CONTENTS

FOREWORD iii

CHAPTER 9 BUSINESS FINANCE 237

CHAPTER 10 FINANCIAL MARKETS 267

CHAPTER 11 MARKETING 291

CHAPTER 12 CONSUMER PROTECTION 362

CHAPTER 13 ENTREPRENEURSHIP DEVELOPMENT 381

LEARNING OBJECTIVES

After studying this chapter, youshould be able to:

explain the meaning of businessfinance;

describe financial management;

explain the role of financialmanagement in our enterprise;

discuss objectives of financialmanagement and how theycould be achieved;

explain the meaning andimportance of financialplanning;

state the meaning of capitalstructure;

analyse the factors affecting thechoice of an appropriate capitalstructure;

state meaning of fixed capitaland working capital; and

analyse the factors affecting therequirement of fixed andworking capital.

CHAPTER

9BUSINESS FINANCE

TATA STEEL ACQUIRES CORUS

Tata Steel, the biggest steel producerin the Indian private sector has acquiredCorus, (formerly known as British Steel)in a deal worth $8.6 billion. This makesTata Steel the fifth largest steelproducer in the world. A financialdecision of this magnitude hassignificant implicitness for both TataSteel and Corus as well as theiremployees and shareholders. Tomention some of them:

Tata Steel will become the fifthlargest producer of steel in the world.

Tata Steel will raise a debt of over$ 8 billion to finance the transaction.The deal will be paid for by Tata SteelUK, a special purpose vehicle (SPV)set up for the purpose. This SPV willget funds from Tata Steel routedthrough a Singapore subsidiary.Another company of the Tata group,Tata Sons Ltd. will invest $ 1 billiondollars for preference shares alongwith Tata Steel which will invest anequal amount.

Tata Steel the acquirer company shallhave to arrange about 36,500 croresof rupees to finance the takeover.

Tata Steel will have to raise thisamount through debt or equity or acombination of both. Some amountmay come from internal accruals also.This financing decision will affect thecapital structure of Tata Steel.

Tata Steel hopes to increaseproduction to 40 million tonnes andrevenue to 32 billion US dollars by2012.

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tangible like machinery, factories,buildings, offices; or intangible suchas trademarks, patents technicalexpertise etc. Also finance is centralto running day-to-day operations ofbusiness like buying supplies, payingbills, salaries, collecting cash fromcustomers, etc. thus, needed at everystage in the life of a business entity.Availability of adequate finance is,thus, very crucial for the survival andgrowth of a business.

FINANCIAL MANAGEMENT

All finance comes at some cost. It isquite imperative that it needs to becarefully managed. FinancialManagement is concerned with optimalprocurement as well as usage offinance. For optimal procurement,different available sources of financeare identified and compared in termsof their costs and associated risks.Similarly, the finance so procuredneeds to be invested in a manner thatthe returns from the investment exceedthe cost at which procurement hastaken place. Financial Managementaims at reducing the cost of fundsprocured, keeping the risk under

INTORDUCTION

In the above case, these decisionsrequire careful financial planning, anunderstanding of the resultant capitalstructure and the riskiness andprofitability of the enterprise. All thesehave a bearing on shareholders as wellas employees. They require anunderstanding of business finance,major financial decision making areas,financial risk, the fixed and workingcapital requirements of the business.Finance, as we all know, is essentialfor running a business. Success ofbusiness depends on how well financeis invested in assets and operationsand how timely and cheaply thefinances are arranged, from outside orfrom within the business.

MEANING OF BUSINESS FINANCE

Money required for carrying outbusiness activities is called businessfinance. Almost all business activitiesrequire some finance. Finance isneeded to establish a business, to runit, to modernise it, to expand, ordiversify it. It is required for buying awhole variety of assets, they may be

It may affect the competitiveness of Tata Steel because the cost of production ofsteel in all probability, will change.

Dividend paying capacity of Tata Steel may be affected because of this huge cashoutflow and because of a significantly higher debt which would need to be servicedbefore paying any dividends to shareholders.

The degree of risk shall also be affected. Needless to emphasise that decisionslike this affect the future of the organisation. These decisions are almost irrevocableafter they have been formalised.

Source: The Economic Times

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control and achieving ef fectivedeployment of such funds. It also aimsat ensuring availability of enough fundswhenever required as well as avoidingidle finance. Needless to say that thefuture of a business depends a greatdeal on the quality of its FinancialManagement.

Role: Role of Financial Managementcannot be over-emphasised, since ithas a direct bearing on the financialhealth of a business. The financialstatements such as Balance Sheet andProfit and Loss Account reflect a firmsfinancial position and its financialhealth. Almost all items in the financialstatements of a business are affecteddirectly or indirectly through somefinancial management decisions. Someprominent examples of the aspectsbeing affected could be as under:

(i) The size as well as the compositionof Fixed Assets of the business: Forexample, a capital budgetingdecision to invest a sum of Rs. 100crores in fixed assets would raisethe size of fixed assets block by thisamount.

(ii) The quantum of Current Assets aswell as its break-up into cash,inventories and receivables: With anincrease in the investment in fixedassets, there is commensurateincrease in the working capitalrequirements. The quantum ofcurrents assets is also influencedby financial management decisions.In addition decisions about creditpolicy, inventory managementaffect the amount of debtors and

inventory which in turn affect thetotal current assets as well as theircomposition.

(iii) The amount of long term and shortterm financing to be used: Financialmanagement, inter alia, involvesdecision about the proportion oflong and short-term finance. Anorganisation wanting to remainmore liquid would raise relativelymore amount on a long term basisand vice-versa. There is a choicebetween liquidity and profitability.The underlying assumption here isthat current liabilities cost lessthan long term liabilities.

(iv) Break-up of long term financing intodebt, equity etc: Of the total longterm finance, the proportions to beraised by way of debt and/or equityis also a financial managementdecision. The amounts of debt,equity share capital, preferenceshare capital are affected by thefinancing decision, which is a partof financing management.

(v) All items in the Profit and LossAccount e.g., Interest, Expense,Depreciation etc. : Higher amountof debt means higher interestexpense in future. Similarly, useof higher equity may entail higherpayment of dividends. Similarly, anexpansion of business which is aresult of capital budgeting decisionis likely to affect virtually all itemsin the profit and loss account ofthe business.

In other words it can, thus, bestated that the financial statements of

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a business have been largelydetermined by financial managementdecisions taken earlier. Similarly, thefuture financial statements woulddepend upon past as well as currentfinancial decisions. Thus, the overallfinancial health of a business isdetermined by the quality of itsfinancial management. Good financialmanagement aims at mobilisation offinancial resources at a lower cost anddeployment of these in most lucrativeactivities.

OBJECTIVES

Primary aim of financial managementis to maximise shareholder’s wealth,which is referred to as the wealthmaximisation concept. The marketprice of a company’s shares are linkedto the three basic financial decisionswhich you will study a little later. Thisis because a company funds belong tothe shareholders and the manner inwhich they are invested and the returnearned by them determines theirmarket value or price. It meansmaximisation of the market value ofequity shares. Market price of equityshare increase if the benefits from adecision exceed the cost involved.Thus, all financial decisions aim atensuring that each decision is efficientand adds some value. Such valueadditions tend to increase the marketprice of shares.

Therefore, when a decision is takenabout investment in a new machine,the aim of financial management is toensure that benefits from theinvestment exceed the cost so that

some value addition takes place.Similarly, when the finance is procuredthe aim is to reduce the cost so thatthe value addition is even higher.

In fact, in all financial decisions,major or minor, the ultimate objectivethat guides the decision-maker is thatsome value addition should take placeso that the market price of equityshares is maximised. It can happenthrough efficient decision making.Decision-making is efficient if, out ofvarious available alternative the bestis selected.

FINANCIAL DECISIONS

In a financial context, it means theselection of best financing alternativeor best investment alternative.Financial decision-making is concernedwith three broad decisions which areas under:

Investment Decision

A firm’s resources are scarce incomparison to the uses to which theycan be put. A firm, therefore, has tochoose where to invest theseresources, so that they are able to earnthe highest possible return for theirinvestors. The investment decision,therefore, relates to how the firm’sfunds are invested in different assets.

Investment decision can be long-term or short-term. A long-terminvestment decision is also called aCapital Budgeting decision. It involvescommitting the finance on a long-termbasis. For example, making investmentin a new machine to replace an existing

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one or acquiring a new fixed asset oropening a new branch etc. Thesedecisions are very crucial for anybusiness since they affect its earningcapacity over the long run. The size ofassets, the profitability andcompetitiveness are all affected by thecapital budgeting decisions. Moreover,these decisions normally involve hugeamounts of investment and areirreversible except at a huge cost.Therefore, once made, it is often almostimpossible for a business to wriggle outof such decisions. Therefore, they needto be taken with utmost care obviously.These decisions must be taken by thosewho understand them comprehensively.A bad capital budgeting decisionnormally has the capacity to severelydamage the financial fortune of a

business.Short term investmentdecisions (also called working capitaldecisions) are concerned with thedecisions about the levels of cash,inventories and debtors. Thesedecisions affect the day to day workingof a business. These affect the liquidityas well as profitability of a business.Efficient cash management, inventorymanagement and receivablesmanagement are essential ingredientsof sound working capital management.

Factors affecting CapitalBudgeting Decision

A number of projects are alwaysavailable to a business to invest in. Buteach project has to be evaluatedcarefully and depending upon thereturns, a particular project is either

Wealth Maximisation Concept

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selected or rejected. If there is only oneproject then its viability in terms of therate of return viz., investment and itscomparability with the industry’saverage is seen. There are certainfactors which affect capital budgetingdecisions.

(a) Cash flows of the project: When acompany takes an investmentdecision involving huge amount itexpects to generate some cashflows over a period. These cashflows are in the form of a series ofcash receipts and payments overthe life of an investment. Theamount of these cash flows shouldbe carefully analysed beforeconsidering a capital budgetingdecision.

(b) The rate of return: The mostimportant criterion is the rate ofreturn of the project. Thesecalculations are based on theexpected returns from eachproposal and the assessment ofrisk involved. Suppose, there aretwo projects A and B (with the samerisk involved) with a rate of returnof 10 per cent and 12 per cent,respectively, then under normalcircumstance, project B will beselected.

(c) The investment criteria involved:The decision to invest in aparticular project involves anumber of calculations regardingthe amount of investment, interestrate, cash flows and rate of return.There are different techniques toevaluate investment proposals

which are known as capitalbudgeting techniques. Thesetechniques are applied to eachproposal before selecting aparticular project.

Financing Decision

This decision is about the quantum offinance to be raised from variouslong-term sources (short-term sourcesare studied in working capitalmanagement).

It involves identification of variousavailable sources. The main sourcesof funds for a firm are shareholdersfunds and borrowed funds.Shareholders funds refer to equitycapital and retained earnings.Borrowed funds refer to finance raisedas debentures or other forms of debt.A firm has to decide the proportion offunds to be raised from either sourcebased on their basic characteristics.Interest on borrowed funds have to bepaid regardless of whether or not a firmhas made a profit. Likewise, borrowedfunds have to be repaid at a fixed time.The risk of default on payment isknown as financial risk which has tobe considered by a firm likely to haveinsufficient shareholders to makethese fixed payments. Shareholdersfunds on the other hand involve nocommitment regarding payment ofreturns or repayment of capital. A firm,therefore, needs to have a judiciousmix of both debt and equity in makingfinancing decisions, which may bedebt, equity, preference share capitaland retained earnings.

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The cost of each type of finance isestimated. Some sources may becheaper than others. For example,debt is considered the cheapest of allsources, tax deductibility of interestmakes it still cheaper. Associated riskis also different for each source e.g., itis necessary to pay interest on debtand redeem the principal amount onmaturity. There is no such compulsion

to pay any dividend on equity shares.Thus, there is some amount offinancial risk in debt financing. Theoverall financial risk depends upon theproportion of debt in the total capital.The fund raising exercise also costssomething. This cost is calledfloatation cost. It also must beconsidered while evaluating differentsources. Financing decision is, thus,

Financial Decisions

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concerned with the decisions abouthow much to be raised from whichsource. This decision determines theoverall cost of capital and the financialrisk of the enterprise.

Factors Affecting FinancingDecision

The financing decisions are affected byvarious factors. Some of the importantfactors are as follows:

(a) Cost: The cost of raising fundsthrough different sources aredifferent. A prudent financialmanager would normally opt for asource which is the cheapest.

(b) Risk: The risk associated withdifferent sources is different.

(c) Floatation Costs: Higher the floatationcost, less attractive the source.

(d) Cash Flow Position of the Business:A stronger cash flow position maymake debt financing more viablethan funding through equity.

(e) Level of Fixed Operating Costs: Ifa business has high level of fixedoperating costs (e.g., buildingrent, Insurance premium,Salaries etc.), It must opt forlower fixed financing costs.Hence, lower debt financing isbetter. Similarly, if fixed operatingcost is less, more of debtfinancing may be preferred.

(f) Control Considerations: Issues ofmore equity may lead to dilutionof management’s control over thebusiness. Debt financing has nosuch implication. Companiesafraid of a takeover bid mayconsequently prefer debt to equity.

India Inc. Issues Bonus Shares and Dividends

Corporate India has opened its purse strings to shareholders with interimdividends and bonus shares. At least 60 companies have declared interim dividendor announced plans to do so in the first three weeks of January. In addition, around12 companies have announced bonus share issues this month, about three timesmore than January 2006.

There are range of things that a company can do for maximising shareholdervalue and dividend is the most direct and simple form of it. Ideally companies needto balance it up between paying cash and building value of the stock for totalshareholder returns.

This trend of dividends and bonuses is in synchronisation with the good profitsbeing posted by companies. It’s a way of rewarding shareholders.

A number of companies have also announced plans of bonus shares for theirshareholders. Most of the companies who have already declared bonus issues orannounced that they would be taking it up in their next board meeting are small ormid-sized companies.

Source: The Economic Times

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(g) State of Capital Markets: Health ofthe capital market may also affectthe choice of source of fund. Duringthe period when stock market isrising, more people are ready toinvest in equity. However,depressed capital market maymake issue of equity sharesdifficult for any company.

Dividend Decision

The third important decision thatevery financial manager has to takerelates to the distribution of dividend.Dividend is that portion of profitwhich is distributed to shareholders.The decision involved here is howmuch of the profit earned by company(after paying tax) is to be distributedto the shareholders and how much ofit should be retained in the businessfor meeting the investmentrequirements. While dividendconstitutes current income re-investment as retained earningincreases the firms future earningcapacity. The extent of retainedearnings, also influences thefinancing decision of the firm. Sincethe firm does not require finds to theextent of re-invested retainedearnings, the decision regardingdividend should be taken keeping inview the overall objective ofmaximising shareholder’s wealth.

Factors Affecting Dividend Decision

How much of the profits earned by acompany will be distributed as profitand how much will be retained in the

business is affected by many factors.Some of the important factors arediscussed as follows:

(a) Earnings: Dividends are paid outof current and past earning.Therefore, earnings is a majordeterminant of the decision aboutdividend.

(b) Stability of Earnings: Other thingsremaining the same, a companyhaving stable earning is in aposition to declare higherdividends. As against this, acompany having unstable earningsis likely to pay smaller dividend.

(c) Stability of Dividends: It has beenfound that the companies generallyfollow a policy of stabilisingdividend per share. The increasein dividends is generally madewhen there is confidence that theirearning potential has gone up andnot just the earnings of the currentyear. In other words, dividend pershare is not altered if the changein earnings is small or seen to betemporary in nature.

(d) Growth Opportunities: Companieshaving good growth opportunitiesretain more money out of theirearnings so as to finance therequired investment. The dividendin growth companies is, therefore,smaller, than that in the non–growth companies.

(e) Cash Flow Position: Dividendsinvolve an outflow of cash. Acompany may be profitable butshort on cash. Availability ofenough cash in the company is

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necessary for declaration ofdividend by it.

(f) Shareholder Preference: Whiledeclaring dividends, managementsusually keep in mind thepreferences of the shareholders inthis regard. If the shareholders ingeneral desire that at least a certainamount is paid as dividend, thecompanies are likely to declare thesame. There are always someshareholders who depend upon aregular income from theirinvestments.

(g) Taxation Policy: The choice betweenpayment of dividends and retainingthe earnings is, to some extent,affected by difference in the taxtreatment of dividends and capitalgains. If tax on dividend is higherit would be better to pay less byway of dividends. As compared tothis, higher dividends may bedeclared if tax rates are relativelylower. Though the dividends are freeof tax in the hands of shareholdersa dividend distribution tax is leviedon companies. Thus, under thepresent tax policy, shareholders arelikely to prefer higher dividends.

(h) Stock Market Reaction: Investors,in general, view an increase individend as a good news and stockprices react positively to it.Similarly, a decrease in dividendmay have a negative impact on theshare prices in the stock market.Thus, the possible impact ofdividend policy on the equity shareprice is one of the important factors

considered by the managementwhile taking a decision about it.

(i) Access to Capital Market: Large andreputed companies generally haveeasy access to the capital marketand therefore may depend less onretained earning to finance theirgrowth. These companies tend topay higher dividends than thesmaller companies which haverelatively low access to the market.

(j) Legal Constraints: Certainprovisions of the Company’s Actplace restrictions on payouts asdividend. Such provisions must beadhered to while declaring thedividends.

(k) Contractual Constraints: Whilegranting loans to a company,sometimes the lender may imposecertain restrictions on the paymentof dividends in future. Thecompanies are required to ensurethat the dividends does not violatethe terms of the loan agreement inthis regard.

FINANCIAL PLANNING

Financial planning is essentiallypreparation of a financial blueprint ofan organisation’s future operations.The objective of financial planning isto ensure that enough funds areavailable at right time. If adequatefunds are not available the firm willnot be able to honour its commitmentsand carry out its plans. On the otherhand if excess funds are available, itwill unnecessarily add to the cost and

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may encourage wasteful expenditure.It must be kept in mind that financialplanning is not equivalent to or asubstitute for financial management.Financial management aims atchoosing the best investment andfinancing alternatives by focusing ontheir costs and benefits. Its objectiveis to increase the shareholders wealth.Financial planning on the other handaims at smooth operations by focusingon fund requirements and their

availability in the light of financialdecisions. For example, if a capitalbudgeting decisions is taken, theoperations are likely to be at a higherscale. The amount of expenses andrevenues are likely to increase.Financial planning process tries toforecast all the items which are likelyto undergo changes. It enables themanagement to foresee the fundrequirements both the quantum aswell as the timing. Likely shortage and

Rising Dividends can Support Valuations

Over the next few years, companies cannot afford to ignore dividends. Investors arelooking for higher payouts and need the assurance of a stated dividend policy.In India, though, there are few companies that are as consistent in dividendpayments, even over the past five years.

The dividend yield, though, has steadily declined and is now at an average of 1.1per cent for a set of 800 companies. These companies form part of the various BSEand NSE indices. Not only has the dividend yield gone down, there is not one companyin this list that has increased dividends in line with profit growth in each of the pastfive years.

Among companies in the set, those that have steadily increased the payout overthe years include a number of multinational companies that also earn a high returnon net worth. Companies such as Astrazeneca Pharma, Nestle India, HindustanLever, Clariant, Pfizer, GlaxoSmithKline Consumer and Cummins India haveenhanced dividends to deliver value to shareholders. These companies do not seemto be constrained for growth, either. Some Indian companies that have also shownthe way forward include Automotive Axles, Ranbaxy Labs, Hero Honda Motors,Asian Paints, Thermax and a number of banking and non-banking financecompanies. These companies, too, are growing fast, and the declaration of dividendshas not dampened prospects.

Companies that have held on to profits and not declared dividends include e-Serve, Cranes Software, Sesa Goa, Tata Motors, Moser Baer, ABB, MICO, AztecSoftware, Havells India, Amtek India and Sterlite Industries. This is only an indicativelist and includes many more. The dividend payout ratio in the case of the indicatedcompanies is less than 20 per cent. Investors, however, need dividends to rise andthey also need a stated dividend policy. The earnings yield (inverse of PE ratio) isnow at about 6 per cent. If the payout ratio were stepped up to 40 per cent then thedividend yield would rise to about 2.5 per cent.

http://www.thehindubusinessline.com/iw/2005/07/24

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surpluses are forecast so thatnecessary activities are taken inadvance to meet those situations.Thus, financial planning strives toachieve the following twin objectives.

(a) To ensure availability of fundswhenever these are required: Thisinclude a proper estimation of thefunds required for differentpurposes such as for the purchaseof long-term assets or to meet day-to-day expenses of business etc.Apart from this, there is a need toestimate the time at which thesefunds are to be made available.Financial planning also tries tospecify possible sources of thesefunds.

(b) To see that the firm does not raiseresources unnecessarily: Excessfunding is almost as bad asinadequate funding. Even if thereis some surplus money, goodfinancial planning would put it tothe best possible use so that thefinancial resources are not leftidle and don’t unnecessarily addto the cost.

Thus, a proper matching of fundsrequirements and their availability issought to be achieved by financialplanning. This process of estimating thefund requirement of a business andspecifying the sources of funds is calledfinancial planning. Financial planningtakes into consideration the growth,performance, investments andrequirement of funds for a given period.

Financial planning includes both short-term as well as long-term planning.Long-term planning relates to long termgrowth and investment. It focuses oncapital expenditure programmes.Short-term planning covers short-termfinancial plan called budget.

Typically, financial planning isdone for three to five years. For longerperiods it becomes more difficult andless useful. Plans made for periods ofone year or less are termed as budgets.Budgets are example of financialplanning exercise in greater details.They include detailed plan of actionfor a period of one year or less.

Financial planning usually beginswith the preparation of a salesforecast. Let us say a company ismaking a financial plan for the nextfive years. It will start with an estimateof the sales which are likely to happenin the next five years. Based on these,the financial statements are preparedkeeping in mind the requirement offunds for investment in the fixedcapital and working capital. Then theexpected profits during the period areestimated so that an idea can be madeof how much of the fund requirementscan be met internally i.e., throughretained earnings (after dividendpayouts). This results in anestimation of the requirement forexternal funds. Further, the sourcesfrom which the external fundsrequirement can be met are identifiedand cash budgets are made,incorporating these factors.

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IMPORTANCE

Financial planning is an important partof overall planning of any businessenterprise. It aims at enabling thecompany to tackle the uncertainty inrespect of the availability and timing ofthe funds and helps in smoothfunctioning of an organisation. Theimportance of financial planning canbe explained as follows:

(i) It tries to forecast what mayhappen in future under different

business situations. By doing so,it helps the firms to face theeventual situation in a better way.In other words, it makes the firmbetter prepared to face the future.For example, a growth of 20% insales is predicted. However, it mayhappen that the growth rateeventually turns out to be 10% or30%. Many items of expensesshall be different in these threesituations. By preparing ablueprint of these three situations

Cutting Back on Debt

Even successful businesses have debt, but how much is too much? Learning howto manage debt is what can put you ahead.

Taking on the right amount of debt can mean the difference between a businessstruggling to survive and one that can respond nimbly to changing economic ormarket conditions. A number of circumstances may justify acquiring debt. As ageneral rule, borrowing makes the most sense when you need to bolster cash flowor finance growth or expansion. But while debt can provide the leverage you need togrow, too much debt can strangle your business. So the question is: How muchdebt is too much?

The answer, experts say, lies in a careful analysis of your cash flow as well asyour industry. A business that doesn’t grow dies. You’ve got to grow, but you’ve gotto grow within the financial constraints of your business. What is the ideal capitalstructure a business needs in its industry to remain viable? The higher thevolatility (in your industry), the less debt you should have. The smaller the volatility,the more debt you can afford.

Although banks and other financial institutions look for a satisfactory debt-to-equity ratio before agreeing to make a loan, don’t assume a creditor’s willingness toextend funds is evidence that your business is in a strong debt position. Some financialinstitutions are overzealous lenders, particularly when trying to lure or hold on topromising business customers. “The bank may be looking more at collateral thanwhether the (business’s) earnings are going to come in to justify the debt service.

To avoid these and other credit pitfalls, it’s up to you to get the financial factson your business and make sound borrowing decisions. Unfortunately, manyentrepreneurs fail to recognise how important financial analysis is to running asuccessful business. Even business owners who receive detailed financial statementsfrom their accountants often do not take advantage of the valuable informationcontained in the documents.

http://www.entrepreneur.com/magazine/entrepreneur/2006/December

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the management may decide whatmust be done in each of thesesituations. This preparation ofalternative financial plans to meetdifferent situations is clearly ofimmense help in running thebusiness smoothly.

(ii) It helps in avoiding businessshocks and surprises and helpsthe company in preparing for thefuture.

(iii) If helps in co-ordinating variousbusiness functions e.g., sales andproduction functions, by providingclear policies and procedures.

(iv) Detailed plans of action preparedunder financial planning reducewaste, duplication of efforts, andgaps in planning.

(v) It tries to link the present with thefuture.

(vi) It provides a link betweeninvestment and financing decisionson a continuous basis.

(vii) By spelling out detailed objectivesfor various business segments, itmakes the evaluation of actualperformance easier.

CAPITAL STRUCTURE

One of the important decisions underfinancial management relates to thefinancing pattern or the proportion ofthe use of different sources in raisingfunds. On the basis of ownership, thesources of business finance can bebroadly classified into two categoriesviz., ‘owners funds’ and ‘borrowedfunds’. Owner’s funds consist of equity

share capital, preference share capitaland reserves and surpluses or retainedearnings. Borrowed funds can be in theform of loans, debentures, publicdeposits etc. These may be borrowedfrom banks, other financial institutions,debentureholders and public.

Capital structure refers to the mixbetween owners and borrowed funds.These shall be referred as equity anddebt in the subsequent text. It can becalculated as debt-equity ratio

i.e.,Debt

Equity

⎛⎝⎜

⎞⎠⎟ or as the proportion of

debt out of total capital

i.e.,Debt

Debt +Equity

⎛⎝⎜

⎞⎠⎟ .

Debt and equity differ significantlyin their cost and riskiness for the firm.Cost of debt is lower than cost of equityfor a firm because lender’s risk is lowerthan equity shareholder’s risk, sincelenders earn on assured return andrepayment of capital and, therefore,they should require a lower rate ofreturn. Additionally, interest paid ondebt is a deductible expense forcomputation of tax liability whereasdividends are paid out of after-taxprofits. Increased use of debt, therefore,is likely to lower the overall cost ofcapital of the firm provided that cost ofequity remains unaffected. Impact of achange in the debt-equity ratio uponthe earning per share is dealt with ingreater details later in this chapter.

Debt is cheaper but is more riskyfor a business because payment ofinterest and the return of principal is

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obligatory for the business. Any defaultin meeting these commitments mayforce the business to go into liquidation.There is no such compulsion in case ofequity, which is therefore, consideredriskless for the business. Higher use ofdebt increases the fixed financialcharges of a business. As a result,increased use of debt increases thefinancial risk of a business.

Financial risk is the chance that afirm would fail to meet its paymentobligations.

Capital structure of a businessthus, affects both the profitabilityand the financial risk. A capitalstructure will be said to be optimalwhen the proportion of debt andequity is such that it results in anincrease in the value of the equityshare. In other words, all decisionsrelating to capital structure shouldemphasis on increasing theshareholders wealth.

The proportion of debt in theoverall capital is also called financial

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

Situation I Situation II Situation III

EBIT 4,00,000 4,00,000 4,00,000

Interest NIL 1,00,000 2,00,000

EBT 4,00,000 3,00,000 2,00,000

(Earnings before taxes)

Tax 1,20,000 90,000 60,000

EAT 2,80,000 2,10,000 1,40,000

(Earnings after taxes)

No. of shares of Rs.10 3,00,000 2,00,000 1,00,000

EPS 0.93 1.05 1.40

(Earnings per share)

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leverage. Financial leverage is

computed asDE

orD

D+ E when D is the

Debt and E is the Equity. As thefinancial leverage increases, the costof funds declines because of increaseduse of cheaper debt but the financialrisk increases. The impact of financialleverage on the profitability of abusiness can be seen through EBIT-EPS (Earning before Interest andTaxes-Earning per Share) analysis asin the following example.

Three situations are considered.There is no debt in situation-I i.e.(unlevered business). Debt of Rs. 10lakh and 20 lakh are assumed insituations-II and III, respectively. Alldebt is at 10% p.a.

The company earns Rs. 0.93 pershare if it is unlevered. With debt of Rs.10 lakh its EPS is Rs. 1.05. With a stillhigher debt of Rs. 20 lakh, its, EPS risesto Rs. 1.40. Why is the EPS rising withhigher debt? It is because the cost ofdebt is lower than the return that

company is earning on funds employed.The company is earning a return oninvestment (RoI)

of 13.33%EBIT

Total Investment� 100

⎛⎝⎜

⎞⎠⎟ ,

4Lakh30Lakh

� 100⎛⎝⎜

⎞⎠⎟ . This is higher than

the 10% interest it is paying on debtfunds. With higher use of debt, thisdifference between RoI and cost of debtincreases the EPS. This is a situationof favourable financial leverage. In suchcases, companies often employ more ofcheaper debt to enhance the EPS. Suchpractice is called Trading on Equity.

Trading on Equity refers to theincrease in profit earned by the equityshareholders due to the presence offixed financial charges like interest.

Now consider the following case ofCompany Y. All details are the sameexcept that the company is earning aprofit before interest and taxes ofRs. 2 lakh.

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 thecompany is falling with increased useof debt. It is because the Company’srate of return on investment (RoI) isless than the cost of debt. The RoI for

company Y is 2Lakh30Lakh

� 100 i.e., 6.67%

whereas the interest rate on debt is10%. In such cases, use of debtreduces the EPS. This is a situation ofunfavorable financial leverage. Tradingon Equity is clearly unadvisable insuch a situation.Even in case of Company X, recklessuse of Trading on Equity is notrecommended. An increase in debtmay enhance the EPS but as pointedout earlier, it also raises the financialrisk. Ideally, a company must choosethat risk-return combination whichmaximises shareholders wealth. Thedebt-equity mix that achieves it, is theoptimum capital structure.

Factors affecting the Choice ofCapital Structure

Deciding about the capital structureof a firm involves determining therelative proportion of various types offunds. This depends on variousfactors. For example, debt requiresregular servicing. Interest paymentand repayment of principal areobligatory on a business. In additiona company planning to raise debt musthave sufficient cash to meet theincreased outflows because of higherdebt. Similarly, important factorswhich determine the choice of capitalstructure are as follows:

1. Cash Flow Position: Size ofprojected cash flows must beconsidered before issuing debt. Cashflows must not only cover fixed cashpayment obligations but there must besufficient buffer also. It must be keptin mind that a company has cashpayment obligations for (i) normalbusiness operations; (ii) for investmentin fixed assets; and (iii) for meeting thedebt service commitments i.e., paymentof interest and repayment of principal.

2. Interest Coverage Ratio (ICR): Theinterest coverage ratio refers to thenumber of times earnings beforeinterest and taxes of a company coversthe interest obligation. This may becalculated as follows:

ICR = EBIT

Interest

The higher the ratio, lower is therisk of company failing to meet itsinterest payment obligations. However,this ratio is not an adequate measure.A firm may have a high EBIT but lowcash balance. Apart from interest,repayment obligations are also relevant.

3. Debt Service Coverage Ratio(DSCR): Debt Service Coverage Ratiotakes care of the deficiencies referredto in the Interest Coverage Ratio (ICR).It is calculated as follows:

A higher DSCR indicates better abilityto meet cash commitments andconsequently, the company’s potentialto increase debt component in itscapital structure.

4. Return on Investment (RoI): If theRoI of the company is higher, it can

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Who funds Indian industry, why it matters?

Using data on listed Indian firms from the mid-1980s to the 1990s, severalissues relating to Indian industry were investigated. One aspect then was theextremely limited extent to which promoters and entrepreneurs actually ownedshares in the various companies they had control of

Proportions of the total capital of the firm

Percentage Share

Where did the borrowing come from?

Borrowing from Commercial Bank 26.69

Borrowings from Financial Institutions 19.89Debentures 7.78Fixed deposits 3.86

Other borrowings 8.78

Who owned the shares?

Shares held by the public at large 10.88Foreign shareholding 3.54

Government shareholding 5.49Institutional shareholding 8.44Directors’ shareholding 2.81

Top 50 shareholders shareholding 1.85

Total Debt and Equity Capital of a Company 100

Nevertheless, in spite of the relative lack of ownership, the majority of listedentities, mostly private sector companies, were managed by these founders, theirsuccessive family members and other promoters as if they were fiefdoms.

By and large, Indian companies were essentially financed by debt. This wasunlike in the West. If the total debt plus nominal equity capital in the average.Indian company was 100, then 67 per cent of that amount came in the form of debtcapital while equity capital contributed only 33 per cent.

If the share of government ownership in corporate equity and the share offinancial institutions’ equity was added, then over 60 per cent (26.69 + 19.89 +5.49 + 8.44) of firms’ finances were funded by the state in one form or another.

Foreign shareholders, in spite of a lot a clamour about their role in India’scorporate economy, hardly owned more than 4 per cent (3.54) of the shares inIndia’s listed companies. While the public at large provided about 11 per cent of thefinances of an average Indian listed company, the share of the Top 50 shareholderswas less than 2 (1.85) per cent.

It is within this particular shareholding category that promoters, entrepreneurs andthe other large shareholders’ equity stakes fall under for the purposes of classification.

The public at large provides five times as much money for the company as theentrepreneurs. Yet, a group of individuals, whose financial contributions towards acompany are exceedingly small in magnitude, effectively control the company.

http://www.thehindubusinessline.com/2005/10/07

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choose to use trading on equity toincrease its EPS, i.e., its ability to usedebt is greater. We have alreadyobserved in Example I that a firm canuse more debt to increase its EPS.However, in Example II, use of higherdebt is reducing the EPS. It is becausethe firm is earning an RoI of only6.67% which lower than its cost ofdebt. In example I the RoI is 13.33%,and trading on equity is profitable. Itshows that, RoI is an importantdeterminant of the company’s abilityto use Trading on equity and thus thecapital structure.

5. Cost of debt: A firm’s ability toborrow at a lower rate increases itscapacity to employ higher debt. Thus,more debt can be used if debt can beraised at a lower rate.

6. Tax Rate: Since interest is adeductible expense, cost of debt isaffected by the tax rate. The firms inour examples are borrowing @ 10%.Since the tax rate is 30%, the after taxcost of debt is only 7%. A higher taxrate, thus, makes debt relativelycheaper and increases its attractionvis-à-vis equity.

7. Cost of Equity: Stock ownersexpect a rate of return from the equitywhich is commensurate with the riskthey are assuming. When a companyincreases debt, the financial risk facedby the equity holders, increases.Consequently, their desired rate ofreturn may increase. It is for thisreason that a company can not usedebt beyond a point. If debt is usedbeyond that point, cost of equity may

go up sharply and share price maydecrease inspite of increased EPS.Consequently, for maximisation ofshareholders’ wealth, debt can be usedonly upto a level.

8. Floatation Costs: Process of raisingresources also involves some cost.Public issue of shares and debenturesrequires considerable expenditure.Getting a loan from a financialinstitution may not cost so much.These considerations may also affectthe choice between debt and equityand hence the capital structure.

9. Risk Consideration: As discussedearlier, use of debt increases thefinancial risk of a business. Financialrisk refers to a position when acompany is unable to meet its fixedfinancial charges namely interestpayment, preference dividend andrepayment obligations. Apart from thefinancial risk, every business has someoperating risk (also called businessrisk). Business risk depends uponfixed operating costs. Higher fixedoperating costs result in higherbusiness risk and vice-versa. The totalrisk depends upon both the businessrisk and the financial risk. If a firm’sbusiness risk is lower, its capacity touse debt is higher and vice-versa.

10. Flexibility: If a firm uses its debtpotential to the full, it loses flexibilityto issue further debt. To maintainflexibility, it must maintain someborrowing power to take care ofunforeseen circumstances.

11. Control: Debt normally does notcause a dilution of control. A public

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issue of equity may reduce themanagements holding in the companyand make it vulnerable to takeover. Thisfactor also influences the choicebetween debt and equity especially incompanies in which the current holdingof management is on a lower side.

12. Regulatory Framework: Everycompany operates within a regulatoryframework provided by the law e.g.,public issue of shares and debentureshave to be made under SEBIguidelines. Raising funds from banksand other financial institutions requirefulfillment of other norms. The relativeease with which these norms can, bemet or the procedures completed mayalso have a bearing upon the choice ofthe source of finance.

13. Stock Market Conditions: If thestock markets are bullish, equityshares are more easily sold even at ahigher price. Use of equity is oftenpreferred by companies in such asituation. However, during a bearishphase, a company, may find raising ofequity capital more difficult and it mayopt for debt. Thus, stock marketconditions often affect the choicebetween the two.

14. Capital Structure of otherCompanies: A useful guideline in thecapital structure planning is the debt-equity ratios of other companies in thesame industry. There are usually someindustry norms which may help. Carehowever must be taken that thecompany does not follow the industrynorms blindly. For example, if thebusiness risk of a firm is higher, it can

not afford the same financial risk. Itshould go in for low debt. Thus, themanagement must know what theindustry norms are, whether they arefollowing them or deviating from themand adequate justification must bethere in both cases.

FIXED AND WORKING CAPITAL

Meaning

Every business needs funds to financeits assets and activities. Investment isrequired to be made in fixed assets andcurrent assets. Fixed assets are thosewhich remains in the business formore than one year, usually for muchlonger e.g., plant and machinery,furniture and fixture, land andbuilding, vehicles etc.

Decision to invest in fixed assetsmust be taken very carefully as theinvestment is usually quite large.Such decisions once taken areirrevocable except at a huge loss.Such decisions are called capitalbudgeting decisions.

Current assets are those assetswhich, in the normal routine of thebusiness, get converted into cash orcash equivalents with in one year e.g.,inventories, debtors, bills receivable etc.

Management of Fixed Capital

Fixed capital refers to investment inlong-term assets. Management of fixedcapital involves around allocationof firm’s capital to different projectsor assets with long-term implications forthe business. These decisions are calledinvestment decisions or capital

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budgeting decisions and affect thegrowth, profitability and risk ofthe business in the long run. These long-term assets last for more than one year.

It must be financed throughlong-term sources of capital such asequity or preference shares,debentures, long-term loans andretained earnings of the business.Fixed Assets should never be financedthrough short-term sources.

Investment in these assets wouldalso include expenditure onacquisition, expansion, modernisationand their replacement. These decisionsinclude purchase of land, building,plant and machinery, launching a newproduct line or investing in advancedtechniques of production. Majorexpenditures such as those onadvertising campaign or research anddevelopment programme having longterm implications for the firm are alsoexamples of capital budgetingdecisions. The management of fixedcapital or investment or capitalbudgeting decisions are important forthe following reasons:(i) Long-term growth and effects:

These decisions have bearing onthe long-term growth. The fundsinvested in long-term assets arelikely to yield returns in the future.These affect future possibilities andprospects of the business.

(ii) Large amount of funds involved:These decisions result in asubstantial portion of capital fundsbeing blocked in long-term projects.Therefore, these investmentprogrammes are planned after a

detailed analysis is undertaken.This may involve decisions likewhere to procure funds from andat what rate of interest.

(iii) Risk involved: Fixed capitalinvolves investment of hugeamounts. It affects the returns ofthe firm as a whole in the long-term. Therefore, investmentdecisions involving fixed capitalinfluence the overall business riskcomplexion of the firm.

(iv) Irreversible decisions: Thesedecisions once taken, are notreversible without incurring heavylosses. Abandoning a project afterheavy investment is made is quitecostly in terms of waste of funds.Therefore, these decisions shouldbe taken only after carefullyevaluating each detail or else theadverse financial consequencesmay be very heavy.

Factors affecting the Requirementof Fixed Capital

1. Nature of Business: The type ofbusiness has a bearing upon the fixedcapital requirements. For example, atrading concern needs lowerinvestment in fixed assets comparedwith a manufacturing organisation;since it does not require to purchaseplant and machinery etc.

2. Scale of Operations: A largerorganisation operating at a higherscale needs bigger plant, more spaceetc. and therefore, requires higherinvestment in fixed assets whencompared with the small organisation.

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and starting a cement manufacturingplant. Obviously, its investment infixed capital will increase.

7. Financing Alternatives: Adeveloped financial market may provideleasing facilities as an alternative tooutright purchase. When an asset istaken on lease, the firm pays leaserentals and uses it. By doing so, itavoids huge sums required to purchaseit. Availability of leasing facilities, thus,may reduce the funds required to beinvested in fixed assets, therebyreducing the fixed capital requirements.Such a strategy is specially suitable inhigh risk lines of business.8. Level of Collaboration: At times,certain business organisations shareeach other’s facilities. For example, abank may use another’s ATM or someof them may jointly establish aparticular facility. This is feasible if thescale of operations of each one of themis not sufficient to make full use of thefacility. Such collaboration reduces thelevel of investment in fixed assetsfor each one of the participatingorganisations.

WORKING CAPITAL

Apart from the investment in fixedassets every business organisationneeds to invest in current assets. Thisinvestment facilitates smooth day-to-day operations of the business. Currentassets are usually more liquid butcontribute less to the profits than fixedassets. Examples of current assets, inorder of their liquidity, are as under.

3. Choice of Technique: Someorganisations are capital intensivewhereas others are labour intensive. Acapital-intensive organisation requireshigher investment in plant andmachinery as it relies less on manuallabour. The requirement of fixed capitalfor such organisations would be higher.Labour intensive organisations on theother hand require less investment infixed assets. Hence, their fixed capitalrequirement is lower.4. Technology Upgradation: Incertain industries, assets becomeobsolete sooner. Consequently, theirreplacements become due faster.Higher investment in fixed assetsmay, therefore, be required in suchcases. For example, computersbecome obsolete faster and arereplaced much sooner than say,furniture. Thus, such organisationswhich use assets which are prone toobsolescence require higher fixedcapital to purchase such assets.5. Growth Prospects: Higher growth ofan organisation generally requireshigher investment in fixed assets. Evenwhen such growth is expected, abusiness may choose to create highercapacity in order to meet the anticipatedhigher demand quicker. This entailshigher investment in fixed assets andconsequently higher fixed capital.6. Diversification: A firm maychoose to diversify its operations forvarious reasons, With diversification,fixed capital requirements increasee.g., a textile company is diversifying

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1. Cash in hand/Cash at Bank

2. Marketable securities

3. Bills receivable

4. Debtors

5. Finished goods inventory

6. Work in progress

7. Raw materials

8. Prepaid expenses

These assets, as noted earlier, areexpected to get converted into cash orcash equivalents within a period of oneyear. These provide liquidity to thebusiness. An asset is more liquid if itcan be converted into cash quicker andwithout reduction in value. Insufficientinvestment in current assets may

make it more dif ficult for anorganisation to meet its paymentobligations. However, these assetsprovide little or low return. Hence, abalance needs to be struck betweenliquidity and profitability.

Current liabilities are thosepayment obligations which, when theyarise, are due for payment within oneyear; such as bills payable, creditors,outstanding expenses, advancesreceived from customers etc.

Some part of current assets isusually financed through short-termsources, i.e., current liabilities. Therest is financed through long-termsources and is called net workingcapital. Thus, NWC = CA – CL i.e.Current Assets - Current Liabilities.

Working Capital Position

”Its been a rather glamorous 18 months, with sales just huge,” says, CFO of PT AstraInternational, the US $4 billion in sales Indonesian automaker. Indonesia is on thegrowth path again, and a new breed of consumer is eager for a first vehicle – motorcycles– as well as Astra’s more premium brands of Hondas and Toyotas. And one of themost beautiful parts of the proposition is that working capital management seems tobe taking care of itself. “Depending on the business, and counting trade receivablesonly, we have between eight and 19 days working capital,” which is manageable giventhe company’s steady growth. One of the reasons that working capital has not expandedat the rate of the business is inventory, or rather the dearth of it. “We’re in a marketthat responds very strongly to new products,” says the manager “and the presales ofproducts are very high. We have advanced orders from four to six months, withdeposits paid, and this helps our cash position.” Best of all, as soon as a vehicle is offthe assembly line, it’s out to the dealer. “We have low inventory costs and the productlines are very easy to move.” The salutary role of banks in working capital managementis one reason that cashflow has improved in his business. Better management is aresult of banking competition that has allowed the company to move from traditionalbankers, the state-owned Indian institutions, to more competitive private institutionsand the foreign banks that partner with them. These banks have invested in technology,allowing a visibility over cashflow unheard of five years ago.

http://www.cfoasia.com/archives/200503-02.htm

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Thus, net working capital may bedefined as the excess of current assetsover current liabilities.

FACTORS AFFECTING THE WORKING

CAPITAL REQUIREMENTS

1. Nature of Business: The basicnature of a business influences theamount of working capital required. Atrading organisation usually needs alower amount of working capitalcompared to a manufacturingorganisation. This is because there is,usually no processing, therefore, thereis no distinction between raw materialsand finished goods. Sales can beeffected immediately upon the receiptof materials, sometimes even beforethat. In a manufacturing business,however, raw material needs to beconverted into finished goods beforeany sales become possible. Otherfactors remaining the same, tradingbusiness requires less working capital.Similarly, service industries whichusually do not have to maintaininventory require less working capital.

2. Scale of Operations: Fororganisations which operate on a higherscale of operation, the quantum ofinventory, debtors required is generallyhigh. Such organisations, therefore,require large amount of working capitalas compared to the organisations whichoperate on a lower scale.

3. Business Cycle: Different phasesof business cycles af fect therequirement of working capital by afirm. In case of a boom, the sales aswell as production are likely to be

higher and therefore, higher amountof working capital is required. Asagainst this the requirement forworking capital will be lowerduring period of depression as thesales as well as production will be low.4. Seasonal Factors: Most businesshave some seasonality in theiroperations. In peak season, because ofhigher level of activity, higher amountof working capital is required. Asagainst this, the level of activity as wellas the requirement for working capitalwill be lower during the lean season.5. Production Cycle: Production cycleis the time span between the receipt ofraw material and their conversion intofinished goods. Some businesses havea longer production cycle while somehave a shorter one. Duration and thelength of production cycle, affects theamount of funds required for rawmaterials and expenses. Consequently,working capital requirement is higherin firms with longer processing cycleand lower in firms with shorterprocessing cycle.6. Credit Allowed: Different firms allowdif ferent credit terms to theircustomers. These depend upon the levelof competition that a firm faces as wellas the credit worthiness of theirclientele. A liberal credit policy resultsin higher amount of debtors, increasingthe requirement of working capital.7. Credit Availed: Just as a firmallows credit to its customers it alsomay get credit from its suppliers. Tothe extent, it avails the credit on itspurchases, the working capitalrequirement is reduced.

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8. Operating Efficiency: Firmsmanage their operations with varieddegrees of efficiency. For example, afirm managing its raw materialsefficiently may be able to manage witha smaller balance. This is reflected ina higher inventory turnover ratio.Similarly, a better debtors turnoverratio may be achieved reducing theamount tied up in receivable. Bettersales effort may reduce the averagetime for which finished goods inventoryis held. Such efficiencies may reducethe level of raw materials, finishedgoods and debtors resulting in lowerrequirement of working capital.

9. Availability of Raw Material: If theraw materials and other requiredmaterials are available freely andcontinuously, lower stock levels maysuffice. If, however, raw materials donot have a record of un-interruptedavailability, higher stock levels may berequired. In addition, the time lagbetween the placement of order andactual receipt of the materials (alsocalled lead time) is also relevant.Higher the lead time, higher thequantity of material to be stored andhigher is the amount of working capitalrequirement.

10. Growth Prospects: If the growthpotential of a concern is perceived tobe higher, it will require higher amountof working capital so that is able tomeet higher production and salestarget whenever required.

11. Level of Competition: Higherlevel of competitiveness maynecessitate higher stocks of finishedgoods to meet urgent orders fromcustomers. This increases the workingcapital requirement. Competition mayalso force the firm to extend liberalcredit terms discussed earlier.

12. Inflation: With rising prices,higher amounts are required even tomaintain a constant volume ofproduction and sales. The workingcapital requirement of a businessthus, become higher with higher rateof inflation. It must, however, be notedthat an inflation rate of 5%, does notmean that every component ofworking capital will change by thesame percentage. The actualrequirement shall depend upon therates of price change of differentcomponents (e.g., raw material,finished goods, labour cost,) Finishedgoods as well as their proportion inthe total requirement.

KEY 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: Money required for carrying out business activities iscalled business finance. Almost all business activities require some finance.Finance is needed to establish a business, to run it, to modernise it, toexpand, or diversify it

Financial Management: Financial Management is concerned with optimalprocurement as well as usage of finance. For optimal procurement, differentavailable sources of finance are identified and compared in terms of their costsand associated risks.

Objectives and Financial Decisions Primary aim of financial management isto maximise shareholder’s wealth, which is referred to as the wealthmaximisation concept. The market price of a company’s shares are linked tothe three basic financial decisions

Financial decision-making is concerned with three broad decisions which areInvestment Decision, Financing Decision, Dividend Decision

Financial Planning and Importance Financial planning is essentiallypreparation of a financial blueprint of an organisation’s future operations. Theobjective of financial planning is to ensure that enough funds are available atright time.

Financial planning strives to achieve the following twin objectives.

(a) To ensure availability of funds whenever these are required:(b) To see that the firm does not raise resources unnecessarily:Financial planning is an important part of overall planning of any business

enterprise. It aims at enabling the company to tackle the uncertainty in respectof the availability and timing of the funds and helps in smooth functioning ofan organisation.

Capital Structure and Factors One of the important decisions under financialmanagement relates to the financing pattern or the proportion of the use ofdifferent sources in raising funds. On the basis of ownership, the sourcesof business finance can be broadly classified into two categories viz., ‘ownersfunds’ and ‘borrowed funds’. Capital structure refers to the mix between ownersand borrowed funds.

Deciding about the capital structure of a firm involves determining therelative proportion of various types of funds. This depends on various factorswhich are: Cash Flow Position, Interest Coverage Ratio (ICR), Debt ServiceCoverage Ratio (DSCR), Return on Investment (RoI), Cost of debt, Tax Rate,Cost of Equity, Floatation Costs, Risk Consideration, Flexibility, Control,

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Regulatory Framework, Stock Market Conditions, Capital Structure of otherCompanies.

Fixed and Working Capital Fixed capital refers to investment in long-termassets. Management of fixed capital involves around allocation of firm’s capitalto different projects or assets with long-term implications for the business.These decisions are called investment decisions or capital budgeting decisionsand affect the growth, profitability and risk of the business in the long run.

Factors affecting the Requirement of Fixed Capital are: Nature of Business,Scale of Operations, Choice of Technique, Technology Upgradation, GrowthProspects, Diversification, Financing Alternatives, Level of Collaboration.

Apart from the investment in fixed assets every business organisation needsto invest in current assets. This investment facilitates smooth day-to-dayoperations of the business. Current assets are usually more liquid butcontribute less to the profits than fixed assets.

Factors affecting the working capital requirements are: Nature of Business,Scale of Operations, Business Cycle, Seasonal Factor, Production Cycle, CreditAllowed, Credit Availed, Operating Efficiency, Availability of Raw Material,Growth Prospects, Level of competition, Inflation.

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. dividend decision

3. Other things remaining the same, an increase in the tax rate on corporateprofits will

a. make debt relatively cheaper

b. make debt relatively less cheap home

c. no impact on the cost of debt

d. we can’t say

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4. Companies with higher growth paternal are likely to

a. pay lower dividends

b. pay higher dividends

c. dividends are not affected by growth considerations

d. none of the above

5. Financial leverage is called favorable if

a. Return on Investment is lower than cost of debt

b. ROI is higher than cost of debt

c. Debt is nearly available

d. If the degree of existing financial leverage is low

6. Higher debt equity ratio Debt

Equity

⎛⎝⎜

⎞⎠⎟ results in

a. lower financial risk

b. higher degree of operating risk

c. higher degree of financial risk

d. higher EPS7. Higher working capital usually results in

a. higher current ratio, higer risk and higher profits

b. lower current ratio, higher risk and profits

c. higher equitably, lower risk and lower profits

d. lower equitably, lower risk and higher profits

8. Current assets are those assets which get converted into cash

a. within six month b. within one year

c. between one and three year d. between three and five year

9. Financial planning arrives at

a. minimising the external borrowing by resorting to equity issues

b. entering that the firm always have sinthicicanlty more fund thanrequired so that there is no pancity of funds

c. ensuring that the firm paces neither a shortage nor a glut of unusablefunds

d. doing only what is possible with the funds that the firms has at itsdisposal

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10. Higher dividends per share is associated with

a. high earnings, high cash flows, unusable earnings and higher growthopportunities

b. high earnings, high cash flows, stable earnings and high growthopportunities

c. high earnings, high cash flows, stable earnings and lower growthopportunities

d. high earnings, low cash flows, stable earnings and lower growthopportunities

11. A fixed asset should be financed through

a. a long-term liability b. a short-term liability

c. a mix of long and short-term liabilities

12. Current assets of a business firm should be financed through

a. current liability only b. long-term liability only

c. partly from both types i.e. long and short term liabilities

Short answer questions

1. What is meant by capital structure?

2. Discuss the two objectives of financial planning.

3. What is ‘Financial Risk?’ Why does it arise?

4. Define a ‘Current Assets’ and gave four examples?

5. Financial management is based on three broad financial decisions. Whatare these?

6. What is the main objectives of financial management? Briefly explain.

7. Discuss about working capital affecting both the liquidity as well asprofitability of a business.

Long answer questions

1. What is meant by working capital. How is it calculated. Discuss fiveimportant determinants of working capital requirements.

2. Capital structure decision is essentially optimisation of risk-returnrelationship. Comment.

3. A capital budgeting decisions is capable of changing the financial fortuneof a business. Do you agree? Why or Why not?

4. Explain factors affecting the dividend decision.

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5. Explain the term ‘ Trading on Equity’. Why, When and How it can beused by a business organisation?

Case Problem

‘S’ Limited is manufacturing steel at its plant in India. It is enjoying a buoyantdemand for its products as economic growth is about 7%-8% and the demandfor steel is growing. It is planning to set up a new steel plant to cash on theincreased demand it is facing. It is estimated that it will require aboutRs. 5000 crores to set up and about Rs 500 crores of working capital to startthe new plant.

Questions

1. What is the role and objectives of financial management for this company?

2. What is the importance of having a financial plan for this company? Givean imaginary plan to support your answer.

3. What are the factors, which will affect capital structure of this company?

4. Keeping in mind that it is a highly capital intensive sector what factors willaffect the fixed and working capital. Give reasons with regard to both insupport of your answer.

Project Work

1. Pick up annual reports of 2 or more companies engaged in the same line ofbusiness. You can access this data on the respective websites of thecompanies and other sources. Compare their capital structures. Analysethe 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 ofyour teacher.

2. From the annual reports that you use in activity 1 analyse the workingcapital of the companies. You can use short- term solvency ratios. Studythe operating cycle of the line of business you have choosen and prepare areport as to the soundness of the working capital management of thecompanies you are studying. Prepare a report of your findings and discussit in class with the help of your teacher.

CHAPTER

10FINANCIAL MARKETS

IDEA SEEKS TO CAPITALISE ON

MARKET MOMENTUM

With the explosive growth of theirsubscriber base, telecom companiesare all looking at capital markets toraise funds to fuel their expansionplan. Idea Cellular, the fifth largestoperator in the country and theflagship telecom venture of AV BirlaGroup, has decided to enter the capitalmarket to raise between Rs. 1,700 andRs. 2,000 crore.

The company has appointed J.M.Morgan Stanley, Merrill Lynch amongother as book-runners for theproposed Initial Public Offer (IPO),which is expected to be ready byJanuary end.

Since, under SEBI norms, theminimum float size is 10 per cent, thecompany will divest between 10and 12 per cent, “The last privateplacement made by the promoters isat a market capitalisation ofRs. 15,000 crore. The proposed floatis expected to be at 10 to 20 per centpremium of the private placementprice,” AV Birla Group recentlydivested 35 per cent stake in thecompany to a clutch of private equityfirms. However, this is a fresh issue ofshares, where the proceeds will beutilised by Ideal Cellular for capitalexpenditure. After the proposedissues, the promoters stake will comedown to around 58 per cent.

Source: www.hindustantimes.com

LEARNING OBJECTIVES

After studying this chapter, youshould be able to:

explain the meaning ofFinancial Market;

explain the meaning of MoneyMarket and describe itsInstruments;

explain the nature and types ofCapital Market;

distinguish between MoneyMarket and Capital Market;

explain the meaning andfunctions of Stock Exchanges;

explain the functioning of NSEIand OTCEI; and

describe the role of SEBI ininvestor protection.

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INTRODUCTION

You all know that a business needsfinance from the time an entrepreneurmakes the decision to start it. It needsfinance both for working capitalrequirements such as payments forraw materials and salaries to itsemployees, and fixed capitalexpenditure such as the purchase ofmachinery or building or to expand itsproduction capacity. The aboveexample gives a fair picture of howcompanies need to raise funds from thecapital markets. Idea Cellular decidedto enter the Indian capital market forits needs of expansion. In this chapteryou will study concepts like privateplacement, Initial public Offer (IPO) andcapital markets which you come acrossin the example of Idea Cellular.Business can raise these funds fromvarious sources and in different waysthrough financial markets. Thischapter provides a brief description ofthe mechanism through which financesare mobilised by a business organisationfor both short term and long termrequirements. It also explains theinstitutional structure and the regulatorymeasures for different financial markets.

CONCEPT OF FINANCIAL MARKET

A business is a part of an economicsystem that consists of two main

sectors – households which save fundsand business firms which invest thesefunds. A financial market helps to linkthe savers and the investors bymobilizing funds between them. Indoing so it performs what is known asan allocative function. It allocates ordirects funds available for investmentinto their most productive investmentopportunity. When the allocativefunction is performed well, twoconsequences follow:

• The rate of return offered tohouseholds would be higher

• Scarce resources are allocated tothose firms which have the highestproductivity for the economy.

There are two major alternativemechanisms through which allocationof funds can be done: via banks orvia financial markets. Households candeposit their surplus funds withbanks, who in turn could lend thesefunds to business firms. Alternately,households can buy the shares anddebentures offered by a businessusing financial markets. The processby which allocation of funds is doneis called financial intermediation.Banks and financial markets arecompeting intermediaries in thefinancial system, and give householdsa choice of where they want to placetheir savings.

HOUSEHOLDS BUSINESS FIRMS

INVESTORSSAVERS

BANKS FINANCIAL MARKETS

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wherever a financial transactionoccurs. Financial transactions couldbe in the form of creation of financialassets such as the initial issue ofshares and debentures by a firm or thepurchase and sale of existing financialassets like equity shares, debenturesand bonds.

FUNCTIONS OF FINANCIAL MARKET

Financial markets play an importantrole in the allocation of scarceresources in an economy by performingthe following four important functions.

facilitates the transfer of savings fromsavers to investors. It gives savers thechoice of different investments and thushelps to channelise surplus funds intothe most productive use.2. Facilitate Price Discovery: You allknow that the forces of demand andsupply help to establish a price for acommodity or service in the market. Inthe financial market, the households aresuppliers of funds and business firmsrepresent the demand. The interactionbetween them helps to establish a pricefor the financial asset which is beingtraded in that particular market.

A financial market is a market forthe creation and exchange of financialassets. Financial markets exist

Financial System

1. Mobilisation of Savings andChanneling them into the mostProductive Uses: A financial market

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3. Provide Liquidity to FinancialAssets: Financial markets facilitate easypurchase and sale of financial assets.In doing so they provide liquidity tofinancial assets, so that they can beeasily converted into cash wheneverrequired. Holders of assets can readilysell their financial assets through themechanism of the financial market.

4. Reduce the Cost of Transactions:Financial markets provide valuableinformation about securities beingtraded in the market. It helps to savetime, effort and money that bothbuyers and sellers of a financial assetwould have to otherwise spend to tryand find each other. The financialmarket is thus, a common platformwhere buyers and sellers can meet forfulfillment of their individual needs.

Financial markets are classified onthe basis of the maturity of financialinstruments traded in them.Instruments with a maturity of less

than one year are traded in the moneymarket. Instruments with longermaturity are traded in the capitalmarket.

MONEY MARKET

The money market is a market forshort term funds which deals inmonetary assets whose period ofmaturity is upto one year. These assetsare close substitutes for money. It is amarket where low risk, unsecuredand short term debt instruments thatare highly liquid are issued andactively traded everyday. It has nophysical location, but is an activityconducted over the telephone andthrough the internet. It enables theraising of short-term funds for meetingthe temporary shortages of cash andobligations and the temporarydeployment of excess funds for earningreturns. The major participants in themarket are the Reserve Bank of India

Classification of Financial Markets

FINANCIAL MARKET

MONEY MARKET CAPITAL MARKET

Primary market Secondary Market

Debt Equity Debt Equity

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(RBI), Commercial Banks, Non-Banking Finance Companies, StateGovernments, Large Corporate Housesand Mutual Funds.

MONEY MARKET INSTRUMENTS

1. Treasury Bill: A Treasury bill isbasically an instrument of short-termborrowing by the Government of Indiamaturing in less than one year. Theyare also known as Zero Coupon Bondsissued by the Reserve Bank of India onbehalf of the Central Government tomeet its short-term requirement offunds. Treasury bills are issued in theform of a promissory note. They arehighly liquid and have assured yieldand negligible risk of default. They areissued at a price which is lower thantheir face value and repaid at par. Thedifference between the price at whichthe treasury bills are issued and theirredemption value is the interestreceivable on them and is calleddiscount. Treasury bills are availablefor a minimum amount of Rs 25,000and in multiples thereof.

Example: Suppose an investorpurchases a 91 days Treasury bill witha face value of Rs. 1,00,000 forRs. 96,000. By holding the bill until thematurity date, the investor receivesRs. 1,00,000. The difference ofRs. 4,000 between the proceedsreceived at maturity and the amountpaid to purchase the bill represents theinterest received by him.

2. Commercial Paper: Commercialpaper is a short-term unsecuredpromissory note, negotiable and

transferable by endorsement anddelivery with a fixed maturity period. Itis issued by large and creditworthycompanies to raise short-term funds atlower rates of interest than market rates.It usually has a maturity period of 15days to one year. The issuance ofcommercial paper is an alternative tobank borrowing for large companiesthat are generally considered to befinancially strong. It is sold at a discountand redeemed at par. The originalpurpose of commercial paper was toprovide short-terms funds for seasonaland working capital needs. For examplecompanies use this instrument forpurposes such as bridge financing.

Example: Suppose a company needslong-term finance to buy somemachinery. In order to raise the longterm funds in the capital market thecompany will have to incur floatationcosts (costs associated with floating ofan issue are brokerage, commission,printing of applications and advertisingetc.). Funds raised through commercialpaper are used to meet the floatationcosts. This is known as Bridge Financing.

3. Call Money: Call money is shortterm finance repayable on demand, witha maturity period of one day to fifteendays, used for inter-bank transactions.Commercial banks have to maintain aminimum cash balance known as cashreserve ratio. The Reserve Bank of Indiachanges the cash reserve ratio from timeto time which in turn affects the amountof funds available to be given as loansby commercial banks. Call money is amethod by which banks borrow fromeach other to be able to maintain the

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cash reserve ratio. The interest rate paidon call money loans is known as the callrate. It is a highly volatile rate that variesfrom day-to-day and sometimes evenfrom hour-to-hour. There is an inverserelationship between call rates andother short-term money marketinstruments such as certificates ofdeposit and commercial paper. A rise incall money rates makes other sourcesof finance such as commercial paperand certificates of deposit cheaper incomparison for banks raise funds fromthese sources.

4. Certificate of Deposit: Certificatesof deposit (CD) are unsecured,negotiable, short-term instruments inbearer form, issued by commercialbanks and development financialinstitutions. They can be issued toindividuals, corporations andcompanies during periods of tightliquidity when the deposit growth ofbanks is slow but the demand for

credit is high. They help to mobilise alarge amount of money for shortperiods.

5. Commercial Bill: A commercialbill is a bill of exchange used to financethe working capital requirements ofbusiness firms. It is a short-term,negotiable, self-liquidating instrumentwhich is used to finance the credit salesof firms. When goods are sold on credit,the buyer becomes liable to makepayment on a specific date in future.The seller could wait till the specifieddate or make use of a bill of exchange.The seller (drawer) of the goods drawsthe bill and the buyer (drawee) acceptsit. On being accepted, the bill becomesa marketable instrument and is calleda trade bill. These bills can bediscounted with a bank if the sellerneeds funds before the bill matures.When a trade bill is accepted by acommercial bank it is known as acommercial bill.

Sterlite Industries

Sterlite Industries, part of the London listed Vedanta Resources Group, isscheduled to be listed on the New York Stock Exchange through an initialpublic 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 aluminiumand copper facilities.

The IPO is a part of an enabling resolution passed by Sterlite to raise upto12,500 crores through American Depository Shares (ADS). Consequently, thecompany has increased its authorised capital from Rs 150 crore toRs 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 tolist on NYSE, outpaced Sensex and rose by 1.4% to close at Rs 545.2 on BSEon the day of the announcement.

Source: The Economic Times

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CAPITAL MARKET

The term capital market refers tofacilities and institutional arrangementsthrough which long-term funds, bothdebt and equity are raised and invested.It consists of a series of channelsthrough which savings of thecommunity are made available forindustrial and commercial enterprisesand for the public in general. It directsthese savings into their most productiveuse leading to growth and developmentof the economy. The capital marketconsists of development banks,commercial banks and stockexchanges.

An ideal capital market is one wherefinance is available at reasonable cost.The process of economic developmentis facilitated by the existence of a wellfunctioning capital market. In fact,development of the financial system isseen as a necessary condition foreconomic growth. It is essential thatfinancial institutions are sufficientlydeveloped and that market operationsare free, fair, competitive andtransparent. The capital market shouldalso be efficient in respect of theinformation that it delivers, minimisetransaction costs and allocate capitalmost productively.

The Capital Market can be dividedinto two parts: a. Primary Marketb. Secondary Market

PRIMARY MARKET

The primary market is also known asthe new issues market. It deals with

new securities being issued for the firsttime. The essential function of a primarymarket is to facilitate the transfer ofinvestible funds from savers toentrepreneurs seeking to establish newenterprises or to expand existing onesthrough the issue of securities for thefirst time. The investors in this marketare banks, financial institutions,insurance companies, mutual fundsand individuals.

A company can raise capitalthrough the primary market in the formof equity shares, preference shares,debentures, loans and deposits. Fundsraised may be for setting up newprojects, expansion, diversification,modernisation of existing projects,mergers and takeovers etc.

Methods of Floatation

There are various methods of floatingnew issues in the primary market :

1. Offer through Prospectus: Offerthrough prospectus is the mostpopular method of raising funds bypublic companies in the primarymarket. This involves invitingsubscription from the public throughissue of prospectus. A prospectusmakes a direct appeal to investors toraise capital, through an advertisementin newspapers and magazines. Theissues may be underwritten and alsoare required to be listed on at least onestock exchange. The contents of theprospectus have to be in accordancewith the provisions of the CompaniesAct and SEBI disclosure and investorprotection guidelines.

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2. Offer for Sale: Under this methodsecurities are not issued directly to thepublic but are offered for sale throughintermediaries like issuing houses orstock brokers. In this case, a companysells securities enbloc at an agreed priceto brokers who, in turn, resell them tothe investing public.

3. Private Placement: Privateplacement is the allotment of securitiesby a company to institutional investorsand some selected individuals. It helpsto raise capital more quickly than a publicissue. Access to the primary market can beexpensive on account of various mandatoryand non-mandatory expenses. Somecompanies, therefore, cannot afford a publicissue and choose to use private placement.

4. Rights Issue: This is a privilege givento existing shareholders to subscribe toa new issue of shares according to theterms and conditions of the company.The shareholders are offered the ‘right’to buy new shares in proportion to thenumber of shares they already possess.

5. e-IPOs: A company proposing toissue capital to the public through theon-line system of the stock exchangehas to enter into an agreement with thestock exchange. This is called an InitialPublic Offer (IPO). SEBI registeredbrokers have to be appointed for thepurpose of accepting applications andplacing orders with the company. Theissuer company should also appoint aregistrar to the issue having electronicconnectivity with the exchange. Theissuer company can apply for listing ofits securities on any exchange otherthan the exchange through which it has

offered its securities. The lead managercoordinates all the activities amongstintermediaries connected with the issue.

SECONDARY MARKET

The secondary market is also knownas the stock market or stock exchange.It is a market for the purchase and saleof existing securities. It helps existinginvestors to disinvest and freshinvestors to enter the market. It alsoprovides liquidity and marketability toexisting securities. It also contributesto economic growth by channelisingfunds towards the most productiveinvestments through the process ofdisinvestment and reinvestment.Securities are traded, cleared andsettled within the regulatory frameworkprescribed by SEBI. Advances ininformation technology have madetrading through stock exchangesaccessible from anywhere in thecountry through trading terminals.Along with the growth of the primarymarket in the country, the secondarymarket has also grown significantlyduring the last ten years.

Distinction between Capital Marketand Money Market

Both the money market and the capitalmarket are the centres which arrangefor the transfer of funds from thesuppliers of funds to the users of funds.They differ, however, in regard to thematurity periods of the financial assetscreated and dealt with for affecting thetransfer of funds. As explained earlier,money market arranges for short term

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and capital market provides formedium to long-term funds. The timelength in respect of short-term fundsis less than and upto one year.

STOCK EXCHANGE

A stock exchange is an institution whichprovides a platform for buying and sellingof existing securities. As a market, thestock exchange facilitates the exchangeof a security (share, debenture etc.) intomoney and vice versa. Stock exchangeshelp companies raise finance, provideliquidity and safety of investment to theinvestors and enhance the creditworthiness of individual companies.

Meaning of Stock Exchange

According to Securities Contracts(Regulation) Act 1956, stock exchangemeans any body of individuals,whether incorporated or not,constituted for the purpose of assisting,regulating or controlling the businessof buying and selling or dealing insecurities.

Functions of a Stock Exchange

The efficient functioning of a stockexchange creates a conducive climatefor an active and growing primarymarket for new issues. An active andhealthy secondary market in existing

Bombay Stock Exchange

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securities leads to positive environmentamong investors. The following aresome of the important functions of astock exchange.

1. Providing Liquidity and Market-ability to Existing Securities: Thebasic function of a stock exchange is thecreation of a continuous market wheresecurities are bought and sold. It givesinvestors the chance to disinvest andreinvest. This provides both liquidity andeasy marketability to already existingsecurities in the market.

2. Pricing of Securities: Share priceson a stock exchange are determined bythe forces of demand and supply. Astock exchange is a mechanism ofconstant valuation through which theprices of securities are determined.Such a valuation provides importantinstant information to both buyers andsellers in the market.

3. Safety of Transaction: Themembership of a stock exchange is well-regulated and its dealings are welldefined according to the existing legalframework. This ensures that theinvesting public gets a safe and fair dealon the market.

4. Contributes to Economic Growth:A stock exchange is a market in whichexisting securities are resold or traded.Through this process of disinvestmentand reinvestment savings getchannelised into their most productiveinvestment avenues. This leads tocapital formation and economicgrowth.

5. Spreading of Equity Cult: Thestock exchange can play a vital role inensuring wider share ownership byregulating new issues, better tradingpractices and taking effective steps ineducating the public about investments.

History of the Stock Market in India

The history of the stock market in India goes back to the end of the eighteenthcentury when long-term negotiable securities were first issued. In 1850 theCompanies Act was introduced for the first time bringing with it the feature oflimited liability and generating investor interest in corporate securities. Thefirst stock exchange in India was set-up in 1875 as The Native Share andStock Brokers Association in Bombay. Today it is known as the Bombay StockExchange (BSE). This was followed by the development of exchanges inAhmedabad (1894), Calcutta(1908) and Madras(1937). It is interesting to notethat stock exchanges were first set up in major centers of trade and commerce.

Until the early 1990s, the Indian secondary market comprised regionalstock exchanges with BSE heading the list. After the reforms of 1991, theIndian secondary market acquired a three tier form. This consists of:• Regional Stock Exchanges

• National Stock Exchange (NSE)

• Over the Counter Exchange of India (OTCEI)

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6. Providing Scope for Speculation:The stock exchange provides sufficientscope within the provisions of law forspeculative activity in a restricted andcontrolled manner. It is generallyaccepted that a certain degree of healthyspeculation is necessary to ensureliquidity and price continuity in thestock market.

TRADING PROCEDURE ON A STOCK

EXCHANGE

Till a few years ago trading on a stockexchange took place through a publicoutcry or auction system. This hasbeen replaced by an online screenbased electronic trading system asalmost all exchanges have becomeelectronic. Trading has, therefore,

shifted from the stock market floor tothe brokers’ office where trades areexecuted through a computer. Brokersare members of a stock exchangethrough whom trading of securities isdone. Brokers may be individuals,partnership firms or corporate bodies.They are the intermediaries betweenthe buyers and sellers. Earlier thesemembers owned, controlled andmanaged the exchanges. The ownershipand management of stock exchangesby brokers often led to a conflict ofinterest between the brokers and theirclients. This led to ‘demutualisation’ ofstock exchanges. Demutualisationseparates the ownership and control ofstock exchanges from the trading rightsof members. This reduces the conflict ofinterest between the exchange and the

Electronic Trading System

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brokers and the chances of brokers usingstock exchanges for personal gains.

A company’s securities can betraded on a stock exchange only if theyare listed or quoted on it. Companieshave to fulfill a stringent set ofrequirements to get their securitieslisted on a stock exchange. Thisensures that the interest of theshareholders is adequately looked after.Transactions on a stock exchange maybe carried out on either cash basis or acarry over basis. The carry over basisis also called badla and is a uniquefeature of Indian stock markets,particularly the BSE. A stock exchangeyear is divided into periods called‘accounts’ which vary from a fortnightto a month. All transactions madeduring one account are to be settledby payment for purchases and bydelivery of share certificates in the case

of sales on notified days of the clearingprogramme of a given stock exchange.

A share certificate is proof ofownership of securities by an individual.Purchase and sale transactions insecurities involved the exchange ofmoney in return for the share certificate.This led to problems of theft, forgery,transfer delays and time involved inpaperwork. To eliminate these problemsan electronic book entry form of holdingand transferring securities has beenintroduced. This is referred to as‘dematerialisation of securities’.

NATIONAL STOCK EXCHANGE OF INDIA

(NSE)

The National Stock Exchange is thelatest, most modern and technologydriven exchange. It was incorporatedin 1992 and was recognised as a stock

Stock Market Index

A stock market index is a barometer of market behaviour. It measures overallmarket sentiment through a set of stocks that are representative of the market.It reflects market direction and indicates day-to-day fluctuations in stockprices. An ideal index must represent changes in the prices of securities andreflect price movements of typical shares for better market representation. Inthe Indian markets the BSE, SENSEX and NSE, NIFTY are important indices.Some important global stock market indices are:• Dow Jones Industrial Average is among the oldest quoted stock market

index in the US.

• NASDAQ Composite Index is the market capitalisation weightages of pricesfor stocks listed in the NASDAQ stock market.

• S and P 500 Index is made up of 500 biggest publicly traded companies inthe US. The S and P 500 is often treated as a proxy for the US stock market.

• FTSE 100 consists of the largest 100 companies by full market value listedon the London Stock Exchange. The FTSE 100 is the benchmark index ofthe European market.

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exchange in April 1993. It startedoperations in 1994, with trading on thewholesale debt market segment.Subsequently, it launched the capitalmarket segment in November 1994 asa trading platform for equities andthe futures and options segment inJune 2000 for various derivativeinstruments. NSE has set up anationwide fully automated screenbased trading system.

The NSE was setup by leadingfinancial institutions, banks, insurancecompanies and other financialintermediaries. It is managed byprofessionals, who do not directly orindirectly trade on the exchange. Thetrading rights are with the tradingmembers who offer their services to theinvestors. The board of NSE comprisesof senior executives from promoterinstitutions and eminent professionals,without having any representation fromtrading members.

OBJECTIVES OF NSE

NSE was set up with the followingobjectives:a. Establishing a nationwide trading

facility for all types of securities.

b. Ensuring equal access to investors allover the country through anappropriate communication network.

c. Providing a fair, efficient andtransparent securities marketusing electronic trading system.

d. Enabling shorter settlement cyclesand book entry settlements.

e. Meeting international benchmarksand standards.

Within a span of ten years, NSE hasbeen able to achieve its objectives forwhich it was set up. It has been playinga leading role as a change agent intransforming the Indian capital market.NSE has been able to take the stockmarket to the door step of the investors.

Some Common Stock Market Terms

You would have often come across the following terms in magazines ornewspapers 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 marketsentiment of the investors. A Bullish phase refers to a period of optimism anda Bearish phase to a period of perssimism on the Bourses.

BADLA – This refers to a carry forward system of settlement, particularly atthe BSE. It is a facility that allows the postponement of the delivery or paymentof 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 stockexchange but whose trading contributes to speculation.

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It has ensured that technology hasbeen harnessed to deliver the servicesto the investors across the country atthe lowest cost. It has provided a nationwide screen based automated tradingsystem with a high degree oftransparency and equal access toinvestors irrespective of geographicallocation.

MARKET SEGMENTS OF NSE

The Exchange provides trading in thefollowing two segments.

(i) Whole Sale Debt Market Segment:This segment provides a tradingplatform for a wide range of fixedincome securities that includecentral government securities,treasury bills, state developmentloans, bonds issued by public

sector undertakings, floating ratebonds, zero coupon bonds, indexbonds, commercial paper, certificateof deposit, corporate debenturesand mutual funds.

(ii) Capital Market Segment: Thecapital market segment of NSEprovides an efficient and transparentplatform for trading in equity,preference, debentures, exchangetraded funds as well as retailGovernment securities.

OVER THE COUNTER EXCHANGE OF INDIA

(OTCEI)

The OTCEI is a company incorporatedunder the Companies Act 1956. It wasset-up to provide small and mediumcompanies an access to the capitalmarket for raising finance in a cost

SENSEX — The Bombay Stock Exchange Sensitive Index

Have you counted the number of times newspaper headlines in the past fewweeks have been screaming about the SENSEX? It goes up and down all thetime and seems to be a very important part of business and economic news. Hasthat made you wonder what the SENSEX actually is?

The SENSEX is the benchmark index of the BSE. Since the BSE has been theleading exchange of the Indian secondary market, the SENSEX has been animportant indicator of the Indian stock market. It is the most frequently usedindicator while reporting on the state of the market. An index has just one job: tocapture the price movement. So a stock index will reflect the price movements ofshares while a bond index captures the manner in which bond prices go up ordown. If the SENSEX rises, it indicates the market is doing well. Since stocks aresupposed to reflect what companies expect to earn in the future, a rising indexindicates that investors expect better earnings from companies. It is also a measureof the state of the Indian economy. If Indian companies are expected to do well,obviously the economy should do well too.

The SENSEX, launched in 1986 is made up of 30 of the most actively tradedstocks in the market. In fact, they account for half the BSE’s market capitalisation.They represent 13 sectors of the economy and are leaders in their respectiveindustries.

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effective manner. It was also meant toprovide investors with a convenient,transparent and efficient avenue forcapital market investment. It is fullycomputerised, transparent, singlewindow exchange ‘which commencedtrading in 1992. This exchange isestablished on the lines of NASDAQ(National Association of SecuritiesDealers Automated Quotations) theOTC exchange in USA. It has beenpromoted by UTI, ICICI, IDBI, IFCI, LIC,GIC, SBI Capital markets and CanBank Financial Services.

Over the counter market may bedefined as a place where buyers seeksellers and vice-versa and then attemptto arrange terms and conditions forpurchase/sale acceptable to both theparties. It is a negotiated market placethat exists any where as opposed to theauction market place, represented bythe activity on securities exchanges.Thus, in the OTC exchange, tradingtakes place when a buyer or sellerwalks up to an OTCEI counter, tapson the computer screen, finds quotesand effects a purchase or saledepending on whether the prices meettheir targets. There is no particularmarket place in the geographicalsense. The objectives of OTCEI are toprovide quicker liquidity to securitiesat a fixed and fair price, liquidity forless traded securities or that of smallcompanies, a simplified process ofbuying and selling and easy andcheaper means of making public saleof new issues.

Advantages of OTC Market

1. It provides a trading platform tosmaller and less liquid companiesas they are not eligible for listingon a regular exchange.

2. It is a cost effective method forcorporates as there is a lower costof new issues and lower expensesof servicing the investors.

3. Family concerns and closely heldcompanies can go public throughOTC.

4. Dealers can operate both in newissues and secondary market attheir option.

5. It gives greater freedom of choiceto investors to choose stocks bydealers for market making in bothprimary and secondary markets.

6. It is a transparent system of tradingwith no problem of bad or shortdeliveries.

7. Information flows are free and moredirect from market makers tocustomers since there is closecontact between them.

SECURITIES AND EXCHANGE BOARD OF

INDIA (SEBI)

The Securities and Exchange Boardof India was established by theGovernment of India on 12 April 1988as an interim administrative body topromote orderly and healthy growthof securities market and for investorprotection. It was to function under

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the overall administrative control ofthe Ministry of Finance of theGovernment of India. The SEBI wasgiven a statutory status on 30January 1992 through an ordinance.The ordinance was later replaced byan Act of Parliament known as theSecurities and Exchange Board ofIndia Act, 1992.

Reasons for the Establishment ofSEBI

The capital market has witnessed atremendous growth during 1980’s,characterised particularly by theincreasing participation of thepublic. This ever expandinginvestors population and marketcapitalisation led to a variety ofmalpract ices on the part ofcompanies, brokers, merchantbankers, investment consultants andothers involved in the securitiesmarket. The glaring examples ofthese malpractices include existenceof self – styled merchant bankersunofficial private placements, riggingof prices, unofficial premium on newissues, non-adherence of provisionsof the Companies Act, violation ofrules and regulations of stockexchanges and listing requirements,delay in delivery of shares etc. Thesemalpractices and unfair tradingpractices have eroded investorconfidence and multiplied investorgrievances. The Government and thestock exchanges were rather helplessin redressing the investor’s problemsbecause of lack of proper penalprovisions in the existing legislation.

In view of the above, the Governmentof India decided to set-up a separateregulatory body known as Securitiesand Exchange Board of India.

Purpose and Role of SEBI

The basic purpose of SEBI is to createan environment to facilitate efficientmobilisation and allocation ofresources through the securitiesmarkets. It also aims to stimulatecompetition and encourage innovation.This environment includes rules andregulations, institutions and theirinterrelationships, instruments,practices, infrastructure and policyframework.

This environment aims at meetingthe needs of the three groups whichbasically constitute the market, viz,the issuers of securities (Companies),the investors and the marketintermediaries.

• To the issuers, it aims to provide amarket place in which they canconfidently look forward to raisingfinances they need in an easy, fairand efficient manner.

• To the investors, it should provideprotection of their rights andinterests through adequate,accurate and authentic informationand disclosure of information on acontinuous basis.

• To the intermediaries, it shouldoffer a competitive, professionalisedand expanding market withadequate and efficient infrastructureso that they are able to renderbetter service to the investors andissuers.

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Objectives of SEBI

The overall objective of SEBI is toprotect the interests of investors and topromote the development of, andregulate the securities market. Thismay be elaborated as follows:1. To regulate stock exchanges and

the securities industry to promotetheir orderly functioning.

2. To protect the rights and interestsof investors, particularly individualinvestors and to guide and educatethem.

3. To prevent trading malpracticesand achieve a balance between selfregulation by the securities industryand its statutory regulation.

4. To regulate and develop a code ofconduct and fair practices byintermediaries like brokers,merchant bankers etc., with a viewto making them competitive andprofessional.

Functions of SEBI

Keeping in mind the emerging natureof the securities market in India, SEBIwas entrusted with the twin task ofboth regulation and development of thesecurities market.

Regulatory Functions

1. Registration of brokers and sub-brokers and other players in themarket.

2. Registration of collective investmentschemes and Mutual Funds.

3. Regulation of Stock Bankers andportfolio exchanges, and merchantbankers.

4. Prohibition of fraudulent andunfair trade practices.

5. Controlling insider trading andtakeover bids and imposingpenalties for such practices.

6. Calling for information byundertaking inspection, conductingenquiries and audits of stockexchanges and intermediaries.

7. Levying fee or other charges forcarrying out the purposes of the Act.

8. Performing and exercising suchpower under Securities Contracts(Regulation) Act 1956, as may bedelegated by the Government ofIndia.

Development Functions

1. Investor education

2. Training of intermediaries

3. Promotion of fair practices andcode of conduct of all SRO’s.

4. Conducting research and publishinginformation useful to all marketparticipants.

The Organisation Structure of SEBI

As SEBI is a statutory body there hasbeen a considerable expansion in therange and scope of its activities. Each ofthe activities of the SEBI now demandsmore careful, closer, co-ordinated andintensive attention to enable it to attainits objectives. Accordingly, SEBI hasbeen restructured and rationalised intune with its expanded scope. It hasdecided its activities into five operationaldepartments. Each department isheaded by an executive director. Apartfrom its head office at Mumbai, SEBI has

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opened regional offices in Kolkalta,Chennai, and Delhi to attend to investorcomplaints and liaise with the issuers,intermediaries and stock exchanges inthe concerned region.

The SEBI also formed two advisorycommittees. They are the PrimaryMarket Advisory Committee and theSecondary Market Advisory Committee.These committees consist of the marketplayers, the investors associations

recognised by the SEBI and theeminent persons in the capital market.They provide important inputs to theSEBI’S policies.

The objectives of the twoCommittees are as follows:a. To advise SEBI on matters relating

to the regulation of intermediariesfor ensuring investors protection inthe primary market.

b. To advise SEBI on issues related tothe development of primary marketin India.

c. To advise SEBI on disclosurerequirements for companies.

d. To advise for changes in legalframework to introduce simplificationand transparency in the primarymarket.

e. To advice the board in mattersrelating to the development and

regulation of the secondary marketin the country.The committees are however non-

statutory in nature and the SEBI is notbound by the advise of the committee.These committees are a part of SEBI’sconstant endeavor to obtain a feedbackfrom the market players on variousissues relating to the regulations anddevelopment of the market.

SEBI Violations

SEBI on Thursday unearthed yet another abuse of IPO norms in the IDFC’sInitial Public Offering (IPO) where a few investors opened over 14,000dematerialised accounts to corner large number of shares of the company.

This is the second such incident, after a similar such violations weredetected in the YES Bank’s IPO.

SEBI said in IDFC’s IPO too four investors opened as many as 14,807dematerialised accounts with Karvy-DP and ‘Strangely’, all these accountholders have their bank accounts with Bharat Overseas Bank Ltd.,Ahmedabad.

SEBI order said: “Further probe is required for examining the systemicfault, if any, of the registrar Karvy-RTI, i.e., Karvy Computer Shares P Ltd.,and the lead managers Kotak Mahindra Capital Company Ltd., DSP MerrillLynch Ltd. and SBI Capital Markets Ltd. in identifying and weeding out thebenami 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 thebank 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 DepositCommercial Bill Money Market Mutual Fund CapitalMarket Primary Market Secondary MarketStock Exchange SEBI, NSE OTCEI

SUMMARY

Financial Market is a market for creation and exchange of financial assets. Ithelps in mobilisation and channelising the savings into most productive uses.Financial markets also helps in price discovery and provide liquidity tofinancial assets.

Money Market is a market for short-term funds. It deals in monetory assetswhose period of maturity is less than one year. The instruments of moneymarket includes treasury bills, commercial paper, call money, REPO’s,Certificate of deposit, commercial bills, participation certificates and moneymarket mutual funds.

Capital Market is a place where long-term funds are mobilised by the corporateundertakings and Government. Capital Market may be devided into primarymarket and secondary market. Primary market deals with new securities whichwere not previously tradable to the public. Secondary market is a place whereexisting securities are bought and sold.

Stock Exchanges are the organisations which provide a platform for buyingand selling of existing securities. Stock exchanges provide continuous marketfor securities, helps in price discovery, widening shareownership and providescope for speculation.

The National Stock Exchange of India is the latest, most modern and technologydriven exchange and was incorporated in 1992. OTCEI was incorporated in1992 to provide listing facility for small companies with paid up capital of lessthan 3 crores.

Securities and Exchange Board of India was established in 1988 and wasgiven statutory status through an Act in 1992. The SEBI was set-up to protectthe interests of investors, development and regulation of securities market.

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EXERCISES

Multiple choice questions

1. Primary and Secondary Marketsa. Compete with each otherb. Complement each otherc. Function Independentlyd. Control each other

2. Total number of Stock Exchanges in India area. 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. 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 yeara. 1999 b. 2000 c. 2001 d. 2002

6. Clearing and settlement operations of NSE is carried out bya. NSDL b. NSCCL c. SBI d. CDSL

7. OTCEI was started on the lines ofa. NASDAQ b. NYSE c. NASAQ d. NSE

8. To be listed on OTCEI, the minimum capital requirement for a company isa. Rs. 5 Croresb. Rs. 3 Crores c. Rs. 6 Crores d. Rs. 1 Crores

9. Treasury Bills are basicallya. An instrument to borrow short term fundsb. An instrument to borrow long term fundsc. An instrument of capital marketd. None of the above

10.REPO isa. Repurchase agreement b. Reliance Petroleumc. Read and Process d. None of the above

Short answer questions

1. What are the functions of financial markets?2. “Money Market is essentially Market for short term funds” Discuss.3. What is Treasury Bill ?

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4. What is REPO and Reverse REPO?5. Distinguish between Capital Market and Money Market.6. What are the functions of Stock Exchange?7. What are the objectives of SEBI?8. What are the objectives of NSE?9. What is OTCEI?

Long answer questions

1. Explain the various Money Market Instruments.2. What are the methods of floatation in Primary Market.3. Explain the Capital Market reforms in India.4. Explain the objectives and functions of SEBI5. Explain the various segments of NSE.

Projects and Assignments

1. Collect the information about the companies that have mobilised resourcesthrough primay market.

2. Collect the information on various measures taken by SEBI to protect theinterests of investors since its inception.

Try and Solve this Crossword

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3. Send a group of students to a trading terminal in your city to gain first handinformation on securities trading and prepare a report.

4. Collect data about the movements in SENSEX and NIFTY puring the lastone month. Find out whether the two move in same or opposite direction.

5. Collect information about SEBI action for Investor Protection taken duringlast two years.

6. Collect information about e-IPO’s in the Indian Market in the last one year.

Clues to the Crossword

Across1. 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)

3. Inclusion of securities in the official trade list of securities in stock market (7)

4. Place of trade I securities (6)

5. Result of selling shares at a price lower than the purchase price. (4)

6. An independent dealer in securities (6)

7. Includes shares, scripts, bonds, debentures (10)

8. Speculator who expects the prices to go down (4)

9. Buying and selling of securities to manipulate the market (7)

10. Speculator who deals in new securities only (4)

Down1. Speculator expecting a rise in the prices (4)

2. Means ‘with’ (3)

3. Means a part or fraction of capital (6)

4. Fraction of profit paid to government (3)

5. Illegal, game based on chance (8)

6. Official statement of securities in the stock market (5)

7. Those who buy and sell securities with objective of profit (10)

8. Money invested in business (7)

9. Return on shares out of profits (8)

10. Instrument acknowledging a debt (9)

11. Govt. document acknowledging a debt (5)

12. Profit or yield (4)

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Case Problem I

‘R’ Limited is a real estate company which was formed in 1950. In about 56years of its existence the company has managed to carve out a niche for itself inthis sector. Lately, this sector is witnessing a boom due to the fact that the Indianeconomy is on the rise. The incomes of middle class are rising. More people canafford to buy homes for themselves due to easy availability of loans andaccompanying tax concessions.

To expand its business in India and abroad the company is weighing variousoptions to raise money through equity offerings in India. Whether to tap equity ordebt. market whether to raise money from domestic market or international marketor Combination of both? Whe their to raise the necessary financé from moneymarket or capital market. It is also planning to list itself in New York Stock Exchangeto raise money through ADR’s. To make its offerings attractive it is planning tooffer host of financial plans products to its stakeholders and investors and alsoexpand 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 IINSE 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 ofIndia. They illustrate the movement of NSE stock indices as well as world stockindices 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 stockindices?

3. What factors affect the movement of stock indices? Elaborate on the natureof these factors.

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4. What relationship do you see between the movement of indices in worldmarkets and NSE indices?

5. Give details of all the indices mentioned above. You can find information onthe web or business magazines.

(The teacher should help the students in answering these questions. Theycan look at the website mentioned above and also website of SEBI, i.e.,www.sebi.gov.in for educational material. This exercise will help the studentsin understanding the stock markets clearly and also create interest therein.)

Project Work

1. Study the wwebsite of Mumbai Stock Exchange, i.e., www.bseindia.com andcompile information which you find useful. Discuss it in your class and findout how it can help you should you decide to invest in the stock market.Prepare a report on your findings with the help of your teacher.

2. Prepare a report on the role of SEBI in regulating the Indian stock market.You can get this information on its website namely www.sebi.gov.in. Do youthink something else should be done to increase the number of investors inthe stock market?

Answers to the Crossword

Across 1. Broker 2. Fluctuations 4. Listing 8. Market 9. Loss

13. Jobber 15. Securities 16. Bear 17. Rigging 18. Stag

Down 1. Bull 3. Cum 5. Stocks 6. Tax 7. Gambling

9. Lists 10. Speculator 11. Capital 12. Dividend 14. Debenture

16. Bonds 19. Gain

LEARNING OBJECTIVES

After studying this chapter, youshould be able to:

explain the meaning of‘marketing’;

distinguish between ‘marketing’and ‘selling’;

list out important functions ofmarketing;

examine the role of marketing inthe development of an economyin a firm, to the society and toconsumers;

explain the elements ofmarketing mix;

classify products into differentcategories;

analyse the factors affectingprice determination;

list out the types of channels ofdistribution; and

explain the tools of promotionmix viz., advertising, personalselling, sales promotion andpublicity.

CHAPTER

11MARKETING

WHERE DO COMPANIES DO THEIR

BUSINESSES?

In the Markets or in the Society?

It is an undisputed fact that a company’ssurvival does not depend upon itsconsumers alone, but a diverse set ofstakeholders like the government,religious leaders, social activists, NGOs,media, etc. Hence, earning thesatisfaction of these segments is also asimperative as they add to the power ofthe brand by word of mouth.

The social concern adds to thestrength of the brand. Corporates thatembraced the deepest social values,have been successful in buildingpowerful brand, and, eventually, robustcustomer relationship. The area ofcorporate social justice fall under twobroad categories. The issues such as thenutrition of children, child care, old-agehomes, amelioration of hunger, offeringaid to those affected by naturalcalamities, etc. needing instant attentionwith humanitarian perspective, comesunder the first category.

The issues that contribute tomaking society a pleasant place to livein the long run, may be grouped underthe second category. Issues whichcomes under this category are healthawareness and aid, education,environmental protection, women’semployment and empowerment,preventing unjust discriminations (onthe basis of caste, community, religion,ethnicity, race, and sex), eradication ofpoverty through employment,preservation of culture, values, andethics, contribution to research, etc.

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Let us consider a typical day in our life.Right from the time we get up in themorning to the time we go to bed, weuse number of products to satisfy ourdifferent needs. Beginning with thebreakfast, we take such items as bread,butter, milk, and rice, to satisfy ourhunger; use the services of a bus or anauto or a cycle to reach to our schoolor place of work; read books, magazinesand newspapers, to keep ourselvesinformed and acquire knowledge; usecomputers, cell phone, television andother gadgets for communication/entertainment; and purchase manyother products like gifts, shoes,clothing, furniture, etc., from marketto satisfy our different needs.

Who makes these products andwhy? These products are manufacturedand marketed by different firms. Forexample, Lifebouy soap, Closeuptoothpaste, Surf detergent powder aremanufactured by Hindustan Lever;Ariel detergent powder by Procter andGamble, Dairy Milk Chocolate by

Nestle, Atlas Cycles by Atlas cyclecompany, Kwality Ice-creams byKwality Walls, LG Televisions by LGElectronics and so on. These firms arecalled marketers. These firmsundertake various activities tostimulate the demand for theirproducts and earn profit by satisfyingcustomer’s needs and wants. Peoplepurchase products because thesesatisfy some of their needs.

Number of activities are performedby the marketers to facilitate exchangeof goods and services betweenproducers and the users of suchproducts. These activities are referredto as marketing activities.

For a proper understanding ofmarketing, number of questions needto be answered. These include: Whatdo we mean by a market? What can bemarketed? Is it products or services orsomething more? Who is a marketer?What is marketing management?These points have been taken up fordiscussion in the following sections.

Infosys Technologies, the leading software consulting service provider, has beencertified ISO 14001, compliant by Det Norske Veritas for its development centers inPune, Chennai, Bangalore, Bhubaneshwar, Hyderabad, Mangalore, Mohali, andMysore, for its ‘Ozone Initiative’. Through this initiative, Infosys has committed forcontinual improvement.

Procter and Gamble’s (P&G) philosophy is that it should lead the industry inimplementing a global environmental programme. P&G is one of the first companiesin the world to actively study the influence of consumer products on the environmentand introduce concentrated products, recycled plastic bottles, and refill packagesto the industry. The overall packaging per case has been reduced by an average of27% and a reduction of 37% in air, waste, and water emissions has been achievedconsistently since 1990. P&G contributes to sustainable development and addressesenvironmental and social issues connected with its products and services.

Source: Adopted from ‘Effective Executive’, Feb. 2006

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WHAT IS A MARKET

In the traditional sense, the term‘market’ refers to the place wherebuyers and sellers gather to enter intotransactions involving the exchange ofgoods and services. It is in this sensethat this term is being used in day today language, even today. The otherways in which this term is being usedis in the context of a product market(cotton market, gold or share market),geographic market (national andinternational market), type of buyers(consumer market and industrialmarket) and the quantity of goodstransacted (retail market andwholesale market).

But in modern marketing sense,the term market has a broadermeaning. It refers to a set of actual andpotential buyers of a product or service.For example, when a fashion designerdesigns a new dress and offers it forexchange, all the people who are willingto buy and offer some value for it canbe stated to be the market for thatdress. Similarly, market for fans orbicycles or electric bulbs or shampoosrefers to all the actual and potentialbuyers for these products.

WHAT IS MARKETING

The term marketing has been describedby different people in different ways.Some people believe that marketing issame thing as ‘shopping’. Wheneverthey go out for shopping of certainproducts or services, they describe itas marketing. There are some otherpeople who confuse marketing with‘selling’ and feel that marketing activitystarts after a product or service hasbeen produced. Some people describeit to mean ‘merchandising’ or designinga product. All these descriptions maybe partly correct but marketing is amuch broader concept, which isdiscussed as follows:

Traditionally marketing has beendescribed in terms of its functions oractivities. In this respect, marketinghas been referred to as performanceof business activities that direct theflow of goods and services fromproducers to consumers.

We know that mostly manufac-turing firms do not produce goods fortheir own consumption but for theconsumption or use by others.Therefore, to move the goods andservices from producers to consumers,

“Business is not financial science, it’s about trading, buying and selling. It’sabout 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

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number of activities such as productdesigning or merchandising, packaging,warehousing, transportation, branding,selling, advertising and pricing arerequired. All these activities arereferred to as marketing activities.

Thus, ‘merchandising’, ‘selling’ and‘shopping’ are all part of a large numberof activities undertaken by a firm,which are collectively called marketing.

It may be noted here that marketingis not merely a post-production activity.It includes many activities that areperformed even before goods areactually produced and continue evenafter the goods have been sold. Forexample, activities such asidentification of customer needs,collection of information for developingthe product, designing suitable productpackage and giving it a brand nameare performed before commencementof the actual production. Similarly,many follow up activities are requiredfor maintaining good customerrelations for procuring repeat sale.

In modern times, emphasis isplaced on describing marketing as asocial process. It is a process wherebypeople exchange goods and services formoney or for something of value tothem. Taking the social perspective,Phillip Kolter has defined marketing as,“a social process by which individualgroups obtain what they need and wantthrough creating offerings and freelyexchanging products and services ofvalue with others”.

Thus, marketing is a social processwhere in people interact with others,in order to persuade them to act in a

particular way, say to purchase aproduct or a service, rather than forcingthem to do so. A careful analysis of thedefinition shows the followingimportant features of marketing:

1. Need and Want: The process ofmarketing helps individuals andgroups in obtaining what they need andwant. Thus, the primary reason ormotivation for people to engage in theprocess of marketing is to satisfy someof their needs or wants. In other words,the focus of the marketing process ison satisfaction of the needs and wantsof individuals and organisations.

A need is a state of felt deprivationor feeling of being deprived ofsomething. If unsatisfied, it leaves aperson unhappy and uncomfortable.For example, on getting hungry, webecome uncomfortable and startlooking for objects that are capable ofsatisfying our hunger.

Needs are basic to human beingsand do not pertain to a particularproduct. Wants, on the other hand,are culturally defined objects that arepotential satisfiers of needs. In otherwords, human needs shaped by suchfactors as culture, personality andreligion are called wants. A basic needfor food, for example, may takevarious forms such as want for dosaand rice for a South Indian andchapatti and vegetables for a NorthIndian person.

A marketer’s job in an organisationis to identify needs of the targetcustomers and develop products andservices that satisfy such needs.

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2. Creating a Market Offering: On thepart of the marketers, the effortinvolves creation of a ‘market offering.Market offering refers to a completeoffer for a product or service, havinggiven features like size, quality, taste,etc; at a certain price; available at agiven outlet or location and so on. Letus say the offer is for a cell phone,available in four different versions, onthe basis of certain features such assize of memory, television viewing,internet, camera, etc., for a given price,say between Rs. 5,000 and Rs. 20,000(depending on the model selected),available for sale at say firm’s exclusiveshops in and around all metropolitancities in the country. A good ‘marketoffer’ is the one which is developed afteranalysing the needs and preferencesof the potential buyers.

3. Customer Value: The process ofmarketing facilitates exchange ofproducts and services between thebuyers and the sellers. The buyers,however, make buying decisions ontheir perceptions of the value of theproduct or service in satisfying theirneed, in relation to its cost. A productwill be purchased only if it is perceivedto be giving greatest benefit or valuefor the money. The job of a marketer,therefore, is to add to the value of theproduct so that the customers preferit in relation to the competing productsand decide to purchase it.

4. Exchange Mechanism: Theprocess of marketing works throughthe exchange mechanism. Theindividuals (buyers and sellers) obtain

what they need and want through theprocess of exchange. In other words,the process of marketing involvesexchange of products and services formoney or something consideredvaluable by the people.

Exchange refers to the processthrough which two or more partiescome together to obtain the desiredproduct or service from someone,offering the same by giving somethingin return. For example, a personfeeling hungry may get food by offeringto give money or some other productor service in return to someone whois willing to accept the same for food.

In the modern world, goods areproduced at different places and aredistributed over a wide geographicalarea through various middlemen,involving exchanges at different levelsof distribution. Exchange is, therefore,referred to as the essence ofmarketing. For any exchange to takeplace, it is important that the followingconditions are satisfied:

(i) involvement of at least two partiesviz., the buyer and the seller.

(ii) each party should be capable ofoffering something of value to theother. For example, the seller offersa product and the buyer, money.

(iii) each party should have the abilityto communicate and deliver theproduct or service. No exchangecan take place if the buyers andsellers are not able tocommunicate with each other or ifthey can not deliver something ofvalue to the other.

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(iv) each party should have freedom toaccept or reject other party’s offer.

(v) the parties should be willing toenter into transaction with eachother. Thus, the acceptance orrejection of the offer takes place onvoluntary basis rather than on thebases of any compulsion.

The points listed above are thenecessary conditions for an exchange

to take place. Whether the exchangeactually takes place or not dependson the suitability of the act of exchangeto both the parties, whether it makesthe parties better off or at least notworse off.

Another important point to benoted is that Marketing is not merely abusiness phenomena or confined onlyto business organisations. Marketingactivities are equally relevant to non-

What can be Marketed

Physical Products : DVD player, Motor cycle, ipods, Cell phone, Footwear,Television, Refrigerator.

Services : Insurance, Health Care, Business Process Outsourcing,Security, Easy Bill service, Financial Services(Investment),Computer Education, Online Trading.

Ideas : Polio Vaccination, Helpage, Family Planning, Donation ofBlood (Red cross), Donation of money on Flag Day (NationalFoundation for Communal Harmony).

Persons : For Election of Candidates for Certain Posts.

Place : ‘Visit Agra – ‘City of Love’, ‘Udaipur – ‘The City of Lakes’,‘Mysore – The City of Gardens’, ‘When Orisa celebrates,Eleven the God Join In’.

Experience : Customised Experiences as Dinner with a cricketer (sayDhoni); Lunch with a celebrity (say Bill Gates or AishwaryaRoy) or experience of Baloon Riding, mountaineering, etc.

Properties : Intangible rights of ownership of real estate in financialproperty (Shares, Debentures).

Events : Sports events (say Olympics, Cricket series), diwali mela,fashion show, music concert, film festival, elephant race(Kerala Tourism).

Information : Production packaging and distribution of information byorganisations such as by universities, research organisation,providing information as market information (marketingresearch agencies), technology information.

Organisations : For boosting their public image organisations such asHindustan Lever, Ranbaxy, Dabur, Proctor and Gamble,communicate with people. Example, Phillips says, Let’s makeThings Better’.

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profit organisations such as hospitals,schools, sports clubs and social andreligious organisations. It helps theseorganisations in achieving their goalssuch as spreading the message offamily planning, improving the literacystandards of people and providingmedication to the sick.

WHAT CAN BE MARKETED

The question commonly coming to themind is what can be marketed. Is it aproduct or service or something else. Letus first understand what is a product?

A product is a ‘bundle of utilities’or ‘source of satisfaction’, that can beused to satisfy human needs andwants. It is not confined to physicalobjects, such as motor cycle, biscuit,bulb and pencil but also refers to otherthings of value such as services, ideas,places, etc., that can be offered to thepotential buyers for their use. In themarketing literature, anything that canbe of value to the buyer can be termedas a ‘product’. It can be tangible, i.e.,which can be felt, seen and touchedphysically such as a pencil, a cycle oran intangible such as services renderedby a doctor, hairdresser or a lawyer.

Apart from the product, what canbe marketed is a service or a person(say political parties persuading tovote for a particular candidate) or an

idea (say Red Cross persuading todonate blood) or a place (say KeralaTourism persuading people to visitKerala for health tourism). Thus,anything that is of value to the othercan be marketed. It can be a productor a service or a person or a place oran idea or an event or an organisationor experience or properties. (see box)

Who is a marketer? : Marketer refersto any person who takes more activepart in the process of exchange.Normally it is the seller who is moreactive in the exchange process as he/she analyses the needs of the potentialbuyers, develops a market offering andpersuades the buyers to buy theproduct. However, there may becertain situations where the buyermay be taking more active role in theexchange process. Let us say insituations of rare supply, the buyermay be taking extra efforts inpersuading the seller to sell theproduct to him/her. This may behappening in defence deals or take asituation where a country havinginstalled a nuclear plant needs thesupply of nuclear fuel or ‘Heavy Water’.It may need to convince the supplierof the products to supply the same toit, by promising that it will be usedfor peaceful purposes only. In thiscase, the buyer will be treated as themarketer. Thus, any body, who takes

Do it yourself

Collect five advertisements each for the marketing of (a) ideas and (b) places from anewspaper or a magazine. Write in your notebook, the messages conveyed throughthese and discuss in the class indicating which of these messages are more appealingto you. Give reasons in support of your answer.

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more active role in the exchangeprocess will be taken as the marketer.

MARKETING MANAGEMENT

Marketing management meansmanagement of the marketingfunction. In other words, marketingmanagement refers to planning,organising, directing and control of theactivities which facilitate exchange ofgoods and services between producersand consumers or users of productsand services. Thus the focus ofmarketing management is on achievingdesired exchange outcomes with thetarget markets. Taking a managementperspective, the term marketing hasbeen defined as “the process ofplanning and executing the conception,pricing, promotion and distribution ofideas, goods and services to createexchanges that satisfy individual andorganisational goals” by AmericanManagement Association, similarlyPhilip Kotler has defined Marketingmanagement as the art and science ofchoosing target markets and getting,keeping and growing customersthrough creating, delivering andcommunicating superior customervalues of management.

A careful analysis of the definitionreveals that the process ofmanagement of marketing involves:

(i) Choosing a target market, say amanufacturer may choose to makereadymade garments for childrenup to the age of 5 years;

(ii) In respect of the target marketchosen, the focus of the process of

management is on getting, keepingas well as growing the customers.That means the marketer has tocreate demand for his products sothat the target customerspurchase the product, keep themsatisfied with the firm’s productsand also attract more customersto the firm’s products so that thefirm can grow; and

(iii) The mechanism for achieving theobjective is through creating,developing and communicatingsuperior values for the customers.That means, the primary job of amarketing manager is to createsuperior values so that thecustomers are attracted to theproducts and services andcommunicate these values to theprospective buyers and persuadethem to buy these products.

Marketing management involvesperformance of various functions suchas analysing and planning themarketing activities, implementingmarketing plans and setting controlmechanism. These functions are to beper formed in such a way thatorganisation’s objectives are achievedat the minimum cost.

Marketing management generallyis related to creation of demand.However, in certain situations, themanager has to restrict the demand.For example, if there is a situation of‘overfull demand’, i.e., the demandbeing more than what the companycan or want to handle, (like what thesituation in our country was before theadoption of policies of liberalisation

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and globalisation, in early 90’s, inmost consumer products be itautomobiles or electronics goods orother durable products. The job ofmarketing mangers, in thesesituations would be to find ways toreduce the demand temporarily by sayreducing the expenditure onpromotion or increasing the prices.Similarly, if the demand is ‘irregular’,such as in case of seasonal products,(say fans, woollen clothes) themarketer’s job is to change the timepattern of demand through suchmethods as providing short-termincentives, to the buyers. Thus, themarketing management in not onlyconcerned with creating demand butwith managing the demand effectively,as per the situation in the market.

MARKETING AND SELLING

Many people confuse ‘selling’ for‘marketing’. They consider these twoterms as one and the same. Marketingrefers to a large set of activities of whichselling is just one part. For example, amarketer of televisions, before makingthe sale, does a lot of other activitiessuch as planning the type and modelof televisions to be produced, the priceat which it would be sold and selectingthe distribution outlets at which thesame would be available, etc. In short,marketing involves whole range ofactivities relating to planning, pricing,promoting and distributing theproducts that satisfy customer’s needs.

The function of selling, on theother hand, is restricted to promotion

of goods and services throughsalesmanship, advertising, publicityand short-term incentives so that titleof the product is transferred fromseller to buyer or in other wordsproduct is converted into cash.

The major differences betweenselling and marketing are listed asbelow:

(i) Part of the Process vs Wider Term:Selling is only a part of the processof marketing and is concerned withpromoting and transferringpossession and ownership of goodsfrom the seller to the buyer.Marketing is a much wider termconsisting of number of activitiessuch as identification of thecustomer’s needs, developing theproducts to satisfy these needs,fixing prices and persuading thepotential buyers to buy the same.Thus, selling is merely a part ofmarketing.

(ii) Transfer of T itle vs SatisfyingCustomer Needs: The main focusof selling is on affecting transferof title and possession of goodsfrom sellers to consumers or users.In contrast, marketing activitiesput greater thrust on achievingmaximum satisfaction of thecustomer’s needs and wants.

(iii) Profit through Maximising Sales vsCustomer Satisfaction: All sellingactivities are directed at maximisingsales and, thereby, the profits of thefirm. In other words, the emphasisis on profit maximisation throughmaximisation of sales. Marketing,

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on the other hand, is concerned withcustomer satisfaction and therebyincreasing profit in the long run. Amarketing organisation, thus,attaches highest importance tocustomer satisfaction as a route toprofit maximisation.

(iv) Start and End of the Activities:Selling activities start after theproduct has been developed whilemarketing activities start muchbefore the product is produced andcontinue even after the producthas been sold.

(v) Difference in the Emphasis: Inselling, the emphasis is on bendingthe customer according to theproduct while in marketing, theattempt is to develop the productand other strategies as per thecustomer needs.

vi. Difference in the Strategies: Sellinginvolves efforts like promotion andpersuasion while marketing usesintegrated marketing ef fortsinvolving strategies in respect ofproduct, promotion, pricing andphysical distribution.

MARKETING MANAGEMENT PHILOSOPHIES

In order to achieve desired exchangeoutcomes with target markets, it isimportant to decide what philosophyor thinking should guide the marketingef forts of an organisation. Anunderstanding of the philosophy or theconcept to be adopted is important asit determines the emphasis or theweightage to be put on different factors,in achieving the organisational

objectives. For example, whether themarketing efforts of an organisationwill focus on the product—saydesigning its features etc or on sellingtechniques or on customer’s needs orthe social concerns.

The concept or philosophy ofmarketing has evolved over a periodof time, and is discussed as follows.

Production Concept

During the earlier days of industrialrevolution, the demand for industrialgoods started picking up but thenumber of producers were limited. Asa result, the demand exceeded thesupply. Selling was no problem.Anybody who could produce the goodswas able to sell. The focus of businessactivities was, therefore, on productionof goods. It was believed that profitscould be maximised by producing atlarge scale, thereby reducing theaverage cost of production. It was alsoassumed that consumers wouldfavour those products which werewidely available at an affordable price.Thus, availability and affordability ofthe product were considered to be thekey to the success of a firm. Therefore,greater emphasis was placed onimproving the production anddistribution efficiency of the firms.

Product Concept

As a result of emphasis on productioncapacity during the earlier days, theposition of supply increased over periodof time. Mere availability and low priceof the product could not ensure

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increased sale and as such the survivaland growth of the firm. Thus, with theincrease in the supply of the products,customers started looking for productswhich were superior in quality,performance and features. Therefore,the emphasis of the firms shifted fromquantity of production to quality ofproducts. The focus of business activitychanged to bringing continuousimprovement in the quality,incorporating new features etc. Thus,product improvement became the keyto profit maximisation of a firm, underthe concept of product orientation.

Selling Concept

With the passage of time, themarketing environment underwentfurther change. The increase in thescale of business further improved theposition with respect to supply ofgoods, resulting in increasedcompetition among sellers. Theproduct quality and availability did notensure the survival and growth offirms because of the large number ofsellers selling quality products. Thisled to greater importance to attractingand persuading customers to buy theproduct. The business philosophychanged. It was assumed that thecustomers would not buy, or not buyenough, unless they are adequatelyconvinced and motivated to do so.Therefore, firms must undertakeaggressive selling and promotionalefforts to make customers buy theirproducts. The use of promotionaltechniques such as advertising,personal selling and sales promotion

were considered essential for sellingof products. Thus, the focus ofbusiness firms shifted to pushing thesale of products through aggressiveselling techniques with a view topersuade, lure or coax the buyers tobuy the products. Making salethrough any means becameimportant. It was assumed that buyerscan be manipulated but what wasforgotten was that in the long run whatmatters most is the customersatisfaction, rather than anything else.

Marketing Concept

Marketing orientation implies thatfocus on satisfaction of customer’sneeds is the key to the success of anyorganisation in the market. It assumesthat in the long run an organisationcan achieve its objective ofmaximisation of profit by identifyingthe needs of its present andprospective buyers and satisfyingthem in an effective way. All thedecisions in a firm are taken from thepoint of view of the customers. In otherwords, customer’s satisfaction becomethe focal point of all decision makingin the organisation. For example, whatproduct will be produced, with whatfeatures and at what price shall it besold, or where shall it be madeavailable for sale will depend on whatdo the customers want. If thecustomers want features like doubledoor in a refrigerator or a separateprovision for water cooler in it, theorganisation would produce arefrigerator with these features, wouldprice it at a level which the customers

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bought not merely because of theirquality, packing or brand name, butbecause they satisfy a specific need ofa customer. A pre-requisite for thesuccess of any organisation, therefore,is to understand and respond tocustomer needs.

are willing to pay and so on. If allmarketing decisions are taken withthis prospective, selling will not be anyproblem. It will automatically follow.The basic role of a firm then is to‘identify a need and fill it’. The conceptimplies that products ad-services are

Differences in the Marketing Management Philosophies

Philosophies/ Production Product Selling Marketing Societal Bases Concept Concept Concept Concept Concept

1. Starting Factory Factory Factory Market Market,Point Society

2. Main Quantity of Quality, Existing Customer CustomerFocus product performance, product needs needs and

features of society’sproduct well being

3. Means Availability Product Selling Integrated Integratedand improve- and marketing marketing

affordability ments promotingof product

4. Ends Profit through Profit through Profit Profit Profitvolume of product through through through

production quality sales customer customervolume satisfaction satisfaction

and socialwelfare

Test Your Understanding I

State whether the following statements are true or false:(i) focus of marketing activities is on facilitating exchange of goods from producers

to consumers or users;(ii) in modern marketing, the term market refers to the place where buyers and

sellers meet for the exchange of goods and services;(iii) marketing is same thing as shopping for goods and services;(iv) marketing is a post production activity only;(v) marketing is equally relevant to non-profit organisations;(vi) The terms ‘need’ and ‘want’ are used interchangeably in the marketing literature;(vii) marketing management means management of the marketing function; and(viii) Product designing does not come under the purview of marketing activities.

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To sum up, the marketing conceptis based on the following pillars:

(i) Identification of market orcustomer who are chosen as thetarget of marketing effort.

(ii) Understanding needs and wantsof customers in the target market.

(iii) Development of products orservices for satisfying needs of thetarget market.

(iv) Satisfying needs of target marketbetter than the competitors.

(v) Doing all this at a profit.

Thus, the focus of the marketingconcept is on customer needs and thecustomer satisfaction becomes themeans to achieving the firms’ objectiveof maximising profit. The purpose ofmarketing is to generate customervalue at a profit.

The Societal Marketing Concept

The marketing concept, as describedin the preceeding section cannot beconsidered as adequate if we look atthe challenges posed by socialproblems like environmentalpollution, deforestation, shortage ofresources, population explosion andinflation. It is so because any activitywhich satisfies human needs but isdetrimental to the interests of thesociety at large cannot be justified. Thebusiness orientation should,therefore, not be short-sighted to serveonly consumers’ needs. It should alsoconsider large issues of long-termsocial welfare, as illustrated above.

The societal marketing conceptholds that the task of any organisationis to identify the needs and wants ofthe target market and deliver thedesired satisfaction in an effective andefficient manner so that the long-termwell-being of the consumers and thesociety is taken care of. Thus, thesocietal marketing concept is theextension of the marketing concept assupplemented by the concern for thelong-term welfare of the society. Apartfrom the customer satisfaction, it paysattention to the social, ethical andecological aspects of marketing. Thereare large number of such issues thatneed to be attended.

FUNCTIONS OF MARKETING

Marketing is concerned with exchangeof goods and services from producersto consumers or users in such a waythat maximises the satisfaction ofcustomers’ needs. From the view pointof management function, number ofactivities are involved, which havebeen described as below:

1. Gathering and Analysing MarketInformation: One of the importantfunctions of a marketer is to gatherand analyse market information. Thisis necessary to identify the needs ofthe customers and take variousdecisions for the successful marketingof the products and services. This isimportant for making an analysis ofthe available opportunities and threatsas well as strengths and weaknessesof the organisation and help in

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deciding what opportunities can bestbe pursued by it. For example, rapidgrowth is predicted in several areasin the Indian economy, say in the useof internet, market for Cell phones andseveral other areas. Which of theseareas a particular organisation shouldenter or in which area should itexpand requires a careful scanning ofthe strengths and, weaknesses of theorganisation, which is done with thehelp of careful market analysis.

With the growth of computers, anew trend has emerged in thecollection of market information. Moreand more companies are usinginteractive sites on the internet, togather customer views and opinions,before taking important businessdecisions. (see the box on GlobalBrands) One of the popular TV NewsChannel (in Hindi) seeks viewerschoice (through SMS) on which of thegiven four or five main news stories of

The Future of Global Brands

Role of Digital connection and consumer cooperation

In China and India, booming middle classes and fast-rising disposable incomeshave created a still-under-tapped consumer culture. Let’s not forget the lessonsbeing learned about the brand-building, power of digital connections and consumerco-creation. Since the advent of the internet, sites that offer social interaction andconnectivity have been at the forefront of our digital revolution, reshaping the wayconsumers expect to interact with each other and, ultimately, with brands.

Online tag-sale site e-Bay, for example was one of the first sites to teach us thatyou can trust people online as well as you might trust a friendly neighbour. Thatsocial interaction paved the way for Friendster and MySpace and You Tube, a socialnetworking tool that, in the past year, has empowered consumers to create theirown content and post it to a global audience. Anyone who doubts the real marketpotential of such a platform only needs to check out October’s biggest businessheadlines: Google purchased the site for $ 1.65 billion.

HSBC effort attempted a similar goal, to give consumers a forum for conversation.At your pointofview.com, consumers in 76 countries can weigh in and give theiropinions on subjects including cloning, fashion, wind farms and video games.

Teenagers in Chinese cities surf the web for 5.1 hours a week, and the onlinead-market is booming—by more than 75% annually for the past three years,according to Business Week, Mobile phones are among the most coveted pieces oftechnology. And 17.5 million bloggers (and their 75 million readers), many of whomfall within the coveted 18–25 age groups, are shaping consumer opinions in Chinawith more intensity than they do in the US.

The internet age has put advertisers and branding experts face-to-face with anempowered consumer. And those consumers are happy to listen to our messages,as long as we are willing to listen to them.

Source: Adopted from Brand Equity, Nov. 1, 2006

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the day would be broadcasted asdetailed story at the prime time, toensure that the viewers get to listento the story of their own choice.

2. Marketing Planning: Anotherimportant activity or area of work of amarketer is to develop appropriatemarketing plans so that the marketingobjectives of the organisation can beachieved. For example a marketer ofcolour TVs, having 10 per cent of thecurrent market share in the countryaims at enhancing his market share to20 per cent, in the next three years. Hewill have to develop a completemarketing plan covering variousimportant aspects including the plan forincreasing the level of production,promotion of the products, etc. andspecify the action programmes toachieve these objectives.

3. Product Designing andDevelopment: Another importantmarketing activity or decision arearelates to product designing anddevelopment. The design of theproduct contributes to making theproduct attractive to the targetcustomers. A good design can improveperformance of a product and also giveit a competitive advantage in themarket. For example, when we planto buy any product say a motorbike,we not only see its features like cost,mileage, etc. but also the designaspects like its shape, style, etc.

4. Standardisation and Grading:Standardisation refers to producinggoods of predetermined specifications,which helps in achieving uniformity and

consistency in the output. Standardisationensures the buyers that goods conformto the predetermined standards ofquality, price and packaging and reducesthe need for inspection, testing andevaluation of the products.

Grading is the process ofclassification of products into differentgroups, on the basis of some of itsimportant characteristics such asquality, size, etc. Grading is particularlynecessary for products which are notproduced according to predeterminedspecifications, such as in the case ofagricultural products, say wheat,oranges, etc. Grading ensures thatgoods belong to a particular quality andhelps in realising higher prices for highquality output.

5. Packaging and Labelling:Packaging refers to designing thepackage for the products. Labellingrefers to designing the label to be puton the package. Label may vary froma simple tag to complex graphics.

Packaging and labelling havebecome so important in modern daymarketing that these are consideredas the pillars of marketing. Packagingis important not only for protection ofthe products but also serves as apromotional tool. Sometimes, thequality of the product is assessed bythe buyers form packaging. We haveseen that in the success of many ofthe consumer brands in recent timessuch as Lays or Uncle Chips potatowafers Clinic Plus shampoos, andColgate Toothpaste, etc., packaginghas played an important role.

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6. Branding: A very important decisionarea for marketing of most consumerproducts is whether to sell the productin its generic name (name of thecategory of the product, say Fan, Pen,etc.) or to sell them in a brand name(such as Pollar Fan or Rottomac Pen).Brand name helps in creating productdifferentiations, i.e., providing basis fordistinguishing the product of a firmwith that of the competitor, which inturn, helps in building customer’sloyality and in promoting its sale. Theimportant decision areas in respect ofbranding include deciding the brandingstrategy, say whether each product willbe given a separate brand name or thesame brand name will be extended toall products of the company, sayPhillips Bulbs, Tubes and Television orVideocon Washing Machine, Television,and Refrigerator. Selection of the brandname plays important role in thesuccess of a product.

7. Customer Support Services: A veryimportant function of the marketingmanagement relates to developingcustomer support services such as aftersales services, handling customercomplaints and adjustments,procuring credit services, maintenanceservices, technical services andconsumer information. All theseservices aim at providing maximumsatisfaction to the customers, which isthe key to marketing success inmodern days. Customer supportservices prove very effective in bringingrepeat sales from the customers anddeveloping brand loyality for a product.

8. Pricing of Products: Price of productrefers to the amount of moneycustomers have to pay to obtain aproduct. Price is an important factoraffecting the success or failure of aproduct in the market. The demand fora product or service is related to itsprice. Generally lower the price, higherwould be the demand for the productand vice-versa. The marketers haveto properly analyse the factorsdetermining the price of a product andtake several crucial decisions in thisrespect, including setting the pricingobjectives, determining the pricingstrategies, determining the price andchanging the prices.

9. Promotion: Promotion of productsand services involves informing thecustomers about the firm’s product,its features, etc. and persuading themto purchase these products. The fourimportant methods of promotioninclude advertising, Personal Selling,Publicity and Sales Promotion. Amarketer has to take several crucial,decisions in respect of promotion ofthe products and services such asdeciding the promotion budget, thepromotion mix, i.e., the combinationof the promotional tools that will beuse, the promotion budget, etc.

10. Physical Distribution: Managingphysical distribution is another veryimportant function in the marketingof goods and services. The two majordecision areas under this functioninclude (a) decision regardingchannels of distribution or themarketing intermediaries (like whole

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salers, retailers) to be used and (b)physical movement of the productfrom where it is produced to a placewhere it is required by the customersfor their consumption or use. Theimportant decision areas underphysical distribution includemanaging inventory (levels of stock ofgoods), storage and warehousing andtransportation of goods from one placeto the other.11. Transportation: Transportationinvolves physical movement of goodsfrom one place to the other. Asgenerally the users of products,particularly consumer products arewide spread and geographicallyseparated from the place these areproduced, it is necessary to move themto the place where it is needed forconsumption or use, For example, teaproduced in Assam has to betransported not only within the statebut to other far off places like TamilNadu, Punjab, Jammu and Kashmirand Haryana, Rajasthan, where it isconsumed.

A marketing firm has to analyseits transportation needs after takinginto consideration various factorssuch as nature of the product, costand location of target market and takedecisions in respect of mode oftransportation to be chosen and otherrelated aspects.

12. Storage or Warehousing: Usuallythere is a time gap between theproduction or procurement of goodsand their sale or use. It may bebecause of irregular demand for the

products such as in the case of woollengarments or Raincoats or there maybe irregular supply because ofseasonal production such as in thecase of agricultural products(sugarcane, rice, wheat, cotton, etc.).In order to maintain smooth flow ofproducts in the market, there is a needfor proper storage of the products.Further, there is a need for storage ofadequate stock of goods to protectagainst unavoidable delays in deliveryor to meet out contingencies in thedemand. In the process of marketing,the function of storage is performedby dif ferent agencies such asmanufacturers, wholesalers andretailers.

ROLE OF MARKETING

All marketing organisations operateeither to earn profit or pursue someother goals such as communityservice, improvement of quality of lifeor promotion of a cause, say UNICEFworking for the welfare of children or‘Helpage’ working for the cause ofsenior citizens. Whether it is aprofit organisation or a non-profitorganisation, marketing playsan important role in achieving itsobjectives. It helps the individualconsumers in raising their standardof living by making available theproducts and services that satisfy theirneeds and wants. It also plays asignificant role in the economicdevelopment of a nation. The role ofmarketing in different situations maybe described in brief as follows.

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Role in a Firm

The modern concept of marketingplays a significant role in achieving theobjectives of a firm. It emphasises thatcustomer satisfaction is the key to thesurvival and growth of an organisationin the contemporary competitivemarketing environment. By adoptingmarketing orientation, an organisationwhether profit making or non-profitmaking, can achieve its goals in themost effective manner. It helps infocusing the activities of anorganisation on the needs and wantsof the customers. For example, whatproducts or services will be marketedby a firm will depend upon what doits customers need. Thus, an analysisof the needs of the customers shall beundertaken in order to decide what toproduce and sell. The product willthen be designed according to theneeds of the potential buyers and bemade available through the outletsconvenient to customers and be pricedat a level which the target customerscan afford. In other words, marketingas a business philosophy helps inserving the customers by satisfyingtheir needs. It is a well known fact thata satisfied customer is the mostvaluable asset of any firm. Thus,marketing plays a crucial role in thesurvival and growth of a firm.

Role in the Economy

Marketing plays a significant role in thedevelopment of an economy. It acts asa catalyst in the economic development

of a country and helps in raising thestandards of living of the people.

Development of a nation can bejudged by the level of standard of livingof its people. Another importantcriteria, which is related to the firstone, is the per capita income of anaverage citizen of a country. On thisbasis, an underdeveloped country maybe stated to be one which ischaracterised by factors like poverty,scarcity of goods and services,predominance of agriculture, etc.

Marketing can play a significantrole in the economic development of anation. It can inspire people toundertake new activities and to set upenterprises for producing goods thatare needed by the customers.Marketing can help in overcomingobstacles posed by high prices due toimbalances in the levels of productionand consumption. It can also ensuresmooth flow of goods through efficientphysical distribution arrangements.

In other words, marketing can helpin finding out right type of productsand services that a firm shouldmanufacture, the places where itshould make such products availablefor sale, the price at which theproducts should be sold and thechannels that should be used formoving the products to the ultimateplace of consumption or use. Thislinkage between the business andconsumption centres, accelerates theeconomic activity leading to higherincomes, more consumption andincreased savings and investment.

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MARKETING MIX

As stated in an earlier section, theprocess of marketing involves creatinga market offering, to satisfy the needsand wants of the present and potentialbuyers. The real question is how tocreate a market offering. Let us say aprofitable business opportunity isseen by some firm in the field ofproducing soft drinks. To develop andmarket a new brand of soft drinks, anumber of important decisions willhave to be taken for example whetherto go for any collaboration with aforeign manufacturer of soft drinks,whether to produce for the localmarket or for a wider market, what willbe the features of the new product,and so on.

There are large number of factorsaffecting marketing decisions. Thesecan broadly be divided into twocategories: (i) controllable factors, and(ii) non-controllable factors. Controllablefactors are those factors which can beinfluenced at the level of the firm. Inthe previous illustration, for example,whether the drink will be packed inglass bottles or plastic cans; what willbe the name (brand name) of the drink;

at what price it will be sold, (at parwith the price at which othercompetitive brands are sold or belowit or above it); what distributionnetwork will be used to make theproduct available (e.g., hotels,restaurants, groceries shops, kiosksselling cigarette, paan, etc.) to thebuyers whether the new soft drink willbe promoted by putting upadvertisements in newspaper ormagazine or on radio or television; orsay if newspaper, whether in a localnewspaper or a national daily; whetherin a paper of regional language or anEnglish daily, etc. is decided at thelevel of marketing manager of the firm.

However, there are certain otherfactors which affect the decision butare not controllable at the firm’s level.These are called environmentalvariables. For example, the politicalfactors such as the government policyon whether to allow any technical orfinancial collaboration in the area ofsoft drinks, production or economicfactors such as rate of inflationprevailing in a given period or a creditpolicy of the central bank affecting thetotal availability of money in the

Test your Understanding II

State whether the following statements are true or false:

(i) packaging serves as a promotional tool;

(ii) storage adds time value to the product;

(iii) financing is important for marketing only high value products;

(iv) marketing play important role from the point of view of individual consumersonly; and

(v) marketing acts as a catalyst in the economic development of a country.

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market, all of which affect the sale ofa particular product but can not becontrolled or influenced by thedecisions at the level of a firm. To besuccessful, the decisions regarding‘controllable factors’ are to be takenkeeping the environmental variablesinto consideration.

The controllable variables becomemarketing tools, which are constantlyshaped and reshaped by marketingmanagers, to achieve marketingsuccess. For example a firm canreshape a market offering by bringingin a change in any of the variable underits own control say introducing achange in the price or promotion offeror product features or channel used tomake the product available to buyers.Thus, from a number of alternativesavailable a firm chooses a particularcombination to develop a marketoffering. The combination of variables

chosen by a firm to prepare its marketoffering is also called marketing mix.Thus, marketing mix is described asthe set of marketing tools that a firmuses to pursue its marketing objectivesin a target market.

ELEMENTS OF MARKETING MIX

The marketing mix consists of variousvariables, which have broadly beenclassified into four categories,popularly known as four Ps ofmarketing. These are: (i) Product, (ii)Price, (iii) Place, and (iv) Promotion,and are discussed as follows:

1. Product: Product means goods orservices or ‘anything of value’, whichis offered to the market for exchange.For example, Hindustan Levercompany offers number of consumerproducts like toiletries (Close-UpToothpaste, Lifebuoy Soap, etc.),

Marketing Mix: Elements

Product PriceProduct Mix Price LevelProduct Quality MarginsNew Product Pricing PolicyDesign and Development Pricing StrategiesPackaging Price Change

LabellingBranding

Place PromotionChannel Strategy Promotion MixChannel Selection AdvertisingChannel Conflict Personal SellingChannel Cooperation Sales PromotionPhysical Distribution Publicity

Public Relations

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detergent powder (Surf, Wheel), foodproducts (Refined Vegetable Oil); Tataoffers Tata Steel, Trucks, Salt and alarge number of other products; LGElectronics Offers Televisions,Refrigerators, Colour Monitors forComputers, etc; Amul offers numberof food products (Amul Milk, Ghee,Butter, Cheese, Chocolates, etc.).

The concept of product relates tonot only the physical product asmentioned in the above examples butalso the benefits offered by it fromcustomer’s view point (for exampletoothpaste is bought for whiteningteeth, strengthening gums, etc.). Theconcept of product also include theextended product or what is offeredto the customers by way of after salesservices, handling complaints,availability of spare parts etc.These aspects are very important,particularly in the marketing ofconsumer durable products (likeAutomobiles, Refrigerators, etc.). Theimportant product decisions includedeciding about the features, quality,packaging, labelling and branding ofthe products.

2. Price: Price is the amount of moneycustomers have to pay to obtain theproduct. In case of most of theproducts, level of price affects the levelof their demand. The marketers havenot only to decide about the objectivesof price setting but to analyse thefactors determining the price and fixa price for the firm’s products.Decisions have also to be taken inrespect of discounts to customers,traders and credit terms, etc. so that

customers perceive the price to be inline with the value of the product.

3. Place: Place or PhysicalDistribution include activities thatmake firm’s products available to thetarget customers. Important decisionareas in this respect include selectionof dealers or intermediaries to reachthe customers, providing support tothe intermediaries (by way ofdiscounts, promotional campaigns,etc.). The intermediaries in turn keepinventory of the firm’s products,demonstrate them to potential buyers,negotiate price with buyers, close salesand also service the products after thesale. The other decision areas relateto managing inventory, storage andwarehousing and transportation ofgoods from the place it is produced tothe place it is required by the buyers.

4. Promotion: Promotion of productsand services include activities thatcommunicate availability, features,merits, etc. of the products to thetarget customers and persuadethem to buy it. Most marketingorganisations, undertake variouspromotional activities and spendsubstantial amount of money on thepromotion of their goods throughusing number of tools such asadvertising, personal selling and salespromotion techniques (like pricediscounts, free samples, etc.). A largenumber of decisions are to be takenin each of the area specified above. Forexample, in the respect of advertisingit is important to decide about themessage, the media to be used(example print-media–newspaper,

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magazines, etc. the objections ofcustomers, etc.).

The success of a market offer willdepend on how well these ingredientsare mixed to create superior value forthe customers and simultaneouslyachieve their sale and profit objectives.Let us say a firm would like to achievenecessary volume of sale at a cost thatwill permit a desired level of profit. Butso many alternative mixes can beadopted by a firm to achieve thisobjectives. The issue before a firm thenis to decide what would be the mosteffective combination of elements toachieve the given objectives.

PRODUCT

In common parlance, the word‘product’, is used to refer only to thephysical or tangible attributes of aproduct. For example, we say we have

bought a car or a pen or a Cell phoneor a tractor.

Our decision to buy a product isnot only af fected by its physicalqualities, but also by certain non-tangible and psychological factors,e.g., brand name, reputation,guaranty, packaging etc. Let us say,when a person buys a car, he/she isnot just buying a few nuts and bolts,an engine, four wheels and so on.Rather he/she is buying a means oftransport, a status symbol, guaranteesand warranties accompanying theproduct, image of the company andmany other such attributes. Thus, inmarketing, product is a mixture oftangible and intangible attributes,which are capable of being exchangedfor a value, with ability to satisfycustomer needs. Besides physicalobjects, we also include services,ideas, persons, and places in the

PepsiCo. Eyes New Products, Acquisitions

Aims at Adding Production Capacity for Gatorade and other Non-carbonated DrinksPepsiCo on Monday said it will launch new healthier products next year and

focus on growth in emerging markets, a continuation of the strategy that helped theworld’s No. 2 beverage company stay profitable ever as sales growth of its flagshipsoft drinks has slowed.

PepsiCo’s new CEO Indra Nooyi, who took the reins on October 1, also said thecompany was on track to meet its annual target of volume and revenue growth inthe mid-single digits and earnings per share growth in the low double digits.

PepsiCo. evolved from being known mostly for selling soda and salty snacksinto a $33-billion food company that has embraced the push into healthier optionslike Tropicana juice, Aquafina water and whole grain Quaker Oats Cereals.

The company said that moving forward, its capital expenditure as a percentageof sales would increase, and that most of the increased spending will go to expansionin developing and emerging markets and adding manufacturing capacity for Gatoradeand other non-carbonated drinks.

Source: Adopted from Economic Times, Oct. 25, 2006

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concept of product. Thus, product maybe defined as anything that can beoffered to a market to satisfy a wantor need. It is offered for attention,acquisition, use or consumption.

From the customer’s point of view,a product is a bundle of utilities, whichis purchased because of its capabilityto provide satisfaction of certain need.A buyer buys a product or service forwhat it does for her or the benefit itprovides to her. There can be threetypes of benefits a customer may seekto satisfy from the purchase of aproduct, viz., (i) functional benefits, (ii)psychological benefits, and (iii) socialbenefits. For example, the purchase ofa motorcycle provides functional utilityof transportation, but at the same timesatisfies the need for prestige andesteem and provides social benefit bythe way of acceptance from a group,

by riding a motorbike. Thus, all theseaspects should be considered whileplanning for a product.

It is customer for companies toreview the progress of their presentproducts and constantly look foropportunities of diversifying into neverareas. (see box on PepsiCo.)

LET US DO IT

Enlist the functional, psychologicaland social benefits that canbe achieved by the purchase of(i) Personal computer, (ii) Colourtelevision, (iii) Wrist watch.

CLASSIFICATION OF PRODUCT

Products may broadly be classifiedinto two categories — (i) consumers’products, and (ii) industrial products.The consumer products may further

Product

Consumer Product Industrial Product

Durability Basis Shopping Efforts Involved

Non- Durable Services Conven- Shopping SpecialityDurable ience Products Products

Products

Classification of Product

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be classified into different groups, asdetailed below:

CONSUMER PRODUCTS

Products, which are purchased by theultimate consumers or users forsatisfying their personal needs anddesires are referred to as consumerproducts. For example, soap, edible oil,eatables, textiles, toothpaste, fans, etc.which we use for our personal and non-business use are consumer goods.

The consumer products have beenclassified on the basis of two importantfactors: (A) the extent of shoppingefforts involved, and (B) durability ofthe product. These have beenexplained as below:

A. Shopping Efforts Involved

On the basis of the time and effortbuyers are willing to spend in thepurchase of a product, we can classifythe consumer product into the followingthree categories as here under:

1. Convenience Products: Thoseconsumer products, which arepurchased frequently, immediately andwith least time and efforts are referredto as convenience goods. Examples ofsuch products are cigarettes, icecreams, medicines, newspaper,stationery items toothpaste. etc. Theseproducts have low unit-value and arebought in small qualities. Some of theimportant characteristics of suchproducts are:

Convenience Products

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(a) These products are purchased atconvenient locations, with leastefforts and time;

(b) Convenience products have aregular and continuous demand,as these generally come under thecategory of essential products;

(c) These products have small unit ofpurchase and low prices. Forexample the eggs are sold at Rs.28 per dozen and the customers

(f) Sales promotion schemes or short-term incentives such as salescontests, discount offers, etc playan important role in the marketingof such products.

2. Shopping Products: Shoppingproducts are those consumer goods,in the purchase of which buyersdevote considerable time, to comparethe quality, price, style, suitability,etc., at several stores, before making

Shopping Products

purchase them in small numbers;(d) Convenience products have

standardised price as most of theseproducts are branded products;

(e) The competition in these productsis high as the supply is greaterthan the demand. The marketershave, therefore, to heavily advertisefor these products; and

final purchase. Some of the examplesof shopping products are clothes,shoes, jewellery, furniture, radio,television, etc. The importantcharacteristics of shopping productsare as below:

(a) The shopping products aregenerally of durable nature, i.e.,they normally survive many uses;

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(b) The unit price as well as profitmargin of shopping products isgenerally high;

(c) As these products have high unitprice, customers compare theproducts of different companiesbefore making selection;

(d) Purchases of shopping productsare generally pre-planned andthere is little degree of impulsebuying in these products; and

(e) Retailers generally play animportant role in the sale ofshopping products as lot ofpersuasive effort is needed toconvince the buyers to purchasethem.

3. Speciality Products: Specialityproducts are those consumer goodswhich have certain special featuresbecause of which people make specialef forts in their purchase. Theseproducts are such, which havereached a brand loyalty of the highest

order, with a significant number ofbuyers. The buyers are willing tospend a lot of time and efforts on thepurchase of such products. Forexample, if there is a rare collection ofartwork or of antiques, some peoplemay be willing to spend a lot ofshopping ef fort and travel longdistance to buy such products. In ourday-to-day life, we see people going toa particular hair-cutting saloon orrestaurant, or a tailor. The demand forthese goods is relatively inelastic, i.e.,even if the price is increased, thedemand does not come down. Someof the important characteristics of thespeciality products may be summedup as follows:

(a) The demand for speciality productsis limited as relatively smallnumber of people buy theseproducts;

(b) These products are generally costlyand their unit price is very high;

Speciality Products

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(c) These products are available forsale at few places as the numberof customers is small and arewilling to take extra efforts in thepurchase of these products;

(d) An aggressive promotion is requiredfor the sale of speciality products,in order to inform people abouttheir availability, features, etc.; and

(e) After sales services are veryimportant for many of thespeciality products.

B. Durability of Products

On the basis of their durability, theconsumer products have beenclassified into three categories—Durable, Non-durable and Services.

1. Non-durable Products: Theconsumer products which are

normally consumed in one or few usesare called non-durable products. Forexample, we purchase products liketoothpaste, detergents, bathing soapand stationary products etc. From themarketing point of view, theseproducts generally command a smallmargin, should be made available inmany locations and need to be heavilyadvertised.

2. Durable Products: Thosetangible consumer products whichnormally survive many uses, forexample, refrigerator, radio, bicycle,sewing machine and kitchen gadgetsare referred to as durable products.These goods are generally used for alonger period, command a higher perunit margin, require greaterpersonal-selling efforts, guarantees

Marketing of ServicesIndia Post Has 28% Market Share Against Blue Dart’s 20%

Speed Post Leads the Race in Express MailSpeed Post has emerged as a market leader in the express mail category with a27.55% volume share, a study commissioned by the Department of Post (DOP) andgovernment of India shows.

According to the study, almost 46.67% crore articles were sent by express mailin 05-06. The study values the express mail industry alone (excluding logistics andcargo which account for almost 35-40% of private firm’s turnover) at around Rs1,500 crore. In value terms, while Speed Post is the leader, Blue Dart is a closesecond with a 20% market share, followed by DTDC with a 11.91% share and FirstFlight with a 10.89% share.

“This has been possible because of our competitive pricing. We are offering thesame services as other private couriers do, with the same efficiency but at half therates”, added Mr. Samuel. In fact, Speed Post claims that its volumes have increasedby 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 withthe setting up of SEZs and greater economic activity in the country fuelled by theincreasing throughput from the manufacturing sector.

Source: Adopted from Economic Times, Oct. 20, 2006

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and after sales services, on the partof the seller.

3. Services: The durable and non-durable goods are tangible in thesense that these have a physicalexistence and can be seen andtouched. Services are intangible inform. By services we mean thoseactivities, benefits or satisfactions,which are offered for sale, e.g., drycleaning, watch repairs, hair cutting,postal services, services offered by adoctor, an architect and a lawyer. Someof the distinguishing characteristics ofservices are as follows:

(a) By their very nature, services areintangible, i.e., we can not see, feelor touch them;

(b) A service is inseparable from itssource. That means we cannotseparate the service from theperson providing the service;

(c) The services cannot be stored.They are highly perishable. Forexample, if a tailor does not workfor one week, the services he wouldhave provided during such periodgo waste; and

(d) Services are highly variable as theirtype and quality depends on theperson providing them. That iswhy, there is a difference in theextent of satisfaction we get fromthe services provided by differentpeople.

INDUSTRIAL PRODUCTS

Industrial products are thoseproducts, which are used as inputs

in producing other products. Theexamples of such products are rawmaterials, engines, lubricants,machines, tools, etc. In other words,industrial products are meant for non-personal and business use forproducing other products.

The market for industrial productsconsists of manufacturers, transportagencies, banks and insurancecompanies, mining companies andpublic utilities. The importantcharacteristics of industrial productsare given below:

1. Number of Buyers: As comparedto the consumer products, thenumbers of buyers of industrialproducts are limited. For example,sugarcane is purchased by fewproducers of sugar, but sugar, whichis a consumer product, is purchasedby crores of people in our country.

2. Channel Levels: Because of limitednumber of buyers, the sale ofindustrial products is generally madewith the help of shorter channels ofdistribution, i.e., direct selling or onelevel channel.

3. Geographic Concentration:Because of location of industries atcertain points or regions, industrialmarkets are highly concentrated,geographically. For instance, thedemand for power loom comes fromBombay, Sholapur, Bangalore, etc.where the textile industry isconcentrated in our country.

4. Derived Demand: The demand forindustrial products is derived from thedemand for consumer products. For

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example, the demand for leather willbe derived from demand for shoes andother leather products in the market.

5. Role of Technical Considerations:Technical considerations assumegreater significance in the purchaseof industrial products because theseproducts are complex products,bought for use in business operations.

6. Reciprocal Buying: Some bigcompanies from basic industries likeoil, steel, rubber, and medicines resortto the practice of reciprocal buying. Forexample, Ashok Leyland may buy tyresand tubes from MRF, which in turnmay buy trucks from Leyland,whenever it feels the need for the same.

7. Leasing Out: A growing trend inindustrial product market is to leaseout rather than to purchase theproducts on outright basis because ofthe heavy price of these products.

Classification

The industrial goods are classified intothe following major categories:

(i) Materials and Parts: Theseinclude goods that enter themanufacture’s productscompletely. Such goods are oftwo types: (a) Raw material:including farm products likecotton, sugar cane, oil seed andnatural products such asminerals (say crude petroleum,iron ore), fish and lumber; and(b) manufactured material andparts. These are again of twotypes – component materialslike glass, iron, plastic andcomponent parts such as tyre,electric bulb, steering, andbattery.

(ii) Capital Items: These are suchgoods that are used in the

Industrial Goods

Materials and Capital Items Supplies andParts Business Services

Raw Manufactured Installations Equipments Maintanence OperatingMaterial Material and Parts and Repair Supplies

items

Farm Natural Component ComponentProducts Products Material Parts

Classification of Industrial Goods

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production of finished goods.These include: (a) installationslike elevators, mainframeComputers, and (b)equipments like Hand Tools,Personal Computer, FaxMachines, etc.

products have dif ferent buyingmotives and have different attitudesand use different approaches in thepurchase of the products. Forexample, an industrial buyer isexpected to be more rational who willstudy the cost of different available

Test Your Understanding III

Please check whether the following statements are true or false:

(i) Products purchased by ultimate consumers for satisfying their personal needsare referred to as industrial products.

(ii) Speciality products are generally costly and their unit price is high.

(iii) Purchase of convenience products in generally pre-planned.

(iv) Shopping products are purchased frequently, immediately and with leastefforts.

(v) Sales promotional schemes play important role in the sale of industrialproducts.

(vi) Product is anything that can be offered to a market to satisfy a want or need.

(vii) Durable products are normally consumed in one or few uses.

(viii) Services can not be stored.

(ix) Furniture is an example of consumer non-durable product.

(x) Toothpaste is an example of consumer product.

(iii) Supplies and BusinessServices: These are shortlasting goods and services thatfacilitate developing ormanaging the finished product.These include: (a) maintenanceand repair items like Paint,Nails, etc., and (b) operatingsupplies like Lubricant,Computer Stationary, WritingPaper, etc.

The difference in the nature ofconsumer products and industrialproducts is important because of thefact that the buyers of the two sets of

brands, their technical specificationsand the goodwill of the supplier.Whereas, the buyer of a consumerproduct may be more impulsive andemotional who is susceptible toadvertising and various salespromotion schemes.

BRANDING

One of the most important decisionsthat a marketer has to take in the areaof ‘product’ is in respect of branding.He has to decide whether the firm’sproducts will be marketed under abrand name or a generic name.

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Generic name refers to the name ofthe whole class of the product. Forexample, a book, a wristwatch, tyre,camera, toilet soap, etc. We know thata camera is a lens surrounded byplastic or steel from all sides andhaving certain other features such asa flash gun and so on. Similarly bookis a bunch of papers, which are in abound form, on which some usefulinformation about a subject is printed.Thus, all products having thesecharacteristics would be called by thegeneric name such as camera or book.

If products were sold by genericnames, it would be very difficult for themarketers to distinguish their productsfrom that of their competitors. Thus,

most marketers give a name to theirproduct, which helps in identifying anddistinguishing their products from thecompetitors’ products. This process ofgiving a name or a sign or a symboletc., to a product is called branding.The various terms relating to brandingare as follows:

1. Brand: A brand is a name, term,sign, symbol, design or somecombination of them, used to identifythe products—goods or services of oneseller or group of sellers and todifferentiate them from those of thecompetitors. For example, some of thecommon brands are Bata, Lifebuoy,Dunlop, Hot Shot, and Parker. Brandis a comprehensive term, which has

Brands and BrandingBranding is creating a corporate brand identity for consumer, and getting thatbrand identity imprinted on the minds of consumer, and this requires brandpositioning and brand management.A brand today is an entity (product. service, company, person, technology, etc.),that offers a set of value exchange measures between what the owner/marketseeks and the price he is willing to pay for.It has always seemed to me that your brand is formed primarily, not by whatyour company says about itself, but what the company does.

— Jeff BezosA product is something made in a factory; a brand is something that is bought bythe customer. A product can be copied by a competitor; a brand is unique. Aproduct can be quickly outdated; a successful brand is timeless.

— Stephen KingYour brand’s power lies in dominance. It is better to have 50% of one market,instead of 10% of five markets.

— Al RiesYour brand image is primarily an emotional construct. Emotion is probably alwaysmore powerful in swaying people than reason. but people like to be able torationalise their choices.

— Drayton Bird

Source: Adopted from Effective Executive, 2006

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two components—brand name andbrand mark. For example, Asian Paintshas the symbol of Gattu on its pack,which is its brand mark.

2. Brand Name: That part of a brand,which can be spoken, is called a brandname. In other words, brand name isthe verbal component of a brand. Forexample, Asian Paints, Safola, Maggie,Lifebuoy, Dunlop, and Uncle Chips arethe brand names.

3. Brand Mark: That part of a brandwhich can be recognised but which isnot utter able is called brand mark. Itappears in the form of a symbol,design, distinct colour scheme orlettering. For example, the Gattu ofAsian Paints or Devil of Onida orsymbol of Yogkshma of LIC, or fourfingers and a palm of Anacin are allbrand marks.

4. Trade Mark: A brand or part of abrand that is given legal protection iscalled trademark. The protection isgiven against its use by other firms.Thus the firm, which got its brandregistered, gets the exclusive right forits use. In that case, no other firm canuse such name or mark in the country.

Though branding adds to the coste.g., to the cost of packaging, labelling,legal protection, and promotion, itprovides several advantages to thesellers as well as the consumers.

Advantages to the Marketers

(i) Enables Marking ProductDifferentiation: Branding helps a

firm in distinguishing its productfrom that of its competitors. Thisenables the firm to secure andcontrol the market for its products.

(ii) Helps in Advertising and DisplayProgrammes: A brand aids a firmin its advertising and displayprogrammes. Without a brandname, the advertiser can onlycreate awareness for the genericproduct and can never be sure ofthe sale for his product.

(iii) Differential Pricing: Brandingenables a firm to charge differentprice for its products than thatcharged by its competitors. This ispossible because if customers likea brand and become habitual ofit, they do not mind paying a littlehigher for it.

(iv) Ease in Introduction of NewProduct: If a new product isintroduced under a known brand,it enjoys the reflected glory of thebrand and is likely to get off to anexcellent start. Thus, manycompanies with established brandnames decide to introduce newproducts in the same name. Forexample, Food Specialties Ltd. hada successful brand Maggie(Noodles), it extended this name tomany of its new productsintroduced such as TomatoKetchup, Soups, etc. SimilarlySamsung extended the brandname of its Television to WashingMachines and other durableproducts, like Microwave oven.

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Advantages to Customers

(i) Helps in Product Identification:Branding helps the customers inidentifying the products. Forexample, if a person is satisfiedwith a particular brand of aproduct, say tea leaves or detergentsoap, he need not make a closeinspection every time, he has tobuy that product. Thus, brandinggreatly facilitates repeat purchaseof the products.

(ii) Ensures Quality: Branding ensuresa particular level of quality of theproduct. Thus, whenever there isany deviation in the quality, thecustomers can have recourse to themanufacturer or the marketer. Thisbuilds up confidence of thecustomers and helps in increasinghis level of satisfaction.

(iii) Status Symbol: Some brandsbecome status symbols because oftheir quality. The consumers ofthose brands of products feel proudof using them and adds to the levelof satisfaction of the customers.

Characteristics of Good BrandName

Choosing the right brand name is notan easy decision. What makes this

decision important is the fact that oncea brand name is chosen and the productis launched in the market, changing thebrand name is very difficult. So, gettingit right the first time is very essential.Following are some of theconsiderations, which should be keptin mind while choosing a brand name.(i) The brand name should be short,

easy to pronounce, spell,recognise and remember e.g.,Ponds, VIP, Rin, Vim, etc.

(ii) A brand should suggest theproduct’s benefits and qualities.It should be appropriate to theproduct’s function. e.g., Rasika,Genteel, Promise, My Fair Ladyand Boost.

(iii) A brand name should bedistinctive e.g., Liril, Sprit, Safari,Zodiac.

(iv) The brand name should beadaptable to packing or labellingrequirements, to dif ferentadvertising media and to differentlanguages.

(v) The brand name should besufficiently versatile toaccommodate new products,which are added to the productline e.g., Maggie, Colgate.

(vi) It should be capable of beingregistered and protected legally.

Do it Yourself

Visit a retail store in your locality and prepare a list of the (i) number of brandsavailable, (ii) the price of each brand, and (iii) most selling brand in respect of anythree consumer non-durable products such as Toilet Soap, Detergent Powder,Cooking, Oil, Toothpaste, Tea, etc. used in your family. Which brand of each ofthe product selected is used in your family? Give reasons.

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(vii) Chosen name should havestaying power i.e., it should notget out of date.

PACKAGING

One of the most importantdevelopments affecting the businessworld in recent years has been in thearea of packaging. Many products,which we thought could never lendthemselves to packing because of theirnature, have been successfully packede.g., Pulses, Ghee, Milk, Salt, ColdDrinks, etc. Packaging refers to the actof designing and producing thecontainer or wrapper of a product.Packaging plays a very important rolein the marketing success or failure ofmany products, particularly the

consumer non-durable products. Infact if one makes an analysis of thereasons for the success of some of thesuccessful products in the recent past,it can be noted that packaging hasplayed its due role. For example, it wasone of the important factors in thesuccess of products like Maggie’sNoodles, Uncle Chips or Crax wafers.

Levels of Packaging

There can be three different levels ofpackaging. These are as below:

1. Primary Package: It refers to theproduct’s immediate container. Insome cases, the primary package iskept till the consumer is ready to usethe product (e.g., plastic packet forsocks); whereas in other cases, it is

Levels of Packaging

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kept throughout the entire life of theproduct (e.g., a toothpaste tube, amatch box, etc.).

2. Secondary Packaging: It refers toadditional layers of protection that arekept till the product is ready for use,e.g., a tube of shaving cream usuallycomes in a card board box. Whenconsumers start using the shavingcream, they will dispose off the boxbut retain the primary tube.

3. Transportation Packaging: It refersto further packaging componentsnecessary for storage, identification ortransportation. For example atoothpaste manufacturer may send thegoods to retailers in corrugated boxescontaining 10, 20, or 100 units.

Importance of Packaging

Packaging has acquired greatsignificance in the marketing of goodsand services, because of followingreasons:

(i) Rising Standards of Health andSanitation: Because of theincreasing standards of living inthe country, more and more peoplehave started purchasing packedgoods as the chances ofadulteration in such goods areminimised.

(ii) Self Service Outlets: The self-serviceretail outlets are becoming verypopular, particularly in major citiesand towns. Because of this, someof the traditional role assigned topersonal selling in respect ofpromotion has gone to packaging.

(iii) Innovational Opportunity: Some ofthe recent developments in thearea of packaging have completelychanged the marketing scene inthe country. For example, milk cannow be stored for 4-5 days withoutrefrigeration in the recentlydeveloped packing materials.Similarly, in the area ofpharmaceuticals, soft drinks, etc.,lots of new innovations have comein respect of packaging. As aresult, the scope for the marketingof such products has increased.

(iv) Product Differentiation: Packaging isone of the very important means ofcreating product differentiation.The colour, size, material etc., ofpackage makes real difference inthe perception of customers aboutthe quality of the product. Forexample, by looking at thepackage of a product say Paint orHair Oil, one can make someguess about quality of the productcontained in it.

Functions of Packaging

As stated above, packaging performsa number of functions in themarketing of goods. Some of theimportant functions are as follows:

(i) Product Identification: Packaginggreatly helps in identification of theproducts. For example, Colgate inred colour, or Ponds cream jar canbe easily identified by its package.

(ii) Product Protection: Packagingprotects the contents of a product

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from spoilage, breakage, leakage,pilferage, damage, climatic effect,etc. This kind of protection isrequired during storing, distributionand transportation of the product.

(iii) Facilitating Use of the Product: Thesize and shape of the packageshould be such that it should beconvenient to open, handle and usefor the consumers. Cosmetics,medicines and tubes of toothpastesare good examples of this.

(iv) Product Promotion: Packaging isalso used for promotion purposes.A startling colour scheme,photograph or typeface may beused to attract attention of thepeople at the point of purchase.Sometimes it may work even betterthan advertising. In self-servicestores, this role of packagingbecomes all the more important.

Labelling

A simple looking but important taskin the marketing of goods relates todesigning the label to be put on thepackage. The label may vary from asimple tag attached to the product(such as in case of local unbrandedproducts like sugar, wheat, pulses,etc.) indicating some information

about the quality or price, to complexgraphics that are part of the package,like the ones on branded products (saythe graphic of Boat and Patwar on thepackage of a popular brand of AfterShave Lotion or of a lady offering apen to solicit the views of the users,on the label of a detergent powder).Lables are useful in providing detailedinformation about the product, itscontents, method of use, etc. Thevarious functions performed by a labelare as follows:

1. Describe the Product and Specifyits Contents: Let us look at some ofthe labels of the products used by usin our day to day life. The label on thepackage of a local tea companydescribes the company as ‘ Mohini TeaCompany, an ISO 9001:200C CertifiedCompany’; a popular brand of PricklyHeat Powder, describes how theproduct provides relief from pricklyheat and controls bacterial growth andinfection, giving caution forbidding itsapplication on cuts and wounds.Package of fast food products likeready to eat Dosa, Idli or Noodles,describe the procedure of cookingthese products; the Package of atoothpaste brand lists the ‘Ten Teethand Gum Problems’, which theproduct claims to fight with its

Do it Yourself

Visit a local Grocery Shop and find out any two products which are sold both inpackaged form and in loose (unpackaged) form and find out i) The product forwhich the sale in packaged form is greater ii) The product for which sale in looseform is greater. iii) the benefit, to the retailer in selling goods on i) packaged formand ii) unpackaged form.

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‘Complete Germicheck Formula’; thePackage of a brand of Coconut Oildescribes the product as pure coconutoil with Heena, Amla, Lemon andspecifies how these are good for Hair.Thus, one of the most importantfunctions of labels is to describe theproduct, its usage, cautions in use,etc. and specify its contents.

2. Identification of the Product orBrand: The other importantfunction performed by labels is tohelp in identifying the product orbrand. For example, the brand nameof and product, say Biscuits orPotato Chips imprinted on i tspackage helps us to identify, fromnumber of packages, which one isour favourite brand. Other commonidentification information providedby the labels include name andaddress of the manufacturer, netweight when packed, manufacturingdate, maximum retail price andBatch number.

3. Grading of Products: Anotherimportant function performed by labelsis to help grading the products intodifferent categories. Sometimesmarketers assign different grades toindicate different features or quality ofthe product. For example, a popular

brand of Hair Conditioners comes indifferent categories for different hair, sayfor ‘normal hair’ and for othercategories. Different type of tea is soldby some brands under Yellow, Red andGreen Label categories.

4. Help in Promotion of Products: Animportant function of label is to aid inpromotion of the products. A carefullydesigned label can attract attention andgive reason to purchase. We see manyproduct labels providing promotionalmessages for example, the pack of apopular Amla Hair Oil states, ‘Baalonmein Dum, Life mein Fun’. The labelon the package of a brand of DetergentPowder says, ‘Keep cloth look good andyour machine in top condition’. Labelsplay important role in salespromotional schemes launched bycompanies. For example the label onthe package of a Shaving Creammentions, ‘40% Extra Free’ or packageof a toothpaste mentioning, ‘FreeToothbrush Inside’, or ‘Save Rs15’.

5. Providing In formation Requiredby Law: Another important functionof labeling is to provide informationrequired by law. For example, thestatutory warning on the package ofCigarette or Pan Masala, ‘Smoking isInjurious to Health’ or ‘Chewing

Do it Yourself

1. Examine the label on the package of any three branded products recentlypurchased for use in your family and list out the type of information containedon these.

2. Find out the promotional messages given on the package of any three consumerproducts of your choice and comment how can these help in the sale of theseproducts.

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Tobacco is Injurious to Health’. Suchinformation is required on processedfoods, drugs and tobacco products. Incase of hazardous or poisonousmaterial, appropriate safety-warningneed to be put on the label.

Thus, labels perform number ofimportant functions relating tocommunicating with the potentialbuyers and promoting the sale of theproducts.

PRICING

When a product is bought, some moneyis paid for it. This money represent thesum of values that consumersexchange for the benefit of having orusing the prdocut and is referred to asthe price of the product. Similarly,money paid for the services such as farefor the transport service, premium foran insurance policy, and fee to a doctorfor his medical advise represent theprice of these services. Price maytherefore be defined as the amount ofmoney paid by a buyer (or received bya seller) in consideration of thepurchase of a product or a service.

Pricing occupies an importantplace in the marketing of goods andservices by a firm. No product can belaunched without a price tag or at leastsome guidelines for pricing. Pricing isoften used as a regulator of thedemand of a product. Generally, if theprice of a product is increased, itsdemand comes down, and vice-versa.

Pricing is considered to be aneffective competitive weapon. In theconditions of perfect competition,

most of the firms compete with eachother on the basis of this factor. It isalso the single most important factoraffecting the revenue and profits of afirm. Thus, most marketing firms givehigh importance to the fixation of pricefor their products and services.

Factors Affecting PriceDetermination

There are number of factors whichaffect the fixation of the price of aproduct. Some of the important factorsin this regard are discussed as below:

1. Product Cost: One of the mostimportant factor affecting price of aproduct or service is its cost. Thisincludes the cost of producing,distributing and selling the product.The cost sets the minimum level or thefloor price at which the product maybe sold. Generally all marketing firmsstrive to cover all their costs, at leastin the long run. In addition, they aimat earning a margin of profit over andabove the costs. In certain circumstance,for example, at the time of introducinga new product or while entering a newmarket, the products may be sold ata price, which does not cover all thecosts. But in the long run, a firmcannot survive unless at least all itscosts are covered.

There are broadly three types ofcosts: viz., Fixed Costs, Variable Costsand Semi Variable Costs. Fixed costsare those costs, which do not vary withthe level of activity of a firm say withthe volume of production or sale. Forexample, rent of a building or salary

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of a sales manager remains the samewhether 1000 units or 10 units areproduced in a week.

Those costs which vary in directproportion with the level of activity arecalled variable costs. For example, thecosts of raw material, labour and powerare directly related with the quantityof goods produced. Let us say, if thecost of wood for manufacturing onechair comes to Rs.100 the cost of woodfor 10 chairs would be Rs. 1000.Obviously, there will be no cost of woodif no chair is produced.

Semi variable costs are those costswhich vary with the level of activitybut not in direct proportion with it.For example, compensation of a salesperson may include a fixed salary ofsay Rs. 10,000 plus a commission of5 per cent on sales. With an increasein the volume of sales, the totalcompensation will increase but not indirect proportion with the change inthe volume of sale.

Total Costs are the sum total of thefixed, variable and semi-variable costsfor the specific level of activity, sayvolume of sales or quantity produced.

2. The Utility and Demand: While theproduct costs set the lower limits ofthe price, the utility provided by theproduct and the intensity of demandof the buyer sets the upper limit ofprice, which a buyer would beprepared to pay. In fact the price mustreflect the interest of both the partiesto the transaction—the buyer and theseller. The buyer may be ready to payup to the point where the utility fromthe product is at least equal to the

sacrifice made in terms of the pricepaid. The seller would, however, try toat least cover the costs. According tothe law of demand, consumers usuallypurchase more units at a low pricethan at a high price.

The price of a product is affectedby the elasticity of demand of theproduct. The demand is said to beelastic if a relatively small change inprice results in large change in thequantity demanded. Here numerically,the price elasticity is greater than one.In the case of inelastic demand, thetotal revenue increases when the priceis increased and goes down when theprice is reduced. If the demand of aproduct is inelastic, the firm is in abetter position to fix higher prices.

3. Extent of Competition in theMarket: Between the lower limit andthe upper limit where would the pricesettle down? This is affected by thenature and the degree of competition.The price will tend to reach the upperlimit in case there is lesser degree ofcompetition while under conditions offree competition, the price will tend tobe set at the lowest level.

Competitors’ prices and theiranticipated reactions must beconsidered before fixing the price of aproduct. Not only the price but thequality and the features of thecompetitive products must be examinedcarefully, before fixing the price.

4. Government and Legal Regulations:In order to protect the interest ofpublic against unfair practices in thefield of price fixing, Government canintervene and regulate the price of

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commodities. Government can declarea product as essential product andregulate its price. For example, thecost of a drug manufactured by acompany having monopoly in theproduction of the same come to Rs 20per strip of ten and the buyer isprepared to pay any amount for it, sayRs 200. In the absence of anycompetitor, the seller may be temptedto extort the maximum amount ofRs 200 for the drug and intervene toregulate the price. Usually in such acase, the Government does not allowthe firms to charge such a high priceand intervene to regulate the price ofthe drug. This can be done by theGovernment by declaring the drug asessential commodity and regulating itsprice. (see box)

5. Pricing Objectives: Pricingobjectives are another important factoraffecting the fixation of the price of aproduct or a service. Generally theobjective is stated to be maximise the

profits. But there is a difference inmaximising profit in the short run andin the long run. If the firm decides tomaximise profits in the short run, itwould tend to charge maximum pricefor its products. But if it is to maximiseits total profit in the long run, it wouldopt for a lower per unit price so that itcan capture larger share of the marketand earn greater profits throughincreased sales.

Apart from profit maximisation, thepricing objectives of a firm may include:

(a) Obtaining Market Share Leadership:If a firms objective is to obtain largershare of the market; it will keep theprice of its products at lower levelsso that greater number of people areattracted to purchase the products;

(b) Surviving in a Competitive Market:If a firm is facing difficulties insurviving in the market because ofintense competition or introductionof a more efficient substitute bya competitor, it may resort to

NPPA Sets 20% annual Cap for drug Price Rise

Drug price watchdog National Pharmaceutical Pricing Authority (NPPA) has decidedto invoke the ‘public interest’ clause in the drugs law more often to pressurecompanies to reduce prices of medicines that go up more than 20% in a year.

The pricing body has also decided to limit its communication with companies tojust one reminder asking them to respond to the show-cause notice on why thedrug should not be recommended for price control, sources told ET.

NPPA has now started scrutinising the fluctuations in the price-to-retailer of48,600 formulation packs every month. Every month, two to three formulations arelikely to get caught on an average.

So far, NPPA has recommended 45 cases of alleged abnormal price increase tothe Chemicals Ministry for appropriate action, on which the ministry has sent noticesto 11 companies asking them to reduce prices or face price control.

Source: Adopted from The Economic Times, Nov. 3, 2006

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discounting its products or runninga promotion campaign to liquidateits stock; and

(c) Attaining Product QualityLeadership: In this case, normallyhigher prices are charged to coverhigh quality and high cost ofResearch and Development.

Thus, the price of a firm’s productsand services is affected by the pricingobjective of the firm.

6. Marketing Methods Used: Pricefixation process is also affected byother elements of marketing such asdistribution system, quality ofsalesmen employed, quality andamount of advertising, salespromotion ef forts, the type ofpackaging, product differentiation,credit facility and customer servicesprovided. For example, if a companyprovides free home delivery, it hassome of flexibility in fixing prices.Similarly, uniqueness of any of theelements mentioned above gives thecompany a competitive freedom infixing prices of its products.

PHYSICAL DISTRIBUTION

The fourth important element ofmarketing mix is the physicaldistribution of products and services.It is concerned with making the goodsand services available at the rightplace, so that people can purchase thesame. There are two importantdecisions relating to this aspect—oneregarding physical movement of goodsfrom producers to consumers or usersand two, regarding the channels or

using intermediaries in thedistribution process. These aredescribed as follows:

Channels of Distribution

In case of large number of consumerproducts, the potential buyers arescattered over a wide geographical area.In order to contact these peopleefficiently and effectively, it is importantto take the help of number ofintermediaries as contacting themdirectly may not be cost effective andmay be difficult even otherwise. Forexample, a manufacturer of detergentpowder in Gujarat would find it verydifficult to directly approach customers,say in Delhi, Thiruvananthapuram,Bhuvaneshwar, Hyderabad Srinagarand other far off places. Therefore, he/she would supply a large quantity ofhis/her product to a big merchant, sayin Hyderabad. This big merchant wouldthen supply detergent powder torelatively small sellers in various townsof Hyderabad. These sellers would, inturn, resell the goods to customers. Inthis manner, goods are distributed fromthe place of production to the place ofconsumption. These people, institutions,merchants, and functionaries, who takepart in the distribution function, arecalled ‘Channels of Distribution’.(see figure on channels)

Channels of Distribution are set offirms and individuals that take title,or assist in transferring title, toparticular goods or services as itmoves from the producers to theconsumers. In other words, channelrefers to a team of merchants, agents,

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and business institutions thatcombine physical movement and titlemovement of products to reachspecific destinations.

Mostly goods and services aredistributed through a network ofmarketing channels. For example webuy merchandise of our need such assalt, bulb, tea, sugar, soap, paper,books, flour, etc., from retail sellers.

The channels bring economy ofeffort. This can be better understoodwith the help of an example. Let ussay you have to buy four things, viz.,Sugar, Bulb, Coffee and Ink. Mostprobably you would walk into aGeneral Merchant’s Shop and buy allthe articles form one place. Imaginewhat would happen if there were nomiddlemen or general merchantsavailable. In that case you would haveto buy directly from the manufacturersof these products. You will have tomake four contacts, each with theproducer of Sugar, Bulb, Coffee andInk. Compared to this, there was onlyone contact when all the things were

bought from the same generalmerchant. Now let us assume thatthere are four customers needing thesame four articles. In all sixteencontacts would have to be made. Incase middleman are used, as shownin the part II of the figure, only eightcontacts could be needed. Thus, useof middlemen brings economy of effort.This situation is illustrated in thepreceeding figure.

Apart from the economy of effort,middlemen help to cover largegeographical area and bring efficiencyin distribution, including transportation,storage and negotiation. They bringconvenience to customers as theymake various items available at onestore and also serve as authenticsource of market information as theyare in direct contact with the customer.

Functions of DistributionChannelsChannels of distribution smoothen theflow of goods by creating possession,place and time utilities. They facilitate

Channels of Distribution used for a Consumer Product

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movement of goods by overcomingvarious time, place and possessionbarriers that exist between themanufacturers and consumers. Theimportant functions performed bymiddlemen are as follows:

1. Sorting: Middlemen procuresupplies of goods from a variety ofsources, which is often not of the samequality, nature, and size. For example,a wholesaler of cashew nuts mayprocure a large quantity from differentcashew nut producing areas, whichwould contain nuts of varied qualityand sizes. He/She then sorts the nutsinto homogenous groups on the basisof the size or quality.

2. Accumulation: This functioninvolves accumulation of goods intolarger homogeneous stocks, whichhelp in maintaining continuous flowof supply.

3. Allocation: Allocation involvesbreaking homogenous stock intosmaller, marketable lots. For example,

once cashew nuts are graded and largequantities are built, these are dividedinto convenient packs of say 1 kg, 500gms and 250 gms, to sell them todifferent types of buyers.

4. Assorting: Middlemen buildassortment of products for resale.There is usually a difference betweenthe product lines made bymanufacturers and the assortment orcombinations desired by the users. Forexample, a cricket player may need abat, a ball, wickets, gloves, helmet, aT-shirt, and a pair of shoes. Perhapsno one manufacturer produces theseproducts in desired combination.Middlemen procure variety of goodsfrom different sources and deliver themin combinations desired by customers.

5. Product Promotion: Mostlyadvertising and other sales promotionactivities are organised bymanufacturers. Middlemen alsoparticipate in certain activities such asdemonstrations, special displays,

Economy of Efforts with the use of Channels

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contests, etc., to increase the sale ofproducts.

6. Negotiation: Channels operatewith manufacturers on the one handand customers one, the other. Arrivingat deals that satisfy both the partiesis another important function of themiddlemen. They negotiate the price,quality, guarantee and other relatedmatters with customers so thattransfer of ownership is properlyaffected.

7. Risk Taking: In the process ofdistribution of goods the merchantmiddlemen take title of the goods andthereby assume risks on account ofprice and demand fluctuations,spoilage, destruction, etc.

Types of ChannelsA manufacturer may choose fromdirect distribution to indirectdistribution and from a short channelconsisting of few intermediaries to along channel of distribution consistingof large number of middlemen. Eachform of channel network differs innumber and type of middlemeninvolved. The major types of channelsare as follows:

Direct Channel (Zero Level)

The most simple and the shortestmode of distribution is directdistribution, where in the goods aremade directly available by themanufacturers to customers, without

(i) Direct Channel (zero level)

Manufacturer Customer

Indirect Channel

(ii) One level Channel

Manufacturer Retailer Customer

(iii) Two level Channel

Manufacturer Wholesaler Retailer Customer

(iv) Three level Channel

Manufacturer Agent Wholesaler Retailer Customer

Types of Channels

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involving any intermediary. This isalso called zero level channel. Astraight and direct relationship isestablished between the manufacturerand the customer. For example, whena manufacturer sells his goodsthrough his own retail outlets (e.g., McDonald, Bata); it is referred to as directchannel. Similarly, mail order selling,internet selling and selling throughown sales force, (e.g., Eureka Forbes)are example of direct selling or zerolevel channel.

Indirect Channels

When a manufacturer employs one ormore intermediary to move goods fromthe point of production to the point ofconsumption, the distributionnetwork is called indirect. This maytake any of the following forms:

1. Manufacturer-Retailer Consumer(One Level Channel): In this form ofarrangement one intermediary i.e.,retailers is used between themanufacturers and the customers.That is, goods pass from themanufacture to the retailers who, inturn, sell them to the final users. Forexample, Maruti Udyog sells its carsand vans through company approvedretailers. This type of distributionnetwork enables the manufacturers tocover wide area of market whileretaining control over the Channels.

2. Manufacturer-Wholesaler-Retailer-Consumer (Two Level Channel): Thisis the most commonly adopteddistribution network for most

consumer goods like soaps, oils,clothes, rice, sugar and pulses. Herethe wholesaler and retailer function asconnecting links between themanufacturer and consumer. Use oftwo middlemen in the channelnetwork enables the manufacturer tocover a larger market area.

3. Manufacturer-Agent-Wholesaler-Retailer-Consumer (Three LevelChannel): In this case, manufactures usetheir own selling agents or brokers whoconnect them with wholesalers andthen the retailers. Thus, one more levelis added to the levels discussed in theproceeding arrangement. It is doneparticularly when the manufacturercarries a limited product line and hasto cover a wide market. An agent ineach major area is appointed, who inturn contact the wholesalers.

Factors Determining Choice ofChannels

Choice of appropriate channel ofdistribution is a very importantmarketing decision, which affects theperformance of an organisation.Whether an organisation will adoptdirect marketing channels or longchannels involving number ofintermediaries is a strategic decision.The choice of channels depends onvarious factors, which are discussedas follows:

1. Product Related Factors: Theimportant product relatedconsiderations in deciding thechannels include whether the product

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is an industrial or a consumerproduct, whether it is a perishable ora non-perishable product, what is theunit value of the product and thedegree of complexity of the product.

Industrial products are usuallytechnical, made to order andexpensive products purchased by fewbuyers. These products require shortchannels i.e., direct channel orinvolving few middlemen.

Consumer products, on the otherhand, are usually standardised, lessexpensive, less bulky, non-technicaland frequently bought products.These can be better distributed by longnetwork of channels, involving manymiddlemen. Perishable products likefruits, vegetables, and dairy productsare best sold through short channels,while non-perishable products liketoiletry products (e.g., soap,toothpaste, hair oil etc.), groceries

(vegetable oil, tea leaf etc.), fabricsrequire longer channels to reach widespread consumers.

If the unit value of a product is lowas in case of most convenienceproducts, long channels are preferredwhile in case of high value products,shorter channels may be used.Similarly, in case of complex productsrequiring technical details as in caseof most industrial or engineeringproducts, short channels are preferredbut if the product is a non-complexone, it is sold through long channels,involving number of intermediaries.

2. Company Characteristics: Theimportant company characteristicsaffecting the choice of channels ofdistribution include the financialstrength of the company and the degreeof control it wants to hold on otherchannel members. Direct sellinginvolves lot of funds to be invested in

India to have Variants of $ Store

It’s the cheap and cheerful concept that has worked all over the world. Now, itscoming to your friendly neighbourhood mall but retail marketers are offering it witha weak or two.

Though the concept, relatively new to the Indian market, retailers are trying toaggressively foray region’s low-cost daily-use retail segment. Idea is to enable acustomer buy a range of products its for or less than Rs 99. This being the template,retailers have introduced nations to suit there business models. The store range oflargely food, healthcare and products.

Home stores has gone a step further to introduce some interesting modificationsto the basic idea of a dollar-and-dime store. “We believe that pricing all products ata flat Rs 99 will be a rigid approach. We have introduced four different price slabs tomake it more attractive and reach a broader customer profile.

Homemaker’s group has modified the idea even further by introducing bargainpricing on its products with the help of a two-digit price band. So customers visitingthe Homemakers shops will not only get products between Rs 10 and Rs 99, theywill also have more price positioning options.

Source: Adopted from The Economic Times, Dec. 16, 2005

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fixed assets say for starting own retailoutlets or engaging large number ofsales force. Indirect selling throughintermediary does not involvedeployment of huge funds on theseaspects. Thus, if the firm has plenty offunds it may go for direct distribution.If spare funds are not available, it maygo for indirect channels.

Similarly if the management wantto have greater control on the channelmembers, short channels are used butif the management do not want morecontrol over the middlemen, it can goin for longer channel or large numberof intermediaries.3. Competitive Factors: The choiceof channel is also affected by thechannel selected by competitors in thesame industry. If the competitor’s haveselected a particular channel sayChemist shops for the sale of toiletryproducts like hair oil, the other firmmay also like to select the similarchannel. In some cases producers maywant to avoid the channels used bycompetitors. For example if othercosmetic producers have chosen bigretail stores for the sale of theirproducts, a particular firm may like toadopt door to door selling. Thus, it willdepend upon the policy of the firm –whether it wants to go with thecompetitors or be different from them.The changing global marketingenvironment has lead to adoption ofnewer channels. (see box)4. Market Factors: Important marketfactors affecting the choice of channelof distribution include size of market,geographical concentration of

potential buyers and quantitypurchased. In case the number ofbuyers is small, like for mostindustrial products, short channelsare used. But if the number of buyersis large, as in case of most convenienceproducts like soft drink, toothpasteetc., longer channels involving largenumber of intermediaries are used.

If the buyers are concentrated in asmall place, short channels may beused but if the buyers are widelydispersed over a large geographicalarea, longer channels may be used.Similarly if the size of order is small,as in case of most consumer products,large number of intermediaries maybe used. But if the size of order is large,direct channels may be used.

5. Environmental Factors: Otherimportant factors affecting the choiceof channels of distribution includeenvironmental factor such as economiccondition and legal constraints. In adepressed economy marketers useshorter channels to distribute theirgoods in an economical way.

PHYSICAL DISTRIBUTION

Once goods are manufactured,packaged, branded, priced, andpromoted, these must be madeavailable to customers at the rightplace, in right quantity and at the righttime. For example, a person convincedabout the quality etc. of a product, say,a detergent bar, wants to purchase thesame. He/She goes to a retail outletand asks for the product. If thatproduct is not available in that shop,

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he/she may purchase some of thealternative brand available. This waya sure sale is lost because goods werenot available at the place where thecustomer wanted to purchase. Thus,it is an important responsibility of themarketers to make the productphysically available at a place wherethe customers would like them to buy.The physical handling and movementof goods from place of production tothe place of distribution is referred toas physical distribution, which is a veryimportant element of marketing mix.

Physical distribution covers all theactivities required to physically movegoods from manufacturers to thecustomers. Important activities involvedin the physical distribution includetransportation, warehousing, materialhandling, and inventory control. Theseactivities constitute major componentsof physical distribution.

Components of PhysicalDistribution

The main components of physicaldistribution are explained as follows:

1. Order Processing: In a typicalbuyer -seller relationship orderplacement is the first step. Productsflow from manufacturers to customersvia channel members while orders flowin the reverse direction, fromcustomers to the manufacturers. Agood physical distribution systemshould provide for an accurate andspeedy processing of orders, in theabsence of which goods would reachthe customers late or in wrong quantity

or specifications. This would result incustomer dissatisfaction, with thedanger of loss of business and goodwill.

2. Transportation: Transportation isthe means of carrying goods and rawmaterials from the point of productionto the point of sale. It is one of themajor elements in the physicaldistribution of goods. It is importantbecause unless the goods arephysically made available, the salecannot be completed.

3. Warehousing: Warehousing refersto the act of storing and assortingproducts in order to create time utilityin them. The basic purpose ofwarehousing activities is to arrangeplacement of goods and providefacilities to store them. The need forwarehousing arises because there maybe difference between the time aproduct is produced and the time it isrequired for consumption. Generallythe efficiency of a firm in serving itscustomers will depend on where thesewarehouses are located and where arethese to be delivered.

Generally larger the number ofwarehouses a firm has, lesser wouldbe the time taken in serving customersat different locations but greater wouldbe the cost of warehousing and vice-versa. Thus the firm has to strike abalance between the cost ofwarehousing and the level of customerservice.

For products requiring long-termstorage (such as agricultural products)the warehouses are located nearproduction sites. This helps in

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minimising the charges ontransportation of the goods. On the otherhand, the products which are bulky andhard to ship (machinery, automobiles)as well as perishable products (bakery,meat, vegetables) are kept at differentlocations near the market.4. Inventory Control: Linked towarehousing decisions are the inventory

decisions which hold key to success formany manufacturers, especially thosewhere the perunit cost is high. A veryimportant decision in respect ofinventory is deciding about the level ofinventory. Higher the level of inventory,higher will be the level of service tocustomers but the cost of carrying theinventory will also be high because lot

Nothing Beats Word of Mouth in India

Nothing sways an Indian buyer’s choice more than a word of reassurance from thepeople he knows. Now even high octane media blitz. A global online survey conductedby ACNielsen puts word of mouth communication and referencing as the biggestinfluence than conventional advertising on consumers in their buying decisions. Inbig ticket purchases like cars, mobile phones and home loans, the study says thatalmost 50% of consumers in India rely on the references from their friends andrelatives while making their decisions.

The story is different in developed economies. Take the case of automobiles. Inmarkets like the US, Canada and Japan more people are influenced by conventionaladvertising by automobile companies, in developing markets like India, Malaysiaand Thailand it’s the neighbour or the colleague who tips the scales one way or theother. “In case of luxury goods, the psyche of Indians has always been different.Buying a car is a family decision, so it is only natural that all the members of thefamily will talk to all the other users of a similar products, who they know”, GeneralMotors India director P Balendran said:

“No wonder, large automakers in India spend as much on customer satisfactionas advertising, and recognitions like the JD Power Customer Satisfaction awardstaken so seriously.”

When the whole world is going crazy with Inter not and mobile marketing, it isinteresting that for Indians it’s still conventional advertising and word of mouthcampaigns that sways their choices. Unlike in the West, Indians come from a veryclosely-knit society where people get influenced by their peers, relatives and localcelebrities. People are more than willing to accept a brand if it’s endorsed by theirfavourite superstar or is recommended by their close associates,” AC Nielsen (southAsia) ED Sarang Panchal says:

“However, in markets like the US, previous experience with the products is thestrongest influencer overall and particularly when it came to buying cars (49%),choosing a banks (46%), mobile phone (39%) and loans (35%). World of mouth is apriority while buying weight loss products and mobile phones.”

Source: Adopted from Economic Times, Oct. 24, 2006

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of capital would be tied up in the stock.Thus, a balance is to be maintained inrespect of the cost and customersatisfaction. With advancements incomputers and information technologythe need for keeping higher inventoryis reducing and the new concept of Just-in-Time-Inventory decision is becomingpopular in an increasing number ofcompanies.

The decision regarding level ofinventory involves prediction aboutthe demand for the product. A correctestimate of the demand helps to holdinventory and cost level down to aminimum. This not only helps the firmin terms of the cash flows but also interms of its ability to maintainproduction at a consistent level.

The major factors determininginventory levels include:

(a) firm’s policy regarding the level ofcustomer service to be offered.Higher the level of service greaterwill be the need to keep moreinventories;

(b) degree of accuracy of the salesforecasts. In case more accurateestimates are available, the need

for keeping very high level ofinventory can be minimised;

(c) responsiveness of the distributionsystem i.e., ability of the systemto transmit inventory needs backto the factory and get products inthe market. In case the timerequired to respond to theadditional demand for theproducts is high there is a need tomaintain higher inventory. But ifthe additional demand can be metin less time, the need for inventorywill also be low; and

(d) cost of inventory, which includesholding cost such as cost ofwarehousing, tied up capital, etcand the manufacturing cost.

PROMOTION

A company may produce a good qualityproduct, price it appropriately and makeit available at the selling points, whichare convenient to customers. But inspite of all this, the product may notsell well in the market. There is a needfor developing proper communicationwith the market. In the absence ofcommunication, the customers would

M CA UR SK TE OT ME ER R

ADVERTISING PERSONAL SELLING

PUBLICITY SALES PROMOTION

Promotion Mix

Marketing Communications

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not be able to know about the productand how it can satisfy their needs andwants or may not be convinced aboutits utility and benefits.

Promotion refers to the use ofcommunication with the twin objectiveof informing potential customersabout a product and persuading themto buy it. In other words, promotionis an important element of marketingmix by which marketers makes use ofvarious tools of communication toencourage exchange of goods andservices in the market.

PROMOTION MIX

Promotion mix refers to combinationof promotional tools used by anorganisation to achieve itscommunication objectives. Varioustools of communication are used bythe marketers to inform and persuadecustomers about their firm’s products.These include: (i) Advertising, (ii)Personal Selling, (iii) Sales Promotion,and (iv) Publicity. These tools are alsocalled elements of promotion mix andcan be used in different combinations,to achieve the goals of promotion. Forexample consumer goods firms mayuse more of advertising through mass

media while the industrial goods firmsmay be using more of personal selling.What combination of these elementsis used by a firm will depend uponvarious factors such as nature ofmarket, nature product, thepromotions budget, objectives ofpromotion, etc. Let us first know aboutthese elements in some details.

ADVERTISING

We generally come across hundredsof advertising messages everyday,which tell us about various productssuch as toilet soaps, detergent powder,soft drinks and services such ashotels, insurance policies, etc.

Advertising is perhaps the mostcommonly used tool of promotion.It is an impersonal form ofcommunication, which is paid for bythe marketers (sponsors) to promotesome goods or service. The mostcommon modes of advertising are‘newspapers’, ‘magazines’, ‘television’,and ‘radio’.

The important distinguishingfeatures of advertising are as follows:

(i) Paid Form: Advertising is a paidform of communication. That is, thesponsor has to bear the cost of

Advertising

“If you’re trying to persuade people to do something, or buy something, it seemsto 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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communicating with the prospects.

(ii) Impersonality: There is no directface-to-face contact between theprospect and the advertiser. It istherefore, referred to as impersonalmethod of promotion. Advertisingcreates a monologue and not adialogue.

(iii) Identified Sponsor: Advertising isundertaken by some identifiedindividual or company, who makesthe advertising efforts and alsobears the cost of it.

Merits of Advertising

Advertising, as a medium ofcommunication, has the followingmerits:

(i) Mass Reach: Advertising is amedium through which a largenumber of people can be reachedover a vast geographical area. Forexample, an advertisementmessage placed in a national dailyreaches lakhs of its subscribers.

(ii) Enhancing Customer Satisfactionand Confidence: Advertisingcreates confidence amongstprospective buyers as they feelmore comfortable and assuredabout the product quality andhence feel more satisfied.

(iii) Expressiveness: With thedevelopments in art, computerdesigns, and graphics, advertisinghas developed into one of the mostforceful medium of communication.With the special effects that canbe created, even simple products

and messages can look veryattractive.

(iv) Economy: Advertising is a veryeconomical mode of communicationif large number of people are to bereached. Because of its wide reach,the overall cost of advertisinggets spread over numerouscommunication links established.As a result the per-unit cost ofreach comes low.

Limitations of Advertising

The following are the major limitationsof advertising as a tool of promotion:

(i) Less Forceful: Advertising is animpersonal form of communication.It is less forceful than the personalselling as there is no compulsionon the prospects to pay attentionto the message.

(ii) Lack of Feedback: The evaluationof the effectiveness of advertisingmessage is very difficult as thereis no immediate and accuratefeedback mechanism of themessage that is delivered.

(iii) Inflexibility: Advertising is lessflexible as the message isstandardised and is not tailormade to the requirements of thedifferent customer groups.

(iv) Low Effectiveness: As the volumeof advertising is getting more andmore expanded it is becomingdif ficult to make advertisingmessages heard by the targetprospects. This is affecting theeffectiveness of advertising.

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OBJECTIONS TO ADVERTISING

In the proceeding sections, you havenoted the merits and limitations ofadvertising. Though advertising is oneof the most frequently used mediumof promotion of goods and services,it attracts lot of criticism. Theopponents of advertising say that theexpenditure on advertising is a socialwaste as it adds to the cost, multipliesthe needs of people and underminessocial values. The proponents,however, argue that advertising is

very useful as it increases the reach,brings the pay unit cost of productiondown and adds to the growth of theeconomy. It is therefore, important toexamine the major criticisms againstadvertising and see the extent towhich these are true. This is takenup as follows:

1. Adds to Cost: The opponents ofadvertising argue that advertisingunnecessarily adds to the cost ofproduct, which is ultimately passedon to the buyers in the form of high

Value AD

Government Shining

It’s not the heavy weight in the FMCG sector which are ruling the roost as topadvertisers on the tube, but surprisingly it’s the government departments andpublic sector units. Apart from Procter & Gamble, Bajaj Consumer Care, Joycoand Eicher Motors, the list of top advertisers across television and print isdominated by Sarkari outfits flaunting their new found passion for mass-medialed public communication.

Top Five Advertisers on Television

Ad Time(in ‘000 seconds)

Procter & Gamble Home Products 799Central Excise Department 375West Bengal Information and Culture 275Joyco India Ltd. 227Bajaj Consumer Care Ltd. 165

PrintAd Volume(Col.com in’000)

Sikkim/Royal Govt. Of Bhutan 416Ratan Ayurvedic Sansthan 388Government Of Mizoram 251Ministry Of Petroleum and Natural Gas 209Eicher Motors Ltd. 157

Source: Adopted from The Economic Times

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prices. An advertisement on TV, for afew seconds, for example, costs themarketers several lakhs of rupees.Similarly an advertisement in printmedia say in a newspaper or amagazine costs the marketers a largeamount of money. The money spentadds to the cost, which in animportant factor in fixation of the priceof a product.

True, advertisement of a productcosts lot of money but it helps toincrease the demand for the productas large number of potential buyerscome to know about the availabilityof the products, its features etc. andare persuaded to buy it. The increaseddemand leads to higher production,which brings with it the economies ofscale. As a result, the per unit cost ofproduction comes down as the totalcost is divided by larger number ofunits. Thus, the expenditure onadvertisement adds to the total costbut the per unit cost comes downwhich in fact lessens the burden ofconsumers rather than adding to it.

2. Undermines Social Values: Anotherimportant criticism of advertising isthat it undermines social values andpromotes materialism. It breedsdiscontent among people as they cometo know about new products and feeldissatisfied with their present state ofaffairs. Some advertisements show newlife styles, which don’t find socialapproval.

This criticism is not entirely true.Advertisement in fact helps buyers byinforming them about the newproducts, which may be improvement

over the existing products. If thebuyers are not informed about theseproducts, they may be using inefficientproducts. Further, the job of anadvertisement is to inform. The finalchoice to buy or not to buy anywayrests with the buyers. They will buy ifthe advertised product satisfies someof their needs. They may be motivatedto work harder to be able to purchasethese products.

3. Confuses the Buyers: Anothercriticism against advertisement is thatso many products are being advertisedwhich makes similar claims that thebuyer gets confused as to which oneis true and which one should be reliedupon. For example, we may notesimilar claims of whiteness or stainremoving abilities in competingbrands of detergent powder or claimsof whiteness of tooth or ‘feelings offreshness’ in competing brands oftoothpaste that it is sometimesconfusing to us as to which one to buy.

The supporters of advertisement,however, argue that we are all rationalhuman beings who make our decisionsfor purchase of products on factorssuch as price, style, size, etc. Thus thebuyers can clear their confusion byanalysing the information provided onthe advertisements and other sourcesbefore taking a decision to purchase aproduct. However, this criticism cannotbe completely overruled.

4. Encourages Sale of InferiorProducts: Advertising does notdistinguish between superior andinferior products and persuade peopleto purchase even the inferior products.

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In fact superiority and inferioritydepends on the quality, which is arelative concept. The desired level ofquality will depend on the economicstatus and preferences of the targetcustomers. Advertisements sellproducts of a given quality and thebuyers will buy if it suits theirrequirements. No advertisementshould however, make false claimabout the quality of a product. If a firmmakes a false claims it can beprosecuted for the same.

5. Some Advertisements are in BadTaste: Another criticism againstadvertising is that some advertise-mentsare in bad taste. These show somethingwhich in not approved by some peoplesay advertisements showing womendancing when not required or runningafter a man because he is wearing aparticular suit or using a particularperfume are certainly not good. Someadvertisements distort the relationshiplike employer employee and are quiteoffensive.

Celebrities’ Influence on Brands’ Performance

Example of ad campaigns featuring celebrities, which resulted in brand buildingand growth in volumes.

Cadbury’s and Amitabh Bachchan: The commercial, a testimonial by Bachchanon a factory visit, was launched to rebuild the trust in the brand. Twelve weeksafter the campaign was launched, the sales reached 90 per cent of volumes prior tothe worm crisis. Big B’s presence helped the company to get media coverage thatadded to the campaign’s impact.

Santro and Shah Rukh Khan: Shah Rukh was roped in Santro ad to strike animmediate bond with the consumers. Shah Rukh Khan is an unconventionalsuperhero with a quirky acting style that matched the image of Santro.

Titan and Aamir Khan: Both are considered to be Indian icons and have made amark internationally; the obsession with detail is common to both, as also a senseof style. The Mangal Pandey look, which was unconventional, made the advertisementstand out, along with the fact that Aamir is less exposed than the other celebrities.

Munch and Rani Mukherjee: The campaign for Munch was aired on TV roped RaniMukherjee to give “a big brand feel”. The company got incredibly good result inrecall and the ad was a big hit with kids. Rani was used as a consumer and not asa filmstar.

Sachin Tendulkar and Boost: Research indicated that the brand’s associationwith Sachin has consistently been successful in strengthening the brand’s corevalues and building brand stature. Kids look up to Sachin as a true hero, want toemulate everything that he does and can’t seem to get enough of him.

Source: Adopted from Indian Journal of Marketing, Oct. 5, 2006

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Personal Selling

‘Most people think ‘selling’ is the same as ‘talking’. But the most effectivesalespeople 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

We have seen the views of theopponents and the proponents ofadvertising. There may be somechances of misuse of advertising as atool, which can be properlysafeguarded by the law or bydeveloping a code of conduct by theadvertisers, for their self regulation.However, most of the criticism againstadvertising are not entirely true. In thechanged economic environment ofglobalisation, advertising isconsidered as an important tool ofmarketing. It helps a firm in effectivelycommunicating with its target market,increasing the sale and there byreducing the per unit cost ofproduction. It is not a social waste,rather it adds value to the social causeby giving a boost to production andgenerating employment.

PERSONAL SELLING

Personal selling involves oralpresentation of message in the form ofconversation with one or moreprospective customers for the purposeof making sales. It is a personal form ofcommunication. Companies appointsalespersons to contact prospective

buyers and create awareness aboutthe product and develop productpreferences with the aim of making sale.

Features of Personal Selling

(i) Personal Form: In personal sellinga direct face-to-face dialogue takesplace that involves an interactiverelationship between the seller andthe buyer.

(ii) Development of Relationship:Personal selling allows asalesperson to develop personalrelationships with the prospectivecustomers, which may becomeimportant in making sale.

Merits of Personal Selling

(i) Flexibility: There is lot of flexibilityin personal selling. The salespresentation can be adjusted to fitthe specific needs of the individualcustomers.

(ii) Direct Feedback: As there is directface-to-face communication inpersonal selling, it is possible totake a direct feed back from thecustomer and to adapt thepresentation according to theneeds of the prospects.

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(iii) Minimum Wastage: The wastage ofefforts in personal selling can beminimised as company can decidethe target customers beforemaking any contact with them.

ROLE OF PERSONAL SELLING

Personal selling plays a veryimportant role in the marketing ofgoods and services. The importanceof personal selling to businessmen,customers and society may bedescribed as below.

Importance to Businessmen

Personal selling is a powerful tool forcreating demand for a firm’s productsand increasing their sale. Theimportance of personal selling to abusiness organisation may bedescribed as follows:

(i) Effective Promotional Tool:Personal selling is very effectivepromotional tool, which helps ininfluencing the prospects aboutthe merits of a product andthereby increasing its sale.

(ii) Flexible Tool: Personal selling ismore flexible than other tools ofpromotion such as advertisingand sales promotion. It helpsbusiness persons in adoptingtheir offer in varying purchasesituations.

(iii) Minimises Wastage of Efforts:Compared with other tools ofpromotion, the possibility ofwastage of efforts in personal

selling is minimum. This helpsthe business persons in bringingeconomy in their efforts.

(iv) Consumer Attention: There is anopportunity to detect the loss ofconsumer attention and interestin a personal selling situation.This helps a business person insuccessfully completing the sale.

(v) Lasting Relationship: Personalselling helps to develop lastingrelationship between the salespersons and the customers, whichis very important for achieving theobjectives of business.

(vi) Personal Rapport: Development ofpersonal rapport with customersincreases the competitive strengthof a business organisation.

(vii) Role in Introduction Stage:Personal selling plays veryimportant role in the introductionstage of a new product as it helpsin persuading customers aboutthe merits of the product.

(viii) Link with Customers: Sales peopleplay three different roles, namelypersuasive role, service role andinformative role, and thereby linka business firm to its customers.

Importance to Customers

This role of personal selling becomesmore important for the illiterate andrural customers, who do not havemany other means of getting productinformation.

The customers are benefited bypersonal selling in the following ways:

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(i) Help in Identifying Needs:Personal selling helps thecustomers in identifying theirneeds and wants and in knowinghow these can best be satisfied.

(ii) Latest Market Information:Customers get latest marketinformation regarding pricechanges, product availability andshortages and new productintroduction, which help them intaking the purchase decisions ina better way.

(iii) Expert Advice: Customers getexpert advice and guidance inpurchasing various goods andservices, which help them inmaking better purchase.

(iv) Induces Customers: Personalselling induces customers topurchase new products thatsatisfy their needs in a better wayand thereby helps in improvingtheir standards of living.

Importance to Society

Personal selling plays a veryproductive role in the economicprogress of a society. The more specificbenefits of personal selling to a societyare as follows:

(i) Converts Latest Demand:Personal selling converts latestdemand into effective demand. Itis through this cycle that theeconomic activity in the societyis fostered, leading to more jobs,more incomes and more productsand services. That is how

economic growth is influenced bypersonal selling.

(ii) Employment Opportunities: Personalselling offers greater income andemployment opportunities to theunemployed youth.

(iii) Career Opportunities: Personalselling provides attractive careerwith greater opportunities foradvancement and job satisfactionas well as security, respect,variety, interest and independenceto young men and women.

(iv) Mobility of Sales People: There isa greater degree of mobility insales people, which promotetravel and tourism in the country.

(v) Product Standardisation: Personalselling increases productstandardisation and uniformityin consumption pattern in adiverse society.

SALES PROMOTION

Sales promotion refers to short-termincentives, which are designed toencourage the buyers to makeimmediate purchase of a product orservice. These include all promotionalef forts other than advertising,personal selling and publicity, used bya company to boost its sales. Salespromotion activities include offeringcash discounts, sales contests, free giftoffers, and free sample distribution.Sales promotion is usually undertakento supplement other promotionalef forts such as advertising andpersonal selling.

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Companies use sales promotiontools specifically designed to promoteto customers (e.g., free samples,discounts, and contests), tradesmenor middlemen (e.g., cooperativeadvertising, dealer discounts anddealer incentives and contests) andto sales person (e.g., bonus, salesmencontests, special of fers). Salespromotions include only thoseactivities that are used to provideshort term incentives to boost thesales of a firm.

Merits of Sales Promotion

(i) Attention Value: Sales promotionactivities attract attention of thepeople because of the use ofincentives.

(ii) Useful in New Product Launch:Sales promotion tools can be veryeffective at the time of introductionof a new product in the market. Itinduces people to break away fromtheir regular buying behaviour andtry the new product.

(iii) Synergy in Total PromotionalEfforts: Sales promotion activitiesare designed to supplement thepersonal selling and advertisingefforts used by a firm and add tothe over all effectiveness of thepromotional efforts of a firm.

Limitation of Sales Promotion

(i) Reflects Crisis: If a firm frequentlyrely on sales promotion, it may givethe impression that it is unable tomanage its sales or that there areno takers of its product.

(ii) Spoils Product Image: Use of salespromotion tools may affect theimage of a product. The buyers maystart feeling that the product is notof good quality or is notappropriately priced.

Commonly used Sales PromotionActivities

1. Rebate: Offering products at specialprices, to clear off excess inventory.Example, a car manufacturer’s offer tosell a particular brand of car at adiscount of Rs 10,000, for a limitedperiod.

2. Discount: Offering products at lessthan list price. Example, a shoecompany’s offer of ‘Discount Up to50%’ or a shirt marketer’s offer of‘50+40% Discount’.

3. Refunds: Refunding a part of pricepaid by customer on some proof ofpurchase, say on return of emptyfoils or wrapper. This is commonlyused by food product companies, toboost their sales.

4. Product Combinations: Offeringanother product as gift along with thepurchase of a product, say offer of apack of ½ kg of rice with the purchaseof a bag of Aatta (wheat flour), or ‘Get128 KB Memory Card Free with aDigicam’ or Buy a TV of 25+ and Get aVacuum Cleaner Free’ or ‘100 Gm Bottleof Sauce Free With 1 kg Detergent.’

5. Quantity Gift: Offering extraquantity of the product commonlyused by marketer of toiletry products.For example, a shaving cream’s offerof ‘40% Extra’ or A Hotel’s offer of

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“Take a 2 Night 3 Days Package At theHotel and Get an Extra Night Stay AtJust Rs 500” or ‘Buy 2 Get 1 Free’ offerof a marketer of shirts.

6. Instant Draws and Assigned Gift:For example, ‘Scratch a Card’ or ‘Bursta Cracker’ and instantly win a

Refrigerator, Car, T-shirt, Computer,with the purchase of a TV.

7. Lucky Draw: For example, the offerof a bathing soap to win a gold coinon lucky draw coupon for free petrolon purchase of certain quantity ofpetrol from given petrol pump or lucky

Sales Promotion

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draw coupon on purchase of easyundergarment and win a car offer.

8. Usable Benefit: ‘Purchase goodsworth Rs 3000 and get a holiday packageworth Rs 3000 free’ or ‘Get a DiscountVoucher for Accessories on ApparelPurchase of Rs 1000 and above.’

9. Full finance @ 0%: Manymarketers of consumer durables suchas Electronic goods, automobiles etcoffer easy financing schemes such as‘24 easy instalments, Eight Up Frontand 16 To Be Paid as Post DatedCheques’. However, one should becareful about the file charges, whichsometimes is nothing but interestrecovered in advance.

10. Sampling: Offer of free sample ofa product, say a detergent powder ortooth paste to potential customers atthe time of launch of a new brand.

11. Contests: Competitive eventsinvolving application of skills or luck,say salving a quiz or answering somequestions.

PUBLICITY

Publicity is similar to advertising, inthe sense that it is a non-personal formof communication. However, as againstadvertising it is a non-paid form ofcommunication. Publicity generallytakes place when favourable news ispresented in the mass media about aproduct or service. For example, if amanufacturer achieves a breakthroughby developing a car engine, which runs

on water instead of petrol, and thisnews is covered by television or radioor newspapers in the form of a newsitem. It would be termed as publicitybecause the engine manufacturerwould benefit from such disseminationof information about its achievementby the media but would not bear anycost for the same. Thus, the twoimportant features of publicity are that:

(i) Publicity is an unpaid form ofcommunication. It does not involveany direct expenditure by themarketing firm; and

(ii) There is no identified sponsor forthe communication as the messagegoes as a news item.

In publicity, as the information isdisseminated by an independentsource, e.g., the press in the form ofnews stories and features, themessage has more credibility than ifthat comes as a sponsored messagein advertising.

Also, as the message goes in theform of a news rather than direct salescommunication, it can reach even tothose persons who otherwise may notpay attention to paid communication.

However, an important limitationof publicity is that as a medium ofpromotion, it is not within the controlof a marketing firm. The media wouldcover only those pieces of information,which are news worthy and whichsymbolise some achievement in thefield. Thus, a firm can’t use publicityto actively promote its products.

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Difference between Advertising and Personal Selling

S. Advertising Personal SellingNo.

Personal selling is a personal form ofcommunication.

In personal selling, the sales talk isadjusted keeping view customer’sbackground and needs.

Personal selling is highly flexible. asthe message can be adjusted.

Only a limited number of people canbe contacted because of time and costconsiderations.

The cost per person is quite high inthe case of personal selling.

Personal selling efforts take a lot oftime to cover the entire market.

Personal selling makes use of salesstaff, which has limited reach.

Personal selling provides direct andimmediate feed back. Sales personscome to know about the customers’reactions immediately.

Personal selling plays important roleat the awareness stage of decisionmaking.

Personal selling is more helpful inselling products to the industrialbuyers or to intermediaries such asdealers and retailers who are relativelyfew in numbers.

1. Advertising is an impersonal form ofcommunication.

2. Advertising involves transmission ofstandardised messages, i.e., samemessage is sent to all the customersin a market segment.

3. Advertising is inflexible as themessage can’ t be adjusted to theneeds of the buyer.

4. It reaches masses, i.e., a large numberof people can be approached.

5. In advertising the cost per personreached is very low.

6. Advertising can cover the market in ashort time.

7. Advertising makes use of mass mediasuch television, radio, newspaper, andmagazines.

8. Advertising lacks direct feedback.Marketing research efforts are neededto judge customers’ reactions toadvertising.

9. Advertising is more useful in creatingand building interest of theconsumers in the firms products.

10. Advertising is more useful inmarketing to the ultimate consumer’swho are large in numbers

The major differences between advertising and personal selling are as follows:

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SUMMARY

In the traditional sense, the term ‘market’ refers to the place where buyersand sellers gather to enter into transactions involving the exchange of goodsand services. But in modern marketing sense, it refers to a set of actual andpotential buyers of a product or service.

What is Marketing: The term marketing has been described as performanceof business activities that direct the flow of goods and services from producersto consumers. Marketing is not merely a post-production activity. It includesmany activities that are performed even before goods are actually producedand continue even after the goods have been sold.

In Modern Times: Marketing is described as a social process by whichindividual groups obtain what they need and want through creating offeringsand freely exchanging products and services of value with others. Marketingis not merely a business phenomena or confined only to business organisations.Marketing activities are equally relevant to non-profit organisations

What can be 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 bean experience, properties, events, information or organisation.

Marketing management means management of the marketing function. It refersto ‘The art and science of choosing target markets and getting, keeping andgrowing customers through creating, delivering and communicating superiorcustomer 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 ison affecting transfer of title and possession of goods from sellers to users.Marketing activities put greater thrust on maximising customer’s satisfaction.

KEY TERMS

Marketing Brand Mark Market Packaging

Marketing Management Labelling Marketing MixChannels of Distribution Marketing Offering Physical Distribution

Consumer Product Promotion Industrial ProductPromotion Mix Convenience Product Advertising

Shopping Product Personal Selling Speciality ProductPublicity Generic Name Sales Promotion

Brand Brand Name Trade Mark

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Marketing Management Philosophies: The different business philosophiesor concepts guiding the marketing efforts are: (i) Production Concept whichassumes that availability and affordability of the product are the key to thesuccess of a firm and puts greater emphasis on improving the production anddistribution efficiency of the firms. (ii) Product Concept assumes that productimprovement is, the key to profit maximisation of a firm; (iii) Sales Conceptassumes that the customers would not buy, or not buy enough, unless theyare adequately convinced and motivated to do so, It is believed that aggressiveselling and promotional efforts are important to make customers buy theirproducts. (iv) Marketing Concept implies that focus on satisfaction of customer’sneeds is the key to the success of any organisation in the market. (v) TheSocietal Marketing Concept is the extension of the marketing concept assupplemented by the concern for the long-term welfare of the society.

Functions of Marketing: The important functions of marketing includeGathering and Analysing Market Information, Marketing Planning, ProductDesigning and Development, Standardisation and Grading, Packaging andLabelling, Branding, Customer Support Services, Pricing of Products,Promotion, Physical distribution, Transportation, Storage or Warehousing.

Role of Marketing: By adopting marketing orientation, an organisationwhether profit making or non-profit making, can achieve its goals in the mosteffective manner. Also marketing acts as a catalyst in the economic developmentof 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 itsmarketing objectives in a target market. The variables or elements of marketingmix have been classified in to four categories, popularly known as four Ps ofmarketing viz., Product, Price, Place and Promotion. These elements arecombined to create an offer.

Product: In common parlance, the word ‘product’, is used to refer only to thephysical or tangible attributes of a product. In marketing, product is a mixtureof tangible and intangible attributes, which are capable of being exchangedfor a value, with ability to satisfy customer needs. It is anything that can beoffered to a market to satisfy a want or need. Products may broadly be classifiedinto two categories—industrial products and consumers’ products. Products,which are purchased, by the ultimate consumers or users for satisfying theirpersonal needs and desires are referred to as consumer products. On thebasis of shopping efforts involved, the products are classified as ConvenienceProduct, Shopping Products and Speciality Products. On the basis of theirdurability, 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., drycleaning, watch repairs, hair cutting, are called services.

Industrial products are those products, which are used as inputs in producingother 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, designor some combination of them, used to identify the products—goods or servicesof one seller or group of sellers and to differentiate them from those of thecompetitors. That part of a brand, which can be spoken, is called a brandname.

That part of a brand which can be recognized but which is not utter able iscalled 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 legalprotection is called trademark.

A good brand name should be short, easy to pronounce, spell, recognize andremember; Should suggest the product’s benefits and qualities; be distinctive;be adaptable to packing or labelling requirements; be sufficiently versatile toaccommodate new products; be capable of being registered and protected legallyand have staying power i.e. it should not get out of date.

Packaging: The act of designing and producing the container or wrapper of aproduct is referred as packaging. There can be three different levels ofpackaging. viz Primary package, Secondary packaged, Transport package.Packaging performs a number of functions in the marketing of goods. Some ofthe 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 goodsrelates to designing the label to be put on the package. The label may varyfrom a simple tag attached to the product to complex graphics that are part ofthe package. The most important functions of labels include i) describing theproduct ii) help in identifying the product or brand; iii) help in grading theproducts into different categories; and aids in promotion of the products.

Pricing: Price may be defined as the amount of money paid by a buyer orreceived 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 profitsof a firm.

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The factors affecting price determination are (i) Product Cost (ii) The Utilityand 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, orassist in transferring title, to particular goods or services as it moves from theproducers to the consumers. Channels of distribution smoothen the flow ofgoods by creating possession, place and time utilities. The important functionsperformed 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 thegoods are made directly available by the manufacturers to customers, withoutinvolving any intermediary; include (II) Indirect Distribution Channels includei. 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 ofChannels 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 movegoods from manufacturers to the customers. The main component of physicaldistribution are. i. Order Processing; ii. Transportation; iii. Warehousing; andiv. Inventory Control: Just-in-Time-Inventory.

Promotion: Promotion refers to the use of communication with the twinobjective of informing potential customers about a product and persuadingthem 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 goalsof promotion.

Advertising is the most commonly used tool of promotion. It is an impersonalform of communication, which is paid for by the marketers (Sponsors) topromote some goods or service. The merits of advertising, as a medium ofcommunication, include i. Mass reach ; ii. Enhancing customer satisfactionand 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 Advertisingare 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 istherefore considered an essential function of marketing.

Personal Selling involves oral presentation of message in the form ofconversation with one or more prospective customers for the purpose of makingsales. Personal Selling plays important role for the business persons as wellas for the society

Sales Promotion refers to short-term incentives, which are designed toencourage the buyers to make immediate purchase of a product service. Theseinclude promotional efforts other than advertising, personal selling andpublicity, used by a company to boost its sales. Commonly used Sales PromotionActivities include Rebate, Discount, Refunds, Product Combinations, QuantityGift, 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 ofcommunication. However, as against advertising it is a non-paid form ofcommunication. In publicity, as the information is disseminated by anindependent source. However, an important limitation of publicity is that as amedium 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 duringthe last few months.

Short answer question

(i) What is marketing ? What functions does if play with process ofexchange of goods and services? Explain.

(ii) Distinguish between the product concept and production concept ofmarketing.

(iii) Product is a bundle of utilities? Do you agree? comment.

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(iv) What are industrial products? How are they different from consumerproducts? 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 nondurable 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.

Long answer type questions

(i) Define Marketing. How is it different from selling? Discuss

(ii) What is the Marketing concept? How does it help in the effectivemarketing of goods and services.

(iii) What is marketing mix? What are it main elements? Explain.

(iv) How does branding help in Creating product differentiation? Does ithelp in marketing of goods and services? Discuss

(v) What are the factors affecting determination of the price of a productor service? Explain

(vi) What do you mean by ‘channels of distribution’ ? What functions dothey play in the distribution of goods and service? Explain

(vii) Explain the major activities involved in the physical distribution ofproducts.

(viii) ‘Expenditure on advertising is a social waste’ Do you agree? Discuss

(ix) Distinguish between advertising and personal selling.

Projects/Assignment

(i) Visit in a team of four-five students to different marketing organisationsin your locality (retailers, wholesalers, distributors etc). Find whatmarketing activities are undertaken by them. Do you find any differencein the activities in the organisations visited by you? What commonactivities are found in these organisations? Write a report.

(ii) Collect ten advertisements appearing in newspapers, magazines etcabout recent sales promotional schemes about some consumers durable

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or non durable products of your choice. Also collect some promotionalmaterial about these products written on the package of these products(cartons/wrappers/bottles etc.) and write important features of thescheme in your notebook. Make a presentation in your class about thesales promotional schemes.

Application based questions

(i) As marketing manager of a big hotel located at an important touristdestination, what societal concerns would be faced by you and whatsteps would you plan to take care of these concerns? Discuss.

(ii) Suppose you are the marketing vice president of an insurance company,planning to design a new mediclaim policy for senior citizens. Whatinformation would you like to collect to perform this task and how willyou collect such information? Discuss.

(iii) What shopping products have been purchased by you/your family inthe last six months. Make a list and specify what factors influenced thepurchase of each of these products.

(iv) What information is generally placed on the package of a food product.Design a label for one of the ford product of your choice.

(v) For buyers of consumer durable products, what ‘customer care services’would you plan as a manager of a firm marketing new brand ofmotorcycle, Discuss.

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 ofconnecting people.

The mobile handset manufacturer has embarked upon a brand new retailstrategy that is based on a classification of its consumers into four majorgroups that separates people in terms of usage, income level and lifestyle.

The classification is based on an extensive survey – the Nokia SegmentationStudy —that was carried over two years involving 42,000 consumers from 16countries. It studied the impact lifestyle choices and attitudes have on themobile devices consumers buy and how they use them.

The strategy, which was announced globally in June last year, is beingunfolded 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 marketingstrategies for the four different segments. The advertising campaigns could bedifferent for the segments.

Nokia’s entire product portfolio has now been re-aligned towards thesefour groups to address the specific needs of each. The first of these segmentsLive, aimed a first time users whose basic need is to stay in touch with voiceas the main driver, would have basic handsets low on features and price.

“These may be functional phones but the target group for these phonesrange 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 morefunctionality and features and connectivity. Accordingly, phones in thissegment would have GPRS, camera and music capabilities.

The next two categories, Achieve and Explore, are aimed at high-end usersand have Nokia’s top-end handsets. For example, Achieve segment looks atenterprise users who need to have business functionalities in their phones.Nokia’s new E-series has been put under this segment with handsets havingQWERTY keyboards and full Internet capabilities.

Aimed at high-end lifestyle users, Explore would be the most prominentsegment for the company in the coming years. Says Nokia India multimediabusiness director Vineet Taneja, “This segment would see the most vibrantgrowth in the coming year. It will look at five different areas – applications,imaging, mobile TV, music and gaming. We are fast developing the ecosystemto support these areas.”

Nokia acquired music solution and content provider LoudEye and GPSsolution 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 apartfrom iPod quality music, in February.

Says Taneja, “There is increasing demand for convergence and multiplefunctionalities in high-end handsets. The N-series will try to address that.”Nokia feels that the new platform strategy wherein different handsets arelaunched under a platform, like the N-Series, will become a status and stylestatement and drive numbers.

Source: www.economictimes.indiatimes.com

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Question

1. Identify the four market segments that Nokia plans to address as per thenews 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 thisfrom the case above.

4. Identify the points that can be highlighted in marketing campaigns foreach segment.

5. What are the different considerations in the mind of consumers of eachsegment while purchasing mobile phones as given in the above case?

LEARNING OBJECTIVES

After studying this chapter, youshould be able to:

state the importance ofconsumer protection;

briefly explain legal frameworkfor consumer protection inIndia;

describe consumer rights inIndia;

list out consumer responsibilities;

briefly describe the ways andmeans of consumer protection;and

describe the role of consumerorganisations and NGOs inprotecting consumers’ interests.

CHAPTER

12CONSUMER PROTECTION

MAHARASHTRA CONSUMER COMMISSION

SLAPS FINE OF RS ONE LAKH ON

COCA COLA

The Maharashtra State ConsumerCommission has asked Coca Cola, oneof the international fizzy drinksmanufacturer, its bottler anddistributor to pay Rs one lakh indamages to a consumer who foundimpurities in a bottle of soft drink thathe had bought.

Chandrashekhar Paradkar, aresident of Shankar Nagar area here,filed a complaint with the Nagpurdistrict Consumer Grievances Fourmseeking compensation of Rupees fourlakh after he found some solid objectsinside a sealed bottle of a soft drink.He had bought six various brands ofthe soft drink— two bottles each ofMazaa, Coca Cola and Sprite from ashop near his house.

Based on that, the District Forumearlier gave a ruling after finding CocaCola, its bottlers Superior Drinks Pvt.Ltd. and distributors Balaji Sales guiltyof supplying drinks unfit for humanconsumption, which was upheld by theState Consumer Commission.

The District Forum had foundobjects resembling pieces of mosquitorepellent mats floating inside the sealedbottle. Having conducted the tests by aPublic Health Laboratory, they foundthe drink unfit for human consumption.

The District Forum came downheavily on the company saying

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in unscrupulous, exploitative andunfair trade practices like defectiveand unsafe products, adulteration,false and misleading advertising,hoarding, black-marketing etc. Thismeans that a consumer might beexposed to risks due to unsafeproducts, might suffer from bad healthdue to adulterated food products,might be cheated because ofmisleading advertisements or sale ofspurious products, might have to paya higher price when sellers engage inoverpricing, hoarding or black-marketing etc. Thus, there is a needfor providing adequate protection toconsumers against such practices ofthe sellers. Let us now discuss theimportance of consumer protection.

IMPORTANCE OF CONSUMER

PROTECTION

Consumer Protection has a wideagenda. It not only includes educatingconsumers about their rights andresponsibilities, but also helps ingetting their grievances redressed. Itnot only requires a judicial machineryfor protecting the interests ofconsumers but also requires theconsumers to get together and form

The above case is just one of theexamples of the many problems thatconsumers might have to face in thepurchase, use and consumption ofgoods and services. The case alsohighlights the need for an appropriatelegal protection to be provided toconsumers to protect them fromvarious forms of exploitation from theseller. Have you ever thought whatwould be the plight of consumers ifadequate protection is not provided tothem? Can the present day businessesafford to ignore the interests ofconsumers? The area of consumerprotection has emerged as a veryimportant area of study havingsignificance for both the consumersand businesses alike.

INTRODUCTION

A consumer is said to be a king in afree market economy. The earlierapproach of caveat emptor, whichmeans “Let the buyer beware”, hasnow been changed to caveat venditor(“Let the seller beware”). However, withgrowing competition and in an attemptto increase their sales and marketshare, manufacturers and service-providers may be tempted to engage

multinational giants would not be allowed to have a free run and exploit a poor countrylike India by manufacturing and marketing sub-standard products.

While giving its ruling, the District Forum relied upon the historic Donald versusStevenson 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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themselves into consumer associationsfor protection and promotion of theirinterests. At the same time, consumerprotection has a special significance forbusinesses too.

From Consumers’ point of view

The importance of consumerprotection from the consumers’ pointof view can be understood from thefollowing points:

(i) Consumer Ignorance: In the lightof widespread ignorance ofconsumers about their rights andreliefs available to them, it becomes

necessary to educate them about thesame so as to achieve consumerawareness.(ii) Unorganised Consumers: Con-sumers need to be organised in theform of consumer organisations whichwould take care of their interests.Though, in India, we do have consumerorganisations which are working in thisdirection, adequate protection isrequired to be given to consumers tillthese organisations become powerfulenough to protect and promote theinterests of consumers.(iii) Widespread Exploitation ofConsumers: Consumers might be

Compensation for impurities in cold drinks

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exploited by unscrupulous, exploitativeand unfair trade practices like defectiveand unsafe products, adulteration,false and misleading advertising,hoarding, black-marketing etc.Consumers need protection againstsuch malpractices of the sellers.

From the point of view ofBusiness

A business must also lay emphasis onprotecting the consumers and adequatelysatisfying them. This is importantbecause of the following reasons:

(i) Long-term Interest of Business:Enlightened businesses realise that itis in their long-term interest to satisfytheir customers. Satisfied customersnot only lead to repeat sales but alsoprovide good feedback to prospectivecustomers and thus, help inincreasing the customer-base ofbusiness. Thus, business firms shouldaim at long-term profit maximisationthrough customer satisfaction.

(ii) Business uses Society’sResources: Business organisations useresources which belong to the society.They, thus, have a responsibility tosupply such products and render suchservices which are in public interestand would not impair public confidencein them.

(iii) Social Responsibility: A businesshas social responsibilities towardsvarious interest groups. Businessorganisations make money by sellinggoods and providing services toconsumers. Thus, consumers form animportant group among the many

stakeholders of business and likeother stakeholders, their interest hasto be well taken care of.

(iv) Moral Justification: It is the moralduty of any business to take care ofconsumer’s interest and avoid any formof their exploitation. Thus, a businessmust avoid unscrupulous, exploitativeand unfair trade practices like defectiveand unsafe products, adulteration,false and misleading advertising,hoarding, black marketing etc.

(v) Government Intervention: Abusiness engaging in any form ofexploitative trade practices wouldinvite government intervention oract ion . Th is can impair andtarnish the image of the company.Thus, it is advisable that businessorganisations voluntarily resort tosuch practices where the customers’needs and interests will well be takencare of.

In view of the above, the governmentof India has enacted several regulationsdesigned to provide adequate protectionto consumers. We shall now discusssome of these regulations.

LEGAL PROTECTION TO CONSUMERS

The Indian legal framework consists ofa number of regulations which provideprotection to consumers. Some of theseregulations are as under.

1. The Consumer Protection Act,1986: The Consumer Protection Act,1986 seeks to protect and promote theinterests of consumers. The Actprovides safeguards to consumers

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against defective goods, deficientservices, unfair trade practices, andother forms of their exploitation. TheAct provides for the setting up of athree-tier machinery, consisting ofDistrict Forums, State Commissionsand the National Commission. It alsoprovides for the formation of consumerprotection councils in every Districtand State, and at the apex level.

2. The Contract Act, 1982: The Actlays down the conditions in which thepromises made by parties to a contractwill be binding on each other. The Actalso specifies the remedies availableto parties in case of breach of contract.

3. The Sale of Goods Act, 1930: TheAct provides some safeguards andreliefs to the buyers of the goods incase the goods purchased do notcomply with express or impliedconditions or warranties.

4. The Essential Commodities Act,1955: The Act aims at controllingproduction, supply and distribution ofessential commodities, checkinginflationary trend in their prices andensuring equal distribution ofessential commodities. The Act alsoprovides for action against anti-socialactivities of profiteers, hoarders andblack-marketers.

Protection against malpractices and exploitation

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5. The Agricultural Produce(Grading and Marking) Act, 1937:The Act prescribes grade standards foragricultural commodities and live-stock products. The Act stipulates theconditions which govern the use ofstandards and lays down theprocedure for grading, marking andpacking of agricultural produce. Thequality mark provided under the Actis known as AGMARK, an acronym forAgricultural Marketing.

6. The Prevention of FoodAdulteration Act, 1954: The Act aimsto check adulteration of food articlesand ensure their purity so as tomaintain public health.

7. The Standards of Weights andMeasures Act, 1976: The provisionsof this Act are applicable in case ofthose goods which are sold ordistributed by weight, measure ornumber. It provides protection toconsumers against the malpractice ofunder-weight or under-measure.

8. The Trade Marks Act, 1999: ThisAct has repealed and replaced the Tradeand Merchandise Marks Act, 1958. TheAct prevents the use of fraudulentmarks on products and thus, providesprotection to the consumers againstsuch products.

9. The Competition Act, 2002: ThisAct has repealed and replaced theMonopolies and Restrictive TradePractices Act, 1969. The Act providesprotection to the consumers in caseof practices adopted by business firmswhich hamper competition in themarket.

10. The Bureau of Indian StandardsAct, 1986: The Bureau of IndianStandards has been set up under theAct. The Bureau has two majoractivities: formulation of qualitystandards for goods and theircertification through the BIS certificationscheme. Manufacturers are permittedto use the ISI mark on their productsonly after ensuring that the goodsconform to the prescribed qualitystandards. The Bureau has also setupa grievance cell where consumers canmake a complaint about the qualityof products carrying the ISI mark.

The most important of theseregulations is the ConsumerProtection Act which provides for sixconsumer rights and helps consumersin getting their grievances redressedfor any shortcoming in the goodspurchased or services availed.

THE CONSUMER PROTECTION ACT,1986

The Consumer Protection Act (CPA)seeks to protect and promote theconsumers’ interest through speedyand inexpensive redressal of theirgrievances.

The scope of the Act is very wide.It is applicable to all types ofundertakings, big and small, whetherin the private or public sector, or inthe co-operative sector, whether amanufacturer or a trader, and whethersupplying goods or providing services.

The Act confers certain rights toconsumers with a view to empoweringthem and to protect their interests.

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CONSUMER RIGHTS

The Consumer Protection Act providesfor six rights of consumers. Theconsumer protection councils set upunder the Act are intended to promoteand protect the various rights ofconsumers. These rights include thefollowing:

1. Right to Safety: The consumer hasa right to be protected against goodsand services which are hazardous tolife and health. For instance, electricalappliances which are manufacturedwith substandard products or do notconform to the safety norms mightcause serious injury. Thus, consumersare educated that they should useelectrical appliances which are ISImarked as this would be an assuranceof such products meeting qualityspecifications.

2. Right to be Informed: Theconsumer has a right to have completeinformation about the product heintends to buy including itsingredients, date of manufacture,price, quantity, directions for use, etc.It is because of this reason that thelegal framework in India requires themanufactures to provide suchinformation on the package and labelof the product.

3. Right to Choose: The consumerhas the freedom to choose from avariety of products at competitiveprices. This implies that the marketersshould offer a wide variety of productsin terms of quality, brand, prices, size,etc. and allow the consumer to makea choice from amongst these.

4. Right to be Heard: The consumerhas a right to file a complaint and tobe heard in case of dissatisfaction witha good or a service. It is because of thisreason that many enlightened businessfirms have set up their own consumerservice and grievance cells. Manyconsumer organisations are alsoworking towards this direction andhelping consumers in redressal of theirgrievances.

5. Right to seek Redressal: Theconsumer has a right to get relief incase the product or service falls shortof his expectations. The ConsumerProtection Act provides a number ofreliefs to the consumers includingreplacement of the product, removalof defect in the product, compensationpaid for any loss or injury suffered bythe consumer, etc.

6. Right to Consumer Education: Theconsumer has a right to acquireknowledge and to be a well informedconsumer throughout life. He shouldbe aware about his rights and thereliefs available to him in case of aproduct or service falling short of hisexpectations. Many consumerorganisations and some enlightenedbusinesses are taking an active part ineducating consumers in this respect.

The Consumer Protection Act byconferring these rights on theconsumers empowers them to fightagainst any unscrupulous, exploitativeand unfair trade practices adopted bysellers. The Box on East Delhi eateryshows how a restaurant owner wasfined for overpricing bottled water.

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Consumer rights, by themselves,cannot be effective in achieving theobjective of consumer protection.Consumer protection can, in effect, beachieved only when the consumers alsounderstand their responsibilities.

CONSUMER RESPONSIBILITIES

A consumer should keep in mind thefollowing responsibilities whilepurchasing, using and consuminggoods and services.

(i) Be aware about various goodsand services available in themarket so that an intelligent andwise choice can be made.

(ii) Buy only standardised goods asthey provide quality assurance.Thus, look for ISI mark onelectrical goods, FPO mark on foodproducts, Hallmark on jewelry etc.

(iii) Learn about the risks associatedwith products and services, followmanufacturer’s instructions anduse the products safely.

(iv) Read labels carefully so as to haveinformation about prices, netweight, manufacturing and expirydates, etc.

(v) Assert yourself to ensure that youget a fair deal.

(vi) Be honest in your dealings.Choose only from legal goods andservices and discourageunscrupulous practices likeblack-marketing, hoarding etc.

(vii) Ask for a cash memo on purchaseof goods or services. This wouldserve as a proof of the purchasemade.

(viii) File a complaint in an appropriateconsumer forum in case of a

Eatery fined for Overpricing Bottled Water

A restaurant owner in east Delhi has been directed to pay a fine of Rs. 5,000 to acustomer who was asked to shell out Rs. 34 for a water bottle which had a maximumretail price (MRP) of Rs.12. The fine comes at a time when consumer courts areturning the heat on shop-owners who overcharge. In a recent landmark decision, thestate consumer commission had slapped a fine of Rs. 50,000 on a cineplex for similarmalpractice. Goel was awarded the compensation by east district consumer forumpresident and members directing Zaika Bazaar, Karkardooma Complex, to compensateGoel for overcharging. The Forum said: “The present complaint is covered by thejudgment of the state consumer commision in case of Nirulas vs Ankit Jain in whichit said no trader or service provider can charge more price than an item’s MRP printedon the packed item, if delivered packed”. Ordering the restaurant owner to discontinuethe malpractice, the forum said charging higher amount than MRP, if delivered inpacked form, was against the law of the land. Goel had bought a bottle of Aquafinawater from the restaurant in November last year and was asked to pay Rs.34 for it,including a VAT of Rs. 4, when the bottle had a MRP of Rs.12 printed on it.

Source: www.corecentre.org

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shortcoming in the quality of goodspurchased or services availed. Donot fail to take an action even whenthe amount involved is small.

(ix) Form consumer societies whichwould play an active part ineducating consumers andsafeguarding their interests.

(x) Respect the environment. Avoidwaste, littering and contributingto pollution.

A consumers’ awareness about hisrights and responsibilities is just oneof the ways in which the objective ofconsumer protection can be achieved.There are other ways in which thisobjective may be achieved.

WAYS AND MEANS OF CONSUMER

PROTECTION

There are various ways in which theobjective of consumer protection canbe achieved.

1. Self Regulation by Business:Enlightened business firms realisethat it is in their long-term interest toserve the customers well. Sociallyresponsible firms follow ethicalstandards and practices in dealingwith their customers. Many firms haveset up their customer service andgrievance cells to redress the problemsand grievances of their consumers.

2. Business Associations: Theassociations of trade, commerce and

Marks indicating quality in different products

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business like Federation of IndianChambers of Commerce of India(FICCI) and Confederation of IndianIndustries (CII) have laid down theircode of conduct which lay down fortheir members the guidelines in theirdealings with the customers.

3. Consumer Awareness: A consumer,who is well informed about his rightsand the reliefs available to him, wouldbe in a position to raise his voiceagainst any unfair trade practices orunscrupulous exploitation. In additionto this, an understanding of hisresponsibilities would also enable aconsumer to safeguard his interests.

4. Consumer Organisations:Consumer organisations play animportant role in educating consumersabout their rights and providingprotection to them. These organisationscan force business firms to avoidmalpractices and exploitation ofconsumers.

5. Government: The government canprotect the interests of the consumersby enacting various legislations. Thelegal framework in India encompassesvarious legislations which provideprotection to consumers. The mostimportant of these regulations is theConsumer Protection Act, 1986. The

Consumer Awareness

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Act provides for a three-tier machineryat the district, state and national levelsfor redressal of consumer grievances.The redressal mechanism under thisthree-tier machinery has beenexplained hereunder.

REDRESSAL AGENCIES UNDER THE

CONSUMER PROTECTION ACT

For the redressal of consumergrievances, the Consumer ProtectionAct provides for setting up of a three-tier enforcement machinery at theDistrict, State, and the National levels,known as the District ConsumerDispute Redressal Forum, StateConsumer Disputes RedressalCommission, and the NationalConsumer Disputes RedressalCommission. They are briefly referredto as the ‘District Forum’, ‘StateCommission’, and the ‘NationalCommission’, respectively. While theNational Commission is set up by theCentral Government, the StateCommissions and the District Forums

are set up, in each State and District,respectively, by the State Governmentconcerned. The Figure on redressalagencies shows the hierarchicalstructure of this three-tire machinery.

Before studying the set-up andfunctioning of these redressal agencieslet see how the Consumer ProtectionAct defines a consumer and who canfile a complaint under the ConsumerProtection Act.

Consumer: A ‘consumer’ is generallyunderstood as a person who uses orconsumes goods or avails of any service.Under the Consumer Protection Act, aconsumer is defined as:

(a) Any person who buys any goods fora consideration, which has beenpaid or promised, or partly paid andpartly promised, or under anyscheme of deferred payment. Itincludes any user of such goods,when such use is made with theapproval of the buyer, but does notinclude a person who obtains goodsfor re-sale or any commercialpurpose.

National Commission

State Commission

District Forum

Redressal Agencies under the Consumer Protection Act

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(b) Any person who hires or avails ofany service, for a considerationwhich has been paid or promised, orpartly paid and partly promised, orunder any system of deferredpayment. It includes any beneficiaryof services when such services areavailed of with the approval of theperson concerned, but does notinclude a person who avails of suchservices for any commercial purpose.

Who can file a complaint?: Acomplaint before the appropriateconsumer forum can be made by:

(i) Any consumer;

(ii) Any registered consumers’association;

(iii) The Central Government or anyState Government;

(iv) One or more consumers, on behalfof numerous consumers havingthe same interest; and

(v) A legal heir or representative of adeceased consumer.

Let us now see how the consumergrievances are redressed by the three-tire machinery under the ConsumerProtection Act.

1. District Forum: The District Forumconsists of a President and two othermembers, one of whom should be awoman. They all are appointed by theState Government concerned. Acomplaint can to be made to theappropriate District Forum when thevalue of the goods or services inquestion, along with the compensationclaimed, does not exceed Rs. 20 lakhs.On receiving the complaint, the District

Forum shall refer the complaint to theparty against whom the complaint isfiled. If required, the goods or a samplethereof, shall be sent for testing in alaboratory. The District Forum shallpass an order after considering the testreport from the laboratory and hearingto the party against whom thecomplaint is filed. In case the aggrievedparty is not satisfied with the order ofthe District Forum, he can appealbefore the State Commission within 30days of the passing of the order.

2. State Commission: Each StateCommission consists of a Presidentand not less than two other members,one of whom should be a woman. Theyare appointed by the State Governmentconcerned. A complaint can to be madeto the appropriate State Commissionwhen the value of the goods or servicesin question, along with thecompensation claimed, exceeds Rs. 20lakhs but does not exceed Rs. 1 crore.The appeals against the orders of aDistrict Forum can also be filed beforethe State Commission. On receiving thecomplaint, the State Commission shallrefer the complaint to the party againstwhom the complaint is filed. If required,the goods or a sample thereof, shall besent for testing in a laboratory. TheState Commission shall pass an orderafter considering the test report fromthe laboratory and hearing to the partyagainst whom the complaint is filed.In case the aggrieved party is notsatisfied with the order of the StateCommission, he can appeal before theNational Commission within 30 daysof the passing of the order.

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3. National Commission: TheNational Commission consists of aPresident and at least four othermembers, one of whom should be awoman. They are appointed by theCentral Government. A complaint canto be made to the National Commissionwhen the value of the goods or servicesin question, along with thecompensation claimed, exceeds Rs. 1crore. The appeals against the ordersof a State Commission can also be filedbefore the National Commission. Onreceiving the complaint, the NationalCommission shall refer the complaintto the party against whom thecomplaint is filed. If required, the goodsor a sample thereof, shall be sent fortesting in a laboratory. The NationalCommission shall pass an order afterconsidering the test report from thelaboratory and hearing to the partyagainst whom the complaint is filed.

An order passed by the NationalCommission in a matter of its originaljurisdiction is appealable before theSupreme Court. This means that onlythose appeals where the value of goodsand services in question, along withthe compensation claimed, exceeded Rs.1 crore and where the aggrieved partywas not satisfied with the order of theNational Commission, can be taken tothe Supreme Court of India. Moreover,in a case decided by the District Forum,the appeal can be filed before the StateCommission and, thereafter, the orderof the State Commission can bechallenged before the NationalCommission and no further.

Relief Available

If the consumer court is satisfied aboutthe genuineness of the complaint, itcan issue one or more of the followingdirections to the opposite party.

(i) To remove the defect in goods ordeficiency in service.

(ii) To replace the defective productwith a new one, free from anydefect.

(iii) To refund the price paid for theproduct, or the charges paid forthe service.

(iv) To pay a reasonable amount ofcompensation for any loss orinjury suffered by the consumerdue to the negligence of theopposite party.

(v) To pay punitive damages inappropriate circumstances.

(vi) To discontinue the unfair/restrictive trade practice and notto repeat it in the future.

(vii) Not to offer hazardous goods forsale.

(viii) To withdraw the hazardous goodsfrom sale.

(ix) To cease manufacture ofhazardous goods and to desistfrom offering hazardous services.

(x) To pay any amount (not less than5% of the value of the defectivegoods or deficient servicesprovided), to be credited to theConsumer Welfare Fund or anyother organisation/person, to beutilised in the prescribed manner.

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(xi) To issue corrective advertisement toneutralise the effect of a misleadingadvertisement.

(xii) To pay adequate costs to theappropriate party.

Brings out some decided caseswhere a complaint was filed in aconsumer court for defective goodsand deficient services.

ROLE OF CONSUMER ORGANISATIONS

AND NGOS

In India, several consumerorganisations and non-governmentalorganisations (NGOs) have been setup for the protection and promotionof consumers’ interests. Non-governmental organisations are non-profit organisations which aim at

Some Decided Cases

Under the Consumer Protection Act, a consumer can file a complaint against themanufacturers or sellers for any defective good supplied to him or any deficientservices rendered to him.

In Jose Philip Mampillil vs. M/s Premier automobiles Ltd. & Anr, a diesel carpurchased by the appellant (consumer) was found defective. The defects in the carwere not removed by the defendants (manufacturer and dealer). The Commissionerappointed by the District Forum found a large number of defects in the car.Consequently, the District Forum directed repair of car free of cost and replacementof engine. The order was upheld by the State Commission except for the directionfor replacement of engine.

In the case of Sashikant Krishnaii Dole vs. Shikshan Prasarak Mandali, theNational Commission held that failure to amount basic safeguards in the swimmingpool amounts to deficiency in service. A school owned a swimming pool and offeredswimming facilities to the public on payment of a fee. The school conducted winterand summer training camps to train boys in swimming and for this purpose engageda coach. The plaintiffs enrolled their only son for learning swimming under theguidance of the coach. It was alleged that due to the negligence of the coach, theboy drowned and died. The school denied any responsibility on its part. The coachclaimed that he had considerable experience in coaching young boys is swimming.When the deceased was found to have been drowned, the coach immediately tookhim out of the water and removed the water from his stomach and gave him artificialrespiration and thereafter took him to a doctor. The doctor advised that the boy betaken to the nearest hospital where the boy died. The State Commission held theschool and the coach deficient in rendering service to the deceased. On appeal, theorder was upheld by the National Commission.

Adapted from: www.indiainfoline.com

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promoting the welfare of people. Theyhave a constitution of their own andare free from government interference.Consumer organisations and NGOsperform several functions for theprotection and promotion of interestof consumers. These include:

(i) Educating the general publicabout consumer rights byorganising training programmes,seminars and workshops.

CERS Wins Case against Railways

In a case filed by Consumer Education and Research Society (CERS), Ahmedabad,and a senior couple, the Consumer Dispute Redressal Forum, Ahmedabad City,has held the Railways responsible for negligence and directed it to pay Rs. 2000to the couple for its mental agony and Rs. 3000 towards cost.

Mr. Man Mohan Singh and his wife Kamlesh had bought a railway journey-cum-reservation ticket at Ahmedabad for travel from New Delhi to Kanpur Centralby the Shatabdi Express on 2 December 2001. The details on the ticket, includingthe coach number, the date of journey, etc., were illegible. Hence, they wereforced to buy another ticket for journey from New Delhi to Kanpur. They appliedfor a refund for the earlier ticket but, as the Forum noted, they had to suffermuch for the purpose. In spite of the couple’s giving the Ahmedabad residentialaddress for sending the refund, the Railways sent it to their Delhi address. Theyapproached CERS for help.

CERS filed a complaint against the Railways before the Consumer DisputeRedressal Forum, Ahmedabad City, under Sections 2(1)(g) and 2(1)(o) of theConsumer Protection Act, 1986. CERS claimed that the two senior citizens hadto face mental harassment due to the deficiency in service by the Railways. TheRailways contended, among other things, that the Forum had no territorialjurisdiction after cancellation of the ticket, the couple were no more consumersin the eye of the law, the complaint was time-barred and the Railway ClaimTribunal was the proper forum to entertain the complaint about refund.

The Forum, however, observed that the couple’s difficulties amounted to theRailways’ deficiency in service and ordered it to pay Rs. 2000 to the couple forthe mental agony suffered by them and Rs. 3000 as cost. The Forum did notdecide on the amount of refund, which it said, was “to be exclusively dealt withby the Railway Claim Tribunal”.

Source: www.corecentre.org

(ii) Publishing periodicals and otherpublications to impart knowledgeabout consumer problems, legalreporting, reliefs available andother matters of interest.

(iii) Carrying out comparative testingof consumer products in accreditedlaboratories to test relative qualitiesof competing brands andpublishing the test results for thebenefit of consumers.

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(iv) Encouraging consumers tostrongly protest and take anaction against unscrupulous,exploitative and unfair tradepractices of sellers.

(v) Providing legal assistance toconsumers by way of providingaid, legal advice etc. in seekinglegal remedy.

(vi) Filing complaints in appropriateconsumer courts on behalf of theconsumers.

(vii) Taking an initiative in filing casesin consumer courts in theinterest of the general public, notfor any individual.

Some of the important consumerorganisations and NGOs engaged inprotecting and promoting consumers’interests include the following.

(i) Consumer Coordination Council,Delhi

(ii) Common Cause, Delhi

(iii) Voluntary Organisation inInterest of Consumer Education(VOICE), Delhi

(iv) Consumer Education and ResearchCentre (CERC), Ahmedabad

(v) Consumer Protection Council(CPC), Ahmedabad

(vi) Consumer Guidance Society ofIndia (CGSI), Mumbai

(vii) Mumbai Grahak Panchayat,Mumbai

(viii) Karnataka Consumer ServiceSociety, Bangalore

(ix) Consumers’ Association, Kolkata

(x) Consumer Unity and TrustSociety (CUTS), Jaipur

KEY TERMS

Consumer Protection Consumer Right Consumer Responsibilities

Redressal Grades Standards

SUMMARY

Importance of Consumer Protection: From the point of consumers, consumerprotection is important because consumers are ignorant, unorganised andexploited by sellers. Consumer Protection is also important for a businessbecause (i) It is in the long-term interest of business, (ii) Business uses society’sresources, (iii) It is a social responsibility of business, (iv) It has moral justification,(v) It avoids government intervention in the functioning of business.

Legal Protection to Consumers: The Indian legal framework consists of anumber of regulations which provide protection to consumers. These include(i) The Consumer Protection Act, 1986, (ii) The Contract Act, 1982, (iii) TheSale of Goods Act, 1930, (iv) The Essential Commodities Act, 1955, (v) The

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Agricultural Produce (Grading and Marking) Act, 1937, (vi) The Preventionof Food Adulteration Act, 1954, (vii) The Standards of Weights and MeasuresAct, 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 sixconsumer 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 consumershould also keep in mind his responsibilities while purchasing, using andconsuming goods and services.

Ways and Means of Consumer Protection: There are various ways in whichthe objective of consumer protection can be achieved. These Include (i) Selfregulation by business, (ii) Business associations, (iii) Consumer awareness,(iv) Consumer organisations, (v) Government.

Redressal Agencies under the Consumer Protection Act: The ConsumerProtection Act provides for setting up of a three-tier enforcement machineryat the District, State, and the National levels. They are referred to as the‘District Forum’, ‘State Commission’, and the ‘National Commission’. Thereare various reliefs available to a consumer under the Act. The appropriateconsumer court may pass an order for removal of defect in goods, replace adefective product, refund the price of the product etc.

Consumer Organisations and NGOs: In India, several consumer organisationsand non-governmental organisations (NGOs) are playing an active role inprotection and promotion of consumers’ interests.

EXERCISES

True or 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 thegoods 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 aconsumer for a defective good and also for deficiency in service.

Short answer questions

(i) Explain the importance of consumer protection from the point of view ofa business.

(ii) Enumerate the various Acts passed by the Government of India whichhelp in protection of consumers’ interests.

(iii) What are the responsibilities of a consumer?

(iv) Who can file a complaint in a consumer court?

(v) What kind of cases can be filed in a State Commission?

(vi) Explain the role of consumer organisations and NGOs in protecting andpromoting consumers’ interests.

Long answer questions

(i) Explain the rights and responsibilities of a consumer.

(ii) What are various ways in which the objective of consumer protection canbe achieved? Explain the role of consumer organisations and NGOs inthis regard.

(iii) Explain the redressal mechanism available to consumers under theConsumer Protection Act, 1986.

Application based questions

(i) Visit a consumer organisation in your town. List down the variousfunctions performed by it.

(ii) Collect some newspaper cuttings of some consumer cases and the rulingsgiven therein.

Case Problem

Now, filing complaint is just a click away. Filing a complaint in a consumercourt’s going to get a lot easier by the end of this year, virtually. No matterwhich 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 ofConsumer Fora), is being executed on a turnkey basis by the NationalInformatics Centre (NIC).

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”Online registration of complaints, the government hopes, will promotee-governance, transparency, efficiency and streamlining of consumer fora,” saidan official in the consumer affairs ministry. Of Rs 48.64 crore set aside for theproject, the government has released Rs 30.56 crore so far, the official added.

”Besides software development and testing, networking and projectimplementation, integration and site preparation, it will include purchase ofhardware for all the 583 district fora, 35 state commissions and the NationalCommission,” the official said.

At present, computer systems and system software have been delivered to 25state commissions and 300 district fora — never mind the fact that it’ssometimes a long wait before the hardware is finally unpacked and set up insome of the districts. Meanwhile, training of staff, sometimes in the classroomand sometimes through e-learning sessions, are in full swing.

”But just setting up an online complaint filing system won’t ensure a strongconsumer protection movement in the country — for that we’re working onGenNext 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 clubsso as to involve them in various consumer welfare activities.

Part of the funding for running the club is to come from various stategovernments, with an equally matching grant from the Centre. However, anumber of state governments are yet to sanction the fund — some of theseinclude Uttar Pradesh, Madhya Pradesh and Kerala.

Source: www.economictimes.indiatimes.com

Question

1. What new measure is the ministry of consumer affairs taking to makefiling of complaint easy?

2. What role can you as a student play to contribute to the cause of consumerprotection?

3. What scenario of consumer protection do you foresee when the measuresproposed in the above news report are implemented?

(Teachers are advised to help students to study judgements of various consumerforums including National Consumer Disputes Redressal Commission atwww.ncdrc.nic.in. This initiative will help the pupils to understand the role ofconsumer protection in India better. Various published material can also beused. Consumer clubs in schools can also help the students in this regard.)

LEARNING OBJECTIVES

After studying this chapter, youshould be able to:

state the meaning of theterms, ‘entrepreneur,’‘entrepreneurship’ and ‘enterprise’;

distinguish betweenentrepreneurship andmanagement and discuss thecharacteristics ofentrepreneurship;

explain the need forentrepreneurship;

describe the roles and functionsof the entrepreneurs;

identify the entrepreneurialcompetencies;

explain and follow the processof entrepreneurshipdevelopment; and

identify with the values,attitudes and motivation for aplunge in entrepreneurship.

CHAPTER

13ENTREPRENEURSHIP

DEVELOPMENT

SEEDS OF VIRCHOW

Until 1981 Narayan Reddy, M.Sc.Organic Chemistry, had been workingfor a pharmaceutical company where hehad developed a molecule. He wascontemplating commercial utilisation ofthat molecule by setting up a small-scaleunit – much smaller than what heactually started. Actually, he met twomedicos, who had just returned from aGulf country and were looking for someproductive avenue for investment oftheir savings (remember the Gulfcrisis?), Reddy’s idea appealed to them.Thus, the willing entrepreneurs met–where there is a will there is a way–and the seeds for the venture weresown. After a detailed study of thetechnical, economic, commercial andfinancial feasibility of the idea ofmanufacturing a bulk drug from themolecule, ‘Virchow Laboratories’ wasstarted in 1982 as a SSI with an initialinvestment of Rs. 28 lakhs – Rs. 8 lakhin the form of equal contribution by thethree promoters and Rs. 20 lakhfunding from the Andhra PradeshState Finance Corporation (APSFC).Project implementation was even morechallenging as he set out to acquire land,construct factory, purchase equipment,negotiate with suppliers, potentialcustomers and obtain environmental,drug control and other clearances.Initially, it was he who acted as the pivotof the enterprise wheel. In the course oftime, a strong managerial team was putin place and thanks to persistentemphasis on good management

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And, in the process, entrepreneurshipbecomes crucial for overall economicdevelopment of a nation.

Given its important role in theoverall scheme of economic development,it is interesting to note that notmany persons opt for a career inentrepreneurship. Traditionally, it wasbelieved that entrepreneurs are born.

No society can wait for the chanceof ‘birth’ of entrepreneurs to pursue itsdevelopmental plans. In fact, plans foreconomic development would bearlittle fruit unless entrepreneurshipdevelopment is regarded as a deliberateprocess of making people aware ofentrepreneurship as a career at an earlyage and creating situations where theymay actually make a choice to becomeentrepreneurs.

When you make this choice, youbecome a job-provider rather than ajob-seeker, besides enjoying a host ofother financial and psychologicalrewards. Taking to entrepreneurship issurely more a matter of aspiring tobecome an entrepreneur rather asbeing born as one.

INTRODUCTION

Entrepreneurship is the process ofsetting up one’s own business as distinctfrom pursuing any other economicactivity, be it employment or practisingsome profession. The person whoset-up his business is called anentrepreneur. The output of the process,that is, the business unit is called anenterprise. You may invoke ‘subject-verb-object (SVO)’ relationship in Englishgrammar to clearly understand theseterms. (See Figure on SVO Analogy)

It is interesting to note thatentrepreneurship besides providingself-employment to the entrepreneur isresponsible to a great extent for creationand expansion of opportunities for theother two economic activities, that is,employment and profession. (Can youthink why and how?) Further, eachbusiness gives rise to other businesses–the suppliers of raw materials andcomponents, service providers (be ittransport, courier, telecom, distributormiddlemen and advertising firms,accounting firms and advocates etc.

practices, Virchow emerged as the world’s largest and the best producer of the basicdrug from the chosen molecule. In fact, web search on ‘Virchow Laboratories’ takesyou to the home page saying “Welcome to Virchow Group of Companies”, the groupcomprising 4 companies with Virchow Laboratories being the flagship company.

Entrepreneur Entrepreneurship Enterprise

The Person/The Actor The Process/The Act The OutcomeSubject Verb Object

SVO Analogy

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THE CONCEPT OF ENTREPRENEURSHIP

You are aware that entrepreneurshipis regarded as one of the four majorfactors of production, the other threebeing land, labour and capital.However, it should surprise you thatas regards its French origin, the term‘entrepreneurship’ (derived from theverb ‘entreprende’ meaning ‘toundertake’) pertained not to economicsbut to undertaking of militaryexpeditions. So is true of many termsin management such as strategy (acourse of action to beat the competition,the ‘enemy’) and logistics (movement ofmen and machines for timelyavailability), etc. Historically, as warsare followed by economic recons-truction, it should be no surprise thatmilitary concepts are used ineconomics and management. It may be

pointed out that whereas the wars arerare and far between, in today’scompetitive world, entrepreneurs wagewars everyday. There is a tremendouspressure to continually develop newproducts, explore new markets, updatetechnology and devise innovative waysof marketing and so on.

The term ‘entrepreneur’ was firstintroduced in economics by the early18th century French economist RichardCantillon. In his writings, he formallydefined the entrepreneur as the “agentwho buys means of production at certainprices in order to sell the produce atuncertain prices in the future”. Since thena perusal of the usage of the term ineconomics shows that entrepreneurshipimplies risk/uncertainty bearing;coordination of productive resources;introduction of innovations; and theprovision of capital.

Entrepreneurship: All in your Hands

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We would like to define entrepre-neurship as a systematic, purposefuland creative activity of identifying aneed, mobilising resources andorganising production with a view todelivering value to the customers,returns for the investors and profits forthe self in accordance with the risksand uncertainties associated withbusiness. This definition points to certaincharacteristics of entrepreneurship thatwe turn our attention to.

CHARACTERISTICS OF ENTREPRENEURSHIP

In the SVO formulation of the conceptsof entrepreneur, entrepreneurship andenterprise, we saw that entrepreneur-ship is about the process of setting upa business. One cannot help butmarvel at the beauty of the process: how

does one first of all decide to choose ownbusiness as a career; how does onesense a market opportunity; how doesone muster up courage to embarkupon it, and mobilise the requisiteresources, etc.; so much so thatrecourse to entrepreneurship, incommon parlance, is considered as anexclusive preserve of a few giftedindividuals. In the following paragraphs,our effort would be to establishentrepreneurship as a career that youshould aspire for. Remember, resourcesmay be limited, aspiration need not be.So, you can aspire for somethinggreater, bigger than your present statusand resources. And start today.Remember, aspiration means desiremultiplied by action.

1. Systematic Activity: Entrepre-neurship is not a mysterious gift or

Nurturing Success

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charm and something that happensby chance! It is a systematic, step-by-step and purposeful activity. It hascertain temperamental, skill and otherknowledge and competency requirementsthat can be acquired, learnt anddeveloped, both by formal educationaland vocational training as well as byobservation and work experience. Suchan understanding of the process ofentrepreneurship is crucial for dispellingthe myth that entrepreneurs are bornrather than made.

2. Lawful and Purposeful Activity:The object of entrepreneurship is lawfulbusiness. It is important to take noteof this as one may try to legitimiseunlawful actions as entrepreneurshipon the grounds that just asentrepreneurship entails risk, so doesillicit businesses. Purpose of entrepre-neurship is creation of value forpersonal profit and social gain.

3. Innovation: From the point ofview of the firm, innovation may be costsaving or revenue-enhancing. If it doesboth it is more than welcome. Even if itdoes none, it is still welcome asinnovation must become a habit!

Entrepreneurship is creative in thesense that it involves creation of value.You must appreciate that in theabsence of entrepreneurship ‘matter’does not become a “resource.” Bycombining the various factors ofproduction, entrepreneurs producegoods and services that meet the needsand wants of the society. Everyentrepreneurial act results in incomeand wealth generation. Even wheninnovations destroy the existing

industries, for example, zerox machinesdestroyed carbon paper industry,mobile telephony threatens landline/basic telephony, net gains accruing tothe economy lend such entrepreneurialactions as commendable as the acts ofcreative destruction.

Entrepreneurship is creative alsoin the sense that it involvesinnovation- introduction of newproducts, discovery of new marketsand sources of supply of inputs,technological breakthroughs as well asintroduction of newer organisationalforms for doing things better, cheaper,faster and, in the present context, in amanner that causes the least harm tothe ecology/environment. It is possiblethat entrepreneurs in developingcountries may not be pioneering/innovative in introducing path-breaking, radical innovations. Theymay be the first or second adopters oftechnologies developed elsewhere.That does not make their achievementsmall. For imitating technologies fromdeveloped world to the indigenoussetting is quite challenging. A ladyentrepreneur wanting to introducethermal pads for industrial heatingfaced tremendous reluctance form theowners of chemical and sugar millsdespite the established superiority ofher products over the conventionalheating of the vessels by burning ofwood/coke or using LPG. Moreover,there is no need to suffer from “it wasnot invented here” complex– there isno need to reinvent the wheel. Theglobal electronics major, Sony did notinvent the transistor! It used the

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transistor to build entertainmentproducts that are world leaders.

4. Organisation of Production:Production, implying creation of form,place, time personal utility, requiresthe combined utilisation of diversefactors of production, land, labour,capital and technology. Entrepreneur,in response to a perceived businessopportunity mobilises these resourcesinto a productive enterprise or firm.It may be pointed out that theentrepreneur may not be possessingany of these resources; he may justhave the ‘idea’ that he promotes amongthe resource providers. In an economywith a well-developed financial system,he has to convince just the fundinginstitutions and with the capital soarranged he may enter into contractsof supply of equipment, materials,utilities (such as water and electricity)and technology. What lies at the coreof organisation of production is theknowledge about availability andlocation of the resources as well as theoptimum way to combine them. Anentrepreneur needs negotiation skillsto raise these in the best interests ofthe enterprise. Organisation ofproduction also involves productdevelopment and development of themarket for the product. Besides,entrepreneur may be required todevelop even the sources of supply ofrequisite inputs. For example, whetherit is a matter of putting together anautomobile manufacturing unit ormanufacture of burger/pizza, besidescultivating a market and developingproducts to suit its tastes and

preferences, there would be a need todevelop a pool of suppliers of thediverse components or elements thatgo into their manufacture.

5. Risk-taking: As the entrepreneurcontracts for an assured supply of thevarious inputs for his project, he incursthe risk of paying them off whether ornot the venture succeeds. Thus,landowner gets the contracted rent,capital providers gets the contractedinterest, and the workforce gets thecontracted wages and salaries.However, there is no assurance of profitto the entrepreneur.

It may be pointed out that thepossibility of absolute ruin may be rareas the entrepreneur does everythingwithin his control to de-risk thebusiness. For example he may enterinto prior contract with the customersof his production. So much so that hemay just be contract manufacturer ormarketer of someone else’s products!What is generally implied by risk-taking is that realised profit may beless than the expected profit.

It is generally believed thatentrepreneurs take high risks. Yes,individuals opting for a career inentrepreneurship take a bigger riskthat involved in a career in employmentor practice of a profession as there isno “assured” payoff. (See Box above)In practice, for example, when a personquits a job to start on his own, he triesto calculate whether he or she wouldbe able to earn the same level of incomeor not. To an observer, the risk ofquitting a well-entrenched andpromising career seems a “high” risk,

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but what the person has taken is acalculated risk. The situation issimilarly to a motorcyclist in the ‘ringof death’ or a trapeze artist in circus.While the spectators are in the awe ofthe high-risk, the artists have taken acalculated risk given their training,skills, and of course, confidence anddaring. It is said that the entrepreneursthrive on circumstances where oddsfavouring and against success areaeven, that is 50:50 situations. They areso sure of their capabilities that theyconvert 50% chances into 100%success. They avoid situations withhigher risks as they hate failure asanyone would do; they dislike lower

risk situations as business ceases tobe a game/fun! Risk as such morethan a financial stake, becomes a matterof personal stake, where less thanexpected performance causesdispleasure and distress.

The characteristics of entrepreneur-ship discussed as above apply indiverse contexts, so does the usageof the term, viz., Agricultural/RuralEntrepreneurship, Industrial entrepre-neurship, Technopreneurship, Netpre-neurship, Green/Environmental orEcopreneurship, Intra-corporate/firmor Intrapreneusrhip and Socialentrepreneurship. In fact, entrepre-neurship has come to be regarded as a

Understanding Entrepreneurial Returns and Risks

Entrepreneurial returns are based on a mathematical expectation, E (Ri) wherethe subscript ‘i’ shows that there are a number of possible rates of returnfrom a business decision, say, 20%, 18%, 17% and 15%. Actually, there maybe quite a large distribution of alternative returns from an investment decision,we have taken just 4 observations to keep it simple. Supposing all these returnsare equally likely, then E (Ri) would be the simple average of these returns.That is, E (Ri) = φ = 20+18+17+15/4= 17.5%. In other words, the expectedreturns from the entrepreneurial decision in this case are 17.5 %. Risk canbe measured in terms of a measure of variation around this expectation, moreprecisely it is the standard deviation of the distribution of returns or óRi. Inthis case it works out be 1.8 %. In other words, actual or realised returns maydeviate from expected returns to the extent of 1.8%. Clearly, higher the valueof standard deviation, larger the risk. It is often said that higher the riskgreater the returns. What this means is as under:(a) for a given risk, a rational person would prefer a higher than or equal to

the expected returns.(b) for a given return, a rational person would prefer a lower risk.(c) should the risk increase, there should be at least a proportional increase

in returns.(d) because the risk runs either ways, that is, realised returns may be more

or less that the expected returns, entrepreneurs who are incorrigiblyoptimistic, tend to believe that variation would only be one-sided, that is,on the higher side.

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‘type of behaviours’, whereby one,(i) rather than becoming a part of theproblem, proactively tries to solve it;(ii) uses personal creativity and intellectto develop innovative solutions;(iii) thinks beyond resources presentlycontrolled in exploiting the emergingopportunities or attending to theimpending problems; (iv) has theconviction to convince others of one’sideas and seek their commitmenttowards the project; and (v) has thecourage of heart to withstandadversities, persist despite setbacksand be generally optimistic.

RELATIONSHIP BETWEEN

ENTREPRENEURSHIP AND MANAGEMENT

Entrepreneurship is about businessstart-ups and renewals. That is, itappears at the time of starting a newbusiness, disappears for some time inthe course of stabilising the venture asan on-going business and reappears incase there is a need for introducingchanges in product, market, technology,structure and so on. In fact, it is said thateveryone is an entrepreneur when heactually ‘carries out new combinations,’and loses that character as soon as hehas built up his business, when hesettles down to running it as other peoplerun their businesses. In developedcountries, the distinction between theentrepreneurial focus on start-ups andmanagerial focus on routine is so sharpthat it is argued that once the projecthas reached a level of maturity, theentrepreneurs must move out and themanagers must come in.

In developing countries, however, theconcept of owner-manager seems moreapt for entrepreneurship as theentrepreneur remains attached even tothe day-to-day operations of the venture.In fact, their lacking in managerial skillsis often forwarded as the cause ofbusiness failures. Just as managers areexpected to play entrepreneurial roles inthe times of need, likewise theentrepreneurs must also demonstratemanagerial abilities for the success oftheir ventures. Irrespective of whether theentrepreneurs pave way for the managersor they themselves assume themanagerial responsibilities, it is possibleto distinguish between the termsentrepreneurship and management. (Seethe table on next page)

NEED FOR ENTREPRENEURSHIP

Every country, whether developed ordeveloping, needs entrepreneurs.Whereas, a developing country needsentrepreneurs to initiate the process ofdevelopment, the developed one needsentrepreneurship to sustain it. In thepresent Indian context, where on theone hand, employment opportunitiesin public sector and large-scale sectorare shrinking, and on the other,vast opportunities arising fromglobalisation are waiting to be exploited;entrepreneurship can really take Indiato the heights of becoming a supereconomic power. (See the Box entitled‘India Needs Entrepreneurs’)

Studies by Global Entrepre-neurship Monitor, a research programeminvolving annual assessment of the

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Differences between Entrepreneurship and Management

S. Basis of Differentiation Entrepreneurship ManagementNo.

1. Focus Business start-up Ongoing operations ofan existing business

2. Resource orientation The entrepreneur A manager isdoes not feel constrained by theconstrained by resources at hisresource. disposalEntrepreneurmobilises theresources

3. Approach to the task Informal Formal

4. Primary motivation Achievement Power

5. Status vis-à-vis the Owner Employeeenterprise

6. Primary economic reward Profit Salary

7. Innovation orientation Challenges the Maintains thestatus quo, that status quois, the existing

8. Risk orientation Risk-taker Risk-averse

9. Approach to decision- Driven by inductive Driven by deductivemaking logic and personal logic and research

courage anddetermination

10. Scale of operations Small business Large business

11. Primary skill requirement Opportunity Organising, systemsspotting, initiative, design and operatingresource procedures, peoplenegotiation management

12. Specialisation orientation Generalist has to Specialistknow and do allthe tradesby himself

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national level of entrepreneurial activityacross a number of countries (visit,www.gemconsortium.org) show thatdifferences in the levels of entrepreneurialactivity account for the differences inthe level of economic growth to theextent of as much as 33%.

What is that the entrepreneurs doto affect economic development? Thisleads us to a discussion of the functionsof the entrepreneurs in relation toeconomic development. As theenterprise is the object of theirendeavour, it is also necessary that weexamine their functions in relation tothe enterprise as well.

Thus, the need for entrepre-neurship arises from the functions theentrepreneurs perform in relation to theprocess of economic development andin relation to the business enterprise.

FUNCTIONS OF ENTREPRENEURS IN

RELATION TO ECONOMIC DEVELOPMENT

You are aware that entrepreneurs“organise” the production process. In

the absence this function, all otherresources, namely land, labour andcapital would remain idle. They maynot be inventing/discovering theproducts, their role in commercialexploitation of the advancements inscience and technology via organisationof the productive apparatus makes theother resources productive and useful.So much so that it is said that in theabsence of entrepreneurial intervention,every plant would remain a weed andevery mineral would remain a rock.

1. Contribution to GDP: Increase inthe Gross Domestic Product or GDP isthe most common definition of economicdevelopment. You are aware that incomeis generated in the process ofproduction. So, entrepreneurs generateincome via organisation of production beit agriculture, manufacturing or services.

You are also aware that incomegenerated is distributed among thefactors of production where land getsrent, labour gets wages and salaries,capital gets interest and the residualincome accrues to the entrepreneur in

India needs Entrepreneurs

It needs them for two reasons: to capitalise on new opportunities and to createwealth and new jobs. A McKinsey and Company–Nasscom report estimates thatIndia needs at least 8,000 new businesses to achieve its target of building a $ 87billion IT sector by 2008. Similarly, in the next 10 years, 110-130 million Indiancitizens will be searching for jobs, including 80-100 million looking for their firstjobs; that’s seven times Australia’s population. This does not include disguisedunemployment of over 50% among the 230 million employed in rural India. Sincetraditional large employers – including the government and the old economy players –may find it difficult to sustain this level of employment in the future, it isentrepreneurs who will create these new jobs and opportunities.

Source: http://www.uwcsea.edu. (First published in India Today,February 2001)

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the form of profits. As rent and interestaccrue to those few who have land andcapital respectively whereas largermasses are destined to earn theirincomes via wage employment, thebiggest contribution of theentrepreneurship lies in capitalformation and generation ofemployment. This is what we turn ourattention to.

2. Capital Formation: The entrepre-neurial decision, in effect, is aninvestment decision that augments theproductive capacity of the economyand hence results in capital formation.In fact, GDP and capital formation arerelated to each other via Capital Output

Ratio (COR); more precisely IncrementalCapital Output Ratio (ICOR) thatmeasures the percentage increase incapital formation required obtaining apercentage increase in GDP. So, if acountry desires to grow @ 10.0 % p.a.and its ICOR is 2.6, then it must ensurecapital formation @ 26.0% p.a.Entrepreneurs, by investing their ownsavings and informally mobilising thesavings of their friends and relativescontribute to the process of capitalformation. These informal fundingsupplements the funds made availableby the formal means of raisingresources from banks, financialinstitutions and capital markets.

Capital Formation

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3. Generation of Employment: Everynew business is a source of employmentto people with different abilities, skillsand qualifications. As suchentrepreneurship becomes a source oflivelihood to those who do neither havecapital to earn interest on nor have theland to earn rent . In fact, what they earnis not only a livelihood or means ofsustenance but also a lifestyle forthemselves and their families as well aspersonal job satisfaction. As suchentrepreneurs touch the lives of many,directly as well as indirectly.

4. Generation of BusinessOpportunities for Others: Every newbusiness creates opportunities for thesuppliers of inputs (this is referred toas backward linkages) and themarketers of the output (what isreferred to as forward linkages). As apen manufacturer you would createopportunities for refill manufacturersas well as wholesalers and retailers ofstationery products. These immediatelinkages induce further linkages. Forexample greater opportunities for refillmanufacturers would mean expansionof business for ink manufacturers. Ingeneral, there are greater opportunitiesfor transporters, advertisers, and, so on.So, via a chain-reaction, entrepreneurshipprovides a spur to the level of economicactivity.

5. Improvement in EconomicEfficiency: You are aware thatefficiency means to have greater outputfrom the same input. Entrepreneursimprove economic efficiency by,

a. Improving processes, reducingwastes, increasing yield ,and,

b. Bringing about technical progress,that is, by altering labour-capitalratios. You are aware that if labouris provided with good implements(capital), its productivity increases.

6. Increasing the Spectrum andScope of Economic Activities:Development does not merely mean‘more’ and ‘better’ of the existing, italso and more crucially meansdiversification of economic activities–across the geographic, sectoral andtechnological scope.

You are aware that underdevelopedcountries are caught in the vicious cycleson the demand as well as supply side.Entrepreneurs penetrate into and breakthese cycles, for example, by organisingand orienting domestic production forexports. Thus, production (and therebygeneration of income) is not constrainedby the inadequacy of domestic demand.(Demand-side Vicious Cycle). In today’scontext, you are aware that India is poisedto become a manufacturing hub for theglobal markets for diverse products.

Economic development is alsoconstrained by the supply-sidepressures resulting into absence ofcapacity to meet the demand whetherdomestic or overseas. Entrepreneursmobilise local and even overseasresources to augment the productivecapacity of a country. IndianMultinational Giants is fast becominga reality.

Entrepreneurs lead the process ofeconomic development via bringing

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Small-Scale Entrepreneurship among Marginalised Groups in India

Marginalised Groups Proportional Representationin Overall Entrepreneurship (%)

Women Entrepreneurs 8

Scheduled Caste (SC) Entrepreneurs 8

Scheduled Tribes (ST) Entrepreneurs 4

Entrepreneurs from the Other 49Backward Classes (OBC)

Source: Third Census of Small Scale Industries in India, Ministry of SmallScale Industries, Government of India

about sectoral change. You must beaware that as the economies grow,percentage of GDP originating fromagriculture decreases and thatoriginating in industry and servicessectors goes up. Entrepreneurs throughtheir decisions to divest from the stalesectors and invest in green-field sectorsbring about a virtual transformation ofthe economy from ‘underdeveloped’ toan ‘emerging’ and ‘developed’ status.

7. Impact on Local Communities:Entrepreneurship, in its naturalhabitat, that is, small business is a greatleveler. You may see from table onmarginalised groups. That small-scaleentrepre-neurship enables suchmarginalised groups as women, SC, STand OBC to pursue their economicdreams. As there are no entry barriersin terms of educational qualifications,entrepreneurship is an even moreattractive career option for suchmarginalised groups.

Agro-based rural industries and craft-based cottage industries can really catapultlocal communities to socio-economic

success stories. Local governments dotheir bit in developing theseentrepreneurship clusters with a view toencouraging inter-firm collaboration anddevelopment of common facilities. entitled,‘Entrepreneurship Clusters in India.’

In regard to the development ofentrepreneurship for impacting localcommunities, some corporate-sectorinitiatives also deserve a mention. ITCthrough their ‘e-Chaupal’ (visit http:/www.itcportal.com agri_exports/e-choupal_new.htm) and HLL throughtheir ‘Shakti’ (visit www.hllshakti.com)initiatives have sought to mobilisenative entrepreneurs for improving thelot of those lying at the bottom of theeconomic pyramid.

8. Fostering the Spirit of Exploration,Experimentation and Daring:Economic development, among otherthings, requires breaking away fromthe shackles of traditions and beliefsthat restrict growth. For example if‘crossing the seas’ were a taboo, therewould not have been international tradeand the resultant economic growth.

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The established ways of life need to bechallenged and change must be seenas an opportunity to improve ratherthan something to be scared of.Entrepreneurs, through their urge todo something new, seeing change as anopportunity, experimenting with thenovel ideas and showing the courageto try them prepare a fertile ground forpersistent economic development. Haveyou seen the Hindi movie ‘Lagaan,’where the protagonist Bhuvan raises a

cricket team from the villagers who hadnot even seen the game? Don’t the featsof Karasn Bhai of ‘Nirma’ whochallenged ‘Surf’ from the mightyHindustan Lever Limited make youproud of the daring of theentrepreneurs?

Thus, whether one looks at economicdevelopment narrowly in terms of theincrease in GDP or in the wider contextof economic, institutional and socialchange, entrepreneurship plays a

Indian Small and Medium Enterprises (SME) Clusters

With a contribution of 40% to the country’s industrial output and 35% todirect exports, the Small-Scale Industry (SSI) sector has achieved significantmilestones for the industrial development of India. Within the SSI sector, animportant role is played by the numerous clusters that have been in existencefor decades and sometimes even for centuries. According to a United NationsIndustrial Development Organisation (UNIDO), there are 388 SSI clustershaving 4,90,000 enterprises, employing 7.5 million persons with an output ofRs. 160,000 crore p.a. The number. of entrepreneurs in these clusters hasbeen growing @ 15-18% p.a. over the last ten years. Besides, there areapproximately 2000 rural and artisan based clusters in India.

Some Indian SSE clusters are so big that they account for 90 per cent ofIndia’s total production output in selected products. As for example, theknitwear cluster of Ludhiana and Hosiery cluster in Tripur in Tamil Nadu.Almost the entire Gems and Jewellery exports are from the clusters of Suratand Mumbai. Similarly, the clusters of Chennai, Agra and Kolkata are wellknown for leather and leather products.

However, the majority of Indian clusters, especially in the handicrafts sector,are very small with no more than hundred workers, so specialised that noother place in the world matches their skills and the quality of their output.This is the case, for example, of the Paithani sarees cluster in Maharashtra.However, only a tiny minority of such artisan clusters are globally competitive.

The formidable challenges created for the SSE sector by the liberalisationof the Indian economy, as well as its closer integration within the globaleconomy, have generated a great deal of interest within India on novelapproaches to SSE development. As a result, both private and public sectorinstitutions at the Central as well as the State levels are increasinglyundertaking cluster development initiatives.

Source: www.smallindustryindia.com

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crucial role. Global EntrepreneurshipMonitor studies report a lag of 1-2years between entrepreneurialactivity and economic development,suggesting that it takes time for theimpact of entrepreneurship oneconomic development.An important observation needs bemade here. While entrepreneurshipleads to economic development, thevice-versa is also true. That is,economic development also fostersentrepreneurship development. Growingeconomies provide a fertile soil for theflourishing of entrepreneurship, an aspectthat we will take up while discussingentrepreneurship development.

ROLE OF ENTREPRENEURS IN RELATION

TO THEIR ENTERPRISE

Drawing an analogy from musicologyin explaining the role of theentrepreneurs in relation to theirenterprise, one may say that anentrepreneur is not only the composerof the musical score and the conductorof orchestra but also a one man band.His roles and functions get muchbroader in scope in a developingcountry context like ours. entitled ‘Roleand Functions of the Entrepreneur inRelation to his/her enterprise.’

These elements are no sequential asthe figure may convey, the entrepreneurmay have to address to all these elementssimultaneously. Yet, depending upontheir backgrounds, the individualentrepreneur may prefer one over theother. For example, technicians tend tobe over obsessed with the production

aspect; those with marketing backgroundmay over emphasise creation of market.Investor type entrepreneurs may beover concerned with the returns fromthe project. One should resist thetemptation of looking at the businessonly from one’s own narrow perspective.Having said this, it is apt that weprovide a brief description of thevarious issues that may be relevant ateach stage.

Opportunity Scouting: Entrepreneurialopportunities have to be activelysearched for. One may rely onpersonal observation, discovery orinvention. Personal/professionalcontacts/networks and experience ormay also help in identifying businessopportunities. Alternatively, one mayrely on published reports, surveysand the like. Narayan Reddy ofVirchow Laboratories relied on thepersonal discovery of the molecule duringhis employment with a pharmaceuticalcompany. As observation meansseeing/hearing/smelling with apurpose, opportunity spottingpresupposes tendency to look at thethings and phenomenon from anentrepreneurial mindset. Most of ushave a consumer’s mindset. If we seeany object of desire, may be a pen,laptop, latest model of the mobilephone or somebody eating pizza orburger, we crave to have the same thingfor ourselves. The entrepreneurialmind, on the other hand startsworking out, what would be themarket size, where to procure it fromand at what price, will I able to woothe customers from the existing

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Roles and Functions of the Entrepreneur in relation the Enterprise

Developing Exchange Relationships1. Perceiving market opportunities2. Gaining command over scarce resources3. Purchasing inputs4. Marketing of Products and responding to competition

Political Administration

5. Dealing with public bureaucracy (approvals, concessions, taxes)

6. Managing human relations within the firm

7. Managing customer and supplier relations.

Management Control

8. Managing finance

9. Managing production

Technology

10. Acquiring and overseeing assembly of the factory

11. Industrial engineering (minimising inputs with a given productionprocess)

12. Upgrading the production process and product quality

13. Introducing new production techniques and products.

Note: The scope of the entrepreneurial functions varies with the level ofeconomy in which the entrepreneur operates; scale of production/operations;and entrepreneurs’ comparative efficiency in utilising managerial employees.In developed countries, entrepreneurship assumes upon themselves theresponsibility of introducing innovations and after some time, pave way forthe managers. In large-scale organisations, entrepreneurs provide leadershipand there is a team of managers to look after specific aspects of enterprise.Likewise, those entrepreneurs who have the ability and willingness to delegatemay concentrate on a select few, strategic aspects of enterprise.

In terms of the process of setting up a business, therefore, an entrepreneuris on the look out for and spots the business opportunity, assesses its value,develops it in the form of a product/service idea, assembles he resourcesand gets going.

Source: Peter Kilby, (ed.), Entrepreneurship and EconomicDevelopment,? New York: The Free Press, 1971.

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players and how– by sell ing itcheaper, by providing more value orby better service and so on.

Entrepreneurial opportunities mayalso be identified through a process ofresearch of international, domestic,sectoral/ industrial analysis.

For example, post WTO,international trade and investment havebecome freer of restrictions. Textilequotas are being phased out, and, thereare greater opportunities for textile andtextile made-ups from India. Globaloutsourcing is on the rise and India

offers a huge and varied pool oftechnical manpower that makes it acost effective destination for in-boundglobal outsourcing in manufacturingas well as Information TechnologyEnabled Services (ITES).Identification of Specific ProductOffering: While the environment scanleads to the discovery of moregeneralised business opportunities,there is a need to zero in on to a specificproduct or service idea. For example,trade liberalisation since WTOs hasresulted in export opportunities, but

Resource mobilisation

Scanning the environment for entrepreneurial opportunities

Development of product/service idea

Assessment of feasibility of the idea and preparation of a business plan

Appraisal by the funding agencies

Project Commissioning and launch

Adaptation and management of growth

Process of Setting up a Business

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the question is what to export andwhere? You may be required to compilea country-product matrix to be able todecide. (See proforma)

This way you may arrive at theproduct-market combination showingthe fastest growing import and fromyour point of view export potential.

Deciding on the product offeringmakes the highest demand on theentrepreneur’s creativity andinnovativeness. Yet, in a competitiveenvironment, it is possible todifferentiate your product offering evenif the generic product is the same andserves the same need.

Clearly decision on specificproduct offering necessitates decisionson who is buying, why, and what arethe value expectations. You will be ableto succeed when the value deliverednot only meets but also exceedscustomers’ expectations and create a‘Vow!’ impact.Feasibility Analysis: The productoffering idea must be technically feasible,that is it should be possible with theavailable technology to convert the ideainto a reality. And this should bepossible at a cost that can be coveredby the price it will fetch; in other words,the idea must be economically feasibletoo. The project cost should be withinthe resources available and the resourceproviders should be reasonably sure ofan appropriate return on (profit) and

return of (safety and liquidity) of theirinvestments. That is, the idea must befinancially viable as well. There shouldbe enough sales in the immediate andthe prospect of growth in the foreseeablefuture; there should be adequateassurance on the commercial viabilityof the chosen product offering. Now aday, it is also important to be sure thatthere aren’t any environmental andother legal restrictions/necessity of priorapprovals for setting up the business.It is also to be decided as to whether thebusiness will be organised as aproprietary concern/partnership firm/company or cooperative entity.

Clearly the chosen product offeringmust be feasible from the diverseperspectives. You must compile thesefindings in the form of a business planthat would have to be submitted to thefunding authorities, in the Indiancontext, the State Finance Corporationof your area. They may be having aprescribed proforma in which the detailsof the business plan are required to befurnished and, as such there may aneed to adapt the contents accordingly.An idea about the generic contents of abusiness plan may be had from.

The business plan may beappraised by the funding institution,and upon satisfying itself about thedesirability of assisting your projectand upon the furnishing of somemargin money it may sanction the loan

International State of the State of theEnvironment Domestic Economy Sector/Industry

IDS Analysis for Entrepreneurial Opportunities

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amount. Recall, Narayan Reddy and histwo other associates provided Rs. 8lakhs and the APSFC contributedRs. 20 lakhs toward the overall projectcost of Rs. 28 lakhs. Upon the projectapproval, the entrepreneur can proceedfor project commissioning, that isputting up the factory premises,installing the equipment, obtaining thesupplies of the input materials with a

view to starting the manufacture andmarketing the product.

As noted earlier too, entrepreneurialfunctions do not come to an end withthe business start-up. He often looksafter its day-to-day operations andstrives for its stability and growth.

Entrepreneurial roles andfunctions clearly seem onerous.Perhaps that is why many shy away

Countries

A B C D E

Import Statistics for Immediately Preceding Years

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

X1

X2

X3

X4

X5

Proforma Country-Product Matrix

Pro

duct

s

Need of the Generic Product Examples of DifferentiatingCustomer Specific Offering

• Size

• Zero Waiting time

• Dine- in/Carry AwayDelivery

Food Burger • Add-ons e.g., Beverage/Chips or No-frills

• Choice of Fried/Grilled

• Customisation of topping,choice of ingredients

Product Differentiation

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to simpler, softer and safer options ofemployment and practice ofprofession. Entrepreneurial going maybe tough; but then that is where thetough get going! Do not worry ifpresently you may find yourself shorton those competencies, values andattitudes. It is just a matter of makingup your mind for a career inentrepreneurship and groomingyourselves for it. This takes us to thediscussion of the process ofentrepreneurship development.

THE PROCESS OF ENTREPRENEURSHIP

DEVELOPMENT

Entrepreneurship does not emergespontaneously. Rather it is the outcomeof a dynamic process of interaction

between the person and theenvironment. Ultimately the choice ofentrepreneurship as a career lies withthe individual, yet he must see it as adesirable as well as a feasible option. Inthis regard, it becomes imperative tolook at both the factors in theenvironment as well as the factors in theindividual as having a nearing on theperception of desirability and feasibilityand thereby entrepreneurshipdevelopment. One may, therefore, modelthe process of entrepreneurshipdevelopment in terms.

In general, capitalist economy withits emphasis on individual achievementis more suitable for entrepreneurship.Lower rates of taxation on personalincome, lower rates of interest andmoderate inflation stimulate

Technical

Administrative/Legal Economic

Commercial Financial

Aspects of Feasibility Analysis

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entrepreneurial activity. (Can you thinkwhy it is so?) Moderately low externalvalue of domestic currency or in otherwords, moderately lower exchangerates, stimulate import substitutingand export promoting entrepre-neurship. (Can you rationalise why?).Well developed financial system, goodinfrastructure, helpful bureaucracy allthese have a favourable impact onentrepreneurship. Specially designedand dedicated institutions such asNational Institute for Entrepreneurshipand Small Business Development (visit,niesbud.nic.in), EntrepreneurshipDevelopment Institute of India (visit,www.ediindia.org) that conductentrepreneurship awareness andentrepreneurship developmentprogrammes (EAPs and EDPs) a furtherfillip to this activity.

An important enabler or disabler ofentrepreneurship is the prevailingsocio-cultural milieu. Those societiesthat respect individual freedom tochoose among occupations, thatencourage the spirit of enquiry,exploration and experimentation,celebrate individual accomplishmentand in general accord important statusto the entrepreneurs are likely to haveself-sustaining supply of able andwilling men and women for taking toentrepreneurship as a career.

THE ROLE OF THE INDIVIDUAL INENTREPRENEURSHIP DEVELOPMENT

Mr. Narayan Reddy was desirous ofstarting a small scale industry and alsohad a sense of efficacy or readiness topursue it given his qualifications,

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,attitudes and motivation (the openingcase does not elaborate this. We willdiscuss these at suitable places). Evenyou may like to see as to where do youfind yourself on the desirability(willingness)-efficacy (ability) matrix,won’t you?

As you may see from the matrixfigure able and willing men and womenare a “ready” source of entrepreneurship.Such persons leap up the firstopportunity comes their way to be ontheir own. Recall, Narayan Reddy leaptup the opportunity as he met the twomedicos who had returned from the Gulf.

At any point of time, there aremany men and women who “want” toset up a business of their own butexperience self-perceived barriers to

entrepreneurship. They could be havinga low perception of self-efficacy eitheron account of lack of resources (or to bemore correct, resourcefulness),knowledge or know-how, and the skills.Collectively, these are referred to ascompetencies, which now we turn ourattention to.

ENTREPRENEURIAL COMPETENCIES

Every opportunity and successfulperformance of every role and functionhas a competence requirement. Its trueof entrepre-neurship as well. entitled‘Cash OR KASH?’

The term ‘competence’ refers to acomposite of knowledge, skills and ahost of psychosocial attributes(including Attitudes and Motivation that

Individual Personality: Environmental Influences:competencies, motivations, Economic Development, Economic

values and attitudes Policy and Institutional Framework

Shape

Individual perception that Individual perception thatentrepreneurship is a “I can live up to the challengedesirable career option of being on my own”

EntrepreneurshipDevelopment

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The Role of Environment in Entrepreneurship Development

Entrepreneurs bring about economic growth and development, and thelatter in turn provides a fertile soil for the flourishing of entrepreneurship.There certainly is a mutually facilitating reciprocity between economicgrowth and entrepreneurship development.

EconomicDevelopment

we will be discussing separately) in aperson that mark his/her effectivenessfor a task. The phrase ‘composite’ iscrucial. For example, the competence“ability to communicate vision” is muchmore than proficiency in writing/speaking skills. It would involve, just toillustrate, vision clarity, understandingthe audience background, interest andreadiness, knowledge about the mediaand choosing the most appropriate one,attracting attention, delivery, leaving notmerely an impression but also animpact and, assessing effectiveness. So,when the entrepreneur in the televisioninterview pointed out KASH as thedeterminants of successfulentrepreneurship, he was indeedreferring to the competencies.

Competency approach to humanresource development in general andentrepreneurship development inparticular was pioneered by DavidMcClelland, a Harvard Universitypsychologist in the late 1960’s and early1970’s. (You will be learning more on

McClelland’s work when we discussentrepreneurial motivation.) McClellandset out to define competency variablesthat could be used in predicting jobperformance and that were not biasedby race, gender, or socio-economicfactors. As a result, it becomes moreimportant to learn what a person doesrather than who he/she is. That is whymanagement and also entrepreneurshipis better defined as what a manager oran entrepreneur does. Becausecompetencies can be built via a processof education and development, we maysay that entrepreneurs are made.

What are the distinct competencies forentrepreneurship? In this regard one mayrefer to the efforts of EntrepreneurshipDevelopment Institute of India (EDI), anational resource institution in the areaof entrepreneurship education researchand development (visit, www.ediindia.org).

EDI has identified a set of 15competencies that contribute towardentrepreneurial performance and success.These are briefly stated hereunder.

Entrepreneurship

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Persistence: A ‘never say die’ attitude,not giving up easily, strivingcontinuously until success is achieved.Information seeking: Knowing andknowing who knows, consulting experts,reading relevant material and an overallopenness to ideas and information.Concern for High Quality of Work:Attention to details and observance ofestablished standards and norms.Commitment to Work Contract:Taking personal pains to complete atask as scheduled.

attending to production, marketing andfinancial aspects (parts) of the overallbusiness strategy (the whole).

Problem-solving: Observing thesymptoms, diagnosing and curing.

Self-confidence: Not being afraid of therisks associated with business andrelying on one’s capabilities tosuccessfully manage these.

Assertiveness: Conveying emphaticallyone’s vision and convincing others ofits value.

Initiative: Acting out of choice ratherthan compulsion, taking the leadrather than waiting for others to start.Sees and Acts on Opportunities: Amindset where one is trained to look forbusiness opportunities from everydayexperiences. Recall ‘oranges’ example.

Efficiency Orientation: Concern forconservation of time, money and effort.

Systematic Planning: Breaking upthe complex whole into parts, closeexamination of the parts and inferringabout the whole; e.g. simultaneously

Eager ReadyEntrepreneur Entrepreneur

Not Ready PotentialEntrepreneur Entrepreneur

Low High

Self-Efficacy

Des

irab

ilit

y

Low

Hig

h

Efficacy-Desirability Matrix

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Persuasion: Eliciting support of othersin the venture.

Use of Influence Strategies: Providingleadership.

Monitoring: Ensuring the progress ofthe venture as planned.

Concern for Employee Welfare:Believing in employee well being as thekey to competitiveness and success andinitiating programmes of employeewelfare.

You would, now, be interested inknowing as to how to build thesecompetencies. Knowledge competencies(what you know regarding facts,technologies, a profession, procedures,a job, an organisation, etc.) can bedeveloped by, for example by readingand interacting with people who know.Skill competencies (what you say or dothat results in good or poorperformance) can be acquired bypractice, haven’t you heard “practice

Cash or KASH

“What do you need to be a business person?” was the opening question the anchor ofa television interview asked an eminent business personality. “Caash” she heard andthough that her interview is going to be a spoil, for it was an answer so obvious andexhaustive 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 itwrong!” “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 hemeant, K=Knowledge, A=Attitude, S=Skills and H=Habits.

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makes a man perfect”? For example,‘persuasion,’ and ‘use of influencestrategies’ require presentation skills.You may do double the homework onwhat you want to say, how you wantto say, who is your audience and whatare their backgrounds, what could bethe possible questions that may beasked, what would be their answersand so on. Practice it all over a numberof times, may be before mirror or yourfriends, so that when you are actuallyin that situation, you perform well.

ENTREPRENEURIAL MOTIVATION

Men and women who have a perceptionof self-efficacy and are yet to feelinterested in or motivated by the ideaof being on their own comprise apotential, future source ofentrepreneurship. What motivates aperson is a question easier asked thananswered. Mr. Narayan Reddy wasdriven by the desire to utilise hisdiscovery of the molecule as a businessopportunity. In terms of Maslow’s needhierarchy theory, one may say that Mr.Narayan Reddy was driven by the needfor self-actualisation. Sinceentrepreneurial situation is characterisedby personal accomplishment incompetitive situations and involvinghigher standards of excellence, oneoften come across reference to ‘need forachievement’ or N-ach for short as theprimary driver of entrepreneurialbehaviour. See Box entitled ‘How N-Ach. Drives Entrepreneurship andEconomic Development’.

Need for Achievement (N-Ach.): Needfor achievement implies a desire toaccomplish something difficult. Tomaster, manipulate, or organisephysical objects, human beings orideas. To do this as rapidly and asindependently as possible. To overcomeobstacles and attain a high standard.To excel one’s self. To rival and surpassothers. To increase self–regard bysuccessful exercise of talent. Yesentrepreneurship provides you with thebest opportunity for making the bestuse of your talents as in employmentthe 9-5 routine, pressure to adhere torules and regulations, preference forcompliance of boss’s instructions overthe use of personal creativity andinnovativeness stifles your progressand self-development. You can createa work environment that suits yourabilities and interests.

Need for Power (N-Pow): Need forPower is the concern for influencingpeople or the behaviour of others formoving in the chosen direction andattaining the envisioned objectives. Incommon perception, politicians, social-religious leaders Chief Executive Officers(CEOs), Government Bureaucrats/CivilServants typify the need for power. Sucha perception seems more based on thebelief that the source of power lies inthe “position” a person occupies inorganisational/societal context. In thesame vein, business ownership too mayimply a need for power. Moreover, youwould appreciate that the process offounding a business, one has to winthe commitment of capital providers,

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suppliers of equipment and materials,the employees and that of thecustomers. Power may not be used tofurther one’s self- interests alone, it maybe also be used to touch the lives ofothers, to make a difference.Entrepreneurs driven by this socialisedface of the need for power. They foundorganisations that are a source ofsustenance and self- respect for many.

needs. Entrepreneurs are believed to below on affiliation, as they are andexpected to be, innovative, trendsettersand tradition breakers. However, it is notnecessary that affiliation should onlyinterfere with achievement. In certaincultures, family comprises the bedrockon which the successful careers arebuilt. One works, as if, not for personalgratification but for family. Desire to

Need for Affiliation (N-Aff.): Often youmust have heard your parents sayingthat whatever they do they do it for theirchildren. If a man thinks aboutinterpersonal relationships, he has aconcern for affiliation. It implies, amongother things a tendency of the people toconform to the wishes and norms ofthose whom they value. Apparently,social activists, environmentalists,teachers, and doctors and nurses mayseem as predominantly driven by these

carry on the tradition of business in thefamily and the community to which onebelongs, may be interpreted as reflectingneed for affiliation as well. In thecountries with the colonial past, suchas ours, the first generation ofentrepreneurs in Independent India wasdriven by patriotic fervor and the desireto rebuild the economy left stagnatedby the alien rulers. One can certainlytrace some elements of affiliationmotivation in such instances.

How N-Ach. Drives Economic and Entrepreneurship Development

Credit for investigating and bringing to the fore the role of need for achievementgoes to McClelland, the Harvard professor whom we referred to also in thediscussion of competency based approach to human resource andentrepreneurship development. He set out to investigate why some countriesare more developed than others He sought to find answer to this question byexamining the proposition that ‘differences in the level of achievementmotivation are responsible for ‘differences in the level of economic development’.For this he examined the popular stories and folklore and readers up to primaryclasses of 39 countries for finding out whether they focused on personalaccomplishment, triumph of human courage and effort over the circumstancesand so on. McClelland’s research upheld the proposition that differences inthe levels of achievement motivation as revealed by the analysis of the storiesand the readers accounted for the differences in the level of economicdevelopment. How? What would be the process? McClelland observed thatentrepreneurship becomes the medium through which the achievementmotivation manifests the best and through which the development takes off.

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Need for Autonomy (N-Aut.): Theneed for autonomy is a desire forindependence and being responsibleand accountable to oneself rather thansome external authority forperformance. It is the desire for anopportunity for the fullest expressionof one’s abilities. In the context ofentrepreneurship, it is usuallyinterpreted as the determination not towork for someone else. In most jobsituations, employees are given littlefreedom to exercise their discretion intaking decisions and choosing a courseof action so much so that absence of itdrives them into starting their ownventures. As such n-pow. becomesmore a desire for preserving one’s ethosrather than the freedom from the boss.Take the example of anotherHyderabad based entrepreneur entitledEntrepreneurship for PreservingPersonal Work Ethos).

What does the above discussionmean for entrepreneurship development?It means that for promoting entrepre-neurship it is important to kindle andarouse the right motivation. In theabsence of motivation, even able menand women may not take to entrepre-neurship. Hence. In every Entrepre-neurship Awareness Programme (EAP)or Entrepreneurship DevelopmentProgramme (EDP), there are specialsessions on entrepreneurial motivation,besides sessions on entrepreneurialcompetencies.

You may note that motivation andability can positively reinforce eachother. Persons having abilities search

for the avenues for their expression andhence are drawn to entrepreneurship.Persons eager to be on their own maystrive hard to acquire the necessarycompetencies to realise their dreams.How truly one has said thatentrepreneurs are the dreamerswho do!

In explaining and developingentrepreneurial motivation, it isimportant to learn that differentindividuals are motivated differently, andthat one may be trying to satisfy morethan one need through one’s pursuit.This is an important observation aseconomic theory very simply says thatthe objective of the firm or that of theentrepreneur is profit maximisation.

ENTREPRENEURIAL VALUES AND

ATTITUDES

While explaining human behaviour,one often comes across the termsvalues and attitudes. Rather thanattempting to distinguish between thesetwo terms, it would be sufficient to sayhere that taken together, entrepreneurialvalues and attitudes refer to thebehavioural choices individuals makefor success in entrepreneurship. Theword ‘choice’ is important, as there arealternative ways of behaving too.In entrepreneurship, a host ofbehavioural tendencies or orientationshave been reported as having a bearingon success. The entrepreneur in ‘Cashor KASH’ labeled these as ‘Habits’,some researches have called these aspolicies or strategies. Be it the decision

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to make a choice about entrepreneurshipas a career, be it the decision to choosethe product line, growth strategy, profitmaking and social responsibility youwould be required to make choices. Thechoice that you make may have atremendous impact on yourperformance. What we do here is to

profile some of the dimensions relatingto starting and managing a businessand the associated behaviouralalternatives, we have considered heretwo to keep the things simple. We havehighlighted those alternatives that havebeen generally observed to beassociated with superior performance.

Entrepreneurship for Preserving Personal Work EthosIn industries having captive power plants, a day’s downtime can cause a lossof crores of rupees. While working for a public sector electrical major, anengineer found it really difficult to cope with the bureaucratic attitude inservicing the customers. It clashed with his personal value, ‘client’s problemsbe attended first, paperwork can wait’. He quit the job and started a turbinerepairing and furbishing company. Incidentally, it takes more money to travelor to transport than to repair or refurbish the turbine. But the downtime isreduced and the clients are happy. Later the company also diversified intothe manufacture of the parts and commissioning of the captive power plantson a turnkey basis.

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Behavioural Choices for Entrepreneurial Success

S. No. Dimensions Behavioural Alternatives

1. Type of Entrepreneurship Choose pioneering/innovative productsChoose tried and tested products

2. Business Decision Choose business as per qualifications/experienceGrab whatever opportunity comes your way

3. HRM: Recruitment Policy Recruit trustworthy, dependable and obedient employeesRecruit qualified and trained professionals

4. Managing Growth: Pace Grow only at/to manageable pace/extentMake a hay while the sun shines

5. Organising: Ability Supervise closelyto Delegate Delegate and decentralise

6. Marketing Management: Sell hard what you produceMarketing Concept Produce according to customers’ requirements

7. HRM: Compensation Reward good performance by additionalincrements/promotionsReward just as you please

9. Managing Growth: Grow around core-competenceDirection Grab whatever opportunity comes your way

10. Marketing Management: Change the product only if absolutely necessaryProduct Planning Innovate/improvise continuallyand Development

11. Operations Management: Locate the business near social contactsLocational Decision Locate purely on economic merits

12. Operations Management: Increase profit by negotiating hard with suppliers,Cost Rationalisation workers and customers

Reduce cost by cutting the overheads andimproved efficiency

13. Managing Competition Fight the competitionAvoid competition

14. Planning: Approach to Scan the environment for business informationDecision-making Rely on intuition/judgment

15. Organising: Formalisation Do everything by yourselfAppoint specialists and professionalise the systems

16. Ethics Never compromise on business ethicsEverything is fair in love, war and business

17. Succession Planning Plan and train a successorBusiness will find a successor

18. Planning: Time Horizon Have a long term perspectiveLive your business day-by-day

19. Operations Management: Invest in R and DResearch and Development R and D is an ill-affordable luxury

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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 understoodby drawing an analogy with the structure of a sentence in English language.Entrepreneur is the person (the subject), entrepreneurship is the process (theverb) 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 developmentand in relation to the enterprise. In relation to economic development, entrepreneurscontribute to growth in GDP, capital formation and employment generation besidescreating business opportunities for others and bringing about an improvementin the quality of life in the community in which they operate. In relation to theenterprise, they perform a number of roles right from the conception of a businessidea, examining its feasibility and mobilisation of resources for its eventualrealisation as a business firm. They bear the uncertainties and risks associatedwith the business activity, introduce product, market, technological and a host ofother innovations. In the developing country context they also assume theresponsibility for the day-to-day management of the enterprise.

Given its critical role in economic development at a broader level and businessstart-ups at the micro level, it is imperative that a conscious effort be made topopularise entrepreneurship as a career option. In this regard, EAPs and EDPscan play an important role. Besides, there is a need to create an entrepreneurshipfriendly environment. Since, entrepreneurship is the outcome of a dynamicinteraction between the person and the environment, there is need also fordeveloping 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 betweenentrepreneurship and management?

a. Entrepreneurs found the business; managers operate it

b. Entrepreneurs are the owners of their businesses; managers areemployees

c. Entrepreneurs earn profits; managers earn salaries

d. Entrepreneurship is once for all activity; management is acontinuous activity

4. In the roles and functions of the entrepreneur identified by Kilby, whichof 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 withsuccessful 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 questions1. 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 scopeof economic activities?

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5. Describe briefly the role of achievement motivation in entrepreneurship.

Long answer questions1. Describe briefly the steps involved in starting a new business.

2. Examine the nature of relationship between entrepreneurship andeconomic development.

3. Clarify how motivation and abilities impact an individual’s decision tochoose entrepreneurship as a career.

Application questionAnshuman was a very industrious sales executive with a small herbal cosmeticmanufacturer. He earned a good salary and commission on the business hebrought for the firm and had very good command over the Delhi market forwhich he had virtually become indispensable. He was aware of the enviableposition he held in the firm and thought aloud:“The key to success in any business is the sale of its products. The beginningand end of the business cycle is nothing but sale and “other” people working inthe factory to manufacture products are mere cogs in the business machine setin motion by sales people. So why carry this burden and get only a tiny share ofthe prosperity of the firm? Instead others enjoying the fruits of my labour, whyshould I not start my own business?”Should Anshuman take a leap? Give reasons for your answer.

Case Problem

Inspiring Feat: Dailywage Labourer Turns Entrepreneur

A landless woman from Bihar has been nominated among the top 25 farmers inAsia by a Mexican website.

Forty-five-year old Lalmuni Devi was a daily wage labourer when she decided totake destiny into her own hands and transformed herself into a successfulmushroom farmer. Today she manages to make Rs. 12,000 every year for aninvestment of only Rs. 600.

Her feat finds mention on a Mexican website that has grouped her as the top 25inspirational farmers in its photo gallery.

”I am a poor woman. I thought that mushroom farming would profit henceforthI 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 onthe outskirts of Patna.

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”It is effortless farming, which we can even do in our village. Working in thescorching heat is very tiring. Mushroom farming generates more profit,” saidUrmila Devi.

Lalmuni and other landless women have been encouraged by the Indian Councilfor 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 toshare croppers,” said Dr A.R. Khan, Principal Scientist, ICAR, Patna.

Lalmuni’s efforts have paved the way for many other landless women to take upmushroom 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?

3. What qualities of entrepreneur did Lalmuni Devi exhibit?

4. What are the benefits and risks of becoming an entrepreneur? How can youguard against the risks?

(Teachers should highlight the qualities of entrepreneurs and motivatestudents to do so. Help that is available from the government of India islisted on the website www.india.gov.in.).

Project Work

1. Visit a newly started small business in your neighbourhood and interviewthe owner. Prepare a report on how he/she decided to start the enterpriseand the difficulties he/she faced. Also include steps taken by the owner toovercome 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 ofcommon traits in these people and discuss it in your class. Can you imbibesome of these qualities and start some enterprise later on in life?