Enrollment No. MBISMCT10716140

MBA Information Systems 1st Year - Assignment

Annamalai University

2: Managerial Economics

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Question 1. Explain the contribution of small scale industries towards the Indian EconomyAnswer:

SMALL SCALE INDUSTRIES (SSIs)Definition

India is an emerging economy with a population of more than 1.2 Billion. Nearly 70% of the population is dependent on the agriculture for sustenance. The economic reconstruction of India depends on the balanced growth of economy in the fields of agriculture and industry. A small-scale industry can be operated by an entrepreneur without needing sophisticated machinery and modem technology and can be established in semi-urban and rural areas where the infrastructure is underdeveloped. The objective is to use local raw material for raising production with the help of local skills. Small-scale industries provide employment without affecting the main occupation, agriculture of illiterate people in rural areas.

The legal framework is provided by Industries Development and Regulation Act, defines small-scale industrial undertaking

"As an industrial undertaking which may be held on ownership terms, lease or hire purchase basis and the original investment in plant and machinery in that undertaking does not exceed the specified limit in force at the time."Definition of the eligibility for small-scale industry has undergone many changes in India since 1950 as per the table:

Evolution of the definition of SSI in IndiaYearCapital

1950Capital assets not exceeding Rs 500,000

1958Capital investment of less than Rs. 500,000

1959In capital investment, the value of machinery to be taken at the original price paid irrespective of it being new or old

1960Gross value of fixed assets up to Rs. 500,000

Original Value of Plant and Machinery Only

1966Up to Rs. 750,000

1975Up to Rs. 1.0 million

1980Up to Rs. 2.0 million

1985Up to Rs. 3.5 million

1991Up to Rs. 6.0 million

1997Up to Rs. 30.0 million

1998Up to Rs. 10.0 million

The definition for small-scale industrial undertakings has changed over time. Initially they were classified into two categories- those using power with less than 50 employees and those not using power with the employee strength being more than 50 but less than 100. An industrial unit can be categorized as a small- scale unit if it fulfils the capital investment limit fixed by the Government of India for the small-scale sector.As per the latest definition which is effective since December 21, 1999, for any industrial unit to be regarded as Small Scale Industrial unit the following condition is to be satisfied: -

Investment in fixed assets like plants and equipments either held on ownership terms on lease or on hire purchase should not be more than Rs 10 million.

Since independence the Government of India has nurtured this sector with special care with the following aims: -

To develop this sector as a major source of employment To encourage decentralized industrial expansion To ensure equitable distribution of income. To mobilize capital investment and entrepreneurship skills Classification of SSISSmall scale industries are mainly classified in two categories:

1. Traditional Small Industries

2. Modern Small Industries1. Traditional Small Industries: Khadi and handloom, sericulture, handicrafts, village industries, coir, Bell metal are some of the traditional small-scale industries in India. One special characteristic of traditional small-scale industries is that they cannot provide full time employment to workers, but instead can provide only subsidiary or part time employment to agricultural labourers and artisans. Among traditional village industries, handicrafts possess the highest labour productivity, besides handicrafts make a significant contribution to earning foreign exchange for the country.1. Modern small industries: Nowadays Indian small-scale industries (SSIs) are mostly modern small-scale industries. The modern small industries offer a wide range of products starting from simple items like hosiery products, garments, leather products, fishing hook, rubber products, plastic products, chemical products, glass and ceramics to more sophisticated items like television sets, electronics control system, various engineering products especially as ancillaries to large industrial undertakings. Modernization has widened the list of products offered by this industry. The traditional small industries are highly labour-intensive while the modern small-scale units make the use of highly sophisticated machinery and equipment. For instance, during 1979-80, traditional small-scale industries accounted for only 135 of the total output but their share in total employment was 56%. As against this, the share of modern industries in the total output of this sector was 74% in 1979-80 but their share in employment was only 33%. Small scale businesses operating in IndiaIn order to encourage growth, expansion and more investment in the small-scale sector the Government has adopted a policy of reservation for allowing certain products to be exclusively manufactured by the small-scale sector. The number of items in the reserve list has changed over time. As per the revision done on March 2005, total 506 items are there in the reserve list for SSIs. The details of the items reserved for SSIs are given below:

Food and allied industries (9)

Wood and wood products (9)

Paper products (19)

Plastic products (53)

Chemicals and chemical products (7)

Natural essential oils (2)

Organic chemicals, drugs and drug intermediates (33)

Other chemicals and chemical products (67)

Glass and ceramics (27)

Mechanical engineering excluding transport equipment (137)

Electrical machines, appliances & apparatus (17)

Electronic equipments and components (1)

Transport equipment boats and truck body building (3)

Auto parts components and ancillaries and garage equipments (36)

Bicycle parts, tricycles and perambulators (41)

Miscellaneous transport equipment (4)

Sports goods (7)

Stationery items (13)

Others (21)

Opportunities in Small Scale BusinessAs Small Scale Businesses are less capital intensive and highly labourintensive, there are huge opportunities for this sector in a labour-abundant capital-scarce economy like India. The other factors that are cater to the fast growth of this sector are Extensive Promotion & Support by the govt, available grants & Subsidies, raw material procurement, rising export demand for Indian products and rising domestic demand which is the result of overall economic growth. But, the growth rates can increase further if more development measures are taken to improve the Technology and Marketing side of Small Scale Business and thus mall-scale businesses can construct the most dynamic and vibrant sector of the economy. The opportunities in the small-scale sector are enormous due to the following factors:

Less Capital Intensive

Extensive Promotion & Support by Government

Reservation for Exclusive Manufacture by small scale sector

Project Profiles

Funding - Finance & Subsidies

Machinery Procurement

Raw Material Procurement

Manpower Training

Technical & Managerial skills

Tooling & Testing support

Reservation for Exclusive Purchase by Government

Export Promotion

Role and Importance of Small Scale Industry in Indian EconomySmall Scale Industries may sound small but actually plays a very important role in the overall growth of an economy. Small Scale Industries can be characterized by the unique feature of labor intensiveness. The importance of this industry increases manifold due to the immense employment generating potential. In a developing country like India, the role and importance of small-scale industries is very significant towards poverty eradication, employment generation, rural development and creating regional balance in promotion and growth of various development activities. It is estimated that this sector has been contributing about 40% of the gross value of output produced in the manufacturing sector and the generation of employment by the small-scale sector is more than five times to that of the large-scale sector.

The small-scale industry have been playing an important role in the growth process of Indian economy since independence in spite of stiff competition from the large sector and not very encouraging support from the government.

The following are some of the important role played by small- scale industries in India:1. Employment generation;

2. Mobilisation of resources and entrepreneurial skill;3. Equitable distribution of income;4. Regional dispersal of industries;5. Provides opportunities for development of technology;6. Indigenisation;7. Promotes exports;8. Supports the growth of large industries;9. Supports the growth of large industries;10. Better industrial relations;1. Employment generation: The basic problem that is confronting the Indian economy is increasing pressure of population on the land and the need to create massive employment opportunities. This problem is solved to larger extent by small-scale industries because small- scale industries are labour intensive in character. They generate huge number of employment opportunities. Employment generation by this sector has shown a phenomenal growth. It is a powerful tool of job creation.

2. Mobilisation of resources and entrepreneurial skill: Small-scale industries can mobilize a good amount of savings and entrepreneurial skill from rural and semi-urban areas remain untouched from the clutches of large industries and put them into productive use by investing in small-scale units. Small entrepreneurs also improve social welfare of a country by harnessing dormant, previously overlooked talent. Thus, a huge amount of latent resources are being mobilised by the small-scale sector for the development of the economy.

3. Equitable distribution of income: Small entrepreneurs stimulate a redistribution of wealth, income and political power within societies in ways that are economically positive and without being politically disruptive. Thus small-scale industries ensures equitable distribution of income and wealth in the Indian society which is largely characterised by more concentration of income and wealth in the organised section keeping unorganised sector undeveloped. This is mainly due to the fact that small industries are widespread as compared to large industries and are having large employment potential.

4. Regional dispersal of industries: There has been massive concentration of industries in a few large cities of different states of Indian union. People migrate from rural and semi urban areas to these highly developed centres in search of employment and sometimes to earn a better living which ultimately leads to many evil consequences of over-crowding, pollution, creation of slums, etc. This problem of Indian economy is better solved by small- scale industries which utilise local resources and brings about dispersion of industries in the various parts of the country thus promotes balanced regional development.

5. Provides opportunities for development of technology: Small-scale industries have tremendous capacity to generate or absorb innovations. They provide ample opportunities for the development of technology and technology in return, creates an environment conducive to the development of small units. The entrepreneurs of small units play a strategic role in commercialising new inventions and products. It also facilitates the transfer of technology from one to the other. As a result, the economy reaps the benefit of improved technology.

6. Indigenisation: Small-scale industries make better use of indigenous organisational and management capabilities by drawing on a pool of entrepreneurial talent that is limited in the early stages of economic development. They provide productive outlets for the enterprising independent people. They also provide a seed bed for entrepreneurial talent and a testing round for new ventures.

7. Promotes exports: Small-scale industries have registered a phenomenal growth in export over the years. The value of exports of products of small-scale industries has increased to Rs. 393 crores in 1973-74 to Rs. 71, 244 crores in 2002-03. This contributes about 35% India's total export. Thus they help in increasing the country's foreign exchange reserves thereby reduces the pressure on country's balance of payment.

8. Supports the growth of large industries: The small-scale industries play an important role in assisting bigger industries and projects so that the planned activity of development work is timely attended. They support the growth of large industries by providing, components, accessories and semi finished goods required by them. In fact, small industries can breath vitality into the life of large industries.

9. Better industrial relations: Better industrial relations between the employer and employees helps in increasing the efficiency of employees and reducing the frequency of industrial disputes. The loss of production and man-days are comparatively less in small- scale industries. There is hardly any strikes and lock out in these industries due to good employee-employer relationship. Of course, increase in number of units, production, employment and exports of small- scale industries over the years are considered essential for the economic growth and development of the country. It is encouraging to mention that the small-scale enterprises accounts for 35% of the gross value of the output in the manufacturing sector, about 80% of the total industrial employment and about 40% of total export of the country.Advantages associated with Small Scale Industries

1. This industry is especially specialized in the production of consumer commodities.

2. Small scale industries can be characterized with the special feature of adopting the labor intensive approach for commodity production. As these industries lack capital, so they utilize the labor power for the production of goods. The main advantage of such a process lies in the absorption of the surplus amount of labor in the economy who were not being absorbed by the large and capital intensive industries. This, in turn, helps the system in scaling down the extent of unemployment as well as poverty.

3. It has been empirically proved all over the world that Small Scale Industries are adept in distributing national income in more efficient and equitable manner among the various participants in the process of good production than their medium or larger counterparts.

4. Small Scale Industries help the economy in promoting balanced development of industries across all the regions of the economy. This industry helps the various sections of the society to hone their skills required for entrepreneurship.

5. Small Scale Industries act as an essential medium for the efficient utilization of the skills as well as resources available locally.

ECONOMIC INDICATORS OF SSI IN INDIA AT A GLANCE

SSIs IN INDIA (Figures for 2002-2003)

Estimated No. of Units3.57 Million

Employment19.96 Million

Share in Industrial Value Added39%

Share in Total Exports

Direct

Overall

45%

34%

Total Number of Items ProducedOver 8000

Number of Reserved Items675

TRENDS IN GROWTH SSI & INDUSTRIAL SECTOR (in %)

YearSSI SectorIndustrial Sector

1991-923.10.6

1992-935.62.3

1993-947.16.0

1994-9510.19.4

1995-9611.412.1

1996-9711.37.1

1997-988.435.8

1998-997.74.0

1999-20008.166.5

TRENDS IN GROWTH OF EMPLOYMENT INSSI & INDUSTRIAL SECTOR (in %)

PeriodGDP Growth per annumIncrease in jobs per annum

Organised Sector including GovernmentSSI sector

1980-19905.7%1.59%6.7%

1991-19975.7%0.86%3.5%

1980 - 1997

Organised Sector 53.66 lakh new jobs

SSI Sector80.00 lakh new jobs

Question 4:Explain pricing methods and which method will be suitable in this present age?Answer:

PRICING METHODS

1. Introduction

One of the most difficult, yet important, issues must decide as an entrepreneur is how much to charge for their product or service. While there is no one single right way to determine the pricing strategy, fortunately there are some guidelines that will help the producer with their decision. One of the four major elements of the marketing mix is price. Pricing is an important strategic issue because it is related to product positioning. Furthermore, pricing affects other marketing mix elements such as product features, channel decisions, and promotion.While there is no single recipe to determine pricing, the following is a general sequence of steps that might be followed for developing the pricing of a new product:1. Develop marketing strategy- perform marketing analysis, segmentation, targeting, and positioning.2. Make marketing mix decisions- define the product, distribution, and promotional tactics.3. Estimate the demand curve- understand how quantity demanded varies with price.4. Calculate cost- include fixed and variable costs associated with the product.5. Understand environmental factors- evaluate likely competitor actions, understand legal constraints, etc.6. Set pricing objectives- for example, profit maximization, revenue maximization, or price stabilization.7. Determine Pricing using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts.These steps are interrelated and are not necessarily performed in the above order. Nonetheless, the above list serves to present a starting framework.To get the actual pricing models, the following factors need to consider:

1. Marketing Strategy and the Marketing Mix2. Estimate the Demand Curve3. Calculate Costs

4. Environmental Factors1. Marketing Strategy and the Marketing Mix: Before the product is developed, the marketing strategy is formulated, including target market selection and product positioning. There usually is a tradeoff between product quality and price, so price is an important variable in positioning.Because of inherent tradeoffs between marketing mix elements, pricing will depend on other product, distribution, and promotion decisions.2. Estimate the Demand Curve: Because there is a relationship between price and quantity demanded, it is important to understand the impact of pricing on sales by estimating the demand curve for the product. For existing products, experiments can be performed at prices above and below the current price in order to determine the price elasticity of demand. Inelastic demand indicates that price increases might be feasible.3. Calculate Costs: If the firm has decided to launch the product, there likely is at least a basic understanding of the costs involved, otherwise, there might be no profit to be made. The unit cost of the product sets the lower limit of what the firm might charge, and determines the profit margin at higher prices. The total unit cost of a producing a product is composed of the variable cost of producing each additional unit and fixed costs that are incurred regardless of the quantity produced. The pricing policy should consider both types of costs.4. Environmental Factors: Pricing must take into account the competitive and legal environment in which the company operates. From a competitive standpoint, the firm must consider the implications of its pricing on the pricing decisions of competitors. For example, setting the price too low may risk a price war that may not be in the best interest of either side. Setting the price too high may attract a large number of competitors who want to share in the profits.From a legal standpoint, a firm is not free to price its products at any level it chooses. For example, there may be price controls that prohibit pricing a product too high. Pricing it too low may be considered predatory pricing or dumping in the case of international trade. Offering a different price for different consumers may violate laws against price discrimination. Finally, collusion with competitors to fix prices at an agreed level is illegal in many countries.Pricing ObjectivesThe firm's pricing objectives must be identified in order to determine the optimal pricing. Common objectives include the following: Return of Investment A business organization must have minimum return of its investment, e.g., 10% or 20% after tax. This rate to be decided by management and followed in the pricing policy. It is a long run pricing objective to have a target return on capital. Current profit maximization- seeks to maximize current profit, taking into account revenue and costs. Current profit maximization may not be the best objective if it results in lower long-term profits Current revenue maximization- seeks to maximize current revenue with no regard to profit margins. The underlying objective often is to maximize long-term profits by increasing market share and lowering costs Maximize quantity- seeks to maximize the number of units sold or the number of customers served in order to decrease long-term costs as predicted by the experience curve. Maximize profit margin- attempts to maximize the unit profit margin, recognizing that quantities will be low Quality leadership- use price to signal high quality in an attempt to position the product as the quality leader Partial cost recovery- an organization that has other revenue sources may seek only partial cost recovery. Survival- in situations such as market decline and overcapacity, the goal may be to select a price that will cover costs and permit the firm to remain in the market. In this case, survival may take a priority over profits, so this objective is considered temporary Status quo- the firm may seek price stabilization in order to avoid price wars and maintain a moderate but stable level of profit.Pricing Methods

A successful pricing strategy must be driven by the "Three C's" of pricing strategy:

Customers, Competitors, and Costs.Price is value of a product in denoted in term of money. It is the amount paid by buyer to a seller for a unit of product or service. A firm may adopt various price policies for a product produce by it. This alternative pricing method can be classified in two major group, methods based on costs of products and methods based on Market Conditions. There are three basic methods to price the product:1. Cost Based Pricing;

2. Competition Based Pricing;

3. Customer Based Pricing;4. Market Based Pricing;1. Cost-Based Pricing is where the price includes the cost of ingredients and cost of operating the business.

Include a profit percentage with product cost

Add a percentage to an unknown product cost

Blend of total profit and product cost

2. Competition-Based Pricing is where the price covers costs (cost of raw materials and the cost of operating the business) and is comparable to the competitors price.

Price is the same as the competition

Set price to increase customer base

Seek larger market share through price

3. Customer-Based Pricing, also known as Value-based Pricing, is a system where the price is based on the customer demand or need for the product. If the product is unique or innovative, a value-based price may help create a demand for the product or service.

Use price to support product image

Set price to increase product sales

Design a price range to attract many consumer groups

Set price to increase volume sales

Price a bundle of products to reduce inventory or to excite customers4. Market-Based Pricing: For new products, the pricing objective often is either to maximize profit margin or to maximize quantity (market share). To meet these objectives, skim pricing and penetration pricing strategies often are employed. Joel Dean discussed these pricing policies in his classic HBR article entitled, Pricing Policies for New Products are as:

i. Skim Pricing

ii. Penetrating Pricing;Skim pricing attempts to skim the cream off the top of the market by setting a high price and selling to those customers who are less price sensitive. Skimming is a strategy used to pursue the objective of profit margin maximization. Skimming is most appropriate when: Demand is expected to be relatively inelastic; that is, the customers are not highly price sensitive Large cost savings are not expected at high volumes, or it is difficult to predict the cost savings that would be achieved at high volume The company does not have the resources to finance the large capital expenditures necessary for high volume production with initially low profit marginsPenetration pricing pursues the objective of quantity maximization by means of a low price. Penetrating is most appropriate when: Demand is expected to be highly elastic; that is, customers are price sensitive and the quantity demanded will increase significantly as price declines Large decreases in cost are expected as cumulative volume increases The product is of the nature of something that can gain mass appeal fairly quickly There is a threat of impending competitionAs the product lifecycle progresses, there likely will be changes in the demand curve and costs. As such, the pricing policy should be re-evaluated over time.Competition-based PricingThe big advantage of competition-based pricing is that seller are focused on the industry and, therefore, their competition. The industry focus associated with competition-based pricing looks closely at the types of existing and emerging competition. Once it is known what are competitors are doing, seller can better decide how they will manage their business. Seller are able to charge a higher price if he can show how the product has a uniqueness or innovative quality and is worth more for the value.

Understanding the competition will take some research. It need to understand:

What product are selling

The types of companies to compete with (direct competition)

The amount and types of substitutes (indirect competition)

How companies operate in the industry

Check with Statistics of industries, the business section of the local library, the local Chamber of Commerce, the yellow pages or the Internet to help find this information. Use the following questions to learn more about the competition:

How many competitors operate in my market?

Are the competitors larger or smaller or major?

Are the competitors close by or far away?

Does the industry have barriers to entry such as legislation, extremely expensive or specialized capital equipment or unique ingredients?

Is it difficult for new competitors to enter the industry?

What types and number of products do the competitors sell?

What pricing method(s) do the competitors use?

Three competition-based pricing methods are:

Price the product the same as the competition. Set the price to increase customer base. seek larger market share through price.Price the Product the Same as the Competition: This market pricing method aims to make the product comparable to competitors. Scout out competitors and find out what they charge for similar products. This type of pricing works well if the standard products is made.

If unique products are made, it need to decide how specialized is the product. Products can be plotted on a scale according to how unique they are. Homogeneous products are on one end of the scale. Highly differentiated products are on the other end. The term highly differentiated is used to describe products that are unique and cannot be compared to other products on the market. Examples of homogeneous products include eggs, butter and bread. Highly differentiated products may begin as homogeneous products but they have one or more layers of special features like packaging, trademarks, design, flavour, freshness, appearance, etc.

Example:Sugar-based pancake syrups are homogeneous products. A highly differentiated product would be birch syrup packaged in single-use containers for the bed and breakfast industry.

Set the Price to Increase Customer Base: This method is also known as market penetration pricing. To improve the market penetration, price need to select that will lure customers away from the competition. This type of pricing intends to improve market share or penetrate the market. To motivate customers to notice the product, and to make a purchase decision, price will need to lower.

Market penetration pricing works well in the introduction stage of the product life cycle. In highly competitive markets this strategy will sell product quickly, creating economies of scale and market penetration. As production increased, some of the costs will decrease because of economies of scale. Saving can be done when materials and ingredients are purchased in larger quantities. The lower costs per unit may be due to bulk buying of raw materials, marketing costs spread over more units, or more efficient labour.

Example:An established producer of beef jerky decides to use market penetration pricing at a local convenience store. A study of other convenience stores shows a price range for jerky of $2.00 to $3.00 per 100 gram package. The seller decides to sell their jerky at $1.50 per 100 gram package to sell larger volumes.

Seek larger market share through price: This type of pricing is often called market-share pricing. Price need to select as that will attract and hold as many customers as possible. Most businesses would adopt market-share pricing after market penetration is achieved. Market share happens when large volumes of product is sold into a market.

Companies who seek market share describe the amount of market they supply as a percentage. Market share is calculated by dividing the amount each company sells out of the total market.

Example:If Alberta Pasta, a fresh pasta processor, sells 1,000 kilograms of product daily into a market of 2,000 kilograms. They hold a 50 per cent market share. Marketers rely heavily on market share to evaluate their success in promotion, pricing, distribution and product strategies.

This pricing method is used mainly by larger, established businesses. The typical user of market share has many economies of scale and wants to measure the success of a marketing campaign.

Tips for Successful PricingGood product prices are important to any successful business. Pricing takes creativity, time, research, good recordkeeping and flexibility. You need to balance the costs of producing a product with competition and the perceptions of your target customer to select the right product price. Follow these tips to ensure greater pricing success.

Be Creative: Think of new ways to sell more to existing customers or to attract new customer groups.

Listen to the Customer: Make a point of noting customer comments in a journal or file. Review them periodically to glean new ideas.

Do the Homework: Keep good notes of how the price arrived so it can make similar assumptions in the future.

Boost the Records: Good recordkeeping will help to set a price and to track the performance of the pricing.

Cover the Basics: The three basics of pricing are product price, competition and customers. Blend pricing methods to ensure the three basics are in balance.

Be flexible: Constantly review both internal and external factors and calculate how a price change would affect the new situation.

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