Krupanidhi School of Management - Bangalore

Module 1 Introduction: Concept, Nature and Scope of Business; forms of business enterprise Concept of business as a system; Business and Environment Interface; Business objectives; Business Ethics and Values; Code of Conduct and Corporate Governance. Introduction: Human beings are generally engaged in some activity or the other. Some of the activities are pursued with economic motives and they are called as Economic activities. Eg: Business, Profession and employment. Many people are engaged in certain Social, Cultural and religious activities these activities are called as Non economic activities. These activities are undertaken to satisfy sentimental requirement of human beings. Concept of Business: Business is an economic activity, which involves regular production and or exchange of goods and services, with the main purpose of earning profits through the satisfaction of human wants. Business involves production and or exchange of goods and services to earn profit or in a broader sense to earn a living. Profit is not the sole objective of the business. It may have other objective like promotion of welfare of the workers and the general public. Thus, business pervades all human activities directed toward earning profit or economic gains.. it includes all activities from production to distribution of goods and services. In other words, industry, trade and other activities like banking, transport, insurance, warehousing, advertising, etc. are integral parts of the modern business system. Nature Of Business Whatever may be the nature and scale of operations, a business enterprise possesses the following characteristics: Dealings in Goods and Services: The first basic characteristics of a business is that it deals in goods and services Goods produced or exchanged may be consumer goods like bread, rice, soap, cloth, etc. or producers goods such as machines, tools, etc. The consumer goods are meant for direct consumption, either immediately or after Prof.Arvinthan Business Perspective Page 1

Krupanidhi School of Management - Bangalore

undergoing some process, whereas the producers goods are meant for being used for the purpose of further production. Producers goods are also called as capital goods. Services include supply of electricity, gas, water, finance and insurance, transportation, etc. Production and or exchange: Every business is concerned with production and exchange of goods and services for value (price). The goods produced or purchased for personal consumption or presenting to others as gifts do not constitute as business, because there is no sale or transfer for value. Eg: if a person cooks at home for personal consumption, it is not a business activity. But if he cooks for others in his dhaba or restaurant and receive payment from them, it becomes his business. Creation of Utility All business activities create utilities for the society. Firm utility is created when raw materials are converted into finished goods and services. Place utility is created when goods are transported from the place of production to the place of consumption. Storage of goods creates time utility. This helps in preserving the goods when not required and making them available, when demanded by the consumers. Regularity and Consistency in Dealings Regularity of economic transactions is the essence of business. There should be continuity, or regularity of exchange of goods and services for money. An isolated business cannot be called as business. Eg: if a person sells his flat and earns some profits, it cannot be called as business. But, if he purchase and sells flats regularly to earn his livelihood, it will be called his business. Profit motive Another important feature of a business activity is its objective. The chief objective of a business is to earn reasonable profit or surplus as it is called in case of public enterprise. The survival of the business depends upon its ability to earn profits. Profit is also essential for growth. Recreation clubs and religious institution cannot be called business enterprises, as they have nothing to do with profit motive. Risk and Uncertainty All business activities involve some element of risk and uncertainty. There may be uncertainty in regard to success of business, taste of people, availability of raw materials, power and other factors. When a businessman invests his capital in some business activity, there is no guarantee that he will be earning Prof.Arvinthan Business Perspective Page 2

Krupanidhi School of Management - Bangalore

sufficient profit to reward himself and keep his capital intact. Every business activity is exposed to some risks, such as: Changing technology, resulting into obsolescence of plant and machinery, and technique of production. Changing consumers tastes and fashion, resulting into fall in consumers demand. Increased competition in the market. Shortage of raw materials, power, fuel, etc.. Faulty managerial decisions. Change in government policies. There are some of the factors, which make business risky and may cause losses. Such risks are generally not insurable. Besides them may be risks of losses, due to factors like theft, fire and natural calamities, which can be insured against. Scope of Business The scope of business is very wide. The business activities may be grouped under two broad headings, Industry Trade and commerce. A business undertaking which deals with growing, extracting, manufacturing or construction is called an industrial enterprise. A business undertaking which deals with exchange ( buying or selling) of goods and services, or with activities that are incidental to trade, like transport, warehousing, banking, insurance and advertising, is called a commercial enterprise.

Prof.Arvinthan

Business Perspective

Page 3

Krupanidhi School of Management - Bangalore

Industry The activities of extraction, production, conversion, processing or fabrication of products are described as industry. The products o industry may fall in any one of the following three categories Consumers Goods Goods used by final consumers are called consumers goods. Eg: Edible oils, cloth, jam, TV, Radio, Scooter, etc. under this category. Producers Goods Goods used for the production of other goods are described as producers goods. Eg: Machine tools and machinery used for manufacturing other products come under this category. These are also called capital goods. Intermediate Goods There are certain materials, which are the finished products of one industry and become the intermediate products of other industries. Eg: copper industry, aluminium industry, plastic industry, the finished products of which are used in manufacturing electrical appliances, electricity wires, toys, baskets, containers, and buckets. Broadly speaking, industrial activities may be classified into Primary and Secondary industries. Primary industry may be either Extractive, or Genetic, and Secondary industry may be either Manufacturing, or Construction. Extractive Industries They extract, or draw out products from natural sources, such as earth, sea, air. The products of such industries are generally used by manufacturing and construction industries, for producing finished goods. Farming, Mining, Lumbering Hunting, Fishing etc. are some of the examples of extractive industries. Genetic industries Genetic means parentage, or heredity. Genetic industries are engaged in breeding plants and animals, for their use in further reproduction. For breeding plants, the nurseries are typical examples of Prof.Arvinthan Business Perspective Page 4

Krupanidhi School of Management - Bangalore

genetic industries. In addition, the activities of cattle-breeding farms and fish hatchery come under the category of genetic industries. Manufacturing industries These are engaged in producing goods through the creation of form utility. Such industries are engaged in the conversion, or transformation of raw materials, or semi-finished products. The products of extractive industries generally become the raw materials of manufacturing industries. Factory production is the outcome of manufacturing industry. Manufacturing industries may assume the following forms Analytical: The basic material is analyzed and separated into a number of products. Petroleum refining is an example of analytical industry. The crude oil is extracted from beneath the earth and is processed and separated into petrol. Kerosene, Lubricating oil, etc. Synthetic: Two are materials are mixed together in the manufacturing operations to obtain some new products. Products like soap, paints, fertilizers and cosmetics are produced by synthetic industries. Processing: In this case, raw materials are processed through a series of manufacturing operations making use of analytical and synthetic methods textiles; sugar and steel are examples of this category. Assembly line: I assembly industry, the finished products can be produced only after various components have been made and then brought together, for final assembly. Production of automobiles, watches, televisions, bicycles, railway, wagons etc.. are the typical examples of this industry. Construction Industries They are concerned with the making or construction of buildings, bridges, dams, roads, canals, etc. These industries use the products of manufacturing industries such as iron, steel, cement, etc. and also from the extractive industry products like stone, marble, etc. The remarkable feature of these industries is that their products are not sold i the sense of being taken to the markets.

Prof.Arvinthan

Business Perspective

Page 5

Krupanidhi School of Management - Bangalore

Trade and commerce. Trade Trade is the voluntary, often asymmetric, exchange of goods, services, or money. Trade is also called commerce or transaction. A mechanism that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and services. Later one side of the barter were the metals, precious metals (poles, coins), bill, paper money. Modern traders instead generally negotiate through a medium of exchange, such as money. As a result, buying can be separated from selling, or earning. The invention of money (and later credit, paper money and non-physical money) greatly simplified and promoted trade. Trade between two traders is called bilateral trade, while trade between more than two traders is called multilateral trade. Kinds of Trade: 1. Home Trade: Trade done within the limited of the Country is called Home Trade or National Trade 2. Foreign Trade: Trade done between the two countries is called Foreign Trade or International Trade. The transactions in this type of trade are called Import Trade (if goods purchased from other country) and Export Trade (if goods sold to other country) International trade International trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders. International trade is in principle not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture. Prof.Arvinthan Business Perspective Page 6

Krupanidhi School of Management - Bangalore

Commerce Commerce is a division of trade or production which deals with the exchange of goods and services from producer to final consumer OR commerce is the exchange of goods and services from the point of production to the point of consumption to satisfy human wants. It comprises the trading of something of economic value such as goods, services, information, or money between two or more entities. Commerce functions as the central mechanism which drives capitalism and certain other economic systems (but compare command economy, for example). Commercialization or

commercialization consists of the process of transforming something into a product, service or activity which one may then use in commerce. Commerce involves trade and aids to trade which help in the exchange of goods and services.

Objectives of business:
1) Profits: Excess of income over expenditure is known as profits. It is reward for taking risk. Making profits is the primary goal of any organization. It is the main incentive, motivate, indicator of production basis for growth expansion and survival. There are many organizations which dont work for profits; their basic objective is to provide services to the society. 2) Growth: The overall development of business in all directions is known as growth, the strategies adopted to achieve growth are: a) Add new products to the markets b) Diversify new products c) Minimize cost, increase the productivity d) Increase the market share e) Mergers and Acquisitions 3) Power: Business organizations have huge resources in the form of money, material human resources and knowledge these resources provide economic and political powers to the business owners and the managers of the organization.

Prof.Arvinthan

Business Perspective

Page 7

Krupanidhi School of Management - Bangalore

4) Employee satisfaction and development: Business is men caring for employees satisfaction and providing for their development is one of the most important objective of enlightened business organization. 5) Quality product and service: This is the most important objective. Economically and morally those who give importance to this objective survive in the competition and stay ahead in the market. 6) Persistent Quality: Persistent quality of products earn brand loyalty and consumer satisfaction. E.g. the products of Hindustan Lever are used in every house hold of the country. To maintain the quality of the product there is requirement of R&D department and high degree of management professionals. 7) Market Leadership: To earn market leadership the main requirement is innovation the main requirement is innovation and diversification and diversification. E.g.: Pepsi retains the market leadership by introducing diet Pepsi. 8) Service to Society: Business is part of society and it has several obligations towards it. Some of them are a) Providing safe and quality goods at reasonable prices. b) Providing Employment. c) Supporting weaker sections of the society. 9) Good Corporate Citizenship: This implies that business should follow the rules, pay the taxes regularly to the government, Care for its employees and customers. If good corporate governance is not maintained, it hampers the growth of the country. Forms of Business Organization: 1) Public Sector Enterprises: When government is the owner or the manager of certain business

units it is said to be under public sector. Under this we have: a) Ministry: In this an undertaking is managed by whole ministry of government such as railways.

Railways are managed by the ministry of railways and its accountable to the parliament.

Prof.Arvinthan

Business Perspective

Page 8

Krupanidhi School of Management - Bangalore

b) Departmental Undertaking: These undertakings are directly subordinate to the ministry but they

have their own management responsible for activities. E.g. Post, Telegraph, Production units etc. c) Statutory Corporations: A corporate created by separate law, independently financed and

vested with the power of independent management is known as Statutory Corporation. E.g. LIC, RBI, Industrial, Finance Commission etc. d) Central Boards: Central boards are charged with the responsibility of executing have projects

which require huge capital investment, they are jointly set up by central & State Government. E.g. River Valley Projects. e) Companies: An enterprise becomes a government company when it has the following

characteristics. 1) 2) 3) 4) 2) Have all the features of private limited company. 51% of share capital is owned by government. Majority of directors are appointed by the government. It is registered under the companys act 1956. Private Sector Companies: When the organization is controlled and managed by the private

sector it is said to be under private sector enterprise. Private organizations can be categorized under the following heads: a) Proprietary: When the enterprise is controlled and managed by a single person it is known as

proprietary. b) Partnership: When two or more people control the business activities it is known as partnership.

Under this type of system all profits, losses and goodwill is shared by the partners. c) Co-Operatives: These are formed by the individuals to help themselves. Consumer Co-Operative

societies are normally formed by the residents of the locality. d) Limited Companies: All limited companies are formed when it is registered under the

companies act 1956. Share Holders are the owners of the company. Day t day management of the company is looked after by a group of people known as the board of directors. Prof.Arvinthan Business Perspective Page 9

Krupanidhi School of Management - Bangalore

Sole Proprietorship A sole proprietorship is a business established, owned, and controlled by a single person. Sole proprietorships come in all shapes and sizes. The owner realizes all the profits and assumes responsibility for all losses. The sole proprietorship is the most prominent of the four forms of ownership. Advantages of a Sole Proprietorship Sole proprietorships are simple to start. No formal action is required. A sole proprietorship may be started immediately. The owner has total control of all aspects of the business. The owner receives all the profits. The business itself pays no income tax; the owner pays income tax as an individual. Disadvantages of a Sole Proprietorship The owner has unlimited responsibility for losses, debts, and other liabilities the business might develop. The owner must make all the decisions. The owner is the only person who can arrange financing or capitalization. The existence of the business ends upon the owners death. PARTNERSHIP: It is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Person who have entered into a partnership with one another are individually called as PARTNERS and collectively called as a FIRM and the name under which their business carried on is called the FIRM NAME Prof.Arvinthan Business Perspective Page 10

Krupanidhi School of Management - Bangalore

Advantages of a Partnership Start-up can be simple because the law does not always require a partnership agreement. Partners share the responsibilities. Partners share any and all liabilities. Liability is limited in the limited partnership. Disadvantages of a Partnership A high percentage of partnerships are terminated. General partners carry unlimited financial liability (in the general partnership). Each general partner carries liability for the errors of his or her partners. Because decision making and management are shared, partners have potentially less control. Partners must share profits. Partnership termination may disrupt business.

Business as a system:
System comprises of four sequential stages: Inputs (material, capital, technology, HR) Conversion process Outputs (goods, services, profit, customer satisfaction) Feedback Each stage is interdependent and is an important in the concept of business.

Prof.Arvinthan

Business Perspective

Page 11

Krupanidhi School of Management - Bangalore

Business and environment interface: All internal and external forces that influence the business are known as business environment. Business environment is the present era is Liberalization, Privatization, & Globalization. Business environment is a multi layered structure and these layers and these exhibit different characteristics. If one layer produces any effect, it is transferred to the other layers may be in a limited manner and over a long period of time. The various layers of business environment are: 1) International Environment: This layer of business environment concerns all business firms weather they are part of international trade or not. A change in the exchange rate can affect the prices of the imported goods and further the cost of production and the prices of domestic goods. The various factors that determine the international environment are: a) The stage of world economy. b) International economy Co-Operation. c) Role of multi lateral institutions such as IMF & WTO. d) International economic Laws and agreements. e) Political systems of different countries. f) Cultural factors across the countries. g) Technology growth and transfer. h) Growth of Multinational organizations. i) National economic policies of different countries. j) Technology growth and transfer. 2) Domestic Microenvironment: Macroeconomic environment envelops all business firms and provides them a frame work with in which they have to operate and adopt themselves.

Prof.Arvinthan

Business Perspective

Page 12

Krupanidhi School of Management - Bangalore

Major Economic Systems: 1) Free Market Economy: In this system productive resources are privately owned individuals and the firms have the freedom to make major decisions about production and consumption under competitive conditions E.g. US, Australia, Canada etc follows this system. 2) Command economy: In this system most of the productive resources are owned and operated by the government. The major decisions regarding the production and consumption are taken by the government. 3) Mixed Economy: In the mixed economy, neither the government nor the private sector has the dominant position. In fact both the sectors operate jointly and major decisions are taken by both the sectors. Growth and Distribution environment: Growth refers to the income in the level of real output over a period of time. There are three basic measures of countrys real output.1) G.D.P 2) N.D.P 3) G.N.P All these measures give the data on the national income and national income data describes the prosperity of an economy. Higher the national income more prosperous the economy is which implies more market potential for the business organizations. 3. Macro Economic Stability: It is manifested in the form of stability of the price level, exchange rate, investment rate, interest rate, money supply, balance of payment etc. Variables are inter related and any instability in one of the variables can output the potential of other variables. 4) Economic policies: The basic objective of economic policies is to stimulate growth, achieve economic stability and bring economy to full employment level which depends on the wisdom of the government who is ruling the country at the point of time. Economic policies can be in the form of monetary policy, fiscal policy, industrial policy and foreign trade policy. 5) Competitive Environment: The state of market competition is one of the major factors affecting the rate of growth, income distribution and welfare of the consumers. Most governments in capitalistic and mixed economy attempt to maintain free and fair competition in various sectors of the economy through suitable laws and regulations. These laws are formed to control the monopolistic and anti competitive trade practices.

Prof.Arvinthan

Business Perspective

Page 13

Krupanidhi School of Management - Bangalore

6) Macro Non Economic Factors: Understanding of non-economic environment is very essential for the business management. An individual firm is not in position to bring change in this environment, it has to operate and adjust according to this environment. Under this the factors which determine the scope of business activities are: a) Political Structure. b) Legal Structure. c) Cultural structure. 7)Demographic Environment: Demographic characters of a country have an important influence on business environment. Apart from the size and growth of the population demography includes density of the population, male female ratio, size of working population etc. These factors are helpful in determining the human resource of the country, demand for the product and wages or salary structure of the working population. 8) External Environment: This is the enterprise level external macro environment constituted by the business relations of an organization with outside parties. Some of the main entities with which the firm has business relations are Customers, Suppliers, Financial Institutions, Competitors etc. 9) Internal Environment: The determinants of the internal environment are: a) Mission and vision of the organization. b) Industrial Relations. c) Management philosophies and Strategies. d) Quality controlled system. e) Team spirit among employees. f) Quality of Internal Communication system. Ethics: It refers to a system of moral policies, a sense of right and wrong, goodness and badness of actions and their consequence. Business Ethics It refers to the applications of ethics in business, it is the extension of values of personal life to business. Corporate Governance: Corporate Governance basically refers to a set of systems and sub systems by which company is controlled and directed, the basic objective of corporate governance is to maximize long run interests of the stakeholders. Prof.Arvinthan Business Perspective Page 14

Krupanidhi School of Management - Bangalore

Hallmark of a good Corporate Governance: 1) To maximize the long run corporate values. 2) It is transparent and Effective. 3) It is able to prevent corporate crimes. 4) It promotes competitiveness and overall growth of the organization. 5) It maintains a healthy corporate culture that blends well into the socio economic and cultural profile of the society. 6) It is ethical and socially responsible. 7) It is flexible and dynamic. 8) It provides adequate space to the shareholders for effective contribution to the governance of the company without getting involved in the day to day functioning of the company. 9) It resolves the conflicts between stakeholders for the long run benefit of the organization. Factors influencing the Corporate Governance: 1) Ownership Structure of the organization: The ownership of can be disbursed among shareholders or can be concentrated in the hands of few shareholders. 2) The structure of Companys Board: The structure of Companys Board has a considerable influence on the way the companys are managed and controlled. The board of directors are responsible for establishing company objectives, policies of the company and selecting the top level executives to carry out these policies and objectives. 3) Financial structure: The proportion between debt and equity has implications for the quality of governance. Investors exercise significant influence on the way the company is managed and controlled. 4) The institutional environment: The legal regulatory and political environment within which the companies operate determines the quality of corporate governance.

Prof.Arvinthan

Business Perspective

Page 15

Krupanidhi School of Management - Bangalore

Mechanism of Corporate Governance: In our country, there are six mechanisms to ensure corporate governance: 1) Company act 1956. 2) S.E.B.I act 1992 3) Market for Corporate Control. 4) Participation of shareholders in the governance of the companies. 5) Statutory auditing. 6) Code of Conduct. The code of conduct is based on the checks and balances specially at the level of board of directors to guard against undue concentration of power and to ensure adequate disclosure of information when it is required. It Comprises of 4 Sections: 1) It is proposed that the number of executive directors should be balanced by adequate members of non executive directors with one board chairman and chief executive director. 2) It was emphasized that non executive directors should be appointed only for a specific time period and there should be formal process for their appointment. 3) There should be full and clear exposure of the emoluments and pay should be set by the remuneration committee consisting mainly of non executive directors. 4) Financial reporting controls: It was recommended that properly constituted ordered committee of the board of directors should be appointed and non executive directors should report regularly on the effectiveness of the system and internal financial control.

Prof.Arvinthan

Business Perspective

Page 16

Krupanidhi School of Management - Bangalore

Prof.Arvinthan

Business Perspective

Page 17