Introduction to Business PDF (2024)

Sultanate of Oman Ministry of Higher Education Research and Innovation (MOHERI) General Directorate of Vocational Training Introduction to Business Course Code: BBSSM1104 Text Book for Students (Septmber2024) V O...

Sultanate of Oman Ministry of Higher Education Research and Innovation (MOHERI) General Directorate of Vocational Training Introduction to Business Course Code: BBSSM1104 Text Book for Students (Septmber2024) V O C A T I O N A L D I P L O M A P R O G R A M Page | 1 Introduction to business Table of content Chapter 1: Nature of Business 1. Definition of Business. 2. Features of Business. 3. Importance of Business. 4. Business Functions. 5. Components of business Chapter 2: Business Activities 1. Industry 2. Commerce 3. International business activities Chapter 3: Types of Business 1. Legal forms of Business ownership. 2. Sole proprietorship. 3. Partnership. 4. Cooperative. 5. Limited liabilities Company. Chapter 4: Business Organization 1. Definition of Business organization. 2. Characteristics of organization. 3. Organization chart. 4. Functions of Business organization. Chapter 5: Business Environment 1. Internal Environmental Factors: 2. External Environmental Factors: Chapter6: Business Strategies 1. The Concept of Strategy 2. Different types of Strategy Page | 2  Chapter 1: Nature of Business We all are to understand that human life is built around work. Whether one likes or dislikes, work is an essential part of life. We know from our experience as also form others around us, that all activities of man fall into two categories. In the first category come all those activities, which are inspired, by love, sympathy, humanity and similar sentiments. For example, a house wife is cooking for her family. The second category of human activities is related to the production and exchange of wealth. In economics, we call these ‘economic activities’. All of them involve working to earn a livelihood, they are called occupations. Objectives: After learning this Chapter, student should be able to - Understand the various fundamental concepts used on business. - Recognize the features, importance, scope and functions of business. - Discuss the various activities of business. Page | 3 Introduction Human Occupations constitute ‘a lawyer going to the court. A teacher to the school or college, the government servant to his office, an employee to his work place, a factory worker to his factory and a factory owner to his factory office to earn a living by producing wealth in different forms. Human occupations can be broadly classified into three ways. They are: - Profession: Profession means an occupation or an economic activity. It involves rendering of personal services of a special and expert nature for example, a lawyer offering his services by charging fees. A doctor treating the patient by charging fees. - Employment: It means an economic activity in this a person has to work under an agreement or rules of service. The person has to perform such work, as directed to him by the employer. Remuneration paid to such work is known as ‘Wages and salaries’. For example: A chartered accountant in appointed in a Bank as’ Accountant’. A doctor is appointed as ‘Medical Officer’ by government. - Business: Business is an economic activity. It is an institution organized and operated by individuals to produce goods and services, to sell these goods and services in a market place, to set reward for the goods and services sold in the form of a price. Business is a very common word or concept. It is common in the sense, that every one of us is aware of a ‘business is, what a business does’ because, business is the fountain-head of modern life. If we go through the Page | 4 1. Definition of Business (On the web): We can find different meaning of business. - It is a commercial or industrial enterprise & the people who constitute it. - It is a commercial enterprise: the activity of providing goods and services involving financial and commercial and industrial aspects. - It is an occupation: the principal activity in your life that you do to earn money; - It is the volume of commercial activity - According to Prof. Y.K.Bhushan, “Business is the regular production or purchase and sale of goods undertaken with the object of earning profits and acquiring wealth through the satisfaction of human wants. 2. Features of Business:  Sale and Transfer of ownership: All business activities are concerned with the sale, transfer of exchange of goods and services for value, production use or free of charge is our side the scope of business.  Dealings in goods and services: Business consists of dealings in goods and services. The goods produced or acquired for business purpose may be consumer goods, like cloth, shoes, etc, or producer’s goods like tools and machinery.  An economic Institution: Business is an economic institution. Economic means a desire to earn a return.  A Social Institution: In the changing socio-economic environment, the concept of corporate social responsibility has become prominent for business existence. Hence, a social institution.  Profit Motive: The profit motive is an important feature of business profit is essential for the very survival of business organizations. Business goals like growth/expansion, social welfare, etc.; cannot be achieved without the surplus, which is otherwise known as profit. Page | 5  Regularity or Continuity of dealings: This is a very important feature of business. To call an activity as business activity, there must be continuity or regularity of dealings or transactions. For example: If you sell your old bike and earns some profit, if cannot be called business. Because it stops that.  Risk and uncertainty: Business means risk. ‘Risk’ and ‘return’ are inter- related. Higher, the risk, the greater the return. Risk due to fire, theft, etc can be insure. They are insurable risks. But, market risks like changes in prices, changes in fashions, policies, cannot be insured.  Innovative creative and Dynamic: Business requires ‘redefining’ on a continuous basis. Because, it is influenced by external factors like, social, economic, technological, regulatory and environmental, it has to be creative, innovative and dynamic.  Global Outlook: today’s modern business needs an entirely new outlook. This, ‘think global and act local’. This should be the mantra for today’s business. Modern business means a global focused unit. Their quality, approach and the delivery must be on the global standard. Page | 6 3. Importance of Business The importance of Business can be known through how to what extent much the business it plays its role in the economic and social development of a country/nation. This can be known through its contribution too its own growth and to its stakeholders. The stakeholders are those people, who influence and who are influenced by the organization, by way of their “exchange of services” to the organization. Therefore the role of business can be studied under the following heads: a) Role of Business to itself. b) Role of Business to other stakeholders - Role of Business to shareholders - Role of Business to workers - Role of Business to customers - Role of Business to the Nation - Role of Business to the Society a. Role of Business to self: The very fundamental business for the business is to do business and continue in business. They cannot be ignored in other words; it should look into various aspects.  Achievement of business objectives  Optimum utilization of its resources  Business competitive strength  Going for growth, expansion or diversification  Innovation & invention and  Building up ‘image and goodwill’ Page | 7 b. Role of Business to its stakeholders: Stakeholders are the main participants and the constituents of the business. Let us begin with this role 1. Role of Business to its shareholders: Shareholders are the real primary owners of the business. They are the risk bearers, for which they act the dividend. The role of business to its shareholders can be in the way mentioned below:  Fair and just, return on their investment in the form of dividend.  Wealth maximization(capital appreciation) in the form of rise in the market have of share;  Transparency that is, voluntary disclosure of the issues affecting the financial interests of the shareholders.  Prelisting the rights of the investors  Exhibiting growth, innovation and diversification a business operations.  Facilitating the speedy and efficient transfer and transmission of shares. 2. Role of Business to its employees: Employees constitute human resource. Human resource is the most important of all resources. Moreover, it is unique by its existence. Employees are to be motivated. To motivate the employees, the business is to deliver the following:  Payment of fair and regular wages & salaries.  Providing healthy working conditions.  Giving all opportunity to employees through participative management practices.  Development of employees through constant training process.  Aiming at increasing the job satisfaction levels.  Career counseling and development  Succession planning. Page | 8 3. Role of business to its customers: Customer is the focus point of all business activities. All business related decisions center on him. The Business is supposed to perform the following activities to its customers.  Innovation of new products.  Supply of products at low & stable prices  Increasing the quality of the existing products.  Protesting the customer rights & their welfare;  Avoiding the misleading & false advertisements  Provision of speedy after sale services. 4. Role of Business to the Nation: Nation or state is the biggest organization in the society. The state is the regulating authority of the business. It helps the business develop with the pro-developed policies. In fact, the business development mostly depends upon the governments support. Therefore, the business has got a specific role to play to the ration, in the following way:  Payment of taxes and duties on time;  Contribution to research and development;  Participating in Nation-building activities along with government;  Extending supporting to the government in achieving the balanced regional development.  Generating employment opportunities to help reduce the burden of unemployment.  Promotion of small and medium enterprises in the country.  Rehabilitation of displaced employees by business organization. Page | 9 5. Role of business to the society: In this contest, the words of ‘peter F. Drucker cannot be ignored. According to him, “a business enterprise should be managed as to make public good, which becomes automatically the private good to the enterprise”. Business to survive should necessarily play a role towards society. It is in the following way:  Undertaking the social responsibility activities to increase the welfare of the society.  Guarding the ecological balance by(way of) preventing the environmental pollution.  Avoiding unfair trade practices like artificial scarcity and adulteration;  Judicious use of natural resources with a outlook to the future generation  Allowing the free and fair competitive practices in the market Page | 10 4. Business functions Mostly, the total business is divided into different functions or activities. They are production, marketing purchase, finance, personnel, research and development function, legal and public relations. a. Production function: for a manufacturing organization, production function is the fundamental and the beginning one production refers to the finished products. The production function is carried on by a department called production department. The department is interested with the following activities:  Planning and control of production activities  Maintenance of plant and machinery required for production activity;  Procurement of raw materials and store-keeping;  Quality control systems and  Inventory management b. Marketing function: Marketing is the basic and the key function in any organization, marketing means distribution of goods & services produced by the production department with the help of middlemen and supply chain network. The marketing department is entrusted with the following activities:  Producer pricing  Producer promotion  Brand positioning  Undertaking market research  Finding new markets Page | 11 c. Purchase function: Generally ‘purchase function’ is part of production function. Because of its complexity and importance, purchase function is given a separate entity and it does the following activities.  Receiving the purchase requisitions from the departments in the business  Locating the sources of supply of raw materials  Finalization of purchase orders  Maintaining proper flow of inventories  Ensuring the right material, at right quantity at right time. d. Finance function: Finance is the life-blood of an organization. Finance function refers to procurement of finance or funds and careful application of funds. The finance department is expected to carry on the following activities.  Planning the total capital requirement  Exploring the various sources of finance  Arranging fixed and looking capital  Careful application of funds  Maintaining sufficient cash flows e. Human Resource function: Human resources is the very need of the business activity. It refers to the recruitment of right person for the right job at the right time. The human resource department is concerned with the following activities.  Human resource planning and development  Recruitment and selection, placement and induction.  Talent development  Career development  Undertaking motivations programs. Page | 12 f. Research and development function: R & D is an important activity in the modern competitive business world. Big organizations maintain separate departments for up gradation of technology. In the present scenario, survival of the business depends upon how storing it is able to upgrade its technological development. g. Legal function: Compliance to legal issues is a must for every business. More so, the modern business organization don require a separate existence be given to this activity. Therefore, a separate legal department is maintained to look after this function. h. Public Relations function: Maintaining cordial relations with the stakeholders is a must for every business organization. Stakeholders include shareholders, customers, employees, suppliers, government and society today, the business organizations are to maintain good relations by organizing publicity campaigns to enhance the image and goodwill of the business in the society. Page | 13  Chapter 2: Business Activities Scope of business is also called as components of business. Business activities are mainly divided into five categories, namely - Activities related to production of goods. - Activities related to the rendering of service - Activities related to distribution of goods - Activities releasing distribution assistance - Activities which render financial assessment. Objectives: After learning this Chapter, student should be able to - Recognize the various types of business activities. - Understand industry with its primary and secondary activities. - Understand commerce with its various classification. Page | 14 The above give activities are headed under two main divisions, they are Industry and Commerce. 1. Industry Industry is one of the parts of business activity, which converts/charges the raw materials into finished goals for the utility of humans. Classification of Industry based on Activities: Industry Primary Secondary Industry Industry Extractive Genetic Construction Manufacturing Service Industry Industry Industry Industry Industry a. Primary Industry: Primary industries are engaged in the production or extraction (mining, pulling out, and taking out) of raw materials which are used in secondary industry. Primary Industry can be divided into two parts: - Extractive Industry: An industry that extracts hidden resources below or beneath the surface of the earth is called as extractive industry. (Mining, quarrying, dredging, oil and gas extraction) - Genetic Industry: It involves activities related in reproducing and multiplying certain species of plants and animals for the production of bio-products like skin, wool, medicinal herbs, etc. (fish culture, cattle breeding, poultry farms, and plant nurseries) Page | 15 b. Secondary Industry: These industries use raw materials to make useful goods. Raw materials for these industries are obtained from primary industry. Secondary industry can be divided into three parts. - Manufacturing Industry: This industry is concerned with converting the raw materials into finished goods or semi-finished goods. (Oil refinery- where crude oil is refined; cotton-convert to textile/cloth) - Construction Industry: This industry is engaged in the construction of buildings, bridges, roads, etc. It utilizes the products of manufacturing industries such as cement, bricks, steel, etc. - Service Industry: This includes those which are engaged in providing services of professionals such as teachers, doctors, lawyers, etc. Page | 16 2. Commerce: Commerce is a word which is most commonly used for all types of trade, like wholesale, retail, import, export etc., and also for different types of services which supports to conduct trade. a. Trade: One of the main aspects of commerce is trade, which deals with exchange of goods & services either barter system or money exchange system. Trade is of two types Internal and External and again Internal trade is of two minds wholesale trade and rational trade, further External trade is of two types namely, Export & Import. This is well shown in the below chart. Internal Trade: Exchange of goods and services between two regions/states of the some ration/country is known as internal trade. It is also called as domestic trading or home trading. - Wholesale Trade: The term of wholesale indicates that something is sold on whole/lump sum in lots. Wholesalers buy goods from the producers/manufacturers in lots and sell them to the retailers. - Retail Trade: Retail means trading of goods in small quantities. The retailers buy from wholesalers and sell them to the end users who are the customers/consumes, which is mean as Retail trading. Page | 17 External Trade: The trading activity between two different countries with different cultures and currencies is known as External trade. It is also as foreign trade or International trade. External trade is classified into Export & Import. - Export: The excess of goods if one country are sold in other countries or foreign territories which is nothing but export trade. - Import: Imports means purchasing goods from a foreign territory or outside the national of a country it opposite to exports, it is always preferable to reduce imports and increase exports for better economy of the country. b. Support to trade: These service oriented organizations which make the smooth flow of goods to each from the producers to the consumers or the end users are known as trade supporting industries or organizations, namely - Banking: Banks facilitate business by providing short term, medium term and long term learns thereby solving funds/finance/investment problem. - Insurance: Any business activity will be operating with a great degree of risk and uncertainty. Without risk taking there exists no business activity. Thus insurance and consumption. - Godowns: Also known as storage houses, where the raw materials and finished goods are stored between the time of production and consumption. - Transport: Different transport models like, road transport, water transport, air cargo and Railway transport, will facilitate the finished goods to reach the enclose located at different places. - Advertising: Advertising is creating awareness and providing information about the goods and services, their features, availability, price, utility etc to the consumers to the customers. Page | 18 3. International Business Activity: a. Importing: Purchasing of goods and services from another country and bringing them into one’s own country. Ex: Manpower, Clothes, Bags, Mobile phone, Laptop, etc. b. Exporting: Selling or shipping of goods or services to another country. Ex: Oil, Dates, etc. c. Licensing: Licensing is an arrangement whereby a firm (the licensor) grants a foreign firm (the licensee) the right to use intangible property such as a patent, logo, formula, process, etc. The licensee pays a royalty or percent of the profits to the licensor. Rather than trying to export a product directly, incurring shipping costs and delays, among other barriers, a company can license their methods of doing business to a foreign organization. For example, rather than blend and bottle a soft drink here and then ship overseas, a company may license a foreign bottler who produces the soft drink locally using the licensed formula like Pepsi. d. Franchising: Franchising is a form of licensing in which the parent company (franchisor) offers some combination of trademark, equipment, materials, managerial guidelines, consulting advice, and cooperative advertising to the investor (franchisee) for a fee and/or percentage of revenues (royalties). Ex: McDonalds, Pizza Hut, Starbucks, KFC, etc. e. Joint Venture: A joint venture is an organization created by two or more companies or a company and a foreign government in which each party contributes assets, owns the entity to some degree, and shares risk. For example, Ford Motor Company (U.S.) entered into a joint venture with the Mazda Company (Japan) Page | 19  Summary To earn the livelihood, it is a must for every individual to work and earn money, the by employment, business or profession. To facilitate employment and profession, business plays a key role and recognized as the fountain hood of modern life. Having different and diversified feature, gaining importance for itself and to the stakeholders. With wide functional areas of business, it was broadly classified under eight headings, namely production, marketing, human resource, finance & legal etc. With an extended scope of business, the activities are headed under two devisers i.e. industry and commerce. Further industries are classified into five types as by the nature of their activity like manufacturing, service, extractive etc. commerce deals with trade and oils to trade, in which there are two types Internal and External, consisting of wholesale, retail and export, import trades respectively which are supported by services like banking, insurance, warehousing, transport, advertising etc. on studying these three concepts of Trade, commerce & industry, are thing is quite clear that cache these activities are interrelated and inter dependent on each other. Thus business plays a vital role in all activity areas and it is an ever changing and dynamic process, in which every individual is contributing and going out of the business activity. Page | 20  Chapter 3: Types of Business (legal forms) Any business activity basically have two individuals involved, one is the producer and other is the purchase, who represent a wise combination of live resources, namely man, money, material, machinery and management. So, business organizations can be categorized into two categories i.e., one which deals with manufacturing/production of goods and services and second deals with the distribution of such goals and services produced. These activities can be run by one person or group of persons, may be on formal or informal basis. With the increased population and demand for more goods and services, the growth and development of business organizations have also grown from one men’s business i.e., sale trading to organizations group ownership i.e., the partnership business and in recent times company business organizations have teak shape on a large scale with huge business operations Objectives: After learning this Chapter, student should be able to - Recognize the various forms of business based on legal forms. - Understand Sole proprietorship with its advantages and disadvantages - Recognize Partnership with its advantages and disadvantages. - Discuss Corporation with its advantages and disadvantages. - Outline the various ways business through acquisition or mergers. Page | 21 All forms of legal ownership should be discussed with a competent attorney before any decision regarding the form to select in made. The attorney will need to know as much about the business and its owner(s) as possible, including the personal financial position(s) of the owner(s), so that sound recommendation can be made. Business can be classified in four categories: - Sole proprietorship: The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. - Partnership: A partnership is a legal association of two or more people as co-owners of a business for a profit. You and your partners would share profit and losses of business and perhaps the management responsibilities. - Cooperative: A corporation is a legal entity, distinct from any individual persons, with the power to own property and conduct business. Shares are sold to numerous investors, who would get a cut of the profits in exchange for their money. - Limited Liabilities Company (LLC): The LLC is an organizational structure which is considered a hybrid between two of the models (corporation and partnership). The structure combines the limited liability protection of a corporation and the management and taxation flexibility of a partnership. Page | 22  1. Sole Proprietorship A sole proprietorship can operate under the name of its owner or it can do business under a fictitious name, such as “Al-Sheefa Saloon”. The fictitious name is simply a trade name--it does not create a legal entity separate from the sole proprietor owner. a. Advantages of Sole proprietorship - Control: Sole traders maintain full control of running their business. - Profit Retention: Sole traders retain all the profits of their business. - Private Data: Information about sole traders is kept private. - Specialist: Sole traders can offer a more personal service with local roots and ties. - Quick Decision: Sole traders can make decisions quickly and act on them swiftly, providing for the needs of their customers. b. Disadvantages of Sole Proprietorship - Finance: Sole traders often find it difficult to raise finance to fund their business. - Liability: Sole traders are subject to unlimited liability. In the worst case, this may mean a person risks their home, personal savings. - Reverse Economies of Scale: Sole traders will be unable to afford to buy in bulk. This might mean that they have to charge higher prices for their products or services in order to cover the costs. - Decision Making Risk: All decisions are taken by the sole trader. In case of wrong decision sole trader has to face consequences. Page | 23  2. Partnerships Partnerships are of two basic types – General Partnership & Limited Partnership - In a general partnership, all partners are considered equal by law, and all are liable for the business debts. If business goes bankrupt, all the partners have to dig in their own pockets to satisfy creditors. - The LLP structure is similar to a general partnership, as each owner has equal power within the company. Unlike a general partnership, a LLP provides each partner with liability protection from the negligent actions of the other partners. Each partner is responsible for his own debts, liabilities and obligations arising from his misconduct or that of his staff or employees. LLPs are typically established by professionals like doctors, lawyers and accountants. To form a LLP, the company must have at least two partners. a. Advantages of Partnerships - Capital: All the partners fund the business with start-up capital. This means that the more partners there are, the more money they can put into the business. - Flexibility: Since in a partnership company only the partners have to decide in the way the business will run therefore it is generally easier to form, manage and run as long as all the partners can agree. - Shared Responsibility: Partners can share the responsibility of the running of the business according to their skills and abilities. - Decision Making: Partners share the decision making and can help each other out when they need to by providing more business ideas. Page | 24 b. Disadvantages of Partnerships - Disagreements: If all partners don’t agree on one solution in that case it can lead to disagreements which might harm the business, - Agreement: Sometime taking opinion of everyone can be time consuming which can delay decision making can be delayed. - Liability: General Partnerships are subject to unlimited liability, which means that each of the partners shares the liability and financial risks of the business. - Profit Sharing: Partners share the profits equally. This can lead to inconsistency where one or more partners aren’t putting a fair share of effort into the running or management of the business, but still reaping the rewards. Page | 25  3. Corporations A corporation is a legal entity, distinct from any individual persons, with the power to own property and conduct business. Shares are sold to numerous investors, who would get a cut of the profits in exchange for their money. They can vote on certain issues that might affect the value of their investment, but they were not involved in managing day-to-day operations. a. Advantages of Corporation - Limited Liability: Investors’ liability is limited to personal investment (through stock ownership) in the corporation. - Continuity: Because it has legal life independent of founders and owners a corporation can, continue forever. - Greater Financing Options: Corporations have advantage of raising money. By selling stock, they can expand the number of investors and the amount of available funds. - Liquidity: It means investors can easily convert their stock into cash by selling it on the open market. b. Disadvantages of Corporation - Publish Information: Corporations are required by the government to publish information about their finances and operation. Disclosing financial information increases the company vulnerability to competitors and those who want to take control of the company against the wishes of the existing management. - Start-Up Cost: The administrative time and start up cost can be burdensome. Top executive must devote considerable time and energy to meet with shareholders, financial analyst and the news media. Page | 26  4. Limited Liability Company The owners of a LLC are called members. A company can be run by one member or an unlimited number of members, who may be individuals, corporations or foreign entities. The Limited Liability Company is a Commercial Company with a fixed capital divided into equal shares. It consists of two or more natural or juristic persons whose liability is limited to the nominal value of the shares in the capital of the company. The stockholders, or owners, of a corporation are liable only for the amount corresponding to their investment. While stockholders may lose the money they have invested in the business, they cannot be forced to pay off company debts with additional money from their personal funds. LLC in Oman: - The number of shareholders of a limited liability company shall not exceed 40. The name of the Limited Liability Company shall, wherever it appears, be followed by the words: “Limited Liability Company”, or by abbreviation “LLC”. Their share capital may not be less than Omani Rial (OR) 20,000 when all partners are Omani and OR 150,000 if there is foreign participation. - Shareholders can sell or transfer the shares at some point during the life of the company. - The manager must acknowledge receipt of the notice and send a copy of the notice to each shareholder in the LLC. The manager must also notify the shareholders of their rights to purchase the shares according to the terms in the notice. - If the shareholders wish to purchase the shares, they must give notice to the manager of the LLC and deposit the full amount of the purchase price within 45 days of the receipt of the notice by the manager. Page | 27  5. Understanding Mergers, Acquisitions, and Alliances - Strategic Alliance: Strategic Alliance is a strategy in which two or more organizations collaborate on a project for mutual gain. - Nawras with Microsoft and I-mate - NBO with Commercial Bank of Qatar. - Joint Venture: Joint Venture is a strategic alliance in which the collaboration involves joint ownership of the new venture. The Oman-India Fertilizer Company (OMIFCO) in Oman is a joint venture between Oman Oil Company and Indian undertakings Iffco and Kribhco. Bharat-Oman Refinery Limited (BORL) in India is joint venture between Oman Oil Company and Bharat Petroleum Corporation Limited (BPCL). - Merger: A merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. For example if company A and Company B merge to and only company A or B exists afterwards. - Oman International Bank with HSBC - Bank Dhofar and Majan International Bank merged in 2003 to form Bank Dhofar - Consolidation: Consolidation is combination of two or more companies in which the old company ceases to exist and new enterprise is created. For example company A and Company B consolidate to form company C. - Acquisition: Acquisition is a form of business combination in which one company buy another company’s voting stock. - Google acquiring DoubleClick (an advertising company) - BP acquiring Amoco - Air France acquiring Alitalia Page | 28 Practice Questions:  What is Sole Proprietorship? Explain its advantages and disadvantages?  What is meant by Partnership? Discuss its advantages and disadvantages?  “A corporation is a legal entity, distinct from any individual persons, with the power to own property and conduct business”. Explain with its advantages and disadvantages? Page | 29  CASE STUDY Three friends Ali, Sultan and Abdullah wanted to start a business. They wanted to come out with a big business. Initially all the three gave RO 2000 each and together took a bank loan of RO 5000. All the three friends were very close to each other, so they started their business on a verbal understanding. After the first year of the operation, the company earned a profit of RO 2000. This is when there were misunderstandings, 0fights and quarrels between the partners on the profit sharing mode and percentages therein. During that year of operation, there were lot of confusions about the specific roles and responsibilities of each and every partner. It was here their common friend Suleiman brought the three friends together again. After 3 years of operation, they decided to expand their business, but were finding it difficult as they didn’t have adequate amount of capital. Even the banks turned down their loan requests. As they were determined to expand the business, they decided to sell shares of their business to the friends and relatives of the respective partners. They were still not clear as to how they would differentiate a shareholder from a director and business manager who would be responsible for running the show. Suleiman told them they need to make lot of adjustments primarily because they were changing from one form of business to another. 1. What was the type of business started by the three friends? ……………………………………………………………………………………………………………………………… ……………………………………………………………………………………….………………………….. 2. Why there were issues regarding profit sharing? ……………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………… ……………………………………………………….......................................................... Page | 30 3. What was the new type of business they moved into and why? ……………………………………………………………………………………………………………………………… ………………………………………………………………………………………………..………………….. 4. How could they have separated the shareholders from the company directors and managers? ……………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………….… 5. What are the advantages and disadvantages of the first form of business over the second one? Advantages Disadvantages Page | 31  Chapter 4: Business Organization Organizing is the function of management that involves developing an organizational structure and allocating human resources to ensure the accomplishment of objectives. The structure of the organization is the framework within which effort is coordinated. The structure is usually represented by an organization chart, which provides a graphic representation of the chain of command within an organization. Decisions made about the structure of an organization are generally referred to as organizational design decisions. Objectives: After learning this Chapter, student should be able to - Understand the basic concepts and functions of business organization. - Discuss the importance of each department. - Define management and its various levels. - Recognize the various functions of management. Page | 32  1. Definition According to Koontz and O'Donnell, "Organization involves the grouping of activities necessary to accomplish goals and plans, the assignment of these activities to appropriate departments and the provision of authority, delegation and co-ordination." Organization involves division of work among people whose efforts must be coordinated to achieve specific objectives and to implement pre-determined strategies. 2. Characteristics of Organizing From the study of the various definitions given by different management experts we get the following information about the characteristics or nature of organization,  Division of Work: Division of work is the basis of an organization. In other words, there can be no organization without division of work. Under division of work the entire work of business is divided into many departments.The work of every department is further sub-divided into sub works.  Coordination: Under organizing different persons are assigned different works but the aim of all these persons happens to be the some - the attainment of the objectives of the enterprise. Organization ensures that the work of all the persons depends on each other’s work even though it happens to be different. It is thus, clear that it is in the nature of an organization to establish coordination among different works, departments and posts in the enterprise.  Plurality of Persons: Organization is a group of many persons who assemble to fulfill a common purpose. A single individual cannot create an organization. Page | 33  Common Objectives: There are various parts of an organization with different functions to perform but all move in the direction of achieving a general objective.  Well-defined Authority and Responsibility: Under organization a chain is established between different posts right from the top to the bottom. Every individual working in the organization is given some authority for the efficient work performance and it is also decided simultaneously as to what will be the responsibility of that individual in case of unsatisfactory work performance.  Organization is a Structure of Relationship: Relationship between persons working on different posts in the organization is decided. In other words, it is decided as to who will be the superior and who will be the subordinate. Leaving the top level post and the lowest level post everybody is somebody's superior and somebody's subordinate. The person working on the top level post has no superior and the person working on the lowest level post has no subordinate.  Organization is a Machine of Management: Organization is considered to be a machine of management because the efficiency of all the functions depends on an effective organization. In the absence of organization no function can be performed in a planned manner. It is appropriate to call organization a machine of management from another point of view. It is that machine in which no part can afford tube ill-fitting or non-functional. In other words, if the division of work is not done properly or posts are not created correctly the whole system of management collapses.  Organization is a Universal Process: Organization is needed both in business and no business organizations. Not only this, organization will be needed where two or mom than two people work jointly. Therefore, organization has the quality of universality. Page | 34   Organization is a Dynamic Process: Organization is related to people and the knowledge and experience of the people undergo a change. The impact of this change affects the various functions of the organizations. Thus, organization is not a process that can be decided for all times to come but it undergoes changes according to the needs. The example in this case can be the creation or abolition of a new post according to the need. 3. Organization Chart: The diagram showing the organization structure explaining how the employees and tasks are grouped and authority flow is called Organization Chart. CEO Manager Manager (Production) (Marketing) Foreman Foreman Sales officer Sales Officer (Fabrication) (Assembly (A) (B) Sales Sales Workers Workers persons persons A formal organization chart of a business firm is given below. Here the structure of business firm is organized on the basis of various functions (divided into departments). Page | 35 4. Functions of Business Organization BOARD OF DIRECTORS CEO- Chief Executive Officer HRM Sales and Research Producti Custome Financ Admini and on / r Service e and stratio Marketin Develop Operatio Accoun n and g ment n ts IT Staff Human Resource Department: The human resource department is responsible for the functions of human resource management as follows: - Work analysis: job specification and job description - Plans the manpower requirements of the company - Recruiting, job posting, interviewing, testing and selection - Provides employees training and development services - Performance measures and discipline - Wage and salary administration and other benefits - Maintains the employees records Sales and Marketing: Marketing is a process of assessing and meeting the societies or customer’s needs and wants by creating, offering and exchanging products of value. The sales and marketing department has the following functions: - It deals with the company’s marketing mix. These are the 4 P’s: product, price, promotion and place - Provides information about the products for sale Page | 36  - Determines the Price of the product - Explore new markets and new products opportunities - Segmentation or Target Market Selection - Designs and develops advertising materials and campaigns - Provides customer services and deals with customer complaints The Research and Development: The Research and Development perform the following: - Designs and tests new products - Improves and updates existing products - Researches into new areas of interest - Analyzes ant tests competing products - Works with production department to develop models and construct the equipment to manufacture new products. - Helps to ensure that new products comply with legal requirements and safety laws. The Production and Operation: Production is the process of creating products (goods and services) in which organizational inputs (resources) are transformed into output. Production Process The production and operation do the following: - Produces or manufactures the different products of the company - Buys the necessary production facilities and equipment - Designs computer aided production or manufacturing - Ensures or controls quality of products - Monitors trends in production techniques Page | 37 Customer Service: Customer service is a series of activities designed to enhance the level of customer satisfaction – that is, the feeling that a product or service has met the customer expectation. Customer service is the provision of service to customer before, during and after a purchase. Following are the functions of this department: - Supervising the distribution of goods to the customers and ensures that the goods reach the customers in time and in good condition. - After sales services like installation, training, repairs, maintenance, etc. can be taken care. - Dealing with customer complaints. Accounting and Finance: The Accounting and Finance Department usually do the following: - Prepares the budgets or projected income statements - Raises funds from various sources - Keeps records of financial transactions and make financial reports namely Income Statement, Balance Sheet and Cash Flow Statements - Income Statement or Profit and Loss Statement shows how a business performed over a specific period and reveals the total sales or income and the total expenses in a period. - Cash Flow Statement shows the cash receipts and cash payments from the business, Oversees payment of wages and other expenses as well as cash control - Balance Sheet summarizes the state of a business at a specific point in time. Page | 38 Administration & IT: The administration & IT department is responsible with information and communication services of the business. It includes the office equipment, office systems and variety of office functions. - Provides information processing and documentation services - Photocopying and distribution services - Records and data storage - Prepares letters, memos, and mailing services - Develops an automated office or electronic office - Coordinates telecommunication services Page | 39  Chapter 5: Business Environment A business firm is an open system. It gets resources from the environment and supplies its goods and services to the environment. There are different levels of environmental forces. Some are close and internal forces whereas others are external forces. External forces may be related to national level, regional level or international level. These environmental forces provide opportunities or threats to the business community. Every business organization tries to grasp the available opportunities and face the threats that emerge from the business environment. Business organizations cannot change the external environment but they just react. They change their internal business components (internal environment) to grasp the external opportunities and face the external environmental threats. It is, therefore, very important to analyze business environment to survive and to get success for a business in its industry. It is, therefore, a vital role of managers to analyze business environment so that they could pursue effective business strategy. Objectives: After learning this Chapter, student should be able to  Define business environment.  The elements that make up an organization’s environments. Page | 40 A business firm gets human resources, capital, technology, information, energy, and raw materials from society. It follows government rules and regulations, social norms and cultural values, regional treaty and global alignment, economic rules and tax policies of the government. Thus, a business organization is a dynamic entity because it operates in a dynamic business environment. On the basis of the extent of intimacy with the firm, the environmental factors may be classified into different types namely internal and external. 1. Internal Environmental Factors: The internal environment is the environment that has a direct impact on the business. The internal factors are generally controllable because the company has control over these factors. It can alter or modify these factors. The internal environmental factors are resources, capabilities and culture. a. Resources: A good starting point to identify company resources is to look at tangible, intangible and human resources. Tangible resources are the easiest to identify and evaluate: financial resources and physical assets are identifies and valued in the firm’s financial statements. Intangible resources are largely invisible, but over time become more important to the firm than tangible assets because they can be a main source for a competitive advantage. Such intangible recourses include reputational assets (brands, image, etc.) and Page | 41  technological assets (proprietary technology and know-how). Human resources or human capital are the productive services human beings offer the firm in terms of their skills, knowledge, reasoning, and decision-making abilities. b. Capabilities: Resources are not productive on their own. The most productive tasks require that resources collaborate closely together within teams. The term organizational capabilities are used to refer to a firm’s capacity for undertaking a particular productive activity. Our interest is not in capabilities per se, but in capabilities relative to other firms. To identify the firm’s capabilities we will use the functional classification approach. A functional classification identifies organizational capabilities in relation to each of the principal functional areas. c. Culture: It is the specific collection of values and norms that are shared by people and groups in an organization and that helps in achieving the organizational goals. Page | 42 2. External Environment Factors: It refers to the environment that has an indirect influence on the business. The factors are uncontrollable by the business. The two types of external environment are micro environment and macro environment. a. Micro Environmental Factors: These are external factors close to the company that have a direct impact on the organizations process. These factors include: - Shareholders: Any person or company that owns at least one share (a percentage of ownership) in a company is known as shareholder. A shareholder may also be referred to as a "stockholder". As organization requires greater inward investment for growth they face increasing pressure to move from private ownership to public. However this movement unleashes the forces of shareholder pressure on the strategy of organizations. - Suppliers: An individual or an organization involved in the process of making a product or service available for use or consumption by a consumer or business user is known as supplier. Increase in raw material prices will have a knock on affect on the marketing mix strategy of an organization. Prices may be forced up as a result. A closer supplier relationship is one way of ensuring competitive and quality products for an organization. - Distributors: Entity that buys non-competing products or product-lines, warehouses them, and resells them to retailers or direct to the end users or customers is known as distributor. Most distributors provide strong manpower and cash support to the supplier or manufacturer's promotional efforts. They usually also provide a range of services (such as product information, estimates, technical support, after-sales services, credit) to Page | 43  their customers. Often getting products to the end customers can be a major issue for firms. The distributors used will determine the final price of the product and how it is presented to the end customer. When selling via retailers, for example, the retailer has control over where the products are displayed, how they are priced and how much they are promoted in-store. You can also gain a competitive advantage by using changing distribution channels. - Customers: A person, company, or other entity which buys goods and services produced by another person, company, or other entity is known as customer. Organizations survive on the basis of meeting the needs, wants and providing benefits for their customers. Failure to do so will result in a failed business strategy. - Competitors: A company in the same industry or a similar industry which offers a similar product or service is known as competitor. The presence of one or more competitors can reduce the prices of goods and services as the companies attempt to gain a larger market share. Competition also requires companies to become more efficient in order to reduce costs. Fast-food restaurants McDonald's and Burger King are competitors, as are Coca-Cola and Pepsi, and Wal-Mart and Target. - Media: Positive or adverse media attention on an organisations product or service can in some cases make or break an organization. Consumer programmes with a wider and more direct audience can also have a very powerful and positive impact, forcing organisations to change their tactics. Page | 44 b. Macro Environmental Factors: An organization's macro environment consists of nonspecific aspects in the organization's surroundings that have the potential to affect the organization's strategies. When compared to a firm's task environment, the impact of macro environmental variables is less direct and the organization has a more limited impact on these elements of the environment. The macro environment consists of forces that originate outside of an organization and generally cannot be altered by actions of the organization. In other words, a firm may be influenced by changes within this element of its environment, but cannot itself influence the environment. Macro environment includes political, economic, social and technological factors. A firm considers these as part of its environmental scanning to better understand the threats and opportunities created by the variables and how strategic plans need to be adjusted so the firm can obtain and retain competitive advantage. - Political Factors: Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate. Some examples include: - Tax policy - Employment laws - Environmental regulations - Trade restrictions and tariffs - Political stability - Economic Factors: Economic factors affect the purchasing power of potential customers and the firm's cost of capital. The following are examples of factors in the macro economy: - Economic growth - Interest rates Page | 45  - Exchange rates - Inflation rate - Social Factors: Social factors include the demographic and cultural aspects of the external macro environment. These factors affect customer needs and the size of potential markets. Some social factors include: - Health consciousness - Population growth rate - Age distribution - Career attitudes - Emphasis on safety - Technological Factors: Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions. Some technological factors include: - R&D activity - Automation - Technology incentives - Rate of technological change Page | 46  Chapter 6: Business Strategies Keep one ear open in almost any business environment and the term "strategy" is sure to crop up on a regular basis. Unfortunately, those using the term frequently fail to define the way in which they are using it. Nor do those hearing it bother to check to see how it is being used. As a result, conversations about strategy can become confusing. Learning Objective of this Chapter:  To understand the meaning and need for a Strategy.  To study different levels of Strategy.  Page | 47 1. The Concept of Strategy: The many definitions of strategy found in the management literature fall into one of four categories: plan, pattern, position, and perspective. According to these views, strategy is: - A plan, a "how," a means of getting from here to there. - A pattern in actions over time; for example, a company that regularly markets very expensive products is using a "high end" strategy. - A position, that is, it reflects decisions to offer particular products or services in particular markets. - A perspective, that is, a vision and direction, a view of what the company or organization is to become. As a practical matter, strategy evolves over time as intentions accommodate reality. Thus, one starts with a given perspective, concludes that it calls for a certain position, and sets about achieving it by way of a carefully crafted plan. Over time, things change. A pattern of decisions and actions marks movement from starting point to goal. This pattern of decisions and actions is called "realized" or "emergent" strategy. Page | 48 2. Different types of Strategy There are at least three basic forms of strategy in the business world and it helps to keep them straight. The objectives of this brief paper are to clarify the general concept of strategy and draw attention to the importance of distinguishing among three forms of strategy: - General strategy (or just plain strategy) - Corporate strategy and - Competitive strategy a. Strategy in General: Strategy, in general, refers to how a given objective will be achieved. Consequently, strategy in general is concerned with the relationships between ends and means, that is, between the results we seek and the resources at our disposal. Strategy and tactics are both concerned with formulating and then carrying out courses of action intended to attain particular objectives. For the most part, strategy is concerned with deploying the resources at your disposal whereas tactics is concerned with employing them. Together, strategy and tactics bridge the gap between ends and means. Page | 49 Although it is not my aim to draw definitive distinctions between strategy and tactics, it is next to impossible to say something about one without also saying something about the other. The table below summarizes some of the more important differences I’ve noted in my studies and observations of strategy and tactics. Strategy and tactics are both terms that come to us from the military. Their use in business and other civilian enterprises has required little adaptation as far as strategy in general is concerned; however, corporate strategy and competitive strategy do represent significant departures from the military meaning of strategy. Page | 50 b. Corporate Strategy: Corporate strategy defines the markets and the businesses in which a company will operate. Competitive or business strategy defines for a given business the basis on which it will compete. Corporate strategy is typically decided in the context of defining the company’s mission and vision, that is, saying what the company does, why it exists, and what it is intended to become. c. Competitive Strategy: Competitive strategy hinges on a company’s capabilities, strengths, and weaknesses in relation to market characteristics and the corresponding capabilities, strengths, and weaknesses of its competitors. According to Michael Porter, a Harvard Business School professor and the reigning guru of competitive strategy, competition within an industry is driven by five basic factors: - Threat of new entrants. - Threat of substitute products or services. - Bargaining power of suppliers. - Bargaining power of buyers. - Rivalry among existing firms. Porter also indicates that, in response to these five factors, competitive strategy can take one of three generic forms: - Focus: It involves concentrated attention on a narrow piece of the total market. It chooses a market niche where buyers have distinctive preferences, special requirements or unique needs. - Differentiation: It incorporate differentiating features that causes buyers to prefer firm’s product or service over the brand of rivals. Uniqueness is achieved in ways that, buyers perceive as valuable and Page | 51  rivals find hard to match or copy. For Example: - Superior service- Federal Express, Spare parts availability- Caterpillar - Cost leadership: Cost leadership strategy is an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors. For Example: - Wal-Mart, McDonalds Page | 52 3. Value Disciplines A value discipline is a model describing three disciplines which are - Operational Excellence - Product Leadership and - Customer Intimacy. In this model the company is meant to choose one of these disciplines, and act upon on it both vigorously and consistently as their primary value principle. - Operational Excellence: Strategy is predicated on the production and delivery of products and services. The objective is to lead the industry in terms of price and convenience. - Customer Intimacy: Strategy is predicated on tailoring and shaping products and services to fit an increasingly fine definition of the customer. The objective is long-term customer loyalty and long-term customer profitability. - Product Leadership: Strategy is predicated on producing a continuous stream of state-of-the-art products and services. The objective is the quick commercialization of new ideas. Page | 53 The preceding discussion asserts that strategy in general is concerned with how particular objectives are achieved, with courses of action. Corporate strategy is concerned with choices and commitments regarding markets, business and the very nature of the company itself. Competitive strategy is concerned with competitors and the basis of competition. Page | 54