
management, the people at the middle and lower levels must be taken into confidence before
launching the TQM. Thus, each and every employee must be encouraged to become involved
in implemented, necessary skills and resources must be invested in the organisation.
Benefits of Total Quality Management
The following benefits can be derived from a sound TQM programme:
(i) Total Quality Management brings quality consciousness in the enterprise which encourages
the production of quality products.
(ii) TQM helps in providing greater satisfaction to customers by meeting their requirements. If
the customers are satisfied, the sales are increased.
(iii) It creates a good public image of the enterprise by helping it to provide goods and services of
higher quality to the society.
(iv) There is better utilisation of materials, machines, capita!, human resources, etc.
(v) Wastages are reduced to the minimum. As a result, cost of production is reduced and
profitability is increased. Even the customers could be provided goods at lower prices. The
competitive position of the firm in the market is improved.
(vi) The employees are committed to higher quality and feel highly motivated. Their morale is
also higher because of the public image of the firm and its goods in the market.
Steps in Implementation of TQM
W.E. Deming, an internationally renowned quality expert known as father of TQM, has suggested
Plan-Do-Check-Act Cycle for the implementation of TQM in any organisation. The steps in FDCA
cycle as shown in Fig. are as follows :
46
Fig.: Steps in TQM Process
(i) Lay down policies and objectives of TQM. Determine what the customer is supposed to
receive and what they are actually receiving.
(ii) Chalk out the methods to achieve TQM objectives.
(iii) Educate and train workers and managers to understand and meet the requirements of TQM.
(iv) Start the operation of TQM by introducing new product, machines, procedures, etc.
(v) Check the causes of non-conformance to quality standards.
(vi) Determine the consequences of non-conformance and place the report before the top
management.
(vii) Meet with suppliers and enlist their help in Quality improvement. Establish personal
relationships with employees so they can voice their concerns and ideas.
(viii) Work on problem prevention rather than problem correction.
Requirements of a Successful TQM Programme
For the successful implementation of TQM, the following guidelines should be followed :
(i) The objectives and policies of the firm must reflect its commitment to quality as a philosophy
of customer satisfaction.
(ii) The TQM philosophy must be effectively communicated to each and every employee and
department so that it is clearly understood throughout the organisation.
(iii) The TQM programme should be properly designed to meet the requirements of the
customers.
(iv) The participation of all the employees should be encouraged so that innovative ideas are put
forward by the employees. TQM should not be imposed upon the employees. The
management should make TQM an employees' programme through proper education of
workers.
(v) Workers and managers should be given the necessary training for the effective
implementation of TQM.
47
(vi) TQM must involve product design and improvement, adoption of new technology, systems
and procedures.
(vii) TQM should be considered a continuous programme as the requirements of customers keep
on changing. TQM should also try to integrate the operations of various departments.
ISO : 9000 SERIES
The International Standards Organisation (ISO) was founded in 1946 and has its headquarters at
Geneva in Switzerland. It has emerged as an apex institution of 'standard organisations' of 91
countries including India. The major thrust of ISO is on quality systems and well knitted procedures
for stringent quality standards to the manufacturer on quality systems and management. The series of
specifications are commonly known as ISO-9000, It may be noted that ISO-9000 is a coveted
standard not only for the quality of products, but also for the systematised planning and management
of an organisation as a whole.
The International Standards Organisation is responsible for promotion and development of

international standards and related activities including conformity assessments such as testing,
inspection, laboratory, accreditation, certification and quality assessment. ISO covers standardisation
in all fields except electrical and electronic engineering standards which are covered by International
Electrotechnical Commission (IRC).
Features of ISO : 9000 Series
The salient features of ISO : 9000 series standards are as follows :
(i) ISO : 9000 series standards call for integration of all activities which have a direct or indirect
effect on the quality of a product or service. They, in fact, lead to the implementation of the
concept of Total Quality Management (TQM).
(ii) ISO : 9000 standard series informs suppliers and manufacturers what is required of quality
oriented working systems.
(iii) It defines the basic concepts and specifies the procedures and criteria to ensure that the
outgoing product meets the customer's requirements. It requires the user organisation to
establish its own procedures.
(iv) The quality standards are designed to be user-friendly. They are generic in nature, and follow
a logical, easily understood format. They are applicable to every product, let it be a tooth
brush or a nuclear reactor.
(v) There is no compulsion to get ISO : 9000 certification. However, the customer would be sure
of the quality if the company has ISO : 9000 certificate.
ISO Standards and India
ISO standards were lain down in 1987 to be renewed every five years to determine whether they
should be confirmed, revised or withdrawn. Standards organisations of various nations have adopted
the ISO standards, though changing their numbers. For example, ISO: 9000 in Britain is known as
BS 5750, in European Community as EN 29000, in Australia AS 39000, in Denmark DS/EN 29000
etc. In India, Bureau of Indian Standards (BIS) has published IS : 14000 series as quality system
standard equivalent of ISO : 9000.
48
Exhibit : ISO Standards and Equivalent Indian Standards.
International Equivalent
S.No. Title
Standard Indian Standard
1. ISO 8402 : 1986 Quality systems - Vocabulary IS 13999 : 1988
2. ISO 9000 : 1987 Quality systems - Guidelines for selection IS 14000 : 1988
and use of standards on quality system
3. ISO 9001 : 1987 Quality systems - Model for quality IS 14001 : 1988
assurance in design / development
production, installation and servicing
assurance in production and installation
assurance in final inspection and test
Benefits of ISO: 9000
If a business concern gets ISO : 9000 certification, it will draw the following advantages :
(i) It is an internationally accepted series of quality system standards. It provides for competitive
edge in the domestic as well as international market.
(ii) It helps in achieving consistency, economy and cost effectiveness through standardisation of
operations.
(iii) It increases customer's confidence in the supplier through quality system transparency.
(iv) It is a versatile marketing tool in today's international scenario. The European countries and
some other countries don't accept foreign goods unless they carry the ISO : 9000
certification.
(v) It paves the way for total quality management (TQM) since it ensures continuous quality
improvement to meet the requirements of customers.
(vi) It reduces the need for inspection by the buyers. It thus saves time and money which would
be spent on multiple inspection of the products for conformance if it does not carry the ISO :
9000 certificate.
(vii) In India, some concessions for import have been given as per Export and Import Policy to the
companies adopting ISO : 9000 certificate.
(viii) The ISO : 9000 certification by a company is a source of motivation to its employees. The
employees feel proud in achieving excellence.
49
Exhibit: ISO : 9000 at a Glance
What Is ISO : 9000 ?

• It is a sel of written standards which comprise quality system.
• It defines the basic elements of the system through documentation.
• It creates a quality system rooted in customers' requirements.
• It ensures uniform systems that are universally recognised.
• It is based on world-recognized standards.
• The quality standards are designed to be user friendly.
How does ISO : 9000 facilitate TQM ?
• It complements TQM's emphasis on the human element.
• It helps assess the organisation's quality standards.
• It translates quality concepts into achieveable targets.
• It provides an opportunity to create and improve quality systems.
• It helps spread the message of quality across the organisation.
Whom does ISO : 9000 help ?
• Companies that market their products to the Europeans and other countries.
• Vendors supplying to companies that demand ISO : 9000 certification.
• Companies whose competitors carry ISO : 9000 certification.
• Companies with global operations.
• Companies whose transnational parent companies have ISO : 9000
certification.
QUALITY CONTROL
The Concepts of Quality and Quality Control
The word 'quality' refers to the degree of excellence of a product. In other words, the quality of a
product means the degree of excellence of the characteristics it possesses. It is a relative term, like
high, low, or inferior grade or in terms of conformity with certain specifications. The word 'control'
is used to denote the process of setting standards, measuring the performance and taking corrective
action. "Control of quality deals with the determination of quality standards and measurement
and control necessary to see that the established standards are maintained and practised."
Quality control refers to the systematic control of various factors that affect the quality of the end
product. The quality of the end product depends on the quality of raw materials used, the
manufacturing tools and equipment, the degree of skill and proficiency of the workers, working
conditions, etc. The purpose of quality control is to regulate these factors to the extent that the end
product conforms to the predetermined standards.
50
A good quality control programme involves the following steps :
(i) Establishing the standards and specifications of products on the basis of the preferences of
the customers and the cost of manufacture.
(ii) Design and use of measures for making production conform to the standards,
(iii) Selection of the process of manufacture.
(iv) Establishing a logical inspection plan and collection and analysis of data. It also includes
evaluation of methods and processes of manufacture.
(v) Coordination of activities to improve the quality.
Benefits of Quality Control
The following benefits can be derived from the efficient system of quality control:
(i) Quality control brings quality consciousness in the enterprise which discourages the
manufacture or production of sub-standard products.
(ii) Quality control ensures better utilisation of resources.
(iii) Quality control helps in providing greater satisfaction to customers. If the customers are
satisfied, the sales are increased.
(iv) Since there is less waste, the cost of production is reduced.
(v) The morale of the employees is increased. They feel that they are working in an enterprise
producing goods of higher quality.
(vi) Quality control creates a good public image of the enterprise by helping it to provide goods
and services of the higher quality to the society.
Methods of Quality Control
The methods of quality control include (1) inspection; and (2) statistical quality control. These
methods are discussed below :
(1) Inspection of Quality. Inspection is an important part of any system of production

control. It aims at getting the products of the right quality. It may be noted that inspection
may be either remedial or preventive. Preventive inspection takes place at various stages of
production in order to avoid the production of substandard products. Remedial inspection is
carried after the goods have been produced or manufactured in order to separate defective
goods from the right quality goods. Inspection is used at the time of purchase of raw
materials also. It helps in accepting a lot as good or bad one.
Following types of inspection may be carried out in workshop :
(a) Remedial inspection. This is done to separate useable raw materials or work- in-
progress from defective raw materials or work-in-progress.
(b) Preventive inspection. This is done to find out the causes responsible for defective
work and to suggest measures to overcome these causes.
(c) Operative inspection. This is done to check and control the quality standards in the
production process.
(d) Centralised and floor inspection. Inspection may be done at specified central points
in the organisation or at the place where actual operations are being carried out. The
51
former is known as centralised inspection and the latter as floor inspection. Under
centralised inspection, raw materials or products are moved to the inspection centre
where the inspectors apply various kinds of tests. But under floor inspection, the
inspectors move from department to department and inspect raw materials, work-in-
progress and finished products then and there. This is also known as patrolling
inspection.
(2) Statistical Quality Control. Statistical Quality Control (SQC) applies the statistical tools to
testing or inspection. It is based on the theory of probability. Statistical Quality Control
makes sample inspection more reliable. In case of sample inspection, a small part of a certain
lot of products is inspected and its quality is assumed to be the quality of the lot. This is
called ‘statistical inference’. The characteristics of the whole lot or population are inferred to
be like the sample. Sampling may prove to be risky because of the possibility that a sample
may not have exactly the same characteristics as the lot.
Sampling is very useful if it is reliable. It eliminates 100% inspection and is the only possible
method for products which must be tested until they fail or break. It is also the only method
to test the chemical characteristics of liquids and powdered materials or the thickness gauge
of sheet metal, paper and cloth. Sampling saves money as well as time.
Statistical quality control deals with samples and their reliability as the indicators of the
characteristics of the lot. The objectives of statistical quality control are to show how reliable
the sample is and how to control the risk associated with sampling technique. According to
Moore and Hendrick, "Statistical quality control has three general uses : (1) to control the
quality of work done on individual operations while the work is being done, (2) to decide
whether to accept or reject lots of products already produced {whether purchased or made
within the company), and (3) to furnish management with a quality audit of the company's
products."
There are two important techniques of statistical quality control, namely, Control Chart and
Acceptance Sampling. Control chart technique is used for the control of process and
acceptance sampling checks the products already completed.
52
UNIT V
LESSON 1
PRODUCT LIFE-CYCLE
Dr. Hem Chand Jain
Like human beings, products also have a limited life-cycle and they pass through several stages in
their life-cycle. A typical product moves through five stages, namely, introduction, growth, maturity,
saturation and decline.
Fig….. Time (Years) Product Life-Cycle

These stages in the life of a product are collectively known as product life-cycle. The length of the
cycle and the duration of each stage may vary from product to product, depending on the rate of
market acceptance, rate of technical change, nature of the product and ease of entry. But sales
volume and profit level change from stage to stage as shown in Fig…….. Every stage creates unique
problems and opportunities and, therefore, requires a special marketing strategy. A brief description
of each stage and the marketing strategy required for it is given below:
1. Introduction: In the first stage, the product is introduced in the market and its acceptance is
obtained. As the product is not known to all consumers and they take time to shift from the
existing products, sales volume and profit margins are low. Competition is very low,
distribution is limited and price is relatively high. Heavy expenditure is incurred on
advertising and sales promotion to gain quick acceptance and create primary demand. Growth
rate of sales is very slow and costs are high due to limited production and technological
problems. Often a product incurs loss during this stage due to high start up costs and low
sales turnover.
2. Growth: As the product gains acceptance, demand and sales grow rapidly. Competition
increases and prices fall. Economies of scale occur as production and distribution are
widened. Attempt is made to improve the market share by deeper penetration into the existing
market or entry into new markets. The promotional expenditure remains high because of
increasing competiton and due to the need for effective distribution. Profits are high on
account of large scale production and rapid sales turnover.
53
3. Maturity: During this stage prices and profits fall due to high competitive pressures. Growth
rate becomes stable and weak firms are forced to leave the industry. Heavy expenditure is
incurred on promotion to create brand loyalty. Finns try to modify and improve the product,
to develop new uses of the product and to attract new customers in order to increase sales.
4. Saturation: Market peaks and levels off during saturation. Few new customers buy the
product and repeat orders disappear. Prices decline further due to stiff competition and firms
fight for retaining market share or replacement sales. Sales and profits inevitably fall unless
substantial improvements in the product or reduction in costs are made. Product
differentiation, market segmentation and product improvement are the marketing strategies
used in this stage.
5. Decline: The sales and profits of the product fall rapidly due to its gradual displacement by
new products or evolving change in consumer preferences. As cost control becomes essential
to avoid losses, promotion expenditure is considerably reduced. Price becomes the main
weapon of competition. Many firms ultimately abandon the product to make better use of
resources. New product innovations enter the market to take the place of the obsolete and
abandoned products. This is the obsolescence stage. Finns' which fail to develop new or
improved products to arrest continuous decline in sales are forced out of business.
The concept of product life-cycle has important implications. Firstly, the concept indicates that
products have a limited life and management must develop new products or improve existing ones to
replace them to maintain sales and profits. Secondly, the product life-cycle concept shows the
expected sales volume and profit margins for a new product at various stages in its life. It can,
therefore, be used as a tool of business forecasting. Thirdly, the concept serves as a framework for
taking sound marketing decisions at each stage of the product life-cycle. Fourthly, the product life-
cycle points out the need for significant and periodic adjustments in the marketing strategy or
marketing mix of the firm. Emphasis on different elements of the marketing mix varies from one
stage to another. In initial stages, product design and promotion are important considerations. During
the middle phase, skilled distribution and effective dealer control become significant. In the final
stage, operating cost control becomes vital. Timely recognition of the need to change marketing
strategy is essential to maintain growth. In the introductory stage, informative advertising is used to
build up initial demand for the product while during maturity, persuasive advertising is required to
improve the competitive status of the product.
Stages in Product Life Cycles and Corresponding Strategies
Stage Features Possible Strategies

Introduction 1. Product unknown 1. Create favourable first
impression
2. Slow customer acceptance 2. Informative advertising––try
my product.
3. High risk of failure 3. Gifts and discounts to attract
customers
4. Main task is to create primary 4. Maintain close personal
demand contact
5. Skimming price strategy
lengthens life cycle but brings
in competition
54
Growth 1. Sales run ahead of production 1. ‘Buy my brand’ promotional
strategy
2. Profits and competition rise 2. New versions of basic

product model offered to
accommodate the growing
market
3. New competitors enter the 3. Expand distribution channels

market
4. Distribution becomes more 4. Establish a range of prices

significant
5. Prices fall 5. Persuasive mass advertising
6. Develop brand image and

preferences
7. Focus on customer service
8. Change from skimming price

strategy to competitive
pricing strategy
Maturity 1. Highest degree of competition 1. Try to maintain differential

price advantage
2. Sales rise at declining rate 2. Introduce new features into

the product
3. Extend warranties
4. Very competitive promotion

strategy
Saturation 1. Sales level off 1. Hold or increase market share
2. Supply exceeds demand 2. Focus packaging to create

more frequent use
3. Intense price competition 3. Develop new uses of the

product
4. Develop new markets
5. Create psychological product

differences
55
6. Diversify
Decline 1. Overcapacity develops 1. Integrate forward
2. Sales and price fall 2. Introduce elements of style

and fashion
3. Selective and specific

promotion
4. Defensive mergers and

acquisitions
5. Repositioning, repackaging to
revive the product
6. Informative advertising.
Product life-cycle analysis is a disciplined and periodic review that provides a profile of a product's
position. Product life-cycle concept does not perfectly explain the behaviour of all products and it
may be difficult to predict the timings of various stages. For instance, salt and sugar have never been
in the decline stage. However, by providing a life-history of a product, life-cycle concept is helpful
in designing appropriate marketing strategies. The life of a product can be prolonged or changed by
developing new uses, reducing prices, using aggressive promotion, changing package, brand or label
and by improving the product. For instance, Dupont, a company of U.S.A. has sustained the sale of
nylon by (1) promoting more frequent use among current users, i.e., necessity of wearing nylon
stockings; (2) developing more varied use of the product, i.e., fashion value of tinted hose; (3)
creating new users, i.e., earl teenagers; and (4) finding new uses for the basic material, e.g., nylon
tyres.
ADVERTISING
Meaning
Mass selling requires quick and economical dissemination of information on a large scale to
potential customers. Advertising is an effective means for this purpose. According to the American
Marketing Association, Advertising is "any paid form of non-personal presentation or promotion of
ideas, goods or services by an identified sponsor." In the words of Stanton, "advertising consists of
all the activities involved in presenting to a group a non-personal, oral or visual, openly sponsored
message regarding a product, service or idea; this message called an advertisement, is disseminated
through one or more media and paid for by the identified sponsor."
Thus, advertising includes all activities required to prepare the message (advertisement) and to get it
to the intended persons to induce action in accordance with the intent of the advertiser.
56
The main features of advertising are as follows :
(i) It is impersonal form of presentation or promotion of products, services or ideas. There is no

face to face contact with the customers.
(ii) It is paid form of communication. The advertisements are communicated through various
advertising media and the advertiser has to pay for the space or time hired to the owner of the
media.
(iii) It is issued by an identified sponsor. The advertisement contains the name of the advertiser.
(iv) It is a form of mass communication. The message is directed to a large number of persons
simultaneously.
Advertising and Publicity
Publicity is any form of commercially significant news about an organisation, a product or service
carried by the press, radio, television, etc. that is not paid for by the sponsor. An organisation may
skillfully promote itself by inducing the news media to carry news favourable to it. These days
business firms commission professional public relations experts for promotion through publicity.
Advertising is different from publicity in the following ways :
(i) Advertising is paid for by its sponsor whereas publicity is usually not paid by its sponsor.
(ii) Advertising is done by an identified sponsor but in publicity the sponsor is not identified.
(iii) Advertising is always impersonal whereas publicity may be both personal and impersonal.
(iv) In advertising the sponsor exercises direct control over the size and frequency of the message.
But in publicity control lies with the news media.
(v) Publicity has greater versatility than advertising. News, stories, editorials and special write
ups about a company or its products appear more authentic to the readers than advertisements
sponsored by a company.
(vi) Publicity is off guard because the news can reach even those who otherwise avoid
advertisement. Advertising is not off guard in this way.
Advertising and Salesmanship
Advertising and salesmanship both are techniques of promoting sales. However, there are following
differences between the two:
(i) Advertising is impersonal and indirect communication whereas salesmanship is direct face to
face and personal communication.
(ii) Advertising is mass communication whereas salesmanship is individualistic communication.
"Advertising is like a shot gun conveying message to masses while personal selling is like a
rifle shooting showing communicating with individuals."
(iii) Advertising is done through written and visual messages while salesmanship involves the use
of spoken word only. Advertising is sometimes described as salesmanship in print. However,
printed word is only one medium of advertising.
57
Distinction between Advertising and Personal Selling
Point of distinction Advertising Personal Selling

1. Nature of Impersonal and mass method of Personal and individualised
communication communication — No face to communication — Face to face
face interaction interaction
2. Payment Direct payment for each No direct payment for each

advertisement contact
3. Cost Less costly and less time More costly and more time
consuming consuming
4. Flexibility Less flexible Very flexible
5. Feedback No immediate feedback Immediate feedback available

available
6. Aims To create customers To make sales
7. Completeness Incomplete sales tool Complete sales tool
8. Sales force Recruitment, training and Requires recruitment, training

management motivation of sales and motivation of sales persons
persons not required
Despite the above differences, advertising and salesmanship are complementary to each other.
Advertising prepares the necessary ground for personal selling by making people aware of a product
and its features. It helps to reduce sales resistance by highlighting the utility and superiority of a
product or service. Advertising is a mass communication that supplements the voice and personality
of the individual seller. Salesmanship converts the potential demand into sales. It completes the task
of advertising by making actual sales to customers attracted through advertising.
To conclude, "salesmanship and advertising are similar in that the main purpose of each is to
persuade individuals outside the company to act in the company's interests. While the salesman uses
the charm of his presence to arouse the customers' interest in the product the advertising man makes
use of his art and copy. They are like cup and saucers or coat and trouser, one being incomplete
without the other."
Objectives and Functions of Advertising
The ultimate objective of advertising is to sell something—a product, service or idea. However,
advertising by itself cannot make sales. Therefore, the real objective of advertising is to influence the
behaviour of prospective buyers in a manner that will lead to higher sales. In addition to this general
objective, advertising is also used for certain specific objectives which are given below:
1. To introduce a new product by creating awareness and interest for it among the prospective
customers.
2. To enter a new market or attract a new group of customers.
3. To fight competition in the market by reminding users to buy the product.
4. To create brand preference and brand loyalty.
5. To support personal selling by opening customer's doors for salesmen.
58
6. To enhance the goodwill of the firm by promising better quality at fair prices.
7. To improve dealer relations because dealers prefer to sell products which are effectively
advertised.
8. To reach people inaccessible to salesmen.
9. To warn the public against imitations or spurious products.
Utility (Need and Significance) of Advertising
Advertising has become an indispensable function in modem business due to cut-throat competition
and mass production. It pervades our economic and social life. It helps to disseminate information
which is useful to businessmen, consumers and the society in general. Through it one can create an
indirect and impersonal link with his prospects easily, quickly and economically. The benefits of
advertising to various parties are described below :
To Producers and Traders: Advertising is helpful to manufacturers and dealers in the following
ways:
(i) Meeting competition: Advertising is an important means for facing competition. By creating
brand loyalty, it helps to maintain sales and market share. It supplements personal selling and
sales promotion. It creates preference for a particular product, opens doors for salesmen and
reinforces point of purchase display, thereby reducing the costs of creating and maintaining
demand.
(ii) Steady demand: Advertising creates regular demand by smoothening out seasonal and other
fluctuations. For instance, advertising is used to emphasise hot and cold uses of coffee to
maintain regular sales both during summer and winter. By suggesting new and more frequent
use of product, advertising helps to maintain demand throughout the year. Steady demand
enables regular production.
(iii) Higher sales volume: Advertising helps to increase demand, expand markets and enhance
sales of existing products. Through repeated advertising, a producer can create new
customers and enter new markets. It creates new wants and increases sales. Advertising is an
essential technique of mass selling.
(iv) Introduction of new product: Advertising is helpful in introducing new products by creating
awareness and gaining their acceptance. By informing consumers about the new product,
advertising stimulates their interest and persuades them to buy it. Effective advertising helps
in over-coming consumers' resistance to new products.
(v) Economies of scale: Advertising facilitates mass distribution of goods. It reduces

dependence on middlemen as dealers are more willing to stock and sell well-advertised
goods. Direct distribution and rapid sales turnover help to reduce costs of distribution. Mass
distribution and steady demand lead to large scale and regular production. As a result, several
economies of scale become available and cost of production per unit is reduced. Investment
in inventories can be reduced.
(vi) Goodwill: Advertising helps in creating a good image of the firm and reputation for its
products. A favourable image increases the capacity of the firm .to survive competition and
depression. It is through effective advertising that Tatas, Birlas, etc. have become household
names. It has rightly been observed that "doing business without advertising is like winking
59
at a girl in the dark. You know what you are doing but no one else knows". By building
goodwill advertising enables business firms to obtain repeat orders.
(vii) Employee morale: By building reputation of the firm, advertising provides a sense of security
to employees and improves their morale. Salesmen feel happy as their task becomes easier
when the product and its producer are known to customers. In a well reputed firm, executives
have a feeling of pride and job satisfaction which are necessary for better performance.
To Customers: Advertising is beneficial to consumers due to the following reasons :
(i) Convenience: Advertising makes purchasing easy by reducing the time and effort involved
in shopping. People become aware of the source and availability of different products and
need not search them out. They can make better choice among different varieties.
(ii) Education of consumers: Advertising provides education and knowledge to consumers about
new products and their diverse uses. Consumers get the benefit of better advice in safe and
proper use of products and develop new ways of life. In this way advertising makes for better
living.
(iii) Lower prices: Effective advertising reduces costs due to large scale production and
elimination of wholesalers. As a result customers get goods at lower prices. Prices of
advertised goods fluctuate less widely and unscrupulous traders cannot easily exploit
consumers by overcharging. Many expensive products of yesteryears have come within reach
of the common man due to continuous advertising and consequent reduction in prices.
Advertising helps to eliminate unnecessary middlemen, thereby making products cheaper for
the consumers.
(iv) Better quality: Advertising is generally done through brand names. Producers try to create
special features in their products to successfully communicate product differentiation. Need
to find arguments in advertising and desire to live upto the image, leads them to improve
quality and product design. Consequently, consumers get better quality and variety of goods.
"Large scale advertising of a product can be really effective if there is a rigid quality control
which enables the customer to buy products of the same standards of performance
anywhere."
(v) Consumers' surplus: Advertising brings the customer closer to the producer so that each can
fully appreciate the needs of the other. Such understanding helps in better matching of
products and services with human needs. Through advertising consumers better appreciate
the utility of products and derive higher satisfaction from their consumption. This satisfaction
and pleasure derived by them from the products is called consumers' surplus.
To Society: Advertising serves the society in the following ways :
(i) Employment: Advertising provides direct employment to a large number of people engaged
in designing, writing and issuing advertisements. Indirectly, advertising increases
employment opportunities by increasing the volume of production and distribution.
(ii) Standard of Living: Advertising improves the standard of living of the people by promoting
variety and quality in consumption. It educates people about new uses of products and
provides information for developing better ways of life. To quote Franklin D. Roosevelt, the
60
late President of America, "advertising brings to the greatest number of people actual
knowledge concerning useful things, it is essentially a form of education and the progress of
civilisation depends on education."
(iii) Sustains the Press: Advertising provides an important source of revenue to newspapers,
magazines, radio and television. As a result public gets news at lower rates and the
circulation of newspapers and magazines increases. Press is the guardian of public opinion
and by helping it to remain independent, advertising promotes liberty and democracy in the
country. By subsidising the press, advertising serves as a bright symbol of freedom of choice.
(iv) Stimulates Research and Development: Advertising can be successful only when it is
backed by new and better products. To derive maximum benefit from advertising in the
competitive market, every producer tries to differentiate his products from the competitive
products. Big business firms have research and development departments to develop new
products and new uses. Research and development becomes necessary also to maximise
.efficiency and to minimise costs of production. In the absence of advertising and mass
distribution, many products would remain confined to the laboratory. By promoting research
and development, advertising helps in the process of rapid industrialisation.
(v) Incentive to Progress: Advertising is a great motivating force. In the words of Sir Winston
Churchill, "Advertising nourishes the consuming power of man. It creates a desire for better
standard of living. It spurs individual exertion and greater production." People are induced to
work hard and earn more to buy new products brought to their knowledge through
advertising.
(vi) Art and Culture: Advertising promotes the creative energies of people required in
designing and developing advertisements. Commercial art is largely the creation of
advertising. Advertising provides a glimpse of national life, a running commentary on the
way people live and work. Advertising also provides entertainment to the public. Many
sponsored programmes on radio and television have become very popular due to their
entertainment and aesthetic value.
Advertising is thus a great force in modem society. It serves as an accelerator of economic progress
by promoting savings and investment. It is the backbone of international trade. In a developing
country like India, it helps to accelerate the rate of capital formation and foreign exchange earnings.
Advertising can be a healing force in a society torn by race, language and caste conflicts, a means of
national integration, civilisation and human welfare. Advertising is to business what steam is to
machinery the great propelling power, the lubricant of the machinery of commerce. It pays to
advertise.
Is Advertising a Social Waste?
Several objections have been raised against advertising and some people criticise advertising as a
social waste. The main points of criticism are as follows:
1. Higher Prices: It is argued that large amounts spent on advertising increase the cost of
distribution which is transferred to customers in the form of higher prices. This objection may
be true in case of inelastic demand when advertising merely transfers demand from one
producer to another. But effective advertising often creates demand and increases the scale of
production. Large scale operations result in lower costs and lower prices. In developed
61
countries, business have reduced costs and prices while spending millions on advertising
every year. "As a competing tool, advertising is perhaps less costly than many other tools
which will be used to a greater degree if advertising were banned."
2. Wasteful Consumption: Advertising multiplies the needs of people and encourages

unhealthy consumption. By exploiting human sentiments, it persuades people to buy products
which they do not need or cannot afford. Advertising promotes artificial living and
extravagance and creates demand for trivial goods. "Modern society has become a society of
chocolate, Campa Cola and Lolipops instead of natural and wholesome food largely because
of advertising." This allegation may be true to some extent but it is based on the assumption
that satisfaction of psychological needs is not as important as that of physiological needs.
Moreover, new tastes and finer emotional experience of life are necessary for the progress of
civilisation. By itself, advertising cannot force people to buy things which they consider
unnecessary.
3. Misleads the Consumer: It is said that advertising is often deceptive and misrepresents
facts to the consumer. Exaggerated or tall claims and flowery language are used to dupe
unwary consumers. They are induced or defrauded through bogus testimonials and false
comparisons to buy goods of doubtful value. There is no denying the fact that some firms
indulge in false and misleading advertising and unscrupulous use of advertising by them
destroys public confidence in advertising. But just because a few people misuse advertising
does not mean that advertising itself is bad and unnecessary.
4. Creates Monopoly: Advertising creates brand preferences and restricts free competition.
Large firms which can afford huge amount of money on advertising eliminate small firms by
creating brand monopoly. Advertising thus encourages the survival of the mightiest rather
than the best. But advertising creates only a temporary brand monopoly as after some time
other brands offer competition. For instance, 'Amul' brand butter enjoys monopoly of brand
but has to face competition from 'Vita' and other brands of butter. In the long run, advertising
"often enables the small businessmen to compete with large concerns as well as to start new
business."
5. Wastage of National Resources: In order to make use of advertising, producers create trivial
differences in their products. Valuable resources that can be used to create new industries are
wasted in the production of needless varieties and designs. Vance Packard, in his book "The
Waste Makers", gives several interesting examples of how producers in America coax
consumers to replace their cars, radios etc., much before their useful life comes to an end.
Appearance, design and style have become more important than the physical utility of the
product. Manipulative and combative advertising leads to criminal wastage of resources.
"The natural resources, capital equipment and labour energy which go into the production of
new items to take the place of the discarded ones amount to waste when measured in terms of
social well-being." Valuable stationery, time and energy used in advertisements go waste as
most of the advertisements either escape the attention of the people or are ignored by them.
6. Undermines Social Values: Modem advertising exerts such a corrupting influence on

cultural and social life that it is not only wasteful but immoral. It degrades ethical and
aesthetic values through nude photographs and indecent language. Many advertisements are
highly objectionable and socially undesirable as they encourage social evils like drinking and
smoking. To some extent advertisements may really be in poor taste but majority of them
62
help to improve social standards. The improved attitude towards hygiene is attributable in no
small measure to the extensive advertising of detergents.
Despite its limitations, advertising is an essential marketing function in modern business. If

advertising were wasteful and unnecessary, it must have been discarded long ago. It becomes
wasteful and objectionable only when it is used dishonestly for anti-social ends. In fact, advertising
is the cheapest selling tool and its abolition will require use of more expensive selling techniques.
"As long as we insist on 'maintaining competition as the core of our economic system, the
elimination of advertising would increase rather than reduce economic waste."
Money spent on advertising is not wasteful or unnecessary provided it is spent in a scientific and
responsible manner. The drawbacks of advertising can be removed through concerted action on the
part of advertisers, public and the Government. Businessman should avoid wasteful and excessive
advertising. Trade associations and chambers of commerce should set up Better Business Bureaus to
exercise self-regulation and control over obscene and deceptive advertising. A suitable code of
conduct may be formulated to ensure that all advertisers follow ethical standards in their
advertisements. Newspapers, radio and television authorities should not accept undesirable
advertisements. Consumers' associations can act as a countervailing force against manipulating and
misleading advertising. Consumers should not get carried away by such advertisements. They should
verify the claims made in advertisements before purchasing a product. Customers' reactions to
advertisements should be invited. Writings on walls and public buildings and noisy advertisements
should be banned. An agency like the Federal Trade Commission of U.S.A. may be constituted to
check deceptive and obscene advertising. “The maintenance of acceptable ethical standards in all
forms of advertising is essential if advertising is to fulfil its proper function as a marketing tool.”
SALES PROMOTION
Sales promotion consists of all promotional activities other than advertising, personal selling and
publicity that help to increase sales through non-repetitive and one time communication. According
to the American Marketing Association, sales promotion includes "those marketing activities other
than personal selling, advertising and publicity that stimulate consumer purchasing and dealer
effectiveness, such as point of purchase displays, shows and exhibitions, demonstrations and various
non-recurring selling efforts not in the ordinary routine."
The ultimate aim of sales promotion is increasing the sales and profits but it is different from
advertising and personal selling in approach and techniques. Personal selling involves face to face
contact with specific individuals while advertising is directed at a large number of potential
customers. Sales promotion serves as a link between the two by focussing selling effort on selected
small groups of people. Sales promotion usually involves non-recurring and non-routine methods, in
contrast to the routine and recurring nature of advertising and personal selling. Under advertising, the
media is not owned and controlled by the advertiser except in direct mail advertisements but sales
promotion methods are controlled by the advertiser. Advertising and personal selling are essential or
basic ingredients of promotion mix while sales promotion is a supporting or facilitating element of
promotional strategy. Sales promotion bridges the gap between advertising and personal selling. It
supplements and reinforces the personal selling and advertising efforts of the firm. Sales promotion
covers miscellaneous stimulants directed to the consumers and dealers. It may stimulate consumer
buying at the point of sale or improve dealer effectiveness at the retail outlets.
63
Sales promotion is of two kinds — consumer sales promotion and dealer sales promotion. Consumer
sales promotion includes activities designed to inform and educate the consumer and to stimulate
demand. Examples of consumer sales promotion are samples, demonstrations, gift coupons,
premium and price offers, fashion shows or parades, bonus stamps, contests, exhibition-cum-sale,
etc. Dealer sales promotion is used to help dealers and to improve dealer effectiveness. It includes
free display material, free window display services, free demonstrations and trials, trade deals
offering discounts and gifts, sales contests for dealers or salesmen, trade show, dealers' conference,
house organs, training of dealers' sales force, advertising display allowances, etc.
Sales promotion activities are designed to achieve the following objectives :

(a) to introduce new products;
(b) to attract new customers;
(c) to increase sales during slack periods;
(d) to encourage dealers to carry large stocks;
(e) to improve the public image of the firm.
Techniques of Sales Promotion
At present a wide variety of devices are available for sales promotion. Some of the important sales
promotion methods are described below:
1. Distribution of Free Samples: Many a times free samples of low priced and repeat sales
items are distributed to selected people to gain consumer acceptance and to popularise the
product. The sample may be distributed in the shop or door-to-door. This is an effective
device of sales promotion as consumers can test the product before buying it. It is particularly
useful in the introduction of new products. Explanatory literature stating the features and uses
of the product can be added to the sample. However, this device is costly and can be used by
big firms. It is not suitable for products which are very expensive or do not give repeated
sales.
2. Coupons: Some firms issue coupons to prospective buyers through newspapers, direct mail,
dealers, package and door-to-door salesman. A coupon is a certificate that entitles its holder
to a specified saving or discount on the purchase of a particular product. The holders of
coupons present their coupons to retailers and get the product at a reduced price. The
manufacturer reimburses the retailers for the value of coupon redeemed by them in addition
to some commission to cover handling costs. Coupons induce the retailers to stock the
product and consumers are stimulated to buy the product.
3. Premiums: A sales premium or bonus offer is the offer of an article free of cost or at a
nominal price on the purchase of a specified product. For instance, one 'Lux' toilet soap may
be given free on the purchase of an economy pack of' Surf detergent powder. A premium is
also known as a combination offer. It is a practical persuasion to buy that helps to increase
immediate sales. Premiums are used in case of convenience goods like detergents, toothpaste,
toilet preparations which are bought frequently. Success of the premium offer depends upon
judicious choice of the bonus item which should be useful and in good taste.
Premiums can be of following types:
(a) With pack premium: In which the bonus item is included either inside or outside the
package, e.g., one spoon free in the packet of Horlicks.
(b) Price off premium: Which implies a reduction in price on the purchase of a large or
64
economy pack.
(c) Money-refund premium: Wherein the cost of the article is fully or partially refunded
on the presentation of the proof of purchase, e.g., wrapper, cash memo, etc.
(d) Extra-quantity premium: Under which a customer can get one unit of the product
free on the purchase of specified units, e.g., one tooth brush free on the purchase of
six tooth brushes.
4. Trading Stamps: Trading or bonus stamps are issued by retailers to customers who buy
goods from them. The number of stamps given to a buyer depends upon the amount of
purchases made by him. For instance, in India Ramon Bonus Stamps are issued at the rate of
2½ per cent of the purchase amount. These stamps are given free of charge and the customer
can redeem them to obtain products out of the specified list. This technique induces
customers to buy their requirements from the retailers who offer such stamps. The purpose is
to increase customer loyalty.
5. Point of Purchase Materials: Such materials include banners, signs, photos, posters, strips,
price cards, racks and other in store promotional tools. They are demonstrated or displayed at
the place where the customer makes actual purchases. Almost every general retail shop
displays posters and signs promoting soft-drinks, cigarettes, confectionery and other
consumer products. The popularity of point of purchase display is increasing due to the
proliferation of brands and expansion of self-service stores with large inventories. Such
materials are an effective device of sales promotion as they remind customers about the brand
name and promote impulsive buying. They should be attractive and self-explanatory. They
are also called dealer aids.
6. Prize Contests: Under this device, consumers are given rewards for analytical or creative
thinking about the product in the form of slogan writing, sentence completion, problem
solving quiz, etc. Rewards are given to successful participants in the form of cash prizes,
merchandise or free travel. Such contests help to create consumers' interest in the product,
provide new ideas for advertising and may reveal buying motives. Contests are generally held
through newspapers, magazines and radio. Such contests may also be organised for salesmen
and dealers to induce them to devote greater effort or to obtain new sales ideas. To be
successful sales contests should be properly planned and objectively executed. The date, time
and period of the contest should be such that all people have equal opportunity. Entries
should be judged by competent people in a fair manner and rewards should be given
promptly.
7. Fairs and Exhibitions: Trade shows, fashion shows, or parades, fairs and exhibitions are an
important technique of sales promotion. They provide a forum for the exhibition or
demonstration of the product. Free literature can be distributed to introduce the firm and its
products to the public. Fairs and exhibitions are organised usually by big firms or trade
associations. At these fairs and exhibitions, business firms are allotted stalls wherein they
display their products. Fairs and exhibitions have wide appeal as several people visit them.
Customers can be attracted through free gifts, special concessions and free demonstrations of
technical and speciality products. They provide an opportunity to the visitors to observe the
competing products and help to promote sales. For instance, the Trade Fair Authority of India
organises trade fairs of various types in New Delhi. The National Book Trust organises after
every two years a World Book Fair at New Delhi where publishers all over the world are
invited to display their publications. Sometimes, sales conventions or conferences of dealers
are held. Producers of garments often organise fashion shows to promote their products.
65
8. Merchandising Aids: These refer to the services provided to induce commercial buyers to
purchase goods in large quantity. Such aids include training in stores layout and inventory
control, advertising, product demonstrations, etc.
9. Clearance Sale: Sales at reduced prices may be organised at important festivals or other
occasions. Such sales attract a large number of customers and help to clear accumulated
stocks. For instance, the Khadi Gramodyog Bhavan in New Delhi offers special discount on
Khadi goods on Gandhi Jayanti.
10. Public Relations: Public relations activities include greetings or thanks in newspapers,
donating space for noble causes, etc. Their purpose is not to create immediate demand or to
increase sales. They are designed to create a good image of the firm in the society.
66
LESSON 2
CHANNEL DECISIONS
Dr. Hem Chand Jain
A channel of distribution or trade channel is the path or route along which goods move from
producers to ultimate consumers or industrial users. It is the distribution network through which a
producer puts his products in the hands of actual users. It is the pipeline through which products flow
during their journey to the market. A trade or marketing channel consists of the producer, consumers
or users and the various middlemen who intervene between the two. The channel serves as a
connecting link between the producer and consumers. By bridging the gap between the point of
production and the point of consumption, a channel creates time, place and possession utilities. A
channel of distribution represents three types of flows :
(a) Goods flow downwards from producer to consumers;

(b) Cash flows upwards from consumers to producer as payment for goods; and
(c) Marketing information flows in both directions. The downward flow includes information on
new products, new uses of existing products, etc. The upward flow of information is the
feedback on the wants, suggestions, complaints, etc. of ultimate
consumers or users.
Nature and Significance of Channel Decisions
Channel decisions refer to the managerial decisions concerning the selection of the most suitable
routes or paths for the distribution of goods from the producer to various consumers or users. Such
decisions involve choice of a channel, determination of market coverage (number of middlemen) and
the selection of particular middlemen or dealers.
The choice of a suitable channel for the distribution of the firm's products is an important decision
area in the field of marketing. It is an important policy decision in marketing management due to the
following reasons:
(i) Distribution channel is an important element of the marketing mix of a firm and other
elements are closely interrelated with and interdependent on the channel of distribution.
Therefore, choice of channel influences other marketing decisions like pricing, promotion
and physical distribution. A mistake in the choice of channel may affect adversely the whole
marketing mix of the firm.
(ii) The cost involved in the use of a distribution channel enters the price of the product that the
ultimate consumer has to pay. Due to a wrong decision regarding channel, distribution cost
may be very high and sales might be very limited. On the other hand, a sound channel
decision enables the firm to cut down costs and maximise sales revenue. Thus, channel
influences sales .volume and profits.
(iii) A product or service is really useful to consumers only when it is available at the right time
and place. The channel decision determines where and when the product will be available to
ultimate consumers or users.
(iv) The choice of a marketing channel involves long-term commitment of the firm. The relations
between the manufacturer and the middlemen depend largely upon the choice of appropriate
channels of distribution. Changes in the channel are very difficult and costly.
(v) If the choice of channels is proper, fluctuations in production can be reduced due to
continuous and effective distribution. The stability of production will help to ensure steady
employment and proper budgetary control. The manufacturer can continuously monitor the
67
sales and stock of his middlemen to exercise effective control over distribution network.
Types of Distribution Channels
Several channels are used for the distribution of products of different types. They vary in the number
and types of middlemen. Some channels are short and direct permitting the producer to have a close
touch with the customers while others are long and indirect involving the use of several types of
intermediaries. The various channels of distribution may broadly be classified as under:
Distribution Channels
1. Manufacturer-consumer: This is the shortest and simplest channel involving direct sale of'
goods and services by the producer to the consumers. No middleman or intermediary is
present between the producer and the consumer. The producer may sell directly to consumers
through door-to-door salesman, direct mail and through his own retail stores. For instance,
Bata India Ltd. has set up its own retail shops throughout the country to sell shoes and other
products through direct contact with customers. Industrial products of high value are
generally sold through this channel. Some firms use direct selling to distribute consumer
products like shoes, clothes, books, hosiery goods and cosmetics. Small producers and those
producing perishable commodities also sell directly to the local customers.
This channel is very fast and economical. The producer has direct contact with his customers
and full control over distribution. But the expert services of middlemen are not available and
the producer himself has to perform all the marketing activities. Large investment is required
to create facilities for direct selling. Therefore, this channel is more popular among big and
well-established firms. In recent years, direct selling has become increasingly popular due to
increasing competition, need for control over distribution costs, wide product lines, technical
nature of products, availability of public warehouses and desire to reduce dependence on
middlemen.
2. Manufacturer-retailer-consumer: Under this channel, the manufacturer sells to one or

more retailers who in turn sell to the ultimate consumers. Various marketing functions are
performed by the producer and the retailers. This channel is popular when the retailers are big
and buy in large quantities, e.g., departmental stores, chain stores and super markets. This
channel is often used for the distribution of consumer durables and products of high value.
Automobiles, home appliances, readymade garments, shoes and perishable products are often
sold through this channel. This channel relieves the manufacturer from much burden of
selling and at the same time provides him control over distribution.
68
3. Manufacturer-wholesaler-retailer-consumer: This is the 'traditional' or normal channel for
the distribution of consumer goods. This channel is suitable where the producer has limited
finance and a narrow product line or where the wholesalers are specialised and provided
strong promotional support. Small producers and small retailers find this channel most
convenient especially in case of products with widely scattered markets. This channel is also
used in case of consumer durables which are not subject to frequent changes in fashion.
Producers of industrial goods may use an industrial distributor who serves as a wholesaler as
well as a retailer.
4. Manufacturer-agent-retailer-consumer: When the retailers are few or geographically

concentrated, distribution through agents may be more economical than through wholesalers.
For instance, a manufacturer may employ selling agents and brokers to sell his products to
retailers. Sometimes even the retailer is bypassed and the agent sells directly to institutional
buyers like consumer cooperatives, business firms, educational institutions and government
agencies or departments. This channel is commonly used to sell textiles, agricultural
products, machinery and equipment, etc. In case of industrial goods, an agent may be used in
place of industrial distributor to reach industrial users.
5. Manufacturer-agent-wholesaler-retailer-consumer: This is the longest channel of

distribution. It is used when the manufacturer wants to be fully relieved of the problem of
distribution. The producer hands over his entire output to the selling agent who distributes it
among a few wholesalers. Each wholesaler sells to a number of retailers who in turn sell to
ultimate consumers. In case of cloth this channel is widely used. For the sale of many
industrial products an industrial distributor is employed due to the storage facilities provided
by him. This channel results in wider distribution of the product.
Choice of a Channel of Distribution
Choice of a channel of distribution involves the selection of the best possible combination of
middlemen or intermediaries. The objective is to secure the largest possible distribution at minimum
costs. The channel must be flexible and efficient. It should be consistent with the declared marketing
policies and programmes of the firm. Such a channel can be selected by evaluating alternative
channels in terms of their costs, sales potential and suitability. The factors affecting the choice of
distribution channels may be classified as follows:
1. Product Considerations: The nature and type of the product have an important bearing on
the choice of distribution channels. The main characteristics of the product in this respect are
given below:
(a) Unit value: Products of low unit value and common use are generally sold through
middlemen as they cannot bear the costs of direct selling. Low priced and high
turnover articles like cosmetics, hosiery goods, stationery and small accessory
equipment usually flow through a long channel. On the other hand expensive
consumer goods and industrial products, e.g., jewellery, machines are sold directly by
the producers.
(b) Perishability: Perishable products like vegetables, fruits and bakery items have
relatively short channels as they cannot withstand repeated handling. Same is true
about articles of seasonal nature. Goods which are subject to frequent changes in
69
fashion and style are generally distributed through short channels as the product has to
maintain close and continuous touch with the market. Durable and non-fashion
articles are sold through agents and merchants.
(c) Bulk and weight: Heavy and bulky products are distributed directly to minimise
handling costs. Coal, bricks, stones, etc., are some examples.
(d) Standardisation: Custom-made and non-standardised products usually pass through

short channels due to the need for direct contact between the producer and the
consumers. Standardised and branded goods can be distributed through middlemen.
(e) Technical nature: Products requiring demonstration, installation and after-sale

service are often sold directly. The producer appoints sales engineers to sell and
service industrial equipment and other products of technical nature. Consumer
products like television, refrigerator, electric mixer-grinder, washing machines, etc.,
are sold through retailers but the after-sale service is generally provided by the
manufacturer.
(f) Product line: A firm producing a wide range of products may find it economical to
set up its own retail outlets. On the other hand, firms with one or two products find it
profitable to distribute through wholesalers and retailers.
(g) Age of the product: A new product needs greater promotional effort and few
middlemen may like to handle it. As the producer gains acceptance in the market,
more middlemen may be employed for its distribution. Channels used for competitive
products may also influence the choice of distribution channels.
2. Market Considerations: The nature and type of customers is an important consideration in

the choice of a channel of distribution. Following factors relating to the market are
particularly significant:
(a) Consumer or industrial market: The purpose of buying has an important influence
on channel. Goods purchased for industrial or commercial use are usually sold
directly or through agents. This is because industrial users buy in a large quantity and
the producer can easily establish a direct contact with them. To ultimate consumers,
goods are sold normally through middlemen.
(b) Number and location of buyers: When the number of prospective buyers is small or
the market is geographically located in a limited area, direct selling is easy and
economical. In case of large and widely scattered markets, use of wholesalers and
retailers becomes necessary.
(c) Size and frequency of order: Direct selling is convenient and economical in case of
large and infrequent orders. When articles are purchased very frequently and each
purchase order is small, middlemen may have to be used. A manufacturer may use
different channels for different types of buyers. He may sell directly to departmental
and chain stores and may depend upon wholesalers to sell to small retail stores.
(d) Buying habits: The amount of time and effort which customers are willing to spend
in shopping is an important consideration. Desire for one-stop shopping, need for
70
personal attention, preference for self- service and desire for credit also influence the
choice of a trade channel.
3. Company Considerations: The nature, size and objectives of the firm play an important role
in channel decisions:
(a) Market standing: Well-established companies with good reputation in the market are
in a better position to eliminate middlemen than new and less known firms.
(b) Financial resources: A large firm with sufficient funds can establish its own retail
shops to sell directly to consumers. But a small or weak enterprise which cannot
invest money in distribution has to depend on middlemen for the marketing of its
products.
(c) Management: The competence and experience of management exercises influence

on channel decision. If the management of a firm has sufficient knowledge and
experience of distribution, it may prefer direct selling. Firms whose management
lacks marketing know-how have to depend on middlemen.
(d) Volume of production: A big firm with large output may find it profitable to set up
its own retail outlets throughout the country. But a manufacturer producing a small
quantity can distribute his output more economically through middlemen.
(e) Desire for control of channel: Firms which want to have close control over the
distribution of their products use a short channel. Such firms can have more
aggressive promotion and a thorough understanding of customers' requirements. A
firm not desirous of control over channel can freely employ middlemen.
(f) Services provided by manufacturers: A company that sells directly has itself to
provide installation, credit, home delivery, after-sale service and other facilities to
customers. Firms which do not or cannot provide such services have to depend upon
middlemen.
4. Middlemen Considerations: The cost and efficiency of distribution depend largely upon the
name and type of middlemen as reflected in the following factors:
(a) Availability: When desired type of middlemen are not available, a manufacturer may
have to establish his own distribution network. Non-availability of middlemen may
arise when they are handling competitive products or they do not like to handle more
brands.
(b) Attitudes: Middlemen who do not like a firm's marketing policies may refuse to
handle its products. For instance, some wholesalers and retailers demand sole selling
rights or a guarantee against fall in prices.
(c) Services: Use of those middlemen is profitable who provide financing, storage,
promotion and after-sale services.
(d) Sales potential: A manufacturer generally prefers a dealer who offers the greatest
potential volume of sales.
71
(e) Costs: Choice of a channel should be made after comparing the costs of distribution
through alternative channels.
(f) Customs and competition: The channels traditionally used for a product are likely to
influence the choice. For instance, locks are sold usually through hardware stores and
their distribution through general stores may not be preferred. Channels used by
competitors are also important.
(g) Legal constraints: Government regulations regarding certain products may influence
channel decision. For instance, liquor and drugs can be distributed only through
licensed shops.
Distribution Policy
After selecting the channel of distribution, a manufacturer has to determine the number of
middlemen to be used or the intensity of distribution. This depends on the degree of market coverage
desired for the product. Market coverage reflects the channel strategy and can be of three types:
(i) Intensive Distribution: Under this strategy, a manufacturer tries to sell his product through
every possible outlet in order to obtain the maximum exposure. Such a distribution policy is
usually employed for the marketing of consumer products of everyday use, e.g., toothpaste,
cigarettes, cosmetics, food products, soaps, etc. In the purchase of these convenience goods,
consumers prefer the nearest location. Therefore, an attempt is made through intensive selling
to go as near to the ultimate consumer as possible. Intensive distribution is sometimes used in
case of some industrial goods like spare parts, lubricants and other supplies. Intensive
distribution can be successful when the manufacturer obtains cooperation from all middlemen
and advertises his products on a large scale.
(ii) Selective Distribution: Selective distribution implies the use of a few selected middlemen in
each sales territory. This policy may be employed at both the wholesale and retail levels. This
type of distribution is appropriate in case of speciality goods and accessories. In such
products, consumers generally have a brand preference so that the use of every outlet is not
necessary. Selective distribution is more economical and provides the manufacturer sufficient
control over the distribution of his products. As the number of middlemen is limited, each
one of them gets sufficient sales volume which is helpful in securing their cooperation.
Dealers are likely to take greater interest in the display and promotion of the products.
(iii) Exclusive Distribution: Such distribution involves the use of one dealer in each sales
territory. The dealer is granted the exclusive right to sell the product in the specified territory
through an agreement with the manufacturer. The dealer is prohibited from dealing in the
competitive products. Exclusive selling is adopted in case of shopping and speciality goods
enjoying brand loyalty. In the purchase of such goods, the consumer spends lot of time and
effort. It is also used when the product requires huge investment in stocks and showrooms,
e.g., automobiles and household appliances like mixer grinder, cooking range, etc. Exclusive
distribution provides full control over distribution and reduces distribution costs. It also
increases the prestige of the product. However, this policy is less flexible and does not permit
wide distribution of the product.
72
Choice of Middleman
After deciding the number of middlemen, a manufacturer has to select the particular dealers through
whom he will distribute his products. While selecting a particular wholesaler or retailer, the
following factors should be taken into consideration:
(i) Location of the dealer's business premises;

(ii) Financial position and credit standing of the dealer;
(iii) Knowledge and experience of the dealer;
(iv) Storage and showroom facilities of the dealer;
(v) Ability of the dealer to secure adequate business and to cover the market;
(vi) Capacity of the dealer to provide after-sale service;
(vii) Willingness of the dealer to handle the manufacturer's products;
(viii) The degree of cooperation and promotional service he is willing to provide;
(ix) General reputation of the dealer and his sales force;
(x) Nature of other products (competitive or complementary), if any, handled by the dealer.
POLICY INITIATIVES FOR ENTREPRENEURIAL GROWTH
To mention a few policy measures that have positively created an ideal environment entrepreneurial
growth are:
(a) Identification of backward areas and announcement of a number of concessions

and incentives for the entrepreneurs to start their ventures in such areas;
(b) Change In the attitude of both Central and State Governments towards private
enterprise in general and promotion of small scale industries in particular;
(c) Liberalisation of Industrial Licensing Policy and announcement of special
incentives for NR1 investments and exporting industrial units.
(d) Promoting coordinated development of large and small industries by—
(i) reserving further expansion either exclusively or partly for the small sector in certain
industries.
(ii) developing small industries more vigorously as ancillaries to large industries, and
(iii) encouraging the participation of small industries in the export drive.
Small Scale Industries Policy
In order to give a fillip to small industries development and thereby to entrepreneurial growth, the
Government for the first time announced a separate small scale industries policy in August 1991. The
highlights of this policy are as follows:
• For small scale industries the investment limit (investment in plant and machinery) is raised
to Rs. 75 lakhs for both ancillary and export oriented units and Rs. 60 lakhs to SSI units. Both
these limits were later on raised to Rs. five crores.
• The investment limit for the tiny sector was raised to Rs. 5 lakhs from Rs. 2 lakhs. This limit
has now been raised to Rs. 25 lakhs.
• Hereafter irrespective of their location would be recognised as small scale industries.
• The Small Industries Development Organisation (SIDO) has been recognised as the nodal
agency to support the small scale industries export promotion.
• An export development centre would be set up in SIDO to serve the small scale units through
its network of field officers to further augment export activities of the sector.
73
• A technology development cell (TDC) will be set up in SIDO which could provide
technology inputs to improve quality and competitiveness of products of small scale sector.
• The scheme for the handloom sector which contributed 30 % of the total textile production in
the country would be redesigned keeping in view the local and regional needs. It would be
the policy of the Government to promote handloom to sustain employment In rural areas and
to improve quality of life for handloom weavers.
• The National Small Industries Corporation (NS1C) would concentrate on marketing of mass
consumption items under common brand name and organizational links between NSIC and
SSlDCs would be established.
• The scope of the national equity fund scheme will be widened to cover projects upto Rs. 10
lakhs for Equity Support (upto 15 per-cent).
• The Single Window loan scheme has also been enlarged to cover projects upto Rs. 20 lakhs
with working capital margin upto Rs. 10 lakhs.
• Small Scale units can have equity support to the extent of 24% of the total investment from
the medium and large scale industries, public undertakings. NRIs or foreign Investment.
In conformity with the socio-economic objectives of the national development plans. the
development banks have introduced a number of promotional innovational schemes to be operated
either separately or jointly. Some of the important schemes are soft loan scheme, seed capital
assistance, risk capital assistance, concessional schemes, etc. In addition, 1FC1 is operating different
subsidy schemes for new and small entrepreneurs. Recently, it has introduced eight consultancy
schemes and lour interest subsidy schemes for the benefit of the entrepreneurs.
Meaning of Incentives and Subsidy
The term 'incentive' is a general one and includes concessions, subsidies and bounties. 'Subsidy'
denotes a single lump sum which is given by a government to an industry. It is granted to an industry
which is considered essential In the national Interest. The term 'bounty' denotes bonus or financial
aid which is given by a government to an industry to help it compete with other units in a nation or in
a foreign market. It is given in proportion to its output. Bounty confers benefits on a particular
industry, while a subsidy is given in the interest of the nation.
These subsidies and incentives offer the following advantages:

(a) They act as a motivational force which makes the prospective entrepreneurs to
enter into manufacturing line.
(b) They encourage the entrepreneurs to start industries in backward areas.
(c) By providing subsidies and incentives the Government can—
(i) Bring industrial development uniformly in all regions
(ii) Develop more new entrepreneurs which leads to entrepreneurial development
(iii) Increase the ability of entrepreneurs to face competition successfully
(iv) Reduce the overall problems of small scale entrepreneurs.
Need for Incentives
1. To remove regional disparities in development. While developed regions in a

country are overcrowded with industrial and business activities the backward areas
remain ignored for want of facilities for industrial development. Incentives are used as
baits to lure industrialists to locate their units overlooking such deficiencies. In the long run
the backward areas become developed and regional imbalances are corrected. Such a
development may lead to the effective utilisation of regional resources, removal of disparities
in income and levels of living and contribute to a more integrated society.
74
2. To promote entrepreneur ship and strengthen the entrepreneurial base in
the economy. The new entrepreneurs may face a number of problems on account of
inadequate infrastructure facilities and other supporting services such as market
assistance, technical training and consultancy and other institutional services, etc. All
these problems may demotivate them. The various incentives normally tend to mitigate some
or all of the problems by several means. Industrial estates, growth centres, power traiff
concessions, capital investment subsidies, transport subsidy, etc. are a few examples of
incentives and subsidies which are aimed at encouraging entrepreneurs to take up new
ventures without much reluctance.
3. To provide competitive strength, survival and growth. While some incentives

are available at the time of promotion of industrial units, several other incentives are
made available over a long period. Reservation of products to small units, price preferences,
concessional finance, etc. contribute towards the competitive strength.
survival and growth of certain industrial units.
4. To generate more employment and remove under-employment and

unemployment. The proper use of incentives and subsidies will generate more
employment by accelerating the industrial growth. Market adjustments and external
economies play a significant role in economic development. The entrepreneurs will
move from developed to backward areas to start more number of units. This will create more
number of jobs which will help to reduce the problems of unemployment and under-
employment.
Problems of Incentives
1. The antagonists argue that the incentive schemes may deteriorate into useless
tax-give away schemes if they are not implemented properly.
2. Empirical studies reveal that the incentive schemes are being highly misused
rather than properly used. Some of the units are located in backward areas with a view
to mainly avail the subsidies and concessions. The real objective of providing incentives is
hardly achieved.
3. Favouritism and corruption have crept into the administrative machinery which
has caused much financial strain on the exchequer.
Schemes of Incentives in Operation
Different incentive schemes applicable to the industrial sector in India are in operation. These
schemes are offered by Central and State Governments including Union Territories. The list of
incentives offered by either or both the governments are listed below :
(i) Export/Import subsidies and bounties
(ii) Interest free loans
(iii) Subsidy for R & D works
(iv) Capital investment subsidy
(v) Transport subsidy
(vi) Interest subsidy
(vii) Subsidy for power generation
(viii) Exemption from property tax
(ix) Subsidies to artisans and traditional industries including handlooms
75
(x) Incentives to non-resident Indians
(xi) Special incentives to women entrepreneurs
(xii) Exemption from income tax
(xiii) Interest free sales tax loans
(xiv) Sales tax exemptions
(xv) Subsidy for buying test equipment
(xvi) Subsidy for industrial housing
(xvii) Land and building at concessional rates
(xviii) Price preference lo SSI units
(xix) Subsidy/Assistance for technical consultancy
(xx) Exemption from stamp duty
(xxi) Concessional water
(xxii) Provision for seed capital
(xxiii) Allotment of developed/constructed sheds
(xxiv) Allotment of controlled or subsidised raw material
(xxv) Subsidising the cost of market studies/feasibility studies or reports.
Incentives for Development of Industries in Backward Areas
As a part of the measures to ensure balanced regional development. Government of India have
announced a number of concessions and facilities for industries established in selected backward
districts/areas from time to time. The Central Government has declared 247 districts (covering about
70% of the areas in the country) as backward and eligible for the subsidies. Many State Governments
have added to this list for the purpose of State level subsidies. The programme of assistance drawn
up for setting up industries in the selected backward area/district is briefly indicated below:
(i) Concessional Finance: All India financial institutions namely, 1DBI. IFCI and others extend
financial assistance on concessional terms to all. new and existing industrial projects having
expansion schemes irrespective of the project costs located in the 247 districts selected by the
government The concessions given by these financial institutions are in the form of lower
interest rate, viz., 9.5% p.a. against the normal rate of 11%, a reduced commitment charge of
0.5 % (which could be waived in exceptional cases), lower underwriting commission of 1.
25% and 0.75% for shares and debentures respectively, initial moratorium period upto five
years, longer amortisations of 15 to 20 years and participation in the risk capital on selective
basis. Besides these the 1DBI follows a flexible attitude in respect of promoter's contribution
margin requirements, rescheduling of repayments during the currency of the loan. Depending
upon the merits of specific cases in respect of refinance, the IDB1 charges a special rate of
6% with the primary lender's rate being subject to a ceiling of 9.5%. The normal rate of
refinance Is 6% with ceiling of 12.5% by the primary lending institution.
(ii) Central Investment Subsidy: The granting of cash subsidy on the capital investment is
called capital investment subsidy. It will be usually in the form of outright grant of 10 % to
20 % of the amount of capital invested in the industrial units in areas specified to be
backward regions/districts. The government also fixes ceiling above which they could not
avail. It is offered by the Central Government.
Out of the 247 districts declared backward by the planning commission. 101 districts/areas
have been selected to qualify for Central investment subsidy. These districts/areas have been
selected on the pattern of six districts/areas for industrially backward states and three
districts/areas for other states. The salient features of the scheme are given below:
76
(a) Quantum of subsidy: When the scheme was originally announced in 1971 10% of
the investment made on fixed capital investment, viz., land, building and plant and
machinery was to be reimbursed as an outright grant subject to a ceiling of Rs. 15
lacs. This was raised to 15 % with effect from 1.3.1973. The maximum amount
payable is, however, restricted to Rs. 15 lakh per industrial unit.
After the division of backward districts into (A), (B) and (C) categories the subsidy
will be: (A) 25 % subject to a maximum of Rs. 25 lacs; (B) 15 % subject lo a
maximum of Rs. 15 lacs (c) 10 % subject to a maximum of Rs. 10 lacs.
(b) Eligibility: An industrial unit other than those run departmentally which made
investments In land, building, and plant and machinery on or after 1-3-1973 and
located In the above category of districts/areas is eligible to claim subsidies. Existing
units taking into expansion, modernisation and diversification are also eligible to
claim subsidy.
(c) Procedure for Claiming Subsidy: The State Governments/Union Territory

administrations have nominated disbursing agencies to administer the scheme of
investment subsidy. State Financial Corporation and financial institutions such as
IDBI, IFCI, and ICICI are some of the agencies selected fur disbursements of subsidy
under the scheme. Each industrial unit being set up in the specified district/area gets
registered with the Director of Industries for claiming investment subsidy. The units
desirous of getting investment subsidy may approach the disbursing agencies who in
trun make recommendation after verification etc., to the State level committee which
has been appointed in each State Union/Territory.
(iii) Tax holiday to new industrial undertakings set up in backward States and Union
Territories: Under section 80-1A of the Income-tax Act 1961. deduction is allowed, in
computing die taxable income in respect of profits derived from new industrial undertaking
or a ship or the business of a hotel. The deduction under this section is allowed in the case of
companies, at 30 per cent of profits in respect of the assessment year relevant to the previous
years in which the hotel starts functioning or the industrial undertaking starts manufacture or
the ship is first brought to use and nine assessment years immediately succeeding the initial
assessment year. In the case of taxpayers being a co-operative society, similar deduction is
allowed for the initial assessment year and eleven succeeding years, the deduction is allowed
at the rate of 25 % in the case of non-corporate assessees. Likewise in the case of new hotels
set up in a hilly area or a rural area or a place of pilgrimage or such other place as the Central
Government may specify, the deduction is admissible at the rate of 50 per cent of the profits.
Tax Holiday for the Power Sector
With a view to substantially increasing the power generation capacity in the country, the Bill
proposes to provide for a full tax holiday for five years and thereafter a partial tax holiday in respect
of profits and gains of industrial undertakings set up anywhere in India for generation or generation
and distribution of power. Such undertaking which begins to generate power on or after 1.4.1993 will
be allowed deduction under section 80-1A, at the rate of 100 per cent of profits in respect of the first
five assessment years starting from the assessment year relevant to the previous year in which I he
undertaking begins generation of power. For the subsequent assessment years, deduction from the
profits from such undertakings will be allowed at the normal rate of 30 per cent in the case of
77
companies and 25 per cent in the case of non-corporate assessees. The deduction, at the enhanced
rate and the normal rale together, will be limited to twelve assessment years In the case of co-
operative societies and ten assessment years in the case of other assessess, as in the existing
provisions.
Subsidised Consultancy Services
Small entrepreneurs proposing to set up rural, cottage, tiny or small scale units, or to
expand/diversity/modernise their existing units, can get consultancy services at a low cost from the
technical consultancy organisations (TCO's) sponsored by all India and State level financial and
promotional institutions and banks. They have to pay only 20 % of the fees charged by a TCO for
assignments such as preparation of feasibility studies, project reports, market studies, pre-investment
studies, diagnostic studies and special studies and applications for seeking financial assistance from
financial institutions, technical assistance, etc. The entire balance of 18 % or Rs. 5,000 whichever is
lower is subsidised by 1FCI in the case of assignments relating to the use of biogas or
renewable/alternative sources of energy. For units identified or assignments covering physically
handicapaped or scheduled caste/tribe entrepreneurs, 100 % of the fees of the TCO for the
assignment or Rs. 6.000 whichever is lower is subsidised. If any entrepreneur is unable to take
effective steps to set up the project within one year from the date of completion of consultancy
assignments he will not be entitled to prevent the use of the report in any form or manner by the TCO
or other entrepreneurs. An entrepreneur who has already set up a project at one place and wishes to
set up an entirely different project at another place may be considered eligible for subsidy for the
second project also. In any case, the subsidy will not be made available to the same entrepreneur for
more than two projects.
Subsidy for Market Studies
New entrepreneurs (locally based or non resident Indians) entering the field of medium and /or
medium large industry for the first time in the country can have market studies for their products
undertaken by TCO at a cheaper cost. The fee for the preparation of a market study payable to TCO
would be subsidised by IFCI up to 75% of the cost or Rs. 15,000 whichever is lower. The subsidy
will be made available only to the TCO with which one or more financial institutions or development
agencies at the State or all India level are associated as shareholder(s) or member(s) of board of
management. The entrepreneur will have to bear only 25% of the cost of the study.
Adoption of Indigenous Technology
Promoters of project involving commercial exploitation of indigenous technology can get assistance
in the form of subsidy covering the interest payment due to IFCI during the first three years of
operations of the project subject to a ceiling of Rs. 5 lakhs a year. In appropriate cases, the total
subsidy could be upto Rs. 25 lakhs over a period of five years. However, the extent of subsidy would
be determined by IFCI on a case to case basis having regard to the earning potential and projected
cash flow of the project. The subsidy would be reimbursed to the concern after it makes payments of
installments of interest to IFCI on due dates. For being eligible for concessional assistance, the
project should be set up with loan assistance from IFCI and be based on indigenous technology. The
right to use this technology must have been acquired by the agency implementing the project from
the concerned institution, viz. Government laboratories, public sector companies, universities, or any
other institution recognised by the Government of India. The technology should be one which has
not already been exploited on a commercial scale in the country, and a certificate to this effect will
have to be obtained from the concerned institution. The technology should be basic to the
78
manufacture of the proposed product and not merely peripheral and the project must be of national
priority as indicated by government from time to time.
Machinery on Hire Purchase
Small scale industrial units including ancillaries are eligible to procure machinery on hire purchase
basis from the National Small Industries Corporation Ltd. through its libralised terms and conditions
for supplying machinery to .small scale industries located in backward areas which qualify for
investment subsidy.
Transport Subsidy
The transport subsidy scheme envisages grant of a transport subsidy to industrial units in selected
areas to the extent of 50% of the transport costs of raw materials which are brought into and finished
goods which are taken out of the selected areas.
The scheme covers the State of Jammu and Kashmir. Himachal Pradesh, hilly areas of Uttar Pradesh
and North Eastern Region comprising States of Assam. Meghalaya, Nagaland, Tripura and the Union
Territories 'of Arunachal Pradesh, Andaman and Nicobar Islands. Mizorarn and Lakshadweep.
Subsidy is paid on transport costs between the selected railheads and location of the industrial units
in the above states/Union Territories.
The highlights of the scheme are:

1. Industrial units in the above-mentioned areas will be given transport subsidy in
respect of the raw materials brought into and the finished goods which are taken out of such
areas.
2. No transport subsidy will be allowed for the internal movement of raw materials
and finished goods within the State of Jammu and Kashmir and the North-Eastern
Region.
3. In the case of Jammu and Kashmir, the transport subsidy will be given between
the railhead at Pathankot and the location of the industrial unit or between the location
of the industrial unit and Jammu. whichever is nearer.
4. For the other above-mentioned States (except J & K). the transport subsidy will
be given on the transport cost between Siliguri and the location of the industrial unit in
these States. While calculating the transport cost, the cost from Siliguri to the railway
station nearest to the industrial unit will be taken into account in respect of raw
materials and finished goods. If any other mode of transport is used the cost will be
limited to the amount which the industrial unit may have paid, if it had used the above
mode of transport.
5. Freight charges for the movement of goods by road will be determined on the
basis of the transport rates fixed by the government of a State/Union Territory from
time to time, or the actual freight paid, whichever is less.
6. The cost of loading or unloading and other handling charges will be taken into
account for the purpose of determining transport costs.
7. All new industrial units located in the selected areas will be eligible for a
transport subsidy equivalent to B0% of the transport cost of raw materials and finished goods.
8. Existing industrial units are also eligible for a 50% subsidy in respect of
additional transport costs of raw materials and finished goods resulting from a
substantial expansion or diversification effected by them after the commencement of the
79
Transport Subsidy scheme.
9. The transport subsidy will cover 50% of the transport charges on the movement
of steel from the Gauhati Stockyard of Hindustan Steel Limited to the site of an
industrial unit in the North-Eastern Region.
10. The State Government/Union Territories will set up a committee consisting of
the Director of Industries, a representative of each of the State Industrial Departments
or the State Finance Departments and a representative of the Ministry of Industry
Development. The committee will operate at the State/Union Territory level. The
claimants would be asked to submit proof of raw materials "imported" into, and the
finished goods "exported" out of the State/Union Territory from a registered chartered
accountant, in the State/Union Territory.
11. The Directorates of Industries in the States/Union Territories will lay down
system of pre-registration of industrial units which are eligible for the transport subsidy. At
the time of registration, the Director will fix and indicate the capacity of such units, and lay
down the procedure to be followed to ensure a regular inflow regarding the movement of raw
materials and finished goods to and from the industrial units.
12. The Ministry of Industrial Development will periodically review the arrangements
made by the Directorates of Industries of various States and Union Territories and
suggest modification in the Procedure for scrutinising the claims, payment of transport
subsidy, etc.
80
LESSON 3
INCENTIVES AVAILABLE TO SSI UNITS IN

BACKWARD/RURAL INDUSTRIES PROJECT AREAS
Dr. Hem Chand Jain
Certain special facilities and incentives have been provided to these back-ward districts. Of these,
101 districts/areas have been declared further as specially backward and hence additional incentives
like capital subsidy, special import facilities, etc.. are provided to industrial projects in these 101
districts/ areas over and above what is given in the 247 districts.
In addition, 111 districts in the country have been covered under the Centrally-sponsored Rural
Industries Project Programme. Small-scale units set up in these areas gel other special concessions
and facilities. The various benefits are enumerated below:
1. An outright subsidy of 15% on the fixed capital investment up to a maximum of Rs. 15 lakhs
is admissible to new units being set up in backward areas.
2. Allotment of factory or factory sheds In Industrial estates/areas and industrially developed
colonies on easy terms.
3. Interest-free loans in lieu of inter-state Sales tax paid/payable by SSI units are
available up to 7 years, provided the loan in a particular year will not exceed 8% of the
capital investment.
4. Loans and advances to SSI units under the State Aid to Industries Act and Rules framed
thereunder, for the construction of factory buildings, purchase of machinery and equipment
and working capital on easy terms.
5. The State Financial Corporations grant loans for acquisition of fixed assets up to
Rs. 30 lakhs in the case of limited companies and registered co-operative societies and
up to Rs. 15 lakhs for others at liberalised margins and rate of interest, and this is done over a
longer span of repayment and moratorium period.
6. The Central/State Government directly or through its subsidiary concern—the
Stale Industrial Development Corporation—underwites or participates in the preference
shares of public limited companies on a selective basis for setting up medium and large
industrial units. The State Government also considers cases for setting up of joint ventures
with the private sector.
7. The SSI units in the backward areas and other industries with a capital
investment in plant and machinery upto Rs. 1 lakh are relieved from the following
taxation in some States:
(i) New units established in the districts are completely exempted from the payment of
electricity duty up to a period of 7 years.
(ii) (New units are exempted from property tax for a period of 5 years.
(iii) Industrial units set up within the municipal limits are exempted from octroi on capital
equipment and building materials subject to a maximum period of 3 years from the
date of regular registration.
8. Provision of essential, controlled raw materials to the SSI units on priority and at
very liberal terms.
9. State Governments have set up independent testing laboratories on behalf of the
Indian Standards Institution, the Export Inspection Council, the Department of Defence,
Government of India and various other government organisations for making industrial
products of good quality.
10. In order to provide some important and sophisticated common facilities, a
network of industrial development centres, heat treatment centres and common facility
81
workshops have been set up in the States to equip the SSI units with modern techniques and
process of manufacturing.
Special incentives in the form of transport subsidy to compensate partially for the higher transport
cost of established industries in hilly backward areas is also being provided by the Union
Government.
The small scale units are now permitted to set up consortia to organise the sales of their own
products abroad. Similarly, a co-operative society of small units will also be permitted to do so. Such
consortium or a co-operative society of small scale units will be eligible for grant of an Export House
Certificate on the following basis :
(1) The applicant is a corporate body or a partnership firm or a co-operative society
and is registered as an exporter;
(2) All the members of the applicant consortium are small or cottage units,
(3) The minimum limit prescribed for select products for grant of a certificate will be
Rs. 50 lacs (the minimum exports may be either in the immediately preceding years or
the annual average of the three years of the base period).
For the purpose of granting the first export house certificate to the consortium, the exports made by
its members will be taken into account, if otherwise acceptable. Thereafter, for the purpose of
renewal, the exports made in the name of the consortium alone will be acceptable.
Seed Capital Assistance
One of the constraints faced by the entrepreneurs, especially first generation or technical
entrepreneurs, is the lack of resources to meet the minimum promoter's contribution. To help the
entrepreneurs overcome the problem. IDBI has come up with a scheme which has gained popularity
as the Seed Capital Scheme. If the project is coming up in non-backward areas, then the project
would not be eligible for subsidy. Hence, the entire amount of promoter's contribution would be
brought by the contributor himself. This would be reduced to the extent of the subsidy if the project
is coming up in backward areas like (category A, B, or C). The maximum amount which can be
sanctioned is to the extent of Rs. 5 lacs per project on the fulfillment of certain conditions.
Objectives of the Scheme
The objective of the scheme is to create new generation entrepreneurs who have the requisite traits of
entrepreneurship but whose financial resources are limited. It envisages extension of assistance at a
nominal service charge for meeting the risk capital requirements of entrepreneurs. The scheme is
expected to promote wider dispersal of ownership and control of industrial undertakings.
Agencies for Operating the Scheme
The scheme is operated through the agency of notified SIDCs and SFCs. Assistance under the
scheme will also be given directly by IDBI in exceptional cases. Projects assisted by commercial
banks are also eligible for seed capital assistance. However, the entrepreneurs will have to submit
their applications through SFC/SIDC functioning in the region.
82
Eligibility Criteria
To be eligible for assistance the entrepreneurs should be technically or professionally qualified or

possess relevant experience or skills either in industry, business or trade. The following categories of
entrepreneurs are eligible for assistance under the scheme:
1. New generation entrepreneurs in small scale requiring seed capital of more than
Rs. 4 lacs.
2. Small scale entrepreneurs who undertake expansion/diversification or modernisation.
3. Entrepreneurs intending to graduate from the small scale to medium sector for the first time.
4. Entrepreneurs intending to set up a project in the medium sector for the first time.
5. Entrepreneurs already in medium sector and intending to undertake diversification for
achieving better viability. Entrepreneurs seeking additional seed capital to meet project cost
over-run caused by factors beyond their control.
6. Entrepreneurs intending to take over an existing sick or closed unit. Projects constituted as
public/private limited companies or partnership/proprietary concerns eligible for assistance.
Amounts and Mode for Assistance
The amount of seed capital assistance for project shall not exceed Rs. 15 lacs. However, the actual
amount will be determined on the basis of gap in the equity required for the project as also shortfall
if any in the prescribed minimum promoter's contribution after taking into consideration his own
contribution and from other sources and subsidies and incentives. For deciding the quantum of
assistance, the debt equity norms of 2:1 in the case of SSI units and 1.5:1 in the case of medium scale
units would be adopted.
The assistance will be in the form of soft loans in the case of proprietary and partnership concerns. In
the case of private limited companies the assistance will be by way of soft loans of subscription to
1% cumulative redeemable preference shares. In the case of public limited companies the assistance
will be normally by way of subscription to equity capital or cumulative redeemable preference shares
(at 1%) or both or by way of soft loan.
The soft loan would be interest free which will carry a service charge of 1% per annum. However,
IDBI may have option to charge the interest on soft loan at a different rate. There is no commitment
charge. The repayment period depends upon repaying capacity of the unit with an initial moratorium
period not exceeding 5 years. Now security except the personal guarantee of the promoter is
stipulated.
TAXATION BENEFITS
The taxation benefits available to small scale industries are explained below:
1. Tax Holiday: New small scale industries are exempted from the payment of
income tax under Section 80J of the Act on their profits up to 6% (7.5 % for companies) from
the total income of the units in the assessment year in which the units began manufacture,
provided the small scale units have followed the procedures laid down in Section 80 J. This
tax holiday is available up to 5 years from the commencement ofproduction.
2. Depreciation Allowance: Under Section 32 of the Income Tax Act. a small scale
industry is eligible to get a deduction on depreciation account of plant and machinery.
land and buildings, at the prescribed rates. In the case of small scale industries the
83
deduction from the actual cost of plant and machinery is allowed up to Rs. 20 lakhs.
The depreciation is calculated on the reducing balance system. Full depreciation is available
for a year irrespective of the actual number of days for which the assets have been used.
Sometime, an additional allowance, called extra shift allowance is available to the units. Any
machinery or plant costing less than Rs. 750 is allowed to be written off completely in the
year in which it is first used.
3. Development Rebate: In respect of new plant or machinery other than office

appliance or road transport vehicles of a small scale unit, which is wholly used for the
purpose of production, a sum, by way of development rebate, as specified below, is allowed
under Section 33, in addition to normal depreciation.
(i) In the case of plant and machinery, 35% of the actual cost, if it were installed before
1st April 1970, and 25% of such cost if it were installed after 31st March 1970.
(ii) Where the plant machinery was installed after 31st March 1967, being an asset
representing expenditure of a capital nature on scientific research related to the
business carried on by a unit, development rebate is given at the specified rates.
4. Rehabilitation Allowance: This is granted to small scale units, under Section 33

B. whose business has been disturbed by:
(a) Riot or civil disturbance.(fa) Floods, typhoons, hurricanes, cyclones, earthquakes or
other natural disasters.
(b) Accidental fire or explosion.
(c) Action by an enemy.
The small scale unit re-established, reconstructed or revived, is allowed a deduction of a sum, by
way of rehabilitation allowance, equivalent to 60% of the amount of the deduction allowable to the
unit.
Investment Allowance: The Investment allowance was introduced in 1976 in place of depreciation
allowance. It is allowed at the rate of 25 per cent of the cost of acquisition of new plant or machinery
installed. The benefit of investment allowance is available for the articles or things except certain
low priority items specified in the Eleventh Schedule. However, the Small scale units are eligible for
investment allowance irrespective of whether they are used for the purpose of business of
construction, manufacture or production of low priority items listed in the Eleventh Schedule.
If a small scale industrial unit produces any article or thing (not listed in the XI Schedule) by using
the know-how developed in Government laboratories, public sector companies and universities, the
rate of investment allowance will be 35 per cent. This higher rate may be claimed only if the new
plant or machinery is installed by it after 20-6-1977 but before 1-4-1982.
The Small scale unit can avail of the benefit of investment allowance only when it has put to use the
plant and machinery either in the year of installation or In the immediate following year; otherwise
the benefit will be forfeited.
Conditions to be fulfilled: An Investment Allowance Reserve must be created during the relevant
financial year. This reserve should be utilised for the purchase of plant and machinery for the
business purpose of the small scale unit in India. It cannot be used for any other purpose such as
distribution of dividends or separation of profits or creation of assets outside India.
84
When Withdrawable: The Investment Allowance will be withdrawn:
(i) If plant and machinery is sold or otherwise transferred by the assessee to any person (other
than the Government, a local authority, a corporation or a Government Company) at any time
before the expiry of eight years from the end of the financial year in which it was acquired or
installed. It is not withdrawn if the sale or transfer is made in connection with the
amalgamation of a partnership firm into a company or where a firm is succeeded by a
company in the business carried on by it.
(ii) If a small scale industrial unit ceases to be a small scale unit by virtue of the total value of
plant or machinery installed exceeding the authorised limit.
Publication of Books : A small scale industry engaged in the business of publication of books is
entitled to claim a deduction of a sum equal to 20 per cent of (.lie-profits and gains derived from
such business under section 80 of the Act. "Books" for the purpose of this Section do not include
newspapers, journals. Magazines, diaries, brochures, pamphlets and other publication of similar
nature.
Tax Benefits for Amalgamation of Sick Units: Sickness in an industry, whether large or small. Is
quite widespread in the country and has become a national problem which has caused a great deal of
concern. It is estimated that the aggregate amount involved in the sick units is more than Rs. 2000
crores. The policy of the Government has been to encourage the amalgamation of sick units and
concessions have been announced to induce healthy units to take over sick concerns in the public
interest. Tax concessions are available for the amalgamation of sick units.
Excise Concession: The long term Fiscal Policy has envisaged to provide the best solution for the
problem of cascading effect of taxation of inputs on the value of final product in the Modified Value
Added Tax (MODVAT) Scheme. This scheme provides for the extension of the present system of
proforma credit to all excisable commodities with the exception of a few sectors like petroleum,
tobacco and textile products. The objective of the scheme is to extend the scope of the provisions for
set offs for excise and countervailing duties paid on inputs. This programme will be implemented in
phased manner over a period of years, taking due account of the revenue implications, the need to
revise administrative procedures and the lessons from experience gained in the early stages of the
reform.
The purpose to use MODVAT is not to give substantial net reliefs on excise. The loss of duty on
inputs will be recouped through higher excise taxation of final products. Indeed, shifting the effective
burden of excise taxation away from inputs and on to final products is at the heart of the proposed
reform. Aside from reducing distortionary effects on production and thus increasing the
competitiveness of Indian industry, the shifting of excise burden to final products will help in
tailoring excise duties in such a manner that the well off bear a higher proportionate burden than the
poor.
Tamil Nadu Micro, Small and Medium Industries Policy 2008
This policy is the first-of-its-kind in the country, with a vision to enhance the Competitiveness of the
Micro, Small and Medium Enterprises sector and aim for sustained annual growth rate of over IO per
cent for MSMEs and generate direct and indirect employment opportunities to the tune of 10 lakhs
during the XI Five Year Plan period. The Policy focused on all initiatives to be taken up for the
development of MSMEs in the State including infrastructure development, incentive schemes,
85
technology development, subsidy schemes for units located in industrially backward areas, skill
development, marketing support, deregulation and simplification, administrative reforms and
rehabilitation of sick enterprises in the state, Through this initiative, the Khadi and Village Industries
Commission. I he Khadi and Village Industries Board, Coir Board, Small Industries Development
Bank of India (SIDBI), Tamil Nadu Industrial Investment Corporation Limited. Tamil Nadu
Industrial Cooperative Bank Limited belonging to the Central and Stale Governments facilitate
assistance and loans along with employment opportunities.
Subsidy Schemes
(a) Micro Manufacturing Enterprises
Micro Manufacturing Enterprises established anywhere in the State are eligible for the
following incentives:
• 15% capital subsidy on the value of eligible plant and machinery, subject to a
maximum of Rs. 3.75 lakhs
• 20% low tension power tariff subsidy for 36 months from the date of
commencement of commercial production or from the date of power connection.
whichever is later, after allotment of Entrepreneur Memorandum.
• 100% subsidy on the net value of value added tax (VAT) paid by them for the
first 6 years up to the value of investment made in plant and machinery at the
time of allotment of Entrepreneur Memorandum.
(b) Backward Area Development Subsidies
Micro, Small and Medium manufacturing enterprises established in 251 industrially

backward blocks and all industrial estates promoted by the Government and Government
Agencies like SIPCOT. SIDCO, etc. (excluding industrial estates located within the radius of
50 Kms. from Chennai City center) and agro based enterprises set up in 385 blocks in the
State are eligible for the package of incentives given below:
maximum of Rs. 30 lakhs-
• 5% additional employment intensive subsidy on the value of eligible plant and
machinery for giving employment to 25 workers for 3 years within the first 5
years from the date of commencement of commercial production, subject to a
maximum of Rs. 5 lakhs.
• 5% additional capital subsidy on the value of eligible plant and machinery for
units set up by women, SC/ST. physically disabled persons and transgender
entrepreneurs, subject to a maximum of Rs. 2 lakhs.
• 25% additional capital subsidy on the value of eligible plant and machinery
installed to promote cleaner and environment friendly technologies, subject to a
maximum of Rs. 3 lakhs and certification by Tamil Nadu Pollution Control Board.
commencement of commercial production or from the date of power connection,
whichever is later.
(c) Special Capital Subsidy for Thrust Sector manufacturing enterprises set up
anywhere in the State
86
Ten thrust-sector manufacturing enterprises viz. Electrical and Electronic Industry. Leather
and Leather goods, Auto parts and components. Drugs and Pharmaceuticals. Solar Energy
Equipment, Gold and Diamond Jewellery for exports. Pollution Control equipments. Sports
Goods and Accessories. Cost effective building material and Readymade Garments, set up
anywhere in the State are eligible for a special capital subsidy of 15% on the eligible plant
and machinery, subject to a maximum of Rs. 30 lakhs.
(d) Generator Subsidy
Micro, Small and Medium manufacturing enterprises established anywhere in the State are
eligible for a subsidy of 25% on the cost of Generator set purchased (up to 125 KVA
capacity), subject to a maximum of Rs. 1.50 lakhs.
(e) Back-ended Interest Subsidy
A back-ended Interest subsidy at the rate of 3% (subject to a maximum of Rs. 10 lakhs per
enterprise over a period of five years) will be extended on loans taken up to Rs. 100 lakhs by
Micro. Small and Medium Enterprises for Modernization by induction of well established
and improved technologies in specified sub-sectors/products as listed in the guidelines on
Credit Linked Capital Subsidy Scheme (CLCSS) of Government of India.
Schemes for Technology Development
The following new schemes for Technology Development are announced In the Micro, Small
and Medium Industries Policy 2OOS:
• 50% subsidy on the cost of filing a patent application, subject to a maximum of Rs. 2 lakhs per
application and 50% of the cost of the application for trade mark registration or Rs. 25000
whichever is less for Micro, Small and Medium Manufacturing Enterprises.
• Establishment of industrial clusters and mini tool rooms under Public Private Partnership mode
by providing 25% of the total project cost, subject to a maximum of Rs. 1 crore as assistance.
• Creation of Technology Development Fund for evolving cleaner/energy efficient/lT
enabled technologies for the Micro. Small and Medium Manufacturing Sector.
• Assistance for creation of Centers of Excellence and Technology Business incubators for
introduction of a new production techniques and design Development to the tune of Rs. 50
lakhs per incubator/center of excellence.
Schemes of Skill Development and Training
Reimbursement of 50% of the tuition fees for Skill Development Training schemes for the benefit of
the educated unemployed youth and upgradation of the skills of existing employees of Micro. Small
and Medium Enterprises by the MSME Associations have been announced in the MSMI Policy
2008.
Marketing support
Government has announced the following schemes to provide marketing support to Micro, Small and
Medium Enterprises in the MSMI Policy 2008.
• 15% Price preference for purchase of goods of domestic Micro and Small
Enterprises as provided in the Tamil Nadu Transparency in Tenders Act. 1998.
87
• Purchase preference for items notified from time to time by the State Government.
• Waiver of Earnest Money Deposit for participation in tenders.
• 50% grant on hall rent for participation in exhibitions within the State and also
in other States by MSME Associations.
• Support for marketing under a common banner or brand name.
Credit Linked Capital Subsidy scheme: The Government of India is operating Credit Linked
Capital Subsidy Scheme to facilitate the upgrading of technology in SSI units in respect of 48
specified products/sub-sectors. Under this scheme. 15% capital subsidy is granted for induction of
proven technologies approved under the Scheme.
TUF scheme for textile: Additional option available for Capital subsidy in lieu of interest rebate for
selected sectors. New or existing SME units—including units in cotton ginning and processing
sector—are eligible 5%/4% interest reimbursement and (he interest actually charged.
Mega Projects Subsidy: The Govt. of Tamil Nadu is offering Mega Project Subsidy for the projects
with investment in Fixed Assets above Rs. 5.00 crores and upto 200 crores as back ended ranging
between 30.00 lakhs to 100.00 lakhs depending up to the investment and direct employment to the
workers.
Subsidy of Ministry of Food Processing Industries: The Ministry of Food processing, Government
of India with a view to accelerate the growth in this sector is providing grants for setting up of food
processing units (including meat and fish processing/milk products/spices/coconut/walnut/cashew
nut) or upgradation and expansion of such unit and for establishing Food Parks. Grant is available at
25% of the cost of capital equipment and technical civil works up to a maximum of Rs. 50.00 lakhs.
Employment Incentive Subsidy: Employment Incentive Subsidy of an additional 5% subject to a

maximum of Rs. 5.00 lakhs will be granted, if at least 25 workers have been employed for a
minimum period of 3 years within the first 5 years from the date of commencement of production.
Special Capital Subsidy to thrust sector enterprises : Micro/Small/Medium manufacturing

enterprises in the following Thrust Sectors are eligible plant and machinery subject to a maximum of
Rs. 30.00 lakhs—
1. Electrical & Electronics Industry
2. Leather & Leather Goods
3. Auto Parts and components
4. Drills and Pharmaceuticals
5. Solar Energy Equipments etc.
Low-tension power tariff (LTPT) subsidy: Flat rate of 20% for the first 36 months from the date of
commencement of production or from the date of power connection, after allotment of an
Entrepreneur Memorandum from District Industries Center.
INSTITUTIONAL SET UP
In order to accelerate the small industries development, Governments at the Central and State levels
have set up a number of development agencies/institutions such as District Industries Centres (DICs).
Small Industries Service Institutes (SIS1) and Small Industries Development Organisation, etc. All-
India Financial Insitutions—1DB1, IFC1. 1CICI—have promoted/sponsored a number of Technical
Consultance Organisations (TCOs) to assist small entrepreneurs in different ways. In 1986. the Small
88
Industries Development Fund was set up in IDBI in order to assist small scale, village and cottage
industries and tiny sector units in the rural areas. Recently, the Small Industries Development Bank
of India (SIDBI) has been established to help small scale units. In addition to these institutions there
are agencies like National Science and Technology Entrepreneurship Board, Khadi and Village
Industries Commission, Commercial Banks, EXIM Bank and Co-operative Banks who undertake
promotional activities aiming at facilitating industrial development.
District Industries Centres (DICS)
Governments—both Central and State, have in the past taken a number of measures for the
development of small and village industries, but the actual achievements have been far below the
expectations. Also the focus of attention for industrial development was mainly on large cities and
State capitals to the neglect of district areas. In addition, multiplicity of institutions involved in small
industries development and complicated systems and procedures made the job of promoting the
industrial units an uphill task for small entrepreneurs. Hence, it was felt necessary to establish a
development agency which could provide all services and facilities to village and small industries
under one roof. Accordingly, the DICs were established in May 1978 in order to cater to the needs of
small units.
Each district has a DIG at its headquarters. The main responsibility of DIC is to act as the chief
coordinator or multifunctional agency in respect of various Government departments and other
agencies. The prospective small entrepreneur would get all assistance from DIC for setting up and
running an industry in rural areas. Up to 1991 about 422 DICs have been set up throughout the
country. These DICs have assisted more them 1.5 lakh units generating employment for more than
10.3 lakh persons. The metropolitan cities of-Delhi, Bombay, Calcutta and Madras have been kept
outside the purview of the DIC.
Functions of DIC
Identification of Entrepreneurs: DIC develops new entrepreneurs by conducting entrepreneurial

motivation programmes throughout the district especially in Panchayat Union Headquarters and
small towns.
Selection of Projects: DIC offers technical advice to new entrepreneurs for the selection of projects
suitable to them.
Provisional Registration under SSI: After the selection of projects, entrepreneurs are issued with
provisional SSI Registration which is essential for obtaining, assistance from the financial
institutions.
Purchase of Fixed Assets: DIC sponsors the loan applications to TIIC. S1DCO and banks for the
purchase of land and buildings anti sanctions margin money under Rural industries Project Loan
Scheme payable to other financial agencies for the purchase of plant and machinery.
Clearances from Various Departments: It takes the initiative to get clearances from various
departments and takes follow up measures to gel speedy power connection.
Assistance to Raw Material Supplies: It makes necessary recommendations to the concerned raw
materials suppliers and issues the required certificates for the import of raw materials and machinery
wherever necessary.
89
Assistance to Village Artisans and Handicrafts: DIC arranges for the financial assistance with the
lead bank or nationalised banks of the respective areas.
Interest-Free Sales Tax Loan: SSI units set up in rural areas can get IFST Loan up in a maximum
limit of 8% of the total fixed assets from S1DCO. But the sanction order from the same is being
issued by DIC. The DIC also recommends the SSI units to NSIC for registration for Government
Purchase Programme.
Subsidy Schemes: DIC assists SSI units and rural artisans to get subsidies such as power subsidy,
interest subsidy for engineers, subsidy under IRDP, etc., from various institutions.
Training Programmes: DIC gives training to rural entrepreneurs and also assists other units giving
training to small entrepreneurs.
Self-employment for Unemployed Educated Youth: This scheme was introduced in 1983-84 for
youths between 18 years and 25 years with SSLC, Technocrats and women are given preference.
District Industries Centres are supposed to provide pre-investment, investment and post- investment
assistance to entrepreneurs under one roof. These centres have done commendable work in the
promotion of small industries, development of entrepreneurship and generation of self- employment.
But much is still desired to be done to make the DIC really one-window service. Steps should be
taken to strengthen and suitably restructure the district industries centres for playing a leading role in
district level industrial development
Industrial Estates
Developing countries require institutional arrangements for their rapid industrialisation and balanced
growth. One such institutional measure is industrial estates. The term 'industrial estate' is called by
different names, e.g. industrial park, industrial zone, industrial region, industrial city, industrial area,
industrial township, etc.
An industrial estate has been defined as a method of "organising, housing and servicing industry, a
planned clustering of industrial enterprises offering standard factory buildings erected in advance of
demand and a variety of services and facilities to the occupants". In other words, an industrial estate
is a tract of land sub-divided and developed according to a comprehensive plan for the use of a
community of industrial enterprises. It is a planned clustering of industrial units offering standard
factory buildings and a variety of services and facilities to entrepreneurs.
The main features of an industrial estate are as follows:

(i) It is a tract of land subdivided and developed into factory plots or sheds.
(ii) It provides several common facilities or infrastructural amenities such as water, power,
transport, toolroom, training, bank, post office, repairs and maintenance, etc. to the
occupants.
(iii) It is a planned clustering of industrial units.
(iv) It is designed as a tool of industrialisation and balanced regional development.
(v) It may be developed in urban, semi-urban or rural areas,
(vi) It may be large, medium and small,
(vii) It may be set up the Government or by cooperatives or by private agencies.
90
Types of Industrial Estates
Industrial estates may be classified into the following categories:
1. General Purpose or Composite Industrial Estates: Such an industrial estate

provides- accommodation to all types of smallscale industries.
It consists of a wide variety and range of industrial units. Most of the Industrial estates in
India are of this type.
2. Special Purpose Industrial Estates: This type of industrial estate is particularly

constructed for specified groups of entrepreneurs, e.g., technically qualified persons.
craftsmen or artisans, etc. For example, Industrial estates for artisans and technical
personnel have been set up at Hyderabad.
3. Ancillary Industrial Estates: Such an industrial estate houses manufacturing

units, which produce, parts and components for a large industrial unit. It is generally
set up near the parent unit.
4. Functional Industrial Estates: This type of Industrial estate consists of

industrial units manufacturing the same product. Such estates have been set up for
leather goods, electronics, sports goods, food preservation, ceramics, etc.
5. Flatted Factory Estates: These are multi-storey buildings constructed in big

cities, to provide space to industrial units manufacturing light weight goods with the
help of simple machine tools. They help to conserve space.
Advantages of Industrial Estates
Industrial estates offer the following benefits:
1. Economies of Scale: Location of many medium or small plants within a large

area offers several economies. Economies of scale arise because all the industrial units enjoy
common infrastructural facilities. As the size of an industrial estate increases the costs of
estate development and administration per unit of each facility decline.
2. Economies of Agglomeration: In an industrial estate, several industrial units

are clustered together. They become interrelated and interdependent. This enables them to
enjoy the benefits of agglomeration and external economies. These external economies
include access to better transportation facilities, availability of trained labour, regular supply
of power and water, easy access to testing and repair facilities, availability of raw materials,
etc.
3. Low Investment: A small scale entrepreneur can obtain an Industrial plot or

shed on rent or hire purchase basis. This reduces considerably fixed capital
requirements as well as fixed costs.
4. Less Risk: Industrial estates serve as risk-absorbing device because of low

capital investment and provision of common facilities and services.
91
5. Saving of Time and Effort: An individual entrepreneur is relieved of the trouble
of searching for a suitable space. He need not waste his time and effort in formalities
involved in acquiring land, obtaining the approval of local authorities, securing power
connection, etc.
6. Nursery for New Entrepreneurs: Industrial estates reduce risks and increase
profitability through Internal and external economies. This induces new entrepreneurs
to setup industrial units.
7. Mutual Cooperation: Industrial estates promote the spirit of cooperation and

joint efforts. All industrial units located in an industrial estate face common problems
and seek to achieve common objectives.
8. Balanced Regional Development: By developing estates in relatively backward

regions, the Government can ensure the balanced industrialisation of different parts of
the country. This will also lead to decentralisation of industries.
Thus, an industrial estate serves as a multipurpose arrangement for the growth of entrepreneurship.
By providing the necessary facilities and services at a single place, it provides a congenial climate
for the growth of small scale industries. It encourages the development of new enterprises. Industrial
estates not only accelerate industrialisation but also facilitate decentralisation of industry
92
LESSON 4
SMALL INDUSTRIES DEVELOPMENT ORGANISATION (SIDO)
Dr. Hem Chand Jain
SIDO is a policy-making, coordinating and monitoring agency for the development of small scale
entrepreneurs. It maintains a close liaison with government, financial institutions and other agencies
which are involved in the promotion and development of small scale units. It provides a
comprehensive range of consultancy services and technical, managerial, economic and marketing
assistance to SSI units. It has a network of 28 Small Industries Service Institutes, 30 branch SISIs, 37
Extension Centres, four Regional Testing Centres, one Product and Process Development Centre,
three Footwear Training Centres and five Production Centres and ten Field Testing Centres.
Functions
The main functions of the SIDO are coordination, industrial development and industrial extension
service. Some important functions are:
(1) To assess the requirements of indigenous and imported raw materials and
components for the small scale sector and to arrange their supplies;
(2) To collect data on consumer items which are imported, and encourage the setting
up of new units by giving them coordinated assistance;
(3) To prepare model schemes, project reports and other technical literature for
prospective entrepreneurs;
(4) To secure reservations of certain products for the SSIs.
(5) To provide consultancy and training services and marketing assistance to
improve the competitive strength of small scale units.
(6) To evolve a national policy for the development of SSIs and coordinate the
policies and programmes of various State Governments
SIDO is now Known as Micro, Small and Medium Enterprises Development Organisation.
NATIONAL SMALL INDUSTRIES CORPORATION LIMITED (NSIC)
The NSIC was set up in 1955 with the objective of supplying machinery and equipment to small
enterprises on a hire-purchase basis and assisting them in procuring Government orders for various
items of stores. NSIC provides a wide range of promotional services to small scale units
The Corporation's Head Office is at Delhi and it has four regional offices at Delhi, Bombay, Madras
and Calcutta, and eleven branch offices. It has one central liaison office at Delhi and depots and sub-
centres. The main functions of NSIC are:
(1) To develop small scale units as ancillary units to large-scale industries:

(2) To provide SSIs with machines on hire-purchase basis;
(3) To assist small enterprises to participate in the stores purchase programme of
the Central Government:
(4) To assist small industries with marketing facilities:
(5) To distribute basic raw materials through their depots:
(6) To import and distribute components and parts to actual small scale users in
specific industries: and
93
(7) To construct Industrial estates and establish and run prototype production-cum-training
centres.
(8) To develop small scale industries in other developing countries on turn key basis
The NSIC has taken up the challenging task of promoting and developing small scale industries
almost from scratch and has adopted an 'integrated approach' to achieve the socio-economic
objectives.
NSIC, in consultation with Rating Agencies and Indian Banks Association, has formulated
Performance & Credit Rating Scheme for Small Industries. The Scheme is aimed to create awareness
amongst small enterprises about the strengths and weakness of their existing operations and to
provide them an opportunity to enhance their organisational strengths and credit worthiness.
NSIC acts as a facilitator to promote marketing efforts and enhance the competency of the small
enterprises for capturing the new market opportunities by way of organizing participating in various
domestic & international exhibitions/trade fairs, buyers-seller meets, intensive campaigns seminars
and consortia formation. NSIC helps small enterprises to participate in International/national
exhibitions/trade fairs at the subsidized rates to exhibit and market their products, participation in
these events provides small enterprises an exposure to the national/international markets.
Buyer Seller Meets are being organized to bring bulk buyers/government departments and micro &
small enterprises together at one platform. This enables micro & small enterprises to know the
requirements of bulk buyers on the one hand and help the bulk buyers to know the capabilities of
micro & small enterprises for their purchases. Intensive campaigns and seminars are organized all
over the country to disseminate/propagate about the various schemes for the benefit of the small
enterprises and to enrich the knowledge of small enterprises regarding latest developments, quality
standards etc.
DIRECTORATES OF INDUSTRIES OF THE STATE GOVERNMENTS
The small-scale Industries is a State subject and. therefore, the development and implementation of
the schemes of assistance to SSIs is the primary responsibility of the State Government. Directorates
of Industries in each State do the work relating to the development of industries in general and small
scale industries in particular. Each directorate is stalled with administration and technical officers at
State headquarters and by a District Industries Officer with supporting staff in each district. The State
Directorates run various training schemes, production schemes and common facilities schemes. They
also provide facilities of developed industrial land and factory sheds in industrial estates, allocate
quotas of scarce raw materials, certify import requirements and organise industrial cooperatives.
Their functions are varied and have grown with the development and diversification of the small
scale sector.
STATE SMALL INDUSTRIES CORPORATIONS
Many State Governments have-set up Small Industries Corporations in order to undertake a number
of commercial activities. The most important of these activities are distribution of scarce raw
materials, supply of machinery on hire-purchase basis, constitution and management of industrial
estates, procurement of orders from Government Departments, assistance in export marketing and in
certain cases provision of financial, technical and managerial assistance to small enterprises.
94
Small Industries Development Corporation (SIDCO)
In Tamilnadu SIDCO is the state small industries corporation. It plays a lead role in developing small
scale sector. It provides the following facilities to small scale units:
(a) Provision of constructed sheds/plots in industrial estates. These are sold to
entrepreneurs on hire-purchase basis or given on rental basis.
(b) Assistance in procuring some scarce key raw materials like iron and steel, paraffin wax,
potassium chlorate, Fatty Acids, etc., through its various distribution centres. Financial
assistance in the form of subsidies to industrial units in back areas like Central Investment
Subsidy, State Capital Subsidy, Interest Sales Tax Loans, Power Tariff Subsidy and Margin
Money Assistance the Rehabilitation of the Sick Small Scale Industries.
(c) Marketing Assistance to small entrepreneurs.
SMALL INDUSTRIES SERVICE INSTITUTES (SISIS)
Established in 1956 this institute—one in each State has been rendering very useful service to small
scale industries. The assistance rendered by the institute and its extension centres in Tamilnadu may
be listed as follows :
1. Technical Consultancy and Advisory Service: This relates to selector of profitable small
enterprises, choice of appropriate machinery and equipment, appraisal of the technique of"
manufacture, processing of raw materials, adoption of recognised standards of testing, quality
performance of the small industry products and encouraging small units to participate in
Governments stores Purchase Programme. The Institute explores the possibility of setting up
small scale units to supply parts/components to large scale industries.
2. Common Facility Service: This includes supply of designs and drawings and
provision of workshop facilities for the manufacture of dies, tools, jigs and fixtures and
components.
3. Training Facilities: Training is provided to workers in basic trades in the workshops

attached to this Institute and its extension centres, to increase their productivity and this helps
to encourage development of small scale industries in rural areas.
Training in various aspects of industrial and business management is also provided for the
benefit of small industrialists.
A training course in small industries entrepreneurship and management to young engineers

with emphasis on the practical aspects of small industries management Is conducted. This has
been Instrumental in creating a new class of qualified entrepreneurs.
4. Testing Facilities: Basic testing facilities (both physical and chemical) are
provided in the laboratories and workshops attached to this institute at concessional
rates.
5. Marketing Assistance: Economic information on the nature and extent of the

market for specific products is collected and furnished to small industrialists at their
request. The institute offers export promotion service by counselling on export
procedures and trends in foreign markets.
95
Market survey for specific products of small enterprises is also undertaken on a regional basis to
enable a small industrialist to increase the sales of his products in the region.
The special information bureau, called the Tamilnadu Sub Contract Exchange, is a Central
Information Centre where machine capacities of small scale industries are registered and enquiries
from large industries for the manufacture of different components are passed on to registered small
scale units having spare capacity, so as to enable them to feed the requirements of large scale units.
The institute conducts economic surveys of particular areas to ascertain their industrial potential.
KHADI AND VILLAGE INDUSTRIES COMMISSION (KVIC)
KVIC was established in 1953 with the primary objective of developing Khadi and Village industries
and improving rural employment opportunities. Its wide range of activities include training of
artisans, extension of assistance for procurement of raw materials, marketing of finished products
and arrangement for manufacturing and distribution of improved tools, equipment and machinery to
producers on concessional terms.
KVIC provides assistance to Khadi and Village industries which are characterised by low capital
intensity and ideally suited to manufacturing utility goods by using locally available resources. There
are about 26 specified village industries such as processing of cereals and pulses, leather, cottage
matches. Gur and Khandsari, palm gur, non-edible oils and soaps, bee-keeping, village pottery,
carpentry and blacksmithy, gobargas, household alluminium utensils, etc.
KVIC's policies and programmes are executed through 30 State Khadi and Village Industries Boards,
2320 institutions registered under the Societies Registration Act. 1960 and about 30,600 Industrial
Cooperative Societies registered under State Cooperative Societies Act. Activities involving
pioneering types of work, such as developing new industries in hilly, backward and inaccessible
areas are undertaken by KVIC directly.
COMMERCIAL BANKS AND ENTREPRENEURIAL DEVELOPMENT
In recent times commercial banks have not confined themselves to mere extension of finance to
small entrepreneurs hut have shown genuine concern for their progress and development. They have
now entered the challenging field of promoting new small scale entrepreneurs through
entrepreneurship development programmes. In their new role as promoters of small scale sector they
have accepted yet another challenging task. They are now holding EDPs in collaboration with
specialised Institutions such as DIG, SIS1, TCOs, etc, with a view to identifying entrepreneurs,
especially in backward areas, and training and monitoring them to start new ventures.
State Bank of India (SBI)
In order to accelerate the development of backward areas by monitoring potential entrepreneurs to

take up risky new ventures, the SBI launched EDPs in 1978. As per the Bank's ventures, the EDPs
consist of one month's intensive training in behavioural science, management aspects, field training.
During the training period, the entire cost of boarding and lodging is borne by the Bank, The Bank's
EDP consists of three phases:
(i) Initiation phase for cretin" awareness about entrepreneurial opportunities.

(ii) Development phase through training programmes in developing motivation and managerial
96
(iii) Support phase counselling, encouragement and infra-structural support for establishing and
running an enterprise.
In 1967 the SBI launched a liberalised scheme for providing financial assistance to technically
qualified or trained entrepreneurs to the extent of 100 per cent, if necessary. The target group is the
technocrats who lack the financial capability to meet the normal margins stipulated by the Bank.
Under its Equity Fund Scheme, the Bank may grant interest-fee loan for the 25% of the project cost
which is the minimum contribution of an entrepreneur.
Recently SBI has set up a Research and Development Fund of Rs. 5 crores for inter-alia. assisting
entrepreneurial development. SBI and its group offer package of financial arrangement and
assistance to small scale units in their promotional and expansion activities and act as banker to
capital issues.
Punjab National Bank
Through its Merchant Banking Division it offers similar package of assistance to small scale units.
The package of measures include the following:
1. The banks study the economic viability and technical feasibility of the proposals
and help in preparation of market-survey report with the assistance of technical consultants.
2. They provide assistance to entrepreneurs in obtaining various government
consents required for industrial projects right from the time the application for letter of intent
is made.
3. They assist the entrepreneur in raising rupee resources in the form of
debentures, term loans, dereferred payment guarantees from financial institutions.
4. They assist in raising foreign exchange resources required for import of plant and
machinery, components, raw materials, etc., by arranging through the Bank's foreign
correspondents, suppliers' credit, buyers' credit and foreign currency loans.
5. They determine the capital structure, assist in obtaining consent of SEB1.
finalisation of syndication of underwriting arrangements, handling of share applications
and relative allotment in consultation with stock exchange, etc.; financing export of
capital equipment on deferred payment terms.
6. They suggest strengthening the capital base of small scale industries, which intend to
expand/diversify by conversion of partnership firms into private limited company, or
conversion of private limited company into public limited company.
Indian Bank—Entrepreneurship Service Cell
The bank provides consultancy services to persons who graduate from colleges and institutions of
engineering, technology, etc. and unemployed engineers, diploma holders and other graduates or
business executives. The consultancy service right from identification of a project to its
implementation and marketing is provided through the personnel of the bank and panels of expert
specialists. For this purpose, the cell after preliminary discussion with a prospective entrepreneur
arranges a meeting with the appropriate panel member. The cell and the appropriate panel member
then assist the entrepreneurs. This service was inaugurated on 3rd October. 1973 and is available
only at Madras and a few other selected centres.
97
Bank of Baroda—Entrepreneurial Banking Service
Bank of Baroda has started what is known as 'Entrepreneurial Banking' in collaboration with Uttar
Pradesh Small Industries Corporation to assist technician entrepreneurs to set up their own units at
Rae Bareli Industrial Complex for building and hardware materials. Under this scheme, the
Corporation assists the technicians with the acquisition of fixed assets, and Bank of Baroda arranges
in-plant training in established industrial units and provides working capital facilities to the
entrepreneurs.
Bank of Baroda has also started a Multi Service Agency at Bombay to provide technical assistance to
self-employed persons about feasibility of their projects/proposals, guide the entrepreneurs in regard
to availability of raw materials, marketing prospects, etc.
Bank of India—Entrepreneurial Clinic-Cum-Guidance Service
With a view to fostering growth of entrepreneurship and economic development, the bank has set up
the cell. The scheme offers;
(i) assistance in selection of industry, preparation and evaluation of project report and market
survey:
(ii) practical training in the line, if necessary;
(iii) assistance in obtaining government clearance, procurement of machinery and equipment and
marketing of product;
(iv) assistance and guidance in implementation of project.
The novel feature of the scheme is the bank will provide from a panel of industrialists a 'foster father'
to guide and assist the budding entrepreneurs.
Canara Bank—Industrial Information and Guidance Service
The bank has set up an industrial information and guidance service to provide information and
advice to its clients on matters, such as scope for establishment of industries, technical and marketing
facilities, taxation, export and imports, accounting and management and to prepare project reports on
proposed industries.
Grindlays Bank Limited
It has two Small Scale Consultancy Service and Merchant Banking Division. Small Scale
Consultancy Service Division is located in Calcutta. This division offers assistance in preparing
project feasibility reports, conducting overall industry studies, marketing and sales, and management
accounting. This division undertakes a detailed in-depth study of the existing system and procedures
in various functional areas for idea problems and other deficiencies, to develop tailor-made solutions.
The Division also helps the management in implementing the suggestions.
The Merchant Banking Division located at Mumbai, Chennai, Calcutta and New Delhi managers
public issues for raising capital, helps to establish liaison with government lending bodies for raising
capital, helps term development finance, assesses the strengths and weaknesses of the company
through management audits and suggests tailor-made solutions to eliminate the weaknesses.
98
Syndicate Bank
Small Scale Industries Department of the Bank with a technical cell of engineers working at the head
office at Manipal (Karnataka) and at different industrial growth centres, besides appraising the
viability of credit proposals from small scale industries sector, offers counselling services to the
entrepreneurs, including helping them to prepare project r ports.
Union Bank of India—General Services Cell
The Bank has opened a General Services Cell at its head office at 66/80 Bombay Samachar Street,
Fort Bombay exclusively for small industrialists and other small borrowers to provide services like
selection of machinery, accounting procedure, financial planning and other matters.
United Bank of India
The Bank's Technical Cell at Calcutta provides assistance to persons about feasibility of their
projects and technical as well as non-technical guidance.
United Commercial Bank
The Bunk has a cell in its head office at Calcutta to provide technical assistance/guidance to self-
employed persons about feasibility of their projects. It also renders them advice in regard to sources
and availability of raw materials, and marketing of their products.
New Entrepreneur Development Agency
The New Entrepreneur Development Agency has been created in order to assist educated
unemployed graduates to set up SSI units in urban and metropolitan areas. The Agency will choose
candidates only from among those sponsored by Government Institutions and Agencies like SISI,
DICs, University Employment Guidance Bureau, etc.
The selected candidates will be assisted in selecting the projects suitable to their aptitude and
backgrounds. The candidates on identifying the projects will undergo an Entrepreneur Development
Programme to be conducted by Agencies like SISI, ITCOT, etc. Practical training will also be
arranged in industries, wherever possible.
Projects with credit requirements up to Rs 5 lakhs are only eligible lor finance under the scheme.
Hundred per cent finance will be provided in the beginning and margin will be built up to 20 per cent
over a period of time depending on the profitability of envisaged project. Assets created with bank
finance and personal guarantees of parents will be sufficient securities for the loans given.
The maximum amount of loan will be Rs. 5 lakhs and the repayment of term loans will be based on
the profitability projection and within seven years. The interest rate for medium term loan is 13.5 per
cent p.a., and for working capital- 14 per cent p.a., up to Rs. 2 lakhs and 15.5 per cent p.a. above Rs.
2 lakhs up to Rs. 5 lakhs.
The candidate will be assisted in getting marketing tie-up with user industries, wherever possible.
Their unit will have to be registered as small scale Industries with the Directorate of Industries and
Commerce, or the DICs as the case may be.
99
Indian Overseas Bank—Bank's Small Business Aid Agency
The agency specialises in the field of small business and offers necessary guidance to those persons
who wish to start the same. It also offers consultancy to professionals, like doctors, engineers,
lawyers, etc. to enable them to start their practice. The operations of this agency are presently
restricted to Madras city and Madurai. though the bank plans to establish similar agencies in other
centres in due course.
SPECIAL ECONOMIC ZONES
In 1980, barely a year after the Chinese strongman Deng Xiaoping initiated his country’s switch to
market economy, a nondescript town in the Guangdong province in southern China, Shenzhen, was
designated a special economic zone (SEZ) by the authorities. It has virtually not modern industries
worth speaking of and had the slow-paced lifestyle that characterizes all backwaters. Today, some 27
years later, Shenzhen is a modern, sprawling metropolis with a population of more than 10.5 million
and home to some elite global brands and Fortune 500 companies. Crammed to the full with
industries of every hue, it is now the economic heartland of China. More importantly, it showcases a
model of growth that leapfrogs the limitations imposed by dirigisme to a high-growth export-led
powerhouse that is the envy of the world.
Today, India Inc. hopes to replicate the Chinese success story by creating its own brand of SEZs.
In simple terms, an SEZ is a designated free trade enclave that is deemed as a “foreign territory’ only
for trade operations’ dukes and tariffs. It has more liberal economic and labour laws than those of the
country and hence has the capacity to attract foreign investments, help promote exports and create a
level-playing field for domestic enterprises and manufacturers to compete in the global market. And
it’s not a new concept either. Since the end of World War II, SEZs, export-processing zones (EPZs)
and free trade zones (FTZs) have been bandied about as a solution to Jump-start economic
development in the developing countries to take on their Western counterparts. Interestingly, it was
the small Latin American country of Puerto Rico that showed the way for SEZs way back in 1947,
when it decided to pass a tax exemption law to attract firms from mainland USA to its shore. But It is
really the success of the five Chinese SEZs—especially Shenzhen in the Guangdong province, which
has attracted more than S 140 billion in FDI since the inception in 1980 and exported goods worth
nearly S 150 billion in 2004 (almost double of India's total exports in 2004-05 of S 80 billion)—that
has made SEZs a global media darling, in fact, China's astounding growth over the last three decades
is largely attributed to SEZs, which contribute more than 45% of the total Chinese exports.
India, too, has along history of dabbling in export promotion schemes. Asia's first EPZ was sent up in
Kandla in 1965, it was followed by the Santa Cruz EPZ in 1973. There were eight EPZs in the
country, but their performance is nothing to talk about.
What thwarted EPZs' progress were multiplicity of controls and clearances, lack of good
infrastructure and an unstable fiscal structure the very bottlenecks the SEZ policy, inspired by the
Chinese model, seeks to remove.
While the EPZs are just industrial estates, SEZs are industrial townships that provide supportive
infrastructure such as housing, roads, ports and telecommunication. EPZs have little protection from
cumbersome procedures and paperwork, while SEZs have single-window clearances that reduce
transaction costs and procedural hassles. But then again, while EPZs enjoy no benefits in terms of
100
relaxation in labour laws, the SEZ Act allows state governments to liberalie the labour laws in SEZs
falling within its jurisdiction.
Considering the country's creaking infrastructure, sorry state of public finances and massive
unemployment, getting private investment in infrastructure and attracting huge amounts of foreign
direct investment (FDI) especially into labour-intensive manufacturing sectors, should be the prime
objectives of the policy makers. After all, India—ranked—ranked at a lowly 134th on the ease of
doing business in the latest World Bank-IMF list—needs radical policy changes to emerge as a
global investment hotspot. And SEZs could just be the perfect tool to woe' all those multinationals
waiting to access our huge pool of cheap labour as well as the big market that India is.
And for one, it will be the private players and not the cash-strapped central government that will be
involved in converting large tracts of land into massive industrial townships.
Incentives for Manufacturers
• Duty-free import of capital goods, raw-materials, consumables and spares.

• 100% exemption on export profits for the first five years.
• 50% tax exemption on export profits for the next five years
• 50% tax exemption for another five years on reinvested profits.
• Exemptions from minimum alternate tax.
• Goods purchased from DTA are exempt from central sales tax.
• Exemption from service tax and capital gains on transfer from an urban area to SEZ.
Incentives for Developers
• No duty on goods imported either from the DTA or abroad.

• Income-tax exemption for the first 10 years.
• Service tax exemption for all services rendered within the SEZ.
• Exemptions from purchase, sale and turnover tax on all transactions.
• Exemption from stamp duty, registration fee and electricity duty.
• No tax on income from dividends and long-term capital gains tax.
• 100% FDI allowed for developers.
Debate over SEZs
The SEZs have been an issue of intense debate. Arguments have been advanced both for and against.
These can be briefly summarised as follows.
Arguments for SEZs
They will:
• Attract global manufacturing companies to set up base here.
• Create world-class infrastructure in the hinterland.
• Help create much-needed jobs across the country.
• Help the Centre save revenue on infrastructure development.
• Ease pressure on metres by creating new centres of employment.
• Ensure that risks of failure are borne entirely by the private sector
• Offer easier access to funds as foreign banks will be allowed in
101
• Bring down transaction costs for companies.
• Make units competitive through flexible labour laws.
• Bring foreign investment, technology and managerial talent.
Arguments against SEZs
They will:
• Lead to exploitation of the policy by fly-by-night developers.
• Could result in significant revenue losses for governments.
• Divert large tracts of farmland into non-performing SEZs.
• Result in domestic markets becoming under-served.
• Not produce world-class facilities in case of smaller size.
• Not guarantee the future of units in unsuccessful zones.
• Distort taxation structure, making units uncompetitive in DTA.
• Not be VITO compatible all the time.
• Lead lo large-scale exodus of industries from DTA.
• Allow the rise of private monopolies that will be against public interest.
102
LESSON 5
MARKETING
Dr. Hem Chand Jain
Marketing may be narrowly defined as a process by which goods and services are exchanged and the
value determined in terms of money prices. That means marketing includes all those activities
carried on to transfer to goods from the manufacturers of producers the consumers.
We shall be learning later in the lesson that marketing is more than mere physical process of
distributing goods and services. It is the process of discovering and translating consumer wants into
products and services. It begins with the customer (by finding their needs) and ends with the
customer (by satisfying their needs).
The scope of marketing can be understood in terms of functions that an entrepreneur has to perform.
These include the following:
(a) Functions of exchange: which include buying and assembling and selling?
(b) Functions of physical supply: include transportation, storage and warehousing.
(c) Functions of facilitation: product planning and development, marketing research,
standardization, grading, packaging, branding, sales promotion, financing.
The Marketing Concept
The marketing concept holds that the key to achieving organizational goals consists in determining
the needs and wants of target markets and delivering the desired satisfactions more effectively and
efficiently than competitors. Under marketing concept, the emphasis is on selling satisfaction and not
merely on the selling a product. The objective of marketing is not the maximization of profitable
sales volume, but profits through the satisfaction of customers. The consumer is the pivot point and
all marketing activities operate around this central point. It is, therefore, essential that the
entrepreneurs identify the customers, establish a rapport with them, identify their needs and deliver
the goods and services that would meet their requirements.
The components of marketing concept are as under:
(a) Satisfaction of customers: In the modern era, the customer is the focus of the organization.
The organization should aim at producing those goods and services, which will lead to
satisfaction of customers.
(b) Integrated marketing: The functions of production, finance and marketing should be
integrated to satisfy the needs and expectations of customers.
(c) Profitable sales volume: Marketing is successful only when it is capable of maximizing
profitable sales and achieves long-run customer satisfaction.
Marketing versus Selling
The basic difference between marketing and selling lies in the attitude towards business. The selling
concept takes an inside-out perspective. It starts with the factory, focuses on the company’s existing
products, and calls for heavy selling and promoting to produce profitable sales. The marketing
concept takes an outside-in perspective. It starts with a well-defined market, focuses on customer
needs, coordinates all the activities that will affect customers, and produces profits through creating
customer satisfaction.
103
Starting point Focus Means Ends
Selling Concept
Factory Products Selling and Profits through
Promoting sales volume
Marketing Concept
Market Customer Coordinated Profits through
Needs marketing customer satisfaction
Importance of Marketing in Small Business
Since marketing is consumer oriented, it has a positive impact on the business firms. It enables the
entrepreneurs to improve the quality of their goods and services. Marketing helps in improving the
standards of living of the people by offering a wide variety of goods and services with freedom of
choice, and by treating the customer as the most important person.
Marketing generates employment both in production and in distribution areas. Since a business firm
generates revenue and earns profits by carrying out marketing functions, its will engage in exploiting
more and more economic resources of the country to earn more profits.
A large scale business can have its own formal marketing network, media campaigns, and sales
force, but a small unit may have to depend totally on personal efforts and resources, making it
informal and flexible. Marketing makes or breaks a small enterprise. An enterprise grows, stagnates,
or perishes with the success or failure, as the case may be, of marketing. “Nirma” is an appropriate
example of the success of small scale enterprise.
Marketing of Services
The services sector is more than twice the size of the manufacturing sector. The growing competitive
market for services means that a marketing orientation has become essential for the survival for
service industries too.
India’s high capabilities in Information Technology are well known. In addition, there is the most
popular segment of its services sector, the entertainment industry, particularly films and TV happens
to be one of the fastest growing in the world. Indian films are popular across West Asia, Afghanistan,
Central Asia, Russia, South Africa and South East Asia. They are now penetrating the western world.
Market Segmentation
A market consists of large number of individual customers who differ in terms of their needs,
preferences and buying capacity. Therefore, it becomes necessary to divide the total market into
different segments or homogeneous customers groups. Such division is called market segmentation.
They may have uniformity in employment patterns, educational qualifications, economic status,
preferences, etc.
104
Market segmentation enables the entrepreneur to match his marketing efforts to the requirements of
the target market. Instead of wasting his efforts in trying to sell to all types of customers, a small
scale unit can focus its efforts on the segment most appropriate to its market.
A market can be segmented on the basis of the following variables:
1. Geographic Segmentation: The characteristics of customers often differ across nations,

states regions cities or neighbourhoods. The entrepreneur can decide to operate in one or a
few or all the geographic areas, but pay attention to differences in geographic needs and
preferences.
2. Demographic Segmentation: Variables such as age, sex, family size, income, occupation,
education, religion, race and nationality are widely used for market segmentation.
3. Psychological Variables: Personality, life style, social class, etc. can also be used for market
segmentation. For example, some products like pens, watches, cosmetics and briefcases are
designed differently for common men and status seekers.
4. Behavioural Segmentation: Buyers are divided into groups on the basis of their knowledge,
attitude, use or response to a product.
Marketing Mix
In order to cater to the requirements of identified market segment, an entrepreneur has to develop an
appropriate marketing mix. Marketing mix is a systematic and balanced combination of the four
inputs which constitute the core of a company’s marketing system – the product, the price structure,
the promotional activities and the place or distribution system. These are popularly known as “Four
P’s” of marketing.
An appropriate combination of these four variables will help to influence demand. The problem
facing small firms is that they sometimes do not feel themselves capable of controlling each o the
four variables in order to influence the demand.
Product Mix Price Mix Place Mix Promotion Mix

• Features • List Price • Location • Advertising
• Design • Discounts • Transport • Personal selling
• Variety • Allowances • Channels • Sales
• Quality • Payment Period • Coverage promotion
• Brand name • Credit Terms • Delivery • Publicity
• Packaging • Availability
• Sizes • Inventory
• Services
• Warranties
A brief description of the four elements of markets mix is as follows:
105
1. Product: The first element of marketing mix is product. A product is anything that can be
offered to a market for attention, acquisition, use, or consumption that might satisfy a want or
need. Products include physical objects, services, events, persons, places, ideas or maxis of
these. This element involves decisions concerning product line, quality, design, brand name,
label, after sales services, warranties, product range, etc. An appropriate combination of
features and benefits by the small firm will provide the product with USP (unique selling
proposition). This will enhance the customer loyalty in favour of its products.
Products and services are broadly classified into consumer products and industrial products.
Consumer products are bought for final consumption; whereas industrial products are bought
by individuals and organisations for further processing or for use in conducting business.
Other ways of classifying products are as follows:
(a) Convenience products: These are consumer products that the customer buys very
frequently, without much deliberation. They are low priced of low value and are
widely available at many outlets. They may be further subdivided as:
• Staple Products: Items like milk, bread, butter etc. which the family consumes
regularly. Once in the beginning the decision is programmed and it is usually
carried on without change.
• Impulse Products: Purchase of these is unplanned and impulsive. Usually when

the consumer is buying other products, he buys these spontaneously for e.g.
Magazines, toffees and chocolates. Usually these products are located where they
can be easily noticed.
• Emergency Products: Purchase of these products is done in an emergency as a

result of urgent and compelling needs. Often a consumer pays more for these. For
example, while travelling if someone has forgotten his toothbrush or shaving it; he
will buy it at the available price.
(b) Shopping products: These are less frequently purchased and the customer carefully
checks suitability, quality, price and style. He spends much more time and effort in
gathering information and making comparisons. E.g. furniture, clothing and sued cars.
(c) Specialty products: These are consumer goods with unique characteristics / brand
identification for which a significant group of buyers is willing to make a special
purchase effort. For example, Mitsubishi Lancer, Ray ban glasses.
(d) Unsought product: These are products that potential buyers do not know exist or do
not yet want. For example Life Insurance, a Lawyers services in contesting a Will.
The above product decisions are very important to ensure the sale of products. A product has
both tangible and intangible components. While buying a product, the customer does not
merely look for the physical product, but a bundle of satisfaction. Thus, the impact that any
product has upon a buyer goes well beyond its obvious characteristics. There is a
psychological dimension to all customer purchases; what a customer thinks about a product is
influenced by far more than the product itself. For example, the buyer of an air conditioner is
106
not purchasing cooling machine only. He looks for attractive colour and design, durability,
low noise, quick cooling, etc. these influencing factors must be considered by the small firms
to meet the requirements of different kinds of customers.
2. Price: The second element is the price, which affects the volume of sales. It is one of the
most difficult tasks of the marketing manager to fix the right price. The variables that
significantly influence the price of a product are: demand of the product, cost competition
and government regulation. The product mix includes: determination of unit price of the
product, pricing policies and strategies, discounts and level of margins, credit policy, terms of
delivery, payment, etc. Pricing decisions have direct influence on the sales volume and profits
of the firm. Price, therefore, is an important element of the marketing mix. Right price can be
determined through pricing research and by adopting test-marketing techniques.
Small firms should think of pricing as a method whereby prices are set with regard to costs,
profit targets, competition and the perceived value of products. Because of their simplicity,
cost-plus-pricing are attractive to small businesses, though this is not the only mode of
pricing utilized by small firms. For example, the profit margin in the cost-plus approach may
well be fixed after examining both the nature of the market and the competitor activity within
it. It is a mistake for small firms to rely wholly on cost-plus, but very small firms do that to
the detriment of profits and market share.
The pricing policies mainly followed by the small firms are:
(a) Competitive pricing: This method is used when market is highly competitive and the
product is not differentiated significantly from the competitor’s products.
(b) Skimming-the-cream pricing: Under this pricing policy, higher prices are charged
during the initial stages of the introduction of a new product. The aim is to recover the
initial investment quickly. This policy is quite effective when the demand for a
product is likely to be more inelastic with respect to price in its early stages; to
segment the market into segments that differ in price elasticity of demand and to
restrict the demand to a level, which a firm can easily meet.
(c) Penetration pricing: Under this policy, prices are fixed below the competitive level
to obtain a larger share of the market. Penetration pricing is likely to be more
successful when the product has a highly elastic demand; the production is carried out
on a large scale to achieve low cost of production per unit; and there is strong
competition in the market.
3. Promotion: Promotion refers to the various activities undertaken by the enterprise to

communicate and promote its products to the target market. The different methods of
promoting a product are through advertisement, personal selling, sales promotion and
publicity.
3. Place or Physical Distribution: This is another key marketing mix tool, which stands for the
various activities the company undertakes to make the product available to target customers.
Place mix or delivery mix is the physical distribution of products at the right time and at the
right place. It refers to finding out the best means of selling, sources of selling (wholesaler,
retailers, and agents), inventory control, storage facility, location, warehousing,
107
transportation, etc. This includes decisions about the channels of distribution, which make the
product available to target customers at the right time, at the right place and at the right price.
By selecting wrong distribution channels or by using the ones it has traditionally used, a
small firm could be depriving it of new market opportunities.
In a situation where a small firm has only one primary product, the general rise and fall of sales will
lead to a rise and fall of the firm, unless the firm learns to consistently adjust its marketing mix to
match consumer demand.
Marketing mix of a firm selling automatic washing machines

Target market Urban household with high income and status
consciousness.
Product Latest technology, automatic washing machines.
Price High, but should not be beyond the low range high-
income groups.
Promotion Heavy advertising through high image magazines and
television stressing the high quality of the machines.
Place (distribution) Though high image retailers.
A marketing mix must be consistent for any product. Pricing, for example, must be consistent with
packaging and perceived product quality. If one of these is not in line with others, then sales might
suffer as a consequence. A manager selecting a marketing mix is like a cook or chef preparing meal.
Each knows through experience that there is no ‘one best way’ to mix the ingredients. Different
combinations may be used depending upon one’s needs and objectives. In the marketing as in
cooking, there is no standard formula for a successful combination or ingredients. Marketing mixes
vary from company to company and from situation to situation. The right marketing mix is important
for any product to have a long life cycle.
Tender Marketing
The Corporation participates in bulk global tender enquiries and local tenders of Central and State
government and Public Sector Enterprises on behalf of small-scale units. It is aimed to assist small
units with ability to manufacture quality products but which lack brand equity and credibility or have
limited financial capabilities. Under this scheme, the Corporation has identified large number of
items for which it actively participate sin tenders of these Departments and Enterprises. On receipt of
the orders, Corporation farms out these orders to the units on whose behalf it has quoted. This
assistance has enabled large number of small units to compete for the orders, which are normally out
of reach of the individual units because of the bulk requirement.
The main benefits of the scheme are:
• Small scale units are provided with all requisite financial support depending upon the units’
individual requirements the purchase of raw material and financing of sale bill.
• Enhanced business volume helps small units achieve maximum capacity utilization.
108
• They are exempted from depositing earnest money.
• Small units are helped to participate in large and global tenders up to its capacity and capability.
• They are also assisted technically for quality upgradation and new product development in
addition to testing facility.
• Ensures fair margin to small units for their production.
• Publicity to small 8industries products.
• Production of quality products from the small scale sector.
Consortia Marketing
A small unit in its individual capacity faces problem very often to procure and execute large orders,
which inhibits and restricts the growth of small scale units. National Small Industries Corporation
Limited (NSIC) accordingly adopted Consortia Approach and built groups / consortia of units
manufacturing same products, thereby easing out marketing problem of SSI units. The Corporation
explores market and secures orders for bulk quantities. These orders are then farmed out to small
units in tune with their production capacity. Testing facilities are also provided to enable units to
improve and maintain the quality of their products conforming to the standard specifications.
• Participation and Procurement of Orders for bulk quantities.

• SSIs capacity of participating in large tenders enhanced.
• Support testing facility provided by NSIC.
• Financial assistance for Raw Material, Bill discounting etc. provided by NSIC.
• Wherever required, equipment is also financed to the SSI on priority.
• Help in developing / designing of new products and quality enhancement of SSI products.
Marketing Problems of Small Scale Units
All types of business enterprises face marketing problems, but these problems are more severe in
case of small scale units because of lack of knowledge, adequate funds and lack of experience. Some
of the marketing problems commonly faced by the small scale entrepreneurs in India are:
(a) Competition from large scale sector: Because of scarcity of resources, small entrepreneur
usually use inferior technology. As a result their products are not standardized. The obsolete
technology used by them gets translated into inferior quality of products.
(b) Lack of marketing knowledge: Most of the small scale entrepreneurs are not highly
educated or professionally qualified to have knowledge of marketing concept and strategy.
Their lack of expertise further inhibits their understanding of the prevailing trends in the
market.
(c) Lack of sales promotion: Small units lack the resources and knowledge for effective sales
promotion. Large scale units mostly have well-known branded names. They also have huge
amount of resources to spend on advertisement and other sales promotion tools. Small scale
units, on the other hand, have to pay a heavy commission to dealers for their selling efforts,
which reduce profits margins.
109
(d) Weak bargaining power: At the time of purchase of inputs, large scale entrepreneur manage
to get huge discounts and credit. Such facilities are not available to small units.
(e) Product quality: It is costly and difficult for a small unit to have quality testing and
evaluating equipment.
(f) Credit sales: The small scale enterprise is invariably called upon to sell on credit. However,
when it comes to purchasing inputs, they are denied liberal credit facilities. As a result, they
have to borrow excessive working capital than actually needed. This increases the general
cost of production and prices, making it non-competitive.
POLICY SUPPORT TO SMALL SCALE INDUSTRIES
Introduction
After attaining independence in 1947 India adopted mixed economic planning as a method to achieve
economic development. Along with the Large Scale sector the thrust was on the Small Scale sector
because of its decentralized, its small size, use of mainly indigenous, employment intensity and its
suitability for rural areas with limited techno-economic structure.
Industrial policies over the years have focused to promote SSIs through various incentives related to
financial, fiscal and infrastructure measures; along with a heavy industry base.
Objectives
After going through this less you should be able to:
• Explain the various provisions under Industrial Policy Resolution formulated by the Government
in assisting the small scale industry (SSI).
• Discuss the various fiscal incentives for SSIs.
Industrial Policy Resolutions and SSIs
Government’s attitude and intention towards industries in general and SSIs in particular are reflected
in Industrial Policy Resolutions. This sub-sections 20.2.1 to 20.2.11 deal with such resolutions.
Industrial Policy Resolution 1948
The government stressed the role of SSIs for balanced industrial growth. It was stated that SSIs are
particularly suited for the utilization of local resources and creation of employment opportunities.
The primary responsibility for developing small industries by creating infrastructure has been
provided to state governments. Central government frames the broad policies and coordinates the
efforts of State Government for the development of SSIs.
It stated that besides continuing the policy support to cottage, village and small industries by
differential taxation or direct-subsidies, the aim of state policy would be that the development of this
sector is integrated with that of large scale industry. The focus was to improve the competitive
110
strength of SSIs. To achieve this 128 items were exclusively reserved for production in SSIs, and 166
items were reserved for exclusive purchase by government from this sector.
It emphasize that whatever can be produced by SSIs must only be so produced. The main thrust of
policy was effective promotion of cottage, village and small industries widely dispersed in rural
areas and small towns. This thinking specified the following things:
(a) 504 items were reserved for exclusive production in the small-scale industries.
(b) The concept of District Industries Centres (DICs) was introduced so that in each district
single agency could meet all the requirements of SSIs under one roof.
(c) Technological upgradation was emphasigned in traditional sector.
(d) Special marketing arrangement through the provision of services, such as, product
standardization, quality control, market survey, were laid down.
The policy focused on the need of promoting SSIs through integrated industrial development
between large and small sectors. Industrially backward districts were indentified for faster growth of
existing network of SSIs. Following measures were specified in the policy:
(a) Investment limit was raised for tiny, small, and ancillary units to Rs. 2 lacs, Rs. 20 lacs, and
Rs. 25 lacs respectively.
(b) “Nucleus plants” in each industrially backward district replaced the “district industries
centres.” These were to concentrate on assembling the products of SSIs and to produce inputs
needed by large number of small units.
(c) Reservation of items and marketing support for small industries was to continue.
(d) Availability of credit to rowing SS units was continued.
(e) Buffer stocks of critical inputs were to continue.
(f) Agricultural base was to strengthen by providing preferential treatment to agro-based
industries.
(g) An early warning system was to establish to avoid sickness and take appropriate remedial
measures.
Main features of this Resolution are as follows:
(a) It raised the investment ceiling in plant and machinery for SSIs.
(b) It created central investment subsidy for this sector in rural and backward areas. Also,
assistance was granted to women entrepreneurs for widening the entrepreneurial base.
(c) Reservation of items to be produced by SSIs was increased to 836.
(d) Small Industries Development Bank of India was established to ensure adequate flow of
credit to SSIs.
(e) Stress was reiterated to upgrade technology in improve competitiveness.
(f) Special emphasis was laid on training of women and youth under Entrepreneurial
Development Programme.
(g) Activities of Kadhi and Village Industries Commission and Khadi and Village Industries
Board were to expand.
111
The basic thrust of this resolution was to simplify regulations and procedures by delicensing,
deregulating, and decontrolling. Its salient features are:
(a) SSIs were exempted from licensing for all articles of manufacture.
(b) The investment limit for tiny enterprises was raised to Rs. 5 lacs irrespective of location.
(c) Equity participation by other industrial undertakings was permitted up to a limit of 24 percent
of shareholding in SSIs.
(d) Factoring services were to launch to solve the problem of delayed payments to SSIs.
(e) Priority was accorded to small and tiny units in allocation of indigenous and raw materials.
(f) Market promotion of products was emphasized through co-operatives, public institutions and
other marketing agencies and corporations.
Comprehensive Policy Package for SSIs and Tiny Sector 2000
Main focus of this policy is as follows:
(a) The exemption for excise duty limit raised from 50 lakhs to Rs. One crore to improve the
competitiveness.
(b) Credit linked capital subsidy of 12% against loans for technology up gradation was provided
in specified industries.
(c) The third census of small scale industries by the ministry of SSI was conducted, which also
covered sickness and its causes in SSI’s.
(d) The limit of investment was increased in industry related service and business enterprises
from Rs. 5 lacks to Rs. 10 lakhs.
(e) The scheme of granting Rs. 75000 to each small scale enterprise for obtaining ISO 9000
certification was continued till the end of 10th plan.
(f) SSI associations were motivated to develop and operate testing laboratories. One time capital
grant of 50% was given on reimbursement basis to each association.
(g) The limit of composite loan was increased from Rs. 10 lakhs to Rs. 25 lakhs.
(h) A group was constituted for streamlining of inspection and repeal of redundant laws and
regulations.
(i) The coverage of ongoing Integrated Infrastructure Development (IID) was enhanced to cover
all areas in the country with 50% reservation for rural areas and 50% earmarking of plots for
tiny sector.
(j) The family income eligibility limit of Rs. 24000 was enhanced to Rs. 40000 per annum under
the Prime Minister Rozgar Yozna (PMRY).
Industrial Policy Package for SSI 2001-02
This policy emphasizes the following:
(a) The investment limit was enhanced from Rs. 1 crore to Rs. 5 crore for units in hosiery and
hand tool sub sectors.
(b) The corpus fund set up under the Credit Guarantee Fund Scheme was increased from 125
crore to 200 crore.
112
(c) Credit Guarantee cover was provided against an aggregate credit of Rs. 23 crore till
December 2001.
(d) 14 items were de-reserved in June 2001 related to leather goods, shoes and toys.
(e) Market Development Assistant Scheme was launched exclusively for SSI sector.
(f) Four UNIDO assisted project were commissioned during the year under the Cluster
development Programme.
Industrial Policy on SSIs 2003-04
The following are the highlight of this endeavor:
(a) 73 items reserved for exclusive manufacture in the SSI sector were de-reserved in June 2003.
These consist of chemical and their products, leather and leather products, laboratory reagents
etc.
(b) Selective enhancement of investment in plant and machinery from Rs. One crore to Rs. 5
crore. It was for 13 items in stationary sector and 10 items of drugs and pharmaceuticals
sector from June 2003.
(c) Banks were directed to provide credit to SSI sector within an interest rate band of 2 percent
above and below their Prime Lending Rate (PLR).
(d) The composite loan limit for SSI was raised from Rs. 25 lakhs to Rs. 50 lakhs.
(e) The limit of dispensation of collateral requirement was raised from Rs. 15 lakhs to Rs. 25
lakhs on the basis of good track record and financial position of the unit.
(f) The lower limit of Rs. 5 lakhs on loans covered under the Credit Guarantee Scheme was
removed. All loans up to Rs. 25 lakhs were made eligible for guarantee cover under the
Credit guarantee Scheme.
(g) 417 specialised bank branches were made operational for SSIs.
(h) Third all India census for SSI was conducted throughout the country and its final results were
released on January 17, 2004.
(i) 60 clusters were identified in July 2003 for focused development.
(j) Small and medium Enterprise (SME) fund of Rs. 10000 crore was set up under SIDBI to
solve the problem of inadequate finance for SSIs.
(k) Laghu Udyami Credit Card Scheme was liberalized. Under this scheme, the credit limit was
increased to Rs. 10 lakhs from Rs. 2 lakhs. But, it was only for borrowers with satisfactory
track record.
Policy Initiatives on SSI 2004-05
Policy initiatives for this year are as follows:
(a) The national commission on Enterprises in the Un-organised/Informal Sector was set up in
September 2004. It suggested measures considered necessary for improvement in the
productivity of these enterprises, generation of large scale employment opportunities, linkage
of the sector to institutional framework in areas like credit, raw material supply,
infrastructure, technology up gradation, marketing facilities and skill development by
training.
(b) 85 items were de-reserved in October 2004.
113
(c) The investment limit in plant and machinery was raised from Rs. One crore to Rs. 5 crore in
October 2004, in respect of seven items of sports goods to help to upgrade the technology and
enhance competitiveness.
(d) The Small and Medium Enterprise (SME) fund of Rs. 10000 crore was started by SIDBI
since April 2004, with 80% of the lending for SSI units. The interest rate was 2% below the
prevailing Prime Lending Rate (PLR) of the SIDBI.
(e) The Reserve Bank of India raised the composite loan limit from Rs. 50 lakhs to Rs. One
crore.
(f) Promotional Package for small enterprises was initiated.
Policy Package for SME 2005-06
This policy package contains the following points:
(a) The Ministry of Small Scale Industries has identified 180 items for dereservation.
(b) Small and Medium Enterprises were recognized in the services sector, and were treated on
par with SSIs in the manufacturing sector.
(c) The corpus of the Credit Guarantee Fund was raised from Rs. 1132 crore in March 2006 to
Rs. 2500 crore in five years.
(d) Credit Guarantee Trust for Small Industries (CGTSI) was advised to reduce the one time
guarantee fee from 2.5 per cent to 1.5 percent for all loans.
(e) Insurance cover was extended to approximately 30,000 borrowers, identified as chief
promoters, under the CGTSI. The sum assured would be Rs. 200000 per beneficiary and the
premium will be paid b y CGTSI.
(f) The emphasis was laid on Cluster Development model not only to promote manufacturing
but also to renew industrial towns and build new industrial townships. The model is now
being implemented, in nine sectors including khadi and village industries, handlooms,
handicrafts, textiles, agricultural products and medicinal plants.
Fiscal Incentives
Fiscal incentives are provided through tax concession granted in the form of exemptions of direct or
indirect taxes leviable on production or profits, besides special tax concessions. These incentives
have been provided to promote the SSIs.
Tax Holiday
With effect from financial year 2005-06, deduction in respect of profits and gains for small scale
industrial undertakings is available under Section 80IB.
Small scale industrial undertaking can claim deduction at the following rates:
(a) If SSI unit is owned by a company, the deduction available in 30% for first 10 years,
(b) If SSI unit is owned by a co-operative society, the deduction to be availed is 25% for first 10
years, and
(c) If any other person owns SSI unit, the deduction to be claimed is 25% for first 10 years.
The small scale units can avail this tax exemption facility only after fulfilling the following
conditions.
114
(a) No small scale or ancillary undertaking shall be subsidiary of, or owned or controlled by
other industrial undertaking.
(b) SSI unit can manufacture any nature type of goods article to avail deduction.
(c) The SSI unit should commence business between 1st April 1991 and 31st March 2002.
(d) They should employ at least 10 workers in a manufacturing process carried out with the aid
of power or at least 20 workers in a manufacturing process carried out without the aid of
power.
(e) This tax exemption from total income is allowed from the assessment year in which unit
begin to manufacture or produce goods or articles.
Excise Concessions
Government of India has provided a major relief by granting full exemption from the payment of
central excise duty on a specified output and thereafter slab-wise concessions. The following
concessions are available to them in this regard:
(a) SSI units producing goods up to Rs. 100 lakhs are exempted from payment of excise duties.
(b) SSI units having turnover less than Rs. 60 lakhs per annum need not have a separate
storeroom for storing the finished products.
(c) SSIs are also not required to maintain any statutory records such as daily stock account of
production and clearances, raw material account, personal ledger account etc. Their own
records are adequate for excise purposes.
(d) There is no distinction between registered and unregistered units for SSI concessions.
Further, the eligibility for excise concessions for SSIs has been based on annual turnover
rather than SSI registration. Duty liability is to be discharged by 15th of the following month.
(e) The SSI exemption is available for home consumption as well as in respect of goods exported
to Nepal & Bhutan.
(f) Normally, excise officers are not expected to visit SSI units paying less than Rs. 11 lakhs
duty annually.
(g) With effect from 1-4-1994, Gate-Pass System was replaced by manufacturer invoice to cover
clearances of goods as the duty-paying document.
Presently there are two streams of concessions to SSIs. These are as follows:
(a) SSI Scheme (Without CENVAT): This scheme is effective from 1st April 2000. The Table
shows the rate of duty applicable to such manufactures whose turnover does not exceed Rs. 3
crores in the previous financial year in respect clearances of excisable goods for home
consumption (including exports to Nepal or Bhutan) from one or more factories of the same
manufacturer or from factory by one or more manufacturers:
Table: Rate of Duty in Respect of Clearances of Excisable Goods
S.No. Value of Clearance Rate of Duty

(Rs.)
1 Up to Rs. 100 Lakhs NIL
2 100 – 300 Lakhs Normal Rate of Duty
It may be noted that beyond clearances of Rs. 100 lakhs, the manufacturer is liable to pay
normal rate of duty. The manufacturer may opt for not availing exemption and instead pay
115
the normal rate of duty on the clearances. But once the option is exercised, it shall continue
till the remaining part of the financial year.
Value for purpose of calculating the limit of 100 and 300 lakhs is the ‘Assessable value’ i.e.,
wholesale price at factory gate, exclusive of taxes, where price is the sole criteria.
(b) SSI Scheme (with CENVAT): This scheme is effective from 1st April 2003. It provides the
concessional rate of duty in respect of clearances of specified goods for home consumption
(including exports to Nepal or Bhutan), and also states that all clearances of the specified
goods which are used for captive consumption in production of the specified goods shall be
subjected to ‘nil’ rate of duty. The Table shows the Rate of Duty.
Table: Rate of Duty in Respect of Clearances of Specified Goods

(Rs.)
1 Up to Rs. 100 Lakhs 60% of normal rate
A manufacturer can opt for this option any time determining his eligibility for concession and
the concessional rate of duty.
The exemption shall apply only subject to the following conditions:
i. A manufacturer who intends to avail the exemption shall exercise his option in writing to the
jurisdiction Deputy Commissioner or Assistant.
ii. The clearances of specified goods already made during the financial year, prior to the
exercise of such option, shall be taken into account for computing the aggregate value of
clearances. Value of all clearances of all factories should be clubbed.
iii. The aggregate value of clearances of all excisable goods should not exceed Rs. 300 lakhs in
the preceding year.
The exemption contained shall not apply to the specified goods bearing a brand name / trade name
(whether registered or not) of another person, except in some specified cases.
Measures for Promotion and Development of SSIs
Central and State governments have formulated several schemes to make the SSIs vital and
competitive. Some of these schemes are enumerated in sub-section 20.4.1 to 20.4.7.
Reservation Policy
Reservation of items for exclusive manufacture in SSI sector has been one of the important policy
measures for promoting and protecting this sector against competition from medium / large /
multinational companies.
The policy received statutory backing in 1984 under Industries (Development & Regulation) Act,
1951. However with the opening up of Indian trade in 1991, most of reserved items were importable
with the removal of quantitative restrictions. This paved the way to phase out reservation in due
course, and every year some items were dropped from the reserved list. Out of 836 items reserved in
116
1989, 39 items were dereserved in four phases viz., 15 items in 1997, 9 items on 1999, 1 item on
2001 and 14 items on 2001. Subsequently, 51 items were dereserved in 2002, 75 items in 2003 and
85 items in 2004, 108 in March 2005, and 180 in May 2006. Now 298 items stand reserved for this
sector.
It is believed that dereservations will enable medium / large / multinational companies to move out
of capital intensive manufacturing to enter labour-intensive production. This shift over will certainly
create new employment opportunities at rapid rate.
Government’s Purchase Preference Policy for SSI Products
Realizing that small scale units face the problem of marketing their products at remunerative prices,
Government stores purchase programme was initiated to assist small-scale industries in obtaining a
fair share of the total purchases made by the Government and its departments. Bulk and departmental
buyers such as the Railways, Defence and Communication ministries and companies are invited in
participate in buyer-seller meets to enrich SSI unit’s knowledge regarding terms and conditions,
quality standard, etc. required by the buyer. Under the Stores Purchase Policy of the Government 409
items of stores were reserved for exclusive purchase from KVIC / Women’s Development
Corporation / Small Scale units in 1989.
This list was reviewed. In February 2004, the Committee (set up to consider the question of inclusion
of additional items) received list and 358 items were approved, after deleting items having common
nomenclature and addition of some new ones. This list also includes 8 handicraft items reserved for
purchase from the Handicraft Sector.
Governments Price Preference Policy for marketing SSI Products
Assistance under Government Stores Purchase Programme in the form of reservation of products for
exclusive purchase from small scale sector and price preference in one of the major instruments for
providing marketing supports to the small scale industries. These facilities include the following:
(a) Price preference up to 15% in case of selected items.

(b) No registration fee.
(c) A consortium to channelize and identify markets for the products of SSIs both in India and
abroad.
Apart from this, the Single Point Registration Scheme of National Small Industries Corporation
(NSIC) the following benefits are given to SSI units, which get them registered with the NSIC:
(a) Availability of Tender Sets free of cost.

(b) Exemption from payment of Earnest Money Deposit.
(c) Exemption from payment of Security Deposit up to the monetary limit for which the unit ire
registered.
(d) Price preference up to 15% over the lowest quotation of the large scale units (on merits).
The units registered with NSIC under this scheme are given a registration certificate indicating items,
for which registered and monetary limit up to which registered. The Policy of the Price Preference of
15% is a critical benefit available to the SSI sector. The benefit is available to compensate them on
117
account of non-availability of economies of scale, poor resource base, poor access to raw-material
etc. as compared to the large scale sector.
Technical Assistance
Technology is the key to enhance an organisation’s competitive advantage in today’s dynamic

information age. SSIs need to develop and implement a technology strategy in addition to financial,
marketing and operational strategies, and adopt the one that helps integrate their operations with their
environment, customer and suppliers.
National Small Industries Corporation Ltd. (NSIC) offers SSI units the following support and
services through is Technical Services Centre, Extension Centres, Software Technology Parks and
Technology Transfer Centre:
(a) Technology audits and benchmarking.

(b) Technology needs assessment.
(c) Technology sourcing.
(d) Application of new techniques.
(e) Technology acquisition.
(f) Material testing facilities through accredited laboratories.
(g) Product design including computer Aided Designs.
(h) Common facility support in machining.
(i) Energy and environment services at selected centres.
(j) Classroom and practical training for skill upgradation.
Software Technology Parks (STPs) facilitate small industries in setting up 100% export-oriented
units for software export. They also act as major point to activate software exports directly through
NSIC. These STPs extend support in terms of the requisite infrastructure to the SSI units to start
business operations with a minimum lead-time. Following facilities are available at NSIC Software
Technology Park:
(a) Built-up Space: this enables the software industries to commence their operations with
minimum gestation period.
(b) Instant Power Connection: Instant power connections and generator facility is also
available on site, which will allow software units to work without any interruptions.
(c) High Speed Data Link: High-speed data communication facility through satellite connection
is available. The member units can avail 64 kbps to 2 mbps dedicated leased channels.
(d) Business Centre: A business centre comprising of Conference Hall, Photocopier, Fax,
Training aids, etc. is available inside the STP complex for the member units.
(e) Telephones: Each member units will be provided with one telephone line for business
promotion on occupation.
Raw material Assistance
NSIC aims to help SSI units by financing purchase of raw material (both indigenous and imported),
thus allowing them to focus on manufacturing quality product. State Directorate of Industries
118
distributes scarce raw materials to small units. State Small Industries Development Corporations
have set up depots for distribution of raw materials to SSIs. The Central Government has introduced
a buffer stock scheme to ensure availability of scarce raw materials to this sector.
Financial Assistance
Central and State Governments have introduced several schemes to ensure adequate and timely
availability of credit to SSIs through various institutions.
The main features of the financial services offered by institutions are as follow:
(a) Financial assistance for the equipment and marketing activities under one roof with speed and
efficiency.
(b) Prompt clearance of the proposals with minimum processing time and without cumbersome
paper work.
(c) Assistance in preparing the proposals and completion of document formalities.
(d) Market oriented interest rates and service charges with liberal terms of margin, level of
assistance and repayment schedules.
(e) Arrangement with commercial banks for sanction of loan proposals received from small
enterprises.
New Initiatives
The following new initiatives have been taken by the government:
(a) Advisory and Mentoring Services: Inadequate management skills are often the cause of
non-performance of small enterprises. NSIC’s advisory and mentoring services are aimed at
effectively addressing this impediment to growth. It offers mentor-pupil relationship services
in which the Mentor, a person with wide experience in running his own business, will
volunteer his services to individual or a group of units – the pupil. An advisor, a senior
professional, generally retired and a specialist in a specific area will assist in the process.
Mentors and advisor will provide the necessary professional and moral support in the early
lifecycle of an enterprise or to existing units facing critical operational problems.
(b) Technology Business Incubators: Innovative entrepreneurial ideas have to be fostered and
developed in a supportive environment before they become attractive for Venture Capital
Institutions. Incubation centre enable technical entrepreneurs to conduct their Research and
Development programmes in a professional, friendly and supportive environment, without
making any further investment.
Technology Business incubators are an important tool for entrepreneurial development.

Recognizing this need, NSIC has setup the following Technology Business Incubators.
(1) Information Technology

(2) Product Design
(3) Energy and Environment
(4) Bio-Technology
(5) Electronics and Communication.
119
(c) Suppliers Rating Accreditation Services: Accreditation, a necessity for buyer comfort,
speaks of the enterprise’s ability to supply reliably and effectively a product, in accordance
with the customer’s changing needs. NSIC provide accreditation to SSI units by developing
an effective accreditation system process through collaboration with Indian and International
Accreditation agencies. Accreditation is provided at two levels – for all Government
purchases and for private national international buyers.
Summary
Small Scale Industry sector has emerged as India’s engine of growth in the New Millennium. The
SSI sector accounts for nearly 40 percent of value added in the manufacturing sector and 34 percent
of total exports from the country. Through 95 percent of industrial units in the country, the sector
provides employment to about 20 million persons.
The government has recognized its importance for the economy and its intention towards promotion
of SSIs is reflected in various Industrial Policy Resolutions right from the year 1948. The primary
objective of the Small Scale Industrial Policy during the nineties was to impart more vitality and
growth-impetus to the sector to enable it to contribute its mite fully to the economy, particularly in
terms of growth of output, employment and exports. The sector has been substantially delicensed.
Further efforts would be made to deregulate and debureaucratise the sector with a view to remove all
fetters on its growth potential, reposing greater faith in small and young entrepreneurs. All statutes,
regulations and procedures were reviewed and modified, wherever necessary, to ensure that their
operations did not militate against the interests of the small and village enterprises.
Government is aware of the challenges faced by SSIs and has been trying to improve their
competitiveness through various measures. These consist of the following:
(a) Tax concessions have been provided to SSIs to promote investment in this sector and also to
grant relief to small entrepreneurs.
(b) Technological facilities have been increased.
(c) In order to facilitate adequate flow of credit efforts have been done.
(d) Measures have also been taken to improve infrastructure facilities and promote marketing of
products.
120
UNIT 5
LESSON 1
PRODUCT LIFE-CYCLE
Dr Hem Chand Jain
Like human beings, products also have a limited life-cycle and they pass through several stages in
their life-cycle. A typical product moves through five stages, namely, introduction, growth, maturity,
saturation and decline.
Fig….. Time (Years) Product Life-Cycle
These stages in the life of a product are collectively known as product life-cycle. The length of the
cycle and the duration of each stage may vary from product to product, depending on the rate of
market acceptance, rate of technical change, nature of the product and ease of entry. But sales
volume and profit level change from stage to stage as shown in Fig…….. Every stage creates unique
problems and opportunities and, therefore, requires a special marketing strategy. A brief description
of each stage and the marketing strategy required for it is given below:
1. Introduction: In the first stage, the product is introduced in the market and its acceptance is
obtained. As the product is not known to all consumers and they take time to shift from the
existing products, sales volume and profit margins are low. Competition is very low,
distribution is limited and price is relatively high. Heavy expenditure is incurred on
advertising and sales promotion to gain quick acceptance and create primary demand. Growth
rate of sales is very slow and costs are high due to limited production and technological
problems. Often a product incurs loss during this stage due to high start up costs and low
sales turnover.
2. Growth: As the product gains acceptance, demand and sales grow rapidly. Competition
increases and prices fall. Economies of scale occur as production and distribution are
widened. Attempt is made to improve the market share by deeper penetration into the existing
market or entry into new markets. The promotional expenditure remains high because of
increasing competiton and due to the need for effective distribution. Profits are high on
account of large scale production and rapid sales turnover.
1
3. Maturity: During this stage prices and profits fall due to high competitive pressures. Growth
rate becomes stable and weak firms are forced to leave the industry. Heavy expenditure is
incurred on promotion to create brand loyalty. Finns try to modify and improve the product,
to develop new uses of the product and to attract new customers in order to increase sales.
4. Saturation: Market peaks and levels off during saturation. Few new customers buy the
product and repeat orders disappear. Prices decline further due to stiff competition and firms
fight for retaining market share or replacement sales. Sales and profits inevitably fall unless
substantial improvements in the product or reduction in costs are made. Product
differentiation, market segmentation and product improvement are the marketing strategies
used in this stage.
5. Decline: The sales and profits of the product fall rapidly due to its gradual displacement by
new products or evolving change in consumer preferences. As cost control becomes essential
to avoid losses, promotion expenditure is considerably reduced. Price becomes the main
weapon of competition. Many firms ultimately abandon the product to make better use of
resources. New product innovations enter the market to take the place of the obsolete and
abandoned products. This is the obsolescence stage. Finns' which fail to develop new or
improved products to arrest continuous decline in sales are forced out of business.
The concept of product life-cycle has important implications. Firstly, the concept indicates that
products have a limited life and management must develop new products or improve existing ones to
replace them to maintain sales and profits. Secondly, the product life-cycle concept shows the
expected sales volume and profit margins for a new product at various stages in its life. It can,
therefore, be used as a tool of business forecasting. Thirdly, the concept serves as a framework for
taking sound marketing decisions at each stage of the product life-cycle. Fourthly, the product life-
cycle points out the need for significant and periodic adjustments in the marketing strategy or
marketing mix of the firm. Emphasis on different elements of the marketing mix varies from one
stage to another. In initial stages, product design and promotion are important considerations. During
the middle phase, skilled distribution and effective dealer control become significant. In the final
stage, operating cost control becomes vital. Timely recognition of the need to change marketing
strategy is essential to maintain growth. In the introductory stage, informative advertising is used to
build up initial demand for the product while during maturity, persuasive advertising is required to
improve the competitive status of the product.
Stages in Product Life Cycles and Corresponding Strategies
Stage Features Possible Strategies

Introduction 1. Product unknown 1. Create favourable first
impression
2. Slow customer acceptance 2. Informative advertising––try

my product.
3. High risk of failure 3. Gifts and discounts to attract

customers
4. Main task is to create primary 4. Maintain close personal

demand contact
5. Skimming price strategy

lengthens life cycle but brings
2
in competition
Growth 1. Sales run ahead of production 1. ‘Buy my brand’ promotional

strategy
2. Profits and competition rise 2. New versions of basic product

model offered to
accommodate the growing
market
3. New competitors enter the 3. Expand distribution channels

market
4. Distribution becomes more 4. Establish a range of prices

significant
5. Prices fall 5. Persuasive mass advertising
6. Develop brand image and

preferences
7. Focus on customer service
8. Change from skimming price

strategy to competitive pricing
strategy
Maturity 1. Highest degree of competition 1. Try to maintain differential

price advantage
2. Sales rise at declining rate 2. Introduce new features into

the product
3. Extend warranties
4. Very competitive promotion

strategy
Saturation 1. Sales level off 1. Hold or increase market share
2. Supply exceeds demand 2. Focus packaging to create

more frequent use
3. Intense price competition 3. Develop new uses of the

product
4. Develop new markets
5. Create psychological product

differences
6. Diversify
3
Decline 1. Overcapacity develops 1. Integrate forward
2. Sales and price fall 2. Introduce elements of style

and fashion
3. Selective and specific

promotion
4. Defensive mergers and

acquisitions
5. Repositioning, repackaging to
revive the product
6. Informative advertising.
Product life-cycle analysis is a disciplined and periodic review that provides a profile of a product's
position. Product life-cycle concept does not perfectly explain the behaviour of all products and it
may be difficult to predict the timings of various stages. For instance, salt and sugar have never been
in the decline stage. However, by providing a life-history of a product, life-cycle concept is helpful
in designing appropriate marketing strategies. The life of a product can be prolonged or changed by
developing new uses, reducing prices, using aggressive promotion, changing package, brand or label
and by improving the product. For instance, Dupont, a company of U.S.A. has sustained the sale of
nylon by (1) promoting more frequent use among current users, i.e., necessity of wearing nylon
stockings; (2) developing more varied use of the product, i.e., fashion value of tinted hose; (3)
creating new users, i.e., earl teenagers; and (4) finding new uses for the basic material, e.g., nylon
tyres.
ADVERTISING
Meaning
Mass selling requires quick and economical dissemination of information on a large scale to
potential customers. Advertising is an effective means for this purpose. According to the American
Marketing Association, Advertising is "any paid form of non-personal presentation or promotion of
ideas, goods or services by an identified sponsor." In the words of Stanton, "advertising consists of
all the activities involved in presenting to a group a non-personal, oral or visual, openly sponsored
message regarding a product, service or idea; this message called an advertisement, is disseminated
through one or more media and paid for by the identified sponsor."
Thus, advertising includes all activities required to prepare the message (advertisement) and to get it
to the intended persons to induce action in accordance with the intent of the advertiser.
The main features of advertising are as follows :
(i) It is impersonal form of presentation or promotion of products, services or ideas. There is no

face to face contact with the customers.
(ii) It is paid form of communication. The advertisements are communicated through various
advertising media and the advertiser has to pay for the space or time hired to the owner of the
media.
(iii) It is issued by an identified sponsor. The advertisement contains the name of the advertiser.
(iv) It is a form of mass communication. The message is directed to a large number of persons
simultaneously.
4
Advertising and Publicity
Publicity is any form of commercially significant news about an organisation, a product or service
carried by the press, radio, television, etc. that is not paid for by the sponsor. An organisation may
skillfully promote itself by inducing the news media to carry news favourable to it. These days
business firms commission professional public relations experts for promotion through publicity.
Advertising is different from publicity in the following ways :
(i) Advertising is paid for by its sponsor whereas publicity is usually not paid by its sponsor.
(ii) Advertising is done by an identified sponsor but in publicity the sponsor is not identified.
(iii) Advertising is always impersonal whereas publicity may be both personal and impersonal.
(iv) In advertising the sponsor exercises direct control over the size and frequency of the message.
But in publicity control lies with the news media.
(v) Publicity has greater versatility than advertising. News, stories, editorials and special write
ups about a company or its products appear more authentic to the readers than advertisements
sponsored by a company.
(vi) Publicity is off guard because the news can reach even those who otherwise avoid
advertisement. Advertising is not off guard in this way.
Advertising and Salesmanship
Advertising and salesmanship both are techniques of promoting sales. However, there are following
differences between the two:
(i) Advertising is impersonal and indirect communication whereas salesmanship is direct face to
face and personal communication.
(ii) Advertising is mass communication whereas salesmanship is individualistic communication.
"Advertising is like a shot gun conveying message to masses while personal selling is like a
rifle shooting showing communicating with individuals."
(iii) Advertising is done through written and visual messages while salesmanship involves the use
of spoken word only. Advertising is sometimes described as salesmanship in print. However,
printed word is only one medium of advertising.
Distinction between Advertising and Personal Selling
Point of distinction Advertising Personal Selling

1. Nature of Impersonal and mass method of Personal and individualised
communication communication — No face to communication — Face to face
face interaction interaction
2. Payment Direct payment for each No direct payment for each

advertisement contact
3. Cost Less costly and less time More costly and more time
consuming consuming
4. Flexibility Less flexible Very flexible
5. Feedback No immediate feedback Immediate feedback available

available
5
6. Aims To create customers To make sales
7. Completeness Incomplete sales tool Complete sales tool
8. Sales force Recruitment, training and Requires recruitment, training

management motivation of sales and motivation of sales persons
persons not required
Despite the above differences, advertising and salesmanship are complementary to each other.
Advertising prepares the necessary ground for personal selling by making people aware of a product
and its features. It helps to reduce sales resistance by highlighting the utility and superiority of a
product or service. Advertising is a mass communication that supplements the voice and personality
of the individual seller. Salesmanship converts the potential demand into sales. It completes the task
of advertising by making actual sales to customers attracted through advertising.
To conclude, "salesmanship and advertising are similar in that the main purpose of each is to
persuade individuals outside the company to act in the company's interests. While the salesman uses
the charm of his presence to arouse the customers' interest in the product the advertising man makes
use of his art and copy. They are like cup and saucers or coat and trouser, one being incomplete
without the other."
Objectives and Functions of Advertising
The ultimate objective of advertising is to sell something—a product, service or idea. However,
advertising by itself cannot make sales. Therefore, the real objective of advertising is to influence the
behaviour of prospective buyers in a manner that will lead to higher sales. In addition to this general
objective, advertising is also used for certain specific objectives which are given below:
1. To introduce a new product by creating awareness and interest for it among the prospective
customers.
2. To enter a new market or attract a new group of customers.
3. To fight competition in the market by reminding users to buy the product.
4. To create brand preference and brand loyalty.
5. To support personal selling by opening customer's doors for salesmen.
6. To enhance the goodwill of the firm by promising better quality at fair prices.
7. To improve dealer relations because dealers prefer to sell products which are effectively
advertised.
8. To reach people inaccessible to salesmen.
9. To warn the public against imitations or spurious products.
Utility (Need and Significance) of Advertising
Advertising has become an indispensable function in modem business due to cut-throat competition
and mass production. It pervades our economic and social life. It helps to disseminate information
which is useful to businessmen, consumers and the society in general. Through it one can create an
indirect and impersonal link with his prospects easily, quickly and economically. The benefits of
advertising to various parties are described below :
6
To Producers and Traders: Advertising is helpful to manufacturers and dealers in the following
ways:
(i) Meeting competition: Advertising is an important means for facing competition. By creating
brand loyalty, it helps to maintain sales and market share. It supplements personal selling and
sales promotion. It creates preference for a particular product, opens doors for salesmen and
reinforces point of purchase display, thereby reducing the costs of creating and maintaining
demand.
(ii) Steady demand: Advertising creates regular demand by smoothening out seasonal and other
fluctuations. For instance, advertising is used to emphasise hot and cold uses of coffee to
maintain regular sales both during summer and winter. By suggesting new and more frequent
use of product, advertising helps to maintain demand throughout the year. Steady demand
enables regular production.
(iii) Higher sales volume: Advertising helps to increase demand, expand markets and enhance
sales of existing products. Through repeated advertising, a producer can create new
customers and enter new markets. It creates new wants and increases sales. Advertising is an
essential technique of mass selling.
(iv) Introduction of new product: Advertising is helpful in introducing new products by creating
awareness and gaining their acceptance. By informing consumers about the new product,
advertising stimulates their interest and persuades them to buy it. Effective advertising helps
in over-coming consumers' resistance to new products.
(v) Economies of scale: Advertising facilitates mass distribution of goods. It reduces

dependence on middlemen as dealers are more willing to stock and sell well-advertised
goods. Direct distribution and rapid sales turnover help to reduce costs of distribution. Mass
distribution and steady demand lead to large scale and regular production. As a result, several
economies of scale become available and cost of production per unit is reduced. Investment
in inventories can be reduced.
(vi) Goodwill: Advertising helps in creating a good image of the firm and reputation for its
products. A favourable image increases the capacity of the firm .to survive competition and
depression. It is through effective advertising that Tatas, Birlas, etc. have become household
names. It has rightly been observed that "doing business without advertising is like winking
at a girl in the dark. You know what you are doing but no one else knows". By building
goodwill advertising enables business firms to obtain repeat orders.
(vii) Employee morale: By building reputation of the firm, advertising provides a sense of security
to employees and improves their morale. Salesmen feel happy as their task becomes easier
when the product and its producer are known to customers. In a well reputed firm, executives
have a feeling of pride and job satisfaction which are necessary for better performance.
To Customers: Advertising is beneficial to consumers due to the following reasons :
(i) Convenience: Advertising makes purchasing easy by reducing the time and effort involved
in shopping. People become aware of the source and availability of different products and
need not search them out. They can make better choice among different varieties.
7
(ii) Education of consumers: Advertising provides education and knowledge to consumers about
new products and their diverse uses. Consumers get the benefit of better advice in safe and
proper use of products and develop new ways of life. In this way advertising makes for better
living.
(iii) Lower prices: Effective advertising reduces costs due to large scale production and
elimination of wholesalers. As a result customers get goods at lower prices. Prices of
advertised goods fluctuate less widely and unscrupulous traders cannot easily exploit
consumers by overcharging. Many expensive products of yesteryears have come within reach
of the common man due to continuous advertising and consequent reduction in prices.
Advertising helps to eliminate unnecessary middlemen, thereby making products cheaper for
the consumers.
(iv) Better quality: Advertising is generally done through brand names. Producers try to create
special features in their products to successfully communicate product differentiation. Need
to find arguments in advertising and desire to live upto the image, leads them to improve
quality and product design. Consequently, consumers get better quality and variety of goods.
"Large scale advertising of a product can be really effective if there is a rigid quality control
which enables the customer to buy products of the same standards of performance
anywhere."
(v) Consumers' surplus: Advertising brings the customer closer to the producer so that each can
fully appreciate the needs of the other. Such understanding helps in better matching of
products and services with human needs. Through advertising consumers better appreciate
the utility of products and derive higher satisfaction from their consumption. This satisfaction
and pleasure derived by them from the products is called consumers' surplus.
To Society: Advertising serves the society in the following ways :
(i) Employment: Advertising provides direct employment to a large number of people engaged
in designing, writing and issuing advertisements. Indirectly, advertising increases
employment opportunities by increasing the volume of production and distribution.
(ii) Standard of Living: Advertising improves the standard of living of the people by promoting
variety and quality in consumption. It educates people about new uses of products and
provides information for developing better ways of life. To quote Franklin D. Roosevelt, the
late President of America, "advertising brings to the greatest number of people actual
knowledge concerning useful things, it is essentially a form of education and the progress of
civilisation depends on education."
(iii) Sustains the Press: Advertising provides an important source of revenue to newspapers,
magazines, radio and television. As a result public gets news at lower rates and the
circulation of newspapers and magazines increases. Press is the guardian of public opinion
and by helping it to remain independent, advertising promotes liberty and democracy in the
country. By subsidising the press, advertising serves as a bright symbol of freedom of choice.
(iv) Stimulates Research and Development: Advertising can be successful only when it is
backed by new and better products. To derive maximum benefit from advertising in the
competitive market, every producer tries to differentiate his products from the competitive
products. Big business firms have research and development departments to develop new
8
products and new uses. Research and development becomes necessary also to maximise
.efficiency and to minimise costs of production. In the absence of advertising and mass
distribution, many products would remain confined to the laboratory. By promoting research
and development, advertising helps in the process of rapid industrialisation.
(v) Incentive to Progress: Advertising is a great motivating force. In the words of Sir Winston
Churchill, "Advertising nourishes the consuming power of man. It creates a desire for better
standard of living. It spurs individual exertion and greater production." People are induced to
work hard and earn more to buy new products brought to their knowledge through
advertising.
(vi) Art and Culture: Advertising promotes the creative energies of people required in
designing and developing advertisements. Commercial art is largely the creation of
advertising. Advertising provides a glimpse of national life, a running commentary on the
way people live and work. Advertising also provides entertainment to the public. Many
sponsored programmes on radio and television have become very popular due to their
entertainment and aesthetic value.
Advertising is thus a great force in modem society. It serves as an accelerator of economic progress
by promoting savings and investment. It is the backbone of international trade. In a developing
country like India, it helps to accelerate the rate of capital formation and foreign exchange earnings.
Advertising can be a healing force in a society torn by race, language and caste conflicts, a means of
national integration, civilisation and human welfare. Advertising is to business what steam is to
machinery the great propelling power, the lubricant of the machinery of commerce. It pays to
advertise.
Is Advertising a Social Waste?
Several objections have been raised against advertising and some people criticise advertising as a
social waste. The main points of criticism are as follows:
1. Higher Prices: It is argued that large amounts spent on advertising increase the cost of
distribution which is transferred to customers in the form of higher prices. This objection may
be true in case of inelastic demand when advertising merely transfers demand from one
producer to another. But effective advertising often creates demand and increases the scale of
production. Large scale operations result in lower costs and lower prices. In developed
countries, business have reduced costs and prices while spending millions on advertising
every year. "As a competing tool, advertising is perhaps less costly than many other tools
which will be used to a greater degree if advertising were banned."
2. Wasteful Consumption: Advertising multiplies the needs of people and encourages

unhealthy consumption. By exploiting human sentiments, it persuades people to buy products
which they do not need or cannot afford. Advertising promotes artificial living and
extravagance and creates demand for trivial goods. "Modern society has become a society of
chocolate, Campa Cola and Lolipops instead of natural and wholesome food largely because
of advertising." This allegation may be true to some extent but it is based on the assumption
that satisfaction of psychological needs is not as important as that of physiological needs.
Moreover, new tastes and finer emotional experience of life are necessary for the progress of
civilisation. By itself, advertising cannot force people to buy things which they consider
unnecessary.
9
3. Misleads the Consumer: It is said that advertising is often deceptive and misrepresents
facts to the consumer. Exaggerated or tall claims and flowery language are used to dupe
unwary consumers. They are induced or defrauded through bogus testimonials and false
comparisons to buy goods of doubtful value. There is no denying the fact that some firms
indulge in false and misleading advertising and unscrupulous use of advertising by them
destroys public confidence in advertising. But just because a few people misuse advertising
does not mean that advertising itself is bad and unnecessary.
4. Creates Monopoly: Advertising creates brand preferences and restricts free competition.
Large firms which can afford huge amount of money on advertising eliminate small firms by
creating brand monopoly. Advertising thus encourages the survival of the mightiest rather
than the best. But advertising creates only a temporary brand monopoly as after some time
other brands offer competition. For instance, 'Amul' brand butter enjoys monopoly of brand
but has to face competition from 'Vita' and other brands of butter. In the long run, advertising
"often enables the small businessmen to compete with large concerns as well as to start new
business."
5. Wastage of National Resources: In order to make use of advertising, producers create trivial
differences in their products. Valuable resources that can be used to create new industries are
wasted in the production of needless varieties and designs. Vance Packard, in his book "The
Waste Makers", gives several interesting examples of how producers in America coax
consumers to replace their cars, radios etc., much before their useful life comes to an end.
Appearance, design and style have become more important than the physical utility of the
product. Manipulative and combative advertising leads to criminal wastage of resources.
"The natural resources, capital equipment and labour energy which go into the production of
new items to take the place of the discarded ones amount to waste when measured in terms of
social well-being." Valuable stationery, time and energy used in advertisements go waste as
most of the advertisements either escape the attention of the people or are ignored by them.
6. Undermines Social Values: Modem advertising exerts such a corrupting influence on

cultural and social life that it is not only wasteful but immoral. It degrades ethical and
aesthetic values through nude photographs and indecent language. Many advertisements are
highly objectionable and socially undesirable as they encourage social evils like drinking and
smoking. To some extent advertisements may really be in poor taste but majority of them
help to improve social standards. The improved attitude towards hygiene is attributable in no
small measure to the extensive advertising of detergents.
Despite its limitations, advertising is an essential marketing function in modern business. If

advertising were wasteful and unnecessary, it must have been discarded long ago. It becomes
wasteful and objectionable only when it is used dishonestly for anti-social ends. In fact, advertising
is the cheapest selling tool and its abolition will require use of more expensive selling techniques.
"As long as we insist on 'maintaining competition as the core of our economic system, the
elimination of advertising would increase rather than reduce economic waste."
Money spent on advertising is not wasteful or unnecessary provided it is spent in a scientific and
responsible manner. The drawbacks of advertising can be removed through concerted action on the
part of advertisers, public and the Government. Businessman should avoid wasteful and excessive
advertising. Trade associations and chambers of commerce should set up Better Business Bureaus to
10
exercise self-regulation and control over obscene and deceptive advertising. A suitable code of
conduct may be formulated to ensure that all advertisers follow ethical standards in their
advertisements. Newspapers, radio and television authorities should not accept undesirable
advertisements. Consumers' associations can act as a countervailing force against manipulating and
misleading advertising. Consumers should not get carried away by such advertisements. They should
verify the claims made in advertisements before purchasing a product. Customers' reactions to
advertisements should be invited. Writings on walls and public buildings and noisy advertisements
should be banned. An agency like the Federal Trade Commission of U.S.A. may be constituted to
check deceptive and obscene advertising. “The maintenance of acceptable ethical standards in all
forms of advertising is essential if advertising is to fulfil its proper function as a marketing tool.”
SALES PROMOTION
Sales promotion consists of all promotional activities other than advertising, personal selling and
publicity that help to increase sales through non-repetitive and one time communication. According
to the American Marketing Association, sales promotion includes "those marketing activities other
than personal selling, advertising and publicity that stimulate consumer purchasing and dealer
effectiveness, such as point of purchase displays, shows and exhibitions, demonstrations and various
non-recurring selling efforts not in the ordinary routine."
The ultimate aim of sales promotion is increasing the sales and profits but it is different from
advertising and personal selling in approach and techniques. Personal selling involves face to face
contact with specific individuals while advertising is directed at a large number of potential
customers. Sales promotion serves as a link between the two by focussing selling effort on selected
small groups of people. Sales promotion usually involves non-recurring and non-routine methods, in
contrast to the routine and recurring nature of advertising and personal selling. Under advertising, the
media is not owned and controlled by the advertiser except in direct mail advertisements but sales
promotion methods are controlled by the advertiser. Advertising and personal selling are essential or
basic ingredients of promotion mix while sales promotion is a supporting or facilitating element of
promotional strategy. Sales promotion bridges the gap between advertising and personal selling. It
supplements and reinforces the personal selling and advertising efforts of the firm. Sales promotion
covers miscellaneous stimulants directed to the consumers and dealers. It may stimulate consumer
buying at the point of sale or improve dealer effectiveness at the retail outlets.
Sales promotion is of two kinds — consumer sales promotion and dealer sales promotion. Consumer
sales promotion includes activities designed to inform and educate the consumer and to stimulate
demand. Examples of consumer sales promotion are samples, demonstrations, gift coupons,
premium and price offers, fashion shows or parades, bonus stamps, contests, exhibition-cum-sale,
etc. Dealer sales promotion is used to help dealers and to improve dealer effectiveness. It includes
free display material, free window display services, free demonstrations and trials, trade deals
offering discounts and gifts, sales contests for dealers or salesmen, trade show, dealers' conference,
house organs, training of dealers' sales force, advertising display allowances, etc.
Sales promotion activities are designed to achieve the following objectives :

(a) to introduce new products;
(b) to attract new customers;
(c) to increase sales during slack periods;
(d) to encourage dealers to carry large stocks;
(e) to improve the public image of the firm.
11
Techniques of Sales Promotion
At present a wide variety of devices are available for sales promotion. Some of the important sales
promotion methods are described below:
1. Distribution of Free Samples: Many a times free samples of low priced and repeat sales
items are distributed to selected people to gain consumer acceptance and to popularise the
product. The sample may be distributed in the shop or door-to-door. This is an effective
device of sales promotion as consumers can test the product before buying it. It is particularly
useful in the introduction of new products. Explanatory literature stating the features and uses
of the product can be added to the sample. However, this device is costly and can be used by
big firms. It is not suitable for products which are very expensive or do not give repeated
sales.
2. Coupons: Some firms issue coupons to prospective buyers through newspapers, direct mail,
dealers, package and door-to-door salesman. A coupon is a certificate that entitles its holder
to a specified saving or discount on the purchase of a particular product. The holders of
coupons present their coupons to retailers and get the product at a reduced price. The
manufacturer reimburses the retailers for the value of coupon redeemed by them in addition
to some commission to cover handling costs. Coupons induce the retailers to stock the
product and consumers are stimulated to buy the product.
3. Premiums: A sales premium or bonus offer is the offer of an article free of cost or at a
nominal price on the purchase of a specified product. For instance, one 'Lux' toilet soap may
be given free on the purchase of an economy pack of' Surf detergent powder. A premium is
also known as a combination offer. It is a practical persuasion to buy that helps to increase
immediate sales. Premiums are used in case of convenience goods like detergents, toothpaste,
toilet preparations which are bought frequently. Success of the premium offer depends upon
judicious choice of the bonus item which should be useful and in good taste.
Premiums can be of following types:
(a) With pack premium: In which the bonus item is included either inside or outside the
package, e.g., one spoon free in the packet of Horlicks.
(b) Price off premium: Which implies a reduction in price on the purchase of a large or
economy pack.
(c) Money-refund premium: Wherein the cost of the article is fully or partially refunded
on the presentation of the proof of purchase, e.g., wrapper, cash memo, etc.
(d) Extra-quantity premium: Under which a customer can get one unit of the product
free on the purchase of specified units, e.g., one tooth brush free on the purchase of
six tooth brushes.
4. Trading Stamps: Trading or bonus stamps are issued by retailers to customers who buy
goods from them. The number of stamps given to a buyer depends upon the amount of
purchases made by him. For instance, in India Ramon Bonus Stamps are issued at the rate of
2½ per cent of the purchase amount. These stamps are given free of charge and the customer
can redeem them to obtain products out of the specified list. This technique induces
customers to buy their requirements from the retailers who offer such stamps. The purpose is
to increase customer loyalty.
12
5. Point of Purchase Materials: Such materials include banners, signs, photos, posters, strips,
price cards, racks and other in store promotional tools. They are demonstrated or displayed at
the place where the customer makes actual purchases. Almost every general retail shop
displays posters and signs promoting soft-drinks, cigarettes, confectionery and other
consumer products. The popularity of point of purchase display is increasing due to the
proliferation of brands and expansion of self-service stores with large inventories. Such
materials are an effective device of sales promotion as they remind customers about the brand
name and promote impulsive buying. They should be attractive and self-explanatory. They
are also called dealer aids.
6. Prize Contests: Under this device, consumers are given rewards for analytical or creative
thinking about the product in the form of slogan writing, sentence completion, problem
solving quiz, etc. Rewards are given to successful participants in the form of cash prizes,
merchandise or free travel. Such contests help to create consumers' interest in the product,
provide new ideas for advertising and may reveal buying motives. Contests are generally held
through newspapers, magazines and radio. Such contests may also be organised for salesmen
and dealers to induce them to devote greater effort or to obtain new sales ideas. To be
successful sales contests should be properly planned and objectively executed. The date, time
and period of the contest should be such that all people have equal opportunity. Entries
should be judged by competent people in a fair manner and rewards should be given
promptly.
7. Fairs and Exhibitions: Trade shows, fashion shows, or parades, fairs and exhibitions are an
important technique of sales promotion. They provide a forum for the exhibition or
demonstration of the product. Free literature can be distributed to introduce the firm and its
products to the public. Fairs and exhibitions are organised usually by big firms or trade
associations. At these fairs and exhibitions, business firms are allotted stalls wherein they
display their products. Fairs and exhibitions have wide appeal as several people visit them.
Customers can be attracted through free gifts, special concessions and free demonstrations of
technical and speciality products. They provide an opportunity to the visitors to observe the
competing products and help to promote sales. For instance, the Trade Fair Authority of India
organises trade fairs of various types in New Delhi. The National Book Trust organises after
every two years a World Book Fair at New Delhi where publishers all over the world are
invited to display their publications. Sometimes, sales conventions or conferences of dealers
are held. Producers of garments often organise fashion shows to promote their products.
8. Merchandising Aids: These refer to the services provided to induce commercial buyers to
purchase goods in large quantity. Such aids include training in stores layout and inventory
control, advertising, product demonstrations, etc.
9. Clearance Sale: Sales at reduced prices may be organised at important festivals or other
occasions. Such sales attract a large number of customers and help to clear accumulated
stocks. For instance, the Khadi Gramodyog Bhavan in New Delhi offers special discount on
Khadi goods on Gandhi Jayanti.
10. Public Relations: Public relations activities include greetings or thanks in newspapers,
donating space for noble causes, etc. Their purpose is not to create immediate demand or to
increase sales. They are designed to create a good image of the firm in the society.
13
LESSON 2
CHANNEL DECISIONS
Dr Hem Chand Jain
A channel of distribution or trade channel is the path or route along which goods move from
producers to ultimate consumers or industrial users. It is the distribution network through which a
producer puts his products in the hands of actual users. It is the pipeline through which products flow
during their journey to the market. A trade or marketing channel consists of the producer, consumers
or users and the various middlemen who intervene between the two. The channel serves as a
connecting link between the producer and consumers. By bridging the gap between the point of
production and the point of consumption, a channel creates time, place and possession utilities. A
channel of distribution represents three types of flows :
(a) Goods flow downwards from producer to consumers;

(b) Cash flows upwards from consumers to producer as payment for goods; and
(c) Marketing information flows in both directions. The downward flow includes information on
new products, new uses of existing products, etc. The upward flow of information is the
feedback on the wants, suggestions, complaints, etc. of ultimate
consumers or users.
Nature and Significance of Channel Decisions
Channel decisions refer to the managerial decisions concerning the selection of the most suitable
routes or paths for the distribution of goods from the producer to various consumers or users. Such
decisions involve choice of a channel, determination of market coverage (number of middlemen) and
the selection of particular middlemen or dealers.
The choice of a suitable channel for the distribution of the firm's products is an important decision
area in the field of marketing. It is an important policy decision in marketing management due to the
following reasons:
(i) Distribution channel is an important element of the marketing mix of a firm and other
elements are closely interrelated with and interdependent on the channel of distribution.
Therefore, choice of channel influences other marketing decisions like pricing, promotion
and physical distribution. A mistake in the choice of channel may affect adversely the whole
marketing mix of the firm.
(ii) The cost involved in the use of a distribution channel enters the price of the product that the
ultimate consumer has to pay. Due to a wrong decision regarding channel, distribution cost
may be very high and sales might be very limited. On the other hand, a sound channel
decision enables the firm to cut down costs and maximise sales revenue. Thus, channel
influences sales .volume and profits.
(iii) A product or service is really useful to consumers only when it is available at the right time
and place. The channel decision determines where and when the product will be available to
ultimate consumers or users.
(iv) The choice of a marketing channel involves long-term commitment of the firm. The relations
between the manufacturer and the middlemen depend largely upon the choice of appropriate
channels of distribution. Changes in the channel are very difficult and costly.
(v) If the choice of channels is proper, fluctuations in production can be reduced due to
continuous and effective distribution. The stability of production will help to ensure steady
employment and proper budgetary control. The manufacturer can continuously monitor the
14
sales and stock of his middlemen to exercise effective control over distribution network.
Types of Distribution Channels
Several channels are used for the distribution of products of different types. They vary in the number
and types of middlemen. Some channels are short and direct permitting the producer to have a close
touch with the customers while others are long and indirect involving the use of several types of
intermediaries. The various channels of distribution may broadly be classified as under:
Distribution Channels
1. Manufacturer-consumer: This is the shortest and simplest channel involving direct sale of'
goods and services by the producer to the consumers. No middleman or intermediary is
present between the producer and the consumer. The producer may sell directly to consumers
through door-to-door salesman, direct mail and through his own retail stores. For instance,
Bata India Ltd. has set up its own retail shops throughout the country to sell shoes and other
products through direct contact with customers. Industrial products of high value are
generally sold through this channel. Some firms use direct selling to distribute consumer
products like shoes, clothes, books, hosiery goods and cosmetics. Small producers and those
producing perishable commodities also sell directly to the local customers.
This channel is very fast and economical. The producer has direct contact with his customers
and full control over distribution. But the expert services of middlemen are not available and
the producer himself has to perform all the marketing activities. Large investment is required
to create facilities for direct selling. Therefore, this channel is more popular among big and
well-established firms. In recent years, direct selling has become increasingly popular due to
increasing competition, need for control over distribution costs, wide product lines, technical
nature of products, availability of public warehouses and desire to reduce dependence on
middlemen.
2. Manufacturer-retailer-consumer: Under this channel, the manufacturer sells to one or

more retailers who in turn sell to the ultimate consumers. Various marketing functions are
performed by the producer and the retailers. This channel is popular when the retailers are big
and buy in large quantities, e.g., departmental stores, chain stores and super markets. This
channel is often used for the distribution of consumer durables and products of high value.
Automobiles, home appliances, readymade garments, shoes and perishable products are often
sold through this channel. This channel relieves the manufacturer from much burden of
selling and at the same time provides him control over distribution.
15
3. Manufacturer-wholesaler-retailer-consumer: This is the 'traditional' or normal channel for
the distribution of consumer goods. This channel is suitable where the producer has limited
finance and a narrow product line or where the wholesalers are specialised and provided
strong promotional support. Small producers and small retailers find this channel most
convenient especially in case of products with widely scattered markets. This channel is also
used in case of consumer durables which are not subject to frequent changes in fashion.
Producers of industrial goods may use an industrial distributor who serves as a wholesaler as
well as a retailer.
4. Manufacturer-agent-retailer-consumer: When the retailers are few or geographically

concentrated, distribution through agents may be more economical than through wholesalers.
For instance, a manufacturer may employ selling agents and brokers to sell his products to
retailers. Sometimes even the retailer is bypassed and the agent sells directly to institutional
buyers like consumer cooperatives, business firms, educational institutions and government
agencies or departments. This channel is commonly used to sell textiles, agricultural
products, machinery and equipment, etc. In case of industrial goods, an agent may be used in
place of industrial distributor to reach industrial users.
5. Manufacturer-agent-wholesaler-retailer-consumer: This is the longest channel of

distribution. It is used when the manufacturer wants to be fully relieved of the problem of
distribution. The producer hands over his entire output to the selling agent who distributes it
among a few wholesalers. Each wholesaler sells to a number of retailers who in turn sell to
ultimate consumers. In case of cloth this channel is widely used. For the sale of many
industrial products an industrial distributor is employed due to the storage facilities provided
by him. This channel results in wider distribution of the product.
Choice of a Channel of Distribution
Choice of a channel of distribution involves the selection of the best possible combination of
middlemen or intermediaries. The objective is to secure the largest possible distribution at minimum
costs. The channel must be flexible and efficient. It should be consistent with the declared marketing
policies and programmes of the firm. Such a channel can be selected by evaluating alternative
channels in terms of their costs, sales potential and suitability. The factors affecting the choice of
distribution channels may be classified as follows:
1. Product Considerations: The nature and type of the product have an important bearing on
the choice of distribution channels. The main characteristics of the product in this respect are
given below:
(a) Unit value: Products of low unit value and common use are generally sold through
middlemen as they cannot bear the costs of direct selling. Low priced and high
turnover articles like cosmetics, hosiery goods, stationery and small accessory
equipment usually flow through a long channel. On the other hand expensive
consumer goods and industrial products, e.g., jewellery, machines are sold directly by
the producers.
(b) Perishability: Perishable products like vegetables, fruits and bakery items have
relatively short channels as they cannot withstand repeated handling. Same is true
about articles of seasonal nature. Goods which are subject to frequent changes in
16
fashion and style are generally distributed through short channels as the product has to
maintain close and continuous touch with the market. Durable and non-fashion
articles are sold through agents and merchants.
(c) Bulk and weight: Heavy and bulky products are distributed directly to minimise
handling costs. Coal, bricks, stones, etc., are some examples.
(d) Standardisation: Custom-made and non-standardised products usually pass through

short channels due to the need for direct contact between the producer and the
consumers. Standardised and branded goods can be distributed through middlemen.
(e) Technical nature: Products requiring demonstration, installation and after-sale

service are often sold directly. The producer appoints sales engineers to sell and
service industrial equipment and other products of technical nature. Consumer
products like television, refrigerator, electric mixer-grinder, washing machines, etc.,
are sold through retailers but the after-sale service is generally provided by the
manufacturer.
(f) Product line: A firm producing a wide range of products may find it economical to
set up its own retail outlets. On the other hand, firms with one or two products find it
profitable to distribute through wholesalers and retailers.
(g) Age of the product: A new product needs greater promotional effort and few
middlemen may like to handle it. As the producer gains acceptance in the market,
more middlemen may be employed for its distribution. Channels used for competitive
products may also influence the choice of distribution channels.
2. Market Considerations: The nature and type of customers is an important consideration in

the choice of a channel of distribution. Following factors relating to the market are
particularly significant:
(a) Consumer or industrial market: The purpose of buying has an important influence
on channel. Goods purchased for industrial or commercial use are usually sold
directly or through agents. This is because industrial users buy in a large quantity and
the producer can easily establish a direct contact with them. To ultimate consumers,
goods are sold normally through middlemen.
(b) Number and location of buyers: When the number of prospective buyers is small or
the market is geographically located in a limited area, direct selling is easy and
economical. In case of large and widely scattered markets, use of wholesalers and
retailers becomes necessary.
(c) Size and frequency of order: Direct selling is convenient and economical in case of
large and infrequent orders. When articles are purchased very frequently and each
purchase order is small, middlemen may have to be used. A manufacturer may use
different channels for different types of buyers. He may sell directly to departmental
and chain stores and may depend upon wholesalers to sell to small retail stores.
(d) Buying habits: The amount of time and effort which customers are willing to spend
in shopping is an important consideration. Desire for one-stop shopping, need for
17
personal attention, preference for self- service and desire for credit also influence the
choice of a trade channel.
3. Company Considerations: The nature, size and objectives of the firm play an important role
in channel decisions:
(a) Market standing: Well-established companies with good reputation in the market are
in a better position to eliminate middlemen than new and less known firms.
(b) Financial resources: A large firm with sufficient funds can establish its own retail
shops to sell directly to consumers. But a small or weak enterprise which cannot
invest money in distribution has to depend on middlemen for the marketing of its
products.
(c) Management: The competence and experience of management exercises influence

on channel decision. If the management of a firm has sufficient knowledge and
experience of distribution, it may prefer direct selling. Firms whose management
lacks marketing know-how have to depend on middlemen.
(d) Volume of production: A big firm with large output may find it profitable to set up
its own retail outlets throughout the country. But a manufacturer producing a small
quantity can distribute his output more economically through middlemen.
(e) Desire for control of channel: Firms which want to have close control over the
distribution of their products use a short channel. Such firms can have more
aggressive promotion and a thorough understanding of customers' requirements. A
firm not desirous of control over channel can freely employ middlemen.
(f) Services provided by manufacturers: A company that sells directly has itself to
provide installation, credit, home delivery, after-sale service and other facilities to
customers. Firms which do not or cannot provide such services have to depend upon
middlemen.
4. Middlemen Considerations: The cost and efficiency of distribution depend largely upon the
name and type of middlemen as reflected in the following factors:
(a) Availability: When desired type of middlemen are not available, a manufacturer may
have to establish his own distribution network. Non-availability of middlemen may
arise when they are handling competitive products or they do not like to handle more
brands.
(b) Attitudes: Middlemen who do not like a firm's marketing policies may refuse to
handle its products. For instance, some wholesalers and retailers demand sole selling
rights or a guarantee against fall in prices.
(c) Services: Use of those middlemen is profitable who provide financing, storage,
promotion and after-sale services.
(d) Sales potential: A manufacturer generally prefers a dealer who offers the greatest
potential volume of sales.
18
(e) Costs: Choice of a channel should be made after comparing the costs of distribution
through alternative channels.
(f) Customs and competition: The channels traditionally used for a product are likely to
influence the choice. For instance, locks are sold usually through hardware stores and
their distribution through general stores may not be preferred. Channels used by
competitors are also important.
(g) Legal constraints: Government regulations regarding certain products may influence
channel decision. For instance, liquor and drugs can be distributed only through
licensed shops.
Distribution Policy
After selecting the channel of distribution, a manufacturer has to determine the number of
middlemen to be used or the intensity of distribution. This depends on the degree of market coverage
desired for the product. Market coverage reflects the channel strategy and can be of three types:
(i) Intensive Distribution: Under this strategy, a manufacturer tries to sell his product through
every possible outlet in order to obtain the maximum exposure. Such a distribution policy is
usually employed for the marketing of consumer products of everyday use, e.g., toothpaste,
cigarettes, cosmetics, food products, soaps, etc. In the purchase of these convenience goods,
consumers prefer the nearest location. Therefore, an attempt is made through intensive selling
to go as near to the ultimate consumer as possible. Intensive distribution is sometimes used in
case of some industrial goods like spare parts, lubricants and other supplies. Intensive
distribution can be successful when the manufacturer obtains cooperation from all middlemen
and advertises his products on a large scale.
(ii) Selective Distribution: Selective distribution implies the use of a few selected middlemen in
each sales territory. This policy may be employed at both the wholesale and retail levels. This
type of distribution is appropriate in case of speciality goods and accessories. In such
products, consumers generally have a brand preference so that the use of every outlet is not
necessary. Selective distribution is more economical and provides the manufacturer sufficient
control over the distribution of his products. As the number of middlemen is limited, each
one of them gets sufficient sales volume which is helpful in securing their cooperation.
Dealers are likely to take greater interest in the display and promotion of the products.
(iii) Exclusive Distribution: Such distribution involves the use of one dealer in each sales
territory. The dealer is granted the exclusive right to sell the product in the specified territory
through an agreement with the manufacturer. The dealer is prohibited from dealing in the
competitive products. Exclusive selling is adopted in case of shopping and speciality goods
enjoying brand loyalty. In the purchase of such goods, the consumer spends lot of time and
effort. It is also used when the product requires huge investment in stocks and showrooms,
e.g., automobiles and household appliances like mixer grinder, cooking range, etc. Exclusive
distribution provides full control over distribution and reduces distribution costs. It also
increases the prestige of the product. However, this policy is less flexible and does not permit
wide distribution of the product.
19
Choice of Middleman
After deciding the number of middlemen, a manufacturer has to select the particular dealers through
whom he will distribute his products. While selecting a particular wholesaler or retailer, the
following factors should be taken into consideration:
(i) Location of the dealer's business premises;

(ii) Financial position and credit standing of the dealer;
(iii) Knowledge and experience of the dealer;
(iv) Storage and showroom facilities of the dealer;
(v) Ability of the dealer to secure adequate business and to cover the market;
(vi) Capacity of the dealer to provide after-sale service;
(vii) Willingness of the dealer to handle the manufacturer's products;
(viii) The degree of cooperation and promotional service he is willing to provide;
(ix) General reputation of the dealer and his sales force;
(x) Nature of other products (competitive or complementary), if any, handled by the dealer.
POLICY INITIATIVES FOR ENTREPRENEURIAL GROWTH
To mention a few policy measures that have positively created an ideal environment entrepreneurial
growth are:
(a) Identification of backward areas and announcement of a number of concessions

and incentives for the entrepreneurs to start their ventures in such areas;
(b) Change In the attitude of both Central and State Governments towards private
enterprise in general and promotion of small scale industries in particular;
(c) Liberalisation of Industrial Licensing Policy and announcement of special
incentives for NR1 investments and exporting industrial units.
(d) Promoting coordinated development of large and small industries by—
(i) reserving further expansion either exclusively or partly for the small sector in certain
industries.
(ii) developing small industries more vigorously as ancillaries to large industries, and
(iii) encouraging the participation of small industries in the export drive.
Small Scale Industries Policy
In order to give a fillip to small industries development and thereby to entrepreneurial growth, the
Government for the first time announced a separate small scale industries policy in August 1991. The
highlights of this policy are as follows:
• For small scale industries the investment limit (investment in plant and machinery) is raised
to Rs. 75 lakhs for both ancillary and export oriented units and Rs. 60 lakhs to SSI units. Both
these limits were later on raised to Rs. five crores.
• The investment limit for the tiny sector was raised to Rs. 5 lakhs from Rs. 2 lakhs. This limit
has now been raised to Rs. 25 lakhs.
• Hereafter irrespective of their location would be recognised as small scale industries.
• The Small Industries Development Organisation (SIDO) has been recognised as the nodal
agency to support the small scale industries export promotion.
• An export development centre would be set up in SIDO to serve the small scale units through
20
its network of field officers to further augment export activities of the sector.
• A technology development cell (TDC) will be set up in SIDO which could provide
technology inputs to improve quality and competitiveness of products of small scale sector.
• The scheme for the handloom sector which contributed 30 % of the total textile production in
the country would be redesigned keeping in view the local and regional needs. It would be
the policy of the Government to promote handloom to sustain employment In rural areas and
to improve quality of life for handloom weavers.
• The National Small Industries Corporation (NS1C) would concentrate on marketing of mass
consumption items under common brand name and organizational links between NSIC and
SSlDCs would be established.
• The scope of the national equity fund scheme will be widened to cover projects upto Rs. 10
lakhs for Equity Support (upto 15 per-cent).
• The Single Window loan scheme has also been enlarged to cover projects upto Rs. 20 lakhs
with working capital margin upto Rs. 10 lakhs.
• Small Scale units can have equity support to the extent of 24% of the total investment from
the medium and large scale industries, public undertakings. NRIs or foreign Investment.
In conformity with the socio-economic objectives of the national development plans. the
development banks have introduced a number of promotional innovational schemes to be operated
either separately or jointly. Some of the important schemes are soft loan scheme, seed capital
assistance, risk capital assistance, concessional schemes, etc. In addition, 1FC1 is operating different
subsidy schemes for new and small entrepreneurs. Recently, it has introduced eight consultancy
schemes and lour interest subsidy schemes for the benefit of the entrepreneurs.
Meaning of Incentives and Subsidy
The term 'incentive' is a general one and includes concessions, subsidies and bounties. 'Subsidy'
denotes a single lump sum which is given by a government to an industry. It is granted to an industry
which is considered essential In the national Interest. The term 'bounty' denotes bonus or financial
aid which is given by a government to an industry to help it compete with other units in a nation or in
a foreign market. It is given in proportion to its output. Bounty confers benefits on a particular
industry, while a subsidy is given in the interest of the nation.
These subsidies and incentives offer the following advantages:

(a) They act as a motivational force which makes the prospective entrepreneurs to
enter into manufacturing line.
(b) They encourage the entrepreneurs to start industries in backward areas.
(c) By providing subsidies and incentives the Government can—
(i) Bring industrial development uniformly in all regions
(ii) Develop more new entrepreneurs which leads to entrepreneurial development
(iii) Increase the ability of entrepreneurs to face competition successfully
(iv) Reduce the overall problems of small scale entrepreneurs.
Need for Incentives
1. To remove regional disparities in development. While developed regions in a

country are overcrowded with industrial and business activities the backward areas
remain ignored for want of facilities for industrial development. Incentives are used as
baits to lure industrialists to locate their units overlooking such deficiencies. In the long run
the backward areas become developed and regional imbalances are corrected. Such a
21
development may lead to the effective utilisation of regional resources, removal of disparities
in income and levels of living and contribute to a more integrated society.
2. To promote entrepreneur ship and strengthen the entrepreneurial base in

the economy. The new entrepreneurs may face a number of problems on account of
inadequate infrastructure facilities and other supporting services such as market
assistance, technical training and consultancy and other institutional services, etc. All
these problems may demotivate them. The various incentives normally tend to mitigate some
or all of the problems by several means. Industrial estates, growth centres, power traiff
concessions, capital investment subsidies, transport subsidy, etc. are a few examples of
incentives and subsidies which are aimed at encouraging entrepreneurs to take up new
ventures without much reluctance.
3. To provide competitive strength, survival and growth. While some incentives

are available at the time of promotion of industrial units, several other incentives are
made available over a long period. Reservation of products to small units, price preferences,
concessional finance, etc. contribute towards the competitive strength.
survival and growth of certain industrial units.
4. To generate more employment and remove under-employment and

unemployment. The proper use of incentives and subsidies will generate more
employment by accelerating the industrial growth. Market adjustments and external
economies play a significant role in economic development. The entrepreneurs will
move from developed to backward areas to start more number of units. This will create more
number of jobs which will help to reduce the problems of unemployment and under-
employment.
Problems of Incentives
1. The antagonists argue that the incentive schemes may deteriorate into useless
tax-give away schemes if they are not implemented properly.
2. Empirical studies reveal that the incentive schemes are being highly misused
rather than properly used. Some of the units are located in backward areas with a view
to mainly avail the subsidies and concessions. The real objective of providing incentives is
hardly achieved.
3. Favouritism and corruption have crept into the administrative machinery which
has caused much financial strain on the exchequer.
Schemes of Incentives in Operation
Different incentive schemes applicable to the industrial sector in India are in operation. These
schemes are offered by Central and State Governments including Union Territories. The list of
incentives offered by either or both the governments are listed below :
(i) Export/Import subsidies and bounties
(ii) Interest free loans
(iii) Subsidy for R & D works
(iv) Capital investment subsidy
(v) Transport subsidy
(vi) Interest subsidy
(vii) Subsidy for power generation
22
(viii) Exemption from property tax
(ix) Subsidies to artisans and traditional industries including handlooms
(x) Incentives to non-resident Indians
(xi) Special incentives to women entrepreneurs
(xii) Exemption from income tax
(xiii) Interest free sales tax loans
(xiv) Sales tax exemptions
(xv) Subsidy for buying test equipment
(xvi) Subsidy for industrial housing
(xvii) Land and building at concessional rates
(xviii) Price preference lo SSI units
(xix) Subsidy/Assistance for technical consultancy
(xx) Exemption from stamp duty
(xxi) Concessional water
(xxii) Provision for seed capital
(xxiii) Allotment of developed/constructed sheds
(xxiv) Allotment of controlled or subsidised raw material
(xxv) Subsidising the cost of market studies/feasibility studies or reports.
Incentives for Development of Industries in Backward Areas
As a part of the measures to ensure balanced regional development. Government of India have
announced a number of concessions and facilities for industries established in selected backward
districts/areas from time to time. The Central Government has declared 247 districts (covering about
70% of the areas in the country) as backward and eligible for the subsidies. Many State Governments
have added to this list for the purpose of State level subsidies. The programme of assistance drawn
up for setting up industries in the selected backward area/district is briefly indicated below:
(i) Concessional Finance: All India financial institutions namely, 1DBI. IFCI and others extend
financial assistance on concessional terms to all. new and existing industrial projects having
expansion schemes irrespective of the project costs located in the 247 districts selected by the
government The concessions given by these financial institutions are in the form of lower
interest rate, viz., 9.5% p.a. against the normal rate of 11%, a reduced commitment charge of
0.5 % (which could be waived in exceptional cases), lower underwriting commission of 1.
25% and 0.75% for shares and debentures respectively, initial moratorium period upto five
years, longer amortisations of 15 to 20 years and participation in the risk capital on selective
basis. Besides these the 1DBI follows a flexible attitude in respect of promoter's contribution
margin requirements, rescheduling of repayments during the currency of the loan. Depending
upon the merits of specific cases in respect of refinance, the IDB1 charges a special rate of
6% with the primary lender's rate being subject to a ceiling of 9.5%. The normal rate of
refinance Is 6% with ceiling of 12.5% by the primary lending institution.
(ii) Central Investment Subsidy: The granting of cash subsidy on the capital investment is
called capital investment subsidy. It will be usually in the form of outright grant of 10 % to
20 % of the amount of capital invested in the industrial units in areas specified to be
backward regions/districts. The government also fixes ceiling above which they could not
avail. It is offered by the Central Government.
Out of the 247 districts declared backward by the planning commission. 101 districts/areas
have been selected to qualify for Central investment subsidy. These districts/areas have been
23
selected on the pattern of six districts/areas for industrially backward states and three
districts/areas for other states. The salient features of the scheme are given below:
(a) Quantum of subsidy: When the scheme was originally announced in 1971 10% of
the investment made on fixed capital investment, viz., land, building and plant and
machinery was to be reimbursed as an outright grant subject to a ceiling of Rs. 15
lacs. This was raised to 15 % with effect from 1.3.1973. The maximum amount
payable is, however, restricted to Rs. 15 lakh per industrial unit.
After the division of backward districts into (A), (B) and (C) categories the subsidy
will be: (A) 25 % subject to a maximum of Rs. 25 lacs; (B) 15 % subject lo a
maximum of Rs. 15 lacs (c) 10 % subject to a maximum of Rs. 10 lacs.
(b) Eligibility: An industrial unit other than those run departmentally which made
investments In land, building, and plant and machinery on or after 1-3-1973 and
located In the above category of districts/areas is eligible to claim subsidies. Existing
units taking into expansion, modernisation and diversification are also eligible to
claim subsidy.
(c) Procedure for Claiming Subsidy: The State Governments/Union Territory

administrations have nominated disbursing agencies to administer the scheme of
investment subsidy. State Financial Corporation and financial institutions such as
IDBI, IFCI, and ICICI are some of the agencies selected fur disbursements of subsidy
under the scheme. Each industrial unit being set up in the specified district/area gets
registered with the Director of Industries for claiming investment subsidy. The units
desirous of getting investment subsidy may approach the disbursing agencies who in
trun make recommendation after verification etc., to the State level committee which
has been appointed in each State Union/Territory.
(iii) Tax holiday to new industrial undertakings set up in backward States and Union
Territories: Under section 80-1A of the Income-tax Act 1961. deduction is allowed, in
computing die taxable income in respect of profits derived from new industrial undertaking
or a ship or the business of a hotel. The deduction under this section is allowed in the case of
companies, at 30 per cent of profits in respect of the assessment year relevant to the previous
years in which the hotel starts functioning or the industrial undertaking starts manufacture or
the ship is first brought to use and nine assessment years immediately succeeding the initial
assessment year. In the case of taxpayers being a co-operative society, similar deduction is
allowed for the initial assessment year and eleven succeeding years, the deduction is allowed
at the rate of 25 % in the case of non-corporate assessees. Likewise in the case of new hotels
set up in a hilly area or a rural area or a place of pilgrimage or such other place as the Central
Government may specify, the deduction is admissible at the rate of 50 per cent of the profits.
Tax Holiday for the Power Sector
With a view to substantially increasing the power generation capacity in the country, the Bill
proposes to provide for a full tax holiday for five years and thereafter a partial tax holiday in respect
of profits and gains of industrial undertakings set up anywhere in India for generation or generation
and distribution of power. Such undertaking which begins to generate power on or after 1.4.1993 will
be allowed deduction under section 80-1A, at the rate of 100 per cent of profits in respect of the first
five assessment years starting from the assessment year relevant to the previous year in which I he
24
undertaking begins generation of power. For the subsequent assessment years, deduction from the
profits from such undertakings will be allowed at the normal rate of 30 per cent in the case of
companies and 25 per cent in the case of non-corporate assessees. The deduction, at the enhanced
rate and the normal rale together, will be limited to twelve assessment years In the case of co-
operative societies and ten assessment years in the case of other assessess, as in the existing
provisions.
Subsidised Consultancy Services
Small entrepreneurs proposing to set up rural, cottage, tiny or small scale units, or to
expand/diversity/modernise their existing units, can get consultancy services at a low cost from the
technical consultancy organisations (TCO's) sponsored by all India and State level financial and
promotional institutions and banks. They have to pay only 20 % of the fees charged by a TCO for
assignments such as preparation of feasibility studies, project reports, market studies, pre-investment
studies, diagnostic studies and special studies and applications for seeking financial assistance from
financial institutions, technical assistance, etc. The entire balance of 18 % or Rs. 5,000 whichever is
lower is subsidised by 1FCI in the case of assignments relating to the use of biogas or
renewable/alternative sources of energy. For units identified or assignments covering physically
handicapaped or scheduled caste/tribe entrepreneurs, 100 % of the fees of the TCO for the
assignment or Rs. 6.000 whichever is lower is subsidised. If any entrepreneur is unable to take
effective steps to set up the project within one year from the date of completion of consultancy
assignments he will not be entitled to prevent the use of the report in any form or manner by the TCO
or other entrepreneurs. An entrepreneur who has already set up a project at one place and wishes to
set up an entirely different project at another place may be considered eligible for subsidy for the
second project also. In any case, the subsidy will not be made available to the same entrepreneur for
more than two projects.
Subsidy for Market Studies
New entrepreneurs (locally based or non resident Indians) entering the field of medium and /or
medium large industry for the first time in the country can have market studies for their products
undertaken by TCO at a cheaper cost. The fee for the preparation of a market study payable to TCO
would be subsidised by IFCI up to 75% of the cost or Rs. 15,000 whichever is lower. The subsidy
will be made available only to the TCO with which one or more financial institutions or development
agencies at the State or all India level are associated as shareholder(s) or member(s) of board of
management. The entrepreneur will have to bear only 25% of the cost of the study.
Adoption of Indigenous Technology
Promoters of project involving commercial exploitation of indigenous technology can get assistance
in the form of subsidy covering the interest payment due to IFCI during the first three years of
operations of the project subject to a ceiling of Rs. 5 lakhs a year. In appropriate cases, the total
subsidy could be upto Rs. 25 lakhs over a period of five years. However, the extent of subsidy would
be determined by IFCI on a case to case basis having regard to the earning potential and projected
cash flow of the project. The subsidy would be reimbursed to the concern after it makes payments of
installments of interest to IFCI on due dates. For being eligible for concessional assistance, the
project should be set up with loan assistance from IFCI and be based on indigenous technology. The
right to use this technology must have been acquired by the agency implementing the project from
the concerned institution, viz. Government laboratories, public sector companies, universities, or any
other institution recognised by the Government of India. The technology should be one which has
25
not already been exploited on a commercial scale in the country, and a certificate to this effect will
have to be obtained from the concerned institution. The technology should be basic to the
manufacture of the proposed product and not merely peripheral and the project must be of national
priority as indicated by government from time to time.
Machinery on Hire Purchase
Small scale industrial units including ancillaries are eligible to procure machinery on hire purchase
basis from the National Small Industries Corporation Ltd. through its libralised terms and conditions
for supplying machinery to .small scale industries located in backward areas which qualify for
investment subsidy.
Transport Subsidy
The transport subsidy scheme envisages grant of a transport subsidy to industrial units in selected
areas to the extent of 50% of the transport costs of raw materials which are brought into and finished
goods which are taken out of the selected areas.
The scheme covers the State of Jammu and Kashmir. Himachal Pradesh, hilly areas of Uttar Pradesh
and North Eastern Region comprising States of Assam. Meghalaya, Nagaland, Tripura and the Union
Territories 'of Arunachal Pradesh, Andaman and Nicobar Islands. Mizorarn and Lakshadweep.
Subsidy is paid on transport costs between the selected railheads and location of the industrial units
in the above states/Union Territories.
The highlights of the scheme are:

1. Industrial units in the above-mentioned areas will be given transport subsidy in
respect of the raw materials brought into and the finished goods which are taken out of such
areas.
2. No transport subsidy will be allowed for the internal movement of raw materials
and finished goods within the State of Jammu and Kashmir and the North-Eastern
Region.
3. In the case of Jammu and Kashmir, the transport subsidy will be given between
the railhead at Pathankot and the location of the industrial unit or between the location
of the industrial unit and Jammu. whichever is nearer.
4. For the other above-mentioned States (except J & K). the transport subsidy will
be given on the transport cost between Siliguri and the location of the industrial unit in
these States. While calculating the transport cost, the cost from Siliguri to the railway
station nearest to the industrial unit will be taken into account in respect of raw
materials and finished goods. If any other mode of transport is used the cost will be
limited to the amount which the industrial unit may have paid, if it had used the above
mode of transport.
5. Freight charges for the movement of goods by road will be determined on the
basis of the transport rates fixed by the government of a State/Union Territory from
time to time, or the actual freight paid, whichever is less.
6. The cost of loading or unloading and other handling charges will be taken into
account for the purpose of determining transport costs.
7. All new industrial units located in the selected areas will be eligible for a
transport subsidy equivalent to B0% of the transport cost of raw materials and finished goods.
8. Existing industrial units are also eligible for a 50% subsidy in respect of
26
additional transport costs of raw materials and finished goods resulting from a
substantial expansion or diversification effected by them after the commencement of the
Transport Subsidy scheme.
9. The transport subsidy will cover 50% of the transport charges on the movement
of steel from the Gauhati Stockyard of Hindustan Steel Limited to the site of an
industrial unit in the North-Eastern Region.
10. The State Government/Union Territories will set up a committee consisting of
the Director of Industries, a representative of each of the State Industrial Departments
or the State Finance Departments and a representative of the Ministry of Industry
Development. The committee will operate at the State/Union Territory level. The
claimants would be asked to submit proof of raw materials "imported" into, and the
finished goods "exported" out of the State/Union Territory from a registered chartered
accountant, in the State/Union Territory.
11. The Directorates of Industries in the States/Union Territories will lay down
system of pre-registration of industrial units which are eligible for the transport subsidy. At
the time of registration, the Director will fix and indicate the capacity of such units, and lay
down the procedure to be followed to ensure a regular inflow regarding the movement of raw
materials and finished goods to and from the industrial units.
12. The Ministry of Industrial Development will periodically review the arrangements
made by the Directorates of Industries of various States and Union Territories and
suggest modification in the Procedure for scrutinising the claims, payment of transport
subsidy, etc.
27
LESSON 3
INCENTIVES AVAILABLE TO SSI UNITS IN

BACKWARD/RURAL INDUSTRIES PROJECT AREAS
Dr Hem Chand Jain
Certain special facilities and incentives have been provided to these back-ward districts. Of these,
101 districts/areas have been declared further as specially backward and hence additional incentives
like capital subsidy, special import facilities, etc.. are provided to industrial projects in these 101
districts/ areas over and above what is given in the 247 districts.
In addition, 111 districts in the country have been covered under the Centrally-sponsored Rural
Industries Project Programme. Small-scale units set up in these areas gel other special concessions
and facilities. The various benefits are enumerated below:
1. An outright subsidy of 15% on the fixed capital investment up to a maximum of Rs. 15 lakhs
is admissible to new units being set up in backward areas.
2. Allotment of factory or factory sheds In Industrial estates/areas and industrially developed
colonies on easy terms.
3. Interest-free loans in lieu of inter-state Sales tax paid/payable by SSI units are
available up to 7 years, provided the loan in a particular year will not exceed 8% of the
capital investment.
4. Loans and advances to SSI units under the State Aid to Industries Act and Rules framed
thereunder, for the construction of factory buildings, purchase of machinery and equipment
and working capital on easy terms.
5. The State Financial Corporations grant loans for acquisition of fixed assets up to
Rs. 30 lakhs in the case of limited companies and registered co-operative societies and
up to Rs. 15 lakhs for others at liberalised margins and rate of interest, and this is done over a
longer span of repayment and moratorium period.
6. The Central/State Government directly or through its subsidiary concern—the
Stale Industrial Development Corporation—underwites or participates in the preference
shares of public limited companies on a selective basis for setting up medium and large
industrial units. The State Government also considers cases for setting up of joint ventures
with the private sector.
7. The SSI units in the backward areas and other industries with a capital
investment in plant and machinery upto Rs. 1 lakh are relieved from the following
taxation in some States:
(i) New units established in the districts are completely exempted from the payment of
electricity duty up to a period of 7 years.
(ii) (New units are exempted from property tax for a period of 5 years.
(iii) Industrial units set up within the municipal limits are exempted from octroi on capital
equipment and building materials subject to a maximum period of 3 years from the
date of regular registration.
8. Provision of essential, controlled raw materials to the SSI units on priority and at
very liberal terms.
9. State Governments have set up independent testing laboratories on behalf of the
Indian Standards Institution, the Export Inspection Council, the Department of Defence,
Government of India and various other government organisations for making industrial
products of good quality.
10. In order to provide some important and sophisticated common facilities, a
network of industrial development centres, heat treatment centres and common facility
28
workshops have been set up in the States to equip the SSI units with modern techniques and
process of manufacturing.
Special incentives in the form of transport subsidy to compensate partially for the higher transport
cost of established industries in hilly backward areas is also being provided by the Union
Government.
The small scale units are now permitted to set up consortia to organise the sales of their own
products abroad. Similarly, a co-operative society of small units will also be permitted to do so. Such
consortium or a co-operative society of small scale units will be eligible for grant of an Export House
Certificate on the following basis :
(1) The applicant is a corporate body or a partnership firm or a co-operative society
and is registered as an exporter;
(2) All the members of the applicant consortium are small or cottage units,
(3) The minimum limit prescribed for select products for grant of a certificate will be
Rs. 50 lacs (the minimum exports may be either in the immediately preceding years or
the annual average of the three years of the base period).
For the purpose of granting the first export house certificate to the consortium, the exports made by
its members will be taken into account, if otherwise acceptable. Thereafter, for the purpose of
renewal, the exports made in the name of the consortium alone will be acceptable.
Seed Capital Assistance
One of the constraints faced by the entrepreneurs, especially first generation or technical
entrepreneurs, is the lack of resources to meet the minimum promoter's contribution. To help the
entrepreneurs overcome the problem. IDBI has come up with a scheme which has gained popularity
as the Seed Capital Scheme. If the project is coming up in non-backward areas, then the project
would not be eligible for subsidy. Hence, the entire amount of promoter's contribution would be
brought by the contributor himself. This would be reduced to the extent of the subsidy if the project
is coming up in backward areas like (category A, B, or C). The maximum amount which can be
sanctioned is to the extent of Rs. 5 lacs per project on the fulfillment of certain conditions.
Objectives of the Scheme
The objective of the scheme is to create new generation entrepreneurs who have the requisite traits of
entrepreneurship but whose financial resources are limited. It envisages extension of assistance at a
nominal service charge for meeting the risk capital requirements of entrepreneurs. The scheme is
expected to promote wider dispersal of ownership and control of industrial undertakings.
Agencies for Operating the Scheme
The scheme is operated through the agency of notified SIDCs and SFCs. Assistance under the
scheme will also be given directly by IDBI in exceptional cases. Projects assisted by commercial
banks are also eligible for seed capital assistance. However, the entrepreneurs will have to submit
their applications through SFC/SIDC functioning in the region.
29
Eligibility Criteria
To be eligible for assistance the entrepreneurs should be technically or professionally qualified or

possess relevant experience or skills either in industry, business or trade. The following categories of
entrepreneurs are eligible for assistance under the scheme:
1. New generation entrepreneurs in small scale requiring seed capital of more than
Rs. 4 lacs.
2. Small scale entrepreneurs who undertake expansion/diversification or modernisation.
3. Entrepreneurs intending to graduate from the small scale to medium sector for the first time.
4. Entrepreneurs intending to set up a project in the medium sector for the first time.
5. Entrepreneurs already in medium sector and intending to undertake diversification for
achieving better viability. Entrepreneurs seeking additional seed capital to meet project cost
over-run caused by factors beyond their control.
6. Entrepreneurs intending to take over an existing sick or closed unit. Projects constituted as
public/private limited companies or partnership/proprietary concerns eligible for assistance.
Amounts and Mode for Assistance
The amount of seed capital assistance for project shall not exceed Rs. 15 lacs. However, the actual
amount will be determined on the basis of gap in the equity required for the project as also shortfall
if any in the prescribed minimum promoter's contribution after taking into consideration his own
contribution and from other sources and subsidies and incentives. For deciding the quantum of
assistance, the debt equity norms of 2:1 in the case of SSI units and 1.5:1 in the case of medium scale
units would be adopted.
The assistance will be in the form of soft loans in the case of proprietary and partnership concerns. In
the case of private limited companies the assistance will be by way of soft loans of subscription to
1% cumulative redeemable preference shares. In the case of public limited companies the assistance
will be normally by way of subscription to equity capital or cumulative redeemable preference shares
(at 1%) or both or by way of soft loan.
The soft loan would be interest free which will carry a service charge of 1% per annum. However,
IDBI may have option to charge the interest on soft loan at a different rate. There is no commitment
charge. The repayment period depends upon repaying capacity of the unit with an initial moratorium
period not exceeding 5 years. Now security except the personal guarantee of the promoter is
stipulated.
TAXATION BENEFITS
The taxation benefits available to small scale industries are explained below:
1. Tax Holiday: New small scale industries are exempted from the payment of
income tax under Section 80J of the Act on their profits up to 6% (7.5 % for companies) from
the total income of the units in the assessment year in which the units began manufacture,
provided the small scale units have followed the procedures laid down in Section 80 J. This
tax holiday is available up to 5 years from the commencement ofproduction.
2. Depreciation Allowance: Under Section 32 of the Income Tax Act. a small scale
industry is eligible to get a deduction on depreciation account of plant and machinery.
land and buildings, at the prescribed rates. In the case of small scale industries the
deduction from the actual cost of plant and machinery is allowed up to Rs. 20 lakhs.
30
The depreciation is calculated on the reducing balance system. Full depreciation is available
for a year irrespective of the actual number of days for which the assets have been used.
Sometime, an additional allowance, called extra shift allowance is available to the units. Any
machinery or plant costing less than Rs. 750 is allowed to be written off completely in the
year in which it is first used.
3. Development Rebate: In respect of new plant or machinery other than office

appliance or road transport vehicles of a small scale unit, which is wholly used for the
purpose of production, a sum, by way of development rebate, as specified below, is allowed
under Section 33, in addition to normal depreciation.
(i) In the case of plant and machinery, 35% of the actual cost, if it were installed before
1st April 1970, and 25% of such cost if it were installed after 31st March 1970.
(ii) Where the plant machinery was installed after 31st March 1967, being an asset
representing expenditure of a capital nature on scientific research related to the
business carried on by a unit, development rebate is given at the specified rates.
4. Rehabilitation Allowance: This is granted to small scale units, under Section 33

B. whose business has been disturbed by:
(a) Riot or civil disturbance.(fa) Floods, typhoons, hurricanes, cyclones, earthquakes or
other natural disasters.
(b) Accidental fire or explosion.
(c) Action by an enemy.
The small scale unit re-established, reconstructed or revived, is allowed a deduction of a sum, by
way of rehabilitation allowance, equivalent to 60% of the amount of the deduction allowable to the
unit.
Investment Allowance: The Investment allowance was introduced in 1976 in place of depreciation
allowance. It is allowed at the rate of 25 per cent of the cost of acquisition of new plant or machinery
installed. The benefit of investment allowance is available for the articles or things except certain
low priority items specified in the Eleventh Schedule. However, the Small scale units are eligible for
investment allowance irrespective of whether they are used for the purpose of business of
construction, manufacture or production of low priority items listed in the Eleventh Schedule.
If a small scale industrial unit produces any article or thing (not listed in the XI Schedule) by using
the know-how developed in Government laboratories, public sector companies and universities, the
rate of investment allowance will be 35 per cent. This higher rate may be claimed only if the new
plant or machinery is installed by it after 20-6-1977 but before 1-4-1982.
The Small scale unit can avail of the benefit of investment allowance only when it has put to use the
plant and machinery either in the year of installation or In the immediate following year; otherwise
the benefit will be forfeited.
Conditions to be fulfilled: An Investment Allowance Reserve must be created during the relevant
financial year. This reserve should be utilised for the purchase of plant and machinery for the
business purpose of the small scale unit in India. It cannot be used for any other purpose such as
distribution of dividends or separation of profits or creation of assets outside India.
31
When Withdrawable: The Investment Allowance will be withdrawn:
(i) If plant and machinery is sold or otherwise transferred by the assessee to any person (other
than the Government, a local authority, a corporation or a Government Company) at any time
before the expiry of eight years from the end of the financial year in which it was acquired or
installed. It is not withdrawn if the sale or transfer is made in connection with the
amalgamation of a partnership firm into a company or where a firm is succeeded by a
company in the business carried on by it.
(ii) If a small scale industrial unit ceases to be a small scale unit by virtue of the total value of
plant or machinery installed exceeding the authorised limit.
Publication of Books : A small scale industry engaged in the business of publication of books is
entitled to claim a deduction of a sum equal to 20 per cent of (.lie-profits and gains derived from
such business under section 80 of the Act. "Books" for the purpose of this Section do not include
newspapers, journals. Magazines, diaries, brochures, pamphlets and other publication of similar
nature.
Tax Benefits for Amalgamation of Sick Units: Sickness in an industry, whether large or small. Is
quite widespread in the country and has become a national problem which has caused a great deal of
concern. It is estimated that the aggregate amount involved in the sick units is more than Rs. 2000
crores. The policy of the Government has been to encourage the amalgamation of sick units and
concessions have been announced to induce healthy units to take over sick concerns in the public
interest. Tax concessions are available for the amalgamation of sick units.
Excise Concession: The long term Fiscal Policy has envisaged to provide the best solution for the
problem of cascading effect of taxation of inputs on the value of final product in the Modified Value
Added Tax (MODVAT) Scheme. This scheme provides for the extension of the present system of
proforma credit to all excisable commodities with the exception of a few sectors like petroleum,
tobacco and textile products. The objective of the scheme is to extend the scope of the provisions for
set offs for excise and countervailing duties paid on inputs. This programme will be implemented in
phased manner over a period of years, taking due account of the revenue implications, the need to
revise administrative procedures and the lessons from experience gained in the early stages of the
reform.
The purpose to use MODVAT is not to give substantial net reliefs on excise. The loss of duty on
inputs will be recouped through higher excise taxation of final products. Indeed, shifting the effective
burden of excise taxation away from inputs and on to final products is at the heart of the proposed
reform. Aside from reducing distortionary effects on production and thus increasing the
competitiveness of Indian industry, the shifting of excise burden to final products will help in
tailoring excise duties in such a manner that the well off bear a higher proportionate burden than the
poor.
Tamil Nadu Micro, Small and Medium Industries Policy 2008
This policy is the first-of-its-kind in the country, with a vision to enhance the Competitiveness of the
Micro, Small and Medium Enterprises sector and aim for sustained annual growth rate of over IO per
cent for MSMEs and generate direct and indirect employment opportunities to the tune of 10 lakhs
during the XI Five Year Plan period. The Policy focused on all initiatives to be taken up for the
development of MSMEs in the State including infrastructure development, incentive schemes,
technology development, subsidy schemes for units located in industrially backward areas, skill
32
development, marketing support, deregulation and simplification, administrative reforms and
rehabilitation of sick enterprises in the state, Through this initiative, the Khadi and Village Industries
Commission. I he Khadi and Village Industries Board, Coir Board, Small Industries Development
Bank of India (SIDBI), Tamil Nadu Industrial Investment Corporation Limited. Tamil Nadu
Industrial Cooperative Bank Limited belonging to the Central and Stale Governments facilitate
assistance and loans along with employment opportunities.
Subsidy Schemes
(a) Micro Manufacturing Enterprises
Micro Manufacturing Enterprises established anywhere in the State are eligible for the
following incentives:
maximum of Rs. 3.75 lakhs
commencement of commercial production or from the date of power connection.
whichever is later, after allotment of Entrepreneur Memorandum.
• 100% subsidy on the net value of value added tax (VAT) paid by them for the
first 6 years up to the value of investment made in plant and machinery at the
time of allotment of Entrepreneur Memorandum.
(b) Backward Area Development Subsidies
Micro, Small and Medium manufacturing enterprises established in 251 industrially

backward blocks and all industrial estates promoted by the Government and Government
Agencies like SIPCOT. SIDCO, etc. (excluding industrial estates located within the radius of
50 Kms. from Chennai City center) and agro based enterprises set up in 385 blocks in the
State are eligible for the package of incentives given below:
maximum of Rs. 30 lakhs-
• 5% additional employment intensive subsidy on the value of eligible plant and
machinery for giving employment to 25 workers for 3 years within the first 5
years from the date of commencement of commercial production, subject to a
maximum of Rs. 5 lakhs.
• 5% additional capital subsidy on the value of eligible plant and machinery for
units set up by women, SC/ST. physically disabled persons and transgender
entrepreneurs, subject to a maximum of Rs. 2 lakhs.
• 25% additional capital subsidy on the value of eligible plant and machinery
installed to promote cleaner and environment friendly technologies, subject to a
maximum of Rs. 3 lakhs and certification by Tamil Nadu Pollution Control Board.
commencement of commercial production or from the date of power connection,
whichever is later.
(c) Special Capital Subsidy for Thrust Sector manufacturing enterprises set up
anywhere in the State
Ten thrust-sector manufacturing enterprises viz. Electrical and Electronic Industry. Leather
and Leather goods, Auto parts and components. Drugs and Pharmaceuticals. Solar Energy
33
Equipment, Gold and Diamond Jewellery for exports. Pollution Control equipments. Sports
Goods and Accessories. Cost effective building material and Readymade Garments, set up
anywhere in the State are eligible for a special capital subsidy of 15% on the eligible plant
and machinery, subject to a maximum of Rs. 30 lakhs.
(d) Generator Subsidy
Micro, Small and Medium manufacturing enterprises established anywhere in the State are
eligible for a subsidy of 25% on the cost of Generator set purchased (up to 125 KVA
capacity), subject to a maximum of Rs. 1.50 lakhs.
(e) Back-ended Interest Subsidy
A back-ended Interest subsidy at the rate of 3% (subject to a maximum of Rs. 10 lakhs per
enterprise over a period of five years) will be extended on loans taken up to Rs. 100 lakhs by
Micro. Small and Medium Enterprises for Modernization by induction of well established
and improved technologies in specified sub-sectors/products as listed in the guidelines on
Credit Linked Capital Subsidy Scheme (CLCSS) of Government of India.
Schemes for Technology Development
The following new schemes for Technology Development are announced In the Micro, Small
and Medium Industries Policy 2OOS:
• 50% subsidy on the cost of filing a patent application, subject to a maximum of Rs. 2 lakhs per
application and 50% of the cost of the application for trade mark registration or Rs. 25000
whichever is less for Micro, Small and Medium Manufacturing Enterprises.
• Establishment of industrial clusters and mini tool rooms under Public Private Partnership mode
by providing 25% of the total project cost, subject to a maximum of Rs. 1 crore as assistance.
• Creation of Technology Development Fund for evolving cleaner/energy efficient/lT
enabled technologies for the Micro. Small and Medium Manufacturing Sector.
• Assistance for creation of Centers of Excellence and Technology Business incubators for
introduction of a new production techniques and design Development to the tune of Rs. 50
lakhs per incubator/center of excellence.
Schemes of Skill Development and Training
Reimbursement of 50% of the tuition fees for Skill Development Training schemes for the benefit of
the educated unemployed youth and upgradation of the skills of existing employees of Micro. Small
and Medium Enterprises by the MSME Associations have been announced in the MSMI Policy
2008.
Marketing support
Government has announced the following schemes to provide marketing support to Micro, Small and
Medium Enterprises in the MSMI Policy 2008.
• 15% Price preference for purchase of goods of domestic Micro and Small
Enterprises as provided in the Tamil Nadu Transparency in Tenders Act. 1998.
• Purchase preference for items notified from time to time by the State Government.
• Waiver of Earnest Money Deposit for participation in tenders.
34
• 50% grant on hall rent for participation in exhibitions within the State and also
in other States by MSME Associations.
• Support for marketing under a common banner or brand name.
Credit Linked Capital Subsidy scheme: The Government of India is operating Credit Linked
Capital Subsidy Scheme to facilitate the upgrading of technology in SSI units in respect of 48
specified products/sub-sectors. Under this scheme. 15% capital subsidy is granted for induction of
proven technologies approved under the Scheme.
TUF scheme for textile: Additional option available for Capital subsidy in lieu of interest rebate for
selected sectors. New or existing SME units—including units in cotton ginning and processing
sector—are eligible 5%/4% interest reimbursement and (he interest actually charged.
Mega Projects Subsidy: The Govt. of Tamil Nadu is offering Mega Project Subsidy for the projects
with investment in Fixed Assets above Rs. 5.00 crores and upto 200 crores as back ended ranging
between 30.00 lakhs to 100.00 lakhs depending up to the investment and direct employment to the
workers.
Subsidy of Ministry of Food Processing Industries: The Ministry of Food processing, Government
of India with a view to accelerate the growth in this sector is providing grants for setting up of food
processing units (including meat and fish processing/milk products/spices/coconut/walnut/cashew
nut) or upgradation and expansion of such unit and for establishing Food Parks. Grant is available at
25% of the cost of capital equipment and technical civil works up to a maximum of Rs. 50.00 lakhs.
Employment Incentive Subsidy: Employment Incentive Subsidy of an additional 5% subject to a

maximum of Rs. 5.00 lakhs will be granted, if at least 25 workers have been employed for a
minimum period of 3 years within the first 5 years from the date of commencement of production.
Special Capital Subsidy to thrust sector enterprises : Micro/Small/Medium manufacturing

enterprises in the following Thrust Sectors are eligible plant and machinery subject to a maximum of
Rs. 30.00 lakhs—
1. Electrical & Electronics Industry
2. Leather & Leather Goods
3. Auto Parts and components
4. Drills and Pharmaceuticals
5. Solar Energy Equipments etc.
Low-tension power tariff (LTPT) subsidy: Flat rate of 20% for the first 36 months from the date of
commencement of production or from the date of power connection, after allotment of an
Entrepreneur Memorandum from District Industries Center.
INSTITUTIONAL SET UP
In order to accelerate the small industries development, Governments at the Central and State levels
have set up a number of development agencies/institutions such as District Industries Centres (DICs).
Small Industries Service Institutes (SIS1) and Small Industries Development Organisation, etc. All-
India Financial Insitutions—1DB1, IFC1. 1CICI—have promoted/sponsored a number of Technical
Consultance Organisations (TCOs) to assist small entrepreneurs in different ways. In 1986. the Small
Industries Development Fund was set up in IDBI in order to assist small scale, village and cottage
35
industries and tiny sector units in the rural areas. Recently, the Small Industries Development Bank
of India (SIDBI) has been established to help small scale units. In addition to these institutions there
are agencies like National Science and Technology Entrepreneurship Board, Khadi and Village
Industries Commission, Commercial Banks, EXIM Bank and Co-operative Banks who undertake
promotional activities aiming at facilitating industrial development.
District Industries Centres (DICS)
Governments—both Central and State, have in the past taken a number of measures for the
development of small and village industries, but the actual achievements have been far below the
expectations. Also the focus of attention for industrial development was mainly on large cities and
State capitals to the neglect of district areas. In addition, multiplicity of institutions involved in small
industries development and complicated systems and procedures made the job of promoting the
industrial units an uphill task for small entrepreneurs. Hence, it was felt necessary to establish a
development agency which could provide all services and facilities to village and small industries
under one roof. Accordingly, the DICs were established in May 1978 in order to cater to the needs of
small units.
Each district has a DIG at its headquarters. The main responsibility of DIC is to act as the chief
coordinator or multifunctional agency in respect of various Government departments and other
agencies. The prospective small entrepreneur would get all assistance from DIC for setting up and
running an industry in rural areas. Up to 1991 about 422 DICs have been set up throughout the
country. These DICs have assisted more them 1.5 lakh units generating employment for more than
10.3 lakh persons. The metropolitan cities of-Delhi, Bombay, Calcutta and Madras have been kept
outside the purview of the DIC.
Functions of DIC
Identification of Entrepreneurs: DIC develops new entrepreneurs by conducting entrepreneurial

motivation programmes throughout the district especially in Panchayat Union Headquarters and
small towns.
Selection of Projects: DIC offers technical advice to new entrepreneurs for the selection of projects
suitable to them.
Provisional Registration under SSI: After the selection of projects, entrepreneurs are issued with
provisional SSI Registration which is essential for obtaining, assistance from the financial
institutions.
Purchase of Fixed Assets: DIC sponsors the loan applications to TIIC. S1DCO and banks for the
purchase of land and buildings anti sanctions margin money under Rural industries Project Loan
Scheme payable to other financial agencies for the purchase of plant and machinery.
Clearances from Various Departments: It takes the initiative to get clearances from various
departments and takes follow up measures to gel speedy power connection.
Assistance to Raw Material Supplies: It makes necessary recommendations to the concerned raw
materials suppliers and issues the required certificates for the import of raw materials and machinery
wherever necessary.
36
Assistance to Village Artisans and Handicrafts: DIC arranges for the financial assistance with the
lead bank or nationalised banks of the respective areas.
Interest-Free Sales Tax Loan: SSI units set up in rural areas can get IFST Loan up in a maximum
limit of 8% of the total fixed assets from S1DCO. But the sanction order from the same is being
issued by DIC. The DIC also recommends the SSI units to NSIC for registration for Government
Purchase Programme.
Subsidy Schemes: DIC assists SSI units and rural artisans to get subsidies such as power subsidy,
interest subsidy for engineers, subsidy under IRDP, etc., from various institutions.
Training Programmes: DIC gives training to rural entrepreneurs and also assists other units giving
training to small entrepreneurs.
Self-employment for Unemployed Educated Youth: This scheme was introduced in 1983-84 for
youths between 18 years and 25 years with SSLC, Technocrats and women are given preference.
District Industries Centres are supposed to provide pre-investment, investment and post- investment
assistance to entrepreneurs under one roof. These centres have done commendable work in the
promotion of small industries, development of entrepreneurship and generation of self- employment.
But much is still desired to be done to make the DIC really one-window service. Steps should be
taken to strengthen and suitably restructure the district industries centres for playing a leading role in
district level industrial development
Industrial Estates
Developing countries require institutional arrangements for their rapid industrialisation and balanced
growth. One such institutional measure is industrial estates. The term 'industrial estate' is called by
different names, e.g. industrial park, industrial zone, industrial region, industrial city, industrial area,
industrial township, etc.
An industrial estate has been defined as a method of "organising, housing and servicing industry, a
planned clustering of industrial enterprises offering standard factory buildings erected in advance of
demand and a variety of services and facilities to the occupants". In other words, an industrial estate
is a tract of land sub-divided and developed according to a comprehensive plan for the use of a
community of industrial enterprises. It is a planned clustering of industrial units offering standard
factory buildings and a variety of services and facilities to entrepreneurs.
The main features of an industrial estate are as follows:

(i) It is a tract of land subdivided and developed into factory plots or sheds.
(ii) It provides several common facilities or infrastructural amenities such as water, power,
transport, toolroom, training, bank, post office, repairs and maintenance, etc. to the
occupants.
(iii) It is a planned clustering of industrial units.
(iv) It is designed as a tool of industrialisation and balanced regional development.
(v) It may be developed in urban, semi-urban or rural areas,
(vi) It may be large, medium and small,
(vii) It may be set up the Government or by cooperatives or by private agencies.
37
Types of Industrial Estates
Industrial estates may be classified into the following categories:
1. General Purpose or Composite Industrial Estates: Such an industrial estate

provides- accommodation to all types of smallscale industries.
It consists of a wide variety and range of industrial units. Most of the Industrial estates in
India are of this type.
2. Special Purpose Industrial Estates: This type of industrial estate is particularly

constructed for specified groups of entrepreneurs, e.g., technically qualified persons.
craftsmen or artisans, etc. For example, Industrial estates for artisans and technical
personnel have been set up at Hyderabad.
3. Ancillary Industrial Estates: Such an industrial estate houses manufacturing

units, which produce, parts and components for a large industrial unit. It is generally
set up near the parent unit.
4. Functional Industrial Estates: This type of Industrial estate consists of

industrial units manufacturing the same product. Such estates have been set up for
leather goods, electronics, sports goods, food preservation, ceramics, etc.
5. Flatted Factory Estates: These are multi-storey buildings constructed in big

cities, to provide space to industrial units manufacturing light weight goods with the
help of simple machine tools. They help to conserve space.
Advantages of Industrial Estates
Industrial estates offer the following benefits:
1. Economies of Scale: Location of many medium or small plants within a large

area offers several economies. Economies of scale arise because all the industrial units enjoy
common infrastructural facilities. As the size of an industrial estate increases the costs of
estate development and administration per unit of each facility decline.
2. Economies of Agglomeration: In an industrial estate, several industrial units

are clustered together. They become interrelated and interdependent. This enables them to
enjoy the benefits of agglomeration and external economies. These external economies
include access to better transportation facilities, availability of trained labour, regular supply
of power and water, easy access to testing and repair facilities, availability of raw materials,
etc.
3. Low Investment: A small scale entrepreneur can obtain an Industrial plot or

shed on rent or hire purchase basis. This reduces considerably fixed capital
requirements as well as fixed costs.
4. Less Risk: Industrial estates serve as risk-absorbing device because of low

capital investment and provision of common facilities and services.
38
5. Saving of Time and Effort: An individual entrepreneur is relieved of the trouble
of searching for a suitable space. He need not waste his time and effort in formalities
involved in acquiring land, obtaining the approval of local authorities, securing power
connection, etc.
6. Nursery for New Entrepreneurs: Industrial estates reduce risks and increase
profitability through Internal and external economies. This induces new entrepreneurs
to setup industrial units.
7. Mutual Cooperation: Industrial estates promote the spirit of cooperation and

joint efforts. All industrial units located in an industrial estate face common problems
and seek to achieve common objectives.
8. Balanced Regional Development: By developing estates in relatively backward

regions, the Government can ensure the balanced industrialisation of different parts of
the country. This will also lead to decentralisation of industries.
Thus, an industrial estate serves as a multipurpose arrangement for the growth of entrepreneurship.
By providing the necessary facilities and services at a single place, it provides a congenial climate
for the growth of small scale industries. It encourages the development of new enterprises. Industrial
estates not only accelerate industrialisation but also facilitate decentralisation of industry
39
LESSON 4
SMALL INDUSTRIES DEVELOPMENT ORGANISATION (SIDO)
Dr Hem Chand Jain
SIDO is a policy-making, coordinating and monitoring agency for the development of small scale
entrepreneurs. It maintains a close liaison with government, financial institutions and other agencies
which are involved in the promotion and development of small scale units. It provides a
comprehensive range of consultancy services and technical, managerial, economic and marketing
assistance to SSI units. It has a network of 28 Small Industries Service Institutes, 30 branch SISIs, 37
Extension Centres, four Regional Testing Centres, one Product and Process Development Centre,
three Footwear Training Centres and five Production Centres and ten Field Testing Centres.
Functions
The main functions of the SIDO are coordination, industrial development and industrial extension
service. Some important functions are:
(1) To assess the requirements of indigenous and imported raw materials and
components for the small scale sector and to arrange their supplies;
(2) To collect data on consumer items which are imported, and encourage the setting
up of new units by giving them coordinated assistance;
(3) To prepare model schemes, project reports and other technical literature for
prospective entrepreneurs;
(4) To secure reservations of certain products for the SSIs.
(5) To provide consultancy and training services and marketing assistance to
improve the competitive strength of small scale units.
(6) To evolve a national policy for the development of SSIs and coordinate the
policies and programmes of various State Governments
SIDO is now Known as Micro, Small and Medium Enterprises Development Organisation.
NATIONAL SMALL INDUSTRIES CORPORATION LIMITED (NSIC)
The NSIC was set up in 1955 with the objective of supplying machinery and equipment to small
enterprises on a hire-purchase basis and assisting them in procuring Government orders for various
items of stores. NSIC provides a wide range of promotional services to small scale units
The Corporation's Head Office is at Delhi and it has four regional offices at Delhi, Bombay, Madras
and Calcutta, and eleven branch offices. It has one central liaison office at Delhi and depots and sub-
centres. The main functions of NSIC are:
(1) To develop small scale units as ancillary units to large-scale industries:

(2) To provide SSIs with machines on hire-purchase basis;
(3) To assist small enterprises to participate in the stores purchase programme of
the Central Government:
(4) To assist small industries with marketing facilities:
(5) To distribute basic raw materials through their depots:
(6) To import and distribute components and parts to actual small scale users in
specific industries: and
40
(7) To construct Industrial estates and establish and run prototype production-cum-training
centres.
(8) To develop small scale industries in other developing countries on turn key basis
The NSIC has taken up the challenging task of promoting and developing small scale industries
almost from scratch and has adopted an 'integrated approach' to achieve the socio-economic
objectives.
NSIC, in consultation with Rating Agencies and Indian Banks Association, has formulated
Performance & Credit Rating Scheme for Small Industries. The Scheme is aimed to create awareness
amongst small enterprises about the strengths and weakness of their existing operations and to
provide them an opportunity to enhance their organisational strengths and credit worthiness.
NSIC acts as a facilitator to promote marketing efforts and enhance the competency of the small
enterprises for capturing the new market opportunities by way of organizing participating in various
domestic & international exhibitions/trade fairs, buyers-seller meets, intensive campaigns seminars
and consortia formation. NSIC helps small enterprises to participate in International/national
exhibitions/trade fairs at the subsidized rates to exhibit and market their products, participation in
these events provides small enterprises an exposure to the national/international markets.
Buyer Seller Meets are being organized to bring bulk buyers/government departments and micro &
small enterprises together at one platform. This enables micro & small enterprises to know the
requirements of bulk buyers on the one hand and help the bulk buyers to know the capabilities of
micro & small enterprises for their purchases. Intensive campaigns and seminars are organized all
over the country to disseminate/propagate about the various schemes for the benefit of the small
enterprises and to enrich the knowledge of small enterprises regarding latest developments, quality
standards etc.
DIRECTORATES OF INDUSTRIES OF THE STATE GOVERNMENTS
The small-scale Industries is a State subject and. therefore, the development and implementation of
the schemes of assistance to SSIs is the primary responsibility of the State Government. Directorates
of Industries in each State do the work relating to the development of industries in general and small
scale industries in particular. Each directorate is stalled with administration and technical officers at
State headquarters and by a District Industries Officer with supporting staff in each district. The State
Directorates run various training schemes, production schemes and common facilities schemes. They
also provide facilities of developed industrial land and factory sheds in industrial estates, allocate
quotas of scarce raw materials, certify import requirements and organise industrial cooperatives.
Their functions are varied and have grown with the development and diversification of the small
scale sector.
STATE SMALL INDUSTRIES CORPORATIONS
Many State Governments have-set up Small Industries Corporations in order to undertake a number
of commercial activities. The most important of these activities are distribution of scarce raw
materials, supply of machinery on hire-purchase basis, constitution and management of industrial
estates, procurement of orders from Government Departments, assistance in export marketing and in
certain cases provision of financial, technical and managerial assistance to small enterprises.
41
Small Industries Development Corporation (SIDCO)
In Tamilnadu SIDCO is the state small industries corporation. It plays a lead role in developing small
scale sector. It provides the following facilities to small scale units:
(a) Provision of constructed sheds/plots in industrial estates. These are sold to
entrepreneurs on hire-purchase basis or given on rental basis.
(b) Assistance in procuring some scarce key raw materials like iron and steel, paraffin wax,
potassium chlorate, Fatty Acids, etc., through its various distribution centres. Financial
assistance in the form of subsidies to industrial units in back areas like Central Investment
Subsidy, State Capital Subsidy, Interest Sales Tax Loans, Power Tariff Subsidy and Margin
Money Assistance the Rehabilitation of the Sick Small Scale Industries.
(c) Marketing Assistance to small entrepreneurs.
SMALL INDUSTRIES SERVICE INSTITUTES (SISIS)
Established in 1956 this institute—one in each State has been rendering very useful service to small
scale industries. The assistance rendered by the institute and its extension centres in Tamilnadu may
be listed as follows :
1. Technical Consultancy and Advisory Service: This relates to selector of profitable small
enterprises, choice of appropriate machinery and equipment, appraisal of the technique of"
manufacture, processing of raw materials, adoption of recognised standards of testing, quality
performance of the small industry products and encouraging small units to participate in
Governments stores Purchase Programme. The Institute explores the possibility of setting up
small scale units to supply parts/components to large scale industries.
2. Common Facility Service: This includes supply of designs and drawings and
provision of workshop facilities for the manufacture of dies, tools, jigs and fixtures and
components.
3. Training Facilities: Training is provided to workers in basic trades in the workshops

attached to this Institute and its extension centres, to increase their productivity and this helps
to encourage development of small scale industries in rural areas.
Training in various aspects of industrial and business management is also provided for the
benefit of small industrialists.
A training course in small industries entrepreneurship and management to young engineers

with emphasis on the practical aspects of small industries management Is conducted. This has
been Instrumental in creating a new class of qualified entrepreneurs.
4. Testing Facilities: Basic testing facilities (both physical and chemical) are
provided in the laboratories and workshops attached to this institute at concessional
rates.
5. Marketing Assistance: Economic information on the nature and extent of the

market for specific products is collected and furnished to small industrialists at their
request. The institute offers export promotion service by counselling on export
procedures and trends in foreign markets.
42
Market survey for specific products of small enterprises is also undertaken on a regional basis to
enable a small industrialist to increase the sales of his products in the region.
The special information bureau, called the Tamilnadu Sub Contract Exchange, is a Central
Information Centre where machine capacities of small scale industries are registered and enquiries
from large industries for the manufacture of different components are passed on to registered small
scale units having spare capacity, so as to enable them to feed the requirements of large scale units.
The institute conducts economic surveys of particular areas to ascertain their industrial potential.
KHADI AND VILLAGE INDUSTRIES COMMISSION (KVIC)
KVIC was established in 1953 with the primary objective of developing Khadi and Village industries
and improving rural employment opportunities. Its wide range of activities include training of
artisans, extension of assistance for procurement of raw materials, marketing of finished products
and arrangement for manufacturing and distribution of improved tools, equipment and machinery to
producers on concessional terms.
KVIC provides assistance to Khadi and Village industries which are characterised by low capital
intensity and ideally suited to manufacturing utility goods by using locally available resources. There
are about 26 specified village industries such as processing of cereals and pulses, leather, cottage
matches. Gur and Khandsari, palm gur, non-edible oils and soaps, bee-keeping, village pottery,
carpentry and blacksmithy, gobargas, household alluminium utensils, etc.
KVIC's policies and programmes are executed through 30 State Khadi and Village Industries Boards,
2320 institutions registered under the Societies Registration Act. 1960 and about 30,600 Industrial
Cooperative Societies registered under State Cooperative Societies Act. Activities involving
pioneering types of work, such as developing new industries in hilly, backward and inaccessible
areas are undertaken by KVIC directly.
COMMERCIAL BANKS AND ENTREPRENEURIAL DEVELOPMENT
In recent times commercial banks have not confined themselves to mere extension of finance to
small entrepreneurs hut have shown genuine concern for their progress and development. They have
now entered the challenging field of promoting new small scale entrepreneurs through
entrepreneurship development programmes. In their new role as promoters of small scale sector they
have accepted yet another challenging task. They are now holding EDPs in collaboration with
specialised Institutions such as DIG, SIS1, TCOs, etc, with a view to identifying entrepreneurs,
especially in backward areas, and training and monitoring them to start new ventures.
State Bank of India (SBI)
In order to accelerate the development of backward areas by monitoring potential entrepreneurs to

take up risky new ventures, the SBI launched EDPs in 1978. As per the Bank's ventures, the EDPs
consist of one month's intensive training in behavioural science, management aspects, field training.
During the training period, the entire cost of boarding and lodging is borne by the Bank, The Bank's
EDP consists of three phases:
(i) Initiation phase for cretin" awareness about entrepreneurial opportunities.

(ii) Development phase through training programmes in developing motivation and managerial
43
(iii) Support phase counselling, encouragement and infra-structural support for establishing and
running an enterprise.
In 1967 the SBI launched a liberalised scheme for providing financial assistance to technically
qualified or trained entrepreneurs to the extent of 100 per cent, if necessary. The target group is the
technocrats who lack the financial capability to meet the normal margins stipulated by the Bank.
Under its Equity Fund Scheme, the Bank may grant interest-fee loan for the 25% of the project cost
which is the minimum contribution of an entrepreneur.
Recently SBI has set up a Research and Development Fund of Rs. 5 crores for inter-alia. assisting
entrepreneurial development. SBI and its group offer package of financial arrangement and
assistance to small scale units in their promotional and expansion activities and act as banker to
capital issues.
Punjab National Bank
Through its Merchant Banking Division it offers similar package of assistance to small scale units.
The package of measures include the following:
1. The banks study the economic viability and technical feasibility of the proposals
and help in preparation of market-survey report with the assistance of technical consultants.
2. They provide assistance to entrepreneurs in obtaining various government
consents required for industrial projects right from the time the application for letter of intent
is made.
3. They assist the entrepreneur in raising rupee resources in the form of
debentures, term loans, dereferred payment guarantees from financial institutions.
4. They assist in raising foreign exchange resources required for import of plant and
machinery, components, raw materials, etc., by arranging through the Bank's foreign
correspondents, suppliers' credit, buyers' credit and foreign currency loans.
5. They determine the capital structure, assist in obtaining consent of SEB1.
finalisation of syndication of underwriting arrangements, handling of share applications
and relative allotment in consultation with stock exchange, etc.; financing export of
capital equipment on deferred payment terms.
6. They suggest strengthening the capital base of small scale industries, which intend to
expand/diversify by conversion of partnership firms into private limited company, or
conversion of private limited company into public limited company.
Indian Bank—Entrepreneurship Service Cell
The bank provides consultancy services to persons who graduate from colleges and institutions of
engineering, technology, etc. and unemployed engineers, diploma holders and other graduates or
business executives. The consultancy service right from identification of a project to its
implementation and marketing is provided through the personnel of the bank and panels of expert
specialists. For this purpose, the cell after preliminary discussion with a prospective entrepreneur
arranges a meeting with the appropriate panel member. The cell and the appropriate panel member
then assist the entrepreneurs. This service was inaugurated on 3rd October. 1973 and is available
only at Madras and a few other selected centres.
44
Bank of Baroda—Entrepreneurial Banking Service
Bank of Baroda has started what is known as 'Entrepreneurial Banking' in collaboration with Uttar
Pradesh Small Industries Corporation to assist technician entrepreneurs to set up their own units at
Rae Bareli Industrial Complex for building and hardware materials. Under this scheme, the
Corporation assists the technicians with the acquisition of fixed assets, and Bank of Baroda arranges
in-plant training in established industrial units and provides working capital facilities to the
entrepreneurs.
Bank of Baroda has also started a Multi Service Agency at Bombay to provide technical assistance to
self-employed persons about feasibility of their projects/proposals, guide the entrepreneurs in regard
to availability of raw materials, marketing prospects, etc.
Bank of India—Entrepreneurial Clinic-Cum-Guidance Service
With a view to fostering growth of entrepreneurship and economic development, the bank has set up
the cell. The scheme offers;
(i) assistance in selection of industry, preparation and evaluation of project report and market
survey:
(ii) practical training in the line, if necessary;
(iii) assistance in obtaining government clearance, procurement of machinery and equipment and
marketing of product;
(iv) assistance and guidance in implementation of project.
The novel feature of the scheme is the bank will provide from a panel of industrialists a 'foster father'
to guide and assist the budding entrepreneurs.
Canara Bank—Industrial Information and Guidance Service
The bank has set up an industrial information and guidance service to provide information and
advice to its clients on matters, such as scope for establishment of industries, technical and marketing
facilities, taxation, export and imports, accounting and management and to prepare project reports on
proposed industries.
Grindlays Bank Limited
It has two Small Scale Consultancy Service and Merchant Banking Division. Small Scale
Consultancy Service Division is located in Calcutta. This division offers assistance in preparing
project feasibility reports, conducting overall industry studies, marketing and sales, and management
accounting. This division undertakes a detailed in-depth study of the existing system and procedures
in various functional areas for idea problems and other deficiencies, to develop tailor-made solutions.
The Division also helps the management in implementing the suggestions.
The Merchant Banking Division located at Mumbai, Chennai, Calcutta and New Delhi managers
public issues for raising capital, helps to establish liaison with government lending bodies for raising
capital, helps term development finance, assesses the strengths and weaknesses of the company
through management audits and suggests tailor-made solutions to eliminate the weaknesses.
45
Syndicate Bank
Small Scale Industries Department of the Bank with a technical cell of engineers working at the head
office at Manipal (Karnataka) and at different industrial growth centres, besides appraising the
viability of credit proposals from small scale industries sector, offers counselling services to the
entrepreneurs, including helping them to prepare project r ports.
Union Bank of India—General Services Cell
The Bank has opened a General Services Cell at its head office at 66/80 Bombay Samachar Street,
Fort Bombay exclusively for small industrialists and other small borrowers to provide services like
selection of machinery, accounting procedure, financial planning and other matters.
United Bank of India
The Bank's Technical Cell at Calcutta provides assistance to persons about feasibility of their
projects and technical as well as non-technical guidance.
United Commercial Bank
The Bunk has a cell in its head office at Calcutta to provide technical assistance/guidance to self-
employed persons about feasibility of their projects. It also renders them advice in regard to sources
and availability of raw materials, and marketing of their products.
New Entrepreneur Development Agency
The New Entrepreneur Development Agency has been created in order to assist educated
unemployed graduates to set up SSI units in urban and metropolitan areas. The Agency will choose
candidates only from among those sponsored by Government Institutions and Agencies like SISI,
DICs, University Employment Guidance Bureau, etc.
The selected candidates will be assisted in selecting the projects suitable to their aptitude and
backgrounds. The candidates on identifying the projects will undergo an Entrepreneur Development
Programme to be conducted by Agencies like SISI, ITCOT, etc. Practical training will also be
arranged in industries, wherever possible.
Projects with credit requirements up to Rs 5 lakhs are only eligible lor finance under the scheme.
Hundred per cent finance will be provided in the beginning and margin will be built up to 20 per cent
over a period of time depending on the profitability of envisaged project. Assets created with bank
finance and personal guarantees of parents will be sufficient securities for the loans given.
The maximum amount of loan will be Rs. 5 lakhs and the repayment of term loans will be based on
the profitability projection and within seven years. The interest rate for medium term loan is 13.5 per
cent p.a., and for working capital- 14 per cent p.a., up to Rs. 2 lakhs and 15.5 per cent p.a. above Rs.
2 lakhs up to Rs. 5 lakhs.
The candidate will be assisted in getting marketing tie-up with user industries, wherever possible.
Their unit will have to be registered as small scale Industries with the Directorate of Industries and
Commerce, or the DICs as the case may be.
46
Indian Overseas Bank—Bank's Small Business Aid Agency
The agency specialises in the field of small business and offers necessary guidance to those persons
who wish to start the same. It also offers consultancy to professionals, like doctors, engineers,
lawyers, etc. to enable them to start their practice. The operations of this agency are presently
restricted to Madras city and Madurai. though the bank plans to establish similar agencies in other
centres in due course.
SPECIAL ECONOMIC ZONES
In 1980, barely a year after the Chinese strongman Deng Xiaoping initiated his country’s switch to
market economy, a nondescript town in the Guangdong province in southern China, Shenzhen, was
designated a special economic zone (SEZ) by the authorities. It has virtually not modern industries
worth speaking of and had the slow-paced lifestyle that characterizes all backwaters. Today, some 27
years later, Shenzhen is a modern, sprawling metropolis with a population of more than 10.5 million
and home to some elite global brands and Fortune 500 companies. Crammed to the full with
industries of every hue, it is now the economic heartland of China. More importantly, it showcases a
model of growth that leapfrogs the limitations imposed by dirigisme to a high-growth export-led
powerhouse that is the envy of the world.
Today, India Inc. hopes to replicate the Chinese success story by creating its own brand of SEZs.
In simple terms, an SEZ is a designated free trade enclave that is deemed as a “foreign territory’ only
for trade operations’ dukes and tariffs. It has more liberal economic and labour laws than those of the
country and hence has the capacity to attract foreign investments, help promote exports and create a
level-playing field for domestic enterprises and manufacturers to compete in the global market. And
it’s not a new concept either. Since the end of World War II, SEZs, export-processing zones (EPZs)
and free trade zones (FTZs) have been bandied about as a solution to Jump-start economic
development in the developing countries to take on their Western counterparts. Interestingly, it was
the small Latin American country of Puerto Rico that showed the way for SEZs way back in 1947,
when it decided to pass a tax exemption law to attract firms from mainland USA to its shore. But It is
really the success of the five Chinese SEZs—especially Shenzhen in the Guangdong province, which
has attracted more than S 140 billion in FDI since the inception in 1980 and exported goods worth
nearly S 150 billion in 2004 (almost double of India's total exports in 2004-05 of S 80 billion)—that
has made SEZs a global media darling, in fact, China's astounding growth over the last three decades
is largely attributed to SEZs, which contribute more than 45% of the total Chinese exports.
India, too, has along history of dabbling in export promotion schemes. Asia's first EPZ was sent up in
Kandla in 1965, it was followed by the Santa Cruz EPZ in 1973. There were eight EPZs in the
country, but their performance is nothing to talk about.
What thwarted EPZs' progress were multiplicity of controls and clearances, lack of good
infrastructure and an unstable fiscal structure the very bottlenecks the SEZ policy, inspired by the
Chinese model, seeks to remove.
While the EPZs are just industrial estates, SEZs are industrial townships that provide supportive
infrastructure such as housing, roads, ports and telecommunication. EPZs have little protection from
cumbersome procedures and paperwork, while SEZs have single-window clearances that reduce
transaction costs and procedural hassles. But then again, while EPZs enjoy no benefits in terms of
47
relaxation in labour laws, the SEZ Act allows state governments to liberalie the labour laws in SEZs
falling within its jurisdiction.
Considering the country's creaking infrastructure, sorry state of public finances and massive
unemployment, getting private investment in infrastructure and attracting huge amounts of foreign
direct investment (FDI) especially into labour-intensive manufacturing sectors, should be the prime
objectives of the policy makers. After all, India—ranked—ranked at a lowly 134th on the ease of
doing business in the latest World Bank-IMF list—needs radical policy changes to emerge as a
global investment hotspot. And SEZs could just be the perfect tool to woe' all those multinationals
waiting to access our huge pool of cheap labour as well as the big market that India is.
And for one, it will be the private players and not the cash-strapped central government that will be
involved in converting large tracts of land into massive industrial townships.
Incentives for Manufacturers
• Duty-free import of capital goods, raw-materials, consumables and spares.

• 100% exemption on export profits for the first five years.
• 50% tax exemption on export profits for the next five years
• 50% tax exemption for another five years on reinvested profits.
• Exemptions from minimum alternate tax.
• Goods purchased from DTA are exempt from central sales tax.
• Exemption from service tax and capital gains on transfer from an urban area to SEZ.
Incentives for Developers
• No duty on goods imported either from the DTA or abroad.

• Income-tax exemption for the first 10 years.
• Service tax exemption for all services rendered within the SEZ.
• Exemptions from purchase, sale and turnover tax on all transactions.
• Exemption from stamp duty, registration fee and electricity duty.
• No tax on income from dividends and long-term capital gains tax.
• 100% FDI allowed for developers.
Debate over SEZs
The SEZs have been an issue of intense debate. Arguments have been advanced both for and against.
These can be briefly summarised as follows.
Arguments for SEZs
They will:
• Attract global manufacturing companies to set up base here.
• Create world-class infrastructure in the hinterland.
• Help create much-needed jobs across the country.
• Help the Centre save revenue on infrastructure development.
• Ease pressure on metres by creating new centres of employment.
• Ensure that risks of failure are borne entirely by the private sector
• Offer easier access to funds as foreign banks will be allowed in
48
• Bring down transaction costs for companies.
• Make units competitive through flexible labour laws.
• Bring foreign investment, technology and managerial talent.
Arguments against SEZs
They will:
• Lead to exploitation of the policy by fly-by-night developers.
• Could result in significant revenue losses for governments.
• Divert large tracts of farmland into non-performing SEZs.
• Result in domestic markets becoming under-served.
• Not produce world-class facilities in case of smaller size.
• Not guarantee the future of units in unsuccessful zones.
• Distort taxation structure, making units uncompetitive in DTA.
• Not be VITO compatible all the time.
• Lead lo large-scale exodus of industries from DTA.
• Allow the rise of private monopolies that will be against public interest.
49
LESSON 5
MARKETING
Dr Hem Chand Jain
Marketing may be narrowly defined as a process by which goods and services are exchanged and the
value determined in terms of money prices. That means marketing includes all those activities
carried on to transfer to goods from the manufacturers of producers the consumers.
We shall be learning later in the lesson that marketing is more than mere physical process of
distributing goods and services. It is the process of discovering and translating consumer wants into
products and services. It begins with the customer (by finding their needs) and ends with the
customer (by satisfying their needs).
The scope of marketing can be understood in terms of functions that an entrepreneur has to perform.
These include the following:
(a) Functions of exchange: which include buying and assembling and selling?
(b) Functions of physical supply: include transportation, storage and warehousing.
(c) Functions of facilitation: product planning and development, marketing research,
standardization, grading, packaging, branding, sales promotion, financing.
The Marketing Concept
The marketing concept holds that the key to achieving organizational goals consists in determining
the needs and wants of target markets and delivering the desired satisfactions more effectively and
efficiently than competitors. Under marketing concept, the emphasis is on selling satisfaction and not
merely on the selling a product. The objective of marketing is not the maximization of profitable
sales volume, but profits through the satisfaction of customers. The consumer is the pivot point and
all marketing activities operate around this central point. It is, therefore, essential that the
entrepreneurs identify the customers, establish a rapport with them, identify their needs and deliver
the goods and services that would meet their requirements.
The components of marketing concept are as under:
(a) Satisfaction of customers: In the modern era, the customer is the focus of the organization.
The organization should aim at producing those goods and services, which will lead to
satisfaction of customers.
(b) Integrated marketing: The functions of production, finance and marketing should be
integrated to satisfy the needs and expectations of customers.
(c) Profitable sales volume: Marketing is successful only when it is capable of maximizing
profitable sales and achieves long-run customer satisfaction.
Marketing versus Selling
The basic difference between marketing and selling lies in the attitude towards business. The selling
concept takes an inside-out perspective. It starts with the factory, focuses on the company’s existing
products, and calls for heavy selling and promoting to produce profitable sales. The marketing
concept takes an outside-in perspective. It starts with a well-defined market, focuses on customer
needs, coordinates all the activities that will affect customers, and produces profits through creating
customer satisfaction.
50
Starting point Focus Means Ends
Selling Concept
Factory Products Selling and Profits through
Promoting sales volume
Marketing Concept
Market Customer Coordinated Profits through
Needs marketing customer satisfaction
Importance of Marketing in Small Business
Since marketing is consumer oriented, it has a positive impact on the business firms. It enables the
entrepreneurs to improve the quality of their goods and services. Marketing helps in improving the
standards of living of the people by offering a wide variety of goods and services with freedom of
choice, and by treating the customer as the most important person.
Marketing generates employment both in production and in distribution areas. Since a business firm
generates revenue and earns profits by carrying out marketing functions, its will engage in exploiting
more and more economic resources of the country to earn more profits.
A large scale business can have its own formal marketing network, media campaigns, and sales
force, but a small unit may have to depend totally on personal efforts and resources, making it
informal and flexible. Marketing makes or breaks a small enterprise. An enterprise grows, stagnates,
or perishes with the success or failure, as the case may be, of marketing. “Nirma” is an appropriate
example of the success of small scale enterprise.
Marketing of Services
The services sector is more than twice the size of the manufacturing sector. The growing competitive
market for services means that a marketing orientation has become essential for the survival for
service industries too.
India’s high capabilities in Information Technology are well known. In addition, there is the most
popular segment of its services sector, the entertainment industry, particularly films and TV happens
to be one of the fastest growing in the world. Indian films are popular across West Asia, Afghanistan,
Central Asia, Russia, South Africa and South East Asia. They are now penetrating the western world.
Market Segmentation
A market consists of large number of individual customers who differ in terms of their needs,
preferences and buying capacity. Therefore, it becomes necessary to divide the total market into
different segments or homogeneous customers groups. Such division is called market segmentation.
They may have uniformity in employment patterns, educational qualifications, economic status,
preferences, etc.
Market segmentation enables the entrepreneur to match his marketing efforts to the requirements of
the target market. Instead of wasting his efforts in trying to sell to all types of customers, a small
51
scale unit can focus its efforts on the segment most appropriate to its market.
A market can be segmented on the basis of the following variables:
1. Geographic Segmentation: The characteristics of customers often differ across nations,

states regions cities or neighbourhoods. The entrepreneur can decide to operate in one or a
few or all the geographic areas, but pay attention to differences in geographic needs and
preferences.
2. Demographic Segmentation: Variables such as age, sex, family size, income, occupation,
education, religion, race and nationality are widely used for market segmentation.
3. Psychological Variables: Personality, life style, social class, etc. can also be used for market
segmentation. For example, some products like pens, watches, cosmetics and briefcases are
designed differently for common men and status seekers.
4. Behavioural Segmentation: Buyers are divided into groups on the basis of their knowledge,
attitude, use or response to a product.
Marketing Mix
In order to cater to the requirements of identified market segment, an entrepreneur has to develop an
appropriate marketing mix. Marketing mix is a systematic and balanced combination of the four
inputs which constitute the core of a company’s marketing system – the product, the price structure,
the promotional activities and the place or distribution system. These are popularly known as “Four
P’s” of marketing.
An appropriate combination of these four variables will help to influence demand. The problem
facing small firms is that they sometimes do not feel themselves capable of controlling each o the
four variables in order to influence the demand.
Product Mix Price Mix Place Mix Promotion Mix

• Features • List Price • Location • Advertising
• Design • Discounts • Transport • Personal selling
• Variety • Allowances • Channels • Sales
• Quality • Payment Period • Coverage promotion
• Brand name • Credit Terms • Delivery • Publicity
• Packaging • Availability
• Sizes • Inventory
• Services
• Warranties
A brief description of the four elements of markets mix is as follows:
1. Product: The first element of marketing mix is product. A product is anything that can be
offered to a market for attention, acquisition, use, or consumption that might satisfy a want or
need. Products include physical objects, services, events, persons, places, ideas or maxis of
these. This element involves decisions concerning product line, quality, design, brand name,
label, after sales services, warranties, product range, etc. An appropriate combination of
52
features and benefits by the small firm will provide the product with USP (unique selling
proposition). This will enhance the customer loyalty in favour of its products.
Products and services are broadly classified into consumer products and industrial products.
Consumer products are bought for final consumption; whereas industrial products are bought
by individuals and organisations for further processing or for use in conducting business.
Other ways of classifying products are as follows:
(a) Convenience products: These are consumer products that the customer buys very
frequently, without much deliberation. They are low priced of low value and are
widely available at many outlets. They may be further subdivided as:
• Staple Products: Items like milk, bread, butter etc. which the family consumes
regularly. Once in the beginning the decision is programmed and it is usually
carried on without change.
• Impulse Products: Purchase of these is unplanned and impulsive. Usually when

the consumer is buying other products, he buys these spontaneously for e.g.
Magazines, toffees and chocolates. Usually these products are located where they
can be easily noticed.
• Emergency Products: Purchase of these products is done in an emergency as a

result of urgent and compelling needs. Often a consumer pays more for these. For
example, while travelling if someone has forgotten his toothbrush or shaving it; he
will buy it at the available price.
(b) Shopping products: These are less frequently purchased and the customer carefully
checks suitability, quality, price and style. He spends much more time and effort in
gathering information and making comparisons. E.g. furniture, clothing and sued cars.
(c) Specialty products: These are consumer goods with unique characteristics / brand
identification for which a significant group of buyers is willing to make a special
purchase effort. For example, Mitsubishi Lancer, Ray ban glasses.
(d) Unsought product: These are products that potential buyers do not know exist or do
not yet want. For example Life Insurance, a Lawyers services in contesting a Will.
The above product decisions are very important to ensure the sale of products. A product has
both tangible and intangible components. While buying a product, the customer does not
merely look for the physical product, but a bundle of satisfaction. Thus, the impact that any
product has upon a buyer goes well beyond its obvious characteristics. There is a
psychological dimension to all customer purchases; what a customer thinks about a product is
influenced by far more than the product itself. For example, the buyer of an air conditioner is
not purchasing cooling machine only. He looks for attractive colour and design, durability,
low noise, quick cooling, etc. these influencing factors must be considered by the small firms
to meet the requirements of different kinds of customers.
53
2. Price: The second element is the price, which affects the volume of sales. It is one of the
most difficult tasks of the marketing manager to fix the right price. The variables that
significantly influence the price of a product are: demand of the product, cost competition
and government regulation. The product mix includes: determination of unit price of the
product, pricing policies and strategies, discounts and level of margins, credit policy, terms of
delivery, payment, etc. Pricing decisions have direct influence on the sales volume and profits
of the firm. Price, therefore, is an important element of the marketing mix. Right price can be
determined through pricing research and by adopting test-marketing techniques.
Small firms should think of pricing as a method whereby prices are set with regard to costs,
profit targets, competition and the perceived value of products. Because of their simplicity,
cost-plus-pricing are attractive to small businesses, though this is not the only mode of
pricing utilized by small firms. For example, the profit margin in the cost-plus approach may
well be fixed after examining both the nature of the market and the competitor activity within
it. It is a mistake for small firms to rely wholly on cost-plus, but very small firms do that to
the detriment of profits and market share.
The pricing policies mainly followed by the small firms are:
(a) Competitive pricing: This method is used when market is highly competitive and the
product is not differentiated significantly from the competitor’s products.
(b) Skimming-the-cream pricing: Under this pricing policy, higher prices are charged
during the initial stages of the introduction of a new product. The aim is to recover the
initial investment quickly. This policy is quite effective when the demand for a
product is likely to be more inelastic with respect to price in its early stages; to
segment the market into segments that differ in price elasticity of demand and to
restrict the demand to a level, which a firm can easily meet.
(c) Penetration pricing: Under this policy, prices are fixed below the competitive level
to obtain a larger share of the market. Penetration pricing is likely to be more
successful when the product has a highly elastic demand; the production is carried out
on a large scale to achieve low cost of production per unit; and there is strong
competition in the market.
3. Promotion: Promotion refers to the various activities undertaken by the enterprise to

communicate and promote its products to the target market. The different methods of
promoting a product are through advertisement, personal selling, sales promotion and
publicity.
3. Place or Physical Distribution: This is another key marketing mix tool, which stands for the
various activities the company undertakes to make the product available to target customers.
Place mix or delivery mix is the physical distribution of products at the right time and at the
right place. It refers to finding out the best means of selling, sources of selling (wholesaler,
retailers, and agents), inventory control, storage facility, location, warehousing,
transportation, etc. This includes decisions about the channels of distribution, which make the
product available to target customers at the right time, at the right place and at the right price.
By selecting wrong distribution channels or by using the ones it has traditionally used, a
small firm could be depriving it of new market opportunities.
54
In a situation where a small firm has only one primary product, the general rise and fall of sales will
lead to a rise and fall of the firm, unless the firm learns to consistently adjust its marketing mix to
match consumer demand.
Marketing mix of a firm selling automatic washing machines

Target market Urban household with high income and status
consciousness.
Product Latest technology, automatic washing machines.
Price High, but should not be beyond the low range high-
income groups.
Promotion Heavy advertising through high image magazines and
television stressing the high quality of the machines.
Place (distribution) Though high image retailers.
A marketing mix must be consistent for any product. Pricing, for example, must be consistent with
packaging and perceived product quality. If one of these is not in line with others, then sales might
suffer as a consequence. A manager selecting a marketing mix is like a cook or chef preparing meal.
Each knows through experience that there is no ‘one best way’ to mix the ingredients. Different
combinations may be used depending upon one’s needs and objectives. In the marketing as in
cooking, there is no standard formula for a successful combination or ingredients. Marketing mixes
vary from company to company and from situation to situation. The right marketing mix is important
for any product to have a long life cycle.
Tender Marketing
The Corporation participates in bulk global tender enquiries and local tenders of Central and State
government and Public Sector Enterprises on behalf of small-scale units. It is aimed to assist small
units with ability to manufacture quality products but which lack brand equity and credibility or have
limited financial capabilities. Under this scheme, the Corporation has identified large number of
items for which it actively participate sin tenders of these Departments and Enterprises. On receipt of
the orders, Corporation farms out these orders to the units on whose behalf it has quoted. This
assistance has enabled large number of small units to compete for the orders, which are normally out
of reach of the individual units because of the bulk requirement.
• Small scale units are provided with all requisite financial support depending upon the units’
individual requirements the purchase of raw material and financing of sale bill.
• Enhanced business volume helps small units achieve maximum capacity utilization.
• They are exempted from depositing earnest money.
• Small units are helped to participate in large and global tenders up to its capacity and capability.
• They are also assisted technically for quality upgradation and new product development in
addition to testing facility.
• Ensures fair margin to small units for their production.
55
• Publicity to small 8industries products.
• Production of quality products from the small scale sector.
Consortia Marketing
A small unit in its individual capacity faces problem very often to procure and execute large orders,
which inhibits and restricts the growth of small scale units. National Small Industries Corporation
Limited (NSIC) accordingly adopted Consortia Approach and built groups / consortia of units
manufacturing same products, thereby easing out marketing problem of SSI units. The Corporation
explores market and secures orders for bulk quantities. These orders are then farmed out to small
units in tune with their production capacity. Testing facilities are also provided to enable units to
improve and maintain the quality of their products conforming to the standard specifications.
• Participation and Procurement of Orders for bulk quantities.

• SSIs capacity of participating in large tenders enhanced.
• Support testing facility provided by NSIC.
• Financial assistance for Raw Material, Bill discounting etc. provided by NSIC.
• Wherever required, equipment is also financed to the SSI on priority.
• Help in developing / designing of new products and quality enhancement of SSI products.
Marketing Problems of Small Scale Units
All types of business enterprises face marketing problems, but these problems are more severe in
case of small scale units because of lack of knowledge, adequate funds and lack of experience. Some
of the marketing problems commonly faced by the small scale entrepreneurs in India are:
(a) Competition from large scale sector: Because of scarcity of resources, small entrepreneur
usually use inferior technology. As a result their products are not standardized. The obsolete
technology used by them gets translated into inferior quality of products.
(b) Lack of marketing knowledge: Most of the small scale entrepreneurs are not highly
educated or professionally qualified to have knowledge of marketing concept and strategy.
Their lack of expertise further inhibits their understanding of the prevailing trends in the
market.
(c) Lack of sales promotion: Small units lack the resources and knowledge for effective sales
promotion. Large scale units mostly have well-known branded names. They also have huge
amount of resources to spend on advertisement and other sales promotion tools. Small scale
units, on the other hand, have to pay a heavy commission to dealers for their selling efforts,
which reduce profits margins.
(d) Weak bargaining power: At the time of purchase of inputs, large scale entrepreneur manage
to get huge discounts and credit. Such facilities are not available to small units.
(e) Product quality: It is costly and difficult for a small unit to have quality testing and
evaluating equipment.
56
(f) Credit sales: The small scale enterprise is invariably called upon to sell on credit. However,
when it comes to purchasing inputs, they are denied liberal credit facilities. As a result, they
have to borrow excessive working capital than actually needed. This increases the general
cost of production and prices, making it non-competitive.
POLICY SUPPORT TO SMALL SCALE INDUSTRIES
Introduction
After attaining independence in 1947 India adopted mixed economic planning as a method to achieve
economic development. Along with the Large Scale sector the thrust was on the Small Scale sector
because of its decentralized, its small size, use of mainly indigenous, employment intensity and its
suitability for rural areas with limited techno-economic structure.
Industrial policies over the years have focused to promote SSIs through various incentives related to
financial, fiscal and infrastructure measures; along with a heavy industry base.
Objectives
After going through this less you should be able to:
• Explain the various provisions under Industrial Policy Resolution formulated by the Government
in assisting the small scale industry (SSI).
• Discuss the various fiscal incentives for SSIs.
Industrial Policy Resolutions and SSIs
Government’s attitude and intention towards industries in general and SSIs in particular are reflected
in Industrial Policy Resolutions. This sub-sections 20.2.1 to 20.2.11 deal with such resolutions.
The government stressed the role of SSIs for balanced industrial growth. It was stated that SSIs are
particularly suited for the utilization of local resources and creation of employment opportunities.
The primary responsibility for developing small industries by creating infrastructure has been
provided to state governments. Central government frames the broad policies and coordinates the
efforts of State Government for the development of SSIs.
It stated that besides continuing the policy support to cottage, village and small industries by
differential taxation or direct-subsidies, the aim of state policy would be that the development of this
sector is integrated with that of large scale industry. The focus was to improve the competitive
strength of SSIs. To achieve this 128 items were exclusively reserved for production in SSIs, and 166
items were reserved for exclusive purchase by government from this sector.
It emphasize that whatever can be produced by SSIs must only be so produced. The main thrust of
policy was effective promotion of cottage, village and small industries widely dispersed in rural
areas and small towns. This thinking specified the following things:
57
(a) 504 items were reserved for exclusive production in the small-scale industries.
(b) The concept of District Industries Centres (DICs) was introduced so that in each district
single agency could meet all the requirements of SSIs under one roof.
(c) Technological upgradation was emphasigned in traditional sector.
(d) Special marketing arrangement through the provision of services, such as, product
standardization, quality control, market survey, were laid down.
The policy focused on the need of promoting SSIs through integrated industrial development
between large and small sectors. Industrially backward districts were indentified for faster growth of
existing network of SSIs. Following measures were specified in the policy:
(a) Investment limit was raised for tiny, small, and ancillary units to Rs. 2 lacs, Rs. 20 lacs, and
Rs. 25 lacs respectively.
(b) “Nucleus plants” in each industrially backward district replaced the “district industries
centres.” These were to concentrate on assembling the products of SSIs and to produce inputs
needed by large number of small units.
(c) Reservation of items and marketing support for small industries was to continue.
(d) Availability of credit to rowing SS units was continued.
(e) Buffer stocks of critical inputs were to continue.
(f) Agricultural base was to strengthen by providing preferential treatment to agro-based
industries.
(g) An early warning system was to establish to avoid sickness and take appropriate remedial
measures.
Main features of this Resolution are as follows:
(a) It raised the investment ceiling in plant and machinery for SSIs.
(b) It created central investment subsidy for this sector in rural and backward areas. Also,
assistance was granted to women entrepreneurs for widening the entrepreneurial base.
(c) Reservation of items to be produced by SSIs was increased to 836.
(d) Small Industries Development Bank of India was established to ensure adequate flow of
credit to SSIs.
(e) Stress was reiterated to upgrade technology in improve competitiveness.
(f) Special emphasis was laid on training of women and youth under Entrepreneurial
Development Programme.
(g) Activities of Kadhi and Village Industries Commission and Khadi and Village Industries
Board were to expand.
The basic thrust of this resolution was to simplify regulations and procedures by delicensing,
deregulating, and decontrolling. Its salient features are:
(a) SSIs were exempted from licensing for all articles of manufacture.
58
(b) The investment limit for tiny enterprises was raised to Rs. 5 lacs irrespective of location.
(c) Equity participation by other industrial undertakings was permitted up to a limit of 24 percent
of shareholding in SSIs.
(d) Factoring services were to launch to solve the problem of delayed payments to SSIs.
(e) Priority was accorded to small and tiny units in allocation of indigenous and raw materials.
(f) Market promotion of products was emphasized through co-operatives, public institutions and
other marketing agencies and corporations.
Comprehensive Policy Package for SSIs and Tiny Sector 2000
Main focus of this policy is as follows:
(a) The exemption for excise duty limit raised from 50 lakhs to Rs. One crore to improve the
competitiveness.
(b) Credit linked capital subsidy of 12% against loans for technology up gradation was provided
in specified industries.
(c) The third census of small scale industries by the ministry of SSI was conducted, which also
covered sickness and its causes in SSI’s.
(d) The limit of investment was increased in industry related service and business enterprises
from Rs. 5 lacks to Rs. 10 lakhs.
(e) The scheme of granting Rs. 75000 to each small scale enterprise for obtaining ISO 9000
certification was continued till the end of 10th plan.
(f) SSI associations were motivated to develop and operate testing laboratories. One time capital
grant of 50% was given on reimbursement basis to each association.
(g) The limit of composite loan was increased from Rs. 10 lakhs to Rs. 25 lakhs.
(h) A group was constituted for streamlining of inspection and repeal of redundant laws and
regulations.
(i) The coverage of ongoing Integrated Infrastructure Development (IID) was enhanced to cover
all areas in the country with 50% reservation for rural areas and 50% earmarking of plots for
tiny sector.
(j) The family income eligibility limit of Rs. 24000 was enhanced to Rs. 40000 per annum under
the Prime Minister Rozgar Yozna (PMRY).
Industrial Policy Package for SSI 2001-02
This policy emphasizes the following:
(a) The investment limit was enhanced from Rs. 1 crore to Rs. 5 crore for units in hosiery and
hand tool sub sectors.
(b) The corpus fund set up under the Credit Guarantee Fund Scheme was increased from 125
crore to 200 crore.
(c) Credit Guarantee cover was provided against an aggregate credit of Rs. 23 crore till
December 2001.
(d) 14 items were de-reserved in June 2001 related to leather goods, shoes and toys.
(e) Market Development Assistant Scheme was launched exclusively for SSI sector.
(f) Four UNIDO assisted project were commissioned during the year under the Cluster
development Programme.
59
Industrial Policy on SSIs 2003-04
The following are the highlight of this endeavor:
(a) 73 items reserved for exclusive manufacture in the SSI sector were de-reserved in June 2003.
These consist of chemical and their products, leather and leather products, laboratory reagents
etc.
(b) Selective enhancement of investment in plant and machinery from Rs. One crore to Rs. 5
crore. It was for 13 items in stationary sector and 10 items of drugs and pharmaceuticals
sector from June 2003.
(c) Banks were directed to provide credit to SSI sector within an interest rate band of 2 percent
above and below their Prime Lending Rate (PLR).
(d) The composite loan limit for SSI was raised from Rs. 25 lakhs to Rs. 50 lakhs.
(e) The limit of dispensation of collateral requirement was raised from Rs. 15 lakhs to Rs. 25
lakhs on the basis of good track record and financial position of the unit.
(f) The lower limit of Rs. 5 lakhs on loans covered under the Credit Guarantee Scheme was
removed. All loans up to Rs. 25 lakhs were made eligible for guarantee cover under the
Credit guarantee Scheme.
(g) 417 specialised bank branches were made operational for SSIs.
(h) Third all India census for SSI was conducted throughout the country and its final results were
released on January 17, 2004.
(i) 60 clusters were identified in July 2003 for focused development.
(j) Small and medium Enterprise (SME) fund of Rs. 10000 crore was set up under SIDBI to
solve the problem of inadequate finance for SSIs.
(k) Laghu Udyami Credit Card Scheme was liberalized. Under this scheme, the credit limit was
increased to Rs. 10 lakhs from Rs. 2 lakhs. But, it was only for borrowers with satisfactory
track record.
Policy Initiatives on SSI 2004-05
Policy initiatives for this year are as follows:
(a) The national commission on Enterprises in the Un-organised/Informal Sector was set up in
September 2004. It suggested measures considered necessary for improvement in the
productivity of these enterprises, generation of large scale employment opportunities, linkage
of the sector to institutional framework in areas like credit, raw material supply,
infrastructure, technology up gradation, marketing facilities and skill development by
training.
(b) 85 items were de-reserved in October 2004.
(c) The investment limit in plant and machinery was raised from Rs. One crore to Rs. 5 crore in
October 2004, in respect of seven items of sports goods to help to upgrade the technology and
enhance competitiveness.
(d) The Small and Medium Enterprise (SME) fund of Rs. 10000 crore was started by SIDBI
since April 2004, with 80% of the lending for SSI units. The interest rate was 2% below the
prevailing Prime Lending Rate (PLR) of the SIDBI.
(e) The Reserve Bank of India raised the composite loan limit from Rs. 50 lakhs to Rs. One
crore.
(f) Promotional Package for small enterprises was initiated.
60
Policy Package for SME 2005-06
This policy package contains the following points:
(a) The Ministry of Small Scale Industries has identified 180 items for dereservation.
(b) Small and Medium Enterprises were recognized in the services sector, and were treated on
par with SSIs in the manufacturing sector.
(c) The corpus of the Credit Guarantee Fund was raised from Rs. 1132 crore in March 2006 to
Rs. 2500 crore in five years.
(d) Credit Guarantee Trust for Small Industries (CGTSI) was advised to reduce the one time
guarantee fee from 2.5 per cent to 1.5 percent for all loans.
(e) Insurance cover was extended to approximately 30,000 borrowers, identified as chief
promoters, under the CGTSI. The sum assured would be Rs. 200000 per beneficiary and the
premium will be paid b y CGTSI.
(f) The emphasis was laid on Cluster Development model not only to promote manufacturing
but also to renew industrial towns and build new industrial townships. The model is now
being implemented, in nine sectors including khadi and village industries, handlooms,
handicrafts, textiles, agricultural products and medicinal plants.
Fiscal Incentives
Fiscal incentives are provided through tax concession granted in the form of exemptions of direct or
indirect taxes leviable on production or profits, besides special tax concessions. These incentives
have been provided to promote the SSIs.
Tax Holiday
With effect from financial year 2005-06, deduction in respect of profits and gains for small scale
industrial undertakings is available under Section 80IB.
Small scale industrial undertaking can claim deduction at the following rates:
(a) If SSI unit is owned by a company, the deduction available in 30% for first 10 years,
(b) If SSI unit is owned by a co-operative society, the deduction to be availed is 25% for first 10
years, and
(c) If any other person owns SSI unit, the deduction to be claimed is 25% for first 10 years.
The small scale units can avail this tax exemption facility only after fulfilling the following
conditions.
(a) No small scale or ancillary undertaking shall be subsidiary of, or owned or controlled by
other industrial undertaking.
(b) SSI unit can manufacture any nature type of goods article to avail deduction.
(c) The SSI unit should commence business between 1st April 1991 and 31st March 2002.
(d) They should employ at least 10 workers in a manufacturing process carried out with the aid
of power or at least 20 workers in a manufacturing process carried out without the aid of
power.
(e) This tax exemption from total income is allowed from the assessment year in which unit
begin to manufacture or produce goods or articles.
61
Excise Concessions
Government of India has provided a major relief by granting full exemption from the payment of
central excise duty on a specified output and thereafter slab-wise concessions. The following
concessions are available to them in this regard:
(a) SSI units producing goods up to Rs. 100 lakhs are exempted from payment of excise duties.
(b) SSI units having turnover less than Rs. 60 lakhs per annum need not have a separate
storeroom for storing the finished products.
(c) SSIs are also not required to maintain any statutory records such as daily stock account of
production and clearances, raw material account, personal ledger account etc. Their own
records are adequate for excise purposes.
(d) There is no distinction between registered and unregistered units for SSI concessions.
Further, the eligibility for excise concessions for SSIs has been based on annual turnover
rather than SSI registration. Duty liability is to be discharged by 15th of the following month.
(e) The SSI exemption is available for home consumption as well as in respect of goods exported
to Nepal & Bhutan.
(f) Normally, excise officers are not expected to visit SSI units paying less than Rs. 11 lakhs
duty annually.
(g) With effect from 1-4-1994, Gate-Pass System was replaced by manufacturer invoice to cover
clearances of goods as the duty-paying document.
Presently there are two streams of concessions to SSIs. These are as follows:
(a) SSI Scheme (Without CENVAT): This scheme is effective from 1st April 2000. The Table
shows the rate of duty applicable to such manufactures whose turnover does not exceed Rs. 3
crores in the previous financial year in respect clearances of excisable goods for home
consumption (including exports to Nepal or Bhutan) from one or more factories of the same
manufacturer or from factory by one or more manufacturers:
Table: Rate of Duty in Respect of Clearances of Excisable Goods

(Rs.)
1 Up to Rs. 100 Lakhs NIL
It may be noted that beyond clearances of Rs. 100 lakhs, the manufacturer is liable to pay
normal rate of duty. The manufacturer may opt for not availing exemption and instead pay
the normal rate of duty on the clearances. But once the option is exercised, it shall continue
till the remaining part of the financial year.
Value for purpose of calculating the limit of 100 and 300 lakhs is the ‘Assessable value’ i.e.,
wholesale price at factory gate, exclusive of taxes, where price is the sole criteria.
(b) SSI Scheme (with CENVAT): This scheme is effective from 1st April 2003. It provides the
concessional rate of duty in respect of clearances of specified goods for home consumption
(including exports to Nepal or Bhutan), and also states that all clearances of the specified
goods which are used for captive consumption in production of the specified goods shall be
subjected to ‘nil’ rate of duty. The Table shows the Rate of Duty.
62
Table: Rate of Duty in Respect of Clearances of Specified Goods

(Rs.)
1 Up to Rs. 100 Lakhs 60% of normal rate
A manufacturer can opt for this option any time determining his eligibility for concession and
the concessional rate of duty.
The exemption shall apply only subject to the following conditions:
i. A manufacturer who intends to avail the exemption shall exercise his option in writing to the
jurisdiction Deputy Commissioner or Assistant.
ii. The clearances of specified goods already made during the financial year, prior to the
exercise of such option, shall be taken into account for computing the aggregate value of
clearances. Value of all clearances of all factories should be clubbed.
iii. The aggregate value of clearances of all excisable goods should not exceed Rs. 300 lakhs in
the preceding year.
The exemption contained shall not apply to the specified goods bearing a brand name / trade name
(whether registered or not) of another person, except in some specified cases.
Measures for Promotion and Development of SSIs
Central and State governments have formulated several schemes to make the SSIs vital and
competitive. Some of these schemes are enumerated in sub-section 20.4.1 to 20.4.7.
Reservation Policy
Reservation of items for exclusive manufacture in SSI sector has been one of the important policy
measures for promoting and protecting this sector against competition from medium / large /
multinational companies.
The policy received statutory backing in 1984 under Industries (Development & Regulation) Act,
1951. However with the opening up of Indian trade in 1991, most of reserved items were importable
with the removal of quantitative restrictions. This paved the way to phase out reservation in due
course, and every year some items were dropped from the reserved list. Out of 836 items reserved in
1989, 39 items were dereserved in four phases viz., 15 items in 1997, 9 items on 1999, 1 item on
2001 and 14 items on 2001. Subsequently, 51 items were dereserved in 2002, 75 items in 2003 and
85 items in 2004, 108 in March 2005, and 180 in May 2006. Now 298 items stand reserved for this
sector.
It is believed that dereservations will enable medium / large / multinational companies to move out
of capital intensive manufacturing to enter labour-intensive production. This shift over will certainly
create new employment opportunities at rapid rate.
63
Government’s Purchase Preference Policy for SSI Products
Realizing that small scale units face the problem of marketing their products at remunerative prices,
Government stores purchase programme was initiated to assist small-scale industries in obtaining a
fair share of the total purchases made by the Government and its departments. Bulk and departmental
buyers such as the Railways, Defence and Communication ministries and companies are invited in
participate in buyer-seller meets to enrich SSI unit’s knowledge regarding terms and conditions,
quality standard, etc. required by the buyer. Under the Stores Purchase Policy of the Government 409
items of stores were reserved for exclusive purchase from KVIC / Women’s Development
Corporation / Small Scale units in 1989.
This list was reviewed. In February 2004, the Committee (set up to consider the question of inclusion
of additional items) received list and 358 items were approved, after deleting items having common
nomenclature and addition of some new ones. This list also includes 8 handicraft items reserved for
purchase from the Handicraft Sector.
Governments Price Preference Policy for marketing SSI Products
Assistance under Government Stores Purchase Programme in the form of reservation of products for
exclusive purchase from small scale sector and price preference in one of the major instruments for
providing marketing supports to the small scale industries. These facilities include the following:
(a) Price preference up to 15% in case of selected items.

(b) No registration fee.
(c) A consortium to channelize and identify markets for the products of SSIs both in India and
abroad.
Apart from this, the Single Point Registration Scheme of National Small Industries Corporation
(NSIC) the following benefits are given to SSI units, which get them registered with the NSIC:
(a) Availability of Tender Sets free of cost.

(b) Exemption from payment of Earnest Money Deposit.
(c) Exemption from payment of Security Deposit up to the monetary limit for which the unit ire
registered.
(d) Price preference up to 15% over the lowest quotation of the large scale units (on merits).
The units registered with NSIC under this scheme are given a registration certificate indicating items,
for which registered and monetary limit up to which registered. The Policy of the Price Preference of
15% is a critical benefit available to the SSI sector. The benefit is available to compensate them on
account of non-availability of economies of scale, poor resource base, poor access to raw-material
etc. as compared to the large scale sector.
Technical Assistance
Technology is the key to enhance an organisation’s competitive advantage in today’s dynamic

information age. SSIs need to develop and implement a technology strategy in addition to financial,
marketing and operational strategies, and adopt the one that helps integrate their operations with their
environment, customer and suppliers.
National Small Industries Corporation Ltd. (NSIC) offers SSI units the following support and
64
services through is Technical Services Centre, Extension Centres, Software Technology Parks and
Technology Transfer Centre:
(a) Technology audits and benchmarking.

(b) Technology needs assessment.
(c) Technology sourcing.
(d) Application of new techniques.
(e) Technology acquisition.
(f) Material testing facilities through accredited laboratories.
(g) Product design including computer Aided Designs.
(h) Common facility support in machining.
(i) Energy and environment services at selected centres.
(j) Classroom and practical training for skill upgradation.
Software Technology Parks (STPs) facilitate small industries in setting up 100% export-oriented
units for software export. They also act as major point to activate software exports directly through
NSIC. These STPs extend support in terms of the requisite infrastructure to the SSI units to start
business operations with a minimum lead-time. Following facilities are available at NSIC Software
Technology Park:
(a) Built-up Space: this enables the software industries to commence their operations with
minimum gestation period.
(b) Instant Power Connection: Instant power connections and generator facility is also
available on site, which will allow software units to work without any interruptions.
(c) High Speed Data Link: High-speed data communication facility through satellite connection
is available. The member units can avail 64 kbps to 2 mbps dedicated leased channels.
(d) Business Centre: A business centre comprising of Conference Hall, Photocopier, Fax,
Training aids, etc. is available inside the STP complex for the member units.
(e) Telephones: Each member units will be provided with one telephone line for business
promotion on occupation.
Raw material Assistance
NSIC aims to help SSI units by financing purchase of raw material (both indigenous and imported),
thus allowing them to focus on manufacturing quality product. State Directorate of Industries
distributes scarce raw materials to small units. State Small Industries Development Corporations
have set up depots for distribution of raw materials to SSIs. The Central Government has introduced
a buffer stock scheme to ensure availability of scarce raw materials to this sector.
Financial Assistance
Central and State Governments have introduced several schemes to ensure adequate and timely
availability of credit to SSIs through various institutions.
The main features of the financial services offered by institutions are as follow:
65
(a) Financial assistance for the equipment and marketing activities under one roof with speed and
efficiency.
(b) Prompt clearance of the proposals with minimum processing time and without cumbersome
paper work.
(c) Assistance in preparing the proposals and completion of document formalities.
(d) Market oriented interest rates and service charges with liberal terms of margin, level of
assistance and repayment schedules.
(e) Arrangement with commercial banks for sanction of loan proposals received from small
enterprises.
New Initiatives
The following new initiatives have been taken by the government:
(a) Advisory and Mentoring Services: Inadequate management skills are often the cause of
non-performance of small enterprises. NSIC’s advisory and mentoring services are aimed at
effectively addressing this impediment to growth. It offers mentor-pupil relationship services
in which the Mentor, a person with wide experience in running his own business, will
volunteer his services to individual or a group of units – the pupil. An advisor, a senior
professional, generally retired and a specialist in a specific area will assist in the process.
Mentors and advisor will provide the necessary professional and moral support in the early
lifecycle of an enterprise or to existing units facing critical operational problems.
(b) Technology Business Incubators: Innovative entrepreneurial ideas have to be fostered and
developed in a supportive environment before they become attractive for Venture Capital
Institutions. Incubation centre enable technical entrepreneurs to conduct their Research and
Development programmes in a professional, friendly and supportive environment, without
making any further investment.
Technology Business incubators are an important tool for entrepreneurial development.

Recognizing this need, NSIC has setup the following Technology Business Incubators.
(1) Information Technology

(2) Product Design
(3) Energy and Environment
(4) Bio-Technology
(5) Electronics and Communication.
(c) Suppliers Rating Accreditation Services: Accreditation, a necessity for buyer comfort,
speaks of the enterprise’s ability to supply reliably and effectively a product, in accordance
with the customer’s changing needs. NSIC provide accreditation to SSI units by developing
an effective accreditation system process through collaboration with Indian and International
Accreditation agencies. Accreditation is provided at two levels – for all Government
purchases and for private national international buyers.
Summary
Small Scale Industry sector has emerged as India’s engine of growth in the New Millennium. The
SSI sector accounts for nearly 40 percent of value added in the manufacturing sector and 34 percent
of total exports from the country. Through 95 percent of industrial units in the country, the sector
66
provides employment to about 20 million persons.
The government has recognized its importance for the economy and its intention towards promotion
of SSIs is reflected in various Industrial Policy Resolutions right from the year 1948. The primary
objective of the Small Scale Industrial Policy during the nineties was to impart more vitality and
growth-impetus to the sector to enable it to contribute its mite fully to the economy, particularly in
terms of growth of output, employment and exports. The sector has been substantially delicensed.
Further efforts would be made to deregulate and debureaucratise the sector with a view to remove all
fetters on its growth potential, reposing greater faith in small and young entrepreneurs. All statutes,
regulations and procedures were reviewed and modified, wherever necessary, to ensure that their
operations did not militate against the interests of the small and village enterprises.
Government is aware of the challenges faced by SSIs and has been trying to improve their
competitiveness through various measures. These consist of the following:
(a) Tax concessions have been provided to SSIs to promote investment in this sector and also to
grant relief to small entrepreneurs.
(b) Technological facilities have been increased.
(c) In order to facilitate adequate flow of credit efforts have been done.
(d) Measures have also been taken to improve infrastructure facilities and promote marketing of
products.
67

Small Business

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Small Business

Uploaded by

Copyright:

Available Formats

UNIT III

After going through the lesson you should be able to:

1.2 Meaning of Business Growth

Check your progress - 1

Write five indicators of growth.

1.3 Need for Growth

Check your progress - 2

1.4 Indicators of Business Growth

Growth is a measure of financial and non-financial improvement of a business firm. However,

1.5 Advantages of Growth

(i) For obtaining the economies of scale.

1.6 Limitations of Growth

1.7 Forms of Growth

1.8. Self – Assessment Questions

1.10 Further Readings

After going through the lesson you should be able to:

2.2 Meaning of Growth Strategy

2.3 Types of growth strategies

Given below is a list of the main growth strategies available to firms:

Internal / Organic Growth Strategy External / Inorganic Growth Strategy

2.3.1 Intensive Growth Strategy

Advantages of Intensive Growth Strategy

Limitations of Intensive Growth Strategy

Practical Problems of Intensive Growth Strategy

Check your progress - 1

Match the following

Table 1: Product-Market Matrix and Growth Strategy

Vertical Diversification (Integration)

(a) Concentric Diversification

Concentric diversification may be employed for the following purposes:

(b) Conglomerate Diversification

Table 2: Ansoff’s Diversification Matrix

New functions Related Technology New Products Unrelated Technology

Check Your Progress - 2

An existing business unit may plan to grow through Modernization of operations.

Check Your Progress - 3

2.3.5 Joint Venture

Check Your Progress - 4

Check Your Progress - 5

“External Growth Strategies”, “Amalgamation”, “Joint Venture”, “merger”, “Absorption”. Rewrite

1. Red Tape - Too much attention to rules and regulations.

2.8 Further Readings

A study of business environment offers the following benefits:

1. It provides information about environment which is essential for successful operation of

3. Knowledge about changing environment enables businessmen to adopt a dynamic approach

PHASES OF BUSINESS ENVIRONMENT

Traditional culture should be protected in so far as it is not a hindrance to innovation, motivation,

SOCIO-ECONOMIC ORIGINS OF ENTREPRENEURSHIP

3. Family background: This factor includes size of family, type of family

4. Religious background: Religion exercises a strong influence on attitudes towards material

6. Occupational Background: Employed people were more attracted towards entrepreneurship

N. Gangadhar Rao conducted a study of 87 entrepreneurs operating in 13 industrial estates of

1. Occupational origins: An overwhelming majority (134 out of 198) of the individual

2. Educational backgrounds: About 30 per cent of the entrepreneurs were graduates, 10

4. Nature of enterprise: Well-established business houses and professionally qualified

The socio-economic background exerts significant influence on the level of entrepreneurial

The main findings of his study are as follows:

1. Out of 100 units, 61 were located in backward districts.

ENVIRONMENTAL FACTORS AFFECTING ENTREPRENEURSHIP

1. Sudden changes in Government policy.

Entrepreneurship is environmentally determined. The most important essential for entrepreneurial

STATE AND THE ENTREPRENEUR

(i) Industrial Policy Resolutions

Development of a healthy business environment is an essential condition for growth of