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Introduction to Business

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Nature of Business
Industry
Manufacturing Industry
Manufacturing Industry converts the basis goods (raw materials) into the finished goods. In other words,
industry creates form utility in the goods already produced by nature like furniture by wood, machines by
iron and cloth is made by cotton.
Extractive Industry
Extractive industry is generally related with the production of Primary Gods. These industries are associated
with agriculture, pastures, mining, and fish keeping or finishing. These industries produce primary goods,
which are used in the manufacturing industries as raw materials. These industries get the goods from
surface, beneath the surface and in the space.
Construction Industry
Activities of the construction industry are related to the houses, buildings, dams, bridges, canals etc.
Genetic Industry
Genetic Industry is concerned with the activities, which increase the kinds of species. These industries can
increases or change the kinds and species of plants, fruits, animals. etc. through genetic changes.
Qualities of Good Businessman
A well-managed business is generally a reflection of a person or persons who have inherent or acquired
qualities of leadership and direction. So a businessman to succeed must be a well-balanced and full-fledged
man of talent. He must have a consistent mind for clearness, steadiness and firmness in his dealings with
others. Some of important and basic qualities of businessman are following:
1. Accuracy
The businessman is that who knows what he is talking about, and what he mean, because he deals with a
number of simple wants. Accurate actions depends upon accurate thinking. The goods businessman must
be able to grasp his problems by treating them quantitatively.
2. Time Sense
Besides quantity and the nature of his product, the businessman must appreciate time. He must always
thinking in terms of time. Actions cannot be taken in complete isolation from each other. There is also a
chain of actions, which must fit in with the rapidly changing desires of the ultimate consumer. This makes it
vital to be able to visualize the various actions in their places in time. There are no hunches in business, but
all actions depend upon figures and facts.
The businessman who has given adequate attention of quality and time will always be ready to make the
most of each opportunity as it arises, and to look ahead as far as he needs.
3. Alertness
A businessman keen on success must keep in with the world, and not keep himself to himself. He should
move about and see what is going on for he has to gauge new wants and new inventions for creating fresh
wants. In this sense he is to be merchant. For selling goods, which have been produced requires character
and knowledge. Even to decide what sort of articles to try and produce with his machinery. The producer
must be something of a merchant. He must be wide-awake and meet the existing demands and be in a
position to create new ones.
4. Honesty
In order to adequately satisfy consumer demands, the businessman must be honest. Misfit sales may be
forced for a time by high pressure salesmanship or misleading publicity, but they will not maintain
themselves; for each sale installs in the possession of the buyer an article which begins at once to educate
him as to error he made in acquiring it, and there is little likelihood of a second order. But if the seller uses
all his ability to provide precisely what is wanted, he makes goodwill for himself. This honesty and optimism
which goes with it are attributes of the businessman at his best.
5. Ability to Co-Operate
Another notable quality of the businessman is ability to co-operate with a large number of other. He must
be able to compromise, adjust, adapt and be willing to admit that his judgment may on occasions be wrong.
Besides he must be temperamentally fitted to exercise a divided authority. He shall be a goods
businessman, if he can place himself in the shoes of other people inside his own business so as to see into
the minds of customers who are outside it.
6. Dependability
Having once brought an organization into existence the businessman should use every effort to hold it
constant and dependable, so that those who work under it know what to expect, as it remains unfluctuating
from day to day. At all times everybody knows what can and what cannot be done. What is expected of him
and what somebody else will do and can adapt himself accordingly. A dependable businessman has satisfied
co-workers who are inevitably loyal to him and the unit directed by him.
7. Energy
A bountiful endowment of physical and nervous energy is another requisite without which other qualities
are hardly of any value. As in any other activity so in business, infinite capacity to taking pains is essential. In
addition to possessing an abundance of energy, he should possess forcefulness enough to put across his
ideas and suggestions, which he believes to be right.
8. Character
All talents are greatly enhanced in value when to them is added moral character, because this gives the
promise of energy, loyalty and steady growth in ability and economy in supervision. Such a person, in the
words of Professor Hocking, will “through his eye, through his voice, through his gestures, through the
substance of what to say, through absorption in his work and belief in his mission infuse his own, state of
mind into his men.” He will avoid any sort of double-dealing, either with his associates or with the rank and
file. All false dealing is futile; and it is absolutely destructive of loyalty.
Capitalism
Economic Systems Any society, whether it is rural without any advancements or it is specialized, must
somehow confront three fundamental and inter-dependent economic problems.
1. What and how much to produce? 2. How to produce? 3. For whom to produce?
These three questions are fundamental and common to all economic but different economic systems differ
in the fact that they try to solve these differently. Over the past two hundred years, different philosophies
have developed in regard to the accomplishment of the economic function. The basic nature of all economic
systems is the same. It is the role of the individuals and the governments that are quite different.
Capitalism
Definition
Under Capitalism, all means of production are the property of private individuals and firms. They are free to
use them with a view of making profit or not to use them, if it so suits them. The desire for profit is the sole
consideration with the property-owners in the use of their property. Besides free and unfettered use of
their property, everybody is free to enter into any contract with other fellow-citizens for his profit.
What to produce, how to produce and for whom to produce-all these central problems of economics are
settled by the free working of the forces of demand and supply.
Salient Features of Capitalism
1. Right of Private Property
Everybody has a right to acquire private property, to keep it, and after his death, to pass it on to his heirs.
The result of this system is that inequalities of wealth distribution are perpetuated.
2. Freedom of Enterprise
This freedom implies three things: a) freedom of enterprise b) freedom of contract and c) freedom to use
one’s property. Everybody is free to take up any occupation that he likes and to enter into contracts or
agreements with his fellow-citizens in a manner most profitable to him. Every citizen has the freedom to
form any firm or company and set up a factory anywhere hi likes.
3. Freedom of Choice by the Consumers
Every consumer enjoys a freedom of choice of the commodities and services that he wishes to consume. It
is the consumers likes and dislikes which determine the magnitude and pattern of production.
4. Profit Motive
The profit motive of individuals governs business enterprise. Those commodities and services are produced
under capitalism, which are expected to yield maximum profit rather than social benefit.
5. Class Conflict
The society has been divided into two classes the “Haves” and “Have-Nots” which are constantly at war with
each other class conflicts is inherent in capitalism.
6. Un-Coordinated Nature
There is no conscious regulation or central direction of economic activity. Every thing seems to go on
automatically. Somehow the demand and supply adjust themselves to each other. Price serves as the
signpost or the signal.
7. Entrepreneurs Role
The entire productive machinery of the country is under the direction of the entrepreneur. It is he who hires
the other factors of production and undertakes to pay them. Everything hinges on him.
8. Control With Risks
This has been called the Golden Rule of Capitalism. He who risks his money must also control the business.
9. Competition
The producers compete with one another is selling the commodity as much as they can through
advertisement. On the other hand, there is also competition among the buyers to obtain the commodity
who did against one another and offer higher prices for the purpose. Similarly, there is competition among
workers for jobs.
10. Importance of Price System
Capitalism is said to be governed by price. It is the price which equates the demand and supply of
commodities and factors of production. Price is a signal which guides the producers as to what to produce
and what not to produce. A higher price is also warning to the consumers to cut down their consumption.
11. Economic Inequalities
A few are very rich indulging in all sorts of conceivable luxuries, whereas the masses are not able to get
even two square meals a day. The gulf between the rich and poor is ever widening.
Merits of Capitalism
1. Automatic Working
Capitalism does not require any central directing authority for its functioning. It functions automatically
through the price-mechanism. It at any time, there is some disturbance in the economy, it is rectified
through price change.
2. Higher Efficiency and Incentive of Hard Working
Under capitalism workers and entrepreneurs are encouraged to work hard to earn higher profits and higher
wages. Hence the entire manpower resources of the country work the hardest (In this way the national
output increases and economic development is accelerated).
3. Higher Rate of Capitalism Formation
People under capitalism have the right to hold property and pass it on to then heirs and successors. Owing
to this people save a part of their income so that it can be invested to earn more income and leave larger
property for their heirs. This accelerates economic growth.
4. Economic Development and Prosperity
The lure of profit compels the entrepreneurs to take risks and to conquer new fields in production.
Capitalism offers great incentive for saving and large opportunities for investment. It encourages innovation
and technological progress. It is thus conductive to economic growth and prosperity.
5. Optimum Utilization of Resources
Every producer and entrepreneur tries to use the productive resources at his disposal in the most
economical manner in order to make maximum profit. In this way, capitalism encourages the most efficient
use of the resources of the country.
6. Just System
The richest reward under capitalism goes to the ablest, the most daring as well as the most prudent
entrepreneur. A man who shows extraordinary resourcefulness and pluck makes the highest profits.
7. Democratic
In the capitalistic economy an attempt is made to adjust production to the consumer wishes. They consume
that they like and not what is supplied to them. The consumers constitute the general public. Hence, the
system is democratic.
8. Encouragement to Enterprise
Capitalism discourages the entrepreneurs to take risks and adopt bold policies. Higher the risk greater is the
profit. They also make innovations in order to cut their costs and maximize their profits. Hence, capitalism
brings about a great technological progress in the country.
9. Flexibility
One of the principal advantages of capitalism is its flexibility and adaptability, which has enabled it to
function from time to time according to changing circumstances and emerge victorious.
Demerits of Capitalism
1. Wasteful Competition
Competition is a sheer waste. Colossal expenditure is incurred on advertisement and salesmanship simply to
defeat a rival. Resources employed by those who are defeated go to waste.
Competition results in the production of too many varieties. But too much variety is wasteful, because a
small variety, but each large in quantity, can be more economically produced.
2. Human Welfare Ignored
The economic decisions made by individual entrepreneurs and producers under capitalism are based on
their self-interest and not from the point of view of good of the society. However, necessary and useful the
commodity may be, the producers will produced it if price does not exceed the cost, because it is only the
profit motive which drives them. Social welfare is ignored altogether.
3. Economic Instability and Unemployment
Production is unplanned and is being augmented by ever increasing accumulation of capital, while the bulk
of the consumers are being impoverished more and more. The result is economic instability. The workers
have to live under a perpetual dread of losing their job. They have no sense of security.
4. Property Rights take Precedence Over Human Rights
Capitalism lays under emphasis on property rights as against human rights. Money, not man, rules the world
and debases humanity.
5. Class-Conflict
Capitalism divides the society into two hostile camps of capital and labour, the “haves” and “have nots”. The
labour wants higher wages and short working hours, which is against the interests of capitalists. Strikes and
lockouts are inevitable.
6. Economic Inequalities
A feature of capitalistic countries is the glaring inequalities of wealth and income. A few are very rich
indulging in all sorts of luxuries, whereas the masses are not able to get even two square meals a day. The
gulf between the rich and poor is ever widening.
7. Mis-Allocation of Resources
Capitalism is also criticized on the ground that the productive resources are utilized for the production of
luxuries for the rich without producing sufficient quantity of goods for mass consummating.
The market prices are not a correct index of the wishes and needs of the general public because the rich
people are able to influence the market prices by their higher income.
8. Emergence of Monopolies
I also happens under capitalism that perfect and free competition ceases to prevail and instead of big
combinations of powerful producers and monopolies emerge against whom it becomes difficult for an
ordinary entrepreneur to compete. The monopolists produce small quantity but charge high prices and thus
exploit the consumers. There is lot of concentration of economic power in a few hands.
9. Malpractices
In recent years, the image of capitalism has been tarnished by malpractices indulged in by high industrialists
and businessmen. Such practices include payment of handsome salaries to influential directors, the
large-scale evasion of fiscal laws, luxurious living at nation’s cost and persistent generation of black money.
10. Lack of Coordination
The in-coordinated nature of such an economic order sometimes becomes a disadvantage. Production is
conducted as a result of the decisions of numerous isolated entrepreneurs and consumers, which is liable to
create confusion in the system.
Socialism
Definition
Socialism is an economic system, which implies state ownership of instruments of production. The
management of business and industry is reduced to the monopolistic control of the government. What is
produced is equally divided among those who helped produce rather than having anything into profits.
Thus, economy is run for social benefit rather than private profit.
Salient Features
1. State Ownership of Means of Production
The means of production are the property of the state and not of private individuals. The profits of all
enterprises go to the state exchequer to be utilized for the benefit of society rather than for the benefit of
few private individuals.
2. No Private Enterprise
production is to be initiated and conducted by the state, which will pay wages and other costs and keep
profits to itself. Interest and rent as payments respectively to the capitalists and the landlords will
disappear, the for the state will by the capitalist, landlord and entrepreneur.
3. Economic Equality
Remuneration for work is to be according to the nature of work and is not to be equal. Earnings will vary
according to ability.
4. Equality of Opportunity
Every individual, whether he belongs to a rich family or a poor family has an equal opportunity to rise in life
under socialism. Every young person is given equal opportunity to receive education or training according to
his aptitude os that he can enter a profession of his choice.
5. Economic Planning
The state is in charge of both production and distribution. The allocation of the productive resources of the
community will be determined according to the direction of a central authority.
6. Social Welfare and Social Security
It is social welfare consideration, which guides productive activity in the economy rather than private profit.
Commodities and services of such type and in such quantities are produced which are essential for
promoting social welfare.
7. Classless Society
The socialists believe in a classless society where the distinction between the rich and the poor and the
“haves” and the “have-nots” has completely disappeared.
Merits of Socialism
1. Social Justice
Under socialism, the inequalities of income are reduced to the minimum and the national income is more
equitably and evenly distributed.
2. Better Allocation of Resources
The productive resources of the nation are more economically and optimally allocated among the various
productive uses. A central planning authority determines the allocation of resources among the various uses
who is in a better position to assess the basic needs of the people and the intensity of their desires.
3. Rapid Economic Growth
A socialist state promotes rapid economic growth. The task of promoting economic growth is not left in the
hands of free private enterprise or market mechanism. A socialist state adopts economic planning and
makes it possible to use potential productive resources in the most effective and fruitful manner.
4. Improving Productive Efficiency
Under socialism, improved techniques of production and scientific research are made freely available to all
organizations that may need them. Also, under socialism, concentrating production in big firms results in
improvement of production techniques. A socialist state makes the fullest use of productive activity.
5. Social Security and Welfare
The socialists believe that people should be given protection against uncertainties relating to income work
and living conditions and the burden of this provision should be borne by the entire society. That is why
modern socialists include in their programme, schemes of the social insurance covering unemployment,
accidents, sickness, old age pensions, death grants, etc.
6. Economic Stability
Socialism eliminates trade cycles, We do not come across depression, unemployment and idel productive
capacity in socialists economies. Since the means of production are owned and controlled by the state, the
level of investment and the level of aggregate demand can also be effectively determined. This ensures
economic stability.
7. Equality of Opportunity
Every individual, whether he belongs to a rich family or a poor family has an equal opportunity to rise in life
under socialism. Every young person is given equal opportunity to receive education or training according to
his aptitude so that he can enter a profession of his choice.
8. Social Welfare and Social Security
It is social welfare consideration, which guides productive activity in the economy rather than private profit.
Commodities and services of such type and in such quantities are produced which are essential for
promoting social welfare.
9. Classless Society
The socialists believe in a classless society where the distinction between the rich and the poor and the
“haves” and the “have-nots” has completely disappeared.
Demerits of Socialism
1. Bureaucracy and Red Tapism
The most important set of arguments advanced against socialism is one against the bureaucratic running of
the economic machinery. The civil servant does not feel the same keen self-interest as the employee of a
private corporation, where his tenure is not so secure. His main concern is to lot things go on somehow
without a positive break down. Bureaucracy will further mean bossism, loss of individual liberty, Gestapo,
etc.
2. Not Successful in Business
The government personnel are not such as can conquer new fields. The conditions in government services
are not congenial for the display of extraordinary ability.
3. Insufficient Resources
It is also urged that government cannot raise the huge amounts of capital, which are necessary for the
efficient running, and expanding of all industries and trades.
4. Mis-Allocation of Resources
Under socialism, there will be no automatic indicator like price mechanism for the most economical
allocation of the resources of the community among different industries. Some commodities will be
produced in excess and wasted, whereas there may be a shortage of others resulting in unsatisfied demand.
As such a chronic maladjustment in demand and supply is feared.
5. Lack of Incentives
It is also feared that incentive to hard work and stimulus to self-improvement will disappear altogether
when personal gain or self-interest is eliminated. Inventive ability, enterprising spirit and the go-ahead
attitude will languish.
6. Loss of Economic Freedom
A serious charge against socialism is that, when freedom of enterprise disappears, even the free choice of
occupation will go. Workers will be assigned certain jobs and they cannot change them without the consent
of the planning authority.
7. No Economic Equality
Socialism has failed to bring about economic equality. The dream of a classless society is far from being
realized. Some degree of skepticism in the efficacy of socialism as a panacea for all social ills has grown and
damped the armour of some enthusiastic socialists.
8. Concentration of Power in the State
Under socialism, the State is not merely a political authority but it also exercises unlimited authority in the
economic sphere. The State is everything and individual is nothing. He may not count at all.
9. Loss of Personal Liberty
That under socialism there is no unemployment is conceded out. Critics regard a socialist State as one big
prison-house and they do not think that employment is any compensation for the loss of liberty.
Economic System of Pakistan
In Pakistan, we have neither of the two extreme systems but our economic system is a via media
compromise of both the systems of capitalistic and socialistic patterns. It can safely be said that it is a mixed
economy.
Concept of Mixed Economy
Mixed Economy is an economic system, which combines in itself the elements of socialism as well as of
capitalism. It is an economic system, which is planned and directed partly by the state and by private
enterprise. Under the “Mixed Capitalist System” or “Mixed Enterprise System”, both State and private
institutions exercise economic control.
Panacea of the Defects of Capitalism and Socialism
A privately owned capitalist system cannot guarantee full employment and elimination of poverty. It may
lead to unequal distribution of wealth and air and water pollution. It produces trade cycles. i.e. sometimes
depression and at other times an inflationary situation. On the other hand, a government owned business
system might stifle innovation and invention. It may not be quickly responsive to public desired for products
and services and may even limit the freedom of the people. It is so realized that economic development
cannot be achieved at the desired rate of growth without any active government help and guidance. That is
why most of the capitalistic and socialistic economics of world have become mixed economics in order to
minimize the evils of unadulterated capitalism and socialism to accelerate economic growth.
Salient Features of Economic System of Pakistan
1. Co-Existence of the Public and Private Sectors
In the economy both public sector and the private sector function together. In one part are those industries,
the responsibility for the development of which is entrusted to the state and they are owned and managed
by the state. Other industries are left under the authority and control of the private entrepreneurs. The
private sector is free to develop them and start new enterprises in this sector.
2. Role of Price System And Government Directives
So far as the public sector is concerned, economic decisions relating to production, prices and investment
are made by the government or authorities appointed by the government. In industries in the private
sector, the decisions regarding investment, production, prices, etc, are made by private entrepreneurs with
the object of making maximum profit on the basis of the price system.
3. Government Regulation and Control of Private Sector
In a mixed economy, the government adopts necessary measures to regulate and influence the private
sector, so that it may function in the interests of the nation rather than exclusively in the interests of the
private entrepreneurs.
4. consumer’s Sovereignty Protected
The consumers are free to buy commodities of their choice and the private entrepreneurs produce
commodities according to consumer’s demand or preferences, although the government can control their
prices in public interest so that they can be prevented from rising unduly high. Besides, the government can
also ration the commodities in short supply so that the limited available quantities can be fairly distributed.
5. Government Protection of Labour
In a mixed economy, Government saves labour from exploitation by the exploitation by the capitalists.
Several factory acts have been passed to regulate the working conditions of labour. The government also
takes necessary steps to prevent industrial disputes.
6. Reduction of Economic Inequalities
The governments in mixed economics take necessary steps for the reduction of inequalities of income and
wealth for promoting social justice and social stability and social welfare, increasing production and for
providing equal opportunities for all.
7. Control of Monopoly
A charge against monopolies is that they reduce output and raise prices in order to get maximum profit
leading to miss-allocation of productive resources of the community, economic inequalities, and
unemployment and hampering of industrial development.
The government tries to control and regulate monopolies in order to remove the above evils and make
them function in public interest. Also, when the government considers it necessary in public interest, it
takes over monopolies and operates them in public interest.
8. Government Provision of Public Services
The government provides certain indispensable public services without which community life would be
unthinkable and which by their nature cannot appropriately be left to private enterprises. Examples are the
maintenance of national defence, of internal law and order and the administration of justice etc.
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2:Business Environment and Social Responsibility
Business Environment
Business environment refers to the conditions prevailing in a society in which a business is to be operated. It
is defined as the total of all things external to business firms and industries, which effect their organization
and operation. The number and scope of environmental factors, which effect business, is broad. There
should be included all aspects of our social, scientific, economic, political and cultural life which have some
bearing upon business.
Relationship of Environment to Business
To understand fully the nature of business, its structure, its organization and its behavior, one must look not
only at the business properly, but also at the environment within which business operates. More
specifically, this means that business exists in surroundings external to its direct or operating components of
firms and industries.
The significant elements of environment for a business house comprise persons, physical resources and
climate, economic and market conditions, altitudes and laws of the land. These elements effect the course
of action of the company.
Business and its environment interact. In our business-oriented society, business has influenced
environmental conditions probably as much as or even more than environmental forces have shaped
business.
The firm depends upon its environmental conditions for the resources and opportunities necessary for its
existence. The environment determines the limits of the firms’ activities. The environment contributes
valuable resources to the business firm only if the firm provides the desired goods or services to the
environment. A firm must look to public needs and attitudes remain sensitive to human values and alert to
the social set up. Good businesses, therefore, are always responsive to the total environment in which they
operate.
Economic Environment
Business is greatly influenced by the economy of the country. Its operational success depends upon an
adjustment and meeting the requirements of the economy. The important factors that are to be looked into
and effectively handled are:
1. Desires, Customers and Markets
The purpose of business is to anticipate desires of people and purpose goods and services accordingly to
satisfy them. Let these goods and services so produced be carried effectively to the place of customers. But
it is not possible unless businessman produces them at proper time and makes them available to customers
at reasonable price. Hence, timing of production and reasonable price. Hence, timing of production and
reasonable price of products are important considerations. Further, the intensity of competition existing in
the market and the degree of marketing strategies to be adopted also are important points to be
considered by a business entrepreneur.
2. Availability
Businessmen must assess the source or sources of capital as well as the cost at which it is available. For a
developing country like ours, obtaining capital is not so easy. It is definitely a problem as its availability
depends upon will and capacity of people to save and invest, existence of good capital and money market,
and economic and financial policy of the government etc.
3. Availability of Labour
Operational efficiency of a business enterprise greatly depends upon the availability of labour at a
reasonable price. If such manpower in the shape of skilled and unskilled workers is sufficiently available to a
business according to its requirement and within reasonable wage rate, it can carry on its activities and
expect profit. But to get workers at right time and at right price is not so easy. There are many factors that
influence their availability.
4. Level of Productivity
Productivity at a reasonable level depends upon how the activities are planned, organized, directed and
controlled. The use of the latest production techniques, machines, manpower, and motivation and
techniques of people to work sincerely and devotedly are some of the requirements to achieve the desired
level of productivity.
5. Imaginative Entrepreneurship
The success of an entrepreneur depends upon the quality of his imagination and skill. More he is intelligent,
imaginative, and farsighted, more he is effective in grabbing the opportunity and playing his role in the
economic growth and betterment of people.
6. Qualified and Capable Manager
The competent role of managers has greatly improved the efficiency of work operation, reduced cost and
enhanced capability to face challenge of competition. The science of management is undergoing a fast
improvement in the light of research, study, experiences and observation. Every business enterprise is
struggling to avail the benefit of intelligent, qualified, and competent managers.
7. Market Size
Market size of a business depends upon its production policy and programme. If its production target is
limited, it will have a small market. On the other hand, if it has a large-scale production programme, it has
to expand its market. Such business enterprises even go to international markets. Desire to expand the size
of market causes them to adopt new marketing strategies and planned efforts to go as deep to different
places as possible and create as many customers as it could be.
8. Price Levels and Inflation
In case if price level is changing fast, it becomes difficult for a business enterprise to plan its activities that
would ensure a reasonable gain. Changing price, levels make the cost of capital, production, distribution,
and profit unpredictable and uncertain. But still then we find entrepreneurs coming up with fair guess and
estimation to make their business operate with better results and survive the vagaries of changing price
levels and inflation.
9. Government Fiscal and Monetary Policy
Government collects revenue through taxes, duties, fees etc, and spends the same on administration, public
utilities like roads, bridges, canals, buildings, hospitals etc. Greater burden of taxes imposed by the
government on people may reduce their ability to save and could affect investment climate. Similarly,
monetary policy, which influences supply of money within the country, does also have its impacts on
business activities. Central Bank of the country as controller of credit plays its role to regulate money supply
together with the government.
Social and Cultural Environment
Businesses produce goods and services for people who dwell in the society. Thus the number of people,
their age and educational composition has great significance for business. What a person buys or the service
he consumes is a reflection of his religious and cultural constraints. Thus the cultural religious and ethnic
pressures have a vital bearing on the affairs of the business.
1. Population Growth
for a businessman, population growth presents both opportunities and problems. Opportunities arise from
the fact that there are continually more consumers to buy business output and more workers to produce
and sell it. Problems are caused by the fact that as more people want and need jobs, businesses must make
them available otherwise the society will have to face the menace of unemployment.
2. Population Composition
(a) Age-Wise Composition
Different age groups have different demands. Young people are interested in automobiles, musical
instruments, sport equipments etc. Older people may be interest in medical care and health, food etc.
(b) Education Standard
An illiterate population can be easily deceived. Gone are the days of the sellers society. The society where
consumers are educated is the buyers society. People can well judge between good and bad and reap the
economies of modern technology.
(c) Economic Standards
Higher income people can afford to satisfy tastes that people of lower incomes cannot. Thus when the
medium family income increases, the market for business products and services also expands.
(d) Changing Job Opportunities
With increased investment in human resources, the opportunities to improve labour productivity are
enhanced. The occupational shifts have been towards professional, technical, managerial jobs and in service
industries. The opportunities for farm workers, craftsmen, machine operators etc, is declining substantially.
3. Social Attitudes and Beliefs
Businesses have to take into account the attitudes, desires, beliefs, tastes, problems and customs of the
consumers. These aspects vary in individuals, groups and even nations. Americans hold attitudes like
respect for all individuals, strong regard for education, faith in science and technology, belief in innovation,
belief in competition, belief in an environment cleansed of air and water pollution, lovable communities
with decent housing, safe streets, efficient transportation, educational and cultural opportunities. Such
social beliefs have a considerable impact on business climate.
4. Pluralism
The society is broken down into many kinds of groups’ consumers, investors, labour organizations,
managers, government’s bureaucrats and politicians, religious groups, racial groups etc. In everything that
business managers do, they must be alert to this pluralistic feature of the society. While the existence of so
many interest groups tends to complicate business operations, they constitute a major safeguard against
dominance of the society by any single interest group.
Technological Environment
There has always been a strong link between business and technology. Any business that wishes to survive
in a changing world must be aware of the modern technological changes and also use technology to develop
and modernize its products or services, to meet cost competition and to improve marketing. The alert
businessman must not only be aware o technological changes affecting his operations and his customs, he
needs to forecast the state of the art so that he will have time to use it successfully before he finds his
products or processes obsolete. This he must also do so that he is the first one to put up a new product at
the suitable time in the market and not lag behind which will be a degrading position in the world of
competition.
Political Environment
Political environment has a great impact on the establishment, operation, growth and expansion of
business. Stable political climate makes things more certain and predictable. Businessman fined themselves
in a better position to estimate future and plan their business. In other worlds, greater is the political
stability, better may be the opportunity for successful business. That is the reason why we often witness
flight of capital from the country where there is political instability or where policy of government
frequently changes.
Legal Environment
Every business is encircled by the laws, regulations, and court decisions of the land. Almost each and every
decision made by a businessman should be within the permissible limits of laws and regulations of the
country. He should know that his action or decision might be subjected to a challenge in the court of law.
Thus all decisions and steps should be within the framework of the law of the land. This success depends
upon how he meets all legal requirements. We know that in certain cases rules and regulations may be
burdensome. But they all aim at creating an atmosphere that is best suited to good conduct of business and
protect the interests of customers and workers as well.
Social Responsibility in Business
A large part of an organization’s response to its environment is called SOCIAL RESPONSIBILITY.
“Social Responsibility has been defined as the organization’s obligation to take actions that protect and
improve the welfare of the society as a whole, along with advancing its own interests.”
Basically business is said to possess this responsibility because of its extreme power to influence societal
conditions.
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3:Establishing A Business
Sole Proprietorship It is the form of business organization in which an individual introduce his own capital,
uses his own skill and intelligence in the management of its affairs and is solely responsible for the results of
its operations. He may run the business alone or may obtain the assistance of employees. It is the easiest to
form and is also the simplest in organization. The sole proprietor may borrow or sue other people’s money
in financing his business.
“The individual proprietor is the supreme judge of all matters pertaining to his business, subject only to the
general laws of the land and to such special legislation as may affect his particular business.”
Advantages of Sole Proprietorship
1. Easy to Start
The formation of sole proprietorship is quite easy than partnership and joint stock Company. There are no
legal formalities for starting this business, like agreement, memorandum of association or articles of
association.
2. Easy to Dissolve
It is easy to dissolve because the sole trader is not required to take permission for dissolution either from
shareholders in the general meeting as in the case of joint stock companies or consult all the partners in the
case of partnership.
3. Freedom of Action
A sole trader has maximum freedom to take decision at his own end. His decision is final. He may expand his
business by adding new products or can discontinue old ones. A sole proprietor can wind up his business or
he can change his business place from one place to another.
4. Freedom from Government Control
A sole trader is free from government control a great extent than any other form of organization. A sole
trader is not required to send his periodical balance sheet to the government.
5. Owner of All Profits
No other form of organization permits to retain cent percent profit they earn. But in sole proprietorship, the
sole trader is the master of his business and is entitled to retain the entire profit of the business.
6. Low Taxes
He has to pay minimum income tax and other taxes than in partnership and Joint Stock Company. In this
manner he saves much out of his profit.
7. Secrecy
Secrecy is he base of a business and it should not be disclosed. Success of a business is based on secrecy. A
sole trader can maintain secrets of his business but it is not possible to keep secrets in partnership or Joint
Stock Company.
8. Low Cost Organization
A sole trader is not required to pay registration fees as paid by Joint Stock Company and legal fees in the
formation of partnership.
9. Full Control
Sole trader has got full control over his planning. No body is there to interfere in his business.
10. Immediate Action and Quick Decision
In business, it becomes very essential to take decision at particular times and for that purpose immediate
action is required. Sole trader can take quick decision and immediate action but in partnership and joint
stock companies action cannot be taken without the persmission of owners and meeting should be called
for this purpose. In this way business cannot take the proper advantage of time.
11. Flexibility of Organization
If any change in the business is called for, the sole proprietor has a right to bring about the change. A good
number of giant sized concerns fail on account of their inability to change their policies promptly with a
change in the situation.
12. Social Desirabilities
From the social point of view:
1. Continuity of individual proprietorships ensures that too much wealth does not get concentrated in few
hands.
2. The unlimited liability ensures sufficient responsibility to the society.
3. It brings into full play the qualities of self-confidence, diligence and tact among business people.
4. The growing number of sole proprietorship firms contribute to the commercial development of a country.
13. Personal Incentive
A man in business for himself has everything to lose if his efforts are not successful to earn profits. This fact
makes him willing to devote maximum time, thought and energy to the successful prosecution of the
activities of business he has organized.
14. Credit Worthiness
A sole proprietor’s liabilities are unlimited as the creditor can even recover his amount from the personal
belongings of the trader. Therefore, this fact makes a sole proprietor credit worthy.
Disadvantages of Sole Proprietorship
The sole proprietorship has some disadvantages, which are as follows:
1. Limited finances
the sole proprietor can face financial problems. He can depend only his own resources. It is neither safe nor
easy for him to borrow large amounts of money from banks or other financial institutions.
2. Difficulties in Management
Each individual has a particular ability or aptitude in particular respect. Modern businesses full of
complications arising specially from the ever-changing nature of market and the various laws that are being
enacted. An individual may not be an expert in all matters, therefore, some times his decisions may be
unbalanced and would lead to the failure of the business.
3. Limited Span of Supervision
A sole proprietor however qualified and clever will find it hard to supervise the work of his sub-ordinates
beyond a certain limit e.g. in case of a large general store owned by single person, it will be difficult for the
owner to keep an eye on all the departments and employees and to sure that the customers are treated
nicely. The problem will be more acute if the store has its branches in other places.
4. Limitation on Size
Because of limitation of finance, managerial skills and span of supervision, a sole proprietor has to manage
the size of the business up to a certain limit. This deprives the firm of the opportunities of reaping the
economics of large-scale production.
5. Unlimited Liability
The sole proprietor assumes a great risk. It is true that he receives all the profits of the business but likewise
he has to face the entire losses. Not only the assets of the business but also his private assets will be used to
pay off the firms debts and losses. Unlimited liability also discourages the expansion of business.
6. Lack of Continuity
Any personal problem or illness, which is affecting the sole proprietor to, has a direct effect on his business.
It ends with the retirement, death or bankruptcy o the owner. If the busines is rendering useful services to
the society, the closure of such a business will be a social loss. Similarly, with the death of the proprietor,
the business may pass on to his successors who may not posses the same degree of self-reliance, ability and
intelligence.
7. Ease of Formation
The very ease and cheapness of entering business as a proprietor may be a disadvantage. Many people go
into business with too little capital and training and are clashed by the competition of the business. As a
result, a number of business failures and proprietorships.
Partnership
It is rare that a person combines in himself all that is essential to make him a successful businessman.
Besides, the reap the economics of large-scale operation, a sole proprietor may fail to cope up with the
demands of expansion. He may possess adequate capital but he may be handicapped by the lack of
experience, skill and managerial, ability. Or it may be other way round. Therefore, a combination of two or
more persons, some having capital and others having skill or experience proves to be beneficial.
According to Section 4 of the Indian Partnership Act of 1932, partnership is defined as, “The relation
between persons, who having agreed to share profits of a business carried on by all or any one of them
acting for all.
The above definitions reveals that:
1. An agreement between the partners is necessary.
2. The agreement must be in regard to the sharing of the profits of the business.
3. The business must be carried on by all or any one of them acting for all.
Advantages of Partnership
Many of the advantages of a sole trader are also present in the partnership form of organization. Therefore,
advantages which render partnership preferable to sole proprietorship are given below:
1. Large Amount of Capital
In sole proprietorship, the amount of capital is limited to the personal fortune and credit of one individual.
In partnership, the capital can easily be raised according to the requirements by bringing in additional
workers.
2. Combined Judgment and Managerial Skills
In partnership business, there are more than one owners, it is therefore possible to combine the abilities
and knowledge of every partner to the best interest of the business. With the combined decision and
judgment, business is greatly benefited and more profit is possibly earned.
3. Personal Interest
Since each general partner is responsible not only for his own act but also for the acts of his partners, he
shall devote his personal attention and interest to the activities of the firm, and this will enable a firm to
attain maximum efficiency.
4. High Credit Standing
A partnership has little difficulty in obtaining credit, especially if the partners have their personal wealth. If
there are several partners and one or more have extensive private means, creditors have little reason to
doubt that the debts of the partnership will be paid in full.
5. Ease of Formation
A partnership business is easy to start as it is free from all legal formalities, it does not suffer from legal
handicaps. The business can be easily increased or reduced to suit the conditions.
6. Retaining of Valuable Persons / Provision of New Blood to the Business
New blood can be infused into the business into the business by admitting new partners. Thus the business
can utilize the genius of an enterprising young men.
7. Co-Ordinated Decisions
The decisions, which take place in the partnership, are co-ordinated decisions i.e. the decisions which are
jointly taken by all the partners.
8. Lighter Risk
Risk in partnership enterprise is spread over several persons who are its partners. All the partners pool
together their abilities and their income.
9. Unlimited Liability
Each partner has an unlimited liability towards the firm’s debts. The creditors can recover debts from the
personal property of the partners.
10. Flexibility of Organization
A partnership organization is extremely mobile, flexible and elastic. The partners are at ease to carry on any
legal business.
Disadvantages of Partnership
1. Divided Control / Delay in Decision Making
In partnership, more than one person is involved in every decision reached. If the partners are not active in
operation, it may necessary to delay the making of important decisions.
2. Frozen or Blocked Investment
For an individual who to invest some money in business, the partnership form may prove to be a poor
investment from the view-point of liquidity and transferability. It is correct to say that it is easy to invest
money but is difficult to withdraw it, because it would mean the termination of business.
3. Limitation on Size
Since the maximum number of partners is 20, it might be possible that at some time the capital becomes
short. If it happens, the business has to be converted into a Joint Stock Company. Therefore, a big business
cannot be started even if they get a chance to expand it, because the capital of 20 persons may not be
sufficient.
5. No Legal Entity
Law does not recognize a partnership as an organization having an entity or existence separate from the
partners who comprise it.
6. Lack of Secrecy
Secrecy in a business is necessary for its success. It is not possible sometimes in a partnership.
7. Possibility of Disagreement Among Partners
Two or more men may start out together as close friends or as relatives. However, they may develop
differences over the years that will make for unpleasantness and inability to work together for the best
interest of the firm.
8. Unlimited Liability
The greatest disadvantage is that of unlimited liability of the partners. All general partners and liable
personally for the partnership debts. Where there are heavy losses, the partner having much property will
have to sustain the entire loss.
Partnership Deed or Partnership Agreement
A partnership deed is a document in which the terms and conditions of partnership agreement are written.
Hence, contract is said to be essence of partnership business. Partnership agreement may be oral or
written. The written document of partnership is known as partnership deed. Partnership may be formed
and conditions of the of the contract put down into black and white. The partnership is to be free from
future confusions and misunderstandings. Happy or good relations between partners may not continue for
a long time.
I future there may be differences of opinions between the partners on some points. The differences may
only be removed if the terms and conditions are in a document to avoid future disputes and
misunderstandings between partners. A well drawn up partnership deed, usually contains the following
terms.
1. Name of the firm.
2. The nature and object of the business.
3. The duration of the business.
4. The names and addresses of the partners.
5. The amount of capital of the firm and the amount contributed by each partner.
6. The ratio of sharing profits and losses of the firm.
7. The management of the firm. (The name or names of the partners who will take part in the management
of the firm).
8. Salaries, if any, paid to any partner.
9. Interest on partners’ capital and partners loan.
10. The rights and duties of the partners.
11. The valuation and treatment of goodwill in case of the dissolution of the firm.
12. Rules and regulations regarding the admission of a new partners and expulsion and retirement of an
existing partner.
13. Appointment of an arbitrator to settle disputes if any among the partners.
14. the names of the banks where firm accounts will be opened.
15. The name of the auditors who will inspect the Bank Accounts.
16. The names of partners who will sign the important documents.
17. The procedure of the dissolution of the firm and settlement of accounts.
18. Any other clause or clauses necessary for future safety for the conveniences of the partners.
The partnership deed must be signed by all the partners. They may, if thought necessary, make alternations
and additions to the provision of the deed at any time.
Memorandum of Association
The first thing in the formation of a Joint Stock Company is the preparation of the Memorandum of
Association. It is a document, which sets out the constitution of the company and as such, is really the
foundation on which the structure of the company rests. That is why this document has often been called
the charter of the company in its relation to the outside world. The document is prepared by the promoters
of the company. The memorandum of Association must contain the following clauses:
1. Name Clause
In this clause the full name of the company is shown and the last word of the name of the company must be
limited. The company can adopt any name but there are certain restrictions and the words like ROYAL,
IMPERIAL, EMPIRE and ESTATE etc cannot be used without the special permission of the Government.
2. Object Clause
This clause is quite important and must be very carefully drafted as it determines the activities of the
company. In the object clause each and every detail of activities of the business to be carried out must be
laid down. Once the object clause is completed, it become very difficult to make any amendment. The value
of the shares, the allotment money must be given in detail.
3. Situation Clause
This act provides that the company must have a registered office so that the registrar may be able to send
notice etc. to the Company at the registered office.
4. Liability Clause
A declaration that shares holder’s liability is limited.
5. Capital Clause
This clause must contain a statement as to the amount of capital with which the company proposes to be
registered and the division there of into shares at a certain fixed amount.
Articles of Association
This is another important document, which must be prepared and filed with the Registrar of the companies.
The Article of Association contains rules and regulations regarding the internal working and management of
the company. It defines the powers, rights and duties of Directors, shareholders and the other officers of
the company. The purpose of the Article of Association is to carry out the objects set out in the
Memorandum. The Memorandum limits the jurisdiction beyond which the Article of Association cannot go.
The Article of Association states how the general meetings are to be held, how the voting is to be
transferred, and how they are to be forfeited, how the accounts are to be kept etc. If a company does not
prepare its Article of Association, it can adopt of Table A of Companies Ordinance.
The articles must be properly drafted, serially numbered and printed and then filed with the Registrar of the
Joint Stock Companies. The article must be signed by the subscribers and witnessed as in the case of
Memorandum. It is usual to print the Memorandum and the Article in one booklet, as the company is
required to provide the copies to members on request. The articles can be altered at any time by special
resolution.
Joint Stock Company
In the modern times the business and industry has been developed on a large scale the capital required for
such industry and trade is huge which cannot be accumulated either in a sole proprietorship or a
partnership organization. As a result of this change, a new form of organization has become quite popular in
modern times which are known as Joint Stock Company. It is normally defined as;
“An association of many person who contribute money or money’s worth to common stock or employ it in
some trade and business, and who share profit or loss arising from there.”
It means the joint stock company is a voluntary association of individual who contribute their money or
profit to a common stock for carrying on a particular business. The money or money’s worth contributed by
the member known as ‘share holders’ forms the capital of the company. The capital is divided into numbers
of unit called share. Each share carries definite face value and is transferable in the market without any
restriction or formalities.
A company as soon as incorporated takes a legal entity distinct from the share holder who composes it. It is
managed by a group of persons known as directors. Directors are the representatives of share holders.
Formation of Joint Stock Company
All the joint stock companies whether public or private are governed by the company’s ordinance 1984 and
must be formed according to the procedures laid down in that act. For the formulation of Joint Stock
Company the following document must be submitted to the registrar, joint stock Company;
1. The list of directors along with their address.
2. the memorandum of association on which at least 7 person, who are promoters should sign in case of
public limited company and two in case of private limited company. In addition of this it is also essential for
the, to purchase the qualification share.
3. Articles of association duly signed as memorandum of association.
4. The consent of all the directors to act as directors.
5. A formal declaration by the secretary that all the formalities are duly completed.
6. A statement of normal capital.
Along with the above documents, registration fees, which varies with the amount of share capital is paid off
to the treasury.
When the registrar of the joint stock companies is satisfied from all the formalities he will enter the name of
the company in the register and will issue a certificate of incorporation. Now the company will have its
separate existence.
Advantages of a Joint Stock Company
1. Huge Amount of Capital
It is in a position to raise large amounts of capital required for big business. The reasons are the limitations
of liability and the ease of transferability of shares. The small value of shares allows a large number of
persons to invest. So, due to limited liability and issuance of shares, large capital may be raised by a Joint
Stock Company.
2. All People can Invest
In a Joint Stock Company, the shares are of different kinds so they are purchased by persons of different
temperaments. The small value of shares allows the poor people also to purchase it. Besides, a company
may also raise finance by the issue of debentures and bonds.
3. Limited Liability of Shareholders
The liability of shareholders is limited. It means that the risk is spread over a large number of shareholders
and the possibility of hardship on a few is reduced. Secondly, if the business is going to be lost, the
shareholders are not liable to loose anything from their private property.
4. Efficient Management
the management of the Joint Stock Company is carried out by Directors who are able, experienced and
trustees of shareholders. The management is thus, the hands of a few experts. Secondly, the company can
also hire efficient and qualified staff since it can pay their wages.
5. Stability of Business
The success of business also depends upon the life of the business. The Joint Stock Company is more suited
in tis respect, for a company is a legal person having a perpetual succession.
Stock/Security Exchange
A stock exchange is an organized market where secondhand listed industrial and financial securities are
bought and sold at auction. The securities are bonds and debentures issued bodies or port trusts.
The securities contracts (Regulation) Act of 1956 defines stock exchange as:
“An Association, organization or body of individuals, whether incorporated or not, established for the
purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.”
An organized stock exchange is thus an association of persons that provides facilities where the securities
can be traded by its members, who are referred to as owning seats on the exchange in accordance with
self-imposed rules and regulations that confirm to public law. The general public is not permitted to handle
security purchases and sales on the floors of these exchanges, only members of the exchange.
Role Played by the Stock Exchange in the Economic Development of a Country
A stock exchange has been variously described such as the barometer of adversity and prosperity of a
nation and as the mart of the world and as “Fortresses of Finance.” In the modern business world of today,
stock exchanges are the important ingredients of the capital markets. They are the prime centers through
which investment activities are carried by individual and business concerns.
Importance of Stock Exchange
From the View Point of the Community
It helps in the economic development by providing a body of interested investors.
It upholds the position of the superior enterprises and assists them in raising funds.
It encourages capital formation.
It helps the government to raise funds through the sale of securities for economic development.
It portrays the prevailing economic situation of a country. All the changing political, economic and industrial
conditions of the nation are reflected on the stock exchange.
Through correct evaluation in terms of their real worth, the stock exchange helps in the orderly flow of
distribution of savings as between different types of competitive investments.
From the View Point of a Company
The maintenance of a free market, with prices established at all times by the forces of supply and demand,
make listed securities more useful then unlisted stocks and bonds.
The Securities can be used as collateral at a bank for a loan or as the security for collateral trust bonds.
By providing a channel through which million of individuals invest their savings in long term securities, the
stock exchange make possible, indirectly, the growth of hundreds of corporations.
A member of the company of a stock exchange enjoys better reputation and credit.
It provides one great view of business, the capital. It serves as a pivot of money market and fortress of
capital.
Due to their purchase and sale on a stock exchange, the market price of the shares of a company is likely to
be higher in relation to earnings, dividends and property value. This raises the bargaining power of the
company in the event of amalgamation.
From the View Point of Investors
It is only an organized securities market, which can provide sufficient marketability and price continuity for
shares so necessary for the needs of investors.
Easily saleable security becomes a good material security for loans.
Strict enforcement of rules safeguards the interest of the investors.
The daily report enables him to know the exact worth of his investment.
It is only such a market that can provide a reasonable measure of safety and fair dealing in the buying and
selling of securities.
Functions Or Services of Stock Exchange
1. Distribution of New Securities
The brokers advise their clients regarding the merits of a new issue and distribute the companies prospectus
among their clients, thus playing a vital role in obtaining subscription from their clients.
2. Facility of Transfer of Securities
The title to the shares is transferable. Hence those investors who do not want to block their money in the
same stock can sell their shares to those who are interested in buying them through the stock exchange.
3. Mobility of Capital
A stock exchange performs the function of a continuous ready market for immediate conversion of stock
into cash and vice versa, thus providing a market for capital without adversely affecting the industry.
4. Function of Evaluating Securities
It performs the evaluating function of shares by publishing the prices at which bargains are made which
become price quotations. In the confidence of these quotations, investors are able to take decisions
regarding their investments.
5. Function of Economic Barometer
Stock exchange is often called an economic barometer, which indicates the wealth and trends of not only
the industries but also of the economy as a whole. Symptoms of any disease in the economy can be easily
traced through the stock exchange. The functioning and operations of stock exchange reflect the
temperament of the economy.
6. Increase in the Number of Dealings
The stock exchange provides the facility for secondary distribution of new securities after their original sale.
Stocks of securities of fared for sale in a stock vary from time to time. It increases the marketability of the
securities since they are bought and sold again and again.
7. Forecasting Function
The stock exchange reflects the future business conditions and trends of price. Signals of impending
financial and business dooms are indicated by the stock exchange in advance.
8. Imparts A Collateral Value to Securities
The fact that the title of the shares are transferable increases the collateral value of the securities and
enables the holder to obtain loan on their basis. The creditor on the other hand, can promptly liquidate
these collaterals by selling in time of emergency.
9. Agency of Capital Formation
The liquidity of shares and proper publicity of securities through various means attracts the general public
to invest their savings in stock and securities. Greater investment means generation of capital.
10. Clearing House of Business
Companies are required to furnish all the essential financial statements and other reports etc to ensure
maximum publicity on corporate operations and working. Thus, stock exchange is an important source of
information, which is valuable to the investors, to government bodies and to the company itself.
11. Regulation of Market Prices
Companies are required to furnish all the essential financial statements and other reports etc. to ensure
maximum publicity on corporate operations and working. Thus, stock exchange is an important source of
information, which is valuable to the investors, to government bodies and to the company itself.
12. Regulation of Market Price
Speculations in the stock exchange promotes equilibrium of demand and supply and prevent large
fluctuations in prices. The price movements are made smoother by the activities of speculators.
13. Regulation of Company Management
A company, which wants its securities to be quoted and traded on a stock exchange, has to get itself
enrolled according to the laws and rules of the stock exchange. Through these regulations, stock exchange
exercise wholesome influence on the management and working of he company in public interest.
Investment Banks
Investment banks perform a major role in the very important function of raising long-term capital for
corporations. Such banks are also sometimes called security houses. These specialize in the marketing of
new issues of common preferred stocks and bonds of old and new companies. They sell them to the general
public or to pension funds, insurance companies or other large investing institutions. These are banks,
which provide capital for industry usually for long period purposes of production, in return taking over
shares in the borrowing companies. What they actually do is to under-write a corporation’s new security
issues. In other words, security houses guarantee the sale of a company’s securities and deliver a check to it
for these new securities. They make their profit by changing a commission which may vary from 3% to 10%
or more of the proceeds of the sale.
The investment bank would make an investigation of a company prior to making any commitment regarding
the proposed bond issue. The final agreement to under-write is usually not signed until a day or two before
the securities are put on the market. The price that the investment bank would be willing to pay would
depend on the amount that it anticipates can be realized from the sale of securities.
Financing by Leasing
Leasing houses or companies are the institutions that provide business premises, building, plants,
machinery, store and office equipments and other fixed assert accessories on rent to business enterprise.
They carry on rental business and their source of earning is rental income. Manufacturers and service
business owners obtain their fixed asset requirements from leasing companies on rent without buying them
up and getting their capital blocked for a longer period. This source is very attractive to those business
enterprises that require a relatively large working capital to meet the growing challenge of increasing
competition. The facility provided by leasing companies is an indirect finance for fixed capital requirements.
Instead of giving loan or providing capital in csh, they offer necessary fixed assets in kinds on monthly rental
basis to manufacturers and service business operators. Leasing the cost of typical lease is, as would be
expected, higher than the interest on loans.
International Chamber of Commerce
It is a world trade organization founded at Atlantic City, N. J, in 1920 with headquarters in Paris. Its
membership, derived from more than 70 countries, consists of Chambers of Commerce, trade and industrial
associations, and individual business firms and corporations. Mr. M. A Rangoonwala has been the Vice
President of I.C.C for quite some time.
It acts as a clearing house for the exchange of views in international economic policies and problems and to
promote world trade. In 1946, it was granted consulative status by the Economic and Social Council of the
United Nations. It gives suggestions to GATT and UNCTAD on matters of restrictions on import, shipment
problems, customs tariffs etc.
International Chamber of Commerce solves the problems of international arbitration of exchange. in fact, it
solves the disputes arising out of payment by a person in one country of a debt payable in another country
by means of a Bill of Exchange purchased in a third country.
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4:Operating A Business
Marketing Marketing is the process by which the demand structure for econoic goods and services is
anticipated and satisfied through the conception, promotion, exchange and physical distribution of such
goods and services.
In words of Stanton,
“Marketing is a total system of business activities designed to plan, price, promote and distribute satisfying
goods and services to present and potential customers.”
1. It is a managerial system.
2. The entire system of business action should be market or customer oriented.
3. The definition suggests that Marketing is a dynamic business process.
4. The Marketing programme starts with the idea of the product and does not end until the customers
wants are satisfied which may be after the sales.
5. It implies that to be successful, marketing must maximize profitable sales over the long run.
Score of Marketing
At first, the marketing department primary responsibility was for sales activities. But as marketing managers
gained experience, they gradually realized that is was far more sensible to make what people wanted to buy
rather than to try to make them buy what they didn’t ask for. Marketing began to enlarge its scope, taking
over company activities such as market research and customer services, advertisig, public relations and
promotions. Product development, product servicing and forecasting also began to come under the
jurisdiction of the marketing manager. The purpose was to help make the entire company more responsive
to the consumer. Industries shifted from a production orientation to a marketing orientation. Thus,
marketing includes not only the whole process of distribution, but also the preliminary activities before
distribution. The domain of marketing grew until marketing could be defined as:
“The performance of business activities which direct the flow of goods and services from producers to
consumers or users in order to satisfy customers and accomplish the company’s objectives.”
In short, we can say that marketing includes all efforts to:
1. Discover the present and potential requirements of consumers.
2. The evolution of the products, which would satisfy those requirements.
3. All the effective methods of product distribution.
4. All the efforts to improve and modify the products.
Importance of Marketing
Marketing is a fundamental human activity that facilitates and expedites exchange. In the following point
we could find, its importance;
1. It is the Essence of Modern Business
Marketing of goods and services is the prime objective of every business. In view of growing competition
and abundant supply of goods and services, marketing helps the business to face the challenge and survive.
Through effective marketing activities, the producers find new outlets of the goods and services and keep
the spiral of economic growth moving upward.
2. It Is A Total System of Interacting Business Activities
Marketing of today is no longer limited to the sales force. It is a total system designed to plan, price,
promote and distribute want satisfying products and services to present and potential customers.
Marketing activities have emerged as a total system with a closer contact with each other and integrated
efforts to bring the desired result.
3. It creates Interest in the Product
Creating utility in the product and developing its usefulness is the most important role of marketing. Even
the best produced goods cannot be appreciated by the customers unless they are properly introduced to
them. Hence marketing helps in creating interest in the product through proper introduction.
4. It Creates Employment
Marketing is a paraphernalia of many activities like advertising, indoor and outdoor salesmanship,
warehousing, transportation, communication, market research and market information. All these have
opened new avenues for jobs. A good number of people have found it a profitable source of employment.
5. It Provides Customer or Consumer Satisfaction
Marketing specialist tries to find out exactly what goods and services consumers are ready to buy. Product
research goes on to make it more useful and more satisfactory to people. This is what a good business
enterprise aims at. Thus, we can say that the essence of marketing activities is consumer satisfaction.
Market Segmentation
A market segment is a group of individuals or firms, within a market, that share one or more common
characteristics. The process of dividing a market into segments is called market segmentation.
“When the market for a product is divided into two more homogenous groups of consumers, and variations
of the product are developed to satisfy each group, market segmentation has occurred.”
Market segmentation is a product development strategy. It allows a marketing manager to develop a
strategy that will be responsive to the needs of a unique market sector and render perfect satisfaction to a
part of the market.
Target Markets
“A target market is a market segment towards which a firm directs its marketing efforts.”
A firm may have more than one target market for a particular product. Its product may be demanded by
persons who are between 20 and 34 years old and also by those who are in the 45 to 54 years age bracket.
On the other hand, a firm may develop different products for different target markets e.g. a manufacturer
of athletic shoes may target the professional athlete and at the same time it may produce shoes and
clothing to appeal the recreational athlete as well.
Bases of Segmentation
A company may select one common characteristic to identify a market segment. Marketers make use of
wide variety of segmentation bases like:
1. Geographic Bases
For many years, marketing managers have reacted to geographical differences in markets like market
density, climate, region and classification as urban, sub-urban and rural.
2. Demographic Bases
Socio-economic variables such as family income, age level, education level, family size, sex distribution,
nationality, occupation, religion, social class, etc are types of demographic date often used to classify
markets.
3. Psychographics Bases
Segmenting markets by identifying individuals who share common attitudinal or behavioral pattern is called
psychographics market segmentation. A college professor and a skilled labourer may be earning dis-similar
incomes, they may be of different ages and may have contrasting educational backgrounds, yet both may
hold common attitudes towards numerous products.
4. Market Bases
One important way to segment is according to whether the purchaser is a consumer (who purchases goods
and services for his own personal use) or an industrial user (who purchases products to use in producing
other products). Because those two groups purchase goods and services for different reasons, marketers
use different marketing strategies to reach them.
5. Product Related Bases
Target markets may be set on product related bases such as volume of usage, end use, benefit,
expectations, brand loyalty and price sensitivity etc.
Marketing Mix / Marketing Strategy
Once market segmentation has identified various target markets, the firm faces the challenge of signing a
marketing strategy appropriate for each. The several elements of such a strategy is known as Marketing
Mix.
Marketing mix refers to the combination of decision elements in a company’s marketing programme. It
consists of four major components; that of product, distribution, promotion and price. Those components
are called marketing decision variables, because a marketing manager can vary the type and amount of
each element. It is carried to satisfy consumer’s needs and to have a better and successful grip over the
market.
Ingredients of Marketing Mix
1. The Product Variable
To maintain a satisfying set of products that will help an enterprise to achieve its gals, a marketing manager
must be able to develop new products, modify existing ones and eliminate those that no longer satisfy
buyers and yield acceptable profits. Product strategies are concerned with the design of the product,
product planning, development, modification and innovation, branding, warranties and packaging decisions.
2. Distribution Variable
In dealing with the distribution variable, a marketing manager attempts to make products available in the
quantities desired to as many customers as possible and to hold the total inventory, transportation, and
storage costs as low as possible. He may even motivate intermediaries (wholesalers and retailers) in
developing and managing transportation and storage systems.
3. The Promotion or Communication Variable
Promotion is used to increase public awareness of an enterprise about its existing or new product or brand.
In addition, promotion is used to educate customers about the features of the product or renew interest in
a product whose popularity is declining. Promotional strategies are concerned with communicating to
consumers and the related personal, selling, advertising and sales promotion decisions.
4. The Price Variable
In the area of the price variable, marketing managers usually have a hand in establishing pricing policies and
determining product prices. Since price is important to consumers, it is a delicate components of the
marketing mix. If prices are too low, the company may be lost. The supply and demand of the product,
transportation costs, size of the order and payment patterns etc. affect the price of a product.
Life Cycle of A Product
Every product progresses through a product life cycle, which is a series of stages in which its sales, revenue
and profits increase, reach a peak and then decline. Thus products are born, they grow up, enjoy their peak
years and eventually wane. Few products last forever, some products have minimum typical pattern
showing a gradual increase to maturity, reaching a maturity stage and then coming to declining stage. Few
periods in the life cycle of a product are generally recognized.
1. Introduction Stage
2. Growth Stage
3. Maturity Stage
4. Decline Stage
Some products pass through these stages rapidly, in a few weeks or months. Others may take years to go
through each stage.
1. Introduction Stage
In the introduction stage, both the sales growth rate and the level of sales are low. The slow sales growth
results from one or more of the following situation.
a) Delays in expansion of production capacity.
b) Technical problems in the product or production
c) Delays in achieving adequate distribution through retail outlets.
Profits are usual non-existent and at this stage, costs of production and the cost of marketing will be high if
there is a genuine product deferential. A company may benefit in different ways e.g. by high initial pricing or
by rapid market penetration.
2. Growth Stage
It is characterized by rapidly increasing sales. In this stage, price should be maintained at a high level to
allow the company to improve its cash position. Advertising and other sales promotional expenditure
remains high as compared to expenditures for established products. The number of competitors increase at
this stage and buying resistance will build up. An imitation of the product by the competitors starts and the
new product of the same style come in the market. Unit margin profit rises rapidly. Sales and profit also
increases rapidly. Due to entry of the competitors in the market, the management must be ready to face in
new products and adjust marketing tactics in lying with anticipated cycle.
3. Maturity Stage
During this period, sales volume continues to grow and the market reaches to full maturity. Sales may
continue to increase but at a decreasing rate. Competitors share the market and their market profitability at
different stages of market development. Programmes to reach more consumers and to find and promote
new uses for mature products become important means of competing. Deduction in price changes in
advertising and promotion techniques designing and quality may prove helpful at this stage.
4. Decline Stage
At this stage profit margin becomes very small and very effort has to be made to reduce cost and improve
distribution efficiency. Price becomes a major issue and this may lead to restriction to distribution to large
outlets. A product which is at the declining stage in one country may find a market in another country with a
less developed economy. The cost of maintaining business at this stage of cycle must be weighed against
the opportunity for investment elsewhere.
Marketers should be aware of the life-cycle stage of each product they are responsible for, and they should
know how long the product is expected to remain in that stage.
Product Planning and Development
Product development is a more united term and includes the technical activities of product research,
engineering and design.
Steps in Product Development
Despite the risk involved, new product development is a competitive necessity and has given incentive to
many companies to adopt a formal procedure for dealing with complexities and uncertainties involved in
product planning and development. Process of product planning and development consist of the following
steps:
1. The Search for New Product Ideas
The starting point for the new product development process is to present ideas. Management concentrates
its efforts on those product ideas that appear to be most promising. New product ideas may occur from
many sources, internal and external to the organization. Primary internal designing and company personnel.
The most important external sources are the customers and competitors.
2. Screening New Product Ideas
Ideas for new product must be completely screened at an early stage. This reduces the number of product
ideas that can undergo further detailed analysis. Screening determines the productivity of the idea, amount
of investment required, market possibilities, customers reactions and media chances of distribution to be
employed.
3. Business Analysis
The basic purpose of business analysis is to determine financial aspects of new product introduction. Such
an analysis is tied directly to the potential profitability of a proposed undertaking. The analysis is basically of
the cost and benefit i.e. the total cost of developing a new product and increase in turnover.
4. Development and Testing
At this stage, no product has been developed. Only a product concept has been creaed. Most product
concepts that successfully passed the business analysis stage are tested with potential consumers before
actual development begins. When consumers are shown the concept statements, they are asked to
evaluate the product idea from the stand point of their need and use of it. They are further asked to
evaluated the idea, suggest improvements in the product and to indicate general features they would like to
have.
5. Test Marketing
It is the introduction of a product in a limited geographical area to determine if the product should be
introduced to the national market. In test marketing, a product is produced on a limited scale under rightly
controlled conditions. It is the last opportunity for the company to modify the product for the marketing
strategy.
6. Introduction and Evaluation
This is the last stage in product planning and development. In this stage, the product is ready for national
distribution and takes its place as a part of the companies existing line and total mix. The marketing
programme designed to assist the new product will be determined by the information generated in the
early phases in planning and development.
Marketing Channels / Channels of Distribution
Marketing channels refer to the routes that are followed in carrying the products from manufacturers to
final consumers or users or the course taken in the transfer of title of a commodity. These channels vary
according to the nature of goods, the market, the character of demand and so on. It is also known as
channels of distribution. In view of growing competition and desire to reach the consumers with all possible
avenues, the channel of distribution adopted by a manufacturer is normally more than one.
To expedite and facilitate the flow of products of producers, middlemen or intermediaries have come up to
play their positive role. Hence in usual practice we find the following marketing channels for consumer
products.
Channels for Consumer Products
A. Producer – Consumer
B. Producer – Retailers – Consumers
C. Producer – Wholesalers – Retailers – Consumers
D. Producer – Agents – Wholesalers – Retailers – Consumers
E. Producer – Salesman – Consumer
Channel A as given above is followed or adopted by a producer where the product is highly perishable or
fast deteriorating or where a direct personal service is desired. Channel B is chose to avoid delay in
distribution and keep the producer nearer the consumers to make him understand their desire or liking with
greater closeness. In all other cases, channels C and D are adopted specially where producers have to sell
over a large geographical area and where they would like to transfer distribution burden to middleman.
Channel E is commonly termed door-to-door selling or personal selling and typified the method selected by
certain companies.
Channels for Industrial Products
F. Producer – Industrial buyers
G. Producer – Industrial Distributors – Industrial Buyers
H. Producer – Agents – Industrial Buyers
I. Producer – Agents – Industrial Distributors – Industrial Buyers
Among buyers there are industrial customers also who buy the product for industrial consumption or for
use in finishing their product or for assembly purpose. Industrial customers, as such, are potential buyers of
certain products. For them, producers use one or more of the above channels.
In normal case, Channel F is being followed in carrying the product to industrial buyers. But this is
practicable where such buyers are in limited number. If the number of industrial buyers increases, the help
of intermediaries is sought and therefore channel G can also be adopted. Where the producer wants to pay
more attention to other things, channel may be placed up where agents are appointed to serve industrial
buyers. In still other cases channel I may also be used to serve a large number of industrial buyers in
different parts of the country of geographical area. Hence these different marketing channels are useful in
their own cases and are adopted by producers according to their needs and requirements.
Pricing
Importance of Price
Price is the value of a commodity expressed in terms of money. Pricing is considered by many to be the key
activity within the capitalistic system of free enterprise. price, thus, is a basic regulation of the economic
system. Price determines what will be produced (supply) and who will get how much of these goods and
services (demand).
Management may decide to improve the quality of the products or add differentiating features. This
decision can be implemented only if the market will accept a price high enough to cover the costs of these
changes. Poorly made and implemented price decisions result in a weaker market position generally and in
the extreme outright business failure.
Pricing Objectives
No marketing job can be done properly without a goal, and pricing is no exception. Management should
decide upon its pricing objectives before determining the price itself. But very few firms clearly state their
specific price policies. The main goals in pricing may be classified as follows:
1. Achieve Target Return on Investment or Net Sales
A firm may price to achieve a certain percentage return on investment or on net sales. They set a
percentage markup on sales that is large enough to cover anticipated operating costs plus a desired profit
for the year. It was selected as a goal by manufacturers that were leaders in their industries.
2. Stabilize Prices
Price stabilization is often the goal in industries with a price leader. Price leadership does not mean that all
items in the industry charge the same price as set by the leaders.
3. Maintain or Improve Share of Market
In some companies, both large and small, the major pricing objective is to maintain or increase the share of
the market held by the firm, and through it, it can usually determine what shares of the market it enjoys, in
some respects, it is better goal than target return especially when the total market is growing. A firm might
be earning a reasonable return, but might be getting a deceased share of the market.
4. Meet or Prevent Competition
Countless firms, regardless of size, price their products simply to meet competition. When a company sells
its output in this manner, we can almost say that it has no control over the goal and the means used to
reach it, or either we fix the price of a commodity so that the competitors do not enter the market.
5. Maximize Profits
the pricing objective of making as much money as possible is probably followed by a larger number of
companies than any other policy. A profit maximization policy if practiced over the long run. For this, the
firm may have to accept short run losses. A firm producing a new product does best by setting low prices
and making least profits for the first few years, but they are laying the solid foundation for adequate profits
over the long run. The goal should be to maximize profits on total output rather than on each single item
marketed.
Factors Influencing Price Determination
After setting their objectives, executives must determined the base price of their product or service. By base
price, we mean the price of one unit of the product at the point of production or resale.
In the price determination process, several factors usually influence the final decision. Factors may be both
internal and external that affects the price at which a product is offered for sale. Internal factors include the
intersection of other marketing controllable like product distribution and promotion. However, following
are the key factors that management should consider.
1. Demand for the Product
The first stage in pricing a product is to estimate the total demand for it. Two practical steps in demand
estimation are:
a) The Expected Price
This is the price of the product at which the customers value it. It is what they think the product is worth of.
If the price is much lower than what the market expects, sales may be lost.
The producer may submit their articles to experienced wholesalers or retailers or engineers and ask them to
estimate its price. Another possibility is to observe prices of comparable competitive products. A third
alternative is to survey potential customers by showing them the articles and asking them to determine its
price.
However, a much more effective approach is to market the product in a few limited test areas. By trying
different prices under controlled research conditions, the seller can determine at least a reasonable range
of prices.
b) Estimates of Sales At Various Prices
It is extremely helpful to estimate what the sales volume will be at several different prices. Here experience
with the product or with like products is the best source of information. A product with an elastic demand
should usually be priced lower than an item with an inelastic demand.
2. Target Share of Market
the market share targeted by a company is a major factor to consider when determining the price of a
product or a service. A company striving to increase its market share may price more aggressively (lower
base price, larger discounts) then a firm that wants to maintain its present share.
The expected share of the market is influenced by present production capacity and ease of competitive
entry.
3. Competitive Reactions
Present and potential competition is an important influence is determining a base price. The threat of
potential competition is greatest when the field is easy to enter and the profit prospects are encouraging.
4. Cream Skimming Pricing Versus Penetration Pricing
While pricing a product, the management should consider, whether to enter the market with a high price or
low price. These opposite alternatives are termed as skim the cream pricing and penetration pricing.
The cream-skimming strategy involves setting a price that is high in the range of expected prices. A seller
may follow this policy for long, or later lower the price to tap other market segments. It is particularly
suitable for new products.
In penetration pricing, a low initial price is set to reach the mass market immediately. It can also be
employed at a later stage in products life cycle. If there is free duty in the market of a product, management
should adopt the penetration pricing policy.
On the other hand, where the market is not large enough to attract the big competitors, it is feasible to
adopt cream-skimming policy.
5. Other Parts of the Marketing Mix – The Product, Distribution Channels and Promotion
In the course of determining a base price, management should consider the other major parts of its
marketing mix.
a) The Product
The price of a product is influenced by whether it is a new item or an older, established one. The
importance of the product in its end use must also be considered.
b) Channels of Distribution
Often a firm sets a different price for wholesalers and retailers. The price to the wholesalers is lower
because they provide facilities such as storage, granting credit to retailers and selling to small retailers.
c) Promotional Methods
The promotional methods used, and the extent to which the product is promoted by the manufacturers or
the middleman are considered in pricing. If major promotion is done by retailers, they will be charged a
lower price for a product.
Promotion
Basic Nature of Promotion
In its promotional activities, a firm gets its chance to communicate with potential customers. It should be
noted particularly that promotion and sales promotion are different. Promotion is the all inclusive term
representing the broad filed and sales promotion is only a part of it. Promotion is the most criticized of all
the marketing activities.
Basically, promotion is an exercise in information, persuasion, and communication. These three are related,
because to inform is to persuade, and conversely a person who is persuaded is also being formed. And
persuasion and information become effective through some form of communication.
Need for Promotion
A company needs promotion to aid in differentiating its products, to persuade the buyers and to bring more
information into the buying decision process. Through the use of promotion, a company hopes to increase a
products sales volume at only given price. Several factors point up the need for promotion.
1. Distances and Number of Consumers
As the distance between the producers and consumers increases, and as the number of potential customers
grows, the problem of market communication becomes significant needs an effective promotional
programme.
2. Disseminate Information
Once the middlemen are introduced in a marketing pattern they must be informed about the products.
Wholesales must promote the products to retailers and retailers to consumers. Even the most useful
product will be a failure, if no body knows about it. A basic purpose of promotions is to disseminate
information to let the customer know.
3. Competition between the Firms
The intense competition between different industries and even between different firms within an industry
needs promotional programmes. Since, variety of goods are growing in the market and since customers are
more selective in their buying choices, so a good promotional program is needed to reach them.
4. Periods of Shortages
Promotion is also needed during the periods of shortages, as advertising can stress product conversation
and efficient uses of the product. The sales force can also help custoemrs in solving their shortage induced
programmes.
5. Economic Decline
Any economic decline quickly points up the importance of selling. During such a period, product planning,
the channels and the pricing structure remain unaffected and unchanged. The key problem is selling.
However, promotion is needed to maintain the high material standard of living and the high level of
employment.
Methods or components of Promotion
The major components or the tools of promotion are as follows:
1. Advertising
Advertising is the principal method of demand creation. It consists of all the activities involved in presenting
to a group, a non-personal, oral or visual, openly sponsored message regarding a product, service or idea.
This message, called advertisement, is disseminated through one or more media and is paid by the
identified sponsor. Advertisement is the message itself while advertising is a process. The factor of payment
made by the sponsor to media differentiates advertising from propaganda and publicity. It is advertising
that has enabled the businessmen to make continuous mass production for the wide markets. It ensures the
introduction and acceptance of a new product in the market.
Advertising, being a comparatively cheaper method, is directed to prepare the necessary ground for the
activities relied upon to a great extent.
2. Personal Selling
Selling is essential to the health and well being of our economic system. The goal of all marketing efforts is
to increase profitable sales by offering want satisfaction to the market. Personal selling is by far the major
promotional method used to reach this goal.
Personal selling consists of individual, personal communication and it has the advantage of being more
flexible in operations. In other words, personal selling is an oral representation in a conversation with one
or more prospective buyers for the purpose of making sales. In personal selling, the company has an
advantage to pinpoint its target market effectively.
3. Sales Promotion
Sales promotion consists of those marketing activities, other than personal selling, advertising and publicity,
that stimulate consumer purchasing and dealer effectiveness, such as displays shows and expositions,
demonstrations, and various non-current selling efforts not in the ordinary routine. It serves as a bridge
between advertising and personal selling. These devices are very important at the point of purchase
because they inform, remind or otherwise stimulate the buyer. The sales promotion department of a
manufacturer may work with many different groups consumers, dealers and distributors, or other sections
of the marketing department. Thus, the marketing managers must carefully consider the role played by
sales promotion in the marketing mix.
4. Publicity
Publicity is a non-personal form of demand stimulation and is not paid for by the person or organization
benefiting from it. Publicity refers to any message concerning an organization appearing in the mass media
as a news item for which the organization does not pay and is not generally considered to be the source.
5. Public Relations
The market target of public relations effort may be any given public such as customers, a government
agency, employees, or people living near the promotional organization.
................................
5:Business in the Global Market
International Marketing International marketing refers to the marketing activities that are performed across
the international boundaries. The planning and control of such marketing activities are carried by the parent
producing company through its strategic marketing activities that are designed and established to meet the
requirements of such a market. The main goal is to introduce and familiarize the product in a manner that
customers get satisfied, develop liking for the product, and build a better image of the multinational
manufacturer.
Marketing strategies are adopted to overcome hindrances and restraints. Greater the multinational
companies pay attention to marketing mix, greater becomes the possibility of exercising effective control or
better grip over the international market. Further the success of international marketing also depends upon
how the producers understand social and cultural built up economic pattern, political environment, and the
technological advertisement that has been acquired by the country where goods and services are to be
provided. In fact, successful international marketing depends upon how the producing company gets
adjusted and fully familiarized with the conditions that prevail in the country where the goods and services
are to be provided.
Balance of Trade
By balance of trade we mean the difference between what a country pays for imports and what is receives
for its exports. It records all visible items that are exported to and imported from other countries through
sea, air and land routes. Balance of trade, as such gives an estimation of total inflow and outflow of goods
that are recorded at the inlet and outlet points.
Balance of Payment
Balance of payment refers to the net results that are drawn after recording all the visible and invisible items
that are imported and exported from the country. Balance of payment, as such, provides a comprehensive
statement over the net results of foreign trade and gives a true picture as to where the country stands in
the international trade. It clearly exposes the economic viability, strength, and in capability by correctly
measuring its imports and exports, competency in goods and services as well as technical know-how. By
services we mean the services of shipping lines, insurance companies, banking concerns, and others. It also
includes the foreign loan that is either provided by it or accepted from other country or countries.
Arguments for Restraints on International Trade
Free international trade is hardly found today. The most popular arguments that are given for restricting
foreign trade among nations are as follows:
1. Military Argument
This argument holds that all industries vital to the national defence should be kept alive through tariff
protection, if necessary.
2. The Home Industry Argument
This argument holds that if foreign goods are kept out of the country. Domestic manufacturers will enjoy a
larger home market. But this argument favours selfish businessmen who are thus able to free themselves
from foreign competition and charge high prices for their own goods. In this view, protective tariff
unnecessarily makes imported goods costlier and render local producers to enjoy a larger home market
where by losing foreign buyers.
3. The Infant Industry
The tenor of this argument is that young struggling industries should be protected from foreign competition
until they are matured enough to face it. But determining how long this protection is needed for each
individual industry and when it should be discarded is a difficult task.
4. The Wages Argument
This argument holds that by excluding foreign goods, goods made by higher paid domestic labour are
encouraged thereby raising the domestic wage level. But by doing this:
1. The domestic prices are unduly raised.
2. Since high wages do not cause high productivity, this results in subsidizing uneconomic production to the
long run disadvantage of all parties concerned.
5. Favourable Balance of Trade Argument
In an attempt to have a favourable balance of trade, a country may make every effort to reduce the import
burden as much as possible by resorting to increased import duty, surcharge etc. while on the other hand,
to increase exports to gain as much favourable results of foreign trade as possible.
Methods of Restricting Free Trade
Some of the methods used as barriers to free foreign trade are briefly given as follows:
1. Tariffs
Tariffs are simply taxes imposed by a nation on products imported from other nations. There are two broad
types of tariffs:
(a) Revenue Tariffs, which are imposed to raise revenue, not necessary to prohibit specific imports.
(b) Protective Tariffs, which are designed to protect domestic industries against foreign competition.
Revenue tariffs are specific duty tariffs and they are levied on imports of a stated amount per unit (such as
per pair, per kilo, per liter and so on). The usual objective is to produce revenue. Protective tariffs, on the
other hand are based on the value of imported products, rather than the quantity. They are of often known
as ad valorem taxes that aim at controlling the retail prices. They thus protect the domestic producers. If the
ad valorem tax is high enough, it can keep foreign products out of the domestic market altogether.
2. Quotas
It is a trade restriction technique where a country simply sets an upper limit on the amount of a certain
product that may be imported. Quota is fixed to restrict import of a certain commodity, to avoid foreign
competition and the home industry operates without any major upset.
3. Embargo
An embargo is a completed prohibition on imports of certain products or from certain countries. It is more a
political motivated action that puts a ban on imports rather than an economic one. Example may be given of
the United States tat prohibited the imports of products from certain communist countries.
4. Difficult Custom Procedures
The creation of complicated and expensive custom procedures can be effective in limiting imports. It can
also be used to discourage exports. Importers and exporters get fed up with difficult custom procedures
that are intelligently introduced by the government.
Organization for Multinational Operation
Multinational operations are conducted by companies with the help of one of different organizational
structures. The four identified organizational structures are:
1. International Division
Some companies set up a separate division, which looks after the multinational operations. The
international division created for the purpose assumes its own-identity apart from the principal
organization.
2. Geographical Division
Some companies have separated divisions to handle business independently in different parts of the world.
3. Functional Division
A third form of organizational structure is based on function. The marketing for the world wide organization
is planned by the Marketing Division. The Finance Department manages international finance along with
domestic finance.
4. Product Division
A company divides its operations according to products of the company. A specific department handles the
complete activity of producing and marketing its products.
Problems of Multinational Operation
Problems tend to sneak up on executives of multinational firms in the most unexpected ways, including the
following:
1. Language Differences
Differences in language constitutes one of the outstanding barriers to international trade. Failure to
communicate properly and adequately through correspondence, advertising and conversation retards
attainment of the full possibilities of a foreign market.
2. Different Monetary Standards
Every nation has its own peculiar currency. Rupee in Pakistan yen in Japan, Lira in Italy etc. This situation
requires not only a mechanism whereby the seller may be paid in his own currency while the buyer makes
payment in his, but also a method whereby each of these national currencies may be value in terms of every
other one. The non-existence of gold standard, which at one time served as a common denominator, has
greatly complicated the problem.
3. Local Attitudes
Local attitudes about certain products may become very important. If a product is thought to be mainly for
men or mainly for children, its sales could certainly be affected. Furthermore, stereotypes about foreign
countries are often incorrect and misleading.
4. Difference of Tastes
Tastes vary from country to country and even within a country from person to person. This difference of
taste may cause drastic problems to multinational companies, which intend to have their plan of operations
in many countries.
5. Lack of Marketing Information
Lack of precise, current marketing information about most foreign countries may also cause a hindrance
.Helpful data can be secured from such sources as foreign trade associations, banks etc. but this information
is usually quite general and can be applied only in part to problems concerning specific products and
markets.
6. Trade Barriers
Practically all countries for one reason or another, interpose barriers that tend to restrict the free flow of
goods across their borders. These barriers can make the free practice of business very difficult. They consist
of tariffs, quotas, exchange restrictions, barter arrangements, laws and occasionally absolute prohibitions to
the import of certain commodities.
7. Climate Difference
In this area, difficulty is anticipated but still encountered. For some commodities, which are sensitive to
climate conditions, special scheduling, and packaging are often required for protection from exceptional
moisture, heat or cold.
8. Business Customs and Bargaining Customs
Business customs and bargaining customs are rarely part of written law. Nevertheless they are sure to affect
marketing strategy.
9. Shortage of Qualified Management Personnel
There is critical shortage of qualified management personnel for multinational operations. Schools are now
training for international management. Some companies are beginning to try to make overseas experience
attractive and a requisite for advancement within the corporation.
10. Interface of Divisions
A final difficulty often occurs in the upper echelons of multinational companies at the critical interface of
divisions. Relationships between divisions can become strained and aggressive when the competitiveness of
division executives is increased by nationalistic pride. Hence great care, for detail and fairness must be tied,
into the agreements and plans for marketing areas and responsibilities of each corporate arm.
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6:Creating Goods and Services
Production Control Production control consists of a well defined set of procedures that has its objective, the
coordination of all the elements of productive process men, machines, tools and materials into a smoothly
flowing whole, which results in the fabrication of products with a minimum interruption.
Management is responsible to see that all business plans are properly adhered to and the standard sets are
attained. Production control therefore involves in control of cost, quality, and time of production. An
effective system of production control minimizes the idleness of men and machines, optimizes the number
of setups required, keeps in process inventories at a satisfactory level, reduces material handling and
storage costs and consequently permits good quality and sufficient quantity of production at low unit cost.
Steps in Production Control
The basic steps in production control, in occur in which they occur are:
(a) Planning
Planning is the part of production control that determines which materials and work are needed in order to
produce the products offered from the manufacturing division. Each order is broken down into its basic
parts on a bill of materials, which lists all the materials, parts and sub assemblies needed to complete that
order. The time needed to supply all required materials must be determined, and thus must be indicated to
other production control personnel. Further, the production controller has to determine whether the
required equipment and trained employees are available for the job at band.
(b) Routing
Routing is the part of production control that determines which route, or path the work will take through
the factory and where and by whom the processing shall be done. This requires the production controller to
know in detail how each machine operation or work process is performed. Route, sheets are prepared to
show the sequence of operations for all parts and materials and for all activities. Route charts are
constructed to indicate the production processes. A route file is constructed that consists of all the
necessary job tickets required to move the materials out of stock to the various machine positions.
(c) Scheduling
Scheduling involves the getting up o the time tables that will govern the movement of the work, which is
subjected to the various fabricating processes. For this, the production controller ha to understand the
nature of work and workload capability of each department. After reviewing them he prepares a master
schedule, which indicates the number of finished products that will come off the assembly each month or
weak until the order is completed. When the job on hand involves several departments, a weekly
departmental schedule is used to show the expected production from each department for each week of
the total production period. Finally load ahead schedule is prepared to indicate the amount of back work
that must be processed in each department before it can handle new work.
(d) Dispatching
dispatching is that part of production control that releases final work orders to the operating departments.
it is the step where work order spell out which work is to be done and the amount of time estimated for its
completion. Besides authorizing the department to proceed with work on the job, the work order states the
priority of the work and gives necessary instructions about it.
(e) Performance Follow-up and Control
Lastly, the production controller must verify or assess the performance results. for this purpose elaborate
control boards are some time set up, utilizing various printed forms that show the progress of the work
section wise or department wise and serve as indicators of satisfactory or unsatisfactory performance.
Many managements use schedule performance reports for this purpose. These reports are issued by the
production controller, but the information on them comes from the operating departments. The report
compares what was accomplished with, what was assigned and scheduled. Additional follow up control is
achieved through scrap reports. They show which work was rejected by inspectors, and why and what is to
be done with rejected products.
The Emerging Service Industry
Service industry has gained prominence during the last two decades. Principles of production management
applicable to manufacturing industry apply to service industry also. The difference between the two types
of industries is of nature of product. One producers goods (tangible) whereas the produces services
(intangible). Banking, insurance, transportation, hotels and motels are engaged in production of services for
customers. As such, planning is as important in banking a in steel industry. Routing must be of a major
concern to a taxi driver. Scheduling should be important for doctors for listing patients.
The characteristics of most of the service industries are as follows:
There is no inventory of completed products in stock. It is so because an unsold airline seat cannot be
restored for the future.
Preferably operated under single ownership, because the initial investment involves small capital.
Operation area usually remains limited because it needs personal attention and supervision.
In a service industry, skill is more important than capital.
Labour is the largest expenditure because of the smaller investment and importance of skilled personnel.
The product is often intangible and consists of maintenance. Haircuts, health care and entertainment need
to be replaced on a regular basis.
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7:Making Goods and Services Available
Purchasing Producers or manufacturers purchase raw materials to be fabricated into products that are
needed in the market. These products may be purchased by industrial customers for further processing, or
by distributors for eventual sale to ultimate consumers. Purchasing, as such, is a major task of a
businessman. For producers, such purchases should be sufficient enough and timely to ensure
uninterrupted production, and for distributors it should be at a reasonable level to avoid the risk of under or
overstocking. High degree of skill, therefore, is required in making purchases.
Steps in Purchasing
1. Establishing Specification and Determining the Need For Goods
The first step in purchasing is to determine exactly the goods that are to be acquired. It is done in the light
of specifications that are received by purchase office from departments concerned. For non-repetitive
goods, endorsement is also obtained from engineering or technical department to determine their
exactness. For repetitive goods, confirmation as obtained from production department in case of
manufacturers or assemblers, and sales manager in case of distributors or middleman.
2. Investigating the Supply Market
After determining the requirements, the next step is to search out all possible sources of the supply market.
Purchase officer must find out all the suppliers, their products, their prices, the quality of their wares, their
terms and conditions, their reputation in the trade and other related things that would help him in deciding
the list of potential suppliers.
3. Starting Purchasing Negotiations
After searching or investigating the market and picking up the names of potential suppliers the purchase
officer carries negotiation with them. Through letters of inquiry, information is collected about the goods.
Letters of quotation provide him facts regarding price, mode of packing, terms of sales, and the time of
delivery. Purchase officer through such negotiation tries to obtain maximum facility that a supplier could
give and comes in a position to decide to which he should place the order.
4. Placing the Order
Soon after deciding about the supplier, the purchase officer places the order to him for supply of the goods
on terms and conditions already settled. Such order is usually placed in writing to have evidence in case of
any dispute that may arise later on. Order in writing carries an exact description of the goods required, the
prices, the quantities desired, the delivery date, the discount terms, shipping or dispatch instructions, billing
instructions, and mode of packing etc. A copy of the purchase order is always maintained by the purchase
officer.
5. Following Up the Order
In order to make sure that the order is executed by the supplier in time, following up the order becomes the
usual step in purchasing. Purchase officer, therefore, monitors the progress of this order and finds out
whether it is being executed by the supplier in time and as desired. This involves frequent contacts with
suppliers and efforts to make certain that there are no delays in dispatch of the goods on their part and the
goods so ordered will be received in time.
6. Receiving the Goods
On receiving the goods, the purchase officer immediately makes them to be compared with order form to
see whether these are correctly sent by the supplier and meet the requirements as per order form. If the
shipment is correct in both quality and quantity, the goods are sent to stock. If there is any differences in
the order and the shipment, the matter is immediately brought to the knowledge of the supplier. Till the
settlement of the discrepancy, the goods so received are held in the receiving room.
Inventory Control
Need of Inventory Control
With few exceptions, most businesses have a considerable financial investment in materials of all kinds.
Inventories are maintained in stock rooms, in process and in transit to and from the company. Such
inventories really constitutes life blood of the business organization.
It is very important that this stream of materials be properly maintained without gaps and without
overflows. Too little means that production will stop or those customers cannot be served. Too much means
excessive storage, and investment costs, with possibilities excessive deterioration or obsolescence.
The right solution lies in steering between two disasters. It is therefore necessary to take steps to see that
flow and amount material supplies throughout the operations are properly adjusted. Th steps taken are
termed inventory control.
Importance of Inventory control
Such controls serve the following purpose:
1. Provide opportunities to save money and eliminate wastes in the quality of goods selected, in the
quantities ordered and used and in the expenditures for transportation, storage, and distrubution to
markets.
2. Replenish supplies before they are dangerously depleted.
3. Prevent accumulation of excessive supplies.
4. Allocate materials to specific needs.
5. Provide proper accounting of inventory positions.
a) Provide written record of transfer of materials from one department to another.
b) provide record of the manufacturing processes through which the materials pass.
c) Serves as an authority for such movement.
d) Serves as a source of cost data for the cost accounting department.
Control Procedure
The details of materials control procedure vary from company to company. The basic philosophy of the
operation however is much the same in all concerns.
1. When the goods are first received and placed in stock, records are made of all pertinent data.
2. All subsequent movements of the materials are accompanied by such paper work as is necessary to
inform the management of their exact location at all times.
3. Periodic counts are made to e certain that cone of the items have been lost in the production process.
4. Whenever materials move from one place to another within the plenty, records are adjusted to reflect
this transfer and to fix the responsibility for their custody.
5. Identifying tags accompany all goods to facilitate accurate checking.
6. As a means of providing information on the number of items of each kind in the stock room, perpetual
inventory records are kept.
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8:Human Resources and Personnel Management
The Personnel Process The essential and time-honoured function of personnel department is to provide
competent people for all positions in the business firm. The steps that are followed in the process are briefly
explained as follows:
1. Determination of Needs
For this purpose job analysis becomes the first requirement. Job analysis involves inquiry into all the details
of each job of the company that is to be filled up. Location of the job, its duties and responsibilities, working
conditions, the salary, the promotion opportunities, and whether or not any training for the job is offered,
are the things that are looked into. Job analysis practically makes a job description and helps in guiding the
person responsible for making selection in determining the qualification, experience and health
requirements of the conditions to be considered for the job.
2. Selection and Recruiting
The procedures for recruiting applicants vary depending upon the firm and the type of work. In usual cases
generally they agree to follow:
Screening
Screening is usually carried through processing the applications blanks and preliminary interview. Each
application or job letter is throughly examined in the light of the job to determine the suitability of the
candidate. Preliminary interview helps in filtering out the correct persons.
Tests
Tests are carried to find out the proficiency and capability of the candidates. For this purpose there could be
intelligence test, aptitude tests, and ability or achievement tests. This may include medical tests to
determine physical fitness.
Main Interview
Applicants who clear above two stages are then invited to a personal or main interview. It involves the most
careful and balanced judgment on the part of the manager, as upon this the human balance sheet of the
enterprise depends.
3. Orientation and Training
Orientation
After the applicant has been hired he must be properly introduced to the policies of the company, to the job
and the surrounding and to the people with whom he will work. The idea is to relive tension, minimize
critical sensitivity and ease the adjustment in new environment.
Things Helpful in the Procedure of Orientation
Lectures in the personnel department on history, producers, policies of the company.
Movies, pamphlets and booklets, which cover company operations and services.
A conducted tour of the factory of office.
A personal introduction to fellow workers and new surroundings.
Subjects Covered in An Orientation Programme
Whatever the method, the following types of subjects are usually covered:
1. Company history, products and major operations.
2. General company policies and regulations.
3. Relation of foremen and personnel department.
4. Rules and regulations regarding:
a) Wages and wage payment
b) Hours of work and overtime
c) Safety and accidents
d) Holidays and Vacations
e) Methods of Reporting Tardiness and Absences
f) Discipline and grievances
g) Uniforms and badges
h) Parking
5. Economic and recreational services available:
a) Insurance plans
b) Pensions
c) Athletic and Social Activities
6. Opportunities
a) Promotion and transfer
b)Job stabilization
c) Suggestion systems
Training
Employee training is the process of teaching and operating technical employers, how to develop their
present jobs more efficiently. It aims at improving employee skill and abilities.
Companies that hope to stay competitive typically make huge commitments to employee training and
development.
Methods or Types of Training
A variety of methods are available for employee training and development. Following are the various
methods that can be used:
1. Training on the Job
This is the most universal method and makes the most lasting impression. Certain types of work lend
themselves to training on the job, whereby the employees learn by doing the work under the supervision of
an instructor.
2. Vestibule Training
This is the method in which the work situation is simulated in a separated area so that learning takes place
away from day-to-day pressures of work. Many firms operate company schools to which new employees are
sent for training. This is used when the work involves dangers or costs, which might lead to expensive
mistakes.
3. Apprentice Training
Apprentice training is traditional in various trades, crafts and technical fields where proficiency is acquired
after years of instruction by experts. It is a combination of class room lectures, special work area practice
and actual work experience.
4. Internship
This provides for cooperation between schools and businesses with intermittent periods of time assigned to
each. Outside experiences can well enhance the development of a new manager.
5. Class Room Teaching and Lectures
Training with industry or short lecture and demonstration courses to show supervisors how to develop
better methods of handling human relationships and to rain subordinates.
6. Conference and Seminar Techniques
Here small groups are brought together to discuss problems, exchange ideas or be briefed on various
situations. Participation in small groups of no more than fifteen is an excellent means of learning.
7. Psychodrama or Role Playing
This is the training in which executives learn by acting out what they should do in actial situations under the
guidance of a trainer from the personnel department.
8. Job Rotation
At higher levels of an organization, management training may take place through job rotation. Position
rotation or moving executives from one job to another so that they get to know the individual and total
problems of a company. Assistant to promotions permit trainees to broaden their view point and
background.
9. Outside Courses
These are used by many organizations that do not have the resources to do their own training. Outside
courses in colleges, correspondence courses, trade association conferences and evening schools are also
commonly used to educate executives.
10. Understudy Plans
This provides for an assistant to be assigned o a skilled worker or executive. By working directly under a
particular man, the under study can learn the ropes and then take on the job when vacancy occur.
11. The Group Dynamics
Under this method, employees are organized into a squadron or group with a view to giving them broad
idea and necessary skills on a number of jobs. This is applicable particularly in those cases where a large
number of potential executives care to be trained up to fill different executive and managerial positions.
4. Performance Appraisal
Performance appraisal or evaluation makes the personnel manager estimate and understand the
effectiveness and performance capability of an employee. This also helps him to find out to what extent the
employee has made improvement in his work performance. Further performance appraisal can also guide
the manager in correctly rewarding the employees, honestly allocating the human resources, fairly filling up
the higher jobs and building the atmosphere of trust and confidence within the enterprise.
To the employee, performance appraisal provides a feedback to him that can greatly guide his future
adjustment and greater preparedness to overcome his weaknesses.
5. Compensation
Compensation is the monetary reward and other benefits that are offered to employees. People should be
paid or rewarded according to what they produce or how much risk they take. It is because compensation is
real lubricant to work performance. Fair compensation to employees always pays in the long run. That is the
reason good personnel manager always recommends a fair compensation to employees.
Compensations that are expected by employees today and which are included in the programme are:
1. Fair wages
2. Continuous employment
3. Reasonable hours of work
4. Pleasant and safe working conditions
5. Future prospects
6. Feeling of contribution
6. Promotion
One of the important considerations in personnel policy is to device and work out the way that would
assure promotion to deserving employees of the enterprise. The hope for earning promotion on the basis of
their competency makes the employees work with greater devotion and sincerity. Good personnel
managers do recognize it and take care in deciding this issue with fair justice. They know that attraction of
good employees and their retention within the enterprise depends upon a formidable promotion policy.
7. Termination
The employees may retire from their jobs after attaining certain age or completing the terms of service.
They may leave the job on their own accord or may be declared surplus by the management. These all
virtually result in termination of the job. Such termination should always end with a happy note. The
management in recognition of the service of their employees determines the retirement benefit in the
shape of pension, provident fund and gratuity.
Trade Unions
Definition
Modern industrialization has given rise to great number of problems.There has come to be a clash between
the interests of labour and organization, the former claiming higher wages and the latter higher profits.
Today, labourers have come to realise that they can improve their conditions of work only through
collective bargaining with the employees. Thus they combine themselves into Trade or labour unions.
The aim of the trade unions is thus to protect the interests of the workers by
1. Conserving the advantages already received.
2. Doing everything legally possible to obtain further the just and genuine benefits from the employers.
Function of Trade Unions
Trade unions assist labour in that they perform three types of functions.
a. Militant Function.
b. Fraternal Function.
c. Political Function.
(a)Militant Functions
The main function of the trade union is to fight for the basic rights and interests of its members. In doing
this they offer the following benefits to the labour community.
1. Collective Bargaining
Labour has weak bargaining power as against his employer. A labourer sells his services as an individual
while the employer buys them on a large scale. Labour is therefore in much greater competition for
employment then the employers are for labour. If labourers do not combine themselves into trade unions
they are likely to be taken advantage by the employers. Trade unions strengthens the bargaining power of
labour through the introduction of what is called collective bargaining. Now instead of each worker
negotiating with the employers on various demands, the trade unions bargain on behalf of them all. If their
reasonable terms are not accepted, they curtail the supply of labour and resort to strikes boycotts or
lockout etc.
2. Standardizing Wage Rate
Modern trade unions fight for the raising of standard wage rate. For that, they try to improve the efficiency
of labour, (by standardizing conditions of work and fostering habits of honesty regularity etc) ensure that
wages are raised up to marginal productivity level, restrict labour supply, increase labour demand and
thereby seek to establish standard wage for a standard quality of work.
3. Job Security
For achieving this objective, seniority rights of workers, control over hiring of labour, grievance procedure
for handling cases of discharge etc. are used as devices.
4. Improving Conditions of Work
Trade unions put pressure on the employers to provide workers with better conditions of work, sufficient
recreation, standardized hours of work etc.
5. Limitation of Output
If a given number of labourers produce more than what they ought to, employment for labour will be
reduced. Hence, output per worker is standardized by the unions.
(b) Fraternal Functions
Fraternal functions consist of mutual help for the welfare of the workers. In this context, trade unions offer
the following benefits:
1. A Ministrant Association
Trade unions act as ministrant association and provide monetary protection to workers against temporary
unemployment, sickness, accident etc. Some trade unions give loans and advances to their members for
meeting their social obligations.
2. Professional Training
Trade unions also arrange for education and professional training of their members and as such assist them
in improving their efficiency and skill.
3. Source of Information
Trade unions serve as a source of defusing labour information the workers. The workers are guided and
advised by trade unions leaders who also defuse information by organizing of workers.
4. Insurance Facilities
Trade unions also arrange for insurance facilities against risks of accidents.
5. Legal Help
Trade unions help the labourers in legal proceedings at the court, in the disputes of labourers.
(c) Political Functions
Many trade unions fight elections to capture the government. In many countries, strong labour parties have
grown up. We have some labour seats in the legislature.
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8:Reducing Risks Through Insurance
Business Risks Risk is the danger that something will happen to destroy the best-laid plans. The more
venturesome the enterprise, the greater the profits or losses that can be expected.
Despite the return for risk taking, the businessman prefers to eliminate as many hazards to successful
operation as possible. Some he must assume while others he can reduce to a minimum.
Kinds of Business Risks
Hence, the risks that confront a business may be divided into 2 types:
1. Uninsurable Risks
2. Insurable Risks
1. Uninsurable Risks
Some risks may be due to external causes over which little or no control can be exercised. These are
uninsurable risks and few of them are as follows:
a. Fluctuations in Price Level
A business firm typically produces goods in anticipation of demand and incurs expenditure on raw material,
wages and various other costs with a view to sell goods at profit. In the meantime of the prices of the
product fall, the firm will have to bear loss.
b. Changes in Distribution Method
The recent development of chain stores, supermarkets and shopping centers has had an impact on small,
independently owned stores. Many of them have been forced to shut their doors.
c. Changes in Laws
Often changing of laws also affects business e.g. if the government bans the import of certain items for any
reason or plates excessive duties on their import, the dealers of such items will be forced out of business.
d. Change in Technology (Advancement)
The development of new products or new brands of better quality, new production techniques etc
constitute a continuous hazard for those who do not keep up with time.
e. Change in Consumer Tastes
A company produces goods keeping in view the tastes of customers. A shift in the whims and fancies of
customers and consequently a fall in demand constitute a risk and bring loss to the company.
2. Insurable Risks
Not all risks are insurable. Only those that are economic in character can be insured. But not all economic
risk is insurable either. They can be divided into SPECULATIVE and PURE RISKS. Speculation consists of
chances and can result in either gain or loss. Insurance is limited to pure risk because in it there is not
chance of gain.
By definition, insurance is a system devised to reduce the burden of financial loss due to some specified but
uncertain event.
a. Risk of Fire
A factory or office building may be damaged by fire. This risk is insured with the insurance company,
whereby the insurance carrier agrees to make goods any loss sustained by a person on property destroyed
by fire.
b. Risk of Theft
A business may be robbed by burglars or a dishonest employee may steal money or goods handled by the
business.
c. Transportation Risk
Maritime perils like sinking, capsizing, damage by sea water etc, and risks due to rains, accidents etc faced
by goods while in transit come under this category.
d. Casualties
A business may suffer losses due to each casualties as wind store or earthquake, employee accidents, suits
against directors and officers by disgruntled stockholders etc.
Other Risks
1. Marketing Risks
Risks are involved in marketing a new product. Even after a product is successfully introduced to the
market, risks continue to plague its existence. To minimize these risks, many companies often use the
means of test marketing.
2. Equipment Risks
The purchase of special facilities and equipment can involve great risks. The expensive equipment required
to produce that new wonder drug may prove useless, if the drug has dangerous side effects. Practically any
major purchase decision involves risks.
3. Credit Risks
Each time a company extends credit to a customer, there is danger that the customer will not pay his bill. If
the credit manager becomes too careful and screen out everybody who has ever been late with a payment,
he runs the risk of restricting company sales.
4. Inventory Risks
Inventories also present the businessman with a dilemma. If he fails to buy adequate supplies, there is the
danger of running out of stock. Yet, the maintenance of large inventories means heavy storage costs plus
potential dangers of theft, deterioration, price declines of obsolescence.
5. Government Risks
Certain Federal laws add to the risks associated with being a businessman. Product Liability means that the
manufacturer may be held liable if someone is injured because of a defective part in his product and so on
with other government laws and conditions.
Methods of Handling Risks
Risks are inherent in business. Some risks must be assumed while others can be minimized. Following are
the five general risk management techniques:
1. Risk Avoidance
A manufacturer can avoid the risk of product failure by refusing to introduce the new products. But this risk
avoidance would be at a very high cost. The business that does not take a chance on new products will
probably fail when the product life cycle catches up with it.
There are however situations in which risk avoidance is a practical technique. Individuals who stop smoking
or jeweler stores that lock up their merchandise in vaults are avoiding risks.
2. Risk Reduction (Protective Measures)
If a risk cannot be avoided, perhaps it can be reduced. A manufacturer can reduce the risk of product failure
through careful product planning and market testing.
Among the techniques used to reduce risks are:
Establishment of employee safety programmes.
Use of proper safety equipment.
Burglar alarms, security guards etc.
Fire proof building, fire alarms, sprinkler system etc.
Accurate and effective accounting and financial controls.
3. Self Insurance (Risk Assumption)
A firm takes on certain risks as part of doing business e.g. a firm assumes that some creditors will not come
up with payments. Risk assumptions is then the act of taking on responsibility for the loss or injury that may
result from a risk.
This usually means setting aside a financial reserve that can be drawn upon, should the loss occur.
(Self-insurance is the process of establishing a monetary fund that can be used to cover the cost of a loss)
e.g. companies maintain an allowance for bad debts.
Self insurance does not eliminate risks, it only provides a means for covering losses. it is more appropriate
for large organizations than for the small businesses.
4. Business Adaptation and Flexibility
Another method of dealing with risks seeks to reduce the potential impact of an undesirable event. Business
firms confronted by risk due to rapid changes in technology should stress on maximum adaptation of
production facilities, organizational structure and procurement method. By hedging they can minimize the
losses due to fluctuation ins price levels.
5. Shifting Risks (Insurance Coverage)
The most commonly used method of dealing with risks is to shift or transfer the risk to professional risk
taker the insurance company.
The insurance company is a firm that agrees, for a fee, to assume financial responsibility for losses that may
result from a specific risk. The fee charged by an insurance company is called Premium. A contract between
an insurer and the person or firm whose risk is assumed is known as an Insurance Policy. Generally an
insurance policy is written for a period of one year and is renewed each year.
Insurance is thus the protection against loss that is afforded by the purchase of an insurance policy.
Insurance companies only assume insurable risks. These estimate on the basis of past experience, the
amount that will have to pay in case losses occur. In addition to covering the losses, it must also recover its
own costs of operation.
Types of Insurance Coverage
Life Insurance
Life insurance does not insure life, as tis replacement is impossible. Practically it provides insurance either to
the assured or beneficiary on agreed amount of money that becomes payable either maturity of the period
or in case of death of the assured. In case if the assured amount becomes payable to the assured on the
expiry of certain period it is known as endowment policy. In case if the insured amount becomes payable on
death only, it is known as whole life policy. In whole life policy the some of the beneficiary must be specified
or mentioned by the insured so that payment could be made to correct person in case of this death. For the
benefit and facility of the insured, there is limited payment plan policy also that also permits the insured to
pay insurance premium to a limited number of years. After that period the policy comes the paid up policy
for the full value of the insured amount. In life insurance, group life coverage is also gaining popularity due
to its sizeable fringe benefits employees. Employers obtain group life insurance policy to cover all
employees less expensively than employees could buy individual polices for themselves.
Fire Insurance
Fire insurance policies protect property owners against losses resulting from damage to property used by
fire, Now its scope has been widened to cover losses from windstorms, hail, riots earthquake, explosion,
flood, chemical or smoke. The amount of premium chargeable by fire insurance companies depend upon
the amount of coverage obtained, type of property, and fire fighting arangements made by the company
obtaining protection.
Marine Insurance
Marine insurance protection is available to merchandise in transit. In fact international trade owes to it. Had
there been no marine insurance, perhaps foreign trade would not have expanded to the extent which we
find today. By offering protection to shippers and foreign traders, marine insurance is playing a vital role in
international commerce. It insures cargo, ship and freight.
When a ship sinks in ocean, three things are lost. Firstly, we lose cargo, secondly the ship itself and thirdly
the freight that would have been earned by the shipping lines. Cargo is insured by the trader, while ship and
freight are insured by the shipping company.
Burglary, Theft and Robbery Insurance
The insurance company draws fine distinctions among burglary, theft and robbery. Burglary is taking of
property by forcible entry, theft is the unlawful taking of property and robbery is the unlawful taking of
property from another person by force or threat of force. Insurance premium rates vary for these different
types of risks. Where all three risks are covered by insurance the insured pays an average premium and is
protected against any losses that do occur.
Automobile Insurance
Automobile insurance offers protection against fire, theft, bodily inquiry, property damage, and collision. It
also covers public liability or damage to the insured automobile. Bodily injury liability insurance under it will
pay the policy holder legal liability, for injury to one person or to a group. If a driver hits a pedestrian or
causing injury to person in other car, the insurance company will pay damages up to the amount of
coverage carried.
Workmen’s Compensation Insurance
The purpose of workman’s compensation insurance is to guarantee medical and salary payments to workers
who are injured on the job unless it can be show that the employees injury or death was will full or caused
by intoxication. This insurance is now required in many countries of the world as a part of legal
requirement. The cost of insurance is born by both employers and employees, but the major share is
assumed by employers.
Fidelity and Surety Bonds
Fidelity bonds are usually written to cover employees occupying positions of trust in which they have
jurisdiction over funds. The employer is guaranteed against loss caused by the dishonesty of such
employees and the insurance company will reimburse the policy holder for loss up to the amount specified
in the policy.
Surety bonds are written to protect the insured against loss from the non-performance of a contract. A
building contractor, for example, who agrees to erect a factory according to specification and within a
certain time, might be required to furnish surety bonds guaranteeing performance of the contract. Such
fidelity and guarantee are covered by insurance company.
Title Insurance
Title insurance guarantees the title to real estate that is purchased by a firm or by an individual. There are
many examples on record of people who build homes on plots that were not theirs. With title insurance,
losses that result under such circumstances are covered by the title insurance company. Title insurance,
therefore, is essential on all real estate owned by a business.
Credit Insurance
This insurance is designed to protect a business firm against excessive, losses from accounts receivable that
are owned to the firm. Most policies of this type cover only losses that exceed the normal rate of loss on
such debt and the rate is specified in the policy. This insurance is taken up by business firms to protect
against excessive bad debts.
Aviation Insurance
Air travel has now become a common means of transport. It involves passengers, cargo and aircraft itself.
They need insurance and for which aviation insurance has come up in action. The insurance of aircraft
relates to aeroplanes, gliders and helicopters. The comprehensive policy issued in respect of aeroplane
covers loss or damage to the aircraft itself and third party legal liability including legal liability for accidents
to passengers. Beside the aircraft it also offers protection to air traveling passengers and crew members.
Further, goods sent by air could also be insured against loss.