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INDUSTRIAL ECONOMICS AND ENTREPRENEURSHIP DEVELOPMENT UNIT -1 COMPILED BY Prof.RUPESH DAHAKE

Unit-1- INDUSTRIAL ECONOMICS (Industrial economics, Types of Business structures, top and bottom line of the organization, economic analysis of business, economics of operations,

economic prudence in business.)

Introduction:- the term industrial was probable originated for the first time in the early 50’s through the writing of P.W.S.

Andrews. It is also entitled as industrial organization, industrial economics, industry and trade and industrial organization

and policy.

Meaning of Industrial Economics:-

Industrial economics is that branch of microeconomics which studies the economic problems of firms and industries and

their relationship with the society as a whole.

Definition: - in the worlds of P.R.Ferguson and G.J.Ferguson “Industrial economics is best defined as the application of

microeconomic theory to the analysis of firm, market and industries”.

Microeconomics is that the way in which individual market works. It may be noted here that both microeconomics and

industrial economics are concerned with the economic aspect of firms and industries seeking to analyze their behavior and

draw their normal implications.

Industrial Economics Features:-

Industrial economics is less formal and more inductive in nature.

Industrial economics down not believe in single goal of profit maximization. It searches the goals of the firm from

revealed facts.

Industrial Economics is Descriptive: industrial economics is descriptive in the sense that is attempts to interpret observed

phenomenon and to formulate theories about possible cause and effects relationship.

Industrial Economics is Prescriptive: - industrial economics is prescriptive in the sense that it attempts to predict the

outcome of specific decision of an industrial organization. Thus the principles developed in industrial economics may be

used to prescribe the most efficient way to achieve an industrial organization objective such as profit maximization.

1. Sole Proprietorship - This is the simplest and most common form of business which an owner can start, as registration is

not required (though a license may be necessary). Sole proprietorship involves only one individual who owns and operates

the enterprise. The liability of the owner is unlimited. It may be a good choice for the production of goods which involve

manual skill e.g. handicrafts, filigree works, jewellery-making, tailoring, hair cutting etc. All profits and losses are borne by

the owner, and the owner alone. The entire capital of the business is provided by the owner, though she may raise more

funds from outside through loans.

Advantages of a Sole Proprietorship:

It is the cheapest and easiest form of business structure

The owner can keep or reinvest the income as she wishes

The owner is in complete control of the business

This business is easy to set up and also easy to dissolve

The liability of the proprietor is unlimited

There are less legal formalities


Disadvantages of a Sole Proprietorship:

The owner is responsible for all debts related to the business

It can sometimes become hard to attract employees of higher quality, especially during the setting up stages of the

business

Funds are limited to only personal savings and loans or borrowings from family or friends

Because of the fact that it is difficult to raise capital, this business entity may have limited growth potential

Unlimited liability

2. Partnership - A partnership is a form of business entity formed by an agreement between two or more people to own and

run the business. Each owner, or partner, shares in the decision making and responsibilities. This arrangement enables

enterprising individuals to pool their resources to establish and expand a business. The owners of a partnership business are

individually known as partners and collectively as a firm. Partners have an equal share in the losses and the profits made by

the company (or as the agreed split may be). Such firms are most suitable for comparatively small businesses such as retail,

wholesale trade, professional services and small manufacturing units. Partnership Firms in India can have a minimum of two

partners and a maximum of 20 partners; however, the banking businesses are allowed a maximum of 10. The relation

between the partners is created by a contract which may be verbal, written or implied and it is known as the “Partnership

Deed”. The partners can share profits in any ratio. Generally, a partnership deed contains certain particulars:

Advantages of a Partnership:

Partnerships are easy to establish and the work and responsibilities are shared

There is an increased possibility of raising funds, as capital can be pooled together

The partners have mutual support and motivation, which is especially important for new entrepreneurs

Disadvantages of a Partnership:

The profits made must be split among the partners in the ratios which are agreed upon

There may be conflicts arising out of shared decisions

Partnerships have a limited life and can end upon the withdrawal of partnership or by the death of one of the

partners

There are also several restrictions on the transfer of rights and there is lack of unanimous authority

3. Private Limited Company - A private limited company is defined by the limited liability of its shareholders and restrictions

on share transfers. The minimum paid up capital at the time of incorporation of a private limited company is INR 1,00,000. It

can be increased at any time, by certain payments of stamp duties and registration fees. A private limited company must

have a minimum of two and a maximum of 50 members as its shareholders, as well as a minimum of two directors and

maximum of 12 directors. When the paid-up capital is equal to or exceeds INR 50 million, a company secretary must be

appointed. The shareholders and directors need not be Indian citizens. A private limited company has a separate legal

identity.

Advantages of a Private Limited Company:

Relatively less compliance requirements than on a Public Limited Company

It is an ideal business entity, when the shares of the company will be closely held and when there is no requirement

for more capital to be raised through public issue


Disadvantages of a Private Limited Company:

There are some restrictions on share transfers, as nobody but the members of the company are allowed to transfer

shares, and even those transfers have some regulation

While most of the time, shareholders have limited liability, there have been cases where the director or the

manager of the company does not have that protection

4. Public Limited Company - A public limited company is a company limited by shares in which there is no restriction on the

maximum number of shareholders, transfer of shares and acceptance of public deposits. The liability of each shareholder is

limited to the extent of his or her owned shares’ worth. A public limited company is an independent entity and is perpetual,

irrespective of death, retirement or insolvency of shareholders. The minimum paid up capital is INR 5,00,000 and the

company must have a minimum of seven shareholders and a minimum of three directors and maximum of 12 directors.

Advantages of a Public Limited Company:

You can raise a lot more capital through the sale of shares, which is the largest difference between a Public Ltd.

Company and a Private Ltd. Company

Liability is limited to the amount of shares owned by a member; she bears no responsibility as to the creditors of the

firm

Disadvantages of a Public Limited Company:

Extremely strict regulations through the Indian Companies Act, 1956 involving registration and operation

You may lose control of your company to outside investors as they attempt to refashion corporate management to

suit their liking

Similarly to a private limited company, the director/manager may have unlimited liability

5. HUF (Hindu Undivided Family):

There is no membership other than the members of a Hindu family.

All coparceners have an equal share in the profit of the business.

The management of the business is in the hands of the senior most family member who is known as the Karta.

The liability of each member of HUF is limited to the extent of his/her share in the business, but the liability of the

Karta is unlimited.

The individual share of each coparcener. This is because every birth of a male child in the family adds to the number

of coparceners and every death of a coparcener reduces the number.

A Joint Hindu family business continues to exist on the death of any coparcener. Even on the death of the Karta, it

continues to exist as the next senior most family member becomes the Karta. However, a joint Hindu family business

can be dissolved at any time, either through mutual agreement between members or by division of its assets.

6. Co-operative:

Individuals having a common interest can come together to form a co-operative society

The minimum membership required to form a co-operative society is 10 and the maximum number is unlimited

The registration of a society under the Co-operative Societies Act is mandatory. Once it is registered, it becomes

a body corporate and enjoys certain privileges just like a joint stock company


The primary objective of any co-operative organization is to render services to its members, in particular, and to

society in general

Every member has a right to take part in the management of the society. Each member has one vote. Generally

the members elect a committee known as the Executive Committee to look after the day to day administration

and the said committee is responsible to the general body of members

A co-operative organization starts with a fund contributed by its members in the form of units called shares. It

can also easily raise loans and secure grants from the government.

The return on capital subscribed by the members is in the form of a fixed rate of dividend after necessary

deductions from the profits.

Top and bottom line of the organization

Topline

When reporting performance, corporate entities post the period’s sales number as the first entry in the top-line of the

income statement. So, generally, when people make remarks on revenue growth of a company they refer to it as ‘top-line

growth’. This figure assumes significance as it brings to fore the company’s business prospects. Breaking up the sales figure

to know what helped its growth is essential as it would only aid in deciphering whether the increase is sustainable or not.

Higher sales can be a result of either increase in volumes (units sold) or increase in realisation. By ‘realisation’, we mean

revenue (selling price) made per unit sold.

Again, there could be two scenarios when a company can see higher realisation. One is when the demand for the specific

product goes up and the price shoots up on tight supplies and, two, when the company delivers value-added products that

command better price in the market over peer products. Top-line growth speaks of how efficient the company has been in

exploiting the opportunities in the market.

Bottom-line

The bottom-line or the bottom figure in an income statement is the ‘net profit’ of the company. This is what the company is

left with after paying all its expenses (both operating and administrative) for the period reported. A company’s bottom-line

generally denotes the efficiency of the management in controlling costs even as it delivers higher sales.

Higher sales in the period will push up net profits, similar to how reduced expense would. In other words, growth in net

profits does not necessarily mean fall in expenses; it could be bolstered by higher sales too. Suppose, ‘X’ company registers a

30 per cent increase in sales and a 10 per cent increase in total expenses, its net profit could be higher despite higher

expenditure on higher revenues.

That, however, may be the least of the challenges for corporates, as the real big challenge comes during recessionary times

like now when demand slumps and so does sales, making reduced or negative growth. Posting profits in such times is

possible only through identifying cost-reduction possibilities and reducing operational inefficiencies. In the December

quarter of 2008, only a few companies were seen posting bottom-line growth despite a fall in top-line. Few companies such

as Siemens, MIC electronics and Cadila Healthcare managed to grow profits despite a fall in sales. However, here again not

all cases were examples of operating efficiencies. Some saw profits soar due to higher other income. What’s other income?

Well, that’s a different story altogether.

Economic analysis of business:-


Whether it is a business situation or a day-to-day event in somebody’s personal life, there is a large number of economic

decisions making involved. One can manage many of these decision problems by using simple economic analysis.

EXAMPLES FOR SIMPLE ECONOMIC ANALYSIS:-

Material Selection for a Product/Substitution of Raw Material

The cost of a product can be reduced greatly by substitution of the raw materials. Among various elements of cost, raw material cost is most significant and it forms a major portion of the total cost of any product. So, any attempt to find a suitable raw material will bring a reduction in the total cost in any one or combinations of the following ways:

Cheaper raw material price

Reduced machining/process time

Enhanced durability of the product

Therefore, the process of raw material selection/substitution will result in finding an alternate raw material which will provide the necessary functions that are provided by the raw material that is presently used. In this process, if the new raw material provides any additional benefit, then it should be treated as its welcoming feature.

Design Selection for a Product:-

The design modification of a product may result in reduced raw material requirements, increased machinability of the materials and reduced labour. Design is an important factor which decides the cost of the product for a specified level of performance of that product.

Building Material Selection:-

As discussed in the introduction to this chapter, the sourcing of raw materials will have a significant effect on the cost of any product. Hence, it is assumed that the price of raw material is location dependent. While sourcing a raw material, the cost of transportation is to be considered in conjunction with the price of the raw material.

Process Planning /Process Modification

While planning for a new component, a feasible sequence of operations with the least cost of processing is to be considered. The process sequence of a component which has been planned in the past is not static. It is always subject to modification with a view to minimize the cost of manufacturing the component. So, the objective of process planning/process modification is to identify the most economical sequence of operations to produce a component.

The steps in process planning are as follows:

1. Analyze the part drawing to get an overall picture of what is required.

2. Make recommendations to or consult with product engineers on product design changes.

3. List the basic operations required to produce the part to the drawing or specifications.

4. Determine the most practical and economical manufacturing method and the form or tooling required for each operation.

5. Devise the best way to combine the operations and put them in sequence.

6. Specify the gauging required for the process.

Economics of operations/Scale:-


In microeconomics, economies of scale are the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output. Often operational efficiency is also greater with increasing scale, leading to lower variable cost as well.

Economies of scale apply to a variety of organizational and business situations and at various levels, such as a business or manufacturing unit, plant or an entire enterprise. For example, a large manufacturing facility would be expected to have a lower cost per unit of output than a smaller facility, all other factors being equal, while a company with many facilities should have a cost advantage over a competitor with fewer.

Some economies of scale, such as capital cost of manufacturing facilities and friction loss of transportation and industrial equipment, have a physical or engineering basis.

The economic concept dates back to Adam Smith and the idea of obtaining larger production returns through the use of division of labor. Diseconomies of scale are the opposite.

Economies of scale often have limits, such as passing the optimum design point where costs per additional unit begin to increase. Common limits include exceeding the nearby raw material supply, such as wood in the lumber, pulp and paper industry. A common limit for low cost per unit weight commodities is saturating the regional market, thus having to ship product uneconomical distances. Other limits include using energy less efficiently or having a higher defect rate.

Large producers are usually efficient at long runs of a product grade (a commodity) and find it costly to switch grades frequently. They will therefore avoid specialty grades even though they have higher margins. Often smaller (usually older) manufacturing facilities remain viable by changing from commodity grade production to specialty products.

Economic Prudence in Business:-

1. Industrial economies presents all those traditional aspects of economies which are relevant to real-life business decision-making, Industrial economics takes from economic theory, the concepts, principles and techniques of analyses which have an impact on the decision-making process. These are adapted and modified according to the situation so that the manager can take better and clear decisions. Thus industrial economics accomplishes the objective of building a suitable toolkit from traditional economics,

2. Industrial economics uses data and ideas from other disciplines like sociology and psychology-, if they are found relevant for decision-making. It takes the help of other disciplines which have an impact on the business decision of the company.

3. Industrial economics helps in reaching a decision for complex problems, for example. What the best size is of should be produced? What technique should be used? What is the best size of the new plant? How should the available capital be allocated?

4. Industrial economics can capture essential relationships which characterize the situation and it leaves out the irrelevant information, Indusirial economics serve as a integrating agent by coordinating the different functional areas of the company like finance, marketing, personnel, production etc.

5. Industrial economics takes into account the interaction of the company and the society, The Company has certain social obligations as well as obligation to shareholders etc. The company should become a socially-oriented business.

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