BUSINESS STUDIES

NOTES

NATURE AND PURPOSE OE BUSINESS

Business: 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 is called business.

Economic Activity: An activity by which someone earns his livelihood is called economic activity.

Non-economic Activity: An activity which done because of sense of love or charity is called non-economic activity. Non-economic activity is not done with the motive of earning money.

Characteristics of Business

An economic activity: All business activities are economic activities and are done for the sole purpose of earning money. A business activity may be done on a small scale or on a large scale. For example; purchase and sale by a shopkeeper is done on a small scale but purchase and sale by a cooperative society may be done on a large scale. Nevertheless, both of them are doing business activity.

Production and procurement of goods and services: A business activity involves production or procurement of goods and services. A manufacturer is involved in production, while a shopkeeper is involved in procurement. A product needs to be manufactured before it can be made available to the end user. Sometimes, the same organization may be involved in both production and sale of product to the end consumer. Similarly, the same organization may be involved in production and sale of services to the end consumer. But in some other cases, the producer and seller are different entities. For example; Hindustan Unilever is involved in production of goods while the local retailer is involved in selling those goods to end users.

Sale and exchange of goods and services: The business dealing always involves transfer or exchange of goods or services for a value. If a goods or service is produced for personal consumption, it cannot be part of a business. For example; if someone cooks food at home for the family it cannot be termed as a business activity. But if the same person cooks at a restaurant, then it is a business activity.

Dealing in goods and services on a regular basis: One time dealing in goods or services cannot be termed as a business. The business should happen on a regular basis. Suppose you have sold your old cell phone through an online portal, it cannot be termed as business activity because it is a one off sale. But if one of your friends sells cell phones through his shop on a regular basis, his activity is a business activity.

Profit earning: Profit earning is the sole motive of doing a business. No business can survive for long term without earning profit. Hence, profit maximization is the prime motive of a business organization. A business organization does this by increasing the volume of sale or by reducing costs.

Uncertainty of returns: Returns can never be certain in business activity. Sometimes, the return can be more than expectations but it can also be less than expectations. This happens because of external factors which are outside the control of the business organization.

Element of risk: An element of risk is always present in business activity. A business organization does not function in isolation. It is influenced by the external environment. Different aspects of the external environment present various types of risk to a business. For example; labour unrest, political unrest, launch of a new competitor, etc. can present risks to a business.

Types of Business Activities

Business activities can be of two main types, viz. Industry and Commerce.

Industry

The term industry is used for those activities in which resources are modified for better usage by humans. Industry does some sort of value addition to the resource. For example; when flour is sent to a bakery, the bakery does value addition by converting flour into bread and cake. Similarly, a biscuit factory changes the same flour into biscuits.

Sometimes, the term industry means group of firms producing similar items. For example; electronics industry includes all those companies which produce any kind of electronic goods. Similarly, cotton textiles industry includes all the firms which are involved in processing cotton items.

Industry can be classified into three types

• Primary Industry
• Secondary Industry
• Tertiary Industry

Primary Industry: Activities which are concerned with extraction and production of natural resources and reproduction and development of living organisms are included in primary industry. Mining is a good example of primary industry. Rearing of animals and breeding of plants also come under primary industry. The primary industry can be further divided into two types, viz. extractive industries and genetic industries.

• Extractive Industry: The industries which draw out product from natural sources are called extractive industry. Extractive industries supply some of the basic raw materials which are mostly products of geographic or natural environment. Farming, mining, lumbering, etc. are examples of extractive industries.
• Genetic Industry: Activities which remain engaged in breeding of plants and animals for their further reproduction come under genetic industry. Nurseries, seed producing companies, cattle breeding farms, poultry farms, hatcheries, etc. are examples of genetic industries.

Secondary Industry: Industry in which some primary resources are processed is called secondary industry. Making steel from iron ore is an example of secondary industry. Construction also comes under the secondary industry. Secondary industry processes primary material either to make the final product or to make intermediary products which would be further processed to make the final product. Secondary industry can be further divided into manufacturing industries and construction industries.

• Manufacturing Industry: Manufacturing industries are involved in processing of raw materials to produce goods and thus enhance the value of the raw material. Manufacturing industries either make fully finished products which we consume or partly finished products which serve as intermediary for other industries. Manufacturing industry can be further classified as follows:
  • Analytical Industry: The industry which analyses and separates different elements from the same material is called analytical industry. Oil refinery is an example of analytical industry.
  • Synthetic Industry: The industry which combines various raw materials to make a product is called synthetic industry. Cement industry is an example of synthetic industry.
  • Processing Industry: The industry which involves successive stages of manufacturing finished products is called processing industry. Sugar and paper are examples of processing industry.
  • Assembling Industry: The industry which assembles different components to make a product is called assembling industry. Television and computer industries are examples of assembling industry. In these cases, no component is made by the manufacturer rather all the components are just assembled by the manufacturer.
• Construction Industry: This industry is involved in making houses, bridges, stadiums, road, etc.

Tertiary Industry: Tertiary industries provide support services to the primary and secondary industry. Banking, transport, warehousing, communication are examples of tertiary industry. The whole service sector comes under the tertiary industry. The activities of tertiary industry can be considered as part of commerce.

Commerce

Commerce facilitates business activities of industries. There are two types of commercial activities, viz. trade and auxiliary to trade. Trade involves buying and selling of goods. A factory needs to sell its goods to the end user. It is not possible for a company to directly sell goods to the end user. Wholesalers and retailers work as channel partners to facilitate trade. Insurance and advertising work as auxiliaries to trade. Advertising is a tool which motivates customers to buy a product. Banking and finance, transport, warehousing are also auxiliaries to trade.

Business

• For starting a business the decision of entrepreneur and other legal formalities are required.
• Business activity involves provision of goods and services.
• No minimum qualification is necessary for starting a business.
• Profit earned is the reward of business.
• Capital investment is as per the size of the business.
• Transfer of interest is possible in business; with some formalities.
• Profits are uncertain and irregular in a business and risks are always involved.
• No prescribed code of conduct is necessary for a business.

• Profession

  • For starting a profession one needs the certificate and membership of a professional body.
  • Nature of work involves rendering personalised and expert services.
  • For a profession; expertise and training in the related field is necessary.
  • Professional fee is the reward of a profession.
  • Limited capital is needed for starting a profession.
  • Transfer of interest is not possible because of intangible nature of professional expertise.
  • Risk is least as fee is generally regular.
  • Professional code of conduct needs to be followed in a profession.

  • Employment

    • Appointment letter and service agreement are necessary to start employment.
    • An employee has to perform work as per contracts or rules of service.
    • Salary or wages is the reward of an employment.
    • No capital investment is required to start working as an employee.
    • Transfer of interest is not possible because of intangible nature of an employee's expertise.
    • There is fixed and regular income and hence there is no risk in empployment.
    • An employee needs to follow the norms of behaviour laid down by the employer.

    • Business Objectives

      Importance of Profit for Business

      • It is a source of income for business persons
      • It can be a source of finance for meeting expansion requirements of business
      • It indicates the efficient working of business
      • It can be taken as society’s approval of the utility of business
      • It builds up the reputation of a business enterprise.
  • Market Standing: Position of a business enterprise vis-à-vis its competitors is called market standing. Market standing gives strong footing and better business compared to competitors. A brand leader is in a position to earn more profit.
  • Innovation: An innovative product gives an edge to a business enterprise. No business enterprise can survive in the market for long without innovation. Apple’s products are very good examples of innovation. The iPad launched by Apple was nothing but an MP3 players which was already existing in the market. Apple made intuitive design and interface for its MP3 player and created an altogether new niche for this product. All of this could be possible because of innovation.
    Productivity: Productivity means taking maximum output from available resources. A higher productivity can lead to a higher profit. As mentioned earlier, a higher profit indicates better productivity of a business organization. This can be achieved by various means; like better resource utilization, better human resource management and better marketing strategies.
    Physical and financial resources: A business enterprise always needs physical and financial resources at regular intervals. A part of profit always needs to be ploughed back into the business to acquire these resources.
  • Earning profit: Profit earning is very important to continue the business in the long run. No business can survive for long term in the absence of profit.
    Manager performance and development: Big businesses cannot be run by a single person, rather needs managers to manage different aspects of business. Managers’ performance and development are important goals of the business. Continuous management development is the key for sorting out succession issues in an organization.
    Worker performance and attitude: Workers need to perform to increase productivity in the business. Worker’s attitude is also important for business.
    Social responsibility: A business organization does not work in vacuum. It has some social responsibilities as well. For example; protection of environment and employment generation are important social responsibility of a business organization.

  • Business Risks

    Possibility of lower profit or possibility of loss is the crux of business risk. There are two types of business risks: speculative risk and pure risk. Speculative risk involves both the possibilities of loss and gain. Market factors form the part of speculative risk. Pure risk involves either profit or loss. For example; in case of fire in the factory there is always a chance of loss.

  • Nature of Business Risks

    Business risks arise due to uncertainties: Uncertainties refers to the lack of knowledge about what is going to happen in the future. Many surprising changes can happen in the future which may warrant the business strategy to be changed altogether. Changes can happen in technology, government laws, socio-economic situation or in political situation. Changes can also take place in the market with the entry of a better product or a more capable competitor.
    Risk is an essential part of every business: Every business faces some or other type of risk. No business can be isolated from risks.
    Degree of risk depends mainly upon the nature and size of business: Nature and size of business are the main factors of risk. For example; the models of cell phones keep on changing almost on a daily basis. A model which is supposed to be superb today may become obsolete tomorrow. A large business organization is usually at lower risk because of its financial muscle, whereas a small business organization is usually at a higher risk.
    Profit is the reward for risk taking: This is because of the risks involved that business persons are rewarded with profit. A person who is averse to risk would prefer employment rather than risking his lifetime’s savings on starting a business.

  • Causes of Business Risk

    Natural causes: Natural causes are beyond the control of human beings. Natural disasters can lead to huge losses in business. Let us take example of various small hotels which were wiped out during the massive floods in Uttarakhand. Nobody could do anything when the flood hit the hilly state.
    Human causes: Strikes, dishonesty, carelessness, etc. are examples of human causes of business risk. Labour unrest have often resulted in shutdown of many factories. The factory of Maruti at Gurgaon is an example of crippling operations due to labour unrest.
    Economic causes: Inflation, unemployment, economic slowdown, etc. are examples of economic causes of business risk. The recent economic slowdown has resulted in reduced demand for housing. According to leading newspapers, there is huge inventory in the housing sector which would take at least ten years to be sold. Luxury products suffer severe decline in demand during an economic slowdown.
    Other causes: Some political events can change the business scenario. A major policy change by the government can change the business environment. A very good example of effect of policy change on a business is the upsurge in mobile telephony market in India when the then telecommunications minister favoured CDMA by making some changes in policy. It is always seen that a stable government at the centre improves the business climate, while an unstable government is detrimental to the business climate.