Small Business Management (SBMT) Solved Question Papers
2019 (May)
COMMERCE (General)
Course: 604 (Small business Management)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
The figures in the margin indicate full marks for the questions
1. (a) Write True or False: 1x4=4
1) Small-scale industries are labour intensive. True
2) Most of the small-scale industries are managed by one person. True
3) Product design is very significant in marketing management. True
4) Small-scale industries are not suited for creating of employment. False
(b) Fill in the blanks with appropriate words: 1x4=4
1) Innovation is important in modern times because of stiff competition. (stiff competition/marketing)
2) The first step for product planning is idea generation. (field study/idea generation)
3) Small-scale industries can raise loans from the commercial bank. (can/cannot)
4) The Micro, Small and Medium Enterprises Act was passed in the year 2006. (1986/2006)
2. Write short notes on (any four): 4x4=16
a) Characteristics of small business enterprises: These are the features of small scale business:
a) Personal Touch: The management and organisation is personal in nature. The managers and owner are the same.
b) Capital: The amount of capital required is less as compared to large scale industries.
c) Employment-Small business is labour intensive and it does not require huge amount of capital because its scale is small.
d) Technology: The technology used is simple in nature.
e) Area of operations: A small business firm generally has local area of operations.
f) Limited Finance: Small business enterprises require limited financial resources in comparison to large scale industries because they are less capital intensive.
g) Limited Demand: Small business enterprises are suitable for goods and services have limited market.
h) Low Cost of Production: Small business use locally available resources and raw material.
b) Rational behind the development of small-scale industries: Small Scale Industries in India enjoy a distinct position in view of their contribution to the socio-economic development of the country. The following points highlight their contribution.
(i) Small industries in India account for 95 per cent of the industrial units in the country. They contribute almost 40 per cent of the gross industrial value added and 45 per cent of the total exports (direct and indirect exports) from India.
(ii) Small industries are the second largest employers of human resources, after agriculture. They generate more number of employment opportunities per unit of capital invested compared to large industries. They are, therefore, considered to be more labour intensive and less capital intensive. This is a boon for a labour surplus country like India.
(iii) Small industries in our country supply an enormous variety of products which include mass consumption goods, readymade garments, hosiery goods, stationery items, soaps and detergents, domestic utensils, leather, plastic and rubber goods, processed foods and vegetables, wood and steel furniture, paints, varnishes, safety matches, etc. Among the sophisticated items manufactured are electric and electronic goods like televisions, calculators, electro-medical equipment, electronic teaching aids like overhead projectors, air conditioning equipment, drugs and pharmaceuticals, agricultural tools and equipment and several other engineering products. A special mention should be made of handlooms, handicrafts and other products from traditional village industries in view of their export value.
(iv) The contribution of small industries to the balanced regional development of our country is noteworthy. Small industries which produce simple products using simple technologies and depend on locally available resources both material and labour can be set up anywhere in the country. Since they can be widely spread without any locational constraints, the benefits of industrialisation can be reaped by every region. They, thus, contribute significantly to the balanced development of the country.
c) Quality control technology for small-scale industries: Quality Control in a manufacturing enterprise means the systematic control of those variables which affect the excellence of the ultimate product. The variables in general are man, machines, materials and manufacturing conditions. Each of these variables is not always uniformly available in the nature. There are differences in them for variety of reasons. For example, due to caprices of nature, materials may differ in their composition and physical characteristics. Similarly, men vary in their degree of skill and proficiency. All machines are not of equal quality as they are made by men by use of materials which vary in several counts. Further, manufacturing conditions such as temperature, humidity, building, vibrations, composition of coolers, dust and dirt in the air are all subject to great variations. The practice of Quality control ensures proper regulation of all these variables so that they do not cause any distortion in excellence of the finished product.
Quality is a related concept, which relates to certain predetermined characteristics such as shape, dimension, compositions, strength, finish, colour, time weight, etc. According to Alford and Beatty, “Quality control is the mechanism by which products are made to measure upto the specifications determined from the customer’s demand and transformed into sales, engineering and manufacturing equipments. It is concerned with making things right rather than discovering and rejecting those made wrong. Quality control is a technique by which the products of uniform acceptable quality are manufactured”.
Quality control techniques are widely used in manufacturing industries for rapid development of the industrial economy. Many improvements are made in the quality of products without any additional capital investment. Several countries of the world have recovered their economies and established firm foreign markets by improving the quality of their products. Among other thing, quality control provides considerable savings at various stages of production. For this purpose, standardization plays a fundamental role in the assessment, specification and measurement of quality of a product. With the help of standardization, it is possible to lay down the basic procedures for ensuring quality control. Thus, standardization and quality control go hand in hand.
d) Sources of working capital in small business: The capital required for a small business is of two types. These are fixed capital and working capital. Fixed capital is required for the purchase of fixed assets like building, land, machinery, furniture etc. Fixed capital is invested for long period, therefore it is known as long-term capital. Similarly, the capital, which is needed for investing in current assets, is called working capital. The capital which is needed for the regular operation of small business is called working capital. Working capital is also called circulating capital or revolving capital or short-term capital.
Sources of working capital are many. There are both external and internal sources. The external sources are both short-term and long-term. Trade credit, commercial banks, finance companies, indigenous bankers, public deposits, advances from customers, accrual accounts, loans and advances from directors and group companies etc. are external short-term sources. Companies can also issue debentures and invite public deposits for working capital which are external long term sources. Equity funds may also be used for working capital.
e) Market segmentation: A market consists of large number of individual customers who differ in terms of their needs, preferences and buying capacity. Therefore, it becomes necessary to divide the total market into different segments or homogeneous customer groups. Such division is called market segmentation. They may have uniformity in employment patterns, educational qualifications, economic status, preferences, etc. Market segmentation enables the entrepreneur to match his marketing efforts to the requirements of the target market. Instead of wasting his efforts in trying to sell to all types of customers, a small scale unit can focus its efforts on the segment most appropriate to its market. It is defined as “The strategy of dividing the market in order to consume them”.
According to Philip Kotler, “It is the subdividing of market into homogenous subsets of consumers where any subset may be selected as a market target to be reached with distinct Marketing Mix”
According to Philip Kotler, market segmentation means "the act of dividing a market into distinct groups of buyers who might require separate products and/or marketing mixes."
According to William J. Stanton, "Market segmentation in the process of dividing the total heterogeneous market for a good or service into several segments. Each of which tends to be homogeneous in all significant aspects."
f) The features of a good packaging: Characteristics of a Good Package:
a) Could attract one's attention.
b) Could make the prompt recognition possible.
c) Could create interest and maintain the same.
d) Could create the desire for the procuring of the product.
e) Could compel for purchasing the product.
f) Could impress the heart of the consumer.
g) Could add to the work-suitability, characteristics and total image of the brand.
3. (a) Describe the major problems faced by the small-scale industries in India. 11
Ans: Problems of Small Business
Small scale industries are at a distinct disadvantage as compared to large scale industries. The scale of operations, availability of finance, ability to use modern technology, procurement of raw materials are some of these areas. This gives rise to several problems. Most of these problems can be attributed to the small size of their business, which prevents them from taking advantages, which accrue to large business organisations. However, the problems faced are not similar to all the categories of small businesses. For instance, in the case of small ancillary units, the major problems include delayed payments, uncertainty of getting orders from the parent units and frequent changes in production processes. The problems of traditional small scale units include remote location with less developed infrastructural facilities, lack of managerial talent, poor quality, traditional technology and inadequate availability of finance. The problems of exporting small scale units include lack of adequate data on foreign markets, lack of market intelligence, exchange rate fluctuations, quality standards, and pre-shipment finance. In general the small businesses are faced with the following problems:
(i) Finance: One of the severe problems faced by SSIs is that of non availability of adequate finance to carry out its operations. Generally a small business begins with a small capital base. Many of the units in the small sector lack the credit worthiness required to raise as capital from the capital markets. As a result, they heavily depend on local financial resources and are frequently the victims of exploitation by the money lenders. These units frequently suffer from lack of adequate working capital, either due to delayed payment of dues to them or locking up of their capital in unsold stocks. Banks also do not lend money without adequate collateral security or guarantees and margin money, which many of them are not in a position to provide.
(ii) Raw materials: Another major problem of small business is the procurement of raw materials. If the required materials are not available, they have to compromise on the quality or have to pay a high price to get good quality materials. Their bargaining power is relatively low due to the small quantity of purchases made by them. Also, they cannot afford to take the risk of buying in bulk as they have no facilities to store the materials. Because of general scarcity of metals, chemicals and extractive raw materials in the economy, the small scale sector suffers the most. This also means a waste of production capacity for the economy and loss of further units.
(iii) Managerial skills: Small business is generally promoted and operated by a single person, who may not possess all the managerial skills required to run the business. Many of the small business entrepreneurs possess sound technical knowledge but are less successful in marketing the output. Moreover, they may not find enough time to take care of all functional activities. At the same time they are not in a position to afford professional managers.
(iv) Labour: Small business firms cannot afford to pay higher salaries to the employees, which affects employee willingness to work hard and produce more. Thus, productivity per employee is relatively low and employee turn over is generally high. Because of lower remuneration offered, attracting talented people is a major problem in small business organisations. Unskilled workers join for low remuneration but training them is a time consuming process. Also, unlike large organisations, division of labour cannot be practised, which results in lack of specialisation and concentration.
(v) Marketing: Marketing is one of the most important activities as it generates revenue. Effective marketing of goods requires a thorough understanding of the customer’s needs and requirements. In most cases, marketing is a weaker area of small organisations. These organisations have, therefore, to depend excessively on middlemen, who at times exploit them by paying low price and delayed payments. Further, direct marketing may not be feasible for small business firms as they lack the necessary infrastructure.
(vi) Quality: Many small business organisations do not adhere to desired standards of quality. Instead they concentrate on cutting the cost and keeping the prices low. They do not have adequate resources to invest in quality research and maintain the standards of the industry, nor do they have the expertise to upgrade technology. In fact maintaining quality is their weakest point, when competing in global markets.
(vii) Capacity utilisation: Due to lack of marketing skills or lack of demand, many small business firms have to operate below full capacity due to which their operating costs tend to increase. Gradually this leads to sickness and closure of the business.
(viii) Technology: Use of outdated technology is often stated as serious problem in the case of small industries, resulting in low productivity and uneconomical production.
(ix) Sickness: Prevalence of sickness in small industries has become a point of worry to both the policy makers and the entrepreneurs. The causes of sickness are both internal and external. Internal problems include lack of skilled and trained labour and managerial and marketing skills. Some of the external problems include delayed payment, shortage of working capital, inadequate loans and lack of demand for their products.
(x) Global competition: Apart from the problems stated above small businesses are not without fears, especially in the present context of liberalisation, privatisation and globalisation (LPG) policies being followed by several countries across the world. Remember, India too has taken the LPG path since 1991. Let us look into the areas where small businesses feel threatened with the onslaught of global competition.
(a) Competition is not only from medium and large industries, but also from multinational companies which are giants in terms of their size and business volumes. Opening up of trade results in cut throat competition for small scale units.
(b) It is difficult to withstand the quality standards, technological skills, financial creditworthiness, managerial and marketing capabilities of the large industries and multinationals.
(c) There is limited access to markets of developed countries due to the stringent requirements of quality certification like ISO 9000.
Or
(b) Describe in brief the different types of micro, small and medium enterprises and their distinctive features. 11
Ans: Various types of Micro, Small Business and Medium enterprises
The definition used by the Government of India to describe small industries is based on the investment in plant and machinery. This measure seeks to keep in view the socio-economic environment in India where capital is scarce and labour is abundant. One more important point to note is that a definition exists only for small and tiny units but not for large and medium units. Medium and large sized enterprises are not defined. Anything that does not fall under the definition of small can be large or medium. Taking capital invested as the basis the small business units in India can fall under any of the following categories:
(i) Small scale industry: A small scale industrial undertaking is defined as one in which the investment in fixed assets of plant and machinery does not exceed rupees one crore. However, to cater to the needs of small industries whose thrust is on export promotion and modernisation, investment ceiling in plant and machinery is rupees five crores.
(ii) Ancillary small industrial unit: The small scale industry can enjoy the status of an ancillary small industry if it supplies not less than 50 per cent of its production to another industry, referred to as the parent unit. The ancillary small industry can manufacture parts, components, subassemblies, tools or intermediate products for the parent unit. Apart from catering to the needs of the parent unit, it can do business on its own. Ancillary units have the advantage of assured demand from parent units. Normally, the parent unit assists the ancillary unit by giving technical guidance as well as financial help.
(iii) Export oriented units: The small scale industry can enjoy the status of an export oriented unit if it exports more than 50 per cent of its production. It can avail the incentives like export subsidies and other concessions offered by the government for exporting units.
(iv) Small scale industries owned and managed by women entrepreneurs: An enterprise promoted by women entrepreneurs is a small scale industrial unit in which she/they individually or jointly have share capital of not less than 51 per cent. Such units can avail the special concessions offered by the government, like low interest rates on loans, etc.
(v) Tiny industrial units: A tiny unit is defined as an industrial or business enterprise whose investment in plant and machinery is not more than Rs. 25 lakhs.
(vi) Small scale service and business (Industry related) enterprises: A small scale service and business enterprise is one whose investment in fixed assets of plant and machinery excluding land and building does not exceed Rs. 10 lakhs.
(vii) Micro business enterprises: Within the tiny and small business sector, micro enterprises are those whose investment in plant and machinery does not exceed rupees one lakh.
(viii) Village industries: Village Industry has been defined as any industry located in a rural area which produces any goods, renders any service with or without the use of power and in which the fixed capital investment per head or artisan or worker does not exceed Rs. 50,000 or such other sum as may be specified by the central government, from time to time.
(ix) Cottage industries: These are also known as Rural Industries or Traditional industries. They are not defined by capital investment criteria as in the case of other small scale industries. However, cottage industries are characterised by certain features like the following:
Ø these are organised by individuals, with private resources;
Ø normally use family labour and locally available talent;
Ø the equipment used is simple;
Ø capital investment is small;
Ø produce simple products, normally in their own premises;
Ø production of goods using indigenous technology.
These are the features of Micro, small scale business and Medium Enterprises:
i) Personal Touch: The management and organisation is personal in nature. The managers and owner are the same.
j) Capital: The amount of capital required is less as compared to large scale industries.
k) Employment-Small business is labour intensive and it does not require huge amount of capital because its scale is small.
l) Technology: The technology used is simple in nature.
m) Area of operations: A small business firm generally has local area of operations.
n) Limited Finance: Small business enterprises require limited financial resources in comparison to large scale industries because they are less capital intensive.
o) Limited Demand: Small business enterprises are suitable for goods and services have limited market.
p) Low Cost of Production: Small business use locally available resources and raw material.
a) Management of a small business in independent. Usually the owner manages his business himself.
b) An individual or a small group of individuals provide capital for the business.
c) The area of operation is normally local.
d) A small business for the purpose of expansion mainly depends upon reinvestment of earnings.
e) A small business captures only a nominal portion of the total market in that line.
4. (a) What do you understand by plant location? Discuss the different factors to be taken into consideration while selecting the location of an industrial unit. 2+9=11
Ans: Plant location and factors affecting plant location
A good location of a production or service facility will give cost advantage to production or services and may also reduce the raw material and distribution costs. The location aspect is particularly advantageous to small business enterprises and service units. Location adds to competitive advantages and improved profits. Usually location question arises when:
(1) a new plant or service facility is planned
(2) there is addition to the existing business or added capacities in the other regions
(3) existing facilities are to be relocated or modified to remove drawback
(4) to get advantage of better infrastructure or incentives from the government sources.
Location of organization plant or service facilities is a permanent fixture and has considerable expenditure. The selection has to be done considering all relevant aspects. If there is any mistake or wrong choice of location, all the expenditure in the form of site development, factory construction, installation of machinery and other infrastructure development will go waste. The location selection has three main issues:
(i) Selection of the region: It is imperative to produce near the raw material base or customer to meet set competition, trade agreement and transport costs.
(ii) Selection of locality: The choices are the rural place, the urban place or suburban area near the metro. The selection usually boils down to developed industrial area or having government sponsored advantages.
(iii) Selection of site: Advantages of low labour cost, low land cost, infrastructure or transport facilities chosen. After the selection of location of manufacturing or services, the next important activity is facilities layout. The arrangement of various departments, machines in the building and plant services is to be done in order to get the maximum efficiency by the optimum usage of resources. The type of production equipment and product characteristics are to be considered while evolving a good factory layout. A factory layout means location of different departments, like foundry, forging, machine shop, tool room, administration, maintenance shop whereas a plant layout means the location sequence or arrangement of machines and equipments in a department.
Factors affecting plant location
Selection of proper location is very important for the success of any business. Plant location is considered as the function of determining where the plant should be located for maximum operating economy and effectiveness. Manufacturing and service companies make location decisions based on many criteria. Following are the factors that should be considered for location of an industry or service unit:
(1) Primary Factors :
a) Nearness to customers
b) Near raw materials
c) Supply of capital
d) Logistic facilities and infrastructure
e) Skilled labour availability
f) Power supply
g) Business climate
(2) Secondary Factors :
a) Host community and political factors
b) Natural factors
c) Historical factors
d) Initial start and living conditions
e) Personal factors
f) Government policies
g) Environmental considerations
h) International factors
Primary Factors:
(a) Nearness to Customers: Nearness to customer helps a plant to incorporate customer needs into the products being made in the unit. Finished goods to customers can reach faster and in less cost. There is less chance of breakage or damage during transportation.
(b) Nearness to raw materials: Cost of raw material input is a large cost in case of manufactured goods. The time & cost of transporting raw material is less if the plant is located near the source of raw material. For example, thermal power plants are located near to the coal mines.
(c ) Supply of capital: Short term and long term funds are required for any manufacturing or service industry. A company decides to locate its plant in such a location where fund movement is hassle free.
(d) Logistic facilities and Infrastructure: Adequate roads, rail, phone, postal and transportation facilities are to be considered while deciding on the location of plant and service facilities.
(e ) Skilled labour Supply: Regular supply of skilled labour is one of the major factors to be considered while deciding on the plant or service location. Example: Software companies are located in Bangalore, Hyderabad and New Delhi.
(f) Power Supply: This is a very critical factor to be analyzed. Uninterrupted power supply with proper voltage is one of the prerequisites of plant location decision.
(g) Business Climate: Companies must find a positive business climate or environment in the area, state or a country to set-up manufacturing or service facility there.
Secondary Factors:
(a) Host community and political factors: The community near the industry proposed location should be willing to welcome the new industry. Local people should feel that there will be improvement in their quality of life due to the new industry.
(b) Natural Factor: Land, water, climate condition, sources of material attract and help some industries Example: Tea industry, cotton industry, coffee industry, coconut oil industry etc.
(c) Historical factors: Capitals of old kingdoms of yesteryears, large religious places sometimes attract companies to set up their plants.
(d) Initial start and living conditions: Some industries were started earlier in certain places during the British era in its early stages. The industries since then have developed making good living conditions. The related industries start getting located in the place. e. g: Jamshedpur, Kirloskar wadi.
(e) Personal factors: The history of the entrepreneuring company or family or personal considerations play a key role in location decision.
(f) Government policies: Government play their own role in the location decision of new industries. The Government of India and the state governments have made special efforts in making industries grow and made manufacturing and service units all over India with a view to have a balanced developmental spread all over the country and the region.
(g) Environmental considerations: Environmental issues for certain industries for a particular location are to be checked before deciding on location.
(h) International factors: For companies deciding to go overseas for locating a unit for manufacturing or service must consider behavioral aspects, cultural differences, technology, government policies etc.
Or
(b) Explain the various stages involved in deciding the product design of a new product. 11
Ans: Stages in New Product Development Process
The introduction of new product usually passes through various stages. In each stage, the management must decide whether to move on to next stage with the product idea or not. Practically, in this process some of the ideas will be eliminated at every step. There are six stages involved in the new product development. The stages are given below:
(I) Idea generation: New products are produced on the basis of new ideas. Ideas may be generated from various sources like customers, dealers, distributors, salesman, top executive, consultancy organisation, Research and Development Department etc. The first step is to collect ideas as many as possible so that the company can find out one of the best idea out of those ideas to convert the same in to actual product.
(II) Screening of Ideas: All new ideas cannot be converted into products as it requires heavy capital investments. Those ideas should be screened and all unworkable ideas should be dropped. Only most viable, feasible and promising one should be selected for further processing. The company uses the concept testing method. In this method, consumer response to a description or picture or drawings is measured even before the product is actually produced. The purpose is to find out few best ideas.
(III) Business Analysis: During this stage, an attempt is made to predict the economic consequences of the product for the company. In these stages, the management should perform the following:
(a) Identify product features.
(b) Estimate market demand and product profitability.
(c) Establish a programme to develop the product.
(d) Assign responsibility for further study of the product feasibility.
(IV) Product Development or Prototype testing: This step consists of the following:
(a) Prototype development giving visual image of the product.
(b) Consumer testing of the model or prototype product.
(c) Branding, packing and labeling of the product.
The marketing people determine an appropriate brand name, package and price and making sure that both tangible and intangible features are considered and included. Focus groups, target market surveys and other market research techniques with the physical product give the marketer additional information.
(V) Market Testing: Test marketing involves placing a full developed new product for sale in one or more selected areas and observing its actual performance under a proposed marketing plan. In the words of P. Kotler- “Test marketing is the stage at which the product and marketing programme are introduced into more realistic market settings”. The basic purpose is to evaluate the product performance and marketing programme in a real setting prior to the commercialization. This step provides the scope of correction and modification of the product as well as marketing programme. Many products fail after commercialization because of lack of test marketing. In this process, the marketers approach the trial purchasers and first repeat purchaser to know their feelings and reaction about the product as well as marketing programme. On the basis of their opinions the marketers make certain required modification in the product as well as marketing programme. After the favourable result usually, products are sent for commercialization.
(VI) Commercialization: After favourable response in test marketing, full scale production and marketing programme are planned and then the product is launched. It may be in phased manner or the product may be introduced simultaneously depending on the company’s plan and resources available. The phased manner introduction helps to avoid short supply of the product due to initial gaps in production and distribution.
5. (a) What is fixed capital? Discuss the various sources of raising fixed capital in small enterprises. 2+9=11
Ans: Meaning and definition of Fixed Capital
Fixed capital is the capital, which is needed for meeting the permanent or long-term purpose of the small business concern. Fixed capital is required mainly for the purpose of meeting capital expenditure of the small business concern and it is used over a long period. It is the amount invested in various fixed or permanent assets, which are necessary for a small business concern.
According to the definition of Hoagland, “Fixed capital is comparatively easily defined to include land, building, machinery and other assets having a relatively permanent existence”.
Sources of Fixed Capital
Various sources of fixed capital are listed below
(i) Equity Shares: Equity shareholders are the owners of the company and their contribution constitute the main source of finance. The promoters are the first to contribute towards share capital of the company and the remaining mount of funds are raised through sale of shares to general public. Equity shareholders are the risk bearers of the company and are going to absorb all stress and strains of the business.
Financial structure of the company is strengthened by equity capital. Equity shareholders have limited liability and they enjoy voting rights. They can increase their stake in the firm or can keep full control over the company through issue of right and bonus shares. Equity capital is permanent capital of the firm and their is no liability for repayment and even dividend payment to the equity shareholders is not obligatory.
(ii) Preference Shares: These shareholders enjoy preference w.r.t. dividend and return of capital. Those investors who opt for limited but steady return on their investment prefer preference shares. Preference share capital possesses certain features of both equity and debt capital. Preference shareholders receive dividend like equity shareholders. Similarly it is like debt capital since the rate of dividend is predetermined.
Preference shares are not a permanent liability on the firm as dividend is payable only when there are profits. A company can introduce flexibility in its capital structure by issuing redeemable preference shares which can be redeemed when the company has sufficient profits. These are not very popular in India and can be made more popular by issuing cumulative convertible preference shares.
(iii) Debentures: Debenture provides the firm with another option of raising term loans from the public. Debentures are normally secured and yield a fixed percentage of interest. Thus they are less risky and give regular return to debenture holders. With the issue of debentures shareholders can retain control and earn more return on their investment.
Debenture capital add more financial burden on the firm during hard times and increase risk of insolvency of the firm. Many companies in India in recent years have issued convertible or partly convertible debentures with the discretion to convert them into equity shares of the company.
(iv) Term Loans: These are the loans obtained from banks and financial institutions and constitute the most important source of finance. Term loans are normally repayable within a period of ten years or more and carry a fixed rate of interest. Lending institutes insist on margin money from promoters and are ready to defer repayment till gestation period is over. Term loans are raised for meeting fixed and working capital needs. Term loans provide – the advantage of trading on equity and at the same time allow owners to have control over the business.
(v) Retained Earnings: Retained earnings are the reserve accumulated over years. This amount can be re-invested in the enterprise for upgradation and expansion. The cost of employment of this capital is practically nil and at the same time no liability worth the name is created.
(vi) Capital Subsidy: In order to tempt entrepreneurs towards backward areas the Central Government provides capital subsidy. Similarly certain state governments too grant development loans to entrepreneurs for setting up industries in exclusively notified areas in their states.
Or
(b) “Working capital is the life blood of an enterprise.” Do you agree with this statement? Give arguments. 11
Ans: Meaning and definition of Working Capital
The capital required for a small business is of two types. These are fixed capital and working capital. Fixed capital is required for the purchase of fixed assets like building, land, machinery, furniture etc. Fixed capital is invested for long period, therefore it is known as long-term capital. Similarly, the capital, which is needed for investing in current assets, is called working capital. The capital which is needed for the regular operation of small business is called working capital. Working capital is also called circulating capital or revolving capital or short-term capital.
In the words of John. J Harpton “Working capital may be defined as all the shot term assets used in daily operation”.
According to “Hoagland”, “Working Capital is descriptive of that capital which is not fixed. But, the more common use of Working Capital is to consider it as the difference between the book value of the current assets and the current liabilities.
From the above definitions, Working Capital means the excess of Current Assets over Current Liabilities. Working Capital is the amount of net Current Assets. It is the investments made by a small business organisation in short term Current Assets like Cash, Debtors, Bills receivable etc.
Need and Importance of adequate Working Capital
Working Capital means excess of current assets over current liabilities. Such Working Capital is required to smooth conduct of small business activities. It is as important as blood to body. An organisation’s profitability depends on the quantum of Working Capital available to it. Adequate Working Capital is a source of energy to any small business organisation. It is the life blood of an organisation. The following points will highlight the need of adequate working capital:
a) Enables a company to meet its obligations: Working capital helps to operate the small business smoothly without any financial problem for making the payment of short-term liabilities. Purchase of raw materials and payment of salary, wages and overhead can be made without any delay. Adequate working capital helps in maintaining solvency of the small business by providing uninterrupted flow of production.
b) Enhance Goodwill: Sufficient working capital enables a small business concern to make prompt payments and hence helps in creating and maintaining goodwill. Goodwill is enhanced because all current liabilities and operating expenses are paid on time.
c) Facilitates obtaining Credit from banks without any difficulty: A firm having adequate working capital, high solvency and good credit rating can arrange loans from banks and financial institutions in easy and favorable terms.
d) Regular Supply of Raw Material: Quick payment of credit purchase of raw materials ensures the regular supply of raw materials fro suppliers. Suppliers are satisfied by the payment on time. It ensures regular supply of raw materials and continuous production. Prompt payments to its creditors also enable a company to take advantage of cash and quantity discounts offered by them.
e) Smooth Small business Operation: Working capital is really a life blood of any small business organization which maintains the firm in well condition. Any day to day financial requirement can be met without any shortage of fund. All expenses and current liabilities are paid on time.
f) Ability to Face Crisis: Adequate working capital enables a firm to face small business crisis in emergencies such as depression.
g) It improves the prospects of prosperity and progress of a company.
Thus, adequate Working Capital is an important factor for prosperity and smooth running of a small business organisation. It is rightly called as the “backbone” of the financial structure of a small business organisation.
6. (a) Discuss the various marketing problems faced by the micro and small enterprises. 11
Ans: Marketing Problems faced by Small Scale Industries
Small scale units are exposed to numerous problems. Major problems faced by these units are concerning raw-material, labour, financial and marketing. Problem of marketing is more complicated in case of small scale industries. These units are in no position to face the competition from large players and at the same time are not in a position to assess the prevailing market scenario or changes which are taking place with respect to tastes, liking, disliking, competition, technology etc. moreover these units do not possess the requisite expertise to adjust their operations according to the changed situation. Some of the important marketing problems faced by the small scale units are given below:
1) Problem of standardization: Small scale units face problems with respect to fixing the standards and sticking. This results in the poor quality of their products and it adversely effects their image or goodwill in the market.
2) Competition from large scale units: Small scale units are ill equipped to face competition from large scale units with respect to quantity, quality and cost. In the modern competitive world there is survival of the fittest, even the existence of small scale units is endangered.
3) High cost of advertisement: A final problem facing small-scale marketing efforts is the cost of advertising. Running a full-page Sunday newspaper ad or Super Bowl TV commercial is no financial hardship for certain large businesses. However, such costs are obviously prohibitive for small-scale businesses. Thus, many will circumvent this dilemma through forming co-ops to split advertising costs or using local advertising and word-of-mouth.
4) Poor bargaining power: Small scale units because of their limited resources and lower scale of operations are in a week position while negotiating with the suppliers of raw-material, finances (or) marketing agencies. They are always at the receiving end and as such are not in a position to safeguard their interests.
5) Poor sale promotion: Small scale units have limited financial resources and hence cannot afford to spend more on sale promotion. These units are not having any standard brand name under which they can sell their products. Various channel members too exploit them because of the lack of goodwill of their products in the market.
6) Transportation cost: Another marketing problem facing the small-scale business is transportation. A large-scale business can buy an item in bulk, which saves money. A small-scale business may not have the money or demand to order such quantity, which raises item cost. This creates a marketing issue: How can a small company sell the same item as its competition at a higher price and remain competitive? That is why many small-scale industries focus upon selling a higher-quality item than its mass-marketed competition.
Or
(b) State the various factors that should be considered while fixing the price of a product. 11
Ans: Factors Affecting Pricing
Factors affecting pricing may be categorized into two categories- internal factors and external factors. In each of these categories some may be economic factors and some may be psychological factors. Some factors may be quantitative and some others may be qualitative. Some of the important factors affecting pricing are given below:
A. Internal Factors:
As regards pricing, the firm has certain objectives -long term as well as immediate. For example, the firm has certain costs of manufacturing and marketing; and it seeks to recover these costs through the price and thereby earning a profit. In respect of all the products, the firm may have a basic philosophy on pricing. The pricing decisions of the firm have to be consistent with this philosophy. Pricing also has to be consistent with the overall objectives of the firm. These objectives could be achieving market share, short term or long term profit. The firm may be interested in seeking a particular public image through its pricing policies. All these constitute the internal factors that influence pricing. From the above, it appears that pricing is influenced by objectives and marketing strategy of the enterprise, pricing philosophy, pricing objectives and policy. More specifically, the internal factors are:
1. Corporate and marketing objectives of the firm: All pricing objectives emanate from the corporate and marketing objectives of the firm. A business firm will have a number of objectives in the area of pricing. Some of these objectives are long-term, while others are short-term. Profit is one of the major objectives in pricing. Firms may not be interested in profit maximization as such, they may be more interested in long term survival and growth.
2. The image sought by the firm through pricing: If a firm offers high quality goods at high prices, the firm will develop a premium image.
3.The characteristics of the product: Sophisticated, complex and new to the world products normally carry high prices. Products having more features carry higher prices.
4. Price elasticity of demand of the product: If price increases, demand decreases and if price decreases demand increases. Marketers may decide on pricing based on ‘what the traffic can bear’. The marketer takes the maximum price which the customers are willing to pay for the product under the given circumstances.
5. The stage of the product on the product life cycle: When a product is introduced for the first time it carries a higher price. Gradually with increasing consumer acceptance and competition price decreases.
6. Use pattern and turn around rate of the product: Price of newspaper and magazines may be different for the immediacy factor, permanence and the pass along readership. Newspapers are having a short life, while magazines enjoy a pass along readership.
7. Costs of manufacturing and marketing: Costs determine price to a great extent. Marketers will have to cover the cost and earn a profit.
8. Extent of distinctiveness of the product and extent of product differentiation practised by the firm: Products having uniform size, shape and compositions can be manufactured at a lesser cost compared to products having differentiation.
9. Other elements of the marketing mix of the firm and their interaction with pricing: Amount spent on product research, advertising, dealer development etc. are some factors which influence price of a product.
10. Composition of the product line of the firm: A firm may sell a number of products in the same product line. In that case , the products are likely to be sold under different prices depending on their quality, features etc.
B. External Factors:
In addition to the internal factors mentioned above, any business firm has to encounter a set of external factors while formulating its pricing decisions. An enterprise exists in an environment and is influenced by environmental factors. The external factors are:
1. Market characteristics: Some markets are having very stiff competition and some are having less. The number of players in a market could be more or less. Market leadership factors also may be different. Different characteristics of the market have a bearing on price.
2. Buyer behaviour in respect of the given product: Value conscious buyers are likely to be interested in low prices. Image conscious buyers may be more attracted by product image rather than low price of the product.
3. Bargaining power of major customers: In industrial buying situations major buyers have a bargaining power. They are in a better position to negotiate prices.
4. Bargaining power of major suppliers: Similar is the case with major suppliers. They are in a better position to supply bulk quantities. They are also in a better position to negotiate terms.
5. Competitors’ pricing policy: Firm’s decision to set a price is heavily influenced by the price set by the competitors. In case of highly unique product having a niche market, a firm can have its own price. In most of the cases, competitive reactions to the price set by the firm have to be seriously studied for future programmes.
6. Government controls/regulations on pricing: As stated earlier the Governmental measures like import duties, excise, subsidy, sales tax etc. influence pricing decisions.
7. Social considerations: Firms have a responsibility to society and to its customers. Firms are not expected to exploit consumers by unnecessarily charging high prices.
As discussed above pricing decisions are complex. For pricing an individual product the firm has to consider its overall objective, prices set for other products, costs etc. These are internal factors. In addition, the pricing decisions are influenced heavily by the external factors as stated above.
7. (a) Discuss the factors that should be considered by the marketer in the selection of a distribution channel. 12
Ans: Factors Affecting the Selection of the Channel of Distribution
Every producer, in order to pass on the product to the consumer, is required to select a channel for distribution. The selection of the suitable channel of distribution is one of the important factors of the distribution decisions. The following factors affect the selection of the channel of distribution:
A. Factors Pertaining to the Product: Keeping in view the nature, qualities and peculiarities of the product, could only the channel for distribution be properly made. The following factors concerning the product, affect the selection of the channel of distribution:
(1) Price of the Product: The products of a lower price have a long chain of distributors. As against it, the products having higher price have a smaller chain. Very often, the producer himself has to sell the products to the consumers directly.
(2) Perishability: The products which are of a perishable nature need lesser number of the intermediaries or agents for their sale. Under this very rule, most of the eatables (food items), and the bakery items are distributed only by the retail sellers.
(3) Size and Weight: The size and weight of the products too affect the selection of the middlemen. Generally, heavy industrial goods are distributed by the producers themselves to the industrial consumers.
(4) Technical Nature: Some products are of the nature that prior to their selling, the consumer is required to be given proper instructions with regard to its consumption. In such a case less of the middlemen arc) required to be used.
(5) Goods Made to Order: The products that are manufactured as per the orders of the customers could be sold directly and the standardized items could be sold off only by the middlemen.
(6) After-Sales Service: The products regarding which the after-sales service is to be provided could be sold off either personally or through the authorized agents.
B. Factors pertaining to the Consumer or Market: The following are the main elements concerned with the consumer or the market:
(1) Number of Customers: If the number of customers is large, definitely the services of the middlemen will have to be sought for. As against it, the products whose customers are less in number are distributed by the manufacturer himself.
(2) Expansion of the Consumers: The span over which are the customers of any commodity spread over, also affects the selection of the channel of distribution. When the consumers are spread through a small or limited sphere, the product is distributed by the producer himself or his agent. As against it, the goods whose distributors are spread throughout the whole country, for such distributors, services of wholesaler and the retailer are sought.
(3) Size of the Order: When bulk supply orders are received from the consumers, the producer himself takes up the responsibility for the supply of these goods. If the orders are received piece-meal or in smaller quantities, for it the services of the wholesaler could be sought. In this way, the size of the order also influences the selection of the channel of the distribution.
(4) Objective of Purchase: If the product is being purchased for the industrial use; its direct sale is proper or justified. As against it, if the products are being purchased for the general consumption, the products reach the consumers after passing innumerable hands.
(5) Need of the Credit Facilities: If, for the sale of any product, it becomes necessary to grant credit to any customer, it shall be helpful for the producer that for its distribution, the services of the wholeseller and retailer businessmen be sought. In this way, the need of the credit facilities too influences the selection of the channel of distribution.
C. Factors Pertaining to the Middlemen: The following are the main factors concerned with the middlemen:
(1) Services Provided by Middlemen: The selection of the middlemen is made keeping in view their services. If some product is quite new and there is the need of its publicity and promotion of sales, then instead of adopting the agency system, the work must be entrusted to the representatives.
(2) Scope or Possibilities of Quantity of Sales: The same channel should be selected by means of which there is the possibility of more sales.
(3) Attitude of Agents towards the Producers' Policies: The producers generally prefer to select such middlemen who go by their policies. Very often when the distribution and supply policies of the producers being disliked by the middlemen, the selection of middlemen becomes quite limited.
(4) Cost of Channel of Distribution: While selecting the channel of distribution, the cost of distribution and the services provided by the middlemen or agents too must be kept into consideration. The producers generally select the most economical channel.
D. Factors Pertaining to the Producer Or Company: The following factors, concerning the producer, affect the selection of the channel of distribution:
(1) Level of Production: The manufacturers who are financially sound and are of a larger category, are able to appoint the sales representatives in a larger number and thug could distribute the commodities (products) in larger quantities. As against it, for the smaller manufacturers, it becomes necessary to procure the services of the wholesalers and the retail traders.
(2) Financial Resources of the Company: From the financial point of view, the stronger company needs less middlemen.
(3) Managerial Competence and Experience: If some producer lacks in the necessary managerial experience or proficiency, he will depend more upon the middlemen. The new manufacturers in the beginning remain more dependent upon the middlemen.
E. Other Factors
(1) Distribution Channel of Competitors: While determining the channel of distribution, the channels of distribution of the competitors too must be borne in mind.
(2) Social Viewpoint: What is the attitude of society towards the distribution, this fact too must be kept into consideration while selecting the middlemen.
(3) Freedom of Altering: While selecting the agents, this fact too must be kept into mind that in case of need, there must be the liberty of changing or replacing the agents (middlemen).
Or
(b) What is salesmanship? Discuss the objectives and benefits of salesmanship. 2+10=12
Ans: The flow of goods from the producers to the consumers may not be possible without the involvement of salespersons. The salespersons play an important role in the process of sale. Starting from the conversation with the consumer to effecting a sale they actually act as an important link between the manufacturer and the consumer. The salesperson at the counter first assessed the interest of the customers and then persuaded them to buy it. This whole exercise of assessing customer’s need, activating it and ultimately satisfying it by selling the product to customers is termed as salesmanship or personal selling. It is a process of assisting and persuading the prospective customers to buy a product in a face-to-face situation. In other words, salesmanship simply means selling through personal communication.
Thus, it is not only the business houses which benefit from salesmanship but also the consumers and the society. The benefits of salesmanship are discussed below:
1. Benefits to Consumers: A salesperson acts as a friend and guide to the consumers. By making conversation with salesperson, the customer gets help in identifying the product of his need and the price range that suits him. The salesperson explains to the customers the uses and the operational aspects of a product. By giving the requisite information about the company and the product, the salesperson provides confidence to the customers to try something new which might be better and/or cheaper. The salesperson also provides the necessary after sales service to the customers.
2. Benefits to the Business: Salesmanship helps a business in increasing its sales. Identification of new customers and persuading them to buy can be done effectively through personal selling. Since the salesperson comes in direct contact with the customers, understands the needs and preferences of the customers and thus, can help the businessman in planning for the right type of products and effecting the necessary improvements there in. In case of products of technical nature the role of salesmanship is very important as the salesperson can personally explain the functioning of the product, its use and precaution to be taken in its use. This ensures proper handling of the product, and boosts customer’s confidence in his choice of the products.
3. Benefits to the Society: Salesmanship facilitates the process of production, distribution and consumption. Salespersons help in collecting market information, credit information, delivering goods and collecting payments. It helps in matching demand with supply because they know what the consumers want. They also inform the consumers about the introduction of new products, if any. By increasing sales, they help in the growth of business.
Objectives of Salesmanship
Objectives of Salesmanship are divided into two parts: Qualitative and Quantitative objectives. The qualitative personal selling objectives are long term and concern the contribution management expects personal selling to make in achieving long-term company objectives. These objectives generally are carried over from one period’s promotional program to the next. Depending upon company objectives and the promotional mix, personal selling may be assigned such qualitative objectives as:
1. To do the entire selling job (as when there are no other elements in the promotional mix).
2. To “service” existing accounts (that is, to maintain contacts with present customers, take orders, and so forth).
3. To search out and obtain new customers.
4. To secure and maintain customers’ cooperation in stocking and promoting the product line.
5. To keep customers informed on changes in the product line and other aspects of marketing strategy.
6. To assist customers in selling the product line.
7. To provide technical advice and assistance to customers (as with complicated products and where products are especially designed to fit buyers’ specializations).
8. To assist (or handle) the training of middlemen’s sales personnel.
9. To provide advice and assistance to middlemen on management problems.
10. To collect and report market information of interest and use to company management.
(OLD COURSE)
Full Marks: 80
Pass Marks: 32
1. Write True or False: 1x8=8
a) The small-scale industries are financed by the Central Government.
b) Small-scale enterprises are managed by the Government.
c) The Small Industries Service Institutes (SISIs) are set up to provide consultancy and training to the small business owners.
d) Advertising is a stage of product development.
e) Market promotion is an internal problem of the small business enterprises.
f) Small-scale industrial enterprises are capital intensive.
g) The first step for product planning is renewal of product.
h) Political instability is an external cause of industrial sickness.
2. Write short notes on (any four): 4x4=16
a) Characteristics of small business enterprises.
b) Features of the Micro, Small and Medium Enterprises Act, 2006.
c) The factors for selecting the location of an industrial unit.
d) Marketing elements or mix.
e) Significance of working capital.
f) Characteristics of advertisement.
3. (a) Discuss the different types and characteristics of small-scale enterprise. 5+6=11
Or
(b) Discuss the role of small-scale industries in the context of Indian economy. 11
4. (a) Describe the various quality control methods that can be used for small-scale industries. 11
Or
(b) Discuss the various stages of new product development. 11
5. (a) Write a note on the sources of fixed capital for small-scale industries. 11
Or
(b) Discuss the determinants of working capital in small business enterprise. 11
6. (a) What do you mean by marketing management? Discuss its functions. 3+8=11
Or
(b) What is packaging? Explain the role of packaging in marketing. 2+9=11
7. (a) Discuss the causes of sickness of small-scale industries and suggest the measures for its remedies. 6+6=12
Or
(b) Explain the concepts of installed capacity and idle capacity. 6+6=12
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