Prof.

Kul Narsingh Shrestha 1

chapter

Introduction Introduction of of Business Business

A. CONCEPT OF BUSINESS

The meaning of business is very comprehensive. The word 'Business' literally means 'a state of being busy'. Every person is busy in some kind of occupation to earn livelihood. Hence, business includes all economic activities pursed for earning livelihood and or profit. Business can be defined as an organized economic activity operated to provide goods and services to society for earning profit. It means production, distribution and exchange of goods and services for mutual benefit. Traditionally, business has been defined as an economic activity. It involves regular production, distribution and/or exchange of goods and services with the main purpose of earning profits through the satisfaction of human wants. Every business activity is performed with a view to earning profit and wealth. According to C. F. Abbot, "Business without profit is not business". No private entrepreneur will start a business unless he hopes to earn profit. The main aim of business is to satisfy the unlimited wants of men living in society. Thus, business is an activity directed to create values for fulfilling needs of man in society through production, distribution, and exchange of goods and services. Technically, business implies an enterprise engaged in the production and marketing of goods and services for a price.

Functionally, business is a form of activity involving production and purchase of goods and services with the object of selling them at a profit. Business consists of repeated dealings in goods or services as against isolated dealings. Definitions of Business According to L.H. Haney : Business may be defined as human activities directed towards producing or acquiring wealth through buying and selling goods. According to W.R. Spriegal : All of the activities included in the production and sale of goods or services may be classified as business activities. According to Prof. Owen : A business is an enterprise engaged in production and distribution of goods for sale in market or the rendering of services for a price. According to Wheeler: Business is an institution organized and operated to provide goods and services to society under the incentive of private gain.

Concepts of Business
Traditional Concept: Traditionally, business has been defined as an economic activity, which involves regular production and/or exchange of goods and services with the main purpose of earning profits. Technical Concept: Technically, business implies an enterprise engaged in the production and marketing of goods and services for a price. Functional Concept: Functionally, business is a form of activity involving production and purchase of goods and services with the object of selling them at a profit. Modern Concept: In modern view, Business involves all the activities of production, distribution and exchange performed to provide goods and services to fulfill wants of society with an equitable adjustment of profit and public welfare.

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In modern view, "Business involves all the activities of production, distribution and exchange performed to provide goods and services to fulfill wants of society with an equitable adjustment of profit and public welfare. It should earn profit fulfilling the social responsibility". The main elements of business are: Organized economic activity. Repeated dealings in goods and services. Production, distribution and exchange of goods and services. Satisfying human wants. Fulfilling the social responsibility. Earning profit and wealth.

B.

CHARACTERISTICS OF BUSINESS
The important characteristics of business are as follows:

(1) Entrepreneurship : There must be someone to take initiative for establishing a business. The person who recognizes the need for a product or service, invests and bears the whole risk is known as entrepreneur. He visualizes a business, combines various factors of production and puts them into a going concern. He is the main figure and promotes business. A business is not possible without an intrepreneurship. (2) Production, Distribution and Exchange : All business activities are directly or indirectly concerned with the production, distribution and exchange of goods and services. Production of goods and services for personal consumption do not constitute business. Hence, if a person cooks his food at home is not business because it does not involve any exchange. (3) Regular Dealings : Business includes only those dealings which have regularity and continuity. Recurring transactions rather than isolated transaction is the essence of business. An isolated transaction will not be called business, even if

the person earns profit. A person builds a house for himself, but later sells on profit. This is not called business. Hence in business the exchange of goods or services should be undertaken regularly. (4) Profit Motive : The main objective of business is to earn reasonable profit. It makes continuity in the business. The survival of business depends upon its ability to earn profits. Every businessman wants to earn profits to receive interest on his capital and to reward himself for his services. Any activity undertaken without profit motive is not business. However, service motive is also essential for the progress of the business.

CHARACTERISTICS OF BUSINESS
1. 2. Entrepreneurship Production, distribution, and exchange 3. Regular dealings 4. Profit motive 5. Element of risk 6. Creation of utility 7. Consumer satisfaction 8. Capital investment 9. Organization 10. Economic activity

(5) Element of Risk : Risk means the possibility of loss. The business involves some degree of risk. It arises due to uncertainties of future. The element of risk exists due to variety of factors, which are outside the control of business enterprise. The risks associated with business are change in technology, change in consumer tastes and fashion, strike by employee, shortage of raw materials, increase in competition, natural calamities, etc. Hence all business involve some element of risk and uncertainties. (6) Creation of Utility : Creation of utility is the main feature of the business. Business creates various types of utilities in goods so that consumer may use them. The utilities may be form utility, place utility, time utility, etc. When raw materials are converted into finished goods, it creates form utility. The goods are transported from the place of production to the ultimate consumers, which create place utility. The process of storing goods when they are not required and supplying them at a time when they are needed is called creation of time utility. (7) Consumer Satisfaction : The ultimate aim of business is to supply goods and services to the consumers. The business should

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satisfy the consumers' wants so that the demand for his product is maintained. Hence, the business should produce goods according to the liking and tastes of consumers. Goods should be made available where and when the consumers require. Without the satisfaction of consumers business cannot exist. (8) Capital Investment : Business requires capital investment. It is life blood of business. It is essential for acquiring other factors of production such as man, machine and materials. The amount of capital for the business depends on the size and scale of business. A proper capital structure is essential for the success of the business. Business cannot exist without capital investment. (9) Organization : Every enterprise needs an organization for its successful working. An organization is essential for proper planning, executing the plan and controlling the performance. It creates the framework for managerial performance and coordinating various business activities. A proper organization is helpful in the smooth running of the business and helps to achieve its objectives. (10) Economic Activity : All activities can be classified as economic and non-economic activity. Business is an economic activity. Economic activities involve production, distribution and exchange of goods and services with profit motive. Non-economic activities are not included in the business. In conclusion, we can say that business is an economic activity which involves regular exchange of goods and services with the aim of earning profit through the satisfaction of human wants.

C.

COMPONENTS OF BUSINESS

Business includes many activities. According to F.C. Hooper's, "It (business) means the whole complex field of commerce and industry .......". Thus, traditionally business had been categorised into two main components: (1) Industry, and (2) Commerce as shown in figure 1.1.

Meaning and Types of Industry

"Industry" refers to production of goods through manufacturing or processing. The activities of extraction, production, conversion, processing or fabrication are described as industry. It converts raw materials into finished goods and thus creates form utility. Goods produced by an industry may be "consumers' goods" or "producers' goods". Consumer goods are in the form in which consumer wants them e.g. clothes, radio, television, foodstuffs, etc. They directly satisfy human wants. Producers' goods are used by other producers for further production e.g. machinery, factory buildings, plants, tools, etc. Industry may be further divided into four different types. 1. 2. 3. 4. Genetic Industry Extractive Industry Construction Industry Manufacturing Industry

Components of Business

Industry Genetic Industry Extractive Industry Construction Industry Manufacturing Industry

Trade

Commerce

Aids to Trade
Transport Communication Banking & Fin. Insurance Warehousing Advertising

Home Trade Foreign Trade

Fig. 1.1 : Components of Business

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(1) Genetic Industry : Genetic Industry is related to the reproducing, breeding, and multiplying certain species of plants and animals with the object of earning profit from their sale. The activities involved are rearing, breeding of animals, birds and growing plants. Nurseries where plants are grown for sale, animal breeding farms, poultry, farming, etc. come under genetic industry. (2) Extractive Industry : The Extractive Industry is concerned with the extraction or drawing out products from natural sources. It supplies basic raw materials to other industries. Examples of such industries are mining, hunting, lumbering, fishing, etc. Materials once extracted from earth cannot be replaced. Hence, these industries are also called exhaustive industries because with extraction there is depletion of resources and exhausts. (3) Construction Industry : This industry is concerned with the construction, erection, fabrication or building products. Examples of such industries are road, bridge, dams, canals, building construction, etc. In this type of industry basic materials are manufactured by other industry like cement, iron, etc. The distinctive characteristic is that their products are not carried to the market for sale, they are erected or built at a fixed site. The products of construction industries cannot be moved. (4) Manufacturing Industry : Generally the term 'industry' refers to the manufacturing industry. This industry is mainly concerned with the production of different types of goods by using raw materials or semi-finished goods. Manufacturing industries produces most of the goods that are used by the consumers. It creates form utility in them. Manufacturing industries may be classified as follows: (a) Analytical Industry : In this industry many types of products are manufactured by analyzing and separating different elements from the same material. Hence, it produces various products from a single raw material. For example crude oil is processed and separated into petrol, diesel, kerosene, lubricating oil, etc. (b) Processing Industry : In this industry raw material is processed through different stages of production to produce the final product. Textiles, paper and sugar are examples of this type.

(c) Synthetic Industry : In this industry various raw materials are put together in manufacturing process to make a new product. Hence, it produces a new product by combining two or more different types of raw materials. For example combining and mixing concrete, gypsum, coal, etc produces cement. (d) Assembling Industry : In this industry various instruments or component parts already manufactured are assembled to make new useful product. Most manufacturing industries are assembling industries. For example, car, bicycle, radio, television, etc.

Types of Industry

Genetic Industry

Extractive Industry

Construction Industry

Manufacturing Industry

Analytical Industry

Processing Industry

Synthetic Industry

Assembling Industry

Fig. 1.2 : Types of Industry Meaning and Classification of Commerce

Commerce is concerned with buying, selling and distribution of goods and services, which are produced by industry. James Stephenson has defined commerce as 'an organized system for the exchange of commodities and distribution of finished products." It signifies a process of exchange, which is the foundation of modern economic life. It helps in transferring the goods from the place of production to those places where it is scarce. The main object of commerce is to ensure smooth distribution of goods and services to satisfy the wants of consumers.

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Hence, it is concerned with the supply of goods and services to the consumers at the right place, at right time and at right condition. According to Evelyn Thomas : Commercial occupations deal with the buying and selling of goods, the exchange of commodities and distribution of the finished goods. In modern era, commerce includes all the functions which are required to buy and sell the product. It deals with the processes which are engaged in the removal of hindrances of persons (trade), hindrances of exchange (banking and finance), hindrances of place (transport, insurance), hindrances of time (warehousing), and hindrances of information (advertising and salesmanship). It provides a link between producer and consumer. Commerce is primarily concerned with two main types of activities: (1) Trade, and (2) Aids to Trade.

COMMERCE

Trade

Aids to Trade
Transport Communication Banking & Finance Insurance Warehousing Advertising & publicity

Home Trade Wholesale Trade Retail Trade

Foreign Trade Import Export Entreport

Fig. 1.3 : Classification of Commerce

(1) Trade

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Trade refers to the sale, transfer or exchange of goods. It is an activity by which buyers and sellers exchange useful goods and services for mutual advantage. It is the process by which goods are taken from the source of production to the consumers. The persons engaged in trade are called 'traders'. A trader acts as an intermediary between producers and consumers. Trade may be broadly classified into two parts: (a) Home Trade, and (b) Foreign Trade. (a) Home Trade : Home trade consists of buying and selling goods within the boundaries of a country. Payments for such sale are made in national currency directly or through banks and the internal transportation system is utilized for the movement of goods. It may be further sub-divided into wholesale and retail trade. Wholesale Trade consists in buying in lots from producers and then selling them to the large number of retailers. It serves as a link between the producers and the retailers. Retail Trade on the other hand, involves purchase of goods from the wholesaler or the producer directly and sale those goods to the large number of consumers in small lots. It is the final stage of distribution. (b) Foreign Trade : Foreign trade involves purchase and sale of goods between different countries. For example, trade carried on between Kathmandu and Tokyo is foreign trade. Two countries are involved in foreign trade. It may be further subdivided into import, export and entreport trade. Import Trade implies purchase of goods from a foreign country. Export Trade on the other hand, implies sale of goods to other countries. Entreport Trade is only re-export. A country imports something not for own use but to export it to other countries is known as entreport trade. (2) Aids to Trade There are various obstacles in the way of smooth running of trade. All the obstacles are overcome with the help of various agencies known as Aids to Trade. Aids to trade are those activities that facilitate buying and selling of goods. In other words, it is the sum total of those processes which are engaged in the removal of hindrance of place (transport and insurance) and time (warehousing) in the exchange (banking) of commodities. So it

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links the consumers and traders. These aids are essential for the growth of trade and industry. Thus, they are also known as aid to business and auxiliary services. Aids to trade include the following services: (a) Transport : Goods are produced at a few places but are required for use at several different places. It is the function of transport to carry goods from centers of production to centers of consumption. It creates place utility by transferring goods from one place to another. It has linked all parts of the world. Transport helps in distribution of goods. It widens market, increases mobility of labor and capital, and facilitates large-scale production. The various modes of transport have helped the growth of industry and trade. (b) Communication : The transmission of information from one place to another for various purposes is known as communication. Development of industry and trade is very much dependent on means of communication. Most important communication media are telephone, fax, telegrams, radio, T.V., etc. They are very much helpful in communicating their message with persons at distant places. Communication also gives information of new product to individuals and firms. (c) Banking and Finance : Banks and financial institutions provide finance to business units. They are traders of money and credit. They provide capital for the business in shape of loan and they also help them in remitting money from one place to another. They play an important role in international trade where traders do not know trading parties. The documents are sent through banks, which release the documents after collecting the dues. (d) Insurance : During the movement of goods from one place to another or during storage, there are chances of goods being damaged or lost. The insurance protects the traders from the fear of loss of goods. The fear of loss of goods due to any cause acts as an obstacle in the development of industry and trade. The insurance companies provide coverage for all types of losses of goods. It has given a great impetus for the development of business. (e) Warehousing : Warehouse is a kind of storage. It creates time utility. Some goods are produced seasonally but they are

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required throughout the year. So there is need to store them, so that they may be supplied according to demand. Hence, warehousing is used to keep the stock of goods when not required for immediate use. (f) Advertising and Publicity : The consumers may not be aware of the availability of various goods in the market. The producer will also like to increase his customers. The advertisement is used to educate customers and to publicize goods and services to promote their sales. Publicity is a method of promoting sales. It is essential for increasing sales and profit. There are several media of publicity like newspaper, radio, T.V., etc.

INTER-RELATIONSHIP BETWEEN INDUSTRY, TRADE AND COMMERCE

Business is divided into two categories: industry and commerce. Commerce is again sub-divided into trade and aids to trade. Practically all of them are closely related to each other. They are inseparable. All of them are parts of the whole business system. Industry and commerce are closely related to each other. Industry cannot exist without commerce and commerce cannot exist without industry. Every producer has to find his market for his products to sell. But the producer has no direct connection with the buyers or consumers. Hence, industry needs commerce. Commerce is concerned with the sale, transfer or exchange of goods and services. Hence, commerce needs industry for the production of goods and services. Commerce makes the necessary arrangement for linking between producers and ultimate consumers. It includes all those activities that are involved in buying, selling, transporting, banking, warehousing of goods, and insurance for safeguarding the goods. Trade includes sale, transfer or exchange of goods. It does not include other functions of commerce like transportation, insurance, banking, warehousing, etc. If there were no trade, the producers would have to find customers for their products. Therefore, without trade there would be little need for commerce. Similarly trade without aids to trade is meaningless and they exist for trade.

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In conclusion, we can say that industry, trade and commerce are inter-related with each other. Industry is concerned with production of goods and services and commerce arranges its sales; but the actual operation of sales is in the hands of trade. So they cannot work independently.

Distinction among Industry, Trade and Commerce

Industry, trade and commerce look alike but have different implication. Differences among them are given below: 1. Meanings: Industry denotes production, trade means regular purchase and sale of goods, and commerce implies various services performed for proper conduct of industry and trade. 2. Creation of Utility: Industry creates form utility by converting the form of raw materials into finished goods. In trade, utility is created through change of ownership. Commerce creates place and time utility. The goods are transported from the place of production to the ultimate consumers to create place utility. Similarly goods are stored when they are not required and supplying them at a time when they are needed create time utility. 3. Scope: Industry incorporates extractive, genetic, manufacturing and constructive activities. Trade is classified into home trade and foreign trade and further classified as wholesale and retail trade as well as export and import trade. Commercial activities include functions of banks, insurance, transport, and communication, etc. 4. Primitiveness: In the primitive age of self-sufficiency, men earned their livelihood by industrial activities of hunting and fishing, etc. Thus, industry was the first to start. In course of time, people began to satisfy their wants through exchange of their excess goods with those of others. Such exchange of an article with another is known as barter and with this, trade originated. With the invention of money and advancement of trade, transport and communication, etc. started. These services mark the beginning of commerce. Thus, commerce was the last to come.

D.

FUNCTIONS OF BUSINESS

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Business performs various functions in order to achieve its objectives. One of the major functions of business is to produce goods from raw materials. Similarly transporting goods from the place of production to the market is also another function of business. Hence, the major functions of business can be identified as follows: (1) Organizing Function : One of the major functions of business is organizing function. Man, machine, materials, and money are essential factors for any business. So organizing function accumulates and coordinates all the necessary factors of business. Proper organizing function is helpful in the smooth running of the business and helps to achieve its objectives. (2) Financing Function : Finance is the life-blood of any business. The availability of factors of production depends upon the availability of finance. So every business needs finance for its existence and success. Hence under this function required capital is estimated, accumulated and properly utilized. A proper capital structure according to the size and nature of the business is essential for the success of the business. (3) Production Function : Business performs production function. Converting raw materials into finished products to satisfy human wants by creating utility is known as production. Under this function raw materials and semi-finished products are processed and assembled to create utility. Hence, the next important function of business is to create utility for satisfaction of the consumers by production of goods. (4) Marketing Function : The function of business is not complete with the production of goods and services only. The main goal of production is to satisfy human wants through the consumption of goods and services. Hence marketing function helps to transfer goods and services from the producer to the ultimate consumer. Marketing functions can be divided into concentrating and dispersing which include buying, selling, transportation, storage, risk taking, market information, etc. (5) Employment Function : The next important function of business is to provide employment opportunities in the country. Every business requires a large number of manpower to perform their activities. So they are helpful in solving employment problem

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of the country by providing maximum employment opportunities. Business sector is possibly the largest employment generating sector in the world. (6) Research and Development : The progress in any field is the result of research and development. In business also research and development is essential for the development of new technologies and new products. By research, new production techniques, interest of the consumers, needs of the market, new markets, etc. can be identified. Hence, business can be increased through research and development. The success of any business depends upon the satisfaction of the consumers. Hence, giving the priority of consumer satisfaction, the above functions of business must be conducted efficiently in order to run business successfully. FUNCTIONS OF BUSINESS
1. 2. 3. 4. 5. 6. Organizing Function Financing function Production Function Marketing function Employment Function Research and Development

E.

OBJECTIVES OF BUSINESS

Business is a very important economic activity. The main objective of business is to earn profit. It also measures the success of business. But no business can continue for long if it ignores public service. So, earning profit and public service are the main objectives of business. However, the objectives of business may be broadly categorized under the following heads: 1. Economic Objectives 2. Social Objectives 3. Human Objectives

(1) Economic Objectives

Business is basically an economic activity. Hence, its primary objectives are economic. The economic objectives of a business are to earn sufficient profit to give reasonable reward to the investors of

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capital and to provide funds for expansion and diversification. The main economic objective of business may be described as under: (a) Earning Profit : Profit earning is the most important objective of business. Business activity is undertaken for earning profit. Profit is the basic incentive to business pursuits. It is necessary for the existence of business. A business needs profit not only for the existence but also for expansion and diversification. The profit is also a measuring rod for business efficiency. Therefore the businessman should charge a reasonable profit which will be beneficial to both business and society.

OBJECTIVES OF BUSINESS
Economic Objectives Social Objectives Human Objectives

a. b. c. d.

Earning profit Production of goods Creation of markets Technological improvements

a. b. c. d. e. f.

Providing goods Supply of quality goods Proper price Providing employment Utilizing the scarce resources properly Avoiding social nuisances

a. b. c.

Welfare of employees Satisfaction of consumers Satisfaction of shareholders

Fig. 1.4 : Objectives of Business

(b) Production of Goods : Business involves sale or exchange of goods and services for earning profit. So, the next objective of business is to produce more goods and sell them to satisfy the needs of consumers. Therefore, considering the tastes,

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preferences and paying capacity of consumers, producers estimate the demand for goods to produce. A businessman creates form, place and time utilities and meets the requirements of the society. (c) Creation of Markets : Business activity can be sustained only if there are enough people to buy the products and services offered by the enterprise. As Peter F. Drucker has said, "There is only one valid definition of business purpose: to create a customer." Without customers a business cannot survive. Customers collectively constitute the market. Thus, the objective of business is the creation of market for its products and services to meet the needs of the customers. (d) Technological Improvements : In business, there is cutthroat competition in which businessman try to sell their products by offering quality goods at lower prices. This is possible when the latest technology is used for manufacturing goods. The businessman should introduce new designs using new techniques and tools to keep pace with the changing business world. It should aim at increasing efficiency in terms of "cost per unit of production" or "units produced per day by each employee". Otherwise it cannot survive long in the market.

(2)

Social Objectives

Since business operates in society it cannot survive and grow unless it meets the needs of the society. For the survival of any business, social objectives are essential. According to Henry Ford, "Service first and profit next should be the motto of every businessman." Thus, it is an important part of business objectives to fulfill its obligations to the society whose ethical and moral code of conduct should not be violated. The philosophy of running a business should be in tune with what is considered right by the society. Some of the social objectives of business are as follows: (a) Providing Goods : The business should provide goods and services for benefit of the society. Goods are used to satisfy physical as well as mental needs. Providing goods and services for society is the first duty of businessmen. (b) Supply of Quality Goods : It is necessary that goods and services should conform to some specified standards. It is the duty

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of businessmen to study wants and needs of consumers and provide them with quality goods. The supply of adulterated goods, low quality, unusable or harmful to health will be against business ethics. A business cannot flourish in the long run if it ignores consumers. (c) Proper Price : Business should supply desirable goods and services at proper prices. Efforts should be made to reduce cost in order to reduce price. When the price is decreased, demand increases and more people are able to satisfy their wants. (d) Providing Employment : Business activities are the greatest source of employment. The business community should plough back its profit for further expansion of business activities that will ultimately create new job opportunities. (e) Utilizing the Scarce Resource Properly : The business should put the scarce national resources to the best possible use. A business is not free to damage or cause discriminate depletion of natural resources. (f) Avoiding Social Nuisances : Business activities generate filth and dirt and also make social environment unhygienic. Constant noise makes living unpeaceful. So, every precaution should be taken to maintain cleanliness, public health and minimum noise.

(3)

Human Objectives

Business activity can be conducted only through the medium of human beings working as individuals or groups in organizations. If the human factor is overlooked, it will be difficult to achieve its objectives. Human objectives of business require that a workable balance should be maintained among the claims of various interested groups like employees, shareholders and consumers. Some of the important human objectives are: (a) Welfare of Employees : The employees should be looked upon as human beings. They help in increasing the profitability and should be given a due share in profits in form of bonus, increased allowances or spending money on their welfare. The best prerequisite for getting the best out of people is providing a fair wages and other incentives.

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(b) Satisfaction of Consumers : The business is meant for consumers and their satisfaction should be the main objectives of business. So goods should be produced according to the needs, tastes and purchasing power of the consumers. They should be provided with quality goods at reasonable prices. (c) Satisfaction of Shareholders : The management should give reasonable return on the money invested by the shareholders. At the same time, the business should grow so that there is capital appreciation also. The shareholder should also feel that the management does not misuse their money.

F.

IMPORTANCE OF BUSINESS

Business is the most important activity of mankind. The progress of any country depends upon the development of business of that country. Therefore countries like Japan, Korea, England, Germany, USA, etc. are developed through business. The following reasons clearly show the importance of business: (1) Fulfillment of Human Wants : In the modern time, human wants are unlimited. Business fulfills such human wants through the production of goods and services. (2) Creation of Utility : Business creates various types of utilities in goods so that consumer may use them according to their preferences and needs. The utility may be form utility, place utility, time utility, etc. (3) Utilization of Natural Resources : Every country has certain natural resources. The business makes it possible to utilize natural resources to their maximum extent. As for example, mineral resources are extracted by extractive industries. Afterwards, they are used by other industries to make different types of useful articles. (4) Employment Opportunity : The field of business is also important from the viewpoint of employment. Today a lot of people are employed by the development of business. So business

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contributes a lot in solving the unemployment problem of the country. (5) Economic Development : The economic development of a country depends upon the development of business. Hence, by utilizing the raw materials available in the country if we can develop industrialization, country could be developed. The economic prosperity of a country is judged by the number of large scale business existing in it. (6) Supply of Quality Goods : The supply of quality goods and services to the consumers at reasonable prices is the responsibility of the business. The business should aim at consumer satisfaction. A business cannot flourish in the long run if it ignores consumers. (7) Earning Foreign Currency : Business is the major source of earning foreign currency. By the development of business (industry, trade), finished goods can be exported to foreign countries and earn maximum foreign currency. Such foreign currency again can be used in importing necessary goods and services for the development of the country.

Importance of Business
1. 2. 3. Fulfillment of human wants Creation of utility Utilization of natural resources 4. Employment opportunity 5. Economic Development 6. Supply of quality goods 7. Earning foreign currency 8. Self-sufficiency 9. Increase in government revenue 10. International relationship

(8) Self-Sufficiency : Business can play an important role in making the country self-sufficient. It should produce all those goods, which are imported from outside. A self-reliant country has more prestige in international community. (9) Increase in Government Revenue : The development of business also increase the government revenue. Industrial and business firms pay excise duty, income tax, sales tax, etc. to the government. As the number of business enterprises increase government revenue also increases. (10) International Relationship : By the development of industry and trade we can export-import goods with other countries.

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The people of different countries come in contact with each other. It creates cooperation, understanding and relations among various nations.

G.

SOCIAL RESPONSIBILITIES OF BUSINESS

Every business operates in the society. It uses society's resources and sells its production to the society and earns profit. Business and society are meant and exist for each other. Without the help of society, business cannot be operated. It can exist only if it fulfills its responsibility towards the society in the socially acceptable manner. Hence, fulfilling the responsibility towards society is the social responsibility of business. Every business should think that profit is his remuneration but social service is his main duty. Profit through service is the basis of the concept of social responsibility of business.

Business Organization's Social Responsibility

T O W A D S

Investors

Employees

Consumers

Community

Government

Figure 1.5 : Social Responsibilities Towards Various Groups / Stakeholders

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Social responsibility may be defined as the obligation of an organization to protect and enhance society within which the organization operates. Every business exists, operates and grows in the society. Hence, it must share his prosperity with those members of the society who have helped the business to prosper. It is concerned with welfare of society. It safeguards the interests of society. The growing power of pressure groups has added importance to social responsibility aspect. According to Keith Davis and Robert L. Blomstorm : Social responsibility refers to the obligation of decision makers to take actions which protect and improve the welfare of society as a whole along with their own interests. According to Richard Steers : Social responsibility focuses on what an organization does to society and what it does for society. The responsibility of business towards important interest groups of society may be summed up as follows: (1) Towards Investors Investors are the owners of business. They invest capital in the business and bear risks. In company investors are known as shareholders. Thus, a business owes a special responsibility towards investors. The responsibilities of business towards them are: a. Safety of Investment: Investors invest money in the business and bear risks. In return, business should provide safety to their capital investment. With this service, the business can win confidence and more people will try to invest in the business. Fair Return: The business should also provide fair return regularly on the investment of the investors. Participation: The business should encourage participation of investors in the management. full

b. c.

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d.

Information: The business should provide accurate and adequate information of the business from time to time to the investors. The progress of the business should be communicated at a regular interval. Utilization of Resources: The resources of the business should be fully utilized without any wastage. Wastage of resources will affect the profit of the business. Capital Appreciation: The capital is invested by the investors for a long period and no investor will like to invest if there is no chance of capital appreciation. Hence, the business should increase the value of capital invested by the owners.

e.

f.

Investors also have certain responsibilities, which they have to discharge to protect their own interests. They should wholeheartedly support and cooperate in the positive efforts of the organization. At the same time, they should appreciate the responsibility of the business to other sections of society -employees, consumers' community and the government. (2) Towards Employees (Workers) The employees are the greatest assets of a business. The success of an organization depends to a very large extent on the morale and whole hearted cooperation of the employees. The social responsibilities to the employees are: a. Fair Salary and Wages: The employees and workers should be given fair wages and salary considering the cost of living. They should not be exploited. Job Security: The job of employees should be well secured. Job security will make the employees tension free and they will be able to work with their full efficiency. Working Condition: The business should provide good working condition and secured working environment. The working environment should be clean, healthy and secured. Selection and Career Development: The selection of employees should be made impartially. Every employee should get equal chances of promotion. A modern business

b.

c.

d.

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organization must provide career development opportunities through training and development. e. f. Participation: Business should encourage employee participation in management and in ownership Welfare Activities: The business should take care of various welfare activities for the employees. Business should provide free quarters, health and medical insurance to the employees and assistance in children' education. There should be provision of retirement benefits like provident fund and pension to the employees. Labour Relations: Business should develop cordial labour relations. Business should encourage to develop good trade union leadership. Proper grievance handling system should be established. Recognition: Business should give proper recognition to good performance of employees. Their special skills and capabilities should be appreciated and rewarded. (3) Towards Consumers The business cannot be successful unless it satisfies the consumers. Consumer satisfaction is the key to satisfying organizational goals. The main responsibilities towards consumers are: a. Consumer Needs: The business should understand consumer needs and take necessary steps to satisfy those needs. It should produce goods and services that are needed and desired by the consumers. Supply Quality Goods and Services: Business should regularly produce and supply quality goods and services to the customers at reasonable prices. The goods should meet quality standards. Consumer Satisfaction: The goods manufactured by the business is used by the consumers. The quality, design, safety, and durability of the good have a direct effect on consumer satisfaction. The availability of quality goods at reasonable prices will enhance consumer satisfaction.

g.

h.

b.

c.

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d.

Marketing: The consumers should be provided with full information about the goods through advertisement or other sources. They should not be mislead by wrong claims about goods. After-sales Services: Business should provide with aftersales services to the consumers. Complaint Handling: Sometimes, the customers may be dissatisfied with whatever a business has offered and complain. Business should handle customers' complaints and inquires promptly and carefully. It should develop loyal customers. Research and Development: Business must regularly conduct research to know the changing tastes, interests and preferences of the customers. Similarly it should conduct research and development for improving the quality of the product and introducing new products. Avoid Unfair Trade Practices: Business must avoid unfair trade practices of hoarding, black marketing, and adulteration. Consumers should not be exploited (4) Towards Community (Society)

e. f.

g.

h.

The existence of a business depends on the well wishes of the whole community. Hence, it has a lot of responsibility to the community. These responsibilities are: a. Utilize Resources Optimally: Natural resources are used as inputs by the business. These resources are depleting at a fast rate. Hence, business must optimally utilize the natural resources. The scarce resources should be saved by finding out alternative sources. Pollution Control: The industrial waste has created a problem of environmental pollution. Pollution control has become a global issue at present. The pollution of air and water are creating problems for the society. Therefore, business should handle problems of pollution and solid waste properly. It should protect the environment where it operates. Employment Generation: Business should generate employment for local community as it operates in the local

b.

c.

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community. It should also assist in he overall development of the locality. d. Community Welfare: Business should set apart of the profits for community welfare activities. It should participate in community welfare programs such as promotion of education, medical facilities, and population control. (5) Towards Government Business activities cannot be performed properly without the protection of the government who is also the best protector of social welfare. It should be conducted according to the rules and regulations of the government. The obligations of business organization to the government are: a. Legal Provisions : Business must be conducted legally and follow legal provisions. It should comply with the various laws of the country. Tax Payment : Business should pay regularly all taxes to the government as per law in time. It should be honest in paying taxes. Support the Government : Business should support the government in its efforts to solve national problems such as unemployment, inflation and regional imbalance in economic development. It should also help Government to stop blackmarketing. It should voluntarily support in Government efforts aimed at improving the quality of life. Provide Business Information : The Government needs business information for planning purposes. Business must provide necessary information and advice to frame favourable policies, plans and laws for business.

b.

c.

d.

In fact government has also the responsibility towards business to create adequate business environment. The government has to develop the necessary infrastructure, adequate rules and regulations, provide facilities and encourage genuine entrepreneurs, and attract productive investments for developing healthy business environment.

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Argument for and Against Social Responsibility

There are two opposing views of social responsibility. On the one hand classical view believes that business has only one responsibility--to maximize profits for the shareholders. On the other hand is the socio-economic view, which holds that the responsibility goes beyond making profits to include protecting and improving the society. Some organizations consider business as economic activity, which has the sole objective of earning profit. Hence, the major arguments against the social responsibilities are as follows: (1) Loss of Profit Maximization: The primary task of business is to maximize profit by focusing strictly on economic activities. Social involvement could reduce profits. (2) Costs to Society: Social obligations can be very expensive and may cause firms to forgo attractive business investments. In the final analysis, society must pay for the social involvement of business through higher prices. (3) Lack of Social Skills: Most businessmen do not have the skills and training to work effectively with social problems. Their training and experience is with economic matters and their skills may not be pertinent to social problems. (4) Dilution of Purpose: The pursuit of social goals may dilute the economic productivity, divide the interests of its leaders, and weaken business in the marketplace. The result would adversely affect the both economic and social roles. (5) Weaken International Balance of Payment: Social involvement can weaken the international balance of payment. The cost of social programs would be added to the price of the product. Thus, selling in international markets would be at a disadvantage when competing in other countries, which do not have these social costs to bear. (6) Enough Power: Business has a lot of power already. If they pursue social involvement they will have even more power and influence, which can be misused.

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(7) Lack of Accountability : There is a lack of accountability of business to society. Unless accountability can be established, business should not get involved. (8) Lack of Support: There is no complete support for involvement in social actions. Consequently, disagreements among groups with different viewpoints will cause friction. Similarly the major arguments supporting a major role for the social responsibility of organization (business) are as follows: (1) Changed Public Expectations: Public needs have changed, leading to changed expectations. Society gives business its charter to exist, and consequently has to respond to the needs of society to remain viable in the long run. Society expects that business organization should also help to solve environmental problems. (2) Better Environment: Social responsibility creates a better environment for business. Both society and business benefits from it. Society gains through better neighbourhoods and employment opportunities where as business benefits from a better community. Community is the source of its work force and consumer of its products. Social responsibility is essential for long term survival and growth of business in society. (3) Less Government Regulations: Government regulates business in the interest of general public. Social involvement discourages additional government regulation and intervention. The result is greater freedom and more flexibility in decision making for business. If business fails to assume social responsibilities, the government may enact legislative measures compelling it to undertake such responsibilities. (4) Public Image: Social involvement creates a favorable public image. Organizations that make clear and visible contribution to society can achieve enhanced reputation and greater market share. Organizations need to improve their image to attract customers, employees, and investors. (5) Balance of Responsibility and Power: Business has a great deal of social power which should be accompanied by an equal amount of responsibility.

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(6) Shareholder Interest: Organizations that make contributions to society can achieve enhanced reputation and garner greater market share for their products. Thus, business will prosper from the social involvement. Hence, it may be in the interest of shareholders. (7) Business has the Resources: Business has a reservoir of management talent, functional expertise and capital. Therefore, business should try to solve social problems, which other institutions have not been able to solve. After all, business has a history of coming up with novel ideas and well known for innovative ability. (8) Prevention is Better than Curing: It is better to prevent social problems through business involvement than to cure them. It may be easier to help the hard-core unemployed than to cope with social unrest. ARGUMENT FOR AND AGAINST SOCIAL RESPONSIBILITY Argument For 1. 2. 3. 4. 5. 6. 7. 8. Changed public expectations Better environment Less Government regulations Public image Balance of responsibility and power Shareholder interest Business has the resources Prevention is better than curing 1. 2. 3. 4. 5. 6. 7. 8. Argument Against Loss of profit maximization Costs to society Lack of social skills Dilution of purpose Weaken international balance of payment Enough power Lack of accountability Lack of support

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IMPORTANT QUESTIONS
Short Answer Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 1. 2. 3. Define business. Explain characteristics of business. What is industry ? Explain the various types of industry. What is commerce ? Explain the various activities involved in commerce. What is industry ? Explain the inter-relationship between industry, commerce, and trade. What are the major functions of business ? Explain. Explain the economic and human objectives of business. Explain the economic and social objectives of business. Explain the social responsibilities of business towards investors and consumers. Explain the social responsibilities of business towards employees and community. Do business have social responsibility ? Support your answer. What is business ? Explain the importance of business. What is business ? Explain the components of business. Describe the objectives of business. What is social responsibilities of business ? Describe the responsibilities of a business towards various groups.

Long Answer Questions