Business Studies - Nature and Purpose of Business

Concept of Business

• All human beings perform activities to satisfy needs.
• These activities also aim to earn a livelihood and psychological satisfaction.
• Human activities are categorized into:
  • Economic activities
  • Non-economic activities

Economic Activity

• Activities performed for economic gain.
• Creates monetary income.
• Can be measured in terms of money.
• Performed regularly to earn income.
• Affects national income.
• Examples: Business, profession, employment, etc.

Non-Economic Activity

• Activities not performed for economic gain.
• Provides psychological satisfaction.
• Cannot be measured in monetary terms.
• Performed for a limited time.
• No impact on national income.
• Examples: Domestic works, social work, etc.

Employment

• An individual works regularly for another person.
• Receives remuneration in return.
• Examples: Working in offices, banks, companies, etc.

Distinction Between Business, Profession, and Employment

Definitions of Business

• Lewis H. Honey: “Business is a human activity directed towards producing or acquiring wealth through buying and selling goods.”
• Peterson and Plowman: “Business is an activity in which different persons exchange something of value whether goods or services for mutual gain or profit.”
• James Stephenson: “Business is the sum total of those processes which are engaged in the removal of hindrances of persons (Trade), places (Transport and insurance) and time (warehousing) in the exchange (Banking) of commodities.”

Modern Business

• No longer deals only with goods or services.
• Cannot be defined only in terms of profit.
• Has become an integral part of society.
• Includes activities such as:
  • Creating a customer.
  • Converting economic resources into goods and services based on customer preferences.
  • Innovating new products or services, leading to technological upgrades.
  • Marketing innovative products and services.

Characteristics of Business

• An Economic Activity
• Production or Procurement of Goods and Services
• Sales or Exchanges of Goods and Services for the Satisfaction of Human Needs
• Dealing in Goods or Services on a Regular Basis
• Profit Earning
• Uncertainty - Risk

Economic Activity

• Undertaken with the aim of earning money and livelihood.
• Not for psychological satisfaction.

Production or Procurement of Goods and Services

• Every business enterprise either produces or procures goods or services from producers.
• Goods may be consumer or industrial goods.
• Services include transportation, banking, insurance, etc.

Sales or Exchange of Goods and Services for the Satisfaction of Human Needs

• Business involves sale or exchange of goods or services.
• Production of goods or services for self-consumption is not business.
• Example: A farmer cultivating crops for sale is involved in business activity.
• There must be sale or exchange of goods or services in business.

Dealing in Goods or Services on a Regular Basis

• Must sell or exchange goods or services on a regular basis.
• Buying or selling goods or services once or twice is not business.
• Regularity of occurrence of a business transaction is a must.

Profit Earning

• The main purpose of business is earning profit.
• If the profit motive is missing, it cannot be considered a business transaction.
• No business can survive without earning sufficient profit.

Uncertainty of Return/Risk

• The presence of a risk factor is an important feature.
• There is always a possibility of losses.
• Market conditions may change, customer’s taste may change, there may be a strike, etc.
• There is always an element of risk involved.

Case study

• Roma bought a dress for $₹5,000$.
• Her friend liked the dress, so Roma sold it to her for $₹5,500$, making a profit of $₹500$.
• Later, Roma opened a shop selling readymade dresses.
• Selling the dress to her friend is NOT termed as business.

Objective of Business

• Objectives are the ends toward which the activities of the business are directed.
• Goals established to guide the company's efforts.
• Objectives should be specific.
• Example:
  • Specific: “Increase in sale by 10% in one year.”
  • General: “Increase in sale.”
• Businessmen have multiple objectives; they cannot follow only one.
• All objectives are important, but the most important is earning profit.
• Earning profit is the prime objective but cannot be the sole objective.
• Business objectives are classified into:
  • Economic Objectives
  • Social Objectives
  • Human or Personal Objectives

Economic Objectives

• The most important objectives.
  • Survival: To survive and exist in the competitive market for a long period by covering costs and earning profit.
  • Profit: Earning an adequate amount of profit is essential for survival, growth, and expansion.
  • Growth: Business organizations must grow and expand their activities.
• Economic objectives include:
  • Survival
  • Profit
  • Growth

Social Objectives

• Supply of Desired Quality of Products: Customers prefer satisfactory quality products at reasonable prices.
• Avoidance of Unfair Trade Practices: Includes avoiding black marketing, adulteration, hoarding, and overcharging.
• Employment Generation: Creating employment opportunities and helping in overcoming the problem of unemployment.
• Social or Community Service: Undertaking various projects of community services.
• Avoiding Pollution: Helping in solving the problem of pollution.

Other Objectives:

• Competitive salary
• Personal Growth
• Peer Recognition
• Special Benefits

Industry

• An activity that converts raw materials into useful products.
• Includes production and processing, as well as rearing and reproduction of animals or other living species.
• Rearing of animals also known as animal husbandry is the process of raising, feeding breeding and taking care of domestic animals
• Animals are reared for their meat, fiber, Milk, Egg and others products.
• Goods such as machinery, cement, etc. are called capital goods and are used in the production process.
• Classified into:
  • Primary Industry
  • Secondary Industry
  • Tertiary Industry

Primary Industry

• Concerned with extraction of natural resources and reproduction of living species.
  • Extractive Industry: Involves extraction of something from natural resources (e.g., minerals from earth, fish from rivers).
  • Genetic Industry: Involves rearing and breeding of living organisms: Birds, Plants, animals

Secondary Industry

• Makes use of products from Primary Industry as raw materials to produce finished products.
• Example: Mining of iron ore (Primary), steel manufacturing (Secondary).
• Two kinds of Secondary Industry:
  • Manufacturing Industries.
  • Construction Industries.

Manufacturing Industries

• Produces two types of goods:
  • Consumer goods: Directly consumed (e.g., cloth, oil, soap).
  • Industrial goods: For manufacturing consumer goods (e.g., machinery, equipment).

Types of Manufacturing Industries

• Analytical industry: Basic raw material is broken into different parts to produce finished products (e.g. crude oil to petroleum, diesel, kerosene).
• Synthetic industry: Two or more materials are mixed to manufacture a new product (e.g., chemicals mixed to produce soap, paints, cosmetics).
• Processing industry: Raw material is processed through various stages (e.g., textile, iron and steel, sugar industries).
• Assembly industry: Various finished products are combined to produce a new finished product (e.g., computers, television, watches, automobiles).

Construction Industry

• Concerned with the construction of buildings, dams, roads, etc.
• Uses products of manufacturing industries (e.g., cement, iron, steel).
• Products cannot be transferred or shifted to the market; they are constructed and remain at a fixed site.

Tertiary or Services Industry

• Provides services that facilitate the smooth flow of goods and services.
• Supports the activities of the primary and secondary industries.
• Examples:
  • Transport: Movement of goods.
  • Banking: Provides credit facilities.

Classification of Business Activities

• Classified into two broad categories:
  • Industry: Production or processing of goods and materials.
  • Commerce: Activities necessary for facilitating the exchange of goods and services.

Commerce

• Provides the necessary link between producers and consumers.
• Includes all activities necessary for maintaining a free flow of goods and services.
• Removes hindrances in the process of exchange (persons, place, time, risk, finance, etc.).
• The hindrance of persons is removed by trade.

Business Risk

• The probability of losses or inadequate profits due to uncertainties or unexpected events beyond control.
• A chance of incurring losses or less profit than expected.
• Demand for a product may decline due to change in tastes, fashion, or competitor’s policy.

Nature of Business Risk

• Arises due to uncertainty.
• Essential part of every business.
• Degree of risk depends on the nature and size of business.
• Profit is rewarded for taking the risk.

Causes of Business Risk

• Natural causes
• Human causes
• Economic causes
• Physical causes