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Finalised I & II Unit

A business can be defined as an organization that provides goods and services to others who want or need them. All businesses vary in size, as measured by the number of employees or by sales volume. The purpose of business goes beyond earning profit.

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0% found this document useful (0 votes)
85 views51 pages

Finalised I & II Unit

A business can be defined as an organization that provides goods and services to others who want or need them. All businesses vary in size, as measured by the number of employees or by sales volume. The purpose of business goes beyond earning profit.

Uploaded by

Sadha Sivam
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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UNIT I

BUSINESS ENVIRONMENT
What is business? A business can be defined as an organization that provides goods and services to others who want or need them. When many people think of business careers, they often think of jobs in large wealthy corporations. Many business-related careers, however, exist in small businesses, non-profit organizations, government agencies, and educational settings. NATURE AND SCOPE OF BUSINESS All of us live in families and depending on the income, we have different standards of living. We require various types of goods and services to satisfy our needs and wants. Some members in your family have to work to earn and provide for the needs of the family. Thus, people engage in different activities which are known as economic activities. In ancient times, people had limited wants to satisfy. In modern times however, we need a large variety of goods and services to satisfy our needs and to raise our standard of living. On the one hand the supply of goods and services has led to various activities. On the other hand, activities of different types are undertaken by people to earn sufficiently to fulfill their increasing wants. Thus we find large numbers of people engaged in business, industry, and profession. Such economic and business activities satisfy various needs and demands for goods and services. Business may be understood as the organized efforts of enterprise to supply consumers with goods and services for a profit. Businesses vary in size, as measured by the number of employees or by sales volume. But, all businesses share the same purpose: to earn profits. The purpose of business goes beyond earning profit. There are: It is an important institution in society. Be it for the supply of goods and services Creation of job opportunities Offer of better quality of life Contributing to the economic growth of the country. Hence, it is understood that the role of business is crucial. Society cannot do without business. It needs no emphasis that business needs society as much. HUMAN ACTIVITIES AND BUSINESS You know that man always keeps himself engaged in some kind of activity to satisfy his needs and wants. All human activities may be broadly divided into two categories: (i) economic activities, and (ii) non-economic activities. The works of a farmer, manufacturer, teacher, doctor, 1

trader etc. are some examples of economic activities. They are primarily concerned with the production, distribution and consumption of goods and services. Economic activities are undertaken to earn ones living and for the production of wealth. Besides economic activities, people also undertake a number of activities for mental satisfaction. They engage in charitable work, practice religion, undertake recreational activities and also do many things out of love for others or out of patriotic feelings. These activities are known as non-economic activities. These activities are undertaken not for any material reward or gain but for ones happiness, pleasure or satisfaction which can not be measured in terms of money. What are the essentials of a successful business? Business has a wide field and has to face the complicated needs of the society. It starts with production of goods at one ends with providing goods to the ultimate consumer. Success in business can be attained on the fulfilment of the following conditions which are termed as requisites of sound business. NATURE OF BUSINESS The nature of business is best understood on the basis of its characteristics or features which are as follows: 1. Business is an economic activity. 2. It includes the activities of production or purchase and distribution. 3. It deals in goods and services. 4. It implies regularity of transactions. 5. It aims at earning profits through the satisfaction of human wants. 6. It involves risk; it is not certain that adequate profit will be earned. 7. It creates utilities. 8. It serves a social purpose by improving peoples standard of living. OBJECTIVES OF BUSINESS Success in business depends on proper formulation of its objectives. Objectives must be clear, and attainable. Objectives may be divided into two parts (i) economic and (ii) social. Economic Objectives Economic objectives of business include earning adequate profit or satisfactory return on capital invested, survival in the case of competition and growth to maintain progress.

Social Objectives Social objectives include providing employment opportunities, supply of quality goods and services at reasonable price, improving the standard of living and contributing to environmental protection. It also includes justice to workers in terms of wages, welfare amenities, improved service conditions and professional growth. Significance of Business in Modern Society Business is an integral part of modern society. It is an organised and systematised activity for profit. It is concerned with activities of people working towards a common goal. The modern society can not exist without business. The need and importance of business in society can be described as follows: 1. Improvement in standard of living: Business helps people in general to improve their standard of living. 2. Proper utilization of resources: It leads to effective utilization of the scarce resources of society. It provides facility of mass production. It involves production, purchase and sale of goods and services for price. Customer satisfaction is the backbone of modern business. Services such as supply of water, electricity etc. may be considered highly significant for the community. 4. Creates utilities: Business makes goods more useful to satisfy human wants. It adds to products the utilities of person, time, place, form, knowledge etc. Thus, people are able to satisfy their wants effectively and economically. 5. Employment opportunities: It provides employment opportunities to large number of people in society. 6. Workers' welfare Business organisations these days take care of various welfare activities for workers. They provide safer and healthier work environment for employees. Classification of Business Activities Business activities are undertaken to satisfy human wants by producing goods or rendering services. We may classify business activities on the basis of functions into two broad categories (a) Industry and (b) Commerce. 3

3. Better quality and large variety of goods and services:

Industry is concerned with the production and processing of goods. This type of business units are called industrial enterprises which produce consumer goods as well as machinery and equipments. On the other hand, Commerce includes all those activities which are necessary for the storage and distribution of goods. Such units are called commercial enterprises which include trading and service activities like transport, banking, insurance and warehousing. Let us examine the characteristics of industry and commerce. Industry and its Types Industry means production of goods for sale by the application of human or mechanical power. In other words, industry refers to economic activities which are connected with raising, producing and processing of goods and services. Characteristics of Industry The main characteristics of industry are as follows:Industry refers to the productive aspect of business. Production is done by the application of human or mechanical power. It creates form utility to natural or partly processed goods. It is concerned with the production of both producer and consumer goods. Industrial activities are regulated by different laws. It involves continuous operation.

Types of Industries Industries are divided into two broad categories: Primary industries Secondary industries.

Primary industries include all those activities which are connected with extraction, producing and processing of natural resources. These industries may be further sub-divided into two types: (a) extractive and (b) genetic. Secondary industries are concerned with the materials which have already been produced at the primary stage. For example, mining of iron ore is a primary industry, but manufacture of steel is a secondary industry. a) Extractive Industries Extractive industries are concerned with the extraction of materials from the earth, sea and air such as mining, farming, fishing and hunting etc. Products of these industries are used either directly for consumption such as food grains, fruits and vegetables or as raw materials such as cotton, sugar-cane, etc.

b) Genetic Industries Genetic industries include activities connected with rearing and breeding of animals and birds and growing plants. Reproduction and multiplication is the main activity in these industries, such as, agriculture, animal husbandry, dairy, poultry, pisciculture etc. Main products are milk, wool, butter, cheese, meat, egg, fish, seeds of plants, etc. Secondary industries may also be of two types: (a) manufacturing, and (b) construction. a) Manufacturing Industries Industries engaged in the conversion of raw materials or semi-finished products into finished product are called manufacturing industries. Cotton is converted onto textiles and iron one is converted into in these industries. It creates a form utility of the product. b) Construction Industries The activities of Construction industries include erection of buildings, bridges, roads, railways canals etc. Their output do not consists of movable goods. It makes use of the output of other industries like brick, cement, steel etc. Characteristics of Commerce Commerce is the sum total of all the activities connected with the placing of the product before the ultimate consumer. It provides the necessary link between the producer and the consumer of goods. Commerce is defined as activities involving the removal of hindrances in the process of exchange. Commerce includes all those business activities which are undertaken for the sale or exchange of goods and services and facilitates their availability for consumption and use - through trade, transport, banking, insurance, and warehousing. Thus commerce includes trade and auxiliaries to trade, that is transport, banking, insurance and warehousing. The main characteristics of commerce are as follows: (i) Commerce is the sum total of activities which facilitate the availability of goods to consumers from different producers. (ii) It aims at ensuring proper distribution of goods. (iii) It adds different type of utilities to the goods by making goods available at the right time and the right place to the people who need them. (iv) It includes trade and auxiliary to trade. Trade and its types Trade is an integral part of commerce and refers to sale and transfer of goods. It involves actual buying and selling of goods. It means exchange of goods and services for cash or credit. Traders help in directing the flow of goods to the most profitable market. They also bring about 5

equitable distribution of goods on a national and international scale. It is because goods are produced on a large scale and it is difficult for producers to reach individual customers, that trade is said to remove the hindrance of persons through traders. Goods acquire place utility through trade. Characteristics of Trade The main characteristics of trade are as follows: (i) Trade is regarded as the primary activity in commerce; (ii) It means exchange of goods and services for price; (iii) It helps in directing the flow of goods to the most profitable market; (iv) It helps to equalise the supply of and demand for goods in different markets both national and international. Classification of Trade Trade may be classified into (i) Home Trade or Internal Trade and (ii) Foreign Trade or External Trade (i) Home Trade Home Trade means trade carried on within the boundaries of a country. The primary object of home trade is to bring about proper distribution of goods within the country. It may be divided into two types (a) Wholesale Trade and (b) Retail Trade (a) Wholesale Trade: Wholesale trade involves buying goods from producers and selling them in small quantities to retailers. The wholesaler generally deals in large quantities of goods of a limited number of varieties. He serves as a connecting link between the producer and the retail dealer. (b) Retail Trade: A retail trade consists of selling goods directly to the consumers in small quantities. A retailer usually purchases goods from wholesalers or manufacturers and deals in a variety of goods of different manufacturers. (ii) External Trade External trade refers to trade between two countries. It implies buying and selling of goods by traders of two different countries. It creates a very wide market for goods produced in different countries. External trade involves (a) Export and (b) Import. Export is concerned with the sale of goods to foreign countries. Import trade relates to the purchasing of goods from other countries. Inter-relationship between Industry, Trade and Commerce All the three branches of business are closely related to each other. Each depends upon the other for the achievement of aims and objectives of business. For example, industry is concerned with the production of goods and services, trade is related with sale and purchase of products, and commerce arranges for their distribution. Industry can succeed only if goods are marketed and 6

without production of goods, there cannot be commerce and trade. Hence, trade provides necessary support to industry and commerce. Thus, industry, trade and commerce are inter-dependent and cannot operate in isolation. Service facilities also provide necessary support to trade. CHARACTERISTICS OF A SUCCESSFUL BUSINESS The chief characteristics of a successful business are: 1. Establishment of objective: Establishing objectives is the primary task of the business objectives determines the aims and goals of the business operation which ultimately helps designing the shape of future events. The objective should disclose the main and subsidiary objectives of the organisation. 2. Proper planning: Planning involves complete set of policies, programme and procedure for the accomplishment of the objectives. Proper planning focuses attention of the objectives of the enterprise, reduces uncertainties, ensures economy and defines the boundaries within which the business has to operate. 3. Location and layout: The objectives of the business can be attained fully when it has a proper location and layout. If the business is not located in a good place, it cannot attract more customers and thereby the success in business cannot be visualized. 4. Sound distribution and management: A successful business necessitates a sound organisation and efficient management. 5. Smooth distribution system: A successful business necessitates smooth distribution of the goods produced otherwise it will involve blockage of capital. 6. Good relationship with employee: A successful business requires the presence of good employer and employee relationship. In the absence of this business should try to render the following services to the society.

Supply of qualitative goods: The business should ensure supply of qualitative products

continuously and without any obstructions. The product so supplied must suit the needs, taste and financial condition of the people in the society.

Charging fair price: To attract customers and to maintain permanent relationship with the

customers, the business should charge reasonable and fair price for the product. Charging of fair price is socially desirable.

Creation of more employment: The business can help the society by creating employment

opportunities. The expansion in the business activities helps the society in a number of ways.

Providing better standard of living: The presence of business creates new markets, new

products and new uses of the product. This also helps in the reduction of cost of production. People 7

in the society are in a better position to get the quality products at a better price and thereby it helps in increasing the standard of living of the people. BUSINESS ENVIRONMENT Environment refers to all external forces, which have a bearing on the functioning of business. Environment factors are largely if not totally, external and beyond the control of individual industrial enterprises and their managements. The business environment poses threats to a firm or offers immense opportunities for potential market exploitation. TYPES OF ENVIRONMENT Environment includes such factors as socio-economic, technological, supplier, competitor and the government. There are two more factors, which exercise considerable influence on business. They are physical or natural environment and global environment. Technological Environment Technology is understood as the systematic application of scientific or other organized knowledge to practical tasks. Technology changes fast and to keep pace with it, businessmen should be ever alert to adopt changed technology in their businesses. Economic Environment There is close relationship between business and its economic environment. Business obtains all its needed inputs from the economic environment and it absorbs the output of business units. Political Environment It refers to the influence exerted by the three political institutions viz., legislature executive and the judiciary in shaping, directing, developing and controlling business activities. A stable and dynamic political environment is indispensable for business growth. Natural Environment Business, an economic pursuit of man, continues to be dictated by nature. To what extend business depends on nature and what is the relationship between the two constitutes an interesting study. Global or international Environment Thanks to liberalization, Indian companies are forces to view business issues from a global perspective. Business responses and managerial practices must be fine-tuned to survive in the global environment. Social and culture Environment It refers to peoples attitude to work and wealth; role of family, marriage, religion and education; ethical issues and social responsiveness of business. 8

ENVIRONMENT BUSINESS RELATIONS Business is the product of the technological, political-legal, economic, social cultural, global and natural factors amidst which it functions. Three features are common to this web of relationship between business and its environment. There is symbolic relationship between business and its environment and among the environmental factors. In other words, business is influenced by its environment and in turn, to certain degree, it will influence the external forces. Similarly, political-legal environment influences economic environment and vice versa. The same relationship between other environment factors too. These environmental forces are dynamic. They keep on changing as years roll by, so does business. The third feature is that a particular business firm, by itself, may not be in a position to change its environment. But along with other firms, business will be in a position to mould the environment in its favor. IMPORTANCE OF ENVIRONMENTAL STUDY The benefits of environmental study are as follows; Development of broad strategies and long-term policies of the firm. Development of action plans to deal with technological advancements. To foresee the impact of socio-economic changes at the national and international levels on the firms stability. Analysis of competitors strategies and formulation of effective countermeasures. To keep oneself dynamic. Distinction between economic and non-economic activities Following are the points of distinction between economic and non-economic activities. S.No Economic Economic activities are motivated by economic gain. Monetary gain is expected from economic activities. Economic activities lead to creation of wealth. Non-economic Non-economic activities are motivated by a desire to achieve mental satisfaction or happiness. There is no such satisfaction from noneconomic activities. Non-economic activities lead to personal satisfaction

However, a particular kind of activity which is non-economic in one case may be economic in the other. Cooking by a housewife is non-economic but cooking in a hotel is an economic activity. 9

TYPES OF ECONOMIC ACTIVITIES When a person is regularly engaged in a particular economic activity, it is known as his or her occupation or vocation. Occupations may be classified into three categories: (i) Business, (ii) Profession and (iii) Employment (Service). Business Activities connected with the production or purchase and sale of goods or services with the object of earning profit are called business activities. Mining, manufacturing, trade, transportation, insurance, banking are business activities. Thus business may be defined as an economic activity involving regular production or purchase and distribution of goods and services with the object of earning profits. Profession Any activity which requires special knowledge and skill to be applied by an individual to earn a living is known as profession. For example doctors, teachers, lawyers, engineers and accountants are engaged in profession. Profession involves intellectual activity. It is not a mechanical or routine operation. The main characteristics of profession are (i) Every profession requires special knowledge and training. (ii) The primary objective is to render service. (iii) The service cannot be substituted by another individual. (iv) Every profession is regulated by a professional body. For example the profession of Chartered Accountants is regulated by the Institute of Chartered Accountants of India. Employment When a person works regularly for others and gets wages/salary in return, he is said to be in employment. Thus factory workers, office assistants and managers are said to be in employment. Those in employment are called employees. Employment may be in government department or in private organization. It may be full-time or part-time, permanent or temporary. The main features of employment are: ECONOMIC ENVIRONMENT OF BUSINESS The decision concept which we have been using here is basically that of a firm. We consider firm as an economic institution in a market system. The market behaviour of the firm reflects the nature of economic decisions taken by the manager of the firm. Micro economic decision making by the firm has never the less-to be made within the broader micro-economic environment, Economic environment of business has reference to the broad characteristics of the economic system in which the business firm operates. 10

The present day economic environment of business is a complex one the business sector has economic relation with the government, capital market, household sector and abroad sector. These different sectors together influence the trends, and structure of the economy. The form and functioning of the economy vary widely. The design-and- structure of any economic system is conditioned by the socio-political arrangements. Such arrangements have got relevance from the standpoint of micro-economic decision making. For example, under a democratic set-up, the public exercise an influence, direct or indirect, through a system of voting, on the nature of decisions taken by the government. Under dictatorship, one ruler takes the crucial decisions for the entire country. Under a parliamentary system, most decisions are processed by the Cabinet of Ministers, whereas under presidential form of government, the President acts as the real manager of the state, it is he who takes/makes decisions. Similarly, the micro-decision making is more decentralized under a federal from the government than under a unitary form. It may be argued that the reference is being made here to political decisions. But it must be emphasized that the political decisions have got far- reaching economic implications. After all, the government is the manager of economy. The nature of government ownership, control and regulation of economic activities of a country provides form and shape to the nature of economic organization. Under a capitalist from of society, the private sector, induced by the profit motive and guided by the indication of a free market mechanism, takes the major economic decisions t& invest, produce and distribute. Under a socialist from of society, such decisions are taken by the public sector, guided by social welfare motive and central planning. In a communist society, economic decisions including consumption are taken by the state in the interest of the community as a whole. In a mixed economy, private, public and joint sectors: a have some say in major decisions for the functioning of economy. In some mixed socialistic pattern of society like India, we even hear of cooperative sectors of small individual savers and workers' sector having say in investment and production decisions of the economy. All civilized economies, whether capitalist, socialist, communist or mixed, have certain fundamental economic problems to solve. Despite the recent talk on "Affluent Society", the hard fact is that in each and every economy, most resources are scarce. Consequently, choices have to be made by individuals, by business corporations, and by society. It is the social choice and community preference which give substance to the question of macroeconomic decisions. From the standpoint of scarcity of resources, the basic economic problem of every economy is that of allocation of resources and subsequent production. This problem has got many facets: What to produce? How to produce? For whom to produce? When to produce? Every economy has to decide the qualities and quantities of goods and services to be produced. It has to decide on the nature of technology and technique of 11

production in view of factor endowment. It has to decide the course and pattern of distribution of goods and services, when those are produced. It has to decide on the timing of production. Note that same decisions are taken by the individual firm as they are taken by the economy as a whole. The problems do not end in general, they repeat; one ends, another crops up. The process of decision-making differs depending on how these problems have solved in different economies this is what constitutes the functioning of the economy-the nature of economic environment. Economics is the study of economic problems. Each and every economic problem is a problem of choice and valuation.' The question of choice arises as and when means (resources) are adjusted to ends (wants); the adjustment itself constitutes an economic activity. The purpose of economic activities is to, satisfy maximum possible ends by sacrificing minimum possible resources. The purpose of .economic activities is so defined because of peculiar characteristics of both wants and resources. Human wants have two fundamental characteristics:(i) Wants are unlimited. Wants are numerous in number and 'various in forms. In general, wants are not satiable. (ii) Wants can be graded in order of intensity. A system of preference can be worked out so that the less urgent wants can be placed down the scale. Resources like money, materials and time have also got two fundamental characteristics:(i) Resources are limited in supply. In general, we face excess demand for resources, and this is the reflection of their scarcity. (ii) Resources have alternative uses. They can be used for more than one purpose. Uses of resources can also be graded in order of priority. It may be noted that the want characteristics and resource-characteristics are very much comparable and contrastable. Unlimited ends and limited means together present the problem of choice. Choice has to be exercised in selecting the ends to be satisfied; choice has to be exercised in selecting the uses of means to an end. Graded list of preference for wants and alternative use of resources together reinforce the question of choice and valuation. Thus an economic problem arises because of the fundamental characteristics of ends and means that have been stated above. The essence of the problem is 'scarcity of resources'. Had resources not been scarce, unlimited wants could have been easily satisfied by using unlimited resources; resource-wastage would not have been 'a concern at all. Since resources at our disposal are limited we are always concerned about the creation of resources mobilization of resources, allocation of resources and optimum utilization of resources. Here are the various facets of any economic problem. The concern of Economics is description and analysis of economic problems faced by individuals, organizations, nations and the 12

world. Economics teaches us how to "minimize" the use of resources and how to or' maximize" the level output there from. This constitutes optimum solution of an economic problem. Apportionment of productive assets among different uses. The issue of resource allocation arises as societies seek to balance limited resources (capital, labour, land) against the various and often unlimited wants of their members. Mechanisms of resource allocation include the price system in free-market economies and government planning, either in state-run economies or in the public sectors of mixed economies. The aim is always to allocate resources in such a way as to obtain the maximum possible output from a given combination of resources. EFFICIENT ALLOCATION OF RESOURCES In a business unit, the goal of maximum profit depends on how the resources are allocated among different projects. Economically speaking by efficient allocation of resources, we mean the distribution of available resources in such a way that all resources are fully utilized and there are increasing returns to scale. In a business organization allocation of resources comes under the Resource management category. Everybody knows that the todays world is subject to limited resources while the human wants are unlimited. So the resources must be allocated effectively not only to earn profits but also to save mankind from scarcity. As we know that there are four factors of production; land, labour, capital and entrepreneur. Hence the resources can also be categorized accordingly: 1. Human resources 2. Investment resources 3. Land resources Now it depends how resource management strategy is employed to these resources. How the combination of different resources is put in an organization to have a maximum output level. For the better understanding of efficient allocation of resources, the concept of marginal productivity of the resources must be kept in mind that is efficient allocation of resources is there when the marginal productivities of all the factors of production are the same in each unit of production at the maximum output level. Decision making is also important while putting resources in any constructive activity. For instance, if a manager starts a project he has to carefully make the decisions regarding the staff. He must compare the costs of the factors that which factor of production is relatively cheaper, which factor is more productive to the project and also analyze the availability of the resources.

13

Time management also plays key role that what combination of resources would complete the project in lesser time, to achieve goals. The most important step in resource allocation decision is the resource leveling or rationing to assign available resources in an efficient and economic way. Resource allocation is used to assign the available resources in an economic way. It is part of resource management. In project management, resource allocation is the scheduling of activities and the resources required by those activities while taking into consideration both the resource availability and the project time. Strategic planning In strategic planning, resource allocation is a plan for using available resources, for example human resources, especially in the near term, to achieve goals for the future. It is the process of allocating resources among the various projects or business units. The plan has two parts: Firstly, there is the basic allocation decision and secondly there are contingency mechanisms. The basic allocation decision is the choice of which items to fund in the plan, and what level of funding it should receive, and which to leave unfunded: the resources are allocated to some items, not to others. There are two contingency mechanisms. There is a priority ranking of items excluded from the plan, showing which items to fund if more resources should become available; and there is a priority ranking of some items included in the plan, showing which items should be sacrificed if total funding must be reduced. Resource Leveling The main objective is to smooth resources requirements by shifting slack jobs beyond periods of peak requirements. Some of the methods essentially replicate what a human scheduler would do if he had enough time; others make use of unusual devices or procedures designed especially for the computer. They of course depend for their success on the speed and capabilities of electronic computers. Algorithms Resource allocation may be decided by using computer programs applied to a specific domain to automatically and dynamically distribute resources to applicants. It may be considered as a specialized case of automatic scheduling. Opportunity Cost The cost of passing up the next best choice when making a decision. For example, if an asset such as capital is used for one purpose, the opportunity cost is the value of the next best purpose the asset could have been used for. Opportunity cost analysis is an important part of a company's decision-making processes, but is not treated as an actual cost in any financial statement. 14

It is expressed in relative price, that is, the price of one choice relative to the price of another. In many cases, the relative price provides better insight into the real cost of a good than does the monetary price. APPLICATIONS OF OPPORTUNITY COST The concept of opportunity cost has a wide range of applications including: 1. Consumer choice 2. Production facilities 3. Cost of capital 4. Time management 5. Career choice 6. Analysis of comparative advantage MEASURING BUSINESS SIZE A business can grow slowly over time by investing money in new machines and buildings. Quicker ways for a business to grow is to takeover or merge with another one. There are a number of reasons why a business would choose to grow, such as: A larger business may be able to make more profit. Higher pay for the managers if they are able to increase the size of the business. It can be easier for a larger business to spread risk as it may diversify into different markets. Economies of scale, these will be discussed in greater detail below. The size of a business is not measured according to the size of its building, but other factors such as: The market share of the business The level of sales turnover The number of employees The value of the business The value of capital employed BALANCE OF TRADE The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports. A positive or favorable balance of trade is known as a trade surplus if it consists of exporting more than is imported; a negative or unfavorable balance is referred to as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance. Factors that can affect the balance of trade include: 15

1. The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting economy vis--vis those in the importing economy; 2. The cost and availability of raw materials, intermediate goods and other inputs; 3. Exchange rate movements; 4. Multilateral, bilateral and unilateral taxes or restrictions on trade; 5. Non-tariff barriers such as environmental, health or safety standards; 6. The availability of adequate foreign exchange with which to pay for imports; and 7. Prices of goods manufactured at home (influenced by the responsiveness of supply) TRADE GAP Trade gap is the difference in value over a period of time of a country's imports and exports of merchandise, "a nation's balance of trade is favorable when its exports exceed its imports". BALANCE OF PAYMENTS The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time. Usually, the BOP is calculated every quarter and every calendar year. All trades conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money is going in and out of a country. If a country has received money, this is known as a credit, and, if a country has paid or given money, the transaction is counted as a debit. Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should balance. But in practice this is rarely the case and, thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming. The Balance of Payments Divided The BOP is divided into three main categories: the current account, the capital account and the financial account. Within these three categories are sub-divisions, each of which accounts for a different type of international monetary transaction. The Current Account The current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account. Within the current account are credits and debits on the trade of merchandise, which includes goods such as raw materials and manufactured goods that are bought, sold or given away (possibly in the form of aid). Services refer to receipts from tourism, transportation (like the levy that must be paid in Egypt when a ship passes through the Suez Canal), engineering, business service fees (from lawyers or management consulting, for example), and royalties from patents and copyrights. When combined, goods and services together make up a country's balance of trade (BOT). The BOT is 16

typically the biggest bulk of a country's balance of payments as it makes up total imports and exports. If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports. Receipts from income-generating assets such as stocks (in the form of dividends) are also recorded in the current account. The last component of the current account is unilateral transfers. These are credits that are mostly worker's remittances, which are salaries sent back into the home country of a national working abroad, as well as foreign aid that is directly received. The Capital Account The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of non-financial assets (for example, a physical asset such as land) and nonproduced assets, which are needed for production but have not been produced, like a mine used for the extraction of diamonds. The capital account is broken down into the monetary flows branching from debt forgiveness, the transfer of goods, and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets (assets such as equipment used in the production process to generate income), the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies, and, finally, uninsured damage to fixed assets. The Financial Account In the financial account, international monetary flows related to investment in business, real estate, bonds and stocks are documented. Also included are government-owned assets such as foreign reserves, gold, special drawing rights (SDRs) held with the International Monetary Fund, private assets held abroad, and direct foreign investment. Assets owned by foreigners, private and official, are also recorded in the financial account. PROTECTIONISM Protectionism is the economic policy of restraining trade between states, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to discourage imports, and prevent foreign take-over of domestic markets and companies. Simply, the restriction of imports into a country by government measures. REASONS FOR PROTECTIONISM Protects businesses from extra competition Helps new businesses to develop before they face competition Helps protect jobs Prevents foreign countries dumping lots of cheap imports Prevents imports of harmful or desirable goods 17

TRADE BARRIERS / METHODS OF PROTECTIONISM 1. Tariffs or import duties: These are taxes on imported goods. They raise the price to customers and make them less attractive. 2. Quotas: These are limits on the quantity of a product that can be imported into a country e.g. 100,000 cars. 3. Regulations: This includes laws and safety guidelines. FREE TRADE Trade without any protectionist / trade barriers between countries. BENEFITS OF FREE TRADE & PROBLEMS OF TRADE BARRIERS 1. Protectionism keeps UK firms away from genuine competition. They may become lazy and inefficient. 2. Free trade forces UK firms to produce quality goods and services as they face much foreign competition. 3. If the UK puts up trade barriers then other countries are likely to retaliate. 4. Free trade encourages firms to export and import. This should encourage a greater choice for consumers and a higher standard of living. 5. Trade barriers increase the cost of trading. For example, a tariff would mean that UK firms and consumers may have to pay more for imports of raw materials or consumer goods. BUSINESS ETHICS Business ethics can be defined as written and unwritten codes of principles and values that govern decisions and actions within a company. In the business world, the organizations culture sets standards for determining the difference between good and bad decision making and behavior. In the most basic terms, a definition for business ethics boils down to knowing the difference between right and wrong and choosing to do what is right. The phrase 'business ethics' can be used to describe the actions of individuals within an organization, as well as the organization as a whole. Moral principles concerning acceptable and unacceptable behavior by business people. Executives are supposed to maintain a high sense of values and conduct honest and fair practices with the public. Business ethics (also known as corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of 18

individuals and business organizations as a whole. Applied ethics is a field of ethics that deals with ethical questions in many fields such as medical, technical, legal and business ethics. Why business ethics? Discussion on ethics in business is necessary because business can become unethical, and there are plenty of evidences as in today on unethical corporate practices. Even Adam Smith opined that People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. Business does not operate in a vacuum. Firms and corporations operate in the social and natural environment. By virtue of existing in the social and natural environment, business is duty bound to be accountable to the natural and social environment in which it survives. Irrespective of the demands and pressures upon it, business by virtue of its existence is bound to be ethical for at least two reasons: one, because whatever the business does affects its stakeholders and two, because every juncture of action has trajectories of ethical as well as unethical paths wherein the existence of the business is justified by ethical alternatives it responsibly chooses. One of the conditions that brought business ethics to the forefront is the demise of small scale, high trust and face-to-face enterprises and emergence of huge multinational corporate structures capable of drastically affecting everyday lives of the masses. BUSINESS EHTICS The two issues - an organizations social responsibility and responsiveness- ultimately depend on the ethical standards of mangers. The term ethics commonly refers to the rules or principles that define right and wrong conduct. Ethics is defined as the discipline dealing with what is good and bad and with moral duty and obligation. Business ethics is concerned with truth and justice and has a variety of aspects such as expectations of society, fair competition, advertising, public relations, social responsibilities, consumer autonomy, and corporate behavior in the home country as well as abroad. TYPES OF BUSINESS ETHICS Moral management Moral management strives to follow ethical principles and precepts, moral mangers strive for success, but never violate the parameters of ethical standards. They seek to succeed only within the ideas of fairness, and justice. Moral managers follow the law not only in letter but also in spirit. The moral management approach is likely to be in the best interests of the organization, long run. Amoral management This approach is neither immoral nor moral. It ignores ethical considerations. Amoral management is broadly categorized into two types intentional and unintentional. 19

Intentional amoral managers exclude ethical issues because they think that general ethical standards are not appropriate to business. Unintentional amoral managers do not include ethical concerns because they are inattentive or insensitive to the moral implications. Immoral management Immoral management is synonymous with unethical practices in business. This kind of management not only ignores concerns, it is actively opposed to ethical behavior. NEED FOR BUSINESS ETHICS Ethics corresponds to basic human needs. It is human trait that man desires to be ethical, not only in his private life but also in his business. These basic ethical need compel the organizations to be ethically oriented. Values create credibility with public. A company perceived by the public to be ethically and socially responsive will be honored and respected. The management has credibility with its employees precisely because it has credibility with the public. An ethical attitude helps the management make better decisions, because ethics will force a management to take various aspects- economic, social, and ethical in making decisions. Value driven companies are sure to be successful in the long run, though in the short run, they may lose money. Ethics is important because the government, law and lawyers cannot do everything to protect society. ETHICAL GUIDELINES Obeying the law: Obedience to the law, preferably both the letter and spirit of the law. Tell the Truth: To build and maintain long-term, trusting and win-win relationships with relevant stockholders. Uphold human dignity: Giving due importance to the element of human dignity and treating people with respect. Adhere to the golden rule: Do unto others as you would have others do unto you Allow Room for participation: Soliciting the participation of stakeholders rather than paternalism. It emphasizes the significance of learning about the needs of stakeholders. Always Act When You Have Responsibility: Managers have the responsibility of taking action whenever they have the capacity or adequate resources to do so. TOOLS FOR ETHICAL MANAGEMENT Top management commitment: Managers can prove their commitment and dedication for work and by acting as role models through their own behaviors. 20

Codes of Ethics: A formal document that states an organizations primary values and the ethical rules it expects employees to follow. The code is helpful in maintaining ethical behavior among employees. Ethics committees: Appointment of an ethics committee, consisting of internal and external directors is essential for institutionalizing ethical behavior. Ethics Audits: Systematic assessment of conformance to organizational ethical policies, understanding of those policies, and identification of serious deviations requiring remedial action. Ethics training: Ethical training enables managers to integrate employee behavior in ethical arena with major organizational goals. Ethics Hotline: A special telephone line that enables employees to bypass the normal chain of command in reporting their experiences, expectations and problem. The line is usually handled by an executive appointed to help resolve the issues that are reported. INTERNATIONAL BUSINESS ETHICS While business ethics emerged as a field in the 1970s, international business ethics did not emerge until the late 1990s, looking back on the international developments of that decade. Many new practical issues arose out of the international context of business. Theoretical issues such as cultural relativity of ethical values receive more emphasis in this field. Other, older issues can be grouped here as well. Issues and subfields include:
1. 2.

The search for universal values as a basis for international commercial behaviour. Comparison of business ethical traditions in different countries. Also on the basis of their respective GDP and [Corruption rankings].

3. 4.

Comparison of business ethical traditions from various religious perspectives. Ethical issues arising out of international business transactions; e.g. bioprospecting and biopiracy in the pharmaceutical industry; the fair trade movement; transfer pricing.

5. 6. 7.

Issues such as globalization and cultural imperialism. Varying global standards e.g. the use of child labor. The way in which multinationals take advantage of international differences, such as outsourcing production (e.g. clothes) and services (e.g. call centres) to low-wage countries.

8.

The permissibility of international commerce with pariah states.

SOCIAL RESPONSIBILITY The idea that businesses should not function amorally, but instead should contribute to the welfare of their communities. Social responsibility is the obligation of decision-makers to take actions, which protect and improve the welfare of society as a whole along with their own interests. Every decision the businessman takes and every action he contemplates have social implications. Be 21

it deciding on diversification, expansion, opening of a new branch, and closure of an existing branch or replacement of men by machines, the society is affected in one way or the other. Whether the issue is significant or not, the businessman should keep his social obligation in mind before contemplating any action. ARGUMENTS FOR SOCIAL RESPONSIBILITY Business has to respond to the needs and expectations of society. Improvement of the social environment benefits both society and business. Social responsibility discourages additional governmental regulation and intervention. Business has a great deal of power, which should be accompanied by an equal amount of responsibility. Internal activities of the enterprise have an impact on the external environment. The concept of social responsibility protects interests of stockholders. Social responsibility creates a favorable public image. Business has the resources to solve some of societys problems. It is better to prevent social problems through business involvement than to cure them.

CORPORATE SOCIAL RESPONSIBILITY Corporate Social Responsibility is the responsibility for the environment. CSR is about how companies manage the business processes to produce an overall positive impact on society. 22

UNIT II
BUSINESS STRUCTURE AND ORGANIZATION
5.1 BUSINESS ORGANISATION You have already learnt about the meaning of business and the various types of business activities like industry, trade, transport, banking, insurance etc. If you observe these business activities carefully, you will realize that whatever business activity one may take up, he has to bring together various resources like men, money, materials, machines, technology, etc. to carryout that activity successfully. Not only that these resources are to be put into action in a systematic manner to achieve the objectives of business. Let us take the example of a rice mill. First, the owner will have to acquire a land, construct a building, buy machines and install them, employ labour to work, buy paddy and then process the paddy to produce rice that will be sold to the customers. Thus, to produce rice from paddy you need to assemble resources like land, building, machinery, labour etc., and put these resources together in action in a systematic way. Then only it becomes possible to produce rice and sell it to the customers, and earn profit. Thus, to carry out any business and achieve its objective of earning profit it is required to bring together all the resources and put them into action in a systematic way, and coordinate and control these activities properly. This arrangement is known as business organization. FORMS OF BUSINESS ORGANISATION Have you ever thought who brings the required capital, takes the responsibility of arranging other resources, puts them into action, and coordinates and controls the activities to earn the desired profits? If you look around, you will find that a small grocery shop is owned and run by a single individual who performs all these activities. But, in big businesses, it may not be possible for a single person to perform all these activities. So in such cases two or more persons join hands to finance and manage the business properly and share its profit as per their agreement. Thus, business organizations may be owned and managed by a single individual or group of individuals who may form a partnership firm or a joint stock company. Such arrangement of ownership and management is termed as a form of business organization. A business organization usually takes the following forms in India: (1) Sole proprietorship (2) Partnership (3) Joint Hindu Family (4) Cooperative Society 23

(5) Joint Stock Company Definition of Sole Proprietorship J.L. Hanson: A type of business unit where one person is solely responsible for providing the capital and bearing the risk of the enterprise, and for the management of the business. Thus, Sole Proprietorship from of business organization refers to a business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk. CHARACTERISTICS OF SOLE PROPRIETORSHIP (a) Single Ownership: The sole proprietorship form of business organization has a single owner who himself/herself starts the business by bringing together all the resources. (b) No Separation of Ownership and Management: The owner himself/herself manages the business as per his/her own skill and intelligence. There is no separation of ownership and management as is the case with company form of business organization. (c) Less Legal Formalities: The formation and operation of a sole proprietorship form of business organization does not involve any legal formalities. Thus, its formation is quite easy and simple. (d) No Separate Entity: The business unit does not have an entity separate from the owner. The businessman and the business enterprise are one and the same, and the businessman is responsible for everything that happens in his business unit. (e) No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone. At the same time, the entire loss is also borne by him. No other person is there to share the profits and losses of the business. He alone bears the risks and reaps the profits. (f) Unlimited Liability: The liability of the sole proprietor is unlimited. In case of loss, if his business assets are not enough to pay the business liabilities, his personal property can also be utilized to pay off the liabilities of the business. (g) One-man Control: The controlling power of the sole proprietorship business always remains with the owner. He/she runs the business as per his/her own will. MERITS OF SOLE PROPRIETORSHIP (a) Easy to Form and Wind Up: It is very easy and simple to form a sole proprietorship form of business organization. No legal formalities are required to be observed. Similarly, the business can be wind up any time if the proprietor so decides. (b) Quick Decision and Prompt Action: As stated earlier, nobody interferes in the affairs of the sole proprietary organization. So he/she can take quick decisions on the various issues relating to business and accordingly prompt action can be taken. 24

(c) Direct Motivation: In sole proprietorship form of business organizations. The entire profit of the business goes to the owner. This motivates the proprietor to work hard and run the business efficiently. (d) Flexibility in Operation: It is very easy to effect changes as per the requirements of the business. The expansion or curtailment of business activities does not require many formalities as in the case of other forms of business organization. (e) Maintenance of Business Secrets: The business secrets are known only to the proprietor. He is not required to disclose any information to others unless and until he himself so decides. He is also not bound to publish his business accounts. (f) Personal Touch: Since the proprietor himself handles everything relating to business, it is easy to maintain a good personal contact with the customers and employees. By knowing the likes, dislikes and tastes of the customers, the proprietor can adjust his operations accordingly. Similarly, as the employees are few and work directly under the proprietor, it helps in maintaining a harmonious relationship with them, and run the business smoothly. LIMITATIONS OF SOLE PROPRIETORSHIP (a) Limited Resources: The resources of a sole proprietor are always limited. Being the single owner it is not always possible to arrange sufficient funds from his own sources. Again borrowing funds from friends and relatives or from banks has its own implications. So, the proprietor has a limited capacity to raise funds for his business. (b) Lack of Continuity: The continuity of the business is linked with the life of the proprietor. Illness, death or insolvency of the proprietor can lead to closure of the business. Thus, the continuity of business is uncertain. (c) Unlimited Liability: You have already learnt that there is no separate entity of the business from its owner. In the eyes of law the proprietor and the business are one and the same. So personal properties of the owner can also be used to meet the business obligations and debts. (d) Not Suitable for Large Scale Operations: Since the resources and the managerial ability is limited, sole proprietorship form of business organization is not suitable for large-scale business. (e) Limited Managerial Expertise: A sole proprietorship from of business organization always suffers from lack of managerial expertise. A single person may not be an expert in all fields like, purchasing, selling, financing etc. Again, because of limited financial resources, and the size of the business it is also not possible to engage the professional managers in sole proprietorship form of business organizations.

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PARTNERSHIP Meaning of Partnership It is basically a relation between two or more persons who join hands to form a business organisation with the objective of earning profit. The persons who join hands are individually known as Partner and collectively a Firm. The name under which the business is carried on is called firm name. Sultan Chand & Co, Ram Lal & Co, Gupta & Co are the names of some partnership firms. Section 4 of the Indian Partnership Act, 1932, defines partnership as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The partners provide the necessary capital, run the business jointly and share the responsibility. Actually, when you invite your friends to start such a business, it should be the duty of all of you to decide (i) the amount of capital to be contributed by each one of you; (ii) who will manage; (iii) how will the profits and losses be shared. Thus, there must be some agreement between the partners before they actually start the business. This agreement is termed as Partnership Deed, which lays down certain terms and conditions for starting and running the partnership firm. This agreement may be oral or written. Actually, it is always better to insist on a written agreement among partners in order to avoid future controversies. A partnership firm is governed by the provisions of the Indian Partnership Act, 1932. FEATURES OF PARTNERSHIP FORM OF BUSINESS ORGANISATION After having a brief idea about partnership, let us identify the various features of this form of business organisation. i. Two or more Members - You know that the members of the partnership firm are called partners. But do you know how many persons are required to form a partnership firm? At least two members are required to start a partnership business. But the number of members should not exceed 10 in case of banking business and 20 in case of other business. If the number of members exceeds this maximum limit then that business cannot be termed as partnership business. A new form of business will be formed, the details of which you will learn in your next lesson. ii. Agreement: Whenever you think of joining hands with others to start a partnership business, first of all, there must be an agreement between all of you. This agreement contains the amount of capital contributed by each partner; profit or loss sharing ratio; salary or commission payable to the partner, if any; duration of business, if any ; 26

name and address of the partners and the firm; duties and powers of each partner; nature and place of business; and any other terms and conditions to run the business.

iii. Lawful Business - The partners should always join hands to carry on any kind of lawful business. To indulge in smuggling, black marketing, etc., cannot be called partnership business in the eye of the law. Again, doing social or philanthropic work is not termed as partnership business. iv. Competence of Partners - Since individuals join hands to become the partners, it is necessary that they must be competent to enter into a partnership contract. Thus, minors, lunatics and insolvent persons are not eligible to become the partners. However, a minor can be admitted to the benefits of partnership i.e., he can have a share in the profits only. v. Sharing of Profit - The main objective of every partnership firm is sharing of profits of the business amongst the partners in the agreed proportion. In the absence of any agreement for the profit sharing, it should be shared equally among the partners. Suppose, there are two partners in the business and they earn a profit of Rs. 20,000. They may share the profits equally i.e., Rs. 10,000 each or in any other agreed proportion, say one forth and three fourth i.e. Rs 5,000/- and Rs. 15000/-. vi. Unlimited Liability - Just like the sole proprietor the liability of partners is also unlimited. That means, if the assets of the firm are insufficient to meet the liabilities, the personal properties of the partners, if any, can also be utilised to meet the business liabilities. Suppose, the firm has to make payment of Rs. 25,000/- to the suppliers of goods. The partners are able to arrange only Rs. 19,000/from the business. The balance amount of Rs. 6,000/- will have to be arranged from the personal properties of the partners. vii. Voluntary Registration - It is not compulsory that you register your partnership firm. However, if you dont get your firm registered, you will be deprived of certain benefits, therefore it is desirable. The effects of non-registration are: Your firm cannot take any action in a court of law against any other parties for settlement of claims. In case there is any dispute among partners, it is not possible to settle the disputes through a court of law. Your firm cannot claim adjustments for amount payable to or receivable from any other parties.

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viii. No Separate Legal Existence - Just like sole proprietorship, partnership firm also has no separate legal existence from that of it owners. Partnership firm is just a name for the business as a whole. The firm means the partners and the partners collectively mean the firm. ix. Principal Agent Relationship - All the partners of the firm are the joint owners of the business. They all have an equal right to actively participate in its management. Every partner has a right to act on behalf of the firm. When a partner deals with other parties in business transactions, he/she acts as an agent of the others and at the same time the others become the principal. So there always exists a principal agent relationship in every partnership firm. x. Restriction on Transfer of Interest - No partner can sell or transfer his interest to any one without the constent of other partners. For example - A, B, and C are three partners. A wants to sell his share to D as his health does not permit him to work any more. He can not do so until B and C both agree. xi. Continuity of Business - A partnership firm comes to an end in the event of death, lunacy or bankruptcy of any partner. Even otherwise, it can discontinue its business at the will of the partners. At any time, they may take a decision to end their relationship. ADVANTAGES OF PARTNERSHIP FORM OF BUSINESS ORGANISATION Partnership form of business organisation has certain advantages, which are as follows: a) Easy to form: Like sole proprietorship, the partnership business can be formed easily without any legal formalities. It is not necessary to get the firm registered. A simple agreement, either oral or in writing, is sufficient to create a partnership firm. b) Availability of large resources - Since two or more partners join hand to start partnership business it may be possible to pool more resources as compared to sole proprietorship. The partners can contribute more capital, more effort and also more time for the business. c) Better decisions - The partners are the owners of the business. Each of them has equal right to participate in the management of the business. In case of any conflict they can sit together to solve the problems. Since all partners participate in decision-making, there is less scope for reckless and hasty decisions. d) Flexibility in operations - The partnership firm is a flexible organisation. At any time the partners can decide to change the size or nature of business or area of its operation. There is no need to follow any legal procedure. Only the consent of all the partners is required. e) Sharing risks - In a partnership firm all the partners share the business risks. For example, if there are three partners and the firm suffers a loss of Rs. 12,000 in a particular period, then all partners may share it and the individual burden will be Rs. 4,000 only. 28

f) Protection of interest of each partner - In a partnership firm every partner has an equal say in decision making. If any decision goes against the interest of any partner he can prevent the decision from being taken. In extreme cases a dissenting partner may withdraw himself from the business and can dissolve it. g) Benefits of specialization - Since all the partners are owners of the business they can actively participate in every aspect of business as per their specialisation and knowledge. If you want to start a firm to provide legal consultancy to people, then one partner may deal with civil cases, one in criminal cases, another in labour cases and so on as per their specialization. Similarly two or more doctors of different specialization may start a clinic in partnership. LIMITATIONS OF PARTNERSHIP FORM OF BUSINESS ORGANISATION In spite of all these advantages as discussed above, a partnership firm also suffers from certain limitations. Let us discuss all these limitations. a) Unlimited Liability: All the partners are jointly as well as separately liable for the debt of the firm to an unlimited extent. Thus, they can share the liability among themselves or any one can be asked to pay all the debts even from his personal properties. b) Uncertain Life: The partnership firm has no legal entity separate from its partners. It comes to an end with the death, insolvency, incapacity or the retirement of any partner. Further, any dissenting member can also give notice at any time for dissolution of partnership. c) Lack of Harmony: You know that in partnership firm every partner has an equal right to participate in the management. Also every partner can place his or her opinion or viewpoint before the management regarding any matter at any time. Because of this sometimes there is a possibility of friction and quarrel among the partners. Difference of opinion may lead to closure of the business on many occasions. d) Limited Capital: Since the total number of partners cannot exceed 20, the capital to be raised is always limited. It may not be possible to start a very large business in partnership form. e) No transferability of share: If you are a partner in any firm you cannot transfer your share of interest to outsiders without the consent of other partners. This creates inconvenience for the partner who wants to leave the firm or sell part of his share to others. TYPES OF PARTNERS In a partnership firm you can find different types of partners. Some may actively participate in the business while others prefer not to keep themselves engaged actively in the business activities after contributing the required capital. Also there are certain kinds of partners who neither contribute capital nor actively participate in the day-to-day business operations. Let us learn more about them. 29

a) Active partners - The partners who actively participate in the day-to-day operations of the business are known as active or working partners. They contribute capital and are also entitled to share the profits of the business. They are also liable for the debts of the firm. b) Dormant partners - Those partners who do not participate in the day-to-day activities of the partnership firm are known as dormant or sleeping partners. They only contribute capital and share the profits or bear the losses, if any. c) Nominal partners - These partners only allow the firm to use their name as a partner. They do not have any real interest in the business of the firm. They do not invest any capital, or share profits and also do not take part in the conduct of the business of the firm. However, they remain liable to third parties for the acts of the firm. d) Minor as a partner -You learnt that a minor i.e., a person under 18 years of age is not eligible to become a partner. However in special cases a minor can be admitted as partner with certain conditions. A minor can only share the profit of the business. In case of loss his liability is limited to the extent of his capital contribution for the business. e) Partner by estoppel - If a person falsely represents himself as a partner of any firm or behaves in a way that somebody can have an impression that such person is a partner and on the basis of this impression transacts with that firm then that person is held liable to the third party. The person who falsely represents himself as a partner is known as partner by estoppel. Take an example. Suppose in Ram Hari & Co firm there are two partners. One is Ram, the other is Hari. If Giri- an outsider represents himself as a partner of Ram Hari & Co and transacts with Madhu then Giri will be held liable for any loss arising to Madhu. Here Giri is partner by estoppel. f) Partner by holding out - In the above example, if either Ram or Hari declares that Gopal is a partner of their firm and knowing this declaration Gopal remains silent then Gopal will be liable to those parties who suffer losses by transacting with Ram Hari & Co with a belief that Gopal is a partner of that firm. Here Gopal is liable to those parties who suffer losses and Gopal will be known as partner by holding out. JOINT STOCK COMPANY Meaning A company form of business orgnisation is known as a Joint Stock Company. It is a voluntary association of persons who generally contribute capital to carry on a particular type of business, which is established by law and can be dissolved only by law. Persons who contribute capital become members of the company. This form of business has a legal existence separate from its members, which means even if its members die, the company remains in existence. This form of business organisations generally requires huge capital investment, which is contributed by its 30

members. The total capital of a joint stock company is called share capital and it is divided into a number of units called shares. Thus, every member has some shares in the business depending upon the amount of capital contributed by him. Hence, members are also called shareholders. The companies in India are governed by the Indian Companies Act, 1956. The Act defines a company as an artificial person created by law, having a separate legal entity, with perpetual succession and a common seal. CHARACTERISTICS OF JOINT STOCK COMPANY i. Legal formation No single individual or a group of individuals can start a business and call it a joint stock company. A joint stock company comes into existence only when it has been registered after completion of all formalities required by the Indian Companies Act, 1956. ii. Artificial person Just like an individual, who takes birth, grows, enters into relationships and dies, a joint stock company takes birth, grows, enters into relationships and dies. However, it is called an artificial person as its birth, existence and death are regulated by law and it does not possess physical attributes like that of a normal person. iii. Separate legal entity Being an artificial person, a joint stock company has its own separate existence independent of its members. It means that a joint stock company can own property, enter into contracts and conduct any lawful business in its own name. It can sue and can be sued by others in the court of law. The shareholders are not the owners of the property owned by the company. Also, the shareholders cannot be held responsible for the acts of the company. iv. Common seal A joint stock company has a seal, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organisation working on behalf of the company. Any document, on which the company's seal is put and is duly signed by any official of the company, become binding on the company. For example, a purchase manager may enter into a contract for buying raw materials from a supplier. Once the contract paper is sealed and signed by the purchase manager, it becomes valid. The purchase manager may leave the company thereafter or may be removed from the job or may have taken a wrong decision, yet for all purposes the contract is valid till a new contract is made or the existing contract expires.

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v. Perpetual existence A joint stock company continues to exist as long as it fulfils the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its members. For example, in case of a private limited company having four members, if all of them die in an accident the company will not be closed. It will continue to exist. The shares of the company will be transferred to the legal heirs of the deceased members. vi. Limited liability In a joint stock company, the liability of a member is limited to the extent of the value of shares held by him. While repaying debts, for example, if a person owns 1000 shares of Rs. 10 each, then he is liable only upto Rs 10,000 towards payment of debts. That is, even if there is liquidation of the company, the personal property of the shareholder can not be attached and he will lose only his shares worth Rs. 10,000. vii. Democratic management Joint stock companies have democratic management and control. That is, even though the shareholders are owners of the company, all of them cannot participate in the management of the company. Normally, the shareholders elect representatives from among themselves known as Directors to manage the affairs of the company. TYPES OF COMPANIES We find a variety of companies in our county. The formations, liability, management and ownership of all companies differ from each other. Let us classify the different types of companies on the basis of their ownership and nationality. Accordingly, we have three type of companies Private Limited, Public Limited and Government companies on the basis of ownership and two types of companies - Indian and Foreign, on the basis of nationality. On the basis of Ownership i. Private Limited ii. Public Limited iii. Government On the basis of Nationality i. Indian ii. Foreign

Private Limited Company These companies can be formed by at least two individuals having minimum paidup capital of not less than Rupees one lakh. As per the Companies Act, 1956 the total membership of these companies cannot exceed 50. The shares allotted to its members are also not freely transferable between them. These companies are not allowed to raise money from the public through open invitation. They are required to use Private Limited after their names. The examples of such 32

companies are Combined Marketing Services Private Limited, Indian Publishers and Distributors Private Limited, Oricom Systems Private Limited, etc. Public Limited Company A minimum of seven members are required to form a public limited company. It must have minimum paidup capital of Rs 5 lakhs. There is no restriction on maximum number of members. The shares allotted to the members are freely transferable. These companies can raise funds from general public through open invitations by selling its shares or accepting fixed deposits. These companies are required to write either public limited or limited after their names. Examples of such companies are Hyundai Motors India Limited, Steel Authority of India Limited, Jhandu Pharmaceuticals Limited etc. Difference between Private Limited and Public Limited Companies: Basis Membership Private Limited Company Minimum - 02 Maximum 50 Use a suffix Private Limited after its name Public Limited Company Minimum - 07 Maximum - no restriction Use a suffix Limited after its name

Identification

Transferability of Shares

Restricted

Free

Capital required

Not less than Rs. 1 lakh

Not less than Rs. 5 lakh

Raising of funds

Can not give open invitation to the public to subscribe the shares

Can raise as much money as required from public

Government Company In these companies the Government (either state or central government or both) holds a majority share capital i.e., not less than 51%. However, companies having less than 51% share holding by the government can also be called Government companies provided control and management lies with the government. Examples of government companies are: Mahanagar Telephone Nigam Limited, Bharat Heavy Electricals Limited.

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Indian Company A company having business operations in India and registered under the Indian Companies Act, 1956 is called Indian Company. An Indian company may be formed as a public limited, private limited or government company. Foreign Company A foreign company is a company formed and registered outside India having business operations in India. ADVANTAGES OF JOINT STOCK COMPANY The main advantages of Joint Stock Company are: (i) Large financial resources: A joint stock company is able to collect a large amount of capital through small contributions from a large number of people. In public limited company shares can be offered to the general public to raise capital. They can also accept deposits from the public and issue debentures to raise funds. (ii) Limited Liability: In case of a company, the liability of its members is limited to the extent of the value of shares held by them. Private property of members cannot be attached for debts of the company. This advantage attracts many people to invest their savings in the company and it encourages the owners to take more risk. (iii) Professional management: Management of a company is vested in the hands of directors, who are elected democratically by the members or shareholders. These directors as a group known as Board of Directors ( or simply Board) manage the affairs of the company and are accountable to all the members. So members elect capable persons having sound financial, legal and business knowledge to the board so that they can manage the company efficiently. (iv) Large-scale production: Due to the availability of large financial resources and technical expertise it is possible for the companies to have large-scale production. It enables the company to produce more efficiently and at lower cost. (v) Contribution to society: A joint stock company offers employment to a large number of people. It facilitates promotion of various ancillary industries, trade and auxiliaries to trade. Sometimes it also donates money towards education, health and community services. (vi) Research and Development: Only in company form of business it is possible to invest a lot of money on research and development for improved processes of production, new design, better quality products, etc. It also takes care of training and development of its employees.

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LIMITATIONS OF JOINT STOCK COMPANY In spite of many advantages of the company form of business organisation, it also suffers from some limitations. Let us note the limitations of Joint Stock Companies. (i) Difficult to form: The formation or registration of joint stock company involves a complicated procedure. A number of legal documents and formalities have to be completed before a company can start its business. It requires the services of specialists such as Chartered Accountants, Company Secretaries, etc. Therefore, cost of formation of a company is very high. (ii) Excessive government control: Joint stock companies are regulated by government through Companies Act and other economic legislations. Particularly, public limited companies are required to adhere to various legal formalities as provided in the Companies Act and other legislations. Noncompliance with these invites heavy penalty. This affects the smooth functioning of the companies. (iii) Delay in policy decisions: Generally policy decisions are taken at the Board meetings of the company. Further the company has to fulfill certain procedural formalities. These procedures are time consuming and therefore, may delay action on the decisions. (iv) Concentration of economic power and wealth in few hands: A joint stock company is a large-scale business organisation having huge resources. This gives a lot of economic and other power to the persons who manage the company. Any misuse of such power creates unhealthy conditions in the society, e.g., having monopoly over a particular business or industry or product; exploitation of workers, consumers and investors. CO-OPERATIVE SOCIETY Meaning of Co-operative Society The term co-operation is derived from the Latin word co-operari, where the word co means with and operari means to work. Thus, co-operation means working together. So those who want to work together with some common economic objective can form a society which is termed as cooperative society. It is a voluntary association of persons who work together to promote their economic interest. It works on the principle of self-help as well as mutual help. The main objective is to provide support to the members. Nobody joins a cooperative society to earn profit. People come forward as a group, pool their individual resources, utilise them in the best possible manner, and derive some common benefit out of it. TYPES OF CO-OPERATIVE SOCIETIES Although all types of cooperative societies work on the same principle, they differ with regard to the nature of activities they perform. Followings are different types of co-operative societies that exist in our country. 35

1. Consumers Co-operative Society: These societies are formed to protect the interest of general consumers by making consumer goods available at a reasonable price. They buy goods directly from the producers or manufacturers and thereby eliminate the middlemen in the process of distribution. Kendriya Bhandar, Apna Bazar and Sahkari Bhandar are examples of consumers co-operative society. 2. Producers Co-operative Society: These societies are formed to protect the interest of small producers by making available items of their need for production like raw materials, tools and equipments, machinery, etc. Handloom societies like APPCO, Bayanika, Haryana Handloom, etc., are examples of producers co-operative society. 3. Co-operative Marketing Society: These societies are formed by small producers and manufacturers who find it difficult to sell their products individually. The society collects the products from the individual members and takes the responsibility of selling those products in the market. Gujarat Co-operative Milk Marketing Federation that sells AMUL milk products is an example of marketing co-operative society. 4. Co-operative Credit Society: These societies are formed to provide financial support to the members. The society accepts deposits from members and grants them loans at reasonable rates of interest in times of need. Village Service Co-operative Society and Urban Cooperative Banks are examples of co-operative credit society. 5. Co-operative Farming Society: These societies are formed by small farmers to work jointly and thereby enjoy the benefits of large-scale farming. Lift-irrigation cooperative societies and panipanchayats are some of the examples of co-operative farming society. 6. Housing Co-operative Society: These societies are formed to provide residential houses to members. They purchase land, develop it and construct houses or flats and allot the same to members. Some societies also provide loans at low rate of interest to members to construct their own houses. The Employees Housing Societies and metropolitan Housing Co-operative Society are examples of housing co-operative society. CHARACTERISTICS OF CO-OPERATIVE SOCIETY i. Open membership: The membership of a Co-operative Society is open to all those who have a common interest. A minimum of ten members are required to form a cooperative society. The Co operative societies Act do not specify the maximum number of members for any co-operative society. However, after the formation of the society, the member may specify the maximum number of members.

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ii. Voluntary Association: Members join the co-operative society voluntarily, that is, by choice. A member can join the society as and when he likes, continue for as long as he likes, and leave the society at will. iii. State control: To protect the interest of members, co-operative societies are placed under state control through registration. While getting registered, a society has to submit details about the members and the business it is to undertake. It has to maintain books of accounts, which are to be audited by government auditors. iv. Sources of Finance: In a co-operative society capital is contributed by all the members. However, it can easily raise loans and secure grants from government after its registration. v. Democratic Management: Co-operative societies are managed on democratic lines. The society is managed by a group known as Board of Directors. The members of the board of directors are the elected representatives of the society. Each member has a single vote, irrespective of the number of shares held. For example, in a village credit society the small farmer having one share has equal voting right as that of a landlord having 20 shares. iv. Service motive: Co-operatives are not formed to maximise profit like other forms of business organisation. The main purpose of a Co-operative Society is to provide service to its members. For example, in a Consumer Co-operative Store, goods are sold to its members at a reasonable price by retaining a small margin of profit. It also provides better quality goods to its members and the general public. v. Separate Legal Entity: A Co-operative Society is registered under the Co-operative Societies Act. After registration a society becomes a separate legal entity, with limited liability of its members. Death, insolvency or lunacy of a member does not affect the existence of a society. It can enter into agreements with others and can purchase or sell properties in its own name. vi. Distribution of Surplus: Every co-operative society in addition to providing services to its members, also generates some profit while conducting business. Profits are not earned at the cost of its members. Profit generated is distributed to its members not on the basis of the shares held by the members (like the company form of business), but on the basis of members participation in the business of the society. For example, in a consumer co-operative store only a small part of the profit is distributed to members as dividend on their shares; a major part of the profit is paid as purchase bonus to members on the basis of goods purchased by each member from the society. vii. Self-help through mutual cooperation: Co-operative Societies thrive on the principle of mutual help. They are the organisations of financially weaker sections of society. Co-operative Societies convert the weakness of members into strength by adopting the principle of self-help 37

through mutual co-operation. It is only by working jointly on the principle of Each for all and all for each, the members can fight exploitation and secure a place in society. ADVANTAGES OF CO-OPERATIVE SOCIETY A Co-operative form of business organisation has the following advantages: i. Easy Formation: Formation of a co-operative society is very easy compared to a joint stock company. Any ten adults can voluntarily form an association and get it registered with the Registrar of Co-operative Societies. ii. Open Membership: Persons having common interest can form a co-operative society. Any competent person can become a member at any time he/she likes and can leave the society at will. iii. Democratic Control: A co-operative society is controlled in a democratic manner. The members cast their vote to elect their representatives to form a committee that looks after the day-to-day administration. This committee is accountable to all the members of the society. iv. Limited Liability: The liability of members of a co-operative society is limited to the extent of capital contributed by them. Unlike sole proprietors and partners the personal properties of members of the co-operative societies are free from any kind of risk because of business liabilities. v. Elimination of Middlemens Profit: Through co-operatives the members or consumers control their own supplies and thus, middlemens profit is eliminated. vi. State Assistance: Both Central and State governments provide all kinds of help to the societies. Such help may be provided in the form of capital contribution, loans at low rates of interest, exemption in tax, subsidies in repayment of loans, etc. vii. Stable Life: A co-operative society has a fairly stable life and it continues to exist for a long period of time. Its existence is not affected by the death, insolvency, lunacy or resignation of any of its members. LIMITATIONS OF COOPERATIVE SOCIETY Besides the above advantages, the co-operative form of business organisation also suffers from various limitations. Let us learn these limitations. i. Limited Capital: The amount of capital that a cooperative society can raise from its member is very limited because the membership is generally confined to a particular section of the society. Again due to low rate of return the members do not invest more capital. Governments assistance is often inadequate for most of the co-operative societies. ii. Problems in Management: Generally it is seen that co-operative societies do not function efficiently due to lack of managerial talent. The members or their elected representatives are not 38

experienced enough to manage the society. Again, because of limited capital they are not able to get the benefits of professional management. iii. Lack of Motivation: Every co-operative society is formed to render service to its members rather than to earn profit. This does not provide enough motivation to the members to put in their best effort and manage the society efficiently. iv. Lack of Co-operation: The co-operative societies are formed with the idea of mutual cooperation. But it is often seen that there is a lot of friction between the members because of personality differences, ego clash, etc. The selfish attitude of members may sometimes bring an end to the society. v. Dependence on Government: The inadequacy of capital and various other limitations make cooperative societies dependant on the government for support and patronage in terms of grants, loans subsidies, etc. Due to this, the government sometimes directly interferes in the management of the society and also audit their annual accounts. MULTINATIONAL COMPANIES You have learnt that we have two types of companies, on the basis of nationality, one is Indian company and the other is Foreign company. But have you ever thought, why are foreign companies coming to India or what are they doing in our country? Actually they are coming to India to produce goods and services and/or to sell their products. Similarly Indian companies are also extending their business operations across the boundaries of our country. This is called globalisation, which means extension of economic activities across the boundaries of a country in search of worldwide markets. In your day-to-day life you might be using different goods and services of Indian as well as foreign origin. The foreign goods are either imported in our country or sometimes these goods are also produced in our country. Due to globalisation the entire world has become one big market. Big companies are coming out of their home countries in search of better markets for their products. In the next section you will find details about these big companies. Meaning of Multinational Companies Simply speaking, a multi-national company is one which is registered as a company in one country but carries on business in a number of other countries by setting up factories, branches or subsidiary units. Such a company may produce goods or arrange services in one or more countries and sell these in the same or other countries. You might have heard about many Multinational Companies (MNCs) running business in India, like Philips, Siemens, Hyundai, Coca Cola, Nestle, Sony, McDonalds, Citi Bank, Good Year, etc. FEATURES OF MULTINATIONAL COMPANIES Multinational Companies generally have the following features: 39

(i) International Operations: Multinational Companies generally have production, marketing and other facilities in several countries. (ii) Large size: The volume of sales, the profits earned, and also the value of assets held by a multinational companies are generally very large. (iii) Centralised Control: The branches and subsidiary units of an MNC operating in different countries are controlled from the headquarters of the company in the home country, which lay down broad policies to be pursued. ADVANTAGES OF MULTINATIONAL COMPANIES The Multinational Companies enjoy several advantages by way of huge earnings due to large-scale production and distribution activities across national borders. Besides, the host countries in which the Multinational Companies operate also derive a number of advantages. These are (i) Investment of Foreign capital: Direct investment of capital by multinational companies helps under-developed countries to speed up their economic development. (ii) Generation of employment: Expansion of industrial and trading activities by multinational companies leads to creation of employment opportunities and raising the standard of living in host countries. (iii) Use of advanced technology: With substantial resources multinational companies undertake Research and Development activities which contribute to improved methods and processes of production and thus, increase the quality of products. Gradually, other countries also acquire these technologies. (iv) Growth of ancillary units: Suppliers of materials and services and ancillary industries often grow in host countries as a result of the operation of multinational companies. (v) Increase in exports and inflow of foreign exchange: Goods produced in the host countries are sometimes exported by multinational companies. Foreign exchange thus earned contributes to the foreign exchange reserves of host countries. (vi) Healthy competition: Efficient production of quality goods by multinational companies prompt the domestic producers to improve their performance in order to survive in the market. LIMITATIONS OF MULTINATIONAL COMPANIES The advantages discussed above are no doubt beneficial to host countries. But there are several limitations of multinational companies, which we should take note of: (i). Least concern for priorities of host countries: Multinational Companies generally invest capital in the most profitable industries and do not take into account the priorities of developing basic industries and services in backward regions of the host country. 40

(ii). Adverse effect on domestic enterprises: Due to large-scale operation and technological skills, multinational companies are often able to dominate the markets in host countries and tend to acquire monopoly power. Thus, many local enterprises are compelled to close down. (iii). Change in tradition: Consumer goods, which are introduced by multinational companies in the host countries, do not generally conform to the local cultural norms. Thus, consumption habits of people as regards food and dress tend to change away from their own cultural heritage. PUBLIC ENTERPRISES The business units owned, managed and controlled by the central, state or local government are termed as public sector enterprises or public enterprises. These are also known as public sector undertakings. A pubic sector enterprise may be defined as any commercial or industrial undertaking owned and managed by the government with a view to maximise social welfare and uphold the public interest. Public enterprises consist of nationalised private sector enterprises, such as, banks, Life Insurance Corporation of India and the new enterprises set up by the government such as Hindustan Machine Tools (HMT), Gas Authority of India (GAIL), State Trading Corporation (STC) etc. CHARACTERISTICS OF PUBLIC ENTERPRISES (a) Government Ownership and Management: The public enterprises are owned and managed by the central or state government, or by the local authority. The government may either wholly own the public enterprises or the ownership may partly be with the government and partly with the private industrialists and the public. In any case the control, management and ownership remains primarily with the government. For example, National Thermal Power Corporation (NTPC) is an industrial organization established by the Central Government and part of its share capital is provided by the public. So is the case with Oil and Natural Gas Corporation Ltd. (ONGC). (b) Financed from Government Funds: The public enterprises get their capital from Government Funds and the government has to make provision for their capital in its budget. (c) Public Welfare: Public enterprises are not guided by profit motive. Their major focus is on providing the service or commodity at reasonable prices. Take the case of Indian Oil Corporation or Gas Authority of India Limited (GAIL). They provide petroleum and gas at subsidised prices to the public. (d) Public Utility Services: Public sector enterprises concentrate on providing public utility services like transport, electricity, telecommunication etc. (e) Public Accountability: Public enterprises are governed by public policies formulated by the government and are accountable to the legislature. 41

(f) Excessive Formalities: The government rules and regulations force the public enterprises to observe excessive formalities in their operations. This makes the task of management very sensitive and cumbersome.

DIFFERENCE BETWEEN PRIVATE AND PUBLIC SECTOR ENTERPRISES In private sector, we mean, economic and social activities undertaken privately by a single individual or group of individuals. They prefer to do business in private sector basically to earn profit. On the other hand, public sector refers to economic and social activities undertaken by public authorities. The enterprises in public sector are set up with the main aim of protecting public interest. Profit earning comes next. Besides the difference in the objective, the enterprises in both these sectors also differ in many other aspects. In this section let us know the differences between the enterprises of public sector and private sector.

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FORMS OF ORGANISATION OF PUBLIC ENTERPRISES

DEPARTMENTAL UNDERTAKINGS Departmental undertakings are the oldest among the public enterprises. A departmental undertaking is organised, managed and financed by the Government. It is controlled by a specific department of the government. Each such department is headed by a minister. All policy matters and other important decisions are taken by the controlling ministry. The Parliament lays down the general policy for such undertakings. FEATURES OF DEPARTMENTAL UNDERTAKINGS The main features of departmental undertakings are as follows: (a) It is established by the government and its overall control rests with the minister. (b) It is a part of the government and is managed like any other government department. (c) It is financed through government funds. (d) It is subject to budgetary, accounting and audit control. (e) Its policy is laid down by the government and it is accountable to the legislature. MERITS OF DEPARTMENTAL UNDERTAKINGS The following are the merits of departmental undertakings: (a) Fulfillment of Social Objectives: The government has total control over these undertakings. As such it can fulfill its social and economic objectives. For example, opening of post offices in far off places, broadcasting and telecasting programmes, which may lead to the social, economic and intellectual development of the people are the social objectives that the departmental undertakings try to fulfill. (b) Responsible to Legislature: Questions may be asked about the working of departmental undertaking in the parliament and the concerned minister has to satisfy the public with his replies. 43

As such they cannot take any step, which may harm the interest of any particular group of public. These undertakings are responsible to the public through the parliament. (c) Control over Economic Activities: It helps the government to exercise control over the specialised economic activities and can act as instrument of making social and economic policy. (d) Contribution to Government Revenue: The surplus, if any, of the departmental undertakings belong to the government. This leads to increase in government income. Similarly, if there is deficiency, it is to be met by the government. (e) Little Scope for Misuse of Funds: Since such undertakings are subject to budgetary accounting and audit control, the possibilities of misuse of their funds is considerably reduced. LIMITATIONS OF DEPARTMENTAL UNDERTAKINGS Departmental undertakings suffer from the following limitations: (a) The Influence of Bureaucracy: On account of government control, a departmental undertaking suffers from all the ills of bureaucratic functioning. For instance, government permission is required for each expenditure, observance of government decisions regarding appointment and promotion of the employees and so on. Because of these reasons important decisions get delayed, employees cannot be given instant promotion or punishment. On account of these reasons some difficulties come in the way of working of departmental undertakings. (b) Excessive Parliamentary Control: On account of the Parliamentary control difficulties come in the way of day-to-day administration. This is also because questions are repeatedly asked in the parliament about the working of the undertaking. (c) Lack of Professional Expertise: The administrative officers who manage the affairs of the departmental undertakings do not generally have the business experience as well as expertise. Hence, these undertakings are not managed in a professional manner and suffer from deficiency leading to excessive drainage of public funds. (d) Lack of Flexibility: Flexibility is necessary for a successful business so that the demand of the changing times may be fulfilled. But departmental undertakings lack flexibility because its policies cannot be changed instantly. (e) Inefficient Functioning: Such organisations suffer from inefficiency on account of incompetent staff and lack of adequate incentives to improve efficiency of the employees. It may be noted that departmental form of organisation for public enterprises is on its way to oblivion. Most undertakings such as those providing telephone, electricity services are now being converted into government companies, e.g., MTNL, BSNL, and so on.

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STATUTORY CORPORATIONS The Statutory Corporation (or Public Corporation) refers to such organisations which are incorporated under the special Acts of the Parliament/State Legislative Assemblies. Its management pattern, its powers and functions, the area of activity, rules and regulations for its employees and its relationship with government departments, etc. are specified in the concerned Act. Examples of statutory corporations are State Bank of India, Life Insurance Corporation of India, Industrial Finance Corporation of India, etc. It may be noted that more than one corporation can also be established under the same Act. State Electricity Boards and State Financial Corporation fall in this category. FEATURES OF STATUTORY CORPORATIONS The main features of Statutory Corporations are as follows: (a) It is incorporated under a special Act of Parliament or State Legislative Assembly. (b) It is an autonomous body and is free from government control in respect of its internal management. However, it is accountable to parliament and state legislature. (c) It has a separate legal existence. Its capital is wholly provided by the government. (d) It is managed by Board of Directors, which is composed of individuals who are trained and experienced in business management. The members of the board of Directors are nominated by the government. (e) It is supposed to be self sufficient in financial matters. However, in case of necessity it may take loan and/or seek assistance from the government. (f) The employees of these enterprises are recruited as per their own requirement by following the terms and conditions of recruitment decided by the Board. MERITS OF STATUTORY CORPORATIONS Statutory Corporation as a form of organisation for public enterprises has certain advantages that can be summarised as follows:

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(a) Expert Management: It has the advantages of both the departmental and private undertakings. These enterprises are run on business principles under the guidance of expert and experienced Directors. (b) Internal Autonomy: Government has no direct interference in the day-to-day management of these corporations. Decisions can be taken promptly without any hindrance. (c) Responsible to Parliament: Statutory organisations are responsible to Parliament. Their activities are watched by the press and the public. As such they have to maintain a high level of efficiency and accountability. (d) Flexibility: As these are independent in matters of management and finance, they enjoy adequate flexibility in their operation. This helps in ensuring good performance and operational results. (e) Promotion of National Interests: Statutory Corporations protect and promote national interests. The government is authorised to give policy directions to the statutory corporations under the provisions of the Acts governing them. (f) Easy to Raise Funds: Being government owned statutory bodies, they can easily get the required funds by issuing bonds etc. LIMITATIONS OF STATUTORY CORPORATIONS Having studied the merits of statutory corporations we may now look to its limitations also. The following limitations are observed in statutory corporations. (a) Government Interference: It is true that the greatest advantage of statutory corporation is its independence and flexibility, but it is found only on paper. In reality, there is excessive government interference in most of the matters. (b) Rigidity: The amendments to their activities and rights can be made only by the Parliament. This results in several impediments in business of the corporations to respond to the changing conditions and take bold decisions. (c) Ignoring Commercial Approach: The statutory corporations usually face little competition and lack motivation for good performance. Hence, they suffer from ignorance of commercial principles in managing their affairs. GOVERNMENT COMPANIES As per the provisions of the Indian Companies Act, a company in which 51% or more of its capital is held by central and/or state government is regarded as a Government Company. These companies are registered under Indian Companies Act, 1956 and follow all those rules and regulations as are applicable to any other registered company. The Government of India has organised and registered a number of its undertakings as government companies for ensuring managerial autonomy, operational efficiency and provides competition to private sector. 46

FEATURES OF GOVERNMENT COMPANIES The main features of Government companies are as follows: (a) It is registered under the Companies Act, 1956. (b) It has a separate legal entity. It can sue and be sued, and can acquire property in its own name. (c) The annual reports of the government companies are required to be presented in parliament. (d) The capital is wholly or partially provided by the government. In case of partially owned company the capital is provided both by the government and private investors. But in such a case the central or state government must own at least 51% shares of the company. (e) It is managed by the Board of Directors. All the Directors or the majority of Directors are appointed by the government, depending upon the extent of private participation. (f) Its accounting and audit practices are more like those of private enterprises and its auditors are Chartered Accountants appointed by the government. (g) Its employees are not civil servants. It regulates its personnel policies according to its articles of associations. MERITS OF GOVERNMENT COMPANIES The merits of government company form of organizing a public enterprise are as follows: (a) Simple Procedure of Establishment: A government company, as compared to other public enterprises, can be easily formed as there is no need to get a bill passed by the parliament or state legislature. It can be formed simply by following the procedure laid down by the Companies Act. (b) Efficient Working on Business Lines: The government company can be run on business principles. It is fully independent in financial and administrative matters. Its Board of Directors usually consists of some professionals and independent persons of repute. (c) Efficient Management: As the Annual Report of the government company is placed before both the house of Parliament for discussion, its management is cautious in carrying out its activities and ensures efficiency in managing the business. (d) Healthy Competition: These companies usually offer a healthy competition to private sector and thus, ensure availability of goods and services at reasonable prices without compromising on the quality. LIMITATIONS OF GOVERNMENT COMPANIES The government companies suffer from the following limitations: (a) Lack of Initiative: The management of government companies always have the fear of public accountability. As a result, they lack initiative in taking right decisions at the right time. Moreover, some directors may not take real interest in business for fear of public criticism. 47

(b) Lack of Business Experience: In practice, the management of these companies is generally put into the hands of administrative service officers who often lack experience in managing the business organisation on professional lines. So, in most cases, they fail to achieve the required efficiency levels. (c) Change in Policies and Management: The policies and management of these companies generally keep on changing with the change of government. Frequent change of rules, policies and procedures leads to an unhealthy situation of the business enterprises.

THE ROLE OF GOVERNMENT IN BUSINESS ACTIVITIES The Govt. forms Industrial policies, provides infrastructural facilities, provides financial assistance (both loans n subsidies), provides training to entrepreneurs n helps in marketing the product of small and medium sector enterprises. Small and Medium-sized Enterprises (SMEs) in market economies are the engine of economic development. Owing to their private ownership, entrepreneurial spirit, their flexibility and adaptability as well as their potential to react to challenges and changing environments, SMEs contribute to sustainable growth and employment generation in a significant manner. SMEs have strategic importance (see Annex 1) for each national economy due a wide range of reasons. Logically, the government shows such an interest in supporting entrepreneurship and SMEs. There is no simpler way to create new job positions, increasing GDP and rising standard of population than supporting entrepreneurship and encouraging and supporting people who dare to start their own business. Every surviving and successful business means new jobs and growth of GDP. Limitations There are several limitations of organizational charts: If updated manually, organisational charts can very quickly become out-of-date, especially in large organizations that change their staff regularly. They only show 'formal relationships' and tells nothing of the pattern of human (social) relationships which develop. They also often do not show horizontal relationships. 48

They provide little information about the managerial style adopted (e.g. 'autocratic', 'democratic' or an intermediate style) The best structure for one type of business may not be the best for another. The best structure for a new business may not be suitable as the business expands.

BUSINESS ORGANIZATION STRUCTURE The following examples are basic structures. Ultimately, you will need to choose and tailor a structure that best fits your business goals and needs - either adopting a basic model or combining different models. 1. Line and Staff organization structure 2. Functional organization structure 3. Project organization structure 4. Matrix organization structure 5. Line or Scalar organization structure Functional Organization Structure

Functional organizations are structured around job functions. This type of business structure is suitable for small to medium-sized businesses that do not have a wide range of products or production requirements. Project Organization Structure

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Project organization structures lend well to organizations such as department stores and supermarkets. When these organizations operate in multiple regions, a hybrid between geographical and product organization structures is suitable. Matrix Organization Structure

Geographical structures are organized, as the name implies, by geographic area or region. Each region is its own complete entity; its goals tied to the overall goals of the business. There is usually a regional manager overseeing the entire operation, who will report to head office, but will otherwise have complete responsibility for the regional unit. The above chart gives an example of a North American geographical structure. The same can be applied internationally, where regions are split up by continents or subcontinents. Automobile manufacturers and multinational fast-food chains often follow this business organization structure. In some cases, products will remain the same across all regions, while in other cases, a product may be slightly modified or a new product introduced to meet local needs. Organization Charts Organization chart is a diagrammatic representation of positions in the organization structure. An organizational chart of a company usually shows the managers and sub-workers who make up an organization. It also shows the relationships between directors: managing director chief executive officer: various departments... In many large companies the organization chart can be large and incredibly complicated and is therefore sometimes dissected into smaller charts for each individual department within the organization. 50

There are three different types of organization charts: Vertical or top-down chart Horizontal or left-to-right chart Circular or concentric chart

VERTICAL CHART

HORIZONTAL CHART

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