Business Organisation and Management 9781642875652, 9789350243244

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aOSIHESS ORCiAHISfiTIOH AHD MAHACiEMEHT

GJlimalaya GJ>ublishing GJlouse MUMBAI .• DELHI • NAGPUR • BAN GALORE • HYDERABAD • CHENNAI • PUNE • LUCKNOW • ERNAKULAM • AHMEDABAD

© J.P. MAHAJAN No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors. Breach of this will be liable for legal action.

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Nagpur

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Bangalore

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Hyderabad

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Chennai

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Pune

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Lucknow

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Ernakulam

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CONTENTS Chapter

Pages

I UNIT - I : FUNDAMENTAL CONCEPTS I 1. Concept, Nature and Scope of Business Concept of Business. Nature of Business. Distinction among Business, Profession and Employment. Inter-relationship between Business, Profession and Employment. Scope of Business. Types of Industries. Commerce, Trade, Aids to Trade. Inter-relationship between Industry, Commerce and Trade. Business Enterprises: Meaning, Types. Essentials of a Successful Business. Need for Formal Study of Business. Review Questions.

2-23

2. Entrepreneurship Meaning and Characteristics of Entrepreneurship. Entrepreneur vs. Intrapreneur vs. Promoter. Types of Entrepreneurs. Functions of Entrepreneur. Entrepreneurship: Meaning, Characteristics and Importance. Factors Affecting Entrepreneurship. Review Questions.

24-31

3. Steps in Starting a Business Enterprise Procedural Steps. Preparation of Project Report. Legal Steps: for Sole Proprietorship, Partnership, Joint Hindu Family Firm, Co-operative Society, Company. Launching the Business Enterprise. Review Questions.

32-40

4. Sources of Finance Long-term Sources of Finance. Equity Shares: Meaning, Features, Benefits, Limitations. Prefer,ence Shares: Meaning, Types, Advantages, Limitations. Debentures: Meaning, Kinds, Advantages, Limitations, Methods of Floating Securities in Market. Borrowings from Financing Institutions. Public Deposits: Restrictions, Advantages, Limitations.

41-59

Pages

Chapter

Retained Earnings : Features, Advantages, Limitations. Sources of Short-term Finance. Trade Credit. Short-term Loans : Bank Credit, Unsecured Bank Loans, Secured Bank Loans, Discounting of Bills. Finance Companies. Miscellaneous Sources. Review Questions. Appendix: Cases On Entrepreneurship, Guidelines for Starting a Small Industry, Project Reports Annexure 1.1. Success Stories of Entrepreneurs. Annexure 1.2. Practical Guidelines for Starting a Small Industrial Unit. Annexure 1.3. Project Reports on the Various Functional Areas of Business.

60-76

I UNIT - II : FORMS OF , OWNERSHIP ORGANISATION I 5. Forms of Business Organisation Business Ownership: Meaning, Types. Forms of Private Ownership Organisation. Ideal Form of Organisation. Choice of a Suitable Form of Organisation. Review Questions.

79-88

6. Sole Proprietorship Meaning and Nature of Sole Proprietorship. Features, Merits, Limitations of Sole Proprietorship. Suitability of Sole Proprietorship. Expansion of Sole Proprietary Business and Decision About Taking a Partner or Manager. Review Questions.

89-95

7. Partnership Organisation

96-108

Meaning, Features of Partnership. Partnership vs. Co-ownership. Types of Partnership. Types of Partners. Partnership Deed. Registration of Partnership Firm: Procedure, Need, Time. Consequent of Nonregistration of Partnership. Evaluation of Partnership Organisation: Merits, Limitations, Suitability. Review Questions. 8. Joint Hindu Family Firm 109-113 Meaning and Nature of Joint Hindu Family Firm. Features of Joint Hindu Family Firm. Distinction between Partnership and Joint Hindu Family Business. Evaluation of Joint Hindu Family Firm: Merits, Limitations, Suitability. Review Questions. Appendix: Model Forms of Partnership Deed . 114-121 Annexure 2.1. Partnership Deed between Two or More Persons with Different Shares, Salary and Interest. Annexure 2.2. Partnership Deed between Two Partners with Equal Shares. Annexure 2.3. Partnership Deed for Admission of a New Partner. Annexure 2.4. Partnership Deed Admitting a Minor to the Benefits of Partnership.

(xi)

Chapter

Pages

Annexure 2.5. Partnership Deed After Minor Attaining Majority and Electing to Become a Partner.

I UNIT - III : JOINT STOCK COMPANY I 9. Nature of Company Organis,ation 125-136 Reasons for Emergence of Company Organisation. Meaning, Definition, Characteristics of Company. Importance of Company. Advantages, Disadvantages, Suitability of Company Organisation. Review Questions. 10. Types of Companies 137-146 Statutory Companies. Registered Companies: Private, Public, Deemed to be Public Companies. Companies Limited by Shares, Guarantee and Unlimited Company. Government Company. Holding and Subsidiary Companies. Licensed Companies. Foreign Companies. One-man (family) Company. Distinction Between Private and Public Company. ~artnership vs. Private Company. Choice for an Expanding Business: Private Company or Public Company. Review Questions. 11. Formation of a Company 147-153 Promotion of a Company: Meaning of Promotion. Promoter: Meaning, Types, Functions, Legal Position of a Company Promo~r. Procedure for Registration of a Company. Capital Raising Stage for Company. Commencement of Business Stage for a Company. Review Questions. 12. Company Documents 154-161 Memorandum of Association: Meaning, Nature, Importance, Contents. Doctrine of Ultra-vires. Articles of Association: Meaning, Nature, Contents. Doctrine of Indoor Management. Difference between Memorandum and Articles. Prospectus: Meaning, Definition, Objects, Contents. Statement in Lieu of Prospectus. Review Question. Appendix: Model Forms of Memorandum and Articles Annexure 3.1. Model Form of Memorandum of Association. Annexure 3.2. Model Form of Articles of Association.

162-166

UNIT - IV: MANAGEMENT, PLANNING AND DECISION-MAKING 13. Introduction to Management 169-189 Meaning, Definitions 'and Characteristics of Management. Management as a Science. Management as an Art. Management as a Profession. Management and Administration. Levels of Management. Managerial Skills. Functions of Management. Importance of Management. Leadership: Meaning, Characteristics and Importance. Traits of Successful Leaders. Management vs. Leadership. Meaning, Features, Need and Importance of Management Principles. Review Questions.

Chapter

Pages

14. Scientific Management and Fayol's Principles of Management 190-200 Taylor's Scientific Management: Meaning, Principles, Techniques, Advantages, Weak Spots and Criticism. Fayol's Administrative Theory of Management. Fayol's 14 Principles of Management. Taylor vs. Fayol. Review Questions. 15. Managerial Planning and Decision-Making 201-220 Planning: Meaning, Definitions, Characteristics, Importance, Limitations. Steps in the Planning Process. Types of Plans. Single Use Plans: Objectives, Strategy, Programme, Budget. StaI:).ding Plans: Policies, Procedure, Method, Rules. Distinction between Strategy and Policy. Distinction between Policies and Procedures. Features of a Sound Plan. Decision-Making : Meaning, Characteristics. Types of Decisions. Steps in Decision-Making Process. Guidelines for Effective Decision-Making. Review Questions. Appendix: Case Studies on Management, Planning and DecisionMaking 221-228 Annexure 4.1. Case Study on Managerial Planning. Annexure 4.2. Case Study on Organisation Environment and Decision-Making. Annexure 4.3. Case Study on Management Process. Annexure 4.4. Case Study on Management by Objectives . . 1

UNIT - V : ORGANISING

I

16. Organising 231-247 Organising: Meaning, Characteristics, Process, Nature, Need and Importance. Organising as a Structure: Meaning, Characteristics, Elements. Factors Affecting Organisation Structure. Features of a Good Organisation Structure. Importance of Organisation. Principles of Organisation. Formal Organisation. Informal Organisation. Difference Between Formal Organisation and Informal Organisation. Organisation Charts: Meaning, Types, Patterns of Presentation. Vertical Charts, Horizontal Charts, Circular Charts. Advantages and Limitations of Organisation Charts. Review Questions. 17. Delegation and Decentralisation of Authority 248-261 Authority: Meaning, Characteristics, Sources. Authority vs. Power. Delegation of Authority: Meaning, Characteristics, Types, Process, Elements, Need and Importance. Obstacles in Effective Delegation. Guidelines to Make Delegation Effective. Principles of Delegation. Centralisation of Authorit}( : Meaning, Factors, Advantages, Limitations. Decentralisation of Authority: Meaning, Factors, Advantages, Limitations. Difference between Delegation and Decentralisation. Review Questions.

Chapter

Pages

Appendix: Case Studies on Organising 262-268 Annexure 5.1. Case Study on Decentralisation of Authority. Annexure 5.2. Case Study on Group Dynamics. Annexure 5.3. Case Study on Organisation: Problem of Personal Conflicts. Annexure 5.4. Case Study on Chain of Command and Managerial Behaviour. Annexure 5.5. Case Study on Departmental Coordination.

"This page is Intentionally Left Blank"

Chapter -1

Concept, Nature and Scope of Business

Chapter - 2

Entrepreneurship

Chapter - 3

Steps in Starting a Business Enterprise

Chapter - 4

Sources of Finance

Appendix

Cases on Entrepreneurship, Guidelines for Starting a Small Industry, Project Report

"This page is Intentionally Left Blank"

CONCEPT, NATURE AND SCOPE OF BUSINESS INTRODUCTION Business is the fountain-head of modern life. Business is a major influence in our everyday life. It affects all of us through the common axis of producers and consumers, owners and users, and employers and employees. Business firms occupy an important place in the modern economy and provide impetus for development. Business firms produce and supply wide varieties of goods and services required by the society. They create enormous employment opportunities for the society. Business firms provide tax revenues to the government that is meant to serve the projects and programmes for social welfare. So it is imperative on our part to know the concept, nature, and scope of business.

CONCEPT OF BUSINESS Bussiness is an economic activity involving the regular production and/or distribution ofgoods and services with the object of earning profits through the satisfaction ofhuman wants. The above definition of business brings out quite a few characteristics-explicit and implicit-to our knowledge. These include the following: 1. Business is an economic activity. As an economic activity, business involves the use of resources which are scarce relative to ends or purposes, and is concerned with the transfer or exchange of goods and services. Production or purchase of goods and services for personal consumption or ex-gratia presentation does not constitute business, because there is no sale or transfer or exchange involved in them. For example, the production

4

BUSINESS ORGANISATION AND MANAGEMENT

of clothes at home by a housewife does not amount to a business activity, while the production of the same clothes by a tailoring shop does constitute a business. Thus, exchange or transfer of goods and services provides the vital test of business, and it is this characteristic that differentiates if from other countless non-economic human activities that are performed in our society. 2. Business includes the activities of production or purchase and distribution. In order to effect sale or transfer, the seller must possess the required goods and services. There are two ways of possessing them, namely, production by the seller himself or purchase from others. When the goods and services are produced by the seller himself, the business goes by the name of industry; however, it takes the name of commerce when the seller, instead of producing them, buys goods and services from others, and makes them available to the consumers through the assistance of numerous marketing and service enterprises. 3. Business deals in goods and services. Business deals in both goods and services, either produced by the seller himself or purchased from others. Goods may take a variety of forms-movable goods (like machines), immovable goods (like buildings), consumer goods (like shoes, cars, radio sets), capital of producers' goods (like machinery, tools, etc.). Apart from goods, a business also deals in services (that are intangible and invisible and can notbe stored for future consumption). These services can take the form of commercial services (like those supplied by transport, electricity, banking, financial institutions, insurance companies, and advertising agencies) or direct services (provided by decorators, dyers and cleaners, beauty parlours, etc.). However, professional services (provided by doctors, lawyers, management consultants, and the like) do not form part of business. 4. Business implies regularity of transactions. Regularity of transactions, rather than one or two isolated transactions involving buying and selling, is the distinguishing feature of a business. To illustrate, if a person buys a pen for personal use but subsequently sells it at a profit, it will not constitute a business transaction. However, if he engages himself continuously in the activities of buying and selling pens, it will become his business. Thus, to become business, transactions will have to be, a series of deals. 5. Business has the object of earning profits through the satisfaction of human wants. Business, as an economic activity, aims at providing benefits both to the seller and to the buyer. Businessman, as the seller of goods and services, receives money (or profit) from the buyer. This is the reward of his time, money, and efforts invested in business. Without the incentive of gain there would be no such thing as business. This is as much true of private business as that of government business. Apart from the benefit of profit to a businessman, a buyer is also benefited by the business through the availability of goods and services which he can use to satisfy his wants.

CONCEPT, NATURE AND SCOPE OF BUSINESS

5

Truly speaking, the characteristic of mutual advantage, provides an element of stability and permanence to a business. Apart from the above-mentioned explicit characteristics (i.e., characteristics' dearly included in the definition of business used above), a business also exhibits certain other equally important (but implicit) characteristics. These are as follows: 6. Business involves risk. This implicit characteristic relates to the' operation of business in the midst of uncertainty'. It is often said in business circles that tlile only thing certain in business is the uncertainty of its operations. These uncertainties are the result of ever-changing environment within which a business operates. These uncertainties arise on account of changes in the scale of preferences of consumers, changes in technology, changes in the behaviour pattern of suppliers of capital and raw materials, labour problems, shifts in the government policies, natural disasters, etc. These uncertainties give rise to the possibilities of various types of risk in a business. Hence, instead of yielding profit it may end in loss. In this respect, business differs from employment or profession which seldom goes without remuneration. 7. People are an important and crucial part of business. A business is not a self-actuating activity. It can b~ conducted only through the efforts of human beings. People play an important and crucial part in business as owners, managers, workers, customers, and the like. Owners, invest money in a business to earn profits and social prestige. Managers are an activating element in organisations. They plan, organise, integrate, and interrelate organisational resources for the purpose of achieving common objectives. In a modern, large business, management is generally in the hands of professional managers who have the time, competence, and the requisite orientation to manage complicated business activities. Apart from managers, a business depends upon workers for the actual conduct of its basic operations in the fields of production, marketing, finance, personnel, office, research and development, and accounting. The success of a business depends, to a large extent, on the efficiency and productivity of workers as far as the business objectives, policies, and programmes formulated by managers are implemented through them. That is why these days efforts are being made to scientifically study the behaviour of people at work andJind out appropriate ways and means of motivating them. Apart from owners, managers, workers and customers also play an important role in the success of a business. For a business, customer is the single most important source of revenue generation which is necessary for its survival and growth. A customer is rightly considered to be a king-pin in the business. A business apart from being an economic institution is also a human institution whose activities should be governed by human considerations.

6

BUSINESS ORGANISATION AND MANAGEMENT

NATURE OF BUSINESS In order to understand the true nature of business, it is important to compare and inter-relate it with other economic activities, namely, profession and employment. Profession Profession is an occupation which renders specialised, expert, and personal service to the members of the society in return for a reasonable remuneration. A lawyer, a doctor, a chartered accountant, or an engineer renders specialised services in return for payment. In order to render specialised services, a professional person must possess the minimum academic and other qualifications prescribed by law or an association he must belong before he can practise his profession. Professional services are rendered for a remuneration that is called" fee", the amount of which may vary from one client to another according to the discretion of professional men. Employment In case of employment, a person undertakes to work for another according to the tenus of a service agreement in return for a salary, or wage, or even commission. A relation of employer and employee is created under the contract of service and the employee acts under the control and supervision of his employer and is supposed to perform his duties under the contract. Business, Profession, and Employment Distinguished One can broadly differentiate business from profession and employment on the following criteria : 1. Basis for establishment. The basis for establishing a business is very simple. What is needed is that a person or a group of persons has to conceive a business idea, convince himself (or themselves) about the profitability of this idea, and finally give it a practical shape by observing legal formalities, if any, and organising and operating the various factors of production. In a profession, however, the membership or enrolmemt of a recognised professional association or institute is necessary. A doctor, for instance, must be a member of, or enrolled with the Medical Council of India, which is a professional association in the field of medicine. A laywer must be a member of, or enrolled with, the Bar Council of India, which is a professional association in the field of law. A chartered accountant must be a member of "the Institute of Chartered Accountants of India. A businessman, however, need not be a member of any professional association, though there may exist such an association (like the Chambers of Commerce and Industry). In employment, the basis for establishment is the service agreement. 2. Qualifications needed. No formal eduction is compulsory for entering

CONCEPT, NATURE AND SCOPE OF BUSINESS

7

into the world of business. What is needed is the technical competence and business acumen of the entrepreneur. A professional, on the other hand, must possess some minimum academic or other qualifications to be eligible for entering into a profession. To become a lawyer, for instance, the minimum academic qualification required is the possession of a law degree (say LL.B.); for a doctor, it is M.B.B.S. or any other fI'cognised degree; and the like. In employment, qualifications depend upon the nature of job. No academic qualifications, for instance, need be possessed by a peon; whereas a production engineer needs specialised knowledge in his field to be successful. 3. Nature of work. A business exists to provide goods and services to the society, keeping in view the needs of the average customers. In a largesized business, production of goods is particularly standardised on a mass scale, and not for meeting the requirements of a particular individual customer. A professional person renders specialised and personalised services to his clients. A doctor, for instance, renders different medical advice to different patients. In employment, the nature of work is decided by the employer and is broadly defined in the service agreement. 4. Capital requirements. Capital is the life-blood of business. No business activity, howsoever small it might be, can be conducted without capital. The capital required in a business depends upon its nature and size. A big manufacturing business, for instance, needs bigger amounts of capital compared to a big trading or service enterprise, because a manufacturing business has to arrange for a wider range of factors of production. In profession, some amount of capital is required for proper establishment; nonetheless, it is usually much smaller compared to a business activity. In employment, there is no need for capital investment. 5. Risk and reward. A business operates in the midst of uncertai,nty which can cause wide variability in its earnings (called profit), that is, its earnings may be too small on one occasion and too large on another, and there may sometimes be even losses. The reward of a professional (known as fees) is generally fixed, which may, however, be graded according to the volume or quality of expertise provided. It is more regular and certain than the profits of a businessman. In employment, no individual risk is involved and an employee is sure to get his remuneration (which may be in the form of wage or salary). 6. Transfer of interest. In business, transfer of interest is possible after following necessary legal formalities. Such a transfer of interest is not possible in a profession. This is because business is a kind of property which can pass from one individual to another, like any other type of property, say a house. Profession is not a property, it is a skill which can not be acquired through legal transfer. It needs to be acquired through a formal process of learning. The interest is just not transferable in employment.

8

BUSINESS ORGANISATION AND MANAGEMENT

7. Code of ethics. A professional is expected to follow a more rigorous code of ethics specifically provided for the profession. Professionals have their associations which regulate the activities of their members. We may note that the professional ethics, in many cases, prohibit the practitioners from making public advertisements, for example, a doctor or an auditor can not advertise. This is not so in employment and business, A businessman depends greatly on advertising for increasing the sale of products and consequently profits. 8. Emphasis on social service and sense of mission. The consideration of

social service and sense of mission is the hallmark of professional activity more than a business or employment. A doctor, for instance, when completes education and is granted degree, he or she is generally administered the 'oath of service to society'. Such a spirit generally lacks in a businessman. He is primarily guided by the profit objective. This does not, in any way, mean that a professional person should not earn income. He must, but through social service. Also, this is not to deny that all businessmen overlook social responsibilities. No doubt, present-day businessmen are increasingly assuming social responsibilities, they, nonetheless, continue to be profit conscious. For some social responsibility comes later and profits first; a professional gives precedence to social service over monetary considerations. Business, Profession, and Employment are Inter-related Although the preceding discussion does differentiate profession and employment from business (in terms of basis for establishment, qualifications, capital requirements, risk and reward, etc.), in actual practice, nonetheless, they are inter-related. In the modem society, where business institutions dominate and are given a definite role to shape the direction of economic development, one witnesses a close inter-relationship among profession, employment, and business. In order to successfully operate a modem business institution, the services of professional experts and employees are utilised. This is so because the modem business is dynamic, competitive, and is beset with such numerous problems that can not be solved by businessman alone. He needs the expert knowledge and assistance of professionals like engineers, chartered accountants, legal experts, functional managers, superintendents, etc. In other words, considering the specialised knowledge that the operation of a modern business demands, management of business is definitely becoming a professional job.

SCOPE OF BUSINESS There are two broad categories of business activities: one concerned with the production of goods and services (caIred industry), and the other with their exchange or distribution (called commerce). These activities are explained below and illustrated in Figure 1.1. (A) Industry

Industry is that branch of business which is concerned with the production of

CONCEPT, NATURE AND SCOPE OF BUSINESS

9

goods and services. For the production of goods and services, an industry uses the processes of extraction, conversion, processing, or fabrication of products. The goods and services produced by an industry may be used either by final consumers (consumer goods) or by businessmen for further production (producers' goods). In this section, therefore, the discussion is divided into two parts: (1) types of industry, and (2) goods and services produced by the industry.

Types of Industries The important types of industries are as follows: (i) Primary Industries. The production of these industries includes all kinds

of work concerned with the extraction of the fruits of the earth and sea, that is, the extractive occupations. In this group, therefore, we find all types of farming or associated occupations-the many branches of agriculture, the rearing of animals; all types of mining- and quarrying; forestry; fishing, etc. Primary industries, thus, employ the process of 'extraction' for production. ' Primary industries may be: (i) wasting (non-replenishable), and (ii)nonwasting. Those (like mining) which use up resources in the course of extraction are wasting industries. When minerals are taken from the ground they are gone forever and can not be easily replaced. This is not the case with vegetable and animal resources, which if properly exploited, can produce indefinitely. Such primary industries are called non-wasting or replenishable industries. (ii) Manufacturing Industries. Etymologically, manufacturing means

making something by hand. This original meaning has changed and now it mostly means using mechanical devices to create something useful. Manufacturing usually takes place in factories, plants, mills, or other places designed for this purpose, and involves division of work into specialised jobs performed in sequence by skilled groups of workers. Manufacturing includes all the work done in an organisation using land, labour, and capital to make products from raw materials and semimanufactured goods. Manufacturing industries, thus, employ the process of 'conversion' for production.

Kinds of Manufacturing Industries. Manufacturing industries are often classified on several criteria : size of the investment (heavy and light industries), scale of operations (small, medium, and large-scale industries), type of product manufactured (textile, steel, oil, sugar industries), nature of operations (assembly line or otherwise), etc. Although these classification systems are correct and widely used, they, however, do not convey the common characteristics of the basic processes involved in manufacturing. It, is therefore, suggested to follow a classification system that explains the basic processes of manufacturing. In all the manufacturing industries, one or a combination of the following

..... a

Business

I

I

I

Industry

Commerce

I Primary

I

I

Wasting

Manufacturing

Construction

I

Service

I

Nonwasting

I

I

Domestic

Synthetic

Conditioning Assembling

I

Overseas (or Foreign)

I

Analytic

Activities Auxiliary to Trade

Trade

~ Retail

Banking

Wholesale

Import

I

I

Export

Fig. 1.1. Divisions of Business.

TransInsurance Wareport and housing communication

Entreport (Re-export)

Advertising (etc.)

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CONCEPT, NATURE AND SCOPE OF BUSINESS

11

dominant processes is used; analytic, synthetic, conditioning, or assembly. Depending upon the process used, the industry is given the same name accordingly an analytical industry uses analytic process, synthetic industry uses synthetic process in manufacturing, and so on. These basic manufacturing industries are explained below:

(a) Analytical manufacturing industries. Analytical industries are those which employ 'analytic' processes in the production of goods. Analytic processes break a raw material into two or more products. In some analytic processes, like oil refining, there may be one useful -product and a waste residue. In others, like petroleum refining, there may be many useful products, such as high and low test gasoline, kerosene, diesel oil, lubricating oil, fuel oil, grease, medicinal material, insecticides, etc. (b) Synthetic manufacturing industries. Synthetic industries are those which employ 'synthetic' processes in the production of goods. A synthetic process puts two or more raw materials together to form one finished product, Soap making is an example of synthetic process. Soap is made by boiling sodium hydroxide with a fat, oil, or fatty acid, and adding fillers, dyes, and perfumes. (c) Conditioning manufacturing industries. Conditioning industries are those which employ 'conditioning' processes in the production of goods. A conditioning process involves such procedures as rolling, casting, bending, drawing, forging, molding, aging, seasoning, dying, or smoking. A few examples of conditioning manufacturing industries could be : rolling mills, where steel shapes are made; wire factories, where metal rods are stretched and drawn through dies; pottery and brick yards, where clay is shaped and burned; and lumber mills, where logs are sawed and seasoned. (d) Assembling manufacturing industries. Assembling industries are those which use 'assembly' processes in the production of goods. An assembly process simply puts together the various component parts, already manufactured, to turn out new useful products. A few examples of such industries could be: automobile industry, television industry, computer industry, etc. (iii) Construction Industries. Construction, although resembling manufacturing in some ways, differs sufficiently to be considered a separate industry. Although, it includes fabrication on a large scale, construction is not done in factories, but on the site where the structure will remain. Businessmen who operate in the construction industry are usually called contractors. Construction includes the erection of new buildings and the alteration of old ones, as well as the building of bridges, roads, railways, streets, canals, docks, tunnels, sewers and sewagedisposal plants, water-supply systems. It does not inc~ude shipbuilding,

12

BUSINESS ORGANISATION AND MANAGEMENT

locomotives, etc. Construction industries, thus, employ the process of ' 'fabrication' for production. (iv) Service Industries. Before discussing about the service industry, it may

be specified that the three types of industries described above (primary, manufacturing, and construction) produce tangible products, i.e., products having a physical form and which can be stored for future consumption. However, a service industry produces intangible goods i.e., goods which do not have any physical form, and therefore, can not be stored for future consumption; however, these intangible goods also have a utility for consumer (i.e., these goods have want-satisfying attributes). Examples of service industries could include: banking and financial institutions, advertising agencies, transportation and communication companies, insurance companies, hotels and restaurants, dyers and cleaners, and so on.

Production of Goods and Services As we have explained in the preceding paragraphs, production may take the form of either goods or services. When all the goods and services available are considered more closely, they can be seem to fit into certain broad classes. It is necessary to understand these broad classes in order to appreciate the correct nature of production activities. Production of Goods

The various types of goods produced (or made available) by the vari.ous kinds of industries can be broadly divided into three categories: (a) primary goods, (b) semimanufactured goods, and (c) manufactured goods. (a) Primary goods. These goods are provided by the primary industry (i.e. from natural sources) and include products such as, wheat, cotton, ironore, coal, fish, etc. (b) Semi-manufactured goods. These are processed goods but can not be used by the ultimate consumer or industrial user unless they pass through further manufacturing processes. For instance, iron-ore is a primary product. When it passes through certain processes it gets converted into pig-iron, i.e., a semi-finished product. Pig-iron has to undergo further processes before it can be converted into usable steel. (c) Manufactured goods. In this category are included all those finished products that can be usefully used by ultimate consumers and industrial users. For example, cloth, sugar, machines, etc. Manufactured goods can be of two types: consumer goods and capital (or industrial or producers) goods. Consumer and capital goods can be further divided into durable and non-durable goods. These are described below: Consumer goods are those products and services purchased by the ultimate

13

CONCEPT, NATURE AND SCOPE OF BUSINESS

consumer for his or her own use. Most of the products we buy-such as, toothpaste, sugar, cassette tapes, medicines, refrigerator, car, television, cloth-are consumer goods. Some consumer goods~such as car, refrigerator, television, cassette tapesare such whose benefits can be obtained over a period of time, and although each time they are used they will come to a little bit nearer to the end of their useful time, their existence will continue during many operations. They are called durable consumer goods. Many articles, however, can not be used over and again, and they will be substantially used up in the actual moment of use. They are called non-durable consumer goods. Within this Category fall sugar and medicine. Capital (or industrial or producers) goods are products purchased to be used, either directly of indirectly, in the production of other goods for resale. Machines, tools, oil are capital goods. Capital goods may be durable like machines and tools, or non-durable like the oil that lubricates machines. Production of Services The consumer is not solely concerned with articles such as motor cars. As leisure increases, the pattern of life becomes more complex. The demand for services increases. We can distinguish two main kinds of services, commercial services and direct services. Commercial services are designed to assist the functioning of industrial and commercial undertakings. They include the work of financial and insurance organisations, transport undertakings, and advertising agencies. All of these services are essential. Direct services, as their name implies, are rendered direct to the consumer in the satisfaction of a need. For example, the services of decorators, dyers and cleaners, beauty parlours, etc. In this context, it may be clarified that professional services (doctors', lawyers' services) do not fall within the ambit of business, and therefore, they are not included here. Figure 1.2 summarises the classification of goods and services. Production

I

I Goods I

I

Primary Semimanufactured

Manufactured

I

Consumer goods

I

Commercial

I

Capital (prod ucers ') goods

I Durable

I

Services

I

Nondurable

Durable

• Nondutable

Fig. 1.2. Classification of Goods and Services.

Direct

14

BUSINESS ORGANISATION AND MANAGEMENT

Industrial Activity: A Few Remarks Before we discuss about the other important branch of business, namely commerce, it is desirable to make the following remarks about industrial activity: (a) That industry is a broad activity which includes production of not only goods of all kinds but also services. It is erroneous to equate industrial activity with production of goods in factories, plants, or mills, i.e., manufacturing industry only. (b) Inspite of their being engaged in the production of different goods, these

industries are interdependent. The goods and services produced by one industry are used by another to facilitate epnduct of operations. Fpr instance, cotton is produced by the primary industry, but the same is used by the textile manufacturing industry to.manufacture cloth. Tractors are produced by tractor manufacturing companies, but are used by primary industry for agricultural production. Services provided by banking, financial, transportation, insurance, and other service enterprises are widely used by primary, manufacturing, and construction industries to facilitate the production processes. (c) The present-day pattern and method of industrial activity is vastly different from what it used to be before the advent of factory system. Industrial revolution (in which changes occurred during the second half of the eighteenth century and the first half of the nineteenth century) gave us factory system of production which helped in the production of goods on a mass scale with the help of machines. The nineteenth century gave us mechanisation of industry, whereby goods could be produced with the help of mechanical power, e.g., oil, steam, or electricity. The twentieth century witnessed automation in production in which one set of machines was invented to run another set of machines. After World War II, the use of electronic devices and computers has become widespread in all spheres of industrial activity. All these developments are responsible for making a wide range of goods and services available to consumers, which has, no doubt, increased their standards of living.

(B) Commerce From an economic point of view, the business of producing a commodity is not complete until it has reached the consumer. For carrying these commodities to consumers certain services of an ancillary nature like transportation, banking, insurance, etc., are necessary. This is commerce-facilitating exchange of goods and services with the help of ancillary services. Commerce = Trade + Aids to Trade Thus, commerce includes trade and ancillary services (or, as they are sometimes known, auxiliaries). This definition includes the exchange of raw materials and producers' goods as well as. the exchange of consumer goods and

CONCEPT, NATURE AND SCOPE OF BUSINESS

15

services through the agency o~ money-ultimately resulting into the transfer of ownership. These two parts of commerce-trade and aids to trade are described below: Trade The basic commercial activity is trade. Trade refers to the sale, transfer, or exchange of goods. It involves buying and selling of goods, but excludes ancillary functions like transportation, banking, insurance, warehousing, advertising, etc., which along with trade constitute commerce. There are three main aspects of trade: home, foreign, and entreport trade. When exchange of commodities takes place within the country, it is home trade; when it crosses national boundaries, it is foreign trade. Entrepot or re-export trade involves the import of foreign goods with a view to re-exporting them and making a profit in the process. The bases for conducting home and foreign trade are diftet'ent. Home trade may be conducted on wholesale (sale of goods in comparatively larger quantities to those traders who are in direct contact with the consumers) or retail basis (i.e., providing goods to the consumers in small quantities). Because home trade is conducted within the bounds of a nation, payments for such trade are made in national currency directly or through the national banking system, and the internal transportation system is used for the movement of goods. International trade, on the other hand, may be conducted in the form of import (buying foreign goods for domestic use) or export trade (selling home goods for foreign use). Because foreign trade crosses national boundaries, payments for such trade are converted into the currency of the other country and means of international transportation have to be used. Aids to Trade The other important component of commerce is 'aids to trade', also called 'illary services or auxiliaries. The ancillary services help in the conduct of trade and include five important sectors: banking, communications and transportation, warehousing, insurance, and advertising, How do these auxiliaries help carrying of trade is described below: