A business (or firm) is an enterprise that provides products or services desired by customers. Along with the large, well-known businesses such as – The Coca-Cola Company and IBM, there are many thousands small businesses that provide employment opportunities and produce products or services that satisfy customers.
Business refers to the economic activities concerned with the production and exchange of goods and services, primarily pursued with the objective of earning profits. According to B.O. Wheeler, “Business is an institution organised and operated to provide goods and services to society under the incentive of private gain.”
Learn about: 1. Meaning of Business 2. Definitions of Business 3. Concept 4. Characteristics 5. Objectives 6. Nature and Scope 7. Categories 8. Types of Stakeholders 9. Methods for Evaluating the Worth of Business
10. Developing the Business Plan 11. Qualities of Business Partner 12. Role of Profit 13. Growth Strategies 14. Risks 15. 80 Tips for Business Success 16. Trends.
Business: Meaning, Definitions, Concept, Characteristics, Objectives, Nature, Scope, Growth Strategies, Risks and Role of Profit
Business – Meaning
Literally speaking, the term ‘business’ means to be ‘busy’ or ‘occupied’. In practice, business includes certain economic activities in which people are busy or engaged. Such activities relate to production, distribution, trading or exchange of goods and services to satisfy the needs of people so as to earn income or profit.
A business is created to provide products or services to customers. If it can conduct its operations effectively, its owners earn a reasonable return on their investment in the firm. In addition, it creates jobs for employees. Thus, businesses can be beneficial to society in various ways.
A business (or firm) is an enterprise that provides products or services desired by customers. Along with the large, well-known businesses such as – The Coca-Cola Company and IBM, there are many thousands small businesses that provide employment opportunities and produce products or services that satisfy customers.
Business refers to the economic activities concerned with the production and exchange of goods and services, primarily pursued with the objective of earning profits. According to B.O. Wheeler, “Business is an institution organised and operated to provide goods and services to society under the incentive of private gain.”
Business – Definitions
“Business may be defined as human activity directed towards or acquiring wealth through buying and selling of goods.” – Lewis H. Haney
“Business is an enterprise engaged in the production and distribution of goods for sale in the market or rendering service for a price.” – R. N. Owens
Literally speaking, the term ‘business’ means to be ‘busy’ or ‘occupied’. In practice, business includes certain economic activities in which people are busy or engaged. Such activities relate to production, distribution, trading or exchange of goods and services to satisfy the needs of people so as to earn income or profit.
Business refers to all those activities which are concerned with the production and/ or purchase and sale of goods or services with the purpose of selling them at a profit. It includes activities concerned with manufacturing, trading, transportation, insurance, warehousing, banking and finance, etc.
Business is basically an economic activity:
According to L.R. Dicksee, “Business is a form of activity pursued primarily with the object of earning profit for the benefit of those on whose behalf the activity is conducted.” Business involves production and/or exchange of goods and services to earn profit, or to earn a living. However, profit is not the sole objective of the business. It may have other objectives like promotion of welfare of the workers and the general public.
“Business is an institution organised and operated to provide goods and services to society under the incentive of private gain.” —B.O. Wheeler
“All the activities including the production and sale of goods or services may be classified as business activities.” —William Spriegel
“Business is a form of activity pursued primarily with the object of earning profit for the benefit of those on whose behalf the activity is conducted.” —L.R. Dicksee.
According to Prof. L.H. Hanrey, “Business means any human activity directed towards producing or acquiring wealth through buying and selling of goods”. But as per the above definition business is limited up to the exchange activity which is not based upon proper understanding of the things. For that matter if you exchange your old furniture with the new one and in the process you save a little money. Can we call it a business? No, definitely not. Because it should be a continuous feature.
According to K. Ashwathappa “Business comprises all profit seeking activities and enterprises that provide goods and services necessary to an economic system. It is the economic pulse of a nation, striving to increase society’s standard of living. Profits are a primary mechanism for motivating these activities”. This definition which seems to be very clear and more comprehensive also lacks on one issue, i.e., on the front of legality.
Whatever activity you do to earn profit that should abide by the country’s law. So, from the above definitions and observations, we can come to a conclusion that “Business is an economic activity carried on by human to earn profit in a continuous manner under the purview of rules and regulations of the country”.
Business – Concept
Business is all around us and it is the mainspring of modern life. But very few people understand its true nature and its role in society. The study of business is essential for training oneself for a career. Study of the principles and practices of business organisation helps in understanding events in their right perspective and in tackling the problem of satisfying human wants through the use of available resources.
Every human being is busy in one activity or the other to satisfy his unlimited wants and desires. The sum total of human activities may broadly be divided into two categories-economic activities and non-economic activities. Economic activities are designed to attain and use the material resources of life. They are concerned with the production, distribution and consumption of goods and services. Human being as undertake economic activities in order to earn their livelihood.
Business consists of economic activities involving production, purchase and sale of goods and services in order to satisfy the needs of society and to earn profit in the process, Technically the term ‘business’ is derived from the word ‘busy’. This means that someone is busy in earning profit through the process of purchase and sale.
However, in a wider sense, business also consists of:
(a) Creating demand for the products and services before producing and purchasing the goods.
(b) Production of the goods and converting the economic resources into goods and services.
(c) Continuous research and development in order to improve the quality of goods and services.
(d) Activities to ensure that the goods and services not only reach the consumers but also satisfy them in fulfilling their needs.
For instance, a shopkeeper runs his shop, a doctor operates his clinic, a manager works in his office and a lecturer teaches in a college to earn a living for himself/herself and for his/her family. On the other hand, non-economic activities are carried out not for earning money but on account of the human sentiments of charity, love, sympathy, patriotism, religion, etc. For example, a person goes to temple to offer his prayers.
Business – Top 5 Characteristics
From the above discussion, we can draw certain characteristics of today’s business which are as follows:
(i) It is a Human Activity:
Business is a human activity which makes available goods and services to the society. It is not only dependent on making available the goods and services or the mere production of these but also depends on the exchange of value which is provided in return because if you are engaged in giving gifts to somebody then it will not be treated as business.
(ii) Continuous Economic Activity:
In business an economic activity must be repeated again and again because if an entrepreneur does not do that it will not be treated as business. For example, if a person sells his own house, this activity does not come under the framework of business.
(iii) Profit Motive:
Any economic activity which leads to generation of profit is considered as business. Therefore, intension should be to earn profit otherwise if a person is engaged in social service or preaching about the religion cannot be treated as business.
One cannot run any sort of business without the element of entrepreneurship irrespective of the size of the business. Business can only be run by a daring person who has the ability to face risk of loss. Because no business is there where the element of risk is missing. Involvement of element of risk of loss makes the business world more challenging and to face financial challenge is not everybody’s cup of tea.
(v) Creation of Utility:
A man does not produce anything in a way, he only converts the form of resources which are provided by the nature. The business changes the form, place and possession utility of goods and makes them available in usable form. The business creates the utility of the things so that these can be consumed.
Business – Objectives: Economic, Social, Human and National Objectives
A business objective may be defined as the purpose or the reason for the existence of the business in the society. If we analyse the objective of a business, it will provide answer to the question, namely, what is it for? The objective provides the direction towards which all business activities will be directed.
Though profit motive constitutes the primary objective of business activities, it should not lead us to conclude that profit is the sole objective of a business. The objectives of the business are to be laid down keeping in view the prevailing social, economic and political environment. Objectives of a business are multi-dimensional in nature.
They can be classified into four categories, namely:
(1) Economic objectives;
(2) Social objectives,
(3) Human objectives, and
(4) National objectives
These objectives are interrelated in nature.
The economic objectives of a business are discussed below:
(i) Earning of Profits – Profits are needed to provide adequate reward to the entrepreneur and to provide funds for future growth. Entrepreneurship is one of the important factors of production. Just as other factors get their rewards, the entrepreneur must get reward for his efforts and taking of risk. Moreover, every businessman will like to see that the business he is managing should grow. This is possible only if the business earns sufficient profits for investing them into the business for expansion.
(it) Satisfaction of Customers – The survival of the business depends upon the satisfaction of customers. Thus, the business must aim at winning and satisfying the customers. Peter F. Drucker has rightly said, “There is only one valid definition of business purpose, i.e., to create a customer.” Customers are created through advertisement and sales promotion and delivering them ‘want satisfaction’.
(iii) Innovation – Innovation means developing new technology, new products and their multiple uses. Business cannot succeed without designing new products and finding their new uses.
(iv) Effective Utilisation of Resources – Business requires the use of men, machines and materials which are considered scarce resources. Every business is expected to make the best possible use of these resources. This objective can be achieved by employing efficient personnel, making full utilisation of machines and reducing wastage of raw materials.
Social objectives of a business denote its obligations towards various stakeholders including customers, employees, community and the government.
The important social objectives include the following:
(i) Supply of Quality Goods at Fair Prices – The business must supply quality products as desired by the customers. The products should be durable, genuine (not duplicate) and safe. The prices charged for the goods should also be reasonable.
(ii) Adoption of Fair Trade Practices – The business should follow fair business practices at all times. It should avoid anti-social practices like hoarding, black-marketing, over-charging the buyers, etc. It should also not indulge in unfair trade practices like spurious products or misleading advertisements.
(iii) Generation of Employment Opportunities – Every business should grow and expand its operations to create new jobs for the society. Further, a business should employ suitable people without any discrimination based on caste, creed, sex or religion.
(iv) Employees’ Welfare – It is an important responsibility of the business to promote the welfare of its employees. Besides providing fair wages, the business should also provide good working conditions, canteen facility, housing, transport and medical facilities, etc., to the employees.
(v) Community Service – Modern business organisations engage in community service to fulfil their social responsibility and thereby enhance their public image. Community service may be carried out by running dispensaries and schools, encouraging social activities and setting up training centres for the unemployed youths in the backward areas.
(vi) Protection of Environment – Every business house should ensure safety of the local surroundings and the protection of neighbourhood environment. It should take adequate measures to check air, water or noise pollution.
(3) Human Objectives:
A business is directly linked with two important groups, namely, – (a) customers, and (b) employees. Both these groups must have a feeling of having been treated as human beings by the business enterprise. As human beings, customers expect courteous service and fair dealings from the business.
The employees look forward to the business enterprise for the following objectives:
(i) The employees are treated as partners in the business and not as inferior lot; they should get fair wages and healthy working conditions;
(ii) They are able to acquire and develop new skills in the process of employment; and
(iii) They derive job satisfaction.
These objectives are concerned with the goals of the nation.
Every business enterprise must contribute to the national goals such as:
(i) Achievement of self-sufficiency in production of goods and services,
(ii) Import substitution and export promotion,
(iii) Development of small scale and ancillary industries,
(iv) Development of backward regions,
(v) Economic development of the nation.
Business – Nature and Scope
Business is a vast and interesting subject. If one goes deeper into it, he faces more absorbing and uphill tasks. It encounters with the use of latest scientific and technical know-how, challenges and difficulties it faces from production to the smooth supply of the products to the target audience, problems confronting in raising money and by which method to raise money and the most challenging job of bringing employee together and to spur their motivation level up to a point so that they strive pleasantly to achieve the organizational goals.
A business also encounters the most amazing and challenging job of grappling with so many laws and regulations lay down by the government. The consumers, employees and various other interests groups also influence the business.
In keeping with its above mentioned factors it is always difficult to limit the discussion on the subject like scope of business.
But with the below factors an endeavour has been made to discuss the nature and scope of business:
Earlier there used to be the business in form of sole proprietorship or in partnership forms and that too was within the boundaries of a particular district or state. Then slowly and gradually the bigger form of business organization evolved in the form of Joint Stock Company. Because the earlier forms could not cope up with the ever growing demand of the society and were unable to meet the challenges of mass production.
The formation of bigger size companies have gradually started replacing manual labour in manufacturing process and with the advent of automatic machines, production in bulk has become possible. The production philosophy has been replaced by the marketing philosophy where the production is being done by knowing the need of the consumers first and then demand is created.
Traditional channels of distribution have been replaced by the new distribution channels, super bazaars, discount houses, trade fairs, different promotional scheme and reshaped world of advertising has become the order of the day in business to meet the present-day challenges. The bigger production level fetches economies of scale and ultimately the benefits pass on to the final buyers.
The trend toward growing business into bigger size is quite evident. The companies like IOC, ONGC, SAIL, etc., have shown their presence in the Fortune 500 lists. This scenario has given a kind of dynamism to the business.
There used to be a time when business operations were limited up to a particular area. Now the trade barriers are crumbling day by day because the word is shrinking rapidly. Networks of transportation, communication, music, and economics have tied the people of the world together as never before. Political boundaries are no barriers to the business.
The fast moving phenomenon of globalization is becoming imperative due to the certain technological explosion, intensity of market competition, and changing lifestyles of the people which has led to the demand for new products. This scenario has occurred due to the multi fold exposure of the people to the ever-growing field of information technology which has opened up new vistas for the business.
This has added up a new dimension that people have stranded learning to be a global manager to meet the challenge of the diversity of the culture to sustain a strong position in the international market.
3. Challenges to the Service Providers:
There was a time when only production and exchange of goods used to come under the scope of business. Service was being considered as the alien part of businesses. But now it is entirely a separate industry which is growing at a very fast pace. These are rapidly growing and increasingly important part of today’s global economy.
Because services are customer-driven, pleasing the customer is more important than ever because service-quality strategists emphasis that it is no longer enough simply to satisfy the customer. The strategic service challenge today is to anticipate and exceed the customer’s expectations which were a rare phenomenon in yester years’ businesses.
Because customers are more intimately involved in the service-delivery process than in the manufacturing process, the business needs to go directly to the customer for service-quality criteria. So, the horizons of business have expanded immensely.
4. An Interdisciplinary Field:
A principle cause of the expansion of the business is due to the information explosion which has been contributed by the various disciplines. Scholars from various fields including psychology, sociology, cultural anthropology, mathematics, philosophy, statistics, political science, economics, logistics, computer science and various fields of engineering have, at one time or another, been interested in business field and its various management theories.
In addition, administrators in business, government, church, health care and education all have drawn from and contributed to the study of business which have given immense knowledge of the field to the practitioners. With each new perspective, new questions and assumptions, new research techniques, different technical jargon, and new conceptual frameworks have come up. This has altogether revolutionized the field of businesses.
5. Information Overload:
Since the time immoral, entire civilization have come and gone. In one form or another, business management was practiced in each. Sadly, during those thousands of years of experience, one modern element was missing- a systematically recorded body of knowledge. In early cultures management was something one learned by word of mouth and on trial and error basis not to record about in textbooks, theorized about or experience with in written form.
Thanks to the modern print and electronic media, the collective genius of thousands of management theorists and practitioners has been compressed into a veritable mountain of textbooks, journals, research monographs, audio and video tapes and computer disks, etc. Use of Internet has also made it more explosive in nature. Never before have present business had so much relevant information at their fingertips, often as close as the nearest library.
Today’s business is also characterized by diversification. Earlier people used to stick to the one or two business only. The product portfolio of today’s business is expanding like anything. One can understand the concept of diversification by having an overview of Tata’s business in India which ranges from salt to steel. Diversification means introducing different lines of products which are not related to each other.
Proliferation is another name of the game today. It represents introducing different brands in the same product line. For example, FMCG’s giant HLL (Hindustan Lever Ltd.) in India has so many soaps in one time but with different brand names. Nowadays, these measures are used by the companies in the form of certain weapons to face severe competition to sustain in the market as we have never seen before this sort of scenario.
The merger and acquisition waves are also sweeping the world. To prevail in the market, we are able to witness some of the biggest mergers in the world which is another feature of today’s business. With the repeal of the some of the provisions relating to Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act), many companies in our country stretched too far in the name of diversification.
7. Foreign Capital and Technology:
There was a time when hardly any country was in the practice of using foreign capital and technology. Because the world is witnessing so many changes and with the implementation of WTO regulations, almost every country has gone international. To pay the international debts, country requires huge amount of foreign capital reservoirs. Most of the countries have been making use of foreign capital and technology to accelerate the pace of their economic growth.
There is hardly any country which is not assisted by foreign capital and technology. Foreign capital and technology play a vital role in the shaping of an economy in a big way. India being a developed economy, the importance of foreign capital and technology needs no emphasis as we have to payback lots of international debts as a new and developing economy.
Broadly a country can access these types of foreign investment, namely, foreign direct investment (FDI) and portfolio investment (FIIs). While FDIs refers to the direct investment in a foreign country whereas the portfolio investors has only a short-term property interest in investing in equities, banks and other securities.
8. Emphasis on Diversity:
Labour forces and consumers are becoming more diverse in terms of national origin, race, religion, gender, and different age categories and personnel preferences around the globe. In today’s business, managers are challenged to manage diversity effectively to tap the full potential of every individual’s unique combination of abilities and traits.
Successful business are the ones which hire the kind of managers who can anticipate and adjust to changing circumstances rather than being passively swept along or caught unprepared. Employers today are hiring managers who can take unfamiliar situations in stride. They are calling for the multilingual and multicultural managers who can manage diversity.
Those who are aware of that how to motivate a diverse workforce. Managing across cultures, emphasis on learning foreign languages are other features of today’s business. Moving from tolerance to appreciation and managing women and their powers are the other different challenges before the business today. This scenario has led the business to different dimensions.
Environmental issues such as deforestation, global warming, and depletion of the ozone layer, pollution of land, air and water are no longer strictly the issues related to books and conferences. The leading politicians and managers around the world have picked up the environmental banner. The green marketing movement has been gaining momentum around the world.
The businesses are challenged today to develop creative ways to make profits without unduly harming the existing environment. Considering the variety of these sources of change in the environment, global managers are challenged to keep themselves abreast and adjust as necessary. Some companies like Daewoo, Hyundai, Maruti, Tata and Hero Honda in India, with their pollution prevention programmes are leading the way. Indeed, cleaning up the environment promises to generate whole new classes of jobs in the future.
Gone are the days when business was heavily protected and subsidized, licences, quotas and restrictions were the order of the day. Now competition is the name of modern business. Businessmen always stand on the brink of a fear to eliminate from the market. They stand on their feet to cut down costs, to eliminate deficiencies and incessant improvement in the quality is order of the day.
But by the competition, consumer is obviously benefitted by the diverse openings of different competitors. According to Michael Porter “aggressive home based suppliers and demanding local suppliers competing domestic rivals will keep each other honest in obtaining government support”. Nowadays, competition is not only from rival firms but also from the ever improving technology.
For example, typewriters have been completely wiped out from the market by the computers. Traditional postage telegrams are at the verge of elimination by the increasing use of Internet services. So, today’s business is witnessing the manifolds competition which was not prevalent in the past.
11. The Rise of the Rural Market:
The rapid growth of the rural market for a number of products is another important development. The developed economies in the world enjoyed the fruit of sustained growth over a longer period of time but now their markets have been saturated due to the limited population. In the search of growth the Multinational Corporations (MNCs) has started looking for the newer avenues.
In the beginning they targeted the underdeveloped and developing nations in their urban areas. In India particularly with the liberalization policy of 1991 of the government of India, so many products were flooded in the Indian markets of genuine prices. This scenario could be witnessed up to 1995-96 but then urban markets of India have also started saturating and the different companies started looking for the newer kinds of market and that was rural market.
Earlier rural market due to certain traditional is cultural barriers was not considered by the marketers but now these markets have become the order of the day where around 70 per cent of the population reside in these areas and contributes hefty percentage in the GDP. So, we can say that business have gone to the every nook and corner of the world.
So, from the above discussion, we can conclude that as far as scope of the business is concerned, it is vast and fascinating. It encompasses the use of latest technology and scientific know-how, it has changed its dimension from just producing and exchange of goods as service industry has given a different direction to it. Literature on this subject is ever-growing.
Numerous books, journals, monographs and research articles are being written and fulfillment on each functional area of the business which have never seen before. Special courses are being conducted by the various universities and institutions on business as it has taken a thoroughly professional shape over a period of time. It has crossed its boundaries across the borders so the managers have to learn how to cope up with the diversities of race, casts, languages, religion and sex, etc.
They have to acquaint different cultures and traditions to be successful in the global market. Therefore, we can say that today’s business is entirely different than that of earlier ones and it poses numerous opportunities as well as challenges to the entrepreneurs.
Business – Subdivided into 2 Categories: Industry and Commerce
Business can be divided into two broad categories, namely industry and commerce.
Category # 1. Industry:
The term industry is used to refer to the processes by which useful things are extracted from the environment, and transformed, processed, fabricated and multiplied into other products.
Industry is of the following types:
a. Extractive Industries:
These industries extract or draw out various products from natural sources such as earth, soil, water, air, etc. The products raised by these industries are provided by nature and collected by human beings. Agriculture, mining, hunting, fishing, lumbering, oil exploration, quarrying, etc. are examples of extractive industries. The products of such industries are used by manufacturing and construction industries.
b. Genetic Industries:
Genetic implies heredity or parentage. Genetic industries involve breeding or reproduction of plants and animals. Plant breeding nurseries, cattle breeding farms, poultry farms, fish hatcheries and commercial kernels are examples of genetic industries.
c. Manufacturing Industries:
These industries are concerned with the conversion or transformation of raw materials and semi-finished products into finished products. Such industries, therefore, create ‘form utility’. Manufacturing industries supply most of the products for daily use. Goods supplied by these industries are known as factory production.
Manufacturing industries are of the following types:
i. Analytical – In an analytical manufacturing industry, a basic raw material is analysed or separated into a number of products. For instance, an oil refinery separates crude oil into kerosene, gasoline, diesel oil, lubricating oil and petrol.
ii. Synthetical – In these industries, two or more materials are combined or mixed together to manufacture a new product. Soap, plastics, cement, paints, cosmetics, fertiliser, etc. are the products of synthetical industries.
iii. Processing – These industries are engaged in the processing of raw materials through different stages of production. Examples of processing industry include textiles, sugar, steel, etc.
iv. Assembling – In this case, various components or parts are brought together to produce a finished product. Manufactures of bicycles, radios, televisions, watches, automobiles, are the typical examples of assembly industry.
d. Construction Industries:
These industries are engaged in the erection or construction of buildings, bridges, roads, dams, canals, etc. Construction industries use the products of extractive industries, e.g., stone, marble, bricks, etc. and also the products of manufacturing industries such as cement, iron and steel, wires, etc. These industries create the basic infrastructure for development. The distinguishing feature of these industries is that their products are made or fabricated at fixed sites. Their products are not carried to the market for sale.
Sometimes industries are classified into primary industry and secondary industry. Primary industry consists of extractive and genetic industries which supply basic raw materials for further production. Secondary industry constitute manufacturing and constructive industries. According to scale of operations, industries may be classified as large scale industry and small scale industry.
Category # 2. Commerce:
Commerce embraces all those activities which ensure a free and smooth flow of goods and services from producers to consumers. It consists of trade and the activities which facilitate trade. According to Stephenson, “Commerce is concerned with the exchange of goods; with all that is involved in the buying and selling of goods at any stage in their progress from raw materials to finished goods in the consumer’s hand. It covers not only the function of buying and selling and handling goods but also the many services which must be provided to finance, insure, store, and transport goods in the course of these exchanges.”
Commerce is thus an organised system for the exchange of goods and services between the members of the business world. It bridges the gap between producers and consumers.
The process of exchange is beset with several hindrances. The principal function of commerce is to remove these hindrances so as to ensure a free and uninterrupted flow of goods and services from producers to consumers.
These hindrances and their solutions have been described below:
a. Hindrance of Person:
The manufacturers and ultimate consumers of goods are often unknown to each other. They are not always situated at the same place. Therefore, certain persons, known as traders, are required to bridge the gap between them. Various types of traders such as wholesalers, retailers and mercantile agents help to remove the hindrance of person. Trade plays an important role in the field of commerce by establishing a contract between sellers and buyers.
b. Hindrance of Place:
Very often goods are produced at places far away from the points of consumption. Various means of transport remove this barrier of distance and help to establish a link between the two.-Packaging of goods to protect them from damage and pilferage in the course of transit also helps to remove the hindrance of place and thereby creates ‘place utility’.
c. Hindrance of Time:
These days’ goods are generally produced in anticipation of demand. Therefore, it becomes necessary to store them and make available as and when the consumers demand them. Warehouses perform this function of storage thereby balancing the time lag between production and consumption. They help to create time utility.
d. Hindrance of Risk:
During transportation and storage, goods are subject to several types of risk. Goods may be stolen or damaged. Fire, flood, earthquake, storm, riot, etc., and other calamities may result in the destruction of goods. Insurance removes this hindrance by covering the risk of loss or damage to goods.
e. Hindrance of Exchange:
Exchange or sale of goods requires safe and economical arrangement for the payment of price. Dealing in goods involve the problems of payment in time and at place. Money serves as the medium of exchange and thereby removes the hindrance of exchange. Banks facilitate exchange by providing credit in various forms. Banking is therefore, an important part of commerce and banks are useful commercial institution. Payments for goods and services can be made easily and safely through the banks.
f. Hindrance of Knowledge:
Exchange of goods can take place only when the seller brings his products to the notice of prospective buyers. Advertising and publicity provide the necessary information to prospective buyers about the utility and features of various products. In this way, they help to remove the hindrance of knowledge.
To sum up, commerce is the sum total of those activities or processes which are engaged in the removal of hindrances of person (through trade), place (through transportation), time (through storage), risk (through insurance), exchange (through banking), and knowledge (through advertising and publicity).
Trade is that branch of commerce which is concerned with the sale, transfer or exchange of goods and services. It involves in buying and selling of goods and services. Trade is the nucleus of commerce because all commercial services like transportation, storage, insurance, banking, packaging, advertising, etc., revolve around it. The super-structure of commerce is built upon the foundation of trade.
Trade is of the following types:
a. Internal or Home Trade:
It implies the buying and selling of goods within the boundaries of a country Payment for the goods sold is made in national currency, either in cash or through the banks. Such trade is also known as domestic trade or inland trade.
Internal trade may be further classified into two categories:
i. Wholesale trade – It refers to the purchase and sale of goods of a specific variety in bulk. A wholesaler buys goods in large quantities directly from manufacturer(s) and sells them in comparatively smaller quantities to the retailers. Wholesale trade constitutes a link between the producers and the retailers.
ii. Retail trade – It involves the sale of goods to the ultimate consumers. A retailer buys goods from wholesaler or manufacturers and sells them to the final consumers. He serves as the last link in the chain of distribution. Retail trade is carried on in several forms, e.g., departmental stores, multiple shops, mail order houses, super bazars, etc. Small scale traders like hawkers, peddlers, street stall holders, pavement dealers and neighborhood stores also carry on retail trade.
b. International or Foreign Trade:
It consists of the exchange of goods and services between persons or organizations operating in two or more countries. International trade involves the use of foreign currency (known as foreign exchange) and international means of transport. A system of international banking has been developed to facilitate payment in the foreign exchange transactions. International means of transport consist generally of shipping and airways. International trade is also carried on between the governments of different countries.
International trade may be further classified into the following categories:
i. Import trade – It involves purchase of goods from foreign countries for use in the domestic market.
ii. Export trade – It is concerned with the sale of domestic goods to foreign buyers or in foreign markets.
iii. Entrepot trade – Entrepot or re-export trade involves the import of foreign goods with a view to re-export them.
(ii) Ancillary to Trade:
In addition to trade, commerce includes several ancillary services which facilitate exchange of goods and services.
These ancillary services or aids to trade are described below:
Transportation carries goods from producers to traders and finally to consumers. It bridges the geographical distances and thereby performs a useful function in commerce. It makes for speed and efficiency in exchange. Transportation provides the wheels of commerce. It is because of transportation that a producer can sell his goods in different parts of the world. It creates place utility.
b. Warehousing or Storage:
It refers to the holding and preservation of goods until they are finally consumed. Goods have to be stored.at every stage in the process of exchange. Warehousing performs a useful function of matching supply with the demand. It helps to make available the seasonally produced goods throughout the year. In the absence of warehousing, a producer will have to dispose of the goods as soon as they are produced. Warehousing creates ‘time utility’.
It facilitates trade by providing a cover against the loss or damage of goods in the process of transit and storage. By getting their goods ensured, producers and traders can avoid the risk of loss due to fire, theft, pilferage, etc. Packaging also helps to protect the goods during transit and storage.
Banks are traders of money and credit. They help in the buying and selling of goods by providing a convenient and safe mode of payment. Banks also grant credit to businessmen with which they can carry on larger volume of trade.
Advertising brings goods and services to the knowledge of prospective buyers. It highlights the distinctive features and utility of different products. With the help of such knowledge, consumers can obtain better value for their money. Marketing research helps to know and understand the requirements of consumers.
There is a close interrelationship between the different branches of business described above. One cannot function without the support of others. Commerce helps industry before and after production through the purchase of materials and the sale of finished products. Production of goods and services is meaningless unless they are distributed among the consumers.
Trade, involving buying and selling of goods, maintains a smooth flow of commerce and thereby supports industry. At the same time, industry provides the goods and services for distribution and thereby gives rise to commerce. As industry develops, trade and commerce also grow.
Interrelationship between Industry, Commerce and Trade:
Industry, commerce and trade are closely related to each other. For example, industry provides goods and services which are distributed through commerce. No commercial activity is possible in the absence of industry and production. At the same time industry and production cannot survive unless the goods and services are distributed among consumers through commerce. Therefore, industry and commerce are interdependent. Industry provides the base for commerce and commerce serves as the backbone of industry.
Trade involves buying and selling of goods. It is the nucleus of commerce because all business activities revolve around transfer or exchange. Trade provides the solid foundation upon which the superstructure of commerce has been raised. It provides necessary support to industry and maintains a smooth flow of commerce. This interrelationship is shown in comparison between Industry, Commerce and Trade.
Business – Types of Stakeholders Involved: Owner, Creditors, Employees, Suppliers and Customers
Every business involves transactions with people. Those people are affected by the business and therefore have a stake in it. They are referred to as stakeholders, or people who have an interest (or stake) in the business.
Five types of stakeholders are involved in a business:
Each type of stakeholder plays a critical role for firms, as explained below:
Every business begins as a result of ideas about a product or service by one or more entrepreneurs. As entrepreneurship is the act of creating, organizing, and managing a business. Today, more than 8 million people in the United States are entrepreneurs. Entrepreneurs are critical to the development of new business because they create new products (or improve existing products) desired by consumers.
People will be willing to create a business only if they expect to be rewarded for their efforts. The rewards of owning a business come in various forms. Some people are motivated by the chance to earn a large income. Others desire to be their own boss rather than work for someone else.
Many people enjoy the challenge or the prestige associated with owning a business. Most business owners would agree that all of these characteristics motivated them to start their own business.
A recent survey by the Center for Entrepreneurial Leadership found that 69 percent of high school students were interested in starting their own business. Yet, about 86 percent of the students rated their business knowledge as very poor to fair. People need to learn how a business operates before they set out to create a business.
How Ownership Spreads?
An entrepreneur who creates a business initially serves as the sole owner. Yet, in order to expand, the business may need more funding than the entrepreneur can provide. Consequently, the entrepreneur may allow other people to invest in the firm and become co-owners.
When the ownership of the firm is shared, the proportion of the firm owned by the existing owners is reduced. Consider a bakery that two people created with a $100,000 investment each. Each person owns one-half of the firm. They can obtain more funds by allowing a third person to invest in the firm. If the third person invests $100,000, each of the three people will own one-third of the firm.
Any profits (or earnings) of the firm that are distributed to the owners will be shared among three owners. By accepting investment from more owners, however, the firm may be able to expand its business so that the original owners benefit despite their decreased share of ownership.
Many firms have grown by issuing stock to other investors; that is, they essentially sell a portion of the ownership to these investors. The stock received by investors is a certificate representing ownership of the specific business. The investors who purchase stock are called stockholders (or shareholders) of those firms.
The funds received by a firm that issues stock can be used to expand the business. Large firms such as Cisco Systems, IBM, and General Motors now have millions of stockholders, but when they were created, they were small businesses.
When a firm’s performance improves, its value may increase as well, as reflected in a higher stock price for those who own the stock. Stockholders can sell their stock to other investors whenever they want. They benefit when a firm performs well because they will be able to sell the stock at a higher price than they paid for it if the firm’s value rises.
As an extreme example, stockholders of Dell, Inc., have doubled their investment in some years because Dell performed so well. At the other extreme, stockholders who owned the stock of firms such as Enron and Global Crossing at the time these firms went bankrupt lost their entire investment.
A firm has a responsibility to the stockholders who have invested funds. It is expected to invest those funds in a manner that will increase its performance and value. Consequently it should be able to provide the stockholders with a decent return on their investment. Some firms perform much better than others, however, so investors must carefully assess a firm’s potential performance before investing in its stock.
Firms typically require financial support beyond that provided by their owners. When a firm is initially created, it incurs expenses before it sells a single product or service. For example, it may have to buy machinery, rent a facility, and hire employees before it has any revenue. In the first several months, its expenses may exceed its revenue even if it is well managed.
Therefore, the firm cannot rely on cash from sales to cover its expenses. The owners of a new business may initially have to rely on friends or family members for credit because their business does not have a history that proves it is likely to be successful and therefore able to pay off its credit in a timely manner.
Even firms that have existed for a long time, such as Little Caesars Pizza, Disney, and Nike, need financial support as they attempt to expand. A fast-growing business such as Little Caesars Pizza would not generate sufficient earnings to cover new investment in equipment or buildings.
Many firms that need funds borrow from financial institutions or individuals called creditors, who provide loans. Bank of America, SunTrust Bank, and thousands of other commercial banks commonly serve as creditors for firms. Firms that borrow from creditors pay interest on their loans.
The amount borrowed represents the debt of the firm, which must be paid back to the creditors along with interest payments over time. Large firms such as General Motors and DuPont have billions of dollars in debt.
Creditors will lend funds to a firm only if they believe the firm will perform well enough to pay the interest on the loans and the principal (amount borrowed) in the future. The firm must convince the creditors that it will be sufficiently profitable to make the interest and principal payments.
Firms hire employees to conduct their business operations. Some firms have only a few employees; others, such as General Motors and IBM, have more than 200,000 employees. Many firms attribute their success to their employees.
Consider the following statements that firms made about their employees in recent annual reports:
“Sara Lee is determined to be an employer of choice for highly talented people, retaining and attracting world-class individuals who have a passion to excel, strong ethical values and a driving entrepreneurial character.” —Sara Lee
“We continually invest in our people—the source of our innovation and competitiveness—who strive each day to find new products and technologies that will significantly improve everyday living.” —The Dow Chemical Company
Those employees who are responsible for managing job assignments of other employees and making key business decisions are called managers. The performance of a firm is highly dependent on the decisions of its managers. Although managers’ good decisions can help a firm succeed, their bad decisions may cause a firm to fail.
Goals of Managers:
The goal of a firm’s managers is to maximize the firm’s value and, therefore, to maximize the value of the firm’s stock. Maximizing firm value is an obvious goal for many small businesses since the owner and manager are often the same. In contrast, most stockholders of a publicly traded firm do not work for the firm.
They rely on the firm’s managers to maximize the value of the stock held by stockholders. The following statements from recent annual reports illustrate the emphasis firms place on maximizing shareholder value:
Maximizing the firm’s value encourages prospective investors to become shareholders of the firm.
To illustrate how managers can enhance a firm’s value, consider the case of Dell, Inc., which created an efficient system for producing computers. This resulted in low costs and allowed Dell to provide high- quality computers at low prices.
Over time, Dell’s sales increased substantially, as did its profits. The ability of Dell’s managers to control costs and sell computers at low prices satisfied not only its customers but also its owners (shareholders).
Firms commonly use materials to produce their products. For example, automobile manufacturers use steel to make automobiles, while home builders need cement, wood siding, and many other materials.
Firms cannot complete the production process if they cannot obtain the materials. Therefore, their performance is partially dependent on the ability of their suppliers to deliver the materials on schedule.
Firms cannot survive without customers. To attract customers, a firm must provide a desired product or service at a reasonable price. It must also ensure that the products or services produced are of adequate quality so that customers are satisfied. If a firm cannot provide a product or service at the quality and price that customer’s desire, customers will switch to the firm’s competitors.
Motorola and Saturn (a division of General Motors) attribute some of their recent success to recognizing the types of products that consumers want. These firms also are committed to quality and to pricing their products in a manner that is acceptable to customers.
Interaction among Stakeholders:
Managers decide how the funds obtained from owners, creditors, or sales to customers should be utilized. They use funds to pay for the resources (including employees, supplies, and machinery) needed to produce and promote their products.
They also use funds to repay creditors. The money left over is profit. Some of the profit (or earnings) is retained and reinvested by the firm. Any remaining profit is distributed as dividends, or income that the firm provides to its owners.
Business – Top 3 Methods Used for Evaluating the Worth of a Business
Integration and diversification through acquisitions and mergers are common strategies today, where evaluating the worth of a business becomes important to strategy implementation. Even in case of retrenchment there may be a sale of division or firm itself, hence it is necessary to establish the net worth or value of a business to successfully implement strategies.
All the various methods for determining a business’s worth can be grouped into three main approaches which are as follows:
i. Net worth Method:
The first approach in evaluating the worth of a business is determining its net worth or stockholders’ equity. Net worth represents the sum of common stock, additional paid-in capital, and retained earnings. After calculating net worth, add or subtract an appropriate amount for goodwill and overvalued or undervalued assets.
ii. Capitalisation of Earnings:
The second approach is based on the future benefits the firm’s owners may derive through net profits. The worth of a business may be taken as certain times (say five times) the firm’s current annual profit. Alternatively, net profits may be divided by capitalisation rate or overall cost of capital (say 20%) to compute the value of business.
iii. Market Price Method:
The third approach is letting the market determine a business’s worth based on market value.
It involves any of the three methods:
a. Take the firm’s worth as the selling price of a similar company which may however not be easy to locate and compare.
b. Divide the market price of the firm’s shares by the annual earnings per share and multiply this number by the firm’s average net income called the price-earnings ratio method.
c. Multiply the number of shares outstanding by the market price per share and add a premium, called the outstanding shares method.
Business – Developing the Business Plan
After entrepreneurs assess markets and consider their competitive advantages, they may decide to create a particular business. They will need to develop a business plan, which is a detailed description of the proposed business, including a description of the product or service, the resources needed for production, the marketing needed to sell the product or service, and the financing required.
The business plan forces the entrepreneurs to think through the details of how they would run the business. Thus, it serves as a checklist to ensure that they have considered all the key functions of the business.
Second, the entrepreneurs can provide the business plan to investors who may be willing to serve as partial owners or to various creditors (such as commercial banks) that may be willing to provide business loans.
Thus, the business plan should be clear and must convince others that the business will be profitable. If investors do not believe in the business plan, they will be unwilling to invest funds in the business. If creditors do not believe in the plan, they will not supply any loans. In that case, the entrepreneurs will have to rely only on their own funds, which may not be sufficient to support the business.
The business plan’s usefulness is not limited to helping the entrepreneurs raise funds to support the opening of the business. The plan will be used as a guide for making business decisions throughout the life of the business.
It provides a sense of direction for the business’s future development. The success or failure of any firm is partially dependent on its business plan. Many business planning packages and software are available and can be used to develop the business plan.
However, the key contents of the business plan require the vision and insight of the entrepreneur. A complete business plan normally includes an assessment of the business environment, a management plan, a marketing plan, and a financial plan.
The business environment surrounding the business includes the economic environment, the industry environment, and the global environment.
a. Economic Environment:
The economic environment is assessed to determine how demand for the product may change in response to future economic conditions. The demand for a product can be highly sensitive to the strength of the economy. Therefore, the feasibility of a new business may be influenced by the economic environment.
b. Industry Environment:
The industry environment is assessed to determine the degree of competition. If a market for a specific product is served by only one or a few firms, a new firm may be able to capture a significant portion of the market. One must also ask whether a similar product could be produced and sold at a lower price, while still providing reasonable earnings.
A related question is whether the new business would be able to produce a higher-quality product than its competitors. A new business idea is more likely to be successful if it has either a price or a quality advantage over its competitors.
c. Global Environment:
The global environment is assessed to determine how the demand for the product may change in response to future global conditions. The global demand for a product can be highly sensitive to changes in foreign economies, the number of foreign competitors, exchange rates, and international trade regulations.
A management plan, which includes an operations plan, focuses on the firm’s proposed organizational structure, production, and human resources.
i. Organizational Structure:
An organizational structure identifies the roles and responsibilities of the employees hired by the firm. The organizational structure of a new factory is more complicated than that of a pizza delivery shop. If the owner plans to manage most of the operations, the organizational structure is simple. Some businesses begin with the owner assuming most responsibilities, but growth requires the hiring of managers.
Even if the owners initially run the business, they should develop plans for the future organizational structure. A job description for each employee should be included, along with the estimated salary to be paid to each employee.
Various decisions must be made about the production process, such as the site (location) of the production facilities and the design and layout of the facilities. The location decision can have a major effect on a firm’s performance because it influences both the cost of renting space in a building and the revenue generated by the business.
The proposed design and layout of the facilities should maximize the efficiency of the space available. This proposal should include cost estimates for any machinery or equipment to be purchased. The cost estimates for factories are normally more complicated than those for retail stores.
The business plan should also include the owners’ plans for the business’s future growth. As a business grows, it needs more space to allow for more production or to accommodate more customers. Its size will need to be sufficient to allow it to meet its production goals or accommodate all of its customers.
It could easily meet these goals by selecting a site with extra space. The more space it obtains, however, the higher will be the cost of leasing the space. The entrepreneurs do not want to pay for space that they will not use. The business’s future production is based on demand for its product, which is uncertain.
Since the entrepreneurs do not know how much production will be necessary, they face a tradeoff. If they select a site with too much space, the business will not use all of its space. Alternatively, if they select a site that is too small, the business may not be able to produce a sufficient volume to accommodate demand.
Those businesses that require a large investment in facilities to produce their product can survive only if they attract substantial demand for their product. For example, a book publisher needs a printing press. If it prints and sells just a few copies of a book, it will not generate enough revenue to pay for producing the book. Therefore, it needs to sell a large number of the books that it produces so that it can recover the cost of its printing press.
In this type of business, there are economies of scale, which means that the average cost per unit produced declines as the firm produces more units. Firms that have expensive machinery can benefit from economies of scale. However, they must be able to sell a large volume of their product in order to benefit from economies of scale.
Many firms that provide services also have economies of scale. A dental office may spend $30,000 or more on X-ray machines and drills. If the dentist uses the drills only a few times, the cost for each use will be very high.
However, if the dentist uses the drills frequently, the cost for each use will be low. To use the drills frequently, the dentist needs many customers. In this way, the dental office can generate enough revenue to recover the cost of the drills.
iii. Human Resources:
Many businesses begin with just a single owner who works without any employees. The owner is focused on making the business successful because the owner has invested his or her own funds in the business and is entitled to the profits of the business. As a business grows, it tends to hire more employees. In general, employees are not as concerned about a business as its owners because they have not invested their own money in the firm. Thus, they may not be motivated to ensure that the business is successful.
Managers of a business are supposed to ensure that employees are doing their job. However, if managers have to oversee a large number of employees, they may not be able to adequately monitor the employees.
A firm could become inefficient if it has many employees and their job descriptions are not clear. In addition, some managers may decide to hire additional employees to make their own job easier, but these extra employees may not be necessary.
A business must set up a work environment that will motivate the employees. It must also have a plan for monitoring and evaluating employees. By monitoring and compensating employees properly the business can ensure that the employees are striving to maximize its performance.
A marketing plan focuses on the target market, product characteristics, pricing, distribution, and promotion.
a. Target Market:
A new business may be unknown to its target market and will need to gain the trust of customers. If its owners believe their product is better than other products, they will need to prove that their product is better.
Customers are not necessarily going to switch to a new product, especially if they are satisfied with existing products with which they are familiar. New businesses rely on various marketing strategies to attract customers, such as advertising their product, offering a special discount, or even providing free samples to the customers.
Once a new business establishes a base of initial customers, it may benefit from repeat business or referrals. Many new small businesses generate much of their revenue from repeat customers. Businesses that produce services such as hairstyling, maid service, and dentistry can benefit from repeat customers because the service is needed frequently.
If the first customers are satisfied, they may not only be repeat customers, but may refer the business to their family members or friends. Then those referrals may purchase the product or service, and if satisfied, they may refer the business to others. The customer base of the business can expand as the referrals continue to spread.
In many cases, a firm will find that it cannot rely only on referrals to achieve the volume of business it desires. It will likely need to spend money on advertising or on other marketing strategies to increase its customer base.
b. Product Characteristics:
The business plan should describe the characteristics of the product, with an emphasis on what makes the product more desirable than similar products offered by competitors. A product may be desirable because it is easier to use, is more effective, or lasts longer. Any competitive advantage of this product over similar products should be identified.
The proposed price of the product should be included. Prices of similar products sold by competitors should also be mentioned. The price will influence the demand for the product.
The business plan should describe the means by which the product will be distributed to the customers. Some products are sold to customers directly, while others are distributed through retail outlets.
The business plan should also describe the means by which the product will be promoted. The promotion strategy should be consistent with the customer profile. For example, products that appeal to college students may be advertised in student newspapers.
The financial plan determines the means by which the business is financed. It also attempts to demonstrate that the creation of the business is feasible.
The creation of a business requires funds to purchase machinery and materials, rent space, hire employees, and conduct marketing. Most firms rely heavily on funding from the entrepreneurs who established them.
Creditors typically prefer that a business demonstrate that it is capable of covering its loan payments before they will provide a loan. Because a new business does not have a history, creditors may be willing to provide a loan only if it is backed by collateral, such as a building or computers owned by the owner. The creditors will claim the collateral if their loan is not repaid. They may limit the size of the loan to the market value of the owner’s collateral.
In addition, creditors will want to look closely at the financial condition of the owners. In some cases, they may require personal financial information that the owners may prefer not to disclose. Creditors may also require that the owners back the loan with their own assets (such as a home). Given the restrictions imposed by many creditors, entrepreneurs may initially attempt to borrow funds from family members or friends who are more willing to provide loans.
Even after a business is established, it may need financing as it grows. The funds may be used to invest in a larger production site or to hire more employees. As time passes, the business’s growth should result in higher revenue, and part of that revenue can be used to cover the interest expenses on a loan or to pay off the loan.
Once a business grows and establishes a track record of good performance, it may be able to borrow funds from financial institutions. To obtain a loan from a financial institution (such as a commercial bank), the firm will need to present a detailed business plan.
The lending institution assesses the business plan to determine whether the business is likely to be successful and therefore deserves a loan. A business might consider issuing stock only after demonstrating adequate performance for several years.
Funding by the SBA:
The Small Business Administration (SBA) has been a key source of funding for new businesses. It is a federal agency that was created in 1953 to assist and protect the interests of small businesses. The SBA relies on financial institutions (such as banks) to provide loans to applicants who qualify, but it sets the financial requirements for obtaining the loans. It backs the loans by guaranteeing a portion of each loan.
The lenders are more willing to provide the loans because the SBA promises partial repayment of the loans. Since 1964, the SBA has had a program under which it backs loans to small business owners below the poverty level who do not meet the standard credit and collateral requirements but have promising business ideas.
Over time, the SBA has added numerous programs, including one that provides management assistance for small businesses owned by women, minorities, and armed forces veterans.
The SBA also offers the SBA Express program, which is tailored to start-up retail firms that have revenue of $6 million or less and manufacturing firms with less than 500 employees. This program provides a fast response to requests for loans by entrepreneurs.
In 2003, about 37,000 loans—about half of all SBA loans—were provided through the SBA Express program. Recently, the volume of micro-business loans (less than $100,000) to small businesses has increased substantially.
Another benefit of developing a business plan is that it forces entrepreneurs to assess the feasibility of their potential business before they invest their money and time in creating it. A business’s feasibility can be measured by calculating its expected earnings (profits).
Earnings are measured as revenue minus expenses. The expected revenue to be generated by the business is based on the sales volume (number of units sold) times the price per unit. A firm’s revenue is influenced by its marketing.
Expenses can be categorized as operating expenses or interest expenses. Operating expenses can be broadly defined as the expenses associated with business operations, such as production and marketing expenses.
Therefore, operating expenses are dependent on the firm’s production and marketing. Interest expenses are the interest payments made to creditors from which funds were borrowed. The interest expenses are dependent on how much money the firm borrows.
When revenue exceeds total expenses, earnings are positive. Entrepreneurs will seriously consider establishing a business only if it is expected to generate positive earnings over time, as those earnings will provide the return on their investment.
Entrepreneurs should also consider the risk of a business, which can be measured as the uncertainty of the future earnings. The less uncertainty surrounding the future earnings, the more desirable is the business.
Business – Qualities of a Business Partner
These are excellent qualities to point out and look for. In addition to being a responsible person, it is important that your business partner possesses and displays a sense of integrity. Is this someone who can be trusted to not only work hard, but to deal with you as well as others in an honest and ethical manner consistently?
Does this person’s word match their deeds? This is something that needs to be carefully considered and watched, especially when it affects your own livelihood and reputation. A dishonest business partner can cause a great deal of damage to you personally and professionally. Unfortunately, many family-run businesses learn this lesson in very painful ways.
Here are some simple things that help to look for in your business partner:
i. Should have common goal and vision
ii. Has good creativity level
iii. Level of commitment in business
iv. Understand your strength and weakness
v. Respect the views/ideas and focus on building trust by talking honestly
vi. Seek responsibility and take responsibility for decision making
vii. Financial Position – Have a good experience in related business with strong financial standing.
Business – Role of Profit in Business
Earning of profits is an important objective of business. According to Peter F. Drucker, “A business must achieve sufficient profits to cover the risks of economic activity and thus to avoid loss.” Profits are also essential to provide adequate return to the owners or shareholders, to ensure funds for growth and expansion, and to improve the goodwill and public image of the business.
A business must earn adequate profits.
This is necessary because of the following factors:
(i) Incentive for Entrepreneurs – Profit is a great incentive for an entrepreneur to launch a business. It motivates the entrepreneurs to run their business units efficiently. By earning sufficient profits, they can lead a decent standard of life through satisfaction of various needs.
(ii) Reward for Risk-taking – Profit is considered as a reward for assuming several business risks. An entrepreneur invests capital and undertakes business risk to earn profits. Profits also serve as a protection against those risks which cannot be insured. By building up reserves, business enterprise can face risks like fall in demand, pilferage, breakdown of machinery, adverse government policy, etc.
(iii) Indicator of Efficiency – A business cannot survive for long without earning profits. A business unit which incurs losses for a number of years becomes a sick unit. It may have to be closed down. Thus, profits may be regarded as an indicator of efficient working of a business.
(iv) Survival – Continuation or survival in the market is a basic objective of any business. This is possible if adequate profits are earned by the business.
(v) Financing of Growth and Expansion – Profits must be earned to provide funds for reinvestment in business. Profitability of the business will ensure funds for its growth, modernisation and expansion.
(vi) Prestige or Reputation – If a business earns good profits, its reputation in the market will increase. Profitability is regarded as an index of performance of those who manage the business. Earning of reasonable profits year after year would enhance the reputation of the business and its management.
A layman may say that business is carried on for profit only. But a good businessman cannot afford to keep profit as his sole objective. According to Urwick, “Earning of profits cannot be the objective of a business any more than eating is the objective of living.” A business unit is an economic entity in which various factors of production are used. Capital is one of the factors of production and the reward for investing capital is given in the form of profit.
Therefore, a business should not be run only to maximise the reward of one factor of production, i.e., capital. Besides earning profits, it should also aim at satisfaction of customers, welfare of workers, community service, etc.
Profit maximisation should not be the sole motive of any business.
The arguments against profit maximisation are as under:
(i) Profit maximization ignores the interests of labour, customers and the society.
(ii) Unfair means such as – hoarding, black marketing or adulteration may be followed to maximise profits.
(iii) Long-term interest of the business may be ignored to maximise profits in the short-run.
(iv) In the present-day environment, a business cannot be effective with the sole objective of profit maximisation. It must also set objectives in areas like customer satisfaction, employee welfare, community development, environment protection, research and development, etc.
Business – 3 Growth Strategies
Organizations adopt various strategies for their growth.
Some of the growth strategies are listed below:
1. Mergers and Acquisitions:
Very often organic form of growth is painfully slow. Organizations seek to achieve fast growth through adding mass onto themselves by taking over other organizations in similar business or in businesses that are of potential interest to them. Mergers, acquisitions, amalgamation, corporate restructuring, takeovers and corporate reorganization are some of the terms that are in use to denote this method of growth. Though this is proven to be a method that provides faster growth of an organization, it has to be ensured that this is done in a healthy manner, to provide for sustainable and profitable growth.
It is important to understand various terms associated with this activity.
i. Merger- A merger is when two firms combine in such a way that only one will survive and the other dissolves. Merger is a growth strategy that is an investment for the future, wherein the resultant benefit is more than the sum of the parts. Merger normally represents a mutually agreeable working. However, mergers are known to take significantly long time.
ii. Acquisition- Acquisition refers to when a company takes a controlling interest of another company, its subsidiaries or selected assets. It is not necessary that an entire company is to be acquired. It can refer to a strategic buy out of only a particular business unit. The shareholders of the acquired company are paid either in cash or stock options.
iii. Amalgamation- Amalgamation is when two or more companies come together, where shareholders of individual companies become substantially the shareholder of the other company that holds the blended companies.
iv. Takeover- Takeover is a form of acquisition that is often considered hostile. Here the acquiring company proceeds to buy out shares of the target company from the market. Takeovers are governed by SEBI Regulation; Substantial Acquisition of Shares and Takeover Regulations (1997). Mergers and Amalgamations (M&A) are outside the purview of SEBI as they constitute a subject matter of the Companies Act.
Mergers are essentially of two types:
a. Cogeneric – In this type of merger, two companies with related business interests come together. The cogeneric merger could represent a horizontal integration where the resulting company enjoys a greater market share than what the individual companies could have. The merger could also signify vertical integration, where through merger; significant cost efficiencies can be realized. Backward integration of Reliance Petrochemicals Limited with Reliance Industries Limited can be seen as a vertical merger, while TOMCO with Hindustan Lever Ltd, can be seen as a horizontal merger.
b. Conglomerate – This type of merger involves companies from different industries. This could lead to better resource allocation and synergy and transfer of managerial capabilities.
Diversification is a growth strategy in which the company explores newer area and opportunities for growth, which are different from its current operations.
Diversification as a growth route is adopted by companies that have reached maturity stage in certain industries or products. When a company reaches a certain level of growth, it tends to find it difficult to achieve the minimum rate of growth promised to its shareholders. And at times, diversification also makes it exciting for the enterprise to continue in the entrepreneurial journey. When such a situation arises in its core business, the entrepreneur and the enterprise constantly look for newer areas which may or may not be related to the enterprise directly.
Sometimes diversification can happen in totally different industries as well. Most often, an enterprise starts with one area and ends up growing themselves into a lot of adjacencies and non-related businesses to achieve growth and to capitalize the opportunities that come in the market.
This kind of diversification strategies have resulted in companies taking on newer forms as they evolve over the years. This has also resulted in the creation of very large enterprises with a portfolio of companies, where there is a small entity that takes care of the opportunity evaluation and investment process across the group and individual leaders leading each of the companies within the group.
3. Joint Ventures:
Joint venture is a form of strategic alliance where the business enterprises decide to create another entity for a particular period of time by pooling resources and sharing the effort, expenses and revenues. A joint venture is often created wherein an enterprise needs to borrow the technical expertise, make use of management contracts, brand use most often for one time contracts.
A joint venture is not expected to go beyond the purpose at hand and is always limited by tenure. A joint venture is normally allowed to indulge only in one type of activity. Sometimes Joint Ventures or JV as they are popularly known are the only way to start a business in some countries. Presence of a local partner is mandatory if one wants to run a business in many countries and some specific industries in India.
Business – Risks: Types, Nature and Causes
The term business risk 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 fashion, tastes or preferences of consumers or due to increase competition from other producers.
A businessman tries to control or minimise the risk, but cannot eliminate the risks.
1. Speculative Risks – Such risk involves both the possibility of gain as well as the possibility of loss. They arise due to changes in market conditions, like fluctuations in demand and supply changes in prices or fashion or tastes consumers. Favourable market conditions lead to gains, where is, unfavourable once lead to losses.
2. Pure Risks – Such risk involves only the possibility of loss or no loss. For example, chance of fire, theft, strikes. Occurrence of such risks leads to loss, whereas non-occurrence leads to absence of loss.
The nature of Business Risk can be understood from following features:
1. Business Risk Arises Due to Uncertainties – Uncertainties mean lack of knowledge about what is going to happen in the future. For example, changes in government policy, fluctuations in demand and supply of products etc., creates risk for business as their outcome isn’t known in advance.
2. Risk is an Essential Part of Business – Every business involves some degree of risks. No Businessman can totally escape from risk, although the amount of risk may vary from business to business. Business risk can be minimised but can’t be eliminated.
3. Degree of Risk Depends on Nature and Size of Business – For example, an entrepreneur dealing in fashionable items has a high degree of risks as compared to business involved in necessity goods as fashion keeps on changing and doesn’t last long.
4. Profit is the Reward for Risk Taking – ‘No risk, No gain’ is an important principle which applies to all types of business. Greater the risks involved in a business, higher are the chance of profit. An entrepreneur assumes risk under the expectation of higher profit.
1. Natural Causes – These are beyond the control of human beings. Natural calamities like floods, earthquake, heavy rains, etc., can lead to huge losses. They result in heavy loss of life, property and income in business.
2. Human Causes – These include chance of loss due to human resources of the organization. There may be carelessness, misunderstanding, dishonesty, etc., on the part of human beings or stoppage of work due to strikes, riots, management inefficiency, etc.
3. Economic Causes – These include chance of loss due to change in market conditions. These causes relate to risk of changes in demand and supply, market competition, price fluctuations, change of technology etc. It also includes financial problems like rise in interest rate for borrowing, levy of higher taxes, etc.
4. Other Causes – There are a number of other factors which causes business risks. A business may suffer losses due to changes in government policies, fluctuations in exchange rate or mechanical failures such as the bursting of boiler.
Risk is an inherent part of business and no business enterprise can escape from it.
However, the entrepreneur can deal with risk situations in following ways:
i. Take insurance policy to transfer risk to insurance company.
ii. Make provisions in the current earnings. For example, provision for bad and doubtful debts.
iii. Avoid too risky transactions.
iv. Share risks with other enterprises. For example, agreement with other enterprises to share losses in case of falling prices.
Business – Top 80 Tips for the Success of Business
1. Before leaving work each day, identify those things you need to do the next day.
2. When you think you may have to compromise on your agenda, classify your issues into “can drop,” “nice to have” and “must have” categories. This will prepare you for negotiation.
3. Before presenting a new idea or an action plan, list the people whose support you will need, learn where each one stands regarding your proposal and formulate a plan to handle each person accordingly.
4. Publicly recognize and reward people who develop themselves and others.
5. Identify the behaviours that you feel are critical to success in your department, and then lead by example.
6. Despite your workload, don’t bring extra work to meetings. Focus on the issues and other people at the meeting.
7. Limit your use of-closed questions-those that can be answered with a “yes” or a “no.”
8. Don’t overreact to events at work. Problems are to be expected and are rarely catastrophic.
9. Set aside a little time every day in which you will practice a behaviour or skill that you’re trying to learn or fine-tune.
10. Limit your personal goals. Genuine progress on two or three most important goals is more meaningful and rewarding than negligible progress on a dozen, less critical fronts.
11. When faced with possible resistance, consider pre-selling your agenda to a couple of key players.
12. Avoid collecting and filing information if it is not actually of use to you personally.
13. Understand that emotional intelligence can transform your performance and career.
14. Get to know your staff members so that you are aware of how best to help them.
15. Remember that people of dissimilar ability can find each other difficult.
16. Set aside a little time every couple of months to review job descriptions and spot any needs for change.
17. Take the word “try” out of your vocabulary. Turn intentions into actions.
18. Remember that, when implementing improvements, things sometimes get worse before they get better.
19. Measure results achieved, not hours worked or number of activities.
20. Write down your most important goals and keep them in front of you at all times-for instance, on a mirror at home, in your middle desk drawer or on the wall in your office.
21. Refrain from saying, “It can’t be done,” and focus on how you can make it happen.
22. Be persistent but not foolish-if what you are trying is not working; get feedback and ideas from others.
23. Focus on people’s strengths rather than their shortcomings.
24. Make sure your network is reciprocal- share information, ideas, resources or influence with others-don’t just take from those within your network.
25. Be alert to details, especially when working in an international context. For example, colours, numbers and symbols often have different meanings in different cultures.
26. Set a good example for others by consistently engaging in ethical behavior and confronting any unethical practices.
27. Live in the present. Don’t stress about mistakes in the past or worry about problems in the future.
28. As a manager, you are now personally responsible for operating within the law. Here’s an important way to ensure you’re safe: Know the law. Practice the law. Protect yourself and your organization.
29. Remember that good ethics lead to good business.
30. Do not confuse assumptions with facts, or you may make a major mistake.
31. When the minutes of a meeting you attended are distributed, read them through and query anything about which you are dissatisfied.
32. Resist using buzzwords-they weaken communication.
33. Express your opinion with conviction, but don’t neglect the position of the other person-be prepared to listen and to be influenced.
34. Compare the amount of time you spend talking and listening during a typical conversation. If you are talking more than 50 percent of the time, you’re talking too much!
35. Remember that public criticism only works when group dynamics are the issue.
36. Be realistic in budgeting a new project-avoid the temptation to keep costs unrealistically low in order to get the project approved.
37. Build mental flexibility by doing brainteasers, so you are in the habit of challenging your assumptions.
38. Recognize that people learn just as much from mistakes as they do from getting it right the first time.
39. When recruiting, ask ‘what-if’ questions to determine how the applicant would respond to tricky situations.
40. Let candidates for a job know how much time the interview will take. This will reassure them that they will have the opportunity to give their information and to ask key questions.
41. Monitor trends in your industry to determine which competencies will become increasingly important. Then, ensure that your organization has employees with these abilities either by hiring from outside or training current staff.
42. Conduct an informal survey of your top performing new hires to find out how they heard about their positions. Focus your recruiting efforts on those sources that have produced your best employees.
43. Encourage people to focus their training and development on areas where they can achieve the greatest impact on organizational performance.
44. When searching for the right candidate for a position… remember to target the market that matches your candidate requirements. Don’t waste time and effort looking at the wrong people. Instead create a job-specific profile so you have a clear vision of the job and responsibilities it entails.
45. Make department and corporate goals come alive for staff members by identifying the resources, skills or abilities critical to mission and goal achievement-that will allow the group to contribute to the corporate mission and goals.
46. When you encounter recurring issues or opportunities, seek the help of those unfamiliar with the situations to get a fresh perspective.
47. Regularly assess the strengths and weaknesses of your strategy, your processes and your customer approach. In today’s fast-changing world, ongoing review of these areas-and implementing change as needed-is critical.
48. Consider how your organizational structure will need to change in the near- and long- term. Give your employees the chance to adjust beforehand.
49. Incorporate communication strategies into your business plans. Ask yourself what information and feedback you need to achieve your objectives.
50. Complete a thorough and objective evaluation of your product or service annually; also determine the health of your organization and its ability to grow.
51. Draw how you see the solution to problem-visual images may be a greater stimulus to creativity than your words.
52. Make your decision, but prepare a fallback position. If you’ve made the wrong decision, you’ll know what to do next to rectify the situation.
53. Monitor employee progress on a task-but not every hour of the day. If things go wrong, give your employee the chance to put them right by himself.
54. Remember that tele workers are entitled to a life outside the work. So don’t telephone them at home in the evening or on the weekend unless it’s a major emergency.
55. If you’re new to management remember these words of caution- hold your authority in check. Don’t overreact to your new position. And don’t play favourites.
56. Monitor the performance of anyone you ask to assist new hires before you make the assignment.
57. Share solutions to problems found by your department with other groups within your organization, thereby saving other groups from having to reinvent the wheel.
58. Treat resistance to change as a problem to solve, not as a character flaw.
59. Test the practicality of your decisions to increase their probability for success. Get into the habit of asking yourself at each stage of the decision-making process whether the decision is workable.
60. Ask your employees how their objectives contribute to the unit’s success. If they don’t know, help them understand how their goals align with the unit’s strategic objectives.
61. Do an annual review of efforts to achieve your unit’s goals to determine any training needs or other shortcomings holding you back. Then, act to address the issues identified.
62. If work due dates are missed, discuss the consequences and options with the person to whom you assigned the task. Don’t take the incomplete delegated work back.
63. Remember that management is not a popularity contest-you should work and behave not to be liked but to win the respect of others.
64. Ensure that people who work with you and your employees know that you have delegated a task to your employee and that you have given the employee the authority to do the job.
65. Isolate the reason for poor performance. May be the staff member does not know what you want him or her to achieve.
66. Communicate constantly with project team members- hold daily team briefings and weekly team meetings and encourage people to share information and ideas.
67. If you want your team to reach a consensus, let them know the place and time for the meeting in advance. Within few days; notice, they will have time to consider alternative ideas and arrive at the meeting with an informed choice.
68. Meet regularly with those responsible for project implementation, not only to determine the project’s status, but also to communicate its importance to the support of the group-and consequently, the corporate-goal.
69. Consider the variety of time zones or office locations for those you are contacting and rotate locations and/or start times for meetings.
70. Challenge the analyses and findings of groups that have worked in the same area for a long time. Encourage the members to rethink their conclusions to ensure they are timely and accurate.
71. Inform customers and suppliers of significant change initiatives, and ask how these could impact the support they receive from or provide to the organization.
72. During face-to-face meetings, reinforce the corporation’s commitment to customers as often as possible if you truly want to build a customer-centric organization.
73. If a customer requires changes, be prepared to change your process or system.
74. Think globally. Study how your competitor sells his products internationally to see if you can do the same.
75. Write the business proposal first, then think about how you want it to look.
76. Identify the key people you need for your strategy to work. Focus on attracting, deploying, developing and retaining these people.
77. Put yourself in your competitor’s shoes. If you were to compete against your firm, what would you do? Based on your thinking, plan a counterstrategy.
78. Identify and plan to avoid the constraints to implementing a plan before you begin implementation.
79. Be open to the idea that others’ behavior, no matter how unreasonable, may be due to personal or work-related problems about which you know nothing.
80. Maintain your sense of humour. Humour is the best remedy to stress. We do our teams and ourselves a favour when we remember to stop and laugh. It will lower the emotional temperature.
Business – Most Prominent Trends: E-Business, Outsourcing and International Business
All business activities are aimed at creating value in the form of goods and services which the customers purchase in order to satisfy their needs. With the emergence of new technologies, it becomes necessary for the business to take benefit of the same in order to meet the ever growing competition, quality standards and better customer care etc.
The most prominent trends that are shaping the business are:
3. Internationalisation and Globalisation
Using the computer network in the conduct of various processes of business is ‘E-Business’. This is business through electronic media. The term business includes, industry, trade and commerce. Therefore, the term E-Business may be defined as the conduct of industry trade and commerce through computer network. Computer network means internet.
E-Business vs E-Commerce:
Both these terms are ‘different’. They are not to be used interchangeably. E-Business is a wider term and it includes E-Commerce. E-Business is a more elaborate term. It includes all business transactions conducted electronically including those relating to production, product development, finance and human resource management.
E-Commerce on the other hand, limits itself to the conduct of transaction between consumers and suppliers, i.e., only selling and buying. E-Business, therefore, is a much wider term than E-Commerce.
i. Wider Reach:
E-Business has increased the reach of business firms and the customers. They can make, sell and buy the products from all parts of the world through internet. It helps the business firms to establish direct contact with the customers. It allows the firm to focus on specific types of customers. The products can be customised according to the needs of customers. Costs of middleman are also saved.
ii. Quick Response:
It allows quick response to the queries of customers and other business houses through the internet because all processes of selection, procurement and payment are through the internet.
iii. Sales Promotion:
It can be used as a sales promotion tool. Catalogues of products and other business information can be transmitted to consumer and traders through the internet.
iv. New Products Launch:
It is easier to launch a new product through the internet. Complete information about the product can be transmitted over the internet. E-mails about the launch of new product can be sent to the dealers and the consumers.
v. Lower Investment Requirement:
E-Business is easy to start. It does not require much capital. It reduces office and administrative costs, advertising and storage costs. There is no need for salesmen as all information is on internet.
E-Business offers all time service to customers to shop while sitting at home. They do not have to waste time in going to market and standing in queues. They can choose the products, place orders on internet and can make payments by credit cards and can get the goods delivered at home or at any other convenient place.
vii. Global Market:
E-Business is not restricted to any particular city or country. Entire world is connected through internet. Whole world is a market and consumers all over the world can get connected. The economy has been globalised in the real sense of the world.
i. Lack of Personal Touch:
As E-Business is conducted through internet, no interpersonal interaction takes place between buyer and seller. So, it is not suitable for certain types of products where the customer wants to try and see the products such as garments, toiletries etc.
ii. Time Consuming:
Actual delivery of products takes time. Sometimes product delivered may not be according to specifications given by customer. This creates problem and leads to legal disputes.
iii. Risks Arising Due to Parties being Strange to Each Other:
The seller and buyer do not know the location, identity and other where about of each other. This develops lack of trust and confidence in mutual dealings.
iv. Complex Technology:
E-Business uses an information technology which is quite complex. This complex technology requires highly skilled and trained professional personnel which are not easily available. Only large organisations may take full advantage of E-Business.
v. People Resistance:
Common people have a tendency to resist change as they want to stick to old patterns and ways of life. E-Business might not be appreciated by such people. They find it difficult to adapt themselves to new technologies.
vi. Fraudulent Trading:
There may be fake websites indulging in fraudulent trading. They may get order from the customers, receive the money but may not deliver the product and thus they may cheat the customers. They may try to collect personal data of the customers and their credit cards, which may be misused by them.
Despite these limitations, E-Business is the trend of the day. These limitations can be overcome. Communication technology is continuously improving with better speed and quality. In view of this E-Business has a future and is here to stay and we should try to learn how E-Business actually works.
The term ‘outsourcing’ means getting something done from external sources rather than doing it within the organisation. It is basically contracting out noncash activities of the business to outside agencies who specialise in such things. The business can pay more attention to core activities.
Business Process Outsourcing (BPO) is a subset of outsourcing that involves the contracting of a specific business task, such as human resources and customer service to a third party service provider.
i. Contracting Out:
Outsourcing involves contracting out some activities to be performed by specialists outside the business. These used to be performed by the business itself. For instance, many companies have started outsourcing sanitation work to outside specialist agencies to perform these activities on contractual basis.
ii. Non-Core Activities are Generally Outsourced:
Business enterprises normally outsource non-core, routine activities to the outside expert agencies. Thus the business can focus on its main activities by concentrating on matters crucial for its survival and growth and non-core activities also get expert attention. For instance in case of a school, bookshop, and canteen are considered non-core activities and they are outsourced to contractors who are specialists.
Big companies, having many subsidiaries, may create a separate unit to perform certain common functions, like recruitment, selection, training, payroll, accounting and customer support services etc. These may be transferred to a separate expert unit created for this purpose.
Such services may also be outsourced to external expert agencies (third party service providers) which specialise in providing such services on contract basis. The third party service providers also specialise in certain processes like human resource management. They offer their services to a large number of clients and firms, from different industries. These are called horizontals. On the other hand, there are service providers who specialise in one or two industries only. They are called verticals.
Health Insurance Companies have appointed Third Party Agents (TPAs) for cashless treatment of the patients.
i. Cost Effective Services:
Outsourcing agencies are specialists. Getting work outsourced reduces expenditure incurred on their performance in the business. This releases the funds for investment elsewhere in the business for better output.
ii. Increases Efficiency:
The firms which do everything themselves have to incur very high research and development costs. Such saving on expenses are passed on to customers. An outside expert renders better service at a lower cost. This leads to increase in efficiency and profit.
iii. Reduces Labour Cost:
Outsourcing helps business firms to focus on their human resources. Hiring and training labour for short-term projects can be very expensive and temporary workers don’t always work efficiently.
iv. Focus on Key Functions of Business:
A business has to perform many activities like procurement, manufacturing, marketing, research and development, accounting, finance, human resource management. It is good to focus on a few core areas, in which it has distinct capability and competency and to contract out the rest of the non-core activities to the outsourcing firm. This will help the business to be conducted in more efficient and effective manner.
v. Specialised and Experienced Services:
Business Process Outsourcing (BPO) helps business firms to use the experience and expertise of the outsourcing agencies. This helps them in achieving greater efficiency. For instance expert services like call centres, data management, health care, research and analysis, advertising etc. are all provided by outsourcing firms.
vi. Economic Growth and Development:
Outsourcing stimulates entrepreneurship and employment. Every function is performed by most competent persons. Division of labour and specialisation helps in increasing productivity and profits. India has become a global giant in Information Technology (IT) enabled services with 60% share in global outsourcing.
In the process of outsourcing a lot of vital information and knowledge is shared with the service provider. If he does not maintain secrecy and confidentiality and silently passes on the secrets to competitors, he can harm the interest of the party which is outsourcing its processes.
Many companies in the developed countries outsource their work which requires manual skills to the developing countries. They pay lower prices for such work because of cheap labour. This is called ‘sweat-shopping’. It is exploitation of the labour.
iii. Protest in Home Country:
When companies outsource their activities to service providers in other countries, they are indirectly moving the employment opportunities to the other countries. This can lead to resentment among the people of home country, particularly if the home country itself is suffering from the problem of unemployment. This is happening in the USA who is getting lot of computer software work outsourced from India. Unemployment is increasing there.
iv. Ethical Concerns:
Outsourcing the activities to developing countries where labour is very cheap because of use of child and female labour and payment of comparatively less wages to female workers as compared to male workers is really an unethical act.
Trend # 3. International Business:
International business is defined as “any commercial transaction taking place across boundary lines of a sovereign entity.” It may take place either between countries or companies or both. Private companies involve themselves in such transactions for revenue, profit and prosperity. If governments are involved, they need to maintain their image, dependency and economic growth.
Sometimes diplomatic ties are strengthened through such transactions. These transactions include investments, physical movement of goods and services, and transfer of technology and manufacturing. Today every company, whether small or large, single entity or partnership, joint stock or government owned, is determined to expand internationally.
The future success of a company will depend upon its operations in many other countries, and not only on the revenue generated indigenously. In the same way a nation’s success will depend on businessmen operating successfully in other countries and establishing their credentials there.
Why should we study international business? Three decades ago very few companies ventured into the international arena, and most of those who did, restricted themselves mainly to the physical movement of goods and services i.e. exports and imports. Restrictions, regulations and other barriers prevented them from taking risks. Today, the whole world is open.
Duties, licence quotas and other investment limitations have gradually been eliminated. Anyone can do business in any part of the world. Risk factors are properly analysed and evaluated and information about them is abundant. The aspiring international businessman can go to any part of the world.
In such a situation, finance flow or investment is a great motivating factor. To manage business internationally, the right human resources are necessary and to manufacture goods, the right technology is a pre-requisite. There should also be a sizeable market to generate revenue. To manufacture goods in any country, raw material, components, consumables and capital items are required.
All organisations, irrespective of whether they are small or medium or large, are keen to enter into international business. Established companies are expanding their business. Many countries encourage trade, and removal of strangulating trade barriers motivates companies to aggressively multiply their targets.
The governments of various countries are also determined to make their economy grow through international business, which has therefore become an inevitable part of their economic policy.
The motive behind international business can be looked at:
All companies have products which pass through different stages of their life cycles. After the product reaches the last stage of the life cycle called the declining stage in one country, it is important for the company to identify a few other countries where the whole life cycle stages could be encased.
For example, Enfield India reached maturity and the declining stage in India for the 350 cc Royal Enfield motorcycle. The company entered Kenya, West Indies, Mauritius and other destinations where the heavy engine two wheeler became popular. The Suzuki 800 cc vehicle reached the last stage of its life cycle in Japan, and entered India in the early 1980’s, where it is still doing good business today.
Even if companies expand their business at home, they may still look overseas for new markets and better prospects. For example, Arvind Mills expanded their business by either setting up units or opening warehouses abroad. Ranbaxy’s growth is mainly attributed to geographic expansion every year to new territories.
The younger generation of business families has considerable international exposure. They are willing to take risks and challenges and also create opportunities for their business. Laxmi Mittal has emerged as the steel king of the world and Vijay Mallya of the UB Group took a major risk in setting up operations in South Africa.
Every corporate in the country has strategic plans to multiply its sales turnover. In case some of the ventures fail, others will offset the losses because of multi- locational operations. For example Coco Cola is not doing well in a number of countries. But this will not affect the company because more than a hundred countries are contributing to offset the losses.
Some companies have outstanding technology through which they enjoy core competency. There is a need for such technology in all countries. Biocon, Infosys and Gharda Chemicals are known for their core competency in biotechnology, IT and pesticides respectively and a huge demand exists throughout the world for their technology.
Prior to profits and revenue generation, many companies first build their corporate image abroad. Once the image is built up, generating revenue is a comparatively easy task. Samsung and LG built their image in India for the first three years and generation of revenue and profits has been considerable as they have expanded to semi-urban and rural India as well.
Companies, which are involved in international business, enjoy fiscal, physical and infrastructural incentives while they set up business in the host country. The Aditya Birla group enjoyed such incentives in Thailand and Indonesia. The home country may also offer many incentives in order to neutralize the cost and allow the country to compete in the world market. In the case of normal exports, companies get duty drawback, advance licences etc.
Many companies have a highly productive labour force. Their unique skills may not be available throughout the world. Manufacturing units in India have consistently performed well, whether in the diamond industry, or in the field of handicraft or wood work or leather. Companies nurture the skills of the artisans and win world markets.
Many companies have entered into business abroad, seeing unlimited opportunities. Health care companies like Cipla, Dr. Reddy, Cadilla and Aurobindo Pharma entered into South American countries like Brazil and Argentina.
Foreign exchange is necessary to balance the payments for imports. India imports crude oil, defence equipment, essential raw materials and medical equipment for which the payments have to be made in foreign exchange. If the exports are high and the imports are low it indicates a surplus balance of payment. On the other hand, if the imports are high and the exports are low it indicates an adverse balance of payment, which all economies would want to avoid.
From time immemorial, nations have depended on each other. Even during the era of Indus Valley civilisation, Egypt and the Indus Valley depended on each other for various items. Today, India depends on the Gulf regions for crude oil and in turn the Gulf region depends on India for tea, rice etc.
Developed countries depend on developing countries for primary goods, whereas developing countries depend on developed countries for value added finished products.
The theories of absolute advantage, comparative advantage and competitive advantage, which have been propounded by classical economists, indicate that a few nations have certain advantages of resources. Such resources allow them to be competitive. These resources may be in the form of labour or infrastructure or technology or even a proactive policy of the government.
Diplomacy and trade always go hand in hand. Many sovereign nations send their diplomatic representatives to other countries with a motive of promoting trade besides maintaining cordial relations. Indian diplomats in Latin America have done a remarkable job of promoting India’s business in the 1990s.
Many countries are endowed with resources, which are produced at an optimum level. Such countries can compete well anywhere in the world. Rubber products from Malaysia, knitwear from India, rice from Thailand and wool from Australia are a few illustrations.
Over the years all countries have invested huge amounts of money on infrastructure by building airports, sea ports, economic zones and inland container terminals. If the trade activities do not increase, the country cannot recover the amounts invested.
Hence, the government fixes targets for every infrastructure unit and time frame to achieve them. Economies like Mauritius, Hong Kong, Singapore, Malta and Cyprus invest in trade related infrastructure in order to elevate themselves to be foreign trade oriented economies.
A new era has emerged from conquering countries by sword to winning by trade. A businessman gives priority to the image of the country he belongs to. We come across products with labels such as ‘made in China’, ‘made in India’ and ‘made in Japan’. Businessmen from India, China and Japan bring credentials to their country while citizens achieve business success elsewhere in the world.
All developing countries announce their trade policies. A clear cut road map is drafted and given to promotional bodies so that timely implementation is possible. Every trade policy in India, in the past had its agenda and action plans right from Import Control Order 1947.
By the year 2010, India aims to have a two percent share of the global market from the current level of one percent. By the year 2006, India should achieve a target of $ 100 billion only through exports.
The apex body of world trade, the World Trade Organisation (WTO), a free, transparent and regulatory body upholds provisions related to elimination of tariffs and non-tariff barriers. The International Bank for Reconstruction and Development (IBRD), popularly called the World Bank extends financial assistance on a soft loan basis in order to assist developing countries in their infrastructure and industrial development.
The International Monetary Fund (IMF) maintains currency stability in various countries through regulatory mechanisms. Many more organisations like International Maritime Organisation, International Standard Organisation, International Telecommunication Union, and International Civil Aviation Organisation are major catalysts to promote trade between nations.