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Factors Determining the Type of Business to Start

A person thanking about owning a business should examine the following factors:

* Capital Requirements: The starting of funds necessary to finance the operation.

* Risk: The amount of risk a person is willing to undertake by starting the business.

* Control: The amount of authority the owner can exercise.

* Managerial abilities: The skills needed to plan, organize, and control the business.

* Time requirements: The time needed to operate the business and provide guidance to the employees.

* Tax liability: The amount of taxes a business must pay to governments on earnings of the business.

Foundation of Business

For understanding business, understanding economics is essential. Economics is the study of how a society (people) chooses to use scarce resources to produce goods and services and to distribute them for consumption. This definition raises certain issues that are key to understanding economics: (1) resources (2) goods and services and (3) allocation of both resources and products.

1. Resources:

A nation’s resources consist of three broad categories like-

* Natural resources are provided by nature in limited amounts; they include –oil natural gas, minerals, timber and water.

* Capital resources are produced goods for the purpose of making other types of goods and services. Some capital resources are called current assets, have a short life and are used up in the production process. For example-fuel, raw materials, paper and money. Some assets are also considered as fixed capital like-factory buildings, machineries, personal computers, etc.

* Human resources are human talents, skills and competence, available in the nation.

2. Goods and Services:

A nation’s resources are used to produce goods and services that will meet people’s needs and wants. Needs lead to wants. For example, we use food and for that matter we want rice.

3. Allocation:

The process of choosing how resources will be used to meet a society’s needs and wants; includes the distribution of products to consumers.

Organizational Response to Natural Environment

Some organizations can take on active roles in promoting environmental awareness. Some managers choose merely to adhere to the legal requirements, while others go so far as to assert environmental values through their organization’s product and marketing. Mangers especially at higher levels-must monitor the external environment and try to forecast changes that will affect the organization. They may use strategic planning and organizational design to adjust to the entrainment.

Stakeholders are the people and groups of people who have an interest in what goes on in the organization. Stakeholder are of two types-

External Stakeholder : It includes customers, suppliers, government, special interest groups, the media, labor unions, financial institutions and competitors.

Internal Stakeholder : It includes- employees, owners, shareholders, and board of directors.

Differences between Natural and Organizational Environments

Managers must recognize the elements of internal organizational environments, such as stakeholders. In addition, managers must also understand the relationship of elements of the natural environments that can affect the organization.

Importance of External Environment

The rapid changes taking place in the external environment of organizations require increasing attention from managers. The external environment contains numerous resources upon which organizations rely. This means that organizations are inevitably affected by what goes on in the environment.

Types of Environment

Organizations have both an external and internal environment. Both environments consist of various dimensions and elements, which are shown in the following diagram:

Diagram: Different Types of Environment

1/ External Environment:

The external environment is everything outside an organization that might affect it. It is composed of two layers: the general environment and task environment.

A. General Environment:

The set of broad dimensions and forces in an organization’s surroundings that create its overall context. The general environment of most organizations has economic, technological, socio-cultural, political-legal, and events that have the potential to influence the organization in important ways.

Economic dimension: The economic dimension of an organization’s general environment is the overall health of the economic system in which the organization operates. Particularly important economic factors for business are inflation, interest rates, and unemployment, all of which affect demand for different products. During times of inflation, a company pays more for resources and must raise its prices to cover the higher costs. With the rise in interest rates consumers are less willing to borrow money and the company itself must pay more when it borrows. High unemployment reduces consumer’s purchasing power and thus lowers the market demand.

Technological dimension: The technological dimension of the general environment refers to the methods available for converting resources into products or services. Although technology is applied within the organization, the forms and availability of that technology come form the general environment.

Socio-cultural dimension: The socio-cultural dimension of the general environment includes the customs, mores, values, and demographic characteristics of the society in which the organization functions. Socio-cultural processes are important because they determine the products, services and standards of conduct the society is likely to value.

Political-legal dimension: The political-legal dimension of the general environment refers to government regulation of business and the general relationship between business and government, It’s important for three basic reasons. The legal system partially defines what an organization can and can’t do; pro-business or anti-business in other countries. The customs, norms, values and government rules of host country are likely to affect foreign business operation.

B. Task environment

The task environment consists of specific organizations or groups that influence an organization. The task environment includes, customers, suppliers, regulators and strategic allies or partners.

Competitors: An organization’s competitors are other organizations that compete with it for survival and growth. The most obvious resources that competitors vie for are customer dollars. Organizations may also compete for different kinds of resources like- quality labor, technological breakthroughs, patents and scarce raw materials.

Customers: A second dimension of the task environment is customers, or whoever pays money to acquire an organization’s products or services. Dealing with customers has become increasingly complex in recent years. New products and services, new methods of marketing and more discrimination customers have all add uncertainty to how businesses relate their customers.

Suppliers: Suppliers are organizations that provide resources for other organizations. It’s obvious that an organization that has strong relationship with its supplier helps to stimulate production and also pay off.

Regulators: Regulators are units in the task environment that have the potential to control, legislate or influence an organization’s policies and practices. There are two important kinds of regulators.

i) Regulatory agencies: Agencies created by the government to regulate business activities. For example- Environmental protection Agency (EPA), Occupational Safety and Health Administration (OSHA), Securities and Exchange Commission (SEC), Food & Drug Administration (FDA), Equal Employment Opportunity Commission (EEOC) etc.

ii) Interest Group: Groups formed by its own individual members to attempt to influence business. For example- National Organization for Women (NOW), Mothers Against Drunk Drivers (MADD), National Rifle Association (NRA) etc.

Strategic Allies: A final dimension of the task environment is strategic allies, which mean that an organization works together with one or more other organizations in a joint venture or under similar arrangement. Strategic alliances help companies get from other companies the expertise they lack. They also help spread risk. Managers must be careful, however, not to give away sensitive competitive information of them.

2/ Internal Environment: An organization’s internal environment consists of conditions and forces within the organization. The major elements of internal environment consist of owners, board of directors, employees, culture etc.

Owners: The owners of a business are the people who have a legal property right to that business. Owners can be a single individual who establishes and runs small business, partners who jointly own the business, individual investors who buy stock in a corporation, or company.

Board of Directors: Not all organizations have board of directors. Corporations, of course, are required to have them but non-incorporated business and many non-business organizations may go without board of directors. Board of directors may be called as board of regents, board plays a major role in helping set corporate strategy and seeing that it is implemented properly. The board also reviews all important decisions made by top management and determines compensation for top managers.

Employees: An organization’s employees are also a major element of its internal environment. When managers and employees embrace the same values and have the same goals, everyone wins. When managers and employees work toward different ends, or when conflict and hostility pervade the organization, everyone suffers.

Culture: The culture of an organization is the set of values that helps its members understand what the organization stands for, how it does things, and what it considers important. Culture is an especially important environmental concern for organizations. Managers must understand that culture is an important determinant of how well their organization will perform, culture can be determined and managed in a number of different ways.

Finally, we can say environment is an essential part of any organization’s operations. One important indicator of how well an organization deals with its environment is its level of effectiveness. Achieving organizational effectiveness is not an easy task. The key to doing so understands the environment in which the organization functions. With this understanding as a foundation, managers can then chart the `correct’ path for the organization as it positions itself in that environment.

Importance of Organization’s Environment

Environmental factors play a major role in determining an organization’s success or failure. It’s like a swimmer who needs to understand conditions in the water. The organization must understand the basic elements of its environment to properly maneuver them for success.

All organizations have both external and internal environments. The external environment is composed of general and task environment layers. The general environment includes nonspecific elements of the organization’s surrounding that might affect its activities in a broad and general sense. The task environment consists of specific dimensions of the organization’s surroundings that are very likely to influence the organization in more direct and immediate sense. The internal environment consists of conditions and forces within the organization. It includes owner, employees, board of directors and culture-each of which play an important role in the internal environment of the organizations.

Organizations and their environment affect each other in several ways. Environmental influences on the organization can occur through uncertainty, competitive forces, and turbulence.

Uncertainty is a major force caused by change and complexity that affects many organizational activities. A simple and stable environment creates the least uncertainty, and a compels and dynamic environment creates the most uncertainty.

Environmental turbulence can cause a major disruption for organizations. Environmental turbulence can often force an organization to respond to catastrophic events with little or no warning. Although organizations could have developed contingency plans for some of these crises, many of them are events that would have been hard to anticipate.

Different Types of Industries

Industry is the process of producing something with a view to earning profit. It is ordinarily viewed as the work of creating form utility. Industry can be classified into two main headings:

Primary industry

Secondary industry

1. Primary Industry: Primary industry can be classified into two groups:

a) Extractive industry: Its engaged in the extraction of the wealth from the land, sea, and air or from beneath the surface of the earth. Example mining, fruit gardening, farming, fishing, hunting, and so on.

b) Genetic industry: Its is engaged in the reproduction, breeding, multiplication of certain species of plants and animals. Example- nurseries, hatcheries, poultry firms, etc.

2. Secondary Industry: Secondary industries are the followings:

a. Manufacturing Industry: Industries which produce goods through the creation of form utility / utilities are called manufacturing industries. They are engaged in the conversion, or transformation of raw materials into finished goods, Examples- Flour mills, Cotton mills, steel mills, Bakery, Bricks etc.

b. Construction Industry : These industries include construction activities. Conversion, or transformation of raw materials into finished goods. Example-Flour mills, Cotton mills, Steel mills, Bakery, Bricks etc.

c. Processing Industry : Industries, which are engaged in the processing of certain raw materials to make them fit for final consumption. Example- Dairy, Backery etc.

d. Service Industry : Industries, which are engaged in rendering service only. Example- Insurance, Bank etc.

Meaning of plant, Firm and Industry

Plant: The term plant refers to a place or establishment where goods are produced. For example- Aziz pipe Factory, Coca-Cola etc.

Characteristics:

Where goods are produced?

From where goods are distributed and

From where goods are supplied?

So plant means a factory, shopping center, or any other establishment. The plant includes not only the building and machinery but also the workers employed therein.

Firm: The term firm refers to the business unit or undertaking which owns the plant, control and manage it. The firm is essentially a unit of control, ownership, and management. A firm may be engaged in the production of the same product or products. For example – Lever Brothers, Bashundhara etc.

Industry: Industry includes all the firms owning, controlling and managing the plants engaged in the production of similar products. For example, sugar industry, jute industry etc. In another way, the industry refers to that part of business activity, which is engaged with the raising, producing, processing, fabricating, extracting, and conversion of goods.

Why We Study Business? Or, Importance of Studying Business

The study of business will help us to increase our skills, sharpen our knowledge and understand the business and economic links among nations. There are some other reasons for which we study business:

1. Increasing dependence on others: Over the years, people have become more and more dependent on others. The knowledge of business is increasing the understanding of mutual dependence through business system. For example- you drive a car that is manufactured in Japan.

2. International opportunities: In the 21^st century, it has become indispensable for every one especially individuals educated in business to take exiting opportunities that will exist around the world. By studying business they can know how to start, operate, and sustain business successfully in the competitive world.

3. Improving standard of living: Standard of living indicates measure of how well a person or family is doing in terms of satisfying needs and wants with goods and services. This is possible through their knowledge of business. So we must study business to develop our standard of living.

4. Coping with change: As like as the world itself, business is also dynamic- always changing, Coping with both predictable and unpredictable events we must have to study business. If a man doesn’t study business, he/she is sure to fail to fit himself/herself in the business world.

5. Preventing misconceptions: Understanding business also prevents us accepting misconceptions, misinformation, and inaccurate data as truths.

6.Creating employment: Business creates more and more employment opportunities in various industries and trades for skilled as well as unskilled workers.

7.Division of labor: Division of labor implies the distribution of manpower in a community for obtaining the maximum production and for improving the quality of output.

8.Utilization of resources: A country’s resources are used to produce goods and services that will meet the needs and wants of people. By studding business, we can easily know how to use properly our resources such as capital resources (fuel, raw materials, paper and money), natural resources (oil, natural gas, mineral, timber, and water) and human resources (human talent, skills and competence, available in the nation.)

Objectives of Business

Success of business cannot be achieved without the setting of right objectives. Objectives may differ from one unit to the other in view of the nature of an organization. All businessmen do not have the same objectives to run the business. Sometimes some of the objectives are social welfare oriented; and some of the objectives are profit oriented. Objectives must be cleared to achieve the mission of an organization. Lists of business objectives generally include such factors as profit, survival, growth and social responsibility.

ü Profit: The main objective of business is to earn profit. The profit objective plays the major role in business. However, profit means things to different people because of their values, attitudes, and perceptions. Profit may be of two types-

ü Business profit: The difference between business income (revenue) and business expenses (cost) selling price minus all costs of making and selling a product including taxes.

ü Economic profit: What remains after expenses and opportunity costs are subtracted from income. Opportunity cost indicates the cost of choosing to use resources for a purpose, which results in sacrificing the next best alternative for the use of those resources.

ü Survival: Survival is the prime objective of business. Survival is very essential to ensure other objectives of business and to compete in the competitive global market.

ü Growth: Growth is inevitable for a firm to be successful. The following indicators can measure growth of a firm:

Increasing market share

Increasing productivity

Long term relationship with customers, suppliers, competitors, and marketing intermediaries.

Harmonious labor relations

Good corporate culture.

ü Social Responsibility: Profit earning cannot be the sole motive of business activity. Businessmen have a social responsibility that must be met. Moreover, business organization produces goods and services to generate profit. At the same time, it must have some impact on society as well as the whole community. The responsibility of businessman is to provide the goods and services in that way, which are not harmful to the society. Besides another responsibility of businessmen is to supply goods and services at a fair price.

In addition to fulfilling numerous roles, businessmen need to perform some specific objectives such as-

Creation of employment

Creation of markets

Using creativity

Investment of capital

Exploitation of resources

Characteristics / Features of Business

Business is the activity performed by and individual or a group of people with a view to earn profit within the government rules and regulations. Some of the important characteristics are given below:

Profit: This is a very important criterion of business that distinguishes it from other types of activities. People start business just to earn profit although there is the possibilities of loss at least in the initial stages.

Risk: Risk is inherent in business although the degree may, vary from one kind to another. It is possible that there may be loss instead of gain. There is no business activity, which is not subject to loss.

Legality: The subject matter of business is to be legal. Business can operate through government rules and regulations of a country. Illegal business is not be considered as business.

Creation of utilities: Business leads to the creation of utilities and thus satisfies human wants by modification of product features, size, color, style, design etc.

Exchange of goods and services: Exchange of goods and services is the foundation of business. If there exists no exchange function there cannot be any business. Exchange function is the means to an end of maximizing profits.

Forecasting: Forecasting is indispensable for growth and survival of a business. Some of the factors that a businessman must have to predict are:
Demand and supply of the product
Qualities of the product
Existing and potential customers of product
Observation of the competitors’ movement
Technological changes
Economic and political changes etc.
Rendering and service to the society: Rendering service to the society is another important feature of business. Business must have some responsibility to wards society as well as the whole community. The responsibility of businessman is to deliver the goods and services in way that is beneficial to the society.

Elements/Components of Business

Business includes all activities concerned with the production, sale or exchange of goods and services with the objectives of earning profit. There are three components of business and these are stated below:

Trade: Trade is the final sage of business activity ans it involves sales and purchase of goods. It can be divided into two types such as-
Home Trade: When trade takes place within the national boundaries.
Foreign trade: When trade takes place across the national boundaries.

Commerce: It is the process of buying, selling and other activities which facilitate trade such as storing, packaging, transportation, insurance, banking, finance and marketing promotion. The principal function of commerce is to remove the hindrances of person, place, time, exchange and knowledge.

Industry: Industry refers to that part of business activity which is engaged in raising, producing, fabricating, extracting and conversion of goods.