PART II
Business Finance and Marketing
Textbook for Class XII
2015-16(21/01/2015)
ISBN 81-7450-697-7 (Part I)
81-7450-756-6 (Part II)
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Suresh Lal
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F OREWORD
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iv
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TEXTBOOK DEVELOPMENT COMMITTEE
CHIEF ADVISOR
D.P.S. Verma, Retired Professor, Department of Commerce, Delhi School
of Economics, University of Delhi, Delhi.
A DVISOR
G.L. Tayal, Reader, Ramjas College, University of Delhi, Delhi.
M EMBERS
Anand Saxena, Reader, Deen Dayal Upadhyaya College, University of
Delhi.
Davinder K. Vaid, Professor, Department of Education in Social Sciences
and Humanities, NCERT, New Delhi.
M.M. Goyal, Reader, PG DAV College, University of Delhi.
Narsimha Murthy, Principal, University Post-Graduate College, Subedari,
Anam Konda, Distt. Warangal, Andhra Pradesh.
Pooja Dasani, PGT (Commerce) Convent of Jesus and Mary, Gol Dak-
khana, New Delhi.
R.B. Solanki, Principal, B.R. Ambedkar College, University of Delhi.
Ruchi Kakkar, Lecturer, Acharya Narendra Dev College, University of Delhi.
Shruti Bodh Aggarwal, Vice-Principal, Rajkiya Pratibha Vikas Vidyalaya,
Kishanganj, Delhi.
Sumati Verma, Reader, Sri Aurobindo College, University of Delhi.
Y.V. Reddy, Reader, Department of Commerce, Goa University, Goa.
M EMBER COORDINATOR
Minoo Nandrajog, Reader, Department of Education in Social Sciences
and Humanities, NCERT, New Delhi.
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ACKNOWLEDGEMENTS
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CONTENTS (PART I)
CHAPTER 4 PLANNING 95
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C ONTENTS
FOREWORD iii
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Constitution of India
Part IV A ( Article 51 A )
Fundamental Duties
It shall be the duty of every citizen of India —
(a) to abide by the Constitution and respect its ideals and institutions, the
National Flag and the National Anthem;
(b) to cherish and follow the noble ideals which inspired our national struggle
for freedom;
(c) to uphold and protect the sovereignty, unity and integrity of India;
(d) to defend the country and render national service when called upon to
do so;
(e) to promote harmony and the spirit of common brotherhood amongst all
the people of India transcending religious, linguistic and regional or
sectional diversities; to renounce practices derogatory to the dignity of
women;
(f) to value and preserve the rich heritage of our composite culture;
(g) to protect and improve the natural environment including forests, lakes,
rivers, wildlife and to have compassion for living creatures;
(h) to develop the scientific temper, humanism and the spirit of inquiry and
reform;
(i) to safeguard public property and to abjure violence;
(j) to strive towards excellence in all spheres of individual and collective
activity so that the nation constantly rises to higher levels of endeavour
and achievement;
*(k) who is a parent or guardian, to provide opportunities for education to
his child or, as the case may be, ward between the age of six and
fourteen years.
Note: The Article 51A containing Fundamental Duties was inserted by the Constitution
(42nd Amendment) Act, 1976 (with effect from 3 January 1977).
*(k) was inserted by the Constitution (86th Amendment) Act, 2002 (with effect from
1 April 2010).
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Notes
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CHAPTER
9
LEARNING OBJECTIVES F INANCIAL M ANAGEMENT
After studying this chapter, you
TATA STEEL ACQUIRES CORUS
should be able to:
Tata Steel, the biggest steel producer
in the Indian private sector has acquired
Ø explain the meaning of business
Corus, (formerly known as British Steel)
finance; in a deal worth $8.6 billion. This makes
Tata Steel the fifth largest steel
Ø describe financial management; producer in the world. A financial
decision of this magnitude has
significant implicitness for both Tata
Ø explain the role of financial
Steel and Corus as well as their
management in our enterprise; employees and shareholders. To
mention some of them:
Ø discuss objectives of financial l Tata Steel will become the fifth
management and how they largest producer of steel in the world.
could be achieved; l Tata Steel will raise a debt of over
$ 8 billion to finance the transaction.
Ø explain the meaning and The deal will be paid for by Tata Steel
importance of financial UK, a special purpose vehicle (SPV)
planning; set up for the purpose. This SPV will
get funds from Tata Steel routed
through a Singapore subsidiary.
Ø state the meaning of capital Another company of the Tata group,
structure; Tata Sons Ltd., will invest $ 1 billion
dollars for preference shares along
Ø analyse the factors affecting the with Tata Steel which will invest an
choice of an appropriate capital equal amount.
structure; l Tata Steel, the acquirer company, shall
have to arrange about 36,500 crores
of rupees to finance the take-over.
Ø state meaning of fixed capital
l Tata Steel will have to raise this
and working capital; and
amount through debt or equity or a
combination of both. Some amount
Ø analyse the factors affecting the may come from internal accruals also.
requirement of fixed and This financing decision will affect the
working capital. capital structure of Tata Steel.
l Tata Steel hopes to increase the
production to 40 million tonnes and
revenue to 32 billion US dollars by
2012.
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l It may affect the competitiveness of Tata Steel because the cost of production of
steel in all probability, will change.
l The dividend paying capacity of Tata Steel may be affected because of this huge
cash outflow and because of a significantly higher debt which would need to be
serviced before paying any dividends to shareholders.
l The degree of risk shall also be affected. Needless to emphasise, decisions like
this affect the future of the organisation. These decisions are almost irrevocable
after they have been formalised.
Source: The Economic Times
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Investment Decision
A firm’s resources are scarce in
comparison to the uses to which they
can be put. A firm, therefore, has to
choose where to invest these
resources, so that they are able to earn Wealth Maximisation Concept
the highest possible return for their
investors. The investment decision, decisions must be taken by those who
therefore, relates to how the firm’s understand them comprehensively. A
funds are invested in different assets. bad capital budgeting decision
Investment decision can be long- normally has the capacity to severely
term or short-term. A long-term damage the financial fortune of a
investment decision is also called a business.Short-term investment
Capital Budgeting decision. It involves decisions (also called working capital
committing the finance on a long-term decisions) are concerned with the
basis. For example, making decisions about the levels of cash,
investment in a new machine to inventory and receivables. These
replace an existing one or acquiring a decisions affect the day-to-day working
new fixed asset or opening a new of a business. These affect the liquidity
branch, etc. These decisions are very as well as profitability of a business.
crucial for any business since they Efficient cash management, inventory
affect its earning capacity in the long management and receivables
run. The size of assets, profitability and management are essential ingredients
competitiveness are all affected by of sound working capital management.
capital budgeting decisions. Moreover,
these decisions normally involve huge Factors affecting Capital
amounts of investment and are Budgeting Decision
irreversible except at a huge cost. A number of projects are often
Therefore, once made, it is often almost available to a business to invest in. But
impossible for a business to wriggle out each project has to be evaluated
of such decisions. Therefore, they need carefully and, depending upon the
to be taken with utmost care. These returns, a particular project is either
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Financial Decisions
The cost of each type of finance has to pay any dividend on equity shares.
to be estimated. Some sources may be Thus, there is some amount of financial
cheaper than others. For example, debt risk in debt financing. The overall
is considered to be the cheapest of all financial risk depends upon the
the sources, tax deductibility of interest proportion of debt in the total capital.
makes it still cheaper. Associated risk The fund raising exercise also costs
is also different for each source, e.g., it something. This cost is called
is necessary to pay interest on debt and floatation cost. It also must be
redeem the principal amount on considered while evaluating different
maturity. There is no such compulsion sources. Financing decision is, thus,
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concerned with the decisions about (d) Cash Flow Position of the Company:
how much to be raised from which A stronger cash flow position may
source. This decision determines the make debt financing more viable
overall cost of capital and the financial than funding through equity.
risk of the enterprise. (e) Fixed Operating Costs: If a
business has high fixed operating
Factors Affecting Financing
costs (e.g., building rent,
Decisions
Insurance premium, Salaries,
The financing decisions are affected by etc.), It must reduce f i x e d
various factors. Important among financing costs. Hence, lower debt
them are as follows: financing is better. Similarly, if
(a) Cost: The cost of raising funds fixed operating cost is less, more
through different sources are of debt financing may be
different. A prudent financial preferred.
manager would normally opt for a (f) Control Considerations: Issues of
source which is the cheapest. more equity may lead to dilution
(b) Risk: The risk associated with each of management’s control over the
of the sources is different. business. Debt financing has no
(c) Floatation Costs: Higher the floatation such implication. Companies
cost, less attractive the source. afraid of a takeover bid would
prefer debt to equity.
Corporate India has opened its purse strings to shareholders with interim
dividends and bonus shares. At least 60 companies have declared interim dividend
or announced plans to do so in the first three weeks of January. In addition, around
12 companies have announced bonus share issues this month, about three times
more than January 2006.
There are range of things that a company can do for maximising shareholder
value and dividend is the most direct and simple form of it. Ideally companies need
to balance it up between paying cash and building value of the stock for total
shareholder returns.
This trend of dividends and bonuses is in synchronisation with the good profits
being posted by companies. It’s a way of rewarding shareholders.
A number of companies have also announced plans of bonus shares for their
shareholders. Most of the companies who have already declared bonus issues or
announced that they would be taking it up in their next board meeting are small or
mid-sized companies.
Source: The Economic Times
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(g) State of Capital Market: Health of Some of the important factors are
the capital market may also affect discussed as follows:
the choice of source of fund. During (a) Amount of Earnings: Dividends are
the period when stock market is paid out of current and past
rising, more people invest in equity. earning. Therefore, earnings is a
However, depressed capital market major determinant of the decision
may make issue of equity shares about dividend.
difficult for any company. (b) Stability Earnings: Other things
remaining the same, a company
Dividend Decision having stable earning is in a better
The third important decision that position to declare higher
every financial manager has to take dividends. As against this, a
company having unstable earnings
relates to the distribution of dividend.
is likely to pay smaller dividend.
Dividend is that portion of profit
which is distributed to shareholders. (c) Stability of Dividends: Companies
The decision involved here is how generally follow a policy of
stabilising dividend per share.
much of the profit earned by company
The increase in dividends is
(after paying tax) is to be distributed
generally made when there is
to the shareholders and how much of
confidence that their earning
it should be retained in the business.
potential has gone up and not
While the dividend constitutes the just the earnings of the current
current income re-investment as year. In other words, dividend per
retained earning increases the firm’s share is not altered if the change
future earning capacity. The extent of in earnings is small or seen to be
retained earnings also influences the temporary in nature.
financing decision of the firm. Since (d) Growth Opportunities: Companies
the firm does not require funds to the having good growth opportunities
extent of re-invested retained retain more money out of their
earnings, the decision regarding earnings so as to finance the
dividend should be taken keeping in required investment. The dividend
view the overall objective of in growth companies is, therefore,
maximising shareholder’s wealth. smaller, than that in the non–
growth companies.
Factors Affecting Dividend Decision (e) Cash Flow Position: The payment
How much of the profits earned by a of dividend involves an outflow of
company will be distributed as profit cash. A company may be earning
and how much will be retained in the profit but may be short on cash.
business is affected by many factors. Availability of enough cash in the
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the management may decide what share capital, preference share capital
must be done in each of these and reserves and surpluses or retained
situations. This preparation of earnings. Borrowed funds can be in the
alternative financial plans to meet form of loans, debentures, public
different situations is clearly of deposits etc. These may be borrowed
immense help in running the from banks, other financial institutions,
business smoothly. debentureholders and public.
(ii) It helps in avoiding business Capital structure refers to the mix
shocks and surprises and helps between owners and borrowed funds.
the company in preparing for the These shall be referred as equity and
future. debt in the subsequent text. It can be
(iii) If helps in co-ordinating various calculated as debt-equity ratio
business functions, e.g., sales and Debt
production functions, by providing i.e., Equity or as the proportion of
clear policies and procedures.
debt out of the total capital i.e.,
(iv) Detailed plans of action prepared
under financial planning reduce Debt
waste, duplication of efforts, and Debt + Equity .
gaps in planning.
Debt and equity differ significantly
(v) It tries to link the present with the in their cost and riskiness for the firm.
future. The cost of debt is lower than the cost of
(vi) It provides a link between equity for a firm because the lender’s risk
investment and financing decisions is lower than the equity shareholder’s
on a continuous basis. risk, since the lender earns an assured
(vii) By spelling out detailed objectives return and repayment of capital and,
for various business segments, it therefore, they should require a lower
makes the evaluation of actual rate of return. Additionally, interest paid
performance easier. on debt is a deductible expense for
computation of tax liability whereas
CAPITAL STRUCTURE dividends are paid out of after-tax
profit. Increased use of debt, therefore,
One of the important decisions under is likely to lower the over-all cost of
financial management relates to the capital of the firm provided that the cost
financing pattern or the proportion of of equity remains unaffected. Impact
the use of different sources in raising of a change in the debt-equity ratio
funds. On the basis of ownership, the upon the earning per share is dealt with
sources of business finance can be in detail later in this chapter.
broadly classified into two categories Debt is cheaper but is more risky
viz., ‘owners’ funds’ and ‘borrowed for a business because the payment of
funds’. Owners’ funds consist of equity interest and the return of principal is
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Example I
Company X Ltd.
Total Funds used Rs. 30 Lakh
Interest rate 10% p.a.
Tax rate 30%
EBIT Rs. 4 Lakh
Debt
Situation I Nil
Situation II Rs. 10 Lakh
Situation III Rs. 20 Lakh
EBIT-EPS Analysis
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Example II
Company Y Ltd.
Situation I Situation II Situation III
EBIT 2,00,000 2,00,000 2,00,000
Interest NIL 1,00,000 2,00,000
EBT 2,00,000 1,00,000 NIL
Tax 60,000 30,000 NIL
EAT 1,40,000 70,000 NIL
No. of shares of Rs.10 3,00,000 2,00,000 1,00,000
EPS 0.47 0.35 NIL
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In this example, the EPS of the flows must not only cover fixed cash
company is falling with increased use payment obligations but there must be
of debt. It is because the Company’s rate sufficient buffer also. It must be kept
of return on investment (RoI) is less than in mind that a company has cash
the cost of debt. The RoI for company Y payment obligations for (i) normal
2Lakh business operations; (ii) for investment
is 100 , i.e., 6.67%, whereas in fixed assets; and (iii) for meeting the
30Lakh
the interest rate on debt is 10%. In such debt service commitments i.e., payment
cases, the use of debt reduces the EPS. of interest and repayment of principal.
This is a situation of unfavourable 2. Interest Coverage Ratio (ICR): The
financial leverage. Trading on Equity is interest coverage ratio refers to the
clearly unadvisable in such a situation. number of times earnings before
Even in case of Company X, interest and taxes of a company covers
reckless use of Trading on Equity is the interest obligation. This may be
not recommended. An increase in debt calculated as follows:
may enhance the EPS but as pointed
EBIT
out earlier, it also raises the financial ICR =
Interest
risk. Ideally, a company must choose
that risk-return combination which The higher the ratio, lower shall be
maximises shareholders’ wealth. The the risk of company failing to meet its
debt-equity mix that achieves it, is the interest payment obligations. However,
optimum capital structure. this ratio is not an adequate measure.
A firm may have a high EBIT but low
Factors affecting the Choice of cash balance. Apart from interest,
Capital Structure repayment obligations are also relevant.
Deciding about the capital structure
3. Debt Service Coverage Ratio
of a firm involves determining the
(DSCR): Debt Service Coverage Ratio
relative proportion of various types of takes care of the deficiencies referred
funds. This depends on various
to in the Interest Coverage Ratio (ICR).
factors. For example, debt requires
The cash profits generated by the
regular servicing. Interest payment operations are compared with the total
and repayment of principal are cash required for the service of the debt
obligatory on a business. In addition
and the preference share capital. It is
a company planning to raise debt must calculated as follows:
have sufficient cash to meet the
Profit after tax + Depreciation + Interest + Non Cash exp.
increased outflows because of higher
Pref. Div + Interest + Repayment obligation
debt. Similarly, important factors
which determine the choice of capital A higher DSCR indicates better ability
structure are as follows: to meet cash commitments and
1. Cash Flow Position: Size of consequently, the company’s potential
projected cash flows must be to increase debt component in its
considered before borrowing. Cash capital structure.
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4. Return on Investment (RoI): If the beyond that point, cost of equity may
RoI of the company is higher, it can go up sharply and share price may
choose to use trading on equity to decrease inspite of increased EPS.
increase its EPS, i.e., its ability to use Consequently, for maximisation of
debt is greater. We have already shareholders’ wealth, debt can be used
observed in Example I that a firm can only upto a level.
use more debt to increase its EPS. 8. Floatation Costs: Process of raising
However, in Example II, use of higher resources also involves some cost.
debt is reducing the EPS. It is because Public issue of shares and debentures
the firm is earning an RoI of only requires considerable expenditure.
6.67% which lower than its cost of Getting a loan from a financial
debt. In example I the RoI is 13.33%, institution may not cost so much.
and trading on equity is profitable. It These considerations may also affect
shows that, RoI is an important the choice between debt and equity
determinant of the company’s ability and hence the capital structure.
to use Trading on equity and thus the
9. Risk Consideration: As discussed
capital structure.
earlier, use of debt increases the
5. Cost of debt: A firm’s ability to financial risk of a business. Financial
borrow at a lower rate increases its risk refers to a position when a
capacity to employ higher debt. Thus, company is unable to meet its fixed
more debt can be used if debt can be financial charges namely interest
raised at a lower rate. payment, preference dividend and
6. Tax Rate: Since interest is a repayment obligations. Apart from the
deductible expense, cost of debt is financial risk, every business has some
affected by the tax rate. The firms in operating risk (also called business
our examples are borrowing @ 10%. risk). Business risk depends upon
Since the tax rate is 30%, the after tax fixed operating costs. Higher fixed
cost of debt is only 7%. A higher tax operating costs result in higher
rate, thus, makes debt relatively business risk and vice-versa. The total
cheaper and increases its attraction risk depends upon both the business
vis-à-vis equity. risk and the financial risk. If a firm’s
business risk is lower, its capacity to
7. Cost of Equity: Stock owners
use debt is higher and vice-versa.
expect a rate of return from the equity
which is commensurate with the risk 10. Flexibility: If a firm uses its debt
they are assuming. When a company potential to the full, it loses flexibility
increases debt, the financial risk faced to issue further debt. To maintain
by the equity holders, increases. flexibility, it must maintain some
Consequently, their desired rate of borrowing power to take care of
return may increase. It is for this unforeseen circumstances.
reason that a company can not use 11. Control: Debt normally does not
debt beyond a point. If debt is used cause a dilution of control. A public
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issue of equity may reduce the should go in for low debt. Thus, the
managements’ holding in the company management must know what the
and make it vulnerable to takeover. This industry norms are, whether they are
factor also influences the choice following them or deviating from them
between debt and equity especially in and adequate justification must be
companies in which the current holding there in both cases.
of management is on a lower side.
12. Regulatory Framework: Every FIXED AND WORKING CAPITAL
company operates within a regulatory Meaning
framework provided by the law e.g., Every company needs funds to finance
public issue of shares and debentures
its assets and activities. Investment is
have to be made under SEBI
required to be made in fixed assets and
guidelines. Raising funds from banks
current assets. Fixed assets are those
and other financial institutions require
which remains in the business for
fulfillment of other norms. The relative
more than one year, usually for much
ease with which these norms can, be
longer, e.g., plant and machinery,
met or the procedures completed may
furniture and fixture, land and
also have a bearing upon the choice of
building, vehicles, etc.
the source of finance.
Decision to invest in fixed assets
13. Stock Market Conditions: If the must be taken very carefully as the
stock markets are bullish, equity shares investment is usually quite large.
are more easily sold even at a higher Such decisions once taken are
price. Use of equity is often preferred irrevocable except at a huge loss.
by companies in such a situation. Such decisions are called capital
However, during a bearish phase, a budgeting decisions.
company, may find raising of equity Current assets are those assets
capital more difficult and it may opt for which, in the normal routine of the
debt. Thus, stock market conditions business, get converted into cash or
often affect the choice between the two. cash equivalents within one year, e.g.,
14. Capital Structure of other inventories, debtors, bills receivables,
Companies: A useful guideline in the etc.
capital structure planning is the debt-
equity ratios of other companies in the Management of Fixed Capital
same industry. There are usually some Fixed capital refers to investment in
industry norms which may help. Care long-term assets. Management of fixed
however must be taken that the capital involves allocation of firm’s
company does not follow the industry capital to different projects
norms blindly. For example, if the or assets with long-term implications for
business risk of a firm is higher, it can the business. These decisions are called
not afford the same financial risk. It investment decisions or capital
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Thus, net working capital may be larger and, therefore, larger amount of
defined as the excess of current assets working capital is required. As against
over current liabilities. this, the requirement for working
capital will be lower during the period
FACTORS A FFECTING THE WORKING of depression as the sales as well as
CAPITAL R EQUIREMENTS production will be small.
4. Seasonal Factors: Most business
1. Nature of Business: The basic
have some seasonality in their
nature of a business influences the operations. In peak season, because of
amount of working capital required. A
higher level of activity, larger amount
trading organisation usually needs a of working capital is required. As
smaller amount of working capital
against this, the level of activity as well
compared to a manufacturing as the requirement for working capital
organisation. This is because there is will be lower during the lean season.
usually no processing. Therefore, there
is no distinction between raw materials 5. Production Cycle: Production cycle
is the time span between the receipt of
and finished goods. Sales can be
effected immediately upon the receipt raw material and their conversion into
finished goods. Some businesses have
of materials, sometimes even before
a longer production cycle while some
that. In a manufacturing business,
have a shorter one. Duration and the
however, raw material needs to be
length of production cycle, affects the
converted into finished goods before
amount of funds required for raw
any sales become possible. Other
materials and expenses. Consequently,
factors remaining the same, a trading
working capital requirement is higher
business requires less working capital.
in firms with longer processing cycle
Similarly, service industries which
and lower in firms with shorter
usually do not have to maintain
processing cycle.
inventory require less working capital.
6. Credit Allowed: Different firms allow
2. Scale of Operations: For organisations different credit terms to their
which operate on a higher scale of customers. These depend upon the level
operation, the quantum of inventory and of competition that a firm faces as well
debtors required is generally high. Such as the credit worthiness of their
organisations, therefore, require large clientele. A liberal credit policy results
amount of working capital as compared in higher amount of debtors, increasing
to the organisations which operate on a the requirement of working capital.
lower scale. 7. Credit Availed: Just as a firm
3. Business Cycle: Different phases allows credit to its customers it also
of business cycles affect the may get credit from its suppliers. To
requirement of working capital by a the extent it avails the credit on
firm. In case of a boom, the sales as purchases, the working capital
well as production are likely to be requirement is reduced.
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8. Operating Efficiency: Firms 10. Growth Prospects: If the growth
manage their operations with varied potential of a concern is perceived to
degrees of efficiency. For example, a be higher, it will require larger amount
firm managing its raw materials of working capital so that it is able to
efficiently may be able to manage with meet higher production and sales
a smaller balance. This is reflected in target whenever required.
a higher inventory turnover ratio. 11. Level of Competition: Higher
Similarly, a better debtors turnover level of competitiveness may
ratio may be achieved reducing the necessitate larger stocks of finished
amount tied up in receivables. Better goods to meet urgent orders from
sales effort may reduce the average customers. This increases the working
time for which finished goods inventory capital requirement. Competition may
is held. Such efficiencies may reduce also force the firm to extend liberal
the level of raw materials, finished credit terms discussed earlier.
goods and debtors resulting in lower 12. Inflation: With rising prices,
requirement of working capital. larger amounts are required even to
9. Availability of Raw Material: If the maintain a constant volume of
raw materials and other required production and sales. The working
materials are available freely and capital requirement of a business
continuously, lower stock levels may thus, become higher with higher rate
suffice. If, however, raw materials do of inflation. It must, however, be noted
not have a record of un-interrupted that an inflation rate of 5%, does not
availability, higher stock levels may be mean that every component of
required. In addition, the time lag working capital will change by the
between the placement of order and same percentage. The actual
the actual receipt of the materials (also requirement shall depend upon the
called lead time) is also relevant. Larger rates of price change of different
the lead time, larger the quantity of components (e.g., raw material,
material to be stored and larger shall finished goods, labour cost,) Finished
be the amount of working capital goods as well as their proportion in
required. the total requirement.
K EY TERMS
Financial Management Wealth Maximisation Investment Decision
Financing Decision Dividend Decision Capital Budgeting
Working Capital Financial Planning Capital Structure
Trading on Equity
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SUMMARY
Business finance: The money required for carrying out business activities is
called business finance. Almost all business activities require some finance.
Finance is needed to establish a business, to run it, to modernise it, to expand,
and diversify it.
Financial Management: Financial Management is concerned with optimal
procurement as well as usage of finance. For optimal procurement, different
available sources of finance are identified and compared in terms of their costs
and associated risks.
Objectives and Financial Decisions The primary aim of financial management
is to maximise shareholders’ wealth which is referred to as the wealth
maximisation concept. The market price of a company’s shares are linked to
the three basic financial decisions
Financial decision-making is concerned with three broad decisions which are
Investment Decision, Financing Decision, Dividend Decision
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EXERCISES
Objective–type questions
1. The cheapest source of finance is:
a. debenture b. equity share capital
c. preference share d. retained earning
2. A decision to acquire a new and modern plant to upgrade an old one is a:
a. financing decision
b. working capital decision
c. investment decision
d. None of the above
3. Other things remaining the same, an increase in the tax rate on corporate
profits will:
a. make the debt relatively cheaper
b. make the debt relatively the dearer
c. have no impact on the cost of debt
d. we can’t say
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5. Explain the term ‘Trading on Equity’. Why, when and how it can be used
by a company?
Case Problem
‘S’ Limited is manufacturing steel at its plant in India. It is enjoying a buoyant
demand for its products as economic growth is about 7%-8% and the demand
for steel is growing. It is planning to set up a new steel plant to cash on the
increased demand. It is estimated that it will require about
Rs. 5000 crores to set up and about Rs 500 crores of working capital to start
the new plant.
Questions
1. Describe the role and objectives of financial management for this company.
2. Explain the importance of having a financial plan for this company. Give
an imaginary plan to support your answer.
3. What are the factors which will affect the capital structure of this company?
4. Keeping in mind that it is a highly capital-intensive sector, what factors
will affect the fixed and working capital. Give reasons in support of your
answer.
Project Work
1. Pick up the annual reports of 2 or more companies engaged in the same
line of business. You can access this data on the respective website of the
companies and other sources. Compare their capital structures. Analyse
the reasons for the difference. You can also use ratio analysis for this.
Prepare a report of your findings and discuss it in the class with the help of
your teacher.
2. From the annual reports that you use in activity, analyse the working capital
of the companies. You can use short-term solvency ratios. Study the
operating cycle of the line of business you have choosen and prepare a
report as to the soundness of the working capital management of the
companies you are studying. Prepare a report of your findings and discuss
it in class with the help of your teacher.
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10
LEARNING OBJECTIVES FINANCIAL M ARKETS
After studying this chapter, you
should be able to: IDEA SEEKS TO CAPITALISE ON
M ARKET M OMENTUM
Ø explain the meaning of
Financial Market; With the explosive growth of their
subscriber base, telecom companies
are all looking at capital markets to
Ø explain the meaning of Money raise funds to fuel their expansion
Market and describe its major plan. Idea Cellular, the fifth largest
Instruments; operator in the country and the
flagship telecom venture of AV Birla
Ø explain the nature and types of Group, has decided to enter the capital
Capital Market; market to raise between Rs. 1,700 and
Rs. 2,000 crore.
The company has appointed J.M.
Ø distinguish between Money Morgan Stanley, Merrill Lynch among
Market and Capital Market; other as book-runners for the
proposed Initial Public Offer (IPO),
Ø explain the meaning and which is expected to be ready by
functions of Stock Exchange; January end.
Since, under SEBI norms, the
minimum float size is 10 per cent, the
Ø describe the functioning of NSEI
company will divest between 10
and OTCEI; and and 12 per cent, “The last private
placement made by the promoters is
Ø describe the role of SEBI in at a market capitalisation of
investor protection. Rs. 15,000 crore. The proposed float
is expected to be at 10 to 20 per cent
premium of the private placement
price,” AV Birla Group recently
divested 35 per cent stake in the
company to a clutch of private equity
firms. However, this is a fresh issue of
shares, where the proceeds will be
utilised by Ideal Cellular for capital
expenditure. After the proposed
issues, the promoters stake will come
down to around 58 per cent.
Source: www.hindustantimes.com
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Financial System
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3. Provid ing Liquidity to Financial
Providing than one year are traded in the money
Assets: Financial markets facilitate easy market. Instruments with longer
purchase and sale of financial assets. maturity are traded in the capital
In doing so they provide liquidity to market.
financial assets, so that they can be
easily converted into cash whenever M ONEY MARKET
required. Holders of assets can readily
The money market is a market for
sell their financial assets through the
short term funds which deals in
mechanism of the financial market.
monetary assets whose period of
4.Reduc ing the Cost of Transactions:
4.Reducing maturity is upto one year. These assets
Financial markets provide valuable are close substitutes for money. It is a
information about securities being market where low risk, unsecured
traded in the market. It helps to save and short term debt instruments that
time, effort and money that both are highly liquid are issued and
buyers and sellers of a financial asset actively traded everyday. It has no
would have to otherwise spend to try physical location, but is an activity
and find each other. The financial conducted over the telephone and
market is thus, a common platform through the internet. It enables the
where buyers and sellers can meet for raising of short-term funds for meeting
fulfillment of their individual needs. the temporary shortages of cash and
Financial markets are classified on obligations and the temporary
the basis of the maturity of financial deployment of excess funds for earning
instruments traded in them. returns. The major participants in the
Instruments with a maturity of less market are the Reserve Bank of India
FINANCIAL MARKET
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cash reserve ratio. The interest rate paid credit is high. They help to mobilise a
on call money loans is known as the call large amount of money for short
rate. It is a highly volatile rate that varies periods.
from day-to-day and sometimes even 5 . Commercial Bill: A commercial
from hour-to-hour. There is an inverse bill is a bill of exchange used to finance
relationship between call rates and the working capital requirements of
other short-term money market business firms. It is a short-term,
instruments such as certificates of negotiable, self-liquidating instrument
deposit and commercial paper. A rise in which is used to finance the credit sales
call money rates makes other sources of firms. When goods are sold on credit,
of finance such as commercial paper the buyer becomes liable to make
and certificates of deposit cheaper in payment on a specific date in future.
comparison for banks raise funds from The seller could wait till the specified
these sources. date or make use of a bill of exchange.
4 . Certificate of Deposit: Certificates The seller (drawer) of the goods draws
of deposit (CD) are unsecured, the bill and the buyer (drawee) accepts
negotiable, short-term instruments in it. On being accepted, the bill becomes
bearer form, issued by commercial a marketable instrument and is called
banks and development financial a trade bill. These bills can be
institutions. They can be issued to discounted with a bank if the seller
individuals, corporations and needs funds before the bill matures.
companies during periods of tight When a trade bill is accepted by a
liquidity when the deposit growth of commercial bank it is known as a
banks is slow but the demand for commercial bill.
Sterlite Industries
Sterlite Industries, part of the London listed Vedanta Resources Group, is
scheduled to be listed on the New York Stock Exchange through an initial
public offering (IPO) of about $2 billion. The proceeds will be used to fund its
$1.9 billion, Greenfield power project in Orissa and to expand its aluminium
and copper facilities.
The IPO is a part of an enabling resolution passed by Sterlite to raise upto
12,500 crores through American Depository Shares (ADS). Consequently, the
company has increased its authorised capital from Rs 150 crore to
Rs 185 crore by creating an additional 17.5 crore equity shares of Rs 2 each.
The shares of Sterlite, which will be among the first metal firms from India to
list on NYSE, outpaced Sensex and rose by 1.4% to close at Rs 545.2 on BSE
on the day of the announcement.
Source: The Economic Times
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(i) There is sale of securities by new (i) There is trading of existing shares
companies or further (new issues only.
of securities by existing companies
to investors).
(ii) Securities are sold by the company (ii) Ownership of existing securities is
to the investor directly (or through exchanged between investors. The
an intermediary). company is not involved at all.
(iii) The flow of funds is from savers to (iii) Enhances encashability (liquidity) of
investors, i.e. the primary market shares, i.e. the secondary market
directly promotes capital formation. indirectly promotes capital formation.
(iv) Only buying of securities takes (iv) Both the buying and the selling of
place in the primary market, securities can take place on the
securities cannot be sold there. stock exchange.
(v) Prices are determined and decided (v) Prices are determined by demand
by the management of the company. and supply for the security.
(vi) There is no fixed geographical (vi) Located at specified places.
location.
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1. Providing Liquidity and Market-
ability to Existing Securities: The
basic function of a stock exchange is the
creation of a continuous market where
securities are bought and sold. It gives
investors the chance to disinvest and
reinvest. This provides both liquidity and
easy marketability to already existing
securities in the market.
2. Pricing of Securities: Share prices
on a stock exchange are determined by
the forces of demand and supply. A
stock exchange is a mechanism of
constant valuation through which the
Bombay Stock Exchange prices of securities are determined.
Such a valuation provides important
debenture etc.) into money and vice
versa. Stock exchanges help instant information to both buyers and
companies raise finance, provide sellers in the market.
liquidity and safety of investment to the 3. Safety of Transaction: T h e
investors and enhance the credit membership of a stock exchange is well-
worthiness of individual companies. regulated and its dealings are well
Meaning of Stock Exchange defined according to the existing legal
framework. This ensures that the
According to Securities Contracts
investing public gets a safe and fair deal
(Regulation) Act 1956, stock exchange
means any body of individuals, whether on the market.
incorporated or not, constituted for the 4. Contributes to Economic Growth:
purpose of assisting, regulating or A stock exchange is a market in which
controlling the business of buying and existing securities are resold or traded.
selling or dealing in securities. Through this process of disinvestment
Functions of a Stock Exchange and reinvestment savings get
channelised into their most productive
The efficient functioning of a stock
investment avenues. This leads to
exchange creates a conducive climate
capital formation and economic growth.
for an active and growing primary
market for new issues. An active and 5. Spreading of Equity Cult: The stock
healthy secondary market in existing exchange can play a vital role in
securities leads to positive environment ensuring wider share ownership by
among investors. The following are regulating new issues, better trading
some of the important functions of a practices and taking effective steps in
stock exchange. educating the public about investments.
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are able to see the full market and transferring shares can also be
during real time. adopted. This electronic form is called
2. It increases efficiency of information dematerialised form.
being passed on, thus helping in
fixing prices efficiently. The Steps in the Trading and
computer screens display Settlement Procedure
information on prices and also It has been made compulsory to settle
capital market developments that all trades within 2 days of the trade
influence share prices. date, i.e., on a T+2 basis, since 2003.
3. It increases the efficiency of Prior to the reforms, securities were
operations, since there is reduction bought and sold, i.e., traded and all
in time, cost and risk of error. positions in the stock exchange were
4. People from all over the country settled on a weekly/fortnightly
and even abroad who wish to settlement cycle whether it was delivery
participate in the stock market can of securities or payment of cash. This
buy or sell securities through system prevailed for a long time as it
brokers or members without increased the volume of trading on the
knowing each other. That is, they exchange and provided liquidity to the
can sit in the broker’s office, log on system. However, since trades were to
to the computer at the same time be settled on specified dates, this gave
and buy or sell securities. This rise to speculation and price of shares
system has enabled a large number used to rise and fall suddenly due to
of participants to trade with each trading and defaults by brokers. A new
other, thereby improving the system, i.e, rolling settlement, was
liquidity of the market. introduced in 2000, so that whenever
a trade took place it would be settled
5. A single trading platform has been
after some days. Since 2003, all shares
provided as business is transacted
have to be covered under the rolling
at the same time in all the trading
settlement system on a T+2 basis,
centres. Thus, all the trading
meaning thereby that transactions in
centres spread all over the country
securities are settled within 2 days after
have been brought onto one
the trade date. Since rolling settlement
trading platform, i.e., the stock
implies fast movement of shares, it
exchange, on the computer.
requires effective implementation of
Now, screen-based trading or on-line electronic fund transfer and
trading is the only way in which you dematerialisation of shares.
can buy or sell shares. Shares can be The following steps are involved in
held either in physical form or an the screen-based trading for buying
electronic book entry form of holding and selling of securities:
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contract note or before the day when delays and paperwork associated with
the broker shall make payment or share certificates or debentures held in
delivery of shares to the exchange. physical form.
This is called the pay-in day. This is a process where securities
8. Cash is paid or securities are held by the investor in the physical
delivered on pay-in day, which is form are cancelled and the investor is
before the T+2 day as the deal has given an electronic entry or number so
that she/he can hold it as an electronic
to be settled and finalised on the
balance in an account. This process of
T+2 day. The settlement cycle is on
holding securities in an electronic form
T+2 day on a rolling settlement
is called dematerialisation. For this, the
basis, w.e.f. 1 April 2003.
investor has to open a demat account
9. On the T+2 day, the exchange will with an organisation called a
deliver the share or make payment depository. In fact, now all Initial Public
to the other broker. This is called Offers (IPOs) are issued in
the pay-out day. The broker then dematerialisation form and more than
has to make payment to the 99% of the turnover is settled by
investor within 24 hours of the pay- delivery in the demat form.
out day since he has already The Securities and Exchange Board
received payment from the of India (SEBI) has made it mandatory
exchange. for the settlement procedures to take
10.The broker can make delivery of place in demat form in certain select
shares in demat form directly to the securities. Holding shares in demat
investor’s demat account. The form is very convenient as it is just
investor has to give details of his like a bank account. Physical shares
can be converted into electronic form
demat account and instruct his
or electronic holdings can be
depository participant to take
reconverted into physical certificates
delivery of securities directly in his
(rematerialisation). Dematerialisation
beneficial owner account.
enables shares to be transferred to
some other account just like cash and
Dematerialisation and
ensures settlement of all trades
Depositories
through a single account in shares.
All trading in securities is now done These demat securities can even be
through computer terminals. Since all pledged or hypothecated to get loans.
systems are computerised, buying and There is no danger of loss, theft or
selling of securities are settled through forgery of share certificates. It is the
an electronic book entry form. This is broker’s responsibility to credit the
mainly done to eliminate problems like investor’s account with the correct
theft, fake/forged transfers, transfer number of shares.
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over the country through an (i) Whole Sale Debt Market Segment:
appropriate communication network. This segment provides a trading
c. Providing a fair, efficient and platform for a wide range of fixed
transparent securities market income securities that include
using electronic trading system. central government securities,
d. Enabling shorter settlement cycles treasury bills, state development
and book entry settlements. loans, bonds issued by public
e. Meeting international benchmarks sector undertakings, floating rate
and standards. bonds, zero coupon bonds, index
Within a span of ten years, NSE has bonds, commercial paper, certificate
been able to achieve its objectives for of deposit, corporate debentures
which it was set up. It has been playing and mutual funds.
a leading role as a change agent in (ii) Capital Market Segment: The capital
transforming the Indian capital market. market segment of NSE provides an
NSE has been able to take the stock efficient and transparent platform for
market to the door step of the investors. trading in equity, preference,
It has ensured that technology has been debentures, exchange traded funds as
harnessed to deliver the services to the well as retail Government securities.
investors across the country at the lowest
cost. It has provided a nation wide screen OVER THE COUNTER EXCHANGE OF INDIA
based automated trading system with a (OTCEI)
high degree of transparency and equal The OTCEI is a company incorporated
access to investors irrespective of
under the Companies Act 1956. It was
geographical location.
set-up to provide small and medium
MARKET SEGMENTS OF NSE companies an access to the capital
market for raising finance in a cost
The Exchange provides trading in the effective manner. It was also meant to
following two segments. provide investors with a convenient,
Some Common Stock Market Terms
You would have often come across the following terms in magazines or newspapers
when you read about the stock market.
BOURSES is another word for the stock market
BULLS and BEARS – The term does not refer to animals but to market sentiment of
the investors. A Bullish phase refers to a period of optimism and a Bearish phase to
a period of perssimism on the Bourses.
BADLA – This refers to a carry forward system of settlement, particularly at the BSE.
It is a facility that allows the postponement of the delivery or payment of a transaction
from one settlement period to another.
ODD LOT TRADING – Trading in multiples of 100 stocks or less.
PENNY STOCKS – These are securities that have no value on the stock exchange but
whose trading contributes to speculation.
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transparent and efficient avenue for takes place when a buyer or seller
capital market investment. It is fully walks up to an OTCEI counter, taps on
computerised, transparent, single the computer screen, finds quotes and
window exchange ‘which commenced effects a purchase or sale depending
trading in 1992. This exchange is on whether the prices meet their
established on the lines of NASDAQ targets. There is no particular market
(National Association of Securities place in the geographical sense. The
Dealers Automated Quotations) the objectives of OTCEI are to provide
OTC exchange in USA. It has been quicker liquidity to securities at a
promoted by UTI, ICICI, IDBI, IFCI, LIC, fixed and fair price, liquidity for less
GIC, SBI Capital markets and Can traded securities or that of small
Bank Financial Services. companies, a simplified process of
Over the counter market may be buying and selling and easy and
defined as a place where buyers seek cheaper means of making public sale
sellers and vice-versa and then attempt of new issues. However, the OTCEI has
to arrange terms and conditions for now been withdrawn.
purchase/sale acceptable to both the
Advantages of OTC Market
parties. It is a negotiated market place
that exists any where as opposed to the 1. It provides a trading platform to
auction market place, represented by smaller and less liquid companies
the activity on securities exchanges. as they are not eligible for listing on
Thus, in the OTC exchange, trading a regular exchange.
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SEBI Violations
SEBI on Thursday unearthed yet another abuse of IPO norms in the IDFC’s
Initial Public Offering (IPO) where a few investors opened over 14,000
dematerialised accounts to corner large number of shares of the company.
This is the second such incident, after a similar such violations were
detected in the YES Bank’s IPO.
SEBI said in IDFC’s IPO too four investors opened as many as 14,807
dematerialised accounts with Karvy-DP and ‘Strangely’, all these account
holders have their bank accounts with Bharat Overseas Bank Ltd.,
Ahmedabad.
SEBI order said: “Further probe is required for examining the systemic
fault, if any, of the registrar Karvy-RTI, i.e., Karvy Computer Shares P Ltd.,
and the lead managers Kotak Mahindra Capital Company Ltd., DSP Merrill
Lynch Ltd. and SBI Capital Markets Ltd. in identifying and weeding out the
benami applications.”
Reference is being made to the RBI to examine the role of BOB, HDFC Bank,
Indian Overseas Bank, ING Vysya Bank and Vijaya Bank in opening the
bank accounts of these benami entities and apparently funding them.
Source: The Economic Times
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KEY TERMS
Financial Market Money Market Treasury Bills
Commercial Paper Call Money Certificate of Deposit
Commercial Bill Money Market Mutual Fund Capital
Market Primary Market Secondary Market
Stock Exchange SEBI, NSE OTCEI
SUMMARY
Financial Market is a market for creation and exchange of financial assets. It
helps in mobilisation and channelising the savings into most productive uses.
Financial markets also helps in price discovery and provide liquidity to
financial assets.
Money Market is a market for short-term funds. It deals in monetory assets
whose period of maturity is less than one year. The instruments of money market
includes treasury bills, commercial paper, call money, Certificate of deposit,
commercial bills, participation certificates and money market mutual funds.
Capital Market is a place where long-term funds are mobilised by the corporate
undertakings and Government. Capital Market may be devided into primary
market and secondary market. Primary market deals with new securities which
were not previously tradable to the public. Secondary market is a place where
existing securities are bought and sold.
Stock Exchanges are the organisations which provide a platform for buying
and selling of existing securities. Stock exchanges provide continuous market
for securities, helps in price discovery, widening share ownership and provide
scope for speculation.
The National Stock Exchange of India is the latest, most modern and technology
driven exchange and was incorporated in 1992. OTCEI was incorporated in
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1992 to provide listing facility for small companies with paid up capital of less
than 3 crores.
Securities and Exchange Board of India was established in 1988 and was
given statutory status through an Act in 1992. The SEBI was set-up to protect
the interests of investors, development and regulation of securities market.
EXERCISES
Multiple choice questions
1. Primary and secondary markets:
a. Compete with each other
b. Complement each other
c. Function independently
d. Control each other
2. The total number of Stock Exchanges in India is:
a. 20 b. 21 c. 22 d. 23
3. The settlement cycle in NSE is:
a. T + 5 b. T+3 c. T+2 d. T+1
4. The National Stock Exchange of India was recognized as stock exchange in
the year:
a. 1992 b. 1993 c. 1994 d. 1995
5. NSE commenced futures trading in the year:
a. 1999 b. 2000 c. 2001 d. 2002
6. Clearing and settlement operations of NSE are carried out by:
a. NSDL b. NSCCL c. SBI d. CDSL
7. OTCEI was started on the lines of:
a. NASDAQ b. NYSE c. NASAQ d. NSE
8. To be listed on OTCEI, the minimum capital requirement for a company is:
a. Rs. 5 crores b. Rs. 3 crores c. Rs. 6 crores d. Rs. 1 crore
9. A Treasury Bill is basically:
a. An instrument to borrow short-term funds
b. An instrument to borrow long-term funds
c. An instrument of capital market
d. None of the above
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Short answer questions
1. What are the functions of a financial market?
2. “Money Market is essentially a Market for short term funds.” Discuss.
3. What is a Treasury Bill ?
4. Distinguish between Capital Market and Money Market.
5. What are the functions of a Stock Exchange?
6. What are the objectives of the SEBI?
7. State the objectives of the NSE.
8. What is the OTCEI?
Long
Long-- answer questions
1. Explain the various Money Market Instruments.
2. What are the methods of floatation in Primary Market?
3. Explain the recent Capital Market reforms in India.
4. Explain the objectives and functions of the SEBI
5. Explain the various segments of the NSE.
Projects and Assignments
1. Collect the information about the companies that have recently mobilised
resources through primay market.
2. Collect the information on various measures taken by SEBI to protect the
interests of investors since its inception.
3. Send a group of students to a trading terminal in your city to gain first hand
information on securities trading and prepare a report.
4. Collect data about the movements in SENSEX and NIFTY during the last
one month. Find out whether the two move in same or opposite direction.
5. Collect information about the SEBI action for Investor Protection taken during
last two years.
6. Collect information about e-IPO’s in the Indian Market in the last one year.
TRY AND SOLVE THE CROSSWORD
Clues to the Crossword
Across
1. Commission Agent who transacts in securities on behalf of non members
or members (6).
2. Changes in the price of securities in the stock market. (12)
4. Inclusion of securities in the official trade list of securities in stock market (7)
8. Place of trade I securities (6)
9. Result of selling shares at a price lower than the purchase price. (4)
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Case Problem I
‘R’ Limited is a real estate company which was formed in 1950. In about 56
years of its existence the company has managed to carve out a niche for itself in
this sector. Lately, this sector is witnessing a boom due to the fact that the Indian
economy is on the rise. The incomes of middle class are rising. More people can
afford to buy homes for themselves due to easy availability of loans and
accompanying tax concessions.
To expand its business in India and abroad the company is weighing various
options to raise money through equity offerings in India. Whether to tap equity or
debt. market whether to raise money from domestic market or international market
or Combination of both? Whe their to raise the necessary financé from money
market or capital market. It is also planning to list itself in New York Stock Exchange
to raise money through ADR’s. To make its offerings attractive it is planning to
offer host of financial plans products to its stakeholders and investors and also
expand it’s listing at NSE after complying with the regulations of SEBI.
(i) What benefits will the company derive from listing at NSE?
(ii) What are the regulations of SEBI that the company must comply with?
(iii) How does the SEBI exercise control over ‘R’ Limited in the interest of
investors?
Case Problem II
NSE Indices World Markets
Index Current Prev. %CHG Index Current Prev. % Change
S&P CNX Nifty 3641.1 3770.55 -3.43% NYSE Composite 8926.88 9120.93 -2.13%
CNX Nifty Junior 6458.55 6634.85 -2.66% NASDAQ Composite 2350.57 2402.29 -2.15%
CNX IT 5100.5 5314.05 -4.02% DOW Jones I. A. 12076 12318.6 -1.97%
Bank Nifty 5039.05 5251.55 -4.05% S&P 500 1377.95 1406.6 -2.04%
CNX 100 3519.35 3640.35 -3.32% Nikkei 225 16676.9 17178.8 -2.92%
More
Source: www.nseindia.com
The above figures are taken from the website of national stock exchange of
India. They illustrate the movement of NSE stock indices as well as world stock
indices on the date indicated.
Questions
1. What do you mean by a stock index? How is it calculated?
2. What conclusions can you draw from the various movements of NSE stock
indices?
3. What factors affect the movement of stock indices? Elaborate on the nature
of these factors.
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11
LEARNING OBJECTIVES M ARKETING
After studying this chapter, you WHERE DO COMPANIES DO THEIR
should be able to: BUSINESS?
In the Markets or in the Society?
Ø explain the meaning of
‘marketing’; It is an undisputed fact that a company’s
survival does not depend upon its
consumers alone, but a diverse set of
Ø distinguish between ‘marketing’ stakeholders like the government,
and ‘selling’; religious leaders, social activists, NGOs,
media, etc. Hence, earning the
Ø list out important functions of satisfaction of these segments is also as
marketing; imperative as they add to the power of
the brand by word of mouth.
The social concern adds to the
Ø examine the role of marketing in strength of the brand. Corporates that
the development of an economy embraced the deepest social values,
in a firm, to the society and to have been successful in building
consumers; powerful brand, and, eventually, robust
customer relationship. The area of
Ø explain the elements of corporate social justice fall under two
marketing-mix; broad categories. The issues such as the
nutrition of children, child care, old-age
homes, amelioration of hunger, offering
Ø classify products into different aid to those affected by natural
categories; calamities, etc. needing instant attention
with humanitarian perspective, comes
Ø analyse the factors affecting under the first category.
price of a product; The issues that contribute to
making society a pleasant place to live
in the long run, may be grouped under
Ø list out the types of channels of the second category. The issues which
distribution; and come under this category are health
awareness and aid, education,
Ø explain the major tools of environmental protection, women’s
promotion, viz. advertising, employment and empowerment,
personal selling, sales preventing unjust discriminations (on
promotion and publicity. the basis of caste, community, religion,
ethnicity, race, and sex), eradication of
poverty through employment,
preservation of culture, values, and
ethics, contribution to research, etc.
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Infosys Technologies, the leading software consulting service provider, has been
certified ISO 14001, compliant by Det Norske Veritas for its development centers in
Pune, Chennai, Bangalore, Bhubaneshwar, Hyderabad, Mangalore, Mohali, and
Mysore, for its ‘Ozone Initiative’. Through this initiative, Infosys has committed for
continual improvement.
Procter and Gamble’s (P&G) philosophy is that it should lead the industry in
implementing a global environmental programme. P&G is one of the first companies
in the world to actively study the influence of consumer products on the environment
and introduce concentrated products, recycled plastic bottles, and refill packages
to the industry. The overall packaging per case has been reduced by an average of
27% and a reduction of 37% in air, waste, and water emissions has been achieved
consistently since 1990. P&G contributes to sustainable development and addresses
environmental and social issues connected with its products and services.
Source: Adapted from ‘Effective Executive’, Feb. 2006
Let us consider a typical day in our life. Nestle, Atlas Cycles by Atlas cycle
Right from the time we get up in the company, Kwality Ice-creams by
morning to the time we go to bed, we Kwality Walls, LG Televisions by LG
use number of products to satisfy our Electronics and so on. These firms are
different needs. Beginning with the called marketers. These firms
breakfast, we take such items as bread, undertake various activities to
butter, milk, and rice, to satisfy our stimulate the demand for their
hunger; use the services of a bus or an products and earn profit by satisfying
auto or a cycle to reach to our school customer’s needs and wants. People
or place of work; read books, magazines purchase products because these
and newspapers, to keep ourselves satisfy some of their needs.
informed and acquire knowledge; use Number of activities are performed
computers, cell phone, television and by the marketers to facilitate exchange
other gadgets for communication/ of goods and services between
entertainment; and purchase many producers and the users of such
other products like gifts, shoes, products. These activities are referred
clothing, furniture, etc., from market to as marketing activities.
to satisfy our different needs. For a proper understanding of
Who makes these products and marketing, number of questions need
why? These products are manufactured to be answered. These include: What
and marketed by different firms. For do we mean by a market? What can be
example, Lifebouy soap, Closeup marketed? Is it products or services or
toothpaste, Surf detergent powder are something more? Who is a marketer?
manufactured by Hindustan Lever; What is marketing management?
Ariel detergent powder by Procter and These points have been taken up for
Gamble, Dairy Milk Chocolate by discussion in the following sections.
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“Business is not financial science, it’s about trading, buying and selling. It’s
about creating a product or service so good that people will pay for it.””
— Anta Roddick
“Marketing takes a day to learn. Unfortunately it takes time to master.””
— Philip Kotler
In the traditional sense, the term The term marketing has been described
‘market’ refers to the place where by different people in different ways.
buyers and sellers gather to enter into Some people believe that marketing is
transactions involving the exchange of same as ‘shopping’. Whenever they go
goods and services. It is in this sense out for shopping of certain products or
that this term is being used in day to services, they describe it as marketing.
day language, even today. The other There are some other people who
ways in which this term is being used confuse marketing with ‘selling’ and
is in the context of a product market feel that marketing activity starts after
(cotton market, gold or share market), a product or service has been
geographic market (national and produced. Some people describe it to
international market), type of buyers mean ‘merchandising’ or designing a
(consumer market and industrial product. All these descriptions may be
market) and the quantity of goods partly correct but marketing is a much
transacted (retail market and broader concept, which is discussed as
wholesale market). follows:
But in modern marketing sense, Traditionally, marketing has been
the term market has a broader described in terms of its functions or
meaning. It refers to a set of actual and activities. In this respect, marketing
potential buyers of a product or service. has been referred to as performance
For example, when a fashion designer of business activities that direct the
designs a new dress and offers it for flow of goods and services from
exchange, all the people who are willing producers to consumers.
to buy and offer some value for it can As we know, most of the
be stated to be the market for that manufacturing firms do not produce
dress. Similarly, market for fans or goods for their own consumption but
bicycles or electric bulbs or shampoos for the consumption or use by others.
refers to all the actual and potential Therefore, to move the goods and
buyers for these products. services from the producer to consumers,
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2. Creating a Market Offering: On the what they need and want through the
part of the marketers, the effort process of exchange. In other words,
involves creation of a ‘market offering. the process of marketing involves
Market offering refers to a complete exchange of products and services for
offer for a product or service, having money or something considered
given features like size, quality, taste, valuable by the people.
etc; at a certain price; available at a Exchange refers to the process
given outlet or location and so on. Let through which two or more parties
us say the offer is for a cell phone, come together to obtain the desired
available in four different versions, on product or service from someone,
the basis of certain features such as offering the same by giving something
size of memory, television viewing, in return. For example, a person
internet, camera, etc., for a given price, feeling hungry may get food by offering
say between Rs. 5,000 and Rs. 20,000 to give money or some other product
(depending on the model selected), or service in return to someone who
available for sale at say firm’s exclusive is willing to accept the same for food.
shops in and around all metropolitan In the modern world, goods are
cities in the country. A good ‘market produced at different places and are
offer’ is the one which is developed after distributed over a wide geographical
analysing the needs and preferences area through various middlemen,
of the potential buyers. involving exchanges at different levels
3. Customer Value: The process of of distribution. Exchange is, therefore,
marketing facilitates exchange of referred to as the essence of
products and services between the marketing. For any exchange to take
buyers and the sellers. The buyers, place, it is important that the following
however, make buying decisions on conditions are satisfied:
their perceptions of the value of the (i) involvement of at least two parties
product or service in satisfying their viz., the buyer and the seller.
need, in relation to its cost. A product (ii) each party should be capable of
will be purchased only if it is perceived offering something of value to the
to be giving greatest benefit or value other. For example, the seller offers
for the money. The job of a marketer, a product and the buyer, money.
therefore, is to add to the value of the
product so that the customers prefer (iii) each party should have the ability
it in relation to the competing products to communicate and deliver the
and decide to purchase it. product or service. No exchange
can take place if the buyers and
4. Exchange Mechanism: T h e sellers are not able to
process of marketing works through communicate with each other or if
the exchange mechanism. The they can not deliver something of
individuals (buyers and sellers) obtain value to the other.
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(iv) each party should have freedom to to take place. Whether the exchange
accept or reject other party’s offer. actually takes place or not depends
(v) the parties should be willing to on the suitability of the act of exchange
enter into transaction with each to both the parties, whether it makes
other. Thus, the acceptance or the parties better off or at least not
rejection of the offer takes place on worse off.
voluntary basis rather than on the Another important point to be
noted is that Marketing is not merely a
bases of any compulsion.
business phenomena or confined only
The points listed above are the to business organisations. Marketing
necessary conditions for an exchange activities are equally relevant to non-
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Do it yourself
Collect five advertisements each for the marketing of (a) ideas and (b) places
from a newspaper or a magazine. Write in your notebook, the messages conveyed
through these and discuss in the class indicating which of these messages are
more appealing to you. Give reasons in support of your answer.
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on the other hand, is concerned with objectives. For example, whether the
customer satisfaction and thereby marketing efforts of an organisation will
increasing profit in the long run. A focus on the product—say designing its
marketing organisation, thus, features etc or on selling techniques or
attaches highest importance to on customer’s needs or the social
customer satisfaction as a route to concerns.
profit maximisation. The concept or philosophy of
(iv) Start and End of the Activities: marketing has evolved over a period
Selling activities start after the of time, and is discussed as follows.
product has been developed while,
marketing activities start much The Production Concept
before the product is produced and During the earlier days of industrial
continue even after the product revolution, the demand for industrial
has been sold. goods started picking up but the
(v) Difference in the Emphasis: In number of producers were limited. As
selling, the emphasis is on bending a result, the demand exceeded the
the customer according to the supply. Selling was no problem.
product while in marketing, the Anybody who could produce the goods
attempt is to develop the product was able to sell. The focus of business
and other strategies as per the activities was, therefore, on production
customer needs. of goods. It was believed that profits
vi. Difference in the Strategies: Selling could be maximised by producing at
involves efforts like promotion and large scale, thereby reducing the
persuasion while marketing uses average cost of production. It was also
integrated marketing efforts assumed that consumers would
involving strategies in respect of favour those products which were
product, promotion, pricing and widely available at an affordable price.
physical distribution. Thus, availability and affordability of
the product were considered to be the
M ARKETING MANAGEMENT PHILOSOPHIES key to the success of a firm. Therefore,
greater emphasis was placed on
In order to achieve desired exchange
improving the production and
outcomes with target markets, it is
distribution efficiency of the firms.
important to decide what philosophy
or thinking should guide the marketing The Product Concept
efforts of an organisation. An
understanding of the philosophy or the As a result of emphasis on production
concept to be adopted is important as capacity during the earlier days, the
it determines the emphasis or the position of supply increased over period
weightage to be put on different factors, of time. Mere availability and low price
in achieving the organisational of the product could not ensure
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increased sale and as such the survival were considered essential for selling of
and growth of the firm. Thus, with the products. Thus, the focus of business
increase in the supply of the products, firms shifted to pushing the sale of
customers started looking for products products through aggressive selling
which were superior in quality, techniques with a view to persuade,
performance and features. Therefore, lure or coax the buyers to buy the
the emphasis of the firms shifted from products. Making sale through any
quantity of production to quality of means became important. It was
products. The focus of business activity assumed that buyers can be
changed to bringing continuous manipulated but what was forgotten
improvement in the quality, was that in the long run what matters
incorporating new features etc. Thus, most is the customer satisfaction,
product improvement became the key rather than anything else.
to profit maximisation of a firm, under
the concept of product orientation. The Marketing Concept
Marketing orientation implies that
The Selling Concept
focus on satisfaction of customer’s
With the passage of time, the needs is the key to the success of any
marketing environment underwent organisation in the market. It assumes
further change. The increase in the that in the long run an organisation
scale of business further improved the can achieve its objective of
position with respect to supply of maximisation of profit by identifying
goods, resulting in increased the needs of its present and
competition among sellers. The prospective buyers and satisfying
product quality and availability did not them in an effective way. All the
ensure the survival and growth of decisions in a firm are taken from the
firms because of the large number of point of view of the customers. In other
sellers selling quality products. This words, customer’s satisfaction become
led to greater importance to attracting the focal point of all decision making
and persuading customers to buy the in the organisation. For example, what
product. The business philosophy product will be produced, with what
changed. It was assumed that the features and at what price shall it be
customers would not buy, or not buy sold, or where shall it be made
enough, unless they are adequately available for sale will depend on what
convinced and motivated to do so. do the customers want. If the
Therefore, firms must undertake customers want features like double
aggressive selling and promotional door in a refrigerator or a separate
efforts to make customers buy their provision for water cooler in it, the
products. The use of promotional organisation would produce a
techniques such as advertising, refrigerator with these features, would
personal selling and sales promotion price it at a level which the customers
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Differences in the Marketing Management Philosophies
are willing to pay and so on. If all bought not merely because of their
marketing decisions are taken with this quality, packing or brand name, but
prospective, selling will not be any because they satisfy a specific need of
problem. It will automatically follow. a customer. A pre-requisite for the
The basic role of a firm then is to success of any organisation, therefore,
‘identify a need and fill it’. The concept is to understand and respond to
implies that products ad-services are customer needs.
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6. Branding: A very important decision 8. Pricing of Product: Price of product
area for marketing of most consumer refers to the amount of money
products is whether to sell the product customers have to pay to obtain a
in its generic name (name of the category product. Price is an important factor
of the product, say Fan, Pen, etc.) or to affecting the success or failure of a
sell them in a brand name (such as product in the market. The demand for
Pollar Fan or Rottomac Pen). Brand a product or service is related to its
name helps in creating product price. Generally lower the price, higher
differentiation, i.e., providing basis for would be the demand for the product
distinguishing the product of a firm and vice-versa. The marketers have
with that of the competitor, which in t o properly analyse the factors
turn, helps in building customer’s determining the price of a product and
loyality and in promoting its sale. The take several crucial decisions in this
important decision areas in respect of respect, including setting the pricing
branding include deciding the branding objectives, determining the pricing
strategy, say whether each product will strategies, determining the price and
be given a separate brand name or the changing the prices.
same brand name will be extended to 9. Promotion: Promotion of products
all products of the company, say and services involves informing the
Phillips bulbs, tubes and television or customers about the firm’s product,
Videocon washing machine, television, its features, etc. and persuading them
and refrigerator. Selection of the brand to purchase these products. The four
name plays an important role in the important methods of promotion
success of a product. include advertising, Personal Selling,
7. Customer Support Services: A very Publicity and Sales Promotion. A
important function of the marketing marketer has to take several crucial,
management relates to developing decisions in respect of promotion of
customer support services such as after the products and services such as
sales services, handling customer deciding the promotion budget, the
complaints and adjustments, promotion mix, i.e., the combination
procuring credit services, maintenance of the promotional tools that will be
services, technical services and use, the promotion budget, etc.
consumer information. All these 10. Physical Distribution: Managing
services aim at providing maximum physical distribution is another very
satisfaction to the customers, which is important function in the marketing
the key to marketing success in of goods and services. The two major
modern days. Customer support decision areas under this function
services are very effective in bringing include (a) decision regarding
repeat sales from the customers and channels of distribution or the
developing brand loyality for a product. marketing intermediaries (like whole
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salers, retailers) to be used and (b) products such as in the case of woollen
physical movement of the product from garments or Raincoats or there may
where it is produced to a place where it be irregular supply because of
is required by the customers for their seasonal production such as in the
consumption or use. The important case of agricultural products
decision areas under physical (sugarcane, rice, wheat, cotton, etc.). In
distribution include managing order to maintain smooth flow of
inventory (levels of stock of goods), products in the market, there is a need
storage and warehousing and for proper storage of the products.
transportation of goods from one place Further, there is a need for storage of
to the other. adequate stock of goods to protect
11. Transportation: Transportation against unavoidable delays in delivery
involves physical movement of goods or to meet out contingencies in the
from one place to the other. As demand. In the process of marketing,
generally the users of products, the function of storage is performed by
particularly consumer products are different agencies such as
wide spread and geographically manufacturers, wholesalers and
separated from the place these are retailers.
produced, it is necessary to move them
to the place where it is needed for ROLE OF M ARKETING
consumption or use, For example, tea All marketing organisations operate
produced in Assam has to be either to earn profit or pursue some
transported not only within the state other goals such as community
but to other far off places like Tamil service, improvement of quality of life
Nadu, Punjab, Jammu and Kashmir or promotion of a cause, say UNICEF
and Haryana, Rajasthan, where it is working for the welfare of children or
consumed. ‘Helpage’ working for the cause of
A marketing firm has to analyse senior citizens. Whether it is a
its transportation needs after taking profit organisation or a non-profit
into consideration various factors organisation, marketing plays
such as nature of the product, cost an important role in achieving its
and location of target market and take objectives. It helps the individual
decisions in respect of mode of consumers in raising their standard
transportation to be chosen and other of living by making available the
related aspects. products and services that satisfy their
12. Storage or Warehousing: Usually needs and wants. It also plays a
there is a time gap between the significant role in the economic
production or procurement of goods development of a nation. The role of
and their sale or use. It may be marketing in different situations may
because of irregular demand for the be described in brief as follows.
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market, all of which affect the sale of chosen by a firm to prepare its market
a particular product but can not be offering is also called marketing mix.
controlled or influenced by the Thus, marketing mix is described as the
decisions at the level of a firm. To be set of marketing tools that a firm uses
successful, the decisions regarding to pursue its marketing objectives in a
‘controllable factors’ are to be taken target market.
keeping the environmental variables
into consideration. E LEMENTS OF MARKETING MIX
The controllable variables become The marketing mix consists of various
marketing tools, which are constantly elements, which have broadly been
shaped and reshaped by marketing classified into four categories,
managers, to achieve marketing popularly known as four Ps of
success. For example, a firm can marketing. These are: (i) Product, (ii)
reshape a market offering by bringing Price, (iii) Place, and (iv) Promotion.
in a change in any of the variable under
These are briefly discussed as follows:
its own control, say introducing a
change in the price or promotion offer 1. Product: Product means goods
or product features or channel used to or services or ‘anything of value’,
make the product available to buyers. which is offered to the market for
Thus, from a number of alternatives sale. For example, Hindustan lever
available a firm chooses a particular offers number of consumer
combination to develop a market products like toiletries (Close-Up
offering. The combination of variables toothpaste, Lifebuoy soap, etc.),
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detergent powder (Surf, Wheel), food traders and credit terms, etc. so that
products (Refined Vegetable Oil); Tata customers perceive the price to be in
offers Tata Steel, Trucks, Salt and a line with the value of the product.
large number of other products; LG 3. Place: Place or Physical Distribution
Electronics offers televisions, include activities that make firm’s
refrigerators, colour monitors for products available to the target
computers, etc; Amul offers a number customers. Important decision areas in
of food products (Amul milk, ghee, this respect include selection of dealers
butter, cheese, chocolates, etc.). or intermediaries to reach the
The concept of product relates to customers, providing support to the
not only the physical product as intermediaries (by way of discounts,
mentioned in the above examples but promotional campaigns, etc.). The
also the benefits offered by it from intermediaries in turn keep inventory
of the firm’s products, demonstrate
customer’s view point (for example
them to potential buyers, negotiate
toothpaste is bought for whitening
price with buyers, close sales and also
teeth, strengthening gums, etc.). The service the products after the sale. The
concept of product also include the other decision areas relate to managing
extended product or what is offered inventory, storage and warehousing
to the customers by way of after sales and transportation of goods from the
services, handling complaints, place it is produced to the place it is
availability of spare parts etc. required by the buyers.
These aspects are very important, 4. Promotion: Promotion of products
particularly in the marketing of and services include activities that
consumer durable products (like communicate availability, features,
Automobiles, Refrigerators, etc.). The merits, etc. of the products to the
important product decisions include target customers and persuade
deciding about the features, quality, them to buy it. Most marketing
packaging, labelling and branding of organisations, undertake various
the products. promotional activities and spend
2. Price: Price is the amount of money substantial amount of money on the
customers have to pay to obtain the promotion of their goods through
using number of tools such as
product. In case of most of the
advertising, personal selling and sales
products, level of price affects the level promotion techniques (like price
of their demand. The marketers have discounts, free samples, etc.). A large
not only to decide about the objectives number of decisions are to be taken
of price setting but to analyse the in each of the area specified above. For
factors determining the price and fix example, in the respect of advertising
a price for the firm’s products. it is important to decide about the
Decisions have also to be taken in message, the media to be used
respect of discounts to customers, (example, print-media–newspaper,
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concept of product. Thus, product may by riding a motorbike. Thus, all these
be defined as anything that can be aspects should be considered while
offered to a market to satisfy a want planning for a product.
or need. It is offered for attention, It is customer for companies to
acquisition, use or consumption. review the progress of their present
From the customer’s point of view, products and constantly look for
a product is a bundle of utilities, which opportunities of diversifying into never
is purchased because of its capability areas. (see box on PepsiCo.)
to provide satisfaction of certain need.
A buyer buys a product or service for LET US DO I T
what it does for her or the benefit it
provides to her. There can be three Enlist the functional, psychological
types of benefits a customer may seek and social benefits that can
to satisfy from the purchase of a be achieved by the purchase of
product, viz., (i) functional benefits, (ii) (i) Personal computer, (ii) Colour
psychological benefits, and (iii) social television, (iii) Wrist watch.
benefits. For example, the purchase of
CLASSIFICATION OF PRODUCTS
a motorcycle provides functional utility
of transportation, but at the same time Products may broadly be classified
satisfies the need for prestige and into two categories — (i) consumers’
esteem and provides social benefit by products, and (ii) industrial products.
the way of acceptance from a group, The consumer products may further
Products
Classification of Products
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Convenience Products
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(a) These products are purchased at (f) Sales promotion schemes or short-
convenient locations, with least term incentives such as sales
efforts and time; contests, discount offers, etc play
(b) Convenience products have a an important role in the marketing
regular and continuous demand, of such products.
as these generally come under the 2 . Shopping Products: Shopping
category of essential products; products are those consumer goods,
(c) These products have small unit of in the purchase of which buyers
purchase and low prices. For devote considerable time, to compare
example the eggs are sold at Rs. the quality, price, style, suitability,
28 per dozen and the customers etc., at several stores, before making
purchase them in small numbers; final purchase. Some of the examples
Shopping Products
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(b) The unit price as well as profit order, with a significant number of
margin of shopping products is buyers. The buyers are willing to spend
generally high; a lot of time and efforts on the purchase
(c) As these products have high unit of such products. For example, if there
price, customers compare the is a rare collection of artwork or of
products of different companies antiques, some people may be willing
before making selection; to spend a lot of shopping effort and
(d) Purchases of shopping products travel long distance to buy such
are generally pre-planned and products. In our day-to-day life, we see
there is little degree of impulse people going to a particular hair-
buying in these products; and cutting saloon or restaurant, or a tailor.
The demand for these goods is relatively
(e) Retailers generally play an
inelastic, i.e., even if the price is
important role in the sale of increased, the demand does not come
shopping products as lot of
down. Some of the important
persuasive effort is needed to characteristics of the speciality
convince the buyers to purchase
products may be summed up as
them.
follows:
3 . Speciality Products: Speciality
products are those consumer goods (a) The demand for speciality products
which have certain special features is limited as relatively small
because of which people make special number of people buy these
efforts in their purchase. These products;
products are such, which have (b) These products are generally costly
reached a brand loyalty of the highest and their unit price is very high;
Speciality Products
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(c) These products are available for normally consumed in one or few uses
sale at few places as the number are called non-durable products. For
of customers is small and are example, we purchase products like
willing to take extra efforts in the toothpaste, detergents, bathing soap
purchase of these products; and stationary products etc. From the
(d) An aggressive promotion is required marketing point of view, these
for the sale of speciality products, products generally command a small
in order to inform people about margin, should be made available in
their availability, features, etc.; and many locations and need to be heavily
(e) After sales services are very advertised.
important for many of the 2. Durable Products: Those
speciality products. tangible consumer products which
normally survive many uses, for
B. Durability of Products example, refrigerator, radio, bicycle,
On the basis of their durability, the sewing machine and kitchen gadgets
consumer products have been are referred to as durable products.
classified into three categories— These goods are generally used for a
Durable, Non-durable and Services. longer period, command a higher per
1 . Non-durable Products: The unit margin, require greater
consumer products which are personal-selling efforts, guarantees
Marketing of Services
India Post Has 28% Market Share Against Blue Dart’s 20%
Speed Post Leads the Race in Express Mail
Speed Post has emerged as a market leader in the express mail category with a
27.55% volume share, a study commissioned by the Department of Post (DOP) and
government of India shows.
According to the study, almost 46.67% crore articles were sent by express mail
in 05-06. The study values the express mail industry alone (excluding logistics and
cargo which account for almost 35-40% of private firm’s turnover) at around Rs
1,500 crore. In value terms, while Speed Post is the leader, Blue Dart is a close
second with a 20% market share, followed by DTDC with a 11.91% share and First
Flight with a 10.89% share.
“This has been possible because of our competitive pricing. We are offering the
same services as other private couriers do, with the same efficiency but at half the
rates”, added Mr. Samuel. In fact, Speed Post claims that its volumes have increased
by almost 30-40% after the introduction of the One India One Rate scheme.
Express companies are hopeful that the market is going to grow further with
the setting up of SEZs and greater economic activity in the country fuelled by the
increasing throughput from the manufacturing sector.
Source: Adopted from Economic Times, Oct. 20, 2006
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and after sales services, on the part in producing other products. The
of the seller. examples of such products are raw
3 . Services: The durable and non- materials, engines, lubricants,
durable goods are tangible in the machines, tools, etc. In other words,
sense that these have a physical industrial products are meant for non-
existence and can be seen and personal and business use for
touched. Services are intangible in producing other products.
form. By services we mean those The market for industrial products
activities, benefits or satisfactions, consists of manufacturers, transport
which are offered for sale, e.g., dry agencies, banks and insurance
cleaning, watch repairs, hair cutting, companies, mining companies and
postal services, services offered by a public utilities. The important
doctor, an architect and a lawyer. Some characteristics of industrial products
of the distinguishing characteristics of are given below:
services are as follows: 1. Number of Buyers: As compared
(a) By their very nature, services are to the consumer products, the
intangible, i.e., we can not see, feel numbers of buyers of industrial
or touch them; products are limited. For example,
sugarcane is purchased by few
(b) A service is inseparable from its producers of sugar, but sugar, which
source. That means we cannot is a consumer product, is purchased
separate the service from the by crores of people in our country.
person providing the service;
2. Channel Levels: Because of limited
(c) The services cannot be stored. number of buyers, the sale of
They are highly perishable. For industrial products is generally made
example, if a tailor does not work with the help of shorter channels of
for one week, the services he would distribution, i.e., direct selling or one
have provided during such period level channel.
go waste; and
3. Geographic Concentration:
(d) Services are highly variable as their Because of location of industries at
type and quality depends on the certain points or regions, industrial
person providing them. That is markets are highly concentrated,
why, there is a difference in the geographically. For instance, the
extent of satisfaction we get from demand for power loom comes from
the services provided by different Bombay, Sholapur, Bangalore, etc.
people. where the textile industry is
concentrated in our country.
INDUSTRIAL PRODUCTS
4. Derived Demand: The demand for
Industrial products are those industrial products is derived from the
products, which are used as inputs demand for consumer products. For
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Industrial Goods
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Generic name refers to the name of the most marketers give a name to their
whole class of the product. For product, which helps in identifying and
example, a book, a wristwatch, tyre, distinguishing their products from the
camera, toilet soap, etc. We know that competitors’ products. This process of
a camera is a lens surrounded by giving a name or a sign or a symbol etc.,
plastic or steel from all sides and having to a product is called branding. The
certain other features such as a flash various terms relating to branding are
gun and so on. Similarly book is a as follows:
bunch of papers, which are in a bound 1 . Brand: A brand is a name, term,
form, on which some useful information sign, symbol, design or some
about a subject is printed. Thus, all combination of them, used to identify
products having these characteristics the products—goods or services of one
would be called by the generic name seller or group of sellers and to
such as camera or book. differentiate them from those of the
If products were sold by generic competitors. For example, some of the
names, it would be very difficult for the common brands are Bata, Lifebuoy,
marketers to distinguish their products Dunlop, Hot Shot, and Parker. Brand
from that of their competitors. Thus, is a comprehensive term, which has
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Levels of Packaging
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kept throughout the entire life of the (iii) Innovational Opportunity: Some of
product (e.g., a toothpaste tube, a the recent developments in the area
match box, etc.). of packaging have completely
2. Secondary Packaging: It refers to changed the marketing scene in
additional layers of protection that are the country. For example, milk can
kept till the product is ready for use, now be stored for 4-5 days without
e.g., a tube of shaving cream usually refrigeration in the recently
comes in a card board box. When developed packing materials.
consumers start using the shaving Similarly, in the area of
cream, they will dispose off the box pharmaceuticals, soft drinks, etc.,
but retain the primary tube. lots of new innovations have come
3. Transportation Packaging: It refers in respect of packaging. As a
to further packaging components result, the scope for the marketing
necessary for storage, identification or of such products has increased.
transportation. For example a (iv) Product Differentiation: Packaging is
toothpaste manufacturer may send the one of the very important means of
goods to retailers in corrugated boxes creating product differentiation.
containing 10, 20, or 100 units. The colour, size, material etc., of
package makes real difference in
Importance of Packaging the perception of customers about
the quality of the product. For
Packaging has acquired great example, by looking at the
significance in the marketing of goods package of a product say Paint or
and services, because of following Hair Oil, one can make some
reasons: guess about quality of the product
(i) Rising Standards of Health and contained in it.
Sanitation: Because of the
increasing standards of living in Functions of Packaging
the country, more and more people
As stated above, packaging performs
have started purchasing packed
goods as the chances of a number of functions in the
adulteration in such goods are marketing of goods. Some of the
minimised. important functions are as follows:
(ii) Self Service Outlets: The self-service (i) Product Identification: Packaging
retail outlets are becoming very greatly helps in identification of the
popular, particularly in major cities products. For example, Colgate in
and towns. Because of this, some red colour, or Ponds cream jar can
of the traditional role assigned to be easily identified by its package.
personal selling in respect of (ii) Product Protection: Packaging
promotion has gone to packaging. protects the contents of a product
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Do it Yourself
Visit a local Grocery Shop and find out any two products which are sold both
in packaged form and in loose (unpackaged) form and find out i) The product
for which the sale in packaged form is greater ii) The product for which sale in
loose form is greater. iii) the benefit, to the retailer in selling goods on i)
packaged form and ii) unpackaged form.
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Do it Yourself
1. Examine the label on the package of any three branded products recently
purchased for use in your family and list out the type of information contained
on these.
2. Find out the promotional messages given on the package of any three consumer
products of your choice and comment how can these help in the sale of these
products.
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Tobacco is Injurious to Health’. Such most of the firms compete with each
information is required on processed other on the basis of this factor. It is
foods, drugs and tobacco products. In also the single most important factor
case of hazardous or poisonous affecting the revenue and profits of a
material, appropriate safety-warning firm. Thus, most marketing firms give
need to be put on the label. high importance to the fixation of price
Thus, labels perform number of for their products and services.
important functions relating to
communicating with the potential Factors Affecting Price
buyers and promoting the sale of the Determination
products.
There are number of factors which
P RICING affect the fixation of the price of a
product. Some of the important factors
When a product is bought, some money in this regard are discussed as below:
is paid for it. This money represent the 1. Product Cost: One of the most
sum of values that consumers important factor affecting price of a
exchange for the benefit of having or product or service is its cost. This
using the prdocut and is referred to as includes the cost of producing,
the price of the product. Similarly, distributing and selling the product.
money paid for the services such as fare The cost sets the minimum level or the
for the transport service, premium for floor price at which the product may
an insurance policy, and fee to a doctor be sold. Generally all marketing firms
for his medical advise represent the strive to cover all their costs, at least
price of these services. Price may in the long run. In addition, they aim
therefore be defined as the amount of at earning a margin of profit over and
money paid by a buyer (or received by above the costs. In certain circumstance,
a seller) in consideration of the for example, at the time of introducing
purchase of a product or a service. a new product or while entering a new
Pricing occupies an important market, the products may be sold at
place in the marketing of goods and a price, which does not cover all the
services by a firm. No product can be costs. But in the long run, a firm
launched without a price tag or at least cannot survive unless at least all its
some guidelines for pricing. Pricing is costs are covered.
often used as a regulator of the There are broadly three types of
demand of a product. Generally, if the costs: viz., Fixed Costs, Variable Costs
price of a product is increased, its and Semi Variable Costs. Fixed costs
demand comes down, and vice-versa. are those costs, which do not vary with
Pricing is considered to be an the level of activity of a firm say with
effective competitive weapon. In the the volume of production or sale. For
conditions of perfect competition, example, rent of a building or salary
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of a sales manager remains the same sacrifice made in terms of the price
whether 1000 units or 10 units are paid. The seller would, however, try to
produced in a week. at least cover the costs. According to
Those costs which vary in direct the law of demand, consumers usually
proportion with the level of activity are purchase more units at a low price than
called variable costs. For example, the at a high price.
costs of raw material, labour and power The price of a product is affected
are directly related with the quantity by the elasticity of demand of the
of goods produced. Let us say, if the product. The demand is said to be
cost of wood for manufacturing one elastic if a relatively small change in
chair comes to Rs.100 the cost of wood price results in large change in the
for 10 chairs would be Rs. 1000. quantity demanded. Here numerically,
Obviously, there will be no cost of wood the price elasticity is greater than one.
if no chair is produced. In the case of inelastic demand, the
Semi variable costs are those costs total revenue increases when the price
which vary with the level of activity is increased and goes down when the
but not in direct proportion with it. price is reduced. If the demand of a
For example, compensation of a sales product is inelastic, the firm is in a
person may include a fixed salary of better position to fix higher prices.
say Rs. 10,000 plus a commission of 3. Extent of Competition in the
5 per cent on sales. With an increase Market: Between the lower limit and
in the volume of sales, the total the upper limit where would the price
compensation will increase but not in settle down? This is affected by the
direct proportion with the change in nature and the degree of competition.
the volume of sale. The price will tend to reach the upper
Total Costs are the sum total of the limit in case there is lesser degree of
fixed, variable and semi-variable costs competition while under conditions of
for the specific level of activity, say free competition, the price will tend to
volume of sales or quantity produced. be set at the lowest level.
2. The Utility and Demand: While the Competitors’ prices and their
product costs set the lower limits of anticipated reactions must be
the price, the utility provided by the considered before fixing the price of a
product and the intensity of demand product. Not only the price but the
of the buyer sets the upper limit of quality and the features of the
price, which a buyer would be competitive products must be examined
prepared to pay. In fact the price must carefully, before fixing the price.
reflect the interest of both the parties 4. Government and Legal Regulations:
to the transaction—the buyer and the In order to protect the interest of
seller. The buyer may be ready to pay public against unfair practices in the
up to the point where the utility from field of price fixing, Government can
the product is at least equal to the intervene and regulate the price of
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movement of goods by overcoming once cashew nuts are graded and large
various time, place and possession quantities are built, these are divided
barriers that exist between the into convenient packs of say 1 kg, 500
manufacturers and consumers. The gms and 250 gms, to sell them to
important functions performed by different types of buyers.
middlemen are as follows: 4 . Assorting: Middlemen build
1. Sorting: Middlemen procure assortment of products for resale.
supplies of goods from a variety of There is usually a difference between
sources, which is often not of the same the product lines made by
quality, nature, and size. For example, manufacturers and the assortment or
a wholesaler of cashew nuts may combinations desired by the users. For
procure a large quantity from different example, a cricket player may need a
cashew nut producing areas, which bat, a ball, wickets, gloves, helmet, a
would contain nuts of varied quality T-shirt, and a pair of shoes. Perhaps
and sizes. He/She then sorts the nuts no one manufacturer produces these
into homogenous groups on the basis products in desired combination.
of the size or quality. Middlemen procure variety of goods
2. Accumulation: This function from different sources and deliver them
involves accumulation of goods into in combinations desired by customers.
larger homogeneous stocks, which 5 . Product Promotion: Mostly
help in maintaining continuous flow advertising and other sales promotion
of supply. activities are organised by
3. Allocation: Allocation involves manufacturers. Middlemen also
breaking homogenous stock into participate in certain activities such as
smaller, marketable lots. For example, demonstrations, special displays,
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Manufacturer Customer
Indirect Channel
Types of Channels
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fixed assets say for starting own retail potential buyers and quantity
outlets or engaging large number of purchased. In case the number of
sales force. Indirect selling through buyers is small, like for most industrial
intermediary does not involve products, short channels are used. But
deployment of huge funds on these if the number of buyers is large, as in
aspects. Thus, if the firm has plenty of case of most convenience products like
funds it may go for direct distribution. soft drink, toothpaste etc., longer
If spare funds are not available, it may channels involving large number of
go for indirect channels. intermediaries are used.
Similarly if the management want If the buyers are concentrated in a
to have greater control on the channel small place, short channels may be
members, short channels are used but used but if the buyers are widely
if the management do not want more dispersed over a large geographical
control over the middlemen, it can go area, longer channels may be used.
in for longer channel or large number Similarly if the size of order is small,
of intermediaries. as in case of most consumer products,
3 . Competitive Factors: The choice large number of intermediaries may
of channel is also affected by the be used. But if the size of order is large,
channel selected by competitors in the direct channels may be used.
same industry. If the competitor’s have 5. Environmental Factors: Other
selected a particular channel say important factors affecting the choice
Chemist shops for the sale of toiletry of channels of distribution include
products like hair oil, the other firm environmental factor such as economic
may also like to select the similar
condition and legal constraints. In a
channel. In some cases producers may depressed economy marketers use
want to avoid the channels used by
shorter channels to distribute their
competitors. For example if other
goods in an economical way.
cosmetic producers have chosen big
retail stores for the sale of their
P HYSICAL DISTRIBUTION
products, a particular firm may like to
adopt door to door selling. Thus, it will Once goods are manufactured,
depend upon the policy of the firm – packaged, branded, priced, and
whether it wants to go with the promoted, these must be made
competitors or be different from them. available to customers at the right
The changing global marketing place, in right quantity and at the right
environment has lead to adoption of time. For example, a person convinced
newer channels. (see box) about the quality etc. of a product, say,
4 . Market Factors: Important market a detergent bar, wants to purchase the
factors affecting the choice of channel same. He/She goes to a retail outlet
of distribution include size of market, and asks for the product. If that
geographical concentration of product is not available in that shop,
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of capital would be tied up in the stock. for keeping very high level of
Thus, a balance is to be maintained in inventory can be minimised;
respect of the cost and customer (c) responsiveness of the distribution
satisfaction. With advancements in system i.e., ability of the system
computers and information technology to transmit inventory needs back
the need for keeping higher inventory to the factory and get products in
is reducing and the new concept of Just- the market. In case the time
in-Time-Inventory decision is becoming required to respond to the
popular in an increasing number of additional demand for the products
companies. is high there is a need to maintain
The decision regarding level of higher inventory. But if the
inventory involves prediction about additional demand can be met in
the demand for the product. A correct less time, the need for inventory
estimate of the demand helps to hold will also be low; and
inventory and cost level down to a (d) cost of inventory, which includes
minimum. This not only helps the firm holding cost such as cost of
in terms of the cash flows but also in warehousing, tied up capital, etc
terms of its ability to maintain and the manufacturing cost.
production at a consistent level.
The major factors determining P ROMOTION
inventory levels include:
A company may produce a good quality
(a) firm’s policy regarding the level of product, price it appropriately and make
customer service to be offered. it available at the selling points, which
Higher the level of service greater are convenient to customers. But in
will be the need to keep more spite of all this, the product may not
inventories; sell well in the market. There is a need
(b) degree of accuracy of the sales for developing proper communication
forecasts. In case more accurate with the market. In the absence of
estimates are available, the need communication, the customers would
M C
A U
R S
ADVERTISING PERSONAL SELLING
K T
E O
PUBLICITY SALES PROMOTION
T M
E E
R Promotion Mix R
Marketing Communications
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not be able to know about the product media while the industrial goods firms
and how it can satisfy their needs and may be using more of personal selling.
wants or may not be convinced about its What combination of these elements is
utility and benefits. used by a firm will depend upon
Promotion refers to the use of various factors such as nature of
communication with the twin objective market, nature product, the
of informing potential customers promotions budget, objectives of
about a product and persuading them promotion, etc. Let us first know about
to buy it. In other words, promotion these elements in some details.
is an important element of marketing
mix by which marketers makes use of ADVERTISING
various tools of communication to We generally come across hundreds
encourage exchange of goods and of advertising messages everyday,
services in the market. which tell us about various products
such as toilet soaps, detergent powder,
P ROMOTION M IX soft drinks and services such as
Promotion mix refers to combination hotels, insurance policies, etc.
of promotional tools used by an Advertising is perhaps the most
organisation to achieve its commonly used tool of promotion.
communication objectives. Various It is an impersonal form of
tools of communication are used by communication, which is paid for by
the marketers to inform and persuade the marketers (sponsors) to promote
customers about their firm’s products. some goods or service. The most
These include: (i) Advertising, (ii) common modes of advertising are
Personal Selling, (iii) Sales Promotion, ‘newspapers’, ‘magazines’, ‘television’,
and (iv) Publicity. These tools are also and ‘radio’.
called elements of promotion mix and The important distinguishing
features of advertising are as follows:
can be used in different combinations,
to achieve the goals of promotion. For (i) Paid Form: Advertising is a paid
example consumer goods firms may form of communication. That is, the
use more of advertising through mass sponsor has to bear the cost of
Advertising
“ If you’re trying to persuade people to do something, or buy something, it
seems to me you should use their language, the language in which they think.””
— David Ogilvy
“ We find that advertising works the way the grass grows. You can never see it,
but every week you have to move the lawn.””
— Andy Travis
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Value AD
Government Shining
It’s not the heavy weight in the FMCG sector which are ruling the roost as top
advertisers on the tube, but surprisingly it’s the government departments and
public sector units. Apart from Procter & Gamble, Bajaj Consumer Care, Joyco
and Eicher Motors, the list of top advertisers across television and print is
dominated by Sarkari outfits flaunting their new found passion for mass-media
led public communication.
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We have seen the views of the buyers and create awareness about
opponents and the proponents of the product and develop product
advertising. There may be some preferences with the aim of making sale.
chances of misuse of advertising as a
tool, which can be properly Features of Personal Selling
safeguarded by the law or by (i) Personal Form: In personal selling
developing a code of conduct by the a direct face-to-face dialogue takes
advertisers, for their self regulation. place that involves an interactive
However, most of the criticism against relationship between the seller and
advertising are not entirely true. In the the buyer.
changed economic environment of (ii) Development of Relationship:
globalisation, advertising is Personal selling allows a
considered as an important tool of salesperson to develop personal
marketing. It helps a firm in effectively relationships with the prospective
communicating with its target market, customers, which may become
increasing the sale and there by important in making sale.
reducing the per unit cost of
production. It is not a social waste, Merits of Personal Selling
rather it adds value to the social cause
(i) Flexibility: There is lot of flexibility
by giving a boost to production and
in personal selling. The sales
generating employment.
presentation can be adjusted to fit
the specific needs of the individual
P ERSONAL SELLING
customers.
Personal selling involves oral (ii) Direct Feedback: As there is direct
presentation of message in the form of face-to-face communication in
conversation with one or more personal selling, it is possible to
prospective customers for the purpose take a direct feed back from the
of making sales. It is a personal form of customer and to adapt the
communication. Companies appoint presentation according to the
salespersons to contact prospective needs of the prospects.
Personal Selling
‘ Most people think ‘selling’ is the same as ‘talking’. But the most effective
.’
salespeople know that listening is the most important part of their job.’
— Roy Bartell
‘ You don’t close a sale, you open a relationship if you want to build a long-term,
successful enterprise.’’
— Patricia Fripp
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Companies use sales promotion (ii) Spoils Product Image: Use of sales
tools specifically designed to promote promotion tools may affect the
to customers (e.g., free samples, image of a product. The buyers may
discounts, and contests), tradesmen or start feeling that the product is not
middlemen (e.g., cooperative of good quality or is not
advertising, dealer discounts and appropriately priced.
dealer incentives and contests) and
to sales person (e.g., bonus, salesmen Commonly used Sales Promotion
contests, special offers). Sales Activities
promotions include only those
activities that are used to provide 1. Rebate: Offering products at special
short term incentives to boost the prices, to clear off excess inventory.
sales of a firm. Example, a car manufacturer’s offer to
sell a particular brand of car at a
Merits of Sales Promotion discount of Rs 10,000, for a limited
period.
(i) Attention Value: Sales promotion 2. Discount: Offering products at less
activities attract attention of the than list price. Example, a shoe
people because of the use of company’s offer of ‘Discount Up to
incentives. 50%’ or a shirt marketer’s offer of
(ii) Useful in New Product Launch: ‘50+40% Discount’.
Sales promotion tools can be very 3 . Refunds: Refunding a part of price
effective at the time of introduction paid by customer on some proof of
of a new product in the market. It purchase, say on return of empty
induces people to break away from foils or wrapper. This is commonly
their regular buying behaviour and used by food product companies, to
try the new product. boost their sales.
(iii) Synergy in Total Promotional 4. Product Combinations: Offering
Efforts: Sales promotion activities another product as gift along with the
are designed to supplement the purchase of a product, say offer of a
personal selling and advertising pack of ½ kg of rice with the purchase
efforts used by a firm and add to of a bag of Aatta (wheat flour), or ‘Get
the over all effectiveness of the 128 KB Memory Card Free with a
promotional efforts of a firm. Digicam’ or Buy a TV of 25+ and Get a
Vacuum Cleaner Free’ or ‘100 Gm Bottle
Limitation of Sales Promotion of Sauce Free With 1 kg Detergent.’
(i) Reflects Crisis: If a firm frequently 5. Quantity Gift: Offering extra
rely on sales promotion, it may give quantity of the product commonly
the impression that it is unable to used by marketer of toiletry products.
manage its sales or that there are For example, a shaving cream’s offer
no takers of its product. of ‘40% Extra’ or A Hotel’s offer of
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“Take a 2 Night 3 Days Package At the lucky draw coupon for free petrol
Hotel and Get an Extra Night Stay At on purchase of certain quantity
Just Rs 500” or ‘Buy 2 Get 1 Free’ offer of petrol from given petrol pump
of a marketer of shirts. or lucky draw coupon on purchase
6. Instant Draws and Assigned Gift: of easy undergarment and win a car
For example, ‘Scratch a Card’ or ‘Burst offer.
a Cracker’ and instantly win a 8. Usable Benefit: ‘Purchase goods worth
Refrigerator, Car, T-shirt, Computer, Rs 3000 and get a holiday package worth
with the purchase of a TV. Rs 3000 free’ or ‘Get a Discount Voucher
7. Lucky Draw: For example, the offer for Accessories on Apparel Purchase of
of a bathing soap to win a gold coin on Rs 1000 and above.’
Sales Promotion
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9. Full finance @ 0%: Many (i) Publicity is an unpaid form of
marketers of consumer durables such communication. It does not involve
as Electronic goods, automobiles etc any direct expenditure by the
offer easy financing schemes such as marketing firm; and
‘24 easy instalments, Eight Up Front (ii) There is no identified sponsor for
and 16 To Be Paid as Post Dated the communication as the message
Cheques’. However, one should be goes as a news item.
careful about the file charges, which In publicity, as the information is
sometimes is nothing but interest disseminated by an independent
recovered in advance. source, e.g., the press in the form of
10. Sampling: Offer of free sample of a news stories and features, the message
product, say a detergent powder or has more credibility than if that comes
tooth paste to potential customers at as a sponsored message in advertising.
the time of launch of a new brand. Also, as the message goes in the
11
11.. Contests: Competitive events form of a news rather than direct sales
involving application of skills or luck, communication, it can reach even to
say salving a quiz or answering some those persons who otherwise may not
pay attention to paid communication.
questions.
However, an important limitation of
publicity is that as a medium of
PUBLICITY promotion, it is not within the control
Publicity is similar to advertising, in the of a marketing firm. The media would
sense that it is a non-personal form of cover only those pieces of information,
communication. However, as against which are news worthy and which
advertising it is a non-paid form of symbolise some achievement in the
communication. Publicity generally field. Thus, a firm can’t use publicity
takes place when favourable news is to actively promote its products.
presented in the mass media about a
PUBLIC RELATIONS
product or service. For example, if a
manufacturer achieves a breakthrough Managing public opinion of an
by developing a car engine, which runs organisation is an important task which
on water instead of petrol, and this news can be performed by the marketing
is covered by television or radio or department. The business needs to
newspapers in the form of a news item. communicate effectively to customers,
It would be termed as publicity because suppliers, and dealers, since they are
the engine manufacturer would benefit instrumental in increasing the sales
from such dissemination of information and profit. Besides those who come into
about its achievement by the media but direct contact with the organisation or
would not bear any cost for the same. its products, there are other members
Thus, the two important features of of the general public whose voice or
publicity are that: opinion is equally important. This
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3 . Corporate Communication: The the take on a particular issue. The
image of the organisation needs to company can build goodwill by
be promoted through communicat- contributing money and time to
ing with the public and the certain causes like environment,
employees within the organisation. wildlife, children’s rights, education,
This is usually done with the etc. Such cause-related activities
help of newsletter, annual help in promoting public relations
reports, brochures, articles and and building goodwill.
audio-visual materials. Companies In addition, maintaining good
rely on these materials to reach and public relations also helps in achieving
influence their target markets. the following marketing objectives:
Speeches by the company’s (a) Building awareness: Public
executives at a meeting of trade relations department can place
associations or trade fairs can really stories and dramatise the product
boost the company’s image. Even in the media. This will build
interviews with TV channels and marketplace excitement before the
responding to queries from the product reaches the market or
media go a long way in promoting media advertising takes place. This
public relations. usually creates a favourable
4 . Lobbying: The organisation has to impression on the target customer.
deal with government officials and (b) Building credibility: If news about
different ministers in charge of a product comes in the media
corporate affairs, industry, finance whether print or electronic it always
with respect to policies relating to lends credibility and people believe
business and the economy. The in the product since it is in the news.
government also seeks to maintain (c) Stimulates sales force: It becomes
a healthy relationship with easier for the sales force to deal with
associations of commerce and the retailers and convince dealers if
industry and solicits the opinion of they have already heard about the
major stakeholders while product in the news before it is
formulating industrial, telecom, launched. Retailers and dealers also
taxation policies, etc. The public feel it is easier to sell the product to
relations department then has to be the ultimate consumer.
really proactive in promoting or (d) Lowers promotion costs:
decoding regulations that affect Maintaining good public relations
them. costs much less than advertising
5 . Counselling: The public relations and direct mail. However, it requires
department advises the a lot of communication and
management on general issues interpersonal skills to convince the
which affect the public and the media to give space or time for the
position the company would like to organisation and its product.
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The major differences between advertising and personal selling are as follows:
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KEY TERMS
Marketing Brand Mark Market Packaging
Marketing Management Labelling Marketing Mix
Channels of Distribution Marketing Offering Physical Distribution
Consumer Product Promotion Industrial Product
Promotion Mix Convenience Product Advertising
Shopping Product Personal Selling Speciality Product
Publicity Generic Name Sales Promotion
Brand Brand Name Trade Mark
SUMMARY
In the traditional sense, the term ‘market’ refers to the place where buyers and
sellers gather to enter into transactions involving the exchange of goods and
services. But in modern marketing sense, it refers to a set of actual and potential
buyers of a product or service.
What is Marketing: The term marketing has been described as performance of
business activities that direct the flow of goods and services from producers to
consumers. Marketing is not merely a post-production activity. It includes many
activities that are performed even before goods are actually produced and
continue even after the goods have been sold.
In Modern Times: Marketing is described as a social process by which
individual groups obtain what they need and want through creating offerings
and freely exchanging products and services of value with others. Marketing is
not merely a business phenomena or confined only to business organisations.
Marketing activities are equally relevant to non-profit organisations
What can be Marketed
Marketed:: Anything that is of value to the other can be marketed.
It can be a product or a service or a person or a place or an idea. It can also be
an experience, properties, events, information or organisation.
Marketing management means management of the marketing function. It refers
to ‘The art and science of choosing target markets and getting, keeping and
growing customers through creating, delivering and communicating superior
customer value of management.’
Marketing and Selling: Many people confuse ‘selling’ for ‘marketing’. However,
selling is only a part of the process of marketing. The main focus of selling is
on affecting transfer of title and possession of goods from sellers to users.
Marketing activities put greater thrust on maximising customer’s satisfaction.
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Marketing Management Philosophies: The different business philosophies
or concepts guiding the marketing efforts are: (i) Production Concept which
assumes that availability and affordability of the product are the key to the
success of a firm and puts greater emphasis on improving the production and
distribution efficiency of the firms. (ii) Product Concept assumes that product
improvement is, the key to profit maximisation of a firm; (iii) Sales Concept
assumes that the customers would not buy, or not buy enough, unless they are
adequately convinced and motivated to do so, It is believed that aggressive selling
and promotional efforts are important to make customers buy their products.
(iv) Marketing Concept implies that focus on satisfaction of customer’s needs is
the key to the success of any organisation in the market. (v) The Societal
Marketing Concept is the extension of the marketing concept as supplemented
by the concern for the long-term welfare of the society.
Functions of Marketing: The important functions of marketing include
Gathering and Analysing Market Information, Marketing Planning, Product
Designing and Development, Standardisation and Grading, Packaging and
Labelling, Branding, Customer Support Services, Pricing of Products, Promotion,
Physical distribution, Transportation, Storage or Warehousing.
Role of Marketing: By adopting marketing orientation, an organisation
whether profit making or non-profit making, can achieve its goals in the most
effective manner. Also marketing acts as a catalyst in the economic development
of a country and helps in raising the standards of living of people.
Marketing Mix is a set of marketing tools that the firm uses to pursue its
marketing objectives in a target market. The variables or elements of marketing
mix have been classified in to four categories, popularly known as four Ps of
marketing viz., Product, Price, Place and Promotion. These elements are
combined to create an offer.
Product: In common parlance, the word ‘product’, is used to refer only to the
physical or tangible attributes of a product. In marketing, product is a mixture
of tangible and intangible attributes, which are capable of being exchanged
for a value, with ability to satisfy customer needs. It is anything that can be
offered to a market to satisfy a want or need. Products may broadly be classified
into two categories—industrial products and consumers’ products. Products,
which are purchased, by the ultimate consumers or users for satisfying their
personal needs and desires are referred to as consumer products. On the basis
of shopping efforts involved, the products are classified as Convenience Product,
Shopping Products and Speciality Products. On the basis of their durability,
consumer products have been classified into categories—Durable, Non-durable
and Services.
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Those activities, benefits or satisfactions, which are offered for sale, e.g., dry
cleaning, watch repairs, hair cutting, are called services.
Industrial products are those products, which are used as inputs in producing
other products. These are broadly classified in to (i) Materials and Parts, (ii)
Capital Items, and (iii) Supplies and Business Services.
Generic name refers to the name of the whole class of the product. For example,
a book, a wristwatch, and tyre. A brand is a name, term, sign, symbol, design
or some combination of them, used to identify the products—goods or services
of one seller or group of sellers and to differentiate them from those of the
competitors. That part of a brand, which can be spoken, is called a brand
name.
That part of a brand which can be recognized but which is not utter able is
called brand mark. Brand mark appears in the form of a symbol, design, distinct
colour scheme or lettering. Brand or part of a brand that is given legal protection
is called trademark.
A good brand name should be short, easy to pronounce, spell, recognize and
remember; Should suggest the product’s benefits and qualities; be distinctive;
be adaptable to packing or labelling requirements; be sufficiently versatile to
accommodate new products; be capable of being registered and protected legally
and have staying power i.e. it should not get out of date.
Packaging: The act of designing and producing the container or wrapper of a
product is referred as packaging. There can be three different levels of
packaging. viz Primary package, Secondary packaged, Transport package.
Packaging performs a number of functions in the marketing of goods. Some of
the important functions, include Product identification; Product protection;
Facilitating the use of the product and Promotion of goods and services.
Labelling: A simple looking but important task in the marketing of goods
relates to designing the label to be put on the package. The label may vary
from a simple tag attached to the product to complex graphics that are part of
the package. The most important functions of labels include i) describing the
product ii) help in identifying the product or brand; iii) help in grading the
products into different categories; and aids in promotion of the products.
Pricing: Price may be defined as the amount of money paid by a buyer or
received by a seller in consideration of the purchase of a product or service.
Generally, if the price of a product is increased, its demand comes down, and
vice-versa. Pricing is considered to be an effective competitive weapon. It is also
the single most important factor affecting the revenue and profits of a firm.
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The factors affecting price determination are (i) Product Cost (ii) The Utility and
Demand (iii) Competition (iv) Government and Legal Regulations and v) Marketing
Methods Used.
Physical Distribution: There are two important decisions relating to this aspect-
one regarding physical movement of goods and two, regarding the channels.
Channels of Distribution are set of firms and individuals that take title, or
assist in transferring title, to particular goods or services as it moves from the
producers to the consumers. Channels of distribution smoothen the flow of
goods by creating possession, place and time utilities. The important functions
performed by middlemen are: (i) Sorting; (ii) accumulation; (iii) allocation; (iv)
assorting; (v) product promotion; (vi) negotiation; and (vii) risk taking:
Types of Channels: (I) Direct distribution channels are those where in the
goods are made directly available by the manufacturers to customers, without
involving any intermediary; include (II) Indirect Distribution Channels include
i. Manufacturer - Retailer – Consumer (One Level Channel) ii. Manufacturer -
Wholesaler - Retailer- Consumer (Two Level Channel) iii. Manufacturer - Agent
- Retailer- Consumer (Three Level Channel) Factors Determining Choice of
Channels include i. Product Related Factors; ii. Company Characteristics iii.
Competitive Factor iv. Market Factor; and v. Environmental Factor.
Physical Distribution Covers all the activities required to physically move
goods from manufacturers to the customers. The main component of physical
distribution are. i. Order Processing; ii. Transportation; iii. Warehousing; and
iv. Inventory Control: Just-in-Time-Inventory.
P romotion: Promotion refers to the use of communication with the twin
objective of informing potential customers about a product and persuading
them to buy it. There are four major tools, or elements of promotion mix,
which are. (i) Advertising, (ii) Personal Selling, (iii) Sales Promotion, and (iv)
Publicity. These tools are used in different combinations to achieve the goals
of promotion.
Advertising is the most commonly used tool of promotion. It is an impersonal
form of communication, which is paid for by the marketers (Sponsors) to
promote some goods or service. The merits of advertising, as a medium of
communication, include i. Mass reach ; ii. Enhancing customer satisfaction and
confidence iii. Expressiveness; and iv. Economy
The limitations of advertising are that it is (i) less forceful (ii) lacks Feedback (iii)
inflexibility (iv) low effectiveness The most common Objections to Advertising
are that it i. adds to cost; ii. undermines social Values; iii. confuses the buyers;
and iv. encourages sale of Inferior Products:
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Most of the criticisms against advertising are not fully true. Advertising is
therefore considered an essential function of marketing.
Personal Selling involves oral presentation of message in the form of conversation
with one or more prospective customers for the purpose of making sales. Personal
Selling plays important role for the business persons as well as for the society
Sales Promotion refers to short-term incentives, which are designed to
encourage the buyers to make immediate purchase of a product service. These
include promotional efforts other than advertising, personal selling and
publicity, used by a company to boost its sales. Commonly used Sales Promotion
Activities include Rebate, Discount, Refunds, Product Combinations, Quantity
Gift, Instant Draws and Assigned Gift, Lucky Draw, Usable Benefit, Full Finance
@ 0%, sampling, and contests
Publicity is similar to advertising, in the sense that it is a non-personal form of
communication. However, as against advertising it is a non-paid form of
communication. In publicity, as the information is disseminated by an
independent source. However, an important limitation of publicity is that as a
medium of promotion, it is not within the control of a marketing firm.
EXERCISES
Very short answer questions
(i) Explain the advantages of branding to marketers of goods and services.
(ii) List the characteristics of a good brand name.
(iii) What is the societal concept of marketing?
(iv) List the characteristics of convenience products.
(v) Enlist the advantages of packaging of a consumer products.
(vi) What are the limitations of a advertising as a promotional tool? Enlist
(vii) List five shopping products purchased by you or your family during
the last few months.
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(iv) What are industrial products? How are they different from consumer
products? Explain.
(v) Distinguish between convenience product and shopping product.
(vi) ‘Products is a mixture of tangible and intangible attributes’. Discuss
(vii) Describe the functions of labeling in the marketing of products.
(viii) Discuss the role of intermediaries in the distribution of consumer non
durable products.
(ix) Explain the factors determining choice of channels of distribution.
(x) Explain briefly the components of physical distribution.
(xi) Define advertising. What are its main features? Explain.
(xii) Discuss the role of ‘sales promotion’ as an element of promotion mix.
Projects/Assignment
(i) Visit in a team of four-five students to different marketing organisations
in your locality (retailers, wholesalers, distributors, etc). Find what
marketing activities are undertaken by them. Do you find any difference
in the activities in the organisations visited by you? What common
activities are found in these organisations? Write a report.
(ii) Collect ten advertisements appearing in newspapers, magazines, etc
about recent sales promotional schemes about some consumers durable
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Case Problems
Nokia takes four-lane road to consumers.
NEW DELHI: After having grabbed a king-size 79% share of the Rs 15,000-
crore mobile handset market in India, Nokia India has found a new way of
connecting people.
The mobile handset manufacturer has embarked upon a brand new retail
strategy that is based on a classification of its consumers into four major
groups that separates people in terms of usage, income level and lifestyle.
The classification is based on an extensive survey – the Nokia Segmentation
Study —that was carried over two years involving 42,000 consumers from 16
countries. It studied the impact lifestyle choices and attitudes have on the
mobile devices consumers buy and how they use them.
The strategy, which was announced globally in June last year, is being
unfolded in India now. While the nitty-gritty of the new strategy is still being
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worked out, it is likely that the company would follow separate marketing
strategies for the four different segments. The advertising campaigns could be
different for the segments.
Nokia’s entire product portfolio has now been re-aligned towards these four
groups to address the specific needs of each. The first of these segments Live,
aimed a first time users whose basic need is to stay in touch with voice as the
main driver, would have basic handsets low on features and price.
“These may be functional phones but the target group for these phones
range from SEC C (low socio-economic class) to SEC A1+ (very high socio-
economic class) markets,” says Nokia India marketing head Devinder Kishore.
The second segment Connect looks at more evolved users who look for more
functionality and features and connectivity. Accordingly, phones in this
segment would have GPRS, camera and music capabilities.
The next two categories, Achieve and Explore, are aimed at high-end users
and have Nokia’s top-end handsets. For example, Achieve segment looks at
enterprise users who need to have business functionalities in their phones.
Nokia’s new E-series has been put under this segment with handsets having
QWERTY keyboards and full Internet capabilities.
Aimed at high-end lifestyle users, Explore would be the most prominent
segment for the company in the coming years. Says Nokia India multimedia
business director Vineet Taneja, “This segment would see the most vibrant
growth in the coming year. It will look at five different areas – applications,
imaging, mobile TV, music and gaming. We are fast developing the ecosystem
to support these areas.”
Nokia acquired music solution and content provider LoudEye and GPS
solution provider Gate5. It is all slated to launch its most high-profile handset,
which boasts of having a 5 mega pixel camera and GPS capabilities apart
from iPod quality music, in February.
Says Taneja, “There is increasing demand for convergence and multiple
functionalities in high-end handsets. The N-series will try to address that.” Nokia
feels that the new platform strategy wherein different handsets are launched
under a platform, like the N-Series, will become a status and style statement
and drive numbers.
Source: www.economictimes.indiatimes.com
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Questions
1. Identify the four market segments that Nokia plans to address as per the
news report above.
2. What is the basis of classification of the market used by the company?
3. What do you mean by realignment of product portfolio? Illustrate this from
the case above.
4. Identify the points that can be highlighted in marketing campaigns for
each segment.
5. What are the different considerations in the mind of consumers of each
segment while purchasing mobile phones as given in the above case?
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CHAPTER
12
LEARNING OBJECTIVES CONSUMER PROTECTION
After studying this chapter, you
should be able to: M AHARASHTRA CONSUMER COMMISSION
S LAPS FINE OF RS ONE L AKH ON
Ø state the importance of C OCA COLA
consumer protection; The Maharashtra State Consumer
Commission has asked Coca Cola, one
Ø briefly explain legal framework of the international fizzy drinks
for consumer protection in manufacturer, its bottler and
India; distributor to pay Rs one lakh in
damages to a consumer who found
impurities in a bottle of soft drink that
Ø describe consumer rights in he had bought.
India; Chandrashekhar Paradkar, a
resident of Shankar Nagar area here,
Ø list out consumer responsibilities; filed a complaint with the Nagpur
district Consumer Grievances Fourm
seeking compensation of Rupees four
Ø briefly describe the ways and lakh after he found some solid objects
means of consumer protection; inside a sealed bottle of a soft drink.
and He had bought six various brands of
the soft drink— two bottles each of
Ø describe the role of consumer Mazaa, Coca Cola and Sprite from a
organisations and NGOs in shop near his house.
Based on that, the District Forum
protecting consumers’ interests.
earlier gave a ruling after finding Coca
Cola, its bottlers Superior Drinks Pvt.
Ltd. and distributors Balaji Sales guilty
of supplying drinks unfit for human
consumption, which was upheld by the
State Consumer Commission.
The District Forum had found
objects resembling pieces of mosquito
repellent mats floating inside the sealed
bottle. Having conducted the tests by a
Public Health Laboratory, they found
the drink unfit for human consumption.
The District Forum came down
heavily on the company saying
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multinational giants would not be allowed to have a free run and exploit a poor country
like India by manufacturing and marketing sub-standard products.
While giving its ruling, the District Forum relied upon the historic Donald versus
Stevenson case, wherein heavy compensation had been awarded to a consumer,
who had found rusted nails inside a bottle of ginger beer.
Source: http://www.indlaw.com/guest/news
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against defective goods, deficient 3. The Sale of Goods Act, 1930: The
services, unfair trade practices, and Act provides some safeguards and
other forms of their exploitation. The reliefs to the buyers of the goods in case
Act provides for the setting up of a the goods purchased do not comply
three-tier machinery, consisting of with express or implied conditions or
District Forums, State Commissions warranties.
and the National Commission. It also 4. The Essential Commodities Act,
provides for the formation of consumer
1955: The Act aims at controlling
protection councils in every District
and State, and at the apex level. production, supply and distribution of
essential commodities, checking
2. The Indian Contract Act, 1872: inflationary trend in their prices and
The Act lays down the conditions in ensuring equal distribution of essential
which the promises made by parties to
commodities. The Act also provides for
a contract will be binding on each other.
action against anti-social activities of
The Act also specifies the remedies
available to parties in case of breach of profiteers, hoarders and black-
contract. marketers.
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5. The Agricultural Produce (Grading 10. The Bureau of Indian Standards
and Marking) Act, 1937: The Act Act, 1986: The Bureau of Indian
prescribes grade standards for Standards has been set up under the
agricultural commodities and live- Act. The Bureau has two major
stock products. The Act stipulates the activities: formulation of quality
conditions which govern the use of standards for goods and their
standards and lays down the certification through the BIS certification
procedure for grading, marking and scheme. Manufacturers are permitted
packing of agricultural produce. The to use the ISI mark on their products
quality mark provided under the Act only after ensuring that the goods
is known as AGMARK, an acronym for conform to the prescribed quality
Agricultural Marketing. standards. The Bureau has also setup
6. The Prevention of Food a grievance cell where consumers can
Adulteration Act, 1954: The Act aims make a complaint about the quality
to check adulteration of food articles of products carrying the ISI mark.
and ensure their purity so as to The most important of these
maintain public health. regulations is the Consumer
7. The Standards of Weights and Protection Act which provides for six
Measures Act, 1976: The provisions consumer rights and helps consumers
of this Act are applicable in case of in getting their grievances redressed
those goods which are sold or for any shortcoming in the goods
distributed by weight, measure or purchased or services availed.
number. It provides protection to
consumers against the malpractice of THE CONSUMER PROTECTION ACT ,
under-weight or under-measure. 1986
8. The Trade Marks Act, 1999: This The Consumer Protection Act (CPA)
Act has repealed and replaced the Trade seeks to protect and promote the
and Merchandise Marks Act, 1958. The consumers’ interest through speedy
Act prevents the use of fraudulent and inexpensive redressal of their
marks on products and thus, provides grievances.
protection to the consumers against The scope of the Act is very wide.
such products. It is applicable to all types of
9. The Competition Act, 2002: This undertakings, big and small, whether
Act has repealed and replaced the in the private or public sector, or in
Monopolies and Restrictive Trade the co-operative sector, whether a
Practices Act, 1969. The Act provides manufacturer or a trader, and whether
protection to the consumers in case supplying goods or providing services.
of practices adopted by business firms The Act confers certain rights to
which hamper competition in the consumers with a view to empowering
market. them and to protect their interests.
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C ONSUMER RIGHTS 4. Right to be Heard: The consumer
has a right to file a complaint and to
The Consumer Protection Act provides
be heard in case of dissatisfaction with
for six rights of consumers. The
a good or a service. It is because of this
consumer protection councils set up
reason that many enlightened business
under the Act are intended to promote
firms have set up their own consumer
and protect the various rights of
service and grievance cells. Many
consumers. These rights include the
consumer organisations are also
following:
working towards this direction and
1. Right to Safety: The consumer has helping consumers in redressal of their
a right to be protected against goods grievances.
and services which are hazardous to
5. Right to seek Redressal: The
life and health. For instance, electrical
consumer has a right to get relief in
appliances which are manufactured
with substandard products or do not case the product or service falls short
conform to the safety norms might of his expectations. The Consumer
Protection Act provides a number of
cause serious injury. Thus, consumers
are educated that they should use reliefs to the consumers including
electrical appliances which are ISI replacement of the product, removal
marked as this would be an assurance of defect in the product, compensation
of such products meeting quality paid for any loss or injury suffered by
specifications. the consumer, etc.
2. Right to be Informed: The 6. Right to Consumer Education: The
consumer has a right to have complete consumer has a right to acquire
information about the product he knowledge and to be a well informed
intends to buy including its consumer throughout life. He should
ingredients, date of manufacture, be aware about his rights and the
price, quantity, directions for use, etc. reliefs available to him in case of a
It is because of this reason that the product or service falling short of his
legal framework in India requires the expectations. Many consumer
manufactures to provide such organisations and some enlightened
information on the package and label businesses are taking an active part in
of the product. educating consumers in this respect.
3. Right to Choose: The consumer The Consumer Protection Act by
has the freedom to choose from a conferring these rights on the
variety of products at competitive consumers empowers them to fight
prices. This implies that the marketers against any unscrupulous, exploitative
should offer a wide variety of products and unfair trade practices adopted by
in terms of quality, brand, prices, size, sellers. The Box on East Delhi eatery
etc. and allow the consumer to make shows how a restaurant owner was
a choice from amongst these. fined for overpricing bottled water.
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Mark of Bureau of
Indian Standards
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Consumer Awareness
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Act provides for a three-tier machinery are set up, in each State and District,
at the district, state and national levels respectively, by the State Government
for redressal of consumer grievances. concerned. The Figure on redressal
The redressal mechanism under this agencies shows the hierarchical
three-tier machinery has been structure of this three-tire machinery.
explained hereunder. Before studying the set-up and
functioning of these redressal agencies
R EDRESSAL AGENCIES UNDER THE let see how the Consumer Protection
C ONSUMER PROTECTION ACT Act defines a consumer and who can
file a complaint under the Consumer
For the redressal of consumer Protection Act.
grievances, the Consumer Protection
Act provides for setting up of a three- Consumer: A ‘consumer’ is generally
understood as a person who uses or
tier enforcement machinery at the
consumes goods or avails of any service.
District, State, and the National levels,
Under the Consumer Protection Act, a
known as the District Consumer consumer is defined as:
Dispute Redressal Forum, State
Consumer Disputes Redressal (a) Any person who buys any goods for
a consideration, which has been
Commission, and the National
paid or promised, or partly paid and
Consumer Disputes Redressal
partly promised, or under any
Commission. They are briefly referred scheme of deferred payment. It
to as the ‘District Forum’, ‘State includes any user of such goods,
Commission’, and the ‘National when such use is made with the
Commission’, respectively. While the approval of the buyer, but does not
National Commission is set up by the include a person who obtains goods
Central Government, the State for re-sale or any commercial
Commissions and the District Forums purpose.
National Commission
State Commission
District Forum
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(b) Any person who hires or avails of any Forum shall refer the complaint to the
service, for a consideration which has party against whom the complaint is
been paid or promised, or partly paid filed. If required, the goods or a sample
and partly promised, or under any thereof, shall be sent for testing in a
system of deferred payment. It laboratory. The District Forum shall
includes any beneficiary of services pass an order after considering the test
when such services are availed of with report from the laboratory and hearing
the approval of the person concerned, to the party against whom the
but does not include a person who complaint is filed. In case the aggrieved
avails of such services for any party is not satisfied with the order of
commercial purpose. the District Forum, he can appeal
Who can file a complaint?: A before the State Commission within 30
complaint before the appropriate days of the passing of the order.
consumer forum can be made by: 2. State Commission: Each State
(i) Any consumer; Commission consists of a President
(ii) Any registered consumers’ and not less than two other members,
association; one of whom should be a woman. They
are appointed by the State Government
(iii) The Central Government or any concerned. A complaint can to be made
State Government; to the appropriate State Commission
(iv) One or more consumers, on behalf when the value of the goods or services
of numerous consumers having in question, along with the
the same interest; and compensation claimed, exceeds Rs. 20
(v) A legal heir or representative of a lakhs but does not exceed Rs. 1 crore.
deceased consumer. The appeals against the orders of a
District Forum can also be filed before
Let us now see how the consumer
the State Commission. On receiving the
grievances are redressed by the three-
complaint, the State Commission shall
tire machinery under the Consumer
refer the complaint to the party against
Protection Act.
whom the complaint is filed. If required,
1. District Forum: The District Forum the goods or a sample thereof, shall be
consists of a President and two other sent for testing in a laboratory. The
members, one of whom should be a State Commission shall pass an order
woman. They all are appointed by the after considering the test report from
State Government concerned. A the laboratory and hearing to the party
complaint can to be made to the against whom the complaint is filed.
appropriate District Forum when the In case the aggrieved party is not
value of the goods or services in satisfied with the order of the State
question, along with the compensation Commission, he can appeal before the
claimed, does not exceed Rs. 20 lakhs. National Commission within 30 days
On receiving the complaint, the District of the passing of the order.
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3. National Commission: The National Relief Available
Commission consists of a President and
If the consumer court is satisfied about
at least four other members, one of
the genuineness of the complaint, it
whom should be a woman. They are
can issue one or more of the following
appointed by the Central Government.
directions to the opposite party.
A complaint can to be made to the
National Commission when the value (i) To remove the defect in goods or
of the goods or services in question, deficiency in service.
along with the compensation claimed, (ii) To replace the defective product
exceeds Rs. 1 crore. The appeals against with a new one, free from any
the orders of a State Commission can defect.
also be filed before the National (iii) To refund the price paid for the
Commission. On receiving the product, or the charges paid for
complaint, the National Commission
the service.
shall refer the complaint to the party
against whom the complaint is filed. If (iv) To pay a reasonable amount of
required, the goods or a sample thereof, compensation for any loss or
shall be sent for testing in a laboratory. injury suffered by the consumer
The National Commission shall pass an due to the negligence of the
order after considering the test report opposite party.
from the laboratory and hearing to the (v) To pay punitive damages in
party against whom the complaint is appropriate circumstances.
filed. (vi) To discontinue the unfair/
An order passed by the National restrictive trade practice and not
Commission in a matter of its original to repeat it in the future.
jurisdiction is appealable before the (vii) Not to offer hazardous goods for
Supreme Court. This means that only sale.
those appeals where the value of goods
(viii) To withdraw the hazardous goods
and services in question, along with
from sale.
the compensation claimed, exceeded Rs.
1 crore and where the aggrieved party (ix) To cease manufacture of
was not satisfied with the order of the hazardous goods and to desist
National Commission, can be taken to from offering hazardous services.
the Supreme Court of India. Moreover, (x) To pay any amount (not less than
in a case decided by the District Forum, 5% of the value of the defective
the appeal can be filed before the State goods or deficient services
Commission and, thereafter, the order provided), to be credited to the
of the State Commission can be Consumer Welfare Fund or any
challenged before the National other organisation/person, to be
Commission and no further. utilised in the prescribed manner.
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Source: www.corecentre.org
promoting the welfare of people. They (ii) Publishing periodicals and other
have a constitution of their own and publications to impart knowledge
are free from government interference. about consumer problems, legal
Consumer organisations and NGOs reporting, reliefs available and
perform several functions for the other matters of interest.
protection and promotion of interest (iii) Carrying out comparative testing
of consumers. These include: of consumer products in accredited
(i) Educating the general public laboratories to test relative qualities
about consumer rights by of competing brands and
organising training programmes, publishing the test results for the
seminars and workshops. benefit of consumers.
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KEY TERMS
Consumer Protection Consumer Rights Consumer Responsibilities
Redressal of grievance Grades Standards
SUMMARY
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Agricultural Produce (Grading and Marking) Act, 1937, (vi) The Prevention of
Food Adulteration Act, 1954, (vii) The Standards of Weights and Measures
Act, 1976, (viii) The Trade Marks Act, 1999, (ix) The Competition Act, 2002,
(x) The Bureau of Indian Standards Act, 1986.
Consumer Rights: The Consumer Protection Act, 1986, provides for six
consumer rights. These are: (i) Right to safety, (ii) Right to be informed,
(iii) Right to choose, (iv) Right to be heard, (v) Right to seek redressal,
(vi) Right to consumer education.
Consumer Responsibilities: In addition to exercising his rights, a consumer
should also keep in mind his responsibilities while purchasing, using and
consuming goods and services.
Ways and Means of Consumer Protection: There are various ways in which
the objective of consumer protection can be achieved. These Include (i) Self
regulation by business, (ii) Business associations, (iii) Consumer awareness,
(iv) Consumer organisations, (v) Government.
Redressal Agencies under the Consumer Protection Act: The Consumer
Protection Act provides for setting up of a three-tier enforcement machinery
at the District, State, and the National levels. They are referred to as the
‘District Forum’, ‘State Commission’, and the ‘National Commission’. There
are various reliefs available to a consumer under the Act. The appropriate
consumer court may pass an order for removal of defect in goods, replace a
defective product, refund the price of the product, pay compensation for the
loss suffered, etc.
Consumer Organisations and NGOs: In India, several consumer organisations
and non-governmental organisations (NGOs) are playing an active role in
protection and promotion of consumers’ interests.
EXERCISES
T rue or F alse
False
State whether the following statements are true or false.
(i) Consumer protection has a moral justification for business.
(ii) In addition to rights, a consumer also has some responsibilities.
(iii) A complaint can to be made to a District Forum when the value of the
goods or services in question, along with the compensation claimed,
exceeds Rs. 20 lakhs.
(iv) The Consumer Protection Act provides for six consumer rights.
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(v) ISI is the quality certification mark used in case of food products.
(vi) Under the Consumer Protection Act, a complaint can be filed by a
consumer for a defective good and also for deficiency in service.
Case Problem
Problem
Now, filing complaint is just a click away. Filing a complaint in a consumer
court’s going to get a lot easier by the end of this year, virtually. No matter
which part of the country you’re in, it’s going to happen at the click of a mouse.
The project, called Confonet (Computerisation and Computer Networking of
Consumer Fora), is being executed on a turnkey basis by the National
Informatics Centre (NIC).
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”Online registration of complaints, the government hopes, will promote
e-governance, transparency, efficiency and streamlining of consumer fora,” said
an official in the consumer affairs ministry. Of Rs 48.64 crore set aside for the
project, the government has released Rs 30.56 crore so far, the official added.
”Besides software development and testing, networking and project
implementation, integration and site preparation, it will include purchase of
hardware for all the 600 district fora, 35 state commissions and the National
Commission,” the official said.
At present, computer systems and system software have been delivered to 25
state commissions and 300 district fora — never mind the fact that it’s
sometimes a long wait before the hardware is finally unpacked and set up in
some of the districts. Meanwhile, training of staff, sometimes in the classroom
and sometimes through e-learning sessions, are in full swing.
”But just setting up an online complaint filing system won’t ensure a strong
consumer protection movement in the country — for that we’re working on
GenNext and the best way to do that is to go to schools,” the official said.
The government is, therefore, involving school children to form consumer clubs
so as to involve them in various consumer welfare activities.
Part of the funding for running the club is to come from various state
governments, with an equally matching grant from the Centre. However, a
number of state governments are yet to sanction the fund — some of these
include Uttar Pradesh, Madhya Pradesh and Kerala.
Source
Source:: www.economictimes.indiatimes.com
Q uestions
1. What new measures is the ministry of consumer affairs taking to make
filing of complaint easy?
2. What role can you, as a student, play to contribute to the cause of consumer
protection?
3. What scenario of consumer protection do you foresee when the measures
proposed in the above news report are implemented?
(Teachers are advised to help students to study judgements of various consumer
forums including National Consumer Disputes Redressal Commission at
www.ncdrc.nic.in. This initiative will help the pupils to understand the role of
consumer protection in India better. Various published material can also be
used. Consumer clubs in schools can also help the students in this regard.)
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CHAPTER
13
LEARNING OBJECTIVES E NTREPRENEURSHIP
After studying this chapter, you
D EVELOPMENT
should be able to:
S EEDS OF VIRCHOW
Ø state the meaning of the
Until 1981 Narayan Reddy, M.Sc.
terms, ‘entrepreneur,’
Organic Chemistry, had been working
‘entrepreneurship’ and ‘enterprise’;
for a pharmaceutical company where he
had developed a molecule. He was
Ø distinguish between contemplating commercial utilisation of
entrepreneurship and that molecule by setting up a small-scale
management and discuss the unit – much smaller than what he
characteristics of actually started. Actually, he met two
entrepreneurship; medicos, who had just returned from a
Gulf country and were looking for some
productive avenue for investment of
Ø explain the need for their savings (remember the Gulf
entrepreneurship; crisis?), Reddy’s idea appealed to them.
Thus, the willing entrepreneurs met–
Ø describe the roles and functions where there is a will there is a way–
and the seeds for the venture were
of the entrepreneurs;
sown. After a detailed study of the
technical, economic, commercial and
Ø identify the entrepreneurial financial feasibility of the idea of
competencies; manufacturing a bulk drug from the
molecule, ‘Virchow Laboratories’ was
Ø explain and follow the process started in 1982 as a SSI with an initial
investment of Rs. 28 lakhs – Rs. 8 lakh
of entrepreneurship
in the form of equal contribution by the
development; and three promoters and Rs. 20 lakh
funding from the Andhra Pradesh
Ø identify the values, attitudes State Finance Corporation (APSFC).
and motivation for a plunge in Project implementation was even more
entrepreneurship. challenging as he set out to acquire land,
construct factory, purchase equipment,
negotiate with suppliers, potential
customers and obtain environmental,
drug control and other clearances.
Initially, it was he who acted as the pivot
of the enterprise wheel. In the course of
time, a strong managerial team was put
in place and thanks to persistent
emphasis on good management
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practices, Virchow emerged as the world’s largest and the best producer of the basic
drug from the chosen molecule. In fact, web search on ‘Virchow Laboratories’ takes
you to the home page saying “Welcome to Virchow Group of Companies”, the group
comprising 4 companies with Virchow Laboratories being the flagship company.
SVO Analogy
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THE C ONCEPT OF ENTREPRENEURSHIP pointed out that whereas the wars are
rare and far between, in today’s
You are aware that entrepreneurship competitive world, entrepreneurs wage
is regarded as one of the four major wars everyday. There is a tremendous
factors of production, the other three pressure to continually develop new
being land, labour and capital. products, explore new markets, update
However, it should surprise you that technology and devise innovative ways
as regards its French origin, the term of marketing and so on.
‘entrepreneurship’ (derived from the The term ‘entrepreneur’ was first
verb ‘entreprende’ meaning ‘to introduced in economics by the early
undertake’) pertained not to economics 18th century French economist Richard
but to undertaking of military Cantillon. In his writings, he formally
expeditions. So is true of many terms defined the entrepreneur as the “agent
in management such as strategy (a who buys means of production at certain
course of action to beat the competition, prices in order to sell the produce at
the ‘enemy’) and logistics (movement of uncertain prices in the future”. Since then
men and machines for timely a perusal of the usage of the term in
availability), etc. Historically, as wars economics shows that entrepreneurship
are followed by economic recons- implies risk/uncertainty bearing;
truction, it should be no surprise that coordination of productive resources;
military concepts are used in introduction of innovations; and the
economics and management. It may be provision of capital.
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We would like to define entrepre- does one first of all decide to choose own
neurship as a systematic, purposeful business as a career; how does one
and creative activity of identifying a sense a market opportunity; how does
need, mobilising resources and one muster up courage to embark
organising production with a view to upon it, and mobilise the requisite
delivering value to the customers, resources, etc.; so much so that
returns for the investors and profits for recourse to entrepreneurship, in
the self in accordance with the risks common parlance, is considered as an
and uncertainties associated with exclusive preserve of a few gifted
business. This definition points to certain individuals. In the following paragraphs,
characteristics of entrepreneurship that our effort would be to establish
we turn our attention to. entrepreneurship as a career that you
should aspire for. Remember, resources
may be limited, aspiration need not be.
C HARACTERISTICS OF ENTREPRENEURSHIP
So, you can aspire for something
In the SVO formulation of the concepts greater, bigger than your present status
of entrepreneur, entrepreneurship and and resources. And start today.
enterprise, we saw that entrepreneur- Remember, aspiration means desire
ship is about the process of setting up multiplied by action.
a business. One cannot help but 1. Systematic Activity: Entrepre-
marvel at the beauty of the process: how neurship is not a mysterious gift or
Nurturing Success
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charm and something that happens industries, for example, zerox machines
by chance! It is a systematic, step-by- destroyed carbon paper industry,
step and purposeful activity. It has mobile telephony threatens landline/
certain temperamental, skill and other basic telephony, net gains accruing to
knowledge and competency requirements the economy lend such entrepreneurial
that can be acquired, learnt and actions as commendable as the acts of
developed, both by formal educational creative destruction.
and vocational training as well as by Entrepreneurship is creative also
observation and work experience. Such in the sense that it involves
an understanding of the process of innovation- introduction of new
entrepreneurship is crucial for dispelling products, discovery of new markets
the myth that entrepreneurs are born and sources of supply of inputs,
rather than made. technological breakthroughs as well as
2. Lawful and Purposeful Activity: introduction of newer organisational
The object of entrepreneurship is lawful forms for doing things better, cheaper,
business. It is important to take note faster and, in the present context, in a
of this as one may try to legitimise manner that causes the least harm to
unlawful actions as entrepreneurship the ecology/environment. It is possible
on the grounds that just as that entrepreneurs in developing
entrepreneurship entails risk, so does countries may not be pioneering/
illicit businesses. Purpose of entrepre- innovative in introducing path-
neurship is creation of value for breaking, radical innovations. They
personal profit and social gain. may be the first or second adopters of
3 . Innovation: From the point of technologies developed elsewhere.
view of the firm, innovation may be cost That does not make their achievement
saving or revenue-enhancing. If it does small. For imitating technologies from
both it is more than welcome. Even if it developed world to the indigenous
does none, it is still welcome as setting is quite challenging. A lady
innovation must become a habit! entrepreneur wanting to introduce
Entrepreneurship is creative in the thermal pads for industrial heating
sense that it involves creation of value. faced tremendous reluctance form the
You must appreciate that in the owners of chemical and sugar mills
absence of entrepreneurship ‘matter’ despite the established superiority of
does not become a “resource.” By her products over the conventional
combining the various factors of heating of the vessels by burning of
production, entrepreneurs produce wood/coke or using LPG. Moreover,
goods and services that meet the needs there is no need to suffer from “it was
and wants of the society. Every not invented here” complex– there is
entrepreneurial act results in income no need to reinvent the wheel. The
and wealth generation. Even when global electronics major, Sony did not
innovations destroy the existing invent the transistor! It used the
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but what the person has taken is a risk situations as business ceases to
calculated risk. The situation is be a game/fun! Risk as such more
similarly to a motorcyclist in the ‘ring than a financial stake, becomes a matter
of death’ or a trapeze artist in circus. of personal stake, where less than
While the spectators are in the awe of expected performance causes
the high-risk, the artists have taken a displeasure and distress.
calculated risk given their training, The characteristics of entrepreneur-
skills, and of course, confidence and ship discussed as above apply in
daring. It is said that the entrepreneurs diverse contexts, so does the usage
thrive on circumstances where odds of the term, viz., Agricultural/Rural
favouring and against success area Entrepreneurship, Industrial entrepre-
even, that is 50:50 situations. They are neurship, Technopreneurship, Netpre-
so sure of their capabilities that they neurship, Green/Environmental or
convert 50% chances into 100% Ecopreneurship, Intra-corporate/firm
success. They avoid situations with or Intrapreneusrhip and Social
higher risks as they hate failure as entrepreneurship. In fact, entrepre-
anyone would do; they dislike lower neurship has come to be regarded as a
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‘type of behaviours’, whereby one, In developing countries, however, the
(i) rather than becoming a part of the concept of owner-manager seems more
problem, proactively tries to solve it; apt for entrepreneurship as the
(ii) uses personal creativity and intellect entrepreneur remains attached even to
to develop innovative solutions; the day-to-day operations of the venture.
(iii) thinks beyond resources presently In fact, their lacking in managerial skills
controlled in exploiting the emerging is often forwarded as the cause of
opportunities or attending to the business failures. Just as managers are
impending problems; (iv) has the expected to play entrepreneurial roles in
conviction to convince others of one’s the times of need, likewise the
ideas and seek their commitment entrepreneurs must also demonstrate
towards the project; and (v) has the managerial abilities for the success of
courage of heart to withstand their ventures. Irrespective of whether the
adversities, persist despite setbacks entrepreneurs pave way for the managers
and be generally optimistic. or they themselves assume the
managerial responsibilities, it is possible
R ELATIONSHIP BETWEEN to distinguish between the terms
E NTREPRENEURSHIP AND M ANAGEMENT entrepreneurship and management. (See
the table on next page)
Entrepreneurship is about business
start-ups and renewals. That is, it N EED FOR ENTREPRENEURSHIP
appears at the time of starting a new
business, disappears for some time in Every country, whether developed or
the course of stabilising the venture as developing, needs entrepreneurs.
an on-going business and reappears in Whereas, a developing country needs
case there is a need for introducing entrepreneurs to initiate the process of
changes in product, market, technology, development, the developed one needs
structure and so on. In fact, it is said that entrepreneurship to sustain it. In the
everyone is an entrepreneur when he present Indian context, where on the
actually ‘carries out new combinations,’ one hand, employment opportunities
and loses that character as soon as he in public sector and large-scale sector
has built up his business, when he are shrinking, and on the other,
settles down to running it as other people vast opportunities arising from
run their businesses. In developed globalisation are waiting to be exploited;
countries, the distinction between the entrepreneurship can really take India
entrepreneurial focus on start-ups and to the heights of becoming a super
managerial focus on routine is so sharp economic power. (See the Box entitled
that it is argued that once the project ‘India Needs Entrepreneurs’)
has reached a level of maturity, the Studies by Global Entrepre-
entrepreneurs must move out and the neurship Monitor, a research programem
managers must come in. involving annual assessment of the
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Differences between Entrepreneurship and Management
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national level of entrepreneurial activity the absence this function, all other
across a number of countries (visit, resources, namely land, labour and
www.gemconsortium.org) show that capital would remain idle. They may
differences in the levels of entrepreneurial not be inventing/discovering the
activity account for the differences in products, their role in commercial
the level of economic growth to the exploitation of the advancements in
extent of as much as 33%. science and technology via organisation
What is that the entrepreneurs do of the productive apparatus makes the
to affect economic development? This other resources productive and useful.
leads us to a discussion of the functions So much so that it is said that in the
of the entrepreneurs in relation to absence of entrepreneurial intervention,
economic development. As the every plant would remain a weed and
enterprise is the object of their every mineral would remain a rock.
endeavour, it is also necessary that we 1. Contribution to GDP: Increase in
examine their functions in relation to the Gross Domestic Product or GDP is
the enterprise as well. the most common definition of economic
Thus, the need for entrepre- development. You are aware that income
neurship arises from the functions the is generated in the process of
entrepreneurs perform in relation to the production. So, entrepreneurs generate
process of economic development and income via organisation of production be
in relation to the business enterprise. it agriculture, manufacturing or services.
You are also aware that income
F UNCTIONS OF ENTREPRENEURS IN generated is distributed among the
R ELATION TO ECONOMIC DEVELOPMENT factors of production where land gets
rent, labour gets wages and salaries,
You are aware that entrepreneurs capital gets interest and the residual
“organise” the production process. In income accrues to the entrepreneur in
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the form of profits. As rent and interest Ratio (COR); more precisely Incremental
accrue to those few who have land and Capital Output Ratio (ICOR) that
capital respectively whereas larger measures the percentage increase in
masses are destined to earn their capital formation required obtaining a
incomes via wage employment, the percentage increase in GDP. So, if a
biggest contribution of the country desires to grow @ 10.0 % p.a.
entrepreneurship lies in capital and its ICOR is 2.6, then it must ensure
formation and generation of capital formation @ 26.0% p.a.
employment. This is what we turn our Entrepreneurs, by investing their own
attention to. savings and informally mobilising the
2. Capital Formation: The entrepre- savings of their friends and relatives
neurial decision, in effect, is an contribute to the process of capital
investment decision that augments the formation. These informal funding
productive capacity of the economy supplements the funds made available
and hence results in capital formation. by the formal means of raising
In fact, GDP and capital formation are resources from banks, financial
related to each other via Capital Output institutions and capital markets.
Capital Formation
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3 . Generation of Employment: Every a. Improving processes, reducing
new business is a source of employment wastes, increasing yield ,and,
to people with different abilities, skills b. Bringing about technical progress,
and qualifications. As such that is, by altering labour-capital
entrepreneurship becomes a source of ratios. You are aware that if labour
livelihood to those who do neither have is provided with good implements
capital to earn interest on nor have the (capital), its productivity increases.
land to earn rent . In fact, what they earn 6. Increasing the Spectrum and
is not only a livelihood or means of Scope of Economic Activities:
sustenance but also a lifestyle for Development does not merely mean
themselves and their families as well as ‘more’ and ‘better’ of the existing, it
personal job satisfaction. As such also and more crucially means
entrepreneurs touch the lives of many, diversification of economic activities–
directly as well as indirectly. across the geographic, sectoral and
4. Generation of Business technological scope.
Opportunities for Others: Every new You are aware that underdeveloped
business creates opportunities for the countries are caught in the vicious cycles
suppliers of inputs (this is referred to on the demand as well as supply side.
as backward linkages) and the Entrepreneurs penetrate into and break
marketers of the output (what is these cycles, for example, by organising
referred to as forward linkages). As a and orienting domestic production for
pen manufacturer you would create exports. Thus, production (and thereby
opportunities for refill manufacturers generation of income) is not constrained
as well as wholesalers and retailers of by the inadequacy of domestic demand.
stationery products. These immediate (Demand-side Vicious Cycle). In today’s
linkages induce further linkages. For context, you are aware that India is poised
example greater opportunities for refill to become a manufacturing hub for the
manufacturers would mean expansion global markets for diverse products.
of business for ink manufacturers. In Economic development is also
general, there are greater opportunities constrained by the supply-side
for transporters, advertisers, and, so on. pressures resulting into absence of
So, via a chain-reaction, entrepreneurship capacity to meet the demand whether
provides a spur to the level of economic domestic or overseas. Entrepreneurs
activity. mobilise local and even overseas
resources to augment the productive
5. Improvement in Economic capacity of a country. Indian
Efficiency: You are aware that Multinational Giants is fast becoming
efficiency means to have greater output a reality.
from the same input. Entrepreneurs Entrepreneurs lead the process of
improve economic efficiency by, economic development via bringing
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Small-Scale Entrepreneurship among Marginalised Groups in India
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The established ways of life need to be cricket team from the villagers who had
challenged and change must be seen not even seen the game? Don’t the feats
as an opportunity to improve rather of Karasn Bhai of ‘Nirma’ who
than something to be scared of. challenged ‘Surf’ from the mighty
Entrepreneurs, through their urge to Hindustan Lever Limited make you
do something new, seeing change as an proud of the daring of the
opportunity, experimenting with the entrepreneurs?
novel ideas and showing the courage Thus, whether one looks at economic
to try them prepare a fertile ground for development narrowly in terms of the
persistent economic development. Have increase in GDP or in the wider context
you seen the Hindi movie ‘Lagaan,’ of economic, institutional and social
where the protagonist Bhuvan raises a change, entrepreneurship plays a
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Resource mobilisation
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the question is what to export and return of (safety and liquidity) of their
where? You may be required to compile investments. That is, the idea must be
a country-product matrix to be able to financially viable as well. There should
decide. (See proforma) be enough sales in the immediate and
This way you may arrive at the the prospect of growth in the foreseeable
product-market combination showing future; there should be adequate
the fastest growing import and from assurance on the commercial viability
your point of view export potential. of the chosen product offering. Now a
Deciding on the product offering day, it is also important to be sure that
makes the highest demand on the there aren’t any environmental and
entrepreneur’s creativity and other legal restrictions/necessity of prior
innovativeness. Yet, in a competitive approvals for setting up the business.
environment, it is possible to It is also to be decided as to whether the
differentiate your product offering even business will be organised as a
if the generic product is the same and proprietary concern/partnership firm/
serves the same need. company or cooperative entity.
Clearly decision on specific Clearly the chosen product offering
product offering necessitates decisions must be feasible from the diverse
on who is buying, why, and what are perspectives. You must compile these
the value expectations. You will be able findings in the form of a business plan
to succeed when the value delivered that would have to be submitted to the
not only meets but also exceeds funding authorities, in the Indian
customers’ expectations and create a context, the State Finance Corporation
‘Vow!’ impact. of your area. They may be having a
Feasibility Analysis: The product prescribed proforma in which the details
offering idea must be technically feasible, of the business plan are required to be
that is it should be possible with the furnished and, as such there may a
available technology to convert the idea need to adapt the contents accordingly.
into a reality. And this should be An idea about the generic contents of a
possible at a cost that can be covered business plan may be had from.
by the price it will fetch; in other words, The business plan may be
the idea must be economically feasible appraised by the funding institution,
too. The project cost should be within and upon satisfying itself about the
the resources available and the resource desirability of assisting your project
providers should be reasonably sure of and upon the furnishing of some
an appropriate return on (profit) and margin money it may sanction the loan
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Countries
Products
A B C D E
Product Differentiation
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to simpler, softer and safer options of between the person and the
employment and practice of environment. Ultimately the choice of
profession. Entrepreneurial going may entrepreneurship as a career lies with
be tough; but then that is where the the individual, yet he must see it as a
tough get going! Do not worry if desirable as well as a feasible option. In
presently you may find yourself short this regard, it becomes imperative to
on those competencies, values and look at both the factors in the
attitudes. It is just a matter of making environment as well as the factors in the
up your mind for a career in individual as having a nearing on the
entrepreneurship and grooming perception of desirability and feasibility
yourselves for it. This takes us to the and thereby entrepreneurship
discussion of the process of development. One may, therefore, model
entrepreneurship development. the process of entrepreneurship
development in terms.
T HE PROCESS OF ENTREPRENEURSHIP In general, capitalist economy with
D EVELOPMENT its emphasis on individual achievement
is more suitable for entrepreneurship.
Entrepreneurship does not emerge Lower rates of taxation on personal
spontaneously. Rather it is the outcome income, lower rates of interest and
of a dynamic process of interaction moderate inflation stimulate
Technical
Administrative/Legal Economic
Commercial Financial
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Business Plan
1. Executive Summary
2. Business/industry background
3. Product/service to be offered
4. Market analysis
5. Sales and marketing strategy
6. Production/operations strategy
7. Management
8. Risk factors
9. Funds required
10. Return on and off investment and exit routes
11. Use of the sales proceeds
12. Financial summaries
13. Appendices, e.g., Reports on Market Survey,
Financial Statements, Track Record etc.
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experience and the necessary values, entrepreneurship. They could be having
attitudes and motivation (the opening a low perception of self-efficacy either
case does not elaborate this. We will on account of lack of resources (or to be
discuss these at suitable places). Even more correct, resourcefulness),
you may like to see as to where do you knowledge or know-how, and the skills.
find yourself on the desirability Collectively, these are referred to as
(willingness)-efficacy (ability) matrix, competencies, which now we turn our
won’t you? attention to.
As you may see from the matrix
figure able and willing men and women E NTREPRENEURIAL C OMPETENCIES
are a “ready” source of entrepreneurship.
Such persons leap up the first Every opportunity and successful
opportunity comes their way to be on performance of every role and function
their own. Recall, Narayan Reddy leapt has a competence requirement. Its true
up the opportunity as he met the two of entrepre-neurship as well. entitled
medicos who had returned from the Gulf. ‘Cash OR KASH?’
At any point of time, there are The term ‘competence’ refers to a
many men and women who “want” to composite of knowledge, skills and a
set up a business of their own but host of psychosocial attributes
experience self-perceived barriers to (including Attitudes and Motivation that
Shape
Entrepreneurship
Development
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Economic
Entrepreneurship
Development
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Initiative: Acting out of choice rather
Initiative: Efficiency Orientation: Concern for
than compulsion, taking the lead conservation of time, money and effort.
rather than waiting for others to start. Systematic Planning: Breaking up
Sees and Acts on Opportunities: A the complex whole into parts, close
mindset where one is trained to look for examination of the parts and inferring
business opportunities from everyday about the whole; e.g. simultaneously
experiences. Recall ‘oranges’ example.
High
Eager Ready
Entrepreneur Entrepreneur
Desirability
Low High
Self-Efficacy
Efficacy-Desirability Matrix
Persistence: A ‘never say die’ attitude, attending to production, marketing and
not giving up easily, striving financial aspects (parts) of the overall
continuously until success is achieved. business strategy (the whole).
Information seeking: Knowing and Problem-solving
Problem-solving: Observing the
knowing who knows, consulting experts, symptoms, diagnosing and curing.
reading relevant material and an overall
openness to ideas and information. Self-confidence
Self-confidence: Not being afraid of the
risks associated with business and
Concern for High Quality of Work:
Attention to details and observance of relying on one’s capabilities to
established standards and norms. successfully manage these.
Commitment to Work Contract: Assertiveness: Conveying emphatically
Taking personal pains to complete a one’s vision and convincing others of
task as scheduled. its value.
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Cash or KASH
“What do you need to be a business person?” was the opening question the anchor of
a television interview asked an eminent business personality. “Caash” she heard and
though that her interview is going to be a spoil, for it was an answer so obvious and
exhaustive that there was not anything else to talk. Or this is what she thought.
The entrepreneur saved her day, “young lady,” he continued, “you seem to have got it
wrong!” “What I meant was not C_a_s_h_=Cash, but K_A_S_H= KASH!”
Interview was off to a flying start! And the interviewee went on to elaborate what he
meant, K=Knowledge, A=Attitude, S=Skills and H=Habits.
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makes a man perfect”? For example, Need for Achievement (N-Ach.): Need
‘persuasion,’ and ‘use of influence for achievement implies a desire to
strategies’ require presentation skills. accomplish something difficult. To
You may do double the homework on master, manipulate, or organise
what you want to say, how you want physical objects, human beings or
to say, who is your audience and what ideas. To do this as rapidly and as
are their backgrounds, what could be independently as possible. To overcome
the possible questions that may be obstacles and attain a high standard.
asked, what would be their answers To excel one’s self. To rival and surpass
and so on. Practice it all over a number others. To increase self–regard by
of times, may be before mirror or your successful exercise of talent. Yes
friends, so that when you are actually entrepreneurship provides you with the
in that situation, you perform well. best opportunity for making the best
use of your talents as in employment
E NTREPRENEURIAL MOTIVATION the 9-5 routine, pressure to adhere to
rules and regulations, preference for
Men and women who have a perception compliance of boss’s instructions over
of self-efficacy and are yet to feel the use of personal creativity and
interested in or motivated by the idea innovativeness stifles your progress
of being on their own comprise a and self-development. You can create
potential, future source of a work environment that suits your
entrepreneurship. What motivates a abilities and interests.
person is a question easier asked than Need for Power (N-Pow): Need for
answered. Mr. Narayan Reddy was
Power is the concern for influencing
driven by the desire to utilise his people or the behaviour of others for
discovery of the molecule as a business moving in the chosen direction and
opportunity. In terms of Maslow’s need attaining the envisioned objectives. In
hierarchy theory, one may say that Mr. common perception, politicians, social-
Narayan Reddy was driven by the need religious leaders Chief Executive Officers
for self-actualisation. Since (CEOs), Government Bureaucrats/Civil
entrepreneurial situation is characterised Servants typify the need for power. Such
by personal accomplishment in a perception seems more based on the
competitive situations and involving belief that the source of power lies in
higher standards of excellence, one the “position” a person occupies in
often come across reference to ‘need for organisational/societal context. In the
achievement’ or N-ach for short as the same vein, business ownership too may
primary driver of entrepreneurial imply a need for power. Moreover, you
behaviour. See Box entitled ‘How N- would appreciate that the process of
Ach. Drives Entrepreneurship and founding a business, one has to win
Economic Development’. the commitment of capital providers,
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Need for Affiliation (N-Aff.): Often you carry on the tradition of business in the
must have heard your parents saying family and the community to which one
that whatever they do they do it for their belongs, may be interpreted as reflecting
children. If a man thinks about need for affiliation as well. In the
interpersonal relationships, he has a countries with the colonial past, such
concern for affiliation. It implies, among as ours, the first generation of
other things a tendency of the people to entrepreneurs in Independent India was
conform to the wishes and norms of driven by patriotic fervor and the desire
those whom they value. Apparently, to rebuild the economy left stagnated
social activists, environmentalists, by the alien rulers. One can certainly
teachers, and doctors and nurses may trace some elements of affiliation
seem as predominantly driven by these motivation in such instances.
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Need for Autonomy (N-Aut.): The for the avenues for their expression and
need for autonomy is a desire for hence are drawn to entrepreneurship.
independence and being responsible Persons eager to be on their own may
and accountable to oneself rather than strive hard to acquire the necessary
some external authority for competencies to realise their dreams.
performance. It is the desire for an How truly one has said that
opportunity for the fullest expression entrepreneurs are the dreamers
of one’s abilities. In the context of who do!
entrepreneurship, it is usually In explaining and developing
interpreted as the determination not to entrepreneurial motivation, it is
work for someone else. In most job important to learn that different
situations, employees are given little individuals are motivated differently, and
freedom to exercise their discretion in that one may be trying to satisfy more
taking decisions and choosing a course than one need through one’s pursuit.
of action so much so that absence of it This is an important observation as
drives them into starting their own economic theory very simply says that
ventures. As such n-pow. becomes the objective of the firm or that of the
more a desire for preserving one’s ethos entrepreneur is profit maximisation.
rather than the freedom from the boss.
Take the example of another E NTREPRENEURIAL VALUES AND
Hyderabad based entrepreneur entitled A TTITUDES
Entrepreneurship for Preserving
Personal Work Ethos). While explaining human behaviour,
What does the above discussion one often comes across the terms
mean for entrepreneurship development? values and attitudes. Rather than
It means that for promoting entrepre- attempting to distinguish between these
neurship it is important to kindle and two terms, it would be sufficient to say
arouse the right motivation. In the here that taken together, entrepreneurial
absence of motivation, even able men values and attitudes refer to the
and women may not take to entrepre- behavioural choices individuals make
neurship. Hence. In every Entrepre- for success in entrepreneurship. The
neurship Awareness Programme (EAP) word ‘choice’ is important, as there are
or Entrepreneurship Development alternative ways of behaving too.
Programme (EDP), there are special In entrepreneurship, a host of
sessions on entrepreneurial motivation, behavioural tendencies or orientations
besides sessions on entrepreneurial have been reported as having a bearing
competencies. on success. The entrepreneur in ‘Cash
You may note that motivation and or KASH’ labeled these as ‘Habits’,
ability can positively reinforce each some researches have called these as
other. Persons having abilities search policies or strategies. Be it the decision
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KEY TERMS
Entrepreneurship Enterprise
Entrepreneurial Risks Experimentation
Exploration Rural Entrepreneurship
Entrepreneurial Opportunities Entrepreneurial Competencies
SUMMARY
The terms ‘entrepreneur,’ ‘entrepreneurship’ and ‘enterprise’ can be understood
by drawing an analogy with the structure of a sentence in English language.
Entrepreneur is the person (the subject), entrepreneurship is the process (the
verb) and enterprise is the creation of the person and the output of the process
(the object).
Entrepreneurs play important roles both in relation to economic development
and in relation to the enterprise. In relation to economic development, entrepreneurs
contribute to growth in GDP, capital formation and employment generation besides
creating business opportunities for others and bringing about an improvement
in the quality of life in the community in which they operate. In relation to the
enterprise, they perform a number of roles right from the conception of a business
idea, examining its feasibility and mobilisation of resources for its eventual
realisation as a business firm. They bear the uncertainties and risks associated
with the business activity, introduce product, market, technological and a host of
other innovations. In the developing country context they also assume the
responsibility for the day-to-day management of the enterprise.
Given its critical role in economic development at a broader level and business
start-ups at the micro level, it is imperative that a conscious effort be made to
popularise entrepreneurship as a career option. In this regard, EAPs and EDPs
can play an important role. Besides, there is a need to create an entrepreneurship
friendly environment. Since, entrepreneurship is the outcome of a dynamic
interaction between the person and the environment, there is need also for
developing entrepreneurial competencies, motivations, values and attitudes.
EXERCISES
Multiple choice questions
Put a tick against the most appropriate answer to the following questions.
1. Entrepreneurs undertake
a. Calculated risks
b. High risks
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c. Low risks
d. Moderate and calculated risks
2. In economics, which of the following is not a function of the entrepreneur?
a. Risk-taking
b. Provision of capital and organisation of production
c. Innovation
d. Day to day conduct of business
3. Which of the following statements does not clearly distinguish between
entrepreneurship and management?
a. Entrepreneurs found the business; managers operate it
b. Entrepreneurs are the owners of their businesses; managers are
employees
c. Entrepreneurs earn profits; managers earn salaries
d. Entrepreneurship is once for all activity; management is a
continuous activity
4. In the roles and functions of the entrepreneur identified by Kilby, which
of the following is not an aspect of ‘political administration’?
a. Dealing with public bureaucracy
b. Managing human relations within the firm
c. Introducing new production techniques and products
d. Managing customer and supplier relations
5. Which of the following attitudes is not generally associated with
successful entrepreneurship
a. Investing in R and D
b. Live your business day by day
c. Innovate and improvise continually
d. Produce as per customers’ requirements
Short answer questions
1. Clarify the meaning of the terms ‘entrepreneur,’ ‘entrepreneurship,’ and
‘enterprise.’
2. Why is entrepreneurship regarded as a creative activity?
3. “Entrepreneurs undertake ‘moderate’ risks.” Elaborate this statement.
4. How does entrepreneurship result in increasing the spectrum and scope
of economic activities?
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Case Problem
Inspiring Feat: Dailywage Labourer Turns Entrepreneur
A landless woman from Bihar has been nominated among the top 25 farmers in
Asia by a Mexican website.
Forty-five-year old Lalmuni Devi was a daily wage labourer when she decided to
take destiny into her own hands and transformed herself into a successful
mushroom farmer. Today she manages to make Rs. 12,000 every year for an
investment of only Rs. 600.
Her feat finds mention on a Mexican website that has grouped her as the top 25
inspirational farmers in its photo gallery.
”I am a poor woman. I thought that mushroom farming would profit henceforth
I started it. Now I can earn a living for my family,” said Lalmuni Devi.
Successful enterprise
The success story has caught on with many women in the Azadpur village on
the outskirts of Patna.
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”It is effortless farming, which we can even do in our village. Working in the
scorching heat is very tiring. Mushroom farming generates more profit,” said
Urmila Devi.
Lalmuni and other landless women have been encouraged by the Indian Council
for Agriculture Research to take up mushroom farming.
”It is to help the poorest of the poor through alternative livelihood support system.
For that we have chosen a village where people have no land and they have to
share croppers,” said Dr A.R. Khan, Principal Scientist, ICAR, Patna.
Lalmuni’s efforts have paved the way for many other landless women to take up
mushroom farming and earn a livelihood for their family with little effort.
Source: - www.ndtv.com/features downloaded on 15/3/2006 at 1.35 am
Question
1. What inspiring feat did Lalmuni Devi perform?
2. Do you feel that you can also become an entrepreneur? Elaborate.
3. What qualities of an entrepreneur did Lalmuni Devi exhibit?
4. What are the benefits and risks of becoming an entrepreneur? How can you
guard against the risks?
(Teachers should highlight the qualities of an entrepreneur and motivate
students to do so. Help that is available from the government of India is
listed on the website www.india.gov.in.).
Project Work
1. Visit a newly started small business in your neighbourhood and interview
the owner. Prepare a report on how he/she decided to start the enterprise
and the difficulties he/she faced. Also include steps taken by the owner to
overcome them. Discuss the findings in the class.
2. Study the life history of great entrepreneurs, such as Dhirubai Ambani,
Jamshedji Tata, G.D.Birla or Kiran Mazumdar Shaw etc. Prepare a list of
common traits of these people and discuss them in your class. Can you
imbibe some of these qualities and start some enterprise later on in life?
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