Business organisation & system

Copyright © 2004 Pearson Education, Inc. Slide 6-1

Business: Concept, Scope & Importance

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BBA –1st Sem

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Unit 1

Nature of Business

Learning Objectives• Introduction• Economic & Non-economic Activities• Concept of Business • Comparison between Business ,Profession ,Employment • Nature & characteristics of Business • Scope of Business• Objectives of a Business System• Structure of Business • Requisites of success in Modern Business • Qualities of successful businessman


Overview

Business

Human Activities

(i) non-economic activities.

economic activities

1. Ex. The work of a farmer, manufacturer, teacher, doctor, trader etc.

2. They are primarily concernedWith the production, distributionand consumption of goods andServices.

3.Economic activities areundertaken to earn one’s living andfor the production of wealth.

1. people also undertake anumber of activities formental satisfaction. Theyengage in charitable work,practice religion, undertakerecreational activities and alsodo many things out of love forothers or out of patriotic feelings.

2.These activities areundertaken not for anymaterial reward or gain but forone’s happiness, pleasure orsatisfaction which can not bemeasured in terms of money.

Differentiation between economic and non-economic activities.

State whether the following statements are true or false by writing ‘T’against true statement and ‘F’ against false statement.i. A doctor attending to patients in his/her clinic is engaged in aneconomic activity.ii. A mother stitching clothes for her children is engaged in aneconomic activity.iii. A tailor stitching clothes for his customers is engaged in aneconomic activity.iv. Distributing food to beggars outside the temple is a noneconomic activity.v. Sachin Tendulkar playing cricket for the country is performinga non-economic activity.

State which of the following activities are economic and which arenon-economic :-i. Playing football with friends.ii. Teaching in a school.iii. Attending to one’s relative who is unwell.iv. Listening a radio.v. Selling fruits and vegetables in the local market.vi. Preparing food at home for family members.vii. Working in an office.

Define ‘economic activities’.____________________________________________________________________________________________________________________________2. Below are given certain non-economic activities. Convert them into economic activities.Example: A nurse attending her ailing son. (Non-economic activity)A nurse attending patients in her hospital. (Economic activity)(a) A person working in his own garden.___________________________________________________________(b) A lady preparing food for her husband.___________________________________________________________(c) A man white-washing his own house.___________________________________________________________(d) A teacher teaching his son at home.___________________________________________________________(e) A chartered accountant preparing his own accounts.___________________________________________________________

Concept of Business

Customer oriented concept of Business

Social or Modern eclectic concept of Business

Profit oriented concept of Business

Profit oriented concept of Business

According to this concept business is a wealth producing or profit making economic activity.

Also known as Traditional concept of Business.

Customer oriented concept of Business

According to this concept business should be done for mutual benefits of both business organizations & customers.

Business should earn profits through service and satisfaction of the customers.

Customer as the king of the market.

Societal or Modern eclectic concept of Business

This concept emphasis on social responsibility of business.

Societal concept of business holds that every business organization should determine the needs, wants and interest of the customers and deliver the desired satisfactions effectively & efficiently in such a way that contributes to the customer’s and society’s well being.

Meaning & Definition of Business

Customer oriented definitions

Societal definitions or Modern eclectic definitions

Traditional or Profit-making economic activity based definition

Traditional or Profit-making economic activity based

definition Meaning- Business is a wealth producing or

profit-making economic activity by production and/or distribution of goods/services.

Definition- According to Haney, L.H., “Business is a human activity directed towards producing or acquiring wealth through buying and selling of goods.”

Customer oriented definitions

Meaning- Businessman were forced to lay emphasis on customer service and satisfaction because of emergence and development of consumerism.

Definition- According to Hopkins, Duff et. al., “Business is a organized activities designed to satisfy people’s want for goods & services.”

Societal definitions or Modern eclectic definitions

Meaning- Business is defined as social point of view along with the customer service & satisfaction.

Definition- According to Buskirk, Green and Rodgers, “Business is a system created to satisfy society’s needs & desired.”

Societal definitions consists of the following 3 aspects

Satisfaction of customers’ needs and wants by providing goods and services.

Improving the standard of living and quality of life of the members of the society.

Earning profits.

CHARACTERISTICS OF BUSINESS

Basic or Fundamental Characteristics

Modern Characteristics

Basic or Fundamental Characteristics1. Economic activity of a person or group of

persons2. Production of goods or services3. Exchange of goods or services4. Creation of utilities5. Recurrence of transactions or exchanges

Basic or Fundamental Characteristics6. Legality7. Profit objective8. Risk & Uncertainty9. Entrepreneurship10. Capital

Modern Characteristics1. Pluralistic institution2. Institutional Framework3. Global organization4. Profit through customer and social well-

being5. Capital intensive6. Growth of service sector7. Increasing trend of combination

Modern Characteristics7. Increasing trend of combination8. Increasing competition9. IT revolution10. Growing concern for environment11. Expansion of e-business12. Both an art and science13.Regulation and control of business

1. Economic activity of a person or group of persons

The business may be carried on by a natural or artificial person e.g. companies, corporations etc.

2. Production of goods & services

Production is the process of transportation of set of resources or raw material into something with greater value which the members of society need.

Goods produced may be Consumer goods or Producer goods.

Consumer goods are those goods which are used or consumed by the individuals.

Bread, butter, sugar, shampoo, stationary items, shoes, scooter, car etc.

Producer goods are those used or consumed in the process of production or manufacturing by the producers or manufacturers.

Industrial dyes and chemicals, industrial machineries and equipments, fertilizers, pesticides etc.

3. Exchange of goods & services

Supply of goods for services

Offer & acceptance for purchase or sale of valuable goods or services

Customer

Businessman or Business

organization

Payment of price orPromise to pay

Exchange process between Buyer & Seller

4. Creation of utilities

a) Form Utility Form utility is created by production or

manufacturing of goods by converting raw materials.

Production of car or steel furniture by converting steel.

Raw MaterialProduction of goods

b) Place utility Place utility is created by exchange and

delivery of goods where customer wants. Goods that are lying at a factory do not serve

the needs of a customer. Transportation also help in the exchange

process.

c) Time utility Time utility is created by providing goods at a

time when they are needed. Warehousing and transport services of

business create time utility of goods.

d) Ownership utility Ownership utility is created by exchange of

goods at a price. The retailing and wholesaling activities of

business create such value by exchanging or selling goods for a price.

e) Possession utility Possession utility is created by providing

goods to customers for their use on hire or rent and get back when their purpose is accomplished.

Business organisations that provide goods or articles such as car, scooter, cycle, books etc. on hire for use of the customers create the possession utility.

In this case, customer do not become owners of the things given on hire or rent. Legally it is called Bailment of goods.

f) Task utility Task utility is created by providing services to

customers that help in performing their task. Banking, insurance, telephone, transport

services etc. create/ provide task utilities to customers

g) Knowledge utility Knowledge utility is created by dissemination

of information and knowledge to the society. educational and research institutions,

publication houses, electronic media etc. are run by business organizations which provide vast amount of knowledge to the society.

5. Recurrence of transactions or exchanges

Production and exchange of goods & services on a regular basis.

Continuity or recurrence of production and exchange of goods or services is the hallmark of business.

6. Legality The business should be conducted in

accordance with the legal framework of the country.

The production or exchange of goods against the law of the land (selling of smuggled or stolen goods) can not be covered under the scope of business.

Profit objective Where any economic activity is carried on

without the objective of earning profits, it cannot be said to be a business.

Every economic activity to be called a business must have one of its objectives to earn profits.

Profit is essential for survival, growth and expansion of the business.

Risk or Uncertainty

Change in the laws, rules, regulations relating to the business

Dispute between the business partners, associations and the third parties

Natural calamities and catastrophesHuman misconduct e.g. fraud, theft etc.

9. Entrepreneurship Entrepreneurship is the ability to take risk. Without entrepreneurship, no business can

be started and operated.

10.Capital Capital is also one of the basic requirements

of Business. It is not possible to run a business without

capital.

1. Pluralistic Institution The conduct & success of business depends

on the efforts and cooperation of various sections of public.

These include entrepreneurship, investors, shareholders, managers, employees, government, consumers, suppliers and other sections of public.

2. Institutional framework Today the partnership, companies or

corporation are formally registered with the proper authorities for carrying on the business activities.

Even individuals today generally do the business by creating formal organizational framework.

3. Global organisations Many global or transnational and

multinational business organisations have emerged and developed in the modern era. A multinational corporation or company (MNC) is

one which has its headquarter in one country but operates its business in two or more other countries.

A global or transnational corporation is one that has worldwide network of integrated production and marketing operations and its managers view the whole world as one market.

4.Profit through customer and social well-being

The modern business regards that;It is an organ of society and

consequently it is a part of the society.It exists for creation and satisfaction of

customers.It owes certain social obligations

towards the society.It must serve as an instrument of social

change.

5.Capital intensive More and more capital is being invested in

business activities. Foreign direct investments are being made. Labour intensity in business has reduced

over the time.

6. Growth of service sector In the past few years, the business in service

sector has grown tremendously. Industrial growth is increased and it indicates

that in modern times share of service sector in business is growing at a faster pace.

8. Increasing competition During the recent years, the competition in

the business is increasing day by day due to liberalization and globalization policies.

Fair competition has always been good to both the business and society.

Consumers have more options to buy than before.

9. IT revolution Business has led to the information

technology revolution. Today, most businesses are computerized. It has, therefore, made it possible to store,

analyze and transmit vast amount of data. Managers can manage their business

operations in any part of the world from their head office.

Lakhs of on-line transactions take place every day all over the world.

10. Growing concern for environment

Business world has realized the significance of clean and healthy environment for the well-being of the society.

Government laws, policies and rules have also compelled the business houses to adopt such products and practices that help reduce pollution and ecological imbalances.

The business houses have started producing eco-friendly products and using eco-friendly packaging materials.

11. Expansion of e-business People are buying and selling products and

services through the internet. Lakhs of transactions are completed

everyday through the internet all over the world.

12. Both Art & Science Business is an art because application of skills is

essential for doing business. Business is a science because it is conducted on the

basis of scientifically developed principles and procedures.

Doing business is both an art and science because it is conducted by applying scientifically developed principles skillfully.

Conducting business is a art, and the knowledge & principle underlying the conduct of the business is science.

13. Regulation & control of business

Competition act, FEMA, micro, small and medium enterprises development act or MSMED act, SEBI act, IRDA act, TRAI act etc. are some statutes promulgated by the government with a view to regulate the various activities of business in the country.

Types of Economic Activities

When a person is regularly engaged in a particular economic activity, it is known as his or her occupation or vocation. Occupations may be classified into three categories —

(i) Business,(ii) Profession and(iii) Employment (Service).

Profession

A profession may be defined as an occupation which involves the rendering of personal services of a specialized nature, based on professional knowledge ,education and training.

It requires a systematic and specialized body of formal knowledge and training for its practice.

Doctors, lawyers, professors, engineers etc. are the professionals.

Employment- Where a person is employed under a contract

by another person or an organization for a specified remuneration, he is said to be under the employment or service of that another service.

Employment Service or employment involve working under a contract by another person or an organization for or under someone known as the employer in return for wages or salary .

1. Define the term ‘profession’ in your own words.______________________________________________________________2. Following is a list of activities. Classify these activities as Business, Profession orEmployment by putting their number in the circles provided at the end of the question.(a)Policeman on duty at your local police station.(b) Teacher working in an educational institution.(c) A driver driving a bus of a State Road Transport Corporation.(d) A taxi-driver who runs his own taxi.(e) A fisherman selling fish in a village.(f) Gopal stitching cloth of the customers regularly at home.(g) A daily-wager working in a factory.(h) A gardener maintaining the lawns in a college.(i) A lawyer practising in a court.(j) An engineer running his consultancy firm.

Business Profession Employment

Scope of Business All the activities that are performed by

industrial, commercial and service organizations may be covered within the scope of business. Like distribution, banking, insurance, transport and so on.

The business activities may broadly be classified under the following three groups:-

i. Industryii. Commerceiii. Direct services/ service industries

Business

Commerce

Direct services

Industry

Manufacturing

Constructive

GeneticExtractivePrimary

AssemblyProcessing

SyntheticAnalytical

Auxiliaries to Trade

Trade

Insurance

Warehousing

Transportation

External

Internal

Entertainment

Hotel, Restaurant

Medical

Health & beauty

Transport/tour ser.

Banking Services

Insurance Services

RetailWholesale

ImportExportExtrepot

Promotional Services

Mercantile Agents

Banking

Industry It is concerned about the production or

manufacturing of goods for final consumption or further production.

Industry can be consumer goods industry or producer goods industry.

Where goods produced by one industry & consumed by another industry, it is known as intermediate goods. Ex. Cotton, synthetic yarn, plastic sheets & granules, steel & aluminum sheets industrial chemical.

1. Primary industry It is the industry that is engaged in production

of primary goods such as food grains, cotton, vegetables, fruits etc. on commercial basis.

2. Genetic Industry Which is engaged in breeding and

reproduction of plants, animals and other creatures on commercial basis.

E.g. Plant breeding, dairy farming, poultry farming, bee-keeping, sericulture etc.

Extractive Industry Which is engaged in extraction of materials

from land, sea, air etc. Extraction of minerals e.g. iron, zinc, gold,

gas stones (including precious & semi-precious), fishing and extracting materials from sea etc. are some of the activities of the extractive industry.

Construction Industry Which is engaged in construction of roads,

building, bridge, fly-overs, airports, industrial estates, railway lines and yards, dams, canals etc.

The products of this industry are immovable property.

Manufacturing Industry Which is engaged in production of goods by

converting raw-material into products for the use or consumption by ultimate consumers or producers.

Manufacturing industries generally create form utility in the product.

This industry may be subdivided into following categories:-

Analytical Industry It is engaged in analyzing some basic

material in order to separate different products associated or mixed in it.

E.g. Crude oil is analyzed in oil refinery with a view to separate from it the petrol, diesel, kerosene, lubricants etc.

Synthetic Industry Synthetic industry is engaged in synthesizing

or mixing two or more materials with a view to manufacture a new product.

E.g. Cosmetics, soaps, shampoo, medicines, fertilizers, artificial fiber, paints etc.

Processing Industry Processing industry is engaged in processing

of raw material or producer goods through a series of manufacturing processes in order to produce some new product.

E.g. Weaving or dyeing of clothes, production of sugar, tea, paper, steel etc.

Assembly Industry It is engaged in assembling various related

parts or components in order to make a useful product.

E.g. watches, cycles, scooters, cars, TV sets, computer sets, air conditioners etc.

Commerce

Trade

Internal Trade

Wholesale Trade Where goods are purchased and sold in bulk. A trader who is engaged in wholesale trade is called

the wholesaler. He is important link between the producer & retailor. He buys goods from producers or manufacturers or

from their agents in large quantities and stocks them in warehouse and sells to retailors in smaller quantities.

Retail Trade Where goods are sold to consumers or ultimate

customers in very small quantities it is known as the retail trade.

Retail Trade is known as retailor. A retailor is usually link between the wholesalers and

the ultimate consumers. The large scale retailers are in the form of

departmental stores, multiple or chain shops, super markets etc.

External or foreign Trade

Import Trade When a trader buys goods in a foreign market

and brings them into his home country, it is said to be import trade.

The buyer or importer has to pay the price of the goods in foreign country.

Export Trade When a trader sells his goods to a foreign

buyer to be taken out to his country, it is said to be the export trade.

Extrepot Trade When a trader imports goods from other

countries with a view to export them to another country or countries, it is known as extrepot trade. It is also known as re-export trade.

Auxiliaries to Trade The term ‘commerce’ includes auxiliaries to

trade. These activities or services facilitate trade.

These services include transportation, warehousing, insurance, banking, advertising etc.

Transportation Transport services creates the place utility in

the goods. Transport service provides facility of moving

the goods from the place of production to the market place or the place of consumption.

Warehousing The goods are produced in anticipation of future

demand. Moreover goods are produced seasonally but are used through the year.

The goods produced are required to be stored and preserved till the demand arise.

Thus warehousing is an activity that creates time utility in the goods and removes the hindrances of time by making the goods available when the goods are demanded by the customers.

Insurance Insurance is a device which protects the insured from

risks for a small amount of premium. Risk of transit, theft, fire, natural calamities,

insolvency of debtors, dishonesty of employees etc. are involve in the conduct of business.

Banking Business involves the transaction of huge amount.

The payment of money in physical form is neither possible nor convenient. Therefore, banking services are essential for smooth functioning of trade.

Business requires huge amount of funds for its fixed and working capital needs.

Banks by mobilizing savings of the public, make available the needed funds.

The banking services removes the hindrance of exchange & finance.

Mercantile Agents Mercantile agents are service middleman who

provides services in the process of trade. They help in buying & selling the goods.

They help establish a link between the producer/ supplier and the wholesale or retail buyers.

These agents are known by different names on the basis of service they provide like factors, brokers, forwarding and clearing agents, auctioneers etc.

Promotional Services Promotional services includes advertising, sales promotion,

personal selling & public relations. Advertising creates awareness among customers about the

availability of different products and their substitute products. These also provide important information about the products

such as quality, price, features etc. of the products. All promotional activities do create goodwill of the sponsoring

firm which, creates sustainable demand for its products. The promotional service remove the hindrance of knowledge.

Direct Services or Service Industry Services of barber, massage-man, washer man, doctor,

teacher, tailor, sweet seller, mechanic, rickshaw puller, carter or Tonga driver etc. are now being provided by business institutions on commercial footings.

These services are now being provided by haircutting salons, health clubs and beauty parlors, restaurants, hotels, resorts and catering firms, nursing homes, hospitals, medical institutions etc., entertainment enterprises, garages for car, scooters etc., taxi, travel & tour operators, educational coaching institutions, dry cleaning houses and so on.

Role/ Importance of Business Business not only satisfies everyday needs but also

provides jobs and ever increasing standard of living to all the members of society.

The role and significance of business may be discussed under the following heads:-

Importance for the national economy Importance for the society Importance for the consumersImportance for the business organizations

Importance for the national Economy

1. Proper utilization of natural physical resources- It help in proper utilization of natural resources like land, forests, rivers, minerals, livestock etc.Without business, a country’s resources of production remain resources & never become products. By proper utilization of natural resources, growth of business is inevitable.


2. Proper utilization of human resources- Human resources plays a crucial role in the development of a country.Sound Business organizations can use this resources effectively.


3. Creates employment opportunities- Business is capable of creating employment opportunities for the people of the country.All the business activities such as production, marketing, finance, accounting, transportation, banking, insurance, R & D, and so on have created many employment opportunities.


4. Helps increase productivity of resources- Business devotes a huge amount of money in R&D and innovation activities.These activities usually find the new methods & techniques that may contributes to efficiency and effectiveness results into the higher productivity of human, physical, financial and technological resources of the nation.


5. Encourage capital formation- Formation of capital takes place in every country but the rate of capital formation is higher in the developed countries. It is because of the limited capacity to save in the developing countries.Developed businesses can increase the avenues for income, savings & investment which may encourage capital formation.


6. Contributes to national planning- Business can also contribute to the planning process.Business organizations can establish, expand & diversify their business according to the priorities of the national plans.Business can also contribute to the success of national plans by participating in the social plans such as plans relating to health, education, rural development, employment generation, population and pollution control etc.


7. Balanced economic development- All parts of the country must be fully developed.Consumer goods industries as well as capital goods industries must be developed.


8. Helps reduce poverty and inequality- Almost one- third of the country’s population of our country is living below the poverty line.Business can successfully fight against these problems or diseases of the country.


9. Contributes to the prosperity of nation- Economist & management experts consider business as the catalyst of growth.Business uses the resources of the country, generates employment, & engages capital and human resources in productive use.All these result in prosperity of the country.



11. Contributes to the national exchequer- Business contributes crores of rupees in the form of direct & indirect taxes to the exchequer.It pays a huge sum of money by the way of income tax, excise duty, commercial tax, value added tax, capital gain tax, security transaction tax, service tax, import- export duties, stamp fees etc.Public sector business enterprises pay dividends to the government that also goes to the national exchequer.


12. Contributes to the foreign exchange reserves- It contributes to the foreign exchange reserves exchange through export earnings, foreign direct investment (FDI), foreign institutional investor’ (FII) investments etc.


13. Creates & maintain sound relations with the nations Business helps create and maintain sound relations with the nations around the globe through the trade and economic corporation.

Importance for the Society1. Proper utilization of society’s resources- Business plays a crucial role in the efficient and proper utilization of society’s resources in the best interests of the members of the society.Business through its varied activities utilizes the human, physical, financial, technological and informational resources of the well-being and welfare of the society.It uses these resources through the best application of technology, managerial skills and knowledge.

Importance for the Society2. Integrates interest of different sections of society- Business as an organization that serves and integrates the interests of all the sections of the society.It serves the interest of investor, lenders, customers, employees, local community, suppliers, government and so on.

Importance for the Society3. Produces and distributes goods & services- Business play a significant role in the production and distribution of goods and services that members of society need.It ensure the proper supply of quality goods and services at the right price, place and time.

Importance for the Society4. Improves standard of living and quality of life- Business helps improve standard of living and quality of life of all the members of society by supplying variety of new and better products.Modern businesses aim to enrich quality of life of society through up-gradation of the standard of living of the members of the society.

Importance for the Society5. Generates employment opportunities- Business generates a large numbers of personnel to carry on its industrial, commercial/ trading activities.Its need to personnel goes on increasing with the expansion and diversification of its activities.Business also needs people to open new production and distribution avenues in different parts of the country or the world.It also needs services of many professional and other service providers such as bankers, insurers, transporters, internet, courier.

Importance for the Society6. Provides career opportunities- Business does not only generate employment opportunities for the public also provides better career opportunities.Business needs many experienced & talented persons for the top & middle level managerial positions.Thus, it provides potentially lucrative and challenging career opportunities to the young, qualified, experienced and talented persons.

Importance for the Society7. Provides avenues for savings and investments- Traditionally, banks have been instrumental for developing saving habits among the members of public.But in the past few decade, a large number of companies, mutual funds, financial institutions, insurance companies, stock exchanges, commodities exchanges etc. have come up.Companies issue shares, debentures, commercial papers, invite deposits from public for raising funds.Mutual funds, stock exchanges, commodity exchanges, insurance companies etc. are the forums which provide opportunities for savings and investments for the members of the public.

Importance for the Society8. Promotes social change- Business is considered to be the instrument of change in society.Business bring social change and cause social innovation.It helps develop new value system and culture in society.

Importance for the Society9. Promotes social upliftment- developing societies face many problems. These include the problems of poverty, starvation, unemployment, injustice towards minority groups, women or economically weaker section etc.Business through its activities helps eradicate these problems and thus promotes social upliftment.

Importance for the Society10. Benefits all sections of public- Modern business is realizing its responsibilities towards all the sections of society/ public.Business nowadays is proactively thinking and working for protecting the interest of investors, customers, employees, suppliers, local community, government & so on.All the sections of public/ society are being directly or indirectly benefited by their business activities.Schools, colleges, hospitals for mentally retarded and physically handicapped persons, development & maintenance of gardens and parks, vocational training programmes, old age homes etc. are sponsored & supported by many business organizations for the welfare of public.

Importance for Customers Helps them to get right product, at the right place, at

the right time & at a right price. Satisfaction of the needs of customers. Customer better facilities, better deal & after-sale

service. Get benefits under loyal customer schemes. The

regular customers get extra benefits and discounts. Customer get better products & services at lower

costs from large business houses. Customer get the joy of larger choice. Growth,

diversification & competition in the field of business had resulted in the availability of many substitutes & new products.

Importance for the Business Helps business persons & business institutions in

accomplishing their objectives. Helps business persons to acquire the knowledge

and better skills of business. With better skills & knowledge, business persons

may go for expansion & diversification of business. Business persons get knowledge & feedback

information from the middleman & customers. So they can easily innovate and develop new products.

Make businessman more customer oriented so they may lay more emphasis on customer satisfaction.

Importance for the Business Helps business persons to create and maintain better relation

with wholesalers, dealers, retailers & other mercantile intermediaries.

Helps business persons to become more responsive to the society. They pay attention to their social responsibility of business towards consumers, employees, suppliers etc.

Helps business persons to pay more attention on optimum utilization of resources in the most efficient and effective way.

Helps business persons to create their institution’s image among the members of society and in the business world.

Owners of a business institution with sound corporate image enjoy a very high social status.