Growth strategies in small business
Stages of Growth:-
Start-up:
It refers to the birth of a business enterprise in the economy.The production takes place in limited scale.The enterprise is cot faced with any competition during this stage. Profits may not be earned during the start up stage.
A. Growth stage
B. Expansion stage
C. Maturity stage
D. Decline stage
Types of growth:-
Strategy in a sense tactics to handle some technique to grow our business. Growth strategy mean a plan to help the enterprise grow big course of time. Types of growth vary from enterprise.
1. Internal growth
2. External growth
Internal growth:-
These imply that enterprise grow their own without joining hands with other enterprises.
A.Expansion
B. Diversification. (FMCG Heavy vehicle manufacturing.)
These two are popular forms of internal growth strategies.
External growth:-
Enterprises grow by joining hands with other enterprises
A Joint ventures,
B. Mergers,
C.Sub-contracting.
Expansion
FMCG Hamam, dove, peers. It means enlargement or increase in the same line of activity. It is natural growth of business enterprise taking place in course of time. There are a three common forms of business expansion. Expansion through market penetration
1) Production strategy:-
Focuses on the firms existing product in its existing market, & the entrepreneur attempts to penetrate this product or market further by encouraging existing customers to buy more of the firms current products.Marketing can be effective in encouraging more frequent repeat purchase.
2) Marketing development strategies:-
It involves selling the firms existing product to new groups of customers. New groups of customers can be categorized in terms of geographic, demographic of based on a new product use. New location, new customer.
3) Expansion through product development / modification:-
It implies developing/modifying the existing product to meet the requirement of the customers.
Advantages:-
Expansion provides the following benefits growth through expansion is natural & gradual enterprise grows without making major changes in its organisational structure. Expansion makes possible the effective utilization of existing resources of an enterprise Gradual growth of enterprise becomes easily manageable by the enterprise. Expansion result in economics of large, scale operations.
Diversification:-
Not possible for a business growth by adding the new product / market to the existing one, such an approach to growth by adding new products to the existing product line is called “diversification” other word defined as “a process of adding more product / market / service to the existing one. L & T – engineering company – cement LIC – mutual fund SBI – merchant banking (expand their business activities)
Advantages:-
Diversification helps an enterprise make more effective use of its resource. Diversification also helps minimize risk involved in the business. Diversification adds to the competitive strength of the business.
Types of diversification:-
There are 4 types
1) Horizontal
2) Vertical
3) Concentric
4) Conglomerate
Horizontal diversification:-
The same type of product / market is added to the existing ones. Adding refrigetor to its original steel locks by godrej.
Vertical diversification:-
Complementary products or service are added to the existing product or service line of the enterprise. AVT manufacturing start producing picture tube sugar will may develop a sugarcane farm to supply raw material or input for it.
Concentric diversification:-
An enterprise enter into the business related to its present one in terms of technology, marketing or both. Nestle originally baby food producer entered into related product like tomato ketchup magi noodles.
Conglomerate diversification:-
It is just contrary to concentric diversification an enterprise diversifies into the business which is not related to its existing business neither in terms of technology nor marketing inter into unrelated to its present one. JVG carrying newspaper & detergent calee & powder. Godrej manufacturing steel safes & showing creams.
Joint venture:
Type of external growth J.V. is a temporary partnership b/w two or more firms to undertake joinly a complete a specific venture. The purties who enter into agreement are called co-ventures. Purties are should b/w the co-ventures in their agreed ratio & in the absence of such agreement the profits or losses are should equally.
Advantage:
1) J.V. reduce risk involved in business
2) It helps increase competitive strength of the business.
Merger:
Merger means combination of 2 or more existing enterprise into one. In other words, when 2 or score existing enterprises are combined into one it is called merger. It take place in 2 ways.
Absorption:
An enterprise or enterprises may be acquired by another enterprise is called absorption.
Amalgamation:
When two or more existing enterprises merge into one to form a new enterprise. It is called amalgamation.
Advantage Merger:
1) Provide benefits of economic scale in terms of production & sales.
2) It facilitate better use of resource.
3) It enables sick enterprise to merger into healthy ones.
Disadvantage:-
leads to monopoly in the particular some
Sub-contracting system:-
Sub-contracting system relationship exists when a company (called a contractor) places on order with another company (called sub-contracter) for the production of parts components, sub-assemblies or assembliest be incorporated into a product sold by the contractor. Whirlpool sub contract Large scale industries do not produce all goods on their own instead they reply on small scale enterprises called sub-contractors for a great deal of production. When the work assigned to small enterprise involves manufacturing wont it is called industrial sub-contracting. In India sub-contracting has emerged in the name of an illarisation or ancillary units.
Advantage:-
1. It increase production in the fastest way without making much efforts.
2. The contractor can produce products without investing in plant & machinery.
3.It is suitable to manufacturing goods temporarily.
4,It enables the contractor to make use of technical & managerial abilities of the sub-contractor.
Franchising:-
Defined as a form of contractual arrangement in which a retailer (franchiser) enter into an agreement with a producer (franchiser) to sell the producer‟s goods or services for a specified fee or commission. Advantages:-
Product franchising:
Dealers were given the right to distribute goods for a manufacturer. eg: singer.
Manufacturing franchising:
Manufacturer given the dealer the exclusive right to produce & distribute the product in a particular area, soft drinks industry.
Business format:Is an arrangement, under which the franchiser offers a wide range of service to the framer including marketing advertising strategic planning, training
Monitoring is the systematic collection and analysis of information as a project progresses.
It is aimed at improving the efficiency and effectiveness of a project or organization. It is based on targets set and activities planned during the planning phases of work. It helps to keep the work on track, and can let management know when things are going wrong. What monitoring and evaluation have in common is that they are geared towards learning from what you are doing and how you are doing it, by focusing on:
a) Efficiency
b) Effectiveness
c) Impact
Efficiency tells you that the input into the work is appropriate in terms of the output. This could be input in terms of money, time, staff, equipment and so on. When you run a project and are concerned about its reliability or about going to scale, then it is very important to get the efficiency element right.
Effectiveness is a measure of the extent to which a development programmes or project achieves the specific objectives it set.
WHY DO MONITORING AND EVALUATION?
In many organizations, “monitoring and evaluation” is something that that is seen as a donor requirement rather than a management tool. Donors are certainly entitled to know whether their money is being properly spent, and whether it is being well spent. But the primary (most important) use of monitoring and evaluation should be for the organization or project itself to see how it is doing against objectives, whether it is having an impact, whether it is working efficiently, and to learn how to do it better.
Monitoring and evaluation are both tools which help a project or organisation know when plans are not working, and when circumstances have changed.
Monitoring and evaluation can:
. Help you identify problems and their causes;
. Suggest possible solutions to problems;
. Raise questions about assumptions and strategy;
. Push you to reflect on where you are going and how you are getting there;
. Provide you with information and insight;
. Encourage you to act on the information and insight;
. Increase the likelihood that you will make a positive development difference. Monitoring involves:
. Establishing indicators (See Glossary of Terms) of efficiency, effectiveness and impact;
. Setting up systems to collect information relating to these indicators;
. Collecting and recording the information; . Analysing the information;
. Using the information to inform day-to-day management
. Monitoring is an internal function in any project or organisation.
Evaluation involves:
1.Looking at what the project or organisation intended to achieve – what difference did
it want to make? What impact did it want to make?
2 . Assessing its progress towards what it wanted to achieve, its impact targets.
3 . Looking at the strategy of the project or organisation. Did it have a strategy? Was it
effective in following its strategy? Did the strategy work? If not, why not?
4 .Looking at how it worked. Was there an efficient use of resources? What were the opportunity costs (see Glossary of Terms) of the way it chose to work? How sustainable is the way in which the project or organisation works? What are the implications for the various stakeholders in the way the organisation works. In an evaluation, we look at efficiency, effectiveness and impact.
There are many different ways of doing an evaluation. Some of the more common terms you may have come across are:
a)Self-evaluation: This involves an organisation or project holding up a mirror to itself and assessing how it is doing, as a way of learning and improving practice. It takes a very self-reflective and honest organisation to do this effectively, but it can be an important learning experience.
b)Participatory evaluation: This is a form of internal evaluation. The intention is to involve as many people with a direct stake in the work as possible. This may mean project staff and beneficiaries working together on the evaluation. If an outsider is called in, it is to act as a facilitator of the process, not an evaluator.
c) Rapid Participatory Appraisal: Originally used in rural areas, the same methodology can, in fact, be applied in most communities. This is a qualitative (see Glossary of Terms) way of doing evaluations. It is semi-structured and carried out by an interdisciplinary team over a short time. It is used as a starting point for understanding a local situation and is a quick, cheap, useful way to gather information. It involves the use of secondary (see Glossary of Terms) data review, direct observation, semi-structured interviews, key informants, group interviews, games, diagrams, maps and calendars. In an evaluation context, it allows one to get valuable input from those who are supposed to be benefiting from the development work. It is flexible and interactive.
a) External evaluation: This is an evaluation done by a carefully chosen outsider or outsider team.
b) Interactive evaluation: This involves a very active interaction between an outside evaluator or evaluation team and the organisation or project being evaluated. Sometimes an insider may be included in the evaluation team.
ADVANTAGES AND DISADVANTAGES OF INTERNAL AND EXTERNAL EVALUATIONS
Advantages of Internal Evaluations:
1 The evaluators are very familiar with the work, the organisational culture and the aims and objectives.
2. Sometimes people are more willing to speak to insiders than to outsiders.
3. An internal evaluation is very clearly a management tool, a way of self-correcting, and much less threatening than an external evaluation. This may make it easier for those involved to accept findings and criticisms.
4. An internal evaluation will cost less than an external evaluation.
Disadvantage
1.The evaluation team may have a vested interest in reaching positive conclusions about the work or organisation. For this reason, other stakeholders, such as donors, may prefer an external evaluation.
2.The team may not be specifically skilled or trained in evaluation.
3.The evaluation will take up a considerable amount of organisational time – while it may cost less than an external evaluation, the opportunity costs may be high.
Advantages of External Evaluation
External evaluation (done by a team or person with no vested interest in the project)
1. The evaluation is likely to be more objective as the evaluators will have some distance from the work.
2. The evaluators should have a range of evaluation skills and experience.
3. Sometimes people are more willing to speak to outsiders than to insiders.
4. Using an outside evaluator gives greater credibility to findings, particularly positive findings.
Disadvantage
1.Someone from outside the organization or project may not understand the culture or even what the work is trying to achieve.
2. Those directly involved may feel threatened by outsiders and be less likely to talk openly and cooperate in the process.
3. External evaluation can be very costly.
4. An external evaluator may misunderstand what you want from the evaluation and not give you what you need.
SELECTING AN EXTERNAL EVALUATOR OR EVALUATION TEAM
Qualities to look for in an external evaluator or evaluation team:
(1) An understanding of development issues.
(2) An understanding of organisational issues.
(3) Experience in evaluating development projects, programmes or organisations.
(4) A good track record with previous clients.
(5) Research skills.
(6) A commitment to quality.
(7) A commitment to deadlines.
(8) Objectivity, honesty and fairness.
(9) Logic and the ability to operate systematically.
(10) Ability to communicate verbally and in writing.
(11) A style and approach that fits with your organisation.
(12) Values that are compatible with those of the organisation.
(13) Reasonable rates (fees), measured against the going rates.
DIFFERENT APPROACHES TO EVALUATION Approach Major purpose Typical focus questions Likely methodology Goal-based Assessing achievement of goals and objectives.
1.Were the goals achieved? Efficiently?
2. Were they the right goals?
3. Comparing baseline (see Glossary of Terms) and progress data (see Glossary of Terms); finding ways to measure indicators.
4. Decision-making Providing information. Is the project effective? Should it continue?
5. How might it be modified?
6.Assessing range of options related to the project context, inputs, process, and product.
7. Establishing some kind of decision-making consensus.
8. Goal-free Assessing the full range of project effects, intended and unintended.
9. What are all the outcomes? What value do they have?
10. Independent determination of needs and standards to judge project worth.
11. Qualitative and quantitative techniques to uncover any possible results.
12. Expert judgement Use of expertise. How does an outside professional rate this project?
13. Critical review based on experience, informal surveying, and subjective insights.
Our feeling is that the best evaluators use a combination of all these approaches, and that an organisation can ask for a particular emphasis but should not exclude findings that make use of a different approach.
Industrial Sickness
DEFINITION
BY SICK INDUSTRIAL COMPANIES(SPECIAL PROVISIONS) ACT, 1985, SEC 3(1) (0)
“Industrial company(being a company registered for not less than five years) which has at the end of any financial year accumulated loss equal to or exceeding its entire net worth and which has also suffered cash losses in such a financial year immediately preceding such financial year”.
BY THE COMPANIES(SECOND AMENDMENT) ACT, 2002
Defines a sick company as one:
1.Which has accumulated losses in any financial year to 50 percent or more of its average net worth during four years immediately preceding the financial year in question, or
2.Which has failed to repay its debts within any three consecutive quarters on demand for repayment by its creditors
CRITERIA TO IDENTIFY INDUSTRIAL SICKNESS
1. Continuous decline in gross output compared to the previous two financial years.
2. Delays in repayment of institutional loan, for more than 12 months.
- Erosion in the net worth to the extent of 50 percent of the net worth during the previous accounting year.
SIGNALS OF INDUSTRIAL SICKNESS
1. 1.Decline In Capacity Utilization
2. 2.Shortage Of Liquid Funds
3. 3.Inventories In Excessive Quantities
4. 4.Irregularity In Maintaining The Bank Accounts
5. 5.Frequent Break Downs In Plant & Equipments
6. 6..Decline In The Quality Of Products
7. 7.. Frequent Turnover Of Personnel
8. 8..Technical Deficiency
EXTERNAL CAUSES
1. Improper Credit Facilities
2. Delay In Advancing Of Funds
3. Unfavourable Investment Climate
4. Shortage Of Inputs
5. Import Restrictions On Essential Inputs
6. Liberal Licensing Of Projects
7. Change In International Marketing Scene
8. Excessive Taxation Policy Of Government
9. Market Recession
INTERNAL CAUSES
(FINANCIAL CONSTRAINTS)
1. Inappropriate Financial Structure
1. Poor Utilization Of Assets
2. Inefficient Working Capital Management
3. Lack Of Proper Costing And Pricing
4. Absence Of Financing, Planning & Budgeting
5. Improper Utilization Or Diversion Of Funds
Consequences
- Huge financial losses to the banks & financial institutions
- Loss to employment opportunities
- Emergence of industrial unrest
- Adverse effect on perspective investors and entrepreneurs
- Wastages of scarce resources
- Loss of revenue to government
- Governmental measures to combat industrial sickness
1. The Industrial Finance Corporation of India (IFCI) in 1948 - to provide medium & long-term credits to
the public sector limited companies in order to facilitate post-war rehabilitation & development.
2. The State Financial Corporations (SFC) were established at state level in 1951 to supplement the work of
IFCI by financing medium and small-scale industrial concerns. 3. Industrial Reconstruction Corporation of India or (IRCI) was set up with its head quarters at Calcutta in 1971
• to revive and revitalise the closed and sick industrial concerns by removing the shortcomings.
• to reconstruct and restructure the financial base as well as the management of the assisted units, besides
providing financial assistance and technical/managerial guidance.
The control measures adopted by IRCI included :
i. transfer of major shares in the name of IRCI;
ii. appointment of IRCI nominees in the Board of Directors of the sick unit;
iii. appointment of personnel and nominees in key managerial post and purchase/sales committees;
iv. frequent plant and factory inspections and so on.
4. Industries (Development & Regulation) Act, 1951 was further amended in 1971 -empowering the Central Government to take over industrial undertakings which special emphasis on sick units.
5. By Amendments in the relevant Act the IFCI with effect from 1972 was empowered to extend its assistance to Pvt Ltd Cos.
6 Foreign Exchange Regulation Act (FERA) 1973 – limited the share of foreign companies to 40% of the total capital.
Governmental measures to combat industrial sickness
7. The Reserve Bank of India set up Tandon Committee, in 1975- guideline was laid down governing the participation of banks in the management of various sick industries.
8. The RBI in 1979 conducted a study to identify the causes of sickness in 378 such large industrial units
9. Further the government came up with several industrial policies in order to revive the sick units .these policies were:
i. Soft loan scheme-
• introduced in 1976 to provide financial assistance to five selected industries (jute, cotton, cement,
textile and sugar) on concessional terms for modernization & rehabilitation of their old machineries.
• Was Being operated by the IDBI in collaboration with IFCI & ICICI.
• In 1984 this scheme was modified into soft loan scheme for modernization –all categories of industries are eligible forfinancial assistance for up gradation of process/technologies/product, export orientation/import substitution,
energy saving, anti-pollution measures and improvement in productivity.
ii. Merger policy of 1977 –
• For merger of sick units with the healthy ones
• Healthy was allowed to carry forward and set off the accumulated losses & unabsorbed depreciation of the sick unit
against its own tax incidence.
• Sick units to be eligible for merger should have >100 employees & assets worth >50 lakh.
Governmental measures to combat industrial sickness
iii. Policy guidelines on sick units-1978
• Made it clear that financial institutes should involve themselves in the management of the sick units in which they have
substantial stake by setting up group of professional directors to look after the management of these units.
• These directors will be nominated to the board of the sick units and they will be required to report to the financial
institutes regularly regarding the various measures required to be incorporated.
• Further the respective state government in collaboration with the financial institutes should provide financial &
managerial assistance for the restructuring and rehabilitation of the sick units.
iv. New strategy 1981-
• Aimed at preventing industrial sickness, quick rehabilitation, & early decisions on the future of such units.
• Units employing >1000employees of having an investment of 9 crore or more should be nationalised if
1. The line of production is critical to the nation‟s economy
2. Its a mother unit with large ancillaries
3. Its closure would cause dislocation and unemployment of such a large number of people that allocation of alternative jobs is not possible.
v. Different committees and industrial sickness-Industrial Sickness, State Level Inter-Institutional Committee, Guidance Committee & others to examine the problems of growing industrial Sickness
vi. Legal framework-
Various provisions for the revival of the sick industries were introduced like The Relief Undertaking Act,
Sec 72(a) Of The Income Tax Act, IRBI Act Of 1984,SICA 1985, and others.
The important provisions of SICA were:-
1. It provided for the constitution of two quasi-judicial bodies, that is, Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR).
2. BIFR was set up as an apex board to tackle industrial sickness and was entrusted with the work of taking appropriate measures for revival and rehabilitation of potentially sick undertakings and for liquidation of non-viable companies.
3. AAIFR was constituted for hearing the appeals against the orders of the BIFR.
4. BIFR would make an inquiry as it may deem fit for determining whether any industrial company had become sick.
5. BIFR may appoint one or more persons as special director(s) of the company for safeguarding the financial and other interests of the company.
The measures include:-
1. The financial reconstruction
2. The proper management by change in or take over of the management of the company;
3. The amalgamation of the sick industrial
4. The sale or lease of a part or whole of the sick industrial company;
5. Such other preventive, ameliorative and remedial measures as may be appropriate;
6. Such incidental, consequential or supplemental measures as may be necessary or expedient in connection with or for the purposes of the measures specified above.
7. The important provisions of SICA were:-
8. Under the Act, whosoever violates its provisions or any scheme or any order of the Board or of the Appellate Authority, shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to a fine.
9. Sick Industrial Companies (Special Provisions) Act,1985 (SICA) was repealed and replaced by Sick Industrial Companies (Special Provisions) Repeal Act,2003.
10. The new Act diluted some of the provisions of SICA & aimed to combat industrial sickness ,reduce the same by ensuring that companies do not view declaration of sickness as an escapist route from legal provisions after the failure of the project or similar other reasons and thereby gain access to various benefits or concessions from financial institutions.
11. Under it, the Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR) were dissolved and replaced by National Company Law Tribunal (NCLT) and National Law Appellate Tribunal (NCLAT) respectively.
RBI guide lines
• RBI has constituted a standing coordination committee to consider issues relating to coordination between commercial banks and lending institutions.
• A special cell has been set up within the rehabilitation finance division of IDBI to attend the case of sickness.
• RBI has issued suitable guidelines to the banks to ensure the potentially viable sick units receive attention and timely support from banks.
• RBI has clarified that units becoming sick on account of wilful mis-management, wilful default should not be considered for rehabilitation.
Rehabilitation Programme:
a) Change management
b) Development of a suitable management information system
c) A settlement with the creditors for payment of their dues in a phased manner, taking into account the expected cash generation as per viability study
d) Determination of the sources of additional funds needed to refinance.
e) Modernization of plant and equipment or expansion of an existing programme or even diversification of the products being manufactured.
f) Concession or reliefs or assistance to be allowed by the state level corporation ,financial institutions and central government.
RECOMMENDATIONS:
I. A Financial reorganisation may involve some sacrifices by the creditors and shareholders of the undertaking which can be in several forms:- 1. Reduction of the par value of shares. 2. Reduction in rates of interest. 3. Postponement of maturity of debt. 4. Conversion of debt into equity. 5. Change in the nature of claim or obligation such as from secured to unsecured. 6. Concession by the Government in the form of reduction or waiving of indirect taxes, electricity dues etc.
II. Monitoring and nursing the sick units during infancy
III. Incentives should be provided to professional managers helping in reviving sick units
IV. Issuing guidelines on major aspects that affect the image of the company
V. Brain storm with a select group to get creative ideas for improvement
VI. Adopt better practices, right technology, better work culture and professional management so that the sick industries can improve their health as well as the economy.
WITH ALL THE BEST FOR EXAMS............
