Académique Documents
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UNIT-1
Business and new economic environment
Characteristic features of business; Features and evaluation of sole
proprietorship; Partnership; Joint stock company; Public enterprises and their
types; Changing business environment in post- liberalization scenario.
What is Business?
It is understood as the organized efforts of enterprises to supply consumers with goods and
services for a profit. Contemporary goals of Business:
Profit
Growth
Market leadership
Customer Satisfaction
Employee Satisfaction
Quality Products & Services
Service to the Society
Commercial activity: An organization or economic system where goods and services are
exchanged for one another or for money.
Macroeconomic influences are broad economic factors that either directly or indirectly
affect the entire economy and all of its participants, including your business. These factors
include such things as:
o Interest rates
o Taxes
o Inflation
o Currency exchange rates
o Consumer discretionary income
o Savings rates
o Consumer confidence levels
o Unemployment rate
o Recession
o Depression
Microeconomic factors influence how your business will make decisions. Unlike
macroeconomic factors, these factors are far less broad in scope and do not necessarily
affect the entire economy as a whole. Microeconomic factors influencing a business
include:
o Market size
o Demand
o Supply
o Competitors
o Suppliers
o Distribution chain - such as retailer stores
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Definition of firm:
Hansn: The firm may be defined as an independently administered business unit.
“A firm is a business unit which hires productive resources for the purpose of producing goods
and services”.
From the above features and characteristics of a firm, it will be clear that a firm has to
perform several functions simultaneously – i.e. to produce a commodity, to sell and distribute
the commodity, to advertise the commodity and to perform all those things which will be
required to survive competition. To cap it all, the firm is expected to make as much as
possible. Theoretically speaking, a firm is expected to organize all the factors of production in
the most profitable manner. If one studies the structure and function of modern firm the
above definitions will appear to be too simple, because in modern times the firm is expected
to perform so many other functions.
Formerly, the entrepreneur was taken to be an independent factor of production. Even today
the entrepreneur is no doubt a very important factor of production but he has become so
highly that it is very difficult to separate him from the production unit of the firm because
ultimately the will to produce is provided by the entrepreneur. The mere presence of all the
factors of production and a market does not guarantee production. The will be to produce is
very important and it cannot be separated from the entrepreneur.
1. Easy to start and easy to close: The form of business organization should be such that
it should be easy to start and easy to close. There should not be hassles or long
procedures in the process of setting up or closing the business. The particulars on the
2. Division of labour: There should be possibility to divide the work among the available
owners. The idea is to pool the expertise of all the people in business and run the
business most efficiently.
3. Large amount of resources: Large volume of business requires large volume of
resources. Some forms of business organizations do not permit to raise larger
resources. Select the one which permits to mobilize the large resources.
4. Liability: The liability of the owners should be limited to the extent of money invested
in business. It is better if their personal properties are not brought into business to
make up the losses of the business.
5. Secrecy: The form of business organization you select should be such that it should
permit to take care of the business secrets. We know that century old business units
are still surviving only because they could successfully guard their business secrets.
6. Transfer of ownership: There should be simple procedures to transfer the ownership
to the next legal heir.
7. Ownership, management and control: If ownership, management and control are in
the hands of one or a small group of persons, communication will be effective and
coordination will be easier. Where ownership, management and control are widely
distributed, it calls for a high degree of professional skills to monitor the performance
of the business.
8. Continuity: The business should continue forever and ever irrespective of the
uncertainties in future.
9. Quick decision making: Select such a form of business organization which permits you
to take decisions quickly and promptly. Delay in decisions may invalidate the relevance
of the decisions.
10. Personal contact with customers: Most of the times, customers give us clues to
improve business. So choose such a form which keeps you close to the customers.
11. Flexibility: In times of rough weather, there should be enough flexibility to shift from
one business to the other. The lesser the funds committed in a particular business, the
better it is.
12. Taxation: More profit means more tax. Choose such a form which permits to pay low
tax.
A. Definition: Individual or sole proprietorship which is also called sole trader ship or
sole single entrepreneurship or proprietary firms is the most common, the
simplest and the oldest form of business organization.
2. PARTNERSHIP:
It is basically a relation between two or more persons who join hands to form a
business organisation with the objective of earning profit. The persons who join hands
are individually known as ‘Partner’ and collectively a ‘Firm’. The name under which the
business is carried on is called ‘firm name’. Sultan Chand & Co, Ram Lal & Co, Gupta &
Co are the names of some partnership firms.
The partners provide the necessary capital, run the business jointly and share the
responsibility. You must be thinking how much capital each partner contributes? Do all
the partners jointly manage the business or can any of them manage the business on
behalf of others? Who will take the profits? If there is any loss then who will suffer the
loss? Yes, these are the few questions that might be coming to your mind. Actually,
when you invite your friends to start such a business, it should be the duty of all of you
to decide (i) the amount of capital to be contributed by each one of you; (ii) who will
manage; (iii) how will the profits and losses be shared. Thus, there must be some
agreement between the partners before they actually start the business. This
agreement is termed as ‘Partnership Deed’, which lays down certain terms and
conditions for starting and running the partnership firm.
This agreement may be oral or written. Actually, it is always better to insist on a
written agreement among partners in order to avoid future controversies.
Kinds of Partners: In a partnership firm you can find different types of partners. Some
may actively participate in the business while others prefer not to keep themselves
engaged actively in the business activities after contributing the required capital. Also
there are certain kinds of partners who neither contribute capital nor actively
participate in the day-to-day business operations. Let us learn more about them.
1. Legal formation
No single individual or a group of individuals can start a business and call it a joint
stock company. A joint stock company comes into existence only when it has been
registered after completion of all formalities required by the Indian Companies Act,
1956.
2. Artificial person
Just like an individual, who takes birth, grows, enters into relationships and dies, a joint
stock company takes birth, grows, enters into relationships and dies. However, it is
called an artificial person as its birth, existence and death are regulated by law and it
does not possess physical attributes like that of a normal person.
3. Separate legal entity
Being an artificial person, a joint stock company has its own separate existence
independent of its members. It means that a joint stock company can own property,
enter into contracts and conduct any lawful business in its own name. It can sue and
can be sued by others in the court of law. The shareholders are not the owners of the
property owned by the company. Also, the shareholders cannot be held responsible
for the acts of the company
4. Common seal
A joint stock company has a seal, which is used while dealing with others or entering
into contracts with outsiders. It is called a common seal as it can be used by any officer
at any level of the organisation working on behalf of the company. Any document, on
which the company's seal is put and is duly signed by any official of the company,
become binding on the company. For example, a purchase manager may enter into a
contract for buying raw materials from a supplier. Once the contract paper is sealed
and signed by the purchase manager, it becomes valid. The purchase manager may
leave the company thereafter or may be removed from the job or may have taken a
wrong decision, yet for all purposes the contract is valid till a new contract is made or
the existing contract expires.
5. Perpetual existence
A joint stock company continues to exist as long as it fulfils the requirements of law. It
is not affected by the death, lunacy, insolvency or retirement of any of its members.
For example, in case of a private limited company having four members, if all of them
die in an accident the company will not be closed. It will continue to exist. The shares
of the company will be transferred to the legal heirs of the deceased members.
6. Limited liability
In a joint stock company, the liability of a member is limited to the extent of the value
of shares held by him. While repaying debts, for example, if a person owns 1000 shares
of Rs.10 each, then he is liable only upto Rs 10,000 towards payment of debts. That is,
even if there is liquidation of the company, the personal property of the shareholder
can not be attached and he will lose only his shares worth Rs. 10,000.
The name of the public company ends with the word ‘limited’ (Ltd.)
Based on nationality : Based on nationality the companies can be divided into two
types :
1. Foreign Company: Foreign Company is a company incorporated outside India
but established a place of business within India. Foreign companies come
under the purview of the Indian Companies Act, 1956.
2. Indian Company: A Company incorporated in India under the Indian
Companies Act, 1956.
3. Types of Shares: The capital of a company can be divided into three types of
shares:
I. Equity or Ordinary Shares: Such shares form the main basis of the finance
of a company. The holders of such shares get divided only after the
preference shareholders are paid out of its profits. Hence they bear
maximum risk. This is because they do not get any divided if the company
does not make any profit. At times when profits high, they get much more
than the rate of dividend paid to preference shareholders.
II. Preference Shares: These shareholders enjoy a preferential or prior right
over equity shareholders to the profit of a company. They are entitled to a
fixed rate of dividend after paying interest on debentures and before any
dividend is paid to equity shareholders.
III. Deferred Shares: They are called the Promoters’ or Management’s of
Founders’ shares. The holders of such shares are paid dividend last out of
the profits left after meeting the claims of ordinary and preference
shareholders and reserve funds. Normally they are issued to promoters of
a company but they may also be issued to public. If dividend paid to other
classes of shareholders is restricted, the deferred shareholders will enjoy
a bigger share of profits. But if there are no profits, they do not get
anything.
Looking at the nature of the public enterprises their basic characteristics can be
summarized as follows:
(a) State Control: The public enterprises are owned and managed by the central or
state government, or by the local authority. The government may either wholly own
the public enterprises or the ownership may partly be with the government and partly
with the private industrialists and the public. In any case the control, management and
ownership remain primarily with the government. For example, National Thermal
Power Corporation (NTPC) is an industrial organization established by the Central
Government and part of its share capital is provided by the public. So is the case with
Oil and Natural Gas Corporation Ltd. (ONGC).
(b) Financed from Government Funds: The public enterprises get their capital from
Government Funds and the government has to make provision for their capital in its
budget.
(c) Accountability of public services: They are accountable to the public beause they
are accountable to the government which represents the people. Public enterprises
are not guided by profit motive. Their major focus is on providing the service or
commodity at reasonable prices. Take the case of Indian Oil Corporation or Gas
Authority of India Limited (GAIL). They provide petroleum and gas at subsidized prices
to the public.
(d) Excessive Formalities: The government rules and regulations force the public
enterprises to observe excessive formalities in their operations. This makes the task of
management very sensitive and cumbersome.
On the other hand public sector refers to economic and social activities
undertaken by public authorities. The enterprises in public sector are set up with the
main aim of protecting public interest. Profit earning comes next.
Statutory companies:
Statutory Corporation (or public corporation) refers to a corporate body created by
the Parliament or State Legislature by a special act which define its powers, functions
and pattern of management. Statutory corporation is also known as public
Corporation. Its capital is wholly provided by the government. Examples of such
organisations are Life Insurance Corporation of India, State Trading Corporation etc.
The Statutory Corporation (or Public Corporation) refers to such organisations which
are incorporated under the special Acts of the Parliament/State Legislative Assemblies.
Its management pattern, its powers and functions, the area of activity, rules and
regulations for its employees and its relationship with government departments, etc.
are specified in the concerned Act. Examples of statutory corporations are State Bank
of India, Life Insurance Corporation of India, Industrial Finance Corporation of India,
etc. It may be noted that more than one corporation can also be established under the
same Act. State Electricity Boards and State Financial Corporation fall in this category.
The main features of Statutory Corporations are as follows:
(a) It is incorporated under a special Act of Parliament or State Legislative Assembly.
(b) It is an autonomous body and is free from government control in respect of its
internal management. However, it is accountable to parliament and state legislature.
(c) It has a separate legal existence. Its capital is wholly provided by the government.
(d) It is managed by Board of Directors, which is composed of individuals who are
trained and experienced in business management. The members of the board of
Directors are nominated by the government.
(e) It is supposed to be self sufficient in financial matters. However, in case of necessity
it may take loan and/or seek assistance from the government.
(f) The employees of these enterprises are recruited as per their own requirement by
following the terms and conditions of recruitment decided by the Board.
Government Companies:
Government Company refers to the company in which 51 percent or more of the paid
up capital is held by the government. It is registered under the Companies Act and is
fully governed by the provisions of the Act. Most business units owned and managed
by government fall in this category.
As per the provisions of the Indian Companies Act, a company in which 51% or more of
its capital is held by central and/or state government is regarded as a Government
Company. These companies are registered under Indian Companies Act, 1956 and
follow all those rules and regulations as are applicable to any other registered
company. The Government of India has organised and registered a number of its
undertakings as government companies for ensuring managerial autonomy,
operational efficiency and provide competition to private sector.
The main features of Government companies are as follows:
(a) It is registered under the Companies Act, 1956.
(b) It has a separate legal entity. It can sue and be sued, and can acquire property in its
own name.
(c) The annual reports of the government companies are required to be presented in
parliament.
(d) The capital is wholly or partially provided by the government. In case of partially
owned company the capital is provided both by the government and private investors.
But in such a case the central or state government must own at least 51% shares of the
company.
(e) It is managed by the Board of Directors. All the Directors or the majority of
Directors
are appointed by the government, depending upon the extent of private participation.
(f) Its accounting and audit practices are more like those of private enterprises and its
auditors are Chartered Accountants appointed by the government.
(g) Its employees are not civil servants. It regulates its personnel policies according to
its articles of associations.
Advantages of Public Enterprises:
1. Social Welfare: Some of the public enterprises like post and telegraphs are not
run for earning profit while other enterprises like HMT as in India run for profits.
But the profits earned by them are utilized for improving services rendered or
for further expansion of their activities. In certain fields the state enterprises
may work more efficiently than private enterprises. This is particularly the case
with public utility services for electricity, water railway service, etc.
2. Sufficient Capital: It is also quite likely that the private sector may not be in a
position to raise enough capital for a project or an industry. But the government
can raise any amount of capital from various sources for investment in any
project or an industry. Hence such projects industries are stated in the public
sector.
3. Large-Scale Production: On account of large scale production, they can enjoy
the economics of large-scale production because the government, has therefore
undertake such big investment in the interest of the society for a long period.
For ex: construction and management of river linking projects, etc.
4. Convertible profits: The profits based enterprises can convert their profits into
another enterprises which are facing survival problems in line with serving the
society and also for the equal development of the all departmental and other
enterprises for Nation’s growth.
5. Balanced Development: They can contribute to a balanced regional
development by locating public enterprises in less developed areas and thereby
reduce the regional income inequalities.
6. Control by people: the working of the public enterprises is subject to the
criticism of the people and the Members of Parliament. Hence, if there is
anything wrong in the working of the public enterprises, it would be set right.
So the public enterprises are ultimately controlled by the people themselves.
Disadvantages:
1. Inefficient management: The government officials may take a long time in
taking decisions as well as action. Hence the government enterprises may be
run with excessive social cost of operation. This may be so because all of them
may be possess much business experience.
2. Lack of Incentives: The public enterprises may not create incentives for hard
work for their workers. The managers may not take risk. This is because their
acts as questioned.
3. Bureaucracy and Corruption: Bureaucracy and corruption may obstruct the
growth of public enterprises. The bureaucrats may not take quick action
because they have followed the established procedures. Hence they may cause
losses to the public enterprises. This would involve a burden to the taxpayers.
4. Political considerations: Political considerations may determine appointments
transfers and promotions. Hence right man may not be placed in the right place.
Such a policy is detrimental to the efficient working of the public enterprises.
Further, bribery and corruption may predominate. Also an enterprise may be
located in a particular area out of the political rather than economic
considerations.
5. Transferring officials: If there might be frequent transfers of the government
officials, this would disturb the smooth working and also development plans of
the government enterprises.
Why Privatisation?
It is resorted to for any one or more of the following reason:
a. To raise revenues for the government through sale of assets of
public enterprises
b. To extend the State ownership to private entrepreneurs.
c. To improve efficiency through competition
d. To improve the performance of the a PSEs
Privatization may take in the following forms:
1. Liquidation: The assets of the Public enterprise, in case of liquidation, are sold
off to a private entrepreneur for a consideration
2. Management Buyout: Employees may form a cooperative and take over the
ownership of the PSE. They may raise the necessary finances form financial
institutions for this purpose. They also get dividends as owners.
3. Holding company pattern: A holding company is one which has working control
of one or more companies called subsidiaries. It was a part or whole of the
share capital of subsidiaries. The main purpose of holding company is to own
shares in other companies and to exercise control over the same.
4. Liberalization: It is as a strategy of privatisation refers to an attempt to permit
and promote competition in areas where previously there was none. Earlier
road transport was totally controlled by state road transport corporations.
Today, the government has permitted private bus operators to run their buses
on State Road Transport corporation (SRTC)routes.
5. Leasing: By this the govt. transfers the physical possession of PSE butnot its
ownership to a private agency with certain conditions and for a specific period.
After the expiry of the lease period the government takes back the possession
of PSE.
6. Denationalization: When the Govt. transfers the ownership of a public
enterprise to entrepreneurs in the private sector , the public enterprise is said
to be denationalized.
7. Joint venture: When part of the ownership (ranging from 25-50 %) in public
enterprise is transferred to the private sector, it is said to be a joint venture.
The percentage of transfer in the ownership is governed by a number of factors
such as govt. policy, financial conditions of PSE, etc.
8. Restructuring: The Govt. May prefer to restructure ailing or sick PSEs by
redefining or restructuring the whole set of operational or commercial activities
or just the issues governing financial matters.
9. Disinvestment: One of the main objectives of privatization is to raise resources
for the govt. In India, disinvestment is the process of withdrawing the
investments made by the govt. in a public enterprise. In keeping with the NIP of
1991, the govt. has been following a disinvestment strategy in respect of PSEs.
Disinvestment as a current trend has been discussed earlier under public sector
reforms.
10. Franchising or contracting out: when private firms are allowed and encouraged
to make bids to run services that were previously exclusively run by the public
sector, the work is said to be franchised or contracted out.
11. Operational strategies: Several measure can be initiated for the privatization of
a public enterprise without resorting to any of the above measures. It may
directed to:
a. Increase production by offering special incentives and overtime to the
workers
b. Outsourcing the public enterprises which doesn’t have the competition
c. Buy from the market by special tenders such items as may be costly to
produce internally
d. Raise funds from the National or International capital market and so on.
GLOBALISATION
It means ‘integrating’ the economy of a country with the world economy with a view
to eliminating supply bottlenecks, improving investment climate, providing a wide
choice of quality goods and services to the ultimate customers. In general globalization
is characterised by the following parameters:
Reduction of trade barriers among different countries across the world.
Creation of a conducive environment in which thre can be perfect mobility of
factors of production such as capital and human resources among countries.
Ensuring free flow of technology across the countries
Policy measures towards globalization:
1. Full Convertibility: A country’s currency is fully convertible when it allows its own
exchange rate to be determined in the international market without official
intervention. The govt. of India has been lifting exchange control measures in a phased
manner and is working towards full convertibility.
2. Liberalising imports: This is more of a strategic measure that makes available to
domestic producers quality machinery and other key inputs, which are likely to
facilitate quality output for exports. The gov. has in keeping with the requirements of
the World Banks to bear lowering import tariffs on goods, except those mentioned in
the negative list and allowing free import of all goods, including charges have been
drastically reduced to facilitate imports.
3. Attracting Foreign Capital: The size of foreign directo investment is one of the major
indicators of globalization of an economy. The NIP, 1991, announced a list of high
technology and investment priority industries where automatics permission was
granted for direct foreign investment upto 51% to 100% foreign equity. They can
invest in Indian capital markets provided they are registered with Securities and
Exchange Board of India (SEBI). They can use their trademarks in India, take back their
profits to their respective native countries, deal in immovable property in India etc.
and 100% DFI is allowed in select sectors such a pharma, tourism, infrastructure,
telecom, etc.
India and the WTO:
India was one of the 118 countries that signed the final Act of the Uruguay Round at
Marrakesh in April 1994, which paved the way for setting up of the WTO in 1995. India,
which was one of the founder members of general agreement in Tariffs and Trade
(GATT), has now become a founder member of the WTO. The WTO agreement was
ratified on December, 1994, and this has far reaching implications for strengthening
global trade and economic growth
It is to be noted that GATT which was promoted by 23 countries in 1947, including
India, was not a formal organization but only a legal arrangement to promote
international trade through tariff reduction, etc.
Environment in Post Liberalization Scenario:
Economic reforms, as envisaged in NIP of 1991, are now 20 year old and there is now
ample evidence to assess their impact on Indian Economy. The Indian industry for over
40 years since independence was predominantly operating in a regulated and
protected economy and hence remained an underperformer. During the
implementation of LPG policies, it would sustain extremely well the pressures in the
new competitive environment.
The impact of economic reforms can be outlined as follows:
1. Attention to World Market: Many companies are setting their eyes on global
markets. With their prudent financial polities, they have emerged cash rich and with
liberal flow of foreign direct investments, they are poised to improve in world clas
ratings. For instance, Tata Steel emerged as the world’s fifth largest steel company
with its recent acquisition of Corus Group, UK. This many companies are now directing
their efforts towards the world market.
2. Improvement in Work culture: Everywhere, including in Govt. organizations, there
is noticeable change in the work culture. The employees have realized the need for
observing speed in response, customer focus and organisations have been focusing on
‘high performing work culture’. The workers/employees have become more quality
and cost conscious.
3. Focus on Capital Intensive Technologies/processes: For long time, the focus was on
labour intensive policies sand processes. Not considering the philosophy that ‘capital
intensive technologies will increase unemployment’, most industries have been
focusing on capital intensive technologies. So many ATMs set up by banks across every
urban area are an example for this.
4. Downsizing and Rightsizing: With a view to reducing the salary bill and enchancin
the productivity per employee, every organization, without exception, has reduced the
number of employees (headcount) significantly through voluntary retirement schemes.
5. Awareness and Stress on quality and R&D: The customer earlier used to trade of
between price and quality. This trend has changed now. The quality awareness levels
have considerably improved.
6. Scale Economies: It is common to find leading companies in every sector to
double/triple their volume of production to attain scale economics through rapid
technological growth and increased productivity.
7. Aggressive Branch Building: The market place became increasingly competitive in
view of domestic companies becoming more aggressive in promoting their brands and
foreign companies invading Indian markets through their cost-effective quality
Products/Services.
In extent of these, there have been many positive developments now encouraging the
Country to think in terms of strengthening these reforms further and moving to
second-generation reforms.
Compiled & Prepared by
N. Aruna Kumari
Asst. Professor in Mngt. Science
VNR VJIET