Business Organizations

Department of Distance and Continuing Education
University of Delhi
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B.A.(Hons.) Economics/English/Political Science

Semester-I
Course Credits-4
Generic Elective (GE) - Commerce
BUSINESS ORGANIZATION
Department of Commerce
As per the UGCF and National Education Policy 2020

Business Organization
Editorial Board
Dr. Sneh Chawla, Dr. Rutika Saini,
Ms. Ritika Sharma
Content Writers
Ms. Amanpreet Kaur, Ms. Ritika Sharma,
Ms. Sumita Jain, Dr. Vipin Aggarwal, Dr. Rutika Saini,
Dr. Navneet Gera, Dr. Ruchi Gupta
Academic Coordinator
Mr. Deekshant Awasthi
© Department of Distance and Continuing Education

ISBN: 978-93-95774-??-?
Ist edition: 2022
E-mail: ddceprinting@col.du.ac.in
commerce@col.du.ac.in
Published by:
Department of Distance and Continuing Education under
the aegis of Campus of Open Learning/School of Open Learning,
University of Delhi, Delhi-110007
Printed by:
School of Open Learning, University of Delhi
© Department of Distance & Continuing Education, Campus of Open Learning,

• The following Unit/Units are edited versions of Study Material prepared for the courses under
Annual/CBCS Mode.
• Corrections/Modifications/Suggestions proposed by Statutory Body, DU/Stakeholder/s in the Self
Learning Material (SLM) will be incorporated in the next edition. However, these
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CONTENTS
Unit-I : Introduction
Lesson-1 : Introduction to Business Organization 01
Lesson-2 : Social Responsibilities of Business 34
Unit-II : Business Enterprises
Lesson-1 : Forms of Ownership Organizations 53
Lesson-2 : One Person Company, Multinational Corporations and
Business Combination 94
Unit-III : Business Environment
Lesson-1 : Business Environment: Analysis and Diagnosis 115
Unit-IV : Entrepreneurship: Founding the Business
Lesson-1 : Entrepreneurship: Founding the Business 135
Lesson 2 : Contemporary Issues in the Entrepreneurship 152
Unit-V : Contemporary Issues of Business Organizations
Lesson-1 : Workforce Diversity 167
Lesson-2 : Organization Structure 175
Lesson-3 : Recent Developments in Business Organization 190

Unit-I
LESSON-1
INTRODUCTION TO BUSINESS ORGANISATION

Ms. Amanpreet Kaur
Ms. Ritika Sharma
STRUCTURE
1.1 Learning Objectives

1.2 Introduction
1.3 Business
1.3.1 Motives for Business
1.3.2 Nature of Business
1.3.3 Requisites of a successful business
1.3.4 Objectives of Business
1.3.5 Components of Business
1.4 Scope of Business
1.4.1 Industry
1.4.2 Commerce
1.4.2.1 Trade
1.4.2.2 Auxiliaries to Trade or Aids to Trade
1.4.3 Inter-relationship between Trade, Commerce and Industry
1.4.4 Difference between Trade, Commerce and Business
1.5 Business as a System
1.5.1 Introduction
1.5.2 Business as an Open System
1.5.3 Characteristics of Business System
1.5.4 Sub-systems of a Business Organization
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1.6 Business and Environment Interface

1.6.1 Types of Business Environment
1.6.2 Nature of Interface between the Business and Environment
1.6.3 Strategies to deal with the Environment
1.7 Business Ethics
1.7.1 Meaning of Business Ethics
1.7.2 Significance of Business Ethics
1.7.3 Principles of Business Ethics
1.7.4 Steps to develop business ethics in an organization
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 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 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
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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 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,
economic 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 Commerce. Industry implies
all those processes, which are responsible for 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.”
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“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
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. Business 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
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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
are called as consumer goods, e.g., clothes, shoes, fans, sugar etc. and the second type
of goods are 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 transaction though it might have resulted
into profits. A transaction 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: whole sellers, 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 business man had 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
businessman. 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.
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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 responsibilities. That a business may have started
purely as an economic venture for maximum profits may soon take on social and political
dimensions. 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.
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:
Economic Social Human

objectives objectives objectives
National Global
objectives objectives
Fig1.1: Objectives of Business
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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, production and distribution
techniques, and services to the 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.
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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.
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 there way.
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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 can therefore guarantee national self-sufficiency and
help the 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 (consumers), with the goal of making a profit. According to F.C.
Hooper, “The whole complex field of commerce and industry, the basic industries, processing
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and manufacturing industries, the network of ancillary services: 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 are called industrial enterprises. On the other hand a business activity concerned
which exchange of goods and services with activities that are incidental to trade like transport,
insurance, banking, warehousing, advertising are 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.
Business
Industry Commerce
Aids to
Trade
trade
Fig 1.2: Types of business activities

1.4.1 Industry: The process of extraction, production, conversion, processing or fabrication of
products are 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 a
variety of articles, such as surgical blades, etc., or engineering concern may make machine
tools and machinery to be used for manufacturing other products. These are called capital
goods.
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Broadly speaking, industrial activities may be classified into primary and secondary industries
as shown below. Primary industry may be either extractive 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, poultry, dams, roads,
fishing, etc. industry, cement
etc. canals etc.
industry, etc.
Fig 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.
3) Manufacturing: These industries are concerned with conversion and transformation of
raw material into finished or semi- finished goods. Such industries create ‘form utility’.
Manufacturing industries have following types:
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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 type 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 materials 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 connection 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.
A brief description of these hindrances is given below:
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, payment for goods and
services is made possible through institutions such as the banks. In this way, banks as part of
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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 demand. 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 where 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 important 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
hindrance 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 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, (transport and insurance) and time
(warehousing and insurance) in the exchange (banking) of commodities.
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Commerce
Trade Aids to trade
Home Trade Foreign Trade Transport
Wholesale
Import Trade Warehousing
trade
Retail trade Export Trade Insurance
Entrepot
Banking
Trade
Advertising
Fig 1.4: Commercial activities

1.4.2.1 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.
Internal trade, also known as home trade or domestic trade, comprises 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.
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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 entreport trade. By import trade we mean buying goods from
suppliers in foreign lands and by export trade selling to buyers in foreign countries. Entreport
trade consists of importing foreign produced goods merely with the object of re-exporting
them.
1.4.2.2 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 performing 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.
3) Insurance: It aids in the development of a sense of security and independence from
concerns and loses in firms. It provides a cover against various loses 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 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 organisations.
5) Advertising: Publicity and advertising are essential medias 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.
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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, shown below:
INDUSTRY
COMMERCE TRADE
Fig 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.
Commerce is seen to help the industry both pre and post production process. All purchases of
raw materials and distribution of finished goods is performed with the help of commerce.
Trade means buying and selling of goods for money or transferring products 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 operations. 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.
Transportation, insurance, warehousing, advertising, banking, and many more services that
support trade are also included in commerce.
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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 Business Commerce Trade
Difference
Meaning All operations that are Any activity that makes it When buyers and
carried out with the easier for things to be sellers exchange
intention of making exchanged between goods or services for
profit are referred to producers and final cash, this is referred
as business. consumers is referred to as to as trade.
commerce.
Scope It has a wide scope. It Its scope is wider than trade It has a narrow scope
needs both trade and because it includes actions as it is only concerned
commerce to run its that promote trade. with buying and
activities selling of goods.
Connectivity Connectivity exists Connectivity exists between Connectivity exists
between owner and producer and final consumer. between the buyer
customers and seller.
Amount of An enormous amount It requires less capital as More amount of
Capital of funds is required to compared to business and capital needed here.
needed run a business. trade.
Risk level Compared to trade Riskier when compared trade. Less risk
and commerce,
business is riskier.
Employment There are more job Numerous Very few job
Opportunities opportunities because employment opportunities as opportunities
various tasks require a result of the abundance of
a huge number of activities
individuals.
Frequency of Regular Regular Irregular
transactions
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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 involves the
sale and purchase of goods and services. True / False
3. Which of the following is a motive of business?
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 arrangements of parts for achieving the
desired objectives. A system may comprise of 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 has to operate in a coordinated way to achieve the planned objectives. For a clear
understanding of a system, it is necessary 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,
nerves 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.
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A sub-system, in our context, may be defined as a departmental activity within the frame work
of a functional activity. Respective departments set their objectives within the framework of
functional objectives and accordingly this may be defined as sub-objectives. Like a human
body system, a business system too consists of various sub-systems like production, 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 industry to which it belongs,
and the industry is a part of the entire industrial set up and that industrial set up 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 social, political and economic environment in which it functions. It
has 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
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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 customers.
Through the feed back process the environments evaluation of the output becomes a part of the
inputs for further organisational activity. If the environment is satisfied with the output,
business operations continue. If it is not, changes are initiated within the business system so
that requirements of customers are fully met.
Fig 1.6 : Business as an open system

(Source: Business organisation and management by Dr. F.C. Sharma)
Business Organisation is the hub or the central part of any business system. It has the usual
features of a system:-
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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 aggregation of all subsystems
in it. It is responsible for transforming the inputs into outputs to satisfy consumer demands. An
organisation has to develop sensitivity to know the changes in its environment and adaptiveness
to the demands of its environments, 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 systems’ approach highlights the
fact that the business system and its environment are inseparable and feed-back 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 entity and purpose provides a sense of direction to the business 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 pars 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
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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.
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 Organisation
A business organisation 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:
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Fig 1.7 : Business System

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 organisation. It helps in taking decisions related to product,
price, promotion and 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 organisation. It involves manpower planning, training, staffing, motivation,
performance evaluation, and other functions related to human resource of an organisation.
5. Research and development system: This subsystem 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 organisation.
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Above are different subsystems of an organisation and each subsystem influences and is
dependent upon the other.
Fig 1.8 : Interaction between Sub-systems

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
organisation as without human resource’s contribution no task is possible. It helps in effective
management of people all across the organisation and achieving competitive edge among the
competitors.
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 subsystem..
1.6 BUSINESS AND ENVIRONMENT INTERFACE
A business organisation mainly functions under two sets of environment, namely internal and
external. The internal environment includes sub-system 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
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business namely, customers, government, state of economy, environmental factors, legal

factors, etc.
Fig 1.9: Business and environment interface

1.6.1 Types of Business Environment
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 that, 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
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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, 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 cause 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.
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As we have read above, business is an open system having continuous interaction with the
external environment as shown in Fig 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 has 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, organisation must exchange information with
the external environment. The information obtained from the environment may relate to
customers preferences, needs, introduction of technology, availability of raw materials,
availability of labour, etc. The organisation 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 that an organisation is an open
system which get inputs from the environment and in turn supply outputs to it. These
inputs help in production and supply of goods. The organisation 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 organisation 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 organisations. Suppliers, shareholders, partners, investors, etc. also influence the
decisions taken by the organisation.
1.6.3 Strategies to deal with the Environment
The environment in the modern world is changing rapidly over the time, new technology and
changing expectations requires managerial expertise to deal with such situation. The
management of the organisation can use the following strategies to cope with uncertainty in
the business environment:
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1. Adapting and anticipating: Managers can occasionally foresee changes in the external
environment and make the necessary adjustments. Managers can assist their organisations
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 organisation may provide price discounts to attract customers to
purchase more of its 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 organisation to form a
new business. In order to accomplish a specific shared goal of both concerned
organisations, a combination is created. A merger pools the resources of the two
organisations to accomplish a single objective and an acquisition helps the acquired
organisation to use resources of the acquirer (big organisation).
6. Procurement of key personnel: To become more competitive, an organisation can hire
dynamic individuals currently employed by competing companies. The organisation 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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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
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. 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 standards. 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 require 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 businesses that run in India comprises of these ethical principles. 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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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 need 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
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provide the training of ethics. He should be well equipped and have sufficient 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 than 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 organization 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 principals of ethics:
a) Integrity b) Loyalty
c) Fairness d) Respect
e) All of the above
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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, discrimination, corporate social
responsibility, and fiduciary responsibilities. Ethics means the set of rules or principles that the
organization should follow. There are several principals like integrity, fairness, leadership,
honesty, etc. that govern a business and helps it in growing.
1.9 ANSWERS TO IN-TEXT QUESTIONS
1. Business 7. False
2. False 8. True
3. All of the above 9. Ethics
4. Commerce 10. True
5. False 11. True
6. Sociological 12. All of the above
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?
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4. What do you mean by the term ‘business ethics’? What are different principals
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. Newyork: 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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LESSON-2
SOCIAL RESPONSIBILITIES OF BUSINESS
Ms. Ritika Sharma (partly)
STRUCTURE

2.2 Introduction
2.3 Meaning of Social Responsibilities
2.3.1 Need for Social Responsibility
2.3.2 Arguments given against Social Responsibility
2.4 Social Responsibility of Business in India
2.4.1 Forces Inducing Social Responsibilities
2.4.2 Obligations of the business towards different groups
2.5 Corporate Social Responsibility
2.5.1 Rationale For CSR
2.5.2 CSR legislations in Companies Act, 2013
2.5.3 Features of CSR
2.5.4 Components of Social Responsibility
2.6 Summary

• The basic concepts and meaning of social responsibility.
• An overview of social responsibility of businesses in India.
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• 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 activities from the
perspective of society are the production and sale of 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 organisation 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 ambitions 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 concept 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 “obligation (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.”
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Harold Koontz and Cyril O’Donnell say, “Since an obligation can be owed only by one person
to another, social responsibility is an interpersonal 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.”
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
employee 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-pollution devices, the costs of which cannot be passed on to
consumers, will reduce profits. But businessman 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.
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2. Building Reputation: Businesses invest a lot of money on maintaining their brand and a
positive reputation in society. In order to do this, a company can also engage in socially
responsible activities that 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
organisations 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 responsibilities, now lets 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, 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
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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 organisations 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 responsibility, 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 commit “50 percent of water withdrawal for global operations,
packaging and agricultural supply chain will be conserved or replenished”. For 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: https://stories.starbucks.com/stories/2020/starbucks-solidifies-
pathway-to-a-planet-positive-future/ & https://www.starbucks.com/responsibility/ sourcing/
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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 character 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 a 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 fellow ship to all 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
suitable 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
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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 is should be run efficiently and competently so that the minimum inputs generate
the maximum output or the surplus. If every business unit in the economy strives for best
utilization of resources, the society 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 form 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.
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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 also 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.
(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 (specially 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)
Workers participation indecision making, (b) better industrial relations and understanding 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 employees satisfaction. It will mean a happy person and a happy family.
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5. To the Society: Business in 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 to follow those lines of action which are desirable in terms of the
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
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training 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. The language to be used for this purpose should be hard.
True/False
2. Which of the followings 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
3. Recognition of human element in industry has lead to bring personnel
management and human resource management under focus of social
responsibility. True/ False
4. Charity or donations to different sections of the society is not a component of
social responsibility of an organisation. True/ False
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2.5 CORPORATE SOCIAL RESPONSIBILITY
Social responsibility in business is also known as corporate social responsibility (CSR). It

relates to organizations conducting business on ethical principles. The ethical conduct involves
sensitivity and consideration legal, social, cultural, economic, and environmental issues while
conforming to governmental legislations on these concerns. These activities include resisting
from business in harmful products, contribution of revenues to environmental and social good
and conduction of programs to assist in development of the society. Engagement in social
responsibility activities helps organizations in creating goodwill and communicating a positive
image while conforming to legal rules and regulations. Compliance to governmental and social
norms puts a positive impact on development, business, and society.
2.5.1 Rationale For CSR
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 breaks 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 approves, acknowledges and appreciates CSR efforts my the organizations, helping
the business survive and prosper.
2.5.2 CSR legislations in 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 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 setup a CSR committee.
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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 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 performance 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.
4. International trends-While financial performance, business investments 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.
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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 helps
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 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 group who may withdraw the
supply of resources and material if their needs and wants are not met judiciously.
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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 exchange etc.
Moreover, business organizations increase pollution 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.
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2.5.4 Components of Social Responsibility or Corporate Social Responsibility
Economic Legal
Voluntary
Ethical
(Philanthropic)
Fig 2.1: Kinds of social responsibility or corporate social responsibility

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 r standing. Thus to avoid public
punishment, companies should strive to comply by the societal and governmental norms.
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. 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 ad giving back to the society. Thus a business has main function of
earning profits. an underperforming business is a liability to the society as the scarce
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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 of firm’s actions and decisions on the sentiment and
values of the 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.
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IN-TEXT QUESTIONS
5. In some countries such as India, ________of the turnover in form of CSR has
been mandated for large organizations to contribute.
6. Corporate social responsibility (CSR), relates to organizations conducting
business on ethical principles. True / False
7. 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
8. 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.
9. 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 is being talked about?
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 favorably 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
breaks images to the business houses. CSR legislations in 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 setup a CSR committee. Components of social
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responsibility includes three types of responsibilities namely economic, governance and

voluntary or philanthropic.
1. Internal social responsibilities 9. Philanthropic Responsibility

2. All of the above 10. Interest to learn
3. True
4. False
5. 2%
6. True
7. Non Voluntary responsibility
8. Goodwill
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 important? Explain the arguments
offered both in favour and against assumption of social responsibilities by a business.
• 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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• Drucker, P. F. (1954). The Practice of Management. Newyork: 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
LESSON-1
FORMS OF OWNERSHIP ORGANISATIONS
Ms. Sumita Jain (Partly)
STRUCTURE

1.2 Introduction
1.3 Sole Proprietorship
1.3.1 Meaning
1.3.2 Advantages of Sole Proprietorship
1.3.3 Limitations of sole proprietorship
1.4 Partnership Organisation
1.4.1 Meaning of Partnership
1.4.2 Legal Implication of Partnership
1.4.3 Features of Partnership
1.4.4 Requisites of an Ideal Partnership
1.4.5 Advantages
1.4.6 Disadvantages
1.5 Company Form of Organisation (Joint Stock Company)
1.5.1 Meaning and Characteristics
1.5.2 Chief Features of Company Form of Organisation
1.5.3 Classes of Companies
1.5.4 Advantages
1.5.5 Disadvantages or Company Organization
1.6 Cooperative Organisation
1.6.1 Why Cooperatives?
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1.6.2 Principal Characteristics

1.6.3 Type of Cooperatives
1.6.4 Advantages
1.6.5 Limitations
1.7 Limited Liability Partnership
1.7.1 Meaning of LLP
1.7.2 Features of LLP
1.7.3 Advantages Of LLP
1.7.4 Disadvantages Of LLP
1.7.5 Limited Liability Partnership Agreement
1.7.6 Difference Between Partnership, Company And LLP
1.8 Summary

• Various forms of ownership organisations including sole proprietorship, partnership,
joint stock company, cooperative society and Limited Liability Partnership.
• An overview of advantages and disadvantages of different forms of organisations.
1.2 INTRODUCTION
One of the basic question to be decided by any entrepreneur is that of ownership of the
organisation. He has to decide whether he would like to organise the entire show individually
or associate other people in his venture. Accordingly it may take the form of individual
proprietorship organisation or an association of persons. An association of persons may take
the following important forms:
1. Sole Proprietorship
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2. Partnership
3. Joint Stock Company
4. Co-operative Society
5. Limited Liability Partnership
In addition to the above four forms, another form of organisation called as Joint Hindu Family
form exists in our country but its number is decreasing 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 weight the distinguishing features of each form of organisation according
to the requirements of the venture proposed to be established. Now we shall discuss the
distinguishing features of different forms of business organisations.
1.3 SOLE PROPRIETORSHIP
1.3.1 Meaning
A sole individual single proprietorship business is a form of organisation in which an individual
produces independently with his own capital (or sometime borrowed from relatives and
friends), skill and intelligence and is entitled to receive all the profits and assumes all the risks
of ownership, He may run the business all alone or with the help of his family members and
some employees. Historically, this form of organisation 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 business requiring licenses. For
example, if a man wishes to open a shop, a grocery store, he may do so, if he can find a suitable
location and can 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 organisation may be said to possess the
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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 organisation 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 proprietorship are retailers,
hawkers, small grocery stores, bakers confectioners, launders, small printing houses, small
machine shops, and thousands of similar enterprises, and professional firms.
1.3.2 Advantages of Sole Proprietorship
The principal advantages of sole proprietorship organisation 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 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.
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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 the 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 obligations 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 organisation 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.
1.3.3 Limitations of sole proprietorship
Despite so many advantages, this form of organisation suffers from several 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 easily expand his business when it
may be found necessary to take advantage or economics 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
sometime 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.
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Limited capita 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 hand, 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 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 retails shops and professional
firm are owned by individual proprietors. It follows that individual proprietorship has its own
scope of activity and continues to occupy an important position in the business world is spite
of the development or larger organisations, 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 manufacturing 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 cottage and small-scale
industry widely dispersed in rural areas.
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IN-TEXT QUESTIONS
1. Under sole proprietorship form of organisation the owner has unlimited liability.
True/ False
2. A _________________ is a form of organisation 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
1.4 PARTNERSHIP ORGANISATION
The individual proprietorship organisation, 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 ability than could be expected of a single individual.
Therefore men of ability combined their resources and for this pooled their resources; labour
and skill partnership organisation resulted.
Historically, partnership organisation 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.
1.4.1 Meaning of Partnership
The formation and management of partnership organisation is governed by the provisions of
the Partnership Act, 1932. Section 4 of the Act defines partnership: ‘The relation between
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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 very 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.
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.
1.4.2 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.
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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 partner. No
agreement between the partners to limit this liability only to some of them has any validity
as 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.
6. Unanimity of consent: In all matters of importance and those 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 is 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 become unlawful, the firm is compulsorily and
automatically dissolved.
1.4.3 Features of Partnership
The distinguishing features of partnership organisation are as follows:
1. Formation: Although a partnership 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 deed 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
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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 other. 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 contributor their
skill and labour. The initial capital may be augmented by borrowing on 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 over all 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 exclusive 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 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
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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.
7. Taxation: A partnership firm is liable to pay income tax and other 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.
1.4.4 Requisites of an Ideal Partnership
Partnership business grows out of the need for combining resources, both human and material.
Some person 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 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.
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.
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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 after the
formation is possible. An unregistered firm suffers from a number of disabilities, which
may cause unnecessary loss to the firm.
Evaluation
Partnership organisation is admirable for medium size undertakings, where personal efforts of
the owners are essential. It enjoys several of the advantages of sole proprietorship organisation
and suffers from its limitations. We may, however, consider here the advantages and
disadvantages of partnership organisation.
1.4.5 Advantages
Partnership organisation 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 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. There is thus an effective motivation to production.
As the partners manage personally their supervision is effective.
5. Benefits of combined ability: Partnership enjoys the benefits of combined ability of it’s
a 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.
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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.
1.4.6 Disadvantages
Despite several advantages, the partnership form of organisation 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 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 overcautious. This restricts enterprise in some sense.
Therefore, partnership organisation 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.
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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, 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 organisation 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 organisation that can be adopted by men of equal wealth and ability who combine their
resources—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.
IN-TEXT QUESTIONS
6. The formation and management of partnership organisation 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
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1.5 COMPANY FORM OF ORGANISATION (JOINT STOCK

COMPANY)
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. 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 industrial revolution and the failure of the existing forms
of business organisation to feed the continuously increasing needs of funds by the large sized
industry.
Accordingly, the fundamental principle of company form of organisation 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 decisions 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 shortcoming of single proprietorship and partnership firms of
organization can be overcome by organizing a business as a joint stock company with limited
liability.
1.5.1 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.
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1. Creation of law: A company is a creation of law, and is sometime 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 enjoy 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.
3. Perpetual succession: The process of incorporation brings into 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
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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. 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.
1.5.2 Chief Features of Company Form of Organisation
The principal and distinguishing features of a company form of organisation are as follows:
1. Formation: Since corporate life and form cannot exists 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 is 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
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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, being satisfied that all that is required to be
done under the law has been done, registers the company and issue 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,
has 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 share holders 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 representative 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 to exist even if all its members die or adjudicated insolvent. This capacity of
perpetual succession ensure its continuity. Members may come and members may go, but
the company goes on undisturbed until dissolved by a process of law. Also, a shareholders
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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 organisations.
6. Taxation: In a large number of situations the tax burden on Companies are 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.
1.5.3 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 to maintain personal contact and secrecy in business. A
private company, therefore, combines the advantages of limited liability and the facilities of
the partnership organisation. Because of the special features of private company and many
privileges enjoyed by it is a common practice with businessman 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
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the general public under the provision of its articles. The minimum number required to form it
is seven, but there is not 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 enterprise, whereas
a private company would be suitable for medium size businesses.
1.5.4 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 is allows the
mobilization for production proposes of a vast amount of capital that would otherwise
might have little chance of 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
saving 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 later must depend mainly upon the financial
resources of the proprietor in facts, no business form is so well adopted 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 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 from rich and poor. Because of diffused risk, limited liability and
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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 of
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 shares are readily transferable, a shareholder can easily convert his 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 is 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.
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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 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.
1.5.5 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 organisation
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 form of

organisation 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 identify 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 organisation. 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.
(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 of to 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.
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(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 his great potentialities 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 exist 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 not limit to maximum number.
13. The liability of shareholders of a company is unlimited. True/ False
1.6 COOPERATIVE ORGANISATION
1.6.1 Why Cooperatives?

The primary aim of the business organization discussed so far is to earn profit. These forms of
organization may exploit the economical weaker sections of society. The cooperative form of
organization attempts to make the common man free from the oppression or injustice of the
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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 ordinarily 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 affair 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 Organisation (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.”
We may give our definition which contains the important attributes of cooperative enterprise.
A cooperative organization is a voluntary association—(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.
1.6.2 Principal Characteristics
The foregoing definition reveal some of the features which are common to cooperative society,
a partnership firm and a company. But in addition to that as a form of business organisation, 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
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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 if a cooperative society differs in this respect. As
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
organisation 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 principal of equality
the management of cooperative society is essentially democratic. As a rule, cooperative
societies work on local basis, which enable 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 member 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 consumers’ 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
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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 society. The members do into
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 be 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.
1.6.3 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.
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The principal types of business cooperatives are:

1. Producers’ Cooperatives.
2. Consumers’ Cooperatives.
3. Marketing Cooperatives Societies.
4. Housing Cooperatives.
5. Cooperative Farming Societies.
Producers’ Cooperatives: One of the solutions of inadequate purchasing power is to eliminate
the class which controls production. i.e., to become your own producer or manufacturer by
organizing producers' cooperatives. 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 an 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, Cooperative 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’ cooperative is to eliminate the middle
man and to protect the interest of consumers. These cooperative are economic enterprises set
up by the consumers, mainly of moderate means, for the distribution of goods of daily needs
primarily 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 organisation. In our country, consumers’ cooperatives have
received-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 these is great scope for cooperation. The
marketing cooperative sales societies are voluntary associations of independent producers
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organised for the purpose of arranging 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 produce, and
secondly to make available a permanent and ready market for 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 association of persons who are interested
either in securing the ownership of a house or obtain 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 voluntary 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 societies 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
because fragmentation of holding per acre production is low. Yet they have not proved to be
successful whatever they have been tried.
Miscellaneous societies: In addition to the more important types of cooperative 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 societies have also been formed for
fisheries, dairy farming, supply of sugar-cane, cold storage, etc.
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1.6.4 Advantages
As a form of organisation, 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 of 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 organisation. 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.
10. The movement has also done a great service by removing inefficient capitalist shop from
localities where cooperatives stores have been established.
11. From the organisation 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.
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(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 co-operation for business,
the problems of coordination are not that grave as in other forms or organisations.
(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.
1.6.5 Limitations
The cooperative form of business enterprise, in spite of many merits, has its limitations and is
not likely to replace other forms of organisations. The limitations are as follows:
1. The idea of cooperative organisation cannot be extended beyond a certain limit, because
a 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
organisation 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 it should not do so lest it might again slip into the clutches of the 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 are 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.
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5. The movement has still to develop the entrepreneurial functions. One of the most serious
obstacle 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 cooperative 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 service 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
1.7 LIMITED LIABILITY PARTNERSHIP
1.7.1 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 excessive legal formalities and both disadvantages 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.
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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 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 provisions 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.
1.7.2 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 the partners personally. Saloman vs Saloman & Co. Ltd. support
the concept fully.
4. Minimum Number of Partners: Minimum number of partners in a 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: A 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 enjoy 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 a LLP shall not effects the existence, rights or liabilities of the limited
liability partnership.
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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 a LLP.
9. Applicability of Partnership Act 1932: No provision of Partnership Act 1932 applicable
to LLP unless needed .
10. Managing the affairs of a LLP : Partners specifically Designated partners are responsible
for management of business if LLP.
11. Investigating the affairs of LLP : Central Government has the power to investigate the
affairs of a LLP
12. Conversion to LLP. A firm, Private Company or an Unlisted Public Company are
allowed to converted into LLP in accordance with the provisions of the LLP Act 2008and
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 LLP Act ,2008 shall have right to
dissolved as accompany.
14. LLP Agreement : A LLP must have a LLP Agreement for describing rights and duties of
partners so in case of any disputes , can be resolved with the help of agreement.
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 Income Tax Act, 1961, shall apply in taxation matters.
17. Financial Year of a LLP: Financial year of a LLP commence from 1st April of a year
and ends on 31st March of a year but if LLP commence 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.
1.7.3 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
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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 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.
7. Flexibility. It provides flexibility without imposing detailed legal and procedural
requirements.
8. Taxation. LLP has to pay no surcharge, DDT (Dividend Distribution Tax) or wealth tax
so its a relaxation to the LLP on its income.
1.7.4 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.
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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.
1.7.5 Limited Liability Partnership Agreement
LLP agreement has been as defined under Section 2(1)(o) and its 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 of the change. In absence of LLP Agreement provisions of 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
1.7.6 Difference Between Partnership, Company And LLP
The following are the points of difference between partnership, company and LLP:
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Basic Partnership Company LLP
1. Regulating Act Governed by Governed by Governed By the

Partnership Act, Companies Act, Limited Liability
1932 2013 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 It does not have It has perpetual It has perpetual

succession perpetual succession succession and the succession and the
as it depends upon the members may came partners may came and
will of partners. and go. go.
5.Management Managed by The affairs of the The business of LLP is

partners itself. company are managed by the
managed by the Board partners including
of Directors. designated partners as
per requirements of
LLP agreement.
6. Liability Liability of Partners Liability is limited and Liability is limited to
are unlimited and can only to the extent of the extent of amount of
go to the personal amount not paid on
contribution but can
assets as well. shares held by
extend if there is any
shareholders.
fraud or omission.
7. Common Seal There is no There is an option to LLP may have a

commons seal. use common seal common seal, it is not
which denotes mandatory
official signature of a
company.
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8. Number of Minimum 2 and Minimum 2 and Minimum 2 partners

members and there is no limit for
maximum 50. maximum 200
maximum
members in case of number of partners.
private company.
Minimum 7
members is case of
public company and
maximum no limit.
Only one person is
required in case of One
Person Company.
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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1.8 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
organisation is a sole proprietorship, it is a sole individual single proprietorship business is a
form of organisation in which an individual produces independently with his own capital (or
sometime 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 primary 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 namely 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 form of organization is excessive legal formalities and both
disadvantages 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.
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1. True 12. Public company

2.Sole proprietorship 13. False
3. All of the above 14. True
4. True 15. True
5. True 16. All of the above
6. Partnership Act, 1932 17. False
7. True 18. True
8. False 19. True
9. True 20. At least two designated partners
10. False
11. Yes
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 organisations have
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 organisation 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.
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7. What is the reason cooperatives have become popular? What are its distinct features
when compare 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.

Pvt. Ltd.
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LESSON-2
ONE PERSON COMPANY, MULTINATIONAL
CORPORATIONS AND BUSINESS COMBINATION
Ms. Ritika Sharma
STRUCTURE

2.2 Introduction
2.3 One Person Company
2.3.1 Legal status of One Person Company
2.3.2 Features of One person Company
2.3.3 Formation of One Person Company
2.3.4 Advantages of One Person Company
2.3.5 Disadvantages of One Person Company
2.4 Multinational Corporations
2.4.1 Features of Multinational Corporation
2.4.2 Advantages of Multinational Corporation
2.4.3 Demerits of Multinational Corporations
2.5 Business Combination
2.5.1 The Objectives of a Business Combination
2.5.2 Advantages of Business Combinations
2.5.3 Disadvantages of Business Combinations
2.6 Forms of Business Combinations
2.6.1 Merger
2.6.2 Acquisition
2.6.3 Takeover
2.7 Summary
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2.10 References

• 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.
2.2 INTRODUCTION
In this chapter we will discuss about the new form of organisation which was introduced under
the companies act, 2013 namely one person company. It is a private corporation but with fewer
compliance obligations than a private corporation. This chapter will also introduce us to
Multinational corporations. A multinational corporation (MNC) is a business that conducts
business both in its country of origin and in other nations. Now days, 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 MNC’s 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.
2.3 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
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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 obligations 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.
2.3.1 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 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.
2.3.2 Features of One person Company
1. Single Member: Unlike other private organisations, 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: An 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 Company’s.
2.3.3 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
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submitting the necessary papers to the Registrar. The member may potentially withdraw his
nomination at a later time if he wants.
One Person Company Registration Process
Apply for DSC
Apply for DIN
Name Approval
Documents required
Approval from MCA
Issue of incorporation
certificate
Fig 2.1: One Person Company Registration Process
Step 1: Apply for Digital Signature Certificate

The first step is to obtain the suggested Director's Digital Signature Certificate (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 Number (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.
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Step 3: Name Approval Application

Choosing a company name is the next stage in incorporating an One Person Company. The
company will be known by the name "XYZ (OPC) Private Limited."
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 Registrar 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 Aadhar 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 professional, 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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2.3.4 Advantages of One Person Company

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.
2.3.5 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 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
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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
2.4 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 organises worldwide administration. MNCs
provide their goods and services in many different nations, necessitating global management.
Multinational companies have 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.
2.4.1 Features of Multinational Corporation
1. Several Assets and High Turnover: MNCs conduct business internationally.
Which 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.
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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.
2.4.2 Advantages of Multinational Corporation
A multinational corporation has many advantages to the home country and the host country as
well. Let us see:
Advantages of
MNCs
In Host In Home
Country Country
Fig 2.2: Advantages of Multinational corporations
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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.
Advantages of MNCs in Home Country
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 worlds 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 country’s 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.
2.4.3 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.
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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.
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 an disadvantage of MNC:
a) Research and Development b) Promotes Collaboration
c) Modernisation of Host Country d) Outflow of resources
2.5 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.
2.5.1 The Objectives of a Business Combination
1. Market expansion: Business growth takes time. Companies acquire the operations of other
organisations 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
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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 together when two or more businesses are combined.
Employees and management are included in business combination transactions with assets
and liabilities. Few acquisitions occurred, particularly for bringing in managers with
expertise and experience.
2.5.2 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 their 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.
2.5.3 Disadvantages of Business Combination
1. Creating Monopoly: When businesses combine, the governing authority may be
concentrated in the hands of only one organisation. 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.
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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.
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.
2.6 FORMS OF BUSINESS COMBINATIONS
2.6.1 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 corporations 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 accept 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 Facebook
and Instagram in 2012.
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Types of Mergers
Mergers
Product Market
Coglomerate Horizontal Vertical
Extention Extention
Fig 2.3: 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 know 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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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’s 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
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.
Q1. According to you, what type of merger is taking place between the above two
companies?
Q2. How are mergers different from acquisitions?
(Source: https://www.businessnewsdaily.com/15786-company-mergers.html)
2.6.2 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 acquisitions. An
acquisition is when company purchases the maximum stakes in other company. The firm whose
shares has been purchases becomes the subsidiary of Purchaser Company. The subsidiary
company’s assets and liabilities comes under the holding company and hence subsidiary loose
its legal identity. Acquisitions helps 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 acquiring 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 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
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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.
Challenges in Acquisition
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 employees 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
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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 organisational
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.
2.6.3 Takeovers
The term ‘takeover’ is sometimes used to refer a hostile situation. According 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 predetermined sum of cash or shares.
Takeover takes place when a company successfully bids to take control of another company.
In most cases, takeovers are carried out by purchasing 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 takeover another firm.
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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 IPO’s.
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 acquires its competitors, a situation of
monopoly is created and this firms 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 take place, several tasks are
undertaken ranging from hiring of legal team, appointing staff for administrative work,
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appointing resource persons for various tasks, etc. These all functions increases the
costs for the firm.
2. Negative feedback from customers and suppliers: Aggressive takeovers are not
considered in favour of the firms that is 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, organisational 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
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
2.7 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
organisation which has only one person as its owner and director, and the owner will have to
name a nominee for establishment of an one person company. It has some advantages like less
legal formalities, limited liability, quick decision making, etc. A multinational 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.
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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 loose motivation as the working environment changes, there may also
occur duplication of tasks when two firms merge.
1. Section 2(62) 9. congeneric mergers

2. False 10. Yes
3. Single member 11. True
4. True 12. Acquisition
5. True 13. Flat
6. True
7. False
8. Outflow of resources
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?
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2.10 REFERENCES
• https://www.investopedia.com/terms/t/takeover.asp
• https://www.mca.gov.in/MinistryV2/onepersoncompany.html
• https://cleartax.in/s/one-person-company-registration-procedure-india
• https://corporatefinanceinstitute.com/resources/knowledge/strategy/multinational-
corporation/
• https://www.mca.gov.in/Ministry/pdf/INDAS103.pdf
• https://www.mca.gov.in/MinistryV2/mergers+and+acquisitions.html
• https://web.sol.du.ac.in/info/bcom-hons-semester-iii (B.Com. Hons/Semester 3/Core
Course/Management Principles and Applications)
• https://www.forbes.com/sites/allbusiness/2018/08/27/mergers-and-acquisitions-key-
considerations-when-selling-your-company/?sh=7d8191274102
• http://www.legalservicesindia.com/article/2407/One-person-company.html
• https://www.indeed.com/career-advice/career-development/mergers-and-acquisitions
• https://www.ukessays.com/essays/marketing/definition-of-mergers-and-acquisitions-
marketingessay.php
• https://www.indiainfoline.com/knowledge-center/share-market/what-is-takeover

• Drucker, P. F. (1954). The Practice of Management. New York: Harper & Row.
• Koontz, H., & Weihrich, H. (2012). Essentials of Management: An International
and Leadership Perspective. Paperback.
• Singh, B. P., & Singh, A. K. (2002). Essentials of Management. New Delhi. Excel
Books Pvt. Ltd.
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Unit-III
LESSON-1
BUSINESS ENVIRONMENT: ANALYSIS AND DIAGNOSIS
Prof. Vipin Aggarwal
Dr Rutika Saini
STRUCTURE

1.2 Introduction
1.3 Meaning of Business Environment
1.4 Nature of Business Environment
1.5 Significance of Business Environment
1.6 Components of Business Environment
1.7 Uncertainty in Business
1.8 Environment analysis and Diagnosis
1.9 Techniques of Environment Analysis
1.9.1 SWOT
1.9.2 TOWS
1.9.3 ETOP
1.10 Summary
1.11 Glossary
• To know concept and nature of business environment

• To understand the various components of business environment
• To assess the environment using various techniques
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1.2 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 opportunities. 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.
1.3 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.
1.4 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 affects the working of different organisation differently.
Sometimes a similar factor may be favourable for one organisation 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 organisation changes continuously
thereby bringing lots of challenges and opportunities for a business. It is important for
an organisation 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
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it uncertain and risky. For example: No business in their worst nightmares anticipated
a nation going into a lockdown due to a virus (COVID-19).
1.5 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 organisation, 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 organisation
in identifying the potential threats. These are the factors that may negatively affect
the working of an organisation. By anticipating such factors, a business can
strategy it’s 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 organisation. Undertaking the challenges of business environment makes them
far-sighted and spontaneous for contingent situations.
4. Flexibility in working: Organisation 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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5. Determines a business success: A successful business organisation is one which

studies its environment carefully. Sometimes, an organisation itself work as leader
for bringing the change in society and this is where the success of a business is
determined.
1.6 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 relatively 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.
Values
Management Policies
Firm
Intangible Human
assets Resources
Tangible
assets
Fig: 1.1 Internal Business Environment
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• Values: The values include the beliefs and the attitudes a firm carry. 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 of the elements 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
organisation. They can also be called as stakeholders having direct interest in the working of
an organisation. These include buyers, consumers, suppliers, distributors etc. Although they
are external to an organisation, but 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.
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Customer
Distributers
Micro Competitor
environment
Suppliers
Fig 1.2: 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 help the business to grow. If the supplies are not good, the
raw material supplied by them would not be able to produce quality good.
• Distributers: The distributers of the company help the manufacturers 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.
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The second layer is Macro environment. It includes all the factors which do affect any
individual organisation but affect all the business organisations 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 organisations. These factors are
broad enough to be controlled by any particular industry or firm. These includes political, legal,
international, socio-cultural factors and economic factors. As these are completely out of the
control of an organisation, they need to be monitored and analyzed carefully.
Political Factors
Economic
Legal Factors
Factors
Macro
Environment
Environmental
Social Factors
Factors
Fig 1.3: Macro Environment (Dimensions of Business Environment)

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 organisations 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.
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• International relations i.e., political relations with other countries

• Political standing in international organisations.
• 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 organisation with its favourable policies 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 includes factors which indicate the way a society is organized and sub-divided, culture,
beliefs and values they share and even changing patterns of society. These are complex factors
as they can only be observed 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 industrialization, lose environment laws-natural
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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 factors. Although
environment friendly products come in luxury consumption, but more and more competition
can bring their prices down.
Legal Factors
The legal environment refers to the principles, rules and regulations established by them
government. These regulations are a result of various legislations. These include
• Legal system 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.
1.7 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.
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Types of Uncertainty
Demand
Capital Production
Environm Business
Cost
ental Uncertainty
Labour Profit
Price
Fig 1.4: Types of Uncertainty in Business

The uncertainty can arise for any department in the business. The following 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.
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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.
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 organisation 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
organisation but affect all the business organisations of all industries.
5. Business Uncertainty and the Business Risk are both one and the same thing.
True/False
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1.8 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 organisation. Once the factors are
identified, environmental diagnosis is done to understand how these factors affect the working.
An understanding about their working help managers in designing strategies and taking key
decisions.
Environment analysis need to be supplemented with information system 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 organisation.
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.
1.9 TECHNIQUES OF ENVIRONMENT ANALYSIS
SWOT Analysis
It is a technique of environment analysis acronym for Strength, Weaknesses 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
popularity due to its simplicity and applicability in all sorts of organisations 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.
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INTERNAL
ENVIRONMENT
STRENGTH (S) WEAKNESSES (W)

OPPORTUNITIES (O) THREATS (T)
EXTERNAL
ENVIRONMENT
Strength (S) refers to all the factors which work in favour of organisation. These can be stated
as set of advantages that gives organisation 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, technologyor they can be intangible
such as goodwill, strong brand name, loyal customer base, skilled capital and so on.
Weaknesses (W) refers to all the factors that work against the organisation. They hamper the
working of organisation and if not corrected may also become the reason for downfall of the
organisation. These are opposite of strengths. Examples of weakness can be- mismanagement
in organisation, 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 organisation.
They are the set of favourable policies, decisions, trends and changes in markets that if grabbed
can multiply the profitability of an organisation.
Threats (T) refers to all the factors which act as hindrances or blockages in the path of
organisation. These can be changes in exchange rate, lawsuit 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 organisation whereas opportunities and threats are
part of external environment of an organisation.
How to use SWOT analysis?
An organisation 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
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quadrant. 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 ofthe organisation.
2. It is applicable to all sorts of organisations irrespective of their size.
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 sophisticated 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, its 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.
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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 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 organisation 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 come 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 firmwants 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 presentin the market
exactly matches to its strength and if grabbed nicely may lead to multiple benefits for
organisation. An organisation needs to approach it aggressively and design an appropriate
course of action.
For example: PAYTM took immediate benefit when Demonetisation was introduced inIndia.
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1. 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 organisation
who is not able to grab opportunities because of weakness may stand to lose in
competition if it does not work in direction of change. For example: If a new technology
is introduced in market for which an organisation needs a skilled labour base than an
organisation 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.
For 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.
2. THE ST STRATEGY: Third quadrant is when threats in external environment are
matched with internal strengths. Here, an organisation’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.
For 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.
3. 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 theenvironmental
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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1.9.3 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 environment.
Procedure followed during the preparation of ETOP.
Step 1: Diving the external environment into various categories depending 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 presented 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: https://sfa.sk/public/custom/personal-statement/etop-analysis.php
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Benefits of using the ETOP:

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 a 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
1.10 SUMMARY
The present chapter throws the light on the meaning of business environment 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 environment of the business.
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1.11 GLOSSARY
Business Environment: Business environment refers to sum total of all the factors that
directly or indirectly affectthe operations and profitability of a business enterprise.
Microenvironment: It consist of all the factors that are directly related to the business
organisation.
Macro environment: It includes all the factors which do affect any individual organisation
but affect all the business organisations of all industries.
SWOT: It is a technique of environment analysis acronym for Strength, Weaknesses
opportunitiesand threats.
1. Business Environment 8. Opportunities

2. Opportunities and Threats 9. SWOT
3. Microenvironment 10. Environment Threats and opportunity
Profile.
4. Macro Environment
11. False
5. False
6. Environmental Analysis
7. False
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?
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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.
8. TOWS is a tool for strategic planning also. Explain this statement.
9. Explain the ETOP. Design ETOP for an organization of your choice.

• Chhabra, T. N. (2020). Business Organisation and Management. Sun India Publications.
New Delhi.
Pvt. Ltd.
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Unit-IV
LESSON-1
ENTREPRENEURSHIP: FOUNDING THE BUSINESS
Dr. Rutika Saini
Ms. Amanpreet Kaur
STRUCTURE

1.2 Introduction
1.3 Entrepreneur-Entrepreneurship- Enterprise
1.4 Form of Entrepreneurship
1.5 Difference between Social Entrepreneur and Business Entrepreneur
1.6 Process of Entrepreneurship
1.7 Summary
1.8 Glossary
• To understand the meaning of Business Entrepreneurship

• To know the features of Entrepreneurship
• To evaluate the features of a Good Entrepreneur
1.2 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
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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.
1.3 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 2 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 not restricts him to employee people
or acquire 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 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 manged 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.
3. Solution seeking- entrepreneur is skilled and educated, thus capable of findings,
producing and providing solutions to problems within limited resources.
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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.
2. Innovation: The new ventures are started to take the new and 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.
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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.
1.4 FORMS OF ENTREPRENEURSHIP
Fig 1.1: Types of Entrepreneurships

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 relatives, family members
or the local residents. The small business entrepreneurship includes the Barbour, tea shops, and
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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 avers 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.
3. Financial Rewards: despite having a larger financial risk, all the 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
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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 start ups 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 being 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 profits are earned, but a
good amount of revenue is also generated which is reinvested in the business later on.
Capital: In such kind 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.
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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.
Large Company Entrepreneurship
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 company’s 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 the
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
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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.
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.
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Social Entrepreneurship
Entrepreneurship is business by finding consumers needs and catering them worth gives and
services while earning a profit. Social entrepreneurship can be understood as a process of
findings social problems and finding and implementing solutions you eradicate the social
problems. The motive still is to earn a profit, but these profits are ploughed back in the solution
implementation of the problem till the problem is completely eradicated. Following figure
illustrates the motivation for social entrepreneurship.
Fig 1.2 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.
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• 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 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
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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.
4. Feeling of Responsibility for the employees: The employees also 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
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1.5 DIFFERENCE BETWEEN SOCIAL ENTREPRENEUR AND

BUSINESS ENTREPRENEUR
Basis Social entrepreneur Business entrepreneur

Capital funding Social In a traditional, business
entrepreneurships seek their entrepreneurship usually
initial phases of funding from seeks capital from a venture
philanthropists. These capitalist firm who are
philanthropists pursue the social interested only in the return
mission more than return on on their investments.
their investments
Problem and social entrepreneur identifies business entrepreneurs
solution social problems, can come up identify needs of products
identification with new solutions to social that can change the face of
problems, implement them on a business. They seize
large scale and change the face opportunities that others
of society by acting change miss, improve systems,
agents. invent new products and also
create solutions to change
business for the better.
Utilization of Even though social A business entrepreneurship
income entrepreneurships invest in only uses their profits to grow the
for-profit activities, their profits company and pay
may be donated to charity or shareholders. You get
used for other philanthropic involved in a business
efforts. Thus, the revenues are entrepreneurship for the sake
used to pursue social missions, of making money and
rather than prospering owners increasing your personal
of the organization. wealth
Example Mohammed Yunus of Grameen Mark Zuckerberg started his
bank, who started a Facebook operations to
microfinance institution in popularize social networking
Bangladesh and to earn
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1.6 PROCESS OF ENTREPRENEURSHIP
Idea
Planning Growth
• Needs generation • Viability • Allocation
• Wants • Sustainable • Sample study • Funds • Feasibility • Evaluation
• Society • Resources • Improvement
Problem Feasibility
Launch
Identification study
Fig 1.3: Entrepreneurship Process

1. Problem identification - The first step in entrepreneurship is to find the need, want,
problem or deficiency in the society. The problem 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.
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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.
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 their 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
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1.7 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 the lesson discusses all those features and characteristics
entrepreneurs need to possess. It also discusses the social entrepreneurship and how it is
different from the business entrepreneurship.
1.8 GLOSSARY
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, organizing
and running a business activity with the motive of earning the profits.
1. Entrepreneur 6. True
2. Small Scale Entrepreneurship 7. False
3. Large Company Entrepreneurship 8. True
4. Social Entrepreneurship
5. True
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 entrepreneurships.
4. Describe the process of social entrepreneurship.
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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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LESSON-2
CONTEMPORARY ISSUES IN THE ENTREPRENEURSHIP
Dr. Rutika Saini
Dr. Navneet Gera
STRUCTURE

2.2 Introduction
2.3 Entrepreneurial Ideas and opportunities in the contemporary Business Environment
2.4 Roadmap to Entrepreneurship Development
2.4.1 Make-in- India – Four Pillars
2.4.2 Progressive plans and entrepreneurship
2.4.3 Startups in India
2.4.4 Skill India Initiatives
2.5 Entrepreneurship and New Challenges of Globalization
2.6 Summary
2.7 Glossary
• To understand the Entrepreneurial ideas

• To know the contemporary issues in the entrepreneurship
• To evaluate the make in India initiatives
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• To discuss some successful start-ups of India

• To understand the Skill India Initiatives
2.2 INTRODUCTION
Entrepreneurs play an important role in economic development in multiple ways. The

important contributions towards economic development could be through providing
employment, contributing towards GDP, contributing towards foreign exchange, infrastructure
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 businesses 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.
Entrepreneurs 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 significant 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 significance 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 quantitatively
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.
2.3 ENTREPRENEURIAL IDEAS AND OPPORTUNITIES IN THE

CONTEMPORARY BUSINESS ENVIRONMENT
2.3.1 Self Help Groups (SHG)

Self Help Groups (SHG) consist 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
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group. These groups also encourage the group members to make small savings which are kept
with the banks. The common fund is deposited with the bank in the same of SHG. The SHG
also provide 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 of 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 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 is to be decided by the group only.
3. Solving problems: The SHG must try to solve the problem of the 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
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situations, the SHG can take the loan from the bank and then give the money to its
members as the loan.
2.3.2 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 Technology 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.
Advantages of Business Incubators
1. They improve the survival rate of the business
2. They support the business monetarily.
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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.
2.3.3 Angel Investors
They are the investors having a high level of net worth and interesting in providing funds to
the new entrepreneurs. They are majorly categorized as Corporate Angels, Entrepreneurial
Angels, Enthusiast Angels, Micromanagement 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
the 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.
• Professional Angels: They carry specialized skills and expertise in a particular field.
They usually tie knots with the businesses who can add to their overall worth and
expertise. These relationships result into growth and development of both the
companies.
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IN-TEXT QUESTIONS
1. _______________ consist 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.
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 the manage
their business on their own. The primary motive behind the investment here is
to seek the synergy out of similar business.
2.4 ROADMAP TO ENTREPRENEURSHIP DEVELOPMENT
2.4.1 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. 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 infrastructure based on state-of-the-art technology with modern high-
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speed communication and integrated logistic arrangements. Existing infrastructure 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.
2.4.2 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-up which comes up with a service to handle labour
for manufacturing 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 internet networks and provide support services to the
government’s vision of delivering services electronically. ClearTax, which helps citizens file
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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 businesses 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 implemented 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.
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
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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 the world.
The Modi Government is marketing this campaign globally and the impact is evident.
2.4.3 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.
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3. Zomato: This application was launched in the year 2008, it gained the popularity
overnight since its launch. It started it journey as foodiepay.com 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.
2.4.4 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 programme 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 atleast 50% of the batch to keep
the performance high.
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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.
Special Projects: The programme arranges some special projects which 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.
2.5 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 international 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 western 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 under-
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 compete worldwide as they
are able to sell their products and services on the global platform. Small and medium sized
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enterprises are always supported 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.
4. In the countries where the conditions of financial institutions are weak, there is always
an element of risk in capital flows.
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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 sis 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 worldwide, 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 __________.
2.6 SUMMARY
The current chapter talks about the new entrepreneurial ideas and opportunities. It discusses
the contemporary developments such as self-help groups and the business incubators. How the
general public can indulge 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
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chapter, some of the famous start-ups of India have been discussed to take the lessons from
their success and failures.
2.7 GLOSSARY
• Self Help Groups (SHG): It consists 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.
• 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.
• Angel Investors: They are the investors having a high level of net worth and interesting
in providing funds to the new entrepreneurs.
• 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 globalization and localization. According to this
approach, a product or a service is customized according to the local tastes and
preferences.
1. Economic 8. Digital Literacy

2. Entrepreneurs 9. Globalization
3. Capital 10. Localization
4. Regional Disparities
5. False
6. Ease of Doing Business
7. Twenty-Five
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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.
Prasad, L. M., Principles and Practice of Management, Sultan Chand and Sons, New
Delhi; 9th edition, 2015.
2013.
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Unit-V
LESSON-1
WORKFORCE DIVERSITY
Ms. Amanpreet Kaur
STRUCTURE
1.2 Introduction
1.3 Diversity at Work
1.3.1 Meaning of Workplace Diversity
1.3.2 Rationale for Workforce Diversity
1.3.3 Benefits of Workforce Diversity
1.4 Diversity and Inclusion at Workplace
1.4.1 Meaning and significance
1.4.2 Develop workforce inclusion at workplace
1.5 Summary
1.6 Glossary
• To understand the meaning of some contemporary topics relevant in the current times.
• To discuss the meaning of diversity and inclusion at workplace,
1.2 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
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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.
1.3 DIVERSITY AT WORKPLACE
1.3.1 MEANING OF WORKPLACE DIVERSITY

According to Josh Bersin, "Companies that embrace diversity and inclusion 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, cultures, 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,
generations. 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.
1.3.2 RATIONALE FOR WORKFORCE DIVERSITY
Rationale of having workforce diversity rises 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 report discrimination signals
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toxicity in company culture adversely 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.
1.3.3 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 skills sets and cultures, it fosters a
fresh perspective to every business aspect. This can lead to benefits 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 conventional jobs that simply pays 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
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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 increases
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
stops them socializing. diversity benefits a firm not only financially but also by
incrementing its company culture. Inherent biases towards certain sections of the
workforce are repelled 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 rise from cross communication. It would also induct
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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
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
1.4 DIVERSITY AND INCLUSION AT WORKPLACE
1.4.1 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
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potential of diversity in organization by creating a work environment 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.
1.4.2 Develop Workforce Inclusion at Workplace
Inclusion is complimentary and imperative to the diversity of the workforce. 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.
a) Access to resources: Give employees the support necessary access 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.
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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 them 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
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.
1.5 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 innovative 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.
1.6 GLOSSARY
Workforce Diversity: It means recruiting, training, understanding, accepting, and valuing

differences pleasing people.
1. Workplace Diversity 4. (d)
2. Workplace democracy 5. (d)
3. True
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Q1) What is Workplace Diversity?

Q2) Describe the importance of workplace diversity.
Q3) Briefly describe difference between sociocracy and democracy at workplace.
Q4) 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?
Q6) Explain the concept of workplace inclusion. How is it related to workplace diversity
Q7) Describe the steps to develop workforce inclusion at workplace
1.9 REFERENCES
Prasad, L. M., Principles and Practice of Management, Sultan Chand and Sons, New
Delhi; 9th edition, 2015.
2013.
Ken Taylor. (1983) Heads and the Freedom to Manage. School Organization 3:3, pages
273-286.
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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LESSON-2
ORGANISATION STRUCTURE
Dr. Vipin Kumar Aggarwal
STRUCTURE

2.2 Introduction
2.3 Traditional Organisation Structures
2.3.1 Functional structure
2.3.2 Product structure
2.3.3 Geographical Structure
2.4 Modern Organization Structure
2.4.1 Project Structure
2.4.2 Matrix Organization
2.4.3 Virtual Organization
2.4.4 Difference between Modern and Traditional organization structure
2.5 Summary
After reading this chapter, you will be able to understand:

• Different types of organisation structure
• Traditional vs. Modern organisation structure
• Different types of traditional structures
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• Functional structure-its advantages and disadvantages

• Product structure-its merits and limitations
• Geographic structure-its merits and limitations
• Project organisations- its merits and limitations
• Matrix organisations-its merits and limitations
• Virtual organisations-its merits and limitations
2.2 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 into small
units. There are many alternative patterns for grouping organizational activities. It can be done
by function, by territory or geography, 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
themselves to the principal of specialization but do not believe in superiority of one function
over another.
2.3 TRADITIONAL ORGANISATION 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. They look like pyramids where organization is divided at 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 organizational 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
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eliminates the vertical design of a traditional company and gives employees ownership of the
work they perform.
Different types of modern and traditional structures are discussed in detail as below:
Traditional structures can be divided into:
2.3.1 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 performed like production, marketing, human
resource, finance, etc. Under 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.
Fig 2.1 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 co-ordination 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 list down all activities and lays emphasis on their performance
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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.
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.
2.3.2 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 functions within their own departments.
Fig 2.2 Product structure
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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.
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.
2.3.3 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 are similar, but it is geographically dispersed.
Fig 2.3 Geographical structure
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Merits
1. It helps in enjoying the benefits of economies of local area operations.
2. It facilitates the expansion of business into various regions.
3. There is better co-ordination of activities as the regional managers 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.
The disadvantages are as follows:
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 organisations 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 organisation into
small units.
5. ______________________ structure is suitable for organisation 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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2.4 MODERN ORGANISATION STRUCTURE
2.4.1 Project Structure

The project organization structure consists of a number of horizontal departments 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
functional 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 functionalspecialists go
back to their original departments. The objectives of the project, its startand 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 manufacturing, 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
thediverse 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.
Specialistsare 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
ofprojects.
Project organization suffers from the following drawbacks:
1. There is lack of clearly defined responsibility, lack of communication lines and
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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.
Top
Manager
Project Project Project

Manager 1 Manager 2 Manager 3
Fig 2.4 Project Structure
2.4.2 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-functional 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.
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
principle of unity of command as each person has two bosses-the functional manager and the
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project manager. This results in indiscipline, confusion, etc., adversely affecting the
productivity and profitability of the organization. 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-project 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 responsibility and well-established lines of
communication helps in 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. The
personnel
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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.
2.4.3 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 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 removed. In this sense, it is a boundary less organization. Partners in
virtual 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
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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.
5. Complementary resources- Virtual organizations combine complementary 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.
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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.
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 workers1. (1https://www.allbusiness.com/new-
research-confirms-virtual-work-increases-employee-productivity-
15244-1.html (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,
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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.
2.4.4 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 design. These structures are complex in design
and understanding.
These are relatively less costly tomaintain. This structure requires updated
technology and resources; therefore, they
involve high cost.
They are suitable for organizations These structures are suitable for global
dealing in one or two product lines with firms dealing in customized or multi-
limited areas of operations. range diverse products.
These structures include product, These structures have both product and
geographic and functional divisions. functional divisions vested in each other.
These structures have centralized These structures have participatory work
authority. environment with balanced delegation of
authority at various levels.
Employees may have low morale in Employee morale is high as they are put
absence of authority and say in decision in command for decision making.
making.
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IN-TEXT QUESTIONS
6. Modern organisation 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 organisation structure can be seen in which of the
following:
a) Traditional organisation structure
b) Modern organisation structure
9. ______________________is also known as digital organisation.
10. ___________________consists of a number of horizontal departments
oriented towards the completion of projects of long duration.
2.5 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 organizational structure. Traditional
organization structure is further divided into
1. Geographical Structure 6. True

2. False 7. Matrix organisation structure
3. Product structure 8. Modern organisation structure
4. Organisation Structure 9. Virtual Organisation
5. Functional 10. Project organisation structure
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1. Explain the difference between traditional and modern organisation structures?

2. If you are manager of global company dealing in multiple products, which organisation
structure will you go for in order to bring maximum benefits to the organisation?
3. Explain in detail various types of traditional structures taking support of diagrams and
illustrations.
4. Explain various types of modern organisation structure taking support of diagrams and
illustrations.
5. Explain the difference between project organisation structure and matrix organisation
structure.
6. Explain in detail working and designing of a virtual organisation. what are its key merits
and limitations.

• Chhabra, T. N. (2020). Business Organisation and Management. Sun India Publications.
• New Delhi.
Pvt. Ltd.
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LESSON-3
RECENT DEVELOPMENTS IN BUSINESS ORGANIZATION
Dr. Rutika Saini
Dr. Ruchi Gupta
STRUCTURE

3.2 Introduction
3.3 Learning Organizations
3.4 Franchising
3.5 E-Commerce
3.6 Outsourcing
3.7 Government and Business Interface
3.8 Sustainability
3.9 Digitalization and Technological Innovations
3.10 Summary
3.11 Glossary
3.14 References
• To Know the recent developments in the Business Organization

• To understand the contemporary issues in Entrepreneurship
• To understand the relevance of learning Organization
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• To discuss the concept of outsourcing the E-Commerce solutions

• To explore the role of digital and technological innovations
3.2 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 organizations 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.
3.3 LEARNING ORGANIZATIONS
The Organizations are striving hard to bring improvements and innovations 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
observed 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 organizations 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 collective
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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3. Mental Models
4. Shared Vision
5. Team Learning
What is a Learning Organization?
In the layman’s words a learning organization can be defined an organization 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 define 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 techniques which are
available in the 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 can not 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
Learning from Past

Experimentaion
Experience
Systematic
problem Solving
Learning from Others Transferring Knowledge
Source: Harvard Business Review

Fig 3.1 Learning organisation
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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 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 are 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 up 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 development, the learnings cannot be made out
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of the success and 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
3.4 FRANCHISING
Franchising refers to an arrangement between the two parties. One party is known as the
franchisor and the another 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 franchisor for which they charge a fee or commission. The franchisee is given the
authority to use the trademark and the brand name.
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Franchising is considered to be great technique to have access to the larger 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 franchise agreement. Thus, a franchiser virtually
sets up the business for the franchisee.
4. The franchiser may also arrange for the training of personnel working in the franchisee
organisation.
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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.
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.
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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 comes in the mind is
regarding the type of the business activity. Franchising is one of the easiest and safest way 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-franchisee relationship is quite evident in the soft-drinks
industry.
Business- format Franchising- It is considered to be one of the most famous types of
franchising where the franchisor allows the franchisee to use its name and brand and in return
provides the services like marketing, advertising, training of the staff, leadership etc.
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Benefits of Franchising
(I) To the Franchiser
1. The franchise can expand his 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! his 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.
6. It is often observed that the franchising increases the purchasing power of franchisee.
The franchisee now becomes a part of a big firm 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.
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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.
5. The franchisor imposes many restrictions of the franchisee 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.
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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 franchising agreement with over 1.5 lakh franchisees and the
4600 franchises.
3.5 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 selling 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
3. Services-e.g., matrimonial services through shaadi.com, placement services through
naukri.com
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 transactions 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 indiatimes.com 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 cooltoad.com, 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)
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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 organisations. An example of B2B transaction is a business organisation
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.
3. Consumer-to-Business (C2B) Electronic Commerce
C2B can be 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 yatra.com his dates of travel, his source and destination of
travel, specifying the total number of tickets required in business/economy class.
Yatra.com 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 timesclassifieds.com. 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 timesclassifieds.com.
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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 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.
6. 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.
7. Direct Contact between Business and Consumer: E-Commerce enables business firms
to establish a direct contact with their customers by eliminating middlemen.
8. 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,
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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.
5. Corporate vulnerability Web farming: The availability of product 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
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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 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 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, infospace.com, which offers
various commercial services to online customers, complained against the resident of
Bhopal for registering his website as indiainfospace.com. 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 rediff.com in the address bar of Internet
Explorer, types by mistake ridif.com or redif.com, 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.
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.
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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.
3.6 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 accounting and financial
services, payroll services, inventory management, advertising services, healthcare and welfare
services, market research, 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.
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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 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 important 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
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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 corporations. 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.
IN-TEXT QUESTIONS
6. Franchising refers to an arrangement between the two parties. On party is
known as the ___________ and the another 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. Outsourcing
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.
3.7 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
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influence its international business activities. 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 infrastructure 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 necessity to avoid the exploitation of general public. The
government set 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 make 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 the 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 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.
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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.
2. Information: The governmental agencies conduct surveys throughout 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 covid19.
3.8 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 sustainability in the 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 the 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?
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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 lowers 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.
Source: Harvard Business School Online

Fig 3.2: Shared Value
How to create a more sustainable business
There are numerous ways of creating a sustainable business. The following 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.
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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 that how it can reach to the goals. A mission statement throws the light on the
ideology 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 the full support towards the
implementation of the strategy. The System, Staff, Structure and Culture has 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.
3.9 DIGITALIZATION AND TECHNOLOGICAL INNOVATIONS
Digital and technological innovation means the implementation of technological 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 ongoing advancements. Following are the benefits
of implementing the digital innovations in your organization.
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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. Which 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 slave. People interact with other using the digital devices rather than meeting them
physically. The digital technologies have made people more alone and isolated. Studies
found that the decrease in realm 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 are available which can easily change the reality. Such issues are
going to exaggerate with advancements in the technology.
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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 the 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 technological advanced tools to
the business problems in order to improvise the organizational practices.
3.10 SUMMARY
The chapter talks about the 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 attached to the same. The
chapter throws light on the role of digitalization and technological innovations in the business
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organizations. Towards the end, the chapter discusses the developments in the entrepreneurship
and deals with the Self-help groups and the Angel investors.
3.11 GLOSSARY
• Learning Organization: A learning organization can be defined an organization

capable of making improvements on the basis of past performance and the results.
• Franchising: Franchising refers to an arrangement between the two parties. On party
is known as the franchisor and the another is known as the franchisee. The franchisor
allows the franchisee to use its name and technology for the marketing and selling
purposes.
• Sustainability: The sustainability in the business means doing the business activities
without hampering the environment, society and the citizens at the large
1. Learning Organization 11. Government

2. Xerox 12. c)
3. Others 13. Sustainability
4. False 14. b)
5. False 15. Digital and technological innovations
6. Franchisor and Franchisee
7. d)
8. Outsourcing
9. d)
10. Non-core
1. What are Learning Organizations?

2. Explain the key features of the learning organizations with the help of a case study.
216 | P a g e

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?
3.14 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://online.hbs.edu/blog/post/what-is-sustainability-in-business
• Peter M. Senge, The Fifth Discipline (New York: Doubleday, 1990), p. 1.

Publications.
• New Delhi.
• 4 | Page
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• Singh, B. P., & Singh, A. K. (2002). Essentials of Management. New Delhi. Excel
Books Pvt. Ltd.
218 | P a g e


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Department of Distance and Continuing Education

B.A.(Hons.) Economics/English/Political Science

As per the UGCF and National Education Policy 2020

© Department of Distance and Continuing Education

© Department of Distance & Continuing Education, Campus of Open Learning,

© Department of Distance & Continuing Education, Campus of Open Learning,

© Department of Distance & Continuing Education, Campus of Open Learning,

INTRODUCTION TO BUSINESS ORGANISATION

1.1 Learning Objectives

© Department of Distance & Continuing Education, Campus of Open Learning,

1.6 Business and Environment Interface

1.1 LEARNING OBJECTIVES

After studying this lesson students may able to understand: -

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behaviour of an entity, that is generally supported by principle of conduct. Business ethics is

© Department of Distance & Continuing Education, Campus of Open Learning,

© Department of Distance & Continuing Education, Campus of Open Learning,

© Department of Distance & Continuing Education, Campus of Open Learning,

1.3.3 Requisites of a successful business

Economic Social Human

Fig1.1: Objectives of Business

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© Department of Distance & Continuing Education, Campus of Open Learning,

© Department of Distance & Continuing Education, Campus of Open Learning,

1.4 SCOPE OF BUSINESS

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and manufacturing industries, the network of ancillary services: distribution, banking,

Fig 1.2: Types of business activities

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Extractive Genetic Manufacturing Construction

Fig 1.3: Classification of industries

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© Department of Distance & Continuing Education, Campus of Open Learning,

© Department of Distance & Continuing Education, Campus of Open Learning,

Trade Aids to trade

Home Trade Foreign Trade Transport

Retail trade Export Trade Insurance

Fig 1.4: Commercial activities

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© Department of Distance & Continuing Education, Campus of Open Learning,

1.4.3 Inter-relationship between Trade, Commerce and Industry

Fig 1.5 : Inter-relationship between Trade, Commerce and Industry

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We may define the term business in the following words :

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1.5 BUSINESS AS A SYSTEM

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Fig 1.6 : Business as an open system

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1. Plans—objectives, policies, procedures etc.

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sub-systems. Therefore, its successful management requires a high degree of knowledge,

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Fig 1.7 : Business System

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Fig 1.8 : Interaction between Sub-systems

1.6 BUSINESS AND ENVIRONMENT INTERFACE

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