Option available to Entrepreneur (Ancillarisation, BPO, Franchise, M&A)

Ancillarisation

An ancillary unit is defined as an Industrial undertaking having investment in fixed assets, in plant & machinery whether held on ownership or on hire purchase not exceeding Rs. 100 crore & engaged in:

• Manufacturer of parts & components, sub-assemblies, tooling or intermediates
• Rendering of service or proposing to supply or render not less than 50 % of his production or service to one or more other industrial undertaking for production.

Major difference between SSI & ancillary is that unit setup which can be recognised as a full fledge large company can be a part of ancillary but under SSI such unit can get transformed into medium or large-scale sectors.

Major benefits of Ancillarisation drive to a country is that:

• Growth of employment
• Growth of GDP
• Growth of entrepreneurship

Advantages of Ancillarisation

• Minimise investments of setting up of large units as the required as the required production can be sourced a lower at rate with same quality through subcontracting from an ancillary unit
• Ancillary unit’s JIT concept helps the large companies to bring down the inventory level and saves a lot of money.
• Sourcing is economical from ancillary units that are normally located near the companies
• Ancillary units work with the parent companies in the process & product development

Disadvantages of Ancillarisation

• Delay in payments puts ancillary companies in big trouble. If the parent co. is big then the ancillary co. finds it difficult to take any legal action
• When parent companies revise the specification, ancillary units are sometimes not given the expected support for adopting the higher technology, not given sufficient time to bring changes in the technology to match that of parent co.
• Multiplication of suppliers makes the ancillary units operate below BEP(Breakeven point) as a result these units incur losses because of capacity utilisation.

BPO

Business Process Outsourcing, popularly known as BPO, is the business strategy where one company hires another company to perform a certain task for them, i.e. they outsource a certain job.

Say for example a manufacturing company will outsource their supply chain management to another company who specializes in supply chain management. So it essentially entails outsourcing one or more non-core business activities or processes to an external service provider. So there are two parties involved, the client company (the outsourced) and the external service provider or the vendor (the outsourcer)

One point to note that only non-core activities are usually outsourced. The companies do not part with their core competencies, they maintain all their focus on these like manufacturing, marketing etc.

However non-core services like after sales service, customer relations, supply chain management, real-time accounting etc. can be outsourced to BPOs.

Advantages of a BPO

1. Flexibility

Outsourcing non-core activities to a BPO allows a company to be far more flexible. Firstly, the company does not have to invest in additionally fixed assets and can convert them to variable costs. It also increases flexibility in resource management of the client company and helps in adapting to changes in the environment much faster.

2. Cost Effective

Outsourcing some of the business processes and activities can be very cost effective for the client company. They save on investing in fixed assets and fixed costs. And they can redirect these funds for their core activities.

Also outsourcing to developing countries proves to be very cost saving for these companies. For example, if any large MNC was to outsource their IT services to India, they would save an average of 30% of the company’s expenses. This is quite a significant difference.

3. Speed

One of the biggest advantages of BPOs is that they increase the speed of the business processes outsourced to them. They have a very good response time and the clients can focus on the core activities. This fragmentation of activities speeds up the whole process and is very important in cases like customer service.

4. Skilled Manpower

When you outsource one of your business activities to a BPO, you are insured of exemplary services provided by skilled manpower. So if you outsource your supply chain management, rest assured your supply chain will be handled by skilled supply chain managers who are experts in their field. Same goes for IT services or accounting etc.

Franchise

Business opportunities are less structured than franchises, so the definition of what constitutes a business opportunity isn’t easy to pin down. In essence, a business opportunity is any package of goods or services that enables the purchaser to begin a business and in which the seller represents that it will provide a marketing or sales plan, that a market exists for the product or service, and that the venture will be profitable.

Here are other key factors:

• A business opportunity doesn’t generally feature the seller’s trademark; buyers operate under his or her own name.
• Business opportunities tend to be less expensive than franchises and generally don’t charge ongoing royalty fees.
• Business opportunities allow buyers to proceed with no restrictions as to geographic market and operations.
• Most business opportunity ventures have no continuing supportive relationship between the seller and the buyer; after the initial package is sold, buyers are on their own.

The Pros

The greatest strength of franchising is its ability to bring independent retailers together using a single trademark and business concept. The benefits of this affiliation are many: brand awareness, uniformity in meeting customer expectations, the power of pooled advertising and the efficiencies of group purchasing.

For the individual owner, there are several advantages to franchising. The ever-present risk of business failure is reduced when the business program has already proved to be successful in the marketplace; the use of an established trademark saves the business owner the cost of creating and advertising a name that customers will recognize; and the advantages of group advertising and purchasing make operations more profitable. In addition, ongoing training creates an instant operational expertise that would otherwise need to be acquired through trial and error. Also, with franchising, expansion seems to come more naturally. Operating a successful franchise may quickly lead to building a second and then a third business, and so on. Fortunes have been built this way.

The Benefits

• Reduction of risk
• Turnkey operation
• Standardized products and systems
• Standardized financial and accounting systems
• Collective buying power
• Supervision and consulting readily available
• National and local advertising programs
• Point-of-sale advertising
• Uniform packaging
• Ongoing research and development
• Financial assistance
• Site selection guidance
• Operations manual provided
• Sales and marketing assistance

M&A

The terms “merger” and “acquisition” are often confused and used interchangeably by business and financial executives. On the face of it, the difference may not really matter since the net result is often the same: Two companies (or more) that had separate ownership are now operating under the same roof, usually to obtain some strategic or financial objective. However, the strategic, financial, tax and even cultural impact of the deal may be very different, depending on how the transaction is structured. Merger refers to two companies joining (usually through the exchange of shares) to become one. Acquisition occurs when one company, the buyer, purchases the assets or shares of another company, the seller, paying in cash, stock or other assets of value to the seller.

In a stock-purchase transaction, the seller’s shares are not necessarily combined with those of the buyer’s existing company. They may be kept separate as a new subsidiary or operating division. In an asset-purchase transaction, the assets to be conveyed by the seller to the buyer become additional assets of the buyer’s company, with the hope and expectation that the value of the assets purchased will, over time, exceed the price paid, enhancing shareholder value as a result of the transaction’s strategic or financial benefits.

Reasons for Merger-mania

There is no single explanation for the current resurgence of merger and acquisition activity, and the full impact on the economy is complex and remains to be seen, but certain themes and trends have emerged. The key reasons deals are getting done are:

• Mergers and acquisitions are clearly more strategically motivated now than were their counterparts of the 1980s and early 1990s. Jobs are often being added, not lost, as a result of these deals. Companies are being built up, not busted up.
• The financing behind deals is sounder and more secure than ever before. Buyers are using their stock as currency and sellers are gladly accepting this form of payment, in lieu of or in addition to cash, which forces both parties to work together on a post-closing basis to truly enhance shareholder value.
• Industry trends. These include rapidly-changing technology (computer industry), (fierce competition (telecommunications and banking), (changing consumer preferences (food and beverage industry), pressure to control costs (healthcare) and reduction in demand, (aerospace and defense contracts).
• Need to transform corporate identity. For example, the airline ValuJet began looking for a merger partner to provide a new image that could offset the negative publicity caused by a major crash and revelations about its spotty safety records.
• Spread risks and costs. Developing new technology (as in the communications and aerospace industries, researching new medical discoveries (medical device and pharmaceutical industries) or gaining access to new sources of energy (oil and gas exploration and drilling) account for a number of recent acquisition and merger deals.
• Develop an international presence and expand market share. This market-penetration strategy is often more cost-effective than trying to build an overseas foothold from scratch.
• Remain competitive or offset seasonal or cyclical market trends. The retail, hospitality, food and beverage, entertainment and financial services industries carried out mergers and acquisitions in response to the consumer’s demand for “one-stop shopping.”
• The IPO boom of the late 1990s in the technology and Internet sectors contributed to the merger and acquisition frenzy. Proceeds from IPOs created large pools of cash earmarked for acquisitions, and sellers became more willing to take the buyer’s stock as currency in the transaction.