Tag: Auditing and Reporting Bangalore University b.com Notes

The economic concepts of the long run and the short run have become part of everyday language. Managerial economists are also concerned with the short-run and long-run effects of decisions on revenues as well as on costs. The actual problem in decision-making is to maintain the right balance between the long-run and short-run considerations. A decision may be made on the basis of short-run considerations, but may in the course of time offer long-run repercussions, which make it more or less profitable than it appeared at first.

The time perspective concept states that the decision maker must give due consideration both to the short run and long run effects of his decisions. He must give due emphasis to the various time periods. It was Marshall who introduced time element in economic theory.

The economic concepts of the long run and the short run have become part of everyday language. Managerial economists are also concerned with the short run and long run effects of decisions on revenues as well as costs. The main problem in decision making is to establish the right balance between long run and short run.

In the short period, the firm can change its output without changing its size. In the long period, the firm can change its output by changing its size. In the short period, the output of the industry is fixed because the firms cannot change their size of operation and they can vary only variable factors. In the long period, the output of the industry is likely to be more because the firms have enough time to increase their sizes and also use both variable and fixed factors.

In the short period, the average cost of a firm may be either more or less than its average revenue. In the long period, the average cost of the firm will be equal to its average revenue. A decision may be made on the basis of short run considerations, but may as time elapses have long run repercussions which make it more or less profitable than it at first appeared.

illustration:

The firm which ignores the short run and long run considerations will meet with failure can be explained with the help of the following illustration. Suppose, a firm having a temporary idle capacity, received an order for 10,000 units of its product. The customer is willing to pay only Rs. 4.00 per unit or Rs. 40,000 for the whole lot but no more.

The short run incremental cost (ignoring the fixed cost) is only Rs. 3.00. Therefore, the contribution to overhead and profit is Rs. 1.00 per unit (or Rs. 10, 000 for the lot). If the firm executes this order, it will have to face the following repercussion in the long run:

(a) It may not be able to take up business with higher contributions in the long run.

(b) The other customers may also demand a similar low price.

(c) The image of the firm may be spoilt in the business community.

(d) The long run effects of pricing below full cost may be more than offset any short run gain.

Haynes, Mote and Paul refer to the example of a printing company which never quotes prices below full cost due to the following reasons:

(1) The management realized that the long run repercus­sions of pricing below full cost would more than offset any short run gain.

(2) Reduction in rates for some customers will bring undesirable effect on customer goodwill. Therefore, the managerial econo­mist should take into account both the short run and long run effects as revenues and costs, giving appropriate weight to most relevant time periods.

The economic development of a country is measured by the development of commerce and industry. The development of business activities in India has been going on with the changes in civilisation. There was a time when there was no commerce at all and now its development has brought the whole world together. There have been different stages through which the development of trade and industry has passed.

Barter System:

Barter is a system of exchange of goods for goods. The earlier system of producing or percuring only for one’s needs gave way to barter system. With the increase in demand for more and more goods and surplus in one’s own production, there was a search for those who wanted to exchange goods for goods. The families started producing more than their needs.

The surpluses were exchanged with those goods which they needed. At a later stage some places were fixed where people used to come for exchanging their surplus products with others. The payment for using the services of other people was also in kind. Though commerce had come into being but it was at an elementary level. There was a problem of bringing together persons who needed each other’s goods. There was no common yardstick for measuring the value of goods to be exchanged.

Village Economy:

People started setting at particular places and began to sow seeds and rearing cattle on the land which they shared with community. These tribes started producing the things which they required and it was a system of self-sufficiency. With the advent of private ownership of land and cattle, the tribe system split into families. Some families started concentrating on occupations other than agriculture.

This led to exchange of goods for satisfying family needs. There was a system of village economy and all the requirements of the village were met by the people themselves. In order to facilitate exchange, a class of people called traders also emerged. Different families started specialising in producing different goods or taking up specific jobs. All these developments led to a self-reliant village economy.

Introduction of Money:

The difficulties faced in barter system compelled people to find out some common medium for exchange. In the beginning some commodities were used as a denominator for exchange. The commodities like stones, shells, cattle, feathers etc. were used to value the goods to be exchanged. Gradually, metals like iron, copper, bronze, silver and gold were taken to be more convenient, as a medium of exchange.

The metals were weighed and stamped to fix their value. The metal money facilitated trade not only in the country but also with foreign countries. The coins were also used to make payments for various types of services availed. It was ultimately the use of paper currency which led to all round development of business activities.

Town Economy:

With the use of money for exchange purposes, the volume of trade started increasing. The system of self-sufficiency gave way to division of labour. Instead of producing for family needs people started meeting needs of the whole village. People started specialising in different products. Certain places were being fixed where people could come to buy and sell goods.

There used to be weekly mandis or fairs where people from nearby villages would come to sell their surplus products and buy goods for their needs. The mandis or fairs became a regular feature. The increased volume of trade encouraged more and more division of labour. A separate class of traders and artisans came into existence.

These persons started settling at central places and established their business premises there. These places were known as towns and became trade centres for people living in villages. The villagers brought raw materials, cattle, milk, etc. to the towns for sale. The artisans would manufacture goods as per the needs of the people. The traders became a link between farmers and artisans.

The traders also started bringing luxury goods from outside places for sale in towns. As the journey was risky, the traders used to move in caravans and with the protection of armed men. The town economy gave further philip to commerce.

Industrial Revolution:

The word ‘Industrial Revolution’ is used to describe a series of changes in the industrial field in England during the period between 1760 and 1850. The changes of far reaching effects took place during this period. Generally, the word ‘Revolution’ is used for an abrupt change but in this case it is used to describe ‘fundamental change’.

A number of inventions took place in England which changed the entire technique of production. Some of the important inventions were the Spinning Jenny of Hargreaves, the Water Frame of Arkwright, the Mule of Crompton and the Power-loom of Cartwright. With the help of these inventions industrial production started at a mass scale.

The machinery was used for production, division of labour was introduced and the modes of transport were improved. The use of steam-engine in place of labour helped to increase production manifold. The use of machines required more capital investments and it led to the change in ownership from a sole proprietorship to a joint stock company.

According to Mr. L.C.A Knowles, “The so-called Industrial Revolution comprised of six great changes or developments-all of which were inter-dependent”.

These changes were:

(i) Development of Engineering:

Industrial revolution brought about a change in engineering skill. Engineers were required to design machines for textile and coal-mixing industries. The tool making for repairing ships and locomotives were also essential. There was a need for sufficient number of trained persons for taking up these jobs. The development of trained people was a part of industrial revolution.

(ii) Revolution in Iron-making:

The casting of iron for manufacturing machines was the other need of this revolution. A sufficient quantity and goods of iron was the need of the time. This development helped in producing sufficient number of machines.

(iii) Use of Steam Power in Textiles:

The use of mechanical devices in textile industry raised its production. First steam power was used in spinning. It created a surplus of yarn because man-made and traditional methods of weaving could not cope with the situation. It necessitated the use of power for weaving purposes also. The use of power was also extended to other aspects of textile industry.

(iv) Rise of Chemical Industry:

The use of power in textile industry necessitated suitable changes in the processes like bleaching, dying, finishing or printing so that production could be accelerated to keep pace with the output of piece goods. All this was possible only with the development of chemical industry.

(v) Development of Coal Mining:

The development of coal mining was inter-dependent on other developments. The coke was needed for smelting and refining iron and pig iron respectively in blast furnaces as also for producing the steam power which had also become the motive power of the industry.

(vi) Revolution in Transport:

The above-mentioned developments could not have been possible without the improved modes of transport. The horse driven carriages could not cope with the needs of large-scale production. The moving of inputs to centres of industrialization and then distribution of manufactured goods to places of consumption will be possible only with better transport means.

The industrial revolution led to large scale production. The production large scale reduced prices of goods. The commodities which were considered luxuries earlier were within the reach of a common man. The division of labour was introduced in factories and this led to specialisation.

Revolution in Transport and Communication:

Industrial production increased manifold after the mechanisation of production methods. There was a need for more and more markets to sell the goods. The discovery of new sea routes, opening of Suez Canal, introduction of railways, steamships, aeroplanes and automobiles revolutionised transport system. The movement of goods among different countries became easy and fast. The trade crossed national boundries.

The trade expanded from local to national and from national to international boundries. The facilities such as insurance and banking also gave philip to the development of trade. The revolution in communication methods has further facilitated the growth of business activities.

The use of telephone, telegraph, radio, T.V. etc. has helped in creating world market for goods. The latest edition of internet, intranet, e-commerce and advanced IT methods has radically changed the structure of trade and commerce both at national and international levels.

Advancements in Modern Business:

A number of advancements have occurred in commerce and industry in the last fifty years. These changes have revolutionised production and distribution.

Some of these changes are described as follows:

(i) Improved Methods of Production:

The use of latest technology has revolutionised production methods. The rate of production has increased substantially. Mechanisation and automation have also helped in controlling wastes and reducing cost of production. Productivity of workers has also gone up.

(ii) Large Scale Production:

The growth of multinational companies has increased the scale of production. The goods are not produced for local or national markets only but international demand is taken into consideration.

(iii) Specialisation:

The division of labour has led to specialisation in every industrial activity. Industrial units produce small number of components but specialise in them. Big industrial units also encourage specialisation in small units. The specialisation helps in raising productivity and competitive strength of the units. Even at international level countries produce only those goods in which they can specialise and have natural advantage. This specialisation has further increased international trade.

(iv) Research and Development:

The focus of industrial units is to devise better and better products on a regular basis. This has necessitated an emphasis on research and development. The thrust now is on revolution and not on evolution. Research and development helps in controlling costs, increasing production and raising standards of living of people.

(v) Expansion of International Trade:

International trade is expanding at a greater pace. The organisations like WTO are helping to bring together the whole world by removing various hindrances imposed by countries in the flow of goods and services. The whole world is now becoming one big market.

Growth of Public and Private Enterprises:

Industrialisation in India mainly started after 1947. British rulers wanted India to be the supplier of raw materials and consumer of their finished goods. After independence the government devised specific roles to public and private sectors. Basic and strategic industries were developed under public sector and consumer goods industries were left to be developed under private sector.

There were a number of changes in industrial policy from time to time. The public sector enterprises could not provide the required quantum for industrial development. It was in 1991 when government decided to limit the role of public sector only to a few industries and rests of the industries were left to be developed by private sector. Foreign entrepreneurs were freely allowed to set up unit in India.

A number of multinational companies, especially in automobile sector and durable consumer goods, have set up their manufacturing facilities in India. Foreign investors are allowed to own majority of equity in a number of Indian industries.

There are basic structural changes in Indian industrial sector in the last 15 years. Under world trade treaties every country has to .allow free access to foreign goods. Indian industries are now operating under intense competition from foreign undertakings. This competition has created awareness about quality and cost among Indian entrepreneurs. Indian exports are now finding good foreign markets.

Businessmen are exploring newer and better foreign markets for Indian goods. The government is also giving proper attention to export promotion. Though public sector is also continuing but the thrust has shifted to private sector. Private sector will have to show results in a fairly competitive environment.

Business is all around us and it is the mainspring of modern life. But very few people understand its true nature and its role in society. The study of business is essential for training oneself for a career. Study of the principles and practices of business organisation helps in understanding events in their right perspective and in tackling the problem of satisfying human wants through the use of available resources.

Every human being is busy in one activity or the other to satisfy his unlimited wants and desires. The sum total of human activities may broadly be divided into two categories-economic activities and non-economic activities. Economic activities are designed to attain and use the material resources of life. They are concerned with the production, distribution and consumption of goods and services. Human being as undertake economic activities in order to earn their livelihood.

According to L.R. Dicksee, “Business is a form of activity pursued primarily with the object of earning profit for the benefit of those on whose behalf the activity is conducted.” Business involves production and/or exchange of goods and services to earn profit, or to earn a living. However, profit is not the sole objective of the business. It may have other objectives like promotion of welfare of the workers and the general public.

“Business is an institution organised and operated to provide goods and services to society under the incentive of private gain.” :B.O. Wheeler

“All the activities including the production and sale of goods or services may be classified as business activities.”: William Spriegel

Characteristics

(i) Continuous Economic Activity:

In business an economic activity must be repeated again and again because if an entrepreneur does not do that it will not be treated as business. For example, if a person sells his own house, this activity does not come under the framework of business.

(ii) It is a Human Activity:

Business is a human activity which makes available goods and services to the society. It is not only dependent on making available the goods and services or the mere production of these but also depends on the exchange of value which is provided in return because if you are engaged in giving gifts to somebody then it will not be treated as business.

(iii) Profit Motive:

Any economic activity which leads to generation of profit is considered as business. Therefore, intension should be to earn profit otherwise if a person is engaged in social service or preaching about the religion cannot be treated as business.

(iv) Creation of Utility:

A man does not produce anything in a way, he only converts the form of resources which are provided by the nature. The business changes the form, place and possession utility of goods and makes them available in usable form. The business creates the utility of the things so that these can be consumed.

(v) Entrepreneurship:

One cannot run any sort of business without the element of entrepreneurship irrespective of the size of the business. Business can only be run by a daring person who has the ability to face risk of loss. Because no business is there where the element of risk is missing. Involvement of element of risk of loss makes the business world more challenging and to face financial challenge is not everybody’s cup of tea.

Objectives

A business objective may be defined as the purpose or the reason for the existence of the business in the society. The objective provides the direction towards which all business activities will be directed.

Though profit motive constitutes the primary objective of business activities, it should not lead us to conclude that profit is the sole objective of a business. The objectives of the business are to be laid down keeping in view the prevailing social, economic and political environment. Objectives of a business are multi-dimensional in nature.

They can be classified into four categories, namely:

(1) Economic objectives

(2) Social objective

(3) Human objectives

(4) National objectives

These objectives are inter­related in nature.

(1) Economic Objectives:

The economic objectives of a business are discussed below:

(i) Earning of Profits: Profits are needed to provide adequate reward to the entrepreneur and to provide funds for future growth. Entrepreneurship is one of the important factors of production. Just as other factors get their rewards, the entrepreneur must get reward for his efforts and taking of risk. Moreover, every businessman will like to see that the business he is managing should grow. This is possible only if the business earns sufficient profits for investing them into the business for expansion.

(it) Satisfaction of Customers: The survival of the business depends upon the satisfaction of customers. Thus, the business must aim at winning and satisfying the customers. Peter F. Drucker has rightly said, “There is only one valid definition of business purpose, i.e., to create a customer.” Customers are created through advertisement and sales promotion and delivering them ‘want satisfaction’.

(iii) Innovation: Innovation means developing new technology, new products and their multiple uses. Business cannot succeed without designing new products and finding their new uses.

(iv) Effective Utilisation of Resources: Business requires the use of men, machines and materials which are considered scarce resources. Every business is expected to make the best possible use of these resources. This objective can be achieved by employing efficient personnel, making full utilisation of machines and reducing wastage of raw materials.

(2) Social Objectives:

Social objectives of a business denote its obligations towards various stakeholders including customers, employees, community and the government.

The important social objectives include the following:

(i) Supply of Quality Goods at Fair Prices: The business must supply quality products as desired by the customers. The products should be durable, genuine (not duplicate) and safe. The prices charged for the goods should also be reasonable.

(ii) Adoption of Fair-Trade Practices: The business should follow fair business practices at all times. It should avoid anti-social practices like hoarding, black-marketing, over-charging the buyers, etc. It should also not indulge in unfair trade practices like spurious products or misleading advertisements.

(iii) Generation of Employment Opportunities: Every business should grow and expand its operations to create new jobs for the society. Further, a business should employ suitable people without any discrimination based on caste, creed, sex or religion.

(iv) Employees’ Welfare: It is an important responsibility of the business to promote the welfare of its employees. Besides providing fair wages, the business should also provide good working conditions, canteen facility, housing, transport and medical facilities, etc., to the employees.

(v) Community Service: Modern business organisations engage in community service to fulfil their social responsibility and thereby enhance their public image. Community service may be carried out by running dispensaries and schools, encouraging social activities and setting up training centres for the unemployed youths in the backward areas.

(vi) Protection of Environment: Every business house should ensure safety of the local surroundings and the protection of neighbourhood environment. It should take adequate measures to check air, water or noise pollution.

(3) Human Objectives:

A business is directly linked with two important groups, namely, (a) customers, and (b) employees. Both these groups must have a feeling of having been treated as human beings by the business enterprise. As human beings, customers expect courteous service and fair dealings from the business.

The employees look forward to the business enterprise for the following objectives:

(i) The employees are treated as partners in the business and not as inferior lot; they should get fair wages and healthy working conditions;

(ii) They are able to acquire and develop new skills in the process of employment; and

(iii) They derive job satisfaction.

(4) National Objectives:

These objectives are concerned with the goals of the nation.

Every business enterprise must contribute to the national goals such as:

(i) Achievement of self-sufficiency in production of goods and services,

(ii) Import substitution and export promotion,

(iii) Development of small scale and ancillary industries,

(iv) Development of backward regions,

(v) Economic development of the nation.

A modern business is that which use the latest in technology on their benefit, in order to maintain a competitive advantage over their competitors.

Committed deeply to delivering individual, social and environmental value. That is tightly aligning with the creation of economic value for its stakeholders.

The Modern Business would rethink these three key business areas:

• Customers experiences are changing. Customers expect seamless transactions and consistent interactions throughout their entire life cycle with the business i.e. from pre-sales to after-sales support.
• You need the right talent to succeed so that means having the right talent for the right job and having streamlined communication and collaboration to meet business goals.
• To perform the way market demands would require rich insights into the business and rapid planning cycles with the ability to agility of execution of strategies.

Modern business has a number of features. Understanding of these would help to appreciate and organize business activities in a highly professional way.

1. A Business Organization is an Economic Unit

Every business organization is engaged in transforming inputs into output to meet the requirements of the people. The selection of input and size of procurement will depend upon, the size of the organization. This would also depend upon the nature or product or service extended/by the business unit. All these are attended with the objective of making profit or surplus. Only when there is surplus achieved, can the business units grow. Hence creation of surplus in a business becomes the focal point and this is best achieved through optimal utilization of resources. That way, all business units have to achieve the maximum output with minimum inputs which in other words is the effort to achieve economic efficiency. Only economic efficiency can enable firms to be efficient in every other sense. Therefore, business organizations are only economic units in nature.

2. Business is an Economic Activity

Business involves organizing activities to satisfy human plants. These activities may result in the manufacture or production of a commodity or extension of a service. When a good or service is produced, resources are involved. Resources like human resources, physical resources and financial resources are all required to realize output to meet human needs. These resources are limited in supply, and so business involves identification of resources, evaluation of resource qualities, buying these resources and utilizing these resources. These resources being scarce in relation to their demand, the resources carry some value [i.e., price]. They cannot be procured at any cost to produce anything to meet human wants. So automatically selection among various resources come up which is made on the basis of requirement and cost. Once they are procured, then they are used in a very judicious manner so that there is no waste. That is optimal utilization-of resources is to be achieved. In this context, several decisions like resource selection, resource procurement, resource mix, resource utilization, etc. are all involved. As in all these stages, choice among alternatives is involved, every business activity is to be treated as economic in nature. Depending upon the business activity, the approach to selection among alternatives would differ. For example, in a manufacturing business, the choice is about input selection to supply quality output, in a service organization the choice is about-inputs and delivery process, in a government organization it is about production and equitable distribution of output, in an institution like bank, provision of various investment opportunities of short term and long term to the public, etc.

3. Business Decisions Making is essentially an Economic Process

All business decisions involve selection from alternatives. In other words, the rational choice of inputs is implied in every business decision. Hence, to be rational, a business unit goes through the process of : determining objectives, identifying opportunities, generating alternatives, classifying these alternatives as feasible and  in-feasible  alternatives, then rank the feasible alternatives on some criteria and then select those alternatives fulfilling the constraints. For example, if the objective of a business unit is to maximize profits, then this would call for minimizing cost and maximizing revenue. On the cost side, the business unit have to identify, procure and utilize resources in the optimal way and on the revenue side, the business unit should determine the price which would facilitate maximization of revenue. Price determination again would depend on various factors like demand, supply, competitive scenario, government interference, statutory compulsions, conflicting interests of the stake holders of the business, etc. Therefore, every decision made in a business would automatically depend on the economic process.

Changing Concept of Business

It has been stated already that the concept of business has undergone a vast change. From a producer driven stage business has become consumer centered and driven stage. While the earliest concept was ‘sell what is produced’ and the modern concept is ‘produce what is wanted.’ So every business depends on consumers and their ever changing needs. Any business unit which has successfully understood its customers and offer the product or service meeting their requirements alone is successful. But in this process, business units have to manage pressures from its owners and other stake holders. It should take into account the requirements of the workers and the trade unions. It should abide by the rules and regulations of a number of government agencies and institutions. It should meet the challenges and threats from competitors. Most important, it has to fulfill its social obligations. To survive every business unit has to also consider: the revolutionary changes in technology, market expansion, information explosion, competitor strategies. These are days when the consumers are better informed and so no business unit can afford to ignore consumer awareness and preferences. Technological development has brought with it the compulsion to use modern methods and techniques. Social obligations have made business units to meet pollution norms, etc. Trade union pressures have made them to design satisfactory service conditions for the work force. Then there is compulsion to provide for development of human resources in the organization to achieve organizational development. All these have made modern business ‘tight rope walking.’

Business & Profession

A Business Unit is most commonly recognized as an independent transaction-processing entity. It is defined as an organization or the subset of an organization which is independent in its accounting and operational functionality. A Business Unit is basically a profit making centre which has a prime focus to segment the market and be able to enhance the product offerings of the company. They usually have a separate clearly defined marketing plan, a well-defined marketing campaign and a detailed analysis of the competition, even when they are essentially a part of a bigger business entity.

In organizations, subsidiaries are often confused with business units. But these two have some significant differences. A company which is at least 50 percent owned by another company, more commonly known as the parent company is referred to as a subsidiary. The subsidiary is a complete corporate body, whereas the business units are sub-components or components of these subsidiaries. Business units are a smaller entity like a department or a functional group within a company which is responsible for handling the issues and affairs of that specific activity. Examples of business units include marketing, finance, operations, accounting, sales, human resources and research and development divisions.

Companies can have multiple independent business units into itself or as a branch, and each one of them is responsible for their own profitability. For example: General Electric is a company having 49 business units.

There are three important parameters that are usually seen as the success determining factors of a business unit:

• The degree of functionality and facility sharing between multiple SBUs.
• The autonomy and power delegated to a business unit manager.
• The way of handling new products in organizations.

Factor affecting Size of Business unit

1. Entrepreneurial Skill:

The most important factor of comes is the skill, initiative and resourcefulness of the entrepreneur. Everything depends on his judgment and ability. An entrepreneur of outstanding ability will be able to procure as much finance as he may need, hire the requisite labor force and build up a huge business. But an entrepreneur of moderate ability will run business on a moderate scale and a man of limited entrepreneurial skill will be content with a small business

2. Managerial Ability:

For running the routine part of the business, managers are appointed. If a firm is lucky enough to have a manager of great ability, the size of the firm will grow to considerable dimensions. On the other hand, a mediocre manager will have a small-sized firm to manage.

3. Availability of Finance:

It is finance which oils the wheels of business machine. If ample funds are available, it will help the entrepreneur to make his business grow to a big size. This requires a proper development, of the banking system so that savings of the community can be effectively mobilized and utilized in the development of trade and industry.

4. Availability of Labour:

Another factor on which the size of the firm depends is the availability of labour of requisite skill. After all, what can the entrepreneur even with large capital do, if the labour to man the business is not available? What is required is efficient and skilled labour.

5. Nature of Business:

Much also depends on the nature of business. If the business obeys the law of increasing Returns, it will grow to a big size, otherwise, in the case of diminishing returns it will remain stunted, and in the case of constant returns it will remain stagnant.

6. Extent of the Market:

The size of the firm also depends on the extent of the market. If the commodity in which the firm deals or which it-manufactures has a wide market, naturally the business will assume a large scale. But if the demand for the commodity is fitful or limited, the size of the firm will continue to be small. These are some of the factors on which the size of an average firm in a country depends.

Nature of an Organization

There are some common features of organization through which a clear idea about its nature can be obtained. These are indicated below:

Process

Organization is a process of defining, arranging and grouping the activities of an enterprise and establishing the authority relationships among the persons performing these activities. It is the framework within which people associate for the attainment of an objective.

The framework provides the means for assigning activities to various parts and identifying the relative authorities and responsibilities of those parts. In simple term, organization is the process by which the chief executive, as a leader, groups his men in order to get the work done.

Structure

The function of organizing is the creation of a structural framework of duties and responsibilities to be performed by a group of people for the attainment of the objectives of the concern. The organization structure consists of a series of relationships at all levels of authority.

An organization as a structure contains an “identifiable group of people contributing their efforts towards the attainment of goals.” It is an important function of man­agement to organize the enterprise by grouping the activities necessary to carry out the plans into administrative units, and defining the relationships among the executives and workers in such units.

Dividing and Grouping the Activities

Organizing means the way in which the parts of an enterprise are put into working order. In doing such, it calls for the determination of parts and integration of one complete whole on the other. In fact, organization is a process of dividing and combining the activities of an enterprise.

Activities of an enterprise are re­quired to be distributed between the departments, units or sections as well as between the persons for securing the benefits of division of labour and specialisation, and are to be inte­grated or combined for giving them a commonness of purpose.

1. Urwick defines organization as: ‘determining what activities are necessary to any purpose and arranging them as groups which may be assigned to individual.
2. Accomplishment of Goals or Objectives

An organization structure has no mean­ing or purpose unless it is built around certain clear-cut goals or objectives. In fact, an organization structure is built-up precisely because it is the ideal way of making a rational pursuit of objectives. Haney defines organization as: “a harmonious adjustment of specialised parts for the accomplishment of some common purpose or purposes”.

Authority-Responsibility Relationship

An organization structure consists of vari­ous positions arranged in a hierarchy with a clear definition of the authority and responsibility associated with each of these. An enterprise cannot serve the specific purposes or goals unless some positions are placed above others and given authority to bind them by their decisions.

In fact, organization is quite often defined as a structure of authority-responsibility relationships.

Human and Material Aspects

Organization deals with the human and material factors in business. Human element is the most important element in an organization. To accomplish the task of building up a sound organization, it is essential to prepare an outline of the organization which is logical and simple. The manager should then try to fit in suitable men. Henry Fayol says in this connection: “see that human and material organizations are suitable” and “ensure material and human order”.

From these features of organization, it emerges that, an organization is essentially an administrative ‘process’ of determining what activities are necessary to be performed for the achievement of objectives of an enterprise, dividing and grouping the work into individual jobs and, a ‘structure’ of positions arranged in a hierarchy with defined rela­tionships of authority and responsibility among the executives and workers performing these tasks for the most effective pursuit of common goals of the enterprise.

Characteristics

1. Economic activity:

Business is an economic activity of production and distribution of goods and services. It provides employment opportunities in different sectors like banking, insurance, transport, industries, trade etc. it is an economic activity corned with creation of utilities for the satisfaction of human wants.

It provides a source of income to the society. Business results into generation of employment opportunities thereby leading to growth of the economy. It brings about industrial and economic development of the country.

2. Buying and Selling:

The basic activity of any business is trading. The business involves buying of raw material, plants and machinery, stationary, property etc. On the other hand, it sells the finished products to the consumers, wholesaler, retailer etc. Business makes available various goods and services to the different sections of the society.

3. Continuous process:

Business is not a single time activity. It is a continuous process of production and distribution of goods and services. A single transaction of trade cannot be termed as a business. A business should be conducted regularly in order to grow and gain regular returns.

Business should continuously involve in research and developmental activities to gain competitive advantage. A continuous improvement strategy helps to increase profitability of the business firm.

4. Profit Motive:

Profit is an indicator of success and failure of business. It is the difference between income and expenses of the business. The primary goal of a business is usually to obtain the highest possible level of profit through the production and sale of goods and services. It is a return on investment. Profit acts as a driving force behind all business activities.

Profit is required for survival, growth and expansion of the business. It is clear that every business operates to earn profit. Business has many goals but profit making is the primary goal of every business. It is required to create economic growth.

5. Risk and Uncertainties:

Risk is defined as the effect of uncertainty arising on the objectives of the business. Risk is associated with every business. Business is exposed to two types of risk, Insurable and Non-insurable. Insurable risk is predictable.

6. Creative and Dynamic:

Modern business is creative and dynamic in nature. Business firm has to come out with creative ideas, approaches and concepts for production and distribution of goods and services. It means to bring things in fresh, new and inventive way.

One has to be innovative because the business operates under constantly changing economic, social and technological environment. Business should also come out with new products to satisfy the growing needs of the consumers.

7. Customer satisfaction:

The phase of business has changed from traditional concept to modern concept. Now a day, business adopts a consumer-oriented approach. Customer satisfaction is the ultimate aim of all economic activities.

Modern business believes in satisfying the customers by providing quality product at a reasonable price. It emphasize not only on profit but also on customer satisfaction. Consumers are satisfied only when they get real value for their purchase.

The purpose of the business is to create and retain the customers. The ability to identify and satisfy the customers is the prime ingredient for the business success.

8. Social Activity:

Business is a socio-economic activity. Both business and society are interdependent. Modern business runs in the area of social responsibility.

Business has some responsibility towards the society and in turn it needs the support of various social groups like investors, employees, customers, creditors etc. by making goods available to various sections of the society, business performs an important social function and meets social needs. Business needs support of different section of the society for its proper functioning.

9. Government control:

Business organisations are subject to government control. They have to follow certain rules and regulations enacted by the government. Government ensures that the business is conducted for social good by keeping effective supervision and control by enacting and amending laws and rules from time to time.

10. Optimum utilization of resources:

Business facilitates optimum utilization of countries material and non-material resources and achieves economic progress. The scarce resources are brought to its fullest use for concentrating economic wealth and satisfying the needs and wants of the consumers.

Business combinations are combinations formed by two or more business units, with a view to achieving certain common objective (specially elimination of competition); such combinations ranging from loosest combination through associations to fastest combinations through complete consolidations.

L.H. Haney defines a combination as follows:

“To combine is simply to become one of the parts of a whole; and a combination is merely a union of persons, to make a whole or group for the prosecution of some common purposes.”

Causes of Business Combinations:

(i) Wasteful Competition:

Competition, which is said to be the ‘salt of trade’, by going too far, becomes a very powerful instrument for the inception and growth of business combinations. In fact, competition, according to Haney, is the major driving force, leading to the emergence of combinations, in industry.

(ii) Economies of Large-Scale Organization:

Organisation of production on a large scale brings a large number of well-known advantages in its wake like technical economies, managerial economies, financial economies, marketing economies and economies vis-a-vis greater resistance to risks and fluctuations in economic activities. Economies of large scale operations, thus become, a powerful force causing increased race for combinations.

(iii) Desire for Monopoly Power:

Monopoly, a natural outcome of combination, leads to the control of market and generally means larger profits for business concerns. The desire to secure monopolistic position certainly prompts producers to join together less than one banner.

(iv) Business Cycles:

Trade cycles, the alternate periods of boom and depression, lead to business combinations. Boom period i.e. prosperity period leading to an unusual growth of firms to reap rich harvest of profits results in intense competition; and becomes a ground for forming combinations.

Depression, the times of economic crisis-with many firms having to only option to close down-prompts business units to combine to ensure their survival.

(v) Joint Stock Companies:

The corporate form of business organization is a facilitating force leading to emergence of business combinations. In joint stock companies, control and management of various corporate enterprises can be concentrated, in a ‘small group of powerful persons through acquiring a controlling amount of shares of different companies.

(vi) Influence of Tariffs:

Tariffs have been referred to as “the mother of all trusts”. (A trust is a form of business combinations). Tariffs do not directly result in combinations; they prepare the necessary ground for it. In fact, imposition of tariffs restricts foreign competition; but increases competition among domestic producers. Home producers resort to combinations, to protect their survival.

(vii) Cult of the Colossal (or Respect for Bigness):

In the present-day-world, business units of bigger size are more respected than units of small size. Those who believe in the philosophy of power and ambition, compel small units to combine; and are instrumental in forming powerful business combinations, in a craze for achieving bigness.

(viii) Individual Organising Ability:

The scarcity of organizing talent has also induced the formation of combinations, in the business world. Many-a-times, therefore, combinations are formed due to the ambition of individuals who are gifted with organising ability. The number of business units is far larger than the skilled business magnates; and many units have to combine to take advantage of the organising ability of these business brains.

Objectives

Eliminates Competition

Business combination helps in eliminating the tough competition among firms in market. In presence of a competition, many businesses are not able to earn suitable profits. They come together and set up their combination to work together for achieving common goals.

Proper Management

It leads to proper management of all business units that merged together into one unit. Small business cannot afford the services of quality managers which affects their performance. Combination of these units together enables them in hiring management experts.

Attains Monopoly

Acquiring market dominance is another major objective of business combination. Several businesses by forming a combination attain a monopoly position and enjoy a larger share in market.

Economy Scale

Business combination assist in availing the benefits of economies of scale. Small business units by merging together purchases large amount of raw materials at cheap rate and carrying out their production activities at a large scale. This brings down their cost of operations and increases their profit level.

Solves Capital Problem

It helps in overcoming the capital problems. Small business units lack funds for growing their activities. By associating with other units they easily gets funds for large scale production, buying advanced machinery and carrying out research activities.

Economic Stability

Combination of business impart them greater health to face crisis. By joining as one unit they can easily overcome times of political and economic instability.

Improve Product Quality

It leads to enhance the quality of products and level of production by firms. Combination enables them in sharing ideas, knowledge and technology with each other which results in better production. By combining the efforts they come up with new and advanced products in market.

Business combinations are of the following types:

(i) Horizontal Combinations.

(ii) Vertical Combinations.

(iii) Lateral or Allied Combinations:

Lateral combination refers to the combination of those firms which manufacture different kinds of products; though they are allied in some way.

Lateral combination may be:

(a) Convergent lateral combination:

In convergent lateral combination, different industrial units which supply raw-materials to a major firm, combine together with the major firm. The best illustration is found in a printing press, which may combine with units engaged in supply of paper, ink, types, cardboard, printing machinery etc.

(b) Divergent lateral combination:

Divergent lateral integration takes place when a major firm supplies its product to other combing firms, which use it as their raw material. The best example of such combination may be found in a steel mill which supplies steel to a number of allied concerns for the manufacture of a variety of products like tubing, wires, nails, machinery, locomotives etc.

(iv) Diagonal (or Service) Combinations:

This type of combination takes place when a unit providing essential auxiliary goods / services to an industry is combined with a unit operating in the main line of production. Thus, if an industrial enterprise combines with a repairs workshop for maintaining tools and machines in good order; it will be effecting diagonal combination.

(v) Circular (or Mixed) Combinations:

When firms engaged in the manufacture of different types of products join together; it is known as circular or mixed combination. For example, if a sugar mill combines with a steel works and a cement factory; the result is a mixed combination.

Forms of Business Combinations:

By the phrase ‘forms of combinations’, we mean the degree of combination, among the combining business units.

According to Haney, combinations may take the following forms, depending on the degree or fusion among combining firms:

(I) Associations:

(i) Trade associations

(ii) Chambers of commerce

(iii) Informal agreements

(II) Federations:

(i) Pools

(ii) Cartels

(III) Consolidations; Partial and Complete:

(а) Partial Consolidations:

(i) Combination trusts

(ii) Community of interest

(iii) Holding company

(b) Complete Consolidations:

(i) Merger

(ii) Amalgamation

The following chart depicts the above forms of business combinations: