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Page 77 of 253
Chapter 2: LITERATURE REVIEW
2. Introduction to Literature Review
There have been many attempts by many researchers through their research studies to
define and arrive at typical entrepreneurial characteristics. All these studies lead us to the
conclusion that there is a definite absence of a generic definition of entrepreneur. There
exits different notions about the traits and characteristics which make an individual, an
entrepreneur. Entrepreneurship is akin to leadership, in fact an entrepreneur is considered
to be a leader, but as it has been established that there cannot be one generic definition of
a leader as many traits, characteristics, even situations lead to leadership, the same is true
for entrepreneur too. There appears to be a general consensus that an entrepreneur is the
one who creates and manages an enterprise. This common agreement leads us to look at
an entrepreneur from his behavior. To have a closer look at the activities undertaken by
an individual who is defined as an entrepreneur. This leads us to behavioral approach and
it definitely is an appropriate approach to follow to study an entrepreneur.
There are some characteristics which have been assigned to an entrepreneur such as risk
takers, locus of control, leadership, initiative, commitment, self reliance, and many more
but it can very well be argued that these characteristics are not specific or restricted to an
entrepreneur, they can be observed in a manger or even a worker too. The above
mentioned characteristics also lead us to a fact that they are more related or manifested
by an activity carried out by an individual. This again confirms that rather than asking a
question who is an entrepreneur, one should try to seek an answer to a query what does
an entrepreneur do.
An entrepreneur is more an opportunity driven individual than a necessity driven. Off
course some individuals get into entrepreneurship due to a necessity and by their
behavior prove to be a successful entrepreneur. Entrepreneur exploits an opportunity and
to exploit the same, he follows some strategies, policies. The strategies and policies
followed by an entrepreneur may differ from situation to situation and even from an
individual to individual. Some of the traits which could be termed as entrepreneurial
traits and characteristics may get amplified or noticed, if one studies the strategies and
policies adopted by an entrepreneur. Entrepreneurship is about bringing together
different resources to create and successfully run a business proposition. The
management of different resources needs some strategic approach, which defines a
Page 78 of 253
successful and non-successful entrepreneur. Strategies, policies assume greater
importance in the study of entrepreneur and entrepreneurship.
An entrepreneur operates in a complex socio economic environment. Socio economic
factors affect the performance of entrepreneur and the entrepreneurship. In fact it also
shapes the behavior of an entrepreneur and the enterprise he manages and operates. The
sustenance and growth of an enterprise which are the fundamental elements of success of
a MSME are achieved through competitiveness only. Again what is competitiveness has
been debated and it is measured by various factors and parameters. Here again the
conclusion appears to be absence of a universal definition of competitiveness.
Competitiveness can be the ability of the enterprise to persuade its customers to choose
his products and or services over other manufacturers or service providers. This can be
achieved by various strategies such as providing quality products, competitive rates, or
even offering products which were hitherto not provided by anybody. Again MSME
becomes and remains competitive by various strategies. Be it a strategy to acquire a
technology to produce quality and innovative products, or to penetrate new markets,
achieve certified quality, or even develop managerial skills to manage the enterprise
effectively and efficiently, besides the entrepreneur’s own resources and efforts, external
assistance is required from different agencies. It includes government and government,
entrusted with the primary responsibility of achieving sustenance, balanced, inclusive
growth of the general economy has to play an important role in making these large
number of MSMEs competitive not only in domestic but also in international arena.
Government has assumed the role of facilitator, moderator, and motivator and has
promoted many a schemes to ensure sustenance and growth of MSMEs. The schemes
have seen a shift in its composition, operations and administration and from a unit based
nurturing and promoting initiative now has settled for a collective approach. This
approach has yielded results, yet these needs to be analyzed further. There definitely is a
need to ascertain the effectiveness of this government initiatives and promotional
schemes. Large public resources are at stake with a clear objective of making the
important and crucial segment of MSMEs more competitive. It is indeed imperative for
researchers to critically study, and assess their contribution in making MSMEs more
competitive. If the objectives are not achieved, definite suggestions are necessary to
ensure the success of the government programs in the larger national interest.
Page 79 of 253
2.1 Entrepreneur
Entrepreneur and especially the entrepreneurial characteristics, entrepreneurial traits
have been a subject of interest of many researchers for many years. Several studies have
been carried out and even today attempts have been made to precisely profile an
entrepreneur. Since 1950 researchers have been looking for personality traits and
characteristics present in an entrepreneur, which contributed to successful
entrepreneurship.
Schumpeter (Schumpeter J. A., 1934)1, put forth the thought that entrepreneur plays a
pivotal role in economic growth process. This set into motion research in the area of
entrepreneurship resulting into research and research papers on various aspects of
entrepreneurship.(Yves Robichaud, 2010)2
Entrepreneurs are described as risk takers, problem solvers and innovators. In
Brockhus’s(1980) view an entrepreneur is the major owner and manager of a business
enterprise and not engaged in any other employment. Davids (1963) described an
entrepreneur as a founder of new business. An entrepreneur’s obsession with relentless
engagement in an activity emerged out of his belief in his business idea, till he creates a
successful enterprise, probably leads to the definition of entrepreneur by Ries, that An
entrepreneur has to be willing to be wrong to fail. (Ries, 2014)3. This depicts the
tenacity, perseverance determination; observed in an entrepreneur and probably many
attempts he has to make to be an owner of successful business. It was observed that
entrepreneurs have a higher need of achievement and at the same time moderate risk
takers. (David C. McClelland, 1961)4.
Many definitions of an entrepreneur primarily refer to creation and management of an
independent activity by an entrepreneur with an element of leadership. This is in
conformity with Schumpeter (1934) views that entrepreneurship is a phenomenon which
falls under the wider aspect of leadership.(Gartner W. , 1988)5.There have been several
studies on characteristics of Leaders, however no empirical evidence was found to
support the argument of leaders having certain finite traits and the traits which
differentiate between a good and bad leader (Ven, 1980)6.
Cole, A.H. Admitted that in his own personal experience of running a research centre, in
entrepreneurial history, for over ten years, though many attempts were made to define
entrepreneur, they all failed. The reason was the different notions carried by different
thinkers and hence no unanimity on one single definition.(Cole, 1969)7.(Gartner W. ,
1988)5.However even after Cole’s above observations, researchers have not stopped from
defining an entrepreneur.
Page 80 of 253
Absence of a generic definition of entrepreneurship or a psychological instrument to
discover the characteristics which would help defining entrepreneur has been stated by
Gartner.(Gartner W. B.)6. There appears to be no significant distinguishing features of
entrepreneurship according to many researchers including Gartner.
2.2 Individual Traits - Characteristics.
Identification of about 500 individual personality traits has been reported by some
researchers. It has also been observed that in studies trying to find out the relationship
between traits and entrepreneurship, not more than half a dozen traits are examined. The
nature of a personality is very complex and even the psychological profiling methods are
not enough to reach the depth of the personality. It is very difficult to measure
personality through some scale of moderate size as it is made of up of thousands of traits
or attributes, which are influenced variedly in accordance with time, emotional condition,
situation etc. The traits or attributes would indeed be dynamic. Secondly, a person may
portray himself quite differently than what really he is and this makes understanding of
the personality more difficult. Our superficial observation of a person is not enough to
distinguish what a person projects himself to be and what really he is. (Murray H. ,
2012)8
Attempts have been made to identify common characteristics shared by all entrepreneurs.
In 60s some attempts were made by some researchers to establish links between
entrepreneurs and psychological traits and characteristics. This was primarily to answers
some basic questions such as the difference between entrepreneur and non entrepreneur,
why some individuals are good in identifying entrepreneurial opportunities. Efforts were
also put in to develop a profile of an entrepreneur.
The decade of 1980s and 1990s presented substantial research on personality
characteristics and socio cultural backgrounds of successful entrepreneurs.
Timmon(1994)analyzed more than 50 studies to arrive at consensus around six general
characteristics of entrepreneurs such as1) Commitment and determination2) leadership 3)
opportunity obsession 4) tolerance, risk, ambiguity and uncertainty 5) creativity, self
reliance and ability to adapt 6) motivation to excel. (Timmons, 1994)9. Some research on
the demographic and cultural background leading to successful entrepreneurship,
(Bianchi1993)indicates some characteristics which include and are relevant from this
research point of view. These characteristics are1) being an offspring of self employed
parents 2) previous employment in a firm with more than 100 people (meaning large
organizations)and 3) being a collage graduate. (Tom Byers, 1997)10
.These factors help
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shape the entrepreneurship of an entrepreneur as they provide guidance, experience and
knowledge, but definitely these are not inherent characteristics.
Researchers have also cited locus of control as one of the characteristics of an
entrepreneur. Locus of control is the individual’s perception of the outside world and are
their beliefs of the causes of events affecting their lives. There are two types of people,
one who believe that they have the control over the environment through their action and
they are characterized to have internal locus of control. The other type has a belief that
they have no control over the environment and they have what is called as external locus
of control. It is said that individuals with internal locus of control tend to become
entrepreneur, while the one with external locus of control would avoid being an
entrepreneur.(Chen, 1998)11
.Here again the perception of the outside world is the
outcome of an interaction of an individual with the external environment and analysis of
the same based on his experience and or knowledge, skills developed. This may not be
regarded as intrinsic characteristics but could be an acquired one. The basic confidence
that an individual has control over the environment through his action is not definitely in
built but is developed from some successful experiences.
Further, a hypothesis by Rotter says that the individuals with internal locus of control
strive more for achievement than individuals with external locus of control. (Rotter,
1966)12
.However this characteristics is not exclusively an entrepreneurial characteristics
but could be observed in non entrepreneurs too. Hence not a differentiator between
entrepreneur and a non entrepreneur.
Propensity to take risk is assumed to be more in entrepreneurs. This may be due to the
characteristics, internal locus of control. The risk includes amongst other, financial,
career and family risk. It is assumed by many researchers that entrepreneurs will take
moderate risk to satisfy their need of achievement. The propensity to take risk is more in
entrepreneurs than managers. (Bowen, 1986)13
. Some researchers have concluded that
amongst the other entrepreneurial characteristics, propensity to take risk is important in
identifying entrepreneur. There are contrary findings too. Rather than viewing risk
seriously, many entrepreneurs manage the risk well with their knowledge and
confidence. There are studies which have indicated that the risk is more situational and
depends on specific conditions and entrepreneurs don’t take more risk than managers.
Even after case studies of successful entrepreneurs and identification of traits present in
them, instrumental for their success, the traits observed might not be same in all cases.
(Murray, 2012)14
. Hence the study of entrepreneurial psychological traits has been
expanded to study other external, internal factors and situational circumstances. (Gartner,
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1988)5, (Ardichvili, 2003)
15.Personality characteristics or individual traits, which explain
entrepreneurial behavior, are termed as internal factors.
Steve Jobs, the cofounder of Apple in 1976 is considered to be an ideal entrepreneur.
Isaacson, the writer of the book on Steve Jobs, has identified some important factors
which lead to Steve Job’s success as an entrepreneur, which could surely be considered
as the important characteristics of an entrepreneur. One of the characteristics is the
“Focus”, the product or the operational area of the Company, where more concentration
is required. A successful entrepreneur needs to concentrate or focus on what is required
to be done and what is not required to be done. That is the characteristics, determination
and commitment analyzed by Timmons. The other characteristics listed are the ability to
simplify things by concentrating on them and eliminating unnecessary components.
Which helps to concentrate on what is good for the organization? Taking responsibility
of everything is yet another important characteristic, again a leadership quality. Steve
Jobs quality of “push for perfection” is other important characteristics entrepreneurs
should have. “A true craftsman uses a good piece of wood even for the back of a cabinet
against the wall”. (Isaacson, 2012)16
, that implies a characteristic, quality conciseness
which probably is more specific. These are more individual specific characteristics which
have been identified after due analysis of the performance and work of the individual.
Again these characteristics can be attributed to the personality development process of
the individual.
“Entrepreneurs who sustain their momentum know that the road to success is always
under construction. Their hallmark is never ending desire to improve along with an
abiding interest in learning all they can. They thrive on challenges during periods of
uncertainty.” (Ms. Lila Poonawalla, Chairperson, DeLaval Private Limited. Chief Guest
of 8th
EDI –PGP Convocation: 2005-06.) (Poonawalla, 2005-06)17
.This statement
probably aims at distinct characteristics of an entrepreneur, the conviction in the ideas,
persistence, adherence to quality and development, ability to accept and deal with
challenges. Which again may be observed in manager too and obviously may not be
inbuilt but could be situational.
An entrepreneurial personality may have a combination of positive and negative
personality characteristics which may not directly influence his behavior but would have
complimentary effect on it. It is argued that these characteristics may not be indicative of
Page 83 of 253
any specific behavior. (Epstein, 1985)18
An individual’s general orientation, the situation
and his own motive may play a role in shaping his behavior. (Shaver, 1991)19
Some Commonly Mentioned Characteristics of Entrepreneurs.
Ability to Learn from
mistakes
Foresight Product Knowledge
Able to take calculated
risks
Goal oriented Profit oriented
Aggressive Honest Quick decision maker
Balanced Imaginative Resourcefulness
Charismatic Independent Responsible
Committed Influential over people Responsive to criticism
Confidence Initiative Responsive to suggestion
Cooperative Intelligent Self reliant
Courageous Integrity Sensitive
Creativity Leadership Sense of power
Customer orientation Market Knowledge Sociable
Determination Maturity Street Smart
Diligence Need for achievement Technical knowhow
Dynamism Non conformist Thorough
Efficacy Optimism Tolerant of ambiguity
Efficient Passion for work Trustful of others
Egotistical perceptive Trustworthy
Energy perseverance Versatility
Flexible Positive to challenge Visionary
Table 2.1
(Murray, 2012)8
The above list of traits appears to be quite narrow. These traits on their own or combined
with some other traits cannot predict entrepreneurial behavior. Some traits may be useful
in phase of entrepreneurship whereas some others could be useful in some other
phase.(Murray, 2012)8.Besides there are many traits in the above list which are not
exclusive to an entrepreneur. Even a worker or a manager may possess many of them.
These traits may not necessarily and definitely lead to entrepreneurship.
Page 84 of 253
It has also been argued that many personality characteristics such as need for power,
recklessness, over confidence, unrealistic optimism (which are identified, confirmed or
inferred post an activity) can have counterproductive results on entrepreneurial behavior.
(Peay, 1989)20
, (Kidd, 1969)21
(Laurie, 1977)22
(Solomon, 1988)23
.
The existence of Individuals with entrepreneurial characteristics appeared to be varied
across the countries and cultures. The factors which contribute to these differences in
entrepreneurial potentials are the culture, the stage of economic development, political
and economic traditions.
It is a common observation that while the economy develops and grows more and more
resources becomes available and hence the entrepreneurship is also on rise. The growth
also promotes innovativeness and that further fuels entrepreneurship and new venture
creation. The economic growth stimulates entrepreneurship which in turn gives rise to
more new ventures. (Mueller, 2008)24
. This is a case of favorable external environment
providing opportunities to potential entrepreneurs and a confluence of internal and
external characteristics to produce entrepreneurship.
The relationship between an individual and the social environment was also considered
to be an important factor, responsible for entrepreneurship. These external factors were
defined as work experience, education, culture, and environment. Entrepreneurship is
considered to be the result of the interaction between the internal and external factors.
(Smith-Hunter, 2003)25
While delivering the key note address at Pune in TiECon (the entrepreneurship
conference of The Indus Entrepreneurs (TiE),held on March 30, 2013 Mr. N.R. Narayan
Murthy the co – founder of Infosys and great business visionary commented that one of
the biggest qualities of an entrepreneur is to have a grand vision. The idea should be
exciting not only to you but also to the people with whom you work. He also mentioned
that the entrepreneur should have the character and strength to sacrifice short term
gratifications for long term goals. Entrepreneurship is all about deferred gratification.
While expressing his views on vision, he advised the budding and potential entrepreneur
to create differentiated value proposition for their customers, which should be simple
enough to be expressed in one sentence. The entrepreneur should be convinced that there
is a good market for the product that he wants to launch. He should also have absolute
trust and confidence in himself. Here again the emphasis is more on the relationship
between the individual and the external environment. An assessment of the external
environment comprising, customers, other stake holders can only help to create vision,
identify market needs, to produce product and services to fulfill that. One can conclude
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from Mr. Narayan Murthy’s statement that more than inherent characteristics what is
important is building a personality, acquiring some attitudes and skills.
The equilibrium model of entrepreneurship of Khilstrom and Laffont, depends on
attributes of the individuals and emphasizes characteristics such as uncertainty which
leads to entrepreneurship. (Laffont, 1979)26
.Though some dimensions of equilibrium
models are useful for understanding entrepreneurship, it is not exhaustive and is
incomplete to some extent. The presence of a large number of entrepreneurs in the
ecosystem, points to the fact that entrepreneurship cannot be explained solely with
reference to characteristics. Some people respond to the situational signals than others
which are not stable characteristics that differentiate some people from others.
The entrepreneur is considered to be a part of the complex process of new venture
creation. “Entrepreneurship is the process of creating or seizing an opportunity and
pursuing it regardless of the resources currently controlled" (Timmons, 1994)9.It is a
behavior, an outcome of a desire to exploit a seen or perceived opportunity.
Entrepreneurship is the outcome of an entrepreneurial act or behavior. Hence the study of
an entrepreneur may not be complete without an examination of his enterprise creation
and operation behavior.
2.3 Behavioral Approach.
Many researches are inclined towards the behavioral approach than the trait approach.
We have many studies which have indicated refocusing on what does an entrepreneur do
rather than addressing the question what an entrepreneur is. Gartner believes that
research on entrepreneurial behaviors is more of field and the researcher should observe
them on the field while performing the tasks of entrepreneurship. That is studying the
management policies and strategies adopted by them. This may bring out the
characteristics of an entrepreneur more distinctly. Organization creation skills are more
relevant than behavioral. Entrepreneurship which is a result of entrepreneur’s activity or
job has been cited as a creation of an enterprise.
There appears to be a general consensus that an entrepreneur is one who necessarily
builds an enterprise. An enterprise is a venture, a project, an activity, an endeavor. In the
creation of such an enterprise he exhibits a distinct behavior. The behavioral approach is
considered to be more relevant than the trait approach and there are many reasons
assigned to that. In many research studies, the entrepreneurs are studied many years after
the start up. The question here is whether the individual succeeded because of his
entrepreneurial characteristics alone or the strategies adopted by them. Again the
Page 86 of 253
entrepreneurial characteristics might have played an important role in shaping strategies
and surely it needs to be researched. The behavioral approach views the creation of an
organization in the context of outcome of many influences.(Gartner W. B.)27
.This
approach probably takes into consideration the inter play, cause and effect of various
external, internal factors and forces.
In a behavioral approach, the study of entrepreneurship treats the organization as the
primary level of analysis and the individual is viewed in terms of activities undertaken to
enable the organization to come into existence.(Gartner W. B., 1985)28
The personality
characteristics are ancillary to the entrepreneurship. There are studies quoted in
psychology which suggest that when an entrepreneur is being observed for his
entrepreneurial actions, the observers often conclude that the actions or results of such
actions are caused by the characteristics of the entrepreneur( like persistence, optimism )
while the entrepreneur may credit the situation or something about the situation. This
pattern is referred to as “fundamental attribution error” because the observer has a
tendency to place credit or discredit on personality characteristics and not enough on the
environmental or situational factors that motivated the entrepreneur to action. (Fiske S.T.
and Taylor, 1991)29
. This attribution error occurs because the observer’s first reaction is
caused by observing the individual rather than also analyzing the operational
environment in which, the entrepreneur acted. According to leadership researcher James
Meindl, the scholars and business reporters emphasize the leader’s individual
characteristics (personality traits)as the causes of performance and the business
environmental factors such as the other people, structural opportunities and constraints
did not get enough attention. (Meindl.J.R., 1990)30
.
Eric Ries a Sillicon Valley entrepreneur and the author of a book titled “The Lean Start
Up” in an interview has quoted entrepreneurship as being fundamentally interactive. An
interaction of the individual with many elements, objects in the operational environment.
Gartner also argues that all new ventures need some type of support which includes
finance, marketing, technology and it could further be extended to government support in
terms of incentives and conducive policies. This causes the interaction for seeking the
external support. Individual knowledge and skills are important in successful
entrepreneurship. (Habib, 2011)31
. They are important mainly because in the absence of
it, the interaction would not be effective, yielding results. But the success also depends
on using knowledge and skills effectively in a conducive atmosphere.
Page 87 of 253
2.4 Opportunity and Necessity Entrepreneurship;
An interaction between internal and external factors results into Entrepreneurship.
(Smith).This response to the environment is not uniform for all the individuals. Some
individuals respond to apparent business opportunities and in some cases unfavorable
circumstances force the individuals to be an entrepreneur. This response is defined as
“Pull” and “push “factors. (Buttener, 1997)32
,(Harding, 2006)33
,(McClelland,
2005)34
,(Stevenson, 1985)35
.
The “Pull” is considered to be a venture creation to seize a market opportunity and it is a
deliberate choice to become an entrepreneur. This is also termed as opportunity
entrepreneurship. The others are pushed into entrepreneurship because of adverse
conditions such as loss of job. This is also termed as necessity entrepreneurship. These
are two different situations and the characteristics of the individuals acting in these
situations cannot said to be the same. One is self driven,self motivated act where as other
is an act more out of compulsion.
A research conducted in Canada shows that entrepreneurs who have exploited
opportunities, are of pull category, with following characteristics,
1) Younger
2) More Educated.
3) Have better relevant skills.
4) They have better penchant to perceive business opportunity in the short term.
5) They have some recent contacts with an entrepreneur.
6) Have more positive view on growth of operations.
Reynolds et al. findings show that the opportunity entrepreneurs are older, that is they
are in the age group of 35 to 44. The necessity entrepreneurs on the other hand fall in the
age group of 18-24. (Reynolds, 2002)36
. Robichaud et al. findings were contrary to
Reynolds and it associates youth with opportunity entrepreneurship.(Lohest, 2011)37
.
Bergmann and Sternbey from their findings have vehemently stated that the level of
education impacts the entrepreneurship of an opportunity entrepreneur. (Bergmann,
2007)38
.
The results have also indicated that the pull category or opportunity driven entrepreneurs,
display more confidence, professionalism. (Yves Robichaud, 2010)2. Opportunity driven
or “Pull” entrepreneurs besides being more confident, are engaged in networking to a
greater degree than those who are pushed into business.(Solymossy, 1997)39
.
Page 88 of 253
Research has shown that networking is an important key to entrepreneurial
performance.(Lerner, 1997)40
It has also been shown that the link between the
opportunity driven entrepreneurs and the perception of opportunity as also the estimates
of more employees, probably required from the growth, expansion perspective are
indicative of aggressive growth intentions observed in the “Pull” category of
entrepreneurs. (Morris).It has been suggested that growth oriented entrepreneurs tend to
follow variety of strategies.(Morris, 2006)41
.These new strategies include manpower
addition, new product introduction, market penetration etc. (LeBrasseur, 2003)42
An entrepreneur is characterized by his innovative behavior, he deploys strategic
management practices, and he establishes or manages business to achieve his objectives
and goals. (James W. Carland, 1984)43
.
This definition also lays an emphasis on behavior rather than on inherent characteristics
or traits and probably also is indicative of the achievement needs of an entrepreneur.
There has been considerable emphasis on behavioral approach than the trait approach.
There are various studies which point towards the need to refocus on what an
entrepreneur does rather than addressing the question, what is an entrepreneur. Gartner
emphasizes the need to study the entrepreneurial field or observing the entrepreneur
while performing his entrepreneurial activities. Observing and studying the management
policies and strategies adopted by an entrepreneur is important to understand an
entrepreneur. It is said that organization skills are more relevant than behavioral. Gartner
argued that all new ventures require financial, marketing, and technological as also
government support in the form of various incentives, conducive policies to perform and
grow. The external environment is also a major contributor in the process of
entrepreneurship.
Many scholars argue as to why would one study entrepreneurship considering the
realities of this ecosystem. It is very difficult to obtain data, theory is in underdeveloped
state and the findings so far are similar to the findings of other areas of business. Still
there are some plausible reasons for the study of entrepreneurship. Much technical
information finds its presence in various products and services. Entrepreneurship
converts this information into the various products and services.(Arrow, 1962)44
. This
conversion is the route through which the information hitherto not available to many
reaches many. Entrepreneurship is a process through which longtime existing
inefficiencies in an economy are discovered and are resolved. (Kirzner, 1997)45
.In a
capitalist society amongst the many change processes Schumpeter recognized
“entrepreneurially driven innovation in products and processes”, as the crucial engine
Page 89 of 253
driving the change process”. Therefore, he observed that entrepreneurship cannot be
separated from the collective theories of markets, firms, organizations, and change makes
our understanding of the business landscape incomplete. Entrepreneurship since is the
outcome of entrepreneurial activity, entrepreneur and entrepreneurship cannot be
separated either in the study of entrepreneur or the entrepreneurship..
Many countries have placed emphasis on promotion of entrepreneurship as an element of
their economic growth and development policies. (African Development Funds., 2006)46
,
(European Commission, 2003)47
, (Leitao, 2009)48
, (Yves Robichaud, 2010)2
Scott Shane and S venkataraman in their article “THE PROMISE OF
ENTREPRENEURSHIP AS A FIELD OF RESEARCH” (SCOTT SHANE, 2000)49
while stating the absence of a conceptual framework of entrepreneurship, have presented
their conceptual frame work based on the earlier research in the field of social sciences
and applied fields of business. The strategic approach of entrepreneurship according to
them is not unique and does not provide adequate test of entrepreneurship, since
entrepreneurship is about discovery and exploitation of profitable opportunities. Strategic
approach mainly looks at the performance side of entrepreneurship. Conceptual frame
work too for assessing relative performance may be good and sufficient for strategic
management but not for entrepreneurship. Their attempt was to provide an integrated
framework for the researchers in the area of entrepreneurship, a framework which
recognizes the relationship amongst the various factors necessary but not sufficient to
understand entrepreneurship. Till date, most of the work in entrepreneurship while
defining entrepreneurship revolves around who is an entrepreneur and what he or she
does. Most of the definitions look at the relationship between lucrative opportunities and
the presence of enterprising individual. (Venkataraman, 1997)50
. There appears to be a
definite need to investigate relationship between different factors playing important role
in the entire process of entrepreneurship. This research could be considered as an attempt
towards that objective.
The definition of an entrepreneur as a person who establishes new enterprise is also an
incomplete definition as it overlooks the other considerations such as quality of
opportunities. It is not only establishment of enterprise which is important but far
important is the sustenance, growth of the enterprise and the role played by it in the
achievement of economic objectives. More exhaustive definition of entrepreneurship
could be the scholarly examination of the entire process,(that is how), the concerned
individual(by whom) the opportunities to create future goods and services are identified,
examined and then exploited definitely in the light of results achieved.(Venkataraman,
Page 90 of 253
1997)50
. The study on entrepreneurship essentially involves the sources of
entrepreneurial opportunities, the entire process of identification, assessment and
utilization of such opportunities, definitely in the light of the group of individuals who
are responsible for such discovery, assessment and exploitation of such opportunities. In
an entrepreneurial research the main research problems are basically concerned with the
“why, when and how” of the three major elements of entrepreneurship, the
entrepreneurial opportunities for the creation of goods and services, the characteristics of
the individuals who exploit such opportunities as distinct from others and the different
modes of actions used for the such an exploitation of entrepreneurial opportunities. The
Shane, Venkataraman framework focus on the existence of entrepreneurial opportunity,
its identification or discovery and its further exploitation, the influence of individuals and
opportunities, rather than environmental background and consequences; and this frame
work extends beyond the sole framework of firm creation. The entrepreneurial
investigation frame work thus assumes multidimensional approach. There appears to be a
further need to go beyond this and examine the relationship between different elements
involved in the process.
2.5 Entrepreneurial Opportunities
Entrepreneurial opportunities are very basic to entrepreneurship. If opportunities don’t
exist, entrepreneurship will not develop. These entrepreneurial opportunities are the
situations which lead to offering of manufactured goods, services, raw materials, to the
market at a price greater than their cost of production.(Casson, 1982)51
. Entrepreneurial
opportunities differ from other business opportunities as entrepreneurial opportunities
need new methods, processes where as others need more efficient optimization of the
existing processes and methods.(Kirzner, 1973)52
.There definitely is a difference
between an entrepreneur and an individual engaged in a business. Business appears to be
a more routine process of vocation.
Entrepreneurial opportunities are of different types. The earlier research on
entrepreneurial opportunities has focused on product markets
opportunities.(Venkataraman, 1997)50
Entrepreneurial opportunities also exist in factor
markets such as discovery of new material. (Schumpeter J. , 1934)1 Peter Drucker has
considered three different categories of entrepreneurial opportunities. The creation of
new information which occurs due to new invention, offers entrepreneurial opportunities.
The second one is exploitation of market inefficiencies resulting from information
asymmetry at all times and places. The third one is the reaction of the market to shift in
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the relative costs and benefits of alternative uses for resources due to various
environmental reasons be it political, regulatory, demographic changes.(Drucker,
1985)53
.
Entrepreneurship is about bringing together different resources to create the new product
or service. The effective management and control of these resources makes the
opportunity profitable. The entrepreneur’s assumptions about the accuracy of resource
prices must differ from those of resource owners and other potential entrepreneurs.
(Casson, 1982)51
. This brings out precisely the difference between an entrepreneur and a
non entrepreneur. If the resource owners are of the knowledge of the entrepreneur they
would price the resource in the light of that knowledge and the entrepreneur’s profit
would vanish. In an entrepreneurial opportunity the assumptions of the entrepreneur and
the resource owners must differ, otherwise there is no entrepreneurial opportunity. The
entrepreneurial profit will get divided amongst many and hence would not provide any
incentive to the potential entrepreneurs. (Schumpeter J. , 1934)1.
On commenting on the different beliefs of different market operators about the prices
market would offer, Kirzner has observed that the process of discovery in a market
requires the participants to understand each others’ expectations. The people decisions
are based on assumptions, intuitions, hunches, heuristics, information which may be
correct or wrong, which leads to correct or incorrect decisions.(Kirzner, 1973)52
.This
leads to shortages, surpluses, misallocated resources, and further exploitation of
opportunities. Schumpeter (Schumpeter J. , 1934)1 has referred to the constant
disequilibrium state of the economy. The technological, political, social, regulatory
changes lead to constant availability of new information on exploitation of resources in
different manners. This may transform the resource to a new valuable form, altering its
value and taking it to its new equilibrium price. As information is imperfectly distributed
in an economy and is not being received by all in its proper perspective, it leads to
creation of entrepreneurial opportunities.
Earlier research has suggested two main categories of factors that lead to discovery of
entrepreneurial opportunities by some and not by all. The first is possession of prior
information to identify opportunity and the second is cognitive, analytical characteristics
to value it. These could be the entrepreneurial characteristics. To recognize an
entrepreneurial opportunity the potential entrepreneur needs to have prior information
which compliments new information triggering entrepreneurship. This information may
be about the specific needs of the user or specific aspect of production or the process.
(Kaish, 1991)54
.(Von Hippel, 1997)55
(Bruderl.J, 1997)56
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It has been observed that same information is not generally shared by two individuals at
the same time. Venkataraman states that information about underutilized resources, new
technology, unfulfilled demand, political and regulatory framework is being recognized
by individuals according to the characteristics and circumstances of the select individuals
in the population.(Venkataraman, 1997)50
.
Even with the availability of the prior information for identifying an entrepreneurial
opportunity, it cannot be conclusively said that the opportunity would be exploited by the
one who possesses it, because of inability to conceptualize the exploitation process and
the end product or service emerging from the process. The process of visualization is
very difficult. Prior research has shown that people differ in their ability to decipher
consequential utility of such relationship. Research in the field of Cognitive science, has
shown that people differ in their abilities to translate existing concepts and information
into new ideas. (Ward, 1997)57
. Sarasvathy, Simon and Lava (1998) have shown that
where the entrepreneurs see entrepreneurial opportunity others sense risk.(Sarasvathy,
1998)58
. The individual entrepreneurial characteristics or traits such as propensity to
assume risk, conviction, determination, etc. may play an important role in the
exploitation of the opportunity. There is an interaction between an internal and external
factor in the process of entrepreneurship.
Though identification of an entrepreneurial opportunity is must in the process of
entrepreneurship, what is more important is the will and determination to exploit the
same. Not all opportunities result into entrepreneurial ventures. According to
Venkataraman(Venkataraman, 1997)50
exploitation of the entrepreneurial opportunity is
the function of characteristics of the opportunity and the individual.
It has been seen that the exploitation of an entrepreneurial opportunity is more if there is
greater availability of funding.(Evans, 1991)59
. In a review of research findings Aldrich
and Zimmer observed that good relationship with resource provider results in
exploitation of entrepreneurship opportunity. This brings out the importance of the role
required by external agencies including government. It has also been concluded that
persons with useful information related to entrepreneurial opportunity from the previous
employment, tend to exploit such an opportunity since such information reduces the cost
of opportunity exploitation.(Cooper, 1989)60
.The prior work experience of the individual
counts vastly in exploitation of entrepreneurial opportunities.
The differences in individual perceptions are also one of the differentiators between
opportunity exploitation or non exploitation, between an entrepreneur and non
entrepreneur. As for any exploitation investment of time and money is required upfront,
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there is always a downside risk of losing the same. The differences in assuming the risk
amongst the individuals influences the decision to exploit an opportunity. (Khilstrom,
1979)61
. Individual levels of optimism also influence the decision to exploit the
entrepreneurial opportunity. The individuals who exploit entrepreneurial opportunities
perceive their success in the entrepreneurial venture much higher than others in the
industry and even higher than the reality.(Cooper A. , 1988)60
.It has also been stated that
over optimism is observed in those individuals who exploit entrepreneurial opportunities.
(Audretsch, 1991)62
.
Researchers have also observed that the individuals who exploit entrepreneurial
opportunities have greater self efficacy and more internal locus of control. Since
opportunity exploitation has the higher element of ambiguity, individuals with higher
tolerance for ambiguity have observed to exploit the entrepreneurial
opportunities.(Begley, 1987)63
. Individuals with higher needs of achievement are more
likely to exploit entrepreneurial opportunity. (McClelland, 1961)64
.
A business starts with some individual eyeing an opportunity, developing an idea to
exploit the opportunity into a product or service. The entire process of business start up
is the perception, interpretation and combining both with prior knowledge into an idea
which with internal motivation translate into actual action, that is the entrepreneurial
venture. Many a times the idea may not totally befitting the opportunity and may require
manipulating the product, resources strategies, capabilities and organization to make the
fit. This dynamic construct may be termed as product of entrepreneurial mindset and the
action as entrepreneurial behavior.(Murray, 2012)8
It is necessary to find out how entrepreneurs find out opportunities. It has been observed
that very few entrepreneurs formally scan the environment. This is inferred because if
they really investigate the environment, we won’t find individuals in high competition,
low margin businesses like majority of the entrepreneurs do. (Johnson, 2004)65
.An
entrepreneurial opportunity or idea evolves with a frame work of time, place, prior
knowledge, motivation, and the creativity to relate all these. Opportunities are rooted in
individual’s personal knowledge, experience, personal aspirations, imaginations and fear
of uncertainty. Most ideas or entrepreneurial thoughts originate from some old idea,
some old observation of experience. (Murray, 2012)8. Most entrepreneurial ventures are
duplication of some earlier seen idea with or without modification.
Individuals working within a particular industry may see some units or customers not
satisfied with a particular product, or they feel something can be done better, or they
observe some more room for another direct competitor and hence they get into that
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activity. Working in a particular industry makes oneself more familiar with that industry
besides the work experience develops confidence, and it is easier to establish network.
This motivates many to establish entrepreneurial venture. The chances of survival in
such situations are more. Research has shown that the major reason why individuals get
into entrepreneurship is that they don’t like to work for others. Self employment is the
major reason for entrepreneurship.(Van Gelderan, 2006)66
(Hamilton, 2000)67
.
The entire process of entrepreneurship starting with Opportunity identification, strategy
development and execution is a multi dimensional process, where multiple factors are
interacting. Only psychological features, characteristics will not alone lead to
entrepreneurial behavior.
The various factors, a combination of socio-psychological characteristics that influence
entrepreneurial behavior can be represented by the following schematic diagram.
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2.6 Socio-Psychological Characteristics Influencing Entrepreneurial Behavior.
Figure 2.1
(Murray, 2012)8
A precise explanation of the phenomenon of entrepreneurship is not possible. It is an
outcome of various factors, internal as well external, personal characteristics, emotions,
traits, social situations, hence very complex to be described by a diagram. It is definitely
a trigger, which could be caused by an external or internal event, which pushes an
individual towards entrepreneurship. The external events could be loss of job, an
opportunity identified while in employment. Internal events could be job dissatisfaction,
frustration, internal desire to be on one’s own, etc.
2.7 Personal Paradigms
Murray Hunter has put forth a concept of a filter which shapes our perceptions, and he
calls it as “personal paradigms”. Personal paradigms are group of attributes which give
meaning for an individual to the information which he is using for his analysis and
decision making. He believes that these personal paradigms decide how an opportunity is
seen, evaluated and acted upon by an individual. Personal paradigms are considered to be
buffers between an individual’s internal and external world. The entire individual
process of perception, feeling and thought is related to personal paradigms.
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Some of the personal paradigms are alertness, the ability to be perceptive to the external
environment, ability to infer from the happenings, information in the external
environment where opportunities exist. High alertness is required to catch the
information, analyze the information and generate entrepreneurial ideas. Motives are the
factor which pushes an individual to act in a particular manner to satisfy one’s needs.
Prior knowledge is yet another personal paradigm. It is the accumulation of information,
knowledge as also experience by an individual over the tenure of his earlier work
life.(Von Hippel E. , 1994)55
.This helps the individuals to identify entrepreneurial
opportunities. This prior knowledge recognizes the opportunities which are there to be
exploited in the realm of related prior familiar areas. Shane states that an individual will
tend to identify opportunities which are related to his area of prior exposure and
knowledge. (Shane, 1999)68
.Consequentially individuals with no prior information or
exposure to that related area will fail to identify such opportunities.(Kirzner I. ,
1997)45
Every individual’s prior information will have different peculiarities and hence
there will be unique “knowledge corridors” with each individual that either assists in
identifying an opportunity or not.(Hayek, 1945)69
,(Ronstadt, 1988)70
.
Ardichvili, A. and Cardozo, R., Ray, S. have presented three dimensions of prior
knowledge. They have classified it as 1) prior knowledge of markets, 2) prior knowledge
of ways to serve markets, and 3) prior knowledge of customer problems. They further
break it down in two areas, the first is the knowledge of subject matter which is the
matter of special interest to the individual which provides a tremendous insight into the
said subject matter. The other one is work experience gathered over a long period. When
the information from the first area is combined with the second, it offers an individual an
opportunity to identify and grab an entrepreneurial opportunity.
The strategic outlook personal paradigm is about the vision, ability of an individual to
identify and critically assess opportunities, visualize them in real world perspective,
identify resource requirements and evaluate all the issues in a strategic manner. This
ability is also linked to individual creativity, perception of own talents, skills and
inclination towards action.
Tom Peters and Robert Waterman have stated “Bias for action “as one of the eight, basic
principles of excellence. Bias for action is the decision to do something rather than doing
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nothing. Individuals may identify opportunities but if the bias for action is not there in
the individual no entrepreneurial action will happen. (Peters, 2003)71
.Hence bias for
action which is seen in some only, can be one of the important characteristics of an
entrepreneur. The characteristics are the desire to achieve, be different than others and to
excel in one’s activity or profession.
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2.8 Variables in new Venture creation
Variables in new Venture creation
Figure 2.2
(Gartner W. , 1985)28
Environment Venture capital availability Leadership Presence of experienced entrepreneurs Technically skilled labour force Accessibility of suppliers Accessibility of customers or new
markets. Governmental influences Proximity of universities Availability of land or facilities Accessibility of transportation Attitude of the area population Availability of supporting services Living conditions. High occupational and industrial
differentiation High percentage of immigrants in the
population Large industrial base Large size urban area by government Availability of financial resources.
Changes.
Barriers to entry
Rivalry amongst competitors
Pressure from substitute products
Bargaining power of buyers
Bargaining power of suppliers.
Individual
Need for achievement
Locus of control
Risk taking propensity
Job satisfaction
Previous work
experience
Entrepreneurial parents
Age, Education
Process
The entrepreneur locates a business opportunity
The entrepreneur accumulates resources
The entrepreneur markets products and services
The entrepreneur produces the product
The entrepreneur builds an organization
The entrepreneur responds to government and
society.
Organization Overall cost
Differentiation Focus
The new product or
services. Parallel competition
Franchise entry Geographical transfer
Supply shortage Tapping unutilized
resources. customer contact
Becoming a second
source Joint ventures
Licensing Market relinquishment
Sell off of division Favored purchasing Governmental rule
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The above diagram vividly brings out the role played by different variables in the
process of entrepreneurship and the inter play between them which is necessary for the
process completion. The variables are internal as well as external. All the variables may
not be involved but an expanded picture always gives a clear idea of the process.
Studies on the entrepreneurs from the SME segment have identified variety of
entrepreneurial motivations. These motivations are of economic and non economic
nature.
2.9 Some Common Motivational Factors for Entrepreneurship.
Motivator Description
Achievement Need to master, manipulate, organize and arrange, object, people and
events in an accomplished way overcoming obstacles and excelling
Exhibition A need to be seen and heard by others and be the center of attention and
make an impression on others.
Order A need to put things in an orderly arrangement, balance and in precision
Dominance To seek and direct the behavior of others by persuasion and command,
coercion or seduction. To seek to control the environment.
Abasement To accept injury, criticism, and blame. To submit to the force of others
and resign yourself to the fate. To admit wrong doing, inferiority and
error.
Aggression To overcome any opposition forcibly. To avenge injury and hurt with
attack and oppression.
Autonomy To maintain free of others restraints, to break out of confines, to be
one’s own master.
Blame avoidance To avoid blame and humiliation at all cost to avoid situation that may
lead to embarrassment, to refrain from action because of fear of failure.
Affiliation/intimacy To seek cooperation with others, to draw near and close to others, to win
affection of others, to be liked to develop loyalty and receive loyalty
from others.
Nurturance To take care of others in need to give sympathy and gratify the needs of
helpless others.
Succor To receive help from others to have one’s needs, gratified by another, to
be indulged, nursed, supported, and protected by others
Table 2.2
(Murray H. , 1938)72
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An example of these motivators could be an additional source of income, or desire for
independence respectively. Many researchers have put forth need for autonomy and
independence as one of the important motivators for the entrepreneurship. (Adrien,
1999)73
,(Carter, 1992)74
. Kirkwood after analysis of various reasons for entrepreneurship
arrrived at a four broad groupings viz. a desire for independence,financial motivations,
factors relating to family and factors related to work. (Kirkwood, 2003)75
Inability to achieve personal development in one’s work and or non fulfillment of the
need for recognition result into professional and personal dissatisfaction. This often leads
to entrepreneurship which has been considered as necessity entrepreneurship.
(Noorderhaven, 2004)76
.Some researchers have classified the entrepreneurship as
necessity or push type of entrepreneurship where the enterprise has been created by an
individual just to meet family expectations or to continue the family tradition. They are
rather pushed into entrepreneurship. In many a cases individuals are pushed into
entrepreneurship because of the obligation to take over family business. (Bhola, 2006)77
In conclusion, we can say that study of entrepreneur, entrepreneurship cannot happen in
isolation. Any research on these topics have to examine the various elements like
entrepreneur, entrepreneurship, the entire process and other factors from the external
environment associated with it. A definition of entrepreneur is linked to the process of
entrepreneurship and vice versa.
It is difficult to identify precisely the characteristics or traits of an entrepreneur as they
are not general in nature. These traits could be subjective and many in number. In many a
situations a trait or characteristics may not be visible on its own but acting with some
other situational factor the inbuilt trait gets magnified. Some of the traits are inherent,
some are acquired and even some are situational. These traits come into play many a
times in an entrepreneurial activity. An entrepreneurial activity again is multifaceted. It
consists of strategies, policies, interactions. We need to proceed further in an
entrepreneurial study in other related areas to have deeper understanding of the
phenomenon.
2.10 Competitiveness
The success of an entrepreneur is judged by the success of his enterprise. The enterprise
performs with the entrepreneur at the helm. The entrepreneur guides, directs and
navigates his enterprise and the entire course the enterprise takes and achieves, is the
entrepreneurship of the entrepreneur. The enterprise operates in a competitive
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environment and all its strategies, policies are supposed to have a competitive
perspective. The sustenance and growth is definitely linked to competitiveness of the
enterprise.
Various research papers have brought forward the absence of a universal and exact
definition for competitiveness. This has left to the assumptions of many to come out with
the definition perceived in different perspectives and may be in different situations. As a
result, competitiveness has received many definitions from many researchers and
authors.
Some researchers and organizations define competitiveness as the ability of the
organization to “persuade customers to choose their offerings over alternatives”.
(Chaharbaghi, 1994)78
.Rainer Feurer and Kazen Chahanbaghi have given a holistic
definition of Competitiveness, “Competitiveness is relative and not absolute”. The
competitiveness of an enterprise is dependent on its value proposition to its shareholders
and customers, its financial strength which in turn determines its ability to operate within
competitive environment and most importantly, the quality and potential of its
manpower, technology for implementation of its strategic plan. Competitiveness can
only be achieved and sustained if an appropriate balance is maintained between these
factors, which can be of a conflicting nature”. (Chaharbaghi, 1994)78
. Some view it as
the ability of the organization to improve continuously process capabilities. It probably
extends beyond that and, it presumes the benefits which follow the improvement in
process capabilities. Core competencies as well as capabilities that drive competence can
be considered as essence of competitiveness. Again a core competency is a vague
concept and even capabilities could be a part of core competency. These two could be
interrelated too. It could be said that, competitiveness is the end result of the strategies
and policies adopted by the entrepreneur and it is the culmination of various operational
decisions taken by the entrepreneur in the short, mid and long term. Hence there appears
to be the need to define competitiveness in a holistic manner. This approach should be
more comparative, bench marking against certain competitiveness measure. Such a
measurement should allow a comparison of the competitive position of an organization
against that of its competitors.
Entrepreneurial performance by earlier studies on “Entrepreneurial Heuristics” has
shown that firm or enterprise performance varies significantly with the types of policies
and strategies adopted by the enterprise (entrepreneur). Such policies and strategies are
often termed as ‘heuristics’ because of their non-formal and evolutionary nature. In an
entrepreneurial venture the primary source of such policies, strategies, or heuristics is
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naturally the founder who normally has the maximum influence on the decisions made in
the enterprise. In entrepreneurship, a relationship between founder characteristics and
policies, strategies designed and adopted by the entrepreneur of the enterprise may be
observed.
“The essence of formulating competitive strategy is relating a Company to its
environment”. (Porter, 2004)79
If the competitive strategy is dependent on external
environment, it implies that the assessment of the competitiveness of a firm has
necessarily to be a comparative analysis of a firm with similar types of the firms
operating in the environment.
Porter considers product differentiation, overall leadership, and focus as the three
Generic strategies. Product differentiation according to him is brand identification,
customer loyalties steaming from past advertising, customer service, product differences
achieved by the firm. (Porter, 2004)79
. Competitiveness could be also achieved simply
being the first in the industry. This could not be the competitiveness of operations of the
company but an advantage of being first in the market to supply product, which hitherto
was not supplied or was inferior. Here customer service would also include quality as the
ultimate quality of Original Equipment Manufacturers (OEM) product is dependent on
the quality of its components secured from various vendors. One of the competitive
strategies according to Porter is to achieve overall cost leadership in an industry through
functional policies, such as aggressive construction of efficient scale facilities, vigorous
pursuit of cost reduction from experience, tight cost and overhead control, cost
minimization, in areas like R & D, service, sales, advertising etc.
Focusing on a particular buyer group, segment of the product line or geographic market
is the third generic competitive strategy, according to Porter. The enterprise creates a
niche position of its own. The policy concentrates on target market whose needs are not
satisfied by way of service or product. It implies servicing a particular target very well..
“The strategy rests on the premise that the firm is thus able to serve its narrow strategic
target more effectively or efficiently than competitors” (Porter, 2004)79
.
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2.11 Porter’s Competitive Strategies.
Porter talks of need of different
resources and skills in
implementing the generic
competitive strategies. It also
requires differing organizational
arrangements, control procedures,
inventive systems as also sustained
commitment to one of the
strategies. In his analysis he puts
forth some commonly required
skills and resources and common
organizational requirements as
given below. Generic Strategy
Commonly Required
Skills and Resources
Common
organizational
requirements.
Overall cost leadership Sustained capital
investment and access to
capital.
Process engineering skills
Intense supervision of
labor
Product designed for ease
in manufacture
Low cost distribution
system
Tight cost control
Frequent, detailed
control reports
Structured
organization and
responsibilities,
Incentives based on
meeting strict
quantitative targets.
Differentiation Strong marketing abilities.
Product engineering
creative flair.
Strong capability in basic
research.
Corporate reputation for
quality or technological
leadership.
Long tradition in the
industry or unique
combination of skills
Strong coordination
among functions in
R & D. product
development, and
marketing.
Subjective
measurement and
incentives instead
of quantitative
measures.
Amenities to attract
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drawn from other
businesses.
Strong cooperation from
channels
highly skilled labor,
scientist or creative
people.
Focus Combination of the above
policies directed at the
particular strategic target
Combination of the
above policies
directed at the
particular strategic
target.
Table 2.3
(Porter, 2004)79
The above table gives us the various elements, actions, resources required to formulate
and implement competitive strategy. The model is exhaustive. In a segment of Micro
Small and Medium Enterprises (MSME)it would be difficult to have all the resources,
skills, capabilities. For example strong capabilities for basic research, engineering design
capabilities, processing capacity, ability to infuse capital etc. Hence the above model
would be more appropriate in the case of large companies. But at the same time the
MSMEs may definitely indulge in practices such as product differentiation, quality, cost
competitiveness, service, product engineering.
Ability to act and react within its competitive environment is considered to be an
important component of competitiveness. The act and react in this case may be act in
response to the needs of the customer and market and react, meaning changes in policies
in tune with the environment and market changes. This at times may need adequate
financial resources to achieve, technological up gradation and also essential to employ
people. An organization is considered to be competitive by its customers, if it is in a
position to deliver a better value proposition as compared to its competitor. Act and react
implies the capacity of the firm to maintain its competitive position by satisfying the
expectations of customers and constantly eliminating threats and exploiting the
opportunities which arise in the competitive environment. Continuous improvement of
the product, services and capabilities of the organization can only assist the organization
to maintain its competitiveness, the level of technology and capabilities of the employers
in achieving and sustaining competitiveness.
Competitiveness cannot be measured or described by a single parameter. It has to be
measured by various parameters from different operational areas. Competitiveness as the
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word implies, is relative and absolute too as it has significance with respect to the type of
industry, the area and the entrepreneur.
To ascertain the competitiveness of a firm, a measurement system comprising different
dimensions is essential. The important dimensions could be customer values, shareholder
value (in this research it could the owner –entrepreneur, where the shareholding is
limited to the entrepreneur and or his family and friends.) technology and manpower.
Customer values are a combination of benefit accrued by customers for a given price for
a product, service and it includes all aspects of physical product. It is the product
characteristics, the process of delivery. It could include cost, speed, flexibility,
dependability. Measurement of shareholder value (entrepreneur/owner value) is by the
return on investment achieved and other evaluator factors could be earnings per share,
payout ratio, dividend yield or more relevant for MSMEs could be ability to acquire
large OEMs order, sustain that order, growth in sales, fixed assets etc.
It is not possible to develop a universal framework for measuring competitiveness. The
measure which defines the ability of the firm to act and react within competitive
environment, profit, ability to raise capital, cash flow, appropriateness of technology and
quality and ability of manpower would be the parameters required to be considered for
confirming the competitiveness of the firm. (Chaharbaghi, 1994)78
.
The operational support to an enterprise by the practices and processes adopted by an
enterprise termed as “soft Technology” along with the procured and developed
equipments, technology, innovations, input materials, called as “Hard Technology” has a
positive relationship with the performance of an enterprise.(Vargas, 2007)80
. Superior the
hard and soft technology better the performance and competitiveness.
Access to relevant technology, excessive costs of product development projects, absence
of effective marketing techniques and limited market research have been identified to be
the main constraints in the competitiveness of MSMEs. (Gunasekaran, 2001)81
, (Chorda,
2002)82
, (Singh R. K., 2010)83
.
It has also been observed that the areas of strategy development for MSMEs are supplier
development, total productive maintenance and organizational culture. The major focus
of the MSMEs is found to be on supplier development as most of them are vendors to
Original Equipment Suppliers (OEM), hence quality at all levels is very crucial and
important. It has also been observed that SMEs, in India pay lowest attention to I.T.
applications. It has also been inferred that Indian MSME strategies such as HR
development, quality improvement, IT applications, are significantly correlated with
competitiveness.
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2.12 I.T. Technology and Competitiveness in MSME
An I.T adoption survey by Dun and Bradstreet conducted in 2009 (Singh, 2010)84
found
that 80% companies in the Pune cluster had I.T adopted processes in their operations as
against 30% in Chennai region. This was attributed to higher revenue of the firms which
adopted I.T. The Pune companies allocated more I.T. budget for hardware and softwares
applications like ERP, accounts software, CNC were few of the adopted I.T applications.
High cost of implementation is the major issue in low IT adoption. The answer could be
tailormade software products, that are cost effective. Another issue is lack of awareness
about ICT related issues. Dissemination of information is considered to be an important
tool to help I.T. adoption and greater penetration. The government for dissemination of
appropriate information can set up a web portal to dessimination of ICT related issues.
This would help SMEs knowing and deciding about the right technology implemant. It is
also suggested that along with government initiatives, MSMEs themselves need to take
initiatives in the adoption of I.T. processes to enhance their competitiveness.
2.13 The Nine Components of Competitive strategies.
The nine components of competitive strategies of MSMEs, identified in order of
importance are as follows.
1. Supplier Development.
2. Total productive Maintenance.
3. Organizational Culture.
4. Customer satisfaction.
5. Quality improvement.
6. Development of Human Resources.
7. Cost Reduction.
8. Competencies Development.
9. IT applications.
(Singh R. K., 2010)83
2.14 The Chinese MSME growth strategy: “Guanxi”
The growth of Chinese MSMEs has been attributed to the implementation of a strategy
which encourages SMEs to develop according to their unique nature and circumstances.
“Guanxi” has been quoted as an important essence of the Chinese approach to business.
“Guanxi” has been defined as ‘existence of direct particularistic ties between one or
more individuals”. It implies that internal management processes are more flexible,
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dynamic as compared to the practices in the west. Minimization of transaction cost by
informal relationship development which is basically highly personalized and fluid is an
important component of the strategy. In the startup period enterprises, aim to create
capabilities to minimize cost, achieve reduction in operation cost by procuring cheap
material, simplifying production process and duplicating western product designs,
compete on price rather than on quality.(Singh R. K., 2010)83
. This appears to be an
appropriate, situation and culture based competitive strategy.
In a manufacturing enterprise manufacturing activity is definitely at the core of the
business of the enterprise. A manufacturing performance which is superior to others
definitely makes the unit competitive. In fact productivity and superior performance are
one and the same. The superior performance encompasses quality and efficiency.
(Leachman, 2005)85
. (Porter M. , 1998)86
.
To remain competitive the MSMEs have to benchmark themselves continuously with the
best practices in the industry. Market conditions would be the guiding force for
formulating strategies and policies. The implementation of these strategies and policies
would lead to performance improvement and in turn competitiveness. This is depicted
well by the following diagram. (Singh R. K., 2008)87
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2.15 Market conditions, Strategies (Framework for Competitiveness Analysis.)
Figure 2.3
(Singh R. K., 2008)87
2.16 The MSME Competitiveness- Challenges
The global as well as domestic competition has forced the firms to outclass others in
many areas such as innovativeness, response to customers, which necessitated enhancing
performance standards in many areas such as quality, cost, productivity, product launch
time, and smooth flowing operations. The capability of the firm to increase business,
excel in manufacturing process to meet the challenges of the global (as well as domestic)
competition are the prerequisites of achieving and maintaining competitiveness in the
long term. In this pursuit the enterprises have to adhere to low defect rates through
quality, excellent product features, competitive prices and delivery performance.
(Lagace, 2003)88
(Singh R. K., 2008)87
.Some of the major challenges for the SMEs to
achieve and remain competitive are up gradation of technology, new product
development, human resources development, partnership with customers, suppliers.
The constraints experienced by the MSMEs in attaining and maintaining competitiveness
have been summarized as
Inadequacy of Technology and other resources.
Market
Conditions
Pressures
Constraints
Strategy
Development
Benchmarking
of Processes
and
Performance
Competitive Priorities.
Process and Management
Practices.
Performance
Page 109 of 253
Far higher or sometimes exorbitant cost of product development.
Inefficient or absence of proper market research and (sales)Marketing.
Inability in meeting the demand of multiple technologies.
Lack of coordination or communication gap between marketing and
production function.
Inadequacy of funds to resort to ICT or advanced software to implement
enterprise resource planning.
(Gunasekaran A. , 2001)81
(Chorda L. A., 2002)82
(Singh R. K., 2008)87
Competitiveness of an enterprise is its ability to perform well in all the areas such as
cost, quality, dependability, innovation and is also possess flexibility of adopting to
demand variations. (Carpinetti, 2000)89
. The four well accepted competitive priorities,
cost, delivery, quality, flexibility are mostly related to manufacturing process.
There are different Strategic initiatives but almost all the initiatives focus on improving
market information, workforce development, supply chain improvements, quality
standards, branding forward integration and process improvements.
The policy and institutional obstacles experienced by the enterprises in the achievement
of competitiveness could be effectively overcome in the best way by a cluster based
approach.
A major measure of competitiveness of a country is the productivity with which the
country uses its human and natural resources. The same can be applied to Industrial units
and enterprises. Competitiveness is definitely not a static concept, but it is dynamic and
again not restricted to only cost and price, as it was earlier. It is now involving
techniques like connectivity, standards, certifications, quality, and innovation
exploitation of geographic and cultural benefits. A sound competitiveness policy should
include appropriate incentive; it should have an effective administration to ensure that
resources flow to an enterprise with comparative advantage and economic efficiency.
The incentive schemes should reward units with good performance exhibited by high
productivity.
Page 110 of 253
2.17 Core Policy Framework for Competitiveness.
Figure 2.4
( World Bank, 2009)90
.
Though the above policy framework has been designed more from the objective of
making units export competitive, the same framework can also be used for the MSME
enterprises for building their capacity, capability and making them competitive. The
factors which are important or relevant for the Manufacturing MSMEs have been
highlighted.
World experience has clearly pointed out that only macroeconomic policies alone cannot
be sufficient to facilitate and sustain improvement in competitiveness. Its conversion to
implementation and operations of firms and markets is also important. Enterprises whose
cost for energy, transport, logistics, finance, specialized skills, is more in comparison to
other enterprises will find it difficult to be competitive. Competitiveness is also about
making production and exchange of goods and services more advanced. Making the firm
sophisticated. An enterprise’s productivity is linked to the environment in which it
works. That is the reason why for increased competitiveness the enterprises have to
depend on government and other institutions. ( World Bank, 2009)90
2.18 Factors enhancing competitiveness
i) 2.18.1 Strategic Planning by MSMEs
To be a competitive enterprise could be the most important objective of MSME units.
Several hard and soft technology measures can be taken to take the unit on the path of
competitiveness. The competitiveness will not be achieved only by improving
Services and Costs: Energy, Telecommunication,
Customs services, transport and logistics,
specialized skills, business services.
An Economic incentive Regime.
Import-Export tariffs, exchange rate systems, factor
market, and tax policies.
Pro active policies and institutions.
Export and investment promotion agencies.
Standards bodies, agency to support innovation and
R & D, cluster facilitation, agencies to help skills
transfer
Page 111 of 253
manufacturing conditions and parameters but it needs to be extended to all other business
functions. This can be achieved only by strategic planning.
Calvin Wang, Elizabeth Walker, Jenice Redmond referring to the various research
studies carried out into SMEs (byLurie 1987,Schwenk and Shrader 1993,Miller &
Cardinal 1994,Hormozi Sutton, McMinn & Lucio 2001) suggest that the key determinant
of success in business is the presence or absence of strategic planning in a SME.. (Calvin
Wang, 2007)91
. (Miller C. C., 1994)92
(Lurie, 1987)93
, (Schwenk, 1993)94
(Miller C. C.,
1994)92
(Hormozi, 2002)95
Strategic planning is setting long term organizational goals, the development and
implementation of the plans to achieve objectives. It also involves allocation of resources
towards the plan execution. (Stonehouse, 2002)96
(O'Regan, 2004)97
.Strategic planning is
carried to achieve Competitiveness. Ohmae has stated that the purpose of Strategic
Planning is to enable business to gain as efficiently a sustainable edge over its
competitors. (O'Regan N. G., 2002)98
.It has been observed that Strategic Planning is
present in companies which are performing well than those whose performance is not
good. SMEs who have well laid strategic policies and plans achieve higher sales growth,
higher returns on assets, higher margins on profits and higher employee growth, which is
quite obvious.(Bracker, 1988)99
Ownership motivations are important determinants in
understanding planning practices in SMEs. These motivations to a greater extent decided
whether an entrepreneur adopts strategic planning or not. Strategic planning is observed
and adopted more if the objectives of the entrepreneur are growth oriented. If the
entrepreneur objectives are non economic such as independence, higher job satisfaction,
which are more personal, he will not adopt strategic planning. It is a fact that many
owner managers do not want to grow and want to stay small. Many SMEs are not
‘entrepreneurial’ and will never engage in active growth activities including strategic
planning. Consequently what strategic or management policies an entrepreneur decides
to adopt and practice would be dependent on the objectives of the entrepreneur. (C
Wang, 2006)100
Strategic planning, it is observed by many researchers leads to enhanced performance of
an enterprise. Many researchers have concluded that SMEs do not resort to strategic
planning. Absence of long term vision and decisions with myopic vision is characterized
in SMEs. Absence or presence of strategic planning is an important determinant of
business success. (Lurie, 1987)93
(Schwenk C. , 1993)94
(Miller, 1994)92
(Hormozi A.
)95
.Strategic planning in brief is setting long-term goals, development of and
implementation of the same, allocation of available resources to achieve the set goals.
Page 112 of 253
(Stonehouse G. P., 2002)96
, (O'Regan N. , 2004)98
. Empirical research has supported the
finding that better performing SMEs have strategic planning, which results in higher
sales growth, higher returns, higher employee growth, and higher returns on asset and
margins of profit. (C Wang, 2006)100
, (Bracker J. P., 1988)99
(Berman, 1997)101
.The
main objective of strategic planning is to acquire sustainable edge over competitors,
efficiently and effectively. (O'Regan N. , 2002)98
Some research has indicated that few SMEs resort to Strategic Planning. The reasons put
forth for non adoption of strategic planning have been identified as lack of Time, lack of
specialized expertise, inadequate knowledge of planning process, or reluctance to share
the strategic plan with the employees or the outsiders. (Robinson, 1984)102
.
It has also been stated that adoption of the process of Strategic Planning depends upon
the stage of development of the firm or life cycle. (Berry, 1998)103
. In early
establishment phase the enterprise especially MSME may not have the resources, which
includes time. In this phase probably such unit’s first objective is to sustain.
Most MSMEs pursue the vision and mission of the entrepreneur. The actions, decisions,
originate and move with the thought process of the owner entrepreneur. The goals and
objectives of the entrepreneur become the goals and objectives of the enterprise. Hence
when studying the policies and strategies of the enterprise, it is necessary to study the
same in the light of the characteristics of the entrepreneur. The motivations, ambitions,
may be influenced by the characteristics of the entrepreneur. The Strategic planning is
hindered in SMEs by various reasons and there are many barriers to adopting strategic
planning. These barriers could be of two types. One Organizational barrier, two,
Individual or Entrepreneurial centric barriers. The enterprise’s indulgence in strategic
planning is dependent on the objectives adopted by the entrepreneur. The entrepreneur
may pursue Profit Growth and Maximization objective or Personal fulfillment objective.
As has been observed, if the objective of Profit Growth and Maximization is pursued
then the entrepreneur adopts strategic Planning. In other case if the personal fulfillment
is the main objective the levels and degree of strategic planning is either low or it is
absent. As strategic planning leads to competitiveness, the adoption of vision, mission by
the entrepreneur decides the competitiveness of the enterprise. (C Wang, 2006)100
Page 113 of 253
2.18.2 Motivations -Strategic Planning.
Motivators of Strategic Planning
Figure 2.5
(C Wang, 2006)100
2.19 Manufacturing Sector and contribution to GDP
Manufacturing assumes importance in almost all economies of the world and it is a core
activity of any economy. This is true of Indian economy too. Currently manufacturing
accounts for about 15 % percent of the country's GDP. The SME sector’s contribution to
the total manufacturing output is about 45% and this segment contributes about 40
percent of the total exports.
Information on the production of Micro, Small and Medium Enterprises (MSMEs) in the
country is collected by conducting All India Census of the sector, periodically. As per
the latest Census (Fourth Census) conducted (with base reference year 2006-07) wherein
data was collected till 2009 and results published in 2011-12, gross output of MSME
Sector has annual compound growth rate of 30.72 percent at current prices as compared
to the Third All India Census of Small Scale Industries (with base reference year 2001-
02), published in 2004. Based on the data published by Central Statistics Office, Ministry
of Statistics and Programme Implementation, the annual compound growth rate of gross
domestic product (GDP) is 13.51 percent at current prices during the same period.
(Ministry of Micro Small and Medium Enterprises, 2013)104.
Owner-Manager’s
Motivation For
Being in Business
Profit Or
Growth
Maximiz
ation
Higher
Levels of
Strategic
Planning
In SMEs.
Personal
Fulfillmen
Lack Or
Lower
Levels Of
Strategic
Planning
in SMEs.
Page 114 of 253
In a written reply to a question in the RajyaSabha Mr. K.H. Muniyappa stated that based
on data of GDP published by Central Statistics office, Ministry of Statistics and program
implementation the estimated contribution of MSMEs to Gross Domestic Product of the
country is as follows
MSME contribution to GDP.
Year Share of MSME sector in GDP%
2006-07 7.20
2007-08 8.00
2008-09 8.72
Table 2.4
(Ministry of Micro Small and Medium Enterprises, MSME contribution to GDP,
2013)104
As per a press release of ASSOCHEM (Embargo for Release on Sunday, May 12, 2013 -
Share of manufacturing in India’s GDP declining, reversing the targets
Saturday, May 11, 2013 ) the share of Indian manufacturing in GDP has declined to
15.2% in the fiscal 2012-13 and its showing a declining trend. Further it is expected to
fall below 15 % in the financial year 2013-14,which is definitely detrimental to the
overall economy.
The Government of India is aiming to bring manufacturing’s contribution to GDP to a
level of about 25 percent by 2020.MSME segment will also have to play an important
role in enhancing its contribution too.
In the MSME segment growth is considered to be achievable only by adopting measures
for enhancing competitiveness. Hence the government policies for MSMEs are directed
towards increasing the competitiveness of the MSME segment.
2.20 The ingredients of an Effective MSME policy.
In a production ecosystem along with land, labor, capital, entrepreneurship is also
considered to be an important factor to produce goods and services. In order to assess the
impact of the entire ecosystem on entrepreneurship it is very essential that an assessment
be done in the context of following parameters.
Page 115 of 253
Parameters
Local environment
& ecosystem
Infrastructure Finance Manpower
Issues
Regulatory
issues
Governance
issues
Support
organizations/incub
ation centers
Road networks Availability
and access to
various sources
of finance.
Availabilit
y of skilled
manpower
Labour
regulations
Bureaucracy
/corruption
Sub Entrepreneurial
education
Railways Availability of
debt loans from
Banks/Instituti
onal investors
Cost of
manpower
Ease of
regulatory
and legal
procedures
for setting
up an
enterprise
( single
window
clearance)
Fiscal
policy, Tax
administrati
on
Mentoring
facilities/
Networking
opportunities
National
connectivity
Venture
capital/ Private
equity
Security of
manpower
Availability
of
information
for setting
up/expandi
ng an
enterprise
( policy,)
Information
on
intellectual
property
rights
parameters Seed funding International
connectivity
Govt. funding Activities
of Trade
unions
Subsidies
inputs( like
land,
electricity
etc.)
Tax
holidays
Angel investor Availability of
power
Favorable
policy
framework
Cost of power
Availability of
water
Telecommunicati
on service
I.T.
Infrastructure
Warehousing and
logistics
Table 2.5
(KPMG, 2008)105
Page 116 of 253
In analysis and designing positive, effective policies for the favorable impact of the
ecosystem on the entrepreneurship the above factors play an important role. If you
analyze the above factors and parameters, the role of government is quite evident. The
above frame work is quite useful in analyzing and also designing an effective policy
framework for the capacity and capability enhancement of the MSMEs.
The government’s efforts since 1990 has been primarily to enhance the capacity and
capability of MSMEs and make them more competitive. The policies of the government
have centered around this fundamental, important objective. In the light of the dropping
contribution of manufacturing to GDP and the need to enhance the same to more
reasonable level as global standards, it is essential that MSMES are made competitive
and thus productive. The policy framework adopted under the 12th
five year plan is well
presented by the following diagram.
2.21 12th
Five Year plan :MSME Strategy Triangle
Figure 2.6
(P.M.Mathew, 2011)106
India Micro, Small and Medium Enterprise Report 2011
The plan envisages a cluster approach through quality investment for a faster, inclusive
sustainable growth of the MSME segment. This approach is expected to make MSMEs
more competitive which is the need of the hour. The cluster approach, the major
backbone of the MSMES policies since 1990 has yielded good results.
Page 117 of 253
2.22 Government schemes for MSMEs
Focal Areas of MSME Policy in India
No. Focal Area Policies Schemes
1. General Policy of Reservation
Reserved Items
Licensing Policy
Trade Policy – Imports & Exports
Price & Purchase Preference Policy
Labour Policies
Rehabilitation of Sick Units
Single window scheme
Industrial estates
National Awards for outstanding
SSI Entrepreneurs
National Awards for Quality
Products in Small Scale Sector
National Award for banks
2. Priority Sector Policy for Tiny Sector
Cottage & Village Industries,
Handicrafts, Khadi & Handlooms
Development of Backward Areas
PMEGP
RGUMY
Assistance to SC/ST
Entrepreneurs
3. Funding &
Finance
Policy of Fiscal Support Policy of
Priority Credit
Equity Participation
Excise Exemption Scheme Tax
Holiday
Venture Capital
National Equity Fund Scheme
Other SIDBI Schemes
NSIC Schemes
4. Modernization
& Training
and Cluster
Development
Quality Certification Schemes (ISO
9000)
Application for the Reimbursement
of Certification Charges for
acquiring ISO 9000 Certification
(or its equivalent) Policy of
Technology Up gradation
(UPTECH) Technology Bureau for
Small Enterprises Policy for
Development of Information
Technology National
Manufacturing Competitiveness
Programme
Technology Development Fund
Schemes Testing Centers
Integrated Infrastructure
Development Training
Infrastructure
Growth Centers
Technology Development &
Modernization Quality
Certification Schemes
Modernization of Small Scale
Industries Ancillary Development
Small Entrepreneur Management
Assistants Scheme
Entrepreneurship Development
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Programme
Management Training
Programme Skill Development
Programme
5. Energy &
Environment
Pollution & Control Measures
Environmental Control
Pollution Control Schemes
Energy Conservation Schemes
Alternative Energy Use Schemes
Ozone Depleting Substances
Phase out
Table 2.6
(P.M.Mathew, 2011)106
India Micro, Small and Medium Enterprise Report 2011.
It would be observed that the schemes promoted by the government has a wider focus.
The important operational areas where the MSMEs need assistance have been covered
under the government policy.
The Ministry of Micro, Small and Medium Enterprises (MSME) provides incentives
under its various schemes and programs with a view to promote Micro, Small and
Medium Enterprise (MSME) in the country. The major schemes/ programs include
Prime Minister's Employment Generation Programme (PMEGP), National
Manufacturing Competitiveness Program (NMCP), Credit Guarantee Scheme (CGS),
Credit Linked Capital Subsidy Scheme (CLCSS) and Cluster Development Program
(CDP).
The total canvass of promotional schemes of the Government, comprises schemes which
envisage a role for Business Membership organizations, associations. The said scope has
been limited mainly to promotion and creation of awareness. There is a definite need for
the review of said scope. There are schemes promoted by sector specific ministries and
cross cutting ministries. Ministries such as Textiles, Food processing, Health focus on
the respective sectors and ministries such as MSME, Commerce, Industry, finance focus
on across the segments.
The development and promotional schemes which are either unit based or cluster based
have different objectives. The schemes which are primarily unit based where individual
units are beneficiary are aimed at enhancing the competitiveness of the units through
technology up gradation support, assistance for marketing access, product, process
Page 119 of 253
development, training, skill up gradation. The schemes which have been promoted for
individual units are,
1. Credit Linked Capital subsidy scheme of MSME Ministry primarily directed
towards Technology up gradation.
2. Technology Up gradation scheme of Ministry of Textiles, for up gradation of
technology of Textile units.
3. Schemes for Ayurveda, siddha & unani (ASU) drug manufacturers to strengthen
in house quality control requirements and to meet the requirements of Good
Manufacturing Practices.
4. Credit Guarantee Fund scheme of Ministry of MSME to facilitate access to
finance.
5. MSME ministry’s financial support scheme for obtaining certification of quality
control.
6. Market development assistance scheme from MSME ministry for the
development of markets for individual units.
7. Financial support for Research and development for new product/process
development from Department of Science and Technology.
The cluster approach for capacity enhancement of the MSMEs has been derived from the
experience of such schemes in Europe and other continents. This approach has been
accepted well and have shown good results in the European region as well as India. The
cluster schemes are basically for number of units who have come together to pool their
resources and overcome gaps which the units on their own find it difficult to address.
These schemes are either primarily oriented towards creation of good infrastructure,
bridging the infrastructure gaps and creating common facilities such as raw material
testing, marketing under a common brand, power supply, transportation etc. some such
schemes are,
1. Integrated Textile park scheme promoted by Ministry of Textiles.
2. Industrial Infrastructure Up gradation schemes (IIUS) from Department of
Industrial policy and promotion (DIPP) to provide quality infrastructure in sector specific
clusters.
3. Scheme of Funds for Regeneration of Traditional Industries (SFURTI) for Khadi
Village Industries.
4. Integrated handloom cluster Development program.
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5. Mega Food Park.
The scheme of latest origin is the “Lean Manufacturing cluster scheme “introduced on a
pilot basis in 2009 and subsequently introduced as a regular scheme in 2013. Very
recently considering the necessity of promoting Electronics manufacturing in the
country, to reduce the major imports, Electronic cluster schemes have been introduced.
The clusters under the scheme are of two types. The brown cluster, a cluster to be created
by existing units and Green cluster, a cluster of new manufacturing units, in a green
field.
Page 121 of 253
The Economic Geography of MSME Clusters in India.
State Number of Clusters Number of Units Employment
Registered Unregistered Registered Unregistered Registered Unregistered
Jammu &
Kashmir
13 13 2016 8582 5561 16801
Himachal Pradesh 20 10 4451 10963 8132 12855
Punjab 67 12 15568 20431 88939 34798
Chandigarh 1 3 118 4050 670 9612
Uttaranchal 17 3637 7030
Haryana 38 2 7468 1130 52171 1637
Delhi 2 10 260 7662 7350 26462
Rajasthan 38 31 6664 30263 26454 48756
Uttar Pradesh 131 157 26910 281356 100586 763977
Bihar 54 85 10114 155213 24480 349038
Nagaland - 3 3170 12374
Manipur 4 13 554 18409 2180 45347
Mizoram 1 - 135 - 559 -
Meghalaya 1 3 113 4933 479 10336
Assam 8 24 1613 36683 6412 90920
West Bengal 36 62 6984 101334 34109 305903
Jharkhand 15 21 2801 50140 11721 88306
Orissa 4 57 587 139101 2405 335197
Chhattisgarh 24 18 5703 17725 16039 68290
Madhya Pradesh 91 64 18372 83374 38442 151922
Gujarat 106 9 38828 17825 195329 26999
Maharashtra 74 42 18254 51227 117874 108154
Andhra Pradesh 71 79 90174 225115
Karnataka 126 55 29624 54360 121706 127806
Kerala 149 17 35615 35089 146116 64236
Tamilnadu 131 28 34741 26499 303699 1300494906
A & N Islands 1 1 132 514 498 1029
Total 1223 819 271262 1250207 1318941 1303420776
Table 2.7
(P.M.Mathew, 2011)106
Source : Third all India Census of Small Scale Industries
Page 122 of 253
The states of Utter Pradesh and Tamil Nadu are leading the table, while the state of
Maharashtra has not been successful in the promotion and utilization of the scheme
though it is one of the leading industrialized state.
2.22.1 Elements of Government MSME schemes.
One notable feature of the schemes promulgated by the Central government is that there
are some 41 schemes where a prominent and important role has been envisaged for what
is called as Business Membership organizations (BMO) or the Industrial associations,
Chambers of commerce and similar organizations. The different types of roles such
organizations are expected to assume are as follows.
2.22.2 Need assessment and scheme design.
Here it is presumed that as an independent body in deep understanding of the industry
segment, the BMO would be in a position to ascertain appropriate needs which are also
demand driven.
2.22.3 Awareness creation and information Dissemination.
The BMOs considering the nature of their role are most appropriate bodies to create and
disseminate information on the schemes made available by the Government.
2.22.4 Promoters and vehicle of implementation.
A typical cluster where the members are individual units there is a need to have a
bonding agency and this need is served by a Special purpose Vehicle ( SPV). This SPV
is the administrative body for the cluster. The SPV creation is a job of an intermediary
and the most apt intermediary is the BMO.
2.22.5 A scheme evaluator and approver.
The BMO with its resources and experience can play the important role in assessing the
scheme of the cluster in total perspective and grant necessary approvals on the
satisfaction of required elements.
2.22.6 An implementation, monitoring and evaluating agency.
The BMO can play an important role in the implementation of the project. It can also
monitor and evaluate the project being an experienced independent body.
Page 123 of 253
The underlying objective of all the schemes promoted and formed by the Government is
enhancement of competitiveness and growth of the MSME segment. The objective is
attained by the schemes by focusing on one of the following areas.
1. Provision of Infrastructure.
2. Soft intervention including capacity building, training etc.
3. Marketing assistance/ market access.
4. Technology up gradation.
5. Research and Development. Innovation.
On the backdrop of the above objectives, the government of India’s National
Manufacturing Competitiveness Program (NMCP) seeks to help Indian SMEs scale up to
global levels. To achieve a sustainable double digit growth in GDP, it is imperative that
the overall growth of the manufacturing sector is on a positive trajectory. In the light of
these broader objectives the government of India is committed with policy incubation in
areas such as IT adoption, manufacturing management, skill development; access to
capital, procedural simplification, marketing and governance reform etc.
2.23 NMCP (National Manufacturing Competitiveness Program)
The objective of making the MSME units more competitive, prompted the Government
of India to launch the National Manufacturing Competitiveness Programme (NMCP).
The NMCP is the national nodal programme of the Government of India to develop
global competitiveness among Indian MSMEs. Conceptualized by the National
Manufacturing Competitiveness Council, the Programme was initiated in 2007-08. An
amount of over Rs.600 crore has been allocated over the 11th Plan period for the scheme.
The NMCP initiative of the government seeks to address these important aspects of the
MSME segment, economic growth and build the scale of Indian micro, small and
medium manufacturing enterprises (MSME) and enable them to compete in the global
arena. It also seeks to provide assistance to help the MSME manufacturers compete with
foreign entrants into the domestic market.
2.23.1 The Ten Components of NMCP
The 10 main components of the programme which seek to address MSME
competitiveness issues, are as follows:
Support for entrepreneurial and managerial development of MSMEs through
incubation
Increasing quality through Quality Management Standards and Quality
Page 124 of 253
Technology Tools
Technology up gradation and quality certification support to MSMEs
Marketing support to MSMEs
Marketing assistance for MSMEs and technology up gradation activities
Design clinic scheme to bring design/innovation expertise
Promotion of ICT ‘
Setting up Mini Tool Room and Training Centers
Building awareness on Intellectual Property Rights
National Programme for Application of Lean Manufacturing
2.23.2 Marketing Assistance/ Support to MSMEs
The first component to be made operational under the national scheme was "Marketing
Assistance and Support to MSMEs". The objective of the scheme is to promote the Bar
Code usage in the Indian SMEs and motivate them to adopt the Bar Code Certification
on large scale. To sell their value added products in the international markets and enable
higher exports with higher price realization. Under the Scheme, 75% of annual fee
(recurring) of Bar Code certification for the first three years are reimbursed to micro and
small entrepreneurs.
2.23.3 Building Awareness on Intellectual Property Rights (IPR)
The scheme for "Building Awareness on Intellectual Property Rights (IPR) was launched
to help Indian MSMEs to attain global leadership position and to empower them in using
effectively the tools of Intellectual Property Rights (IPR) of innovative projects. The
main features of the scheme are:
i. Awareness/Sensitization Programmes on IPR;
ii. Pilot Studies for Selected Clusters/Groups of Industries;
iii. Interactive seminars/Workshops;
iv. Specialized Training;
v. Assistance for Grant on Patent/GI Registration;
vi. Setting up of IP Facilitation Centre (IPFC); and
vii. Interaction with International Agencies. These initiatives are being developed
through Public-Private Partnership (PPP) mode.
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2.23.4 Entrepreneurial and Managerial Development through Incubators
Providing Entrepreneurial and Managerial Development of MSMEs through Incubators
is a scheme whose objective is to nurture innovative business ideas (new/ingenious
technology, processes, products, procedures, etc.), which could be commercialized in a
year. Under the scheme, various institutions like Engineering Colleges, Research Labs,
etc. receive funds up to Rs.6.25 lakh for handholding each new idea/entrepreneur. The
incubators provide technology guidance, Workshop and Lab support and linkage to other
agencies for successful launching of the Business and guide the entrepreneur in
establishing the enterprise.
2.23.5 Enabling competitiveness through QMS & QTT
Under the NMCP, the Government has also introduced a scheme, namely, "Enabling
Manufacturing Sector to be Competitive through Quality Management Standards (QMS)
and Quality Technology Tools (QTT)".The scheme is introduced to improve quality and
productivity in the MSME sector. It would help the MSMEs to adopt quality
consciousness in their operations. The major activities under this scheme are
Introduction of Appropriate Modules for Technical Institutions; Organizing Awareness
Campaigns for MSEs; Organizing Competition-Watch (C-Watch); Implementation of
Quality Management Standards and Quality Technology Tools in selected MSMEs;
Monitoring International Study Missions; and Impact Studies of the initiatives.
2.23.6 Mini Tool Rooms under PPP mode
Under the scheme, "Mini Tool Rooms under PPP mode", mini tool rooms are to be set
up. The objective is to develop more tool room facilities for providing technological
support to the SME segment. This would help create capacity in the private sector for
designing and manufacturing quality tools. The facility would also provide quality
training in this area.
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2.23.7 Lean Manufacturing Competitiveness Programme
The Ministry of Micro Small and Medium Enterprises in July 2009,introduced the sixth
component of the NMCP, namely, "Lean Manufacturing Competitiveness Programme
for MSMEs”, on a pilot basis. Under the Lean Manufacturing Programme (LMP),
MSMEs will be assisted in reducing their manufacturing costs, through proper human
resources management, effective space utilization, scientific inventory management,
improved process flows, reduced engineering time and so on. Lean Manufacturing would
also help in improving the quality of the product and lowering costs which are essential
for competing in national and international markets. The broad activities included in the
program are total Productive Maintenance (TPM), 5S, Visual Control, Standard
Operation Procedures, Just in Time, Kanban System, Cellular Layout, Poka Yoke, TPM,
etc.
2.23.8 Promotion of Information & Communication Tools (ICT)
The NMCP component on "Promotion of Information & Communication Tools (ICT)” in
Indian MSME sector aims at identifying some of those clusters of SMEs, which are
engaged in equality production and have export potential. This scheme will assist them
in adopting ICT applications to achieve competitiveness in the national and international
markets. The broad initiatives planned under the scheme include, identifying target
clusters for ICT intervention, setting up of e-readiness infrastructure, developing web
portals for clusters, skill development of MSME staff in ICT applications, preparation of
local software solutions for MSMEs to enhance their competitiveness, construction of e-
catalogue, e-commerce, etc. and networking MSME cluster portals on the National Level
Portals in order to outreach MSMEs into global markets.
2.23.9 Design Clinics Scheme for MSMEs
The main objective envisaged for “Design Clinics Scheme for MSMEs” is to bring the
MSME sector and design expertise on to a common platform and to provide expert
advice and solutions on real time design problems, resulting in continuous improvement
and value-addition for existing products. It also aims at value-added cost effective
solutions. The broad activities planned under the scheme include creation of Design
Clinics Secretariat along with regional centers for intervention on the design needs of the
MSME sector.
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2.23.10 Marketing Assistance & Technology Up gradation Scheme
The "Marketing Assistance and Technology Up gradation Scheme for MSMEs” is
directed towards improving the marketing competitiveness of MSME segment by
improving their techniques and technology for promotion of exports. It involves eight
sub components for which funding assistance is available from the government. The
major activities under the scheme are,
1) Technology Up gradation in packaging.
2) Skill up gradation/development for modern marketing techniques.
3) Competition studies.
4) Special component for North Eastern region.
5) New Markets through state/District level local exhibitions, trade fairs.
6) Corporate Governance practices.
7) Marketing hubs.
8) Reimbursement to ISO 18000//22000//27000 certification.
The main objective of "Technology and Quality Up gradation Support to MSMEs”
scheme is to make aware and motivate the manufacturing MSME sector in India for up
gradation of their technology, usage of energy efficient technologies to reduce emissions
of Green House Gases, adoption of other technologies mandated as per the global
standards, improving their quality and reduce cost of production, etc., towards becoming
globally competitive. The major activities planned under the scheme include Capacity
Building of MSME Clusters for Energy Efficiency/Clean Development Interventions,
Implementation of Energy Efficient Technologies in MSME sector, Setting up of Carbon
credit aggregation centers and encouraging MSMEs to acquire product certification
licenses from National/International bodies.
All the components of the National Manufacturing Competitiveness Programme have an
inbuilt objective of providing competitive edge to the MSMEs in the long run by
focusing on cost reduction and efficiency, productivity enhancement. This is expected to
help MSMEs in achieving twin objectives of achieving a higher growth rate and
expanding markets, both at the domestic and global level. In the national perspective it
would create more job opportunities and employment.
The Government has initiated several measures for enhancing the competitiveness of
SMEs in the present competitive and integrated global environment. The first important
step in this direction was the enactment of the ‘Micro, Small and Medium Enterprises
Development Act, 2006’, which aims to facilitate the promotion and development and
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enhance the competitiveness of MSMEs. The Act came into force from 2nd October
2006.
2.24 Prime Minister’s Task Force on MSMEs.
The Prime Minister of India in August 2009 set up a task force to study and formulate an
agenda for action to address the concerns and issues regarding MSMEs. The Task force
identified 6 major areas for the said assignment and the areas covered were1) Credit
2)marketing 3)labour 4)rehabilitation and exit policy 5) infrastructure, technology and
skill development 6) taxation. Six sub groups were formed to study each of the issues
and these sub groups submitted their reports to the task force.
Some of the major recommendations of the sub groups and the Task Force are as
follows.
1. Earmarking an additional public expenditure of Rs. 5000-5500 crores, in next 3-5
years, with an objective of targeting deficiencies in the existing infrastructure and
institutional set up. These funds were recommended for1) supporting the establishment
of rehabilitation funds at the state level for the revival of potentially viable sick units 2)
Assistance to MSMEs for acquisition, adoption of new clean technology and also
creation of technology banks and product specific Technology Development centres3)
promotion of business incubators in educational institutions 4) renovate existing MSME
industrial estates and develop new infrastructure for MSMEs 5) reengineer, strengthen
and revitalize District Industries centers in order to make them capable of playing a more
active role in advocacy, capacity building 6) Strengthening NSIC equity base for
enhanced market support to MSMEs, 7) Up scaling the existing entrepreneurship and
skill development programs.
2. Government should initiate appropriate measures for the transition of MSMEs
from unorganized to organized sector as well as their corporatization.
3. The impending Direct Tax code, GST should seek attainment of the above
objectives through appropriate graded corporate tax structures, incentives for R & D. etc.
4. Government should set up a national independent body for the promotion and
development of MSMEs, the body should provide financial, managerial support for
setting up of industrial estates, common facility centers in partnership with private
sector, promote technology development, dissemination of information etc.
5. Government should create fund of Rs. 1500 crore to support clean technology.
Page 129 of 253
6. The central government should support the state governments to set up
rehabilitation fund and set up appropriate mechanism for rehabilitation of sick units with
potential viability.
7. The government should infuse capital in industrial estates and upgrade them to
Industrial Townships. This will permit effective municipal administration and a single-
stop mechanism for the provision of municipal services.
8. The Government should work on insolvency legislation.
9. Labour laws needs to be simplified in order to reduce compliance transaction
cost.(Price Water House Coopers, Confederation of Indian Industries., 2010)
2.25 Implementation, Utilization and Outcomes of various Government schemes
To create more awareness amongst the Micro, Small and Medium Enterprises (MSMEs)
about the major schemes of the government, the MSME ministry is taking important
action by involving industry and trade associations to take responsibility and create
awareness amongst the potential beneficiaries.
"Among Indian MSMEs, there is a lack of awareness about existing schemes, which are
intended to benefit the industry, leading to their non-implementation on time. Therefore,
there is a need to ensure that the right level of awareness is created among
entrepreneurs," MSME Secretary, Madhav Lal said during FICCI's 4th annual Micro,
Small and Medium Enterprises (MSME) Summit 2013, in New Delhi. He added that the
government is implementing various schemes and policies to boost employment
generation through development of manufacturing/service oriented enterprises, including
those exclusively meant for women empowerment.
The MSME Ministry is creating a framework where the role, responsibility and
obligations of each sector-specific industry associations will be clearly spelt out, he
mentioned. "The idea is to bring together MSME industry associations dealing with a
particular sector so that the coverage of the related schemes is enlarged and their
adoption is expedited," he added.
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State-wise Financial Assistance/Subsidy Extended to Small Scale
Entrepreneurs in India
(2003-2004 to 2005-2006)
(Rs. in Lakh)
State/UTs
Credit Linked Capital
Subsidy Scheme
ISO-9000/14001
Certification
Reimbursement
Scheme
Performance and
Credit Rating
Scheme 2005-06*
Adoption of
Bar Code
Certificate
2003-04 to
2005-06 2003-04 2004-05 2005-06 2003-
04 2004-005 2005-06
Andaman and Nicobar 0.00 0.00 0.00 0 0.00 0 0 0
Andhra Pradesh 6.02 162.51 123.87 22.89 86.47 65.80 20.75 0.86
Arunachal Pradesh 0.00 0.00 0.00 0 0.00 0 0 0
Assam 0.00 0.00 0.00 0 1.76 1.97 0 0.41
Bihar 2.40 19.20 0.00 1.27 8.76 5.62 1.10 0.07
Chandigarh 0.00 0.00 17.67 3.63 8.66 14.24 0 0.0
Chhattisgarh 6.15 51.09 61.21 0 5.40 8.01 0 0.90
Dadra & Nagar Haveli 0.00 0.00 0.00 3.09 6.18 7.63 0 0
Daman & Diu 0.00 0.00 0.00 2.57 11.00 10.36 0 0.45
Delhi 36.66 81.75 37.46 14.36 44.99 43.23 35.07 3.00
Goa 0.00 0.00 7.29 0.58 4.88 0.96 0.0 0.60
Gujarat 0.00 58.12 83.59 11.45 38.70 42.69 7.40 2.31
Haryana 58.72 4.52 57.07 70.02 177.65 186.28 5.81 1.61
Himachal Pradesh 0.00 0.00 0.96 2.73 7.39 11.54 0.0 0.15
Jammu & Kashmir 0.00 0.00 0.00 0 0.49 7.26 0.00 0.75
Jharkhand 0.00 0.00 16.78 2.49 18.95 9.64 0.30 0.00
Karnataka 12.92 91.29 295.17 26.62 100.08 125.07 23.63 3.49
Kerala 7.16 0.00 11.24 6.19 25.02 33.81 1.10 2.81
Madhya Pradesh 8.79 43.02 34.85 9.57 2788.00 22.53 4.32 1.01
Maharashtra 13.91 173.90 158.24 106.37 366.08 447.08 42.82 9.65
Manipur 0 0.00 0.00 0.00 0.00 0 0 0.00
Meghalaya 0 0.00 0.00 0.00 0.00 0 0 0.00
Mizoram 0 0.00 0.00 0.00 0.00 0 0 0
Nagaland 0.00 0.00 0.00 0.00 0.00 0 0.00 0.00
Orissa 4.80 2.40 14.40 2.88 13.66 8.20 1.90 0.11
Pondicherry 0 0.00 0 0 3.54 5.19 0.40 1.42
Punjab 16.74 94.66 71.77 40.10 119.04 122.71 7.82 1.76
Rajasthan 3.72 126.40 206.78 36.81 90.38 84.23 6.32 0.00
Sikkim 0.0 0.00 0 0 0.00 0 0 3.34
Tamil Nadu 185.72 381.98 512.84 60.82 269.05 415.75 44.06 0.00
Tripura 0.0 0.00 0 0 0.00 0.00 0 3.04
Uttar Pradesh 10.78 45.52 80.89 1.87 183.35 180.90 23.54 0
Uttaranchal 0 0.00 0.00 1.51 9.65 10.10 0.40 0
West Bengal 0.00 23.40 22.17 21.47 74.16 73.84 14.28 1.39
Total 374.49 1359.76 1814.25 489.29 1730.51 1944.64 241.02 39.13
Table 2.8
Note : * : Scheme Started In 2005-2006.
Source :LokSabha Unstarred Question No. 3722 dated 16.05.2006.
Page 131 of 253
During 2008-2009 the Indian Industry also suffered due to the global slowdown and the
SME segment was the one which was affected more severely. To withstand the effects of
slowdown government of India announced many sops for the MSME segment. A survey
conducted by The Federation of Indian Chambers of Commerce and Industry (FICCI)
stated that 73% of the enterprises were not aware of the stimulus package. Business
standard in its report, after an interaction with entrepreneurs confirmed the same view.
The Industry association opined that they can create awareness about the schemes
amongst the SME units but the problem is poor implementation and the lack of
information about the scheme. A serious problem with information dissemination at the
ground level was voiced to be a major problem in the poor utilization of the schemes.
Business standard report of its interview with H E Farooq Ahmed, Executive Director,
South India Shoe Manufacturers Association, commented that the Government is taking
all necessary steps and efforts and identified the problem with the implementation
agency. He provided an example of Lean Manufacturing cluster scheme under NMCP.
The scheme is basically for enhancing the productivity of the MSMEs. While the scheme
according to many is one of the best schemes introduced by the government, according
to Mr. H E Farooq the scheme is not being properly implemented by the government
agency and there is no enthusiasm observed in its implementation. This researcher who
was also actively involved in the implementation of the said scheme concurs with the
same views. It’s been further confirmed by the above interviewee that the Lean
manufacturing scheme if implemented properly by the MSMEs they would be able to
bring down overall cost by at least 15%. (The same views are confirmed by the
researcher. This has also been documented and confirmed by another association,
Mahratta Chamber of Commerce Industries and Agriculture, Pune.)The survey
conducted by FICCI observed that a major segment of respondents about 59 %, who
expressed high cost of finance as a persistent problem. This was considered to be serious
as the same survey reported that 90% of the respondents were dependent on bank finance
for their operations. (Narasimhan, 2010)107
.
2.26 Why Entrepreneurs don’t avail incentives:
Lack of awareness is often cited as the reason why majority of the entrepreneur do not
avail the incentives and grants offered by the Government under its various schemes. It is
difficult to apprehend the fact that these entrepreneurs never heard of any schemes
promoted by the government for helping the SMEs. In this context the awareness means,
inability to relate the different incentives to individual enterprise.
Page 132 of 253
In a study jointly conducted by TiE and KPMG, designed to develop the Indian
Entrepreneurial Confidence Index and create awareness on issues which are relevant to
entrepreneurs, a sample of 1000entrepreneurs across 15 Indian states was researched.
The study evaluated the entrepreneurial perception of the ecosystem in their respective
states. The ecosystem comprised Finance, Governance issues, Infrastructure, Local
environment and ecosystem, manpower issues, regulatory issues that affect an
entrepreneur. The result indicated an average level of conduciveness for entrepreneurial
ventures at 3.3, on a scale of 5, where 5 indicated an excellent state, 3 averages and 1
poor state. The study showed that Finance, infrastructure, manpower in order of
importance have been indicated as the most important factors considered for encouraging
entrepreneurial growth. Though finance emerged as the most important factor the
interviewed entrepreneurs still indicated some obstacles in the easy procurement of the
same. The study pointed out towards a credit gap, that is availability, supply and demand
of finance. The new initiatives of funding start ups, as well as small and medium
enterprises were also considered to be not effective and lacking in some respect,
fundamentally due to several procedural issues and the demand of high collateral. The
entrepreneurs demanded improvement in infrastructure, majorly power. The study also
indicated unawareness of many schemes like incubation centers, mentoring facilities and
entrepreneurial development training. A large number of respondents considered
procedural formalities as major obstacle in starting and expanding an enterprise. The
KPMG study while assessing the Maharashtra state entrepreneur’s confidence in their
ecosystem observed that state’s entrepreneur consider local environment and ecosystem
as the most important factor. It is observed that the entrepreneurs in the state are aware of
incubation facilities, mentoring opportunities. (KPMG, 2008)105
Education and training are considered to be important ingredients of a public policy on
entrepreneurship development. A total and drastic change in education and training at
University is required if entrepreneurship is to be nurtured in India. Business Bankruptcy
is often considered as a social stigma in many world societies. The situation is different
in United States and there even very successful entrepreneurs have been through two or
three bankruptcies and have learned from experience. This is due to the progressive
bankruptcy laws of the United States. In Indian society, bankruptcy is very often an
irrevocable social stigma.
(Mueller, 2008)24
Some of the obstacles to entrepreneurship in Switzerland outlined by an OECD studies
are as follows.
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♦ Administrative burdens on Entrepreneurs. (Very true in Indian context too)
♦ Strict bankruptcy law is a very strong deterrent on the creation of Businesses. Many
entrepreneurs are less likely to take risks and may refrain from expanding their activities.
(In India also fear of failure and bankruptcy could be one of the predominant reasons for
shunning away from entrepreneurship.)
(Mueller, 2008)24
A survey amongst 100 SMEs conducted by FICCI and Grant Thornton indicated
regulatory compliances and availability of finance as the main constraints faced by the
SMEs in their operations and expansion. In the said survey only 31% of the respondents
believed that the government was playing a meaningful role in enhancing
competitiveness of their businesses. These units felt the need of introduction of policies
and procedures to address this area of enhancement of competitiveness and growth.
Amongst the respondents who could secure business with multinational corporations
more than 80% have identified quality and competitive pricing as the factors that have
secured the collaboration for them with multinational corporations. (Jacob, 2013)108
.
Mint in its feature “SME PANORAMA” has referred to a study by The Associated
Chamber of Commerce and Industry (ASSOCHAM), “Cluster development drives
inclusive growth in MSME sector”, which has recommended a creation of a statutory
body as Cluster Development Authority(CDA)in each state for promoting the
development of MSME clusters. This would help in proper deployment of funds and
development of clusters. The report has further quoted Mr. Sunil Kakkad, Chairman
ASSOCHAM Gujarat council, as saying that the cluster development not only creates
huge employment at lower cost but also contributes to inclusive growth and prosperity
around the region where the cluster is developed. According to Mr. D.S. Rawat, National
Secretary General of ASSOCHAM, the number of clusters assisted by the government in
2010 is around 450 as against unassisted cluster of around 6,000. Mint in its said report
also quotes a sample survey covering five clusters in five locations which has observed
that the cost of production in assisted cluster was 15-20 percent less than the unassisted
clusters and the assisted clusters showed 20-30per cent overall improvement in income
generation, social welfare, product quality, raw material consumption and skill
improvement. Due to non availability of government assistance to a large number of
clusters in the country, the estimated loss would be around Rs. 1000 crore, on account of
loss of manufacture of goods and services as also loss of jobs estimated around2- 3 lakh
in a single year. (Mint, 2010)109
.
Page 134 of 253
The daily business news paperMINT also reported a survey conducted by REGUS, the
world’s largest workplace solution provider which infers that despite contributing
significantly to the economy the SME segment feels that they have been neglected by the
government in the matter of making enough capital available to them. About 56% of the
SMEs in India echoed the same views in this survey. The said survey, gathered feedback
from about 5000 entrepreneurs from 78 countries on their main concerns. About 78%
respondents globally and 87 % in India opined that banks should be forced to lend more
to these units. 86 % entrepreneurs globally and 90% in India responded that government
should make available venture capital funds to the entrepreneurs. (Mint, 56 % SMES feel
Neglected by Government : REGUS survey, 2010)110
In a survey conducted by PHDCCI 68% of the respondents indicated that they are
planning to scale up their operations and move from small to medium scale to derive the
benefits of competition and growth. However 32% of the respondents were satisfied to
be in the small scale segment. 66% of the respondents in the said survey said that they
would like to scale up their operations in their core area of competence, provided the
government provides necessary enabling policy environment. (Ahuja, 2010)111
In another survey conducted by FICCI in the116 SMEs, manufacturing a diverse range
of products from 20 locations across the country, suggestions were received that the
faster processing of loan applications, government support for technical up gradation,
and setting up of more training institute to provide skilled manpower, availability of
quality control facilities near the clusters are essential for the competitiveness of the
SMEs. (Narasimhan, SMEs Face the heat from Cheap Chinese imports. , 2010)112
.
New technology adoption is imperative for the sustenance and growth of MSMEs.
Adoption of new advance technology by MSMEs becomes difficult due to the high cost
and this has a definite effect on the competitiveness of the MSMEs. (CII, 2013)113
Dr. Arvind Panagariya in his article : “MSME separating wheat from chaff”, has cited
the size of the MSMEs as the main reason for the perpetual low productivity of the
MSMEs. According to him, they are too small to take advantage of the modern
technology. He further cites the ongoing work of Mr. Hasan and Ms. Kapoor, and an
example provided by them from the apparel industry. Though a variety of machines and
tools are available for pre-sewing and post sewing operations, the cost of the machines
keeps away the MSMEs in this segment from acquisition of these machines which are
essential for high volume, good quality, just in time production, the demand of the world
competitive market place. Dr. Panagariya argues that last more than 50 years
interventions for making MSMEs competitive have not produced tangible results and we
Page 135 of 253
are indirectly encouraging them, to stay small and unproductive. The government
support for MSMEs should help them to grow large and competitive, in the world
market. Dr. Arvind Panagariya, professor of economics at Columbia concludes that, “Do
not look for easy interventions to help small-scale enterprises - carry out the
reforms that will let them grow big”.(Panagariya, 2014)114
In the manufacturing segment the MSMEs are the specialist suppliers of sub assemblies,
components, to original equipment manufacturers mainly because of their cost
advantage. A bad quality component may result into a poor quality product of the OEM
and it can affect the competitiveness of the OEM. (Singh R. K.)115
Hence the OEM has to
ensure that its vendors are also competitive and adhere to quality philosophy. Hence in
the selection of a vendor the OEM would be very careful and considerate. He will seek
component supplies only from those who meet stringent norms and hence a vendor
selected by a OEM after due diligence and evaluation would definitely be competitive as
compared to those who are not the vendors of the OEM. To ascertain the competitiveness
of its suppliers, the OEMs before registering the vendor for their supply, gather
information on certifications obtained, the manufacturing practices adopted by the
vendor, inspections. Often the vendor insists for certain manufacturing practices such as
5S, Kaizen, Kanban, Total Productive Maintenance (TPM),MIS, and Standard Operating
Practices(SOP) etc. These are basically important components of Lean Manufacturing
Practices. These practices yield many benefits and contribute hugely for enhancing the
competitiveness of the manufacturing MSMEs. The Lean Manufacturing scheme is an
important and appropriate component of NMCP.
Page 136 of 253
Performance of National Manufacturing Competitiveness Programme (NMCP)
2013-14
Sr.
No
Activity No. of Beneficiary
Units
Amount of
reimbursement. Rs.
1 New Markets through
state/District Level
Exhibition/Trade Fairs
30 8,42584
2 Assistance for obtaining Bar
Code
53 15,80,992
3 Assistance for obtaining
Product certification
National
International
33
04
17,89,307
6,02,872
4 ISO Reimbursement scheme 87 3,389,692
5 BIS Licensing National
Standards
40 14,35,098
Table 2.9
(MSME Development Institute, 2014)116
The above report is for the state of Maharashtra. The above data shows that the
utilization of the scheme by the MSME segment is too low. The major assistance has
been sought for obtaining ISO certification, followed by BIS Licensing for national
standards and product certification. We can conclude that the major assistance is
obtained for ensuring that the units are certified for their quality.
2.27 Entrepreneurship Skill Development Programme (ESDPs)
The Government of India’s agency MSME development Institute, Mumbai, organizes
ENTREPRENEURSHIP SKILL DEVELOPMENT PROGRAMMES(ESDPs).The
objective of the said scheme is to offer comprehensive training programs for the up
gradation, of technological, production skills of entrepreneurs and their work force.
The performance of the said programme, Entrepreneurship Skill Development
Programme(ESDPs) for the year 2013-2014, is as follows.
Page 137 of 253
Performance Entrepreneurship Skill Development Programme. 2013-14
Particulars
Target 126
Achievement/Programs Completed 126
Expenses in Rs. Lakh 75
Number of persons trained 3026
Table 2.10
Source: MSME Development Institute, 2014116
2.28 Clusters: Definitions and overview of Lean cluster scheme
Definitions
"Clusters are a geographically proximate group of interconnected companies and
associated institutions in a particular field linked by commonalities and
complementarities. Clusters encompass an array of linked industries and other entities
important to competition…including governmental and other institutions- such as
universities, standard setting agencies, think tanks, vocational training providers and
trade associations." Porter (1998).
“Geographically bounded concentration of similar, related or complementary
businesses, with active channels for business transactions, communications and dialogue,
that share specialized infrastructure, labor markets and services, and that are faced with
common opportunities and threats." Rosenfeld (1997).
"Regional clustering has been used to describe industrial districts of small crafts
firms, high technology centers, agglomerations of financial and business service firms in
cities, company towns, and large branch plants and their supply chains.""….clusters at
least must be characterized along relevant dimensions if appropriate policies are to be
devised … (these include)…density…breadth…depth…activity base…growth
potential…innovative capacity." Enright (1998).
Source: OECD 2007, Cluster Policies Whitebook 2004 & Enright (1998).(OECD,
2007)117
,(Foundation for MSME Clusters., 2007)118
Page 138 of 253
Some Critical Success factors in cluster Development.
Success Criteria. Percentage of Respondents.
Net working & Partnership 78
Innovative Technology 74
Human Capital 73
Physical Infrastructure 42
Table 2.11
Some Critical Success factors in cluster Development.
Graph/Chart 2.1
(Foundation for MSME Clusters., 2007)118
An Industrial cluster is a mass of industrial or business units, their suppliers, service
providers, associated, allied institutions, in a particular area or segment of an industry,
which also includes educational institutions, financial institutions, and governmental
agencies. The entire mass is chained in a particular geographical area by externalities and
complementarities of different types.
Due to the geographical proximity and similarity of activities, the members of the cluster
enjoy the economic benefits of several location specific externalities and synergies. The
general advantages are availability of specialized man power, suppliers, knowledge
spillovers, competition (leading to enhancing performance).These clusters very
effectively get linked to the national economy. Clusters can contribute substantially to
the national competitiveness. An effective implementation of clusters can serve as an
effective vehicle for broader policy reforms, private sector development and hence can
also effectively lead towards capacity building of MSME segment. “The concept of
0
20
40
60
80
Net working &Partnership
InnovativeTechnology
HumanCapital
PhysicalInfrastructure
Page 139 of 253
economy-wide competitiveness has brought forward the relevance of a cluster approach.
Competitiveness is a proxy for the productivity of an economy.”
( World Bank, 2009)90
A typical cluster
An Agribusiness Cluster
Figure 2.7
2.29 Some NMCP Schemes in Action and Results.
2.29.1 Overview of Lean Management Cluster Scheme.
One of the important components of NMCP which is primarily introduced with an
objective of enhancing the competitiveness of the MSMEs is the Lean Manufacturing
Cluster Scheme. It is a cluster which is formed to jointly learn the various techniques of
lean manufacturing then adopt and practice it at individual work places.
The idea of Mini – Cluster germinated from Lean Management Competitiveness
Scheme. The scheme is a government of India initiative to germinate ideas and
Seed Nurseries
Fertilizers
Insecticides
Farm Equipment
Storage Facility
Irrigation
Technology
State Government and
Donner Agencies
Growers Processors
Clusters of other
Agricultural products.
Clusters of
Buyers/Consumer
Industries.
Educational, Research and Trade
Operations
Crop
Processing
Transportatio
n
Packing
Services
Public Relations
Advertising
Specialized
Publications
Financial
Services
Page 140 of 253
methodologies of Waste Elimination in the SME sector in India. Which contributes to
the increased competitiveness of the unit.
The scheme is governed by the Ministry of Micro Small and Medium Scale
Enterprises (MSME) along with NPC-National Productivity Council as the key
Monitoring and Implementation Unit.
It seeks to bring a similar success like TQM movement in India
Offers substantial subsidy for the implementation of the scheme
Started in 2009 and pilot phase of 100 clusters completed.
The Scheme has been launched under the 5 year program as Lean Manufacturing
Competitiveness Scheme -.Very recently in 2013 the scheme has been re- launched with
some new additions and improvements.
2.29.2 Objectives of Lean Cluster
Lean Cluster
Reduce Waste
Improve productivity
Improve Competitiveness
Inculcate Good Management Systems
Imbibe culture of Continuous Improvement
Page 141 of 253
Lean Manufacturing Scheme State wise Special Purpose Vehicles set up.
Sr. No. State. Number of Lean SPVs set
up.
1 Himachal Pradesh 4
2 Punjab 11
3 Uttarakhand 1
4 Haryana 2
5 Delhi/NCR 15
6 Utter Pradesh 17
7 Rajasthan 2
8 Madhya Pradesh 2
9 Gujarat 9
10 Maharashtra 15
11 Jharkhand 3
12 West Bengal 5
13 Andhra Pradesh 2
14 Karnataka 5
15 Tamil Nadu 14
16 Pondicherry 2
17 Kerala 4
18 Assam 3
19 Orissa 5
Total 121
Table 2.12
(National Productivity Council, 2014)119
Page 142 of 253
Sector wise Representation of Lean Manufacturing SPVs.
Graph/Chart 2.2
(National Productivity Council, 2014)119
The pilot scheme of Lean Manufacturing introduced by the government of India in 2009
has been fairly successful. Under the said scheme 112 Special Purpose Vehicles
represented by 1000 MSMEs were formed. 55 SPVs., have been able to successfully
complete their lean interventions.
Classification of clusters based on activity
Activity Number clusters
Number of clusters where implementation was
completed.
55
Number of clusters where Tripartite Agreement
was signed
89
Number of clusters where SPV was formed 112
Number of Awareness Program conducted 120
Number of clusters covered through Awareness
Programs
136
Table 2.13
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to &
Engi
nee
rin
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Wh
ite
go
od
s
SPVs
SPVs
Page 143 of 253
Classification of cluster based on Activity
Graph/Chart 2.3
(National Productivity Council, 2014)119
The above statistics indicate that Maharashtra is second in the list of beneficiaries of the
Lean Manufacturing scheme promoted by the government of India. Engineering, Auto
and Engineering component segment are the two segments amongst MSMEs who have
taken the benefit of Lean Manufacturing scheme, whose objective is to enhance the
competitiveness of the SMEs. This also reflects the awareness and utility of the scheme
from the point of view of MSME entrepreneurs.
0 20 40 60 80 100 120 140 160
Number of clusters where implementation wascompleted.
Number of clusters where Tripartite Agreementwas signed
Number of clusters where SPV was formed
Number of Awareness Program conducted
Number of clusters covered through AwarenessPrograms
Page 144 of 253
Performance of Lean Manufacturing Scheme (The All India Pilot project 2009)
1 No. of Clusters started implementing Lean Manufacturing 89
2 No. of Clusters successfully completed 55
3 No. of SMEs participating in LMCS 900
4 Annual Savings from LM 60 cr.
5 Salvage Value of Scrap from 5S implementation 3 cr.
6 Increase in Production capacity without CAPEX 10%
7 Space reclaimed for productive work 10%
8 Increase in Inventory turnover 25%
9 Reduction in Manufacturing Lead Time 5-30%
10 Improvement in OEE ( Model Machines 15%
11 No. of Kaizens generated 7500
Table 2.14
Source: (National Productivity Council, 2014)119
2.30 Success stories of Lean Manufacturing under NMCP.
“The Lean Manufacturing Program left us with a cleaner Shop floor. All waste was
identified and reused wherever possible and the remaining was scrapped. This program
educated our workmen to reduce waste and our Customer M/s TATA Motors was
satisfied with our improved performance on Quality and Delivery”. Shri Bharat Khanna,
MD, Stallion Auto Parts Pvt. Ltd.
Stallion Auto parts, Lucknow, Kanpur, is a small unit established in 1995and is the
manufacturer and exporter of precision auto components.
“We are convinced that Lean will give competitive edge”. Shri G.P. Singh, CEO, PMT
Engineers Pvt. Ltd. Faridabad, A Small company established in 2010 with a turnover of
2.63 crores. Providing machining services to auto industrial units.
“We have been benefitted in terms of improved man and machine productivity; better
quality of products and reduced rejections. The training given to us on 5S was very
beneficial for improving the housekeeping of our shop floor. Our employees are
motivated and number of Kaizen are evolved for improvements
Shri Pawan Sharma, MD, Victor Components, Pvt. Ltd. NOIDA, U.P.
Victor Components Pvt. Ltd established in 1989is an electrical and electronic component
manufacturer. The company mainly manufacturers, Ferrite core transformers, Torroid
Page 145 of 253
coils, EMI filters, inductors, linearity coils, Line Filters, Linear Transformers and LED
Drivers etc.
“Techniques like waste management (Muda) and 5S,Inventory management amongst
others have equipped young firms like ours with new found wisdom and expertise to
create value through resourcefulness. For our organization Lean has been a continuous
journey of growth which has sensitized us towards various facets of world class
manufacturing. Shri Shirish Khutale, CMD, of M/s Khutale Engineering, Satara,
Maharashtra, established in 996.Company manufactures, sheet metal pressed
components and fabrication assemblies in India. The company registered a sales turnover
of 7 crores.
The benefits achieved by Khutale Engineering, Satara, are as follows.
Particulars
Productivity Increase 10 to 15%
Area saved (Sq. Mts.) 159.50
Annual Savings (Rs.) 127,965
Salvage value due to 1 S (Segregation) (Rs.) 87145
Change over time reduction 24%
Kaizen, Poka Yoke related savings (Rs.) 1144/shift
Table 2.15
Source: (National Productivity Council, 2014)119
2.31 The Pune Experience and findings.
The Researcher was involved in implementing Lean Manufacturing clusters at his
Organization, Mahratta Chamber of Commerce Industries and Agriculture, Pune. During
and at the completion stage the benefits derived by the cluster members were
documented. The following tables indicate the achievements, benefits accrued to the
cluster members by adopting and availing one of the important components of the
NMCP scheme, “Lean Manufacturing Scheme”.
Page 146 of 253
Machining and Press Parts Cluster (Cluster 3)-Details
No. of
Companies Duration Date of Commencement Date of Completion
10 1 Year 19th
August, 2011 18th
July, 2012
Table 2.16
Light Engineering Cluster (Cluster 4)-Details
No. of Companies Duration Date of Commencement Date of Completion
10 1 Year 1st April, 2012 31
st March, 2013
Table 2.17
Cluster 3 & 4 benefits.
Sr. Parameters Cluster 3 Cluster 4
1 Average Productivity Improvement 24.63 % 11.20 %
2 Average Reduction in the Area under
Production 16.22 % 15.10 %
3 Average reduction in In-house Rejection 34.04 % 28.92 %
4 Average reduction in Customer Complaints 64.71 % 55.15 %
Table 2.18
Page 147 of 253
Cluster 3 & 4 Other Benefits
Improvements in Reduction in
Inventory management & Fund
flow
Machine maintenance
Organizational set up
Work culture & Employee morale
Use of safety equipments
CEOs confidence
Customer confidence
Inventory carrying cost
Losses due to machine breakdown
Losses due to rejection/rework
Workers’ fatigue level
Machine changeover time
Accident frequency and severity
Customer rejections
Customer complaints
Deployment of new Improvement Initiatives
Kaizen &Poka Yoke
Collection of data on 16 parameters
Graphical display of data
Internal review mechanism
Sunrise and Sunset meetings
Modification in machine layout
Optimum utilization of the shop floor
Creation of gangways
Preventive maintenance plan
Macro and Micro production plan
Standard Operating Procedures
Creation of problem bank
Use of8 D Approach
Disposal of old accumulated scrap
Table 2.19
(Source: Reports submitted by the Lean Manufacturing Consultant)
The Nasik Experience and Findings.
Areas of improvement
Quality
Delivery
Productivity
Sales Revenue
Inventory Turnover
5S Score
Floor Space Utilization
Reduction in ppm to the tune of 50%.
At least 20% capacity released without any additional investment.
15% improvement in Asset Availability due enhanced Maintenance Practices
Tangible Productivity improvements and Savings due to Waste reduction
Page 148 of 253
Access to knowledge regarding the latest Operations Management techniques and
their applications.
Reduction in rejections – Nasik Project.
Unit Reduction in Rejection PPM( parts per million)
Before After Remarks Trend
Aher Engineering and Fabrication 1434 252 82% Improvement
Amod Enterprises 0 0 Maintained No change
Auto Works 403 294 27% Improvement
Automech 2586 700 73% Improvement
Leena Gears & Engineers 0 0 Maintained No change
Mitesh Ancillary Pvt. Ltd. 8970 230 97% Improvement
Nasik Forge Pvt. Ltd. 14489 7445 49% Improvement
Panchal Engineers 986 804 19% Improvement
PATNSONS 2313 511 78% Improvement
Somesh Forge Pvt. Ltd. 8990 7446 17% Improvement
VM Auto Parts Pvt. Ltd. 19775 1500 92% Improvement
Table 2.20
(Hariharan, 2014)120
Delivery Performance Nasik Project
Unit OTIF(On Time in Full)#
Before% After
%
Remarks
%
Trend
Aher Engineering and Fabrication 96 100 4 Improvement
Amod Enterprises 95 100 5 No change
Auto Works 100 100 Improvement
Automech 100 100 Improvement
Leena Gears & Engineers 80 100 20 No change
Mitesh Ancillary Pvt. Ltd. 76 100 24 Improvement
Nasik Forge Pvt. Ltd. 67 90 23 Improvement
Panchal Engineers 47 82 35 Improvement
PATNSONS 98 100 2 Improvement
Somesh Forge Pvt. Ltd. 75 100 25 Improvement
VM Auto Parts Pvt. Ltd. 78 100 22 Improvement
Table 2.21
(Hariharan, 2014)120
Page 149 of 253
# OTIF (On Time in Full) is a measure of delivery or shipping performance. Meaning
How many orders were shipped Complete and on time.
Ahmednagar Experience & Finding Improvement in Rejections
Unit Reduction in Rejection PPM( parts per
million)
Before After Remarks Trend
Akshar Industries 1152 587 49% Improvement
Arihant Industries 6487 2753 58% Improvement
Indo Meta Forge 3240 1770 45% Improvement
Kaizen Engineer 19478 9209 53% Improvement
Phoenix Enterprises 2770 2527 9% Improvement
Sadguru Enterprises 723 539 25% Improvement
Shriram Coatings 16419 3448 79% Improvement
Sun Electrical services 15978 5641 65% Improvement
Superb Die Castings 745 652 12% Improvement
Supertech Heavy Equipment 8216 3378 59% Improvement
Technotrak Engineers 10443 7084 32% Improvement
Table 2.22
(Hariharan, 2014)120
Page 150 of 253
Ahmednagar Improvement in Delivery
Unit OTIF
Before After Remarks Trend
Akshar Industries 95 100 1 Improvement
Arihant Industries 95 99 4 Improvement
Indo Meta Forge 90 96 6 Improvement
Kaizen Engineer 78 97 19 Improvement
Phoenix Enterprises 100 100 0 Improvement
Sadguru Enterprises 95 100 5 Improvement
Shriram Coatings 91 99 8 Improvement
Sun Electrical services 90 96 6 Improvement
Superb Die Castings 96 99 3 Improvement
Supertech Heavy Equipment 99 100 1 Improvement
Technotrak Engineers 90 100 10 Improvement
Table 2.23
Source: (Hariharan, 2014)120
Page 151 of 253
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