KAKINADA EXPERIMENT

Entrepreneurs possess certain traits or competencies, which result in superior performance. The
question that arises is whether these characteristics are inborn in the entrepreneurs or whether they
can be induced and developed. A well-known behavioural scientist David McClelland
at Harvard University made an interesting investigation into why certain societies displayed great
creative powers at particular periods of their history. He found that ‘the need for achievement’ was the
answer. It was the ‘need to achieve’ that motivated people to work hard and moneymaking was
incidental. Money was only a measure of achievement, not its core motivation.

In order to answer the next question, whether this need for achievement could be induced, McClelland
conducted a five-year experimental study in one of the prosperous districts of Andhra Pradesh in India in
collaboration with the Small Industries Extension and Training Institute (SIET) at Hyderabad. This
experiment is popularly known as the ‘Kakinada Experiment’.

Under this experiment, young persons were selected and put through a three-month training
programme and motivated to see fresh goals. One of the significant conclusions of the experiment was
that the traditional beliefs did not seem to inhibit an entrepreneur and that suitable training can provide
the necessary motivation to entrepreneurs. It was the Kakinada Experiment that made people
appreciate the need for entrepreneurial training (now popularly known as EDPs) to induce motivation
and competence among young prospective entrepreneurs. At present, some 700 all India and state level
institutions conduct EDPs. This model is followed in other countries too, such as the ‘Junior
Achievement’ programme in USA and ‘Young Enterprises’ in UK.

The objectives of EDPs are to develop and strengthen the entrepreneurial quality, to motivate them for
achievement and to enable participants to be independent, capable, promising entrepreneurs. The
objective is to make the trainees prepared to start their own enterprise after the completion of the
training programme.

The course contents of an EDP are selected in line with its objectives. The training duration is about six
weeks. The inputs are normally:

a. Introduction to entrepreneurship – Factors affecting small-scale industry, role of entrepreneurs in

economic development, entrepreneurial behaviour and the facilities available for establishing small-
scale enterprise.

b. Motivation training – Participants are induced and their need for achievement is increased which in
turn helps in building confidence and positive attitude. Successful entrepreneurs share their
experiences.

c. Management skills – Small entrepreneurs cannot afford expert managers, therefore knowledge of
finance, production, marketing and human resource is imparted to them.

d. Support system and procedure – Support available from different institutions is informed and the
procedure for approaching them, applying and obtaining support is explained.
e. Fundamentals of project feasibility study – Participants are taught how to carry out the analysis and
the feasibility of marketing, organisation, technical, financial, and social aspects.

f. Plant visits – Visits to various industrial plants are arranged which help participants know more about
an entrepreneur’s behaviour, personality, thoughts and aspirations.

NEW PRODUCT PLANNING

New products are a vital part of a firm’s competitive growth strategy. Leaders of successful firms know
that it is not enough to develop new products on sporadic basis. What counts is a climate of a products
development that leads to one triumph after another. It is common place for major companies to have
50 percent or more of their current sales in products introduced within the last 10 years.

Some Additional facts about new products are:

Many new products are failures. Estimates of new product failures range from 33%- 90%, depending on
industry.

New product sales grow far more rapidly than sales of current products, potentially providing a
surprisingly large boost to a company’s growth rate; Companies vary widely in the effectiveness of their
new products programs; A major obstacle to effectively predicting new product demand is limited
vision; Common elements appear in the management practices that generally distinguish the relative
degree of efficiency and success between companies.

In one recent year, almost 22 000 products were introduced in supermarkets, drugstores, mass
merchandisers and health food stores.

Every product starts as an idea. But all new product aides do not equal merit or potential for economic
or commercial success. Some estimates indicate that as many as 60-70 ideas are necessary to yield one
successful product. To develop a new product the following step must be realized:

Idea generation; Idea screening; Project planning; Product development; Test marketing;
Commercialization.

The primary function of the idea screening process is two fold: first, to eliminate ideas for new products
that could not be profitably marketed by the firm, and second, to expand viable ideas into full product
concepts. New product ideas may be eliminated either because they are outside the fields of the firm’s
interest or because the firm does not have the necessary resources or technology to produce the
product at a profit. The organization has to consider three categories of risk in the idea screening phase
prior to reaching a decision. These three risk categories are:

1. Strategic risk – strategic risk involves the risk of not matching the role or purpose of a new product
with a specific strategic need or issue of the organization;

2. Market risk – market risk is the risk that a new product won’t meet a market need; As products are
being developed, customer requirements change and new technologies evolve;
3. Internal risk – internal risk is the risk that a new product won’t be developed within the desired time
and budget;

Product development

At this juncture, the product idea has been evaluated from the standpoint of engineering,
manufacturing, finance and marketing. If it has met all expectation, it is considered a candidate for
further research and testing. A development report to management is prepared that spells out in fine
detail: 1. results of the studies; 2. required plan design; 3. Production facilities design; 4. tooling
requirements; 5. marketing test plan; 6. financial program survey and 7. estimated release data.

Commercialization

This is the launching step in which the firm commits to introducing the product into the marketplace.
During this stage, heavy emphasis is placed on the organization structure and management talent
needed to implement the marketing strategy. Emphasis is also given to following up on such things as
bugs in the design, production costs, quality control, and inventory requirements.

Importance of time

Over the course of the last five years, companies have placed an increasing emphasis on shortening their
products’ time to market. Time to market can be defined as the elapsed time between product
definition and product availability. It has been well documented that companies that are first in bringing
their products to market enjoy a competitive advantage both in terms of profits and market share.

Consumers consider that the level of product quality when making purchase decisions are both new and
existing products. At minimum, buyers want product that will perform the functions they are supposed
to and do so reasonably well. Some customers are willing to accept lower quality if product use is not
demanding and the price is lower. In designing new products, marketers must consider what criteria
potential customer use to determine their perceptions of quality. Eight general criteria are given below:

1. Performance – How well does the product do what it is supposed to do?

2. Features – Does the product have any unique feature that are desirable?

3. Reliability – Is the product likely to function well and not break down over a

reasonable time period?

4. Conformance – Does the product conform to established standards for such things as

safety?

5. Durability – How long will the product last before it will be worn out and have to be

replaced?
6. Serviceability – How quickly and easily can any problems be corrected?

7. Aesthetics – How appealing is the product to the appropriate senses of sight, taste,

smell, feel and/or sound?

8. Overall evaluation – Considering everything about the product, including its physical

characteristics, manufacturer, brand image, packaging and price, how good is this

product?

Product safety

Clearly, new products must have a reasonable level of safety. Safety is both an ethical and practical
issue. Ethically, customers should not be harmed by using a product as intended. The practical issue is
that when users get harmed by a product, they may stop buying, tell others about their experience, or
sue the company.

Cause of New Product Failure

Many new products with satisfactory potential have failed to make the grade. Here is a brief list of some
of the more important causes of new product failures after the products have been carefully screened,
developed and marketed:

1. No competitive point of difference, unexpected reactions from competitors;

2. Poor positioning;

3. Poor quality of product;

4. Non-delivery of promised benefits of product;

5. Too little marketing support;

6. Poor perceived price/quality value;

7. Faulty estimates of market potential and other marketing research mistake;

8. faulty estimates of production and marketing costs;

9. Improper channels of distribution and marketing costs;

10. Rapid change in the market after the product was introduced.
BUYING AN EXISTING BUSINESS

The decision to buy a business is an extremely important one, for such an acquisition almost inevitably
brings significant changes in the buyer's financial situation and personal life. Such purchases, then,
should not be made before first thoroughly investigating all aspects of the business under consideration
and the impact that ownership of that enterprise would likely have on the buyer's personal and
professional life.

Even before beginning the search for an appropriate existing business, would-be buyers are encouraged
to honestly assess the level of commitment and resources that they are willing to bring to bear to made
a new business endeavor a successful one. Small business experts encourage potential business buyers
to frankly ponder the levels of time and energy that they can devote to a new enterprise. Are the
number of hours available sufficient given the work involved? Does the business require a higher level of
exertion than you are prepared to expend?

Experts also encourage potential business buyers to canvass their families about their attitudes
regarding the sacrifices—both financial and personal—that are sometimes necessary to move an
acquired business forward. In addition, buyers should investigate whether the nature of the business
will be a rewarding one for them. What are their motives in pursuing a business purchase? What criteria
are being used to search for one? Finally, potential buyers should determine the level of financial
commitment that they are willing to make to the new business (and the level of financial assistance that
they are likely to be able to secure, if needed). If, after a thorough assessment of these factors, the
would-be buyer is still in the market for a business, he or she can proceed.

EVALUATING BUSINESSES

"The first step a buyer must take in evaluating a business for sale is that of reviewing its history and the
way it operates," wrote John A. Johansen in the Small Business Association's How to Buy or Sell a
Business."It is important to learn how the business was started, how its mission may have changed since
its inception and what past events have occurred to shape its current form. A buyer should understand
the business's methods of acquiring and serving its customers and how the functions of sales,
marketing, finance and operations interrelate."

In an article for theHouston Business Journal,Scott Clark mentioned several key questions prospective
buyers should consider in evaluating a business for purchase. For example, it is important for the buyer
to understand why the business is being sold, whether the business is financially sound, and what legal
considerations may be involved in the sale. Clark also noted that buyers should evaluate the market
value of the business's assets as well as the market potential of its products or services.
BALANCESHEET

Much of this information—and all-important data on the company's fundamental financial health—can
be gleaned through an examination of the enterprises's financial statements and operations documents.
Several areas of the business's balance sheet that should be thoroughly looked over when evaluating a
company:

Accounts Receivable—can provide information to buyers on diversification of customer accounts (or lack
thereof), accounts that are overdue or in dispute, accounts that have been pledged as collateral, and the
company's credit policies.

Accounts Payable—as with Accounts Receivable, can provide information on diversification and status of
accounts; can also help buyers identify undisclosed or contingent liabilities.

Inventory—can provide buyers with information on the size, age, and condition of the inventory, the
method of inventory valuation, the process by which damaged inventory is valued, and other data on
current owner inventory methods.

Real Estate—these records can help buyers establish the condition and market value of all buildings and
lands that are part of the business, and can be valuable in assessing whether to secure the services of an
appraiser; also provides information on various aspects of maintenance, including business relationships
and costs.

Marketable Securities—can aid buyers in determining the value and status (restricted or pledged) of any
marketable securities.

Machinery/Equipment—schedules of machinery and equipment owned or leased by the company can

provide potential buyers with information on 1) condition, age, and maintenance needs of equipment
and machinery; and 2) those items that are used to adhere to local, state, or federal regulatory
requirements, and whether existing machinery is sufficient to meet those requirements.

Accrued Liabilities—schedules of accrued liabilities inform buyers about the business's accounting
mechanisms for unpaid wages, accrued vacation pay and sick leave, payroll taxes due and payable, and
accrued federal taxes, among other accruals.

Notes Payable and Mortgages Payable—can help buyers identify causes of debt, determine terms and
payment schedules of those debts (and whether they are assumable); also delineates whether a change
in ownership would accelerate the note or mortgage or trigger a prepayment penalty.

Problems in any of these areas can help prospective buyers decide whether to secure the services of an
appraiser.

The balance sheet, though, is only one of myriad aspects that need to be thoroughly evaluated by
buyers. Other areas of the business that should be examined include its financial ratios, income
statements, rental or lease arrangements, employees, station in the marketplace, and other legal issues
(ranging from status of patents to current level of adherence to legal requirements).

INCOME STATEMENTS

Profit and loss statements provide vital information on the business's recent financial history and
potential for future success. Experts commonly advise would-be buyers to examine income statements
from the previous three to five years, and to substantiate the data contained therein via the company's
tax returns. Johansen cautioned, though, that the business's earning power "is a function of more than
bottom line profits or losses. The owner's salary and fringe benefits, non-cash expenses, and non-
recurring expenses should also be calculated."

FINANCIAL RATIOS Information contained in the company's income statements and balance sheet can
be used to figure important financial ratios that can provide insights into the company's fiscal well-
being. Important financial ratios include current ratio, accounts receivable turnover, inventory turnover,
and sales/accounts receivable.

LEASE ARRANGEMENTS Any examination of a business is woefully incomplete without also checking on
the business's lease or rental obligations. All such agreements should be closely studied to learn not only
about the length of the contract, but other matters as well. For example, some landlords include a
"percent of sales" clause in their leases which require commercial tenants to pay them an additional fee
over and above their rent (some also call for additional fees for common area maintenance, etc.). Other
lease agreements include option periods and/or demolition clauses. Lease contracts also detail
maintenance parameters (will the landlord fix the air conditioning, or will you foot the bill?) and
conditions—if any—under which the lease can be assumed or extended by a new owner.

EMPLOYEES

A business's work force can be among its most attractive assets. Conversely, it can also be a problem
area. Key information that should be analyzed when looking at a company's personnel include job
descriptions and current compensation (including benefits) for each employee, skill levels, and morale.
In settings where unions are present (or imminent), buyers need to inform themselves about current
contracts and management-union relations. Finally, buyers that are pondering acquiring a business in an
industry with which they are unfamiliar need to determine whether they will be able to retain key
personnel after a purchase is made.

MARKETPLACE STATUS Potential buyers should find out not only about the targeted company's market
standing—including market share, competitive advantages, and geographic strength—but also about
the strengths and weaknesses of its competitors.

LEGAL ISSUES

Diligent buyers will make certain that they are well-informed about a company's legal situation, from its
standing with the IRS to its vulnerability to litigation. Would-be owners should determine if any lawsuits
against the company have been filed or are pending. They should also ensure that the company is
meeting OSHA and EPA requirements, and that the business is in compliance with state registration and
local zoning requirements. Articles if incorporation, bylaws, partnership agreements, supplier contracts,
and franchise agreements should also be carefully reviewed if applicable.

NEGOTIATING A PURCHASE PRICE

Once a buyer has located a suitable business—usually through newspaper advertisements, industry
contacts, or intermediaries (business brokers or merger and acquisition consultants)—undertaken the
appropriate research into the enterprise's strengths and weaknesses, and determined what sort of
business organization (partnership, sole proprietorship, corporation) will be most advantageous in terms
of taxes and other issues, he or she must then go about the process of negotiating a purchase price with
the seller.

If a buyer is still interested in acquiring the business in question after negotiating the above issues and
securing a reliable valuation of the business, he or she can proceed with an opening offer. This can take
the form of a letter of intent (which is generally nonbinding) or a purchase and sale agreement (which is
usually legally binding). Both kinds of offers will typically include the following:

Total compensation offered, including breakdown (size of security deposit, down payment, seller-
financed debt, bank debt)

Warranties of clear and marketable title

Detailed list of all liabilities and assets to be purchased

Assurances of the validity and assumability of contracts (if applicable)

Tax liability limitations

Operating condition of all equipment and machinery at time of purchase

Stipulations allowing buyer to adjust the purchase price in the event that: 1) undisclosed liabilities come
due after settlement, and 2) actual inventory purchased does not match amount specified in sale
agreement

Provisions that the business passes any and all necessary inspections

Provisions that final sale is contingent on verification of financial statements, license and lease transfers

Provisions that final sale is contingent on obtaining financing for purchase

Restrictions on business operations until final settlement

Non-competition and advisory clauses

(these are sometimes arranged in a separate document)

Allocation of purchase price

FINANCING

Whether the buyer and seller ultimately agree to an installment sale, a leveraged buyout, a stock
exchange, or an earn-out to transfer ownership of the company (see the entry "Selling a Company" for
descriptions of these options), the sale cannot proceed if the buyer is unable to secure adequate
financing.

Most small businesses are acquired by buyers who finance a considerable portion of the purchase price
themselves. Even so, the buyer must still make sure that he or she has enough money to make a down
payment and cover the business's capital requirements. Sometimes, then, buyers are forced to secure
financing from outside sources.

Lending institutions like banks and consumer finance companies are more open to borrowers involved in
purchasing larger companies, but even in these instances, the institutions often ask buyers to put up the
company's inventory, machinery, real estate, and accounts receivable as collateral.

CLOSING THE DEAL

Closings are generally done either via an escrow settlement or via an attorney performs settlement. In
an escrow settlement, the money to be deposited, the bill of sale, and other relevant documents are
placed with a neutral third party known as an escrow agent until all conditions of sale have been met.
After that, the escrow agent disburses the held documents and funds in accordance with the terms of
the contract.
TARIFF vs NON TARIFF BARRIERS

Tariffs and Tariff Rate Quotas Tariffs, which are taxes on imports of commodities into a country or
region, are among the oldest forms of government intervention in economic activity. They are
implemented for two clear economic purposes. First, they provide revenue for the government. Second,
they improve economic returns to firms and suppliers of resources to domestic industry that face
competition from foreign imports.

Tariffs are widely used to protect domestic producers’ incomes from foreign competition. This
protection comes at an economic cost to domestic consumers who pay higher prices for import
competing goods, and to the economy as a whole through the inefficient allocation of resources to the
import competing domestic industry.