ISSUES IN MANAGING GROWTH OF SMEs

STRATEGIES

Q-1. Briefly discuss the following strategies with regards to a small scale enterprise :
(i) Turnaround strategy
(ii) Exit strategy
(iii)Harvesting strategy

Ans : (i) Turnaround strategy : Turnaround is a process that involves

establishing accountability,
conducting diagnostic analyses,
setting up an information system,
preparing action plans,
taking action and evaluating results.

Turnaround means shifting from negative direction to the positive one. Business turnaround
refers to reviving a business to its original healthy position after a tough time.

During the life cycle of his business, an entrepreneur may have to face adversity because of
external factors (such as downturn in economy, increased competition, changes in
consumer needs/preferences, overinvestment in technology or unpredictable events such
as war, terrorism or natural calamities) or internal factor (e.g., poor management). Severity of
adversity can result in bankruptcy or in a need to refocus the business and strive for a
turnaround.

There are three stages of a turnaround strategy :

1) Pre-turnaround
2) Period of Crisis
3) Period of Recovery.

Some principles to be considered by the entrepreneur are as follows :

Consulting a C.A. or a lawyer or a turnaround management consulting firm

Aggressive hands-on management : meeting and communicating with all the
employees, being honest and upfront with them. keeping employees energized and
focused on bringing the company back to original, healthy state.
Charting out a solid plan to understand the problem, to set goals and objectives,
getting people involved in finding out opportunities to improve companys market and
financial position by cost-cutting, improved customer service etc.
Putting plan into action.

(ii) Exit strategy : Every entrepreneur, who starts a new venture should think about an exit
strategy. Exit strategy is also known as succession strategy. It refers to handing over the
business to someone else.

Generally, there are three options for an entrepreneur, who wants to exit from his or her
business :

1) Transfer to a Family member : The business may be transferred to a family member. But,
according to the experts, half such attempts fail in the transition from first to second generation
ownership. Before handing over the venture to family members, an entrepreneur must consider the
following things :
Will the actual owner work full-time/part-time? Or will he/she retire?
Is everyone able to work together or are some family members unable to work together?
Income for working family members and shareholders
The current business environment
 Treatment to be given to the loyal employees

Transfer of a business to a family member may create internal problems with employees. To avoid
this, the following steps may be taken :

Operational responsibilities to be given to the successor at an early stage

Assistance to be provided by the employees
Staying around for a while to advise the successor.

2) Transfer to a Non-family member : Transfer to a non-family member may requitre the

entrepreneur to consider the following things :

Whether the new owner is familiar with the business and the market
Financial capacity and managerial ability of the new owner
Whether senior management is committed to the succession plan or not
Whether job descriptions are well-defined or not
Participation of employees

3) Harvesting : Selling the business outright (totally) to either an employee or an outsider.

(iii) Harvesting strategy : Harvesting refers to selling the business outright (totally) to either
an employee or an outsider. Various methods of harvesting are as follows :

1) Direct sale : Small, successful businesses are in demand by large firms, which want
to grow by acquiring smallr successful business. An entrepreneur should consider the
following things while selling his business :
How buyer will pay full payment at a time, instalments, payment based on
future profits etc.
To tighten spending avoiding large personal salaries and expenses
To invest back in business as much as possible
Taking the services of business brokers
Making a comprehensive 5-year business plan

2) Employee Stock Option Plan (ESOP) : Under this plan, the business is sold to
employees over a period of time. The purpose of ESOP is to reward employees and to
clarify the succession decision of the new venture. ESOP has certain merits e.g.,
It is a unique incentive that can motivate employees to put in extra time or
effort. Employees recognize that they are working for themselves and so, they
focus their efforts on innovations, which ensure long-term success of the venture.
It provides a mechanism to pay back those employees, who have been loyal to
the venture during tough times.
It allows the transfer of business under a carefully planned written agreement.

ESOP also have some demerits e.g.,

ESOP is quite complex to establish.

A complete valuation of business is required to establish the amount of ESOP
package.
It may raise issues such as taxes, payout ratio, amount of equity to be transferred
every year and the amount actually invested by employees etc.

3) Management Buyout : If the entrepreneur wants to sell or transfer the venture to loyal key
employees, direct sale of the venture for some predetermined price is an easy way. An
entrepreneur may sell venture to key employees for cash or it can be financed through
bank or payment in instalment (depending upon the income from sale). Other methods of
selling/transferring a business are through public offering or even a merger with another
business.

REGISTRATION OF SSI UNITS

Q-1. Briefly explain the procedure for the registration of an SSI unit.
Ans : Registration of Small Scale Industries : Registration of an SSI unit is not compulsory. But,
The main objectives of SSI registration are..
 - to maintain the record of small scale units, and
- to provide them necessary support, incentives and benefits.

The central government, the state government and SIDO have decided a common registration
procedure for SSI units. The procedure is done in 2 stages :
1. Provisional Registration Certificate (PRC)
2. Permanent Registration Certificate

1. Provisional Registration Certificate (PRC) : It is a temporary registration certificate. PRC

is issued before starting the actual business. It is valid for 5 years.

The following documents are required to get PRC :

1. Application
2. Passport size photograph
3. Photocopy of ration card
4. Photocopy of partnership deed, if it is a partnership firm
5. Photocopy of the Memorandum, Articles of Association and the Certificate of
Incorporation, if it is a company

PRC can help...

- to apply for NOC (No Objection Certificate)
- to apply for financial assistance from banks and financial institutions
- to apply for shed in industrial estate
- to apply for electricity and water connection
- to apply for getting machinery on hire purchase basis
- for registration of sales-tax, excise duty etc.

2. Permanent Registration Certificate : It is a permanent registration certificate. It is issued

after the actual business starts. There is an inspection of the unit, before issuing PRC. If
everything is okay, the unit can get PRC. This certificate is valid till the unit is running.

The following documents are required for permanent registration certificate :

1. Photocopy of house tax receipt / rent receipt / NOC from landlord
2. Photocopy of partnership deed, if it is a partnership firm
3. Photocopy of the Memorandum of Association and Certificate of Incorporation,
if it is a company
4. Affidavit attested by the Notary
5. Photocopy of project report and approval of scheme
6. Photocopy of purchase invoice of raw material and machinery

Permanent Registration Certificate helps SSI to get many benefits and concessions like...
- Easy availability of raw materials
- Concessions in electricity charges
- Exemptions from excise duties
- Exemption from sales tax as per the policy of state government
- Preference of government to purchase goods made by SSI units

If a unit wants to get additional plant and machinery or wants to diversify, it has to get
endorsement on the registration certificate. If an existing unit wants registration, it is also
possible.

Deregistration : Deregistration of an SSI occurs, if the unit..

- remains closed for more than 1 year
- misuses raw material
- fails to provide necessary information to registration authority
- is subsidiary of any large or medium scale unit