STUDY MATERIAL - MBA
BUSINESS LAW
MODULE - I
INTRODUCTION TO BUSINESS LAW
INTRODUCTION
The occupation of business plays an extremely important role in the economy of any
country. The act of engaging in business, which consequently results in the creation of
jobs and opportunities, along with the generation of revenues for the economic sector, sector
forms a significant part in nation building. The proliferation of business activities calls for a
mechanism to regulate its conduct, and law facilitates this purpose. For strong and
productive economies, the need to have an adequately enforced system of equally applied
law has been increasingly felt. Law has become an important part of any business activity. A
certain framework of law is necessary for maximum incentive to entrepreneurs, investors
and inventors. Business law has taken an important place because cause it secures the
elements of trust and certainty that are vital to economic transactions amongst strangers. It
also includes a study of legal compliances related to any business activity. In this Unit,
there will be a discussion on the concept of ‘Business’
‘Business’ and the objectives of ‘Business
Law’. The Unit will help in the understanding of the significance of business law in the
present business environment and elaborate on the various sources of business law.
The terms “Business law” and “Business Laws” are
are used interchangeably in the text.
“Business Law” is a generic or umbrella term which provides legal and regulatory
framework for doing business. Business environment in any country is governed by its
business laws that are necessary for conducting business
business transactions and regulate
business.
Understanding the basics of business law are extremely important for the students of
business management stream to get a firm grasp on the concepts and gaining deeper
knowledge of the subject. This Unit shall focus on
on defining the meaning of business, the
scope and significance of business law in the current economic scenario, and to
acknowledge the different sources of law which contributed in the evolution of business
law.
Three concepts establish a necessary framework
framework for the most effective functioning of
market in the modern nation-
nation Law, the Rule of Law and the Property.
Property The forces that
hold societies together range from custom and religion to law and economic ties. In the
modern nation, however, the most significant of the social forces is law because law can
glue together diverse peoples of different backgrounds in to very large, organized
groups. Law is known by everyone as being intended to tell members of society what
they can and cannot do.
LAW:
It is necessary to have preliminary discussion on ‘what is law’ before students are
introduced to ‘Business Law’. The term “law” has been defined in many ways. It is not
easy to give a precise definition of law. It has been defined as rules of human action. A
Dr. Amaresh C Nayak, Asso. Prof. (HR & OB)
STUDY MATERIAL - MBA
BUSINESS LAW
simple definition of law provides that law is a formal social force, is made up of rules which
are laid down by the state and are backed by enforcement.
RULE OF LAW:
Under the Rule of law, laws are made generally and equally applicable. They apply to all
members of society and to various groups in the same way. In the words of Secretary
General of United Nations, “without confidence based on the rule of law; without trust and
transparency- there could be no well-functioning markets.”
“Without the rule of law, major economic institutions such as corporations, banks and trade
unions would not function, and the government’s many involvements in the economy-
regulatory mechanisms, tax systems, customs structure,
structure, monetary policy and the like-
would be unfair, inefficient and opaque.”
PROPERTY:
The term ‘property’ has two meanings, something that is owned and ownership. It is
through the law of property that individuals and business organizations can possess, use
and transfer their private resources. The property is a legal fence that keeps others out
without your permission. The exclusionary right of property provides a basis for the private
market and modern business. Property has been thought of as the central concept
underlying Western Legal Systems. Contract law enables an owner to exchange resources
at a future date, tort law compensates owners whose resources are wrongfully harmed by
actions of others, criminal law punishes those who who harm an owner’s resources in a
particular way and the law of business organizations identifies how individuals can own
and use private resources in groups.
BUSINESS
Defined as an enterprise or organization involved in an industrial, mercantile or commercial
activity.
• May be brought forth for a profit purpose or can serve non-profit non purposes
supporting a charitable or a social cause.
• Referred to the activities of an individual or a group of individuals engaged in the
sale of goods and provision of services with a profit motive.
Business - an organised efforts of enterprises to supply consumers with goods and
services and to earn profit in the process.
• Includes varied activities as production, promotion, wholesaling, retailing,
distribution,
tion, transportation, warehousing, financing, insurance, consultancy, and
the like.
L.R. Dickson - Business as a form of activity pursued primarily with the object of earning
profit for the benefit of those on whose behalf the activity is conducted.
• supply of goods and services, creating job opportunities, offering better quality of
life, contributing to the economic growth of the country, etc.
BUSINESS: Business may be understood as the organized effort of enterprises to
supply consumers with goods and services
services for a profit. The Business may vary in size
Dr. Amaresh C Nayak, Asso. Prof. (HR & OB)
STUDY MATERIAL - MBA
BUSINESS LAW
or the number of employees or the sales volume but all the business share the same
purpose to earn profit. The role of business is crucial. Beyond earning profit business
creates Job opportunities, offers a better quality of life, contributing to the economic
growth of the country. So the society cannot do without business.
CHARACTERISTICS OF BUSINESS
1. CHANGE: Perhaps change is the only word which can characterize the modern
business in all sense. The ever changing
changing market place has become a battle ground
for various companies surviving on consumer’s loyalty and preferences. Today’s
growth product may be tomorrow’s earthen pot. Companies like Bajaj had to say
good buy to their best selling products like Garnar and Lambretta. Modern business
is dynamic and so companies have to depend on their research and development
wing to survive in the market.
2. VAST BUSINESS CANVASS: The industrial revolution has made a significant
impact over modern business. Mass production and mass marketing has been the
norms of the modern business. Machines are gradually replacing manual labour in
manufacturing processes. Mass
Mass production and mass marketing fetch economics of
scale to manufacturers and the benefits passes to the buyers. So as the say the
number of companies having annual turnover of Rs. 100/-Crores
100/ Crores each was only a
few in 1970s and 1980s, but the figure has gone
gone beyond hundreds now a days. But
many times the companies have flattered because of this vast canvass of modern
business. Cost and time overruns the business and made the business almost
shelved.
3. DIVERSIFICATION: Today’s Business is also characterized by diversification,
contrast with what most American companies do. The product portfolio of any
medium or large scale business house reads like who is who. Diversification may be
CONCENTRIC i.e. adding new but related products or services. The best example
iss HLL which has several brands of soaps in one line. Diversification may be
HORIZONTAL i.e. adding a new but unrelated product or services for present
customers. Like Sony Corporations purchase of Columbia Pictures Entertainment
Ltd. Diversification may also
also be CONGLOMERATE i.e. adding new and unrelated
Dr. Amaresh C Nayak, Asso. Prof. (HR & OB)
STUDY MATERIAL - MBA
BUSINESS LAW
products or services for a new set of customers like TATA. What ever it may be
diversification is the best media of business expansion and the companies often
follow the path of merger and acquisition route to expand adopting diversification.
4. GLOBALISATION: Going international is one of the trends followed by the modern
business. Political barriers are no barriers to business. Internationalization of
business is a means of sustaining a strong domestic base in terms of technology,
product, market and capital over a longer period. Production facilities are being set
up in different countries and products are being sold through a global network.
Gradually business houses are exposed to global competition which augurs
au will for
consumers. But many times globalization becomes imperative for the modern
business due to intensity of market competitions, changing life styles, and global
flow of capital and technology.
5. SCIENCE: Science also occupies a special role in modern
modern business, and global
economic scenario. Apart from innovations and technological developments,
introduction of mathematics in decision making process and management practice
processes are also the contributions of science.
6. INFORMATION: Another characteristic
characteristic of contemporary business is the recognition
of and the need of information. The whole areas of retrieving and extending
information including data processing, information system analysis and preparation
of records and reports have achieved a major status.
status. Mean while Information
Technology’s it self a subject to revolutionary change. From a hand written
document to typed to stencil cutting to photo copying to floppies to cyberspace the
advancement of Information Technology is commendable.
7. GOVERNMENT INTERFERENCE:
TERFERENCE: Interference of the Govt. in business is common
in every country. In the names of self reliance and protecting the domestic industries
restrictions are placed on the import of foreign goods. In order to reduce in
equalities of income, to prevent
prevent concentration of economic power and to realize
other socio economic objectives. Government’s impose restrictions and levy taxes
on domestic industries. Today, there is no government in the world which doesn’t
interfere in business activities in some respect
resp or the other.
8. COMPETITION: Competition is another feature of modern business. Gone are the
days of Sheltered, Subsidies, Licenses, Quotas and restrictions. Gone are the days
of monopolies. Business firms have worked out strategically to eliminate
inefficiencies,
iciencies, cut down costs and improve productivity. Inefficient and marginal
firms will either be forced to windup or rewrite their success plans. However
competition is beneficial for the competing firms as well as the consumers.
BUSINESS ENVIRONMENT
On the
he basis of the extent of intimacy with the firm, the environmental factors may be
classified into different types or levels. Broadly there are two types of environment, the
internal environment and the External environment. The internal environment consists
consis
of the factors internal to the firm and are generally controllable factors where as the
Dr. Amaresh C Nayak, Asso. Prof. (HR & OB)
STUDY MATERIAL - MBA
BUSINESS LAW
factors external to the firm are by large and beyond the control of the firm. Again the
external factors are classified as micro environment and macro environment. Therefore
T
we may consider the business environment at three levels:
• Internal environment,
• Micro Environment / Task environment / Operating environment.
• Macro Environment / General environment.
INTERNAL ENVIRONMENT:
A. VALUE SYSTEM:: The value system of the foundersfounders and those at the helm of
affairs has important bearing on the choice of the business, the mission and
objectives of the organization, business policies and proactive. It is widely
acknowledged fact that the extent to which the value system is shared by all in
the organization is an important factor contributing to success.
B. MISSION AND OBJECTIVES:
OBJECTIVES: The business domains of the company, priorities,
direction of development, business philosophy, business policy etc. are guided
by the mission and objectives
objective of the company.
C. MANAGEMENT STRUCTURE:
STRUCTURE: The organizational structure, the composition of
the board of directors, extent of professionalisation of management etc. are
important factors influencing business decisions.
D. INTERNAL POWER RELATIONS:
RELATIONS Factors like the amount of support the top
management enjoys from different levels of employees, shareholders and Board
of directors have important influence on the decision and their implementation.
E. HUMAN RESOURCES:
RESOURCES: The characteristics of the human resources like skill,skil
quality, morale, commitment, attitude etc. could contribute to the strength and
weakness of the organization.
F. COMPANY IMAGE AND BRAND EQUITY: EQUITY: The image of the company matters
while rising finance, forming joint ventures or other alliances, soliciting marketing
ma
intermediaries, entering purchase or sale contracts, launching new products etc.
Brand equity is also relevant in several of these cases.
Dr. Amaresh C Nayak, Asso. Prof. (HR & OB)
STUDY MATERIAL - MBA
BUSINESS LAW
G. MISCELLANEOUS:: Other miscellaneous factors like the Physical Assets and
Facilities, The R & D and Technological
Technological Capabilities, the Marketing Resources
and the Financial Factors are also responsible for contributing to the business
success and failures or influencing the decision making.
EXTERNAL ENVIRONMENT
1. MICRO ENVIRONMENT - The micro environment consists of the actors in the
company’s immediate environment that affects the performance of the company.
These include the suppliers, the marketing intermediaries, competitors, publics and
the customer.
a. Suppliers:: An important force in the micro environment of the company
compa is the
suppliers, i.e. those who supply the inputs like raw materials and components to
the company. The importance of reliable source of supply to the smooth
functioning of the business is obvious. Recognizing the critical importance of the
supply factor,
or, companies all around the world are increasingly resorting to
partnering / relationship marketing.
b. Customers: As it is often exhorted, the major task of a business is to create and
sustain customers. A business exists only because of its customers. Monitoring
Moni
the customer sensitivity is therefore a prerequisite for the business success. A
company may have different categories of customers like the individuals,
households, industries, and other commercial establishments, and government
and other institutions.
ons. The choice of the customer segments should be made by
considering the number of factors such as the relative profitability, the
dependability, stability of demand etc.
c. Competitors:: A firms competitors include not only the other firms which market
the same or the similar products but also those who compete for the
discretionary income of the customers. The competition among the different
products are called as the DESIRED COMPETITION, where as the competition
among the alternatives of a particular product
product is known as the GENERIC
COMPETITON and the competition between the different brands of the same
product form is known as the BRAND COMPETITION.
d. Marketing Intermediaries:
Intermediaries: The immediate environment of a company may
consists of a number of marketing intermediaries
intermediaries which are the firms that aid the
company in promoting, selling and distributing its goods to final buyers. The
marketing intermediaries include middlemen such as agents, and merchants
who help the company find customers or close sales with them. Marketing M
intermediaries are the vital links between the company and the final customers.
e. Financiers:: Another important micro environmental factor is the financiers of the
company. Besides the financing capabilities, their policies and strategies,
attitudes,, abilities to provide non-financial
non financial assistance etc. are very important.
f. Publics:: A company may encounter certain publics in its environment. A public
is any group that has an actual or potential interest in or impact on an
organizations ability to achieve its interests.
Dr. Amaresh C Nayak, Asso. Prof. (HR & OB)
STUDY MATERIAL - MBA
BUSINESS LAW
2. MACRO ENVIRONMENT: A company and the forces in its micro environment
operate in a larger macro environment of forces that shape opportunities and pose
threats to the company. As stated earlier, the macro environment is also known as
the general
eral environment and the Remote environment.
The macro forces are, generally, more uncontrollable that the micro forces. When
the macro environment is uncontrollable, the success of a company depends on its
adaptability to the environment. Important macro environmental factors include the
economic environment, political and regulatory, the social, the cultural, the
demographic, the technological and the natural environment along with the global
environment.
COMPETITIVE STRUCTURE OF INDUSTRIES
The competitive ve structure of industries is a very important business environment.
Identification of forces affecting the comp0etitive dynamics of an industry will be very
useful in formulating the strategies. According to Michael Porter’s well known model of
structural analysis of industries, the state of competition in an industry depends on five
basic competitive forces, Viz.,
a. Rivalry among existing firms.
b. Threat of new entrants.
c. Threat of substitutes.
d. Bargaining power of suppliers.
e. Bargaining power of buyers.
A. Threat of Entry:: A growing industry often faces threat of new entrants that can alter
the competitive environment. There may be a number of barriers to the entry.
Potential competition tends to be high if the industry is profitable or critical, entry
barriers
ers are low and expected retaliation from the existing firms is not serious.
However some of the common entry barriers are:
• Government Policy,
• Economies of Scale.
• Cost disadvantages Independent of Scale.
• Product differentiation.
Dr. Amaresh C Nayak, Asso. Prof. (HR & OB)
STUDY MATERIAL - MBA
BUSINESS LAW
• Monopoly Elements.
• Capital Requirements.
B. Rivalry among Existing Competitors:
Competitors: Rivalry among existing competitors is often
the most conspicuous of the competitions. Firms in an industry are mutually
dependent – competitive moves of a firm usually affects others and may be
retaliated. A number of factors may influence the intensity of rivalry. These include
• Number of firms and their relative market share, strength etc.
• State of growth of industry.
• Fixed or storage costs.
• Indivisibility of capacity augmentation.
• Product standardization and switching costs.
• Strategic stake.
• Exit barrier.
• Diverse competitors.
• Switching costs.
• Expected retaliation.
C. Threat of Substitutes:
Substitutes: An important force of competition is the power of
substitutes. Substitutes limit the potential returns in an industry by placing a ceiling
on the price firms in the industry can profitability charge. The more attractive the
price performance alternative offered by substitutes, the farmer the lid on the
industry profits.
D. Bargaining power of the buyers:
buyers For several industries buyers are the potential
competitors – they may integrate backward. Besides, they have different degrees of
bargaining power. Buyers compete with the industry by forcing down prices,
bargaining for higher quality or more services, and playing competitors against
a each
other – all at the expense of industry profitability.
E. Bargaining Power of Suppliers:
Suppliers: Porters analysis shows that competition in an
industry goes well beyond the established players. Knowledge of these underlying
sources of competitive pressure highlights the critical strengths and weaknesses of
the company, animates its positioning in its industry, clarifies the areas where
strategic changes may yield the greatest payoff, and highlights the areas where
industry trends promise to hold the great significance
significance as either opportunities or
threats.
BUSINESS LAW
Business law, also commonly known as commercial or mercantile law, is that branch of
law that conducts the relationship between the enterprises, companies and individuals
engaged in commercial matters. This section of law governs issues in relation to the
legal rights, duties and liabilities of the entities engaged in business transactions.
Business law is a body of legal rules regulating business activities.
activities Business Law can
also be defined as follows:
Dr. Amaresh C Nayak, Asso. Prof. (HR & OB)
STUDY MATERIAL - MBA
BUSINESS LAW
1. “Business law is that portion of the legal system which guarantees an orderly
conduct of business affairs and the settlement of legitimate disputes in a just
manner.”
2. “Business law establishes a set of rules and
and prescribes conduct that enables us to
avoid misunderstandings and injury in our business relationships.”
SIGNIFICANCE OF BUSINESS LAW
Business law is that branch of the legal system which promotes an orderly treatment of
business affairs, facilitates the
the regulation of commercial activities in accordance with
established practices of law, and provides for settlement of disputes in an amicable
manner. Business law has gained significance due to the changing business environment.
Business environment is dynamic
dynamic in nature and there is a requirement of having
adequate laws in place to govern the business organisations functioning in the society.
OBJECTIVES OF BUSINESS LAW
Business law serves a variety of purposes some of which are listed below:
a. A comprehensive set of standards established universally
b. Promoting industrial growth
c. Laying down the procedure for the establishment of business
d. Enforcement of Rights
e. Contributes to the building of healthy business relationships
f. Reduced possibilities of fraud
f
g. Business laws help maintain equilibrium
h. Ethical conduct
i. Social Responsibility
j. Laying down law in accordance with the evolving standards
k. Providing penalties for violation of laws
l. Insurance against Risks
Understanding the basics of business law are extremely
extremely important for the students of
business management stream to get a firm grasp on the concepts and gaining deeper
knowledge of the subject. This Unit focuses on defining the meaning of business, the
scope and significance of business law in the current economic scenario, and to explain
the different sources of law which contributed in the evolution of business law.
Dr. Amaresh C Nayak, Asso. Prof. (HR & OB)