Unit-5 New Venture Expansion Strategies & Issues

The new venture expansion or growth strategies are divided into internal strategies for growth & external
strategies for growth.
Internal growth strategies
These strategies involve efforts taken within the firm itself such as new product development, other
product related strategies & international expansion, with the purpose of increasing sales, revenue &
profitability. The distinctive attribute of internally generated growth is that a business relies on its own
competencies, expertise, business practices & employees.
External Expansion
Internal Expansion
Strategies
Strategies
*Joint Ventures
*New Product
Firm Growth
*Franchising
Development
Strategies
*Acquisition
*Other Product
*Merger
related strategies
*Licensing
*International
*Strategic Alliance
Expansion
External Growth Strategies
These strategies rely on establishing relationships with third parties such as, mergers, acquisitions,
strategic alliances, joint ventures, licensing & franchising. Thus, joint ventures, licensing & franchising
are strategic options entrepreneurial firms use both to enter foreign markets & accomplish external
growth.

Joint Venture
With the increase in business risks, hyper competition & failures, joint ventures have occurred with
increased regularity & often involve a wide variety of players. Joint ventures as s means of expansion by
entrepreneurial firms for a long time. Joint venture is a restricted or a temporary partnership between two
or more firms to undertake jointly to complete a specific venture. The parties who enter into agreement
are called co-ventures & this joint venture agreement will come to end on the completion of work for
which it was found the co-ventures participation the equality & operations of the business. The profits or
losses are shared between the co-ventures in their agreed ratio & in the absence of such agreement; the
profits or losses are shared equally.
Types of Joint ventures
In a joint venture, two or more businesses or individuals partners to enhance their success in a business
undertaking. They pool their resources efforts or skills & share their profits from the venture. The
following are the types of joint ventures.
1. Fully Integrated- A fully integrated joint venture closely related resembles a merger. In this
arrangement, firms integrate all of their functions from manufacturing to sales. They may
integrate function in just in one area of business such as a particular product line, or all areas.
2. Research & development-In research & development venture, a firm pool their skills, knowledge
or equipment to develop better products, services or production methods. Each firms area of
expertise may benefit the other, allowing the firms to develop these outputs more efficiently.
3. Production & marketing- Under this type, firms may either produce goods or services together or
market them together. In some cases, they do both combining their facilities, equipment &
methods can allow firms to produce goods more efficiently. They may jointly produce a product
they designed together or produce their own products using combined resources. BY marketing
together, they can also pool their resources to advertise more widely.
4. Purchasing- A joint venture agreement to purchase goods together gives both firms more
marketing power. They typically purchase goods at a lower rate by purchasing them in larger

amounts; which they divide between each other firms. Firms can also reduce costs by storing
goods together & sharing the administrative staff that monitor the inventory.
5. Networking- In some industries, joint ventures between numerous firms create a network that
better serves customers. The telecommunication, banking, & transportation industries are
examples of networking joint ventures, For example, banks use large network to process credit
card transactions & allow customers access to their funds via ATMs.
6. Domestic & International- Any of the above joint ventures can take place between two firms with
the same country; or two firms from different countries. Firms from different countries often join
together to broaden their market bases.
Advantages of joint venture
1. Accessing additional financial resources- Asset sharing is one of the best advantages of joint
venture. Large amount of funds can be used to facilitate production & operation of projects &
products, one can increase profit margin & increase revenue potential.
2. Sharing economic risk with co-venture- This involve to have someone sharing responsibility since
assets shared, the risk of losing a great deal of money is divided to both the parties.
3. Widening economic scope fast- Building reputation is often difficult, not to mention time
consuming & expensive. At a joint venture, firms can able to widen their economic scope without
spending too money.
4. Tapping new methods, technologies & approaches- In order to grow & expand, firm need
resources in the form of methods, technology & approach. Joint venture agreement will make a
firm to opens up for its needs.
5. Building relationship with vital contacts- Another advantage of joint venture is the ability to give
business relationships with vital contacts. This is just like automatically befriending partners
influence that can give access to lots of things such as business opportunities & a pass to vital
information,
Disadvantages
1. Shared profit- Since assets are shared, profits are to be shared. The profit of both the parties
usually depends on the size of the share to the venture or may be defined on the agreement.
2. Diminished control over some important matters- Operational control & decision making are
sometimes compromised in joint ventures. Since there is an agreement that divides which one
will take over a particular operation, the other may not be satisfied.
3. Undesired outcome of the quality of project- Since, one party may not have control on the
supervision of the production or the execution of one part of the system often leads to disputes &
lawsuits. To avoid this, both parties agree on specific details about the whole operation process.
4. Uncontrolled & unmonitored increase in operating costs- Defined control over the operation may
lead to this disadvantage. It is important therefore to make sure that all things are clarified on the
paper signing in the joint venture agreement.

Franchising
The word franchise comes from French which means privilege or freedom. Franchising is an
alternative means by which an entrepreneur may expand his business by having others pay fot the use of
name, process, product, service & so on. Franchising is a form of business organization which involves an
arrangement whereby the manufacturer or sole distributor of a trademarked product or service given
exclusive rights of local distribution to independent retailer in return for their payment of royalties &
conformance to standardized operating procedures.
Under franchising, a firm already has a successful product or service( franchisor), licenses its trademark
& method of doing businesses to other businesses(franchisees) in exchange for an initial franchise is
known as franchisor, the franchisee is the person who purchases the franchise & is given the
opportunity to enter a new business with a better chance to succeed.

Types of franchise systems

These are two distinctly different types of franchise systems1. Product & trademark franchise- It is an arrangement under which the franchisor grants to the
franchisee the right to buy its products & use its trade name. This approach typically connects a
single manufacturer with a network of dealers or distributors. For example, General Motors(GM)
has established a network of dealers that sell GM cars & use the GM trademark in their
advertising & promotions. Rather than obtaining a royalty or franchise fee, the product &
trademark franchisor obtains the majority of its income from selling its product to its dealers or
distributors at a markup. Examples are agricultural machinery dealers, soft drink bottlers etc.,
2. Business format franchise- This a more popular approach to franchising & is more commonly
used by entrepreneurs. In a business format franchise, the franchisor provides a formula for doing
business to the franchisee along with training, advertising & other forms of assistance. Fast food
restaurants, convenience stores, fitness centers are the examples of this type of franchising.
Business format franchisors obtain the majority of their revenues from the franchisees in the form
of royalties, franchise fees.
Types of Franchise agreements
For both product & trademark franchises & business format franchises, the franchisor-frnachisee
relationship takes three forms of franchise agreements.
1. Individual franchise agreement: It involves the sale of s single franchise for a specific location.
Franchisor
(Mumbai)
Franchisee
2. Area franchise agreement: It allows a franchisee to earn & operate a specific number of outlets in
a particular geographical area. For example, a franchisee may purchase the rights to open
franchises within the city limits. This is very popular franchise agreement. Because in most cases
it gives the franchisee exclusive rights for a given area.
Franchisor

Franchisee
Franchisee
Franchisee
3. Master franchise agreement: It is similar to an area franchise agreement with one major
difference, in addition to having the right to open & operate a specific number of locations in a
particular area, also has the right to offer & sell the franchise to other people in its area. The
people who buy franchises from master franchisees are typically called Sub- franchisees.
Franchisor

Franchisee
Franchisee
(in a particular geographic area)

Plus

Sub- franchisee (sell to others)

Franchisee

Franchisee

Franchisee

Advantages of Franchising
1. Rapid, low-cost market expansion: Franchisees provide most of the cost of expansion; the
franchisor can expand the size of its business fairly rapidly.
2. Income from franchise fees & royalties: By collecting franchise fees, the franchisor gets a fairly
quick return on the products/ services. The franchisor also receives ongoing royalties from its
franchisees without incurring substantial risk.
3. Franchisee motivation: Franchisees put their personal capital at risk, they are highly motivated to
make their franchise outlets successful. In contrast, the managers of company-owned outlets
typically do not have their own capital at risk.
4. Access to ideas & suggestions: Franchisees represent a source of intellectual capital & often
make suggestion to their franchisors. BY incorporating these ideas into their business models,
franchisor can in effort leverage the ideas & suggestions of their individual franchisees.
5. Cost savings: Franchisees share many of the franchisors expenses, such as the cost of regional &
national advertising.
6. Increased buying power: Franchisees provide franchisors increased buying power by enlarging
the size of their business allowing them to purchase larger quantities of products & services when
buying those items.
Disadvantages
1. Profit sharing: By selling franchises instead of operating company-owned stores, franchisors
share the profits derived from their proprietary products or services with their franchisees.
2. Loss of control: It is typically more difficult for a franchisor to control its franchisees than it is for
a company to control its employees. Franchisees, despite the rules governing the franchise
system. Still often view themselves as independent business people.
3. Friction with franchisees: A common complaint of franchisor is dealing with the friction that
often develops between franchisors & franchisees. Friction can develop over issues such as
payment of fees, house of operation & surprise inspection.
4. Managing growth: Franchisors that are in growing industries & have a strong trademark often
grow quickly, rapid growth can be difficult to manage. A franchisor provides each of its
franchisees a number of services such as site selection & employee training. If a franchise system
is growing rapidly, the franchisor will have to continually add personnel to its own staff to
properly support its growing number of franchisees.
5. Legal expenses: Many governments have specific laws pertaining to franchising. As a result, if a
franchisor sells franchises in multiple areas, legal expenses can be high to properly interpret &
comply with each government laws.

Acquisition
Another way the entrepreneur can expand the venture is by acquiring an existing business. Acquisition
provides an excellent means of expanding a business by entering new markets or new product areas. An
acquisition is the purchase of an entire company, or part of the company, by definition, the company is
completely absorbed & no longer exists independently. An acquisition can take many forms depending on
the goals & position of the parties involved in the transaction, the amount of money involved &the type of
the company. In an acquisition, the surviving firm is called the Acquirer & the firm that is acquired is
called the target. Acquiring another business can fulfill several of a companys needs, such as expanding
its product line, gaining access to distribution channels, achieving economies of scale, or expanding the
companys geographic reach. In most cases, a firm acquires a competition or a company that has a
product line or distinctive competency that it needs.
Ex. Google acquired You Tube in 2006 to gain access to its online video streaming technology & to
provide another platform for its online ads.

Advantages

For an entrepreneur, there are many advantages to acquire an existing business.

1. Establishes business: The most significant advantage is that the acquired firm has an established
image & track record. If firm has been profitable, the entrepreneur need only continue its current
strategy to be successful with the existing customer base.
2. Location: New customers are already familiar with the location.
3. Established marketing structure: An acquired firm has its existing channel & sales structure
known suppliers, wholesalers, retailers & manufacturers representatives are important assets to
an entrepreneur. With this structure already in place, the entrepreneur can concentrate on
improving or expanding the acquired business.
4. Cost: The actual cost of acquiring a business can be lower than other methods of expansion.
5. Existing employees: The employees of an existing business can be an important asset to the
acquisition process. They know how to run the business & can help ensure that the business will
continue in its successful mode. They already have established relationships with customers,
suppliers & channel members & can improve these groups when a new owner takes over the
business.
6. More opportunity to be creative: Since the entrepreneur does not have to be concerned with
finding suppliers, channel members, hiring new employees, or creating customers awareness,
more time can be spent assessing opportunities to expand or strengthen the existing business &
tapping into potential synergies between the businesses.
Disadvantages
1. Marginal success record: Most ventures that are for sale has an erratic, marginally successful, or
even unprofitable track record. It is important to review the records & track record. It is important
to review the records & meet with important constituents to assess that record in terms of the
businesss future potential.
2. Over confidence in ability: Sometimes an entrepreneur may assume that he can succeed where
others have failed. This is why a self- evaluation is so important before entering into any purchase
agreement. Often managers are over confident in their ability the overcome cultural difference
between their current business & the one being acquired.
3. Key employee loss: Often, when a business changes hands, key employees also leave. Key
employee loss can be problem to an entrepreneur who is acquiring a business since the value of
the employees. Incentives can sometimes be used to ensure that key employees will remain with
the business.
4. Over valuation: it is possible that the actual purchase price is inflated due to the established
image, customer base, channel members or suppliers. It is important to look at the investment
required in purchasing a business & at the potential profit & establish a reasonable payback to
justify the investment.
5. After balancing the pros & cons of the acquisition, an entrepreneur needs to determine a fair price
for the business.

Mergers
Mergers are yet another form of external growth strategy. Merger means a combination of two or more
existing enterprises into one. Merger takes place in two ways, first, an enterprise or enterprises may be
acquired by another usually a big one, it is called Absorption. Second, when two or more existing
enterprises merge into one to form a new enterprise, it is called Amalgamation.
Types of Mergers
Mergers are classified into four types:
1. Horizontal merger: In this type, the same type of product or market is added to the existing ones.
Adding refrigerators to its original products of steel safes & locks by Godrej is an example of
horizontal merger.
2. Vertical merger: Under this type, complimentary products or services are added to the existing
[product or service line of the enterprise. The new product or services serve either as inputs or a

customer for the firms own product. A TVC manufacturer may start producing tubes needed by
its. Setting up of retails hops by companies like Delhi cloth mills to sell its fabrics is also vertical
type of merger.
3. Concentric merger: An enterprise enters into the business related to its present one in terms of
technology, marketing or both. Nestle, originally a baby food producer, entered into related
products like Tomato Ketchup, & Maggi Noodles. Similarly, a tea company like Lipton may
diversify into coffee.
4. Conglomerate merger: This type of merger is just contrary to concentric merger. IN other word, in
this type of growth strategy, an enterprise diversifies into the business which is not related to its
existing business neither in terms of technology nor marketing. Godrej, manufacturing steel safes
& having shaving creams are examples of conglomerate merger.
Advantages
Merger provides the following advantages:
1. It provides benefits of economies of scale in terms of products & sales.
2. It facilitates better use of resources.
3. It enables sick enterprises to merge into healthy ones.
4. It also promotes diversification in product line to take advantage of opportunities available in
particular.
Disadvantages
Merger also suffers from the following drawbacks:
1. Larger scale operation often makes co ordination & control in effective. This adversely affects
business performance as a whole.
2. Sometimes merger leads to monopoly in the particular business.

Rights Issue
According to companies act, 1956, if a company wants to increase its subscribed capital by allotment of
further shares after 2 years from the date of formation or one year from the date of its first allotment,
whichever is earlier should offer shares at first to the existing shareholders in proportions to the shares
held by them at the time of order. The shareholders have no legal binding to accept the offer & they have
right to reject the offer in favour of any person. Shares of this type are called Right shares. Generally
right shares are offered at an advantageous rate compared with the market rate.
Conditions to issue Right shares
The company has to satisfy certain following conditions to issue right shares:
1. Right shares must be offered to the equity shareholders in proportions to the capital paid on those
shares.
2. A notice should be issued to specify the number of shares issued.
3. The time given to accept the right offer should not be less than 15 days.
4. The notice should also sate the right of the shareholders to reject the offer in favour of others.
5. After the expiry of the time given in the notice, the board of director has the right to dispose the
unsubscribed shares in such a manner, as they think most beneficial to the company.

Public Issue
Public issue is the issue of stock on a public market rather than being privately funded by the companys
own promoters. By issuing stock publically, this allows the public to own a part of the company, though
not be a controlling factor. Public issue is a source of equity funding is to sell stock to the public by
offering an Initial Public Offering (IPO). An IPO is the first sale of stock by a firm to the public. When a
company goes public, its stock is typically traded on one of the major stock exchanges.
Going public occurs when the entrepreneur of the venture offers & sell some part of the company
to the public through a registration statement filed with the securities commission of the country. In India,

Securities & Exchange of India (SEBI) created by SEBI Act, 1992. The first step in initializing a public
offering is for a firm to hire an investment bank. An investment bank is an institution that acts as an
underwriter or agent for the firm issuing securities. The investment bank acts as a firms advocate &
advisor supports in the process of going public. The most important issues the firm & its investment bank
must agree on are the amount of capital needed by the firm. The type of stock to be issued, the price of the
stock when it goes public & the cost to the firm to issue the securities.
An investment bank issues a preliminary prospectus that describes the offering to the general
public. The preliminary prospectus has to get approved by SBEI then investment bank issues final
prospectus, which sets s date & issuing price for the offering. The preliminary prospectus called as Red
Herring, because a statement printed in red ink appears on the front page. A variation of IPO is a private
placement, which is the direct sale of an issue of securities to a large institutional investor. When a private
placement is initiated, there is no public offering & no prospectus is prepared.
Advantages
1. Going public generally results in a public trading market & provides merchandise for valuing the
company & allowing this value to be easily transferred among parties.
2. Public traded companies often find it easier to acquire other companies by using their securities
in the transactions.
3. Investors benefit due to easier liquidation of their investment when the companys stock takes on
value & transferability.
4. Publicly traded companies find it easier to raise additional capital, particularly debt. Money can
be borrowed more easily.
Disadvantages
1. Making long term decisions can be difficult in publicly traded companies where sales &
profit results indicate the capability of management via stock values.
2. Public issue may result to loss of autonomy as well as increased duties to public stockholders
& administrative burdens.
3. Publicly traded companies spends significant amount of additional time, expenses & liability
risks are greater.

Bonus Issue
Bonus refers to an unexpected extra benefit. Bonus can be paid to shareholders either in the form of cash
or in the form of equity shares. When bonus is paid in the form of shares then it is called as Bonus issue.
Bonus share is the share allotted (issued) by company after capitalization of free reserves. IN other words,
bonus shares are issued to the existing shareholders by converting free reserves into equity capital without
taking any consideration from investors.
Generally, companies will not declare 100% dividend because they create some free reserve for future
contingencies, thus it retain some portion of earnings. When company keeps doing this for a long time &
companys financial performance is fair, then free reserves have to be distributed to shareholders which is
called as bonus. This issue of bonus shares does not affect capital structure of the company.
Objectives / Reasons for Bonus Issue
The following are the prime reason for issue of bonus shares.
1. To bring down the market price per share within a more popular range.
2. To promote active trading of shares in secondary market.
3. To reduce the impression that company is making huge profits, because bonus issue increase
number of shares, thereby, dividend comes down.
4. To achieve respectable size in the eyes of investors, bonus issues increase capital base.
5. To send signal that companys future prospects have brightened & also create an impression that
future divided will increase.

6. To improve prospects of raising additional funds. Usually, investors prefer to invest in a company
which is declaring dividends,; so it helps to raise additional funds easily.

Stock Split
Stock split can be done only by publicly traded companies which have a number of shares outstanding on
the stock market. Stock split is the action of company to reduce the par value of stock & increase the
number of shares proportionately. Stock split is a decision the number of companys board of directors
(BODs) to increase the number of shares that are outstanding by issuing shares to the current
shareholders.
For example, in a 2 for 1 split, 2 new shares are issued for each old share, with new share worth half the
value of each of old share. Stock split has no impact on the companys capital structure. Stock split
reduces stock price, since the number of shares outstanding has increased.
Stock Split & Capital Structure
Particulars
Capital Structure before Stock split
Equity share capital (4,00,000 shares @Rs. 10 each)
Retained earning
Particulars
Capital Structure after Stock split
Equity share capital (8,00,000 shares @Rs. 5 each)
Retained earning

Amount
40,00,000
10,00,000
1,40,00,000
Amount
40,00,000
10,00,000
1,40,00,000

Reasons for Stock split

1. To make share trading attractive: The prime reason of stock split is to reduce the share price in the
market, attract small investors.
2. Indicators of higher profits in the future: Share split sends wrong signals to investors that firm is
expecting higher profits in the near future.
3. To give higher dividends to shareholders to shareholders: Share split is the only way through
which a company can increase or reduce the cash dividend per share. However, total dividends of
the shareholder increase after a share split.

Unit-8 Global Aspects of Entrepreneurship

International entrepreneurship is the process of an entrepreneur conducting business activities across
national boundaries. The activities necessary for ascertaining & satisfying the needs & wants of target
consumers take place in more than one country. International business has become increasingly important
top firm of all sizes, when every firm is competing in a hyper competitive global economy. The successful
entrepreneur will be someone who fully understands how international business differs from domestic
business to respond accordingly, thereby successfully going global.
International Vs. Domestic Entrepreneurship
Bothe international and international entrepreneurs are concerned with the sales, costs & profits,
differences arise in the variation in the relative importance of the factors affecting each decision.
International entrepreneurship decisions are complex due to following uncontrollable factors and these
factors affects entrepreneurial performance.
1. Economics: In a domestic business strategy, as single country at a specified level of economic
development is the focus of the firms entrepreneurial efforts. Creating a business strategy for a
multi country market means dealing with the differences in levels of economics development,
currency valuation, government regulations, banking, marketing & distribution systems.
2. Current account: With the present system of flexible exchange rates , a countrys current
account( the difference between the value of countrys exports & imports over time) affects the
valuation of its currency. The valuation of one countrys currency affects business transactions
between countries.
3. Political & legal environment: The variety of different political & legal factors in the international
markets creates vastly different business problems. One significant factor in this environment can
influence business strategy of an entrepreneur. Product decisions are affected by legal
requirements with respect to ingredients, packaging & labeling. The types of ownership &
organizational forms vary widely throughout the world & its laws also vary. Several legal issues
are critical to some extent for every entrepreneur especially, product safety, product liability,
property rights etc.,
4. Language: Sometimes one of the biggest problems for an entrepreneur is finding a translator.
Significant problems can occur with careless transaction, to avoid such errors; care should be
taken to hire a translator.
5. Technological environment: Technology varies significantly across countries. While firms in
developed countries, produce mostly standardized, relatively uniform products that can be sorted
to meet industry, standards. This is not the case in many countries, making it difficult to achieve
consistent level of quality.
6. Culture: Culture is learned behavior & the identity of an individual & society. Culture
encompasses a wide variety of elements, including language, social structure, religion, political,
education, manners & customs. An entrepreneur must have command of the language in the
country in which business is being done, it is important for information gathering and evaluation
& essential for communication in developing advertising campaigns.
Foreign Market Selection
The market selection decision should be based on both past sales & competitive positioning as well as
an assessment of each foreign market alternative. Data need to be collected on a systematic basis
on both a regional & country basis. While there are several market selection models available,
one good method employs a five-step approach:
1. Develop appropriate indicators: Appropriate indicators need to be developed based on past sales,
competitive research, experience & discussions with other entrepreneur doing global business.
Specific indicators for the company need to be developed in three general areas: overall market

2.

3.

4.
5.

size indicators, market growth indicators & product indicators. Market size indicators include
population, per capita income, market & types of consumers. Product indicators such as size of
export, number of sales & levels of interest should be established.
Data collection: This method involves collecting data or each of these indicators & making the
data comparable. Bothe primary & secondary data, where primary is the original information
collected for particular requirements & secondary data is already available data. When collecting
international secondary data, there are several problems which include compatibility of one
country to other, availability, accuracy & cost. The collected data for each selected indicator
needed to be converted to a point score so that each indicator of each country can be numerically
ranked against the other country.
Establish weights for each indicator: The third step is to establish appropriate weights for the
indicators to reflect the importance of a particular indicator in predicting foreign market potential.
The assignment of weights & points as well as the selection of indicator vary greatly from one
entrepreneur to other. This requires intensive thinking & internal discussion & results is far better
market selection decisions being made.
Analysis of data: This step involves analyzing the results from data collection. When looking at
the data, the entrepreneur should carefully scrutinize & question the results. He should also look
for errors, as mistakes can be easily made.
Selection of market: The final step involves selecting a market to enter as well as follow-up
markets so that appropriate entry strategy can be selected a market plan developed.

Entrepreneurial Entry Strategies / Modes of Foreign Entry

There are various ways an entrepreneur can market products internationally. The method of entry into a
market & the mode of operating foreign operators are dependent on the goals of the entrepreneur & the
companys strengths & weaknesses. The following are the modes of entering in international business can
be dividing into three general categories:
1.
Exporting: Frequently, an entrepreneur starts doing international business through exporting.
Exporting normally involves the sale & shipping of products manufactured in one country to a customer
located in other country. There are two general ways of exporting:
Direct Exporting: direct exporting is done through independent distributors or a companys
own overseas sales office is a way to get involved in international business, Independent
foreign distributor usually handle products for seeking relatively rapid entry into a large
number of foreign markets/ Entrepreneur also can open their own overseas sales office & hire
their own sales persons to provide market representation.
Indirect Exporting: Indirect exporting involves having a foreign purchase in the local market
or using an export management firm. For certain products, foreign buyers actively seek out
sources of supply & have purchasing offices in markets throughout the world. This method
involves least amount of knowledge & risk.
2. Non- equity arrangement: Ehen market & financial conditions changes an, entrepreneur can enter into
international business by one of the following three types of non equity arrangements. These methods
allows entrepreneur to enter a market & obtain sales & profits without direct equity investment in
foreign market.
Licensing: Licensing involves an entrepreneur who is a manufacturer (licensor) giving a
foreign manufacturer (licensee) the right to use a patent, trademark, technology, production
process, or product in return for the payment of royalty. The licensing arrangement is the
most appropriate when entrepreneur ahs no intension of entering through exporting or direct
investment. Since, the process of low risk yet provides A way to generate incremental
income, a licensing agreement can e good method to enter into international business.
Turn-key projects: another method of doing international business without much risk is
through turn-key projects. Under this method, a foreign entrepreneur build a factory or other
facility, train the workers, train the management,& then turn it over to local owners once the

operations is going. Franchising is provided by the local company or the government with
periodic payments being made over the life of the project.
Management contracts: Several entrepreneurs have successfully entered international
business by contracting their management techniques & skills. The management contracts
allow the purchasing country to gain foreign expertise without giving ownership of its
resources to a foreigner.
3.
Foreign Direct Investment: The wholly owned foreign business has been preferred mode of
ownership for
entrepreneurs using direct foreign investment for doing business international markets. The percentage of
ownership obtained in the foreign venture by the entrepreneur is related to their amount of money
invested, the nature of the industry & the rules of foreign government. The following are the methods of
FDIs are:
Minority interest: Japanese companies have been frequent users of the minority equity
positions indirect foreign investment. A minority interest can provide a firm with sources of raw
materials or relatively captive market for its products. Entrepreneurs have used minority positions
to acquire experience in a market before making a major commitment.
Majority interests: Another equity method by which the entrepreneur can enter international
markets is through the purchase of a majority interests in foreign business, it refers to over 50%
of the equity in a firm of majority interest.
Joint venture: Another direct foreign investment method by entrepreneurs to enter foreign
markets is joint venture. Under this process, two firms ( for example, one US firm one UK firm)
get together & form a third company, in which they share the equity. Entrepreneurs use joint
ventures most often in two situations:
1. When the entrepreneur wants to purchase local knowledge as well as an already
established manufacturing facility.
2. When rapid entry into a market is needed.
3. One of the most frequent reasons an entrepreneur forms a joint venture is to share the
costs & risks of a project.
4. Mergers: An entrepreneur can obtain 100% ownership to ensure complete control. Many US
companies desire complete ownership & control in foreign investments. If an entrepreneur has capital,
technology & marketing skills required for successful entry, there may be no reason to share ownership.
An entrepreneur have to spend more time searching for a firm to acquire & their finalizing the
transaction.
5. Entrepreneurial Partnering: One of the best methods for an entrepreneur to enter into an international
market is to partner with an entrepreneur in that foreign country. The foreign entrepreneurs know the
country & culture & therefore can facilitate business transactions. There are several characteristics of a
good partner. A good partner helps the entrepreneur to achieve his goals such as market access, cost
sharing or also share entrepreneurs vision.

Unit-4 Financing A New Venture

Sources of capital
One of the most difficult problems in new venture creation process is obtaining finance. For the
entrepreneur, available financing needs to be considered from the perspective of debt vs. equity and
internal & external funds.
Debt Vs. Equity financing
Two types of financing to be considered, debt & equity financing. Debt financing is a financing method
which involves an interest bearing instrument usually a loan, the payment of which is only indirectly
related to sales & profits of the venture. Short term debt used to provide working capital to finance stock,
accounts receivables or the operations of the business. Long term debt is frequently used to purchase
some assets like machinery, land & buildings etc.,
Equity financing offers the investor some form of ownership position in the venture; the investor shares in
the profits of the venture. Usually, an entrepreneur meets financial needs by employing a combination of
debt & equity financing.
Internal & external funds
Financing is also available from internal & external funds. The funds most frequently employed are
internally generated funds. Internally generated funds can come from several sources within the company;
profits, sale of assets, reduction in working capital, extended payment terms & fast account receivables.
In every new venture, the startup years involve putting all the profits back into the venture.
The other general sources of funds are external to the venture. Alternative sources of external financing
need to be evaluated on three basis: the length of time the funds are available, the costs involved & the
amount of the company needed.. The most frequently used sources of funds are as follows:
Personal funds: The sources of personal funds include savings, life insurance, or mortgage on the
house or any property.
Family & friends: After the entrepreneur, family & family are a common source of capital; for a
new venture. They are most likely to invest due to their relationship with the entrepreneur. A
formal agreement before investment helps top avoid future problems.
Commercial banks: Commercial banks are by for the source of short term funds most frequently
used by the entrepreneur when guarantee is available. The funds provided are in the form of debt
financing.
Private placements: Another source of funds for the entrepreneur is private placements also called
business angels, who may be family members & friends or wealthy individuals.
R&D Limited partnership: R&D Limited partnerships are another possible source of funds for
entrepreneurs in high technology areas. This method of financing provides funds from investors
looking for tax-shelters. A typical R&D partnership arrangement involves a high degree of risk &
significant expense in doing the basic research & development.
Major Elements
The three major components of any R&D limited partnership are the contract, the sponsoring company &
the limited partnership.
Contract: It specifies the agreement between the sponsoring company & the limited partnership,
whereby the sponsoring company agrees to use the funds provided to conduct the proposed R&D.
The sponsoring company does not guarantee results but performs the work on best effort basis.
The contact has several key features-1. The liability for any loss incurred is borne by the limited
partners.2. There are some tax advantages to both the limited partners & the sponsoring company.

Limited partners are similar to shareholders of the company, they have limited liability. When the
technology is successfully developed, the partners share in the profits.
Sponsoring company acts as the general partners developing the technology. The sponsoring
company usually retains the rights to use this base technology6 to develop other products & to
use the developed technology in the future for a license fee.

Procedure / Stages in R&D Limited partnership

An R&D Limited partnership generally progresses through three stages:
1. Funding stage: A contract is established between sponsoring company & limited partners & the
money is invested for the proposed R&D effort. All the terms & conditions of ownership, as well
as the scope of the research are carefully documented.
2. Development stage: The sponsoring company performs the actual research, using the funds from
the limited partners. If the technology is subsequently successfully developed, the exit stage
commences in which sponsoring company & the limited partners enjoy the benefits of the effort.
There are three basic types of arrangements for doing this:
Equity partnership arrangement, where the sponsoring company & limited partners forms
a new, jointly owned corporations.
Royalty partnership arrangement, where a royalty based on sale of the products
developed form the technology is paid by the sponsoring company to R&D limited
partners. The royalty rates range from 6 to 10 percent of gross sales.
Exit stage arrangement, this arrangement is through a joint venture. Here the sponsoring
company & the partners form a joint venture to manufacture & market the products
developed from the technology.
Financing New Venture
The following are the stages of business development or venture capital financing:
1. Early-stage financing:
Seed capital- Relatively small amounts needed to prove concepts & finance feasibility
studies.
Start-up capital- funding for a product development & initial marketing; as they are no
commercial sales yet, funding required to actually get the company operations started.
2. Expansion or growth financing:
First stage- Working capital required for initial growth phase, as there is no clear
profitability or cash flow yet.
Second stage- Funding needed for major expansion for company with rapid sales growth;
company is at break even or positive profit levels but is still private.
Third stage- Bridge financing needs to prepare company for public offering.
3. Acquired & Leveraged Buy-Out financing:
Traditional acquisition: Funds for acquiring ownership & control of another company.
Leveraged buy-out (LBOs) - Funds for acquiring control of another company by buying
out the present owners.
Going Public- Funds for some of the owners / mangers of a company to buy all the
outstanding stock, making a public company.
Venture capital
Money provided by investors to startup firms & small businesses with perceived long term growth
potentials. Venture capital is a very important source of funding for startups that do not have access to
capital markets. It typically involvers high risk, but it has the potential for above average returns. Venture
capital can do include managerial &technical expertise. Most venturte comes from a group of wealthy
investors, investment banks other financial institutions that pool such investments or partnerships. This

forms of raising capital is popular among new companies which cannot raise funds by issuing debt.
Venture capitalists usually involvers in company decisions in addition to a portion of the equity.
Meaning of Venture capital
Venture capital is a means of equity financing for rapidly growing companies. Finance may be required
for startup development / expansion or purchase of a company. Venture capital firms invests funds on
professional basis often focusing on a limited sectors of specialization like IT, infrastructure, health
sectors etc.,
With venture capital financing, the venture capitalist acquires an agreed proportion of equity of the
company in return for the funding. When venture capitalists invest in a business they typically acquire a
seat on the companys board of directors. They tend to take a majority share in the company; usually do
not take day to day control. Professional venture capitalists acts as mentors &aim to provide support &
advice on arrange of management, sales & technical to assist the company to develop its full potential.
Characteristic features of venture capital
A venture capital has five main characteristics:
1. Venture capital is a financial intermediary, that it taken the investors capital & invests it directly
in portfolio companies.
2. Venture capital invests only in private companies. This means that once the investments are made,
the companies cannot be immediately traded on a public exchange.
3. Venture capital takes an active role in monitoring & helping the companies.
4. Venture capitalists primary goal is to maximize its financial return by existing investments.
5. A venture capital invests funds for the internal growth of companies.
Process of Venture capital
The following are the stages in venture capital (VC) investing:
1. Seed stage: The first stage of venture capital financing provides capital to entrepreneur to finance
the early development of a new product / service. These early financing may be directed towards
product development, market research, developing a business plan. A seed stage company has
usually not yet established commercial operations, cash required to fund continued research &
product development is essential. It requires capital for pre-startup R&D, product development &
testing or designing specialization equipment.
2. Early stage: For companies tat are able to begin operations but are not ye6t at the stage of
commercial manufacturing & sales, early stage financing supports a step up capabilities. At this
point, new business can consume vast amounts of cash.
Startup- Startup financing provides funds to companies for product development & initial
marketing. Firms have already assembled key management, prepared a business plan &
made market studies at this point.
First stage- Capital is provided to initiate commercial manufacturing & sales. Most first stage
companies have been in business less than 3 years & have as product / service in testing or
pilot production.
3. Formative stage: this stage includes seed & early stage.
4. Later stage: Capital provided after commercial manufacturing & sales. The product or service is
in production & is commercially available. The company demonstrates significant revenue
growth, but may or may not be showing a profit. It has usually been in business for more than 3
years.
Expansion stage- Capital provided for major expansion such as physical plant expansion,
product improvement & marketing.
Mezzanine (bridge)- Finances the step of going public & represent the bridge between
expanding the company & the IPO ( Initial Public Offering).
Angel Investment
An investor who provides financial backing for small startups or entrepreneurs. Angel investors are
usually found among an entrepreneurs family & friends. The capital they provide can be a one time

injection of seed money or ongoing support to carry the company through difficult times. They are
focused on helping the business succeed, rather than reaping a huge profit form their investment. Angel
investors are essentially the exact opposite of a venture capitalist.
Angel investors are often retired entrepreneurs or executives, who may be interested in angel investing for
reasons that go beyond pure monetary return. These include wanting to keep eye on current developments
in a particular business area, mentoring another generation of entrepreneurs & making use of their
experience & network. Thus, in addition to funds, angel investors can often provide valuable management
advice & important contacts.
Advantages
1. Funding range: for many small businesses, an angel investor may be a more suitable source of
startup funds than a venture capital. These investors usually invest in small amounts, which can
provide most of a companys needed startup capital.
2. Business experience: Angel investors are experienced in the field of business & can usually being
a great deal of that experience to ay business venture, Few investors in startup, angel investors
may take a significant part in decision- making.
3. No debt financing: As opposed to loans & other forms of credit financing, angel investors funding
is a much cheaper form of seed capital. Angel funding does not require monthly payments on the
capital & interest, they take a portion of profits. The ownership share allotted to angel investors
typically starts at about 10% but increase with the amount of funding invested in the business
venture
Disadvantages
1. Control: Angel investors may provide necessary guidance; some may make demand on company
that entrepreneurs find to be excessive.
2. Less Transparent: Compared to venture capital firms, angel investors are much harder to research
& contacts.
Types of business angels
1. Growth hunters: Many individuals invest in a business hoping that it will turn a profit. Some
business angels focus on investing in ideas that will turn the quickest profit. These investors want
to see a large return on their investment within a few years.
2. Advisory angels: Some investors contribute money towards the industry that they know well or
work in. These types of investors often contribute in other ways, such as analyzing business
decisions or reviewing products. Some business angles do not invest money at all but rather work
as advisors for startup firms.
3. Passive angels: Silent angels contribute the necessary funding to a startup company, but remain
passive in all other aspects. Silent angels do not work within the company, but provides assistance
or makes any business decisions as the company launches.
4. Group angels: Not all business angels work alone. Angel investor group invest money as a
collective. Typically, a main investor will seek out new investment opportunities & then propose
idea to the group, who decide whether or not to invest as a group. Group of angels split any
profits made from an investment. Individuals within group can act in an advisory capacity or
remain passive.
Record Keeping
The entrepreneur should be comfortable & able to understand what is going on in the business. The goals
of good record keeping system are to identify key incoming & outgoing revenues that can be effectively
controlled.
Record keeping refers to the retention of records deemed important to a person, company or any other
establishment. It is the process & system of maintaining business documents so that risk records can be
found quickly & easily. Under Income Tax act, a business is required to keep business records for a period
of at least 5 years.
Importance of Record keeping

The business documents should & must be kept for a period of not less than seven years. Good record
keeping practices are important part of your business. Having good record keeping practices can benefit
in the following ways:
a. Better internal control of business to help business planning & decision making.
b. An essential sources of evidence to detect business losses, internal fraud & theft etc.,
c. Reduction in cost & effort on collecting information when preparing tax & other reporting
obligations.
Benefits of Record Keeping
The benefits of keeping accurate records are as follows:
1. To determine the profitability of a business, by keeping proper records, the profit or loss made by the
business can be easily calculated.
2. To maintain proper financial control of the business in order to maximize profit. Proper record
keeping will help to determine whether or not the resources of the business are being managed
efficiently.
3. To be able to provide financial information about the business is very important in assisting
management, investors, creditors etc., make informed decisions about the business.
4. To provide necessary information to file a tax return as well as to furnish the relevant information for
auditing.
Internet Advertising / Online advertising
Advertising on internet can be important of marketing strategy, helping to drive people to website. Unlike
other traditional advertising, online advertising can deliver visitors immediately through a simple click on
ad & provides measurable results. The internet is vast, to maximize the effectiveness of online
advertising, need to ensure that ads appear in a right place by selecting websites that can deliver the right
audience for product or service.
Definition
Online advertising is marketing strategies that involve the use of the internet as a medium to obtain
website traffic target & deliver marketing messages to the right customers.
Costs of online advertising
Online advertisements are purchased through one of the following common vehicles:
1. Cost Per Thousand (CPT): Advertisers pay when their messages are exposed to specific
audiences.
2. Cost Per Click (CPC): Advertisers pay every time a user clicks on their ads.
3. Cost Per Action (CPA): Advertisers only pay when a specific action (generally a purchase) is
performed.
Examples of online advertising include banner ads, search engines, result pages, social networking ads,
email spam, online classified ads, pop-ups, contextual ads & spyware.
Types of Online advertising
1. Display advertising: It refers to the use of web banners r banner ads placed on a third party
website to drive traffic to a corporate website & increase product awareness. These banners
consist of static or animated images, as well as interactive media including audio & video.
2. Affiliate marketing: It is a form of online advertising where advertisers place campaigns with a
potentially large number of publishers, who are only paid media fees when the advertiser receives
web traffic.
3. Social networking advertising: It is a form of online advertising on social networking sites, such
as facebook. Advertising on social media networks can take the form of direct display ads
purchased on social network.
4. Search engine marketing (SEM): It is a form of marketing that seeks to promote websites by
increasing their visibility in search engines results pages(SERPs). Advertisers pay each time users
on their visiting are redirected to other websites.

5. Mobile advertising: Cell phone advertising is the ability for organizations & individuals to
advertise their product or service over mobile devices. This advertising is generally carried out
via text messages or applications. The best advantage of mobile advertising is that mobile devices
are usually close t the users throughout the day.
Advantages
1. Extensive coverage: Network connections with computers worldwide, it is global network of
large & small throughout the world. This involves wide scope of spreading information & human
contact to every corner of the world.
2. Large capacity of information: Capacity to provide information is unrestricted. Companies can
provide thousands of pages of advertising information & instructions. A small banner ad includes
products or services including product performance, price, model etc.,
3. Strong interaction with sensory: Online advertising carrier is basically a multimedia, hypertext
format, as long as the audience interested in a certain product, they can tap the mouse further to
know more.
4. Real time & long lasting unity: Internet media has the right to change information at any time
according to their need. They can get adjust product prices, product information, a web can get
latest information & this media can also be long term preservation advertising information.
Disadvantages
1. Filtered visitors: Some visitors do not want to see, this situation is similar to other media, only
handful consumers will buy product.
2. Lack of skills. The expression & transmission of information still need presentation skills to
attract consumers. Attractive presentation skills & marketing skills is more demanded in online
advertising.
3. Marketing personnel requirements are higher: Online advertising marketing personnel
requirement are higher than other media. This advertising requires marketers integrated use of
traditional advertising performance practices, providing information on the use of soft methods &
network marketing techniques.
Financial Control
The financial plan is an internal part of business plan. For preparing performa income & cash flow
statements for the first 3 years, the entrepreneur will need some knowledge of how to provide appropriate
controls to ensure that projections & goals are met. Some financial skills are thus necessary for the
entrepreneur to manage the venture during these early years. Cash flows, the income statement & the
balance sheet are the key areas that will need careful management & control.
Areas of Financial control
1. Managing cash flows: Since cash outflow may exceed cash inflow when growing a business, the
entrepreneur should try to have an up to date assessment of the cash position. This can be accomplished
by preparing monthly cash flow statements & comparing the budgeted with the actual results. This will
provide some indicators as to where cash flow problems may exist. For a new venture, it may be
necessary to prepare a daily cash sheet.
2. Managing Inventory: During the growth of a new venture, the management of inventory is an
important task. Too much inventory can drain cash flow since manufacturing, transportation & storage
costs must be borne by the venture. On the other hand, too little inventory to meet customer demand can
also cost the venture in lost sales. Growing ventures typically tie up more cash in their inventory than in
any other part of the business. Efficient electronic data interchange (EDIs) among producers, wholesalers
& retailers can enable these firms to communicate with one another. Transport mode selection can also be
important in inventory management of inventory through a computerized system & by working with
customers & other channel members can minimize transportation costs.
3. Managing fixed assets: Fixed assets generally involve long term commitments & large investments for
the new venture. These fixed assets will have certain costs associated with them. If the entrepreneur
cannot afford to buy equipment or fixed assets, leasing could be considered as an alternative. The

entrepreneur can take a lease for short period, reducing the other terms commitments to any specified
assets. As with any other make or buy decisions, the entrepreneur should consider all costs associated
with the decision as well as its impact on cash flows.
4. Managing costs & profits: Cash flow analysis can assist the entrepreneur in assessing & controlling
costs, it is also useful to compute the net income during the periods. The cost effective use of income
statements is to establish cost standards & compare the actual with the budgeted amount for that time
periods. Where expenses or costs have been much higher than budgeted, it may be necessary for he
entrepreneur to carefully analyze the account.
5. Taxes: The entrepreneur will be required to deduct taxes for his or her employees. The entrepreneur
should be careful not to use these funds, since, if payments are late, there will be high interest & penalties
imposed. These taxes will need to be part of any budget since they will affect cash flows or tax. The
accountant can also assist the entrepreneur in planning or budgeting appropriate funds to meet any of
these expenses.
Motivating & Leading teams
Motivation is a process that motivates a person into action & induces to continue the course of action for
the achievement of goals. Motives are the expressions of a persons goals or needs.
Motive
Goals

Behavior
Process of Motivation

Motivating Factors
There are several factors which motivate entrepreneurs to start enterprises.
1.Internal factors: a. Desire to do something, b. Educational background, c. Occupational background or
experience.
2.External factors: a. Government assistance & support, b. Availability of labour & raw material, c.
Demand for the product.
Motivation Theories
The importance of motivation to human life & work can be judged by number of theories to explain
peoples behavior. There are some prominent theories relevant to entrepreneurship are Maslows Need
Hierarchy theory & McClellands Acquired Need theory.
1. Maslows Need Hierarchy theory: Maslows Theory is based on human needs. These needs are
classified into sequential priority from lower to higher. Abraham H. Maslow classified all human need
into 5 groups:
5. Self Actualization needs
4. Esteem needs
3. Social needs
2. Safety needs
1. Physiological needs
1. Physiological needs: These needs are basic to human life & include food, clothing, air, water & other
necessities. These needs tremendous influence on human behavior. Entrepreneur needs to meet his
physiological needs for survival. Hence, he motivated to work in the enterprise to have economic rewards
to meet the basic needs.
2. Safety & Security needs: After satisfying physiological needs, safety & security needs find expression
in such desires as economic security & protection from physical dangers. Meeting these needs requires
more money; hence, the entrepreneur is prompted to work more in his enterprise.

3. Social needs: Man is asocial animal. These needs therefore, refer to belongingness. All individuals
want to be recognized & accepted by others. Likewise, an entrepreneur is motivated to interact with
fellow entrepreneurs, his employees & others.
4. Esteem needs: These needs refer to self-esteem self respect. They include such needs like selfconfidence., achievement, independence, competence & knowledge. IN case of entrepreneurs, the
ownership & self control over enterprise satisfies their esteem needs by providing them status, respect,
reputation & independence.
5. Self- Actualization: The final step in this process is the need for self- actualization; this refers to selffulfillment. It means to become actualized in what one is potentially good. An entrepreneur may achieve
self- actualization in being successful entrepreneurs.
McClellands Acquired Need theory
According to David McClelland, a person acquires three types of needs as a result of ones life
experience. These needs are:
1. Need for Affiliation: These refer to needs to establish & maintain friendly & warm relations with
others.
2. Need for Power: These mean the ones desire to dominant & influence others by using physical objects
& actions.
3. Need for Achievement: This refers to ones desires to accomplish something with own efforts. This
implies ones will to excel in his efforts.
McClelland also suggests that three needs may simultaneously be acting on a individual. But, in
case of an entrepreneur, the high need for achievement is found dominating one. In his vie, the people
with need for achievement are characterized by the following:
a. They set moderate, realistic & attainable goals for them.
b. They need concrete feedback on how well they are doing.
c. They look for challenging tasks.
d. They find solutions for solving personal responsibility.
e. They have need for achievement for attaining personal accomplished.
E-Commerce
E-Commerce is the use of computer applications communicating over networks to allow buyers & sellers
to complete a transaction or part of a transaction. In simple words, E-Commerce is an electronic business.
It is the capability of exchanging value electronically. E-Commerce relates to the electronic exchange of
all trading relationship external to the enterprise. E-Commerce involves exchange of money, goods,
service as well as information.
According to World Trade Organization (WTO), E-Commerce refers to production, distribution,
marketing, sale or delivery of goods & services by electronic means. A commercial transaction can be
divided into three main stages: advertising & searching stage; ordering & payment stage; & delivery
stage. Any or all these may be carried out electronically & may, therefore, be covered, by the concept of
electronic commerce.
Categories of E-Commerce
Due to differences in the markets involved, two categories of e-commerce have emerged1. Business-to-Business(B2B)
2. Consumer-to-Business(C2B)
B2B: Corporate attention is focused on the use internet & web technologies. B2B transaction occurred
across value-added networks supporting electronic data interchange (EDI) but the high cost & technical
complexity of that process has limited its used to large enterprise & their trading partners.
C2B: The internet is a medium for shopping & opens new alternatives for consumers, offering them a
different set of trade-offs between costs, selection, convenience & experience than the other channel. The
consumer has a much wider choice on the internet. They can compare products features, prices & even
look up reviews before they select what they want. They also have the convenience of having their orders
delivered right at their doorstep.
Types of Applications

The application out of the e-commerce initiative can be broadly grouped into seven categories. These
seven categories cover most of the common business transaction.
B to B procurement(E-Procurement)
B to B & B to C Sales( E-Sales)
B to B Virtual Market Places & Enterprise portals(E-Portals)
One to One marketing (E- Promotion)
Customer Service(E-CS)
Electronic Payments(E-Pay)
Employee Self Service(E-ES)
In addition to these, e-commerce can be implemented between government organizations & between the
government & the public. However, this application can also be broadly classified B to B or B to C.
An integrated Business Solution
E-Commerce is a dynamic set of technologies, applications & business practices that link enterprises,
customers & suppliers through electronic transactions. E-Commerce implementation should be an
integrated solution of the existing business practices namely, customers, suppliers, vendors & net
providers, the organizations business processed & the technology. The adoption of e-commerce standards
also means drastic changes in the ways of conducting business.
Benefits of E-Commerce
The importance points to consider here are:
1. No holidays: The business is on for 24 hours a day & 365 days in a year
2. Complete transparency: The organization displays its products / services in the virtual market
place.
3. High-Customer specifications: The customer wants a product according to his specifications.
Applications of E-Commerce
Procurement
Sales

E
C
O
M
M
E
R
C
E

Market
Places
Enterprise
Portals
Marketing
Promotion
Customer
Service
Payment
Self-Service
Values

Challenges / Problems of E-Commerce

1. Infrastructural problems: Internet is the backbone of e-commerce. Unfortunately, internet penetration
in India is low compared to other nations. Internet is still accessible through PCs with the help of
telephone lines. Besides these, both cost of PCs & internet access in India is quite high.
2. Absence of Cyber laws: Another big challenge associate with e-commerce market is the near absence of
cyber laws to regulate transactions on web. The Information Technology (IT Act, 2000) passed to tackle
legally. However, it does not care of issues for privacy & protection.
3. Privacy & Security concern: As of today, the dangerous issues related to e-commerce are privacy &
security. So far, there is no protection offered by websites or others against hazards.
4. Payment & tax related issues: The electronic payment is made through plastic money which could not
become popular so far in India because of fear of frauds by hackers. As establishing incidence of tax in
economic transactions become difficult, thus, it provides scope for tax evasion.
5. Digital illiteracy & Consumer Psyche: At present, digital illiteracy is one of the major problems of ecommerce in India. The Indian consumers does not go long distances when nearby shops provides him
whatever he wants. So, consumers does not browse internet.
6. Virus problem: Computer virus also a major problem in the execution of e-commerce.
7. English Specific: The software so far in the country is English specific. To make e-commerce to reach
small enterprises, it needs to be available in regional languages.

Unit-2 Creating & Starting New Venture

Creativity is the process of generating a novel or useful idea. The creative process can be broken into five
stages:
1. Preparation: Preparation is the background, experience & knowledge that an entrepreneur brings to the
opportunity recognition process. An entrepreneur needs expertise to spot opportunities. Studies that 50%90% of startup ideas emerge from a person work experience.
2. Incubation: Incubation is the stage during which a person considers an idea or thinks about a problem.
Sometimes incubation is a conscious activity & sometimes it is unconscious & occur while a person is
engaged in another activity.
3. Insight: Insight is the flash of recognition when the solution to a problem is seen or an idea is born. It is
sometimes called the Eureka experience. In business context, this is the moment an entrepreneur
recognizes an opportunity.
4. Evaluation: Evaluation is the stage of the creative process during which an idea is subject to sruitiny &
analyzed for its viability.
5. Elaboration: Elaboration is the stage during which the creative idea is put into a final form. The details
are worked out & the idea in transformed into something of value such as a new product, service or a
business concept.
Preparation

Incubation

Insight

Evaluation

Elaboratio
nn

Opportunity Recognition Process

There is a continuous between an awareness of emerging trends & the personal characteristics of the
entrepreneur because the 2 facets of opportunity recognition are interdependent. For example, an
entrepreneur with a well established social network may be in a better position to recognize emerging
technological trends.
Environmental Trends
Economic factors
Social factors
Technology
Political factors
Personal Characteristics
of an Entrepreneur

Business, Product or Service

Opportunity Gap
Difference between whats
available & whats possible

New Business, Product and

service and ideas.

Prior experience
Social Network
Creativity

Sources of New Ideas

A sound idea is essential to launch venture, some of the frequently used of sources of ideas for
entrepreneur are as follows:
1. Consumers: Potential entrepreneurs should pay close attention to the final point of the idea for a
new product / service the potential consumers. This can be an informal / formal survey of
consumers expressing their opinions.

2. Existing companies: Entrepreneurs should establish a formal method for monitoring &
evaluating the products & services in the market. Frequently this analysis uncovers ways to
improve on these offering that may result in a new product that has more market appeal.
3. Distribution channels: Members of distribution channels are also excellent sources for new ideas
because they are familiar with the needs of the market. They frequently have suggestions. For
new product & also help in marketing the entrepreneurs newly developed products.
4. Federal Government: The federal government can be source of new product ideas in two easy.
First, the files of patent office contain numerous new product possibilities. Several government
agencies & publications are helpful in monitoring patent applications. Second, new p[product
ideas can come in response to government regulations.
5. Research & development: The largest source of new ideas is the entrepreneurs own research &
development. A formal research & development department is often better equipped & enables
the entrepreneurs to conceptualize & develop successful new product.
Methods / Techniques for generating new ideas
Even with the wide variety of sources available, coming up with an idea to serve as the basis for the new
venture can still be a difficult problem. The entrepreneur can use several methods to help generate & test
new ideas:
1. Brainstorming: A common way to generate new business idea is through brainstorming. Brain
storming is the process of generating several ideas about a specific topic. In a formal brain
storming session, the leader of the group asks the participants to share their ideas. One person
shares an idea, another person reacts to it, another person reacts to the reaction & so on. An
electronic whiteboard is used to record all the ideas. The ideas generated during a brain storming
session need to be filtered and analyzed. While using brainstorming, these five rules should be
followed:
a. No criticism is allowed by anyone in the group- no negative comments.
b. Freewheeling is encouraged- the wilder the idea, the better.
c. Quality of ideas is desired-the greater the number of ideas, the greater the like hood of the
emergence of useful ideas.
d. Reap fogging is encouraged- this means using one idea as a means of jumping forward
quickly of other ideas.
2. Focus Groups: A focus group is a gathering of five to ten people who are selected because of their
relationship to the issue being discussed. Focus groups typically involve a group of people who
are familiar with a topic are brought together to respond to questions. Although focus groups are
used for a variety of purposes, they can be used to help generate new business ideas.
3. Library & internet research: Libraries are often an underutilized source of information for
generating new business ideas. Libraries provide useful resources such as industry specific
magazines, trade3 journals & industry reports. Internet research is also important, simply typing
new business ideas into Google or Yahoo! Will provide links to newspaper & magazines
articles about the latest new business ideas. This technique, which is available for free, will feed
you daily stream of new articles about specific topics.

4. Problem inventory analysis uses individuals in a manner that is similar to focus groups to
generate new product ideas. However instead of generating new ideas themselves, consumers are
provided with a list of problems in a general product category. They are then asked to identify and
discuss products in this category that have the particular problem. This method can also be used
to test a new product idea. An example of food industry, most difficult problems list like weight,
taste, appearance & cost.
Psychological
a. Weight:
Fattening
Calories
b. Health

Indigestion
Acidity

Sensory
a. Taste
Bitter
Salty
b. Appearance

Colour
Shape

Activities
a. Preparation
Too much
trouble
Too many pans
b. Cooking:
Burns
Sticks

Buying Usage
a. Portability
Eat away from
home
Take lunch
b.Spoilage:

Gets mouldy
Goes sour

5. Other techniques: Firms use a variety of other techniques to generate ideas. Some companies set
up Customer Advisory Board that meet regularly to discuss needs, wants & problems that may
lead to new ideas. Other companies conduct survey by sending testers to homes to see how its
products are working.
Creative Problem Solving
Creative problem solving is a technique for attaining new ideas focusing on the parameters. Creative
ideas & innovations generated by using any of the following techniques:
1.Brain storming: The first technique, brainstorming, is probably the most well known and widely used
for both creative problem solving and idea generation. It is an unstructured process for generating all
possible ideas about a problem within a limited time frame through the spontaneous contribution of
participants. All ideas, no matter how illogical, must be recorded, with participants prohibited from
criticizing or evaluating during the brainstorming session.
2.Reverse Brain storming: Reverse brain storming is similar to brain storming except that criticism is
allowed. This technique is based on finding faults, since the focus is on the negative aspects of the
product, service or idea, care must be taken to maintain the groups morale. This method stimulates
innovative thinking./ The process usually involves the identification of everything wrong with an idea,
followed by a discussion of ways to overcome these problems.
3.Gordon method: This method, unlike other techniques, begins with group members not knowing the
exact nature of the problem. The entrepreneur starts by mentioning a general concept associated with the
problem, the group responds by expressing a number of ideas. Then a concept is developed followed by
the group to more suggestions for implementation or refinement of the final solution.
4.Brain writing: Brain writing is a form of written brain storming. It was created by Bernd Rohrback in
1960s, where the ideas are in silent & written generation of ideas by the group of people. The participants
write their ideas on special forms or cards that circulate within the group, which usually consist of six
members. Each member generates & writes down three ideas during five minute period & it passed on to
other members. If participants located at their own places & sheets are rotated by e-mails.
5.Check-list method: In this method, a new idea is developed through a list of related issues or
suggestions. The entrepreneur can use the list of question / statements to guide. The checklist may take
any form & a general checklist is as follows:
i. Uses-put to other uses, new ways to use.
ii. Modify-change meaning, colour, form, shape etc.,
iii. Magnify-what to add? More time, stronger, larger, thicker etc.,
iv. Minify-what to less? Smaller, lower, shorter, lighter etc.,

v. Substitute-other ingredients, other material, other process etc.,

6.Collective Note book method: Under this method, a small notebook that easily fits in a pocket,
containing a statement of the problem, blank pages is distributed. Participants consider the problem & its
possible solutions, recording ideas at least once, but preferably three times a day. AT the end of a week,
list of best ideas is developed, along with any suggestions. This technique can also be used with the group
of individuals who record their ideas, giving their notebook to a central coordinator who summarizes all
the material & list the ideas in the order of frequency of mention. The summary becomes the topic of final
creative focus group discussions by the group participants.
7.Cause-Effect Analysis: This is a technique developed by Toyota Motor Corporation & popularized by
the Quality circle movement, often with the use of Why-Why analysis. It is a simple technique of asking
a series of Why in a sequence when confronted with the problem. That is, each answer to a why will be
confronted by another why. For example, a decline in sales may be normally treated as a marketing
problem, nut a why-why analysis may lead to product quality issues, which in turn may lead to machine
set up problems, improper employee training etc.,

Product Planning And Development Process

Once idea emerges from idea sources or creative problem solving, they need further development and
refinement in to final product or service to be offered. This refining process- the product planning and
development process is divided in to five major stages. Idea stage, concept stage, product development
stage, test marketing stage and commercializing; it result in the product life cycle. Each of these stages
will have to be evaluated for which the entrepreneur has to establish appropriate evaluation criteria.
Establishing evaluation criteria
At each stage of product planning and development process, criteria for evaluation need to be established.
Criteria should be developed to evaluate the new product in terms of market opportunity, competition the
marketing system, financial factors and production factors. A market opportunity and adequate market
demand must exist. Current competing producers, prices, and policies should be evaluated in their impact
on market share. The product should be able to be supported by and contribute to the company's financial
structure. The compatibility of new product's production requirements with existing plant, machinery, and
personnel should be determined.
1. Idea Stage
Promising new product ideas should be identified and impractical ones eliminated in the idea stage
allowing maximum use of company's resources. In the systematic market evaluation checklist method,
each new product idea is expressed in terms of its chief values, merits, and benefits. The company should
also determine the need for the new product and its value to the company. Need determination should
focus on the type of need, its timing, the users involved, the importance of marketing variables, and the
overall market structure and characteristics.
2.Concept Stage
In the concept stage the refined idea is tested to determine consumer acceptance without manufacturing it.
One method of testing is the conversational interview in which respondents are exposed to statements that
reflect attributes of the product. Features, price, and promotion should be evaluated in comparison to
major competitors to indicate deficiencies or benefits. The relative advantages of the new product versus
competitors should be determined.
3. Product Development Stage
In this stage, consumer reaction is determined, often through a consumer panel. The panel can be given
samples of the product and competitors' products to determine consumer preference. Participants keep the
record of their use of product and comment on its virtues and deficiencies. The panel of consumers is also
given a sample of product and one or more competitive product simultaneously. One test product may
already be on the market, whereas the other test product is new.

4. Test Marketing Stage

Although the results of product development stage provide the basis of the final marketing plan, the
market test can be done to increase the certainty of successful commercialization. The last step in the
evaluation process, the test marketing stage, provides actual sales results which indicate the acceptance
level of consumers. Positive test results indicate the degree of probability of a successful product launch
and company formation.
5. Commercialization: In the last stage of the process, actual launching of the product is done, where the
new product is released to the defined market. Successful commercialization defines the successful
release of the new product to the market.
Product Planning& Development Process diagram a follows