business-organisation-msbte-iom

Lecture notes prepared by Meet Bakotia

Unit 1- Business Organizations

ObjectivesAfter studying this lesson, student shall be able to:

1) classify Business organisations,2) understand characteristic features of various business organisations,3) compare the advantages and limitations of all business organizations,4) understand various principles of organisation,5) compare Line type, functional type and Line & Staff type organisations,6) understand the basics of marketing management.

Business organisationBusiness organisation is a firm which combines the factors of production (men, materials and machines) in a plant for the purpose of producing goods or services and selling them at profit. The various types of Business Organisation/ Ownership

(a) Sole proprietorship(b) Partnership(c) Joint stock company(d) Co-operative societies(e) Public sector

Individual OwnershipIt is also called as Sole/Single Proprietorship. Sole means single and proprietor means owner. The business organisation in which a single person owns, manages and controls all the activities of the business is known as sole proprietorship form of business organisation. In this type of enterprise, a person invests the entire capital. He organizes and manages the business himself, and takes the entire risk. The entire authority and responsibility in the matter of decision making, policy making and workings belongs to him. All profits and losses are his own. If necessary he can employ some persons to assist him. Individual ownership business cannot expand beyond certain limits because the limited capital resources. There are no legal formalities required for starting this kind of business. Advantages of Individual Ownership:1) Simple in nature 2) Easy to manage3) No legal formalities

4) Owner enjoys all the profits

5) Business secrets maintained

6) Better quality product and less wastage of materials since personal attention given to the products.

Limitations of Individual Ownership:


1) Limited capital2) Limited life span of business3) Less/No business expansion4) Entirely owner’s risk of profit and loss

5) Wrong decisions of owner affects business

6) Expert’s guidance unavailable

Partnership Business Single ownership business looses its existence if owner becomes too old to work or if he dies. In such case owner can join hands with partners. When friends are invited to run a business, following points should decided (i) the amount of capital to be contributed by each one of them; (ii) who will manage; (iii) how will the profits and losses be shared. Partners share profits and losses in same proportion. There can be 2 or more persons (lesser the better) who share their powers, responsibilities and profits according to an agreement among themselves. This agreement is called as “Partnership Deed”. The partnership deed contains the terms and conditions relating to partnership and the rules and regulations. It mentions the rights and duties of the partners. The agreement is submitted to the Registrar of Firms along with necessary registration fees. Advantages of Partnership Organisation:

1. Easy formation compared to Joint Stock company

2. Large capital generated

3. Distribution of workload amongst partners

4. Quick decisions taken.

5. Suitable for medium size business

6. Expert guidance is available

Disadvantages of Partnership Organisation::

1) Compulsory Registration

2) Losses to be shared amongst partners

3) Not suitable for large scale business

4) Partners can cheat each other

5) Secrets are hardly maintained


6) Selfish behavior of the partners may affect other good partners.

Joint stock company:With the change in scale of production from small scale to large scale over the recent years and with widening of the market from local to national and international, the individual ownership and partnership firms failed. This is due to limitations of individual ownership and partnership such as: limited capital, short life span, limited managerial skill and unlimited liability. This resulted in evolution of Joint Stock Company. In a Joint stock company, capital is raised by a large number of persons, in the form of shares of different values. Persons who purchase the shares are called as share holders. Share holders elect the managing body called as “Board of Directors”. Board of Directors (1) make policies; (2) take decisions; and (3) run company efficiently. The day to day business is carried on by the salaried manager or Managing Director. The shares are transferrable. Legal documents are then submitted to the Registrar of Joint Stock Company and if the Registrar is satisfied then he will issue a certificate of commencement of business and then the company starts operating.

Types of Joint Stock Company:

1. Private Limited Company 2. Public Limited Company

Private Ltd. Company Public Ltd. Company

Generally close friends and relatives are the members.

Membership is open to general public.

Less legal formalities as compared to Public Ltd. Company.

More legal formalities are required to be completed.

Minimum no. of shareholders is 2 and maximum no. is 50.

Minimum no. of members is 7 and there is no maximum limit.

Shares are not transferrable without the agreeing of other

partners.

Shares are transferrable.

The aim is to earn profit.Along with earning profit it aim is to

serve the society.

Suitable to medium scale industries.

Suitable to large scale industries.

Short span. Long life.

Advantages of Joint Stock Company:

1. Large-scale production

2. Shares are transferable


3. Long life span

4. Specialist’s Services available

5. Risk of loss divided among shareholders

6. Stable, efficient and flexible managementDisadvantages of Joint Stock Company:

1. Compulsory Registration

2. Difficult to form.3. Complex Legal formalities.

4. People commit frauds with the company.

5. High cost of Management.

6. Concentration of economic power and wealth in few hands

Co-Operative Organisations:Cooperative society is an independent organisation formed to serve the members and for the welfare of the society. Sole proprietorship, partnership and joint stock companies are formed with the basic purpose of making profit. These ownerships try to exploit the poor through long working hours, lower wages, bad working conditions, higher prices of product etc. This kind of exploitation of the poor people and lower class made them to unite and form a movement through mutual help. This movement gave rise to the formation of co-operative enterprises. Co-operative enterprises eliminate the aim to make profit and it provides goods and services to the members of the co-operative at lower cost. Normally 10 members form co-operative enterprises. Members supply the capital, manage the business and share all profits and losses. Legal documents are sent to registrar who issues certificated of registration if he is satisfied and hence business is started.

Types of Co-operative Societies: Producers co-operative Society, Consumers Co-operative Society, Housing Co-operative Society, Credit Co-operative Society, Co-operative Farming

Advantages of Co-operative Societies:

1) Profit is not the basic purpose.

2) Suitable for small scale industries.

3) Democratic ownership

4) Promotes co-operation, mutual assistance and idea of self-help.

5) Beneficial to common man.


6) Middle class and poor class people are benefited by this type of ownership.

Disadvantages of Co-operative Societies:

1) Less capital available.

2) No specialists services available

3) Not suitable for large scale industry.

4) Organisation can get dissolved

Public Sector (State Enterprises):The term public enterprise stands for business organisation that is owned and managed by the state or any public authority. Public enterprise is defined as an enterprise which may be (a) Owned by the state (b) Managed by the state or (c) Owned and managed by the state. Following are few objectives of Public Sector:1) Promotes rapid economic development. 2) Provides basic infrastructure facilities for the growth of the economy.3) Reduces disparities in income and wealth.4) Avoid concentration of wealth and power in a few hands.5) Creates employment opportunities on an increasing scale.6) Distribution of goods of better quality and fair price.Forms of Public Sector:1. Enterprises Owned and Managed by Government Department. It is run by government. The main purpose is to earn profits or to provide a service to society at minimum possible cost. Post and telegraph, broadcasting, railway and defense industries are the leading examples of departmental organisation. 2. Government Company 51% or more of the share capital is owned by the central or state governments. This form of management is run-like public enterprise but is operated, financed and taxed like a private enterprise. The company form of management is usually adopted (i) to take over the existing enterprises in emergency (ii) To start a business with collaboration of private enterprise (iii) To start any new business and to run it as a public enterprise.3. Public CorporationA public corporation is a body created by an appropriate law passed in the Parliament (Legislative Assembly). Parliament controls its general policies. The chief executives (managers) are appointed by the government. Board of directors controls day to day affairs, recruitment and organisation of corporation. The final control remains with the government. Aim of corporation is the welfare of the community. Examples: Life Insurance Corporation of India (LIC), Oil and Natural Gas Corporation (ONGC), National Textiles Corporation (NTC).Merits of Public Sector:1. Large capital available2. Easy transport facility, electricity and power supply available


3. Large employment opportunities.4. Minimizes exploitation of the workers.5. Collaboration with foreign industries and import of foreign technology is more easy.6. Fast economic development not in a particular region but all over the country.7. Encourages industrial Growth.

Demerits of Public Sector:1. Inefficient as compared to Private Sector2. Favourism, dishonesty and laziness3. Low Profits4. Too much interference of Government and politicians 5. Delayed decisions 6. Inefficient persons may occupy high positions.7. Workers avoid work.

OrganisationOrganisation is systematic group of people in any industry. Organizing is one of the functions of management. People at various levels are systematically arranged and their group efforts perform the management function. Organisation is process of (i) identifying and grouping the work to be performed (ii) defining and delegating the responsibility and authority and (iii) establishing the relationships for the purpose of enabling people to work most efficiently together in accomplishing objectives. Organisation is a co-ordination of men, materials, machines, and money in such a way that maximum output is obtained efficiently and effectively with minimum total cost. Organisation is the backbone of management, which establishes relationship between people, work and resources.

Characteristics of Good organisation:

Good organisation should have:

1) Well defined objectives.

2) Properly divided authorities and responsibilities.

3) Well defined and easy to perform activities

4) Perfect co-ordination of various activities.

5) Two way communications between the boss and the worker.

6) Reasonable span of control

7) well defined Policies and procedure


8) methods to increase morale and motivation of employees

Principles of organisation:

(1) Consideration of objectives (Goals):

(2) Relationship of Basic Components of Organisation:

(3) Principle of parity of Authority and Responsibility

(4) Principle of span of control

(5) Principle of division and grouping Work

(6) Principle of effective Delegation

(7) Principle of communication

(8) Line and staff relationships

Delegation of Authority When the work of an executive increases beyond certain limit, he may not be able to do that work. In that case, he delegates some of his authorities among his subordinates. The process of passing on a given job to somebody else is called as delegation. It is distribution of one’s work since the job has grown beyond his personal capacity. Delegation means assigning work to others and giving them authority to do it. When a responsibility of one individual exceeds a limit then he has to get help from others to get his job done. To delegate means to transfer the authority from superior to subordinate to get the job done. When a job becomes too big for one person to do it himself he does it through dividing his load of work and sharing his responsibilities with subordinates. Advantage of Delegation

1. Natural limitations of human beings are solved.2. Relieved of tensions and stresses3. Proper organisation structure is formed.4. Proper management is accomplished.5. Everyone gets trained to fulfill tasks.6. Everyone gets some new task to perform.

D ecentralization When the organisation is large and complex, management cannot centrally control all information necessary for decisions. The practical solution is to divide the organisation in to semiautonomous decision making units. Thus we have a decentralized organisation with wide spread decision making power. Decentralization is closely


related to delegation. Decentralization refers to the systematic efforts to delegate to the lowest levels all authority except that which can only be exercised at the central point. Delegation refers primarily transfer of authority from one individual to another. Decentralization applies to the systematic delegation of authority to all units in an organisation.Advantage of Decentralization:1) Reduction in burden of Chief Executive.2) Quick decisions. .3) Development of Managerial employees4) Motivation to work harder5) Effective Control and Supervision.6) Speedier communication, better utilization of lower level and middle level executives.Limitations or disadvantages of Decentralization:1) Inconsistencies in the organisation. 2) Wrong decisions if subordinate not talented enough to solve the work.3) Costly 4) Problems in coordination among the various units.5) Small scale industries fail in decentralization of authority.6) Chances that work gets spoiled.

Types of organisation:(1) Line Organisation (Military or Scalar organisation)(2) Functional Organisation(3) Line & staff Organisation

1) Line /Military/ scalar organisation:

This is the simplest and oldest type of organisation. Each departmental head has complete control over his section and he is fully authorized to select his labour, staff, and purchase of raw materials, stores etc. The General Manager is the overall in-charge. Foreman or Supervisor is a person who supervises the workers and directs the activities which are to be done by workers. Any enterprise that starts small always starts with line type of organisation.


Advantages of line organisation:

1. Simple and easy to understand.

2. Flexible to expand or contract.

3. Clear cut authority and responsibility.

4. Clear channel of communication with no confusion amongst workers.

5. Strong discipline

6. Effective co-ordination within the department is obtained.Disadvantages of line organisation:1. Less Capital, machines, raw materials etc. i.e. less resources.2. Limited to small scale industry

3. Overload of Work

4. Dictatorship kind of organisation like the Hitler’s organisation in Germany.

5. Expert’s guidance not available.

6. Wastage of materials and man hours due to lack of expert advice.

2) Functional Organisation:


F.W.Taylor, the father of Scientific Management, suggested Functional organisation. He recognized that it was difficult to find all-round persons qualified to work at middle-management in the line organisation. In line type of organisation, a foreman (supervisor) had to be a master of specialist in everything and it is difficult to find such all round person. Therefore in functional type of organisation, instead of one foreman there are eight functional foremen, each specialist in his own field.

The function of each foreman is as under:

1. Route clerk: is in-charge of issuing work orders and routing the jobs.

2. Instruction Clerk; imparts instructions and specifications of jobs to the workers.

3. Time and cost clerk: Keep records pertaining to the time (spent in doing work) and cost (i.e. worker’s wages).

4. Disciplinarian: keeps discipline amongst workers

5. Gang boss: has charge of the preparation of all work up to the time that the workpiece is set in the machine.

6. Speed boss: ensures that proper cutting tools are being used, cut is started at right place in the workpiece, and the optimum speeds, feed and depths of cut are being employed.

7. Repair boss: conducts adequate repairs and maintenance of equipment/machinery.


8. Inspection boss: is responsible for the quality of product.Advantages of functional organisation:

1. Proper Division of work: 2. Expert’s (8 functional foremen) guidance available3. Expert’s guidance leads to greater efficiency4. No wastage of materials and man hours5. Quality of work is improved6. Executives are relieved of routine work

Disadvantages of Functional Organisation:

1. Confusion amongst workers because of 8 foremen.

2. Indiscipline amongst workers.

3. Each foreman has same authority so chances of friction and jealousy amongst them.

4. Anything goes wrong, no single foreman can be held responsible for that.

5. Expensive organisation since more number of people involved.

6. Constant spoon-feeding to workers kills their talent.

3) Line and staff organisation:

Line organisation expanded as line and staff organisation. All the disadvantages of line organisation and functional organisation are solved in line and staff organisation.


Board of directors (chairman), General Manager, Works Manager, Production Superitendent, foreman and workers are people working in the line. Secretary, Legal advisor, Sales manager, Purchase Engineer, Accounts officer, Personal Manager, Design Engineer, Industrial Engineer and stores officer are people appointed as staff. The line maintains discipline and stability, staff provides experts information and helps to improve overall efficiency. Therefore, the staff has no administrative authority. They serve only in advisory capacity in their field of specialization. The supervisory authority and control over the work of subordinates always remains in the hands of line executives.

Advantages of Line & Staff Organisation:

1. Quality of Product is improved

2. Expert’s guidance available.

3. Line executives can focus only on production

4. Less wastage of Material, Manhours and Machinehours.

5. Workers are not confused.

6. Line & staff organisation has combined advantages of Line org. & functional org..Disadvantages of Line & Staff Organisation:1. Friction and Jealousy amongst line and staff executives.2. Advice given by staff may be ignored by line heads:


3. Not applicable to small scale industries.4. Costly organisation:

5. Loss of initiative by line executive because of too much dependency on staff 6. Constant spoon-feeding to workers kills their talent.

C ommittee: A committee is a group of people who give advice on certain important problems of the enterprise, which cannot usually solved by an individual. Committee members meet repetitively and solve problems of the enterprise. Since there are more people in a committee, obviously their advice will be much realistic to that of one single man.Rules/Principles for use of a Committee:1) Minimum 5 members should be there in a committee.2) Duties, Authority, responsibility and objectives of committee must be well defined.3) Agenda in written form should be circulated all over workplace.4) Only complicated problems should be included in the agenda.5) No one should divert from agenda or start discussing unwanted topics.6) Committee meetings should begin and end on prefixed timings.7) Solution to problem should be published and circulated in organisation.8) A committee must be dissolved after its purpose is over.Types of Committee:

(1) Standing committee/Permanent Committee: Exists permanently and formed when organisation faces complex problems frequently(2) Temporary committee: Dissolved after work is over(3) Committee in Control: has full powers to act(4) Co-ordination and Discussion Committee: Has no power to act (5) The Advisory Committee : The committee does not have power to act. It simply advices the executive. Final decision is taken by the concerned executive(6) Educational Committee : It helps in solving educational projects

Advantages of Committee:1) More persons are involved.2) Correct Decisions are likely to come out.3) Reduces work load of management.4) Brain storming exercise brings out talent of employees.5) Feeling of mutual understanding & co-operation is developed amongst employees.6) Young executives get trained and get fast exposure to work environmentDisadvantages of Committee:1) Not affordable in small scale industries.


2) Delayed decisions because of slow going process3) Get compromised solutions4) Conflicts amongst members on final decision.5) Weak members of committee keep low profile while aggressive members always try

to prove their point.6) Committee decision is a group decision and no individual member can be held

responsible for anything that goes wrong.

Marketing Management:Marketing management is planning, implementation and controlling of marketing activities like pricing, promotion, distribution of goods and services, etc. Marketing management involves producing product or services that satisfies a customer. Marketing management also involves achieving organisational objectives like profit making through selling product and satisfying customer.

Difference between sales department (selling) concept & Marketing conceptSelling focuses on the needs of the seller whereas marketing focuses on the needs of the buyer. In selling main aim is to sell your product. For e.g. if 5000 dresses are manufactured then the aim is to sell the whole lot and achieve profit while in marketing the dresses won’t be manufactured first. First of all customer demand related to dresses is observed, what type of product (dress) will actually satisfy the needs of customer, that is observed and then manufacturing and selling of product is done. Marketing focuses more on customer than on profit.

Market : Market is a place where things are brought and sold where buyers and sellers personally meet to affect purchase and sale. Market is a place where proper communication between a buyer and seller takes place.

Types of Market:

Market can be classified depending upon:

1) The product sold in the market: e.g. cloth market, jute market, share market, grain market, etc,

2) Nature & volume of selling: A wholesale market where goods are sold in large quantities to dealers and A retail market where goods are sold in small quantities to consumers.

3) Area covered: Depending upon the area covered, it may be a home/local market, national market or an international market.

4) Time- interval: Depending upon the time interval, it may be a short period market (e.g. money market) or a long period (or term) market (e.g. capital market).


5) Seller’s position: Depending upon the seller’s position, it may be a local market, central market or a terminal market. In case of primary/local market farmers sell their surplus produce to traders in the village. In case of secondary/central market, wholesalers sell to retailers. In case of terminal market, consumers buy from retailers or local dealers.

Market Research:Market research is effort to collect information about customer’s needs, wants and desires. If the customer’s needs, wants and desires are fulfilled, company can earn profit. The term is commonly interchanged with marketing research; however, expert practitioners draw a distinction saying that marketing research is concerned with marketing processes, while market research is concerned specifically with markets. Market research provides important information to identify and analyze the market need, market size and competition.Need/Purpose of Market Research:To perform marketing function effectively, businessmen need information about customer wants, market demand, competition, distribution channels etc. This information needs to be updated regularly because businesses operate in a dynamic environment. Market research is needed because of

(1) Changes in technology (2) Changes in consumer tastes.(3) Changes in the product ranges of competitors (4) Changes in economic conditions (5) Need of more detailed understanding of consumers’ needs (6) Need to reduce the risk of product/business failure

Advertising: Advertising is a form of promotion that is done through selected media outlets to convey message about the product to be sold to the customer. Advertising is a form, either written or orally, that attempts to sell a product. Advertising is necessary:

1. To inform customer about company’s product.2. To increase sales of a particular product.3. To launch a new product4. To build the company or brand image5. To remind and reassure customer6. To compete in market Types/Sources of advertising: 1) Advertising through newspapers and pamphlets2) Television advertising and Radio advertising3) Online advertising and Email Advertising4) Press advertising5) Street advertising

http://en.wikipedia.org/wiki/Marketing_research


6) Celebrity branding

business-organisation-msbte-iom

Business

lecture notes prepared

joint stock company

small scale industries

sole proprietorship

legal formalities

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