CU-MBA-SEM-II-Entrepreneurship

By drawing from the definitions ascribed to franchising by the British Franchise Association, 8 the International Franchising Association and the Federal Trade Commission of the United States10, the following characteristic traits of franchising emerge.  A franchise arrangement is based upon a contractual relationship.  The franchisor should have developed a business system or format, which is identified with a brand name.  The franchisee makes a substantial initial capital investment and normally owns the business operation.  The franchisor normally trains the franchisee to ensure that it is equipped to effectively comply with the business system.  Once the franchisee’s business commences, the franchisor continually supports the franchisee in certain aspects of the business operation.  The franchisor also regularly supervises the franchisee’s business operations in order to protect the franchisor’s goodwill and brand name.  Some form of consideration is paid by the franchisee to the franchisor for the rights licensed and the services rendered. Types of franchising agreements: The object of a franchise agreement is either to promote a product or a business format. Historically, franchising developed as a means of distributing products. Product franchising involves the franchisee concentrating on one manufacturer’s product, and thereby acquiring the manufacturer’s identity to some extent. Typical examples are automobile dealerships and gas service stations. However, the 1950’s witnessed the dawn of a new form of franchising, Business Format franchising, wherein the franchisee has to follow strict guidelines and operational standards on product development and marketing.13 Examples of business format franchising include restaurants, convenience stores, and personal and business services. (a) Invention Licensing Agreement: This kind of an agreement is common in a situation when a person has created a new invention and seeks to maximize the fruits of his invention, by firstly patenting the invention and thereafter exploiting it on a nationwide or worldwide platform. Such an agreement focuses on the licensing of patent and design rights and the manufacturing and marketing of the invention. (b) Trademark Licensing Agreement: In order to build brand equity, the owner of a trademark can grant a license to another person to use the trademark on goods, which are associated with that particular trademark. This type of an agreement may be for the manufacture, preparation, marketing, presentation, and sale of 201 CU IDOL SELF LEARNING MATERIAL (SLM)

goods and would generally contain provisions to preserve the standard of quality of the goods and the goodwill and reputation of the brand. (c) Character Merchandising Agreement: In such an agreement, the name of a famous entertainment or sports personality or probably a fictional or graphical character is licensed to be used on certain products. This kind of an agreement would necessarily concentrate on provisions to protect the reputation and / or copyright associated with such personalities and / or characters. (d) Dealer / Distributor / Marketing arrangements: These are the most common franchising agreements where usually the dealers or distributors adopt a particular business system or format of the franchisor. Generally, these agreements are entered into in cases of dealerships with automobile companies (such as with Hyundai and Maruti Udyog), food and consumer goods chains (such as McDonalds and barista), petrol pumps and gas stations (such as Hindustan petroleum) et al. Pros and cons of a franchising arrangement: Though franchising can be a very profitable business arrangement for the franchisor and the franchisee, if not entered into properly or looked after well, it could prove quite the contrary This section aims at highlighting some of the benefits and assessing some of the risks that could arise in franchising. The following tables briefly summarize the pros and cons from the franchisor and franchisee’s viewpoints. FRANCHISOR’S VIEWPOINT PROS CONS Financial investment and commitment are Difficulty in finding a suitable person as a limited. franchisee Reasonable (sometimes, high) profits and Loss of goodwill / dilution of brand, if the exponential growth of brand equity, without franchisee acts independently and does not high-capital risks. adhere to certain basic standards Breakdown of a trust-based relationship between Exploitation of a wider territorial area, not the parties or difficulty in receiving co-operation typically within his/its scope. from franchisees Manpower resources looked after by the Franchisee may not disclose complete and Franchisee. Consequently, fewer labour problems accurate income for calculation of franchise fees to cope with. FRANCHISEE’S VIEWPOINT 202 CU IDOL SELF LEARNING MATERIAL (SLM)

PROS CONS Capitalizing and benefiting from the Franchisor’s invention / brand / business Imposition of controls and supervision by the franchisor systems / know-how. Elimination of unnecessary expenses due to Heavy initial capital investment, in addition to franchisor’s experience and pilot operations. consideration for using the franchisor’s invention / brand / business systems / knowhow and receiving the franchisor’s services. Continual assistance from the franchisor while Dependence on the franchisor may hinder the operating the business. franchisee’s personal drive Benefit from the franchisor’s advertising and Franchisor’s policies may affect the franchisee’s promotional campaigns. profitability and business operations. 13.8 SUMMARY  Intellectual property encompasses the properties that are the creations of the human mind, labour, capital and intellect.  Intellectual property is divided into two categories: Industrial property, which includes inventions (patents), trademarks, industrial designs, and geographic indications of source; and Copyright, which includes literary and artistic works such as novels, poems and plays, films, musical works, artistic works such as drawings, paintings, photographs and sculptures, and architectural designs.  The most noticeable difference between intellectual property and other forms of property, however, is that intellectual property is intangible, that is, it cannot be defined or identified by its own physical parameters. It must be expressed in some discernible way to be protectable.  Copyright is a well-recognized form of property right which had its roots in the common law system and subsequently came to be governed by the national laws in each country.  Copyright is a right given by the law to creators of literary, dramatic, musical and artistic works and producers of cinematograph films and sound recordings. In fact, it is a bundle of rights including, inter alia, rights of reproduction, communication to the public, adaptation and translation of the work.  In India, the law relating to copyright is governed by the Copyright Act, 1957 which has been amended in 1983, 1984, 1985, 1991, 1992, 1994, 1999 and 2012 to meet with the national and international requirements 203 CU IDOL SELF LEARNING MATERIAL (SLM)

 Under the Copyright Act, 1957 copyright subsists throughout India in the following classes of works: Original literary; dramatic, Musical and artistic works; Cinematograph films; and Sound recordings.  A trade secret is any kind of information that is secret or not generally known in the relevant industry giving the owner an advantage over competitors.  Unlike patent, a trade secret does not have to pass the test of novelty; nevertheless, the idea should be somewhat new, unfamiliar to many people including many in the same trade  Trade secrets are not protected by law in the same manner as trademarks or patents. In India, trade secrets are not covered under any law. 13.9 KEY TERMS  Trade Related Intellectual Property Rights (TRIPS) Agreement under WTO contains provisions with regard to setting up of standards concerning availability, scope and use of Intellectual Property Rights, Geographical Indications, Layout- Design of Integrated Circuits etc.  A utility model is an exclusive right granted for an invention, which allows the right holder to prevent others from commercially using the protected invention, without his authorization for a limited period of time.  The World Intellectual Property Organization (WIPO) is a specialized agency of the United Nations.  Intellectual capital is recognized as the most important asset of many of the world’s largest and most powerful companies. 13.10 LEARNING ACTIVITY 1. What are the IPRs used in the business? What is their value (and hence level of risk)? ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 2.Illustrate the methods for the valuation of intangibles. ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 13.11 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is meant by Intellectual Property? 204 CU IDOL SELF LEARNING MATERIAL (SLM)

2. What are Intellectual Property rights? 3. Why does intellectual property need to be promoted and protected?? 4. Who are responsible for administration of IPRs in the country? 5. How does accounting differ from finance? Long Questions 1. India provides protection to Intellectual Property Rights in accordance with its obligations under the TRIPS Agreement of the WTO. Discuss? 2. List out the subject matter protected by intellectual property rights under the World Intellectual Property Organization (WIPO)? 3. Outline the main differences between utility models and patents. Does India have legislation on Utility models? 4. Briefly explain the term “copyright” and the rights conferred by the copyright. 5. Copyright protects the rights of authors. How an author has been defined under the Copyright Act? B. Multiple Choice Questions 1. Which of the following is a recognized disadvantage of setting up as a start-up as compared with other routes to market entry a.Less satisfaction of the owners. b.Less help from various agencies. c.There are more funds required. d.There is a high failure rate 2. Someone legally appointed to resolve the financial difficulties of an insolvent firm iscalled____________. a. An administrator. b. A predator. c. An auditor. d. A turnaround consultant. 3. Goods or services reach the marketplace through ________. a. Marketing channels. b. Multilevel pyramids. c. Monopolies. d. Multiplication 205 CU IDOL SELF LEARNING MATERIAL (SLM)

4. To provide financial assistance to entrepreneurs the government has set up a numberof___________? a. Financial advisors. b. Financial intermediaries. c. Industrial estates. d. Financial institutions. 5. _____________ can be defined as a specifically evolved work plan densed to achieve a Specific objective within a specific period of time a. Idea generation. b. Opportunity Scanning. c. Project. d. Strategy. Answers 1-d, 2-a, 3-a. 4-d 5-c 13.12 REFERENCES Textbooks  T1 Gupta, R.K. & Lipika, K.L. 2115. Fundamentals of entrepreneurship development & project management, Himalaya Publishing House. ISBN: 978-9351426844.  T2 Ivaturi, V.K., Ganesh, M., Mittal, A., Subramanya, S. 2117. The Manual for Indian Start-ups: Tools to Start and Scale-up Your New Venture, Penguin Random House India. ISBN: 978-0143428527. Reference Books  R1 Gordan, E. and Natarajan, K. 2117. Entrepreneurship Development, 6th Edition, Himalaya Publishing House, ISBN: 978-9352125404. 206 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT – 14 : DESIGNING ORGANIZATION STRUCTURE – LEGAL ISSUES STRUCTURE 14.0 Learning Objectives 14.1 Introduction 14.2 Startups 14.3 Differences between Startups and Traditional companies 14.4 Corporate Governance 14.4.1 Elements of Corporate Governance 14.4.2 Corporate governance requirements in India 14.5 Start-ups and Corporate Governance 14.6 Summary 14.7 Keywords 14.8 Learning Activity 14.9 Unit End Questions 14.10 References 14.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe the concept of Startups.  Explain the elements of Corporate Governance.  Explain the startups and traditional companies’ differences.  Describe the corporate governance requirements in india.  Describe the strategies of start-ups and corporate governance. 14.1 INTRODUCTION We, as humans tend to focus on the factors, we assume carry more weightage in the context of a particular outcome we seek for, and when any deviations occur in our expectations; we would try to convince ourselves that maybe we didn't put in enough efforts in respect to those factors. What most of us don't realize is there could be some innate and integral factor we missed altogether which may have led to those deviations. Over the years and especially in the recent ones, the entrepreneurial spirit has grown exponentially throughout the globe not leaving India from its bounds. We are able to confidently state this because of the fact that India is now home to more than 4200 startups with 600 of them opening up in 2015 itself, as 207 CU IDOL SELF LEARNING MATERIAL (SLM)

per NASSCOM. (NASSCOM) However, another fact that comes to our attention is that almost 90% of startups in India fail within the first five years of inception as per studies by IBM and Oxford. (Aggarwal). Most research done on ascertaining the factors responsible for this has been concerned with  Lack of proper execution of operations  Lack of Technology and skilled workforce  Lack of proper Business Models. (D'Cunha) One aspect which gets missed out in the conversation is corporate governance. Corporate Governance continues to be a significance element in successful businesses with recent examples of Tata's and Infosys; what could happen to companies if it is not given the care and attention it requires. Corporate governance describes “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled within corporations. It encompasses the mechanisms by which companies, and those in control, are held to account. (ASX Corporate Governance Council). With the increasing number of cases of large Multinational Corporations facing problems with the aspect of corporate governance and how to deal with it when a problem arises, it would be interesting to know that whether startups, companies which are in their first five years of operations, take it seriously and consider it as a factor to a healthy organization or see it as a burden that they have to carry for the sake of it. 14.2 STARTUPS Most people understand a startup as some organization which is going through the initial stage of sustaining itself and evaluating its potential for the future at the same time. They are mostly recognised as small companies which are self-funded and operated by 20 to 30-year- olds. In actual scenario, however, Startups are made for larger markets because they have something to offer for the large markets. (Landau) They tend to grow fast, way faster than any small restaurant that open in city, which could be classified as a small business. Another very common misconception is that only tech or online companies can be classified as startups, which is understandable because people only come across those in daily life, but it is not true. The government of India has especially clarified this in their definition of startups. (Kalbi and Ayyar) So, one has to understand that the definition of a startup is ever expanding but if one needs to refer to something, one could frame startups as \" an entrepreneurial venture taken up by an individual or a group looking at potential success in the future owing to innovation which caters to a wide market.\" A more traditional definition would also include that a company remains a 'Startup' only till the first five years of its incorporation which might not fit in with the actual sense of the term completely. Flipkart and Ola are still considered as 'startups' even though they have been incorporated for more than five years now. 208 CU IDOL SELF LEARNING MATERIAL (SLM)

The following chart shows the different features of startups which make it unique and thus define it: Fig 14.1Difference features of Startups 14.3 DIFFERENCES BETWEEN STARTUPS AND TRADITIONAL COMPANIES Now, considering the above elements which define Startups, it is now easier to draw a parallel between them and traditional companies; companies who have crossed the development stage and who focus on maintenance and further growth, steadied their revenues and profits over the years and now look to expand their business. Startups need to take more risk in every aspect than a traditional company would, and with heavier expenses and lower profits, it becomes all the more difficult. (Zhuo). Most surveys and researches show massive difference in mindsets of Startup owners and CEOs of larger companies with regard to the decisions they take, stakeholders they consider while taking these decisions and how they deal with the impact of these decisions. Another way to look at it would be saying that every established company was once a startup, and hence it knows where it went wrong and now it is just trying to rectify that. It is also important to note that there aren't any two separate principles or rules for startups and traditional companies. The major points that differentiate startups from mature corporations with respect to corporate governance are: 1) Sources of funds i.e., the type of investors 2) Hierarchy of board or management 3) Rules and regulations to be followed 4) The entrepreneurial model 14.4 CORPORATE GOVERNANCE Corporate Governance can be defined as the rules, practices and processes by which a company is directed and controlled. The concept itself could be traced back to 1930s but it emerged only in the 1970s. 209 CU IDOL SELF LEARNING MATERIAL (SLM)

It is quite evident that its importance has grown many folds over the years, and it is unlawful today for a company to not follow its guiding principles. The international organisation, Global Network of Director Institutes, Toronto has elaborated these guiding principles. These principles are formed from general experiences and are not prescriptive in any way. They don't force any legal compliance on any organization to follow them but act as starting points or guidelines for these organizations to act upon. 1.Responsibility Every organisation should be headed by an effective board that is collectively responsible for overseeing the long-term success of the organisation and is charged with its direction. 2.Organisational structure The board sets the cultural and ethical tone for the organisation. Governance structures should be designed to encourage an appropriate organisational culture of integrity, ethics and corporate social responsibility and be tailored to the needs of the organisation. 3. Disclosure of practices The governance structures and practices that have been adopted by the board should be disclosed (for example, in a member communication document or on the organization’s website) together with an explanation of why the board considers them to be appropriate for the organisation, with particular focus on any aspects that are unusual or contrary to commonly accepted governance practices directors without members of the executive being present. 4.Independence Taking into consideration the scale and nature of the organisation’s activities, the board should comprise an appropriate number of directors who have a relevant and diverse range of skills, expertise, experience and background and who are able to effectively understand the issues arising in the organisation’s business, provide insight and add value. Directors must be able to 210 CU IDOL SELF LEARNING MATERIAL (SLM)

allocate sufficient time to their roles, both collectively and individually, to discharge their duties effectively. 1.14.1 Elements of corporate governance: Corporate governance works like a mesh with many elements working together to trap unethical elements. Many countries have their own framework to deal with corporate governance. Take for instance corporate governance codes in the United Kingdom. The Financial Reporting Council (2012) has laid out four principles to be followed by companies operating in the U.K. which involve  The leadership of those who take key decisions in the company e.g., shareholders, chairman etc. The decisions must be taken in the best interests of the company.  The board should be effective and must possess the relevant skills and expertise to guide the company  The board must be kept accountable for the decisions they make by being transparent about the same.  The board should be remunerated such that they look at the long-term success of the company.  The shareholders must interact with one another to ensure that they collectively contribute Other corporate governance frameworks follow similar lines, though they might differ due to the nuances in each country, for e.g., differing court structures might impact corporate governance legal frameworks in different countries (Hopt). Written in 1999 and revised most recently in 2015, the OECD guidelines were formed about deliberations by both member and non-member nations (Jesover and Kirkpatrick). It is noteworthy that the Securities and Exchange Board of India (SEBI) has also participated and actively tried to adhere to the same principles (SEBI). The principles are simply meant to provide a comprehensive set of guidelines which a nation must look at when developing their corporate governance principles. 1.14.2 Corporate governance requirements in india: Corporate governance in India has had a curious relationship. The three notable committees set up in the 2000 (headed by Kumar Mangalam Birla), 2003 (headed by Narayan Murthy) and most recently in 2017 (headed by Uday Kotak) (Srivats) have all tried to update corporate governance in the country based on the revised needs of the time and age. This has resulted in Clause 49 in the listing agreement, revised after the Narayan Murthy commission. This deals with all the corporate governance requirements which companies need to follow. These includes guidelines regarding the board of directors (with distinction between independent and dependent directors), provisions regarding institutional investors, risk 211 CU IDOL SELF LEARNING MATERIAL (SLM)

management, redressing the stakeholder concerns, risk management, remuneration of executives among others (Deloitte) While these provisions have tried to equip the businesses in the country with regulations which aid compliance, there has been a dearth to address the corporate governance needs for start-ups in the country. While the number of days to start a business in India has gone down from 123 days in 2003 to only close to 26 days in 2016 (The World bank), it is important to note that making it easier to start a business without helping them create effective structures to stay afloat is equivalent to building jails without jailers, there is no system for the companies to regulate themselves effectively. This may put them at odds with the government and one may find a system which dooms start-ups to being branded as criminal enterprises for not being able to decode the cryptic and unrealistic laws which have been set for the same. 14.5 START-UPS AND CORPORATE GOVERNANCE As per the popular business professional Fahim Al Qasimi, startups need corporate governance mainly for three reasons  Managing complex decision making  Saving time  Promoting investor confidence It is quite understandable that startups don't actually look forward towards incorporating corporate governance as an element from the initiation itself as it may seem to be a cumbersome and redundant matter to look into. Its guidelines are not as clear as one would expect and end up acting as hindrances more than they serve to be the framework the business runs upon. A scan of startup boot camps previously completed in Singapore reveals none include it in their agendas (Yen). However, while it may sound difficult to cope with it, it is impossible to run a business ignoring the elements of Corporate Governance. 14.6 SUMMARY  A more traditional definition would also include that a company remains a 'Startup' only till the first five years of its incorporation which might not fit in with the actual sense of the term completely.  Corporate Governance can be defined as the rules, practices and processes by which a company is directed and controlled.  All stakeholders are informed about all company activities, Stakeholders participate in decision making process of the firm, Stakeholders consult one another when firm is making decisions which involve them, and Stakeholders with less power are able to voice their concerns. 212 CU IDOL SELF LEARNING MATERIAL (SLM)

 The three notable committees set up in the 2000 (headed by Kumar Mangalam Birla), 2003 (headed by Narayan Murthy) and most recently in 2017 (headed by Uday Kotak) (Srivats) have all tried to update corporate governance in the country based on the revised needs of the time and age. 14.7 KEY TERMS  SSIM:Structural Self-Interaction Matrix  MICMAC is an acronym for Matrice d’Impacts croises-multiplication appliqúe an classment (cross-impact matrix multiplication applied to classification)  Business Ethics - Ghosh (2012) explains ethics as, “ethics is derived from the Greek word, ‘Ethikos’ meaning conduct, custom or habit. 14.8 LEARNING ACTIVITIES 1: Explain the Changing face of Corporate Ethics? ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 2: Why do we need Business Ethics? ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 14.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Startups? 2. Define Corporate Governance? 3. What are the unethical practices in IT industry? 4. What is the extent of unethical behaviour? 5. What are unethical practices in HRM? Long Questions 1. Why do we need Business Ethics? 2. Difference between startups and traditional companies? 3. Describe the elements of corporate governance? 4. Briefly explain the corporate governance requirements in india. 5. Differentiate Startups and corporate governance? B. Multiple Choice Questions 213 CU IDOL SELF LEARNING MATERIAL (SLM)

1. PERT stands for __________. a.Programme Evaluation and Research Techniques. b.Project Evaluation and Review Techniques. c.Programme Evaluation and Review Techniques. d.Project Evaluation and Research Techniques 2. _____________ is used to accomplish the project economically in the minimum available time with limited resources a. Project Scheduling. b. Network Analysis. c. Budget Analysis. d. Critical Planning. 3. ______________ is a form of financing especially for funding high technology, high risk and perceived high reward projects a. Fixed capital. b. Current capital. c. Seed capital. d. Venture capital 4. In _________, machines and equipment’s are arranged in the order or sequence in which they are to be used for manufacturing the product a. Factory Layout. b. Product Layout. c. Process Layout. d. Combined Layout. 5. The term ___________ denotes bonus or financial aid which is given by a government to an industry to help it compete with other units a. Incentive. b. Subsidy. c. Bounty. d. Concession. Answers 1-a, 2-c, 3-a. 4-b 5-b 214 CU IDOL SELF LEARNING MATERIAL (SLM)

14.10 REFERENCES Textbooks  T1 Gupta, R.K. & Lipika, K.L. 2115. Fundamentals of entrepreneurship development & project management, Himalaya Publishing House. ISBN: 978-9351426844.  T2 Ivaturi, V.K., Ganesh, M., Mittal, A., Subramanya, S. 2117. The Manual for Indian Start-ups: Tools to Start and Scale-up Your New Venture, Penguin Random House India. ISBN: 978-0143428527. Reference Books  R1 Gordan, E. and Natarajan, K. 2117. Entrepreneurship Development, 6th Edition, Himalaya Publishing House, ISBN: 978-9352125404. 215 CU IDOL SELF LEARNING MATERIAL (SLM)