CHAPTER VI SWOT ANALYSIS OF VENTURE CAPITAL UNDERTAKINGS. The main focus of this chapter is the analysis of the organisational factors such

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1 CHAPTER VI SWOT ANALYSIS OF VENTURE CAPITAL UNDERTAKINGS INTRODUCTION The main focus of this chapter is the analysis of the organisational factors such as strengths and weaknesses and the environmental factors namely opportunities and threats in order to formulate strategies for enhancing the venture capital undertakings. As Peter Drucker 93 cautions, all institutions have to make global competitiveness a strategic goal. No institution, whether a business, a university or a hospital, can hope to survive, let alone succeed, unless it measures up to the standards set by the leaders in its field, any place in the world. Keegan 94 rightly puts it, The world economy has undergone revolutionary changes during the past 50 years. Perhaps the greatest and most profound change is the emergence of global market, global competitors, and winners and losers in global competition. The strength, weakness, opportunity and threat analysis is needed for all organisations. The threat represents the competitive pressures in the global 93 Peter F. Drucker, Management Challenges for the 21 st century, Harper Business, New York, 1999, p Warren J. Keegan, Global Marketing Management, Prentice-Hall of India Pvt. Ltd, New Delhi, 7 th Edition 2003, p

2 economy. Nowadays, all organizations encounter threats and opportunities. The success of the organisation depends upon how the organisation converts its threats into opportunities. For that conversion, the organisation has to go for self evaluation i.e. analyse their weakness and strength. 6.1 SWOT Analysis SWOT is a tool created by Albert Humphrey in the 1970 s. It is used today as a basic process of examining the factors in business that pertains to both success and failure, allowing companies to evaluate their current situation 95. SWOT analysis is used to identify strategies for enhancing competitiveness of venture capital fund companies. Hence, the organisational factors (i.e., the strengths and weakness) and the environmental factors (i.e., the opportunities and threats) are analysed to formulate strategies for enhancing competitiveness of venture capital fund companies in Tamil Nadu Strengths Strength means the core competencies, corporate capabilities and resources that provide the basis for strategy formulation. It is the competitive advantage and positive factor possessed by the organisation to face the competition and to satisfy the customers needs and wants. In the venture capital undertakings have come 95 Kim Warren, Strategic Management, John Wiley and Sons Ltd, 2008, ISBN

3 across much strength. The strengths of the venture capital undertakings in Tamil Nadu are identified and described in this section. The higher the average scores for strength, the more was the success for the undertakings. The calculated results are given in Table 6.1. TABLE 6.1 STRENGTHS OF VENTURE CAPITAL UNDERTAKINGS Sl. No. Items of Strength ICICI Entrepreneurs Average Score Rank IFCI Entrepreneurs Average Score Rank 1. Profitable business with positive cash flows Vast network Quality products Constant innovation Experienced & competent management Matured Processes Attractive price points Patended technology In-house expertise in critical areas Big growing market share Source: Primary data

4 It is observed from table 6.1 that the statement namely profitable business with positive cash flows ranked first by both the category of entrepreneurs among ICICI and IFCI venture capital companies. The vast net work is the next strength for both types of entrepreneurs. Ranking differs for other strengths and the big growing market share is considered as the least strength by both category of entrepreneurs Weaknesses Weaknesses are the qualities that prevent the organization from accomplishing their mission and achieving their full potential. These weaknesses deteriorate influences on the organizational success and growth. Weaknesses are the critical part of business that must either be strengthened or hidden from the competitors, which tend to decrease the competencies of the firm, in comparison with its competitors. The following are considered as weaknesses of the venture capital undertakings. The average score of each weakness of ICICI and IFCI venture capital companies entrepreneurs is presented in table 6.2: 290

5 TABLE 6.2 WEAKNESSES OF VENTURE CAPITAL UNDERTAKINGS Sl. No. Items of Weaknesses ICICI Entrepreneurs Average Score Rank IFCI Entrepreneurs Average Score Rank 1. Technological of obsolescence Poor inventory control Limited product life Poor planning and decision making Inefficient processes High prices due to inefficiencies Lack of research and development Lack of marketing expertise Unproductive workforce Lack of working capital Source: Primary data. It is clear from table 6.2, that ICICI entrepreneurs accorded first place to technological of obsolescence with an average score of 2.06 and. The 291

6 entrepreneurs viewed poor inventory control as the second weakness with an average score of The lack of working capital was accorded last place. The entrepreneurs of IFCI observed poor inventory control as the first weakness with an average score of 2.19, technological of obsolescence was ranked second with an average score of The limited product life was accorded the last rank by IFCI entrepreneurs Opportunities An opportunity is a major favourable situation in the firm s environment. Opportunities are the benefits that are likely to occur from external environment. The various opportunities that promoted their undertakings were listed and the entrepreneurs were asked to rank them in the order of importance. The average score of each opportunity of ICICI and IFCI venture capital companies entrepreneurs is presented in table 6.3. Table 6.3 presents the major opportunities for venture capital undertakings. ICICI entrepreneurs accorded easy liquidity with low interest rates as the first opportunity with a score of The technological changes was ranked second with an average score of Leading to increased demand was viewed as the least ranked opportunity for ICICI venture capital undertakings. The IFCI entrepreneurs perceived technological changes as the first opportunity with an average score of 2.62 and easy liquidity with low interest rates was 292

7 accorded with second rank. High entry barriers for new entrants were considered to be the third opportunity for the entrepreneurs with an average score of Leading to increased demand was considered as the last opportunity by both the ICICI and IFCI entrepreneurs. TABLE 6.3 OPPORTUNITY OF VENTURE CAPITAL UNDERTAKINGS Sl. No. Items of Opportunity ICICI Entrepreneurs Average Score Rank IFCI Entrepreneurs Average Score Rank 1. Easy liquidity with low interest rates Technological changes Rapidly growing target markets High entry barriers for new Entrants Scarcity of product in the locality Existence of only few Social and cultural changes Tax incentives and grants Favorable government policies Leading to increased demand Source: Primary data. 293

8 Threats Threats arise when conditions in external environment pose a danger to the reliability and profitability of the organization s business. Threats are uncontrollable. When a threat comes, the stability and survival can be at stake. The variations and possible exceptions put off the energetic functioning of the organisation. Venture capital entrepreneurs faced many problems like changing Government policies, fluctuations in currency value, shipment cost, changing demand and so on. The average score of threats given by the ICICI and IFCI entrepreneurs are given in Table

9 TABLE 6.4 THREAT OF VENTURE CAPITAL UNDERTAKINGS Sl. No. Items of Threat ICICI Entrepreneurs Average Score Rank Average Score IFCI Entrepreneurs Rank 1. High tax rates Confusing and unstable government regulations and procedures Poor quality of labour force Poor law and order Corruption Low entry barriers Too much of corruption Inequitable and harsh legal framework High cost and shortage of raw materials Poor infrastructure Source: Primary data. It is inferred from table 6.4 that the entrepreneurs have ranked the threats according to their perception of the threats prevailing in the global market. ICICI entrepreneurs considered high tax rates and confusing and unstable 295

10 government regulations and procedures as their first and second threats, respectively. Poor infrastructure is ranked as the tenth threat. In case of IFCI entrepreneurs ranked low entry barriers as their first and foremost threat with an average score of Confusing and unstable government regulations and procedures and high tax rates were ranked second and third respectively by the IFCI entrepreneurs. They considered too much of corruption as the tenth threat. 6.2 DISTRIBUTION OF VENTURE CAPITAL ENTREPRENEURS BASED ON SWOT Frequency distribution is used to evaluate the relative weightage between overall strengths, weaknesses, opportunities and threats of venture capital undertakings. Weighted score based on the rank is given to each of the statements. The weightage given were 5, 4, 3, 2 and 1 for strongly agree, agree, neutral, disagree and strongly disagree respectively. The weighted score thus arrived at was converted into % of maximum possible score, that is, for example for ten strengths identified the maximum possible score was 750. Thus, %score of all items of strengths, weaknesses, opportunities and threats for each of the entrepreneurs was calculated. The individual score % of each entrepreneurs was analysed and to draw further inference a frequency distribution of entrepreneurs with score % in the 296

11 class intervals of 0 10 %, %, %, %, %, %, %, %, % and % was made for strength, weakness, opportunities and threats separately having obtained the number of entrepreneurs in each class intervals, the % of entrepreneurs was calculated to draw appropriate conclusions on differences in the relative scores of strengths, weaknesses, opportunities and threats and is presented in Table 6.5 Score percentage TABLE 6.5 SWOT ANALYSIS OF VENTURE CAPITAL UNDERTAKINGS percentage of Entrepreneurs Strength Weakness Opportunity Threat Total Source: Primary data Skewness is used to analyse the distribution of strengths, weaknesses, opportunities and threats of the venture capital undertakings. According to 297

12 Garrett, A distribution is said to be skewed, when the mean and the median fall at the different points in the distribution, and the balance is shifted to one side or the other-to left or right 96. Skewness is calculated with the help of Karl Pearson s coefficient of Skewness formula: Mean - Mode Skp = Standard Deviation Skp = Karl Pearson s coefficient of Skewness. The Skewness for SWOT analysis of venture capital undertaking entrepreneurs is calculated with the data in Table 6.5 and the calculated Mean, Mode, Standard Deviation and Skp value are presented in Table S.P.Gupta, Statistical Methods, Sultan Chand & Sons, New Delhi, 32 nd Revised Edition 2004, pp

13 TABLE 6.6 KARL PEARSON S CO-EFFICIENT OF SKEWNESS SWOT Variables Mean Mode Standard Deviation Skp Strengths Weaknesses Opportunities Threats Source: Primary data Table 6.6 depicts positive Skewness in the case of strength and opportunities whereas negative Skewness in the distribution of weakness and threats. This means that Skp value is relatively less skewed in case of strength and opportunities and more skewed for threats and weaknesses. The entrepreneurs gave more score %age of distribution to strength and opportunity as they consider it as more important and posses it in their undertakings in Tamil Nadu. The following figure 6.1 shows the distribution of strength, weakness, opportunities and threats of venture capital undertakings in Tami Nadu. 299

14 FIG 6.1 SWOT ANALYSIS OF VENTURE CAPITAL UNDERTAKINGS It is clear from the figure 6.1 that the strength and opportunity curve have longer tail towards the right and it is said to be positively skewed. Whereas the weaknesses and threats curve have longer tail towards the left, so it is said to be negatively skewed. Thus, the positive factors such as strength and opportunity were considered more important for venture capital undertakings than the negative factors threats and weakness. This is a very significant pointer to the positive attitude of entrepreneurs and their confidence in their enterprises ability to survive and prosper. 300

15 Among the positive factors of strength and opportunities, the Skp value of strength is close to central point of tendency and the Skp value of opportunities is away from the central point. It shows that entrepreneurs consider the individual qualities of strength that they possess inside the organisation as more important than opportunity. Similarly, among the negative factors of threats and weakness, threats from external environment were considered even less important than the weakness of the individual. 6.3 FACTORS INFLUENCING THE PROBLEMS FACED BY THE VENTURE CAPITAL UNDERTAKINGS In order to study the factors influencing the problems faced by the entrepreneurs of venture capital undertakings, the researcher has found the following twenty problems and they are qualified by using Likert s five point scale. 1. Lack of Raw Material 2. Lack of Skilled Labour 3. Lack of Unskilled labour 4. Lack of Research & development 5. Lack of Technical assistance 6. Lack of Managerial assistance 301

16 7. Lack of Financial assistance 8. Limited demand 9. Severe competition 10. Global recession 11. Poor Infrastructural facilities 12. Poor Legal System 13. Stringent Labour Laws 14. Corruption 15. Lack of readily available information 16. Licences 17. Multiple and high taxes 18. Red tapism and procedural Hazzles 19. Poor awareness as to venture Capital 20. Lack of quick exit routes The five point scale consists of very high, high, moderate, little and very little. The score of each statement in the five point scale is five, four three, two and one respectively. In the present study, the principal factor analysis method with the Orthogonal Varimax Rotation is used to identify the factors influencing the problems faced by entrepreneurs of venture capital undertakings. 302

17 The principal component factor analysis method was applied to the inter correlation matrix of the twenty dimensions of the problems and the results were rotated using the Kaiser Varimax criteria. The data validity for factor analysis has been examined with the help of the Kaiser-Meyer-Olkin (KMO) measures of sampling adequacy and the Bartlett test of Sphericity. The KMO measure of at the zero level significance of chi-square satisfies the validity of data for factor analysis. The factor analysis results in seven factors. The factor loading of the variables in seven factors, its communality, Eigen value and %age of variable explained are shown in Table 6.7. Table 6.7 gives the loadings received by the factors under F1, F2, F3, F4 and F5 for venture capital undertakings. Table reveals the rotated factor loadings for the twenty problems faced by the venture capital undertaking entrepreneurs in Tamil Nadu. It is clear from Table 6.7 that all the twenty problems have been extracted into five major factors namely F1, F2, F3, F4 and F5. The factors with identified the new names which influence the problems faced by the entrepreneurs. 303

18 Sl. No. TABLE 6.7 ROTATED FACTOR MATRIX FOR PROBLEMS FACED BY THE Variables RESPONDENTS Facto r 1 Facto r 2 Facto r 3 Factor 4 Facto r 5 1. Lack of Managerial assistance Lack of Unskilled labour Lack of Skilled Labour Lack of Technical assistance Stringent Labour Laws Lack of Raw Material Limited demand Severe competition Lack of Financial assistance Poor Infrastructural facilities Poor Legal System Global recession Corruption Lack of Research & development Lack of readily available information Licences Poor awareness as to venture Capital Lack of quick exit routes Multiple and high taxes Red tapism and procedural Hazzles Eigen Value %age Variance Cumulative %age h 2 The first factor is designed as Lack of Human Resource Management on the basis of the loaded variables. Five variables in this category are important with high factor loading. It indicates that among the various performance scale, Lack of Managerial assistance (0.8346), Lack of Unskilled labour (0.7675), Lack of Skilled Labour (0.7031), Lack of Technical assistance (0.6933) and 304

19 Stringent Labour Laws (0.6631) are important attributes in this category. Thus, the lack of human resource management is identifying an important factor to influence the problems of venture capital undertakings entrepreneurs in Tamil Nadu. The second factor is narrated as Lack of raw material and finance on the basis of the loaded variables. Four variables in this category are important with high factor loading. It indicates that among the various performance scale, Lack of Raw Material (0.8180), Limited demand (0.7922), Severe competition (0.7747) and Lack of Financial assistance (0.6845) are important attributes in this category. Thus, the lack of raw material and financial assistance is identifying an important factor to influence the problems faced by the entrepreneurs of venture capital undertakings. The third factor is prescribed as Poor Infrastructural facilities on the basis of the loaded variables. Four variables in this category are important with high factor loading. It indicates that among the various performance scale, Poor Infrastructural facilities (0.7588), Poor Legal System (0.7333), Global recession (0.7218) and Corruption (0.6660) are important attributes in this category. Thus, the poor infrastructural facilities are identifying an important factor to influence the problems faced by the entrepreneurs of venture capital undertakings. 305

20 The fourth factor is highlighted as Lack of Research and Development on the basis of the loaded variables. Three variables in this category are important with high factor loading. It indicates that among the various performance scale, Lack of Research & development (0.8248), Lack of readily available information (0.8158) and Licences (0.7513) are important attributes in this category. Thus, the lack of research and development are identifying an important factor to influence the problems faced by the entrepreneurs of venture capital undertakings in Tamil Nadu. The fifth factor is designed as Lack of awareness on venture capital on the basis of the loaded variables. Four variables in this category is important with high factor loading. It indicates that among the various performance scale, Poor awareness as to venture Capital ( , Lack of quick exit routes (0.8199), Multiple and high taxes ( and Red tapism and procedural Hazzles (0.6859) are important attributes in this category. Thus, the lack of awareness on venture capital is identifying an important factor to influence the problems faced by the entrepreneurs of venture capital undertakings in Tamil Nadu FACTORS INFLUENCING THE PROMOTIONAL MEASURES FOR PROMOTION OF VENTURE CAPITAL BUSINESS The analysis on factors influencing the entrepreneurs to promote the venture capital fund for their undertaking are Create of awareness on venture 306

21 capital activities through informed websites/ Seminar /Conferences, Vigorous promotional measures such as venture fairs / Venture Clubs Venture networks, Establishment of business incubators, Fiscal and tax incentives, Corporate sectors encouraged to participate in venture capital, FIs and high net worth individuals encouraged to invest in venture funds, Encouragement to One Person Company /Limited Liability Partnership, Establishing single window clearance for venture capital undertaking, Moderate and make transparent and accessible IPR infrastructure, Special commercial courts to deal with commercial disputes, Simplifying bankruptcy loss, Strengthening secondary market for small Companies, Creating new instruments like venture debt instruments, Development of systematic risk management system like SMERA credit rating etc. and Developing recognition and rewards system for venture capital undertakings. In order to find out the significant relationship among venture capital fund companies regarding the factors influencing to promote the venture capital fund, t-test was applied. The importance of the variables that influence to promote the venture capital fund has been furnished with the help of its mean score and the computed results of t-test in Table

22 Sl. No TABLE 6.8 FACTORS INFLUENCING TO PROMOTE THE VENTURE CAPITAL FUND Variables Create of awareness on venture capital activities through informed websites/ Seminar /Conferences Vigorous promotional measures such as venture fairs / Venture Clubs Venture networks Mean Scores among ICICI Entrepreneurs IFCI Entrepreneurs t-values * Establishment of business incubators * 4. Fiscal and tax incentives * Corporate sectors encouraged to participate in venture capital FIs and high net worth individuals encouraged to invest in venture funds Encouragement to One Person Company /Limited Liability Partnership Establishing single window clearance for venture capital undertaking Moderate and make transparent and accessible IPR infrastructure Special commercial courts to deal with commercial disputes * * * Simplifying bankruptcy loss * Strengthening secondary market for small Companies Creating new instruments like venture debt instruments Development of systematic risk management system like SMERA credit rating etc. Developing recognition and rewards system for venture capital undertakings Source: Computed data. * Significant at 5 % level * * * * 308

23 It is found from Table 6.9 that the important variables that influence the entrepreneurs to promote the venture capital fund through ICICI are Moderate and make transparent and accessible IPR infrastructure, Corporate sectors encouraged to participate in venture capital and Strengthening secondary market for small Companies since the mean scores are , and respectively. Among the entrepreneurs belonging to the IFCI, Vigorous promotional measures such as venture fairs / Venture Clubs Venture networks, Establishment of business incubators and Special commercial courts to deal with commercial disputes, since the mean scores are , and Regarding the perception on the factors influencing the entrepreneurs to promote venture capital fund, the significant difference among the two group of entrepreneurs has been identified in the perception experience and competency of the entrepreneur, Create of awareness on venture capital activities through informed websites/ Seminar /Conferences, Establishment of business incubators, Fiscal and tax incentives, Corporate sectors encouraged to participate in venture capital, FIs and high networth individuals encouraged to invest in venture funds, Encouragement to One Person Company /Limited Liability Partnership, Simplifying bankruptcy loss, Strengthening secondary market for small Companies, Creating new instruments like venture debt instruments, Development of systematic risk management system like SMERA credit rating etc., and Developing recognition 309

24 and rewards system for venture capital undertakings since the respective t statistics are significant at 5 % level FACTORS INFLUENCING THE PREFERENCE LEVEL FOR EXIT OPTIONS The analysis on factors influencing the entrepreneurs to exit their venture capital undertaking are Selling of the stake to strategic buyer, Initial Public offering in India or overseas, Sale to any other venture capital fund or private equity fund, Secondary sale in stock market, Merger with an existing listed company and Management / Company buy-back. In order to find out the significant relationship among venture capital fund companies regarding the factors influencing to exit their venture capital undertakings, t-test was applied. The importance exit options that influence to exit from their venture capital undertakings has been presented with the help of its mean score and the computed results of t-test in Table

25 Sl. No TABLE 6.9 FACTORS INFLUENCING TO EXIT THEIR VENTURE CAPITAL UNDERTAKINGS Variables Mean Scores among ICICI Entrepreneur s IFCI Entrepreneu rs t- Values 1. Selling of the stake to strategic buyer * 2. Initial Public offering in India or overseas * 3. Sale to any other venture capital fund or private equity fund Secondary sale in stock market * 5. Merger with an existing listed company * 6. Management / Company buy-back * Source: Computed data. * Significant at 5 % level. 311

26 4 2 0 t-values ICICI entrepreneurs ICICI entrepreneurs IFCI entrepreneurs t-values It is inferred from Table 6.9 that the important exit options that influence the entrepreneurs to exit their venture capital fund through ICICI are Merger with an existing listed company, Secondary sale in stock market and Selling of the stake to strategic buyer since the mean scores are , and respectively. Among the entrepreneurs belonging to the IFCI, Management / Company buy-back, Selling of the stake to strategic buyer and Initial Public offering in India or overseas, since the mean scores are , and Regarding the perception on the options to influence the entrepreneurs to exit from their venture capital undertakings, the significant difference among the two group of entrepreneurs has been identified in the perception experience and 312

27 competency of the entrepreneur, Selling of the stake to strategic buyer, Initial Public offering in India or overseas, Secondary sale in stock market, Merger with an existing listed company and Management / Company buyback, since the respective t statistics are significant at 5% level. 313