1. The basis of business and the environment in which it operates

1.    The basis of business and the environment in which it operates.

Business concept

All the activities related to the production, distribution, selling of goods and services with a profit motive in order to satisfy human needs and wants can generally be defined as business.  There are businesses which fulfill the needs and wants without a profit motive.

 “A business is any economic activity which fulfils human needs and wants.”

Needs and wants

Needs

The physical and mental conditions which are compulsory to be fulfilled by humans are known as needs. Eg:- Food, clothes, house, education, health, communication, transport, safety  •

Wants

Wants are the different ways of fulfilling the needs.  Eg:- Rice, bread, string hoppers, tea

The examples of needs and wants are given below

Needs	Wants
Food	Rice, bread, string hoppers, tea
Cloth	Saree, frock, trouser, shirt
House	Storied house, lodges, hostels, quarters,
Education	School education, education in pirivenas, private schools, educational courses, books
Health	Government hospitals, private hospitals, medicines, medical tests
Communication	Telephone, fax, email, internet facilities
Safety	Police, army, private security services

The differences between needs and wants

Needs	Wants
Limited  Common to every person  Essential for survival  Cannot be created by businessmen  Cannot be changed by social forces	Unlimited Differs from person to person Not essential for survival  Can be created by businessmen  Can be changed by social forces

Products

Anything offered to the market which fulfils human needs and wants are known as

 “Products”.

• Products can be categorized mainly as goods and services.

 Differences between goods and services

Goods	Services
Tangible ( Can be touched )  Can be stored.  Identical products can be produced.  Separable from the producer.	Intangible (Cannot be touched)  Cannot be stored. Varies according to service Provider.  Inseparable from the service Provider.

Human needs and wants are fulfiled by products.

Market

Market is any situation where buyers and sellers meet or connect.

Eg:- retail market, wholesale market, stock market,

 Goods and services are obtained from the market to fulfil human needs and wants.

Characteristics of  business.

Ø  Exchange or selling takes place.

Ø  Transaction of goods and services take place.

Ø  Continuous transactions will take place.

Ø  Motivated by profit.

Characteristics of business

1. Exchange or selling takes place.

All the businesses sell or exchange goods and services for monetary value, buying or selling of a goods and services at a price is an essential factor of the business. If there is no such selling or exchange then there is no business activity. For example cooking food for family members at home is not considered as a business whereas cooking food to sell is considered as a business.

2 Transaction of goods and services takes place.

All the businesses produce or purchase goods and services in order to sell others. They can be consumer goods or industrial (business) goods. Goods which are bought for final/end consumption such as bread, clothes, shoes are known as consumer goods. Goods which are bought for the production of consumer goods such as raw materials, machinery are known as industrial / business goods. Intangibles such as electricity, insurance, banking services are some examples for services.

3 Continuous transactions take place

If the transaction of goods and services are done continuously for a long period of time, it is known as a business. If only one transaction takes place it is not considered under business. For example if a person sells his old scooter which was used by him is not a business. But if he sells the scooters on a continuous basis it is a business.

4 Motivated by profit/ benefits

The basic goal of a business is to earn money and acquire wealth. A profit earned in terms of rupees and cents, an income more than the expenditure, building business relationships, generating business opportunities and providing social welfare are included in profit. Accordingly, there are profit motive businesses as well as businesses with non profit motive but motivated by benefits. Therefore profit in the business field is essential for the expansion of a business.

5 Has a risk

There are risks in the businesses due to the uncertainty in earning profit and the possibility of incurring a loss. Since the future of a business is uncertain, changes in the business environment, the inability to control the following facts which affect profit will create an uncertainty for a business.

1.      Changes in consumer taste design and demand.

2.      Changes in production technology and machinery.

3.      Increase in market competition.

4.      Scarcity of raw material, power failure and shortage of fuel.

5.      Employee problems and strikes.

6.      Fire, theft, burglary and accidents.

7.      Incorrect management decisions on using the business resources.

8.      Businesses always face risks. Having such risks is a characteristic of a business.

6. Create wants

Businesses produce goods and services to satisfy human wants. Some businesses turn raw materials into finished goods to satisfy human wants. Some businesses satisfy human wants by transporting products from a place to a place where there is a high demand for the product. Some businesses satisfy human wants by storing at the time of harvesting in order to provide at the time of scarcity. Accordingly, every business creates human wants by providing goods and rendering services.

7. An economic activity

Businesses are essentially considered as economic activities since they produce goods and services using limited resources and engage in distribution activites. It is money oriented. Businesses are economic activities since they sell goods and services and use limited resources.

Ø  Has a risk.

Ø  Creates wants.

Ø  An economic activity

 Two main activities of a business

Ø  Fulfilment of needs and wants.

Ø  Adding value to the resources.

• Value addition is the increment of the value of resources which happens when the nature of  the resource is changed during the production of goods and services. When businesses change  the nature of the resources there will be a value addition. Accordingly the value addition to the resources will be an activity of the business.

• There can be various goals/ objectives for a business, some of them are given below,

1.      Survival in the market.

2.      Profit maximization.

3.      Sales maximization.

4.      Increasing market share.

5.      Increasing consumer satisfaction.

6.      Maximizing the market value of shares.

7.      Personal satisfaction of businessmen.

8.      Social and community welfare.

9.      Employee welfare.

 Businesses also contribute to the existence of the economy.

Examples :

1.      Satisfying wants which are complex and changing.

2.      Innovation.

3.      Generating employment.

4.      National economic development.

Evolution of business

Direct production à barter system à Use of money à Industrial revolutionà Information era

There was a self sufficient economic system in the past. In that self sufficent economic system, one produced his own requirements by himself. Producing his own requirement by himself is known as direct production. Specialization was developed through direct production. The result of personal specialization is the surplus of production. The surplus production caused the barter system. Barter system was the first stage of the evolution of business. But the barter system ended up with some difficulties such as

1.      Problems in double coincidences of wants

2.      Divisibility problems

3.      Difficulties in transportation

4.      Difficulties in measuring value

5.      Problems in storing

Trade emerged with the barter system.  Producing for the market is known as indirect production. People started to exchange goods for common medium of exchange. It was known as money. Various materials were used as the medium of exchange to overcome the drawbacks of the barter system. The evolution of money from the barter system to the present can be sorted as follows:

• Use of materials

example: sea shells, tobacco

• Use of metals

Example: metals such as gold and silver

• Use of metal money

 values were imprinted on the face of metal pieces indicating the values. This became the

 base for the printed metal coins that came later.

• Use of coins & notes

 To rectify the inconvenience caused by using precious metals as money, notes and coins that don’t contain intrinsic value came into use. This includes notes and coins issued by the  government authority.

Examples -: Sri Lanka – Rupees

 Great Britain – Pound

 USA – Dollar

 Countries in the European Union – Euro

Use of bank money

 Usage of current accounts cheques

• Use of electronic money

 A method in which the transactions are done with computerized networks which was  introduced by the development of information and digital technology.

Examples - Credit cards

 Debit cards

 Prepaid cards

 Micro chips or mobile cash

Functions of money

1.      Common medium of exchange

2.      Measure of value / unit of account

3.      Standard of differed payment

4.      Store of wealth

 Usage of money is the second stage of the evolution of business.

With the industrial revolution in European countries, cottage industries converted into large scale industries and trade was expanded. There was a development in auxiliary services such as banking, transport, insurance, communication and warehousing due to the industrial revolution Industrial revolution is the third stage of the evolution of business.

Commerce is the combination of trade and support services (commerce = trade + support services)

At present there is an era of electronic commerce and electronic business. When buying and selling activities are conducted through internet, it is known as electronic commerce.When all the activities which belong to the business are conducted by the use of internet it is known as electronic business.

 Information era is the fourth stage of the evolution of business.  Following are some of the reasons for the popularity of electronic commerce

 Business information can be exchanged without documents

Speeding up of business activities

1.      Minimizing operational cost and inventory costs

2.      Emergence of global market space

3.      Increase in the quality of goods and services

4.      Saving customers’ time and energy

5.      Increasing computer literacy

6.      Improvement of infrastructure facilities

 Following are the four important stages of business evolution

Ø  Barter system

Ø  Use of money

Ø  Industrial revolution

Ø  Information era

 New trends in the business field

1.      Expansion of globalization

2.      Emergence of electronic businesses

3.      Use of electronic money

4.      Concern on environment

5.      Concern on business social responsibilities

Business classification criteria

Business can be classified under the following criteria.

Ø  According to the nature of the production.

Ø  According to the ownership/ proprietorship.

Ø  According to the goals.

Ø   According to the scale.

Ø  According to the production sector/source of production.

Criteria	Classification
Nature of production	Primary Secondary Tertiary
ownership	Private Public
goals	Profit Non profit
scale	Small scale Large scale
Production sector	Agriculture Industries Services

 Classifications of primary, secondary and tertiary according to the nature of the production

Primary sector-  Agriculture, forestry and fishing Mining and quarrying

Secondary sector- Manufacturing industries Construction industries.

Tertiary sector-  Electricity, gas providing steam and air conditioning, Clarification and distribution of water, Banking, Insurance and real estate etc, Ownership of dwelling

Businesses can be classified as agriculture, industries and services according to the production

 sector or source of industries.

The sectorial composition of the GDP is published in the annual report of the Central Bank of Sri Lanka.

1. Agriculture, livestock timber and forestry

1.1 Tea

1.2 Rubber

1.3 Coconut

1.4 Minor export crops

1.5 Paddy

1.6 Live stocks

1.7 Other faced crops

1.8 Plantation development

1.9 Timber and forestry

1.10 Other agricultural crops.

2. Fishing

2.1 Industry

3. Mining and quarrying

4. Manufacturing

4.1 Processing ( Tea, Rubber, Coconut)

4.2 Manufacturing

4.3 Cottage industry

5. Electricity, Gas and water

 5.1 Electricity

 5.2 Gas

 5.3 Water

1. Construction Services

2. Wholesale and retail trade

 2.1 Import trade

 2.2 Export trade

 2.3 Domestic trade

3. Hotels and restaurants

4. Transport and communication

 4.1 Transport

 4.2 Cargo handling. Ports and Civil aviation

5. Banking, Insurance, real estate etc.

6. Ownership of dwelling

7. Government service

8. Private services

Mining and quarrying come under primary sector, when classifying according to the nature of production, but mining and quarrying come under industries when classifying according to the source of industries. According to the nature of production electricity, gas and water come under the tertiary sector but according to the source of industries they come under industries.The sectorial contribution to the GDP can be presented as a percentage.

Business as a process of inputs and outputs

Inputs / Resources Land Labour Capital Entrepreneurship Information Time Knowledge

Business Functions Administration Operations (Production) Marketing Financial Human resource activities Research and development Management information

Goods And Services

 

Inputs /factors of production

Input factor	Examples
Land	·         Land where building is situated ·         Ventilation ·         Sunlight (Natural light)
Labour	·         Physical and mental labour of the tailor ·         Physical and mental labour of the supervisor ·         Mental labour of the managers ·         Labour of the watchmen
Capital	·         Building ·         Sewing machines, equipment ·         Distributing vehicles  Materials, thread, buttons, zips Money
Entrepreneurship	·         Decision maker of the combination of resources ·         (Person who enjoys profits) ·         Decision maker who undertakes risks ·         Individuals or institutes
Information	·         Designs that suit with consumer taste ·         New information about raw materials ·         Information about new technology ·         Information about the market
Time	·         Working hours of employees ·         Working hours of machines ·         Time taken to make decisions
Knowledge	·         Obtaining patents for new products ·         Skills of garment employees ·         Knowledge processed by managers ·         Knowledge of designing technicians ·         Law advice

Business functions

Functions	Examples
Administration	·         Preparing garment employee s’ ·         files. ·         Providing relevant advice ·         Maintaining attendance sheets
Production	·         Obtaining raw materials ·         Inventory control ·         Quality control
Marketing	·         Distribution of garments ·         Advertising ·         Deciding of price
Financial activities	·         Obtaining funds ·         Paying salaries ·         Investing funds
Human resource activities	·         Recruiting o f employees ·         Training ·         Promoting
Research and development	·         Conducting researches on new ·         Innovations ·         Improving the pro ducts ·         Exploring low cost methods
Management of information activities	·         Maintaining information ·         system ·         Obtaining new information ·         Updating the information

Reasons for the interest of stakeholders in businesses

The stakeholders of a business.

1.      Owners/shareholders

2.      Managers

3.      Employees

4.      Creditors

5.      Customers

6.      Suppliers

7.      Potential investors

8.      Government

9.      Community

10.  Other parties

Reasons for the interest of each stakeholder

Owner

·         To know if they receive an adequate profit for the money they have invested

·         To find about the growth of the business

·         To know the market share

Managers

·         To maximize the profit of the business

·         To know the growth of the business

·         To know the successfulness of the management decisions

Employees

·         To obtain a higher salary

·         To obtain a bonus

·         To get promotions

Debtors

·         To know the ability of recovering the loans

·         To know the safety of the lendings

·         To ensure the safety of collaterals

Customers

·         To receive quality goods and services

·         To see if the responsibilities are fulfilled properly.

·         To ensure the existence of the business

Supplies

·         To receive continuous orders

·         To collect money back for the goods supplied

Potential Investors

·         To invest their resources in that business in future

Government

·         To collect taxes/ to give tax reliefs

·         To improve the employment

·         To measure the economic development

Community

·         To know about the envionment protection.

·         To obtain job opportunities.

·         Given below are some reasons for the importance of stakeholders to a business.

 Reasons for the importance of stakeholders to a business

Owners  

v  To increase the investment

v  To  ensure the existence of the business

Employees

v  To improve the employees’ efficiency

v  To retain the employees

v  To get the employee attraction

Debtors

v  To obtain the funds continuously

v  To obtain the funds at low cost

Customers

v  To protect the market of the relevant goods and services

v  To build up consumer confidence

v  To create consumer loyalty

Government

v  To get tax reliefs

v  To get infrastructure facilities

v  To obtain technological knowledge

Business environment

The environment, in which the factors which influence the business operates is known as business environment. Factors of business environment can be catergorized into two

1.      Internal Environment

The forces and conditions that influence and exist within an organization are known as

 Internal environment.

 2. External Environment

All forces that influence and exist outside of an organization are known as External environment. It consist of two sub environments

Immediate/ Task/ close environment - The specific organizations or groups that influence and belong to external environment of the business are known as immediate environment.(Task environment)

Macro environment

The broad environment of a business and influential groups related to it are known as macro environment or general environment.

Benefits that a businessman get by studying business environment

v  To identify strengths

v  To identify weaknesses

v  To identify business opportunities

v  To identify threats

 The Internal environment

Ø  The party, who contributed resources or invested funds in a business and endures profits or losses is owners.

Ø  The party who formulates business plans and makes decisions is the managers.

Ø  The party, who is engaged on relevant works according to the plans and decisions made by the top managers, is employees.

Ø  The organization culture is the beliefs, values, attitudes, norms, habits, behavioural patterns that are shared among everyone in the business and which will be handed over to future generation.

Ø  The way in which the functions, resources and authority of a business are distributed to achieve the objective of a business easily is organization structure.

Ø  Everything such as land, labour, capital, entrepreneurship, time, information and knowledge that are used as inputs for producing goods and services are resources .

Environmental factor	Strengths	Weaknesses
Owners	·         Having a larger number of them. ·         Their increased financial strength. ·         Their increased knowledge and experience.	·         Having a smaller number of them. ·         Decreased financial strengths in them. ·         Lack of knowledge and experience in them
Managers	·         Their increased training and experience. ·         Ability to take correct decisions.	·         Decreased training and development. ·         Being backward to take decisions. ·         Taking wrong decisions.
Employees	·         Having clever experienced employees. ·         Having versatile abilities in them. ·         Having good attitudes in them. ·           ·         Having motivated employees.	·         Having inexperienced employees. ·         Having irresponsible and unaccountable employees. ·         Having unfavourable working habits in them ·         Having negative attitudes in them. ·         Having inefficient employees.
Organizational culture	·         Having a positive evaluation and value system. ·         Having an inherent, developed ethics and habits.	·         Not having an established value system and ethical system. ·         Not having a high supervision.
Organizational strcture	·         Proper division of work. ·         Proper building up of the organization	·         Having conflicts among roles. ·         Lack of coordination among sections.
Resources	·         Quantitativeness ·         Qualitativeness	·         Having outdated resources ·         Lack of resources ·         Not having enough resources

The task environmental forces of a business.

·         Customers (Consumers)

Buyers of the goods and services of a business are the consumers. Factors such as, awareness of consumers, income of consumers etc. will create opportunities. for some businesses and will create threats for some business.

·         Suppliers

Individuals and institutions that provide resources needed for a business are suppliers. Factors   such as, providing or not providing quality materials in time by suppliers, giving or not giving discounts etc. create opportunities as well as threats to a business.

·         Competitors

The business that provides similar goods and services as that of the business are competitors of the business. Entry of new competitors to the market, existing competitors leaving the market, providing different facilities with goods and services by competitors etc. create opportunities as well as threats for a business.

·         Produces of substitute products

Those who supply alternative products or services for the product that the business supply are the producers of substitute products.While the availability of plentiful substitute products is a threat to a business, it also creates other business opportunities.

·         Potential businessmen

Those who expect to enter the market create opportunities and threats as well.

Macro environmental factors

Political Environment

 Government agencies, political policies of existing government affect businesses.

examples :

              Government’s political vision and policies

              Following open economic policies.

 Businesses should try to get use of the opportunities and face threats implied from this

environment.

Legal Environment

 Government acts, rules and regulations will have an impact on the businesses in that country.

 o Consumer affairs authority act

 o Labour rules and regulations

 o Sri Lankan standard act

Businesses should try to conduct business activities according to these rules and regulations and face the opportunities and threats implied from this environment.

Economic Environment

While the purchasing power of people influence the existence of businesses, the cost that have to be incurred for business activities also depend on economic factors

examples :

 Inflation, interest rate, gross national product, employment, cost of living, inequality inincome distribution savings, investments.

While these factors influence businesses, businesses should try to take advantage of the

opportunities and face threats which will arise from that environment.

Social and cultural environment

Beliefs, social ethics etc. that individuals possess are included in social and cultural environment.

examples :

 Beliefs of individuals

 Values of individuals

 Customs

 Wishes

 Religious beliefs

While these factors impact on businesses, business activities should be carried out adhering to these factors.

Technological Environment

Trends in communication technology and the changes that have happened in agricultural,

industrial and medical sector belong to technological environment.

examples :

 New technical inventions

 Rapid change in technology

 Changes in communication technology

 Expiry of products

Business should try to get the use of opportunities and face threats which implies from the changes in technological environment.

Demographic Environment

The main factor that connect with businesses is population. That is, market is made up of

persons.

examples -:

 Size of the population

 Growth rate of population

 Gender

 Age structure

Composition of ethnicity

 Level of education

 Composition of family

 Household patterns

Business should try to make use of opportunities and avoid threats.

Natural Environment

Today, there is a global awareness on the damages caused to natural resources. Business

activities in many countries have polluted air, water and land. Rules and regulations have

been imposed to conduct business activities in order to protect the natural environment.

Changes in natural environment will impact on businesses.

example -:

 Finding new natural resources

 Changes in weather and climate

 Location of the land

Natural disasters

A businessman should try to make use of opportunities and face threats that imply in natural

environment.

Global Environment

There are greater opportunities to exchange goods and services from the time of globalisation.

The culture of individuals has changed as well. As a result, different kinds of goods and

services have entered the world market. Tough competition can also be seen.

example :

Trade agreements are signed

 Trade blocs being created

 Formation of world organization

Creating rules and regulations internationally

A businessman should try to make use of opportunities and face threats that imply in

Global environment.

The impacts of macro environmental forces on the business can be explained through the

following examples.

 o Under the demographic environment, the demand for goods and services is increased

 because of the increase in population which will create opportunities to businesses.

 o In the same way, decrease in population will decrease the demand which will create

 threats to businesses.

 o Under economic environment, a decrease in interest rate results in increase in borrowing loans which will create opportunities to businesses. Similarly, increase in interest rate limits the borrowing of loans and businesses have to face threats.

 o Under the political and legal environment, imposing favourable rules and regulations for  businessmen will create business opportunities and imposing unfavourable rules and

 regulations will cause businesses to face threats.

Most of the time macro environmental forces create opportunities and threats to businesses through influencing task environmental forces.

 For example :

 o Increase in price level of goods and services will cause the increase in price of goods and services supplied by suppliers. Similarly increase in salary level will increase the income of customers, (consumers) who is a force in task environment, which will increase the demand for goods and services.

The following examples clarify that there are interconnections among macro environmental forces.

 o Gem mines belong to natural environment. But to make it a business activity, one has to take legal approval.

 o When commercial banks install ATM machines for the convenience of customers, they

 should get the approval from the central bank.