BUSINESS ORGANIZATION

Editorial Board

Dr. Sneh Chawla, Dr. Rutika Saini,

Ms. Ritika Sharma
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Ms. Amanpreet Kaur, Ms. Ritika Sharma,

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Dr. Navneet Gera, Dr. Ruchi Gupta
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Deekshant Awasthi

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 BUSINESS ORGANIZATION

Disclaimer

Reviewer
Dr. Pankaj Sharma

Disclaimer

This Study Material is duly recommended and approved in Academic Council

meeting held on 11/08/2023 Vide item no. 1015 and subsequently Executive
Council Meeting held on 25/08/2023 vide item no. 1267.

u The following Unit/Units are edited versions of Study Material prepared for
the courses under Annual/CBCS Mode
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 Contents

PAGE
UNIT-I
Lesson 1: Introduction to Business Organization 3–37

Lesson 2: Social Responsibilities of Business 38–57

UNIT-II
Lesson 3: Forms of Ownership Organizations 61–105

Lesson 4: One Person Company, Multinational Corporations and Business

Combination106–128

UNIT-III
Lesson 5: Business Environment: Analysis and Diagnosis 131–151

UNIT-IV
Lesson 6: Entrepreneurship: Founding the Business 155–171

Lesson 7: Contemporary Issues in the Entrepreneurship 172–186

UNIT-V
Lesson 8: Workforce Diversity 189–197

Lesson 9: Organization Structure 198–213

Lesson 10: Recent Developments in Business Organization 214–244

Glossary 245–246

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 UNIT - I

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 L E S S O N

1
Introduction to Business
Organization
Ms. Amanpreet Kaur

STRUCTURE
1.1 Learning Objectives
1.2 Introduction
1.3 Business
1.4 Scope of Business
1.5 Business as a System
1.6 Business and Environment Interface
1.7 Business Ethics
1.8 Summary
1.9 Answers to In-Text Questions
1.10 Self-Assessment Questions
1.11 Suggested Readings

1.1 Learning Objectives

After studying this lesson, students may be able to understand:-
‹ The basic concept, nature and scope of business.
‹ An overview of Business as a system and Business ethics.
‹ To create awareness about business and environment interface.

1.2 Introduction
This lesson will give us an overview of basics of business. Many people confuse the
terms business, trade and commerce to be same but these are not same and there exists a

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 BUSINESS ORGANIZATION

Notes lot of differences between these, which will be discussed in the coming
topics. The economic activity started with the view to earn profit was
often referred to as ‘Business’. Different motives to start a business are:
Ambition to earn profits, Psychological factors or Ambition to provide
service. Business environment is something in which a business operates,
it can be termed as economic, demographic, financial, legal, etc. This
chapter will also put light on the need of the hour for every business i.e.
business ethics. Ethics literally means appropriate and moral behaviour
of an entity, that is generally supported by principle of conduct. Business
ethics is the appropriate conduct through business practices by the enter-
prises while serving the wealth maximization objective. It is the study of
appropriate corporate culture, employee conduct, business policies and
practices regarding corporate business subjects like corporate governance,
insider trading, bribery, discrimination, corporate social responsibility,
and fiduciary responsibilities.

1.3 Business
The ordinary meaning of the word business is busyness, i.e., any activity
in which a man is busy. A man may be busy in two kinds of activities:
economic and non-economic. An economic activity denotes work or
effort directed towards the production of wealth. In other words, eco-
nomic activity is aimed at profit. Economic activity of a man is called
business. Business, therefore, means the production or purchase of goods
with a view to sell them at profit. Besides, if services are rendered on
payment to others, they shall be included in business. Business may be
defined as a human activity directed towards producing or acquiring
wealth through buying and selling of goods and services. “Business is
an economic activity which involves regular production and exchange of
goods and services with the main purpose of earning profits through the
satisfaction of human wants.”
The term business includes trade, commerce and industry. The process
of buying and selling of goods, is called Trade. Such an activity may be
carried on within a country when it is called home or domestic trade. It
may be called foreign or international trade when it is carried on between
two different countries. To help trade, some facilities such as storing,
grading, financing, transporting and insuring are needed, these are called

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Commerce. Industry implies all those processes, which are responsible for Notes
the extraction and production of goods which are sold for either ultimate
consumption or for further production.
So, we may say that Business = Industry + Trade + Commerce. We shall
discuss the various components of business at the end of this lesson. There
are service enterprises, which provide services like domestic services and
financial services, etc., to individuals and business enterprises. Take the
example of cinemas or hotels, they render services to the community at
large.
As observed by Urwick and Hunt, “A business is any enterprise which
makes, distributes or provides any article or service which other members
of the community need and are willing to pay for that.”
“Business is an institution organized and operated to provide goods and
services to society under the incentive of private gain”- B.O. Wheeler
“A form of activity pursued primarily with the object of earning profit
for the benefit of those on whose behalf the activity is conducted”- L.R.
Dicksee

1.3.1 Motives for Business

Following factors provide motives to business:
1. Ambition to earn profits
2. Psychological factors
3. Ambition to provide service
These factors are now discussed vis-à-vis the motives they provide.
1. Profit Motive: Personal gain is one of the supreme motivating forces.
Business is that sphere of a man’s activity where the amount of
effort determines the size of profit. It is needless to say that greater
personal effort brings in greater monetary reward. This single factor
has resulted in the establishment, running and expansion of business
by individuals or group of individuals.
2. Psychological Factors: It is an old saying that a man does not live
by bread alone. It is equally true in business. An entrepreneur may
not work solely for amassing fortune. He may be guided by the
ambition to build up a business empire. The biographer of William

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Notes Lever, the founder of Lever Bros, Charles Wilson quotes Lever, who
once said “My happiness is my business “. To grow and become
big and to find an industrial empire has been valid psychological
factors for business.
3. Service Motive: It is also a great motivating force. Many people
are motivated to render some service to their community. Henry
Ford, the founder of Ford Motors stated that “Money chasing is not
business”. In our country Jamshedji Tata built a steel plant with a
great missionary zeal. Businesses have been founded with service
as their motive. An enterprise must earn profit to remain intact and
to grow and this element draws men to business. At the same time
it is necessary that an enterprise must produce goods and services
of the type and quality that the customers want, must offer right
kind of employment conditions to its employees, and the society
must accept it as a useful institution. In fact, the mixing or blending
of these two elements is necessary for any business enterprise. Of
course, profit is a significant motive for business without which
an economy under capitalism may not grow. Consistent growth
of an economy is necessary to provide more employment and a
better standard of living. Thus the two motives must co-exist in a
business enterprise for its existence, growth and status as a useful
institution.

1.3.2 Nature of Business

The common features of a business can be given below:
(a) Dealing in Goods and Services for Value: Business provides goods
and services to society. The goods may be for consumption or for
production. The first type of goods is called as consumer goods,
e.g., clothes, shoes, fans, sugar etc. and the second type of goods
is called as capital goods, e.g., plant and machinery. These goods
and services are meant for sale. The goods and services produced
for personal consumption are not within the scope of business. So,
when a person repairs his own scooter, it is not business but when
he opens a repair workshop that becomes business.
(b) Recurring Nature of Transactions: A single transaction of sale or
purchase or any dealing casually does not amount to a business

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transaction though it might have resulted in profits. A transaction Notes

comes under business only when it occurs at regular intervals or it
is recurring in nature. For example, where a person sells his scooter
that is not business. But if he opens a garage and keeps a stock of
scooters for sale that would constitute business.
(c) To Earn Profits: Business is a human activity directed towards earning
wealth. Profit is essential for the livelihood of the entrepreneur as
well as survival and expansion of the business.
(d) Increase in Utility: Business activities create utility in one form
or the other. Manufacturers convert raw materials into finished
products: wholesalers, retailers and transporters etc. help in their
distribution. Thus each one of them increases the utility of goods.
(e) Risk Element: Business is full of risks. Profits do not depend solely
on efforts of entrepreneur. Certain other forces may intervene over
which a businessman has no direct control. These factors may be
changes in consumer tastes and fashions; changes in technology,
strikes; power failures; loss by fire and theft etc. Some of these risks
can be passed on to others by means of insurance while some risks
have to be borne by businessmen. Most of the business decisions
relate to future and future is full of uncertainties. It is because of
these uncertainties that business is also called as an adventure.

1.3.3 Requisites of a Successful Business

A successful business must bring a compromise between the conflicting
objectives of providing goods and services to consumers and social re-
sponsibilities. That a business may have started purely as an economic
venture for maximum profits may soon take on social and political di-
mensions. To achieve its different objectives a business system should
continuously strive to fulfill the following requisites:
1. Before establishing any business both long range and short range
objectives should be established.
2. Planning should be given due importance. To plan is to propose
a forward programming for guiding the future functioning of an
enterprise.
3. Proper location and layout of the plant and suitable size of the firm
contribute substantially to the success of a business system.

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Notes 4. The organization must be clearly defined. It should be adequately

manned with competent personnel.
5. It must have an up-to-date knowledge of the latest developments in
the field of technology.
6. Research in all aspects of business, e.g., product research for ensuring
success in the long run.
7. Last but not the least is the requisite of efficient management.

1.3.4 Objectives of Business

The following are objectives of business:

Figure 1.1: Objectives of Business

1. Economic Objectives: The term “economic objectives of a firm”
refers to the goal of making a profit as well as actions that directly
influence profit earning objective. Primary economic objectives of
business are stated below:
(i) Profit Making: The survival, expansion, reputation, and stability
of the company depend on its capacity to turn a profit. If a
company has losses for a number of years, it will not be able
to last for very long. Generating sufficient earnings is the
main objective of a business.
(ii) Creation of Customers: Customers are essential to a company’s
existence, expansion, and success. By meeting their demands
with the proper amount of goods and services at the proper
price, at the proper time, and at the proper location, businesses
may attract more customers.
(iii) Innovation: In order to meet changing consumer demands,
innovation is the key focus for providing new goods, materials,

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production and distribution techniques, and services to the Notes

customers. Introducing innovation enhances the existing products
and helps the business to stand out from the competitors.
(iv) Increasing Market Share: Businesses must outperform their
rivals in terms of product quality, accessibility, and cost. To
maintain its market position, it must raise the standard of its
products and services with lower prices and enhanced the
distribution system.
2. Social Objectives: Business goals that are intended to assist and
benefit the society are referred to as social objectives. The following
are some of the main social goals:
(i) Producing and Supplying High-quality Goods and Services: The
primary purpose of business is to meet societal requirements. It
is the company’s first and main social goal. Products produced
and supplied and services should be of higher quality and
should be offered at reasonable prices.
(ii) Creation of Employment Opportunities: A business must
provide employment opportunities for society’s members
because it is a social institution.
(iii) Fair Remuneration to Employees: The success or failure of
the business depends on its employees and not on the way
the business is conducted. Employees are more valuable since
they perform the key functions from which a business runs,
therefore they must receive fair compensation for the work
they do.
(iv) Stay away from Anti-Social Behavior: A company must behave
honorably towards its customers, suppliers, competitors, and
other stakeholders in order to make a lawful profit. Antisocial
behaviours like speculation, hoarding, adulteration, etc. must
not be present.
(v) Protection of Environment: An environment is where a business
is created, runs, and develops. Pollution and environmental
degradation are problems brought on by the expansion of modern
enterprises. Therefore, a business needs to run responsibly
and preserve the natural resources from degradation.

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Notes (vi) Social and Community Service: A company needs to build up

goodwill in the area where it is located and conducts business.
It is expected to give back to the neighbourhood by getting
involved in charity and social causes in order to enhance its
reputation and goodwill.
3. Human Objectives: The term “human aims of business” primarily
refers to goals that are intended to protect the welfare and interests
of its employees. The following are some of the main human goals:
(i) Fair Return to Owners: Every business’s owner invests
their money with the hope of receiving some kind of return.
Therefore, a firm must ensure fair returns to business owners
or shareholders.
(ii) Fair Wages for Employees: A company’s most important asset
is its workforce. Their diligence and effectiveness play a
significant role in a company’s success. They must therefore
receive just compensation in line with their merit.
(iii) Employee Welfare: Since employees give their all to a company’s
success, it must respect the dignity of labour and treat them
as partners rather than just as parts inside the machine. They
should be provided with good working conditions and fair
rewards.
(iv) Learning and Development Programs: Employees should
be provided with proper training and development sessions
before assigning a task to them, this will motivate them and
save them from any big accident in the workplace.
(v) Job Satisfaction: For a firm to be productive and profitable,
employee motivation is crucial. Therefore, a company must
make sure that its people are satisfied with their jobs and
opportunities coming their way.
4. National Objectives: National objectives of business are the goals
of fulfilling these goals and aspirations on a national level. National
goals and aspirations include things like:
(i) Promote National Self-sufficiency and Exports: In general, a
corporation should manufacture and market those products and
services that support exports and replace imports. A company

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can therefore guarantee national self-sufficiency and help the Notes

country achieve a good balance of payments situation.
(ii) Production as per National Priorities: Business must create
the commodities and services that are in demand in the whole
country since it will lead to national growth and reduction in
dependence on the other nations.
(iii) Payment of Taxes and Debts on Time: A business firm must
be pro-active in paying the taxes and debts on time, the money
generated from taxes is used in the development of the nation
and society.
(iv) Proper Utilization of Natural Resources: Each nation has access
to some natural resources that are essential in its development.
In order to cut imports and conserve foreign cash, a corporation
must make an effort to employ local resources effectively with
small wastage and proper utilization.
5. Global Objectives: The global goals of business are to meet the
problems and challenges arising in a global marketplace. Some of
the global goals include:
(i) Exporting Goods: Making goods and services available that
are competitive on a worldwide scale, and exporting them
to the needy nations should be done by a business in order
to earn reputation around the globe and in achieving a trade
balance situation for its home country.
(ii) Promotion of Equality: Decreasing inequities between wealthy
and developing countries by increasing business and trade
activities in developing nations can be done by the firm.

1.4 Scope of Business

The business has a highly diverse scope and nature. It almost entirely
encompasses all actions involved in producing and delivering goods and
services from a source (the production location) to the destination (con-
sumers), with the goal of making a profit. According to F.C. Hooper,
“The whole complex field of commerce and industry, the basic industries,
processing and manufacturing industries, the network of ancillary services:

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Notes distribution, banking, insurance, transport and so on, which serve and
inter-penetrate the world of business as a whole are business activities.”
The business activities may be grouped under two broad categories, (1)
Industry and (2) Commerce. A business undertaking which deals with
growing, extracting, manufacturing or construction is called industrial
enterprises. On the other hand a business activity concerned which ex-
change of goods and services with activities that are incidental to trade
like transport, insurance, banking, warehousing, advertising is called
commercial enterprises.

Components of Business
Business is an all-embracing term. It includes trade, commerce and industry.
Business can be classified into two broad categories: (a) Industry and (b)
Commerce (including trade). Industry is concerned with the production
of goods, and commerce with the distribution of what is produced.

Figure 1.2: Types of Business Activities

1.4.1 Industry
The process of extraction, production, conversion, processing or fabri-
cation of products is described as industry. The products of industry are
sold either for further transformation into finished goods or for ultimate
consumption. Goods used for final consumption are termed as consumers’
goods, and those used in production of other goods are designated as
producers’ goods. A steel mill may make steel for further fabrication into

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a variety of articles, such as surgical blades, etc., or engineering concern Notes

may make machine tools and machinery to be used for manufacturing
other products. These are called capital goods.
Broadly speaking, industrial activities may be classified into primary and
secondary industries as shown below. Primary industry may be either ex-
tractive or genetic, and secondary industry may be either manufacturing
or construction.

Industry

Primary Secondary

Extractive Genetic Manufacturing Construction

Engineering, Iron
Nursery, cattle Building bridges,
Farming, mining, and steel
breeding, dams, roads,
fishing, etc. industry, cement
poultry, etc. canals, etc.
industry, etc.

Figure 1.3: Classification of Industries

Industry is of following types:
1. Extractive Industries: These industries extract and draw out various
products from natural resources. The products that come under this
type are provided by nature and collected by human beings for
production of finished goods. Farming, mining, quarrying, hunting
are examples of extractive industries.
2. Genetic Industries: Genetic industries are engaged in breeding or
reproduction of plants and animals. For breeding of plants, the
nurseries exist and for breeding of animals and birds poultry farming,
cattle breeding, fisheries are established.

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Notes 3. Manufacturing: These industries are concerned with conversion and

transformation of raw materials into finished or semi-finished goods.
Such industries create ‘form utility’. Manufacturing industries have
following types:
(a) Analytical: Here a basic raw material is analysed and separated
into number of products. For example, an oil refinery separates
raw crude oil into petroleum, kerosene, diesel, etc.
(b) Synthetical: In these industries two or more materials are
combined or mixed together to form a new product. For
example: Soap, paint, fertilizer, etc.
(c) Processing: In this industry type, the final product is produced
via a series of industrial processes. For example: textiles,
sugar, steel, etc.
(d) Assembling: In this type of manufacturing industry various parts,
items, and components are put together to create a finished
product. For example: mobile phones, cars, watches, etc.
4. Construction Industries: These types of industries are engaged
in construction of various projects like construction of bridges,
roads, buildings, etc. Construction industries use products from
manufacturing and extractive industries. These industries create
basic infrastructure for development of the nation.
Initially industries are classified into Primary and secondary industries.
Primary industry consists of extractive and genetic industries that supply
raw materials to various firms for further production. Manufacturing and
construction industries are part of secondary industries that use raw ma-
terials supplied by primary industries for manufacturing of final goods.

1.4.2 Commerce
The process of buying and selling and all those activities which facilitate
trade, such as storing, grading, packaging, financing, insuring, transporting
are called commerce. The principle function of commerce is to remove
the hindrances of person, place, time, exchange and knowledge, in con-
nection with distribution of commodities until they reach the consumers.
By removing these hindrances commerce ensures a free and smooth flow
of goods from producers to consumers.

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A brief description of these hindrances is given below: Notes

Hindrances of Persons: Buyers and sellers of goods and services are not
always found at the same place so that contact between them is hindered
by distance. Commerce helps to remove this hindrance between persons
by means of trade. Trade as part of commerce therefore plays a major
role in establishing contact between sellers and buyers.
Hindrance of Exchange: With money as the medium of exchange, pay-
ment for goods and services is made possible through institutions such
as the banks. In this way, banks as part of commerce act to remove the
hindrance of exchange and enable buyers to procure goods, especially
by extending their own credit.
Hindrances of Place: The goods may be produced at one place and the
demand for them may be greatest at a different place where they are not
produced. This barrier of distance is removed by commerce through the
different means of transport and the goods are carried from one place
to another.
Added to direct movement of goods from the points of production to the
points of consumption are the services of insurance to cover the risk of
loss and packing to protect goods against damage and pilferage.
Hindrances of Time: Goods are often produced in anticipation of de-
mand. They must therefore be stored in a safe place to be released as and
when demanded. The function of storing and preservation is performed by
warehouses. The warehouses remove the hindrances of time by balancing
the time lag between production and consumption, and so create time
utility. Insurance comes into play when goods are stored in warehouses
and cover the risk of loss or damage through theft or fire.
Hindrances of Information: Selling of products is today the most im-
portant problem that a manufacturer has to solve. His product may be
the best, but unless the prospective buyer knows about them they remain
unsold. Advertising and personal salesmanship help to remove this hin-
drance of the lack of knowledge or information by bringing to the notice
of the people the advantages of buying the goods and services offered.
To sum up, commerce may be said to be that branch of business which
facilitates exchange of goods by removing the various hindrances, namely,
those of persons through trade and of exchange through banking; of place

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Notes through transport, insurance and packing; of time through warehousing

and insurance; lack of knowledge or information through advertising and
salesmanship.
Stephenson defines commerce as “the sum total of those processes which
are engaged in the removal of hindrances of person (trade), place, (trans-
port and insurance) and time (warehousing and insurance) in the exchange
(banking) of commodities.

Figure 1.4: Commercial Activities

[Link] Trade
Trade is the fundamental state of business activity and involves the sale
and purchase of goods and services. It is to facilitate the transfer of
goods from the seller to the buyer that all the above-mentioned activities
are undertaken.
Types of Trade: Trade may be (a) Internal or domestic, or it may be
(b) External, Foreign or International. Internal trade may in turn, be (i)
wholesale trade or (ii) retail trade. Foreign trade would be (i) import
trade and (ii) export trade.

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Internal trade, also known as home trade or domestic trade, comprises Notes
of buying and selling of goods within the bounds of a country. It may be
wholesale or retail trade. Wholesale trade relates to purchase of goods in
large quantities from producers and growers and their resale to retailers
in small lots. It serves as a link between the manufacturers or producers
and retailers who sell them to the ultimate consumers. Retail trade is
the last link in the economic chain whereby human wants are satisfied.
The retailer assembles at a convenient place, his shop or stores, various
types of products from numerous sources and supplies these in small
quantities to consumers.
Foreign trade refers to buying of goods from or selling commodities
to traders doing business in foreign lands. Foreign or international trade
is normally wholesale trade and takes the form of import or export, or
it may be entrepot trade. By import trade we mean buying goods from
suppliers in foreign lands and by export trade selling to buyers in foreign
countries. Entrepot trade consists of importing foreign produced goods
merely with the object of re-exporting them.

[Link] Auxiliaries to Trade or Aids to Trade

Certain functions such as transport, warehousing, insurance, banking
and advertising are considered aids to trade. These all actions assist in
exchange of goods. These are referred to as ‘aids’ as they help in per-
forming various commercial activities. A smooth flow of goods from
producers to consumers is made possible by these auxiliaries to trade.
Following are types of aids:
1. Transport: This service or aid performs the function of carrying
goods from one place to another or from the producer to consumer.
It makes trade more accessible and also helps in distribution of
goods.
2. Warehousing: Currently, goods are produced before actual demand.
The products must therefore be stored long before selling them. Many
goods, like wheat, sugar, pulses, etc. are seasonal in products but
have a year-round demand. To guarantee that the items are accessible
throughout the year, suitable storage arrangements must be made
and this problem is solved by warehousing.

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Notes 3. Insurance: It aids in the development of a sense of security and

independence from concerns and losses in firms. It provides a
cover against various losses related to goods at a nominal amount
of insurance premium. Insurances can be of various types namely
fire insurance, marine insurance, vehicle insurance, life insurance,
etc.
4. Banking: The financial issues are fixed by banking. Firms pay and
receive significant sums of money from time to time. It is unsafe
to transport a huge sum of cash from one location to another. This
problem is resolved by banking and financial organizations.
5. Advertising: Publicity and advertising are essential media for
mass communication. Consumers can learn about the numerous
brands produced by various producers with the help of advertising.
Radio, newspapers, magazines, TV, the internet, billboards, etc. are
various means of advertising.

1.4.3 Inter-relationship between Trade, Commerce and Industry

All the three components cannot function in the absence of one another
being closely related to each other. Trade, Commerce and industry are
crucial segments of a business system. They all are interdependent and
interrelated as a process, as shown below:

Figure 1.5: Inter-relationship between Trade,

Commerce and Industry
The foundation of trade and commerce is industry. Only once products
are manufactured within an industry, the challenge of distribution become
noticeable. Then the need for trading and commercial operations like
transportation, insurance, banking and finance, warehousing, etc. will
arise. At the same time industry and production cannot survive unless the
goods and services are distributed among consumers through commerce.
Hence, industry and commerce are interconnected.

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Commerce is seen to help the industry both pre- and post-production Notes
process. All purchases of raw materials and distribution of finished goods
are performed with the help of commerce.
Trade means buying and selling of goods for money or transferring prod-
ucts and services from one individual or organization to another. Trade
supplies the stable base on which commerce’s architecture has been built.
It keeps commerce moving smoothly and gives industry the assistance it
needs. In this way industry, commerce and trade are related.
Industry tries to provide a base for trade and commerce and commerce
serves as the backbone of the industry.

1.4.4 Difference between Trade, Commerce and Business

Trade and commerce are two separate concepts used in business op-
erations. Trade is a subset of commerce and has a limited reach when
compared to commerce.
Trade, in its most basic definition, is the exchange of things for cash
between buyers and sellers. Contrarily, commerce encompasses all of the
activities necessary to complete the exchange of goods from producers
to final consumers in addition to the buying and selling of goods. Trans-
portation, insurance, warehousing, advertising, banking, and many more
services that support trade are also included in commerce.
We may define the term business in the following words:
“As an institution organized by person or group of persons to produce or
distribute goods or services within incentive of earning profit through the
satisfaction of human wants. The element of risk is also involved in it.”

Basis of
Difference Business Commerce Trade
Meaning All operations Any activity that When buyers and
that are carried makes it easier sellers exchange
out with the in- for things to be goods or services
tention of making exchanged be- for cash, this is
profit are referred tween producers referred to as
to as business. and final consum- trade.
ers is referred to
as commerce.

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Notes Basis of
Difference Business Commerce Trade
Scope It has a wide Its scope is wid- It has a narrow
scope. It needs er than trade be- scope as it is
both trade and cause it includes only concerned
commerce to run actions that pro- with buying and
its activities. mote trade. selling of goods.
Connectivity Connectivity ex- Connectivity ex- Connectivity ex-
ists between own- ists between pro- ists between the
er and customers. ducer and final buyer and seller.
consumer.
Amount of An enormous It requires less More amount of
Capital Needed amount of funds capital as com- capital needed
is required to run pared to business here.
a business. and trade.
Risk Level Compared to Riskier when Less risk.
trade and com- compared to
merce, business trade.
is riskier.
Employment Op- There are more Numerous em- Very few job op-
portunities job opportunities ployment oppor- portunities.
because various tunities as a result
tasks require a of the abundance
huge number of of activities.
individuals.
Frequency of Regular Regular Irregular
Transactions

IN-TEXT QUESTIONS
1. All operations that are carried out with the intention of making
profit, this statement is referring to __________.
2. Trade is the fundamental state of business activity which does
not involve the sale and purchase of goods and services. (True/
False)

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3. Which of the following is a motive of business? Notes

(a) Earning Profit

(b) Earning Market Share
(c) Earning Goodwill
(d) All of the above
4. The process of buying and selling and all those activities which
facilitate trade, such as storing, grading, packaging, financing,
insuring, transporting are called __________.
5. Numerous employment opportunities are available in case of
trade. (True/False)

1.5 Business as a System

1.5.1 Introduction
In simple words, system means an assemblage or combination of things
or parts forming a complex or unitary whole. It is an establishment or
arrangement of parts for achieving the desired objectives. A system may
comprise different sub-systems and it may itself be a part of another
broader system. All these are inseparably related with each other like the
fear in a machine and have to operate in a coordinated way to achieve
the planned objectives. For a clear understanding of a system, it is nec-
essary to know the interrelationship of sub-systems in order to find out
how they are interrelated. When the study of a phenomenon is undertaken
in this manner, it is called a ‘systems analysis’ or a ‘system approach.
The meaning of the term ‘system’ can be best understood by taking
the example of human body system which in itself consists of various
sub-systems like digestive system, respiratory system, nervous system etc.
These sub-systems have further sub-parts. All subsystems of the human
body system must function in a closely coordinated way. The interrelated
sub-systems form a unitary whole i.e., a human being who is himself a
part of the environment and the society in which he lives.
A sub-system, in our context, may be defined as a departmental activity
within the framework of a functional activity. Respective departments
set their objectives within the framework of functional objectives and

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Notes accordingly, this may be defined as sub-objectives. Like a human body

system, a business system too consists of various sub-systems like pro-
duction, financing, marketing, personnel etc. which operate in unison to
make the unitary whole i.e., a business system. These sub-systems may
have further sub-systems.
For example, personnel sub-system is divided into other sub-systems
like selection, training, remuneration, promotion etc. The success of any
business system as a unitary whole depends on the close coordination
of these sub-systems.
Another way of distinguishing sub-systems is according to activities and
accordingly each business may have the following sub-systems:
(a) A decision-making sub-system to produce plans and shape the
activities of the enterprise as a whole.
(b) A processing sub-system which procures information, materials,
energy etc. and converts these into saleable products.
(c) An information handling sub-system specially concerned with the
use of accounting data.
(d) A control sub-system to ensure that actual performance is according
to plans.
(e) A memory sub-system to store information and make it available
as and when required.
(f) A sensory sub-system to measure significant changes in both, the
system and its environment.
A business house as a system is part of the broader system i.e., the indus-
try to which it belongs, and the industry is a part of the entire industrial
setup and that industrial setup is a part of the national economic situation.
Thus, there is a chain of complicated relationships each affecting the other.
A business can be regarded, from the angle of the system approach as
an entity or a system functioning in the social, economic and political
environment of the country or even the world. The use of the ‘system’
theory in the study of a business enterprise is really quite complicated
because it is difficult to know where to draw a line of distinction that
separates a firm as a unique entity from its environment. Present day
business cannot function in vacuum. It has to take a serious note of the

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social, political and economic environment in which it functions. It has Notes

the social responsibility and unless it proves its commercial viability
and its concern towards the interest of consumers, employees, creditors
and the society in general, it simply cannot survive for long. When
undertaking the study of a business system, we are concerned not only
with the structure of the business system but also with its environment
because these environmental factors have a direct bearing on the smooth
functioning of a business system and its environment.

1.5.2 Business as an Open System

A system can be open or closed. A closed system is self-dependent and
does not have interaction with the external environment. On the other
hand, an open system has active participation in the external and internal
environment both.
A business is an open system as it has continuous interaction with the
environmental forces such as suppliers, customers, competitors, government
etc. It obtains inputs such as raw material, labour, capital, information
and technology from the environment itself. Operations are performed on
the inputs to obtain desirable outputs which are supplied to the custom-
ers. Through the feedback process the environment’s evaluation of the
output becomes a part of the inputs for further organizational activity. If
the environment is satisfied with the output, business operations contin-
ue. If it is not, changes are initiated within the business system so that
requirements of customers are fully met.

Feedback

Figure 1.6: Business as an Open System

(Source: Business organization and management by Dr. F.C. Sharma)

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Notes Business Organization is the hub or the central part of any business
system. It has the usual features of a system:
1. Plans: Objectives, policies, procedures etc.
2. Inputs: Men, machine, material, money etc.
3. Processing: Activities concerning production, financing, marketing,
personnel, etc.
4. Output: Goods and services to society.
5. Feedback: Alteration and modification of plans and activities if
needed.
A business system on the whole is something more than just the aggrega-
tion of all subsystems in it. It is responsible for transforming the inputs
into outputs to satisfy consumer demands. An organization has to develop
sensitivity to know the changes in its environment and adaptiveness to
the demands of its environment, if it has to accept the challenges and
also ensure its survival and growth. Feedback is necessary to achieve
this objective.
The interesting feature of a business system is that its various parts are
inter-related and interact with each other, while the business system on
the whole, interacts with its environment. The business system affects
its environment by its output and is itself dependent on its environment
which increases or decreases the inputs according to the satisfaction to
the society. So, an efficient business system should not only be a suitable
mix of its various sub-systems but it should also be in tune with the
changing environment. Thus a system’s approach highlights the fact that
the business system and its environment are inseparable and feedback is
necessary from one subsystem to another subsystem so that the process
of providing goods and services to the society continues smoothly and
efficiently.
1.5.3 Characteristics of Business System
Business system is characterized by the following features:
1. Goal-orientation: Business system is directed towards the achievement
of specific objectives, e.g., supply of goods and services to consumers,
earning of profits for survival and growth, meeting society’s
expectations, fair deal to employees, etc. Business is a purposeful

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entity and purpose provides a sense of direction to the business Notes

system.
2. Creativity: Business system is creative in the sense that it converts
resources into useful products. The results of the system are more
than the sum of its parts. Business system creates various forms of
utility and adds value to the inputs.
3. Complexity: Business appears to have a well-defined structure
with its parts arranged in an orderly manner. But business system
is very complicated and consists of many elements and entities.
Each sub-system of business is in itself a system having its own
sub-systems. Therefore, its successful management requires a high
degree of knowledge, skills and experience.
4. Interdependence (or Wholeness): Various components of a business
system are highly interacting and interdependent. Business system
functions as a whole rather than as a collection of parts. There
is interdependence not only between the departments of a firm
but between different firms and industries too. People working
in a business enterprise interact with one another and have social
relationships due to which business is known as a ‘psychosocial
system’.
5. Diversity: Business system is diverse in design and operation. There
is diversity not only in the range of output but also in the size,
ownership, location organization, management, etc. of business
firms.
6. Dynamism: Business is an open-adaptive system as it influences
and is influenced by its environment continuously changing due to
changes in its environment.
7. Part of Socio-economic System: Business is a part and parcel of the
wider system. The wider supra-system constitutes the environment
of business system. Business environment consists of all those
economic, social, political, legal, technological and other forces
which influence the functioning of business. Economic environment
or economic system serves as the framework of business system.
There is a constant interaction between business system and its
environment.

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Notes 8. Control Mechanism: Business system works through a control mechanism.

The control system of business is designed by management. The nature
and scope of the control mechanism varies from one firm to another.
Control mechanism helps to coordinate the organizational activities
and to respond to environmental opportunities and constraints.

1 .5.4 Sub-systems of a Business Organization

A business organization is an open adaptive system as it influences and
is influenced by its environment continuously. In order to carry out the
business and operations successfully a business generally creates certain
departments which are known as sub-systems. The important sub-systems
of a business are:

Figure 1.7: Business System

(Source: Business organization and management by Dr. F.C. Sharma)
1. Production System: It deals in production and manufacturing related
activities. This sub-system deals with planning, organizing and
developing production facilities achieving production goals.
2. Finance System: This subsystem supports the decisions involved in
the financial decision making process. It deals with crucial decisions
related to investment, expenditure, management of cashflows, etc.
It also provides support and financial resources to all other sub-
systems.
3. Marketing System: This system gathers and analyses all the
information related to marketing campaigns of the organization. It

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helps in taking decisions related to product, price, promotion and Notes

physical distribution. This subsystem performs market research and
continuously monitors the external environment.
4. Personnel System: This subsystem supports the functions of human
resource management of an organization. It involves manpower
planning, training, staffing, motivation, performance evaluation,
and other functions related to human resource of an organization.
5. Research and Development System: This sub-system monitors
the internal and external environment and concludes a source for
innovation. It deals with discovery of new ideas, technology, methods,
etc. for development and growth of the organization.
Above are different subsystems of an organization and each subsystem
influences and is dependent upon the other.

Figure 1.8: Interaction between Sub-systems

(Source: Business organization and management by Dr. F.C. Sharma)

All these sub-systems must be properly integrated and closely coordinated

so that the entire system functions as an integrated whole in accomplishing
objectives for which the business has been set up. For example marketing
department sells whatever is produced in the production department and
production is based on the research and development department for new
ideas and innovative products. The finance department supports all the
other departments in one or the other way. It provides every department
financial assistance for smooth functioning and performance of tasks.
Personnel department runs the whole organization as without human
resource’s contribution no task is possible. It helps in effective man-
agement of people all across the organization and achieving competitive
edge among the competitors.

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Notes To achieve a successful integration of these sub-systems a two way

communication is desired, there should be a periodic review of the
functioning of all sub-systems and proper emphasis should be given to
each sub-system.

1.6 Business and Environment Interface

A business organization mainly functions under two sets of environment,
namely internal and external. The internal environment includes sub-sys-
tem of production, finance, personnel, marketing, etc. These sub-systems
operate under the influence of external environment, also known as ‘Supra
system’. The external environment involves all the factors outside the
business namely, customers, government, state of economy, environmental
factors, legal factors, etc.

Figure 1.9: Business and Environment Interface

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1.6.1 Types of Business Environment Notes

Now we shall try to explain in detail, how the environment affects a
business system. The environment may be:
1. Economic Environment: As already stated in this lesson, no
business exists in a vacuum and cannot independently control its
destiny, as it is subjected to external influences over which it has
no direct control. A business must suitably react to these external
influences in order to survive. A business firm belongs to a particular
industry: manufacturing, banking, insurance, mining and so on. These
industries are the essential element of national economic system.
The national economic system cannot exist in isolation either, as it
is an integral part of the world economic system. Both national and
international economic forces influence the demand for the product
of a particular business. Production program of business firms are
affected by these economic forces and the production programs in
turn determine the resources required in the shape of raw materials.
The availability of these resources is also dependent on political,
economic and social circumstances prevailing within the countries
supplying raw materials. Demand affects the level of employment at
home and abroad. Increase in demand at home for consumer goods
creates additional demand for new plant and machinery, in order to
expand its production which may be purchased from home capital
goods industry or from abroad. It may create balance of payment
problems, if purchased from abroad which have to be financed
either by additional exports or by loans from international financial
institutions.
2. Technological Environment: The demand for a product is affected
by the technological changes. Consumers respond to technological
changes and demand for products incorporating the latest technology. A
business must be quick to respond to these technological developments.
Examples of this include transistorized radios and changeover from
metal products to plastic or fiberglass products. A business can
retain its share of production or increase only by quick response to
technological developments and for this market research is a must.
3. Financial Environment: A business unit cannot remain unaffected
by the financial environment existing in the country. For instance,

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Notes the economic crisis in a country may be reflected in the financial

position of those business houses who have to suffer from deficiency
of liquid funds. Economic crisis, leading to lower level of demand
causes fall in production which in turn leads to increase in fixed
cost per unit thus reducing profit margin of per unit sold. Even
where a business can obtain some short-term finance in the form
of loans, the interest rate is quite high which further increases the
financial overhead burden.
4. Sociological Environment: The employees of today are developing
a new sociological outlook. The present-day employees cannot
be effectively controlled in an autocratic fashion. They want to
participate in the management process. This calls for democratic
approach in management and for that management has to change
its traditional approach towards the personnel or labour.
5. Legislative Environment: A large number of government legislations
like the Companies Act, the Industries Development and Regulation
Act, Income Tax Act, Sales Tax Act etc. affect the activities of
business.
As we have read above, business is an open system having continuous
interaction with the external environment as shown in Figure 1.6.
It depends on the external environment for resources and survival.
It draws inputs such as capital, labour, land, raw materials, etc.
from external sources. The term ‘business environment interface’
means that business and environment influence each other and are
dependent on each other. As environment has impact on business so
does the business on environment. Its products and services satisfy
needs of the society and also work as inputs in other firms. If a
big business house stops its operations it will definitely affect the
environment in some sense. However, as we know environment is a
bigger system and has more impact on the business than the latter.

1.6.2 Nature of Interface between the Business and Environment

The interface between the business and its environment can be studied
under these three areas:
1. Exchange of Information: For survival, organization must exchange
information with the external environment. The information obtained

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from the environment may relate to customers’ preferences, needs, Notes

introduction of technology, availability of raw materials, availability
of labour, etc. The organization must in turn supply the information
related to its production, imports, exports, innovations, future plans,
etc. to the environment.
2. Exchange of Resources: As we have discussed above an organization
is an open system which gets inputs from the environment and in
turn supply outputs to it. These inputs help in production and supply
of goods. The organization depends on the external environment for
sale of outputs and to perceive needs of the external environment.
Beside the needs of customers the management has to meet the
demands of the other groups namely shareholders, investors, workers,
suppliers, government, etc.
3. Exchange of Influence and Power: The external environment holds
the power over the business organization and offers a range of
opportunities, rewards and incentives with a set of constraints, threats
and restrictions. Government and legal factors impose their will
over the organizations. Suppliers, shareholders, partners, investors,
etc. also influence the decisions taken by the organization.
1.6.3 Strategies to Deal with the Environment
The environment in the modern world is changing rapidly over time,
new technology and changing expectations require managerial expertise
to deal with such situation. The management of the organization can
use the following strategies to cope with uncertainty in the business
environment:
1. Adapting and Anticipating: Managers can occasionally foresee
changes in the external environment and make the necessary
adjustments. Managers can assist their organizations in internally
adapting to anticipate environmental demands using information
from forecasting. For instance, hotels and restaurants in well-known
hilly destinations can prepare for the tourist season by increasing
their food, water, and other service supplies.
2. Levelling or Smoothing: This method seeks to level or smooth
the sales throughout the course of the year. An organization may
provide price discounts to attract customers to purchase more of its

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Notes products during times of low demand. It can impose higher prices
during the busiest times to discourage excessive demand.
3. Rationing: It results in the creation of a list of priorities for the
use of limited resources, such as capital or materials. For instance,
there is a higher demand for liquids like cold drinks, milk, juice,
etc. during the summer, so these products are acquired in large
amounts as compared to ghee, butter and condensed milk.
4. Contracting: The availability of supplies and working capital may
be unclear. As a result, the management is free to negotiate working
capital supply terms with commercial banks and other financial
institutions. Similar agreements can be made with other businesses
for the provision of supplying labour or the selling of finished
goods.
5. Combination: This term describes joining forces with another
organization to form a new business. In order to accomplish a
specific shared goal of both concerned organizations, a combination
is created. A merger pools the resources of the two organizations to
accomplish a single objective and an acquisition helps the acquired
organization to use resources of the acquirer (big organization).
6. Procurement of Key Personnel: To become more competitive, an
organization can hire dynamic individuals currently employed by
competing companies. The organization can guarantee a bright
future for itself by hiring experienced and qualified people from
professional institutions.

IN-TEXT QUESTIONS
6. “Democratic approach in management” is part of which business
environment:
(a) Legal (b) Technological
(c) Sociological (d) Economic
7. Diversity and Dynamism are not the characteristics of Business
system. (True/False)
8. Trade has a narrow scope when compared to Commerce. (True/
False)

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Notes
1.7 Business Ethics

1.7.1 Meaning of Business Ethics

Ethics literally means appropriate and moral behaviour of an entity that
is generally supported by principle of conduct. Business ethics is the
appropriate conduct through business practices by the enterprises while
serving the wealth maximization objective. It is the study of appropri-
ate corporate culture, employee conduct, business policies and practices
regarding corporate business subjects like corporate governance, insider
trading, bribery, discrimination, corporate social responsibility, and fi-
duciary responsibilities. Ethics means the set of rules or principles that
the organization should follow. While in business ethics refers to a code
of conduct that businesses are expected to follow while doing business.

1.7.2 Significance of Business Ethics

The law often guides business ethics, but at other times business ethics
provide a basic guideline, called the code of conduct guidelines that
businesses can choose to follow to gain public approval. Through ethical
code of conduct, a standard is set for the organization to regulate their
behavior. This helps them in distinguishing between the wrong and the
right in the day-to-day as well as special decision making in the business.
Ethics comprise all these values to guide a business by providing stan-
dards. Businesses should have to make a tradeoff and maintain a balance
between the needs of the stakeholders and their desire to make profits.
While carrying out this balancing act, often businesses are required to
do tradeoffs. To combat such scenarios, rules and principles are formed
in the organization, called ethics. These ethics ensure that businesses
gain without affecting the individuals or society as a whole. The ethics
involved in the businesses reflect the vision of that organization.

1.7.3 Principles of Business Ethics

Essentially, any business that runs in India comprises these ethical prin-
ciples. Following are the pillars of business ethics:
1. Integrity: Whenever there is great pressure to do right instead of
maximizing profits, this principle is tested. The executives need
to demonstrate courage and personal integrity, by doing what they
think is right. These are the principles, if upheld, are honoured.
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Notes 2. Loyalty: No ethical behaviour can be promoted without trust. The

executives need to be worthy of this trust while remaining loyal to
the companies and the person. There should be devotion and loyalty
for the duty, in times of adversity. Secrecy should be priority and
organizational interest must be prioritized over personal interest.
They should not use or disclose personal information. This leads
to confidence in the organization.
3. Honesty: The ethical executives are honest while dealing with their
regular work. They also need to be truthful and do not deliberately
deceive or mislead the information to others. There should be an
avoidance of the partial truths, overstatements, misrepresentations, etc.
Thus, they should not have selective omission by any means possible.
4. Respect and Concern: When the executive is ethical he is compassionate,
kind, and caring towards those in need. The executives also need to
show respect towards the colleague’s dignity, privacy, autonomy and
rights. Ethics require persons to be courteous and treat the person
equally and rightly.
5. Fairness: Fair people are inclined more towards justice and ensure that
the people are treated equally. They should be tolerant, open-minded,
willing to admit their own mistakes. The executives should also be
able to change their beliefs and positions based on the situation.
Ethical person in a firm should avoid taking undue advantage of
power, position and subordinates and should treat them courteously.
6. Leadership: Ethics motivates and inculcates leadership among
employees. They should be able to handle the responsibilities. They
should be aware of the opportunities due to their position. Proper
leadership qualities model a person as a role model to others too.

1.7.4 Steps to Develop Business Ethics in an Organization

Ethics in an organization be developed by doing the following:
1. Training and Awareness: When the ethics built in the organization
are not understood or practiced, then it is only worth of paper or
space it is stored in the organization. To make ethics relevant in the
day-to-day functioning of the organization, companies must have their
own in-house training departments. These departments should provide
the necessary requisite training required by the employees as well as
the leaders of the organization. A trainer is engaged to provide the
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training of ethics. He should be well-equipped and have sufficient Notes

experience in the field of ethics so that he can be more effective.
2. Code of Ethics: Ethics are the backbone of any organization. That is
why it is important to have a strong code of ethics in the organization.
The Companies Act, 2013 makes it mandatory for the businesses
to compulsorily have an ethics code of conduct. This means that
there should be a code in writing which every employee can follow
and strive to achieve it. Code of Ethics are best utilized if they are
implemented and enforced on the members of the organization.
3. Reporting Mechanism: A whistleblower policy as well as a secure
reporting system encourages employees to report any misconduct
at the workplace without the fear of being harmed. Further, this
adds discouragement to the people who are getting involved in such
acts. A strong reporting system raises sense of loyalty in employees.
Also, if the misconducts are resolved earlier then the company may
be able to save a huge amount of money in the future.
4. Ethical Councilor: Just as the employees require training in ethics,
there should also be a supervisor to enforce ethics and resolve any
issues related to ethics. He should be a confidential resource in
matters of employees.
This supervisor should help find out an ethical way out in case the orga-
nization faces dilemma. He should be aware of the ethical laws, policies
and concepts and should be able to take the decisions required.
IN-TEXT QUESTIONS
9. __________ means the set of rules or principles that the
organization should follow.
10. A whistleblower policy as well as a secure reporting system
encourages employees to report any misconduct at the workplace
without the fear of being harmed. (True/False)
11. The Companies Act 2013 makes it mandatory for the businesses
to compulsorily have an ethics code of conduct. (True/False)
12. Which of the following are principles of ethics?
(a) Integrity (b) Loyalty
(c) Fairness (d) Respect
(e) All of the above
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 BUSINESS ORGANIZATION

Notes
1.8 Summary
The above lesson gave us an introduction to what a business activity is
and how it is conducted. Economic activity of a man is called business.
Business, therefore, means the production or purchase of goods with a
view to sell them at profit. Besides, if services are rendered on payment
to others, they shall be included in business. Business may be defined as
a human activity directed towards producing or acquiring wealth through
buying and selling of goods and services. The term business includes trade,
commerce and industry. The process of buying and selling of goods, is
called Trade. Business ethics is the study of appropriate corporate culture,
employee conduct, business policies and practices regarding corporate
business subjects like corporate governance, insider trading, bribery, dis-
crimination, corporate social responsibility, and fiduciary responsibilities.
Ethics means the set of rules or principles that the organization should
follow. There are several principles like integrity, fairness, leadership,
honesty, etc. that govern a business and help it in growing.

1.9 Answers to In-Text Questions

1. Business
2. False
3. (d) All of the above
4. Commerce
5. False
6. (c) Sociological
7. False
8. True
9. Ethics
10. True
11. True
12. (e) All of the above

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 Introduction to Business Organization

Notes
1.10 Self-Assessment Questions
1. Explain the concept of ‘Business’. What are its different motives
and features?
2. What do you mean by the term Business Environment? List different
types of business environments.
3. Explain the concept of Commerce and trade. How is trade different
from commerce? Which one according to you is better?
4. What do you mean by the term ‘business ethics’? What are different
principles governing business ethics?
5. List the differences between Trade, Commerce and Business.
6. What do you mean by a business system? List its different characteristics.
7. Explain the concept of ‘business ethics’. How can these ethics be
developed among the existing and new employees of the firm?

1.11 Suggested Readings

‹ Basu, C. (2017). Business Organisation and Management. McGraw
Hill Education.
‹ Chhabra, T. N. (2020). Business Organisation and Management.
Sun India Publications, New Delhi.
‹ Drucker, P. F. (1954). The Practice of Management. New York:
Harper & Row.
‹ Kaul, V. K. (2012). Business Organisation Management. Pearson
Education.
‹ Koontz, H., & Weihrich, H. (2012). Essentials of Management: An
International and Leadership Perspective. Paperback.
‹ Laasch, O. (2022), Principles of Management, 2e, Sage Textbook.
‹ Singh, B. P., & Singh, A. K. (2002). Essentials of Management.
New Delhi. Excel Books Pvt. Ltd.

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 L E S S O N

2
Social Responsibilities of
Business
Ms. Ritika Sharma

STRUCTURE
2.1 Learning Objectives
2.2 Introduction
2.3 Meaning of Social Responsibilities
2.4 Social Responsibility of Business in India
2.5 Corporate Social Responsibility
2.6 Summary
2.7 Answers to In-Text Questions
2.8 Self-Assessment Questions
2.9 Suggested Readings

2.1 Learning Objectives

After studying this lesson students may able to understand:
‹ The basic concepts and meaning of social responsibility.
‹ An overview of social responsibility of businesses in India.
‹ To create the awareness about practice of corporate social responsibility.
‹ The features and components of corporate social responsibility.

2.2 Introduction
A firm should operate to make money in a way that satisfies societal expectations. Every
person who lives in society owes something to it. They are required to adhere to social
standards and beliefs. Society grants a business permission to engage in commercial or
industrial activity with the goal of making money. However, it is important for business to
refrain from taking any actions that are socially unacceptable. Some examples of undesirable

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 Social Responsibilities of Business

activities from the perspective of society are the production and sale of Notes
adulterated goods, failure to pay required taxes, engaging in dishonest
behaviour, and exploitation of the environment. These could boost a
company’s earnings but, on the other hand, would be bad for society as
a whole. Contrarily, providing high-quality goods, maintaining a healthy
workplace, paying taxes on time, installing pollution control equipment
or preventing pollution, and sincerely resolving customer complaints are
some examples of socially desirable activities that benefit businesses and
increase their profitability. Businesses can achieve long-term success by
acting in an ethical and socially responsible manner.

2.3 Meaning of Social Responsibilities

Social responsibility is the duty an organization has to act in a way that
benefits society and upholds its values. In order to meet their social
obligations, businesses are expected to respect society’s values and am-
bitions and do everything in their power to realize both these objectives
and their own. In simple language, it is the duty of an organization to
uphold social responsibility and to work for the betterment of society. The
phrase ‘social responsibility’ is widely used in the literature of sociology,
anthropology, economics, politics and business management.
The goal of managers making business decisions, according to the con-
cept of social responsibility in business, is not just to maximize profit or
shareholder value, but also to serve and safeguard the interests of other
members of society, such as the consumer, employee, and community at
large.
H.R. Bowen has defined the concept of social responsibility as “obliga-
tion (of manager) to pursue those policies, to make those decisions, or to
follow those lines of action which are desirable in terms of the objectives
and values of our society.”
Harold Koontz and Cyril O’Donnell say, “Since an obligation can be
owed only by one person to another, social responsibility is an interper-
sonal relationship that exists when people are continuously dependent
upon one another in both organized and unorganized way. As a working
definition it may be regarded as the personal obligation of people as they
act in their own interest to assure that the rights and legitimate interests
of others are not impinged.”

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 BUSINESS ORGANIZATION

Notes Thus the business managers must assess the implications and effects of
their decisions and policies on the other components of the society and
to ensure that the interests are not adversely affected by their actions.
The action taken by a business which help society to achieve more of
its objectives, are socially responsible actions which may be classified
as internal or external to a business. Internal social responsibilities are
concerned with assuring due process, justice, equity and morality in em-
ployee selection, training, promotion, increasing employee productivity etc.
While external social responsibilities refer to such actions as stimulating
minority enter premiership, improving the balance of payments or training
and hiring hard-core unemployed.
Social responsibilities may also be considered from the point of view of
their impact on profits. A company may take socially responsible actions
which serve to improve short-run profits. For example, it may install a
machine to replace one which is hazardous to workers. In doing so, it
may also make new rules concerning workers’ bonus and promotion which
result in higher productivity as well as social justice. Actions can be taken
which clearly reduce profits. For instance, installing expensive anti-pollu-
tion devices, the costs of which cannot be passed on to consumers, will
reduce profits. But businessmen will not take actions which will reduce
both short and long-run profits. They may be willing to take an action
that reduces short-run profits if they believe that it will somehow increase
long-run profits, but rationalization of such actions may lack conviction.

2.3.1 Need for Social Responsibility

While a company exists to maximize profits, that shouldn’t be its only
goal, it should also have a social responsibility. The following justifies
the need for social responsibility by an organization:
1. Society’s Evolving Expectations: Compared to earlier years, the
world has undergone significant transformation. Nowadays, society
demands more from a business than just the provision of goods
and services. In exchange for the labour, natural resources, and
other resources that society gives to businesses, it hopes that these
businesses will provide something good for society.
2. Building Reputation: Businesses invest a lot of money in maintaining
their brand and a positive reputation in society. In order to do this,

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 Social Responsibilities of Business

a company can also engage in socially responsible activities that Notes

will boost profitability, sales, sustainable growth, brand perception,
and the ability to recruit top personnel.
3. Avoidance of Government Action: The government has passed
numerous legislation, putting pressure on businesses to take moral
and legal responsibility for their actions. The government will get
involved in the business if the corporation fails or abstains from
certain activities. Therefore, businesses must fulfil their social
obligations in order to prevent such government involvement.
4. Long-term Self Interest of Business: Socially responsible business
strategies are advantageous for both society and businesses over the
long term. Having a reputation in the market as a brand or business
that contributes to society in addition to making a profit will help
a company’s image and serve its own interests.
5. Better Utilization of Resources: Optimal resource utilization is one
of the goals of organizations when they produce and sell goods
and services to clients. Resources must be preserved for future
generations since, as we all know, they are becoming more limited
due to population growth. As a result, businesses need to act with
social responsibility and maximize resource utilization.
6. Growth of Consumer Base: Compared to earlier times, modern
consumers are better informed and more aware of their rights
and options. They are aware of the actions they can take when a
company engages in unfair trade practices, such as providing them
with inferior goods and services or charging them more money.
Therefore, in order to keep current customers and draw in new
ones, businesses need to adopt social responsibility.

2.3.2 Arguments Given against Social Responsibility

Since long there has been a controversy whether business should assume
social responsibilities, or it has no such obligations to fulfil, in the above
section we discussed arguments that support adoption of social responsi-
bilities, now let’s discuss arguments against its adoption:
1. Violation of Profit Maximisation Objective: This argument contends
that the sole purpose of business is to maximise profits. Therefore,
any discussion of social duty runs counter to this goal. In reality,

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 BUSINESS ORGANIZATION

Notes businesses that maximise earnings through improved efficiency and

decreased expenses are better able to uphold in the market. According
to some business persons they can adopt the provision of social
responsibility only if they have a reserve of profits. According to
the traditional view, businesses are economic institutions, and as
such, their main duties are to produce goods and services profitably
for their owners or shareholders.
2. Burden on Consumers: It is maintained that social obligations like
pollution prevention and environmental protection are exceedingly
expensive and frequently necessitate significant financial outlays.
In such situations, businesspeople are inclined to simply shift this
social responsibility burden by raising costs on consumers rather
than shouldering it themselves. Therefore, taxing customers in the
name of social responsibility is unfair.
3. Lack of Skills in Business Houses: Not all social issues can be
resolved in the same manner that commercial issues are. In reality,
businesspeople lack the knowledge and expertise needed to address
social issues. Therefore, this argument suggests that other specialised
organizations should handle social concerns.
4. Lack of Public Support: The claim made in this instance is that
business involvement in or interference with social programmes
is unpopular with the general population. Because of the lack of
public trust and participation in resolving social issues, business
cannot operate properly.
CASE STUDY
“Starbucks Ethical Sourcing of Sustainable Products”
Starbucks Corporation has always been dedicated to social responsi-
bility, which includes environmental protection and support for local
communities. It actively promotes sustainable farming in the areas
where supplies are sourced and buys Fair Trade Certified ingredients to
make products. Starbucks ensures to become a resource positive brand
by promising to give more then they take from the planet. They com-
mit “50 percent of water withdrawal for global operations, packaging

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 Social Responsibilities of Business

and agricultural supply chain will be conserved or replenished”. For Notes

its more than 9,000 company-operated locations in the U.S., Canada,
and EMEA since 2015, Starbucks has used only renewable energy.
The company has significantly increased the number of renewable
energy projects on its pipeline in the US, promoting the integration
of green energy into the grid close to the end-user businesses.
For more details refer to: [Link]
starbucks-solidifies-pathway-to-a-planet-positive-future/ & https://
[Link]/responsibility/sourcing/

2.4 Social Responsibility of Business in India

Since independence, government, educationists, political parties, labour
unions and other groups in our society have brought about a lot of changes
in the minds of the people about aims and values of life. The government
is eager to see that the rate of our national income is increased in order
to have a better living standard for the people. For this purpose, Indian
business will have to make full use of modern technology and science
and encourage the development of innovational personnel.
Another important social responsibility is to increase the rate of new jobs
to absorb persons. The development plans should normally create new jobs
for engineers, technologists, scientists and other personnel. But business
has not increased its absorptive capacity in proportion to the supply of
trained personnel. This problem needs to be considered.
An important social responsibility of the entrepreneurs is to develop an
organizational culture in business. This will aim at giving a unity of char-
acter in thinking and action among all its members and adapts itself to the
changes made necessary by other culture. It is the entrepreneurial culture
with its distinct aims about ownership, exercise of authority, control and
sharing of gains which dominates business. Authority, control and gains
are desired by all employees. The contract with entrepreneurial culture
naturally brings these desires in these employees, more so when they are
competent enough in their functional areas. Such an organizational culture
must have a unity of purpose which will make it possible for all members
to respond to all human situations in society, to offer a fellowship to all

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 BUSINESS ORGANIZATION

Notes members in which their life assumes new meaning and direction and to
appreciate desires and aspirations of men who have the abilities.
A new social problem in India is the slow alienation of the public from
the problems and difficulties of big enterprises in the private sector due
to lack of social purpose in the private sector. The business class can
bring a considerable change in the attitude of the public by taking suit-
able measures like developing an organization culture similar to that in
the public sector.

2.4.1 Forces Inducing Social Responsibilities

Businessmen are now recognizing various social responsibilities due to
the following forces:
1. Businessman have been forced to consider their social obligations
because of ever increasing fear of public interference through the
government. For instance, in India many Acts like Factories Act,
Industrial Disputes Act, Companies Act have been enacted to control
the functioning of the business undertakings.
2. There is a pressure of organized labour also as participation of
labour in the decision-making process is increasing with a demand
to consider their view points before taking final decisions.
3. There is recognition of human element in industry leading to
enlightened personnel management.
4. Due to spread of education, public opinion about the quality of life
and the need to remove all types of pollution is growing.
5. As a result of separation of ownership and control in case of large
business professional managers are able to act as trustees and
adopt objective attitude in the distribution of surplus among all the
interested parties as they are not the owners of the enterprises and
so they do not have any vested interest.

2.4.2 Obligations of the Business towards Different Groups

1. To itself: The first duty of any business is to itself i.e. to create
conditions which will make it stable, continuing and established.
A loss making company is a public as well as private liability. It
should be run efficiently and competently so that the minimum inputs
generate the maximum output or the surplus. If every business unit

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 Social Responsibilities of Business

in the economy strives for best utilization of resources, the society Notes
will benefit and the national dividend will increase.
Earning of profits does not only mean a fair return on investment
but also creation of reserves for contingencies which will provide a
cushion to the business from jerks generated by economic ups and
downs.
This profitability should not lead to profiteering by creating
monopolistic tendencies and artificial shortage of supplies in the
market, so that the consumers are compelled to pay high prices. In
a nutshell, the business should avoid adopting unethical business
practices. It should be Adam Smith’s ‘Invisible hand’ to distribute
each one’s due share to each one in a rational way.
2. To its Shareholders: The dilemma before the professional manager
is that if they do not ensure adequate return consistent with the
prevalent interest rates, the sources of capital will dry up and the
debt-equity ratio will go on deteriorating to the detriment of sound
capital gearing. Thus, the first obligation towards the shareholders
is to ensure a fair return on capital employed.
Secondly, wider disclosure of information on the part of directors is
required.
Thirdly, the company must protect the assets and use these as trustee
of the shareholders.
Thus, responsibility of company towards shareholders becomes even
greater when we find that:
(a) Shareholders cannot demand dividend.
(b) Unorganized shareholders are scattered all over the country.
(c) The proxy system which makes shareholders control ineffective.
3. To its Creditors: A business unit owes its responsibility towards
its creditors who are also part of the society.
(i) The term of the credit should be observed.
(ii) Litigation and consequent wastage of company’s money should
be avoided.
(iii) Details of trade creditors should be given in annual accounts
and report.

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 BUSINESS ORGANIZATION

Notes (iv) As the law stands, any person who is knowingly a party to a
company carrying on business with intent to defraud creditors
may be declared personally responsible without any limitation
of liability for all or any of the debts of the company.
The Implications of the above are:
(a) Liability of shareholders is limited. The creditors (especially
trade creditors) become unsecured creditors.
(b) The lender has no share in the increased profitability of the
company.
4. To its Employees: The employees of the business form a major section
of the society. The well-being of the employee therefore means
well-being of the society. A business owes certain duty towards its
employees also. The expectation of employees is continuously on
the rise. They are no longer satisfied with the conditions of work,
increased contributions, to retirement benefits and medical benefits
etc. The reason is that employees are human beings and like profit
monetary gain is not everything. The business, beside providing the
employee’s (a) subsidized (i) transport (ii) lunch and canteen facilities
(iii) housing and (iv) medical benefits (b) profit sharing and (c)
bonus etc., must also satisfy their self-esteem and ego. This can be
done by: (a) Worker’s participation in decision making, (b) better
industrial relations and understanding of the worker as a human being,
(c) equity-participation by employees and (d) Institution of workers
as directors. These will provide a platform of dialogue between the
business and the employees. This will result in employee satisfaction.
It will mean a happy person and a happy family.
5. To the Society: Business is not an end in itself. It is only a means
to achieve an end, that end is person oneself and the individual.
Therefore, business has by direct and indirect tests, to contribute
to one’s happiness, freedom and material, moral and spiritual
growth. It must be made conscious of its social responsibilities.
Social responsibility is the personal obligation of everyone as one
acts in one’s own interest, to assume that the rights and legitimate
interests of all others are not affected adversely. Social responsibility
or business is to pursue those policies to make those decisions or

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 Social Responsibilities of Business

to follow those lines of action which are desirable in terms of the Notes
objectives and values of our society.
In the real sense, the assumption of social responsibilities implies
recognition and understanding of the aspiration of a society and
determination to contribute to its achievements. As Peter Drucker
puts it, “the business enterprise should be so managed as to make
the public good become the private good of the enterprise.”
A company should behave like a good citizen in business. The
law does not (and cannot) contain or prescribe the whole duty of
a citizen. A good citizen takes account of the interest of others
besides himself and tries to exercise and form an imaginative ethical
judgement in deciding what he should and should not do. This is
exactly how companies should seek to behave. It should pay proper
regards to the environmental and social consequences of its business
activities, and should not sacrifice the safety of efficiency of goods
and services in the interest of expediency or competitiveness.
1. In environment matters, it is usually the business unit that is
the first to know of a potential hazard. Ecological safeguards
are very important. Control of Pollution is now being made
obligatory by various enactments in different countries. The
Company has a duty in such circumstances not only to take all
possible remedial measures but also to inform the responsible
authorities. The Company can save the community from the
outbreak of a possible epidemic or certain skin allergies, stomach
diseases etc. The health of the society can be protected.
2. To give employment to local population is another aspect of
its responsibility. The enterprise can create its own township
if it is of a giant size. Examples are Tata Nagar, Mohan
Nagar, Walchand Nagar, Modi Nagar, Pilani etc. all set up
by industrialists. The company can ask its employees to take
interest in the management of these townships. Related to this
the facility which it can provide to the society, the subsidized
housing scheme or loans to employees for housing.
3. The business owes its duty to educate and improve the education
and skill of its employees and the local community. These
can be financed by the business. The modes can be training

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Notes school, opening of technical and customary educational colleges,

institution of scholarships and apprenticeship schemes. A dialogue
between the business and the society should be initiated where
the two could have an opportunity to discuss the areas of mutual
interests and points of disagreement and conflict.
4. As a good citizen the enterprise must not cause damage to
amenities of the community. It should bear the social cost of
its anti-social conduct, e.g., destruction of the natural beauty
of the surroundings, condition of slums and congestion. The
Company’s management must shed socially irresponsible and
self-defeating business policies and balance the claims of the
workers, shareholders, community upon the company.
5. Business can help the society by giving charity or donations
to different sections of the public. It can help the disabled
and the handicapped people by giving the suitable jobs.
6. The company is duty bound to pay taxes and levies etc. to
the Government and thus contribute in the economic growth
and national revenue. Thus, to conclude in the complex
economic and business life of the country every enterprise
has a manifold responsibility viz, to itself, to its customers,
workers, shareholders and the community, and it is the task
of management to reconcile these separate and sometimes
conflicting responsibilities.
IN-TEXT QUESTIONS
1. __________ are concerned with assuring due process, justice,
equity and morality in employee selection, training, promotion,
increasing employee productivity etc.
2. Social responsibility is the duty of an organisation to act in a
way that benefit the society. (True/False)
3. Which of the following are the reasons for a business to assume
social responsibility?
(a) Long-term Self-interest of Business
(b) Response to Social Obligations
(c) Avoidance of Government Action
(d) All of the above

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 Social Responsibilities of Business

4. Recognition of human element in industry has led to bring Notes

personnel management and human resource management under
focus of social responsibility. (True/False)
5. Charity or donations to different sections of the society is not a
component of social responsibility of an organization. (True/False)

2.5 Corporate Social Responsibility

Corporate Social Responsibility (CSR) refers to a business model in which
companies integrate social, environmental, and ethical concerns into their
operations and interactions with stakeholders, beyond just making a profit.
CSR involves companies taking responsibility for the impact their activities
have on society, the environment, and the economy. This goes beyond legal
obligations and includes voluntary actions that contribute to sustainable
development and the welfare of society.
Some examples of CSR initiatives are given below:
‹ Companies donating to charity or volunteering in local communities.
‹ Reducing carbon emissions or adopting sustainable sourcing practices.
‹ Implementing fair trade practices and ensuring fair wages for workers.
‹ Promoting diversity and inclusive within the workplace, etc.

2.5.1 Rationale for CSR

CSR has grown in importance due to its significance for the business-
es. The rationale for engaging in CSR activities can be understood by
the rising importance of sustainability and energy saving in the world.
Sustainable operations bring better goodwill and break images to the
business houses. Sustainable activities are also compliant to the legal
and judicial system of a country, thus, saving a business from negative
externalities. It helps create committed and loyal customers willing to
support responsible companies. The stakeholders, investors and media also
approve, acknowledge and appreciate CSR efforts by the organizations,
helping the business survive and prosper.

2.5.2 CSR Legislations in the Companies Act, 2013

The Companies Act, 2013 provides for inclusion of CSR by business
houses. It is a landmark legislation that made India the first country to
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Notes mandate CSR expenditure and quantify CSR efforts. The inclusion of
CSR is an attempt by the government to engage the businesses with the
national agenda of sustainability. The Act came into force from April 1,
2014, with following CSR provisions.
1. The law prescribes every private or public limited firm, with a
net worth of Rs. 500 crore or a turnover of Rs 1,000 crore or net
profit of Rs. 5 crore, to spend at least 2% of its average net profit
of preceding three financial years on CSR activities.
2. Law further prescribes corporations to set up a CSR committee.
3. Another provision puts power in the CSR committee and requires
it to formulate a CSR policy. This policy encompasses all the CSR
activities the corporation’s plans to conduct. It shall also monitor
and supervise the plans.
4. The Board of the companies are given the powers to approve the
SR policy and disclose the contents of such Policy in its report. A
digital copy of the same is mandated to be put on the company’s
website. The board is empowered to ensure the compliance of CSR
policy and expenditures of the company.
5. The act also provides penal actions for corporations and individuals
for failure to abide by any of the provisions of the act.

2.5.3 Features of CSR

A good business doesn’t stand on measuring only the financial perfor-
mance but rather its overall performance, health, impact and goodwill
of the business.
1. Voluntary or Mandatory: CSR may be voluntary by the entrepreneurs
and the management. In some countries such as India, 2% of the
turnover in form of CSR has been mandated for large organizations
to contribute.
2. Theoretical and Practical: CSR is based on principle of ethics,
sustainability and morality. These practices guide organizations to
practice CSR in an operational and measurable way.
3. Social and Economical Alignment: CSR requires businesses to
confirm their economical goals to social objectives while night
compromising on financial health of the organization.

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 Social Responsibilities of Business

4. International Trends: While financial performance, business investments Notes

and industrial position highly affect a firm’s competitive edge, their
international standing also impact its domestic as well as foreign
operations. Companies need to keep up with international trends, norms,
principles for an effective presence around the world. This highly
depends on the company’s ability to integrate social responsibility
efforts into decision making and performance improvement. With
rising global trends of incorporating Social responsibility concern in
the functioning of businesses, a firm can get international standing,
too, by perusal of such objectives. International organizations such as
UNPRI, UNCTAD, GRI and UNGC give guidelines on incorporating
social responsibility in corporation while also performing financially
well.
5. Management of Externalities: CSR requires thought on management
of extremities and results in a management of extremities itself.
6. Long-Term Interest: It is in the long-term interest of the business
to discharge its social obligations by serving different interest
groups such as employees, consumers, government and citizens.
By undertaking social responsibility, the uncertainties and negative
externalities associated with business operations are combated
which benefits organizations in long term. Working for the society,
stakeholders and government help an enterprise in establishing a
strong public image. On the other hand, a business organization
committed to selfish interests may get ignored by the society.
7. Indebted to Society: A business is related to the society through an
obligation where it derives resources of production from the society.
Businesses, hence, should give back to the society in lieu of the
resources extracted. They should tend to the needs of the society
by partly utilizing its resources for community welfare. This wins
the confidence as well as trust of the people who are willing to
spare more resources for the company in future.
8. Social Power: Given the economic position and social standing of
the businesses, the management can exploit this power to change the
standard of living and addressing more crucial regional, economic
or psychological issues prevalent in a society. persons are endowed
with a lot of social power. The businesses should initiate to engage

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Notes in corporate social responsibility given the potential of this social

power.
9. Goodwill: Businesses that engage in corporate social responsibility
communicate a positive image about the organizational operations.
The members of the society are thus motivated to spare more
and more of the scarce and valuable resources at low cost for the
development of such businesses that care about the societal well-
being. This goodwill can further be monetized in valuation of the
company. Public image positively impacts all the stakeholders including
investors, employees, suppliers, customers and the government.
10. Social Awareness: With stricter legal norms, procedures and legislations,
the organizations are not free from public scrutiny. With transparency,
clarity and awareness a company’s stakeholders customers are more
informed about their rights. It has become mandatory on the part of
the organizations to cater to needs of all members of the stakeholder
group, including consumer, workers, society and the government.
The businesses are under constant scrutiny of these interest groups
who may withdraw the supply of resources and material if their
needs and wants are not met judiciously.
11. To Avoid Government Intervention: A businesses’ operations are
doomed if doesn’t abide by the social norms or judicial legislations.
The public awareness combined with legislations strengthens the
interest group to take action against ill performing or harming
businesses and rip them off of any societal power and standing.
Thus to avoid public punishment, companies should strive to comply
by the societal and governmental norms.
12. Law and Order: A businesses not conforming to societal and
governmental legislations, is subject to constant scrutiny and find
itself defending its actions in public courts. To avoid law and order
non-alignment, companies should make sure to take steps for the
welfare of its stakeholders.
13. Moral Justification: A business possesses resources such as finance
and talent pool to help bail out troubled masses out of social issues
like poverty, dowry, unemployment and illiteracy by organizing special
campaigns and programs. Additionally, business houses can assist
the government in solving many other issues like lack of foreign

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exchange etc. Moreover, business organizations increase pollution Notes

by releasing untreated sewage into the environment. Thus, it is a
moral obligation of the business to render its services in tackling
these issues.
14. Socio-Cultural Norms: India has a rich legacy of business values
passed down by the legendary and morally upright business owners
like Ratan Tata, Azim Premji, etc. Only those business persons who
sincerely abide by the canon of business will get the privilege of
being honored by the citizens and the government. Hence, the business
should aim to promote equal opportunity and maintain healthy
interpersonal relations with all the stakeholders such as customers,
employees to carve a niche for itself as an honest enterprise.
15. Trusteeship: The great socio-political leader Mahatma Gandhi
propounded the philosophy that owners of wealth and property should
hold and use the wealth for the welfare of the society. Therefore,
company owners should operate the business not only for their own
benefit, but also for the prosperity of the society. According to Keith
Davis, since business has the resources to resolve the mounting
social problems, it should try and assume social responsibilities.

2.5.4 Components of Social Responsibility or Corporate Social

Responsibility

Figure 2.1: Kinds of Social Responsibility or

Corporate Social Responsibility
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 BUSINESS ORGANIZATION

Notes 1. Governance/Legal Responsibility: A business’s operations are doomed

if doesn’t abide by the social norms or judicial legislations. The
public awareness combined with legislations strengthens the interest
group to take action against ill performing or harming businesses
and rip them off of any societal power or standing. Thus to avoid
public punishment, companies should strive to comply by the societal
and governmental norms. A business not conforming to societal
and governmental legislations, is subject to constant scrutiny and
find itself defending its actions in public courts. To avoid law and
order non-alignment, companies should make sure to take steps for
the welfare of its stakeholders. Every business has a responsibility
to operate within the boundaries set by the various commissions
and agencies at every level of the government. These rules and
regulations are set for maintaining balance and the greater good
of the society. For example, it’s a business’s duty to pay taxes to
the government and keep its account books clean as it helps the
government to track the economic state of the company.
2. Economic Responsibility: The business is economic activity. Profits
are needed for growth, survival and giving back to the society. Thus
a business has main function of earning profits. An under-performing
business is a liability to the society as the scarce resource committed
to it is not used effectively and efficiently. While understanding the
preferences of the consumer and meeting their needs and demand
to earn a profit is the economic responsibility of a business. The
economic growth of a business trickles down to the society as a
whole.
3. Voluntary/Philanthropic Responsibility: It is a discretionary and
moral responsibility of the society to transform the valuable resources
of the society into valuable products. These products should support
and improve the society whenever it can. If a business is making
profits from societal resources, it is the business’s responsibility
to give back to society in donation, service or standards of living.
This is because businesses are those machines that bring economic
development in a society. Business should be philanthropic towards
the society by donating funds, helping finding solutions to societal
problems or donating goods and services. It also includes social
conduct of a business wherein it should be sensitive to the impact
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 Social Responsibilities of Business

of firm’s actions and decisions on the sentiment and values of the Notes
general public. It’s the philanthropic responsibility of the business
to invest in social activities and help different groups of the society.
It should also work towards environmental protection and providing
free education by opening educational institutes. This engages the
customers and uncertainty and risk related to the business is curbed.
4. Ethical Responsibility: This comprises the company’s actions that
are expected by society but not regulated by the law. For instance,
when promoting a product, respecting people’s dignity and religious
beliefs. It involves some voluntary action to fulfil this obligation.
ACTIVITY
Take 2-3 well known Indian Companies and evaluate what initiatives
they have undertaken as part of their corporate social responsibilities.

IN-TEXT QUESTIONS
6. In some countries such as India, __________ of the turnover
in form of CSR has been mandated for large organizations to
contribute.
7. Corporate social responsibility (CSR), relates to organizations
conducting business on ethical principles. (True/False)
8. From the following which is not a component of Corporate social
responsibility:
(a) Legal responsibility
(b) Economic responsibility
(c) Philanthropic Responsibility
(d) Non Voluntary responsibility
9. Businesses that engage in corporate social responsibility communicate
a positive image about the organizational operations, and it
helps in creating a good __________ of the firm.
10. It also includes social conduct of a business wherein it should
be sensitive to the impact of firm’s actions and decisions on the
sentiment and values of the general public. Which component
of CSR is being talked about?

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 BUSINESS ORGANIZATION

Notes
2.6 Summary
In this lesson we studied that business has a privilege, not a right, granted
by society and this privileged will be continued only as long as it serves
social needs and it offers social satisfaction. Today, society insists on the
quality of life and freedom from pollution. Business plans and policies as
well as programmes are expected to act as instruments of social change
and are to be implemented with effective controls to promote maximum
public welfare. A socially responsible business firm must respond fa-
vorably to the needs, desires and problems of its shareholders such as
customers, employees, suppliers, shareholders, bankers, government and
the general public. CSR has grown in importance due to its significance
for the businesses. The rationale for engaging in CSR activities can be
understood by the rising importance sustainability and energy saving in
the world. Sustainable operations bring better goodwill and break imag-
es to the business houses. CSR legislations in the Companies Act, 2013
prescribe that every private or public limited firm, with a net worth of Rs
500 crore or a turnover of Rs. 1,000 crore or net profit of Rs. 5 crore,
to spend at least 2% of its average net profit of preceding three financial
years on CSR activities and also set up a CSR committee. Components
of social responsibility include three types of responsibilities namely
economic, governance and voluntary or philanthropic.

2.7 Answers to In-Text Questions

1. Internal social responsibilities
2. True
3. (d) All of the above
4. True
5. False
6. 2%
7. True
8. (d) Non Voluntary responsibility
9. Goodwill
10. Philanthropic Responsibility

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Notes
2.8 Self-Assessment Questions
1. Differentiate between business ethics and social responsibility of a
company. Also give examples.
2. What do you understand by corporate social responsibility? Explain
CSR legislations under Companies Act, 2013 in brief.
3. Write a note on “Social responsibilities of businesses in India”.
Also explain obligations of the businesses towards different groups
of society.
4. Define Corporate Social Responsibility and explain its features. What
are different components of social responsibility for businesses?
5. Why do you think the concept of social responsibility is important?
Explain the arguments offered both in favour and against assumption
of social responsibilities by a business.

2.9 Suggested Readings

‹ Basu, C. (2017). Business Organisation and Management. McGraw
Hill Education.
‹ Chhabra, T. N. (2020). Business Organisation and Management.
Sun India Publications. New Delhi.
‹ Drucker, P. F. (1954). The Practice of Management. New York:
Harper & Row.
‹ Kaul, V. K. (2012). Business Organisation Management. Pearson
Education.
‹ Koontz, H., & Weihrich, H. (2012). Essentials of Management: An
International and Leadership Perspective. Paperback.
‹ Laasch, O. (2022), Principles of Management, 2e, Sage Textbook.
‹ Singh, B. P., & Singh, A. K. (2002). Essentials of Management.
New Delhi. Excel Books Pvt. Ltd.

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 UNIT - II

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 L E S S O N

3
Forms of Ownership
Organizations
Ms. Sumita Jain

STRUCTURE
3.1 Learning Objectives
3.2 Introduction
3.3 Sole Proprietorship
3.4 Partnership Organization
3.5 Company Form of Organization (Joint Stock Company)
3.6 Cooperative Organization
3.7 Limited Liability Partnership
3.8 Summary
3.9 Answers to In-Text Questions
3.10 Self-Assessment Questions
3.11 Suggested Readings

3.1 Learning Objectives

After studying this lesson students may able to understand:
‹ Various forms of ownership organizations including sole proprietorship, partnership.
joint stock company, cooperative society and Limited Liability Partnership.
‹ An overview of advantages and disadvantages of different forms of organizations.

3.2 Introduction
One of the basic questions to be decided by any entrepreneur is that of ownership of the
organization. He has to decide whether he would like to organize the entire show individ-
ually or associate with other people in his venture. Accordingly, it may take the form of

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Notes individual proprietorship organization or an association of persons. An

association of persons may take the following important forms:
1. Sole Proprietorship
2. Partnership
3. Joint Stock Company
4. Co-operative Society
5. Limited Liability Partnership
In addition to the above four forms, another form of organization called
as Joint Hindu Family form exists in our country but its number is de-
creasing day by day. An enterprise can be owned only by any one type
and one form is more suitable than the other because of its distinguishing
features. Before taking the final decision in setting up a business in the
private sector, a businessman has to weigh the distinguishing features of
each form of organization according to the requirements of the venture
proposed to be established. Now we shall discuss the distinguishing fea-
tures of different forms of business organizations.

3.3 Sole Proprietorship

3.3.1 Meaning
A sole individual single proprietorship business is a form of organization
in which an individual produces independently with his own capital (or
sometimes borrowed from relatives and friends), skill and intelligence
and is entitled to receive all the profits and assumes all the risks of own-
ership, He may run the business all alone or with the help of his family
members and some employees. Historically, this form of organization is
the oldest form of business ownership. It is also the simplest and most
natural. The proprietor carries on the business exclusively by and for
himself. He invests his own capital and is thus the owner manager of
the business; the full control rests with him. He is the supreme judge
on all matters pertaining to it as he makes his own decisions. He bears
the entire risk but derives the total benefit. He has unlimited freedom
of action. He may engage in any business of his choice without any
legal formalities unless he wishes to engage in certain types of busi-
ness requiring licenses. For example, if a man wishes to open a shop, a

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grocery store, he may do so, if he can find a suitable location and can Notes
furnish money to produce a supply of goods on the other hand, to open
a restaurant, he will have to obtain a license from the Health Department
of the Municipal Corporation. As his capital is limited and his liability
unlimited, a sole proprietor can only run a small business.

Characteristics
To sum up, single proprietorship form of organization may be said to
possess the following main characteristics:
1. One-man or single ownership.
2. Proprietor and the firm identical.
3. Personal control.
4. Unlimited liability.
5. Total or undivided risk.
6. Relatively free from government regulations.
Because of its special features, single proprietorship form of organi-
zation is suitable for, and is adopted by enterprises:
(a) Which are small in size;
(b) Which require little capital;
(c) Which lend themselves readily to control add management by one
man;
(d) Where risk involved is not heavy;
(e) Where personal attention to customers’ need and tastes is important.
Consequently, the main types of business that take the form of sole propri-
etorship are retailers, hawkers, small grocery stores, bakers confectioners,
launders, small printing houses, small machine shops, and thousands of
similar enterprises, and professional firms.

3.3.2 Advantages of Sole Proprietorship

The principal advantages of sole proprietorship organization are as follows:
1. An individual enterprise is easy to form and simple to run. No legal
formalities like registration are required to set it up. Any person
can engage in such a business at will. The only, restriction is where

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Notes he wishes to start a specified type of business requiring a license,

such as a restaurant, or sell opium, liquor, medicines, etc.
2. The direct touch with customers and personal interest in the
business which makes for efficiency and economy. A sole trader is
in a position to be in close touch with his customers and to cater
for their individual tastes. This helps him to build up goodwill for
himself. The direct relationship between effort and reward acts as
a stimulus to maximum exertion for a sole proprietor.
3. As the sole proprietor is the sole master of his business his control
over it is complete. He is responsible to no one else.
4. Promptness in taking decisions makes for efficiency. As there is no
one else to dispute his judgement, he can maintain a decision made
by him.
5. As the proprietor has full control over his business and is the supreme
judge in all matters he can introduce changes as the exigencies of
occasion demand, and without any delay.
6. Secrecy is of vital importance for the success of a small business,
and the sole proprietor is in an eminent position to keep his affairs
to himself. As there is no legal obligation to supply any information
regarding his business to anyone so he can maintain utmost secrecy
in all matters.
7. The social advantage is also great. This form of organization provides
a way of life for those who take pride in ownership and control of
what they own. It gives the sole proprietor an opportunity to utilize
his capacity to the maximum and to enjoy freedom of action. As he
is his own master and manager, he derives the greatest satisfaction
from his venture.

3.3.3 Limitations of Sole Proprietorship

Despite so many advantages, this form of organization suffers from sev-
eral limitations. The limitations are as follows:
1. The first limitation is regarding capital. The amount of capital that
a sole proprietor can get together is limited. He can invest only as
much as he owns or may be able to raise form friends and relatives.
As a result, he is not in a position to easily expand his business

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when it may be found necessary to take advantage or economics Notes

of large-scale operation.
2. An individual howsoever capable, cannot be expected to possess
knowledge in all branches of a business and is bound to fritter or
waste away his energies in doing things which could be left to
others in a partnership or a company. Since he is not an expert in
all matters and the burden of responsibilities is likely to be more,
his decisions may sometimes be unbalanced.
3. The liability of the owner is unlimited. It is not only the assets
of the business that are liable, but also his entire personal fortune
for the debts of the business. The advantage of personal control is
counter-balanced by personal risk which might turn out to be very
great. Limited capital and managerial ability and unlimited liability
act as brakes to the development and expansion of business.
4. Continuity of business is difficult to maintain. When the proprietor
dies or is no longer able to run the business, the business may come
to an end, if there is no one capable enough to take his place. Very
often the heirs lack the requisite ability or inclination to carry on
the business. If it falls into weak hands, it will fail causing loss not
only to the owner but also to society. The closure of the business
which has been rendering a useful service to the community,
would be a social loss. In conclusion, it may be safely stated that
one man control of business is the best from the point of view of
efficiency and profitability, provided that one man is big enough
to manage everything indefinitely. Unfortunately, such omnipotent
person does not exist. This form of business is, therefore, suitable
in the following cases:
(a) Where the capital required is small and the risk is not heavy.
(b) Where promptness in decision making is of particular importance.
(c) Where customers require personal attention.
(d) Where special attention has to be paid to the tastes and fashions
of the customers.
It is but natural that household and personal service concerns retail shops
and professional firms are owned by individual proprietors. It follows
that individual proprietorship has its own scope of activity and continues

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 BUSINESS ORGANIZATION

Notes to occupy an important position in the business world is spite of the

development or larger organizations, such as joint stock companies. In
India, as elsewhere, single proprietorship businesses continue to be the
most numerous, in spite of the entry of large companies owning giant
business concern. It is also almost certain that individual proprietorship
is in no danger of being crowded out by large corporations, because of
the opportunities it offers to a vast number of people. The Government
has also been encouraging individual owners to take up small manufac-
turing activities by setting up industrial estates and by providing training
facilities, as well as granting financial assistance. The Industrial Policy
statement of the Central Government has laid stress on encouraging cot-
tage and small-scale industry widely dispersed in rural areas.

IN-TEXT QUESTIONS
1. Under sole proprietorship form of organization the owner has
unlimited liability. (True/False)
2. A __________ is a form of organization in which an individual
produces independently with his own capital
3. Which of the following are limitations of a sole proprietorship:
(a) Less capital
(b) Owner cannot have knowledge of all fields
(c) Continuity of business is difficult to maintain
(d) All of the above
4. No legal formalities like registration are required to set up a
sole proprietorship. (True/False)
5. The main types of business that take the form of sole proprietorship
are retailers, hawkers, small grocery stores, bakers confectioners,
launders, small printing houses, small machine shops. (True/False)

3.4 Partnership Organization

The individual proprietorship organization, with all its limitations, proved
unequal to the requirements of expanding business. Expansion of business
called for more capital, advanced the risk, and required greater managerial

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ability than could be expected of a single individual. Therefore men of Notes

ability combined their resources and for this pooled their resources; labour
and skill partnership organization resulted.
Historically, partnership organization has grown out of the need for more
capital to produce for the ever-growing market, more effective supervision
and control, greater specialization and division of spreading the risk. It
is indeed the simplest method of extending the size of a business and at
the same time relieving the sole proprietor of part of the burden.

3.4.1 Meaning of Partnership

The formation and management of partnership organization is governed
by the provisions of the Partnership Act, 1932. Section 4 of the Act
defines partnership: ‘The relation between persons who have agreed to
share profits of a business carried on by all or any of them acting for
all’. This definition brings out the following characteristics of partnership:
1. Contractual Relationship: Partnership can be formed only by a
contract between two or more persons called partners, Only persons
competent to enter into a contract can be partners. A minor cannot be
a partner, although he may be admitted to the benefits of partnership.
Also, a Hindu Joint family Firm which results from statute is not
a partnership.
2. Plurality of Persons: As partnership results from a contract, there
must be at least two partners, although the maximum number of
partners must not be more than fifty.
3. Existence of Business: Partnership implies business, and where
there is no business there is no partnership. Thus, the persons must
form an association by contract to carry on some business. The
Partnership Act, however, uses the term ‘Business’ in the widest
sense, and covers all sorts of enterprises. It includes every trade,
occupation or profession.
4. Sharing of Profits: The agreement must be to make and share profits
of a business among all the partners.
5. Mutual Agency: The business must be carried on by all the partners
or any one or more of them acting for all the partners. In results,
each partner is both an agent and a principal.

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Notes All these conditions must be satisfied to constitute partnership. There

must be a business and it must be run for sharing profits by the partners,
all of whom, or some acting for all, may carry it on. It should be noted
that, although sharing of profits is essential in order to be a partner, yet,
merely sharing of profits does not necessarily make a person partner in
a firm. Thus, a manager, who may be given a share in the profits, does
not become a partner. The real test of whether a person is a partner is
whether the business is conducted on his behalf. In other words, there
must be an element of agency.

3.4.2 Legal Implication of Partnership

Some of the legal implications of partnership, which should be kept in
mind while forming a partnership, are stated below:
1. Legal Position: Legally a partnership firm is not a legal entity, nor a
parson with any separate right distinct from the partners constituting
it. It is only an association of persons who are called individually
partners and collectively ‘a firm’. ‘Firm’ is only a convenient phrase
to describe the partners and has no legal existence apart from them.
2. Extent of Liability: The liability of each partner for the debts of the
firm is unlimited. The creditors have a right to recover the firms’
debts from the private property of any or all partners, where the
firms’ assets are insufficient.
3. Nature of Partners’ Liability: While the acts of the partnership are
in the name of the firm, the responsibility created is joint as well
as several resting upon each of the partners. No agreement between
the partners to limit this liability only to some of them has any
validity against the claims of any uninformed parties.
4. Utmost Good Faith: The relation of partners is founded on mutual
confidence and trust. Each partner must, therefore, be just and
honest towards the other partners. He must not make secret profits.
5. Implied Authority: Each partner is an agent able to bind the other
partners in respect of all regular acts done by him on behalf and
in the name of the firm. Such an act of a partner is deemed to be
the act of the firm (i.e., the act of all the partners). This authority
of a partner is called an Implied authority to bind all the partners.

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6. Unanimity of Consent: In all matters of importance and those Notes

affecting policy and nature of the business, unanimous decision by
all the partners is necessary. The majority principle does not apply.
7. Non-transferability of Share or Interest: No one is allowed to
transfer his partnership interest to any outsider, so as to make him
a partner in the business. The majority principle does not apply.
8. Dissolution: Unless there is an agreement to the contrary, the death or
insolvency of partner dissolves the firm. If, however, all the partners
or all but one are adjudicated as insolvent, or the business of the
firm becomes unlawful, the firm is compulsorily and automatically
dissolved.

3.4.3 Features of Partnership

The distinguishing features of partnership organization are as follows:
1. Formation: Although a partnership is constituted by means of
contract between the partners, no legal formalities are required for
its formation. An oral contract is sufficient to bring it into being.
But it is advisable to reduce the agreement into writing and prepare
all properly drafted deeds of partnership laying down the terms
and conditions of partnership and the rights, obligations and duties
of partners. As partnership arises by an agreement, a partnership
firm must have a minimum of two partners. The maximum is ten
for a banking business and fifty for other business. Registration
of a partnership firm is not compulsory under our law, nor is any
penalty provided for non-registration. The law, however, introduces
certain disabilities, which make registration necessary at one time
or another. The first disability is that an unregistered firm cannot
file a suit to enforce a right arising from a contract. Secondly, a
partner cannot sue the firm or other partners to enforce a right
arising from a contract or conferred by the Partnership Act. But an
outsider can sue an unregistered firm and its partners.
2. Finances: Normally, the capital of partnership firm consists of the
amounts contributed by the various partners. The capital contribution
by all the partners need not be equal, and one or more may not put
in any capital at all. Such partners would only contribute their skill
and labour. The initial capital may be augmented by borrowing on

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Notes the security of the security of the firms’ property and also on the
strength of the private estate of partners.
3. Control: As partnership results from a contract, the control will
depend upon its terms as agreed between the partners. Where all
partners take active part in the conduct of the partnership business,
the control rests with all of them. All major decisions are made by
the unanimous consent of all the partners. There may, however, be
some partners who do not take any active part in the conduct of
the business, they are known as sleeping or dormant partners. In
short, the control is shared by the active or ostensible partners.
4. Management: According to law every partner has a right to take a
part in the management of the affairs of the business of the firm.
In practice, partnership agreement provides for the division of
work among the different partners according to their experience
and knowledge. It is not unusual to have one of them as the
senior partner who would be in the position of the chief executive,
exercising overall supervision.
5. Joint Ownership: Every partner is a joint owner of the partnership
property, and has an equal share in it unless different shares are
provided by agreement. The property of the firm is required to be
used exclusively for the purposes of the partnership.
6. Duration of Partnership: The partners may fix the duration of the
partnership or say nothing about it. When they agree to carry on
business for a definite period of time, it is called a partnership for
a fixed term. When the term is over, the partnership comes to an
end, but if the business is continued after the expiry of the period
originally fixed the renewed partnership will become a Partnership
at will. Where a partnership is formed for a particular adventure, it
is called a Particular partnership which would last until the business
is finished. If the partners say nothing about the duration or agree to
carry on the business as long as they wish to do so, the partnership
will be one at will. Such a partnership can be dissolved at the will of
any partner on his giving a notice to the partner. Where the partner
cannot agree for the firm, the court may, on application order its
dissolution.

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7. Taxation: A partnership firm is liable to pay income tax and other Notes
taxes, as an individual is liable to pay. But there is slight difference
with regard to the rate of tax depending on whether the firm is
registered under the Income Tax Act or not. If it is under the Income
Tax Act, the income will be divided among the partners and each
partner will be assessed separately. If the firm is not so registered,
the firm will be required to pay on its total profit as distinct from
the incomes of the individual partners.

3.4.4 Requisites of an Ideal Partnership

Partnership business grows out of the need for combining resources, both
human and material. Some people may contribute capital, others their
business ability and experience and still others may bring in technical skill
the faithful contribution of each partner will make it successful. Mutual
confidence and utmost good faith are essential. As each partner is the
agent of the others and binds them to the fullest extent of their fortunes,
it is necessary to be extremely careful while selecting a partner. When you
are considering a partner, do not be in a hurry. Give yourself time to test
him. Very often firms fail, because the partners cannot work in harmony.
An ideal Partnership will satisfy the following conditions or requisites:
1. All partners must act with zealous cooperation and for the greatest
common advantage. Each partner must contribute to the success of
the business in accordance with his skill, knowledge, influence and
personality.
2. Honesty of purpose and fairness in dealings are the fundamental
principles of partnership. Each partner must create mutual trust and
confidence among themselves. Only such persons as are known to
one another should form partnership. The number of partners should
also be kept small; otherwise, the partnership will become unwieldy.
3. The necessary funds, both for short-term and long-term use should
be available in insufficient amount. Long-term funds would normally
be supplied by the partners as their capital contributions, and others
might be obtained by way of loans. To maintain the sound financial
position of the firm, drawings by the partners should be kept as
low as possible. Part of the profit should be ploughed back into
the business of the firm for further development.

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Notes 4. The term or duration of partnership should be sufficiently long.

Only long-term partnerships can adequately set up businesses and
consolidate them effectively for success.
5. In order to avoid misunderstandings and future disputes it is advisable
that mutual rights and obligations of partners be incorporated into a
partnership deed. It should contain full details about capital, sharing
of profits, extent of authority of each partner and so on.
6. The partnership firm should be registered with the Registrar of firms
as soon as the formation is possible. An unregistered firm suffers
from a number of disabilities, which may cause unnecessary loss to
the firm.

Evaluation
Partnership organization is admirable for medium size undertakings,
where personal efforts of the owners are essential. It enjoys several of
the advantages of sole proprietorship organization and suffers from its
limitations. We may, however, consider here the advantages and disad-
vantages of partnership organization.

3.4.5 Advantages
Partnership organization enjoys the following advantages:
1. Facility of Formation: Like an individual enterprise, partnership can
be formed without any legal formality and much expense. It can also
be dissolved in the same way. Partnership taxes are also relatively
small.
2. Benefits of Larger Resources: Partnership enjoys larger resources
than a sole proprietor, so that the scale of operation is large and
economies of large-scale production are enjoyed. There is always
scope for the introduction of new talent and further capital.
3. Flexibility: The business is abundantly mobile and elastic, as it
is free from legal restrictions on its activities. The partners can
introduce any changes they consider necessary to meet the changed
circumstances.
4. Personal Element: The personal element in the business and the
corresponding care, skill, efficiency and economy are ensured.

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There is thus an effective motivation for production. As the partners Notes

manage personally their supervision is effective.
5. Benefits of Combined Ability: Partnership enjoys the benefits of
combined ability of its partners processing varying degrees of talent
and skills. This is a distinct advantage over sole proprietorship. Two
heads are better than one is an old saying.
6. Prompt Decisions: The partners exercise joint responsibility and
meet frequently. This enables to make decisions promptly.
7. Sharing of Risk: Any losses sustained by the firm will be shared by
all the partners with the result that the burden borne by each partner
will be much less than what a sole proprietor may have to bear.
8. Wholesome Effect of Unlimited Liability: The fact that the
liability of the partners unlimited and each partner is liable to
the full extent of his private fortune acts as a great check against
dangerous speculation. This is a great safeguard against reckless
actions. Unlimited liability also enhances the credit of the firm in
the eyes of the leading public and thus enables it to borrow easily
at a low rate of interest.
9. Protection of Minority Interests: The minority interest in a partnership
is effectively protected by law. In matters of policy all partners must
agree; and even in ordinary affairs of routine nature a dissatisfied
partner may withdraw and dissolve the firm. Thus, in all important
matters, the minority enjoys the right of the veto. In fact, the
law gives every partner the right to be heard and consulted. In
consequence, each member of the firm is equally important.

3.4.6 Disadvantages
Despite several advantages, the partnership form of organization suffers
from the following limitations:
1. Lack of Harmony: There is always a danger of friction within the
firm. Difference of opinion very often results in disharmony and
lack of united management. This ultimately results in disruption
and dissolution.
2. Limited Resources: The limit in the number of partners limits the
amount of capital that can be raised. Actually, in order to maintain

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Notes harmony among the partners, the number has to be kept much
smaller than the maximum allowed by the law, five partners should
ordinarily constitute a partnership. This obviously limits the capital
still further.
3. Registered Enterprises: As unlimited liability extends to the entire
fortune of each partner, the partners tend to become the over-cautious.
This restricts enterprise in some sense. Therefore, partnership
organization tends to be useful only for small businesses.
4. Instability: The business may come to an abrupt end on the death
or insolvency of any partner.
5. Social Loss: Such an abrupt closure of business is harmful not only
to its owners, but to society, particularly if it has been successful
and contributing to the well-being of the community.
6. Lack of Public Confidence: The absence of legal regulations and
the fact that there is no publicity in regard to a partnership’s affair,
also reduces to some extent of public confidence.
7. Heavy Burden through Implied Authority: Each partner as an agent,
is able to bind the others by his acts and omissions in the ordinary
and usual course of the business of the firm. When, therefore, one
partner is negligent, or commits a tort (civil wrong), or is guilty of
a fraud within the scope of his authority, his partners are equally
liable. This may put a heavy financial burden on other the partners,
which may, in some cases, result in the total ruin of the firm.
Conclusion: On balance, partnership form of organization is most suitable
where size of the business is relatively small, and so the capital can be
contributed by the partners themselves, it is an organization that can be
adopted by men of equal wealth and ability who combine their resourc-
es—capital, skill and labour—and run it for the common advantage of
all the partners.
But the very success of the business would create problems relating to
expansion for coping with the increased demand for the goods. In such a
case, it would be necessary to convert the business into a limited company
and collect funds from the public and take advantage of limited liability.

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IN-TEXT QUESTIONS Notes

6. The formation and management of partnership organization is

governed by the provisions of the __________.
7. Every partner is a joint owner of the partnership property, and
has an equal share in it, unless different shares are provided
by agreement. (True/False)
8. As partnership results from a contract, there must be at least
two partners, although the maximum number of partners must
not be more than forty. (True/False)
9. Like an individual enterprise, partnership can be formed without
any legal formality and much expense. It can also be dissolved
in the same way. (True/False)

3.5 Company Form of Organization (Joint Stock Company)

As a result of the Industrial Revolution, huge funds of capital were required
to make the best use of technical lot of capital innovations. Individual
proprietorship could not supply such huge capital or if someone could
they did not like to risk their capital in new ventures.
Therefore, it became imperative to have another form of organization
through which large sums of money could be amassed from large number
of people who are either not capable of managing business enterprises or
have no time or inclination to do so. They are, however, willing to invest
their saving in a business provided they are assured that their money is
safe and they will not be called upon to pay anything more than what
they undertake to invest to earn a reasonable return. This form suitable
to serve these purposes was found to be a limited company. The form
enables the enterprises to secure the required capital from the general
public, retaining at the same time, the management of the business in
their hands.
Thus we can say that company form of business organization came into
existence because of the growing needs of industry after the Industrial
Revolution and the failure of the existing forms of business organization
to feed the continuously increasing needs of funds by the large sized
industry.

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Notes Accordingly, the fundamental principle of company form of organization

is that the capital of undertaking is contributed by a large group of people
called the shareholders, who exercise control over the company through
the directors elected by them in general body meetings. The Board of
Directors look after the management of company, take vital policy de-
cisions and exercise their control through the General and Departmental
Managers. Since the management is entrusted to people who have keen
insight into business and large amount of funds can be collected from a
large number of people, company form of organization is suited to large
scale production. In fact, most of the shortcomings of single proprietorship
and partnership firms of organization can be overcome by organizing a
business as a joint stock company with limited liability.

3.5.1 Meaning and Characteristics

A company is a voluntary association of persons for profit with capital
divisible into transferable shares, limited liability, corporate body with
perpetual succession and having a common seal. An analysis of this
definition will bring out the principal characteristics of company.
1. Creation of Law: A company is a creation of law, and is sometimes
called artificial legal person. It exists only in contemplation of law
and therefore has no physical shape or form. Although invisible,
and intangible it enjoys almost all the rights of a natural person. It
can enter into contracts and own property. It can sue and be sued.
The legal personality is one of its distinctive features.
2. Separate and Distinct Legal Entity: Being a creature of law, a
company is a legal entity, something distinct from the persons who
are its members. The life of the company is independent of the life
of its members. Even if all the members die, the company does
not come to an end. A member can both own its shares and be its
creditor at the same time. Such a member cannot be said to be a
creditor himself, but he is a creditor of the company which has its
own independent personality. A member can also be an employee
of the company. A shareholder cannot be hence liable for the acts
of the company, even though he holds virtually the entire capital
of it. It enjoys all the privileges of a natural person. It can sue in
court of law and it can be sued but a company cannot be citizen
hence it cannot caste vote.

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3. Perpetual Succession: The process of incorporation brings into Notes

being a corporate body distinct and separate from the members
who constitute it. The right given to the shareholder to transfer
their shares without affecting in any manner the position of the
company gives the company continuity. As a natural consequence of
corporation and transferability of shares, the company has perpetual
or uninterrupted existence. It continues to exist without regard to
the death of the individuals involved in its corporate affairs or the
transfer by them of their interests in the company. Members may
come and members may go, but of immortality, inasmuch as its
members change from time to time without affecting its existence.
4. Limited Liability: The limited liability of the shareholders is another
important characteristic of a company. A person, by buying shares
in a company acquires an interest in it, and is at liberty to dispose
of these shares whenever he likes. If anything goes wrong with
the company, his liability is limited by the nominal amount of the
shares held by him. In other words, while he stands to lose the
money he has invested, he cannot be called upon to pay single paisa
out of his private property in order to help to meet the company’s
obligations.
5. Common Seal: The law requires every company to have a seal with
its name engraved on it. As the company has no physical form or
shape, it cannot sign its name on a document. Therefore, originally,
all documents and contracts required the affixing of the seal known
as common seal. But now most of the transactions are signed by
the directors who act as its agents. For instance, it is compulsory
to affix the common seal on share certificate and debentures.
6. Divorce between Ownership and Management: The personality
of the company is separate from the personalities of the persons
constituting it. Therefore, the shareholders can not bind the company
by their acts. Since the investors of share capital are a heterogeneous
group of people residing far and wide, they cannot be expected
to manage the affairs of the company. They leave this task of
their representatives—the Board of Directors. This characteristic
of a company militates against the golden rule of capitalism
that management and ownership should vest in the same person.

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Notes Shareholders are the real owners of a joint stock company. They
elect directors for the management of company. But the elected
directors either may not have sufficient time to look into the affairs
of a company or may not have the requisite specialization, so they
appoint professional managers. Though shareholders are the owners
but the ultimate management lies in the hands of hired employees
thus there is divorce between ownership and management.

The Chief Implications of the Foregoing Analytical Description of the

Company may be summed up as follows:
(a) A company is a voluntary association of mutually agreeing persons.
(b) It is an autonomous legal unit distinct from its associating members
in name, in the duration of its life and the liability to creditors.
(c) It exists because the State has by statute enabled it to exist as
a separate legal entity enjoying similar rights as owing similar
obligations as a natural person.

3.5.2 Chief Features of Company Form of Organization

The principal and distinguishing features of a company form of organi-
zation are as follows:
1. Formation: Since corporate life and form cannot exist without the
permission of the State, a company having corporate personality,
can be brought into being only by following certain formalities as
provided by the law. The formation of a company passes through
two main stages viz., Promotion and Incorporation. Promotion
consists of process of conceiving an idea and developing it into a
concrete proposition project to be accomplished by the incorporation
and floatation of a company. The person or persons, known as
Promoters, take the necessary steps to accomplish these objectives.
They discover the opportunities to make money; investigate the
propositions, assemble and finance them and thereby produce a going
concern. To prepare the two fundamental documents, namely the
Memorandum of Association and the Articles of Association, and
get them registered with the Registrar of Companies, on payment
of the necessary stamp duty and the registration fee. The Registrar,

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being satisfied that all that is required to be done under the law Notes
has been done, registers the company and issues a Certificate of
Incorporation in token of the birth of the Company.
2. Financing: Where the capital needs are not vast and it is desired
to preserve secrecy and family character of the business but enjoy
the benefit of limited liability, a private limited company is formed
and the general public is invited through a prospectus to supply the
capital.
3. Control: In law and theory, the members of company, who contribute
the share capital, have the ultimate control of company’s affairs. Every
company is required to hold an annual general meeting at which
the shareholders are supposed to exercise their power of control.
In practice, however, the control lies with the ‘management’ or the
‘inside group’. But the board of directors is required to prepare and
present at the meeting its annual report as also the annual audited
accounts, for the consideration of the shareholders present at the
meeting. The effective control is exercised by the board of directors
as the representatives of the members and as agent of the company.
4. Management: Since the risk-bearing shareholders are widely scattered,
and do not, in most cases, have the time, or knowledge of business,
the management of the company has to be entrusted to the board of
directors. The Companies Act also states that the Board of Directors is
entitled to exercise all such powers as the company in general meeting
can exercise. Thus, the directors are the exclusive representatives
of the shareholders and are charged with the administration of
the affairs of the company and the use of its assets. The directors
of the company lay down the objects and frame the policies and
secure their implementation by the managerial personnel right from
the Chief Executive to the first-line supervisors. It could be noted
that the shareholders are the risk-bearers, but the directors are the
risk-takers.
5. Duration: A company comes into being through a process other than
natural birth, and so possesses the property of immortality. Thus, it is
said to have perpetual existence. Its life is not affected or interrupted
by the death or insolvency or withdrawal of any member. It continues

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Notes to exist even if all its members die or adjudicated insolvent. This
capacity of perpetual succession ensures its continuity. Members may
come and members may go, but the company goes on undisturbed
until dissolved by a process of law. Also, a shareholder cannot get
back his money from the company. This is provided for to save the
company from disintegration. In all these respects company form
of organization is superior to partnership and sale-proprietorship
organizations.
6. Taxation: In a large number of situations the tax burden on Companies
is heavier than those on partnerships. For example, a company’s
profits are taxed at a flat rate as against slab rates in case or
unincorporated associations, e.g., partnerships. In other words, the
rate or income tax in the case of a company remains the same no
matter whether its profits are large or small. On the other hand,
sole proprietorship business or partnership firm will be taxed at
progressive rates, going up with the increase in profits.

3.5.3 Classes of Companies

(a) Private Companies: A private company is one, which by its articles:
(i) Restricts the right to transfer its shares.
(ii) Limits the number of its members to 200, excluding employee
members and ex-employee members.
(iii) Prohibits any invitation to the public for subscription to its
shares or debentures.
A private company must always comply with these restrictions.
A violation of any of these restrictions will make the company
a public company. The minimum number of members to form a
private company is two. By definition, a company which is not a
private company is a public company. The minimum number of
members for a public company is seven, but there is no limit to the
maximum number. A private company suits the need of those who
which to take advantage of limited liability and at the same time
keep the business as private as possible, maintaining its secrecy.
It is in some respects like a partnership. The shares are not freely
transferable nor can share warrants be issued by it. In this way,
the members of a private company like partners are in a position

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to maintain personal contact and secrecy in business. A private Notes

company, therefore, combines the advantages of limited liability and
the facilities of the partnership organization. Because of the special
features of private company and many privileges enjoyed by it is a
common practice with businessmen to convert their family business
into private limited companies, and enjoy, the double advantage
of retaining privacy as regards internal affairs and limiting their
liabilities. Then, as and when need arises, they convert the private
company into a public company by simply altering the Articles of
Association by special resolution.
(b) Public Company: The Companies Act defines a public company as
a company which is not a private company. A public company is
a company the membership of which is open to the general public
under the provision of its articles. The minimum number required
to form it is seven, but there is no limit to maximum number. It
invites the members of the public through a prospectus. It does
not impose any of the restrictions required in the case of a private
company, and any person competent to contract can become its
member. However, it is subject to much greater statutory control
than a private company. For example, it must allot its shares within
120 days of the issue of the prospectus, but only if the “Minimum
Subscription” has been subscribed. It must have at least three directors
and can commence its business only after obtaining the Certificate
to Commence Business. Its managing director or manager can be
appointed only with the approval of the Central Government. The
managerial remuneration can be paid with the approval of the said
Government. As a public company is in a position to raise vast
amount of capital and can raise huge sums, it is suitable for large-
scale enterprises, whereas a private company would be suitable for
medium size businesses.

3.5.4 Advantages
The principal advantages of the company form of organization are as
follows:
1. Vast Amount of Capital: The outstanding advantage of the company
is that it allows the mobilization for production proposes of a
vast amount of capital that would otherwise have little chance of

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Notes being used. In a public company there is no limit to the maximum

number of its shareholders. Very large number of people, who
are otherwise busy, may, by buying shares in a company, acquire
interest in it without giving up their own vocations. As the shares
can be bought in small amounts, investors can divide their savings
amongst a number of companies, and thus reduce the overall risk.
The fact that the shares are easily transferable gives joint stock
companies an added advantage in attracting capital. This method of
collecting capital from many people, each of whom may have only
a comparatively small amount gives the company the use of much
larger capital than can be collected by private business. The latter
must depend mainly upon the financial resources of the proprietor
in fact, no business form is so well adapted to raising vast amounts
of capital as the joint stock company.
2. More Scope for Expansion: More capital funds at the disposal of
company and the ploughing back of company’s profits make it
possible for the business to expand. Thus the company form of
organization offers an excellent scope for self-generating growth.
3. Diffused Risk: The risk of loss is spread over a large number of
investors and the possibility of hardship on a few persons as in
the case of partnership and on an individual in the case of single
proprietorship is minimized. Large amount of capital can be collected
from far and wide rich and poor. Because of diffused risk, limited
liability and management in the hands of professional members, a
company can afford to take bold decisions and enter into entirely
new business ventures.
4. Democratization of Ownership: The fact that relatively small amounts
of capital can be mobilized collectively results in democratization
of ownership. While it enables all types of people, big and small,
venture some and cautious, to become part owners, it permits
the use of skill and initiative of the able entrepreneur, his expert
knowledge and business ability which would otherwise be lost to
the community.
5. Transferability of Shares: A shareholder can at any time transfer
his share to any person who is willing to take them. The stock
exchanges assist in the sale and purchase of the shares. As the

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shares are readily transferable, a shareholder can easily convert his Notes
holdings into cash. This facility coupled with the limited liability
has encouraged investment by the general public.
6. Stability: Company organization, we have already seen is a legal
entity with perpetual succession. Therefore, it may outline many
generations of private producers. The continuation of succession
as a result of incorporation makes for stability. This encourages
experimentation for efficiency. The continuity is not seriously
affected by a change either in the management or the owners.
7. Organized Intelligence: The power of capital is supplemented by
organized intelligence which makes for increased efficiency of
direction and management. The skills and flexibility of administration
are increased as a result of limited liability and the entity idea. The
wisest and the most skillful directors may be chosen; and anyone
found indifferent or inefficient may be removed. The company
being independent of any single man, the organized intelligence of
the Board of Directors and the expertise of other top managers is
available for sound and bold policies.
8. Definite Standing: The Company gives a definite standing and
facilitates binding actions through it agents. An outsider willingly
deals with a company because he knows the exact scope of its
business and legal limits of its powers.
9. Limited Liability: The liability of members of a company is
limited. He cannot be called upon to pay anything more than the
nominal value of the shares held by him. When acquiring shares
in a company, he knows the maximum loss he may suffer if the
company fails. This encourages people, even those with relatively
small savings, to invest money in a company, thus providing large
amount of capital for initial outlay and further expansion.
10. Special Advantages: The greater advantage to society of the company
organization is to be found in its added encouragement of investment
and the possibility it affords of efficient direction of large-scale
industry. The element of stability is notably well cared for by the
company. The compulsory publicity and other regulations of companies
are beneficial to the community, especially with regard to banking
and Public Utility Company. The overhead costs unit per incurred

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Notes in the form of salaries paid to the managerial personnel comes to

be low vis-à-vis other form of organization. The company through
mass production of goods has succeeded in converting luxuries of
yesterday into necessities of today. Even people with low incomes
have been enabled to possess things which they could not have dreamt
of owning.
11. Tax Relief: A company pays income tax as a separate large person
at a flat rate fixed by the Finance Act from year to year. In case
of higher incomes this rate is lower than · that charged in the case
of sole traders and partners.

3.5.5 Disadvantages or Company Organization

In spite of so many advantages of company form of organization here are
some drawbacks of this form of organization. The principal disadvantages
of company form of organization are as follows:
1. Difficulty in Formation: The legal formatives and procedures required
in the formation of a company are many. The cost involved is
quite heavy. In addition to the cost promotion and the preparation
of necessary documents and payment of commission to brokers
and underwriters. At the time of floatation, heavy stamp duty and
registration fees have to be paid.
2. Incapable or Fraudulent Management: The company form of
organization can be used by dishonest promoters and fraudulent
directors to cheat or overcharge the ignorant public, in spite of
many safeguards provided by company law.
3. Encouragement of Reckless or Careless Speculation: The company
form of organization encourages reckless speculation on the stock
exchange. This is an evil of greater magnitude in our country
because in many cases the stock exchanges act as “hush agencies”
rather than an aid to sound investment or stability.
4. Waste and Inefficiency Associated with Indirect Management:
Lack of personal interest on the part of salaried managers is likely
to lead to inefficiency and waste as there is little individual initiative
and personal responsibility. Motivation is less direct than in sole
proprietorship or partnership.

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5. Clash of Interests between Members and Management: The company Notes

form of organization does not promote or safeguard the interest of
the shareholders. Because of the separation of management from
ownership, it is not the owners who govern but a few who control
and manage a company’s affairs. In other words, a few govern but
let the shareholders believe that they are the rulers. Thus, in theory,
the company form of organization seems to be democratic but in
practice, it is oligarchic. The interest of the minority shareholders
are often in jeopardy. This lack of identity of interests between the
company (i.e., the shareholders) and its management encourages
financial manipulation and speculation.
6. Bureaucratic Approach: A company form of organization does not
enjoy the same amount of flexibility and promptness of decisions
as the single proprietorship concerns or partnership firms do. The
bureaucratic habit of the company managements to discourage
troublesome decisions often retards growth. Decisions are further
delayed, to some extent at least, when they have to be taken at
meetings, which are often far between.
7. Excessive Regulation by Law: The State that creates the company
regulates its activities much more closely than those of non-
corporate bodies. A company and its management have to function
well within the law, and the provisions of the Companies Act are
quite complex and strict. At every step, it is necessary to comply
with its provisions lest the company and it management might
be penalized. The penalties are quite heavy, and in several cases,
officers in default can be punished with imprisonment.
8. Social Ill-effect of Large Company: There are notable failings of big
business which necessarily flow from company form of organization.
These are summed up as follows:
(a) The absence of responsibility to the shareholders for work done
with his wealth frequently leads to abuse, e.g., unsatisfactory
working conditions and exploitation of labour.
(b) A big business, to be successful must have a system of checks and
counter checks in each department. Such a system is necessarily
wasteful of effort and represses elasticity and initiative and
encouragement to do work in a mechanical manners.

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Notes (c) There is generally a tendency for company organizations to

form themselves into combinations exercising monopolistic
powers which has a harmful effect on other producers in the
same line as consumers of the commodity produced.
(d) The company form of organization is conducive to concentration
of wealth and economic power to the loss of public interest.
(e) It encourages restrictive trade practices, which are against the
interests of the community.
From the social point of view the effects of company organization upon
the distribution of wealth are highly important. It has great potentiali-
ties both for good and evil. On the one hand it might tend to diffuse
wealth by encouraging widespread investment in small amounts and
the distribution of profits and interests of industry accordingly. On the
other hand it; might result in undemocratic concentration of wealth in
the hands of a few industrial dictators. Inequality in wealth distribution
has been encouraged by joint stock organization. However, considering
good and bad points in the history of business units, no finer instrument
exists with which to meet the complex problems of modern enterprise. To
the large unit, company offers an easier way to finance itself by means
of dividing its ownership into many small portions that can be sold to
a wide range of purchasers. Other forms, which are suitable for small
and medium enterprises, many outnumber it, but most of the business in
transacted by units of this type.
IN-TEXT QUESTIONS
10. A public company, restricts the right to transfer its shares.
(True/False)
11. The legal formatives and procedures required in the formation
of a company are many. The cost involved is quite heavy. (Yes/
No)
12. A __________ company is a company the membership of which
is open to the general public under the provision of its articles.
The minimum number required to form it is seven, but there
is no limit to maximum number.
13. The liability of shareholders of a company is unlimited. (True/
False)

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Notes
3.6 Cooperative Organization

3.6.1 Why Cooperatives?

The primary aim of the business organization discussed so far is to earn
profit. These forms of organization may exploit the economically weaker
sections of society. The cooperative form of organization attempts to make
the common man free from the oppression or injustice of the economically
strong people and organization. The philosophy behind cooperatives is
mutual assistance and service. The aim is at encouraging self-help on the
part of economically weaker sections of society by looking after their own
affairs in cooperation with one another. Thus, the principal theory of true
cooperative organization is the elimination of profit and the provision of
goods and service to its members at a proper price.
As a form of business organization, a cooperative is an enterprise ordi-
narily set up by economically weaker section of society to achieve their
common economic and social interest, to eradicate capitalist exploitation,
to eliminate middlemen, and to bring the consumer and producer together.
With these objectives in view, the consumer, belonging to working and
lower middle classes, combine either to produce goods themselves or
to purchase them collectively thus retaining for themselves some of the
benefits usually derived from business by capitalists. This joint effort
on their part enables them to protect their interests to some extent. The
cooperative organization is democratic because the affairs are managed
by member and each member has only one vote irrespective of his shares
in the co-operative society.
The term cooperative means working together. A cooperative enterprise
means a voluntary association of persons (usually of smaller means)
joining together on equal basis for promotion of certain economic and
business interests.
The International Labour Organization (I.L.O.) defines a cooperative as
“an association of persons, usually of limited means who have voluntarily
joined together to achieve a common economic end through the formation
of a democratically controlled business organization, making equitable
contributions of the capital required and accepting fair share of risk and
benefits of the undertaking.”

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Notes We may give our definition which contains the important attributes of
cooperative enterprise. A cooperative organization is a voluntary associa-
tion—(i) with unrestricted membership, and (ii) collectively owned funds,
(iii) organized on democratic principles of equality, (iv) by persons of
moderate means and wants through mutual action, (v) in which the motive
of production and distribution is service rather than profit.

3.6.2 Principal Characteristics

The foregoing definition reveals some of the features which are common
to co-operative society, a partnership firm and a company. But in addi-
tion to that as a form of business organization, a cooperative enterprise
possesses the following special characteristics.
1. A Cooperative Society is a Voluntary Association: The membership
of the society is voluntary and to all persons having common interest.
In other words, there is no compulsion for any person to become a
member nor can any person be denied the right to become a member
of the society. A member may leave a society by giving due notice
and withdraw his capital; but he cannot transfer his shares to another
person. The position of a shareholder of a company and member
of a cooperative society differs in this respect. A shareholder in a
company can transfer his shares to another person but he cannot
take back his capital from the company by surrendering his shares.
A member of a cooperative society can get back his capital but
cannot transfer his shares to another person.
2. Its Members Enjoy Equal Voting Rights: A cooperative society is
a democratic organization and so all its members have equal voice
in the management of its affairs. The rule is one member, one vote.
Therefore, each member has one vote regardless of the number
of shares held by him. This rule is based upon the principles of
cooperation and equality which states that a rich man cannot be
allowed to exercise control because he is rich and can afford to
hold a large number of shares. In this respect also the cooperative
organization differs from a company. In a company, the voting rights
are governed by the amount of capital invested by a member.
3. Its management is Democratic: As a necessary consequence of
the principle of equality the management of co-operative society is

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essentially democratic. As a rule, cooperative societies work on local Notes

basis, which enables almost all the members to attend the meetings
and elect their managing committees. Since each member exercises
an equal right with others, the managing committee is in the real
sense an elected body and must pay attention to the wishes of all
members and not only a section of them. In many cases, some or all
the members may take part in the day-to-day work of their society,
and may appoint a manager from among themselves. Of course,
outsiders will be appointed when the society grows in size.
4. A Cooperative Society is organized to Render Service to its
Members and not to make profit at the cost of its members: If, for
instance, a society produces a product, it is mainly to supply to its
members at a reasonable price. A consumer’s cooperative society is
expected to supply goods first to its members and then to outsiders
at a reasonable profit.
5. Payment of Surplus as Bonus to Members on Purchases Made by
Them: Commercial concerns usually distribute their profits among
their shareholders in proportion to their capital contribution. But a
cooperative society does not distribute its surplus as dividend among
its shareholders in proportion to the capital provided by them. The
share capital is virtually treated as loan capital and a moderate
rate of interest (although called dividend) is allowed out of the
surplus. A portion of the balance is utilized for the general benefit
of the members. A portion may be paid as bonus to employees and
workers. The rest of the net surplus is distributed among members
in proportion to their individual purchases from the society. The
non-member purchasers are not usually paid anything out of the
surplus, although there is no bar to such payment. A company earns
the profits and shareholder receive dividend, often at the cost of
the consumers. In a cooperative society the consumer is the one
who is looked after.
6. Trading on Cash Basis: As a rule, cooperative societies conduct
business on cash basis and allow no credit. A member in need
of money can get back part of his capital, and re-invest when he
can afford to do so. Since the members are normally persons of
small means, this principle helps both the member-buyers and the

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Notes society. The members do incur debts and the society does not face
the danger of bad debts
7. State Control and Registration: A cooperative society is required
to be registered under the Cooperative Society Act, 1912. On
registration, it becomes a corporate body like an incorporated
company, enjoying certain privileges and subject to control and
supervision of the Government.
A Cooperative Society must fulfill the following Conditions in
Order to obtain Registration Namely:
(a) It must have 10 adult members, i.e., those who have completed
the age of 18 years.
(b) The members should be bound together by a common bond,
e.g., they should belong to the same village or locality, tribe
or occupation, etc.
(c) The members should present a joint application to the Registrar
of Cooperative Societies furnishing required particulars, such
as membership, share capital, objects and powers, etc.
(d) A copy of the bye-laws and scheme of organization should
be submitted to the Registrar.
After registration the society comes under the supervision of the
Registrar who keeps a watch over its working. Every cooperative
must have its annual accounts audited by an auditor from the
Cooperative Department and then submit returns, copies of audited
accounts and the annual report to the Registrar.

3.6.3 Type of Cooperatives

Cooperatives may be formed practically for any type of activity. Since
we are concerned mainly with those cooperatives which are engaged in
some kind of business, only business cooperatives are discussed here.
The principal types of business cooperatives are:
1. Producers’ Cooperatives.
2. Consumers’ Cooperatives.
3. Marketing Cooperatives Societies.
4. Housing Cooperatives.
5. Cooperative Farming Societies.

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Producers’ Cooperatives: One of the solutions of inadequate purchasing Notes

power is to eliminate the class which controls production i.e., to become
your own producer or manufacturer by organizing producers’ coopera-
tives. They are also called industrial Cooperatives. We have several sugar
cooperatives in our country. The Producers Cooperatives may be defined
as voluntary associations of work people owning enterprises producing
goods for their consumption and for sale at a profit in order to retain the
profits which would otherwise go to the capitalist, and by the application
of the system of co-partnership, to substitute an alternative method of
labour remuneration instead of wages.
The system provides a greater incentive to do one’s best because the
division of interest between the worker and employer is removed by
combining the two entities. The worker becomes his own employer. Co-
operative productive enterprises are best suited to trades and industries
where little capital is needed. Cooperative production activity should,
therefore, be confined to cottage and small-scale industries. As stated
above, cooperative sugar mills, particularly in the South and West of
India, have been fairly successful.
Consumer’s Cooperative: The objective of consumers’ cooperatives is to
eliminate the middleman and to protect the interest of consumers. These
cooperatives are economic enterprises set up by the consumers, mainly
of moderate means, for the distribution of goods of daily needs primar-
ily among the members of the societies. These societies have no profit
motive as they are formed by the consumers themselves. These societies
buy goods in bulk from wholesalers and sell to consumers are reasonable
prices. The difference is represented by the surplus which is distributed
among the purchasing members in the form of a bonus on purchases. This
is the oldest form of cooperative organization. In our country, consumers’
cooperatives have received a good deal of impetus from the Government,
as they help to check rise in prices of consumer goods.
Marketing Cooperatives: In the field of agriculture there is great scope
for cooperation. The marketing cooperative sales societies are voluntary
associations of independent producers organized for the purpose of arrang-
ing for the sale of their produce. The aim of the marketing cooperative
or sales society is two-fold. One to secure a remunerative price for pro-
duce, and secondly to make available a permanent and ready market for

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Notes the produce of the members. The marketing society collects the produce
from members, grades them and then sells at a remunerative price to the
wholesale market. The cash proceeds are distributed among the members
according to the quantity pooled.
Housing Cooperative: Housing cooperatives are associations of persons
who are interested either in securing the ownership of a house or obtaining
accommodation at reasonable rent. Such societies are formed mostly in
urban areas. Intending builders of houses join together to form cooperatives
of this kind. Such a society can secure for the members, the economies
of collective purchase of building materials, buildings and loans at low
rates of interest. There is much scope for such societies in India.
Cooperative Credit Societies: The cooperative credit societies are volun-
tary associations of people with moderate means formed with the object
of extending short-term financial assistance to members and creating the
habit of thrift among them. The funds of these societies consist of share
capital contributed by the members. The liability of members is generally
unlimited. This helps the society in raising additional funds from outside
sources and ensures that every member shows keen interest in the working
of the society. Normally, loans are granted for productive purposes, but
the rate of interest charged is kept as low as possible.
The credit societies may be either agricultural cooperative credit societ-
ies or non-agricultural credit societies. The former generally confine the
activities to their respective villages. The non-agricultural credit societies
are formed by city people of moderate or limited means.
Cooperative Farming Societies: The cooperative farming societies are
basically agricultural cooperatives formed with the object of reaping the
benefits of large farming and maximising agricultural output. Although
these societies are advocated in countries like India where fragmentation
of holding per acre production is low. Yet they have not proved to be
successful whatever they have tried.
Miscellaneous Societies: In addition to the more important types of co-
operatives stated above, some other types are found in some parts of the
world. Societies set up in rural areas with the object of processing certain
raw materials produced by the tillers of land to supply to industries, are
known as Processing Cooperatives. Cooperatives for processing cotton,
jute, paddy, sugarcane, oilseeds, fall under this category. Cooperative

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societies have also been formed for fisheries, dairy farming, supply of Notes
sugar-cane, cold storage, etc.

3.6.4 Advantages
As a form of organization, the cooperative store offers the following
advantages:
1. The consumer controls his own supplies, and cuts out the middleman’s
profit.
2. He is saved from the loss common to retail trade, on speculative
buying. The ordinary shop has to rely on itself to judge whether
there is a market for an article. But the cooperative store knows
what is required by the members.
3. There is no need to have surplus stock at hand as the demand is
constant and regular.
4. Some of the expenses of management are saved by the voluntary
service of the controlling committee. It is possible to get even a paid
manager at a lower salary as a result of the ideal of cooperation.
5. There is a complete integration between the manufacturer, wholesaler
and the retailer and thus they have clear advantage over capitalistic
enterprise.
6. A cooperative store has its regular customers and therefore it does
not have to incur expenses on publicity which is a big item in the
budget of the capitalistic manufacturer.
7. There is no profit for any special class of investors which tends to
equalize the distribution of wealth.
8. The payment of part of profits as bonus on purchases proves to be
better than other methods and ties the members to the organization.
The capitalists have tried to copy this by issuing gift coupons or
giving away small items free with purchases.
9. Above all, they are more than a mere device for getting necessities
cheaper. They have a social value of increasing welfare. They
provide a school of self-government for a class that has difficulty
in getting it elsewhere. The movement has done a great service to
the workers and people with reasonable means.

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Notes 10. The movement has also done a great service by removing inefficient
capitalist shop from localities where cooperative stores have been
established.
11. From the organization point of view, a cooperative enjoys some more
advantages such as:
(a) The registration of a cooperative society is relatively simple.
Any ten people can register it without any elaborate legal
formalities.
(b) As the members of a cooperative society belong to a particular
locality, office or group and they enjoin together with the
common goal of cooperation for business, the problems of
coordination are not as grave as in other forms or organizations.
(c) After giving dividend, the balance of the surplus earned can
be utilized for the growth and expansion of the business of the
society.
(d) The life of a cooperative society like that of an incorporated
company is independent of the lives of its members.
(e) The law gives preferential treatment to cooperatives in respect
of income tax.
(f) Since cooperation is an instrument of the socio-economic policy
of the Government, the State extends many forms of assistance
to cooperatives.

3.6.5 Limitations
The cooperative form of business enterprise, in spite of many merits, has
its limitations and is not likely to replace other forms of organizations.
The limitations are as follows:
1. The idea of cooperative organization cannot be extended beyond a
certain limit because Cooperatives can secure only a limited amount
of capital, as the members usually come from a limited group and
normally have limited means. Again, the extension of size of the
organization might become a serious threat to its success.
2. Unlike the capitalistic system, cooperation cannot be extended to
cover the whole economic system because of the very philosophy
behind it. In order to embrace or cover the entire economic system,
it must attract people of all incomes and grades of society. But this
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it should not do so lest it might again slip into the clutches of the Notes
capitalist and hit at the very purpose of starting the cooperative.
3. The management of a cooperative vests in a managing committee
which generally lacks technical knowledge, is often incompetent and
is often influenced by considerations other than efficient service. It is
often difficult to get the service of experienced and efficient workers
on account or limited capacity to pay adequate remuneration. Even
if a real efficient man has been found, he is likely to be attracted
by a capitalist on a much higher salary unless he is an idealist.
4. Cooperative is also subjected to a considerable degree of State
regulations and the cooperative department almost over-administers
them. This obviously goes against the flexibility and efficiency of
management. Because of too much democratization of its management,
secrecy in business cannot be maintained.
5. The movement has still to develop the entrepreneurial functions. One
of the most serious obstacles in the success of cooperatives is the
bickering or disagreements among members. Once the initial enthusiasm
is over, groupism begins which leads to frictions and rivalry among
active members, and once it begins there is no end to it.
IN-TEXT QUESTIONS
14. The joint stock companies are not directly concerned with the
promotion of welfare or efficiency of their shareholders. In the
case of cooperatives the welfare is the main objective. (True/
False)
15. The principal theory of true cooperative organization is the
elimination of profit and the provision of goods and services
to its members at a proper price. (True/False)
16. What are the various types of cooperatives? Pick the correct
one from the following:
(a) Producers’ Cooperatives
(b) Consumers’ Cooperatives.
(c) Marketing Cooperatives Societies
(d) Housing Cooperatives
(e) All of the above

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Notes
3.7 Limited Liability Partnership

3.7.1 Meaning of LLP

Limited Liability Partnership (LLP) is a concept in which features of two
types of business entities combined namely Partnership and joint stock
company. As we all know major drawbacks of partnership is unlimited
liability and main disadvantage of company form of organization is ex-
cessive legal formalities and both disadvantages are overcome by Limited
Liability Partnership form of business. LLP combines the advantages of
both partnership and joint stock company or we can say LLP is much
like Private form of company.

Definition of Limited Liability Partnership - Section 2(1)(n)

Limited Liability Partnership means a partnership formed and registered
under the Limited Liability Partnership Act, 2008,
Various expert committees have recommended for legislation of LLP’s
and these are Abid Hussain Committee (1997), The Naresh Chandra
Committee(2003) and Dr. J.J. Irani Committee (2005).
Finally in the year 2008 law of L.L.P. was formed and was notified in
the official gazette on 9th January, 2009 and it contains 81 sections and
4 schedules and finally came into force on 31st March, 2009. Some pro-
visions of that also made effective on 31st May, 2009. It extends to the
whole of India and came into force with effect from 31-3- 2009.

3.7.2 Features of LLP

1. Body Corporate [Sec. 3(1)]: LLP is to be treated like a body
corporate which is formed and incorporated under LLP Act 2008.
2. Liability (Limited): The partners of LLP would be liable to the
extent of their agreed contributions in the LLP but in some cases the
liability of the partners can be unlimited when the partner (s) found
to have acted with an intention to defraud creditors. Sometimes the
liabilities of the LLP shall be met out of the property of the LLP.
[Sec.27(4)]
3. Separate Legal Entity [Sec. 3(2)]: A LLP is a legal entity separated
from its partners. All assets and liabilities are assets and liabilities
of LLP only. The creditors of LLP cannot bring any action against

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the partners personally. Saloman vs. Saloman & Co. Ltd. supports Notes
the concept fully.
4. Minimum Number of Partners: Minimum number of partners in an
LLP must be two and that same applicable to Designated Partners
also. However, there is no limit on maximum number of partners.
5. LLP is an Artificial Person: An LLP is an artificial person. It is
created by law and comes to an end by law (legal process) only.
6. Perpetual Succession [Sec. 3(2)]: LLP enjoys benefits of perpetual
succession. It is created by a legal process so it comes to an end
only by way of law. Any changes in the partner’s status of an LLP
shall not effect the existence, rights or liabilities of the limited
liability partnership.
7. Common Seal: However not mandatory but if LLP wants then it
can have a Common Seal.
8. Partners of a LLP: Any individual can become a partner in an LLP.
9. Applicability of the Partnership Act, 1932: No provision of the
Partnership Act, 1932 is applicable to LLP unless needed.
10. Managing the Affairs of an LLP: Partners specifically designated
partners are responsible for management of business in LLP.
11. Investigating the Affairs of LLP: Central Government has the power
to investigate the affairs of an LLP.
12. Conversion to LLP: A firm, Private Company or an Unlisted Public
Company are allowed to be converted into LLP in accordance
with the provisions of the LLP Act, 2008 and Schedule II, III, IV
respectively.
13. Conversion of LLP into Joint Stock Company: Under the Companies
Act, 2013 it is allowed to an LLP to get registered as Company and
as per the Companies Act, 2017, upon registration as a company,
LLP incorporated under the LLP Act, 2008 shall have right to
dissolved as accompany.
14. LLP Agreement: An LLP must have an LLP Agreement for describing
rights and duties of partners so in case of any disputes, can be
resolved with the help of agreement.

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Notes 15. Accounts: Every LLP has to maintain annual accounts showing the
financial position of the LLP and they must have to be filed with
the Registrar after being audited, if required.
16. Taxation of LLP: The LLP Act, 2008 does not give any information
regarding taxation of LLP. Hence, the provisions of the Income Tax
Act, 1961, shall apply in taxation matters.
17. Financial Year of an LLP: Financial year of an LLP commences on
1st April of a year and ends on 31st March of a year but if LLP
commences after 30th September then the financial year comes to
an end on 31st March of next year. For Example: if LLP starts its
operation on 15 October 2018 then its financial year comes to an
end on 31st March 2020.
18. Winding up: An LLP may be wound up voluntarily or by the Tribunal
or Court under the Insolvency and Bankruptcy Code, 2016.

3.7.3 Advantages of LLP

1. Separate Legal Entity: LLP is a legal entity distinct and separate
from its partners. It means that LLP can sue and be sued in its
own name. It can own and hold or dispose off property in its own
name. Hence, LLP can do or undertake any act or thing as a natural
person may do or undertake.
2. Limited Liability: The liability of the LLP is limited to the extent of
its assets and the liability of a partner is limited to his contribution
in the LLP. Hence there is no liability on the partners’ personal
assets.
3. Capital Requirement: For an LLP there is no legal requirement in
regard to any minimum capital.
4. Freedom of Operations: An LLP enjoys full freedom in the matter
of conducting its business and operations.
5. Number of Partners: There is no restriction as to the maximum
number of partners under LLP hence it is an opportunity for
expansion or diversification of its activities.
6. Responsibility for Compliances: A designated partner is made
responsible for various compliances and filing requirements of the
LLP. Hence the other partners of LLP are relieved of this pressure.

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7. Flexibility: It provides flexibility without imposing detailed legal Notes

and procedural requirements.
8. Taxation: LLP has to pay no surcharge, DDT (Dividend Distribution
Tax) or wealth tax so it’s a relaxation to the LLP on its income.

3.7.4 Disadvantages of LLP

1. Unlimited Liability: There may be unlimited liability on the LLP
or its partners in some cases.
2. Time Consuming: It takes more days to form an LLP as signatures
of all the partners are required for each and every document.
3. Assets Contribution: The Cash or other assets contributed by a
partner are not returned to a continuing partner unless mentioned
in LLP Agreement.
4. Transfer of Ownership: Ownership rights are not transferable easily
without obtaining consent of all the partners of LLP.
5. Conversion to LLP: A firm, private company or unlisted public
company cannot convert to an LLP unless all partners or shareholders
become the partners of LLP.
6. Liabilities of Designated Partner: LLP makes designated partners
responsible for compliance of the provisions of the Act and liable
for all offences and penalties thereby putting unnecessary pressure
on designated partners.
7. Lack of Secrecy: LLP is required to disclose its financial information
hence the secrecy of information is lost.
8. No Access to Public Money: LLP has to function from contribution
made by partners hence it cannot raise money through public.

3.7.5 Limited Liability Partnership Agreement

LLP agreement has been as defined under Section 2(1)(o) and it means
any written agreement between the partners of the LLP or between the
LLP and its partners which determiners the mutual rights and duties in
relation to that LLP.
The LLP Agreement is very important to a LLP and its partners and it
must be filed with the Registrar within 30 days of the incorporation of
an LLP. Any change in the agreements is also to be filed within 30 days

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 BUSINESS ORGANIZATION

Notes of the change. In absence of LLP Agreement provisions of the LLP Act,
2008 must be followed. LLP Agreement is not a public document and it
must be properly stamped.

Contents of LLP Agreement

‹ Name of LLP.
‹ Addresses of LLP registered Office.
‹ Name and address of partners and designated partners.
‹ Salary of partners.
‹ Profit Sharing Ratio of partners.
‹ Rights and duties of partners in LLP.
‹ Proposed Business of LLP.
‹ Rules relating to management of LLP.
‹ Any other matter relating to LLP.

3.7.6 Difference between Partnership, Company and LLP

The following are the points of difference between partnership, company
and LLP:
Basic Partnership Company LLP
1. Regulating Act Governed by Partner- Governed by Compa- Governed by Limited
ship Act, 1932. nies Act, 2013. Liability Partnership
Act, 2008.
2. Creation Created by Contract. Created by Law. Created by Law
3. Separate Entity It is not a separate It is a separate legal It is a separate legal
legal entity. entity. entity.
4. Perpetual succes- It does not have per- It has perpetual It has perpetual
sion petual succession as succession and the succession and the
it depends upon the members may come partners may come
will of partners. and go. and go.
5. Management Managed by partners The affairs of the The business of LLP
themselves. company are man- is managed by the
aged by the Board partners including
of Directors. designated partners
as per requirements
of LLP agreement.

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 Forms of Ownership Organizations

Basic Partnership Company LLP Notes

6. Liability Liability of Partners Liability is limited Liability is limited to
is unlimited and can and only to the ex- the extent of amount
go to the personal tent of amount not of contribution but
assets as well. paid on shares held can extend if there
by shareholders. is any fraud or omis-
sion.
7. Common Seal There is no common There is an option LLP may have a com-
seal. to use common seal mon seal, it is not
which denotes offi- mandatory.
cial signature of a
company.
8. Number of mem- Minimum 2 and max- Minimum 2 and max- Minimum 2 partners
bers imum 50. imum 200 members and there is no limit
in case of private for maximum number
company. Minimum of partners.
7 members is case of
public company and
maximum no limit.
Only one person is
required in case of
One Person Com-
pany.
9. Registration Optional. Compulsory with Compulsory with
ROC. ROC.
10. Dissolution By mutual consent, Voluntary or by order Voluntary or by order
insolvency and by of Tribunal or Court. of Tribunal or Court.
Court order.

IN-TEXT QUESTIONS
17. There is a restriction as to the maximum number of partners
under LLP. (True/False)
18. LLP can also sue and be sued by third party. (True/False)
19. Under Partnership Act 1932, a partnership firm does not have a
separate legal entity. (True/False)
20. How many designated partners are required in LLP?
(a) Seven designated partners
(b) At least two designated partners
(c) Only two partners
(d) Five designated partners

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 BUSINESS ORGANIZATION

Notes
3.8 Summary
In this lesson we discussed that an association of persons may take form
of a sole proprietorship, partnership, joint stock company or a cooperative
society. The oldest form of organization is a sole proprietorship, it is a
sole individual single proprietorship business is a form of organization
in which an individual produces independently with his own capital (or
sometimes borrowed from relatives and friends), skill and intelligence
and is entitled to receive all the profits and assumes all the risks of
ownership. Expansion of business called for more capital, advanced the
risk, and required greater managerial ability than could be expected of a
single individual. Therefore if men of ability combined their resources it
could lead to a more successful business, this gave rise to a partnership.
A partnership is required to have at least two members as partners and if
any ratio is not decided than profits and capital is shared equally among
both of them. As a result of industrial revolution, huge funds of capital
were required to make the best use of technical lot of capital innovations.
Individual proprietorship could not supply such huge capital or if someone
could they did not like to risk their capital in new ventures. Therefore, it
became imperative to have another form of organization through which
large sums of money could be amassed from large number of people
who are either not capable of managing business enterprises or have no
time or inclination to do so. This gave rise to formation of a company.
A company can be a private company or a public company. The prima-
ry aim of the business organization discussed so far is to earn profit.
These forms of organization may exploit the economical weaker sections
of society. The cooperative form of organization attempts to make the
common man free from the oppression or injustice of the economically
strong people and organization. The philosophy behind cooperatives is
mutual assistance and service. Cooperatives can be of many types name-
ly producer cooperative, consumer cooperatives, housing cooperatives,
marketing cooperatives, etc.
Limited Liability Partnership (LLP) is a new concept combining the features
of partnership and joint stock company. As we all know major drawbacks
of partnership is unlimited liability and main disadvantage of company

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form of organization is excessive legal formalities and both disadvantages Notes

are overcome by Limited Liability Partnership form of business. LLP
combines the advantages of both partnership and joint stock company
or we can say LLP is much like Private form of company. It contains
81 sections and 4 schedules and finally came into force on 31st March,
2009. Some provisions of that also made effective on 31st May, 2009.

3.9 Answers to In-Text Questions

1. True
2. Sole proprietorship
3. (d) All of the above
4. True
5. True
6. Partnership Act, 1932
7. True
8. False
9. True
10. False
11. Yes
12. Public company
13. False
14. True
15. True
16. (e) All of the above
17. False
18. True
19. True
20. (b) At least two designated partners

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 BUSINESS ORGANIZATION

Notes
3.10 Self-Assessment Questions
1. Explain the concept of joint stock company. How is a private company
different from public company?
2. What do you understand by unlimited liability? Which form of
organizations has unlimited liability?
3. Differentiate between a company and a cooperative organization.
Also elaborate different forms of business cooperatives.
4. What is a sole proprietorship? Explain its advantages and disadvantages.
5. Rahul wants to start a shoe manufacturing business. He has to set
up huge machines for this manufacturing and has set a target of
manufacturing 100 shoes per day. Which according to you will be
the best form of organization he can adopt? Explain its advantages
and disadvantages also.
6. How is a sole proprietorship different from a partnership? Which
one according to you is good for a small business of handicrafts,
and why?
7. What is the reason cooperatives have become popular? What are
its distinct features when compared to a private company?
8. What is a cooperative business? Elaborate different types of
cooperatives.
9. “The validity of a Certificate of Incorporation cannot be disputed
on any ground whatsoever.” Critically examine the statement.
10. “An LLP is a definite improvement over the partnership in the matter
of promoting entrepreneurship.” Discuss.
11. “An LLP is a legal person distinct from its members taken individually
or collectively.” Comment.
12. Discuss the feature of separate legal entity and perpetual existence
in relation to an LLP.
13. Explain the rules regarding change of name of Limited Liability
Partnership.

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Notes
3.11 Suggested Readings
‹ Basu, C. (2017). Business Organisation and Management. McGraw
Hill Education.
‹ Chhabra, T. N. (2020). Business Organisation and Management.
Sun India Publications. New Delhi.
‹ Drucker, P. F. (1954). The Practice of Management. New York:
Harper & Row.
‹ Kaul, V. K. (2012). Business Organisation Management. Pearson
Education.
‹ Koontz, H., & Weihrich, H. (2012). Essentials of Management: An
International and Leadership Perspective. Paperback.
‹ Laasch, O. (2022), Principles of Management, 2e, Sage Textbook.
‹ Singh, B. P., & Singh, A. K. (2002). Essentials of Management.
New Delhi. Excel Books Pvt. Ltd.

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 L E S S O N

4
One Person Company,
Multinational Corporations
and Business Combination
Ms. Ritika Sharma

STRUCTURE
4.1 Learning Objectives
4.2 Introduction
4.3 One Person Company
4.4 Multinational Corporations
4.5 Business Combination
4.6 Forms of Business Combinations
4.7 Summary
4.8 Answers to In-Text Questions
4.9 Self-Assessment Questions
4.10 References
4.11 Suggested Readings

4.1 Learning Objectives

After studying this lesson students may able to understand:
‹ The basic concept and meaning of one person company.
‹ An overview of a multinational corporation.
‹ To create awareness about different forms of business combinations involving mergers,
acquisitions and takeovers.

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 One Person Company, Multinational Corporations and Business Combination

Notes
4.2 Introduction
In this chapter we will discuss about the new form of organization which
was introduced under the Companies Act, 2013 namely one person com-
pany. It is a private corporation but with fewer compliance obligations
than a private corporation. This chapter will also introduce us to Multi-
national corporations. A multinational corporation (MNC) is a business
that conducts business both in its country of origin and in other nations.
Nowadays, many individuals aspire to work in multinational corporations
as it provides a global exposure to the employees. Here we will discuss
about various features of MNCs that include a progressive and good
management, aggressive marketing, use of latest technology and so on.
This chapter will also give an overview of different forms of business
combinations, namely mergers, acquisitions and takeovers.

4.3 One Person Company

A one-person company is one that only has one person as a member,
according to Section 2(62) of the Companies Act. In addition, members
to this company are nothing but just subscribers to its memorandum of
association. So an OPC is essentially a firm with just one stakeholder
as a member. A single person could not start a corporation before the
Companies Act of 2013 went into effect. If a person wished to start a
business, they could only choose a sole proprietorship because a company
required to have at least two directors and two members in order to be
formed. A one person company can be incorporated with just 1 Director
and 1 Member. It is a type of corporation with fewer compliance ob-
ligations than a private corporation. One person may serve as both the
director and a member. Therefore, a one-person company is a business
that has the characteristics of a corporation and the advantages of a sole
proprietorship and can be incorporated by a single person, who may be
a resident or an NRI.

4.3.1 Legal Status of One Person Company

The member grants the OPC separate legal entity status. The sole person
who incorporated the OPC is protected by its distinct legal status. The

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 BUSINESS ORGANIZATION

Notes member’s liability is restricted to the value of his or her shares; he or

she is not personally responsible for the company’s loss. Therefore, the
OPC and not the member or director may be sued by the creditors.

4.3.2 Features of One Person Company

1. Single Member: Unlike other private organizations, One Person
Companies are limited to having a single shareholder or member.
2. Nominee: One distinctive characteristic of OPCs that sets them
apart from other types of businesses is the requirement, that the
company’s lone member should name a nominee when registering
the business.
3. No Perpetual Succession: Since an OPC only has one member,
upon his death, the nominee will have the option of accepting or
rejecting the position of the One Person Company’s lone member.
4. Minimum One Director: A one person company should have
minimum one member as a director. It can have a maximum of
fifteen directors.
5. No Minimum Share Capital: There is no requirement for a minimum
paid-up share capital under the 2013 Companies Act for One Person
Companies.

4.3.3 Formation of One Person Company

By adding his name to the memorandum of association and meeting
other requirements outlined by the Companies Act of 2013, one person
can create an OPC. This memorandum must include information on a
nominee who will take over as the only member of the company in the
event that the original member passes away or becomes unable to enter
into a binding contract.
Along with a registration application, the Registrar of Companies should
receive this memo and the nominee’s approval to his candidacy. Such a
nominee may opt out at any time by submitting the necessary papers to
the Registrar. The member may potentially withdraw his nomination at
a later time if he wants.

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One Person Company Registration Process Notes

Figure 4.1: One Person Company Registration Process

Step 1: Apply for Digital Signature Certificate
The first step is to obtain the suggested Director’s Digital Signature Cer-
tificate (DSC), for which documents like Address proof, a PAN card, an
email id, photo, Aadhaar card and a phone number are needed.
Step 2: Apply for Director Identification number
After obtaining the Digital Signature Certificate (DSC), the proposed
director must submit an application for a Director Identification Num-
ber (DIN) in SPICe Form along with documentation of their name and
address proof. Only companies that already exist may use Form DIR-3.
The SPICe form now allows the application of DIN for a maximum of
three directors.
Step 3: Name Approval Application
Choosing a company name is the next stage in incorporating a One Per-
son Company. The company will be known by the name “XYZ (OPC)
Private Limited.”

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 BUSINESS ORGANIZATION

Notes In the Form SPICe+ 32 application, only one preferred name and the
reason for preserving it may be listed. If the name is turned down, submit
a different name by submitting a second Form SPICe+ 32 application.
We proceed to the following phase as soon as the Ministry of Corporate
Affairs approves the name.
Step 4: Documents Required
We have to prepare the following documents for submission to the Reg-
istrar of companies.
1. Memorandum of Association: MoA which are also considered as
objects to be followed by a company.
2. Articles of Association: AoA lays down laws and regulations under
which company will operate.
3. Since there is only one Director and one Member, it is necessary to
nominate a nominee on their behalf so that, in the event of their
incapacity or death and their inability to discharge their obligations,
the nominee will act on their behalf and take their place. Along
with his PAN card and Aadhaar card, his written consent in Form
INC-3 will also be required.
4. Proof of registered office with proof of ownership is also required.
5. Forms INC-9 and DIR-2, respectively, will be required for proposed
Director’s Declaration and Consent.
Step 5: Filing of forms with MCA
Along with the Digital Signature Certificate of the Director and the pro-
fessional, all of these papers will be posted to the MCA site for approval
and connected to the SPICe Form, SPICe-MOA, and SPICe-AOA. When
the Company is incorporated, an automatic process generates the Pan
Number and TAN. The PAN Number and TAN do not require separate
applications to be submitted.
Step 6: Issue of the Certificate of Incorporation
Once all the above processes are complete and verification by Registrar
of companies is done, ROC will issue a Certificate of Incorporation to
the company.

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4.3.4 Advantages of One Person Company Notes

1. Legal Status: The sole person who incorporated the One Person
Company is protected by its distinct legal status. The member’s
liability is restricted to the value of his or her shares; he or she is
not personally responsible for the company’s loss.
2. Easy to raise Funds: One Person Company can easily raise money
through venture capital, angel investors, incubators, and other sources
because it is a private firm. Banks and other financial institutions
prefer to lend money to corporations over sole proprietorship
businesses. This makes getting money simple.
3. Less Compliances: The Companies Act of 2013 grants the One
Person Company some exemptions in relation to compliances. The
cash flow statement does not have to be made by the OPC. The
annual reports and books of accounts may only be signed by the
director and do not require the company secretary’s signature.
4. Easily Manageable: The One Person Company can be founded
and maintained by a single person, making administration simple.
Making decisions is simple, and decision-making happens quickly.
5. Can be Easily Incorporated: One Person Company can be incorporated
quickly because all that is needed is one member and one nominee.
The director may also be a member. There is no minimum paid-
up capital requirement, but the minimum authorized capital for
incorporating OPC is Rs. 1 lakh. As a result, incorporation is simple
in comparison to other business structures.

4.3.5 Disadvantages of One Person Company

1. Good for Small Business: One Person Company works well for the
structure of small businesses. There can only ever be one member
of the OPC at a time. OPC cannot gain additional shareholders or
members in order to raise more money. As a result, more members
cannot be joined as the business expands and grows.
2. Restriction of Business Activities: The One Person Company is not
permitted to engage in non-banking financial investment operations,
such as buying corporate securities. It cannot be changed into a

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 BUSINESS ORGANIZATION

Notes corporation with the charitable purposes listed in Section 8 of the

2013 Companies Act.
3. Ownership and Management: There will not be a significant
separation between ownership and management because the only
member may also serve as the company’s director. All decisions
must be made and approved by the lone member. There is a blurring
of the lines between ownership and control, which could lead to
unethical commercial actions.
IN-TEXT QUESTIONS
1. A one-person company is one that only has one person as a
member, according to Section __________ of the Companies
Act.
2. Sole Proprietorship is same as one person company. (True/False)
3. Which of the following are features of one person company?
(a) Single Member
(b) Unlimited liability
(c) 5 owners
(d) None of the above
4. It is necessary to appoint one nominee under One Person Company
Act. (True/False)
5. The member’s liability is restricted to the value of his or her
shares in one person company. (True/False)

4.4 Multinational Corporations

A Multinational Corporation (MNC) is a business that conducts business
both in its country of origin and in other nations. It keeps a central
office in a single nation that manages all of its other offices, including
administrative branches and manufacturing. A multinational corporation
typically maintains branches, factories, or other facilities throughout the
world in addition to a centralized headquarters that organizes worldwide
administration. MNCs provide their goods and services in many different

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nations, necessitating global management. Multinational companies have Notes

many assets, a high rate of turnover, and aggressive marketing strategy.
The MNCs in India include LTI, TCS, Tech Mahindra, Deloitte, and
Capgemini, to name a few.

4.4.1 Features of Multinational Corporation

1. Several Assets and High Turnover: MNCs conduct business
internationally. This implies they have substantial holdings in
practically every country where they do their business. Their
turnovers can likewise be exceptionally high. Apple, for instance,
has a 1 trillion-dollar market capitalisation.
2. Control of MNC: MNCs exercise unified control. Even though they
have numerous branches spread throughout numerous nations, their
head office in the country of origin will continue to exercise primary
control. Although the host country’s corporate operations have their
own management and offices, the head office nevertheless retains
ultimate control.
3. High Technology Advantage: An MNC has access to enormous
wealth and investments, as we already learned. This enables them
to enhance their products and business using the greatest technology
available. The majority of businesses also make significant financial
investments in their R&D division in order to create and unearth
new technical wonders.
4. Professional Management: An MNC is managed by extremely
talented and competent people. To handle their business operations,
technology, financing, expansion, etc., they have qualified managers.
Additionally, because of their reputations and resources, they are
able to draw top talent towards their businesses.
5. Aggressive Marketing: MNCs have a lot of resources available for
marketing, advertising, and promotional efforts. Since they aim
to reach a global audience, good marketing is required. They can
take the market and sell their items all over the world thanks to
aggressive marketing.

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Notes 4.4.2 Advantages of Multinational Corporation

A multinational corporation has many advantages to the home country
and the host country as well. Let us see:

Figure 4.2: Advantages of Multinational Corporations

Advantages of MNCs in Host Country
1. Growth of Host Country: MNCs help the host nation’s economy
develop, which is one of the key benefits. They bring a lot of
capital and significant investments to the host country. Then they
encourage quick industrial growth through subsidiaries, joint ventures,
branches, and factories. MNCs are actually regarded as the carriers
of progress.
2. Modernization of Host Country: A global firm contributes to the
nation’s technological advancement. They provide the host nation
with fresh innovations and cutting-edge technology. They aid in the
modernization of the sector in underdeveloped nations.
3. Reduction in Imports: MNCs lessen the host nation’s reliance on
imports. Exports from the nation increase while imports decline in
many cases.
4. Research and Development: Large amounts of finance and resources
are available to MNCs in general. In Research & Development, a
sizable amount of these resources are used. The host nations as well
as the home nation get the benefit of this research activity being
carried.
5. Effective Utilization of Resources: Additionally, multinational firms
encourage the best possible use of the nation’s resources. This brings
economic and nation development to the host nation.

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Advantages of MNCs in Home Country Notes

1. Generation of Wealth for Home Country: MNCs generate enormous
wealth for their native countries through their profits. The business
will gather fees, royalties, earnings, and charges from each of
its host nations and send them home. The home nation benefits
greatly from this enormous input of foreign currency. We can take
the example of apple, how it has captured the world’s market and
brought wealth to its nation.
2. Promotes Collaboration: MNCs offer a way for industrialized and
developing or undeveloped nations to collaborate. This enables both
parties to gain from the collaboration. Both countries get benefit
from this activity.
3. Promotes Bilateral Trade: Additionally, these multinational firms
support the development of bilateral trade between nations. Both
the national economies and the global market and economy profit
from this.

4.4.3 Demerits of Multinational Corporations

1. Money Minded Approach: A global corporation’s primary interest
is in making money. Their objectives could not coincide with those
of the host nation and could affect that nation’s development and
economy.
2. Hampers Competition: The presence of MNCs can limit competition
in some host nations and may even result in a monopoly or
monopolistic competition. Enterprises of host country are effected
badly sometimes.
3. Outflow of Resources: In their host countries, they too impose
steep fees and levies. Then transfer all the proceeds to their native
nation. This currency outflow could be harmful to the host nation.
Likewise resources also flow out from the home country, this loss
may be very big sometimes.

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Notes IN-TEXT QUESTIONS

6. Multinational companies have many assets, a high rate of turnover,
and aggressive marketing strategy. (True/False)
7. A global firm or MNC does not contribute to the nation’s
technological advancement. (True/False)
8. Which of the following is a disadvantage of MNC?
(a) Research and Development
(b) Promotes Collaboration
(c) Modernisation of Host Country
(d) Outflow of resources

4.5 Business Combination

A business combination is a form of transaction in which two businesses
merge in order to expand their size by employing the acquisition of the
other business and the subsequent control of its operations and workforce.
In plain English, it is the merging of two or more companies in order to
achieve a single objective by eradicating competition.

4.5.1 The Objectives of a Business Combination

1. Market Expansion: Business growth takes time. Companies acquire
the operations of other organizations that operate in the same
sector but serve a different market. The major goal is to expand
the customer base and share of the market.
2. Expansion of the Product Line: Establishing a new product line from
scratch is a time-consuming and challenging procedure. Companies
may merge with another business that offers the desired product
line. Combining these two benefits prevents businesses from starting
from scratch while allowing them to buy an existing company.
3. Elimination of Competition: Leading companies acquire control of
rival businesses to end rivalry in the same sector. It’s advantageous
to combine businesses under one management, and thus promotes
market monopolies.
4. Effective Management: The company’s assets are its workers
and skilled managers. The top managerial talent is also brought
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together when two or more businesses are combined. Employees Notes

and management are included in business combination transactions
with assets and liabilities. Few acquisitions occurred, particularly
for bringing in managers with expertise and experience.

4.5.2 Advantages of Business Combinations

1. End of Competition: A business combination helps in elimination
of competition in the market. It helps both the companies to work
together and end the rivalry, which in the end brings an end to the
emerging competition.
2. Brings more Customers: Combinations lead to the exploitation
of untapped markets. More sales will result from this rise in new
customers and clients.
3. Cost-effective: Mergers or business combinations facilitate the
attainment of economies of scale. The use of the best methods in
combination with large-scale production reduces the cost per unit.
4. Better Management: It brings together the top managers and the
teams, who can benefit the combined business with new strategies
and plans. When businesses are combined it not only combines
capital but with that personnel, ideas, assets, policies and resources
are also combined.
5. Better Services: The manufacturing business will be able to offer
customer support services by acquiring a service company. Greater
consumer satisfaction will result from this.

4.5.3 Disadvantages of Business Combination

1. Creating Monopoly: When businesses combine, the governing
authority may be concentrated in the hands of only one organization.
In the long term, the market and the customers will suffer if the
corporation abuses its position of dominance by creating a monopoly
in the market.
2. Added Expense: A corporation must hire professionals to start and
complete a business combination deal, which is a time-consuming and
expensive process. Resources of both the companies are exhausted
in this process.

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Notes 3. Confusion among Employees: Business combinations when occur,

lead to confusion in the minds of employees. Many employees get
a feeling of uncertainty, for the acquiring company can either keep
them or hire new employees on their position. Therefore, employees
should be provided with proper counselling and assurance.
4. Fear of Failure: Business combinations work well only if right
strategies are implemented and followed while the combining
process. Success is not guaranteed when a business arrives in the
market. Therefore, there is always a fear of failure in the minds of
employees and management.

4.6 Forms of Business Combinations

4.6.1 Mergers
According to Sudarsanam (1995), a merger takes place when two or
more corporations come together to contribute and share their resources
to achieve common objectives.
According to Gaughan (2002), a merger is a process in which two corpo-
rations combine and only one survives and the merged corporation ceases
to exist. Sometimes there is a combination of two companies where both
the companies cease to exist and an entirely new company is created.
When two businesses merge, they create a new business with a single
pooled share of stock. The boards of directors of the merging firms ac-
cept the union and request shareholder’s approval. A corporate approach
for operating as a single legal entity is to merge with another business.
Usually, the size and scope of activities of the companies agreeing to a
merger are equal. Here, two businesses merge to create a new business.
Both businesses become invisible.
Businesses want to merge in order to access a bigger market and customer
base, lessen competition, and obtain economies of scale. An acquisition
differs from a merger, as an acquisition is the taking over of a firm by
another company, a merger occurs when two or more businesses come
together to establish a new entity. Example of Merger: Merger of Face-
book and Instagram in 2012.

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Types of Mergers Notes

Figure 4.3: Types of Mergers

1. Conglomerate Merger: A conglomerate merger combines two
businesses with unconnected and different business operations
from various industries. Diversifying corporate processes, cross-
selling products, and reducing risk exposure are all advantages
of a conglomerate merger. The 1995 merger of The Walt Disney
Company and American Broadcasting Company (ABC) resulted in
the creation of a conglomerate.
2. Market Extension Merger: Companies that sell the same items but
compete in separate markets often merge together under this type
of merger. Companies that merge in a market extension transaction
want to expand their clients by gaining access to a larger market.
This merger is done by companies that sell same type of product
but in different markets.
3. Product Extension Merger: Product extension merger is also known
as congeneric mergers. Here two companies that provide separate
services to the same customer base, like a Wi-Fi provider and a
computer manufacturer, work together.
4. Horizontal Merger: A horizontal merger combines two businesses
from the same sector, which may include both direct and indirect
competitors. Greater purchasing power, more marketing options,
less rivalry, and a wider audience reach are all advantages of a
horizontal merger. In order to access a larger consumer base and
increase their purchasing power from the same vendors, this kind
of merger is typical in the food sector. Here, two businesses that
compete directly and have similar product lines and markets merge
together.

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Notes 5. Vertical Merger: In a vertical merger, two businesses that operate

at several points in the same supply chain and provide various items
or services for the same final product come together. An improved
supply chain, reduced costs, and improved product control are all
advantages of a vertical merger. Think of a software manufacturer
and computer manufacturer, once a computer is ready software need
to be added at the next stage if these two companies merge it will
be known as a vertical merger.
Advantages of Mergers
1. Increases Market Share: By combining the resources that both
firms bring to the business agreement and operating in the same
domain or offering identical products and services, a new company
can capture a larger market share.
2. Reduction in Cost of Production: Businesses can cut costs by
achieving economies of scale, for example, by purchasing raw
materials in large quantities cost can be reduced.
3. Expansion of Business: A business that seeks to expand in a particular
region may merge with the firm operating in the same region with,
identical and comparable product lines.
4. Access to more Financial Resources: The combined financial
resources of all companies involved in a merger or acquisition
improve the existing companies’ overall financial position and helps
the company to access more funds.
Disadvantages of Mergers
1. Creates Unemployment: A firm may decide to get rid of the other
company’s underperforming assets in an aggressive merger. It might
lead to workers losing their jobs and creating unemployment.
2. Increased Legal Costs: The legal business transaction of merging
two businesses frequently involves the participation of various
important professionals including lawyers, agents, registrars, etc.
this intern increases the legal cost.
3. Raise Price of Products: A merger increases market share and
lessens competition. As a result, the new business might establish a
monopoly and raise the pricing of the goods and services it offers.

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CASE STUDY Notes

Merger of Disney and Fox

The $52.4 billion Disney and Fox merger was announced in 2019.
Before the transaction was completed, the price increased to $71.3
billion, making it one of the biggest mergers in history. Additionally,
it constituted one of the biggest industrial mergers ever seen. Disney
and Fox were already two of the top three global proprietors of media
content. They combined to become a superpower, owning more film
and television properties than any other company in recorded history.
1. According to you, what type of merger is taking place between
the above two companies?
2. How are mergers different from acquisitions?
(Source: [Link]
html)

4.6.2 Acquisitions
A corporate transaction known as an acquisition is one in which one firm
buys all or a portion of the equity or assets of another company. In most
cases, acquisitions are conducted in order to control, enhance, and seize
synergies from the target company’s strengths. There are different forms
of business combinations, including amalgamations, mergers, and acquisi-
tions. An acquisition is when company purchases the maximum stakes in
other company. The firm whose shares have been purchased becomes the
subsidiary of Purchaser Company. The subsidiary company’s assets and
liabilities come under the holding company and hence subsidiary loses
its legal identity. Acquisitions help a company to diversify its business
portfolio. Firms having good financial position may strategically acquire
a company to add to its set of competitive advantages. Generally acquir-
ing firm targets a company with strong brand name but weak financial
position or with huge potential to earn profit. However, the acquisitions
are not always smooth.
There are two types of acquisitions - Friendly and hostile/take-overs. In
case of friendly acquisition both the firms mutually decide and settle for
a price at which acquiring firm is going to buy stakes in other firm. It
happens under the knowledge and with the agreement of both firms but

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Notes in case of hostile acquisitions, the acquiring firms take advantages of low
market prices of shares of other company and buys maximum shares at
that price. It is also called as take-over. Here the approach of acquiring
company is aggressive. The other company is left with no choice but
to do its operations under the other company. Example of acquisition:
Amazon acquires Whole foods; Sun pharmaceuticals acquires Ranbaxy.

Benefits of Acquisition
1. Access to Expertise: Small businesses can access expertise like
financial, legal, and human resource professionals when they partner
with larger massive enterprises. A corporation may decide to acquire
another company in order to gain resources and skills that it does
not currently possess.
2. Access to Capital: After an acquisition, a small company’s access
to finance is improved. Due to their difficulty to obtain big loan
funding, small business owners are typically forced to invest their
own money in the expansion of their companies. With an acquisition,
however, a higher amount of money is available, allowing business
owners to acquire the funds they need without having to reach into
their own pockets.
3. Fresh Ideas: With new perspectives and ideas and a zeal for assisting
the company in achieving its objectives, a new team of professionals
is frequently assembled with the aid of mergers and acquisitions.
New ideas and ways of work flow within the company.
4. Increased Market Share: A speedy growth in your company’s
market share may be possible through an acquisition. Growth by
acquisition can be useful in acquiring a competitive edge in the
market, even though competition can be difficult. Market synergies
are accomplished through the method.
5. Easy Entry to New Markets: Through Merger & Acquisition, a
business can quickly enter new markets and product categories with
a well-known brand, a solid reputation, and an established customer
base. Previously difficult market entry obstacles may be removed
with the aid of an acquisition.

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Challenges in Acquisition Notes

Cultural Differences: Each corporation has a unique culture that has
evolved since it was founded. It can be difficult to buy a company whose
culture clashes with your own. It’s possible that the actions of the em-
ployees and management from the two companies won’t mix as expected.
Employee opposition to the change may also result, which could lead to
tension inside the corporation.
Duplication of Tasks: Employees may duplicate one other’s tasks as a
result of acquisitions. Two departments or individuals may perform the
same task when two businesses with similar products or services unite.
This may result in high wage expenditures for the corporation. As a
result, Merger & Acquisition transactions frequently result in losses and
organizational restructuring to increase efficiency. However, layoffs can
lower staff morale and result in very less amount of output.
Reduced Level of Motivation: When two companies go through the
process of acquisition, many employees are laid off and others have a
constant fear of being laid off and this creates lower level of motivation
and low morale among the employees. Therefore, a company should
conduct sessions and ensure employees, best practices will be taken in
interest of the employees.
Conflicting Objectives: Given that the two companies engaged in the
transaction formerly operated separately, they might have different goals
now. For instance, the acquired firm might be wanting to reduce costs
while the original company might wish to expand into new markets.
This could result in internal opposition to the acquisition, which would
undercut any efforts being made.

4.6.3 Takeovers
The term ‘takeover’ is sometimes used to refer a hostile situation. Accord-
ing to Gaughan (2002), this happens when one company tries to acquire
another company against the will of the company’s management. However,
according to Sudarsanam (1995), a takeover is similar to an acquisition
and also implies that the acquirer is much larger than the acquired.
The words “takeover” and “acquisition” sound extremely similar. In a
takeover, one business will buy or take control of another for a prede-
termined sum of cash or shares.

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Notes Takeover takes place when a company successfully bids to take control
of another company. In most cases, takeovers are carried out by purchas-
ing the majority of a company’s stock from a seller who is prepared to
deal with the other. One company takes over another company through
acquisitions or mergers. The company making the offer to buy is referred
to as the acquirer in a takeover, while the company being acquired is
referred to as the acquiree.
Types of Takeovers
There are Different Types of Takeovers which are discussed below:
1. Hostile Takeover: A hostile or uninvited takeover can be highly harsh
because only one party is willing to participate. The purchasing
company may employ negative strategies to take over another firm.
2. Reverse Takeover: When a private company acquires a publicly listed
one, it is called a reverse takeover. The target company must have
sufficient capital to finance the acquisition being taken forward. A
private company can use reverse takeovers to go public without
having to incur the risk or additional costs relating to IPOs.
3. Creeper Takeover: A creeping takeover is when an acquirer gradually
buys shares of the target company. The acquirer’s goal is to gradually
buy up a sufficient number of shares of the target business on the
open market to get a majority stake. For instance, if a business
needs 51% or more of the voting shares of another company to
acquire a majority ownership, it will gradually purchase these 51%
shares slowly in several coming years.
4. Friendly Takeover: In this case, both the firms mutually agree for
the takeover contract and its terms. The acquiree (the company
that is being acquired) company is thought to initiate the takeover
process by publicly announcing its willingness to sell the firm.
Advantages/Reasons for Takeovers
There may exist the following reasons for performing a takeover:
1. Increasing Market Share: As we discussed above, takeovers also
move with the goal of increasing the market share by combining
the resources of both the firms.
2. Eliminate Competition: Takeovers are generally done with the
motive of eliminating competition in the market. When a company

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 One Person Company, Multinational Corporations and Business Combination

acquires its competitors, a situation of monopoly is created and this Notes

firm enjoys all the benefits from the market.
3. Acquire Intangible Assets: With the motive of acquiring the popular
brands, goodwill and copyrights of a company the other company
can proceed with a takeover.
4. Enhanced Distribution: A takeover can expand a company geographically
in a totally new environment or region, this will automatically
enhance the ability to distribute their products and services in this
region. Both the companies can work collectively for the distribution
of products.

Disadvantages of Takeovers
Some common drawbacks of takeovers include the following:
1. High Cost Involved: Whenever the process of takeover takes place,
several tasks are undertaken ranging from hiring of legal team,
appointing staff for administrative work, appointing resource persons
for various tasks, etc. These all functions increase the costs for the
firm.
2. Negative Feedback from Customers and Suppliers: Aggressive
takeovers are not considered in favour of the firms that are taking
over the other firm, therefore it receives a negative feedback from
the customers, suppliers, and other stakeholders.
3. Incompatibility: Takeovers generally disturb the overall flow of
work and it is disturbing for the existing employees too. When
new management enters in the command the old management is
disturbed and there may exist an incompatibility of management
style, organizational structure, and culture of both.
IN-TEXT QUESTIONS
9. Product extension merger is also known as __________.
10. Acquisitions and takeovers can cause a reduced level of motivation
among the employees. (Yes/No)
11. Through Merger & Acquisition, a business can quickly enter
new markets and product categories with a well-known brand.
(True/False)

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 BUSINESS ORGANIZATION

Notes 12. Small businesses can access expertise like financial, legal, and
human resource professionals when they partner with larger
massive enterprises. This can be termed as an advantage of
__________.
13. Which of the following is not a type of merger?
(a) Horizontal
(b) Flat
(c) Vertical
(d) Product extension

4.7 Summary
In this lesson we have learned how a one person company is established,
and the six step process which is to be followed for its corporation. One
person company is a type of organization which has only one person as
its owner and director, and the owner will have to name a nominee for
establishment of a one person company. It has some advantages like less
legal formalities, limited liability, quick decision making, etc. A multina-
tional corporation is different from indigenous companies being run in the
country. It helps the company and its employees to get a global exposure
and access to new technology being used around the globe. We have also
learnt various forms of business combinations which include a merger,
acquisition and takeover. A merger and acquisition helps the organization
to revive, get more expertise, more resources and a new environment to
work in. It may have certain disadvantages also, employees may lose
motivation as the working environment changes, there may also occur
duplication of tasks when two firms merge.

4.8 Answers to In-Text Questions

1. Section 2(62)
2. False
3. (a) Single member
4. True

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 One Person Company, Multinational Corporations and Business Combination

Notes
5. True
6. True
7. False
8. (d) Outflow of resources
9. Congeneric mergers
10. Yes
11. True
12. Acquisition
13. (b) Flat

4.9 Self-Assessment Questions

1. What is a One Person Company and how is it incorporated?
2. ‘A One person company is not same a sole proprietorship”. Do you
agree with statement? List differences between the two.
3. What do you mean by a Multinational Corporation? State its
disadvantages for the host country?
4. What are the different advantages of Multinational Corporation?
Does it have some demerits also? List them.
5. What is a Takeover? Mention and explain various types of takeovers.
6. How is merger different from acquisition? Which one according to
you is more beneficial for a small company?
7. Explain the term ‘Merger’. What are different types of mergers?
8. What do you mean by ‘acquisition’? What are different challenges
that a firm faces in the process of acquisition?

4.10 References
‹ [Link]
‹ [Link]
‹ [Link]

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 BUSINESS ORGANIZATION

Notes ‹ [Link]
multinational-corporation/
‹ [Link]
‹ [Link]
‹ [Link]
acquisitions-key-considerations-when-selling-your-company/?
sh=7d8191274102
‹ [Link]
html

4.11 Suggested Readings

‹ Basu, C. (2017). Business Organisation and Management. McGraw
Hill Education.
‹ Chhabra, T. N. (2020). Business Organisation and Management.
Sun India Publications. New Delhi.
‹ Drucker, P. F. (1954). The Practice of Management. New York:
Harper & Row.
‹ Kaul, V. K. (2012). Business Organisation Management. Pearson
Education.
‹ Koontz, H., & Weihrich, H. (2012). Essentials of Management: An
International and Leadership Perspective. Paperback.
‹ Laasch, O. (2022), Principles of Management, 2e, Sage Textbook.
‹ Singh, B. P., & Singh, A. K. (2002). Essentials of Management.
New Delhi. Excel Books Pvt. Ltd.

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 UNIT - III

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 L E S S O N

5
Business Environment:
Analysis and Diagnosis
Prof. Vipin Aggarwal
Dr. Rutika Saini

STRUCTURE
5.1 Learning Objectives
5.2 Introduction
5.3 Meaning of Business Environment
5.4 Nature of Business Environment
5.5 Significance of Business Environment
5.6 Components of Business Environment
5.7 Uncertainty and Business
5.8 Environment Analysis and Diagnosis
5.9 Techniques of Environment Analysis
5.10 Summary
5.11 Answers to In-Text Questions
5.12 Self-Assessment Questions
5.13 Suggested Readings

5.1 Learning Objectives

‹ To know concept and nature of business environment.
‹ To understand the various components of business environment.
‹ To assess the environment using various techniques.

5.2 Introduction
There is a strong need to scan the external and internal environment while doing any
business. The environment has the power to make anything successful when it has oppor-

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 BUSINESS ORGANIZATION

Notes tunities. On the other hand, if it is full of challenges than the success
of the business may get delayed. The present chapter aims to provide
the information about various types of environments and suggested some
techniques to analyse those environmental forces.

5.3 Meaning of Business Environment

Business environment refers to sum total of all the factors that directly or
indirectly affect the operations and profitability of a business enterprise.
It includes employees, customers, competitors, and political, social, and
economic factors, legal factors and so on. There are certain factors of
this environment that a business can control but there are certain factors
which are completely beyond the control of it but affect it adversely. The
factors which a business can control directly or indirectly, they constitute
as part of internal business environment and the factors it cannot control
are usually called as external business environment.

5.4 Nature of Business Environment

1. Complex: As already stated business environment is sum total of
factors i.e., it consists of various factors all of which affect the
working of different organization differently. Sometimes a similar
factor may be favourable for one organization and the same may
not be favourable for another. Therefore, it is very important to
understand these factors individually as well as a whole.
2. Dynamic: The external business environment of an organization
changes continuously thereby bringing lots of challenges and
opportunities for a business. It is important for an organization to
monitor and scan these factors and to be adaptive towards them.
3. Interrelated: All the factors of business environment are interrelated
and interdependent on each other. For example: Introduction of
Goods and Service taxation system has brought changes in political
and economic policies of India.
4. Unpredictable: A business can only anticipate the working of these
factors, but it cannot predict them with accuracy. The dynamic
nature of business environment makes it uncertain and risky. For

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 Business Environment: Analysis and Diagnosis

example: No business in their worst nightmares anticipated a nation Notes

going into a lockdown due to a virus (COVID-19).

5.5 Significance of Business Environment

With reference to system theory of management, we can say that every
business is a sub- system operating under the total system divided in
three layers. This is called as business environment. As already stated,
that business environment is dynamic and complex, Business cannot
operate and survive without taking into account these factors especially
today when there are not only national but also international factors at
play. Majority of the businesses and start-ups today are ambitious and
aggressively approaching the market with new and innovative ideas. In
such a scenario, a business needs to scan and monitor its environment.
The significance of studying business environment is explained below:
1. Knowledge of Emerging Opportunities: The analysis of business
environment helps an organization in detecting the emerging
opportunities in business world. An organization, with the help
of its internal factors can grab these opportunities and increase
its profitability. In fact, it can maximize the benefits of these
opportunities by becoming the first one to grab them. Environment
scanning, monitoring, analysis and diagnosis.
2. Knowledge of Threats: Awareness of business environment helps an
organization in identifying the potential threats. These are the factors that
may negatively affect the working of an organization. By anticipating
such factors, a business can strategise its working well in advance.
3. Prepare Leaders for Tomorrow: Managers who study and analyze
the environment involve themselves in a continuous learning process.
They understand the changing environment and their possible
repercussions on working of organization. Undertaking the challenges
of business environment makes them far-sighted and spontaneous
for contingent situations.
4. Flexibility in Working: Organization which analyze their environment
continuously understand the importance of change and hence they
maintain flexibility in their working so that as and when need arises
they adapt to the change.

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Notes 5. Determines a Business Success: A successful business organization

is one which studies its environment carefully. Sometimes, an
organization itself work as leader for bringing the change in society
and this is where the success of a business is determined.

5.6 Components of Business Environment

The business environment is broadly classified into two categories i.e.,
Internal and External.
Internal Environment: It refers to all the factors and elements present
within the company and affecting the business. These factors are rela-
tively controllable as the company can easily control them. The internal
environment comprises of the tangible and intangible assets of the firm,
conditions and forces. It also includes the procedures and the tasks to
be carried out during the course of action. The human resources and the
value system of the organization is also taken into consideration while
assessing the internal environment of the firm.

Figure 5.1: Internal Business Environment

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‹ Values: The values include the beliefs and the attitudes a firm carry. Notes
It is the working style of the people of the company. If the people
around the firm carry the same values, beliefs and the attitudes
then the company is more likely to be successful as there would
be a better coordination.
‹ Policies: These are the rules set by the organization. The company
has the full control over its policies and can modify them accordingly.
‹ Human Resources: The human resources of a company play an
important role in the success of a business. A well-trained workforce
can do wonders for a business. A highly motivated staff can easily
help a firm to reach its goals. The human resources are the most
important part of the internal environment of a firm.
‹ Tangible Assets: It includes the physical infrastructure of the firm.
The machinery, plant, building and other facilities of the company
can empower any business and help them to have competitive
advantage over others.
‹ Intangible Assets: The intangible assets like goodwill and brand
image have a significance role in fund raising. These assets allow
the firm to have a good customer base. It also helps them to have
long lasting relationship with the intermediaries.
‹ Management: The Management of the business has a major bearing
on the business and its operations. The management and the leadership
style can bring a lot of change in the business procedures and can
take the business to the new heights.
External Environment: The external environment comprises the el-
ements present outside the enterprise. These forces usually affect the
whole industry, country or the global market. The forces are not within
the company and therefore the company does not have any control over
them. This environment can be further divided into two categories i.e.
Micro Environment and Macro Environment. Both of these categories
have been discussed below:
Microenvironments consist of all the factors that are directly related to
the business organization. They can also be called as stakeholders having
direct interest in the working of an organization. These include buyers,
consumers, suppliers, distributors etc. Although they are external to an

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Notes organization, they play a great role in decision making and affecting the
performance of a business. This is the first layer of external environment
of a business.

Customer

Micro
Distributors Competitor
environment

Suppliers

Figure 5.2: Microenvironment

‹ Customers: The people purchasing the firm’s offerings are the
customers of the firm. The customers can be in the form of
individuals. Company or the government. Customers of a company
play an important role in deciding the existence of the company.
A company with the happy customers has a long and wealthy life.
‹ Competitors: The business enterprises are not always alone in the
industry. There are many other similar firms working and dealing
in the same products or services. They are known as competitors.
The competitors can pose a threat to the company and therefore
utmost care has to be taken while scanning the microenvironment.
‹ Suppliers: They are the people who supply essentials to the company.
A stable and reliable channel of suppliers helps the business to
grow. If the supplies are not good, the raw material supplied by
them would not be able to produce quality good.

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‹ Distributers: The distributers of the company help the manufacturers Notes

to market, promote and sell the product. They are the ultimate parties
who bring the product or the service to the customer. Therefore,
the distribution channels have to be chosen carefully. Wholesalers,
retailers, advertising agencies and marketing research agencies are
some of them.
The second layer is Macro environment. It includes all the factors which
do affect any individual organization but affect all the business organi-
zations of all industries. They are also known as the dimensions of the
business environment. This affect can be favorable for some or can be
unfavorable for others but duly affect all types of organizations. These
factors are broad enough to be controlled by any particular industry or
firm. These include political, legal, international, socio-cultural factors
and economic factors. As these are completely out of the control of an
organization, they need to be monitored and analyzed carefully.

Figure 5.3: Macro Environment (Dimensions

of Business Environment)

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Notes These factors are explained in detail as follows:

Political Factors
These are the forces of governance of a nation and their interference in
the economic activities of its citizens. Political stability, transparent and
democratic governing system is key to development of a nation and aids
in development of organizations as well. These factors include:
‹ Political system which may be democratic or autocratic.
‹ Ideologies of governance which can be individualistic or collectivist.
‹ Government interference which may range from laissez fair to fully
controlled economy.
‹ International relations i.e., political relations with other countries.
‹ Political standing in international organizations.
‹ Political stability and acceptability i.e., a stable government.
Government is one of the key stakeholders of a business. It can bring
favours and opportunities for an organization with its favourable poli-
cies such as subsidies, removal of tariffs, and promotion in exports etc.
but sometimes may create hindrances in their working as well such as
increased taxes, banning exports and imports, international wars, lack of
political stability and so on.

Economic Factors
These are the factors which affect the level of economic activity in a
country. These include:
‹ Level of economic growth: developed, developing, transitioning or
underdeveloped economies.
‹ Nature of economic system: socialistic, capitalistic or mixed economy.
‹ Foreign exchange rate system: fixed exchange rate or flexible
exchange rate system.
‹ Economic indicators: inflation rate, interest rate, income level,
GDP etc.

Social Factors
These include factors which indicate the way a society is organized and
sub-divided, culture, beliefs and values they share and even changing

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patterns of society. These are complex factors as they can only be ob- Notes
served and cannot be studied. They need to be respected as people are
very sensitive about them. These factors include
‹ Social system- caste system, class system etc.
‹ Religions
‹ Traditions and customs
‹ Festivals
‹ Lifestyle and preferences

Environmental Factors
These are the factors which have become active in the last ten years.
Due to nations rapidly growing in race of globalization, increased in-
dustrialization, lose environment laws - natural resources were getting
shrink, pollution levels were rising, and energy is getting exhausted.
These factors include:
‹ Concern for Energy-emergence of solar energy, energy saving devices.
‹ Concern for natural resource saving and their optimal utilization.
‹ Environment laws.
‹ Sustainable development issues.
‹ Green production and consumption.
Businesses today are gaining competitive edge on the basis of these fac-
tors. Although environment friendly products come in luxury consumption,
more and more competition can bring their prices down.

Legal Factors
The legal environment refers to the principles, rules and regulations
established by the government. These regulations are a result of various
legislations. These include:
‹ Legal systems such as theocratic laws, common laws or civil laws.
‹ Emerging laws and amendments such as corporate social responsibility
laws.
‹ Product safety standards and product liabilities.
‹ Consumer rights and competition law.

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Notes
5.7 Uncertainty and Business

Business Uncertainty
Business Uncertainty refers to the situation that is not predicted by the
business. The uncertainty can have the negative impact on the business if
not managed properly. The concept of uncertainty is totally different from
that of risk. The risk can be measured and predicted in a given situation.
The Uncertainty does not enjoy this privilege. The business cannot easily
measure the uncertainty as it is the situation that is not anticipated. The
uncertainty is not something that subsides over a period of time. The
uncertainty is always present in any business activity.

Types of Uncertainty

Figure 5.4: Types of Uncertainty in Business

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The uncertainty can arise for any department in the business. The follow- Notes
ing are some of the business uncertainties that a firm often encounters:
1. Demand Uncertainty: The demand forecasts are not always accurate.
The decision regarding the demand is very important as it regulates
all other decisions. The sales, production and staff requirements are
dependent upon the demand conditions.
2. Production Uncertainty: The production uncertainty arises due to
the uncertainty associated with the raw material and suppliers. The
production uncertainty can be defined with the help of following
questions.
(i) What quantity of the finished products should be produced?
(ii) What schedule of the production shall be followed?
(iii) What resources should be utilized in production?
3. Cost Uncertainty: The uncertainty related to the cost is always
present in any kind of business. If the price of the raw material
increases, it affects the cost of production. Similarly, if the fixed
cost like rent increases, then it has a direct bearing on the cost of
the product.
4. Profit Uncertainty: Profit refers to the difference between the total
cost and the revenue. When there is an uncertainty about the cost
of the product and the revenue, it is obvious to have uncertainty
about the profit generation also.
5. Price Uncertainty: The price of the product majorly depends upon
the cost of production, but apart from the cost there are other factors
also that may affect the price of the product. The demand conditions
and the market conditions are highly uncertain. The presence of
competitors and the substitutes may also affect the price. Therefore,
leading to the uncertainty in pricing of the product.
6. Labour Uncertainty: The labour is the one resource that has the
power to turn the raw material to the finished product. The labour
of a firm plays an important role in making the firm successful. If
the labour is not appropriate or talented enough, the firm will have
to suffer. The uncertainty regarding the availability and efficiency
always remains.

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Notes 7. Environmental Uncertainties: The environment in which the business

operated has the power to change the rules of game. The internal
environment consists of the management the policies of the business
which are somewhat under the control of the business. But the
external environment is beyond the control of the business which
is highly uncertain.
8. Capital Uncertainty: The funds used by the business have to be
raised from many sources. The sources are uncertain as they are
regulated by the external forces like the economic and political
condition of the country and the global market. Therefore, the
capital needs of the business cannot be easily predicted.
IN-TEXT QUESTIONS
1. __________ refers to sum total of all the factors that directly or
indirectly affect the operations and profitability of a business
enterprise.
2. The external business environment of an organization changes
continuously thereby bringing lots of __________ for a business.
3. __________ consist of all the factors that are directly related to
the business organization.
4. __________ includes all the factors which do affect any individual
organization but affect all the business organizations of all
industries.
5. Business Uncertainty and the Business Risk are both one and
the same thing. (True/False)

5.8 Environment Analysis and Diagnosis

Environmental analysis is a process of identifying all the factors internal
as well as external which affect or can potentially affect the working of
organization. Once the factors are identified, environmental diagnosis
is done to understand how these factors affect the working. An under-
standing about their working help managers in designing strategies and
taking key decisions.

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Environment analysis need to be supplemented with information system Notes

that can keep continuously scan internal and external environment and
provide up-to-date and accurate information.
IN-TEXT QUESTIONS
6. __________ is a process of identifying all the factors internal
as well as external which affect or can potentially affect the
working of organization.
7. Business Environment is simple and easy to assess. (True/False)
8. The analysis of business environment helps an organization in
detecting the emerging __________ in business world.

5.9 Techniques of Environment Analysis

SWOT Analysis
It is a technique of environment analysis acronym for Strength, Weak-
nesses opportunities and threats. It is simple yet powerful technique of
environment analysis. It was designed by management consultant Albert
Humphrey at the Stanford Research Institute in 1960s. It gained popu-
larity due to its simplicity and applicability in all sorts of organizations
and is popular till date.
This analysis is done in the form of a matrix divided into four quadrants,
one representing strength, second weaknesses, third opportunities and
then last threat.
Internal Environment
Strength (S) Weaknesses (W)
Opportunities (O) Threats (T)
External Environment
Strength (S) refers to all the factors which work in favour of organization.
These can be stated as set of advantages that gives organization an edge
to fight competitors, claim better prices for its products, and increase
its bargaining power in front of suppliers. These factors can be tangible
such as investment, scale of operations, assets, technology or they can
be intangible such as goodwill, strong brand name, loyal customer base,
skilled capital and so on.

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Notes Weaknesses (W) refers to all the factors that work against the organi-
zation. They hamper the working of organization and if not corrected
may also become the reason for downfall of the organization. These are
opposite of strengths. Examples of weakness can be - mismanagement
in organization, lack of loyal customer base, weak brand image, lack
efficient and skilled workforce and so on.
Opportunities (O) refers to all the factors which act as stimulator in
growth of an organization. They are the set of favourable policies, de-
cisions, trends and changes in markets that if grabbed can multiply the
profitability of an organization.
Threats (T) refers to all the factors which act as hindrances or blockages
in the path of organization. These can be changes in exchange rate, law-
suit against firm, political disturbances and so on. These also include the
contingencies of future which cannot be predicted as per normal human
intellect like natural disasters such as earthquake, virus attack etc.
Strengths and Weaknesses are Internal to an organization whereas oppor-
tunities and threats are part of external environment of an organization.

How to use SWOT Analysis?

An organization can use SWOT analysis by listing down all the points
of strength, weaknesses, opportunities and threat. It is not a onetime
technique rather it should be used continuously. All the factors of firm’s
micro and macro environment should be classified in appropriate quad-
rant. It requires application of intellect by manager but now- a-days lot
of software’s are also available to assist manager in this task.

Strategizing with the Help of SWOT

Once the factors have been listed, the next step is to design strategies.
The strategies should be designed in such a way that a firm is able to
maximise the benefits from its opportunities, minimise the risk from threats,
optimally use its strength and overcome its weaknesses. These strategies
are discussed in detail in the next environment analysis technique.
Benefits of Using SWOT as a Technique of Environment Analysis
1. It a comprehensive tool which studies both internal as well as external
factors of the organization.

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2. It is applicable to all sorts of organizations irrespective of their size. Notes

3. It can be used both as a technique of analysis as well as for designing
the strategy.
However, SWOT analysis is a tool in the hands of a manager. It is on
the skills and intellect that he can classify different factors in different
quadrants. For one manager, a factor can be strength and for other it can
be weakness. It is based on subjective judgements of manager. Therefore,
SWOT analysis should be supplemented with objective information, facts
and figures to bring accuracy in its working.

Limitations of Using SWOT Analysis

The Business Organizations may get overwhelmed with the sophisticat-
ed techniques of scanning the environment like SWOT analysis but the
techniques is not untouched by the limitations. Following section deals
with the limitations of SWOT technique.
1. Prioritization Problem: Sometimes the leaders go too much in the
techniques and overlook some of the important aspects. They might
give more importance to the irrelevant opportunities and ignore the
real challenges. Therefore, it is suggested to prioritize the relevant
aspects of the business rather than just believing the SWOT.
2. Reduced Clarity: A Single factor can be a threat and an opportunity
too. Similarly the internal resources can be considered as a strength
and a weakness at the same time. For example, a new competitor
in the market can be a potential threat to your business but its
low quality product can become an opportunity for your business.
Therefore, the SWOT analysis reduces the clarity for the management.
3. Subjectivity: The individual who creates or designs the SWOT
analysis of the firm can be biased towards a particular situation of
the environment. It also changes with the nature of the person and
the experience he/she has. For example, an optimistic person can
list down too many opportunities and strengths while a pessimistic
person can do its opposite. A realistic approach has to be followed
while doing such analysis.
4. Large Involvement: While conducting the SWOT analysis, various
managers are involved in the process and therefore different opinions
of different people is being sought. Sometimes, this difference in

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Notes the opinions can be conflicting and does not produce the desired
results. The leader might feel difficult to address the views of every
stakeholder.

TOWS Analysis
TOWS analysis is extension of SWOT analysis. It is a framework which
begins once the analysis of environment has been done as per SWOT. It
is more of strategic tool than being a tool for analysis only. It focuses
upon taking action, designing strategies and making key decisions. But
why its name is TOWS? This is because it is SWOT analysis spelled
backwards.
SWOT analysis in not just an acronym but the name also indicates the
direction of analysis i.e., first internal environment of an organization
is studied, and then external environment is analysed but for designing
strategies TOWS suggest that first external environment need to be studied
and then internal environment is adapted.
One of the shortcomings of SWOT analysis is that it does not match the
four factors with each other. For example: once the weaknesses are listed
it does not tell how to overcome them. These questions are answered by
TOWS analysis.
SWOT analysis matches internal factors with external factors and comes up
with four different broad strategies. These strategies are listed as follows:
1. The SO Strategy: The first quadrant is created by matching strength
with opportunities. This is also known as Maxi–Maxi Strategy because
here firm wants to maximise on both the variables i.e., strengths as
well as opportunities. This is the quadrant with maximum benefit
for the firm. The opportunity present in the market exactly matches
to its strength and if grabbed nicely may lead to multiple benefits
for organization. An organization needs to approach it aggressively
and design an appropriate course of action.
Example: PAYTM took immediate benefit when Demonetisation was
introduced in India.
2. The WO Strategy: The second quadrant is created once the weaknesses
are matched with opportunities in market. Here the strategies should
be designed in the direction of change, learning, improvement and
breaking the status quo. An organization that is not able to grab

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opportunities because of weakness may stand to lose in competition Notes

if it does not work in direction of change. For example: If a new
technology is introduced in market for which an organization needs
a skilled labour base than an organization can start training its
unskilled workers. It should convert its weakness in strength. This
is also known as min-max strategy i.e., Improve internal weaknesses
by using external opportunities.
Example: Us companies outsourcing accountancy and engineering
work to India on account of cheap labour available. They are
reducing their costs as their internal labour is expensive for such
works.
3. The ST Strategy: Third quadrant is when threats in external environment
are matched with internal strengths. Here, an organization’s purpose
is to minimise the consequences of threats by leveraging upon its
strength. It is also called as Maxi-Mini Strategy. Here a firm need
to be smart enough to play its strengths in order to fight threats.
Example: Maggie was charged with a legal suit which leads to its
ban for a certain period of time in market, but Maggie overcame
it through a loyal customer base and a strong brand name. It re-
established itself into market with same liking in minds of people.
4. The WT Strategy: This is the last quadrant where threats in external
environment are matched with weaknesses. It is the quadrant with
maximum risk. Here the position of a firm is very weak, and it
needs to design its needs to be defensive in its approach. It is also
called as Mini- Mini Strategy. At this quadrant, firms usually resort
to mergers, join ventures, retrenchments, shutting down of some
departments and so on.
Hence, TOWS is simple and easy to use tool for strategy designing.
It serves the most important purpose of strategic planning i.e.,
designing strategies as per the environmental variables. Both SWOT
and TOWS should be used in complement to each other.
Tows matrix Opportunities Threats
Strength SO Strategy (SO) ST Strategy (ST)
Weakness WO Strategy (WO) WT Strategy (WT)

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Notes 5.9.1 ETOP: Environmental Threat and Opportunity Profile

The Environmental Threat and Opportunity Profile is a technique to scan
and analyse the external environment of a business. In this analysis the
environment is classified in various sectors. The overall impact of the
sector is analysed on the business to know the favourability of the en-
vironment.
Procedure Followed During the Preparation of ETOP:
Step 1: Diving the external environment into various categories depend-
ing upon their nature and degree of relatedness. The environment can be
divided into the sectors such as technological, political, legal, economic
and social etc.
Step 2: Analysis of impact of each sector on the business.
Step 3: The further division of the sectors into sub-sectors if needed.
Step 4: Analysis of each sub-sector.
Step 5: Final representation of the ETOP.
In the below section, the ETOP of a motorbike company has been pre-
sented where the external environment has been divided into various
sectors and then assessed. The signs have been given in order to show
the favourable ↑, Adverse ↓, and → neutral.

(Source: [Link]

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Benefits of Using the ETOP: Notes

1. The analysis helps the organization to scan the opportunity and
threats present in the environment.
2. It strengthens the enterprise’s competitive position.
3. It allows the organization to take decisions quickly and logically.
4. It helps the organization to formulate the strategy.
5. It helps in the evaluation of the environment.
Limitations of Using ETOP:
1. It does not analyse the interdependence of the factors like political,
legal and social etc.
2. It only assesses the static environment i.e. the prevailing situation
at that point of time only.
3. A lot of subjectivity is involved in the tool as the person who is
doing the analysis can have an optimistic or pessimistic nature.
IN-TEXT QUESTIONS
9. __________ analysis is used to assess strength, weaknesses,
opportunities and threat.
10. ETOP stands for __________.
11. Threats and the opportunities are a part of internal environment.
(True/False)

5.10 Summary
The present chapter throws the light on the meaning of business envi-
ronment and its impact on the wellbeing of the business. The Business
environment has been categorised in Micro and Macro environment on
the basis of its impact on the business. The chapter also discusses about
various techniques used for assessing the external and internal environ-
ment of the business.

5.11 Answers to In-Text Questions

1. Business Environment
2. Opportunities and Threats

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Notes 3. Microenvironment
4. Macro Environment
5. False
6. Environmental Analysis
7. False
8. Opportunities
9. SWOT
10. Environment Threats and opportunity Profile
11. False

5.12 Self-Assessment Questions

1. What is the meaning of the term business environment? What are
the various components of it?
2. What is environment analysis and diagnosis? Why is it important
for a firm to keep up to date with environmental changes?
3. What are various techniques of environment analysis for a business?
How can they be used in complement to each other to do a total
analysis?
4. What do you mean by SWOT analysis? Explain in detail its working
with the help of diagram and examples.
5. TOWS is an extension of SWOT analysis. Explain the above statement
and along with it highlight the point of differences between them.
6. TOWS is a tool for strategic planning also. Explain this statement.
7. Explain the ETOP. Design ETOP for an organization of your choice.

5.13 Suggested Readings

‹ Basu, C. (2017). Business Organisation and Management. McGraw
Hill Education.
‹ Chhabra, T. N. (2020). Business Organisation and Management.
Sun India Publications. New Delhi.

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 Business Environment: Analysis and Diagnosis

‹ Drucker, P. F. (1954). The Practice of Management. New York: Notes

Harper & Row.
‹ Kaul, V. K. (2012). Business Organisation Management. Pearson
Education.
‹ Koontz, H., & Weihrich, H. (2012). Essentials of Management: An
International and Leadership Perspective. Paperback.
‹ Laasch, O. (2022), Principles of Management, 2e, Sage Textbook.
‹ Singh, B. P., & Singh, A. K. (2002). Essentials of Management.
New Delhi. Excel Books Pvt. Ltd.

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 UNIT - IV

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 L E S S O N

6
Entrepreneurship:
Founding the Business
Dr. Rutika Saini
Ms. Amanpreet Kaur

STRUCTURE
6.1 Learning Objectives
6.2 Introduction
6.3 Entrepreneur-Entrepreneurship-Enterprise
6.4 Forms of Entrepreneurship
6.5 Difference between Social Entrepreneur and Business Entrepreneur
6.6 Process of Entrepreneurship
6.7 Summary
6.8 Answers to In-Text Questions
6.9 Self-Assessment Questions
6.10 Suggested Readings

6.1 Learning Objectives

‹ To understand the meaning of Business Entrepreneurship.
‹ To know the features of Entrepreneurship.
‹ To evaluate the features of a Good Entrepreneur.

6.2 Introduction
The current chapter deals with the entrepreneurship and its various forms. It has been seen
that the business environment is dynamic and complex. An entrepreneur has to possess
some qualities in order to run the business successfully. The chapter discusses upon those
qualities. The concept of social entrepreneur is emerging over a period of time where the
entrepreneur is not working for the profit motive but for the welfare of the society.

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Notes
6.3 Entrepreneur-Entrepreneurship-Enterprise

Enterprise
An Enterprise can be explained as a business organization which operates
to provide the public with the goods and services. The organization gives
employment to the people hence contributes towards the nation building.
An enterprise is a venture indulged into the business/economic activities.
Following are the reasons of starting an enterprise:
1. To Solve a Problem: Some organizations are formed to solve the
problem of the customers, or the government or the society. For
example, there are some software like Grammarly which are available
to correct the spelling and grammatical errors.
2. To Exploit an Idea: Sometimes an enterprise is started to provide
the benefit to the society from an idea. The inventions are taken
up to a platform where they can serve the public. For example, the
advertising agencies sell idea to the companies who cannot make
advertisements on their own.
3. To Fill a Gap: Some enterprises are being formed because there is
a difference in the existing product and the expected product. These
enterprises mainly focus upon the innovations. For example, The
IBM felt the gap between the already existing mobile phones and
the expected smart phones and launched the mobiles with e-mail
facility.

Forms of Enterprise
The people who want to start an enterprise in India have to research
a lot about the options available, legal requirements and the funding
facilities. Following section deals with the various forms of enterprise
available in India.
1. Sole Proprietorship: As discussed in Unit II of the book, the sole
proprietorship is the one of the easiest and quickest way of setting
up an enterprise. As the name suggests it only needs one person to
do the business. It also does not restrict him to employing people
or acquiring necessary resources. The legal documentation and other
requirements are nominal in this form of entrepreneurship.

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2. Partnership Firm: A partnership firm is the one where two or more Notes
individuals work together for an economic gain. They also share
the gains and losses in a particular ratio. The partnership deed
must specify all the terms and conditions of the business. One of
the members can also be considered as the managing partner of
the firm. The only limitation that lies with the partnership is the
limited liability towards the creditors.
3. Company: A company is kind of enterprise that enjoys the status of
separate legal entity. That means the company is separate from its
members. They have a limited liability towards the creditors. The
companies can be classified into two broad categories i.e., Private
Company and Public Company. In order to commence a company,
the memorandum of Association and Articles of association are the
two main legal documents of the company and have to be filled
with the registrar of the companies.
4. Limited Liability Partnership: The Limited Liability partnership is
a concept that has newly been introduced in India. The main reason
behind its introduction is to do away with the unlimited liability
clause of the partnership. In LLP the partners have the limited
liability towards the creditors.
5. One-Person Company: It is a company that is started by one
person and a director. It enjoys all the features of a company and
is managed by only one person. The decision making is quick in
this form of enterprise as the decisions are to be taken by only one
person. The person who starts a One-Person company has to suffix
OPC in its company’s name.
Entrepreneur
An entrepreneur is a person who undertakes risk to start ventures and
pursue opportunities with discretion and expertise.
Following are the characteristics of a business entrepreneur:
1. Risk Seeking: The entrepreneur is risk seeking as he/she gets an
adrenaline rush from risk. It satisfies the adventure needs, and
failure different disappoint the entrepreneur.
2. Problem Identifying: Entrepreneur is sensitive to people’s problems
and empathizes worth them. This motivated him to seek solution to
the problems.

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Notes 3. Solution Seeking: Entrepreneur is skilled and educated, thus capable

of findings, producing and providing solutions to problems within
limited resources.
4. Innovative: Thinking out of the box and unconditionally stands an
entrepreneurial venture out from other businesses. Innovation also
requires him to find solutions in such a way so as to sustain own
business as well as the environment.
5. Motivated: An entrepreneur is enthusiastic and is not demotivated by
failures. He introspects to find the shortfalls and builds an improved
structure by learning from mistakes.
6. Self-critical: Entrepreneur is self- critical and is willing to learn
from other achievements. He critically examines each of his own
ventures and aims to beat himself.
7. Good Communicator: An entrepreneur is good at communication
and convincing skills. This helps him acquires initial funding as
well as market his innovations.
8. Excellent Leader: Entrepreneurship requires cultivation of leadership
skills, as it requires proper delegation of duties to be performed by
group members, thus enabling the entrepreneur to direct his energies
to more important issues.

Entrepreneurship
Entrepreneurship can be defined as the process of developing, organizing
and running a business activity with the motive of earning the profits.
In order to generate the profit, the entrepreneur has to undertake many
risks. It can be termed as the art of creating a business and generating
the employment for others.

Benefits of Entrepreneurship
Following are some benefits of the entrepreneurship:
1. Helps in Creating the Jobs: Entrepreneurship is a process where
the business activities are undertaken. To perform these activities
a well skilled and competent staff is required. The entrepreneurial
activities require human resources those who can make the enterprise
successful. Therefore, such kind of activities create jobs in the
market.

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2. Innovation: The new ventures are started to take the new and Notes
innovative products to the public. The entrepreneurship leads to
the innovations and development in the existing offerings. It has
been observed that some of the latest technologies are a result of
the new businesses.
3. Change: Entrepreneurs are known for their unique thinking. They
brought changes to the society. They just follow their instinct and
ready to take the risk. Entrepreneurs like Steve Jobs and Bill gates
are the greatest examples of game changers.
4. Adds to the Society: The entrepreneurial activities always help the
society to grow. They bring a lot of changes and improvements in
the standard of living. They introduce new products to the public.
They also make many activities convenient for the people. For
example, the services on urban clap for the people who do not have
time to search for such services physically.
5. Nation Building: As it creates the job and a huge profit for the
entrepreneur, it creates a wealthy nation also. As per a report by
Global Entrepreneurship Monitor the entrepreneurial activities rise
from 5.3% in 2020 to 14.4% in 2021. Also, the Business Ownership
rate has risen to 8.5% in 2021 from 5.9% in 2020.

6.4 Forms of Entrepreneurship

Figure 6.1: Types of Entrepreneurship

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Notes Small Business Entrepreneurship

This is one of the most common types of Entrepreneurships observed
round the globe. The main reason behind its popularity is its size. Most
of the enterprises are small in size. These types of ventures are usually
started by the people who have limited resources and do not have any
plan to expand the business in the future.
The people included in this type of entrepreneurship are mostly the rel-
atives, family members or the local residents. The small business entre-
preneurship includes the Barbour, tea shops, and the local grocery stores.
The capital is usually raised through the small loans or personal savings.

Features of Small Business Entrepreneurship

‹ Single Product: The small business Entrepreneurship usually deals
in the single product category. The infrastructure includes a small
shop or a factory having minimal number of employees.
‹ Limited Scope: The entrepreneurs working for small businesses
do not have a plan to expand their business in the future. They
sell their products in the local region. The products are customised
according to the local requirements.
‹ Risk Aversion: The entrepreneurs are risk averse and are not ready
to take higher risk. They play safe and try to generate profits from
the very beginning. As the funds involved here are limited, the risk
factor is also minimised.

Advantages of Small Business Entrepreneurship

Following are the Advantages and Disadvantages of having/owning a
small business
1. Independence: In the small business ownership, the person who starts
it is the boss himself. Being your own boss means that you don’t
need to take the permission about important decisions. It leads to
the independence.
2. Lifestyle: The independence also improves the lifestyle of the owner.
If he/she wants to spend the time with the family, they don’t have
to ask for it. Also, many activities can be done online and leading
to a better work-life balance.

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3. Financial Rewards: Despite having a larger financial risk, all the Notes
financial gains go with the entrepreneur only. The owner’s hard
work is directly proportional to the profits of the business.
4. Learning Opportunities: As the owner is involved in every activity
of the business, he/she learns a lot. The entrepreneur learns through
experience and also from the other firms of the same kind.

Disadvantages
1. Financial Risk: As the investments are done by a single individual,
the financial risk for him can be high here. The funds in this type
of Entrepreneurship are usually raised from the family and friends
and its liability lies solely on the entrepreneur.
2. Stress: In this type of Entrepreneurship, everything is managed
by the business owner himself. Which can be stressful and tiring
sometimes. When a single person handles all activities like production,
recruitment, and competition etc., there are chances of mistakes and
chaos.
3. Time Commitment: Sometimes, the freedom comes with a lot
of responsibilities. Similarly in this type of Entrepreneurship the
business owner often finds it difficult to spare time for the family
and friends. He has a lot of responsibilities and work burden.
4. Undesirable Duties: As this is one man show, the owner has to play
all the important roles for the business irrespective of his personal
interest.

Scalable Startup Entrepreneurship

The scalable startups are the enterprises which are formed with a view of
changing the world. Initially these entrepreneurs start the business with a
limited fund but eventually attract the investors and expand the scale. The
funds are raised and used towards the research and development. Over a
period of time, these startups become more powerful. They usually work
on the experimental model and hire the best of the employees.

Features of Scalable Startup Entrepreneurship

Vision: Scalable Startup Entrepreneurship are also started with a small
amount of investment on the initial level but later on the business is be-

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Notes ing expanded with a vision to achieve more in the future. Unlike small
businesses, this kind of business is opportunistic in nature and has a
vision to bring change in the society.
Revenue Generation: In this type of entrepreneurship, not only the prof-
its are earned, but a good amount of revenue is also generated which is
reinvested in the business later on.
Capital: In such kinds of entrepreneurships, the funds are mostly raised
by the external investors and venture capitalists.

Advantages
1. Choice Liberty: A lot of freedom is enjoyed by the people who
are indulged in Entrepreneurship. Every decision is taken by the
entrepreneur and therefore, the utmost liberty is exercised.
2. Low Investment: Initially, the scalable start-up entrepreneurship does
not need a huge investment. One can start a business with a limited
capital and later expand the business according to the opportunities
and threats in the external environment.
3. Flexibility: Entrepreneurship gives flexibility to its owners regarding
the utilization of its resources. They can employ resources on their
convenience.
4. Questioning Freedom: The entrepreneurs have all the freedom to
question their employees, suppliers and distributors. They are not
accountable to anybody else.

Disadvantages
1. Risk Taking: A large number of the ventures fail in their initial years
as a huge amount of risk is involved with the Entrepreneurship.
2. Commitment: Entrepreneurship needs a great degree of commitment.
One has to forget about all other things and workday and night for
the success of the business.
3. Excessive Responsibility: As compared to other type of careers, the
entrepreneurship comes with greater responsibility. The entrepreneur
has to take all the decisions on his own and work for the well-being
of its stakeholders.

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Large Company Entrepreneurship Notes

Large Company Entrepreneurship is a type of entrepreneurship where
the life cycles of the organization are already defined. It means they
have to continuously work upon the improvement of their products and
services due to the prevailing competition and customer expectations.
Mostly, such kind of entrepreneurships are a result of small business or
scalable Start-up entrepreneurships. These are large conglomerates and
need expertise in every department. These companies usually launch the
new products which are directly or indirectly related to the core product
of the business. However, in order to diversify, they also try to keep on
innovating new products and services. Greatest examples of such kind of
entrepreneurships are Google, Microsoft and Facebook etc.

Features of Large Company Entrepreneurship

1. Innovations: In this type of entrepreneurship, owners mainly focus
upon innovations and work towards the society upliftment.
2. Acquisition: They usually acquire small business entrepreneurship
and scalable start-up entrepreneurship to increase their geographic
accessibility.
3. Sustainability: These entrepreneurships are more sustainable than
other types of businesses due to its large scale.

Advantages
1. Availability of Resources: The Large company enterprises usually start
with a high level of investment. The resources are easily available
in this type of entrepreneurship. It has been observed that most of
the small businesses and Scalable start-ups fail due to the non –
availability of resources. But in the case of large-scale businesses,
they raise the funds from the big investors and make everything
readily available before the commencement of the business.
2. Brand Name: In Large company entrepreneurship, the brand is usually
a well-established name in the market which gives a great edge to
the entrepreneurs. Starting a business with an unknown name is not
an easy task as it takes years to establish a goodwill in the market.
But this struggle is not involved in the large company enterprises.

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Notes 3. Better Team: As the funds are enough to run the business, this type
of entrepreneurship takes the experts from each and every area. A
good team is built up which is competent and capable of taking
the business to new heights. A good team means a good result.
4. Innovation: Innovation acts as the blood for any kind of company. A
firm cannot survive for a long period of time if it cannot innovate.
A Large company has the courage to take the bold moves and work
in a risky environment.

Disadvantages
1. Job Security: As the Large company enterprises are riskier, the people
who are involved in it are also at a higher risk. Their position is
always vulnerable as they may have to incur a loss with the loss
of the company. The external environment is uncertain, and the
uncertainty leads to the job insecurity.
2. Failures: The Risk: When new initiatives are introduced, the results
are not certain. The new initiatives can put all the things in vain
and lead to failure. The management should focus on creating an
environment where the shocks can easily be absorbed.
3. Pressure: Such kind of entrepreneurships have to undergo a high
pressure for creating a change in the society. They are bound to
come up with the new and innovative products.
IN-TEXT QUESTIONS
1. An __________ is a person who undertakes risk to start ventures
and pursue opportunities with discretion and expertise.
2. __________ is a type of entrepreneurship that starts with a little
amount of funds.
3. __________ is an entrepreneurship that works on the vision and
aspire to change the society.

Social Entrepreneurship
Entrepreneurship is business by finding consumers’ needs and catering
them worth gives and services while earning a profit. Social entrepre-
neurship can be understood as a process of findings social problems and
finding and implementing solutions you eradicate the social problems.

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The motive still is to earn a profit, but these profits are ploughed back Notes
in the solution implementation of the problem till the problem is com-
pletely eradicated. Following figure illustrates the motivation for social
entrepreneurship.

Figure 6.2: Motivation for Social Entrepreneurship

Features
‹ Solution-seeking: Social entrepreneurship is an approach by start-
up companies and entrepreneurs, in which they develop, fund and
implement solutions to social, cultural, or environmental issues.
‹ Problem Identification: Social entrepreneurship is all about recognizing
the social problems and achieving a social change by employing
entrepreneurial principles, processes and operations.
‹ Continual Process: It is all about making research to completely
define a particular social problem and then organizing, creating and
managing a social venture to attain the desired change. The change
may or may not include a thorough elimination of a social problem
and it may be a lifetime process focusing on the improvement of
the existing circumstances.
‹ Social Capital: While a general and common business entrepreneurship
means taking a lead to open up a new business or diversifying the

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Notes existing business, social entrepreneurship mainly focuses on creating

social capital without measuring the performance in profit or return
in monetary terms.
‹ Profit-orientated: The entrepreneurs in this field are associated with
non-profit sectors and organizations. But this does not eliminate the
need of making profit. After all entrepreneurs need capital to carry
on with the process and bring a positive change in the society.

Characteristics of a Social Entrepreneur

‹ Ambitious: They adopt a mission to create and sustain social value
(not just private value). Further, they recognize and relentlessly
pursue new opportunities which serve the mission.
‹ Adaptive: Also, engage in a process of continuous innovation,
adaptation, and learning.
‹ Courageous: Further, act boldly without being limited by the
resources in hand.
‹ Responsible: Finally, exhibit heightened accountability to the
constituencies served and also the outcomes created.

Advantages
1. Impactful: The social entrepreneurs work for the society. They work
for the wellbeing of general public and therefore they are more
impactful than other types of entrepreneurships. According to a
study conducted by Unilever in 2017, it was published that around
one third of the consumers like to purchase products and services
from a company that is indulged in the social activities.
2. Help from Others: Whenever something is started with a view of
serving the society many others come forward with a hand. Similarly,
when a business is commenced for the welfare of the society then
government and other investors come forward to help them.
3. Ease in Marketing: Social causes and CSR activities add goodwill
to the name of the enterprise and helps in promoting its products
and services. The entrepreneurs easily attract the media and general
public. The nature of the entrepreneurship also helps in publicity
and influencer marketing.

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4. Feeling of Responsibility for the Employees: The employees also Notes

feel happy as they know that they are also contributing towards the
society. They utilise the resources of the firm in a socially responsible
manner and work towards the sustainability of the business.
Disadvantages
1. Competition: The social nature of the business does not spare it
from competing in the business. The business has to compete for
the survival which is in contradiction to its basic nature.
2. Stringent Rules and Regulations: As these enterprises work under
some special statutes, the rules and regulation here are relatively
strict and complex. They have to be extra conscious regarding its
income and expenditure. They have to be more open and transparent
in terms of their financial statements.
3. Lack of Success: Such entrepreneurships have not been very
successful in the past. If we take a look back to the history, we’ll
find that only few social entrepreneurs could successfully survive
in the world full of competition and profit motives.
IN-TEXT QUESTIONS
4. __________ can be understood as a process of findings social
problems and finding and implementing solutions you eradicate
the social problems.
5. The social entrepreneur does not work for the profit motive.
(True/False)

6.5 Difference between Social Entrepreneur and Business

Entrepreneur

Basis Social Entrepreneur Business Entrepreneur

Capital funding Social entrepreneurs seek In a traditional, business
their initial phases of fund- entrepreneurship usually
ing from philanthropists. seeks capital from a ven-
These philanthropists pursue ture capitalist firm who are
the social mission more than interested only in the return
return on their investments. on their investments.

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Notes Basis Social Entrepreneur Business Entrepreneur

Problem and Social entrepreneur iden- Business entrepreneurs
solution iden- tifies social problems, can identify needs of products
tification come up with new solu- that can change the face
tions to social problems, of business. They seize
implement them on a large opportunities that others
scale and change the face miss, improve systems, in-
of society by acting change vent new products and also
agents. create solutions to change
business for the better.
Utilization of Even though social entre- A business entrepreneurship
income preneurships invest in only uses its profits to grow the
for-profit activities, their company and pay share-
profits may be donated to holders. You get involved
charity or used for other in a business entrepreneur-
philanthropic efforts. Thus, ship for the sake of making
the revenues are used to pur- money and increasing your
sue social missions, rather personal wealth.
than prospering owners of
the organization.
Example M o h a m m e d Yu n u s o f Mark Zuckerberg started
Grameen bank, who started his Facebook operations to
a microfinance institution popularize social network-
in Bangladesh. ing and to earn.

6.6 Process of Entrepreneurship

Figure 6.3: Entrepreneurship Process

1. Problem Identification: The first step in entrepreneurship is to find

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 Entrepreneurship: Founding the Business

the need, want, problem or deficiency in the society. The problem Notes
should be general to people and should be approachable. Understanding
of the environments and sensitivity to public sentiments provides
opportunities to the entrepreneurs.
The entrepreneurship’s need arises because of the gaps in the market.
The entrepreneur identifies the interest area and the audience he
needs to cater. Then he analysis the environment and identifies the
need.
2. Idea Generation: Idea to provide solution to problems is the second
step to a start-up. The idea should be sustainable to the environment,
sensitive to the society and compliant with the legislation. The process
of idea generation involves the techniques like group brainstorming
and solo brainstorming.
‹ Group Brainstorming: It is the process of collecting ideas from
different group members according to their experience and views.
It helps the organization to have diverse views on the same topic.
‹ Solo Brainstorming: It involves the entrepreneur to think and
work upon various alternatives to reach to the final idea.
3. Feasibility Study: Feasibility test is the study of viability of the
idea in terms of cost benefit and sustainability over the long term.
It includes the following studies which can help the entrepreneur
to make the decision.
Sample Study: Before starting the business, a sample study is
conducted to know the reaction of audience.
Field Survey: A survey is done beforehand so that the field can be
studies easily.
Pilot Study: It means the product is introduced to a small group of
people to know their reaction.
4. Planning: Planning is the initial most step-in execution of idea. It starts
with acquisition of funds, resources and labour and transformation
of the energies to delivery of goods and services in conformity to
public needs and wants. The entrepreneur analyses the different
sources of funds and resources so that he can acquire them in the
most profitable manner.

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Notes Acquisition of Funds: The entrepreneur has to decide among

different types of funds like equity, debentures and, long term loans
etc.
Resource Allocation: The Entrepreneur has to decide about the
recruitment of its human resources in the most efficient manner.
He/she also need to decide about the Plant and Machinery, from
where they can be acquired at the minimum cost.
5. Launch: Once the feasibility tests are done, and the opportunity is
clear to the entrepreneur, and sufficient funds have been collected,
he then plans the launch of his idea, through his enterprise. This is
called the final execution process. The implementation of the plans
needs the perfect synchronization among its system, structure and
the people. The execution of the plan involves all the departments
to work rigorously towards the achievement of the desired/planned
goals.
6. Growth: Entrepreneurship is about constant evaluation and improvement.
The entrepreneur then seeks new ideas for inculcating in his enterprise,
to render it competent and sustainable in uncertain environments.
Evaluation is an important part of any process as it allows the
entrepreneur to know the results of his/her efforts. If any kind of
variance is detected then some corrective actions are to be taken
to improve the results.
IN-TEXT QUESTIONS
6. A business entrepreneurship uses its profits to grow the company
and pay shareholders. (True/False)
7. Social entrepreneurships seek their initial phases of funding from
venture Capitalists. (True/False)
8. Entrepreneur is self-critical and is willing to learn from other
achievements. (True/False)

6.7 Summary
The present chapter talks about the most important type of business,
Entrepreneurship. The entrepreneurship is a kind of business that needs
some special traits in order to become successful in the future and therefor

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 Entrepreneurship: Founding the Business

the lesson discusses all those features and characteristics entrepreneurs Notes
need to possess. It also discusses the social entrepreneurship and how it
is different from the business entrepreneurship.

6.8 Answers to In-Text Questions

1. Entrepreneur
2. Small Scale Entrepreneurship
3. Large Company Entrepreneurship
4. Social Entrepreneurship
5. True
6. True
7. False
8. True

6.9 Self-Assessment Questions

1. Briefly describe difference between business and social entrepreneurship.
2. Explain the relationship among Enterprise, Entrepreneur and
Entrepreneurship.
3. What are the different types of entrepreneurship?
4. Describe the process of social entrepreneurship.

6.10 Suggested Readings

‹ Prasad, L. M. Principles and Practice of Management, Sultan Chand
and Sons, New Delhi; 9th edition, 2015.
‹ Vasishth, N. Principle of business organization, Taxmann Publications
Private Limited, 2013.

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 L E S S O N

7
Contemporary Issues in
the Entrepreneurship
Dr. Rutika Saini
Dr. Navneet Gera

STRUCTURE
7.1 Learning Objectives
7.2 Introduction
7.3 Entrepreneurial Ideas and Opportunities in the Contemporary Business Environment
7.4 Roadmap to Entrepreneurship Development
7.5 Entrepreneurship and New Challenges of Globalization
7.6 Summary
7.7 Answers to In-Text Questions
7.8 Self-Assessment Questions
7.9 Suggested Readings

7.1 Learning Objectives

‹ To understand the Entrepreneurial ideas.
‹ To know the contemporary issues in the entrepreneurship.
‹ To evaluate the Make-in-India initiatives.
‹ To discuss some successful start-ups of India.
‹ To understand the Skill India Initiatives.

7.2 Introduction
Entrepreneurs play an important role in economic development in multiple ways. The import-
ant contributions towards economic development could be through providing employment,

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 Contemporary Issues in the Entrepreneurship

contributing towards GDP, contributing towards foreign exchange, infra- Notes

structure development, getting innovation, technology development and
creating new avenues of business. Entrepreneurs create new businesses,
generating jobs for themselves and those they employ. In many cases,
entrepreneurial activity increases competition and, with technological or
operational changes, it can increase productivity as well. The small busi-
nesses in India are often ones created by self-employed entrepreneurs.
“Entrepreneurs give security to other people; they are the generators of
social welfare,” Carl J. Schramm, president and chief executive officer
of Ewing Marion Kauffman Foundation, said in February 2007. Entre-
preneurs innovate and innovation is a central ingredient in economic
growth. As Peter Drucker said, “The entrepreneur always searches for
change, responds to it, and exploits it as an opportunity.” Entrepreneurs
are responsible for the commercial introduction of many new products
and services, and for opening new markets. Moreover, it is evident from
research that entrepreneurs were essential to many of the most signif-
icant innovations, ones that revolutionized how people live and work.
From the automobile to the airplane to personal computers – individuals
with dreams and determination developed these commercial advances.
The crucial role played by the entrepreneurs in the development of the
emerging countries has made the people much conscious of the signifi-
cance of entrepreneurship for economic development. Now, people have
begun to realize that for achieving the goal of economic development,
it is necessary to increase entrepreneurship both qualitatively and quan-
titatively in the country. It is only active and enthusiastic entrepreneurs
who fully explore the potentialities of the country’s available resources
labour, technology and capital.

7.3 Entrepreneurial Ideas and Opportunities in the

Contemporary Business Environment

7.3.1 Self Help Groups (SHG)

Self Help Groups (SHG) consist of poor people who suffer from the
similar problems. They usually work for a group so that they can solve
their problem by helping each member of the group. These groups also
encourage the group members to make small savings which are kept with

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Notes the banks. The common fund is deposited with the bank in the same of
SHG. The SHG also provides financial assistance to the group members
in the form of small loans.

Characteristics of a SHG
1. Size: A SHG usually consists of 10-20 members (Legally it should
not be more than 20 members).
2. Membership: Each family can have one family member as the
member of the group only. The groups usually comprise only men
or only women. The members should carry the same social and
financial status to ensure the equal participation of every member
without the exertion of any power.
3. Meetings: The group has the requirement of regular meetings. Ideally
there should be a meeting every week or at least once in a month.
The membership records and the minutes of the meeting are to be
maintained in the registers.
4. Bookkeeping by SHG: The group has to maintain a simple and
clear record of data. If the members of the group are not capable
of keeping the records, they can outsource this service to any other
person. Following is the list of books that need to be maintained
by SHGs:
(a) Minutes Book
(b) Savings and Loan Register
(c) Weekly/Monthly Register
(d) Members Passbook

Major Functions Performed by the SHGs

1. Promoting Savings: The SHG encourages its members to save a
small amount in order to make it their habit. Every SHG should
promote the idea of “Savings first and credit later”.
2. Lending to Members: The group can use the saved amount to give
loans to the other needy members. The purpose of the loan, the
maximum amount and the rate of interest are to be decided by the
group only.

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 Contemporary Issues in the Entrepreneurship

3. Solving Problems: The SHG must try to solve the problem of the Notes
group members. The members of the groups are usually financially
weak and semi-skilled; therefore, the other members can help them
on financial and non-financial matters. In some situations, the SHG
can take the loan from the bank and then give the money to its
members as the loan.

7.3.2 Business Incubators:

A business incubator is a well-established network of varied facilities
providing funding services to startups to bear risk and authenticate the
business proposition. The services provided by such incubators consist
early-stage support, cash availability, working space, networking and
mentoring services. The government has launched varied incubators in
order to support the startups for example, National Science and Tech-
nology Entrepreneurship Development, Indian Science and Technology
Entrepreneurs Parks and Business Association, Centre for innovation
incubation and entrepreneurship, Agri business incubator etc.

Objectives of Business Incubators:

‹ Decrease in the cost of launching an enterprise
‹ Increase the confidence among new entrepreneurs
‹ Increase the risk-taking ability
‹ Facilitate infrastructure and networks
‹ Help in venture funding and legal formalities
‹ Foster innovation and creativity
Stages of Incubation
‹ Pre-incubation: The funds are made available for the research and
development activities, training and business planning.
‹ Early Stage: In this stage the funds are made available for the
marketing activities, legal services and accounting procedures.
‹ Classic Incubation: Funds are given for providing the support in
order to enhance the networking process.
‹ Graduation: This is the last stage of incubation, where the funds
are invested in marketing of products and services and helps the
startup to reach its end users.

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Notes Advantages of Business Incubators

1. They improve the survival rate of the business.
2. They support the business monetarily.
3. They help the business to reach the best investors.
4. They provide the accountant, lawyer, coaching and mentoring
services.
5. They provide better infrastructure and space facilities.

Disadvantages of Business Incubators

1. The incubators help the business to initialize the process but later
on they can interfere and distract the entrepreneurs.
2. It can pose a threat to the integrity of business innovation.

7.3.3 Angel Investors

They are the investors having a high level of net worth and interested in
providing funds to the new entrepreneurs. They are majorly categorized
as Corporate Angels, Entrepreneurial Angels, Enthusiast Angels, Micro-
management Angels and professional Angels.

Types of Angel Investors

There are varied types of angels depending upon their nature and ability
to support the startups.
‹ Corporate Angels: They are senior professionals in the business.
They support the companies and other big enterprises.
‹ Entrepreneurial Angels: They are the entrepreneurs who have
their own business and manage their business on their own. The
primary motive behind the investment here is to seek the synergy
out of similar business.
‹ Enthusiast Angels: These investors are self-sufficient and well-
established businesses. They invest in other businesses in order
to enhance the quality of business operations and bring a radical
change in the market in the times to come.
‹ Micromanagement Angels: These are the angels who have reached
to this position with the help of their hard work, and they are
serious about their job.

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‹ Professional Angels: They carry specialized skills and expertise in Notes

a particular field. They usually tie knots with the businesses who
can add to their overall worth and expertise. These relationships
result in growth and development of both the companies.
IN-TEXT QUESTIONS
1. __________ are the investors having high level of net worth and
interested in providing funds to new entrepreneurs.
2. Which of the following is not maintained by the SHGs?
(a) Minutes Book
(b) Savings and Loan Register
(c) Profit and Loss Account
(d) Member’s Passbook
3. A __________ is a well-established network of varied facilities
providing funding services to startups to bear risk and authenticate
the business proposition.
4. Which of the following is not a stage of Business Incubation?
(a) Pre-incubation
(b) Early stage
(c) Classic incubation
(d) Post-incubation
5. __________ are the entrepreneurs who have their own business
and manage their business on their own. The primary motive
behind the investment here is to seek the synergy out of similar
business.

7.4 Roadmap to Entrepreneurship Development

7.4.1 Make-in-India - Four Pillars

New Processes: ‘Make in India’ recognizes ‘ease of doing business’ as
the single most important factor to promote entrepreneurship. A number
of initiatives have already been undertaken to ease business environment.

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Notes The aim is to de-license and de-regulate the industry during the entire
life cycle of a business.
New Infrastructure: Availability of modern and facilitating infrastructure
is a very important requirement for the growth of industry. Government
intends to develop industrial corridors and smart cities to provide infra-
structure based on state-of-the-art technology with modern high-speed
communication and integrated logistic arrangements. Existing infrastruc-
ture to be strengthened through upgradation of infrastructure in industrial
clusters.
New Sectors: ‘Make in India’ has identified 25 sectors in manufacturing,
infrastructure and service activities and detailed information is being shared
through interactive web portal and professionally developed brochures.
New Mindset: Industry is accustomed to see Government as a regulator.
‘Make in India’ intends to change this by bringing a paradigm shift in
how Government interacts with industry. The Government will partner
with industry in the economic development of the country. Our approach
will be that of a facilitator and not that of a regulator.
7.4.2 Progressive Plans and Entrepreneurship
Besides the measures outlined above which will directly act as a boost
to the entrepreneurship ecosystem, various other plans and policies which
the government have worked on are sure to incentivize entrepreneurship
too, albeit indirectly. Take for example the ‘Make in India’ campaign
which has been garnering widespread publicity ever since its launch.
Launched amidst much fanfare, this campaign which aims to change the
notion that it’s difficult to business in India, will in two ways also act
as a boon to entrepreneurs. Firstly, the success of the campaign lies on
the premise that bureaucratic processes and red tape will be cut down
and it will be easier for international firms to do business in India. This
means that dealing with authorities and regulations will become easier for
home-grown entrepreneurs too, implying they’ll be more likely to join in
to make in India. The second way in which this campaign holds bright
prospects for entrepreneurship is that it will lead to a rise in the number
of start-ups which have products/services built around the manufacturing
industry (which the campaign primarily targets).For instance, a HR start-

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up which comes up with a service to handle labour for manufacturing Notes

firms, or a logistics start-up which helps in distribution of finished goods.
Another ambitious campaign started by the Modi government is ‘Digital
India’. One of the core components of this campaign is to maximize
digital literacy by 2019. This dedicated thrust provided to digital literacy
means that startups in the digital space stand to benefit massively. May
they be online-education start-ups or e-commerce firms or mobile apps,
all of them will pick a chunk of the multi-billion-dollar digital consumer
market which will eventually evolve. Other core aims of the campaign
include setting up a nation-wide digital infrastructure and delivering
services digitally. These aims will give an opportunity to the tech talent
that our country boasts of to unleash their latent entrepreneurial skill
set and provide solutions to connect rural areas under high-speed inter-
net networks and provide support services to the government’s vision
of delivering services electronically. ClearTax, which helps citizens file
tax returns online, is one such start-up providing an ancillary service
that has become the first India-focused startup to the switchover to the
Goods and Services Tax (GST), scheduled for 1st April. 2016, seeks to
streamline and modernize a thoroughly fragmented indirect tax system
riddled with multiplicity of rates levied by states. This will be done by
the government levying a unified tax that will subsume a large number
of central and state taxes on the supply of goods and services. This is
indeed a giant step in the direction of making it easier to run business-
es in India. With less complexities of the tax structure to worry about,
this move decreases the entry barrier for start-ups. Also, such a move
means less legal/financial hassles as well as lesser risks of corruption/
bribery – leading to a more entrepreneurship conducive environment for
those starting-up their own companies. Scaling up a company to expand
to multiple cities & states will also consequently become easier.
Under the Modi-government, well-defined progressive steps have been
taken and the global sentiment of the Indian economy is at an all-time
high. If this support continues, and the above plans & policies are imple-
mented successfully, there will be no stopping for the country’s economic
growth. And with India poised as one of the world’s leading consumer
countries, it is only natural that new-age enterprises will have to spring
up to meet the rising demand.

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Notes Make in India Initiatives for Entrepreneurship Development

‹ Foster Innovation: It aims to support new ideas.
‹ Protect Intellectual Property: It aims to safeguard the creations
of mind.
‹ Best-in-class Manufacturing Infrastructure: It also aims to create
state of the art facilities for manufacturing goods.
‹ Process of applying for Industrial License & Industrial Entrepreneur
Memorandum made online on 24×7 basis through eBiz portal.
‹ Validity of Industrial license extended to three years.
‹ Plan for integrating the Services of all Central Govt. Departments
& Ministries with the eBiz – a single window IT platform.
‹ Process of obtaining environmental clearances made online.
‹ All returns should be filed on-line through a unified form.
Make it to YCombinator, arguably the world’s most prestigious accelerator.
‹ India’s manufacturing infrastructure and capacity for innovation
is poised for phenomenal growth: new smart cities and industrial
clusters, being developed in identified industrial corridors having
connectivity, new youth-focused programs and institutions dedicated
to developing specialized skills.
‹ A new ‘National Industrial Corridor Development Authority’ is being
created to coordinate, integrate, monitor and supervise development
of all Industrial Corridors.
‹ Work on 5 smart cities in progress as a part of the Delhi-Mumbai
Industrial Corridor: Dholera, Shendra-Bidkin, Greater Noida, Ujjain
and Gurgaon.
‹ Approval accorded to 17 National Investment and Manufacturing
zones.
India seems to be doing better than it was a couple of years ago. The
Modi Govt has been launching one initiative after another, supporting the
country’s business and economy. While some initiatives struggle to make
much of an impact, most are working wonders for India. The ‘Make in
India’ program, for example, promotes India as a manufacturing hub for

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the world. The Modi Government is marketing this campaign globally Notes
and the impact is evident.

7.4.3 Start-Ups in India

India is observing an evolution of startups, achieving the milestones
not just in the domestically but also in all over the world. There is an
ample of inspiring success stories of people who have their own roads
of innovation and dreams.
1. Make My Trip: This startup was a creation of Mr. Deep Kalra, who
was an alumnus of IIM Ahmedabad. Make My Trip has transformed
the travel industry over the last decade. The application was initially
launched to the United States in the year 2000 to cater to the needs
of NRIs for their Indo-American trips. It launched it actions in India
in 2005, opening with flight tickets. After a few years, Make My
Trip got listed in NASDAQ and next year the company grew with
3 acquisitions. It has got worldwide recognition and innumerable
rewards.
2. Flipkart: There is no Indian who is not aware of the Flipkart.
Flipkart achieved massive success which is the result of its first
mover advantage in the online market in India. The startup was
launched by Mr. Sachin and Mr. Binny Bansal; both were IIT-Delhi
alumni. They had already worked with the Amazon prior to working
here and therefore they introduced the same concept to the Indian
market as well. Just like Amazon, they also started offering books
in 2007 and now transact in every type of product, from a small
bottle of shampoo to diamond jewelry, from CDs to stationery. In
the year 2014 the Flipkart acquired Myntra for around INR 2000
crore. Flipkart is one of the top five startups with a worth of $11
Billion.
3. Zomato: This application was launched in the year 2008; it gained
the popularity overnight since its launch. It started it journey as
[Link] and in a couple of years it reached to the heights
and become one of the most promising online applications in C.
Deepinder Goyal and Mr. Pankaj Chaddah took the assignment to
newer heights with their full dedication and a low level of funding
in the initial days.

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Notes 7.4.4 Skill India Initiatives

The Skill India programmed is an initiative taken by the government of
India in the year 2014 to skill over 40 crore people of India belonging to
different industries. The initiative carries the vision to stand an effective
workforce by the year 2022 which is capable of carrying various training
programs. The main objective of the program is to develop the skills in
the Indian youth.
The Pradhan Mantri Kaushal Vikas Yojna (PMKVY) is the flagship pro-
gramme under the Skill India Project. The scheme ensures the skilled
youth of India which can secure a better life.

Objectives of the Programme

1. Adequate Training: The first and foremost objective of the skill India
initiative is to provide the adequate training to the young India.
2. Creating the Opportunities: As most of the jobs need skills, the
program ensures that its skills people in a way that they are made
job ready.
3. Supporting National Skill Development Corporation: The scheme
works with the assistance of NSDC and penetrate to the rural India
for the skill development.

Components of Skill India Programme

Following is some of the components included under the abovementioned
scheme.
Short-term Training: The purpose of this module is to provide a short-
term training to the people who could not complete their school/college.
The main focus is on the training of the unemployed people who can
learn new skill under the national Skills Qualification Framework.
Kaushal and Rozgar Mela: Under this scheme, the government mandates the
organization of Kaushal and rozgar melas in every six months. The scheme
allows its training partners to arrange placements. The training partner is
required to place at least 50% of the batch to keep the performance high.
Recognition of Prior Learning: The Skill India programme acknowledges
the people who have some prior knowledge and experience. They provide
the certificates to the people who have already done some courses so that
they can be taken forward to bridge the knowledge gaps.
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Special Projects: The programme arranges some special projects which Notes
are otherwise out of the purview of other projects.
Monitoring Guidelines: The programme ensures that all the projects are
guided by the proper guidelines so that a uniformity is maintained among
all the training centres. The proper rules and regulations are needed to
have structural clarity.

7.5 Entrepreneurship and New Challenges of Globalization

Mobility of Jobs: One of the greatest challenges posed by the global trade
system is how to shift the jobs from one place to another. How the jobs can
move from the developed nations to the developing and under-developed
nations. In the developed nations, where low-skilled workers lose their
jobs have to face difficulty while searching for the new job. Job-losses in
the developed nations result in double strain on them as the nation has to
support the workforce along with a cut on the tax revenues.
Dominance of Developed Nations: There is a dominance of developed
western nations over other emerging markets when it comes to interna-
tional orders. These nations hold a huge impact on the capita flow and
how it travels from one nation to another. For example, the apex bodies
like International Monetary Fund and World Bank make it easier for the
developed nations to acquire money from these organizations. The west-
ern culture is not a universal culture but still it has a major influence
over other developing and under-developed nations. Sometimes western
countries exert their power which in turn alleviates the poverty in un-
der-developed countries.
Threat to the Cultural Diversity: As a result of globalization, the
western culture was able to penetrate the world, but it has posed a great
threat to the cultural diversity all over the world. The dominance of
some cultures has overtaken some of the cultures, as a result the global
cultural diversity is emulating.

Advantages of Globalization on Entrepreneurship

Global Advantage: Globalization has allowed small businesses to com-
pete worldwide as they are able to sell their products and services on the
global platform. Small and medium sized enterprises are always supported

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Notes by the shipping companies as they offer package shipping all around
the globe. Additionally, these small business owners often purchase the
products from cross nation markets with the purpose of reselling. This
practice helps small businesses to gain a price advantage which was
earlier available to the giant conglomerates only. They even gain from
the foreign exchange rates if buying from a country where the worth of
dollar is more than that of the local currency.
Local Advantage: Globalization enabled international chains to set up
shops in the neighboring markets with low prices. It can be accomplished
by taking the advantage of the cheap labour available and then selling
it at a low level of margin. As an entrepreneur, one can always fight
back and provide the goods and services which are not available at chain
stores. For example, it is often observed that local restaurants offer the
local food that is not available in the popular restaurant chains.
Piracy: The global economy has not been able to come up with global
standards. The rules and regulation regarding the piracy are different for
different nations. Some of the nations have really liberal policies which
threatens entrepreneurs with cheap imitations. However, an increased level
of competition has emerged as a shield for the patents and encourages
the innovation and risk taking.
Speed of Adaptability: The business potential is no longer dependent
upon the size of the firm as firm of any size can achieve success in the
global environment. The only thing critical to success is the speed. It is
believed that small businesses are able to adapt to the global and local
changes easily as they do not follow a large bureaucracy.
Disadvantages of Globalization on Entrepreneurship
1. The emergence of international trade worsening the inequalities of
income in the industrialized and less- industrialized nations.
2. The global trade is mainly dominated by the huge transnational
companies who only work for the profit motive without paying
any consideration to the individual needs of developing and under-
developed nations.
3. The policies formulated in the industrialized countries favor the
countries of its kind and restrain some producers to have access
to the exports.

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4. In the countries where the conditions of financial institutions are Notes

weak, there is always an element of risk in capital flows.
5. Developing nations engage in a race to attract the foreign investments
which can often lead to the lower environmental standards.

Glocalization: A Blend of Globalization and Localization

Glocalization is a combination of globalization and localization. According
to this approach, a product or a service is customized according to the
local tastes and preferences. The product or the service is provided to the
global audience and has a wide reach. Due to the diversity and dynamic
environment, it becomes important for the manufacturers to localize the
offering in order to better satisfy the audience.
For example, the car manufacturers sell the same type of model world-
wide, but they have to adjust their cars according to the needs, roads
and legal system of that particular country.
IN-TEXT QUESTIONS
6. Which of the following is not a pillar of Make in India?
(a) New Processes
(b) New leadership
(c) New infrastructure
(d) New Mindset
7. Make in India recognizes __________ as the single most important
factor to promote entrepreneurship.
8. Digital India initiatives motive is to maximize the __________.
9. __________ has allowed small businesses to compete worldwide
as they are able to sell their products and services on the global
platform.
10. Glocalization is a combination of globalization and __________.

7.6 Summary
The current chapter talks about the new entrepreneurial ideas and op-
portunities. It discusses the contemporary developments such as self-help
groups and the business incubators. How the general public can indulge

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 BUSINESS ORGANIZATION

Notes in the entrepreneurial activities. The chapter also discusses the make in
India initiatives along with the skill India and start-up India projects.
Towards the end of the chapter, some of the famous start-ups of India
have been discussed to take the lessons from their success and failures.

7.7Answers to In-Text Questions

1. Angel Investors
2. (c) Profit & Loss Account
3. Business Incubator
4. (d) Post-incubation
5. Entrepreneurial Angels
6. (b) New leadership
7. Ease of doing business
8. Digital Literacy
9. Globalization
10. Localization

7.8 Self-Assessment Questions

1. What are Self-help Groups?
2. Who are angel investors?
3. What are the four pillars of Make-in-India programme?
4. How can the Angel Investors help in start start-ups?
5. What are the different schemes under skill-India Programme?
6. What is the role of Globalization in Entrepreneurship?

7.9 Suggested Readings

‹ Prasad, L. M. Principles and Practice of Management, Sultan Chand
and Sons, New Delhi; 9th edition, 2015.
‹ Vasishth, N. Principle of business organization, Taxmann Publications
Private Limited, 2013.

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 UNIT - V

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 L E S S O N

8
Workforce Diversity
Ms. Amanpreet Kaur

STRUCTURE
8.1 Learning Objectives
8.2 Introduction
8.3 Diversity at Workplace
8.4 Diversity and Inclusion at Workplace
8.5 Summary
8.6 Answers to In-Text Questions
8.7 Self-Assessment Questions
8.8 References
8.9 Suggested Readings

8.1 Learning Objectives

‹ To understand the meaning of some contemporary topics relevant in the current times.
‹ To discuss the meaning of diversity and inclusion at workplace.

8.2 Introduction
The Diversity at workplace has become part and parcel of any organization as it allows
the organization to grow and understand the business well. The current chapter talks about
emerging issues in the business organization and also throws the light on the issues related
to the workforce. The concept of workplace democracy has also been discussed hereby.
Workplace democracy is inclusion of democratic practices at the workplace, with the use
of tools such as voting, employee ownership and public debate, to the workplace. This
may vary widely across organizations based on size, type, objective and work culture of
the business.

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Notes
8.3 Diversity at Workplace

8.3.1 Meaning of Workplace Diversity

According to Josh Bersin, “Companies that embrace diversity and inclu-
sion in all aspects of their business statistically outperform their peers.”
Diversity at the workplace is a growing phenomenon in companies
worldwide. It means recruiting, training, understanding, accepting, and
valuing differences pleasing people. Recruiting people from divergent
backgrounds to work in a corporate space is called workplace diversity.
Along with their unique identities, diversity brings diverse knowledge.
It includes those: a) of different races, ethnicities, genders, ages, cul-
tures, religions, disabilities, and sexual orientations b) with differences
in regional backgrounds, education, personalities, skills, experiences, and
knowledge bases Organizations should strive to have workforce diversity
in its composition at all levels. It means not just recruiting, but retaining
workforce from different backgrounds, experiences, and perspectives, gen-
erations. Meanwhile, a McKinsey study (2018) shows, greater diversity
in the workforce results in greater profitability and value creation, and
there exists a positive correlation between diverse leadership and financial
performance. Diversity gives a company a broader reach and contact for
a talented composition. This composition is not one that belongs to a
particular, mindset, upbringing, culture and background, perspective or
ethnicity. This wide perspective helps the companies connect with the
needs and motivations of all of their spread out and international customer
base, rather than being restricted to a single type of client.

8.3.2 Rationale for Workforce Diversity

Rationale of having workforce diversity arises from the ill effects of
having a lack of it. Following are some consequences of having a lack
of diversity in an organization:
1. Unsatisfactory Employee: Lack of a workforce diversity mechanism
at the workplace usually results in employee alienation, with some
employees side-lined by the majority If any incidence of harassment
or discrimination occurs, the victim can easily feel alone. This may
even result in victims’ reluctance to report discrimination workplace.
This reluctance arises due to the complexity of minority. Failure to

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report discrimination signals toxicity in company culture adversely Notes

impacting talent pool available to the company as well as employee
productivity.
2. Limited Perspective: Diversity brings perspectives affected by
backgrounds, beliefs and culture and a variety of perspectives bring
innovation and creativity in an organization. With lack of diversity,
a diversity of experience, perspective, knowledge and skills is also
lacked with constraints and limits the operations and growth of the
organization. It limits the perspectives companies have to consider
when developing products and strategies, implementing policies
to deal with the uncertain business environment and specially to
expand businesses to foreign regions.
3. Lack of Motivation: Proper workforce diversity creates proper leadership
for app levels and varieties of employees. They look up to role
models for inspiration especially with whom they characteristically
connect with. With lack of such role model mentors, employees
easily feel alienated. In organization not providing for diversity
to thrive, facilities, incentives and opportunities to prosper are
limited, curbing employee output. Organizations without diversity
lack proper inclusive infrastructure, usually, also lack in harassment
and discrimination reporting mechanism, further demotivating the
workforce.

8.3.3 Benefits of Workforce Diversity

Workforce diversity has incentives wide and spread across all aspects of
business operations. Some of the Benefits of having workforce Diversity
can be listed below:
(a) New Perspectives: Diversity brings perspective. When a company
hires employees from diverse backgrounds, nationalities, experiences
and skill sets and cultures, it fosters a fresh perspective to every
business aspect. This can lead to benefits of quick problem solving
and better decision making. The co-workers may initially be reluctant
to the idea of change, but the diverse workforce can help create a
perspective to accept the change.
(b) Wider Talent Pool: Diversity acts as a motivator to employees
from diverse backgrounds. These employees no longer look for

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Notes conventional jobs that simply pay them for a 9-5 job, rather look
for an organizational space to be recruited, grow, feel accepted, and
be challenged. That’s why those companies that foster diversity will
attract a wider range of candidates who are looking for a progressive
place to work. As a result, diverse companies are more likely to
attract the more motivated and better talent than its competitors.
(c) Employee Excellence: Diversity and firm performance go hand-in-
hand. When an organization has a work environment where employees
see a representation of a variety of cultures, backgrounds, and ways
of thinking, all of them are more likely to feel comfortable being
themselves. This, in turn, leads to happier, more productive employees
and employee turnover falls. On the other hand, in a homogeneous
culture there prevails a pressure to conform. If employees feel
alienated at workplace, they’re more likely to fear rejection and
not produce their best work. Better redressal mechanism to resolve
diversity issues also motivates employees as employees are assured
of redressal of their grievances if discrimination happens. This
assurance helps employees to prosper.
(d) Increased Profits: Various research studies empirically prove how
ethical and racial management and workplace diversity bring employee
turnover down and increase productivity to financially benefit the
organization through not just more employees, but more customers
and investors.
(e) New Business Prospects: Language being a barrier in globalization
and internationalization of a business, can be overcome by engaging
a diverse workforce that is inducted from various parts of the
world and that helps in connecting the business operations to native
customer base through language. Cultural diversity has become a
business strategy for better standing of the entity in foreign markets
which can be helpful to increase the market reach and cover of the
business. This leads to increased profitability and equal opportunity
for the company and its employees thus, diversity at workplace
builds a great reputation for the company.
(f) Fight Psychological Biases: Communities have biases against foreign
communities which stop them socializing. Diversity benefits a firm
not only financially but also by incrementing its company culture.

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Inherent biases towards certain sections of the workforce are repelled Notes
which also helps in appreciating the differences. When biases are
dispersed, there is a higher probability of the workforce to work as
a team and in tandem. A good company culture is also a competitive
edge in this competitive business environment. Company culture is
the personality of the company. Your employee’s beliefs and actions
in internal and external matters tell a lot about your company. Thus,
it is favourable to enhance this company culture.
(g) Improves Company Culture: A company derives its culture from
its members. Company culture varies from company to company.
Some follow an informal and casual approach. It also depends on
the size of the company, its ethics, goals and work environment.
(h) Creativity: Workplace diversity are hubs of innovation. While
some level of homogeneity of skills is sought to have a bond of
assistance and help among employees, diversity brings unique
perspective. Working with colleagues from different backgrounds,
experiences and working styles, creative concepts may arise from
cross-communication. It would also induct a chain of thought from
bouncing ideas by the diverse workforce. It also helps in creating
better groups and teams. While on the one hand an employee brings
fresh ideas to the table, another fellow may be good at the execution
part of the strategy, given his experience in the field. If you have
a homogenous group of people, chances are that everything – from
their thought patterns to life experiences to problem-solving skills are
likely to be similar as well. So, to foster creativity, it is imperative
to embrace workforce diversity.
IN-TEXT QUESTIONS
1. Recruiting people from divergent backgrounds to work in a
corporate space is called __________.
2. __________ is inclusion of democratic practices at the workplace.
3. Cultural diversity has become a business strategy for competitive
edge of the company in foreign markets. (True/False)
4. Lack of diversity leads to:
(a) High employee turnover
(b) Limited corporate perspective

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Notes (c) Low corporate culture

(d) All of the above
5. Workforce diversity helps develop which of the following?
(a) Wider talent pool
(b) Increased productivity
(c) Global competitive edge
(d) All of the above

8.4 Diversity and Inclusion at Workplace

8.4.1 Meaning and Significance

Having diversity in workforce recruitment isn’t enough. It needs engraving
of the diversity, which is called an Inclusion. Inclusion means a work
culture in a business organization which is collaborative, supportive, and
has ethics that encourage the contribution of employees from diverse
backgrounds. Inclusion is important to make connections and thoroughly
exploit the potential of diversity in organization by creating a work envi-
ronment that encourages healthy and inclusive brainstorming, discussions
and input seeking at all levels of organization.
Inclusion simply inculcates a sense of belonging among employees, which
helps inducting changes, creating different alternatives and implementing
major strategies and policies. Inclusion conceptually, means diversity
in practice. The task of recruiting diverse workforce is easy but giving
opportunity through inclusion is challenging. Diversity and inclusion go
hand in hand. An organization may recruit a diverse workforce but if it
cannot support and develop it, the diversity will dissolve. Simply having
diversity is not important, thriving and prospering the diversity is also
important. It is imperative to develop rules, policies, infrastructure, and
diversity awareness to retain them.

8.4.2 Develop Workforce Inclusion at Workplace

Inclusion is complimentary and imperative to the diversity of the work-
force. Without inclusive policies, diversity in company sheds, resulting
in poor organizational image as well as high recruitment costs. Following
are the ways to develop the same.

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 Workforce Diversity

(a) Access to Resources: Give employees the support necessary access Notes
to resources, and expertise necessary to be inclusive. Access to
employee resource groups, inclusive infrastructure or technology
will help create an environment to be themselves and thrive.
(b) Group Discussions: Group discussion is three best ways to induce
inclusion. Employees feel included when they are involved in
decision making and when this needs to feel they have a say in
decisions that impacts their work. Group discussions issuing have
common assembly places. It is an easy and cost effective method to
simply go through major points and evaluate and weight different
courses of actions. Including diversity in decision making gives a
new perspective to complex problems and also helps induct and
implement the decision organization wide.
(c) Learning Conducive Environment: Employees must feel they
have the opportunity to develop and advance their careers at their
organization. Without learning and development as a key component
of inclusion and broader company values, you’ll stunt employee
growth and limit innovation.
(d) Collaborative Environment: When teams feel a stronger sense of
connection between each other, they’re able to utilize the strengths
and skills of every individual. Collaboration is key for the success
of your business and a huge piece of inclusion in the workplace.
(e) Redressal Mechanism: Proper redressal mechanism to address
discrimination and harassment concerns build a strong organization
where employees don’t feel cornered. When employees can speak
out their concerns, positive signal about the company are sent across
the organization that curbs such cases in future.
(f) Awareness Programmes Sensitivity: While it is easy to feel alienated
in a foreign environment, this feeling can be curbed by organizing
recreational as well as goal-oriented programs that introduces and
sensitizes co-employees about their differences and the benefits
these differences bring to the organization. These differences should
be celebrated rather than restrained. Programs to acknowledge self-
worth and boost self-confidence are also helpful in maintaining the
unique identity of the diverse workforce.

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 BUSINESS ORGANIZATION

Notes (g) Emotional Motivation: Employees’ sense of belonging at their

organization can affect their levels of intent to stay at their
organization, and their well-being, engagement and overall success
in their roles.

8.5 Summary
The current chapter deals with the meaning and importance of workforce
diversity in the organization. The diversity can help a business to grow
more as it allows different people to come up with the different innova-
tive ideas. The concept of workplace democracy has also been discussed
in the chapter. Also, the various ways of incorporating the democracy in
the organization have been discussed hereby.

8.6 Answers to In-Text Questions

1. Workplace Diversity
2. Workplace democracy
3. True
4. (d) All of the above
5. (d) All of the above

8.7 Self-Assessment Questions

1. What is Workplace Diversity?
2. Describe the importance of workplace diversity.
3. Briefly describe difference between sociocracy and democracy at
workplace.
4. Explain the idea of diversity at workplace in brief. How is it relevant
for contemporary organizations? How does an organization with
lack of diversity suffer?
5. Explain the concept of workplace inclusion. How is it related to
workplace diversity?
6. Describe the steps to develop workforce inclusion at workplace.

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Notes
8.8 References
‹ Prasad, L. M. Principles and Practice of Management, Sultan Chand
and Sons, New Delhi; 9th edition, 2015.
‹ Vasishth, N. Principle of business organization, Taxmann Publications
Private Limited, 2013.
‹ Ken Taylor. (1983) Heads and the Freedom to Manage. School
Organization 3:3, pages 273-286.

8.9 Suggested Readings

‹ Prasad, L. M. Principles and Practice of Management, Sultan Chand
and Sons, New Delhi; 9th edition, 2015.
‹ Vasishth, N. Principle of business organization, Taxmann Publications
Private Limited, 2013.

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 L E S S O N

9
Organization Structure
Dr. Vipin Kumar Aggarwal

STRUCTURE
9.1 Learning Objectives
9.2 Introduction
9.3 Traditional Organization Structures
9.4 Modern Organization Structure
9.5 Summary
9.6 Answers to In-Text Questions
9.7 Self-Assessment Questions
9.8 Suggested Readings

9.1 Learning Objectives

After reading this chapter, you will be able to understand:
‹ Different types of organization structure.
‹ Traditional vs. Modern organization structure.
‹ Different types of traditional structures.
‹ Functional structure - its advantages and disadvantages.
‹ Product structure - its merits and limitations.
‹ Geographic structure - its merits and limitations.
‹ Project organizations - its merits and limitations.
‹ Matrix organizations - its merits and limitations.
‹ Virtual organizations - its merits and limitations.

9.2 Introduction
Grouping of activities into departments (or small units) is an essential step in setting up
an organizational structure. It is a means of dividing the large and complex organization

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into small units. There are many alternative patterns for grouping orga- Notes
nizational activities. It can be done by function, by territory or geogra-
phy, by production, by kinds of customers served or by a combination
thereof. Broadly the organization structures are classified as Traditional
and Modern Organization structures. Traditional Organization structures
associate themselves with division of organization on the principal of
specialization but highly guided by hierarchy i.e., one division being
superior to another. Modern Organization structures also associate them-
selves to the principal of specialization but do not believe in superiority
of one function over another.

9.3 Traditional Organization Structures

Traditional Organization structures associate themselves with division of
organization on the principle of specialization but highly guided by hier-
archy i.e., one division being superior to another. They look like pyramids
where organization is divided into three levels i.e., top, middle and lower
level of management. Where all the major decisions are communicated to
mid-level and low-level management by top level management. Little to
no input is required or solicited from employees, and ultimate authority
rests in the hands of those at the top of the chart.
Modern Organization structures also associate themselves to the principal
of specialization but do not believe in superiority of one function over
another. They believe in ideas of flexibility and freedom. This organiza-
tional design is all about empowering employees to make decisions and
implement changes without needing the approval of supervisors. In this
type of structure, employees are given the productivity goals and hence
their performance is assessed on the basis of productivity rather than the
amount of time spent inside the organization. This structure eliminates the
vertical design of a traditional company and gives employees ownership
of the work they perform.
Different Types of Modern and Traditional Structures
Traditional Structures can be divided into:

9.3.1 Functional Structure

This is the most common basis of structuring an organization. Under
this basis, groping of activities is done on the basis of functions to be

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Notes performed like production, marketing, human resource, finance, etc. Un-
der this each department specialize in these functions. These are most
suitable for organization dealing single product but have large scale
production and therefore need to specialize in functions to reduce their
cost of production. This is the most widely used organization structure
which exists in all organizations at some level.

Figure 9.1: Functional Structure

Merits
1. It leads to optimum utilization of human and material resources.
2. Appropriate delegation of work to different departments’ leads
reduces burden on top management.
3. It facilitates coordination within the departments as they have
commonality in terms of functions.
4. It eliminates duplication of efforts thereby leading to efficiency in
functioning.
5. It classifies and lists down all activities and lays emphasis on their
performance

Limitations
1. It may lead to over specialization i.e., creation of too many departments
on the basis of functions may lead to confusion and chaos in the
organization may affect the teamwork.
2. It may be difficult to co-ordinate the activities of different departments
as different department heads may narrow their focus to the
department.

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Notes
3. Functional department restricts the overall development of the managers
as they concentrate their efforts on one skill and activity.
4. This structure may not be suitable for an organization who deal in
multiple and diverse products.

9.3.2 Product Structure

In this structure, the departments are created product-wise. For every
product that an organization produces, there is different department for
it. It is suitable in case of organizations producing multiple and diverse
products especially when product lines are not related to each other. Big
organizations such as Unilever limited, TATA Procter & Gamble, Godrej,
Samsung follow such classification. Such organization structure keeps the
functioning of one department separate from other. Departments created
on the basis of product may further be sub-divided on the basis of func-
tions within their own departments.

Figure 9.2: Product Structure

Merits
1. Each product division is considered as strategic business unit with
its own growth curve.
2. The performance of each product can be easily evaluated. As
responsibility for the performance of the product can be fixed on
the concerned product managers.

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Notes 3. It permits maximum use of specialized production facilities leading

to specialization in a product.

Limitations
1. There is duplication of physical facilities and functions; as each
product has its own specialized functions, resulting in higher
operating costs.
2. When the demand for a particular product decline, there is underutilization
of plant capacity.
3. The product manager may work in the interest of his own product
department ignoring the overall goals of the organization.
4. It is a complex organization structure to handle as there is double
layer of divisions i.e., one on the basis of product and second on
the basis of functions.

9.3.3 Geographical Structure

It is appropriate for organizations that have multiple areas of operations
in different geographical locations. For instance, an insurance company,
a bank, a chain store, etc. have their business spread in many locations
throughout the country. All activities of a particular territory are assigned
to one department. The activities are classified into zones, districts and
branches. Each region has a regional manager. It is suitable for large
scale enterprises or the companies whose nature of activities is similar,
but it is geographically dispersed.

Figure 9.3: Geographical Structure

Merits
1. It helps in enjoying the benefits of economies of local area operations.
2. It facilitates the expansion of business into various regions.

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3. There is better coordination of activities as the regional managers Notes

look after all the operations of that division/region.
4. Since managers are aware of local customs, styles, preferences, etc.,
they can respond to the local conditions more effectively.
5. It provides an opportunity to train managers as they perform all the
functions of that division.

Disadvantages
1. There is duplication of physical facilities resulting in high operating
costs.
2. Administrative control and co-ordination of different regional
divisions by the top managers becomes difficult.
3. There may be a problem of integration of various regions.

IN-TEXT QUESTIONS
1. It is suitable for large scale enterprises or the companies whose
nature of activities are similar, but it is geographically dispersed.
Name the type of traditional structure. __________.
2. International division is a part of product structure. (True/False)
3. Which traditional structure is suitable in case of organizations
producing multiple and diverse products especially when product
lines are not related to each other:
(a) Product structure
(b) Geographical Structure
(c) Functional structure
(d) None of the above
4. __________ is a means of dividing the large and complex
organization into small units.
5. __________ structure is suitable for organization dealing single
product but have large scale production and therefore need to
specialize in functions to reduce their cost of production.

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Notes
9.4 Modern Organization Structure

9.4.1 Project Structure

The project organization structure consists of a number of horizontal de-
partments oriented towards the completion of projects of long duration.
The size of project varies from one project to another. Each project is
important for the organization. A team of specialists from different func-
tional areas is created for each project. The activities of the project are
coordinated by the project manager.
It is temporary organization structure created for a specific project with a
given time limit. After the project is completed, the structure is dismantled,
and the functional specialists go back to their original departments. The
objectives of the project, its start and finishing time, and the resources
required for its implementation are clearly defined. The project department
staff is separate and independent of the functional department. The figure
below shows the project organization structure. The project managers
form their own teams in addition to the existing functional departments.
The project organization is employed in organizations where projects are
subject to high standards of performance like aero-space, aircraft manufac-
turing, construction and professional areas like management consultants.

The Project Organization offers the Following Benefits:

1. Project organization focuses attention on the complex project by
unifying the diverse actions towards the completion of the project.
2. It facilitates the timely completion of the project without disturbing
the normal routine work of the entire organization.
3. Project organization allows maximum use of specialized knowledge.
Specialists are highly motivated while working on the complex
projects.
4. It provides flexibility in accomplishing the work, thereby encouraging
initiative and creativity on the part of the project staff.
5. Project members become versatile due to the experience in different
kinds of projects.

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Project Organization Suffers from the Following Drawbacks: Notes

1. There is lack of clearly defined responsibility, lack of communication
lines and absence of standards of performance for the functional
specialists. This makes the job of project manager very difficult.
2. Since there are specialists from a number of diverse fields, there is
a danger of over-specialization.
3. Every project has a completion date which makes the work environment
stressful.
4. It causes a sense of insecurity among the members as they feel that
they might lose their jobs once the project is completed.

Figure 9.4: Project Structure

9.4.2 Matrix Organization

Matrix organization has been developed to cater to the needs of large
and complex organizations which require structure that is more flexible
and technically oriented than the functional organization structure. The
objective is to successfully complete a series of projects.
Matrix organization is a combination of two organization structures-func-
tional and project. The organization is divided into different functional
areas, e.g., purchase, production, marketing, human resource, etc. Each
function is headed by a functional manager. The organization is also
divided on the basis of projects. Each project has a project manager.
The employees have to work under two superiors. The authority of the
project managers flows horizontally (across) while the authority of the
functional manager flows vertically (downward). Therefore, it is called
matrix organization.

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Notes The project teams are created from the functional departments and are
placed under the project manager for the duration of the project. When
the assignment is complete, they go back to the functional department to
which they belong. The matrix organization structure violates the prin-
ciple of unity of command as each person has two bosses-the functional
manager and the project manager. This results in indiscipline, confusion,
etc., adversely affecting the productivity and profitability of the organi-
zation. It is, therefore, important to determine the nature and extent of
authority of each boss for the smooth functioning of the organization.
Matrix organization structure is used in industries with highly complex
products as in case of aerospace industry where project teams are created
for specific space and weapon systems. It is also suitable for multi-proj-
ect organizations like construction companies engaged in constructing
different projects at the same time.

Matrix Organization Offers the Following Benefits:

1. It facilitates proper co-ordination and control. Each project is assigned
specialists from several functional areas. The project manager
monitors the progress of the project to ensure its timely completion.
2. It is more flexible than the traditional functional structure. Effective
exchange of information and regular interaction between the project
department and the functional specialists enables the enterprise to
respond quickly to the changes in market, technology, etc.
3. In matrix structure, people get an opportunity to enhance their skills
and knowledge as they interact with specialists from diverse fields.
It encourages creativity and widens the horizons of the personnel.
4. It provides motivation to the project staff as they use their competence
for the completion of a particular project. Clear definition of

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responsibility and well-established lines of communication helps in Notes

coordinating the efforts of people from various functional groups
and the project manager.
5. Each project is assigned the requisite physical, financial and other
resources.

Matrix Organization Suffers from the Following Limitations:

1. It violates the principle of unity of command as employees receive
orders from the functional boss as well as the project manager.
This creates confusion and gives rise to jurisdictional conflicts in
the organization.
2. In matrix organization, people are drawn temporarily from different
functional departments. Project manager does not have line authority
over his group of personnel. This results in the problem of coordinating
the efforts of the people for the project objectives.
3. Matrix organization is not a homogeneous and a compact group.
The multiplicity of vertical and horizontal relationships may impair
organizational efficiency. The functional specialists may try to
emphasize their own specialization at the cost of overall project.
There is no clarity of jurisdiction of functional specialists and the
project managers.
4. In matrix organization, working relationships are not very clear.
It is difficult to balance the authority of the project manager and
functional manager.
5. The employees are temporarily drawn from the functional departments
and work on a number of projects over a period of time. It is
difficult for the functional managers to appraise the performance
of employees. The employees may find it difficult to adjust to the
requirements of the new project resulting in low employee morale.

9.4.3 Virtual Organization

Virtual organization is a relatively new form of organization structure
that emerged in 1990s as a result of the proliferation on information and
communication technologies (ICT). It is also known as digital organization.
Practically, the term “virtual organization” is used to describe a network
of independent firms that are linked together by information technology

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Notes to share skills, costs and access to one another’s markets. It may or may
not have any central office nor organization chart. The primary aim of
a virtual organization is to provide innovative, high-quality products or
services.
They are often associated with terms such as virtual office, virtual teams,
and virtual leadership. In a virtual organization, all the boundaries of
traditional organization structure- vertical as well as horizontal are re-
moved. In this sense, it is a boundary less organization. Partners in vir-
tual organizations share risks, costs, and rewards in pursuit of a specific
market opportunity. They bring together world-class core competences
in the domains of design, manufacturing, marketing, technology etc.,
and thereby creating substantial synergies. The life of such organizations
usually last up till the time the specific market opportunity is exploited.

Characteristics of Virtual Organization:

Some of the defining features of virtual organization are discussed below.
This list is non-exhaustive but covers the essential features:
1. Borderless Organization: Virtual organizations are borderless in
the sense that they are not situated in a particular country like
traditional organizations. They bring myriad people from different
parts of the country and in some cases from different parts of the
world to work on a specific project or market opportunity, linked
by the ICT tools.
2. Flat Organization: Compared to the traditional organization structures,
virtual organizations have flatter structure and fewer or no management
level (or hierarchies) between staff level and top executives.
3. ICT is the Backbone: The origin of virtual organizations is attributed
to the proliferation of ICT tools. A virtual organization relies on
various ICT tools such as Google documents, Dropbox, Slack,
Yammer, TeamViewer etc., to coordinate the flow of work, scheduling
team meetings, information sharing etc.
4. Informal Communication: Most of the communication in the virtual
organizations is informal in nature. People in such organizations
do not stick to conventional chain of communication, sending
information from one level to the next.

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5. Complementary Resources: Virtual organizations combine complementary Notes

resources of different individuals, groups, or organization, in order
to achieve a common goal. For example, a virtual organization in
the area of Financial Technologies (FinTech) would usually combine
an individual or organization having core competence in the area
of finance and other in technology. The idea is to combine together
the resources and competences such that they create synergy, i.e.,
greater returns can be earned from the combined use of the resources,
than individually.
6. Interdependent Relationships/Blurred Boundaries: Members
of the virtual organization create a network of interdependent
relationships. These relationships between different individuals,
groups, or organizations make them more dependent on each other
than they have been in the past and in other forms of structure.
The interdependencies make organizations boundaries to get blurred
as competitors, suppliers, and customers enter into cooperative
agreements.

Advantages of Virtual Organization:

1. The flat structure of the organization enables quick decision making
which is essential in the rapidly changing business environment
where market opportunities can be won or lost in a blink of an eye.
2. Use of information and communication tools provides a cost-effective
way of coordinating teamwork and maintaining communication across
and beyond the boundaries of a nation. This leads to substantial
savings in the time, cost, and effort.
3. A most significant advantage of virtual organization is that it allows
its members the access to superior resources and competences
without actually needing to invest in them or owning them.
4. Virtual organization structure results in substantial savings in
overhead costs associated with maintaining an office space like in
traditional organization. This frees up resources that can be utilized
in improving the scalability and growth potential of the organization.
5. Relative to traditional organization structure, a virtual organization
has greater ability to tap into global pool of talented workers as
physical presence is not an impediment.

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Notes 6. Virtual organizations tend to be more productive. The ability to work

remotely without having to travel to the traditional office premises
and being exposed to office setting is claimed to increase productivity
level of workers 1. ( 1[Link]
[Link]
(accessed 3 July 2020).

Disadvantages of Virtual Organization

In spite of the number of advantages, virtual organizations suffer from
the following disadvantages:
1. While the use of information and communication tools significantly
reduce the time and expense involved with decision making,
arranging meetings etc., the lack of physical touch results into many
complexities.
2. The conduct of confidential and sensitive business transactions is
more effective when done in physical presence.
3. Virtual organizations bring together people from various diverse
backgrounds, especially culture. The members may also be located
in different time zones. Many a times, multicultural teams may not
come on a common understanding of common goals, thereby having
detrimental effects.
4. This form of organization has relatively less control over its members
which could lead to poor work performance and damage to firm
reputation.
Despite these limitations, virtual organizations have become a reality and
are growing in popularity. There are several successful cases of virtual
organizations in different parts of the world.
9.4.4 Difference between Modern and Traditional Organization
Structure
Traditional Modern
These organization structures are These organization structures are
relatively stable and inflexible. dynamic and flexible.
These structures follow a simple These structures are complex in
design. design and understanding.

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Traditional Modern Notes

These are relatively less costly to This structure requires updated tech-
maintain. nology and resources; therefore, they
involve high cost.
They are suitable for organizations These structures are suitable for
dealing in one or two product lines global firms dealing in customized
with limited areas of operations. or multi- range diverse products.
These structures include product, These structures have both product
geographic and functional divisions. and functional divisions vested in
each other.
These structures have centralized These structures have participatory
authority. work environment with balanced
delegation of authority at various
levels.
Employees may have low morale Employee morale is high as they
in absence of authority and say in are put in command for decision
decision making. making.

IN-TEXT QUESTIONS
6. Modern organization structures have a participatory work environment
and delegation of authority can be seen there. (True/False)
7. __________ structure is used in industries with highly complex
products as in case of aerospace industry where project teams
are created for specific space and weapon systems.
8. Dynamic and Flexible organization structure can be seen in which
of the following:
(a) Traditional organization structure
(b) Modern organization structure
9. __________ is also known as digital organization.
10. __________ consists of a number of horizontal departments
oriented towards the completion of projects of long duration.

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Notes
9.5 Summary
In this lesson we discussed about organizational structure which is a
framework that specifies how certain tasks are to be carried out in order to
meet the objectives of an organization. Rules, roles, and obligations may
be a part of these activities. How information is transferred across layers
of the organization is likewise governed by its organizational structure.
Organization structure can be divided into traditional and modern organi-
zational structure. Traditional organization structure is further divided into

9.6 Answers to In-Text Questions

1. Geographical Structure
2. False
3. (a) Product structure
4. Organization Structure
5. Functional
6. True
7. Matrix organization structure
8. (b) Modern organization structure
9. Virtual Organization
10. Project organization structure

9.7 Self-Assessment Questions

1. Explain the difference between traditional and modern organization
structures.
2. If you are manager of global company dealing in multiple products,
which organization structure will you go for in order to bring
maximum benefits to the organization?
3. Explain in detail various types of traditional structures taking support
of diagrams and illustrations.
4. Explain various types of modern organization structure taking support
of diagrams and illustrations.

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5. Explain the difference between project organization structure and Notes

matrix organization structure.
6. Explain in detail working and designing of a virtual organization.
What are its key merits and limitations?

9.8 Suggested Readings

‹ Basu, C. (2017). Business Organisation and Management. McGraw
Hill Education.
‹ Chhabra, T. N. (2020). Business Organisation and Management.
Sun India Publications, New Delhi.
‹ Drucker, P. F. (1954). The Practice of Management. New York:
Harper & Row.
‹ Kaul, V. K. (2012). Business Organisation Management. Pearson
Education.
‹ Koontz, H., & Weihrich, H. (2012). Essentials of Management: An
International and Leadership Perspective. Paperback.
‹ Laasch, O. (2022), Principles of Management, 2e, Sage Textbook
‹ Singh, B. P., & Singh, A. K. (2002). Essentials of Management.
New Delhi. Excel Books Pvt. Ltd.

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 L E S S O N

10
Recent Developments in
Business Organization
Dr. Rutika Saini
Dr. Ruchi Gupta

STRUCTURE
10.1 Learning Objectives
10.2 Introduction
10.3 Learning Organizations
10.4 Franchising
10.5 E-Commerce
10.6 Outsourcing
10.7 Government and Business Interface
10.8 Sustainability
10.9 Digitalization and Technological Innovations
10.10 Summary
10.11 Answers to In-Text Questions
10.12 Self-Assessment Questions
10.13 References
10.14 Suggested Readings

10.1 Learning Objectives

‹ To know the recent developments in the Business Organization.
‹ To understand the contemporary issues in Entrepreneurship.
‹ To understand the relevance of learning Organization.
‹ To discuss the concept of outsourcing the E-Commerce solutions.
‹ To explore the role of digital and technological innovations.

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 Recent Developments in Business Organization

Notes
10.2 Introduction
The current chapter deals with the recent developments in the business
organizations and entrepreneurship. The lesson talks about the franchising
and outsourcing as efficient ways of managing the business. It has been
observed that a business entity alone cannot do all the jobs and therefore
need to focus only on the core competencies. Therefore, the outsourcing
can help the organizations to become more effective. The chapter also
talks about the new concepts like E-Commerce and learning organiza-
tions which can help the business to grow more. Lastly, the digitization
is the need of the hour, and the implementation of new technologies can
make the business and entrepreneurs more effective and efficient. The
lesson also throws light on the use of digital technologies to enhance
the business activities.

10.3 Learning Organizations

The Organizations are striving hard to bring improvements and innova-
tions in order to have a competitive edge over others. There is a strong
need to learn and improve if the business entities want to grow and be
successful over a short span of time. But unfortunately, it has been ob-
served that the number of successful moves is far lesser than the number
of failures. Why? The organizations fail to realize the importance of
continuous learning along with the improvement programs.
The current section deals with the importance of learning in the orga-
nizations and how an organization becomes a “Learning organization”.
The concept of learning organization is the brainchild of a famous strategist
Peter Senge. He has introduced the concept of learning organization in
his book titled “The Fifth Discipline”. He described it as “where people
continually expand their capacity to create the results, they truly desire,
where new and expansive patterns of thinking are nurtured, where collec-
tive aspiration is set free, and where people are continually learning how
to learn together.”. He has suggested five elements in order to achieve
the learning in the organization. These five elements are:
1. Systems Thinking
2. Personal Mastery

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Notes 3. Mental Models

4. Shared Vision
5. Team Learning

What is a Learning Organization?

In layman’s words, a learning organization can be defined as an organi-
zation capable of making improvements on the basis of past performance
and the results. However, a concrete definition of such organizations is
still lacking in the literature. Some of the authors have attempted to de-
fine learning organizations in their articles. Few of them are as follows:
According to C. Marlene Fiol and Marjorie A. Lyles,
“Organizational learning means the process of improving actions through
better knowledge and understanding.”
According to George P. Huber,
“An entity learns if, through its processing of information, the range of
its potential behaviours is changed.”
According to Barbara Levitt and James G. March,
“Organizations are seen as learning by encoding inferences from history
into routines that guide behavior.”
According to Chris Argyris,
“Organizational learning is a process of detecting and correcting error.”
According to Ray Stata,
“Organizational learning occurs through shared insights, knowledge, and
mental models…[and] builds on past knowledge and experience—that is,
on memory.”

Key Characteristics
The above definitions focus upon the following key highlights of the
learning organizations:
1. Improvement: The Learning cult makes the organization systematic
which brings a lot improvements in its value chain.
2. Better Knowledge and Understanding: If the processes and procedures
are written in a systematic way, the employees would have a better
understanding of them.

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3. Processing of Information: There are sophisticated tools and Notes

techniques which are available in learning organizations which help
its employees to arrange and analyse the data.
4. Behavioural Changes: A good learning culture also promotes a good
atmosphere and a good mental health of people.
5. Inferences from History: The learning culture emphasis on the
historical data and experiences so that its employees can learn from
them.
6. Detection and Correction of Errors: When the data is recorded,
classified and analysed properly then the detection of errors becomes
easy. A cluttered set of data cannot be cleaned properly.
7. Shared Insights: A learning organization promotes culture of shared
vision rather than following a Top-Down and Bottom-Up approach.
That means, the suggestions are welcomed from everywhere and
not only from the top management.

Building Blocks of Learning Organization

Figure 10.1: Learning Organization

(Source: Harvard Business Review)

1. Systematic Problem Solving: An organization faces numerous

problems while doing the business. It is suggested to use some
scientific methods for the diagnosis of the issues. The diagnosis

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Notes should not be just based on the guesswork or the assumptions but
rather should have some concrete basis. It is suggested to use some
basic statistical tools to organize the data well.
The Xerox company has been using this approach of problem
solving on a wider scale. They introduced a six-step process as
given below:
(a) Identify and select the problem
(b) Analysis of the Problem
(c) Generation of potential solutions
(d) Selecting and planning the solution
(e) Implementing the solution
(f) Evaluating the solution.
2. Experimentation: In order to become a learning organization, it’s
important to test the new knowledge. The experimentation is a process
that allows the organization to go for the unexpected outcomes with
different set of action. The experimentation is mainly classified as
the ongoing programs and one-of-a-kind demonstration projects.
In ongoing programs, there is a need of continuous experimentation
which is incremental in nature.
3. Learning from the Past Experience: The organizations are supposed
to review their past performance. They need to track their success
and failures to strategize in the future. Every experience comes with
a learning and an opportunity to improve with the future course
of action. The process of learning from the past has been called
at “Santayana Review” by an expert. It is based upon the view of
George Santayana who stated, “Those who cannot remember the
past are condemned to repeat it.”
According to research conducted by Maidique and Zirger (1985) on
150 new products observed that the past experience and the failure
have the ultimate power. It stated that “the knowledge gained from
failures [is] often instrumental in achieving subsequent successes…
In the simplest terms, failure is the ultimate teacher.”
4. Learning from Others: It’s not possible to learn everything from
the past experience. In the case of a new venture or a new product

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development, the learnings cannot be made out of the success and Notes
the failures of the past. Therefore, it becomes necessary to scan
the outside environment and have a look over the competitors to
learn from their mistakes. According to Camp (1989) benchmarking
is an ongoing investigation and learning experience that ensures
that best industry practices are uncovered, analysed, adopted, and
implemented.”
5. Transferring Knowledge: An organization can become a learning
organization only when it spreads its knowledge quickly to all
the departments within it. The knowledge can be transferred from
one person to another, one team to another and one department
to another. It can be done through the implementation of a good
communication system facilitating the written, oral and visual
messages. The site visits and the personnel rotation programs are
also useful in transmission of the knowledge.
IN-TEXT QUESTIONS
1. A __________ can be defined an organization capable of making
improvements on the basis of past performance and the results.
2. Systematic problem solving is a technique invented by __________
where the learning organizations solve problems systematically
by following a procedure.
3. Learning from past experience is not always possible as in the
case of new ventures. In this case learning from __________
is recommended.
4. Experimentation should be avoided in a learning organization as
it can lead to the loss and failures. (True/False)
5. Transferring Knowledge means the transfer of knowledge to
the competitor. (True/False)

10.4 Franchising
Franchising refers to an arrangement between the two parties. One party
is known as the franchisor and the other is known as the franchisee. The
franchisor allows the franchisee to use its name and technology for the
marketing and selling purposes. The franchisor gives some rights to the

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Notes franchisor for which they charge a fee or commission. The franchisee is
given the authority to use the trademark and the brand name.
Franchising is considered to be great technique to have access to the larg-
er market share without incurring a huge investment. It is a relationship
of two parties where one party sells another’s product or gains the right
on the intellectual property. The most common examples of franchising
agreements in India are that of food chains like McDonald’s, Domino’s,
Pizza hut, Subway, Burger king etc.

Definition
Franchising may be defined as a contractual license (right) granted by
one person (franchiser) to another (franchisee) which:
‹ Permits the franchisee to carry on a particular business using the
franchiser’s business know-how under the franchiser’s brand as an
independent business.
‹ Enables the franchiser to exercise control over the manner in which
the franchisee carries on the franchised business.
‹ Requires the franchiser to provide the franchisee with ongoing
support in carrying on the franchised business.

Examples of Franchising
In India, NIIT (computer education), APTECH (computer education), Pizza
Hut (fast food), McDonalds (fast food), Nirulas (fast food), Subway (fast
food), Bata (shoes), Liberty (shoes), Nike (shoes and sports apparel),
Adidas (shoes and sports apparel), Reebok (shoes and sports apparel), Van
Huesen (clothing); Allen Solly (clothing), Pantaloons (clothing), Barista
(coffee), Café Coffee Day (coffee) are examples of franchise agreements.

Features of Franchising
The salient features of franchising are as follows:
1. The franchiser allows the franchisee to use his trademark under a
license.
2. The franchise agreement requires the franchisee to follow franchiser’s
policies regarding mode of operation of business.
3. The franchiser provides marketing support and technology to the
franchisee to carry on business in the manner specified in the

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franchise agreement. Thus, a franchiser virtually sets up the business Notes

for the franchisee.
4. The franchiser may also arrange for the training of personnel working
in the franchisee organization.
5. The franchisee pays to the franchiser a sum of money (called royalty)
for using his business know-how and trademark.
6. The right to use the business know-how and trademark of the
franchiser is for a limited period of time defined in the franchise
agreement. However, the franchise agreement may be renewed from
time to time.

Franchise Manual
A franchise manual is the embodiment of the know-how of the franchise.
The manual is a living document and will continually change as the
business develops.
The following is an illustrative list of the likely contents of the franchise
manual.
‹ Shop layout
‹ Staff uniform/appearance
‹ Staff etiquette
‹ Staff job descriptions
‹ Training requirements
‹ Pricing policies
‹ Storage requirements
‹ Advertising and marketing policies
‹ Technical information about equipment used
‹ Customer complaint procedures

Franchise Agreement
The agreement between franchiser and franchisee is called franchise
agreement. Such an agreement contains various terms and conditions of
the franchise.
Some of the terms and conditions of a franchise agreement are given
below.

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Notes 1. The term of the franchise.

2. The franchise agreement may be renewed with the mutual consent
of both the parties on expiry of the term.
3. The franchisee agrees in the form of an undertaking not to carry
other competing business during the term of the franchise. The
franchiser, in turn, undertakes not to sell the franchise to any other
person in the same region.
4. The franchisee gives an undertaking not to disclose any confidential
information pertaining to the franchise during the term of the
franchise agreement and two years thereafter.
5. The franchisee gives an undertaking to pay the specified royalty
fee to the franchiser.
6. The franchiser gives an undertaking not to terminate the franchise
agreement before the expiry of the term except for a “good cause”.

Types of Franchise
Whenever a person thinks of doing a business activity the first thing
that comes in the mind is regarding the type of the business activity.
Franchising is one of the easiest and safest ways of doing business as it
allows one to have an established name and goodwill. The following are
some of the types of franchises an entrepreneur can go for:
1. Product Franchising
2. Manufacturing Franchising
3. Business Format Franchising
Product Franchising: In this type of franchising the franchisor allows
the franchisee to sell the goods of the manufacturer. The franchisee has
to pay a fee in return to the franchisor for using his name and brand.
One example of the product franchising can come from the year 1800
where the Singer Corporation allowed third parties to sell their product,
its sewing machines.
Manufacturing Franchising: In this type of the franchising the franchisor
is the one who allows the franchisee to even manufacture the product
along with the distribution of that product. Such kind of franchisor-fran-
chisee relationship is quite evident in the soft-drinks industry.

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Business-format Franchising: It is considered to be one of the most Notes

famous types of franchising where the franchisor allows the franchisee
to use its name and brand and in return provides the services like mar-
keting, advertising, training of the staff, leadership etc.

Benefits of Franchising
(i) To the Franchiser
1. The franchise can expand its distribution system in the least
possible time.
2. The franchiser is able to expand the business with little extra
capital as the franchisee provides the capital for the outlet.
3. The franchiser gets important feedback about the popularity
of the product and specific needs and preferences of the local
customers from the franchisees.
4. Franchising enables the franchiser to increase his goodwill and
reputation by expanding his network.
5. The Franchiser gains wider acceptance of his brand name
through the franchisees.
(ii) To the Franchisee
1. Starting a business is made easy with the introduction of
franchising agreements. It gives you a well-established brand
recognition in the market.
2. The business is based on a proven idea. The franchisee
can check out how successful other franchisees are before
committing himself.
3. The franchisee can use the brand name of the franchiser to
attract customers and increase its sales.
4. The franchisee can get assistance from the franchiser in
training his staff, promotion of the product, designing store
layout etc.
5. As the brand is already established in the market, the chances
of failure are bleak. According to Frankart Global, every year
around 300 companies start the franchising business.

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Notes 6. It is often observed that the franchising increases the purchasing

power of franchisee. The franchisee now becomes a part of
a big firm and therefore starts exercising more power.
7. The benefit of research and development done by the franchisor
is going to pay to the franchisee as well.
8. There are greater chances of success of the franchisee because
the brand of the franchiser is well known.
9. The franchise ensures a high degree of quality control. This
enables the franchisee to satisfy his customers by offering
quality products.
10. The franchisee enjoys exclusive rights in his territory. The
franchiser won’t sell any franchises in the same region.

Disadvantages of Franchising
(i) To the Franchiser
1. The franchiser’s brand name and reputation may get tarnished
if the franchisee is not able to maintain standards of quality
and service.
2. The franchiser has to provide initial financial assistance and
support in the form of staff training, advertising etc.
3. There are ongoing costs of supporting the franchisee and
national advertising.
(ii) To the Franchisee
1. The franchisee does not enjoy complete freedom in his business.
The franchise agreement generally contains restrictions on
how the franchisee would run the business.
2. Payment of royalty on a regular basis is to be made to the
franchiser.
3. The franchisee cannot sell his business without taking approval
from the franchiser.
4. As the entrepreneurship is all about the creativity and innovation,
here the franchising limits the scope of both. The franchisee
has to think and act according to the franchisor.

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5. The franchisor imposes many restrictions of the franchisee Notes

and therefore the franchisee can feel frustrated.
6. The franchisee cannot build their own goodwill and have to
bear the negative image of the franchisor as well.
7. The franchising agreement has the clause of buyback, and the
franchisor can exercise the same at the end of the contract.

Potential Disputes
There might be sometimes some disputes between the franchiser and the
franchisee. Some possible causes of disputes may be:
1. Poor performance of the franchisee.
2. The franchisee may find that the franchiser has licensed another
person in his territory.
3. The franchisee fails to pay the royalty fee.
4. There is a leak out of the confidential information pertaining to the
franchise or the franchiser’s business.
Despite many disadvantages, the franchising is a good technique of doing
business and capitalizing on a well-established name. According to The
Economic Times, India is the 2nd largest market catering to the franchis-
ing agreement with over 1.5 lakh franchisees and the 4600 franchises.

10.5 E-Commerce

Meaning
The term e-commerce or electric commerce refers to a comprehensive
system of trading that uses networks of computers for buying and sell-
ing of goods, information and services. In simple words, e-commerce
refers to buying and selling of goods, information and services through
electronic means.
Thus, e-commerce includes buying and selling of:
1. Goods-e.g., digital cameras, music systems, clothes, accessories
2. Information-e.g., subscription to some law site may give access to
some court cases

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Notes 3. Services-e.g., matrimonial services through [Link], placement

services through [Link]
The European Union website defines e-commerce as a general concept
covering any form of business transactions or information exchange that
is made by using information and communication technology. According
to International Fiscal Association, e-commerce means “commercial trans-
actions in which an order is placed electronically, and goods or services
are delivered in tangible or electronic form. For instance, a digital camera
purchased by a consumer from [Link] which might be delivered
to him at his residence, is a good delivered in a tangible form whereas,
a song downloaded from a site like [Link], is a good delivered
in electronic form.

Classification of E-Commerce
Based upon the entities involved in transaction, electronic commerce has
been classified into the following categories:
1. Business-to-Business (B2B)
2. Business-to-Consumer (B2C)
3. Consumer-to-Business (C2B)
4. Consumer-to-Consumer (C2C)
1. Business-to-Business (B2B) Electronic Commerce: Under B2B
electronic commerce, commercial transactions take place between
different business organizations. An example of B2B transaction is a
business organization purchasing material from suppliers. Compared
to B2C and C2C transactions, the value per transaction is higher
in B2B transactions because bulk purchases are made. The buyers
also might get the advantage of discounts on bulk purchases.
2. Business-to-Consumer (B2C) Electronic Commerce: Under B2C
electronic Commerce, commercial transactions take place between
business firms and their consumers. Here companies sell goods,
information or services to customers online in a more personalized
dynamic environment. An example of B2C transaction is Amazon.
com selling books to customers.

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3. Consumer-to-Business (C2B) Electronic Commerce: C2B can be Notes

described as a form of electronic commerce where, the transaction,
originated by the consumer has a set of requirement specifications or
specific price for a commodity, service or item. It is the responsibility
of electronic commerce business entity to match the requirements of
the consumers to the best possible extent. For instance, a consumer
may specify on a site like [Link] his dates of travel, his source
and destination of travel, specifying the total number of tickets
required in business/economy class. [Link] then finds out the
various options for him which best meet his requirements.
4. Consumer-to-Consumer (C2C) Electronic Commerce: C2C is
the electronic commerce activity that provides the opportunity for
trading of products and/or services amongst consumers who are
connected through the internet. In this category, electronic tools and
internet infrastructure are employed to support transactions between
individuals. For instance, a consumer who wants to sell his property
can post an ad on [Link]. Another person interested in
purchasing a property can browse the property ads posted on this
site. Thus, the two consumers can get in touch with each other for
sale/purchase of property through [Link].

Benefits of E-Commerce
E-Commerce is gaining popularity because it offers the following benefits:
1. Global Market: E-Commerce enables business firms to reach out to
customers all over the world who have access to internet. Thus, the
whole world becomes a potential market for business enterprises.
2. Lower Transaction Cost: E-Commerce reduces the cost of business
transactions substantially. For instance, the number and cost of
customer service representatives in a bank can be reduced by using
net banking.
3. Higher Margins: An e-commerce firm can earn higher margins as
the transaction costs are reduced to a great extent.
4. 24X7 Working: A website is open all 24 hours, 7 days in a week it
can, thus, take orders, keep an eye on delivery of goods and receive

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Notes payments at any time. A business firm can provide information

about its products and services to customers around the clock. 5.
Wide Choice: For the consumers, the whole world becomes a shop.
They can look at and evaluate the same product at different websites
before making a purchase decision.
5. Customer Convenience: Customers can shop from home or office.
They don’t need to stand in long queues to talk to a salesman. They
can read details regarding model numbers, prices, features etc. of
the product from the website and purchase at their own convenience.
Payments can also be made online.
6. Direct Contact between Business and Consumer: E-Commerce
enables business firms to establish a direct contact with their
customers by eliminating middlemen.
7. Customer Satisfaction: E-Commerce allows quick response and
redressal to consumer complaints. This helps in increasing customer
satisfaction.

Limitations of E-Commerce
E-Commerce suffers from the following drawbacks:
1. Security: Security continues to be a problem for online businesses.
Customers might be reluctant to give their credit card number at
the website due to a number of credit card fraud cases.
2. System and Data Integrity: Data protection and integrity of the
system that handles the data are serious concerns. Computer viruses
may cause data corruption, file backups, storage problems etc.
there is also a danger of hackers accessing the files and corrupting
accounts.
3. Costs: Even though the company may initially save money by cutting
intermediaries, other costs may be incurred as start-up costs in
terms of hardware and software as well as training of employees
and costs to maintain the website.
4. Products People won’t buy Online: There are certain products like
home furnishings which people might not like to buy online. They
might want to, for instance, sit on a sofa to see how comfortable
it is, feel the texture of the fabric etc.

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5. Corporate Vulnerability Web farming: The availability of product Notes

details, catalogs, and other information about a business through
its website makes it vulnerable to access by the competitors. The
competitors might then indulge in web farming i.e., extracting
business intelligence from your competitor’s web pages.
6. Problem of Customer Loyalty: No business can survive for long
without loyal customers. The new breed of net savvy customers
buys from a website where they are getting the best deal. They are
not loyal to a particular seller.
7. Shortage of Talent: There is a great shortage of skilled people who can
handle e- commerce successfully. Traditional organizational structures
and poor work cultures also inhibit the growth of e-commerce.
8. Fulfillment Problems: There could be problems related to shipping
delays and merchandise mix-ups.
9. Returning Goods: Returning goods online can be difficult. There
are uncertainties regarding whether the goods will get back to their
source, who will pay for the return postage, will the refund be paid
etc.

Resources Required for Successful Implementation of E-Commerce

Successful implementation of e-commerce requires the following resources.
1. Well Designed Website: A business enterprise must develop a
comprehensive website to communicate effectively with its customers
and business partners. The basic infrastructure of a website consists
of pages with text, graphics, audio, and links to other pages. The
entry point is called the homepage and other web pages are linked
to the homepage. The website must be able to provide information
about the company, its history, its products, their features and prices
and other technical details. The website should also have the ability
to input data into the system, for instance, filling out a form, sending
an e-mail message to the company or sending feedback about the
website.
2. Adequate Computer Hardware: The computer hardware consists
of its monitor, servers, back up devices, printer etc. For smooth
e-commerce transactions, a business needs a computer with a lot
of memory, a powerful Central Processing Unit (CPU), and a fast

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Notes link to the internet. A large storage space will give a quicker access
to stored data. A processor with good speed will lead to quicker
download.
3. Adequate Computer Software: Computer software consists of
operating systems like Windows, Linux etc. In addition to an
operating system, the company needs a browser such as Internet
Explorer which allows surfing on the net. Some basic software like
File Transfer Protocol (FTP), Telnet, Archie etc. are also required.
4. Effective Telecommunication System: E-commerce requires an
effective telecommunication system in the form of telephone lines,
optic fiber cables, and internet technology to handle the traffic on
the internet. E-commerce cannot be successful if telephone lines
are getting frequently disconnected and it is difficult to access the
internet.
5. Technically Qualified and Responsive Workforce: A well-trained
workforce that is capable of working easily with the internet and
computer networks is essential for the success of e-commerce. The
company staff must be trained to handle sales inquiries, processing
orders and ensuring prompt delivery. There must be proper coordination
between receipt of order, delivery of goods and receipt of payment
so as to minimize errors.
6. Business Service Infrastructure: A foolproof system of receiving
payment for the goods and services must be developed. Adequate
information must be made available to enable the customers to
know their bill amount. An inbuilt system of refunds, in case
excess amount is received should be created. Electronic payments
and refunds should be secured through banks and credit agencies.

Threats to E-Commerce Transactions

E-commerce transactions face the following threats.
1. Hacking: Hacking refers to breaking security to gain access to a
system. It thus, refers to unauthorized entry into a website. They
intercept confidential information and misuse such information to
their advantage or modify and even destroy its contents to harm
the parties.

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2. Cyber Squatting: In order to take advantage of some established Notes

brand name or trademark, a firm might use the name/mark for its
own website while getting the domain name (name of the website)
registered. This is done so as to induce a customer to believe that
there is a direct link between the website holder and the trademark.
Such a practice is known as cybersquatting. For instance, a US
company, [Link], which offers various commercial services
to online customers, complained against the resident of Bhopal for
registering his website as [Link]. It was held that the
addition of the word ‘India’ would only induce the people to believe
that the site was an Indian affiliate of the US company and thus,
amounted to cybersquatting.
3. Viruses: Viruses cause harm to the efficient and smooth functioning
of e-commerce. Some viruses destroy all the information stored in a
computer. They cause huge loss of revenue and time. Viruses may
enter a computer system through e-mail or disc drive floppies.
4. Typo Piracy: Some websites try to take advantage of common
typographical errors that the users might make in typing a website
address to direct users to a different website. Such people who try
to take advantage of some popular websites to generate accidental
traffic for their websites are called typo pirates and such a practice
is referred to as typo piracy. For instance, if a user instead of typing
[Link] in the address bar of Internet Explorer, types by mistake
[Link] or [Link], then he will find that a different webpage
with altogether a different name might open.
5. Impersonation: In e-commerce transactions, sometimes hackers may
pretend to be consumers themselves. They, thus, make use of stolen
credit card numbers of real customers.
6. Fraudulent Trading: A business enterprise operating a website might
indulge in fraudulent practices. It may operate a fake website, take
away money from customers and not supply the good or service to
the customer.

Disputes regarding E-Commerce Transactions

Several kinds of disputes may arise regarding e-commerce transactions:

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Notes 1. The customer pays for the merchandise, but the business fails to
deliver.
2. The customer pays in full but receives a partial order or the wrong
merchandise.
3. The customer does not like the product, but the business has no
procedure for accepting returned merchandise.
4. The business delivers but the customer does not admit that he ever
received the merchandise.
5. The customer receives the merchandise, but it arrives damaged. The
carrier (Courier Company) denies responsibility and the business
says it is carrier’s responsibility.

10.6 Outsourcing

Business Process Outsourcing

Outsourcing or Business Process Outsourcing (BPO) means transferring a
firm’s non-core activities to an external provider. It means getting some
business activities accomplished through an outside agency. For instance,
a manufacturing firm instead of setting up its own advertising department
may outsource the advertising work to some advertising agency. The Ad
agency can help the client company in fixing the advertising budget,
preparing advertising copy, choosing the most appropriate media such as
TV, radio, newspapers, magazines and buying media space.
In an outsourcing agreement, there are two parties:
1. The outsourced, i.e., the client company which wants to outsource
a business process.
2. The vendor or external provider who provides the service to the
company.
Thus, in the above example the manufacturing firm is the client company
or the outsourced and the advertising firm is the vendor or the external
provider.
Some of the business processes which may be outsourced include ac-
counting and financial services, payroll services, inventory management,

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advertising services, healthcare and welfare services, market research, Notes

courier service etc.
Outsourcing enables a company to concentrate on its core activities by
contracting out the non- core and routine activities to outsiders. There
is no need for the firm to recruit, train and pay workers on a permanent
basis to undertake non-core activities.

Benefits of BPO
Outsourcing offers the following advantages:
1. Outsourcing enables a firm to concentrate on its core activities as
the non-core activities are outsourced to an external provider.
2. The external vendor is a specialist in performing the outsourced
business process and thus can perform the same at a lower cost.
3. The firm need not create a separate department to perform non-core
business processes and thus lesser investment needs to be done.
4. The external vendor provides his expert advice to the client company
for better performance of outsourced services.
5. The firm has a freedom to choose the external provider who it
thinks can perform the business process most efficiently. In case
the firm is not satisfied with the performance of the vendor, it can
terminate the contract and find a new vendor.
6. For certain services which are require temporarily, outsourcing them
is the best option.

The Outsourcing Guide

Outsourcing business processes to an external vendor requires a careful
consideration of the following areas:
1. Selection of the right activities to be outsourced
2. Identification of the right supplier of services

Which Activities to Outsource?

It is important to identify those activities of the business which an external
provider can perform in a more cost-efficient way. These are generally

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Notes the non-core activities of a business. Such activities when outsourced to

an external vendor do not require any fixed investment in the form of a
separate department to perform these activities. However, the firm must
be aware that outsourcing may imply losing control over its operations.

Identifying the Right Supplier of Services

Choosing the right company to outsource the jobs is not easy. It is import-
ant to identify the key technical and management issues in outsourcing.
A few prime factors one has to focus on are:
‹ The vision and mission of the company in evaluation
‹ Balance sheets of the previous years
‹ Client lists
‹ Infrastructure
The external vendors are evaluated on these criteria and the best one is
chosen with whom the firm will enter into an outsourcing agreement.
The more providers there are in the market, the better position the firm
is in for negotiating a deal. Besides, it also allows the firm the option
to switch, if the need arises.

BPO in India
India is rapidly emerging as an outsourcing base for multinational corpo-
rations. India has low cost but highly qualified English-speaking labour.
Therefore, business process outsourcing is accelerating quite fast in
India. Initially, companies which started experimenting with India as an
outsourcing base were MNCs who started company owned back-office
operations and call centers. Very soon they started outsourcing more
complex business processes to India. In India, companies like Infosys,
Wipro, HCL Technologies and Satyam have entered BPO operations.
With time, the upsurge in BPO has offered Indian companies a route to
participate in the core business processes of MNCs and gradually move
up the value chain. This would be the time when they will be more like
business partners rather than mere suppliers of services to MNCs.

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IN-TEXT QUESTIONS Notes

6. Franchising refers to an arrangement between the two parties.

One party is known as the __________ and the other is known
as the __________.
7. Which of the following is not a type of Franchising?
(a) Product Franchising
(b) Manufacturing Franchising
(c) Business Format Franchising
(d) None of the Above
8. __________ is a process of allowing somebody else to do an
activity for your organization.
9. Which of the following is not a benefit of In-House production?
(a) Better Control
(b) Better Access
(c) Better Knowledge
(d) Better Time management
10. In the process of outsourcing, the outsourcing of __________
competencies are recommended.

10.7 Government and Business Interface

The business and the government are very important part of any country’s
economy. A stable government can help any business and economy grow.
The government has the power to influence its international business ac-
tivities. The government intervention is often needed to save the domestic
industries as the giant international companies may hamper the market.
The government should play an important role and encourage people to
be involved in the developmental activities by providing a good infra-
structure and environment. The following section defines the role of the
government in business activities.
1. Government as the Strategist: The government is supposed to set
some objectives for the businesses to ensure that the interest of
the society is served well. The government intervention becomes

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Notes necessity to avoid the exploitation of general public. The government

sets realistic goals for the businesses, and they are bound to reach
them. One of such objectives is the contribution of businesses
towards the CSR activities.
2. Government as the Resource Manager: As one of the defined roles
of the government is to set the objectives for the businesses, the
government has the responsibility to move the resources towards
the business organizations to facilitate the goal achievement.
3. Government as a Customer: Sometimes the government mandates a
specific purchasing procedure. The government often makes purchases
from the business and provides a huge opportunity for it.
4. Government as a Competitor: In the education system, the government
is giving a tough competition to the private sector, especially in
higher education. The government has the power to take new
initiatives which can sometime make the business irrelevant for the
other business owners.

Responsibilities of the Business towards the Government

1. Tax Payment: A great source of revenue for the government is the
tax paid by the big business giants. It is the responsibility of the
business to abide by all the prevailing laws and legalities involved
in the business.
2. Voluntary Programmes: There are many business enterprises who
support the government in its various programmes and functions
like recruitment and training of people. In return, the businesses get
benefit of such activities as it is done under the aegis of Corporate
Social Responsibility.
3. Government Contracts: There are many business ventures who bid
for the governmental contracts. Some examples of such contracts
are Housing projects, Oil pipelines and turnkey projects.

Responsibilities of Government towards the Businesses

1. Infrastructure: The Government has the responsibility to provide all
the amenities to the businesses as these businesses work towards
the society. The amenities include transportation services, financial
services, Electricity and other civic amenities.

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2. Information: The governmental agencies conduct surveys throughout Notes

the year. They collect a huge amount of data and maintain a huge
database. The businesses can take the advantage of such database
to check the market feasibility.
3. Transfer of Technology: The research done by the government is
often sold to the private owners as it can bring a positive change in
the society. For example, the research done by the government of
India was made available to many private pharmaceutical companies
to develop the vaccine of COVID-19.

10.8 Sustainability
As we are moving towards more and more advancements in the business
activities, it has become really important for the businesses to integrate
the sustainability along with their business strategy. A survey conducted
by McKinsey, around 70 percent companies admit that they keep the sus-
tainability in their view and formally implement it while doing business.

Meaning of Sustainability in the Business

The sustainability in the business means doing the business activities
without hampering the environment, society and the citizens at large.
The key highlights of sustainability are:
1. The Impact of the Business has on the Environment
2. The Impact of the Business on the Society
If the companies fail to keep the interest of society or environment,
then it may result in something serious like environmental degradation
and social injustice. The whole idea behind being a socially responsible
company is not only about the sustainability of the environment but
also the sustainability of the business. If the business wants to survive
for years, it has to fulfil its responsibility towards its stakeholders. The
sustainability ensures that the short-term profits do not result in a long-
term liability for the business.

Why sustainability is important?

The businesses today are using the metrics like ESG (Environmental,
Social and Governance) which analyses the organization’s ethical position.
It has been observed that companies enjoying a good ESG ratings have
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Notes lower cost of debt and equity. The financial performance of the company
can be improved by employing these sustainability initiatives.
The integration of social and environmental initiatives and financial
objectives is called shared value opportunity. It explains the direct and
positive impact of “doing good” on the “doing well”. The relationship
is explained in the following diagram.

Figure 10.2: Shared Value

(Source: Harvard Business School Online)

How to Create a More Sustainable Business

There are numerous ways of creating a sustainable business. The follow-
ing section suggests few steps which can help an enterprise to sustain
its business for a longer time.
3. Identification of the Problem: Firstly, a business has to answer
few questions in order to identify the key problem areas of the
organization. These few questions can be
(a) How much waste is being created by the organization?
(b) Do we pay importance to the workforce diversity?
(c) Does our product provide a solution to a problem?
(d) What are we doing for the society?
The answer to such question can help us to define our sustainability
objectives very well.
4. Establishing the Mission: A mission can be defined as the actions
you take to reach the goal. Once the sustainability objectives of the
firm are defined then the company may decide how it can reach

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to the goals. A mission statement throws the light on the ideology Notes
of the business. For example, the mission statement or an eyewear
brand “Warby Parker” is “to offer designer eyewear at a revolutionary
price, while leading the way for socially conscious businesses.”
5. Built upon Strategy: After deciding about the mission of the company,
a sustainable strategy has to be formulated. One thing that has to
be kept in mind while creating a sustainable strategy is to keep the
profits high as it helps the business to survive longer. The more
you become profitable, the more you become sustainable.
6. Implementing the Strategy: Once the strategy is formulated, it has
to be implemented in the same manner. All the people concerned
should have full support towards the implementation of the strategy.
The System, Staff, Structure and Culture have to be aligned in order
to facilitate the execution.
7. Assessment: Once the Sustainability strategy has been implemented
it has to be assessed to know its results. If there is a variance in the
expected performance and the actual performance, then the strategy
needs to be modified so it can help to reach the desired goals.

10.9 Digitalization and Technological Innovations

Digital and technological innovation means the implementation of techno-
logically advanced tools to the business problems in order to improvise
the organizational practices. The digital technologies involve the ongoing
improvisation of the business activities to stay competitive in the market.
The digital initiatives include the following activities:
1. Transition from analog to digital
2. Implementation of new software
3. Data analytics
4. Cloud computing
5. Automation

Benefits of Digital Innovation

The digital innovation has become necessity to run a healthy business.
The long-term growth of the business can only be ensured with the

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Notes ongoing advancements. Following are the benefits of implementing the

digital innovations in your organization.
1. Helps in Gaining the Competitive Edge: A good digital solution has
the power to streamline all the processes like product development,
internal processes and the customer engagement. As all the three
aspects are of utmost importance to the company, it can help it to
gain competitive advantage over the rivals.
2. Protection from the Threats: As the new companies enter the market,
it becomes all the more important for the existing organizations to
keep up with the pace and compete with them otherwise they will
be substituted.
3. Improved Productivity: The new technologies and digital advancements
help the organizations to use new methods which can increase the
productivity of the workforce. They can be trained to use the new
innovative techniques through which the overall performance of the
business can be enhanced.
4. Better ROI: As the new techniques and methods are introduced, the
increased productivity results in an increased ROI. In the recent era,
the COVID outbreak has changed the customers’ expectations. The
customers want a quick service and feedback system. The digital
innovations have enabled the business organizations to respond in
no time. The digital implementation may seem to be an expensive
deal in the first instance but surely it has the power to improve
your ROI in the long term.

Limitations of Digital Innovations

1. Data Security: The digital innovation means that a huge amount of
data can be produced, stored and transmitted. This means that the
personal information of an individual is also stored and shared on
a network. When an information is shared using a network, one
can lose his/her control over the data. These days many businesses
are illegally using the personal data of the users to expand their
market reach.
2. Social Disconnect: It has been observed that the digital innovations
have made people their slaves. People interact with other using the

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digital devices rather than meeting them physically. The digital Notes
technologies have made people more alone and isolated. Studies
found that the decrease in real life communication has led to
depression and mental illness.
3. Digital Manipulation: When everything is available online, there are
greater chances of data manipulation. The videos and audios can be
morphed easily. There are many tools like Photoshop available which
can easily change the reality. Such issues are going to exaggerate
with advancements in the technology.
4. Anonymity and Fake Personas: The advancements in the digital
technologies give a high scope to the people to hide their reality.
They can make fake accounts and mislead other people on the
network. The fake accounts have also increased the level of crime.
IN-TEXT QUESTIONS
11. A stable __________ can help any business and economy grow.
12. Which of the following is not a role of the government in the
government business interface?
(a) Government as the strategist.
(b) Government as the Resource manager
(c) Government as the funding source
(d) All of the above
13. The __________ in the business means doing the business
activities without hampering the environment, society and the
citizens at large.
14. ESG stands for:
(a) Economy, Social and Government
(b) Environmental, Social and Governance
(c) Enterprises, Society and Government
(d) Entrepreneurship, Society and Governance
15. __________ means the implementation of technologically advanced
tools to the business problems in order to improvise the
organizational practices.

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Notes
10.10 Summary
The chapter talks about learning organizations and why it is beneficial
for the organizations to introduce such a concept in order to grow in the
future. The key features of the learning organizations have been discussed
in the chapter. The lesson also deals with the recent developments in the
area of Business organization and management. How the E-commerce
activities of a business can be outsourced and what are the benefits at-
tached to the same. The chapter throws light on the role of digitalization
and technological innovations in the business organizations. Towards the
end, the chapter discusses the developments in the entrepreneurship and
deals with the Self-help groups and the Angel investors.

10.11 Answers to In-Text Questions

1. Learning Organization
2. Xerox
3. Others
4. False
5. False
6. Franchisor and Franchisee
7. (d) None of the Above
8. Outsourcing
9. (d) Better Time management
10. Non-core
11. Government
12. (c) Government as the funding source
13. Sustainability
14. (b) Environmental, Social and Governance
15. Digital and technological innovations

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Notes
10.12 Self-Assessment Questions
1. What are Learning Organizations?
2. Explain the key features of the learning organizations with the help
of a case study.
3. How the In-house e-commerce solutions can help the company to
save on costs.
4. Distinguish between In-House and Outsourcing.
5. How can the Digitalization and Technological innovations help the
businesses to gain competitive advantage?

10.13 References
‹ Argyris, C. (1977). Double loop learning in organizations. Harvard
Business Review, 55(5), 115-125.
‹ Darwin, C. (2017). Building a learning organization. Knowledge
Solutions, 57.
‹ Fiol, C. M., & Lyles, M. A. (1985). Organizational learning. Academy
of Management Review, 10(4), 803-813.
‹ Huber, G. P. (1991). Organizational learning: The contributing
processes and the literatures. Organization science, 2(1), 88-115.
‹ Levitt, B., & March, J. G. (1988). Organizational learning. Annual
review of sociology, 319-340.
‹ Stata, R. (1989). Organizational learning - the key to management
innovation. MIT Sloan Management Review, 30(3), 63.
‹ WHAT DOES “SUSTAINABILITY” MEAN IN BUSINESS? https://
[Link]/blog/post/what-is-sustainability-in-business

10.14 Suggested Readings

‹ Peter M. Senge, The Fifth Discipline (New York: Doubleday, 1990),
p. 1.
‹ Basu, C. (2017). Business Organisation and Management. McGraw
Hill Education.

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 BUSINESS ORGANIZATION

Notes ‹ Chhabra, T. N. (2020). Business Organisation and Management.

Sun India Publications, New Delhi.
‹ Drucker, P. F. (1954). The Practice of Management. New York:
Harper & Row.
‹ Kaul, V. K. (2012). Business Organisation Management. Pearson
Education.
‹ Koontz, H., & Weihrich, H. (2012). Essentials of Management: An
International and Leadership Perspective. Paperback.
‹ Laasch, O. (2022), Principles of Management, 2e, Sage Textbook.
‹ Singh, B. P., & Singh, A. K. (2002). Essentials of Management.
New Delhi. Excel Books Pvt. Ltd.

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 Glossary

Angel Investors: They are the investors having a high level of net worth and interesting
in providing funds to the new entrepreneurs.
Business Environment: Business environment refers to sum total of all the factors that
directly or indirectly affect the operations and profitability of a business enterprise.
Business Incubator: It is a well-established network of varied facilities providing funding
services to start-ups to bear risk and authenticate the business proposition.
Enterprise: An Enterprise can be explained as a business organization which operates to
provide the public with the goods and services.
Entrepreneur: An entrepreneur is a person who undertakes risk to start ventures and
pursue opportunities with discretion and expertise.
Entrepreneurship: Entrepreneurship can be defined as the process of developing, orga-
nizing and running a business activity with the motive of earning the profits.
Franchising: Franchising refers to an arrangement between the two parties. On party is
known as the franchisor and the other is known as the franchisee. The franchisor allows
the franchisee to use its name and technology for the marketing and selling purposes.
Globalization: It allows small businesses to compete worldwide as they are able to sell
their products and services on the global platform.
Glocalization: It is a combination of globalizsation and localization. According to this
approach, a product or a service is customized according to the local tastes and preferences.
Learning Organization: A learning organization can be defined an organization capable
of making improvements on the basis of past performance and the results.
Macro Environment: It includes all the factors which do affect any individual organiza-
tion but affect all the business organizations of all industries.
Microenvironment: It consists of all the factors that are directly related to the business
organization.
Self Help Groups (SHG): It consists of poor people who suffer from the similar problems.
They usually for a group so that they can solve their problem by helping each member
of the group.

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Notes Sustainability: The sustainability in the business means doing the business
activities without hampering the environment, society and the citizens at
large.
SWOT: It is a technique of environment analysis acronym for Strength,
Weaknesses Opportunities and Threats.
Workforce Diversity: It means recruiting, training, understanding, ac-
cepting, and valuing differences pleasing people.

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