Nature and Scope of business

Old Concept of Business:

In the old days the business was conceived merely in terms of busi­ness. The business of business is business. In those days the sole and exclusive objective of busi­ness was maximization of profit at any cost. Business began merely as an institution for the pur­pose of making money.

So long as a man made money and kept himself out of jail he was considered successful. He felt no particular obligation and acknowledged no responsibility to the community. As he was the owner of the business he thought he had the perfect right to do with it what he pleased.

New Concept of Business:

The modern busi­ness enterprise is a social and economic institu­tion. It does not live in a vacuum. Business by it­self is not an end but a means to achieve an end i.e., public welfare. Urwick has rightly pointed out that profit can no longer be the main objective of a business than eating is the main objective of living.

According to Peter Drucker the objective of business is to create a customer.

The first business of every business is to se­cure customers. The customer is the master and to serve him well is the only purpose of business. Business cannot survive without customers. Mod­ern business aims at profit through service.

The term Business Organization is a composite of two terms “Business” and “Organization“. In order to understand the term it is relevant to deeply look into the meaning and the components of the terms business and organization. Clear understanding of these two terms will enable us to grasp the economic basis of modern social organization.

The word business simply means “The state of being busy“. It confines its study only to those human activities in relation to exchange of goods and services for money.

The purpose of exchange of goods and services is to satisfy human wants. A number of authors and authorities have attempted to define the term business in so many ways. However, all definitions focus their attention on one particular aspect i.e., “satisfaction of human wants“.

Of the above definitions, the comprehensive definition of L.B. Dicksee is given below:

“Business refers to a form of activity pursued primarily with the object of earning profits for the benefit of those on whose behalf the activity is conducted. The term is used to cover the whole complex field of commerce and industry — the basic industries and the net work of ancillary services, distribution, banking, insurance, transport and so on which serve and interpenetrate the world of business as a whole“.

Characteristics of Business:

Production or Acquisition of Goods:

The business of business is to provide goods and serv­ices (intangible goods) at a price. These goods must be either produced or procured so that they can be sold and supplied at a price.

Dealings in Goods and Services:

Business means dealing in goods and services. Goods may be either consumer goods such as food, clothing, watches etc. or may be producers’ goods such as machinery which is used not for direct consump­tion but for production.

Recurrence of Transactions:

Regularly and recurring nature of buying and selling is a charac­teristic of business. A single buying and selling transaction does not constitute business. If a per­son sells his car and makes a profit, it does not amount to business. But if he keeps a stock of cars and conducts a series of such deals, it will be his business.

Profit Motive:

Profit motive is an impor­tant characteristic of business. Business is an activ­ity by which a man makes his living or earns profit. Profit is the biggest motivation for continuing busi­ness. Profit is essential for survival and develop­ment. If a person could not earn profit in a particu­lar business, he will turn to another business. This is true even of Govt. business. Profit is a reward for the efficiency of the entrepreneur.

Abot remarked, Business without profit is not a business any more than a pickle in a candy. Peter Drucker said, busi­ness cannot behave like anything else, it can only behave like business, that it must apply economic rationality to whatever it is doing and this is the right way for it to behave.

Elements of Risk:

Risk means the possibil­ity of loss. Economic activity is related with future and future is always uncertain and full of risks. Since business activity involves risks, it is often called an adventure. It is through the assumption of risks that business earns profit.

Scope of Business:

Easiest way to define the scope of business is to say, business is what businessmen do. Business includes trade, commerce and industry. Business has two aspects economic and functional. Production, distribution and exchange of goods for the purpose of earning money come within the scope of business.

Production is the economic aspect of business. Production means the creation of utility. Utility means the power to satisfy a human want. Any commodity or service which can satisfy a human want is said to have utility.

There are five different types of utility:

a. Form:

Utility can be created by changing the form of matter. Mud has usually no utility, but if a pot is made of mud, it acquires utility.

b. Place:

Utility can be created by transferring matter from one place where it is less useful to another place where it is more useful. Coal at the bot­tom of earth is of no use but when it is brought to a factory it becomes more useful.

c. Time:

Utility can be created by holding matter over to a time when it would be more use­ful. Clothing is sold at a higher price during the puja season than in other times of the year.

d. Nature:

Men obtain many useful goods from nature, e.g., air, sunlight etc. They yield satisfac­tion to men. Such goods are said to have natural utility.

e. Service:

Utility can be created by perform­ing a service. Personal services that of a doctor, or teacher can satisfy human needs.

Business is also concerned with three impor­tant economic issues:

i. What goods are to be produced?

What goods are to be produced and in what quantities arise di­rectly because of the scarcity of resources? If re­sources were unlimited, the problem of what goods are to be produced would not have arisen because in that case we would have been able to produce all goods we wanted and in the desired quantities. Since resources are scarce relative to human wants, a business firm has to choose among various goods.

ii. How are the different goods produced?

There are various alternative methods of produc­tion and a firm has to choose among them. For ex­ample, cloth can be produced either with power-looms or with handlooms. The business firm has to decide which particular method has to be adopted.

iii. Are all available resources being fully and efficiently utilised?

Resources being scarce a firm will try to use all the available resources in the op­timal manner with a view to maximizing profit. Distribution and exchange are the functional aspects of business. When goods have been produced and ready, the next task is its distribution, to bring it to the mar­ket and the consumer.

The businessman has to en­sure that the product reaches its destination in good condition, in the desired quantity, at the right time, involving the appropriate cost.

Exchange takes place in market. Formerly, commodities were produced for home consump­tion, but now production is mainly for sale and ex­port. Under the barter system surpluses of produce were interchanged between the parties concerned.

It was only after the introduction of money that markets came to be organised for the sale and pur­chase of commodities. Agricultural marketing was of little significance under subsistence farming. The commercialisation of agriculture gave rise to mar­keting and the development of transport and com­munications contributed to its growth.

Scope of business includes following three as­pects of business:

Business is an Economic Activity:

An eco­nomic activity involves the task of adjusting means to the ends or ends to the means. An economic ac­tivity may assume the form of production, con­sumption, distribution and exchange. Each busi­ness firm has a target to achieve and for that pur­pose it has some resources at its disposal.

Some­times the target has to be matched with given re­sources and sometimes resources have to be matched with the given target. Either way, the func­tion of the business firm is to achieve optimum re­sult of economic activities.

Business Firm is an Economic Unit:

A busi­ness firm is basically a transformation unit, it trans­forms input into output. The objective of this activ­ity is to earn maximum profit in the long run. It is a value added process the value of output in ex­cess of the value of input.

Business Decision making is the Most Im­portant Aspect of Business Firm:

Decision making involves making a choice from a set of alternative courses of action. Rational choice is the root of all business problems. The question of choice arises because resources are scarce. When input is the con­straining factor, business firm’s decision variable is the output and when output is the constraining factor firm’s decision variable is the input.

The scope of business will be wider if we look at it from the systems approach.

A business organisation in an open system as it influences and is also influenced by its environment. It receives inputs from the society in the form of raw materi­als, labour, capital and information. It throws out­put into the society in the form of goods and serv­ices.

Broadly speaking, business organisation as a system has five subsystems:

(a) Finance system to look after finance function,

(b) Production system to look after production function,

(c) Marketing system to look after marketing function,

(d) Per­sonnel system to look after the development and utilisation of human resources, and

(e) Research and development system for innovations.

Each func­tional area of business may be considered as a sub­system of the operating enterprise.