Part V- Multiple Goals of business and Government Regulations
Business firms have multiple goals or objectives depend upon its need to satisfy various classes of stakeholders. The stakeholders may be of shareholders, managers, employees, customers etc. Therefore the goals of an organisation may be multiple and conflicting.
The major goals are:
(a)Maximisation of profits
(b)Maximisations of sales
(c)Maximisation of market share
(d)Maximisation of services
(e)Maximisation of worker satisfaction
(f)Maximisation of firm’s social responsibility, etc.
Profit Maximisation and Wealth Maximisation
Traditionally profit maximisation is considered as the main object of the firm. Profit maximisation is the maximising the rupee income of the business. Presently wealth maximisation is regarded as the better objective which refers to the maximisation of the market price of shares of the company. The modern theory of the firm postulates that the primary goal of the firm is to maximise the wealth or value of the firm.
Share holder Value Maximisation Model
The shareholder value maximisation or the shareholder wealth maximisation model assumes that the objective of the firm is to maximise the value of the firm as measured in the market place, i.e., maximise the market value of firm’s share. The value can be defined as the present value of the expected future cash flows of the firm.
Therefore the value of the firm is the value of its expected future earnings, discounted back to the present by an appropriate rate of interest. Since shareholders are the owners of the business, value of a firm represent the shareholder’s wealth.
.
. . Value of the firm = Net Present Value of expected future profits.
Government Regulations
What ever be the economic system, there must be some regulations and a legal framework to facilitate the smooth functioning of the system. The government has to consider the interests of all the stakeholders while framing such regulations. The government formed commercial laws or business laws to govern business and commercial transactions.
Commercial law include Mercantile law, Law of Agency, Law of Indemnity and Guarantee, Negotiable Instruments Act, Partnership Act, Company law etc. There are certain acts like MRTP ACT 1969, FERA 1973 (replaced by FEMA 1999) etc to control and manage monopolies and foreign trade.
Wednesday, December 1, 2010
Methodology of Business Studies - Section 2, Part 4
Part- IV Managerialism and Corporate Governance
Managerialism
The word management is a complex one. It is considered as a function, a process, a group, a discipline and so on. All institutions require management and in all of them, management is the effective and the active organ. Managerialism is the effective can the active organ. Managerialism is the belief that organisations have more similarities that differences, and thus the performance of all organisations can be optimised by the application of generic management skills and theory. It is the belief in or reliance on the use of professional managers in administering or planning activity. In short the experience and skills pertinent to an organisation’s core business are considered secondary but the generic skills of management are considered primary. This gains importance because of separation of ownership and management in corporate entities.
Corporate Governance
Corporate Governance means the way in which corporate bodies are governed or managed. Business ethics or ethical practices of the professionals and the corporate social responsibility, accountability to stakeholders, transparency and full disclosure are required for better governance. All these considerations within which a company is managed in order to increase the value of shareholders and protect the interest of stakeholders are called corporate Governance.
Corporate Governance is defined by Milton Friedmen as, “the conduct of business in accordance with shareholder’s desire, which generally is to make as much money as possible, while confirming to the basic rules of the society embodies in law and local customs”.
Managerialism, with corporate governance confines to not only efficient corporate management, but it include a fair, professional and transparent administration and strive to meet certain well defined, written objectives, irrespective of the type of organisation, its objectives, scale of operation or the nature of stake holders.
Managerialism
The word management is a complex one. It is considered as a function, a process, a group, a discipline and so on. All institutions require management and in all of them, management is the effective and the active organ. Managerialism is the effective can the active organ. Managerialism is the belief that organisations have more similarities that differences, and thus the performance of all organisations can be optimised by the application of generic management skills and theory. It is the belief in or reliance on the use of professional managers in administering or planning activity. In short the experience and skills pertinent to an organisation’s core business are considered secondary but the generic skills of management are considered primary. This gains importance because of separation of ownership and management in corporate entities.
Corporate Governance
Corporate Governance means the way in which corporate bodies are governed or managed. Business ethics or ethical practices of the professionals and the corporate social responsibility, accountability to stakeholders, transparency and full disclosure are required for better governance. All these considerations within which a company is managed in order to increase the value of shareholders and protect the interest of stakeholders are called corporate Governance.
Corporate Governance is defined by Milton Friedmen as, “the conduct of business in accordance with shareholder’s desire, which generally is to make as much money as possible, while confirming to the basic rules of the society embodies in law and local customs”.
Managerialism, with corporate governance confines to not only efficient corporate management, but it include a fair, professional and transparent administration and strive to meet certain well defined, written objectives, irrespective of the type of organisation, its objectives, scale of operation or the nature of stake holders.
Methodology of Business Studies - Section 2, Part 3
Part III – Public Sector – Private Sector -Cooperative Sector
and Non Profit Enterprises
Public Sector
A public sector enterprise is one that is owned, managed and controlled by the Central Government or any State Government or local authority. There are about 1000 PSEs, of which about 800 are owned by the States. The major part of public investment by the central government has been made in infrastructure such as power, coal, petroleum, steel, fertilizers, etc and a low percentage of investment has been made in textiles and consumer goods.
The major contributions of Public Sector to Indian economy are in the forms of :- (Goals of PSUs)
(1)Development orientation through mobilizing and utilizing saving and further capital formation.
(2)Generation of more employment opportunities.
(3)Contributes to the net domestic product through generation of internal resources, payment of dividend and through contribution to government exchequer (taxes and duties).
(4)Contributes towards the development of infrastructure.
(5)Contributes towards the welfare of weaker sections of economy.
(6)Helps in maintaining process of raw- materials.
(7)Contribute towards promotion of exports and import substitution.
(8)Helps in preventing imbalance of wealth and promoting equity.
(9)Protects the interest on consumers and
(10) Stands for the common good of all.
Problems faced by PSus:-
(1)Poor service from employees and their jobs are more secure than those in private sector.
(2)More wastage.
(3)Consumer dissatisfaction due to lack of innovative practices.
(4)Mis investment and mismanagement.
(5)Misallocation of labour and capital.
(6)Political influence and
(7)Lack of proper accountability.
Changing role of PSUs in India:-
At the time of Independence, PSUs were regarded as important catalysts for social change. They are regarded as the development agents. In the post 1990, the role of PSUs was redefined and made them accountable for losses and returns in investment. The government initiated disinvestment and even privatisation. Disinvestment means the dilation of stake of government is PSU to less than 50% of its total stock, and retains the control and management by govt. If disinvestment exceeds 50%, and the control and mgt. transferred to private – enterprise, it results is privatization. The government for raising resources now utilising this means and there fore the role of PSUs are getting reduced day by day and they need to compete with private sector for growth and survival.
Private Sector
A private sector enterprise is one which is owned, managed and controlled by individuals or group of individuals. In the post liberalisation era, role of private sector turns to be very important. The government has sought to transform itself from being a provider of public services to a purchaser on behalf of users. Why private sector is regarded as an important part of Indian economy, there are several reasons for the same:
(1) The private sector is the dominant sector of the economy.
(2) It contributes towards development through research and innovation.
(3) It creates more and more employment opportunities.
(4) It contributes to the development through small and micro businesses.
(5) It improves the standard of living of people through diversification.
(6) It attracts more foreign exchange.
(7) It provides fair return to investors.
The largest private sector company in terms of market capitalization is Reliance industries and the top 3 companies in terms of assets were Reliance Industries, Tata Steel and Hindalco. The top 3 IT Companies of the country are Infosys, TCS and Wipro.
Market capitalization is simply the value assigned by the stock market to a firm.
Co-operative Sector
Cooperative refers to an institutional frame work to organise self help among members. The major features of it consist of voluntary membership, democratic functionary, social interest promotion etc. The Indian cooperatives are patronised by the state through:
(1)Prevention of concentration of economic power.
(2)Wider dispersal of ownership of productive resources.
(3)Active involvement of people in the development programmes.
(4)Augmentation of productive resources.
(5)Prevention of unemployment and poverty.
(6)lower the bureaucratic evils.
(7)Act as instruments for planned growth of the country.
Non- Profit Enterprises
A non- profit organisation is an organisation that does not distribute its surplus funds to owners or shareholders, but instead uses them to pursue its goals. They can be of trusts, societies, section 25 companies and special licensed organisations. The basic objective or goal of NPOs is to obtain a response from a target market. The response could be a change in values, a financial contribution, the donation or services or some other type of exchange. They use advertising, publicity and personnel selling to communicate with clients and the public. Now a days they are raising money by increasing the prices of their services or are starting to change for their service. They also resort to donations, contributions or grants.
and Non Profit Enterprises
Public Sector
A public sector enterprise is one that is owned, managed and controlled by the Central Government or any State Government or local authority. There are about 1000 PSEs, of which about 800 are owned by the States. The major part of public investment by the central government has been made in infrastructure such as power, coal, petroleum, steel, fertilizers, etc and a low percentage of investment has been made in textiles and consumer goods.
The major contributions of Public Sector to Indian economy are in the forms of :- (Goals of PSUs)
(1)Development orientation through mobilizing and utilizing saving and further capital formation.
(2)Generation of more employment opportunities.
(3)Contributes to the net domestic product through generation of internal resources, payment of dividend and through contribution to government exchequer (taxes and duties).
(4)Contributes towards the development of infrastructure.
(5)Contributes towards the welfare of weaker sections of economy.
(6)Helps in maintaining process of raw- materials.
(7)Contribute towards promotion of exports and import substitution.
(8)Helps in preventing imbalance of wealth and promoting equity.
(9)Protects the interest on consumers and
(10) Stands for the common good of all.
Problems faced by PSus:-
(1)Poor service from employees and their jobs are more secure than those in private sector.
(2)More wastage.
(3)Consumer dissatisfaction due to lack of innovative practices.
(4)Mis investment and mismanagement.
(5)Misallocation of labour and capital.
(6)Political influence and
(7)Lack of proper accountability.
Changing role of PSUs in India:-
At the time of Independence, PSUs were regarded as important catalysts for social change. They are regarded as the development agents. In the post 1990, the role of PSUs was redefined and made them accountable for losses and returns in investment. The government initiated disinvestment and even privatisation. Disinvestment means the dilation of stake of government is PSU to less than 50% of its total stock, and retains the control and management by govt. If disinvestment exceeds 50%, and the control and mgt. transferred to private – enterprise, it results is privatization. The government for raising resources now utilising this means and there fore the role of PSUs are getting reduced day by day and they need to compete with private sector for growth and survival.
Private Sector
A private sector enterprise is one which is owned, managed and controlled by individuals or group of individuals. In the post liberalisation era, role of private sector turns to be very important. The government has sought to transform itself from being a provider of public services to a purchaser on behalf of users. Why private sector is regarded as an important part of Indian economy, there are several reasons for the same:
(1) The private sector is the dominant sector of the economy.
(2) It contributes towards development through research and innovation.
(3) It creates more and more employment opportunities.
(4) It contributes to the development through small and micro businesses.
(5) It improves the standard of living of people through diversification.
(6) It attracts more foreign exchange.
(7) It provides fair return to investors.
The largest private sector company in terms of market capitalization is Reliance industries and the top 3 companies in terms of assets were Reliance Industries, Tata Steel and Hindalco. The top 3 IT Companies of the country are Infosys, TCS and Wipro.
Market capitalization is simply the value assigned by the stock market to a firm.
Co-operative Sector
Cooperative refers to an institutional frame work to organise self help among members. The major features of it consist of voluntary membership, democratic functionary, social interest promotion etc. The Indian cooperatives are patronised by the state through:
- Participation in share capital.
- Provision of loans to societies.
- Provision of tax concessions.
- Provision of legal concessions.
- Provision of education and training.
- Assistance of RBI.
(1)Prevention of concentration of economic power.
(2)Wider dispersal of ownership of productive resources.
(3)Active involvement of people in the development programmes.
(4)Augmentation of productive resources.
(5)Prevention of unemployment and poverty.
(6)lower the bureaucratic evils.
(7)Act as instruments for planned growth of the country.
Non- Profit Enterprises
A non- profit organisation is an organisation that does not distribute its surplus funds to owners or shareholders, but instead uses them to pursue its goals. They can be of trusts, societies, section 25 companies and special licensed organisations. The basic objective or goal of NPOs is to obtain a response from a target market. The response could be a change in values, a financial contribution, the donation or services or some other type of exchange. They use advertising, publicity and personnel selling to communicate with clients and the public. Now a days they are raising money by increasing the prices of their services or are starting to change for their service. They also resort to donations, contributions or grants.
Methodology of Business Studies - Section 3, Part 4
Part – IV ACCOUNTING
Accounting: Accounting is a discipline which records, classifies, summarizes and interprets financial information about the activities of a concern so that intelligent decisions can be made about the concern. According to the committee on Terminology of the American Institute of Certified Public Accounts (AICPA), ‘ Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character, and interpreting the result there of .
Book Keeping and Accounting: Book keeping is the art and science of keeping a systematic record of business transactions in a set of books. But accounting is more concerned with summarization of the same for decision making. The major differences between them are
Book keeping is concerned with preliminary steps in accounting process viz. recording of business transactions, so it is used in a narrow sense. Whereas Accounting is used in a wider sense covering grouping, summarization, analysis, interpretation etc...
The scope of work in book keeping is clerical and routine in nature but scope of work of accounting is analytical in nature.
The results of records prepared in boo-keeping are for internal use. But the results of records prepared in accounting are communicated to both internal and external users.
Branches of Accounting: There are mainly 3 branches of accounting according to contents of information and usefulness.
Financial accounting – It deals with recording of financial transactions to enable the business to prepare final accounts. The main object of it is to find out the profitability and to provide information about the financial position of the concern.
Cost accounting – It is concerned with finding out the cost of goods produced or services rendered by a business. It is the process of accounting for costs. It helps in cost-control decision making.
Management accounting- It is related to that aspect of accounting information, which is useful to the management for taking various decisions. Thus management accounting consists of cost accounting, budgetary control, inventory control, internal auditing, reporting etc. In short it is the accounting for management.
The Accounting Process: The process of accounting that leads to the measurement of financial performance and position of an enterprise consists of the following stages:
Accounting is the language of business. To make the language convey the same meaning to all people, accountants all over the world have developed certain rules, procedures and conventions which represent a consensus view by the profession of good accounting practices and procedures. The uniformity in accounting practice enable comparison of financial reports of different companies. Accounting standards are the methods and procedures used in accounting for events reported in financial statements. The object of accounting standards is to provide uniformity in financial reporting and to ensure consistency and comparability of information.
To maintain uniformity in accounting principles throughout the world, International Accounting Standards Committee (IASC) came in to being on 29th June 1973 consisting of accounting bodies from 9 nations with its headquarters at London. The committee has laid down standards regarding various accounting matters. In tune with the same Institute of Chartered Accountants of India established an Accounting Standards Board (ASB) in April 1977. ASB prepared several accounting standards in tune with International Accounting Standards.
Some important Accounting Standards are
Accounting Standard 1– Disclosure of accounting policies
Accounting Standard 2- Valuation of inventory
Accounting Standard 3- Cash flow statements
Accounting Standard 6- Depreciation Accounting
Accounting Standard 8- Accounting for Research and Development
Accounting Standard 10- Accounting for fixed Assets etc...
Major factors of production and their rewards: The various resources that go into the production process for goods or services are called the factors of production or inputs. The major factors of productions are land, labor, capital and entrepreneurship.
Land- Land refers to the various natural resources like land surface, mines, forests, rivers and the sea. Land represents the gift of nature to own production process. Normally rent is regarded as the reward for land.
Labour - : Labour represents all kinds of physical and mental efforts of a man undertaken to earn an income. Wages or Salaries is the reward for labour.
Capital – Capital represents a stock of existing wealth that is used to produce further wealth. Interest is regarded as the reward for capital.
Profit – Profit is regarded as the reward for entrepreneurship.
Factors to be considered for starting a business
Direct taxes include taxes on income and property and indirect taxes covers taxes on commodities and services. Important direct taxes are income tax, corporate tax and wealth tax. Important indirect taxes are sales tax, excise duties and input duties.
Major sources of tax revenues for central government
Accounting: Accounting is a discipline which records, classifies, summarizes and interprets financial information about the activities of a concern so that intelligent decisions can be made about the concern. According to the committee on Terminology of the American Institute of Certified Public Accounts (AICPA), ‘ Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character, and interpreting the result there of .
Book Keeping and Accounting: Book keeping is the art and science of keeping a systematic record of business transactions in a set of books. But accounting is more concerned with summarization of the same for decision making. The major differences between them are
Book keeping is concerned with preliminary steps in accounting process viz. recording of business transactions, so it is used in a narrow sense. Whereas Accounting is used in a wider sense covering grouping, summarization, analysis, interpretation etc...
The scope of work in book keeping is clerical and routine in nature but scope of work of accounting is analytical in nature.
The results of records prepared in boo-keeping are for internal use. But the results of records prepared in accounting are communicated to both internal and external users.
Branches of Accounting: There are mainly 3 branches of accounting according to contents of information and usefulness.
Financial accounting – It deals with recording of financial transactions to enable the business to prepare final accounts. The main object of it is to find out the profitability and to provide information about the financial position of the concern.
Cost accounting – It is concerned with finding out the cost of goods produced or services rendered by a business. It is the process of accounting for costs. It helps in cost-control decision making.
Management accounting- It is related to that aspect of accounting information, which is useful to the management for taking various decisions. Thus management accounting consists of cost accounting, budgetary control, inventory control, internal auditing, reporting etc. In short it is the accounting for management.
The Accounting Process: The process of accounting that leads to the measurement of financial performance and position of an enterprise consists of the following stages:
- Documentations
- Recording of transactions chronologically in journal.
- Classification of transactions according to nature and posting them in to respective ledgers.
- Summarizing the transactions with the help of trail balance
- Bifurcating transactions and preparing P&L account and balance sheet.
- Analyzing the statements and interpreting the data.
- Formulation of economic policies
- Anticipating changes and preparing for the same
- Giving early warning of sickness
- Helping in evolving a proper system of financial and Information technology
- Providing evidence in the court of law
- Ascertaining financial conditions of enterprise and so on
Accounting is the language of business. To make the language convey the same meaning to all people, accountants all over the world have developed certain rules, procedures and conventions which represent a consensus view by the profession of good accounting practices and procedures. The uniformity in accounting practice enable comparison of financial reports of different companies. Accounting standards are the methods and procedures used in accounting for events reported in financial statements. The object of accounting standards is to provide uniformity in financial reporting and to ensure consistency and comparability of information.
To maintain uniformity in accounting principles throughout the world, International Accounting Standards Committee (IASC) came in to being on 29th June 1973 consisting of accounting bodies from 9 nations with its headquarters at London. The committee has laid down standards regarding various accounting matters. In tune with the same Institute of Chartered Accountants of India established an Accounting Standards Board (ASB) in April 1977. ASB prepared several accounting standards in tune with International Accounting Standards.
Some important Accounting Standards are
Accounting Standard 1– Disclosure of accounting policies
Accounting Standard 2- Valuation of inventory
Accounting Standard 3- Cash flow statements
Accounting Standard 6- Depreciation Accounting
Accounting Standard 8- Accounting for Research and Development
Accounting Standard 10- Accounting for fixed Assets etc...
Major factors of production and their rewards: The various resources that go into the production process for goods or services are called the factors of production or inputs. The major factors of productions are land, labor, capital and entrepreneurship.
Land- Land refers to the various natural resources like land surface, mines, forests, rivers and the sea. Land represents the gift of nature to own production process. Normally rent is regarded as the reward for land.
Labour - : Labour represents all kinds of physical and mental efforts of a man undertaken to earn an income. Wages or Salaries is the reward for labour.
Capital – Capital represents a stock of existing wealth that is used to produce further wealth. Interest is regarded as the reward for capital.
Profit – Profit is regarded as the reward for entrepreneurship.
Factors to be considered for starting a business
- Select a proper line of business based on its capacity to generate good return at minimum risk
- Select a proper location for the business by considering various factors like availability of raw-materials, availability of labor, transportations and banking facilities, power, water etc.
- Decide about the form of organisation structure – i.e., sole proprietorship, partnership, corporate form etc.
- Estimate the fund requirements and find various sources of finance.
- Decide on the structures and constructions
- Decide on labour requirements, sources and rewards
- Fulfillment of legal requirements and procedural formalities
- Launching of the enterprise
Direct taxes include taxes on income and property and indirect taxes covers taxes on commodities and services. Important direct taxes are income tax, corporate tax and wealth tax. Important indirect taxes are sales tax, excise duties and input duties.
Major sources of tax revenues for central government
- Tax on income other than agricultural income
- Customs duty and exports duties
- Corporation tax
- Estate duty in respect of succession to properly other than agricultural land
- Taxes on sale or purchase of newspapers and on advertisements published there is etc.
- Taxes on agricultural income
- Land revenue
- Taxes on land and building
- Taxes on electricity
- Taxes on vehicle for use on roads etc...
Methodology of Business Studies - Section 3, Part 3
Part III STOCK EXCHANGE
Savings: The income of a person may be used for purchasing goods and services that he currently requires or it may be saved for meeting future requirements. Savings are generated when a person or an organisation abstains from present consumption for a future use.
The Central Statistical Organisation (CSO) defines saving as “ the excess of current income over current expenditure and is the balancing item on the income outlay accounts of producing enterprises, households, government administration and other final consumers’. For the purpose of estimating the domestic savings, the economy has been divided into three broad institutional sectors: such as households, private corporate and public sector.
Factors affecting savings : In order to promote economic development, savings is not only to be generated but also to be mobilized to the maximum extent possible and then channelize them into productive investment. The main factors that determine the size of savings are:
Financial Market: A market is a place used for buying and selling goods. The economic units in an economy such as individuals in the house hold sector, business units in the industrial and commercial sector and government organizations and departments engaged in various economic activities and transactions involving money. Some are in financial deficit and some others are in financial surplus. The transfer of funds from surplus generators to deficit generators is essential for economic development.
The market facilitate such an exchange or transfer is called financial market. the commodity exchanged in this market is a financial asset instead of physical asset. When the financial assets transferred are corporate securities and government securities, the mechanism of transfer is called securities market.
Money Market and Capital Market: On the basis of the maturity period of securities traded in the securities market, the market is segmented into money market and capital market. Money market is the market for short- term financial assets with maturities of one year or less. Treasury bills, commercial bills, commercial paper, certificated of deposits, etc are the short term securities traded in the money market.
Capital market is the market where securities with maturities of more than one year are bought and sold. Equity shares, preference shares, debentures and bonds are the long term securities traded in the capital market
Primary Market and Secondary Market: Depending on the nature and type of securities traded, financial market may be classified as primary market and secondary market. The market mechanism for buying and selling of new issues of securities is known as primary market. This market is also termed as new issues market.
The Secondary market deals with securities which have already been issued and are owned by investors. These may be traded between investors. The buying and selling of securities already issued and outstanding take place in stock exchanges. Hence stock exchanges constitute the secondary market.
Methods of floating New Issues
The methods by which new issues of shares are floated in the primary market in India are:
Public issue – Sale of securities to members of the public directly by a company. The company makes an offer for a sale of a fixed number of shares at a particular price through a legal document called prospectus.
Rights Issue – As per section 81 of the Companies Act, 1956, when a company issues additional equity capital it has to be offered first to the existing shareholders on a pro-rata basis. Such an issue of securities to the existing share holders in proportion to their current holding is called rights issue.
Private Placement – Private placement is a sale of securities privately by a company to a selected group of investors. The securities are normally placed with the institutional investors, mutual funds or other financial institutions.
Stock Exchange – Definition
A stock exchange may be defined as, “a centralised market for buying and selling stocks where the price is determined through supply- demand mechanism”.
According to the Securities Contracts (Regulation) Act 1956, “Stock exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities”.
Role and functions of a Stock Exchange: A stock exchange has an important role to fulfill the economic development of a country. The stock exchange performs certain essential functions in the process of capital formation and in raising resources for the corporate sector. Some of them are:
Characteristics of Stock Exchange: The essential features or characteristics of stock exchange are:
Stock broking: Stock broking is the professional activity of buying and selling stocks and shares for clients. A transaction on a stock exchange must be made between two members of the exchange. Such an exchange must be done through a broker. “There are 3 types of stock broking services:
Difference between Primary market and Secondary Market
In Primary Market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already issued securities are traded among investors. Secondary market could be either auction or dealer market. Stock Exchange is the part of an auction market and over the Counter market as part of the dealer market.
NASDAQ- NASDAQ is an American Stock Exchange. It originally stood for ‘National Association of Securities Dealers Automated Quotations’. It is the largest electronic screen-based equity securities trading market in the US and fourth largest by market capitalization in the world.
Savings: The income of a person may be used for purchasing goods and services that he currently requires or it may be saved for meeting future requirements. Savings are generated when a person or an organisation abstains from present consumption for a future use.
The Central Statistical Organisation (CSO) defines saving as “ the excess of current income over current expenditure and is the balancing item on the income outlay accounts of producing enterprises, households, government administration and other final consumers’. For the purpose of estimating the domestic savings, the economy has been divided into three broad institutional sectors: such as households, private corporate and public sector.
Factors affecting savings : In order to promote economic development, savings is not only to be generated but also to be mobilized to the maximum extent possible and then channelize them into productive investment. The main factors that determine the size of savings are:
- Size of income
- The fiscal and monetary policy of the government. (Monetary policy concerned with the management of the supply, cost and availability of money. Fiscal policy is a package of economic measures of the government regarding its public expenditure, public revenue and public borrowing.)
- Subjective factors like need for meeting unforeseen contingencies, meet expected future needs, meet speculative or business purposes, need to accumulate wealth etc.
- Rate of interest prevailing in the economy
- Price level changes (Inflation )
- Spending habit of people
- Demonstration effect (desire to imitate the superior consumption standards of the advanced countries.
Financial Market: A market is a place used for buying and selling goods. The economic units in an economy such as individuals in the house hold sector, business units in the industrial and commercial sector and government organizations and departments engaged in various economic activities and transactions involving money. Some are in financial deficit and some others are in financial surplus. The transfer of funds from surplus generators to deficit generators is essential for economic development.
The market facilitate such an exchange or transfer is called financial market. the commodity exchanged in this market is a financial asset instead of physical asset. When the financial assets transferred are corporate securities and government securities, the mechanism of transfer is called securities market.
Money Market and Capital Market: On the basis of the maturity period of securities traded in the securities market, the market is segmented into money market and capital market. Money market is the market for short- term financial assets with maturities of one year or less. Treasury bills, commercial bills, commercial paper, certificated of deposits, etc are the short term securities traded in the money market.
Capital market is the market where securities with maturities of more than one year are bought and sold. Equity shares, preference shares, debentures and bonds are the long term securities traded in the capital market
Primary Market and Secondary Market: Depending on the nature and type of securities traded, financial market may be classified as primary market and secondary market. The market mechanism for buying and selling of new issues of securities is known as primary market. This market is also termed as new issues market.
The Secondary market deals with securities which have already been issued and are owned by investors. These may be traded between investors. The buying and selling of securities already issued and outstanding take place in stock exchanges. Hence stock exchanges constitute the secondary market.
Methods of floating New Issues
The methods by which new issues of shares are floated in the primary market in India are:
Public issue – Sale of securities to members of the public directly by a company. The company makes an offer for a sale of a fixed number of shares at a particular price through a legal document called prospectus.
Rights Issue – As per section 81 of the Companies Act, 1956, when a company issues additional equity capital it has to be offered first to the existing shareholders on a pro-rata basis. Such an issue of securities to the existing share holders in proportion to their current holding is called rights issue.
Private Placement – Private placement is a sale of securities privately by a company to a selected group of investors. The securities are normally placed with the institutional investors, mutual funds or other financial institutions.
Stock Exchange – Definition
A stock exchange may be defined as, “a centralised market for buying and selling stocks where the price is determined through supply- demand mechanism”.
According to the Securities Contracts (Regulation) Act 1956, “Stock exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities”.
Role and functions of a Stock Exchange: A stock exchange has an important role to fulfill the economic development of a country. The stock exchange performs certain essential functions in the process of capital formation and in raising resources for the corporate sector. Some of them are:
- Established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in securities.
- Provides a market for the trading of securities to individuals and organisations seeking to invest their savings or excess funds through the purchase of securities.
- Provides a physical location for buying and selling securities that have been listed for trading on that exchange.
- Establishes rules for fair trading practices and regulates the trading activities of its members according to those rules.
- The exchange itself does not buy or sell the securities, nor does it set prices for them. It assures that no investor will have an undue advantage over the other market participants.
Characteristics of Stock Exchange: The essential features or characteristics of stock exchange are:
- It is a voluntary association registered by certain laws.
- Control of the exchange performed by governing body, which was elected by the members of exchange.
- The members should obey the rules and regulations
- Only securities enlisted in the official list of stock exchange can be transacted through stock exchange.
Stock broking: Stock broking is the professional activity of buying and selling stocks and shares for clients. A transaction on a stock exchange must be made between two members of the exchange. Such an exchange must be done through a broker. “There are 3 types of stock broking services:
- Pertaining to only execution, which means the broker will only carryout the client’s instruction to buy or sell
- Concerned with the advisory dealing, where the broker advises the client on which shares to buy and sell, but leaves the final decision to the investor.
- Discretionary dealings, where the stock broker ascertains the clients’s investment objectives and then makes all dealing decisions on behalf of his client.
Difference between Primary market and Secondary Market
In Primary Market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already issued securities are traded among investors. Secondary market could be either auction or dealer market. Stock Exchange is the part of an auction market and over the Counter market as part of the dealer market.
NASDAQ- NASDAQ is an American Stock Exchange. It originally stood for ‘National Association of Securities Dealers Automated Quotations’. It is the largest electronic screen-based equity securities trading market in the US and fourth largest by market capitalization in the world.
Methodology of Business Studies - Section 3, Part 2
Part -2 – BUSINESS FINANCE
Business Finance: - Finance is considered to be the life blood of business. When finance is used for some business activities, it may be called business finance. It refers to the money and credit employed in business. It may be defined as the process of raising, providing and managing of all funds to be used in connection with business activities.
According the B.O Wheeler, “Business finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of a business enterprise”.
Finance is required for the purchase of fixed assets, meeting the cost of current assets, acquiring intangible assets, meeting the day to day expenses, meeting the cost of raising finance, providing for the growth and expansion of business and so on. the capital required by a business is segregated into fixed capital and working capital.
Fixed Capital: - Fixed capital is represented by fixed assets like plant and machinery, land and buildings, furniture etc. Capital investment in such assets is more or less permanent in nature. It requires large amount of money for a long period of time. The return will derived over a long period of time. The amount of fixed capital required in an organization depends on nature of business, scale of operation, type of manufacturing process, mode of acquiring fixed assets etc.
Working Capital: - Working Capital is the amount of capital which is required for the day to day working of a business. It is the capital used for carrying out routine business operations of financing current assets. It is also known as circulating capital because of the fact that it keeps on revolving or circulating from cash to current assets and back. There are two concepts of working capital- Gross working Capital (Total funds invested in current assets) and Net working Capital (Difference between current assets and current liabilities.)
On the basis of period for which finance is required, business finance may be classified into:
Long term finance: – Funds which are required to be invested in the business for a long period generally exceeding five years are called long- term finance. Shares, debentures, loans etc are the main sources of this finance.
Medium – term finance: – Finance required for a period of one year to five years is known as medium term finance. Redeemable preference shares, debentures, loans etc are its main sources.
Short – term finance: - finance required for meeting day- to- day operations of a business or for meeting the working capital requirements are called short- term finance. Trade credit, short term loans, public deposits, accounts receivable financing etc are the main sources to it. This type of finance is required for a short period up to one year.
Sources of business finance: The term source implies the agencies from which funds are procured. To meet its requirements, the private corporate sector raises finance from different sources. These sources can be classified into two categories:
A. Owned funds: - The amount contributed by the owners is known as ownership capital. Owned funds consist of the amount contributed by owners as well as the profits reinvested in the business. It acts as a source of permanent capital, risk capital and affords a right to management and control with claim only on the residual profit.
B. Borrowed Capital: – Finance raised by way of loans and credit from the public, banks and financial institution is known as borrowed capital. Its major sources consist of debentures, public deposits, banks etc. It usually available only for a fixed period and involves payment of fixed rate of interest at regular intervals.
Difference between Ownership Capital and Creditorship Capital
1. Owned capital comprises the amounts contributed by the owners and their profits reinvested. Creditorship capital consists of funds available in the form of loans or credit.
2. Owned capital is permanently invested in business whereas borrowed capital is available only for a limited period of time.
3. Owned capital act as the risk capital of business but the borrowed capital is generally secured in nature.
The major sources of business finance are:
1. Share: - The capital of a company is usually divided into certain indivisible units of a definite sum. These units are called share. Shares represent the interest of a share holder in a company measured in terms of money. Those who subscribe shares are called shareholders. Different kinds of shares are:
Preference shares:- Those shares which carry preferential right in respect of dividend and repayment of capital in the event of winding up of the company. These shares may be of:
Cumulative and Non cumulative
Participating and Non Participating
Convertible and Non Convertible
Redeemable and Irredeemable
Equity shares or ordinary shares: - Shares which do not enjoy any of the preferences attached to the preference shares are known as equity shares. They are the real owners of the company and bear the risk of business. Dividend on equity shares is paid after the dividend on preference shares has been paid. In the event of winding up, equity capital can be repaid only after settling all other claims.
Debentures: - Debenture is a certificate issued by a company under its seal acknowledging a debt due to its holders. It is a creditor ship security entitled to get the periodical payment of interest at a fixed rate.
Retained Earning: - Profits which are not distributed among the shareholders and re-invested into business is called retained earnings. This process of ploughing back of profits is also known as ‘self financing’ because it is an internal source of finance
Public deposits: – The deposits made by the public with corporate are known as public deposits.
Leading Institutions for business finance
Institutional finance refers to an institutional source of finance to business enterprises. It generally consists of:
1.Banks and other public financial institutions
2.Non- Banking finance companies, and
3.Investment Trusts and Mutual funds
Commercial Banks:- Commercial banks play a very significant role in financing the short term requirements of corporates. They provide finance by way of loans, overdrafts, cash credit and discounting bills.
Loan is granted for a specific project or purpose. Under overdraft arrangement, a customer having a current account with the bank is allowed to overdraw his account. Under cash credit scheme, the bank fixes a cash credit limit for the customer, the customer can withdraw up to this limit any number of times. But interest is charged only on the amount actually utilized. Commercial banks extend credit to industries by discounting their bills and promissory notes at a price less than their face value, the difference is the amount of interest charged by the bank.
Lending is the primary source of income for banks. The RBI insisted that 40 % of the total lending of banks should be to priority sectors such as agriculture, small enterprises, retail trade, micro-credit, education loans and housing loans.
There are 3 constituents of commercial banking structure in India. They are Public Sector banks, private sector banks and foreign banks. Public sector banking in India consists of 19 nationalized banks besides the State Bank of India and its seven associate banks, one other public sector bank (IDBI Ltd) and 88 regional rural banks. The foreign banks in the private sector are those banks that are incorporated in foreign countries. There are 30 such banks with 279 branches.
Non- Banking Finance Companies (NBFCs): Non-banking finance companies are financial institutions that provide specific financial services to meet the requirements of specific segments of the industry. NBFC is defined as a company that is a financial institution and has as its business the receiving of deposits or lending under any scheme of arrangement. It resembles like banking company since it receives deposits and lends money. However, it is not a bank because it is not incorporated as a bank and is not governed by Banking Regulation Act 1947. RBI mentioned five kinds of NBFCs such as – leasing finance companies, hire-purchase finance companies, loan finance companies, investment finance companies and residuary non- banking companies.
International sources of business funds: With the globalization and liberalization of the economy, Indian companies have started generating funds from international markets. The international sources from where the funds can be procured include foreign currency loans, commercial banks, financial assistance from international agencies and issues of financial instruments like global depository receipts (GDR) American depository receipts (ADR) and foreign currency convertible bonds (FCCB).
GDR is an instrument issued abroad by an Indian company to raise funds in some foreign currency and is listed and traded on a foreign stock exchange. GDR is issued in the form of depository receipt or certificate created by the Overseas Depository Bank outside India and issued to non – resident investors against the issue of ordinary shares or foreign currency convertible debentures of the issuing company.
The depositary receipts issued by a company in the US to US citizens only and can be listed and traded on a stock exchange of US only is called ADR.
An FCCB is a bond issued by an Indian company subscribed by non-residents in foreign currency and convertible is to equity shares of issuing company.
Cost of Capital: - Cost of Capital means the minimum return expected by the suppliers of capital. It is the rate of return required by lenders and stockholders of lend or invest their funds in the firm. This expected return depends on the risk they have to undertake.
Business Finance: - Finance is considered to be the life blood of business. When finance is used for some business activities, it may be called business finance. It refers to the money and credit employed in business. It may be defined as the process of raising, providing and managing of all funds to be used in connection with business activities.
According the B.O Wheeler, “Business finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of a business enterprise”.
Finance is required for the purchase of fixed assets, meeting the cost of current assets, acquiring intangible assets, meeting the day to day expenses, meeting the cost of raising finance, providing for the growth and expansion of business and so on. the capital required by a business is segregated into fixed capital and working capital.
Fixed Capital: - Fixed capital is represented by fixed assets like plant and machinery, land and buildings, furniture etc. Capital investment in such assets is more or less permanent in nature. It requires large amount of money for a long period of time. The return will derived over a long period of time. The amount of fixed capital required in an organization depends on nature of business, scale of operation, type of manufacturing process, mode of acquiring fixed assets etc.
Working Capital: - Working Capital is the amount of capital which is required for the day to day working of a business. It is the capital used for carrying out routine business operations of financing current assets. It is also known as circulating capital because of the fact that it keeps on revolving or circulating from cash to current assets and back. There are two concepts of working capital- Gross working Capital (Total funds invested in current assets) and Net working Capital (Difference between current assets and current liabilities.)
On the basis of period for which finance is required, business finance may be classified into:
Long term finance: – Funds which are required to be invested in the business for a long period generally exceeding five years are called long- term finance. Shares, debentures, loans etc are the main sources of this finance.
Medium – term finance: – Finance required for a period of one year to five years is known as medium term finance. Redeemable preference shares, debentures, loans etc are its main sources.
Short – term finance: - finance required for meeting day- to- day operations of a business or for meeting the working capital requirements are called short- term finance. Trade credit, short term loans, public deposits, accounts receivable financing etc are the main sources to it. This type of finance is required for a short period up to one year.
Sources of business finance: The term source implies the agencies from which funds are procured. To meet its requirements, the private corporate sector raises finance from different sources. These sources can be classified into two categories:
A. Owned funds: - The amount contributed by the owners is known as ownership capital. Owned funds consist of the amount contributed by owners as well as the profits reinvested in the business. It acts as a source of permanent capital, risk capital and affords a right to management and control with claim only on the residual profit.
B. Borrowed Capital: – Finance raised by way of loans and credit from the public, banks and financial institution is known as borrowed capital. Its major sources consist of debentures, public deposits, banks etc. It usually available only for a fixed period and involves payment of fixed rate of interest at regular intervals.
Difference between Ownership Capital and Creditorship Capital
1. Owned capital comprises the amounts contributed by the owners and their profits reinvested. Creditorship capital consists of funds available in the form of loans or credit.
2. Owned capital is permanently invested in business whereas borrowed capital is available only for a limited period of time.
3. Owned capital act as the risk capital of business but the borrowed capital is generally secured in nature.
The major sources of business finance are:
1. Share: - The capital of a company is usually divided into certain indivisible units of a definite sum. These units are called share. Shares represent the interest of a share holder in a company measured in terms of money. Those who subscribe shares are called shareholders. Different kinds of shares are:
Preference shares:- Those shares which carry preferential right in respect of dividend and repayment of capital in the event of winding up of the company. These shares may be of:
Cumulative and Non cumulative
Participating and Non Participating
Convertible and Non Convertible
Redeemable and Irredeemable
Equity shares or ordinary shares: - Shares which do not enjoy any of the preferences attached to the preference shares are known as equity shares. They are the real owners of the company and bear the risk of business. Dividend on equity shares is paid after the dividend on preference shares has been paid. In the event of winding up, equity capital can be repaid only after settling all other claims.
Debentures: - Debenture is a certificate issued by a company under its seal acknowledging a debt due to its holders. It is a creditor ship security entitled to get the periodical payment of interest at a fixed rate.
Retained Earning: - Profits which are not distributed among the shareholders and re-invested into business is called retained earnings. This process of ploughing back of profits is also known as ‘self financing’ because it is an internal source of finance
Public deposits: – The deposits made by the public with corporate are known as public deposits.
Leading Institutions for business finance
Institutional finance refers to an institutional source of finance to business enterprises. It generally consists of:
1.Banks and other public financial institutions
2.Non- Banking finance companies, and
3.Investment Trusts and Mutual funds
Commercial Banks:- Commercial banks play a very significant role in financing the short term requirements of corporates. They provide finance by way of loans, overdrafts, cash credit and discounting bills.
Loan is granted for a specific project or purpose. Under overdraft arrangement, a customer having a current account with the bank is allowed to overdraw his account. Under cash credit scheme, the bank fixes a cash credit limit for the customer, the customer can withdraw up to this limit any number of times. But interest is charged only on the amount actually utilized. Commercial banks extend credit to industries by discounting their bills and promissory notes at a price less than their face value, the difference is the amount of interest charged by the bank.
Lending is the primary source of income for banks. The RBI insisted that 40 % of the total lending of banks should be to priority sectors such as agriculture, small enterprises, retail trade, micro-credit, education loans and housing loans.
There are 3 constituents of commercial banking structure in India. They are Public Sector banks, private sector banks and foreign banks. Public sector banking in India consists of 19 nationalized banks besides the State Bank of India and its seven associate banks, one other public sector bank (IDBI Ltd) and 88 regional rural banks. The foreign banks in the private sector are those banks that are incorporated in foreign countries. There are 30 such banks with 279 branches.
Non- Banking Finance Companies (NBFCs): Non-banking finance companies are financial institutions that provide specific financial services to meet the requirements of specific segments of the industry. NBFC is defined as a company that is a financial institution and has as its business the receiving of deposits or lending under any scheme of arrangement. It resembles like banking company since it receives deposits and lends money. However, it is not a bank because it is not incorporated as a bank and is not governed by Banking Regulation Act 1947. RBI mentioned five kinds of NBFCs such as – leasing finance companies, hire-purchase finance companies, loan finance companies, investment finance companies and residuary non- banking companies.
International sources of business funds: With the globalization and liberalization of the economy, Indian companies have started generating funds from international markets. The international sources from where the funds can be procured include foreign currency loans, commercial banks, financial assistance from international agencies and issues of financial instruments like global depository receipts (GDR) American depository receipts (ADR) and foreign currency convertible bonds (FCCB).
GDR is an instrument issued abroad by an Indian company to raise funds in some foreign currency and is listed and traded on a foreign stock exchange. GDR is issued in the form of depository receipt or certificate created by the Overseas Depository Bank outside India and issued to non – resident investors against the issue of ordinary shares or foreign currency convertible debentures of the issuing company.
The depositary receipts issued by a company in the US to US citizens only and can be listed and traded on a stock exchange of US only is called ADR.
An FCCB is a bond issued by an Indian company subscribed by non-residents in foreign currency and convertible is to equity shares of issuing company.
Cost of Capital: - Cost of Capital means the minimum return expected by the suppliers of capital. It is the rate of return required by lenders and stockholders of lend or invest their funds in the firm. This expected return depends on the risk they have to undertake.
Methodology of Business Studies - Section 3
Part I- Entrepreneurship
For every person who has a head and heart, there are three options to keep him or her busy and to contribute to his or her development and economic development of the country at large. The three alternatives are wage-employment, self-employment and being the employer. Among them the best option is accepting the challenge of becoming an employer than being an employee.
Entrepreneur- The word entrepreneur is derived from the French verb ‘ entreprendre’ which means to undertake. An entrepreneur is a person who brings us overall change through innovation for the maximum social good. He is a person handling ventures spun-off from a large business such as a company created as a subsidiary to produce the products of anew invention.
Professor Schumpter defined entrepreneur as “ any person who is innovative and profit earned by an entrepreneur is a reward for innovativeness”.
In short, an entrepreneur is a person who is responsible for setting up a business or an enterprise. He is one who has the innovative skill, looking for high achievements, agent of change and works for the good people.
Entrepreneurship- In broad sense, the word entrepreneurship is the process of starting and running ones’ own business. Presently it is known by other words as “adventurism”, ‘risk-taking’, ‘thrill-seeking’,’ innovating’ and the like.
According to professor B. Higgins, Entrepreneurship is “the function of seeking investment and production opportunities, organizing an enterprise to undertake a new product, process of raising capital, having labour, arranging the supply of raw-materials, finding site, introducing a new technique and commodities, discovering new sources of raw-materials and selecting top managers for day-to –day operations of the enterprise”.
In short, entrepreneurship is the creative and innovative response of the environment and an ability to recognize, initiate and exploit economic opportunity.
Difference between Entrepreneur and Entrepreneurship: Actually the words entrepreneur and entrepreneurship are inseparable and the latter part speaks of the functions of the former. The major differences based on it is as shown below.
Entrepreneur
Entrepreneurship
Person
Process
Organizer
Organization
Innovator
Innovation
Initiator
Initiative
Decision Maker
Decision
Leader
Leadership
Risk-taken
Risk
Motivator
Motivation
Communicator
Communication
Administrator
Administration
Planner
Planning
Director
Direction etc….
Factors affecting Entrepreneurial supply: The entrepreneurs are responsible for providing economic efficiency and bringing new innovations to the market. One of the key tasks of economic development in developing countries is the fostering of an entrepreneurial spirit. The emergence and development of entrepreneurship is not spontaneous, but it depends on economic, social, psychological, political and legal factors prevailing in the economy.
The major facilitating factors which influences the entrepreneurship are:
1)Function of innovation
2)Function of high achievement
3)Function of building organization
4)Function of leadership skills
5)Function of linking the missing gaps
6)Function of group solidarity
7)Function of religious belief.
Intrapreneurship- Intrapreneurship is the practice of Entrepreneurship by employees with in an organization. It means the innovation occurs inside established companies through the efforts of creative employees. The idea of Entrepreneurship calls that managers inside the company should be encouraged to be entrepreneurs within the firm rather than moving out.
Entrepreneur Vs Intrapreneur
Entrepreneur is one who has a dream and builds an organization to achieve it. Intrapreneur is one who has a dream and tries to achieve it within an already existing co-operation.
Entrepreneurs must ensure the technology works, and sell it at a profit. Intrapreneurs must also get their company to let them do the innovative project to completion.
Entrepreneurs require funds of their own to initiate the project but the company/organizations often has capital to fund the project for the intrapreneurs.
Entrepreneurs require to arrange manpower for the project, but intrapreneurs do not have to worry about finding the talent tot get tasks performed.
Entrepreneur has to create a brand of his own. Intrapreneurs can use the branding of the company/organization to get their ideas to take root.
Entrepreneur Vs Manager
A manager is someone who directs a team and an entrepreneur is someone who organizes, manages and assumes the risk of a business or enterprise. So an entrepreneur can be a manager but a manager cannot be an entrepreneur.
A manager always like to control all aspects of their workplace. They constantly supervise the work assigned to their employees. But an entrepreneurs is generally considered as a leader versus a manager. They will give people tasks and deadline and generally leave them alone until it is completed. They trust the people than that of managers.
Entrepreneur is creator of ideas and managers are the peoples who implement the ideas of others. Manager is regarded as a coordinator, but an entrepreneur is regarded as a leader.
Savvy Intrapreneur - Savvy Intrapreneur takes a good idea and makes it better. A Savvy Intrapreneur steps out of the comfort zone of corporate security, to insure he creates additional income, which at least matches their take home pay. A Savvy Intrapreneur runs themselves like a business putting in 1 hour a day of overtime for their own financial future.
Entrepreneurship and Economic Development: Entrepreneurship and economic development are intimately related. Schumpter opines that entrepreneurial process is a major factor in economic development and the entrepreneurship the key to economic growth. Entrepreneurship is an approach to management that can be applied in start-up situations as well as within more established businesses. The growing interest, in the area of entrepreneurship has developed alongside interest in the changing role of small businesses. Small entrepreneurship has a fabulous potential in a developing country like India. The small industries now – a – days turn to be the main source of employment of our country. So it leads to growth in employment and decrease in unemployment. It also leads to improvement in the social, economic and institutional progress in many respects.
For every person who has a head and heart, there are three options to keep him or her busy and to contribute to his or her development and economic development of the country at large. The three alternatives are wage-employment, self-employment and being the employer. Among them the best option is accepting the challenge of becoming an employer than being an employee.
Entrepreneur- The word entrepreneur is derived from the French verb ‘ entreprendre’ which means to undertake. An entrepreneur is a person who brings us overall change through innovation for the maximum social good. He is a person handling ventures spun-off from a large business such as a company created as a subsidiary to produce the products of anew invention.
Professor Schumpter defined entrepreneur as “ any person who is innovative and profit earned by an entrepreneur is a reward for innovativeness”.
In short, an entrepreneur is a person who is responsible for setting up a business or an enterprise. He is one who has the innovative skill, looking for high achievements, agent of change and works for the good people.
Entrepreneurship- In broad sense, the word entrepreneurship is the process of starting and running ones’ own business. Presently it is known by other words as “adventurism”, ‘risk-taking’, ‘thrill-seeking’,’ innovating’ and the like.
According to professor B. Higgins, Entrepreneurship is “the function of seeking investment and production opportunities, organizing an enterprise to undertake a new product, process of raising capital, having labour, arranging the supply of raw-materials, finding site, introducing a new technique and commodities, discovering new sources of raw-materials and selecting top managers for day-to –day operations of the enterprise”.
In short, entrepreneurship is the creative and innovative response of the environment and an ability to recognize, initiate and exploit economic opportunity.
Difference between Entrepreneur and Entrepreneurship: Actually the words entrepreneur and entrepreneurship are inseparable and the latter part speaks of the functions of the former. The major differences based on it is as shown below.
Entrepreneur
Entrepreneurship
Person
Process
Organizer
Organization
Innovator
Innovation
Initiator
Initiative
Decision Maker
Decision
Leader
Leadership
Risk-taken
Risk
Motivator
Motivation
Communicator
Communication
Administrator
Administration
Planner
Planning
Director
Direction etc….
Factors affecting Entrepreneurial supply: The entrepreneurs are responsible for providing economic efficiency and bringing new innovations to the market. One of the key tasks of economic development in developing countries is the fostering of an entrepreneurial spirit. The emergence and development of entrepreneurship is not spontaneous, but it depends on economic, social, psychological, political and legal factors prevailing in the economy.
The major facilitating factors which influences the entrepreneurship are:
- Govt and Institutional support
- Favourable economic conditions including availability of capital
- Support from the society
- Mechanical knowledge and availability of workers.
- Entrepreneurial training facilities
- Support from suppliers of raw-materials
- Favourable market conditions and market contacts.
- Prevalence of family business
- Capable advisors and supporters, and
- Successful role models
- Legal and bureaucratic constraints
- Lack of co-operation from financial institutions
- Political instability
- Non-availability of capital
- Lack of business knowledge
- Social stigmas
- Lack of technical skills
- Lack of proper market
- Time pressures and distractions
1)Function of innovation
2)Function of high achievement
3)Function of building organization
4)Function of leadership skills
5)Function of linking the missing gaps
6)Function of group solidarity
7)Function of religious belief.
Intrapreneurship- Intrapreneurship is the practice of Entrepreneurship by employees with in an organization. It means the innovation occurs inside established companies through the efforts of creative employees. The idea of Entrepreneurship calls that managers inside the company should be encouraged to be entrepreneurs within the firm rather than moving out.
Entrepreneur Vs Intrapreneur
Entrepreneur is one who has a dream and builds an organization to achieve it. Intrapreneur is one who has a dream and tries to achieve it within an already existing co-operation.
Entrepreneurs must ensure the technology works, and sell it at a profit. Intrapreneurs must also get their company to let them do the innovative project to completion.
Entrepreneurs require funds of their own to initiate the project but the company/organizations often has capital to fund the project for the intrapreneurs.
Entrepreneurs require to arrange manpower for the project, but intrapreneurs do not have to worry about finding the talent tot get tasks performed.
Entrepreneur has to create a brand of his own. Intrapreneurs can use the branding of the company/organization to get their ideas to take root.
Entrepreneur Vs Manager
A manager is someone who directs a team and an entrepreneur is someone who organizes, manages and assumes the risk of a business or enterprise. So an entrepreneur can be a manager but a manager cannot be an entrepreneur.
A manager always like to control all aspects of their workplace. They constantly supervise the work assigned to their employees. But an entrepreneurs is generally considered as a leader versus a manager. They will give people tasks and deadline and generally leave them alone until it is completed. They trust the people than that of managers.
Entrepreneur is creator of ideas and managers are the peoples who implement the ideas of others. Manager is regarded as a coordinator, but an entrepreneur is regarded as a leader.
Savvy Intrapreneur - Savvy Intrapreneur takes a good idea and makes it better. A Savvy Intrapreneur steps out of the comfort zone of corporate security, to insure he creates additional income, which at least matches their take home pay. A Savvy Intrapreneur runs themselves like a business putting in 1 hour a day of overtime for their own financial future.
Entrepreneurship and Economic Development: Entrepreneurship and economic development are intimately related. Schumpter opines that entrepreneurial process is a major factor in economic development and the entrepreneurship the key to economic growth. Entrepreneurship is an approach to management that can be applied in start-up situations as well as within more established businesses. The growing interest, in the area of entrepreneurship has developed alongside interest in the changing role of small businesses. Small entrepreneurship has a fabulous potential in a developing country like India. The small industries now – a – days turn to be the main source of employment of our country. So it leads to growth in employment and decrease in unemployment. It also leads to improvement in the social, economic and institutional progress in many respects.
Monday, September 13, 2010
Methodology of Business Studies
Methodology of Business Studies
Introduction:-
Before a person starts practicing medicine and surgery, he has to acquire sufficient knowledge about the structure of the body, functions of different organs etc. Likewise, a person can hope to understand and tackle problems of business properly only if he has some knowledge of the business world, business activity and its organisation and the relationship of business with the world around it. As we all know, we are all striving for achievement of a work. Our life is built around work, and the work is an essential part of life. This work activity is divided into two broad segments economic and non-economic. So business is an economic activity.
Business is viewed as an organized economic activity aiming at the production and sale of goods and services needed by the individuals in a society, so the business system cannot be studied without reference to the economic system in which it has to function.
Economic Systems:-
An economic system consists of people and institutions through which economic resources are utilized for satisfying needs of individuals in a society. Every society adopts certain institutions through which it attempts to utilize its resources in the best possible manner for satisfaction of human wants. These institutions together constitute an economic system. So simply it refers to the management or the organization pattern formed by various institutions governing economic activities in a society.
Definition of Economic System:-
An economic system may be defined as the system of production, distribution and consumption of goods and services in a country. In other words, it is the set of principles and techniques by which problems of economics are addressed, such as problem of society, poverty, unemployment etc.
Central Problems/Basic questions to be addressed by an Economic System:-
a) What commodities shall be produced and in what quantities?
b) How shall the goods be produced? In other words, by whom and with what resources and by what technology are these to be produced?
c) For whom shall goods be produced?
In other words, whose needs are to be catered to by the production and distribution of goods and services?
In addition to these, modern economies are facing difficulties in relation to maintaining accelerated rate of growth of the economy and in the optimum utilization of resources.
These questions are answered differently by various economic systems. Business activity and its organization will naturally depend upon the decision made by the society regarding what goods and services should receive priority, which types of consumers should be addressed for making goods and services available to these consumers. This necessitates the study of different economic systems.
Different Economic Systems:- The basic economic systems fall under four categories: Capitalism, Socialism, Communism and Mixed Economy.
Capitalism:-
It is an economic system in which individuals are relatively free to determine how goods and services shall be produced and allocated. Here, Capital is owned and invested by individuals and private-owned institutions to earn profit. The investors ultimately benefit by profit and are having the right to own tangible and intangible private property. The system is marked by little or no interference by the Government in business run by private institutions or individuals. This enables individuals to choose what to produce, in what quantity and in which markets to sell.
Socialism:-
The basic philosophy of socialism is the provision of certain goods and services to all individuals in the nation. It seeks to create more opportunity for the under privileged classes and to end inequality based on birth. So that society can be rebuilt on the foundation of co-operation instead of competition, incentive or profit. Under this economic system, the Government determines what goods shall be produced, how they shall be produced etc. The ultimate goal of this economy is to replace the private ownership of means of production by social ownership and control.
Communism:-
This system emerged in the twentieth century in countries like Russia and China. Under communism all control of economic power vests in the State. Means of production are socialized and private property is abolished with the object of ending the exploitation of the poor by the rich. The Government owns all economic resources and decided what to produce, how to produce, how to distribute etc. Individuals in such as economy work not for private gain but for the good of society. Here State is the only employer and private freedom of choice and action is getting eliminated.
Mixed Economy:-
It is a combination of State ownership and control of business and private enterprise. Here the private enterprise is permitted to function and flourish subject to the control and restrictions by the Government. It aims at blending together the best of control, socialists or communist economy with the best of free enterprise in a capitalist economy.
Division of Labour:-
The allocation of different jobs to different people is known as specialization or division of labour. It allows individuals to specialize in the types of work in which they have a comparative advantage. It allows the workers to acquire specialized skills, both through training and by learning from experience on the job.
F.W. Taylor through scientific management initiated division of labour. The emergence of scientific management in business and planning in national economic systems made the social system of division of labour the key for attaining faster economic growth and better standard of living for people around the world.
Division of labour was used as a social system in older days to categorize different jobs, and divide labour force to skilled members of a society. An increasingly complex division of labour is closely associated with the growth of total output and trade, the rise of capitalism and of the complexity of industrialization process. Due to globalization, it reaches its maximum scope through business process out sourcing and so on. The WTO supports it through its policy to expand world trade based on comparative advantage.
It is widely accepted that the division of labour is to a great extent inevitable, simply because no one can do all tasks at once. Some time critics of extreme division of labour argue that over specialization is bad for intellectual and emotional development and leads to narrow mindedness and feelings of alienation.
Innovation:-
The term innovation refers to anew way of doing something. It may refer to incremental, radical and revolutionary changes in thinking, products, processes, or organizations. Innovation refers to the commercial application of invention and is the result of attempts to satisfy some feeling of a ‘gap’ somewhere the person is working at. Innovation now a day determines the fate of an industry and paves the way for new allied industries.
Innovations are of three types: neutral, labour-saving and capital saving. Labour saving innovation enables production of a given output with less labour relative to capital and capital saving innovation enables production of a given output with less capital relative to labour. All other innovations are called neutral innovations.
The innovation is simply defined as, “the successful introduction of a new thing or method”. Joseph Schumpeter provided an economic conception which includes:
1. The introduction of new good, which is new to consumers, or of a new quality.
2. The introduction of a new method of production.
3. The opening of a new market.
4. The conquest of a new source of supply of raw materials.
5. The carrying out of the new organization of only industry.
Thus the systematic programs of organizational innovations are most frequently driven by:
1. Improved quality
2. Creation of new markets
3. Extension of the product range
4. Reduced labour costs
5. Improved production processes
6. Reduced materials
7. Reduced environmental damages
8. Replacement of products/services
9. Reduced energy consumption
10. Conformance to regulations
The causes of failure in innovation of a firm may be external or internal. Common causes of failure with in the innovation process in most organizations can be distilled into 5 types, such as:
1. Poor goal definition
2. Poor alignment of actions to goals
3. Poor participation in teams
4. Poor monitoring of results and
5. Poor communication and access to information
Flow of Goods and Services : Accumulation of wealth Flow of goods and services simply means trade. In this global economy, the flow of goods and services across borders is a critical factor to the health and growth of a country’s economy.
The accumulation of capital simply refers to the gathering or amassment of objects of value, the increase in wealth; or the creation of wealth. It refers to net addition to existing wealth, or to a redistribution of wealth. If more wealth is produced than there was before, a society becomes richer, the total stock of wealth increases. But if some accumulate wealth only at the expense of others, wealth is merely shifted from A to B.
Under Capitalism:-
Since Capitalism is based on economic individualism, it does not guarantee that each individual will share equally in the benefits arising out of the working of the economy. Individuals commanding more wealth will have the advantage over the less wealthy. Capitalism was based on the assumption that competition would automatically eliminate inefficiency in individuals and institutions.
The flow of goods and services and the accumulation of wealth and income distributions under capitalism are decided on the basis of prices and cost calculations of privately owned, independent business firms. Members of the capitalist economy are free to save part of their income and accumulate wealth. Savings results in investment, which permits the production of capital goods that, contribute to the growth of the economy.
The main features of capitalism include:-
(1)The upper hand of price mechanism
(2)The consumer’s sovereignty
(3)Absence of a central plan
(4)Freedom of enterprise
(5)Property rights
(6)Competition
Merits of Capitalism:-
1. Economic Freedom
2. Efficient use of resources
3. Economic development and prosperity
4. Rise in standard of living
5. Flexibility
Demerits of capitalism are:-
(1) Class Struggles
(2) Wasteful Competition
(3) Emergence of monopoles and concentration of economic power
(4) Economic instability
(5) Ignoring human rights
Under Socialism:-
Socialism or Common economy believes in social ownership of property and productive resources, central planning and government control, and social welfare activities. Socialists believe in the abolition of private ownership of the instruments of production. It is an economic and political theory based on public or common ownership and cooperative management of the means of production and allocation of resources.
Socialist economies are centrally planned. The entire economic life of the people and the country is directed and controlled by the State. So the central planning authority decides the organization of production and distribution of goods and services. Here the profit motive has no role to play.
The merits of Socialism are:-
(1) End of exploitation
(2) Check on trade cycles
(3) Prevention of competitive waste
(4) Class Less society
(5) Better allocation of resources.
Demerits of socialism are:-
(1)Bureaucracy and red tapism
(2) Not successful in business
(3) Lack of incentives
(4) Loss of liberty
(5)Absence of price mechanism and mis allocation of resources
Under Communism:-
Communism is a social structure in which classes are abolished and property is commonly controlled, as well as a political philosophy and social movement that advocates and aims to create such a society. ‘Pure Communism’ refers to a classless, stateless society, one where decisions on what to produce and what policies to pursue are made in the best interest of the collective society with the interests of every member of society given equal weight in the practical decision – making process in both political and economic spheres of life.
Features:-
1. It is the extreme form of Socialism
2. Absence of private property
3. Society produces every thing needed by it. It is a stage of abundance.
4. People will work willingly and efficiently without wages.
5. It is based in the principle ‘to each according to need, from each according to ability.’
Merits of Communism:-
1. No scarcity, No classes and No exploitation, so there will be no need for a state.
2. No differences between occupations and towns and villages.
3. Dignity of all citizens.
Demerits:-
1. Not successful in business
2. Lack of incentives
3. Loss of Liberty
4. Absence of price mechanism, Individual freedom etc.
5. In practice, Authoritarian govts with ownership of all means of modes.
Under Mixed Economy:-
As its name indicates it is a mixture of capitalism and socialism. There is co-existence of private sector and public sector. Govt dissects and control same key areas of the economy and the rest are left to price mechanism. Decisions regarding what to produce, how to produce and how much to invest etc. are taken by govt. At the same time private sector is allowed to operate freely except in same key areas. There are two types of mixed economics. In the first, the means of production are owned by private entrepreneurs, while the govt directly controls and regulates the working of the economy through monetary and fiscal policies.
Here the govt. producer only defence equipments and taken care of public utility services like water, gas, electricity & transport. So this system is also called mixed capitalism or controlled capitalism.
In the second, govt. Plays a vital role in the production of commodities and also directs and controls private enterprises. Here the strategic sectors like mining, metals, steel, oil, defence etc are under the control of state and the rest are owned by private entrepreneurs.
Features:-
1. Co-existence of public & private Sector.
2. Centralized economic planning.
3. Depends on both price mechanism and govt. directives.
4. Blending of profit motive with social interest.
5. Consumer’s sovereignty is protected.
Forms of business organizations:-
Business is an organized economic activity deals with production and sale of goods and services needed by the society. It includes both industrial and commercial activities aiming at profit.
The major characters of business are:
1. Sale, transfer or exchange of goods and services for the satisfaction of human beings.
2. It deals in goods and services
3. Recurrence of Transactions
4. Profit Motive, and
5. The presence of the element of risk
Every business needs some resources like men, money, materials etc. If these resources are put together to work systematically, that is referred to as organization. Therefore, a business organization is an economic institution which combines and coordinates all the required resources required for carrying out the production and distribution activity with an objective of earning profit.
The first question to be addressed in organizing the business is that of the ownership of organization. In a mixed economy there are three broad categories of business organizations. They are:
(1) Private Sector Organizations,
(2) Public Sector Organizations, and
(3) Joint Sector Organizations
The modern day Business Organizations are also classified in to three broad categories on the basis of their ultimate aim. They include:
1. Business for Profit
2. Business not for Profit, and
3. Business for Non-Profit
I.Private Sector Enterprises:-
An organisation which is owned, managed and controlled by private individuals are called Private sector enterprise.
Eg: TELCO,TISCO,TATA POWER etc of TATA Century, Birla Yamaha, Grasium Industries etc. of Birla, Reliance Industries, Reliance Capital etc. of Ambanies. The various forms of organisation under private sector includes- Sole proprietorship, partnership, HUF, joint stock companies, MNC’S, and Co-operative Societies.
Features:-
1. Private ownership
2. Private management
3. Profit objective
4. private – accountability
5. Private Financing
Industrial Policy Act 1956 demarcated the areas for the Public and Private sector in India. However, since the introduction of economic reforms in 1991, the government has sought to transform itself from being a provider of probable services to a purchaser on behalf of user. Thus emerged a new paradigm of public-private-partnership (PPP)
Business for Profit/ Private Sector Enterprises:-
1. Sole Proprietorship:-
Sole Proprietorship is a form of business organization in which an individual introduces 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. The major features of this form of organization are single ownership, one-man control, undivided risk, unlimited liability, minimum or no government intervention and absence of separate legal entity.
Merits:
1. Ease of formation and dissolution
2. Direct Motivation
3. Facility of Co-ordination
4. Promptness in decision – making
5. Flexibility in management
6. High Secrecy
7. Credit Standing
8. Freedom from Govt. Regulations.
Limitations:
1. Limited Finances
2. Limited Managerial skill
3. Unlimited Liability
4. Lack of Continuity
5. Not suited for large scale business operations.
6. Greater risks.
2. Joint Hindu Family Firm / Hindu Undivided Family Business (HUF):-
Business organization owned by all the male members of an HUF and managed by the head of the family. The members are called coparceners and the head is called Karta. There is no contractual relationship among coparceners, so it is not a partnership. The liability of Karta is unlimited whereas the liabilities of all other members are limited. HUF is a family consists of all male persons lineally descended from a common ancestor and includes their wives and unmarried daughters. The property of an HUF is inherited by a Hindu from his ancestors.
Under Hindu Law, there are two systems of inheritance:
1. Dayabhaga-
Under this system, male as well as female members of a family can become coparceners. This system prevails in West Bengal.
2. Mitakashara:-
Under this system, only male heirs can become coparceners in the family business. The three successive male generations, ie., sons, grandsons and great – grandsons become joint owners of ancestral property.
In Kerala, the concept of coparceny was abolished and according to the Kerala Joint Family System (Abolition) Act, 1975, the heirs, both male and female do not acquire property by birth but only hold it as tenants as if a partition has taken place.
Features of HUF business:
1. Membership is by virtue of birth in the family as per Hindu Succession Act, 1956.
2. Managed by eldest male member of family called Karta.
3. Liability of Karta is unlimited.
4. Liabilities of coparceners are limited.
5. Right to the accounts vested with the Karta alone.
6. Continuity of business
7. Implied authority of Karta to enter in to contracts and to pledge the business.
3. Partnership Firm:-
A partnership is a form of business in which two or more people operate for the common goal which is often making profit. They are individually known by the name partners and collectively by the name firm. The name in which they operate business is the firm name. According to sector 4 of Indian Partnership Act 1932, 'Partnership is the relation between two or more persons who have agreed to share the profits of a business carried on by all or any of them acting for all.'
Feature of Partnership:-
1. Partnership is the result of an agreement called Partnership deed, which may be either oral or written. Written agreement should be duly stamped as per Indian Stamp Act 1889.
2. Minimum number of persons required to form a partnership is 2 as per Indian Partnership Act.
3. Maximum number of members for a banking business is 10 and for a non-banking business is 20 as per Section 11 Indian Companies Act.
4. Funds/Capital for the business is usually contributed by all the partners
5. Control/Management vest with all the partners.
6. Incomeof partnership is taxed under slab system.
Types of Partners:-
(a)Active Partners –Those who carry on the business on behalf of all other partners.
(b)Sleeping or dormant partners –Those who invest capital, shares profit, shares liability but not participating in management.
(c)Nominal Partners -Those who do not invest, do not share profit, do not participate in management but only lend their name to the firm. They are liable to third parties.
(d)Partner by estoppel –Persons behave in such a fashion that he is mistaken to be a partner by third partner and he will be held liable to those third partner who extend credit to the firm on the reputation of his being a partner.
(e)Partner by holding out –If a person is declared by word or deed to be a partner by another, the person concerned should deny it immediately on coming to know of such a declaration. If he does not, he will be held liable to third partner. Such partners are known as partner by holding out.
(f)Minor partners –As the partnership is formed by an agreement, a minor cannot enter in to a partnership. But with the consent of all the partners, a minor may be admitted to the benefits of partnership and his liability will be limited to the extent of his share in the firm.
Types of Partnership:-
Based on the type of agreement, partnership may be a general partnership and special partnership. General partnership may be partnership at will and particular Partnership. When there is no provision in partnership agreement for the duration of partnership, it is called partnership at will. A particular partnership is formed for a specific purpose or for a particular period. A special partnership may be limited partnership where the liability of one more partners is limited and unlimited partnership.
4. Joint Stock Companies:-
Company form of business organization emerged due to the limitations of earlier forms of organizations on the one hand, and the highly increased needs of large-scale industry in the era following the industrial revolution on the other.
According to US Supreme Court Justice John Marshall, a company is an artificial being, invisible, intangible and existing only in contemplation of law.
Sec.3 (1) of the Companies Act 1956, Company means a company formed and registered under this Act or an existing company. An existing company means a company formed and registered under any of the previous Acts.
Characteristics -
1. Separate legal entity
2. Limited liability of members
3. Perpetual existence
4. Common seal as a substitute for signature.
The process of company formation may be divided into two stages such as promotion and incorporation.
Promotion is the process of exploration, investigation, and the organization of necessary resources with the object of initiating business under corporate ownership. The persons who take this kind of an initiative to start a business are known as promoters.
Incorporation is the legal process through which the separate corporate entity of a company is given recognition by law. To secure incorporation, the promoters prepare and file with Registrar of Joint Stock Companies the documents like. Memorandum of Association-Charter of the company contains, name, location, objectives, capital etc. of company.
Articles of Association- contains rules and regulations of the company
If the registrar is satisfied with these documents , he will issue a certificate of Incorporation.
Types of Companies –
A. On the basis of Incorporation
1. Chartered Companies
2. Statutory Company
3. Registered Company
(a) Public Limited Companies- Minimum 7 members and no restriction towards maximum number of members. The word limited is used at the end of its name. Free transferability of shares. Invites public to accept shares. Minimum paid up capital 5, 00,000. Minimum number of directors required is 3.
(b) Private Limited Companies- Minimum 2 members is enough. Maximum is restricted up to 50. Minimum paid up capital is 1, 00,000/-cannot issue prospectus. Restricts right to transfer shares. The word 'Private- Limited' is used at the end. Minimum number of directors required is 2.
B. On the basis of Liability:-
1. Company limited by shares
2. Company limited by guarantee
3. Unlimited Companies
C. On the basis of area of functioning:-
1. National Company
2. Multinational or transnational Company
5. Cooperative Organizations:-
A co-operative society is essentially an association of persons who join together on a voluntary basis for the promoting their common economic interest. It functions on the principle of self help through mutual help. The primary motto of cooperative sector is “ll for each and each for all.'
According to Sec.4 of Indian Cooperative Societies Act, 1912, a cooperative organisation is a ' Society which has as its objectives the promotion of the interests of its members in accordance with cooperative principles'
Features:-
1. Voluntary association
2. Democratic Control
3. Service motive
4. Distribution of surplus to members
5. Separate legal entity
6. Government control and support
7. Contribution of share capital by members
Types of Cooperative Societies:-
1. Consumer cooperative societies- Retail stores owned and organized by people of small means to make available to themselves their daily requirements of goods at moderate prices.
2. Producer's Cooperative Societies – Voluntary organisation of producers formed with the object of eliminating the capitalist class from the system of industrial production. Producer's cooperative society may be of two types:
(a) Society will supply the necessary inputs and guidance to members, and the members are only expected to produce individually and sell the same to society.
(b) Cooperatives in which members are rapid wages by the society for the work done by them.
3. Cooperative Credit Societies- Credit societies are set up to pool savings of members and to make them available as loans to those members who need credit at cheaper rates.
4. Marketing Co-operatives- Societies for sitting manufactured and agricultural products, for enabling members to get fair prices for their products. They may be of agricultural marketing cooperatives and industrial marketing cooperatives.
5. Cooperative farming societies- The agricultural cooperatives pool the fragmented land holdings of small land owners and farm on a collective basis.
6. Housing cooperative Societies-Societies formed to provide housing to their members either on an ownership basis or at a fair rent.
II. Public Sector Enterprises:-
An organisation which is owned, managed and controlled by the central government or any State government or local authority is known as PSU. Various forms of PSU’S are
1. Departmental Undertakings:-
A PSU is organised, controlled and financed by the government in the same way as any other government department. Railways, Civil Aviation, Post and Telegraph, Public Works etc. are examples.
2. Statutory Cooporations:-
It is an autonomous organisation that is established and governed by a special act of parliament or assembly. LIC, Air India, ONGC, FCI are examples for the same.
3. Government Company:-
Any company in which at least 51% of the paid up share capital is held by Central Government, or by any State Government or Governments, or partly by Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a government company. Examples SAIL (Steel Authority of India Limited, Coal India Limited and HMT.)
III. Joint Venture: Joint Venture is a legal entity formed between two or more parties to undertake an economic activity together. It is the pooling of resources and expertise by two or more businesses to achieve a particular goal. The organizations involved may be private, government owned, or foreign, and working on the basis of a Memorandum of Understanding (MOU) signed by all parties.
Merits:
1.Creates a base for growth and innovation
2.Enhances resources and capacity
3.Improves access to technology
4.Lowers cost of production
5.Lowers risk, and
6.Establishes brand name.
Demerits:
1.Slow decision making
2.Lack of full disclosure from partnering companies
3.Level of technology to be adopted in not fully disclosed.
Examples are Maruti – Suzuki, Hero – Honda, Ford – Escort etc.
Business Not for Profit/ Non-Profit Organizations:
A non profit or not for profit organization is an organization that does not distribute its surplus funds to owners or shareholders, but instead uses them to help pursue its goals. Usually they do not seek profits as a goal. Examples of NPOs include charitable organizations, trade unions, arts organizations and NGOs. They fill certain needs of society that are not provided by Government and business.
In India, NPOs are commonly known as Non Governmental Organizations (NGOs) and they can be registered as Trusts, Societies, Section 25 Companies or by Special Licensing. NGOs in India are governed by Articles 19(1) and 30 of the Constitution of India, Indian Income Tax Act 1961, Societies Registration Act 1860, Section 25 of the Indian Companies Act 1956, Foreign Contribution (Regulation) Act 1976 and by the Public Trusts Acts of various States. The main sources of receipts for NPOs in India are self generated funds, loans, grants and donations.
Examples are Bill Gates Foundation, Amnesty International, Rotary Internationsl, Red Cross, UNESCO, World Wide Fund for Nature, Scout, Helpage India, Save the Children fund etc.
Problems faced by NPOs
1.Difficult to measure the performance of employees and managers when the goal is providing public service rather than increasing sales and profits.
2.Rely on external funding to maintain their operations and changes in these sources may influence the reliability or predictability with which organizations can hire and retain staff, sustain facilities, create programs or maintain tax-exempt status.
3.Unreliable funding, long hours of work and low pay can lead to employee burnout and high labour turnover.
4.Resource mismanagement is high because the employees are not accountable to anybody.
5.Dynamic founders with strong vision try to retain control over the organization, even as new employees or volunteers want to expand the projects' scope and try new things (Founder's Syndrome)
Multi Nationals – Trans Nationals
A MNC or TNC is also called Multi National Enterprise (MNE). It is a corporation or enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation.
An MNC is defined as, a corporation that has its management headquarters in one country, known as home country, and operates in several other countries, known as host countries.
The first modern MNC is generally thought to be the East India Company. MNCs can have a powerful influence in local economies, and even the world economy and also play an important role in international relations.
Public-private-partnership
Public-private-partnership describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. These schemes are sometimes referred to as PPP, P3, or P .
PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In some types, the cost of using the services is borne by the users of the service and in other types capital investment is made by the private sector on the strength of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government.
Typically, a private sector consortium forms a Special Company called a Special Purpose Vehicle (SPV) to develop, build, maintain and operate the asset for the contracted period. In cases where the government has invested in the project, it is typically alloted an equity share in SPV.
Example- KGS Aranmula Airport Limited of Pathanamthitta.
Sectors of the Economy:
A nation’s economy can be divided into various sectors to define the proportion of the population engaged in the activity sector. This categorization is seen as a continuum of distance from the natural environment. The continuum starts with the primary sector, which concerns itself with the utilization of raw materials from the earth such as agriculture and mining. From there, the distance from the raw materials of the earth increases.
Primary Sector
The primary sector of the economy extracts or harvests products from the earth. The primary sector includes the production of raw material and basic foods. Activities associated with the primary sector include agriculture (both subsistence and commercial), mining, forestry, farming, grazing, hunting and gathering, fishing, and quarrying. The packaging and processing of the raw material associated with this sector is also considered to be part of this sector.
In developed and developing countries, a decreasing proportion of workers are involved in the primary sector. About 3% of the U.S. labor force is engaged in primary sector activity today, while more than two-thirds of the labor force were primary sector workers in the mid-nineteenth century.
Whereas agriculture dominates the Indian economy to such an extent that about two-thirds of India's workforce is directly engaged in agriculture for their livelihood.
Secondary Sector
The secondary sector of the economy manufactures finished goods. All of manufacturing, processing, and construction lies within the secondary sector. Activities associated with the secondary sector include metal working and smelting, automobile production, textile production, chemical and engineering industries, aerospace manufacturing, energy utilities, engineering, breweries and bottlers, construction, and shipbuilding.
Tertiary Sector
The tertiary sector of the economy is the service industry. This sector provides services to the general population and to businesses. Activities associated with this sector include retail and wholesale sales, transportation and distribution, entertainment (movies, television, radio, music, theater, etc.), restaurants, clerical services, media, tourism, insurance, banking, healthcare, and law.
In most developed and developing countries, a growing proportion of workers are devoted to the tertiary sector. In the U.S., more than 80% of the labor force are tertiary workers.
Quaternary Sector
The quaternary sector of the economy consists of intellectual activities. Activities associated with this sector include government, culture, libraries, scientific research, education, and information technology.
Quinary Sector
Some consider there to be a branch of the quaternary sector called the quinary sector, which includes the highest levels of decision making in a society or economy. This sector would include the top executives or officials in such fields as government, science, universities, nonprofit, healthcare, culture, and the media.
Hospitality Industry
The hospitality industry consists of broad category of fields within the service industry that includes lodging, restaurants, event planning, theme parks, transportation, cruise line, and additional fields within the tourism industry. The hospitality industry is a several billion dollar industry that mostly depends on the availability of leisure time and disposable income. A hospitality unit such as a restaurant, hotel, or even an amusement park consists of multiple groups such as facility maintenance, direct operations (servers, housekeepers, porters, kitchen workers, bartenders, etc.), management, marketing, and human resources.
The hospitality industry covers a wide range of organizations offering food service and accommodation. The hospitality industry is divided into sectors according to the skill-sets required for the work involved. Sectors include accommodation, food and beverage, meeting and events, gaming, entertainment and recreation, tourism services, and visitor information.
Health Care Industry
Health care or healthcare is the treatment and prevention of illness. Health care is delivered by professionals in medicine, dentistry, nursing, pharmacy and allied health. The health-care industry incorporates several sectors that are dedicated to providing health care services and products. According to industry and market classifications, such as the Global Industry Classification Standard and the Industry Classification Benchmark, the health-care industry includes health care equipment and services as well as pharmaceuticals, biotechnology and life sciences. The particular sectors associated with these groups are: biotechnology, diagnostic substances, drug delivery, drug manufacturers, hospitals, medical equipment and instruments, diagnostic laboratories, nursing homes, providers of health care plans and home health care.
According to government industry classifications, which are mostly based on the United Nations system, the International Standard Industrial Classification, health care generally consists of hospital activities, medical and dental practice activities, and other human health activities. The last class consists of all activities for human health not performed by hospitals, physicians or dentists. This involves activities of, or under the supervision of, nurses, midwives, physiotherapists, scientific or diagnostic laboratiories, pathology clinics, home, or other para-medical practitioners in the field of optometry, hydrotherapy, medical massage, music therapy, occupational therapy, speech therapy, chiropody, homeopathy, chiropractics, acupuncture, etc.
Business Process Outsourcing
Business process outsourcing (BPO) is a subset of outsourcing that involves the contracting of the operations and responsibilities of specific business functions (or processes) to a third-party service provider. Originally, this was associated with manufacturing firms, such as Coca Cola that outsourced large segments of its supply chain. In the contemporary context, it is primarily used to refer to the outsourcing of services.
BPO is typically categorized into back office outsourcing - which includes internal business functions such as human resources or finance and accounting, and front office outsourcing - which includes customer-related services such as contact center services.
BPO that is contracted outside a company's country is called offshore outsourcing. BPO that is contracted to a company's neighboring (or nearby) country is called nearshore outsourcing.
Given the proximity of BPO to the information technology industry, it is also categorized as an information technology enabled service or ITES. Knowledge process outsourcing (KPO) and legal process outsourcing (LPO) are some of the sub-segments of business process outsourcing industry.
Introduction:-
Before a person starts practicing medicine and surgery, he has to acquire sufficient knowledge about the structure of the body, functions of different organs etc. Likewise, a person can hope to understand and tackle problems of business properly only if he has some knowledge of the business world, business activity and its organisation and the relationship of business with the world around it. As we all know, we are all striving for achievement of a work. Our life is built around work, and the work is an essential part of life. This work activity is divided into two broad segments economic and non-economic. So business is an economic activity.
Business is viewed as an organized economic activity aiming at the production and sale of goods and services needed by the individuals in a society, so the business system cannot be studied without reference to the economic system in which it has to function.
Economic Systems:-
An economic system consists of people and institutions through which economic resources are utilized for satisfying needs of individuals in a society. Every society adopts certain institutions through which it attempts to utilize its resources in the best possible manner for satisfaction of human wants. These institutions together constitute an economic system. So simply it refers to the management or the organization pattern formed by various institutions governing economic activities in a society.
Definition of Economic System:-
An economic system may be defined as the system of production, distribution and consumption of goods and services in a country. In other words, it is the set of principles and techniques by which problems of economics are addressed, such as problem of society, poverty, unemployment etc.
Central Problems/Basic questions to be addressed by an Economic System:-
a) What commodities shall be produced and in what quantities?
b) How shall the goods be produced? In other words, by whom and with what resources and by what technology are these to be produced?
c) For whom shall goods be produced?
In other words, whose needs are to be catered to by the production and distribution of goods and services?
In addition to these, modern economies are facing difficulties in relation to maintaining accelerated rate of growth of the economy and in the optimum utilization of resources.
These questions are answered differently by various economic systems. Business activity and its organization will naturally depend upon the decision made by the society regarding what goods and services should receive priority, which types of consumers should be addressed for making goods and services available to these consumers. This necessitates the study of different economic systems.
Different Economic Systems:- The basic economic systems fall under four categories: Capitalism, Socialism, Communism and Mixed Economy.
Capitalism:-
It is an economic system in which individuals are relatively free to determine how goods and services shall be produced and allocated. Here, Capital is owned and invested by individuals and private-owned institutions to earn profit. The investors ultimately benefit by profit and are having the right to own tangible and intangible private property. The system is marked by little or no interference by the Government in business run by private institutions or individuals. This enables individuals to choose what to produce, in what quantity and in which markets to sell.
Socialism:-
The basic philosophy of socialism is the provision of certain goods and services to all individuals in the nation. It seeks to create more opportunity for the under privileged classes and to end inequality based on birth. So that society can be rebuilt on the foundation of co-operation instead of competition, incentive or profit. Under this economic system, the Government determines what goods shall be produced, how they shall be produced etc. The ultimate goal of this economy is to replace the private ownership of means of production by social ownership and control.
Communism:-
This system emerged in the twentieth century in countries like Russia and China. Under communism all control of economic power vests in the State. Means of production are socialized and private property is abolished with the object of ending the exploitation of the poor by the rich. The Government owns all economic resources and decided what to produce, how to produce, how to distribute etc. Individuals in such as economy work not for private gain but for the good of society. Here State is the only employer and private freedom of choice and action is getting eliminated.
Mixed Economy:-
It is a combination of State ownership and control of business and private enterprise. Here the private enterprise is permitted to function and flourish subject to the control and restrictions by the Government. It aims at blending together the best of control, socialists or communist economy with the best of free enterprise in a capitalist economy.
Division of Labour:-
The allocation of different jobs to different people is known as specialization or division of labour. It allows individuals to specialize in the types of work in which they have a comparative advantage. It allows the workers to acquire specialized skills, both through training and by learning from experience on the job.
F.W. Taylor through scientific management initiated division of labour. The emergence of scientific management in business and planning in national economic systems made the social system of division of labour the key for attaining faster economic growth and better standard of living for people around the world.
Division of labour was used as a social system in older days to categorize different jobs, and divide labour force to skilled members of a society. An increasingly complex division of labour is closely associated with the growth of total output and trade, the rise of capitalism and of the complexity of industrialization process. Due to globalization, it reaches its maximum scope through business process out sourcing and so on. The WTO supports it through its policy to expand world trade based on comparative advantage.
It is widely accepted that the division of labour is to a great extent inevitable, simply because no one can do all tasks at once. Some time critics of extreme division of labour argue that over specialization is bad for intellectual and emotional development and leads to narrow mindedness and feelings of alienation.
Innovation:-
The term innovation refers to anew way of doing something. It may refer to incremental, radical and revolutionary changes in thinking, products, processes, or organizations. Innovation refers to the commercial application of invention and is the result of attempts to satisfy some feeling of a ‘gap’ somewhere the person is working at. Innovation now a day determines the fate of an industry and paves the way for new allied industries.
Innovations are of three types: neutral, labour-saving and capital saving. Labour saving innovation enables production of a given output with less labour relative to capital and capital saving innovation enables production of a given output with less capital relative to labour. All other innovations are called neutral innovations.
The innovation is simply defined as, “the successful introduction of a new thing or method”. Joseph Schumpeter provided an economic conception which includes:
1. The introduction of new good, which is new to consumers, or of a new quality.
2. The introduction of a new method of production.
3. The opening of a new market.
4. The conquest of a new source of supply of raw materials.
5. The carrying out of the new organization of only industry.
Thus the systematic programs of organizational innovations are most frequently driven by:
1. Improved quality
2. Creation of new markets
3. Extension of the product range
4. Reduced labour costs
5. Improved production processes
6. Reduced materials
7. Reduced environmental damages
8. Replacement of products/services
9. Reduced energy consumption
10. Conformance to regulations
The causes of failure in innovation of a firm may be external or internal. Common causes of failure with in the innovation process in most organizations can be distilled into 5 types, such as:
1. Poor goal definition
2. Poor alignment of actions to goals
3. Poor participation in teams
4. Poor monitoring of results and
5. Poor communication and access to information
Flow of Goods and Services : Accumulation of wealth Flow of goods and services simply means trade. In this global economy, the flow of goods and services across borders is a critical factor to the health and growth of a country’s economy.
The accumulation of capital simply refers to the gathering or amassment of objects of value, the increase in wealth; or the creation of wealth. It refers to net addition to existing wealth, or to a redistribution of wealth. If more wealth is produced than there was before, a society becomes richer, the total stock of wealth increases. But if some accumulate wealth only at the expense of others, wealth is merely shifted from A to B.
Under Capitalism:-
Since Capitalism is based on economic individualism, it does not guarantee that each individual will share equally in the benefits arising out of the working of the economy. Individuals commanding more wealth will have the advantage over the less wealthy. Capitalism was based on the assumption that competition would automatically eliminate inefficiency in individuals and institutions.
The flow of goods and services and the accumulation of wealth and income distributions under capitalism are decided on the basis of prices and cost calculations of privately owned, independent business firms. Members of the capitalist economy are free to save part of their income and accumulate wealth. Savings results in investment, which permits the production of capital goods that, contribute to the growth of the economy.
The main features of capitalism include:-
(1)The upper hand of price mechanism
(2)The consumer’s sovereignty
(3)Absence of a central plan
(4)Freedom of enterprise
(5)Property rights
(6)Competition
Merits of Capitalism:-
1. Economic Freedom
2. Efficient use of resources
3. Economic development and prosperity
4. Rise in standard of living
5. Flexibility
Demerits of capitalism are:-
(1) Class Struggles
(2) Wasteful Competition
(3) Emergence of monopoles and concentration of economic power
(4) Economic instability
(5) Ignoring human rights
Under Socialism:-
Socialism or Common economy believes in social ownership of property and productive resources, central planning and government control, and social welfare activities. Socialists believe in the abolition of private ownership of the instruments of production. It is an economic and political theory based on public or common ownership and cooperative management of the means of production and allocation of resources.
Socialist economies are centrally planned. The entire economic life of the people and the country is directed and controlled by the State. So the central planning authority decides the organization of production and distribution of goods and services. Here the profit motive has no role to play.
The merits of Socialism are:-
(1) End of exploitation
(2) Check on trade cycles
(3) Prevention of competitive waste
(4) Class Less society
(5) Better allocation of resources.
Demerits of socialism are:-
(1)Bureaucracy and red tapism
(2) Not successful in business
(3) Lack of incentives
(4) Loss of liberty
(5)Absence of price mechanism and mis allocation of resources
Under Communism:-
Communism is a social structure in which classes are abolished and property is commonly controlled, as well as a political philosophy and social movement that advocates and aims to create such a society. ‘Pure Communism’ refers to a classless, stateless society, one where decisions on what to produce and what policies to pursue are made in the best interest of the collective society with the interests of every member of society given equal weight in the practical decision – making process in both political and economic spheres of life.
Features:-
1. It is the extreme form of Socialism
2. Absence of private property
3. Society produces every thing needed by it. It is a stage of abundance.
4. People will work willingly and efficiently without wages.
5. It is based in the principle ‘to each according to need, from each according to ability.’
Merits of Communism:-
1. No scarcity, No classes and No exploitation, so there will be no need for a state.
2. No differences between occupations and towns and villages.
3. Dignity of all citizens.
Demerits:-
1. Not successful in business
2. Lack of incentives
3. Loss of Liberty
4. Absence of price mechanism, Individual freedom etc.
5. In practice, Authoritarian govts with ownership of all means of modes.
Under Mixed Economy:-
As its name indicates it is a mixture of capitalism and socialism. There is co-existence of private sector and public sector. Govt dissects and control same key areas of the economy and the rest are left to price mechanism. Decisions regarding what to produce, how to produce and how much to invest etc. are taken by govt. At the same time private sector is allowed to operate freely except in same key areas. There are two types of mixed economics. In the first, the means of production are owned by private entrepreneurs, while the govt directly controls and regulates the working of the economy through monetary and fiscal policies.
Here the govt. producer only defence equipments and taken care of public utility services like water, gas, electricity & transport. So this system is also called mixed capitalism or controlled capitalism.
In the second, govt. Plays a vital role in the production of commodities and also directs and controls private enterprises. Here the strategic sectors like mining, metals, steel, oil, defence etc are under the control of state and the rest are owned by private entrepreneurs.
Features:-
1. Co-existence of public & private Sector.
2. Centralized economic planning.
3. Depends on both price mechanism and govt. directives.
4. Blending of profit motive with social interest.
5. Consumer’s sovereignty is protected.
Forms of business organizations:-
Business is an organized economic activity deals with production and sale of goods and services needed by the society. It includes both industrial and commercial activities aiming at profit.
The major characters of business are:
1. Sale, transfer or exchange of goods and services for the satisfaction of human beings.
2. It deals in goods and services
3. Recurrence of Transactions
4. Profit Motive, and
5. The presence of the element of risk
Every business needs some resources like men, money, materials etc. If these resources are put together to work systematically, that is referred to as organization. Therefore, a business organization is an economic institution which combines and coordinates all the required resources required for carrying out the production and distribution activity with an objective of earning profit.
The first question to be addressed in organizing the business is that of the ownership of organization. In a mixed economy there are three broad categories of business organizations. They are:
(1) Private Sector Organizations,
(2) Public Sector Organizations, and
(3) Joint Sector Organizations
The modern day Business Organizations are also classified in to three broad categories on the basis of their ultimate aim. They include:
1. Business for Profit
2. Business not for Profit, and
3. Business for Non-Profit
I.Private Sector Enterprises:-
An organisation which is owned, managed and controlled by private individuals are called Private sector enterprise.
Eg: TELCO,TISCO,TATA POWER etc of TATA Century, Birla Yamaha, Grasium Industries etc. of Birla, Reliance Industries, Reliance Capital etc. of Ambanies. The various forms of organisation under private sector includes- Sole proprietorship, partnership, HUF, joint stock companies, MNC’S, and Co-operative Societies.
Features:-
1. Private ownership
2. Private management
3. Profit objective
4. private – accountability
5. Private Financing
Industrial Policy Act 1956 demarcated the areas for the Public and Private sector in India. However, since the introduction of economic reforms in 1991, the government has sought to transform itself from being a provider of probable services to a purchaser on behalf of user. Thus emerged a new paradigm of public-private-partnership (PPP)
Business for Profit/ Private Sector Enterprises:-
1. Sole Proprietorship:-
Sole Proprietorship is a form of business organization in which an individual introduces 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. The major features of this form of organization are single ownership, one-man control, undivided risk, unlimited liability, minimum or no government intervention and absence of separate legal entity.
Merits:
1. Ease of formation and dissolution
2. Direct Motivation
3. Facility of Co-ordination
4. Promptness in decision – making
5. Flexibility in management
6. High Secrecy
7. Credit Standing
8. Freedom from Govt. Regulations.
Limitations:
1. Limited Finances
2. Limited Managerial skill
3. Unlimited Liability
4. Lack of Continuity
5. Not suited for large scale business operations.
6. Greater risks.
2. Joint Hindu Family Firm / Hindu Undivided Family Business (HUF):-
Business organization owned by all the male members of an HUF and managed by the head of the family. The members are called coparceners and the head is called Karta. There is no contractual relationship among coparceners, so it is not a partnership. The liability of Karta is unlimited whereas the liabilities of all other members are limited. HUF is a family consists of all male persons lineally descended from a common ancestor and includes their wives and unmarried daughters. The property of an HUF is inherited by a Hindu from his ancestors.
Under Hindu Law, there are two systems of inheritance:
1. Dayabhaga-
Under this system, male as well as female members of a family can become coparceners. This system prevails in West Bengal.
2. Mitakashara:-
Under this system, only male heirs can become coparceners in the family business. The three successive male generations, ie., sons, grandsons and great – grandsons become joint owners of ancestral property.
In Kerala, the concept of coparceny was abolished and according to the Kerala Joint Family System (Abolition) Act, 1975, the heirs, both male and female do not acquire property by birth but only hold it as tenants as if a partition has taken place.
Features of HUF business:
1. Membership is by virtue of birth in the family as per Hindu Succession Act, 1956.
2. Managed by eldest male member of family called Karta.
3. Liability of Karta is unlimited.
4. Liabilities of coparceners are limited.
5. Right to the accounts vested with the Karta alone.
6. Continuity of business
7. Implied authority of Karta to enter in to contracts and to pledge the business.
3. Partnership Firm:-
A partnership is a form of business in which two or more people operate for the common goal which is often making profit. They are individually known by the name partners and collectively by the name firm. The name in which they operate business is the firm name. According to sector 4 of Indian Partnership Act 1932, 'Partnership is the relation between two or more persons who have agreed to share the profits of a business carried on by all or any of them acting for all.'
Feature of Partnership:-
1. Partnership is the result of an agreement called Partnership deed, which may be either oral or written. Written agreement should be duly stamped as per Indian Stamp Act 1889.
2. Minimum number of persons required to form a partnership is 2 as per Indian Partnership Act.
3. Maximum number of members for a banking business is 10 and for a non-banking business is 20 as per Section 11 Indian Companies Act.
4. Funds/Capital for the business is usually contributed by all the partners
5. Control/Management vest with all the partners.
6. Incomeof partnership is taxed under slab system.
Types of Partners:-
(a)Active Partners –Those who carry on the business on behalf of all other partners.
(b)Sleeping or dormant partners –Those who invest capital, shares profit, shares liability but not participating in management.
(c)Nominal Partners -Those who do not invest, do not share profit, do not participate in management but only lend their name to the firm. They are liable to third parties.
(d)Partner by estoppel –Persons behave in such a fashion that he is mistaken to be a partner by third partner and he will be held liable to those third partner who extend credit to the firm on the reputation of his being a partner.
(e)Partner by holding out –If a person is declared by word or deed to be a partner by another, the person concerned should deny it immediately on coming to know of such a declaration. If he does not, he will be held liable to third partner. Such partners are known as partner by holding out.
(f)Minor partners –As the partnership is formed by an agreement, a minor cannot enter in to a partnership. But with the consent of all the partners, a minor may be admitted to the benefits of partnership and his liability will be limited to the extent of his share in the firm.
Types of Partnership:-
Based on the type of agreement, partnership may be a general partnership and special partnership. General partnership may be partnership at will and particular Partnership. When there is no provision in partnership agreement for the duration of partnership, it is called partnership at will. A particular partnership is formed for a specific purpose or for a particular period. A special partnership may be limited partnership where the liability of one more partners is limited and unlimited partnership.
4. Joint Stock Companies:-
Company form of business organization emerged due to the limitations of earlier forms of organizations on the one hand, and the highly increased needs of large-scale industry in the era following the industrial revolution on the other.
According to US Supreme Court Justice John Marshall, a company is an artificial being, invisible, intangible and existing only in contemplation of law.
Sec.3 (1) of the Companies Act 1956, Company means a company formed and registered under this Act or an existing company. An existing company means a company formed and registered under any of the previous Acts.
Characteristics -
1. Separate legal entity
2. Limited liability of members
3. Perpetual existence
4. Common seal as a substitute for signature.
The process of company formation may be divided into two stages such as promotion and incorporation.
Promotion is the process of exploration, investigation, and the organization of necessary resources with the object of initiating business under corporate ownership. The persons who take this kind of an initiative to start a business are known as promoters.
Incorporation is the legal process through which the separate corporate entity of a company is given recognition by law. To secure incorporation, the promoters prepare and file with Registrar of Joint Stock Companies the documents like. Memorandum of Association-Charter of the company contains, name, location, objectives, capital etc. of company.
Articles of Association- contains rules and regulations of the company
If the registrar is satisfied with these documents , he will issue a certificate of Incorporation.
Types of Companies –
A. On the basis of Incorporation
1. Chartered Companies
2. Statutory Company
3. Registered Company
(a) Public Limited Companies- Minimum 7 members and no restriction towards maximum number of members. The word limited is used at the end of its name. Free transferability of shares. Invites public to accept shares. Minimum paid up capital 5, 00,000. Minimum number of directors required is 3.
(b) Private Limited Companies- Minimum 2 members is enough. Maximum is restricted up to 50. Minimum paid up capital is 1, 00,000/-cannot issue prospectus. Restricts right to transfer shares. The word 'Private- Limited' is used at the end. Minimum number of directors required is 2.
B. On the basis of Liability:-
1. Company limited by shares
2. Company limited by guarantee
3. Unlimited Companies
C. On the basis of area of functioning:-
1. National Company
2. Multinational or transnational Company
5. Cooperative Organizations:-
A co-operative society is essentially an association of persons who join together on a voluntary basis for the promoting their common economic interest. It functions on the principle of self help through mutual help. The primary motto of cooperative sector is “ll for each and each for all.'
According to Sec.4 of Indian Cooperative Societies Act, 1912, a cooperative organisation is a ' Society which has as its objectives the promotion of the interests of its members in accordance with cooperative principles'
Features:-
1. Voluntary association
2. Democratic Control
3. Service motive
4. Distribution of surplus to members
5. Separate legal entity
6. Government control and support
7. Contribution of share capital by members
Types of Cooperative Societies:-
1. Consumer cooperative societies- Retail stores owned and organized by people of small means to make available to themselves their daily requirements of goods at moderate prices.
2. Producer's Cooperative Societies – Voluntary organisation of producers formed with the object of eliminating the capitalist class from the system of industrial production. Producer's cooperative society may be of two types:
(a) Society will supply the necessary inputs and guidance to members, and the members are only expected to produce individually and sell the same to society.
(b) Cooperatives in which members are rapid wages by the society for the work done by them.
3. Cooperative Credit Societies- Credit societies are set up to pool savings of members and to make them available as loans to those members who need credit at cheaper rates.
4. Marketing Co-operatives- Societies for sitting manufactured and agricultural products, for enabling members to get fair prices for their products. They may be of agricultural marketing cooperatives and industrial marketing cooperatives.
5. Cooperative farming societies- The agricultural cooperatives pool the fragmented land holdings of small land owners and farm on a collective basis.
6. Housing cooperative Societies-Societies formed to provide housing to their members either on an ownership basis or at a fair rent.
II. Public Sector Enterprises:-
An organisation which is owned, managed and controlled by the central government or any State government or local authority is known as PSU. Various forms of PSU’S are
1. Departmental Undertakings:-
A PSU is organised, controlled and financed by the government in the same way as any other government department. Railways, Civil Aviation, Post and Telegraph, Public Works etc. are examples.
2. Statutory Cooporations:-
It is an autonomous organisation that is established and governed by a special act of parliament or assembly. LIC, Air India, ONGC, FCI are examples for the same.
3. Government Company:-
Any company in which at least 51% of the paid up share capital is held by Central Government, or by any State Government or Governments, or partly by Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a government company. Examples SAIL (Steel Authority of India Limited, Coal India Limited and HMT.)
III. Joint Venture: Joint Venture is a legal entity formed between two or more parties to undertake an economic activity together. It is the pooling of resources and expertise by two or more businesses to achieve a particular goal. The organizations involved may be private, government owned, or foreign, and working on the basis of a Memorandum of Understanding (MOU) signed by all parties.
Merits:
1.Creates a base for growth and innovation
2.Enhances resources and capacity
3.Improves access to technology
4.Lowers cost of production
5.Lowers risk, and
6.Establishes brand name.
Demerits:
1.Slow decision making
2.Lack of full disclosure from partnering companies
3.Level of technology to be adopted in not fully disclosed.
Examples are Maruti – Suzuki, Hero – Honda, Ford – Escort etc.
Business Not for Profit/ Non-Profit Organizations:
A non profit or not for profit organization is an organization that does not distribute its surplus funds to owners or shareholders, but instead uses them to help pursue its goals. Usually they do not seek profits as a goal. Examples of NPOs include charitable organizations, trade unions, arts organizations and NGOs. They fill certain needs of society that are not provided by Government and business.
In India, NPOs are commonly known as Non Governmental Organizations (NGOs) and they can be registered as Trusts, Societies, Section 25 Companies or by Special Licensing. NGOs in India are governed by Articles 19(1) and 30 of the Constitution of India, Indian Income Tax Act 1961, Societies Registration Act 1860, Section 25 of the Indian Companies Act 1956, Foreign Contribution (Regulation) Act 1976 and by the Public Trusts Acts of various States. The main sources of receipts for NPOs in India are self generated funds, loans, grants and donations.
Examples are Bill Gates Foundation, Amnesty International, Rotary Internationsl, Red Cross, UNESCO, World Wide Fund for Nature, Scout, Helpage India, Save the Children fund etc.
Problems faced by NPOs
1.Difficult to measure the performance of employees and managers when the goal is providing public service rather than increasing sales and profits.
2.Rely on external funding to maintain their operations and changes in these sources may influence the reliability or predictability with which organizations can hire and retain staff, sustain facilities, create programs or maintain tax-exempt status.
3.Unreliable funding, long hours of work and low pay can lead to employee burnout and high labour turnover.
4.Resource mismanagement is high because the employees are not accountable to anybody.
5.Dynamic founders with strong vision try to retain control over the organization, even as new employees or volunteers want to expand the projects' scope and try new things (Founder's Syndrome)
Multi Nationals – Trans Nationals
A MNC or TNC is also called Multi National Enterprise (MNE). It is a corporation or enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation.
An MNC is defined as, a corporation that has its management headquarters in one country, known as home country, and operates in several other countries, known as host countries.
The first modern MNC is generally thought to be the East India Company. MNCs can have a powerful influence in local economies, and even the world economy and also play an important role in international relations.
Public-private-partnership
Public-private-partnership describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. These schemes are sometimes referred to as PPP, P3, or P .
PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In some types, the cost of using the services is borne by the users of the service and in other types capital investment is made by the private sector on the strength of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government.
Typically, a private sector consortium forms a Special Company called a Special Purpose Vehicle (SPV) to develop, build, maintain and operate the asset for the contracted period. In cases where the government has invested in the project, it is typically alloted an equity share in SPV.
Example- KGS Aranmula Airport Limited of Pathanamthitta.
Sectors of the Economy:
A nation’s economy can be divided into various sectors to define the proportion of the population engaged in the activity sector. This categorization is seen as a continuum of distance from the natural environment. The continuum starts with the primary sector, which concerns itself with the utilization of raw materials from the earth such as agriculture and mining. From there, the distance from the raw materials of the earth increases.
Primary Sector
The primary sector of the economy extracts or harvests products from the earth. The primary sector includes the production of raw material and basic foods. Activities associated with the primary sector include agriculture (both subsistence and commercial), mining, forestry, farming, grazing, hunting and gathering, fishing, and quarrying. The packaging and processing of the raw material associated with this sector is also considered to be part of this sector.
In developed and developing countries, a decreasing proportion of workers are involved in the primary sector. About 3% of the U.S. labor force is engaged in primary sector activity today, while more than two-thirds of the labor force were primary sector workers in the mid-nineteenth century.
Whereas agriculture dominates the Indian economy to such an extent that about two-thirds of India's workforce is directly engaged in agriculture for their livelihood.
Secondary Sector
The secondary sector of the economy manufactures finished goods. All of manufacturing, processing, and construction lies within the secondary sector. Activities associated with the secondary sector include metal working and smelting, automobile production, textile production, chemical and engineering industries, aerospace manufacturing, energy utilities, engineering, breweries and bottlers, construction, and shipbuilding.
Tertiary Sector
The tertiary sector of the economy is the service industry. This sector provides services to the general population and to businesses. Activities associated with this sector include retail and wholesale sales, transportation and distribution, entertainment (movies, television, radio, music, theater, etc.), restaurants, clerical services, media, tourism, insurance, banking, healthcare, and law.
In most developed and developing countries, a growing proportion of workers are devoted to the tertiary sector. In the U.S., more than 80% of the labor force are tertiary workers.
Quaternary Sector
The quaternary sector of the economy consists of intellectual activities. Activities associated with this sector include government, culture, libraries, scientific research, education, and information technology.
Quinary Sector
Some consider there to be a branch of the quaternary sector called the quinary sector, which includes the highest levels of decision making in a society or economy. This sector would include the top executives or officials in such fields as government, science, universities, nonprofit, healthcare, culture, and the media.
Hospitality Industry
The hospitality industry consists of broad category of fields within the service industry that includes lodging, restaurants, event planning, theme parks, transportation, cruise line, and additional fields within the tourism industry. The hospitality industry is a several billion dollar industry that mostly depends on the availability of leisure time and disposable income. A hospitality unit such as a restaurant, hotel, or even an amusement park consists of multiple groups such as facility maintenance, direct operations (servers, housekeepers, porters, kitchen workers, bartenders, etc.), management, marketing, and human resources.
The hospitality industry covers a wide range of organizations offering food service and accommodation. The hospitality industry is divided into sectors according to the skill-sets required for the work involved. Sectors include accommodation, food and beverage, meeting and events, gaming, entertainment and recreation, tourism services, and visitor information.
Health Care Industry
Health care or healthcare is the treatment and prevention of illness. Health care is delivered by professionals in medicine, dentistry, nursing, pharmacy and allied health. The health-care industry incorporates several sectors that are dedicated to providing health care services and products. According to industry and market classifications, such as the Global Industry Classification Standard and the Industry Classification Benchmark, the health-care industry includes health care equipment and services as well as pharmaceuticals, biotechnology and life sciences. The particular sectors associated with these groups are: biotechnology, diagnostic substances, drug delivery, drug manufacturers, hospitals, medical equipment and instruments, diagnostic laboratories, nursing homes, providers of health care plans and home health care.
According to government industry classifications, which are mostly based on the United Nations system, the International Standard Industrial Classification, health care generally consists of hospital activities, medical and dental practice activities, and other human health activities. The last class consists of all activities for human health not performed by hospitals, physicians or dentists. This involves activities of, or under the supervision of, nurses, midwives, physiotherapists, scientific or diagnostic laboratiories, pathology clinics, home, or other para-medical practitioners in the field of optometry, hydrotherapy, medical massage, music therapy, occupational therapy, speech therapy, chiropody, homeopathy, chiropractics, acupuncture, etc.
Business Process Outsourcing
Business process outsourcing (BPO) is a subset of outsourcing that involves the contracting of the operations and responsibilities of specific business functions (or processes) to a third-party service provider. Originally, this was associated with manufacturing firms, such as Coca Cola that outsourced large segments of its supply chain. In the contemporary context, it is primarily used to refer to the outsourcing of services.
BPO is typically categorized into back office outsourcing - which includes internal business functions such as human resources or finance and accounting, and front office outsourcing - which includes customer-related services such as contact center services.
BPO that is contracted outside a company's country is called offshore outsourcing. BPO that is contracted to a company's neighboring (or nearby) country is called nearshore outsourcing.
Given the proximity of BPO to the information technology industry, it is also categorized as an information technology enabled service or ITES. Knowledge process outsourcing (KPO) and legal process outsourcing (LPO) are some of the sub-segments of business process outsourcing industry.
MARKET AND DEMAND ANALYSIS
MARKET AND DEMAND ANALYSIS
In most cases, the first step in project analysis is to estimate the potential size of the market for the product proposed to be manufactured and get an idea about the market share that is likely to be captured. To make an idea about these things an in depth study and assessment of various factors like patterns of consumption growth, income and price elasticity of demand, composition of the market, nature of competition, availability of substitutes, reach of distribution channels and so on is required. Market and demand analysis should be carried out in an orderly and systematic manner. The key steps in such analysis are as follows:
Situational analysis and specification of objectives
Collection of secondary information
Conduct of market survey
Charecterisation of the market
Demand forecasting
Market planning
Situational analysis and specification of objectives
In order to get an idea about the relationship between the product and its market, the project analyst may informally talk to customers, competitors, middlemen, and others in the industry. Wherever possible, he may look at the experience of the company to learn about the preferences and purchasing power of customers, actions and strategies of competitors, and practices of the middlemen. If such a situational analysis generates enough data to measure the market and get a reliable handle over projected demand and revenues, a formal study need not be carried out, particularly when cost and time considerations so suggest. The informal goals that guide situational analysis need to be expanded and articulated with greater clarity. A helpful approach to spell out objectives is to structure them in the form of questions. In doing so, always bear in mind how the information generated will be relevant in forecasting the overall market demand and assessing the share of the market the project will capture.
The objectives of the market and demand analysis may be to answer the following questions:
Who are the buyers of our product?
What is the current demand?
How is the demand distributed?
What is the break-up of demand?
What the price customers willing to pay?
How can potential customers be convinced about the superiority of our product?
What channels of distribution most suited?
Collection of secondary information
In order to answer the questions listed while setting the objectives of the market study, information may be obtained from secondary and/or primary sources. Secondary information is information that has been gathered in some other context and is already available. Primary information on the other hand, represents information that is collected for the first time to meet the specific purpose on hand. Secondary information provides the base and starting point of market and demand analysis. It indicates what is known and often leads for gathering primary information required for further analysis.
General sources of secondary information
The important sources of secondary information useful for market and demand analysis in India are mentioned below:
a)Census data published every ten years containing information on population, demographic characteristics, household size and composition and maps.
b)National sample survey reports containing data on various economic and social aspects like patterns of consumption, distribution of industries etc.
c)Planning commission reports containing data on plan proposals, physical and financial targets, actual outlays, accomplishments etc.
d)Statistical abstracts published by Central Statistical Organisation which contain data on demographic characteristic, national income estimates, agricultural and industrial statistics.
e)India Year Book published by Ministry of Information and Broadcasting containing wide-range of data on economic and other aspects.
f)UN Statistical Year Book giving world statistical data relating to population, gross domestic production, industrial production, world trade etc.
g)Annual Economic Survey published by Ministry of Finance containing data on wholesale prices, industrial production, exports, agricultural production, national income etc.
h)Central Statistical Organisation’s annual Survey of Industries providing information regarding various aspects of industry.
i)Annual reports published by Commerce and Industry department of Indian Government.
j)Exports and Imports Annual Bulletin of Statistics.
k)Techno economic surveys conducted and published by the National Council of Applied Economic Research.
l)Industrial potential Surveys conducted by All India Financial Institutions under the leadership of IDBI giving data on several backward areas.
m)Stock Exchange Directory containing data on financial performance of various companies classified industry wise.
n)Monthly bulletin of Reserve Bank of India containing data on prices, production indices, exchange rates, balance of payment, etc.
o)Monthly studies of production of selected industries published by Central Statistical Organisation containing data on production, number of units installed, their capacities etc. for selected industries.
p)Publications of advertising agencies containing data on consumer index of markets, test markets etc. which is valuable for understanding Indian markets.
The advantage of secondary sources of data is that it is readily and economically available. But the accuracy, reliability and relevance of such data must be studied carefully.
Conduct of market survey
Secondary information, though useful, often does not provide a comprehensive basis for market and demand analysis. It needs to be supplemented with primary information gathered through market survey, specific to the project being appraised. The market survey may be a census survey or a sample survey. Census surveys are employed principally for intermediate goods and investment goods when such goods are used by a small number of firms. In other cases, a census survey is costly and may also be infeasible. Due to the limitations of census survey, the market survey, in practice is typically a sample survey. In such a survey a sample of the population is contacted/observed and relevant information is gathered. On the basis of such information, inferences about the population may be drawn.
The information sought in a market survey may relate to one or more of the following:
Total demand and rate of growth of demand
Demand in different segments of the market
Income and price elasticity of demand
Motives of buying
Purchasing plans and intentions
Satisfaction with existing products
Unsatisfied needs
Attitudes toward various products
Distributive trade practices and preferences
Socio-economic characteristics of buyers
Steps in a sample survey
Typically, a sample survey consists of the following steps:
a.Define the target population In defining the target population the important terms should be carefully and unambiguously defined. The target population may be divided into various segments which may have differing characteristics.
b.Select the sampling scheme and sample size There are several sampling schemes: simple random sampling, cluster sampling, stratified sampling, systematic sampling and non-probability sampling. Each scheme has its advantages and limitations. The sample size has a bearing on the reliability of the estimates- the larger the sample size, the greater is the reliability.
c.Develop the questionnaire The questionnaire is the principal instrument for eliciting, information from the sample of respondents. The effectiveness of the questionnaire depends on its length, the type of questions, the wording of the questions. Developing the questionnaire requires a thorough understanding of the product and its usage, imagination, insight in to human behavior, the familiarity with the tools of descriptive and inferential statistics to be used later for analysis. Since the quality of the questionnaire has an important bearing on the results of the market survey, the questionnaire should be tried out in a pilot survey and modified in the light of problems/difficulties noted.
d.Recruit and train the field investigators Recruiting and training of field investigators must be planned well since it can be time consuming. Great care must be taken in recruiting the right kind of investigators and imparting the proper kind of training to them.
e.Obtain information as per Questionnaire from the sample of respondents Respondents may be interviewed personally, telephonically, or by mail for obtaining information. Personal interviews ensure a high rate of response. But they are expensive and likely to result in biased responses because of the presence of the interviewer.
f.Scruitinise the information gathered Information gathered should be thoroughly scrutinized to eliminate data which is internally inconsistent and which is invalid
g.Analyse and interpret the information Information gathered in the survey needs to be analysed and interpreted with care and imagination. After tabulating it as per a plan of analysis, suitable statistical investigation may be conducted, if necessary. For purposes of statistical analysis, a variety of methods are available. These may be divided into two broad categories: parametric method and non-parametric methods. Parametric methods assure that the variable or attribute under study conforms to some known distribution. Non-parametric methods do not presuppose any particular distribution.
Results of the data based on the sample survey will have to be extrapolated to the target population. For this purpose, appropriate inflationary factors, based on the ratio of the size of the target population to the size of the sample studies, will have to be used.
Charecterisation of the market
Based on the information gathered from secondary sources and through market survey, the market for the product or service may be described in terms of the following
Effective demand in the past and present
Breakdown of demand
Price
Methods of distribution and sales promotion
Consumers
Supply and competition
Government policy
Effective demand in the past and present- To gauge the effective demand in the past and present, the starting point typically is apparent consumption which is defined as:
Production + Imports – Exports – Changes in Stock level
The figure of apparent consumption has to be adjusted for consumption of the product by the producers and the effect of abnormal factors. The consumption series, after such adjustments, may be obtained for several years.
Breakdown of demand – To get deeper insight into the nature of demand, the aggregate market demand may be broken into demand for different segments of the market. Market
segments may be defined by (i) nature of product, (ii) consumer group, and (iii) geographical division.
Price - Price statistics must be gathered along with statistics pertaining to physical quantities. It may be helpful to distinguish the following types of prices: (i) manufacturer’s price quoted as FOB price or CIF price, (ii) landed price for imported goods,(iii) average wholesale price, and (iv) average retail price.
Methods of distribution and sales promotion – The method of distribution may vary with the nature of product, capital goods, Industrial raw materials or intermediates, and consumer products tend to have differing distribution channels. Further, for a given product, distribution methods may vary. Likewise, methods used for sales promotion may vary from product to product.
Consumers – Consumers may be characterized along two dimensions viz, demographic and sociological –age, sex, income, profession, residence, social background etc and attitudinal-preferences, intentions, habits, attitudes, responses etc.
Supply and Competition- It is necessary to know the existing sources of supply and whether they are foreign or domestic. Competition from substitutes and near substitutes should also be specified.
Government policy – The role of government in influencing the demand and market for a product may be significant. Government plans, policies, legislations etc. have a bearing on the market and demand of the product under examination should be spelt out.
Demand forecasting
After gathering information about various aspects of the market and demand from primary and secondary sources, an attempt may be made to estimate future demand. A wide range of forecasting methods is available to the market analyst. These may be divided into three categories: qualitative methods, time series projection methods and casual methods.
Qualitative methods
These methods rely essentially on the judgment of experts to translate qualitative information into quantitative estimates. The important qualitative methods are as follows.
Jury of executive opinion method- It is very popular in practice. This method calls for the pooling of views of a group of executives on expected future sales and combining them into a sales estimate. A small number of top executives are requested to register their individual opinions relating to the probable amount of future sales. A forecast is derived from the average of these figures. As executives are fully aware of the market conditions, capabilities of the firm etc., a forecast under this method gives a better result.
Poll of Sale Force Opinion method - In this method, sales personnel from different sales territories are asked to provide sales forecasts. These individual sales forecasts are then combined, modified and refined by the top executives to predict the total or master forecast for the firm.
Delphi method – This method involves converting the views of a group of experts, who do not interact face-to-face, into a forecast through an iterative process. The steps involved in this method are:
a.A group of experts is sent a questionnaire by mail and asked to express their views.
b.The responses received from the experts are summarized without disclosing the identity of experts, and sent back to the experts, for reviewing their views in the light of other experts opinion.
c.This process may be continued for one or more rounds till a reasonable agreement emerges in the view of the experts.
Time series projection methods
These methods generate forecasts on the basis of an analysis of the historical time series. The important time series projection methods are as follows:
Trend projection method – The trend projection method involves determining the trend of consumption by analyzing past consumption statistics, and projecting future consumption by extrapolating the past trend onto the future.
When trend projection method is used, the most commonly employed relationship is the linear relationship.
Yt = a + bT
Where Yt = Demand for the year t
a = Interception of the relationship
b = Slope of the relationship
T = Time variable
To estimate the parameters a and b of the linear relationship, the least squares method is used.
Moving average method – According to this method, the forecast for the next period represents a simple arithmetic average or weighted arithmetic average of the last few observations.
Exponential smoothing method – This method is used in case of short range sales forecasts. It is a type of moving average representing a weighted sum of all past numbers in a time series, with the heaviest weight placed on the most recent data. This is used to reduce the gap between the actuals and the forecasts. In exponential smoothing, forecasts are modified in the light of observed errors.
Casual methods
These methods seek to develop forecasts on the basis of cause-effect relationships specified in an explicit, quantitative manner. The important methods under this category are as follows:
Chain ratio method – In this method the sales of a product may be estimated by applying a series of factors to a measure of aggregate demand. For example, a firm planning to manufacture stainless steel blades in India can be estimate its potential sales in the following manner.
Adult male population in the country : 150 million
Proportion of adult male using shaving blades : 0.60
Adult male population using shaving blades : 90 million
Number of times a person uses shaving blades in a year : 100
Total shaving done per year : 9,000 million
Proportion of shaving done with stainless steel blades : 0.40
Average number of shaving per stainless steel blade : 4
Number of stainless steel blades used per year : 900 million
Proportion of stainless steel blade market the firm could capture : 0.20
Potential sales : 180 million
Consumption level method – This method estimates consumption level on the basis of elasticity coefficients, the important ones being the income elasticity of demand and the price elasticity of demand.
End use method – This method is suitable for estimating demand for intermediate products. The end use method, also referred to as the consumption coefficient method, involves the following steps:
1.Identify the possible uses of the product.
2.Define the consumption coefficient of the product for various uses.
3.Project the output levels for the consuming industries.
4.Derive the demand for the product.
Leading indicator method – Leading indicators are variables which change ahead of other variables, the lagging variables. Hence, observed changes in leading indicators may be used to predict the changes in lagging variables. For example, the change in the level of urbanization may be used to predict the change in the demand for air conditioners.
Econometric method – An econometric model is a mathematical representation of economic relationship derived from economic theory. The primary objective of econometric analysis is to forecast the future behavior of the economic variables incorporated in the model.
Market planning
To enable the product to reach a desired level of market penetration, a suitable marketing plan should be developed. Broadly, it should cover pricing, distribution, promotion and service. A marketing plan usually has the following components:
Current marketing situation
Opportunity and issue analysis
Objectives
Marketing strategy
Current Marketing Situation
This part of marketing plan deals with the different dimensions of the current situation. It examines the market situation, competitive situation, distribution situation, and the macro environment.
Market situation deals with size, the growth, the consumer aspirations, and buying behaviour in the market under consideration. Competitive situation exhibits who are major competitors, their objectives, strategies, strengths, etc. Distribution situation compares the distribution capabilities of the competitors and available distribution systems which are suitable for our product. Macro-environment describes the effect of social, political, economic, technological, and other external variables on the market.
Opportunity and Issue Analysis
The management should conduct a SWOT analysis for the product and the core issues before the product be identified. The strength may be the use of distribution channel already established for the existing products. The weakness may be its limited resources. The opportunities might be the favourable consumer preference. The threat might be the competition from substitutes.
The core issues may be how to use our strengths to offset probable threats, how can succeed with the product with identified weaknesses, and how to exploit the opportunities available.
Objectives
Objectives have to be clear-cut, specific, and achievable. These objectives form the basis for selection of marketing strategies. Objectives should be expressed unambiguously, preferable quantitatively and with an indication of time span within which the objectives are planned to be achieved.
Marketing Strategy
The marketing strategy covers target segment, positioning, product line, price, distribution, sales force, sales promotion, and advertising.
The market segment the firm wants target should be clearly specified. It needs to be described clearly in terms of the psychographics.
Positioning is how a product is placed in the mind of the customer. Having decided the target market, the positioning should be done in appropriate with its characteristics.
Product line refers number of similar products a firm offering. So it has to decide whether to introduce the product with varieties or a single variant.
Price should be in a range existed within the segment. It should have a bearing on positioning also.
The various distribution channels may be available to our product. Then decision has to be taken to use an effective combination of distribution channels
Sales force should be planned in such a manner that to achieve the objectives. So strategy in this regard specifies their size, probable abilities, and method training which is proposed to be given to them.
Sale promotion strategies should also be formulated. A balance should be made between dealer level sales promotion and consumer level sales promotion.
Strategy should also be formulated regarding advertisement. The firm can choose from a large variety of advertisement media. Before selecting an advertisement media the firm should analyse its effectiveness with respect to our product.
In most cases, the first step in project analysis is to estimate the potential size of the market for the product proposed to be manufactured and get an idea about the market share that is likely to be captured. To make an idea about these things an in depth study and assessment of various factors like patterns of consumption growth, income and price elasticity of demand, composition of the market, nature of competition, availability of substitutes, reach of distribution channels and so on is required. Market and demand analysis should be carried out in an orderly and systematic manner. The key steps in such analysis are as follows:
Situational analysis and specification of objectives
Collection of secondary information
Conduct of market survey
Charecterisation of the market
Demand forecasting
Market planning
Situational analysis and specification of objectives
In order to get an idea about the relationship between the product and its market, the project analyst may informally talk to customers, competitors, middlemen, and others in the industry. Wherever possible, he may look at the experience of the company to learn about the preferences and purchasing power of customers, actions and strategies of competitors, and practices of the middlemen. If such a situational analysis generates enough data to measure the market and get a reliable handle over projected demand and revenues, a formal study need not be carried out, particularly when cost and time considerations so suggest. The informal goals that guide situational analysis need to be expanded and articulated with greater clarity. A helpful approach to spell out objectives is to structure them in the form of questions. In doing so, always bear in mind how the information generated will be relevant in forecasting the overall market demand and assessing the share of the market the project will capture.
The objectives of the market and demand analysis may be to answer the following questions:
Who are the buyers of our product?
What is the current demand?
How is the demand distributed?
What is the break-up of demand?
What the price customers willing to pay?
How can potential customers be convinced about the superiority of our product?
What channels of distribution most suited?
Collection of secondary information
In order to answer the questions listed while setting the objectives of the market study, information may be obtained from secondary and/or primary sources. Secondary information is information that has been gathered in some other context and is already available. Primary information on the other hand, represents information that is collected for the first time to meet the specific purpose on hand. Secondary information provides the base and starting point of market and demand analysis. It indicates what is known and often leads for gathering primary information required for further analysis.
General sources of secondary information
The important sources of secondary information useful for market and demand analysis in India are mentioned below:
a)Census data published every ten years containing information on population, demographic characteristics, household size and composition and maps.
b)National sample survey reports containing data on various economic and social aspects like patterns of consumption, distribution of industries etc.
c)Planning commission reports containing data on plan proposals, physical and financial targets, actual outlays, accomplishments etc.
d)Statistical abstracts published by Central Statistical Organisation which contain data on demographic characteristic, national income estimates, agricultural and industrial statistics.
e)India Year Book published by Ministry of Information and Broadcasting containing wide-range of data on economic and other aspects.
f)UN Statistical Year Book giving world statistical data relating to population, gross domestic production, industrial production, world trade etc.
g)Annual Economic Survey published by Ministry of Finance containing data on wholesale prices, industrial production, exports, agricultural production, national income etc.
h)Central Statistical Organisation’s annual Survey of Industries providing information regarding various aspects of industry.
i)Annual reports published by Commerce and Industry department of Indian Government.
j)Exports and Imports Annual Bulletin of Statistics.
k)Techno economic surveys conducted and published by the National Council of Applied Economic Research.
l)Industrial potential Surveys conducted by All India Financial Institutions under the leadership of IDBI giving data on several backward areas.
m)Stock Exchange Directory containing data on financial performance of various companies classified industry wise.
n)Monthly bulletin of Reserve Bank of India containing data on prices, production indices, exchange rates, balance of payment, etc.
o)Monthly studies of production of selected industries published by Central Statistical Organisation containing data on production, number of units installed, their capacities etc. for selected industries.
p)Publications of advertising agencies containing data on consumer index of markets, test markets etc. which is valuable for understanding Indian markets.
The advantage of secondary sources of data is that it is readily and economically available. But the accuracy, reliability and relevance of such data must be studied carefully.
Conduct of market survey
Secondary information, though useful, often does not provide a comprehensive basis for market and demand analysis. It needs to be supplemented with primary information gathered through market survey, specific to the project being appraised. The market survey may be a census survey or a sample survey. Census surveys are employed principally for intermediate goods and investment goods when such goods are used by a small number of firms. In other cases, a census survey is costly and may also be infeasible. Due to the limitations of census survey, the market survey, in practice is typically a sample survey. In such a survey a sample of the population is contacted/observed and relevant information is gathered. On the basis of such information, inferences about the population may be drawn.
The information sought in a market survey may relate to one or more of the following:
Total demand and rate of growth of demand
Demand in different segments of the market
Income and price elasticity of demand
Motives of buying
Purchasing plans and intentions
Satisfaction with existing products
Unsatisfied needs
Attitudes toward various products
Distributive trade practices and preferences
Socio-economic characteristics of buyers
Steps in a sample survey
Typically, a sample survey consists of the following steps:
a.Define the target population In defining the target population the important terms should be carefully and unambiguously defined. The target population may be divided into various segments which may have differing characteristics.
b.Select the sampling scheme and sample size There are several sampling schemes: simple random sampling, cluster sampling, stratified sampling, systematic sampling and non-probability sampling. Each scheme has its advantages and limitations. The sample size has a bearing on the reliability of the estimates- the larger the sample size, the greater is the reliability.
c.Develop the questionnaire The questionnaire is the principal instrument for eliciting, information from the sample of respondents. The effectiveness of the questionnaire depends on its length, the type of questions, the wording of the questions. Developing the questionnaire requires a thorough understanding of the product and its usage, imagination, insight in to human behavior, the familiarity with the tools of descriptive and inferential statistics to be used later for analysis. Since the quality of the questionnaire has an important bearing on the results of the market survey, the questionnaire should be tried out in a pilot survey and modified in the light of problems/difficulties noted.
d.Recruit and train the field investigators Recruiting and training of field investigators must be planned well since it can be time consuming. Great care must be taken in recruiting the right kind of investigators and imparting the proper kind of training to them.
e.Obtain information as per Questionnaire from the sample of respondents Respondents may be interviewed personally, telephonically, or by mail for obtaining information. Personal interviews ensure a high rate of response. But they are expensive and likely to result in biased responses because of the presence of the interviewer.
f.Scruitinise the information gathered Information gathered should be thoroughly scrutinized to eliminate data which is internally inconsistent and which is invalid
g.Analyse and interpret the information Information gathered in the survey needs to be analysed and interpreted with care and imagination. After tabulating it as per a plan of analysis, suitable statistical investigation may be conducted, if necessary. For purposes of statistical analysis, a variety of methods are available. These may be divided into two broad categories: parametric method and non-parametric methods. Parametric methods assure that the variable or attribute under study conforms to some known distribution. Non-parametric methods do not presuppose any particular distribution.
Results of the data based on the sample survey will have to be extrapolated to the target population. For this purpose, appropriate inflationary factors, based on the ratio of the size of the target population to the size of the sample studies, will have to be used.
Charecterisation of the market
Based on the information gathered from secondary sources and through market survey, the market for the product or service may be described in terms of the following
Effective demand in the past and present
Breakdown of demand
Price
Methods of distribution and sales promotion
Consumers
Supply and competition
Government policy
Effective demand in the past and present- To gauge the effective demand in the past and present, the starting point typically is apparent consumption which is defined as:
Production + Imports – Exports – Changes in Stock level
The figure of apparent consumption has to be adjusted for consumption of the product by the producers and the effect of abnormal factors. The consumption series, after such adjustments, may be obtained for several years.
Breakdown of demand – To get deeper insight into the nature of demand, the aggregate market demand may be broken into demand for different segments of the market. Market
segments may be defined by (i) nature of product, (ii) consumer group, and (iii) geographical division.
Price - Price statistics must be gathered along with statistics pertaining to physical quantities. It may be helpful to distinguish the following types of prices: (i) manufacturer’s price quoted as FOB price or CIF price, (ii) landed price for imported goods,(iii) average wholesale price, and (iv) average retail price.
Methods of distribution and sales promotion – The method of distribution may vary with the nature of product, capital goods, Industrial raw materials or intermediates, and consumer products tend to have differing distribution channels. Further, for a given product, distribution methods may vary. Likewise, methods used for sales promotion may vary from product to product.
Consumers – Consumers may be characterized along two dimensions viz, demographic and sociological –age, sex, income, profession, residence, social background etc and attitudinal-preferences, intentions, habits, attitudes, responses etc.
Supply and Competition- It is necessary to know the existing sources of supply and whether they are foreign or domestic. Competition from substitutes and near substitutes should also be specified.
Government policy – The role of government in influencing the demand and market for a product may be significant. Government plans, policies, legislations etc. have a bearing on the market and demand of the product under examination should be spelt out.
Demand forecasting
After gathering information about various aspects of the market and demand from primary and secondary sources, an attempt may be made to estimate future demand. A wide range of forecasting methods is available to the market analyst. These may be divided into three categories: qualitative methods, time series projection methods and casual methods.
Qualitative methods
These methods rely essentially on the judgment of experts to translate qualitative information into quantitative estimates. The important qualitative methods are as follows.
Jury of executive opinion method- It is very popular in practice. This method calls for the pooling of views of a group of executives on expected future sales and combining them into a sales estimate. A small number of top executives are requested to register their individual opinions relating to the probable amount of future sales. A forecast is derived from the average of these figures. As executives are fully aware of the market conditions, capabilities of the firm etc., a forecast under this method gives a better result.
Poll of Sale Force Opinion method - In this method, sales personnel from different sales territories are asked to provide sales forecasts. These individual sales forecasts are then combined, modified and refined by the top executives to predict the total or master forecast for the firm.
Delphi method – This method involves converting the views of a group of experts, who do not interact face-to-face, into a forecast through an iterative process. The steps involved in this method are:
a.A group of experts is sent a questionnaire by mail and asked to express their views.
b.The responses received from the experts are summarized without disclosing the identity of experts, and sent back to the experts, for reviewing their views in the light of other experts opinion.
c.This process may be continued for one or more rounds till a reasonable agreement emerges in the view of the experts.
Time series projection methods
These methods generate forecasts on the basis of an analysis of the historical time series. The important time series projection methods are as follows:
Trend projection method – The trend projection method involves determining the trend of consumption by analyzing past consumption statistics, and projecting future consumption by extrapolating the past trend onto the future.
When trend projection method is used, the most commonly employed relationship is the linear relationship.
Yt = a + bT
Where Yt = Demand for the year t
a = Interception of the relationship
b = Slope of the relationship
T = Time variable
To estimate the parameters a and b of the linear relationship, the least squares method is used.
Moving average method – According to this method, the forecast for the next period represents a simple arithmetic average or weighted arithmetic average of the last few observations.
Exponential smoothing method – This method is used in case of short range sales forecasts. It is a type of moving average representing a weighted sum of all past numbers in a time series, with the heaviest weight placed on the most recent data. This is used to reduce the gap between the actuals and the forecasts. In exponential smoothing, forecasts are modified in the light of observed errors.
Casual methods
These methods seek to develop forecasts on the basis of cause-effect relationships specified in an explicit, quantitative manner. The important methods under this category are as follows:
Chain ratio method – In this method the sales of a product may be estimated by applying a series of factors to a measure of aggregate demand. For example, a firm planning to manufacture stainless steel blades in India can be estimate its potential sales in the following manner.
Adult male population in the country : 150 million
Proportion of adult male using shaving blades : 0.60
Adult male population using shaving blades : 90 million
Number of times a person uses shaving blades in a year : 100
Total shaving done per year : 9,000 million
Proportion of shaving done with stainless steel blades : 0.40
Average number of shaving per stainless steel blade : 4
Number of stainless steel blades used per year : 900 million
Proportion of stainless steel blade market the firm could capture : 0.20
Potential sales : 180 million
Consumption level method – This method estimates consumption level on the basis of elasticity coefficients, the important ones being the income elasticity of demand and the price elasticity of demand.
End use method – This method is suitable for estimating demand for intermediate products. The end use method, also referred to as the consumption coefficient method, involves the following steps:
1.Identify the possible uses of the product.
2.Define the consumption coefficient of the product for various uses.
3.Project the output levels for the consuming industries.
4.Derive the demand for the product.
Leading indicator method – Leading indicators are variables which change ahead of other variables, the lagging variables. Hence, observed changes in leading indicators may be used to predict the changes in lagging variables. For example, the change in the level of urbanization may be used to predict the change in the demand for air conditioners.
Econometric method – An econometric model is a mathematical representation of economic relationship derived from economic theory. The primary objective of econometric analysis is to forecast the future behavior of the economic variables incorporated in the model.
Market planning
To enable the product to reach a desired level of market penetration, a suitable marketing plan should be developed. Broadly, it should cover pricing, distribution, promotion and service. A marketing plan usually has the following components:
Current marketing situation
Opportunity and issue analysis
Objectives
Marketing strategy
Current Marketing Situation
This part of marketing plan deals with the different dimensions of the current situation. It examines the market situation, competitive situation, distribution situation, and the macro environment.
Market situation deals with size, the growth, the consumer aspirations, and buying behaviour in the market under consideration. Competitive situation exhibits who are major competitors, their objectives, strategies, strengths, etc. Distribution situation compares the distribution capabilities of the competitors and available distribution systems which are suitable for our product. Macro-environment describes the effect of social, political, economic, technological, and other external variables on the market.
Opportunity and Issue Analysis
The management should conduct a SWOT analysis for the product and the core issues before the product be identified. The strength may be the use of distribution channel already established for the existing products. The weakness may be its limited resources. The opportunities might be the favourable consumer preference. The threat might be the competition from substitutes.
The core issues may be how to use our strengths to offset probable threats, how can succeed with the product with identified weaknesses, and how to exploit the opportunities available.
Objectives
Objectives have to be clear-cut, specific, and achievable. These objectives form the basis for selection of marketing strategies. Objectives should be expressed unambiguously, preferable quantitatively and with an indication of time span within which the objectives are planned to be achieved.
Marketing Strategy
The marketing strategy covers target segment, positioning, product line, price, distribution, sales force, sales promotion, and advertising.
The market segment the firm wants target should be clearly specified. It needs to be described clearly in terms of the psychographics.
Positioning is how a product is placed in the mind of the customer. Having decided the target market, the positioning should be done in appropriate with its characteristics.
Product line refers number of similar products a firm offering. So it has to decide whether to introduce the product with varieties or a single variant.
Price should be in a range existed within the segment. It should have a bearing on positioning also.
The various distribution channels may be available to our product. Then decision has to be taken to use an effective combination of distribution channels
Sales force should be planned in such a manner that to achieve the objectives. So strategy in this regard specifies their size, probable abilities, and method training which is proposed to be given to them.
Sale promotion strategies should also be formulated. A balance should be made between dealer level sales promotion and consumer level sales promotion.
Strategy should also be formulated regarding advertisement. The firm can choose from a large variety of advertisement media. Before selecting an advertisement media the firm should analyse its effectiveness with respect to our product.
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