A brief on Business Studies, Essays (university) of Business Ethics

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PART I

Foundations of Business

CHAPTER 1

NATURE AND PURPOSE OF B USINESS

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

• explain the concept and characteristics of business;
• compare the distinctive features of business, profession and employment;
• classify business activities and clarify the meaning of industry and commerce;
• state various types of industry;
• explain the activities relating to commerce;
• analyse the objectives of business;
• describe the nature of business risks and their causes; and
• discuss the basic factors to be considered while starting a business.

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activities are those performed out of love, sympathy, sentiments, patriotism, etc. For example, a worker working in a factory, a doctor operating in his clinic, a manager working in the office and a teacher teaching in a school— are doing so to earn their livelihood and are, therefore, engaged in an economic activity. On the other hand, a housewife cooking food for her family or a boy helping an old man cross the road are performing non-economic activities since they are doing so out of love or sympathy. Economic activities may be further divided into three categories, namely business, profession and employment. Business may be defined as an economic activity involving the production and sale of goods and services undertaken with a motive of earning profit by satisfying human needs in society.

1.3 C HARACTERISTICS OF B USINESS

A CTIVITIES

In order to appreciate how business activity is different from other activities in society, the nature of business or its fundamental character must be explained in terms of its distinguishing characteristics, which are as follows: (i) An economic activity: Business is considered to be an economic activity because it is undertaken with the object of earning money or livelihood and not because of love, affection, sympathy or any other sentimental reason. (ii) Production or procurement of goods and services: Before goods are offered to people for consumption they

must be either produced or procured by business enterprises. Thus, every business enterprise either manu- factures the goods it deals in or it acquires them from producers, to be further sold to consumers or users. Goods may consist of consumable items of daily use such as sugar, ghee, pen, notebook, etc. or capital goods like machinery, furniture, etc. Services may include facilities offered to consumers in the form of transportation, banking, electricity, etc. (iii) Sale or exchange of goods and services for the satisfaction of human needs: Directly or indirectly, business involves transfer or exchange of goods and services for value. If goods are produced not for the purpose of sale but say for internal consumption, it cannot be called a business activity. Cooking food at home for the family is not business, but cooking food and selling it to others in a restaurant is business. Thus, one essential characteristic of business is that there should be sale or exchange of goods or services between the seller and the buyer. (iv) Dealings in goods and services on a regular basis: Business involves dealings in goods or services on a regular basis. One single transaction of sale or purchase, therefore, does not constitute business. Thus, for example, if a person sells his/her domestic radio set even at a profit, it will not be considered a business activity. But if he/she sells radio sets regularly either through a shop or from his/her

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residence, it will be regarded as a business activity. (v) Profit earning: One of the main purpose of business is to earn income by way of profit. No business can survive for long without earning profit. That is why businessmen make all possible efforts to maximise profits, by increasing the volume of sales or reducing costs. (vi) Uncertainty of return: Uncertainty of return refers to the lack of knowledge relating to the amount of money that the business is going to earn in a given period. Every business invests money (capital) to run its activities with the objective of earning profit. But it is not

certain as to what amount of profit will be earned. Also, there is always a possibility of losses being incurred, in spite of the best efforts put into the business. (vii) Element of risk: Risk is the uncertainty associated with an exposure to loss. It is caused by some unfavourable or undesirable event. The risks are related with certain factors like

Business refers to those economic activities, which are connected with the production or purchase and sale of goods or supply of services with the main object of earning profit. People engaged in business earn income in the form of profit. Profession includes those activities, which require special knowledge and skill to be applied by individuals in

changes in consumer tastes and fashions, changes in methods of production, strike or lockout in the work place, increased competition in the market, fire, theft, accidents, natural calamities, etc. No business can altogether do away with risks.

1.4 C OMPARISON OF BUSINESS,

P ROFESSION AND E MPLOYMENT

As has been mentioned earlier, economic activities may be divided into three major categories viz., (i) Business (ii) Profession (iii) Employment

Business Functions at Enterprise Level Business includes a wide variety of functions performed by many different kinds of organisations called business enterprises or firms. Financing, production marketing and human resource management are the four major functions which are performed by business enterprises to carry on business. Financing is concerned with mobilising and utilising funds for running a business enterprise. Production involves the conversion of raw materials into finished products or generation of services. Marketing refers to all those activities which facilitate exchange of goods and services from producers to the people who need them, at a place they want, at a time they require and at a price they are prepared to pay. Human resource management aims at ensuring the availability of working people who have necessary skills to perform various tasks in enterprises.

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salaries are in the employment of factory owners and are employees of the factory. Similarly, people who work in the offices of banks, insurance companies or government department, as managers, assistants, clerks, peons or security guards are the employees of these organisations.

1.5 C LASSIFICATION OF BUSINESS

A CTIVITIES

Various business activities may be classified into two broad categories — industry and commerce. Industry is concerned with the production or processing of goods and materials. Commerce includes all those activities which are necessary for facilitating the

exchange of goods and services. On the basis of these two categories, we may classify business firms into industrial and commercial enterprises. Let us examine in detail the activities relating to business.

1.6 I NDUSTRY

Industry refers to economic activities, which are connected with conversion of resources into useful goods. The term industry is used for activities in which mechanical appliances and technical skills are involved. These include activities relating to producing or processing of goods as well as breeding and raising of animals. The term industry is also used to mean

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groups of firms producing similar or related goods. For example, cotton textile industry refers to all manufacturing units producing textile goods from cotton. Similarly, electronic industry would include all firms producing electronic goods, and so on. Further, in common parlance, certain services like banking and insurance are also referred to as industry, say banking industry, insurance industry etc. Industries may be divided into three broad categories namely primary, secondary and tertiary. (a) Primary industries: These include all those activities, which are connected with the extraction and production of natural resources and reproduction and development of living organisms, plants etc. These industries may be further sub- divided as follows: (i) Extractive industries: These industries extract or draw out products from natural sources. Extractive industries supply some basic raw materials that are mostly products of the soil. Products of these industries are usually transformed into many other useful goods by manufacturing industries. Important extractive industries include farming, mining, lumbering, hunting and fishing operations. (ii) Genetic industries: These industries remain engaged in breeding plants and animals for their use in further

reproduction. For the breeding of plants, the seeds and nursery companies are typical examples of genetic industries. In addition, activities of cattle- breeding farms, poultry farms, and fish hatchery come under the class of genetic industries. (b) Secondary industries: These are concerned with using the materials, which have already been extracted at the primary stage. These industries process such materials to produce goods for final consumption or for further processing by other industrial units. For example, the mining of an iron ore is a primary industry, but manufacturing of steel is a secondary industry. Secondary industries may be further divided as follows: (i) Manufacturing industries: These industries are engaged in producing goods through processing of raw materials and thus creating form utilities. They turn out diverse finished products, that we consume, through the conversion of raw materials or partly finished materials in their manufacturing operations. Manufacturing industries may be further divided into four categories on the basis of method of operation for production.

- Analytical industry which analyses and separates different elements from the same materials, as in the case of oil refinery.

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makes it possible for producers and traders to inform consumers about the goods and services available in the market. Hence, commerce is said to consist of activities of removing the hindrances of persons, place, time, risk, finance and information in the process of exchange of goods and services.

1.7.1 Trade

Trade is an essential part of commerce. It refers to sale, transfer or exchange of goods. It helps in making the goods produced available to ultimate consumers or users. These days goods are produced on a large scale and it is difficult for producers to themselves reach individual buyers for sale of their products. Businessmen are engaged in trading activities as middlemen to make the goods available to consumers in different markets. In the absence of trade, it would not be possible to undertake production activities on a large scale. Trade may be classified into two broad categories — internal and external. Internal or home trade is concerned with the buying and selling of goods and services within the geographical boundaries of a country. This may further be divided into wholesale and retail trade. When goods are purchased and sold in bulk, it is known as wholesale trade. When goods are purchased and sold in comparatively smaller quantities, it is referred to as retail trade. External or foreign trade consists of the exchange of goods and services between persons

or organisations operating in two or more countries. If goods are purchased from another country, it is called import trade. If they are sold to other countries, it is known as export trade. When goods are imported for export to other countries, it is known as entrepot trade.

1.7.2 Auxiliaries to Trade Activities which are meant for assisting trade are known as auxiliaries to trade. These activities are generally, referred to as services because these are in the nature of facilitating the activities relating to industry and trade. T ransport, banking, insurance, warehousing, and advertising are regarded as auxiliaries to trade, i.e., activities playing a supportive role. In fact, these activities not only support trade but also industry and hence, the entire business activity. However, auxiliaries are an integral part of commerce in particular and business activity in general. These activities help in removing various hindrances which arise in connection with the production and distribution of goods. Transport facilitates movement of goods from one place to another. Banking provides financial assistance to the trader. Insurance covers various kinds of business risks. Warehousing creates time utility with storage facility. Advertising provides information. In other words, these activities facilitate movement, storage, financing, risk coverage and sales promotion of goods. Auxiliaries to trade are briefly discussed below:

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(i) Transport and Communication: Production of goods generally takes place in particular locations. For instance, tea is mainly produced in Assam; cotton in Gujarat and Maharashtra; jute in West Bengal and Orissa; sugar in U.P, Bihar and Maharashtra and so on. But these goods are required for consumption in different part of the country. The obstacle of place is removed by transport — road, rail or coastal shipping. T ransport facilitates movement of raw material to the place of production and the finished products from factories to the place of consumption. Along with the transport facility, there is also a need for communication facilities so that producers, traders and consumers may exchange information with one another. Thus, postal services and telephone facilities may also be regarded as auxiliaries to business activities. (ii) Banking and Finance: Business activities cannot be undertaken unless funds are available for acquiring assets and meeting the day-to-day expenses. Necessary funds can be obtained by businessmen from a bank. Thus, banking helps business activities to overcome the problem of finance. Commercial banks generally lend money by providing overdraft and cash credit facilities, loans and advances. Banks also undertake collection of cheques, remittance of funds to different places, and discounting of bills on behalf of traders. In foreign trade, payments are arranged by commercial

banks on behalf of importers and exporters. Commercial banks also help promoters of companies to raise capital from the public. (iii) Insurance: Business involves various types of risks. Factory building, machinery, furniture etc. must be protected against fire, theft and other risks. Materials and goods held in stock or in transit are subject to the risk of loss or damage. Employees are also required to be protected against the risks of accident and occupational hazards. Insurance provides protection in all such cases. On payment of a nominal premium, the amount of loss or damage and compensation for injury, if any, can be recovered from the insurance company. (iv) Warehousing: Usually, goods are not sold or consumed immediately after production. They are held in stock to be available as and when required. Special arrangement must be made for storage of goods to prevent loss or damage. Warehousing helps business firms to overcome the problem of storage and facilitates the availability of goods when needed. Prices are thereby maintained at a reasonable level through continuous supply of goods. (v) Advertising: Advertising is one of the most important methods of promoting the sale of products, particularly, consumers goods like electronic goods, automobiles, soaps, detergents etc. Most of these goods are manufactured and supplied in the market by numerous firms — big or small. It is practically impossible for producers and traders to contact each

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goals it requires multiple objectives. It cannot follow only one objective and expect to achieve excellence. Objectives have to be specific in every area and sphere of business. For example, sales figures have to be set, the amount of capital to be raised has to be estimated and the target number of units to be produced should be defined. The objectives define what the business is going to do in concrete terms that enable the business to analyse their own experience and as a result improve their performance. Objectives are needed in every area where performance and results affect the survival and prosperity of business. Some of these areas are described below: (a) Market standing: Market standing refers to the position of an enterprise in relation to its competitors. A business enterprise must aim at standing on stronger footing in terms of offering competitive products to its customers and serving them to their satisfaction. (b) Innovation: Innovation is the introduction of new ideas or methods in the way something is done or made. There are two kinds of innovation in every business i.e., (i) innovation in product or service; and (ii) innovation in the various skills and activities needed to supply them. No business enterprise can flourish in a competitive world without innovation. Therefore, innovation becomes an important objective.

(c) Productivity: Productivity is calculated by comparing the value of outputs with the value of inputs. It is used as a measure of efficiency. In order to ensure continuous survival and progress, every enterprise must aim at greater productivity by the best use of available resources. (d) Physical and financial resources: Any business requires physical resources like plants, machines, offices, etc., and financial resources, i.e., funds to be able to produce and supply goods and services to its customers. The business enterprise must aim at acquiring these resources according to their requirements and use them efficiently. (e) Earning profits: One of the objectives of business is to earn profits on the capital employed. Profitability refers to profit in relation to capital investment. Every business must earn a reasonable profit which is so important for its survival and growth. (f) Manager performance and development: Business enterprises need managers to conduct and coordinate business activity. Various programmes for motivating managers need to be implemented. Manager performance and development therefore, is an important objective. The enterprises must actively work for this purpose. (g) Worker performance and attitude: Worker’s performance and attitudes determine their contribution towards productivity and profitability of any

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enterprise. Therefore, every enterprise must aim at improving its workers performance. It should also try to ensure a positive attitude on the part of workers. (h) Social responsibility: Social responsibility refers to the obligation of business firms to contribute resources for solving social problems and work in a socially desirable manner. Thus, a business enterprise must have multiple objectives to satisfy different individuals and groups, for its own survival and prosperity.

1.8.2 Business Risks

The term ‘business risks’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. For example, demand for a particular product may decline due to change in tastes and preferences of consumers or due to increased competition from other producers. Decrease in demand will result in lesser sales and profits. In another situation, the shortage of raw materials in the market may shoot up its price. The firm using these raw materials will have to pay more for buying them. As a result, cost of production may increase which, in turn, may reduce profits. Business enterprises constantly face two types of risk: speculative and pure. Speculative risks involve both the possibility of gain as well as the possibility of loss. Speculative risks arise due to changes in market

conditions including fluctuations in demand and supply, changes in prices or changes in fashion and tastes of customers. Favourable market conditions are likely to result in gains whereas unfavourable ones may result in losses. Pure risks involve only the possibility of loss or no loss. The chance of fire, theft or strike are examples of pure risks. Their occurrence may result in loss whereas non-occurrence may explain absence of loss, instead of gain.

1.9 NATURE OF B USINESS RISKS

Nature of business risks can be understood in terms of their peculiar characteristics: (i) Business risks arise due to uncertainties: Uncertainty refers to the lack of knowledge about what is going to happen in the future. Natural calamities, change in demand and prices, changes in government policy, improvement in technology, etc., are some of the examples of uncertainty which create risks for business because the outcome of these future events is not known in advance. (ii) Risk is an essential part of every business: Every business has some risk. No business can avoid risk, although the amount of risk may vary from business to business. Risk can be minimised but cannot be eliminated. (iii) Degree of risk depends mainly upon the nature and size of business: Nature of business (i.e., type of goods and services produced and sold) and size of business (i.e., volume of production and sale) are the main

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minimum cost. This is especially true of the modern business world where competition is very tough and risks are high. Some of the problems, which business firms encounter, are of a basic nature. For example, to start a factory, plans must be made and implemented about such problems as the location of the business, the possible number of customers, the kind and amount of equipment, the shop layout, purchasing and financing needs, and hiring of workers. These problems become more complex in a big business. However, some of the basic factors, which must be considered by anybody who is to start the business are as follows: (i) Selection of line of business: The first thing to be decided by any entrepreneur of a new business is the nature and type of business to be undertaken. He will obviously like to enter that branch of industry and commerce, which has the possibility of greater amount of profits. The decision will be influenced by the customer requirements in the market and also the kind of technical knowledge and interest the entrepreneur has for producing a particular product. (ii) Size of the firm: Size of the firm or scale of its operation is another important decision to be taken at the start of the business. Some factors favour a large size whereas others tend to restrict the scale of operation. If the entrepreneur is confident that the demand for the proposed product is likely to be good over time and he can arrange the necessary capital for

business, he will start the operation at a large scale. If the market conditions are uncertain and risks are high, a small size business would be better choice. (iii) Choice of form of ownership: With respect to ownership, the business organisation may take the form of a sale proprietorship, partnership, or a joint stock company. Each form has its own merits and demerits. The choice of the suitable form of ownership will depend on such factors as the line of business, capital requirements, liability of owners, division of profit, legal formalities, continuity of business, transferability of interest and so on. (iv) Location of business enterprise: An important factor to be considered at the start of the business is the place where the enterprise will be located. Any mistake in this regard can result in high cost of production, inconvenience in getting right kind of production inputs or serving the customers in the best possible way. Availability of raw materials and labour; power supply and services like banking, transportation, communication, warehousing, etc., are important factors while making a choice of location. (v) Financing the proposition: Financing is concerned with providing the necessary capital for starting as well as for continuing the proposed business. Capital is required for investment in fixed assets like land, building, machinery and equipment

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and in current assets like raw materials, book debts, stock of finished goods, etc. Capital is also required for meeting day-to-day expenses. Proper financial planning must be done to determine (a) the requirement of capital, (b) source from which capital will be raised and (c) the best ways of utilising the capital in the firm. (vi) Physical facilities: Availability of physical facilities including machines and equipment, building and supportive services is a very important factor to be considered at the start of the business. The decision relating to this factor will depend on the nature and size of business, availability of funds and the process of production. (vii) Plant layout: Once the requirement of physical facilities has been determined, the entrepreneur should draw a layout plan showing the arrangement of these facilities. Layout means the physical arrangement of machines and equipment needed to manufacture a product. (viii) Competent and committed worked force: Every enterprise needs competent and committed work force

to perform various activities so that physical and financial resources are converted into desired outputs. Since no individual entrepreneur can do everything himself, he must identify the requirement of skilled and unskilled workers and managerial staff. Plans should also be made about how the employees will be trained and motivated to give their best performance. (ix) Tax planning: Tax planning has become necessary these days because there are a number of tax laws in the country and they influence almost every aspect of the functioning of modern business. The founder of the business has to consider in advance the tax liability under various tax laws and its impact on business decisions. (x) Launching the enterprise: After the decisions relating to the above mentioned factors have been taken, the entrepreneur can go ahead with actual launching of the enterprise which would mean mobilising various resources, fulfilling necessary legal formalities, starting the production process and initiating the sales promotion campaign.

Key Terms

Business Profession Primary Innovation Warehousing Profit Employment Secondary Insurance Social responsibility Risk Industry Tertiary Mining Manufacturing

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resources, earning profits manager performance and development, worker performance and attitude, and social responsibility. Business risks: The term ‘risk’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. Its nature can be explained with the help of its peculiar characteristics which are: (i) Business risks arise due to uncertainties, (ii) Risk is an essential part of every business, (iii) Degree of risk depends mainly upon the nature and size of business, and (iv) Profit is the reward for risk taking. Business risks arise due to a variety of causes including natural, human, economic and other causes. Starting a business — basic factors: Some of the basic factors which must be considered by anybody who is to start the business are: selection of line of business, size of the firm, choice of form of ownership, location of business enterprise, financing the proposition, physical facilities, plant layout competent and committed workforce, tax planning and launching the enterprise.

EXERCISES

Multiple Choice Questions

1. Which of the following does not characterise business activity? (a) Production of goods (b) Presence of risk and services (c) Sale or exchange of (d) Salary or wages goods and services
2. Which of the broad categories of industries covers oil refinery and sugar mills? (a) Primary (b) Secondary (c) Tertiary (d) None of them
3. Which of the following cannot be classified as an auxilliary to trade? (a) Mining (b) Insurance (c) Warehousing (d) Transport
4. The occupation in which people work for others and get remunerated in return is known as (a) Business (b) Employment (c) Profession (d) None of them
5. The industries which provide support services to other industries are known as (a) Primary industries (b) Secondary industries (c) Commercial industries (d) Tertiary industries

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6. Which of the following cannot be classified as an objective of business? (a) Investment (b) Productivity (c) Innovation (d) Profit earning
7. Business risk is not likely to arise due to (a) Changes in government policy (b) Good management (c) Employee dishonesty (d) Power failure

Short Answer Questions

1. State the different types of economic activities.
2. Why is business considered an economic activity?
3. Explain the concept of business.
4. How would you classify business activities?
5. What are various types of industries?
6. Explain any two business activities which are auxiliaries to trade.
7. What is the role of profit in business?
8. What is business risk? What is its nature?

Long Answer Questions

1. Explain the characteristics of business.
2. Compare business with profession and employment.
3. Explain with examples the various types of industries.
4. Describe the activities relating to commerce.
5. Why does business need multiple objective? Explain any five such objectives.
6. Explain the concept of business risk and its causes.
7. What factors are important to be considered while starting a business? Explain.

Projects/Assignments

1. Choose a locally operated trading or business unit. Find out the kind of risks it faces in business and the way it deals with them.
2. Select a local business enterprise and find out the objectives it pursues. Check why it does not pursue other objectives.