Unit -1 Business Environment
Nature and purpose of business, classification of business activities, industry, commerce and trade, objective of business and essential of successful business, economic environment-basic problems of scarcity and choice, allocation of resources, opportunity cost, Business growth and measurement of size, International Environment-balance of trade, the trade gap, balance of payments, role and methods of trade protectionism, Business Ethics.
Nature and Purpose of Business
All of us live in families and depending on the income, we have different standards of living. We require various types of goods and services to satisfy our needs and wants. Some members in your family have to work to earn and provide for the needs of the family. Thus, people engage in different activities which are known as economic activities. In ancient times, people had limited wants to satisfy. In modern times however, we need a large variety of goods and services to satisfy our needs and to raise our standard of living. On the one hand the supply of goods and services has led to various activities. On the other hand, activities of different types are undertaken by people to earn sufficiently to fulfil their increasing wants. Thus we find large numbers of people engaged in business, industry, and profession. Such economic and business activities satisfy various needs and demands for goods and service
Nature of Business:
The nature of business is best understood on the basis of its characteristics
or features which are as follows:
1. Business is an economic activity
2. It includes the activities of production or purchase and distribution.
3. It deals in goods and services.
4. It implies regularity of transactions.
5. It aims at earning profits through the satisfaction of human wants.
6. It involves risk; it is not certain that adequate profit will be earned.
7. It creates utilities.
8. It serves a social purpose by improving people’s standard of living.
The purpose of a business :
Most would argue that the main purpose of a business is to maximize profits for its owners, or in the case of a publicly-traded company, its stockholders. The late economist Milton Friedman was a proponent of this view. Others would say that its principal purpose is to serve the interests of a larger group of stakeholders, including employees, customers, and even society as a whole. Most philosophers would agree, however, that business activities ought to comport with legal regulations. One proponent of a broader view which includes a moral component has been U.S. businessman-turned-futurist John Renesch  who writes, "Corporations are human-made organisms, associations of human beings. To see this association as having one solitary purpose and responsibility, to grow only in economic terms, is such an extreme view that implosions like what happened to Enron, WorldCom and other corporate collapses will become more and more commonplace." Anu Agha, ex-chairperson of Thermax Limited, once said, "We survive by breathing but we can't say we live to breathe. Likewise, making money is very important for a business to survive, but money alone cannot be the reason for business to exist". Profit maximization is extremely relevant when top management is mandated with the job of selecting the right strategy for the business. According to Jackson Mullane, the primary goal for any business strategy exercise must be that of maximizing profitability.
Peter Drucker defined the very purpose of business as creating a satisfied customer. This definition is also useful in evaluating to what extent a business is succeeding in fulfilling its stated purpose.
Many observers would hold that concepts such as economic value added (EVA) are useful in balancing profit-making objectives with other ends. They argue that sustainable financial returns are not possible without taking into account the aspirations and interests of other stakeholders (customers, employees, society, environment). This conception suggests that a principal challenge for a business is to balance the interests of parties affected by the business, interests that are sometimes in conflict with one another.
Spiritual capital theory is a new emerging approach to business purpose, and becomes more and more influential due to the recent financial crisis.
Classification of Business Activities :
Business activities are undertaken to satisfy human wants by producing goods or rendering services.
We may classify business activities on the basis of functions into two broad categories
(a) Industry and
Industry is concerned with the production and processing of goods. This type of business units are called ‘industrial enterprises’ which produce consumer goods as well as machinery and equipments. On the other hand, ‘commerce’ includes all those activities which are necessary for the storage and distribution of goods. Such units are called ‘commercial enterprises’ which include trading and service activities like transport, banking, insurance and warehousing.
Let us examine the characteristics of industry and commerce.
Industry and its Types :
Industry means production of goods for sale by the application of human or mechanical power. In other words, industry refers to economic activities which are connected with raising, producing and processing of goods and services.
Characteristics of Industry
The main characteristics of industry are as follows:-
• Industry refers to the productive aspect of business.
• Production is done by the application of human or mechanical power.
• It creates form utility to natural or partly processed goods.
• It is concerned with the production of both producer and consumer goods.
• Industrial activities are regulated by different laws.
• It involves continuous operation.
Types of Industries
Industries are divided into two broad categories:
(i) Primary industries
(ii) Secondary industries.
Primary industries include all those activities which are connected with extraction, producing and processing of natural resources. These industries may be further sub-divided into two types: (a) extractive and (b) genetic.
Secondary industries are concerned with the materials which have already been produced at the primary stage. For example, mining of iron ore is a primary industry, but manufacture of steel is a secondary industry.
a) Extractive Industries:
Extractive industries are concerned with the extraction of materials from the earth, sea and air such as mining, farming, fishing and hunting etc. Products of these industries are used either directly for consumption such as food grains, fruits and vegetables or as raw materials such as cotton, sugar-cane, etc.
b) Genetic Industries:
Genetic industries include activities connected with rearing and breeding of animals and birds and growing plants. Reproduction and multiplication is the main activity in these industries, such as, agriculture, animal husbandry, dairy, poultry, etc. Main products are milk, wool, butter, cheese, meat, egg, fish, seeds of plants, etc.
Secondary industries may also be of two types: (a) manufacturing, and (b) construction.
a) Manufacturing Industries :
Industries engaged in the conversion of raw materials or semi-finished products into finished product are called manufacturing industries. Cotton is converted onto textiles and iron one is converted into in these industries. It creates a form utility of the product.
b) Construction Industries :
The activities of Construction industries include erection of buildings, bridges, roads, railways canals etc. Their output do not consists of movable goods. It makes use of the output of other industries like brick, cement, steel etc.
Characteristics of Commerce
Commerce is the sum total of all the activities connected with the placing of the product before the ultimate consumer. It provides the necessary link between the producer and the consumer of goods.
Commerce is defined ‘as activities involving the removal of hindrances in the process of exchange’. Commerce includes all those business activities which are undertaken for the sale or exchange of goods and services and facilitates their availability for consumption and use - through trade, transport, banking, insurance, and warehousing. Thus commerce includes trade and auxiliaries to trade, that is transport, banking, insurance and warehousing.
The main characteristics of commerce are as follows:
- Commerce is the sum total of activities which facilitate the availability of goods to consumers from different producers.
- It aims at ensuring proper distribution of goods.
- It adds different type of utilities to the goods by making goods available at the right time and the right place to the people who need them.
- It includes trade and auxiliary to trade.
Trade and its types
Trade is an integral part of commerce and refers to sale and transfer of goods. It involves actual buying and selling of goods. It means exchange of goods and services for cash or credit. Traders help in directing the flow of goods to the most profitable market. They also bring about equitable
distribution of goods on a national and international scale. It is because goods are produced on a large scale and it is difficult for producers to reach individual customers, that trade is said to remove the hindrance of persons through traders. Goods acquire place utility through trade.
Characteristics of Trade
The main characteristics of trade are as follows:
(i) Trade is regarded as the primary activity in commerce;
(ii) It means exchange of goods and services for price;
(iii) It helps in directing the flow of goods to the most profitable market;
(iv) It helps to equalize the supply of and demand for goods in different markets both national and international.
Classification of Trade
Trade may be classified into (i) Home Trade or Internal Trade and (ii) Foreign Trade or External Trade.
i) Home Trade:
Home Trade means trade carried on within the boundaries of a country. The primary object of home trade is to bring about proper distribution of goods within the country. It may be divided into two types
- Wholesale Trade and (b) Retail Trade
(a) Wholesale Trade: Wholesale trade involves buying goods from producers and selling them in small quantities to retailers. The wholesaler generally deals in large quantities of goods of a
limited number of varieties. He serves as a connecting link between the producer and the retail dealer.
(b) Retail Trade: A retail trade consists of selling goods directly to the consumers in small quantities. A retailer usually purchases goods from wholesalers or manufacturers and deals in a variety of goods of different manufacturers.
ii) External Trade:
External trade refers to trade between two countries. It implies buying and selling of goods by traders of two different countries. It creates a very wide market for goods produced in different countries. External trade involves (a) Export and (b) Import.
Export is concerned with the sale of goods to foreign countries. Import trade relates to the purchasing of goods from other countries.
Distinction between Industry, Commerce and Trade
Basis of Industry Commerce Trade
- Meaning Production of goods Sum total of activities Exchange of goods
and services for sale connected with transfer for price thro buying
of goods from and selling.
producers to consumers
- Utility Creates from Creates time and Creates time and
utility place utility place utility and
- Broad Four Types: Two Types: Two Types:
Classification Genetic, Trade and auxiliaries Internal and External
Extractive, to trade
Inter-relationship between Industry, Trade and Commerce
All the three branches of business are closely related to each other. Each depends upon the other for the achievement of aims and objectives of business. For example, industry is concerned with the production of goods and services, trade is related with sale and purchase of products, and commerce arranges for their distribution. Industry can succeed only if goods are marketed and without production of goods, there cannot be commerce and trade. Hence, trade provides necessary support to industry and commerce. Thus, industry, trade and commerce are inter-dependent and cannot operate in isolation. Service facilities also provide necessary support to trade.
Objectives of business :
Success in business depends on proper formulation of its objectives. Objectives must be clear, and attainable. Objectives may be divided into two parts -
(i) Economic and
Economic Objectives :
Economic objectives of business include earning adequate profit or satisfactory return on capital invested, survival in the case of competition and growth to maintain progress.
Social objectives include providing employment opportunities, supply of quality goods and services at reasonable price, improving the standard of living and contributing to environmental protection. It also includes justice to workers in terms of wages, welfare amenities, improved service conditions and professional growth.
The 5 Essentials of Successful Business :
Business is in my blood. I grew up listening to many dinnertime discussions between my father and grandfather about running their businesses. I heard about the issues, challenges and successes they faced every day and learned more about running a business through those discussions than I did in school. I believe this gave me one leg up over other businesses when it came to getting started; I understood early on what it takes and I was ready when it finally happened to me.
Although I plan on tackling the answers to questions concerning the operation and growth of a wide range of businesses, I want to get down to basics first. Just how do you start a business?
It seems that it's never a "right" time to start a business; you often have to take a leap of faith for those first baby steps. And, this year's economic turbulence might provide just the right incubator for a strong idea. If you are thinking about jumping, here are some key points in starting your own business:
1. Find your passion. I believe that having a passion is the first step toward building your own business. Start with both a zeal to be your own boss and an idea that you are excited about. I came up with the idea for my first business, an online payroll service, in the late 1990s when I was still working at Intuit. I had a fire and passion in me that kept me going and attracted excellent people to participate and share the rewards of making my dream happen. Eight years later, my first business has 60K+ small businesses as customers. Even with that success, the dream is never complete, it just changes.
2. Believe in yourself and your idea. If you have a tendency toward entrepreneurship already, the next step is to build on an idea that has staying power. It's important to do your homework first. That means getting quantitative data about the market for your product or service, competitive information on the companies already out there and qualitative data from potential customers. There are hundreds of Web sites and research resources available to get the information you need to help build your case. With a conviction for an idea, plus the data to back you up, you will have a powerful case to present to potential backers, employees and customers.
3. Be resourceful. Once you've done your homework on the viability of your idea, then it's time to figure out your financing. Unless you are independently wealthy with a cash reserve for business ventures, you will need to raise money. There are hundreds of approaches.
My grandparents used money from their back pocket-whatever was in the bank went into the business. My Dad has done the same while supplementing with small loans when needed. I have used some of my reserves but mostly have relied on professional investors, such as Venture Capitalists. Many people rely on credit cards to either fuel their start-ups or pay their day-to-day living expenses while they use savings to fund the business.
There are pros and cons to all of these approaches. Some business owners mortgage their homes. It's not a practice I used, but it has worked for many. Others use credit cards to launch. Taking a second mortgage offers lower interest rates compared to credit cards. Otherwise, using credit cards protects your investment in your home.
4. Share the Risk. For my first venture, I minimized the risk of the new venture by joining up with my co-founder, Martin Gates. I also had been socking away money for just this time. We started the business in my house, as we developed the business plan and ironed out the details of the product. Once we had a prototype, we brought in other people (both backers and possible employees). It was a cautious way to start up, but it worked out in the end.
5. Listen to your customer. In the early stages of launching a business, although it's important to have passion for your ideas, it's equally important to listen to the market and tweak when necessary. For example, while working at Intuit, I became an expert in payroll and saw a distinct need in the market for specialized payroll services. The original idea for the business was to manage payroll needs surrounding household employees. Today, after moving in the direction of the market needs and really listening to our customers, my first venture is a leader in providing on-demand payroll for small businesses and small business accounting professionals. At both my previous and current businesses, we prototyped an automated solution while performing the tasks manually behind the scenes. That way we were able to get early feedback from customers on what was valuable and wasn't. Some of our best, most unique features came from listening to the customers using our prototyped solution. There is nothing like real customer data to make decisions.
Economic Environment :
Scarcity and Choice in Resource Allocation What is Economics?
The Economist's Dictionary of Economics defines economics as
"The study of the production, distribution and consumption of wealth in human society"
Another definition of the subject comes from the economist Lionel Robbins, who said in 1935 that "Economics is a social science that studies human behaviour as a relationship between ends and scarce means which have alternative uses. That is, economics is the study of the trade-offs involved when choosing between alternate sets of decisions."
The purpose of economic activity
Road space throughout the world is becoming increasingly scarce as the demand for motor transport increases each year – what do you think are some of the best solutions to reducing the problem of congestion on our roads?
It is often said that the central purpose of economic activity is the production of goods and services to satisfy consumer’s needs and wants i.e. to meet people’s need for consumption both as a means of survival but also to meet their ever-growing demand for an improved lifestyle or standard of living.
The basic economic problem is about scarcity and choice since there are only a limited amount of resources available to produce the unlimited amount of goods and services we desire.
All societies face the problem of having to decide:
- What goods and services to produce: Does the economy uses its resources to operate more hospitals or hotels? Do we make iPod Nanos or produce more coffee? Does the National Health Service provide free IVF treatment for thousands of childless couples? Or, do we choose instead to allocate millions of pounds each year to providing beta-interferon to sufferers of multiple sclerosis?
- How best to produce goods and services: What is the best use of our scarce resources of land labour and capital? Should school playing fields be sold off to provide more land for affordable housing? Or are we contributing to the problem of obesity by selling off these playing fields?
- Who is to receive goods and services: What is the best method of distributing products to ensure the highest level of wants and needs are met? Who will get expensive hospital treatment - and who not? Should there be a minimum wage? If so, at what level should it be set?
We use an average of 158 litres of water a day in Britain, for which we pay a price of 28p per litre — but much of it is just cash down the drain, according to water companies. Most are campaigning to cut the amount we use. And the front-line weapon in their campaign is the water meter. They want us all to have one and one company is seeking powers to make them compulsory. When a meter is installed, in most homes, consumption drops by 20 per cent and, in some, it goes down by a third. According to Ofwat, the water industry regulator, the average water and sewerage bill for homes with a meter is £248 compared with £289 for those with flat-rate bills. At present only 25 per cent of households have meters and most of those are in East Anglia. They are installed free by water companies but households then have about £43 added to each bill to cover the cost of installing and reading the meter. Unsurprisingly, we use more water in summer. Peak demand on hot days can be 50 to 70 per cent above average. Most of this is for lawns, flowers, paddling pools and extra showers and baths.
If something is scarce - it will have a market value.
If the supply of a good or service is low, the market price will rise, providing there is sufficient demand from consumers. Goods and services that are in plentiful supply will have a lower market value because supply can easily meet the demand from consumers. Whenever there is excess supply in a market, we expect to see prices falling. For example, the prices of new cars in the UK have been falling for several years and there have been huge falls in the prices of clothing as supply from countries such as China and Vietnam has surged.
Insatiable human wants and needs
Human beings want better food; housing; transport, education and health services. They demand the latest digital technology, more meals out at restaurants, more frequent overseas travel, more leisure time, better cars, cheaper food and a wider range of cosmetic health care treatments.
Opinion polls consistently show that the majority of the electorate expect government policies to deliver improvements in the standard of education, the National Health Service and our transport system. (Whether voters are really prepared to pay for these services through higher taxes is of course another question!)
Economic resources are limited, but human needs and wants are infinite. Indeed the development of society can be described as the uncovering of new wants and needs - which producers attempt to supply by using the available factors of production. For a perspective on the achievements of countries in meeting people’s basic needs, the Human Development Index produced annually by the United Nations is worth reading. Data for each country can be accessed and cross-country comparisons can be made.
Because of scarcity, choices have to be made on a daily basis by all consumers, firms and governments. For a moment, just have a think about the hundreds of millions of decisions that are made by people in your own country every single day.
Take for example the choices that people make in the city of London about how to get to work. Over six million people travel into London each day, they have to make choices about when to travel, whether to use the bus, the tube, to walk or cycle – or indeed whether to work from home. Millions of decisions are being taken, many of them are habitual (we choose the same path each time) – but somehow on most days, people get to work on time and they get home too! This is a remarkable achievement, and for it to happen, our economy must provide the resources and the options for it to happen.
Trade-offs when making choices
Making a choice made normally involves a trade-off - in simple terms, choosing more of one thing means giving up something else in exchange. Because wants are unlimited but resources are finite, choice is an unavoidable issue in economics. For example:
- Housing: Choices about whether to rent or buy a home – a huge decision to make and one full of uncertainty given the recent volatility in the British housing market! There are costs and benefits to renting a property or choosing to buy a home with a mortgage. Both decisions involve a degree of risk.
- Working: Choosing between full-time or part-time work, or to take a course in higher education lasting three years – how have these choices and commitments been affected by the introduction of university tuition fees?
- Transport and travel: The choice between using Euro-Tunnel, a speedy low-cost ferry or an airline when travelling to Western Europe. Your choices about which modes of transport to use to get to and from work or school each day.
An economic system is best described as a network of organizations used by a society to resolve the basic problem of what, how and for whom to produce.
There are four categories of economic system.
Traditional economy: Where decisions about what, how and for whom to produce are based on custom and tradition. Land is typically held in common ie private property is not well defined.
- Free market economy: Where households own resources and free markets allocate resources through the workings of the price mechanism. An increase in demand raises price and encourages firms to switch additional resources into the production of that good or service. The amount of products consumed by households depends on their income and household income depends on the market value of an individual’s work. In a free market economy there is a limited role for the government. Indeed in a highly free market system, the government limits itself to protecting the property rights of people and businesses using the legal system, and it also seeks to protect the value of money or the value of a currency.
- Planned or command economy: In a planned or command system typically associated with a socialist or communist economic system, scarce resources are owned by the state (i.e. the government). The state allocates resources, and sets production targets and growth rates according to its own view of people's wants. The final income and wealth distribution is decided by the state. In such a system, market prices play little or no part in informing resource allocation decisions and queuing rations scarce goods.
- Mixed economy: In a mixed economy, some resources are owned by the public sector (government) and some resources are owned by the private sector. The public sector typically supplies public, quasi-public and merit goods and intervenes in markets to correct perceived market failure. We will come back to all of these concepts later on in our study of microeconomics.
Opportunity Cost :
What does Opportunity Cost Mean?
1. The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.
2. The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).
Investopedia explains Opportunity Cost
1. The opportunity cost of going to college is the money you would have earned if you worked instead. On the one hand, you lose four years of salary while getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to offset the lost wages.
Here's another example: if a gardener decides to grow carrots, his or her opportunity cost is the alternative crop that might have been grown instead (potatoes, tomatoes, pumpkins, etc.).
In both cases, a choice between two options must be made. It would be an easy decision if you knew the end outcome; however, the risk that you could achieve greater "benefits" (be they monetary or otherwise) with another option is the opportunity cost.
There is a well known saying in economics that “there is no such thing as a free lunch!” Even if we are not asked to pay a price for consuming a goods or a service, scarce resources are used up in the production of it and there must be an opportunity cost involved.
Opportunity cost measures the cost of any choice in terms of the next best alternative foregone. Many examples exist for individuals, firms and the government.
Work-leisure choices: The opportunity cost of deciding not to work an extra ten hours a week is the lost wages foregone. If you are being paid £6 per hour to work at the local supermarket, if you choose to take a day off from work you might lose £48 from having sacrificed eight hours of paid work.
Government spending priorities: The opportunity cost of the government spending nearly £10 billion on investment in National Health Service might be that £10 billion less is available for spending on education or the transport network.
Investing today for consumption tomorrow: The opportunity cost of an economy investing resources in new capital goods is the current production of consumer goods given up. We may have to accept lower living standards now, to accumulate increased capital equipment so that long run living standards can improve.
Making use of scarce farming land: The opportunity cost of using arable farmland to produce wheat is that the land cannot be used in that production period to harvest potatoes.
Sectors of production in the economy
- Primary sector: This involves extraction of natural resources e.g. agriculture, forestry, fishing, quarrying, and mining
- Secondary sector: This involves the production of goods in the economy, i.e. transforming materials produced by the primary sector e.g. manufacturing and construction industry.
- Tertiary sector: the tertiary sector provided services such as banking, finance, insurance, retail, education and travel and tourism.
- Quaternary sector: The quaternary sector is involved with information processing e.g. education, research and development.
Allocation of Resources :
Business is about making money. Nobody goes into business without ever thinking about the possibility of a big pay off. After all, profit is one of the primary considerations when an individual plans or decides to venture into business. Profit is the single motivational factor that drives most of the individuals that go into business. No matter what is the product or the service, in the end it all comes down to profit. This is the reason why all the competition as to who gets the largest market shares. This is the nature of business. That is why a lot of individuals plan on having a business of their own at one point in their lives.
A lot of people go into business because of certain possibilities that having a business might provide them. Some individuals go into business hoping to do well and be able to enjoy early retirement. Other individuals go into business hoping to earn a better living than being an employee. Others decide to go into business because they want to improve their way of living. These are all valid reasons why people go into business but the realization of their dreams depends on a single factor. It all depends on how much profit their businesses would make. As long as they choose the right business for them and they manage it well there is the possibility that the business might turn in enough profit to make their dreams come true and then some.
There are many ways to maximize the potential profitability of any business. It all depends on the allocation of resources. When you go into business, one of your primary resources is your investment capital. This is the primary resource your use to procure other resources necessary for your business to operate. The proper use or misuse of this resource can spell success or failure for your business. Based on the demand and the trend of the market you have to choose the right product to offer. There is no sense in wasting valuable financial resources in products or services that have no viable market. You have to market your business very well; proper marketing will boost your income level. You have already spent for your products, now you have to follow through with effective marketing. Unless you do so you will be stuck with products or services that won't sell as fast as it should be; therefore you won't make a healthy profit. Again, it is a waste of resources. You have to hire the right people for the job that you need to get done. You will be spending money on your employees. You will be paying them a set amount on regular intervals because you need them to perform certain tasks for your business. Make sure you hire the right people for the right job.
With the proper use of resources any business could maximize its potential earning. By properly allocating your resources properly you are able to save time and money in turn helping you maximize your revenue.
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