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Nature & organization
of business
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Factors of production
LandThis general term not only includes land itself but all
renewable andnon-renewable resources of nature. Ex: coal, oil, wood
etc.
LaborManual and skilled labour make up the workforce of the
business.
CapitalThis is not just finance to start the business, but also
all resources used inproduction. Ex: machines, computers, offices,
vehicles, etc.
Organization / Enterprise / EntreneurshipThis is the driving
force, provided by risk-taking individuals combining
factors of production into a unit that is capable of producing
goods andservices.
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Business functions
Finance
Marketing
HR management
Operation management
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Economic sectors
Primary sector
- All natural resources that a economy
posses, on which the people are depending.
Ex: Agriculture, fishing, mining, etc.
- Where nature contributes the major share
and man kind uses those inputs for their
existence.
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Secondary sector
- Those firms that manufacture and process
products from natural resources.
Ex: clothes making, cement, etc.
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Tertiary sector
- All those firms that provide services to
customers and other business.
Ex: Transportation, hotels, banking, consultancy,
other professions.
- In the developed countries this sector hasgrown in
importance.
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Changes in Economic structure
Importance in each sector changes over time.
Industrialization is the term used to describe
the growing importance of secondary sector in
developing countries.
This importance of each sector is measured
either of employment or output levels of whole
economy.
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Benefits of change in sector
Total national output (Gross Domestic Product)increases and this
raises average standards of living.
Increasing output of goods can result in lower importsand higher
exports of such products.
Expanding manufacturing businesses will result inmore jobs being
created.
Expanding and profitable firms may more tax to
thegovernment.
Value is added to countries output of raw materials
rather than just exporting these as basic,
unprocessedproducts
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Change from Secondary to Tertiary
The situation is reverse in developed economy, where peopleare
moving from secondary sector to tertiary.
This situation is termed as de-industrialization.
Rising incomes associated with living standards have led
consumers to spend much money in services rather than goods.
There has been substantial growth in tourism, hotels,
restaurants.
Rest of the world industrializes, so the developed economies
faces competition and these rivals tend to be more efficientand
use cheap labor.
This results in importing of goods taking away the
domesticsecondary sector firms.
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Problems of change in sector
Change of work in manufacturing can encourage a
huge movement of people from rural areas to towns
or urban areas, which leads to housing and social
problem. Import of raw materials and components are often
needed, which can increase the countries import cost.
School drop outs are increasing as more employment
is available in secondary & tertiary sector.
Much of the growth is because of MNCs.
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Types of business organization
Public sector
Organizations accountable & controlled by
government.
No out side or private individual investment.
These are argued to be significant in nature where
no private business organizations are allowed.
Ex: Defence, public law and order (police force),prison
services, education services, etc.
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Private sector
Business owned and controlled by individuals or
groups.
In every country most of the businesses are
controlled by private sector.
The main objective of these are to earn maximum
profits.Ex: Pepsi, Honda, Microsoft, etc.
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Reasons to start business
Observed opportunity or gap in the market.
Do the same work by starting a business and be a
employer, not a employee.
Family business.
Having surplus cash reserves, encouraging to start
your own business.
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Identify market opportunity
Continues study of current market goods or
services.
Identify the gap in the market.
Create opportunity for the new goods orservices.
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Possible challenges in business
Finance
No huge capital
No sufficient security for bank loans
No much support from bank for new firms
Location
Initially it is very costly to hire good location
Not suggestible to start in remote or non business
areas
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Possible challenges in business
Customer confidence
Brand loyalty
Reputation in customer support
After sale services
Poor cash flow
Improper managing of cash flow
Chasing customers for payment
Slow down payment to suppliers
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Possible challenges in business
Entrepreneur interest in perpetual existence of
business
HR managerial skill
Motivate employees
Care for employee
Encourage employee idea or though for
development
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`Private Sector Organizations
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Sole Trader
Single ownership firm, business and business
man are one and the same
All the business activities are managed by one
person
All profits & losses are born by one individual
No legal formalities Unlimited liability
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Advantages of Sole trading business
Easy to set upno legal formalities
Owner have complete controlnot answerable
to any body else
Able to choose times and patterns of working
Owner keeps all profits
Establish close relationship with employee andcustomers
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Disadvantages of Sole trading
business
Unlimited liabilities
Difficult to raise additional capital
Lack of continuity Intense competition from other bigger firms
in
the market
Lack of specialize in area of business Long hours often
necessary to make business
pay
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Partnership Organization
Agreement between two or more people to carry on
business together to earn profit.
This does not create a separate legal entity.
Liability is unlimited.
No legal formalities are required to draw partnership
deed between all the partners.
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Advantage and Disadvantages
Partners may specialize indifferent areas of
businessmanagement.
Shared decision making
Additional capital injected by
each partner. Business losses are shared among
partners.
Greater privacy and fewer legalformalities than corporate
organizations
Unlimited liability for all partners
Profits are shared
No continuity, as in case of deathof partner, they need to
reformedthe deed and business.
All the partners are bound by thedecisions of any one of
them.
Not possible to raise capital fromselling shares.
Lose independence in decision
making
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Limited Companies
Private limited & Public limited companies
Separate Legal Entity
Perpetual Existence
Limited Liability
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Advantages of Limited Co.,
Shareholders have limited liability.
Separate legal personality.
Continuity. Ease of buying and selling of shares for
shareholders, this encourages investments in
companies.
Access to substantial capital source.
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Disadvantages of Limited Co.,
Legal formalities in formation.
Cost of business consultants and financial
advisers when creating such a company.
Share price fluctuationsome times beyond
the control of company, Ex: state of economy.
Disclosure of financial information to public.
Directors influenced by short-term objectives
of major investors.
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Non-Profit & Non-Government.
Organizations
These organizations are established for service
to society.
Their intension is service and not profit.
NGOs are involved in economic development
and on humanitarian issues.
These organizations are give tax rebate or
exemption, based on the service rendered to
the society.
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Public & Private Enterprise
Public Private Partnership (PPP)
Forms of cooperation between public authorities and the
world of business which aim to ensure the funding,
construction, renovation, management or maintenance of
infrastructure or the provision of service.
Private finance initiative (PFI)
This PFI is a form of (PPP) that marries a public
procurement programme, where the public sector purchasescapital
items from the private sector, to an extension of
contracting-out, where the public services are contracted
from private sector.
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The key difference between PFI and
conventional ways of providing public services
is that the public does not own the asset. The
authority makes an annual payment to theprivate company who
provides the building
and associated services, rather like mortgage.
