Big picture
Business is as old as civilisation. India was a major trading nation for thousands of years, with famous ports, trade routes and indigenous banking. Today, business means any economic activity carried on regularly to earn profit by producing or exchanging goods and services.
This chapter lays the foundation for the rest of Business Studies: what business is, what it aims for, how its activities are classified, the risks it faces, and what to think about before starting one.
Learning goals
Describe the history of trade and commerce in India.
Explain the meaning and characteristics of business.
Compare business, profession and employment.
Explain the multiple objectives of business and the role of profit.
Classify business activities into industry and commerce, with examples.
Explain the nature and causes of business risk.
Explain the factors to consider when starting a business.
Core ideas
1. History of trade and commerce in India
Ancient trade: the Indus Valley civilisation traded with Mesopotamia; India exported spices, textiles, precious stones and ivory.
Trade routes: the Uttarapath (north, linking with Central Asia and the Silk Route) and the Dakshinapath (south and west), and sea routes to Southeast Asia, Arabia, Africa and Rome.
Ports: Tamralipti (Bengal), Bharuch (Gujarat), Muziris (Kerala), Kaveripattinam (Tamil Nadu) and Surat.
Mercantile institutions: merchant guilds (shreni) regulated trade, settled disputes and gave credit.
Indigenous banking: instruments such as the hundi (a written order to pay, used to transfer money and as credit) and the chitti were used. Families of bankers (seths and shroffs) financed trade.
Major trade centres: Pataliputra, Takshila, Ujjain, Varanasi, Mathura and Surat.
Colonial period: the East India Company came first to trade and later ruled. India became a supplier of raw materials and a market for British goods, and traditional industries declined.
Indian businessmen today have built global companies, and India is among the world's fastest-growing economies.
2. Meaning and characteristics of business
Business is an economic activity involving the regular production or purchase and sale of goods and services with the aim of earning profit by satisfying human needs.
Characteristic | Explanation |
|---|---|
An economic activity | It is carried on to earn money, not out of love or affection |
Production or procurement of goods and services | Goods are produced or bought before they are sold |
Sale or exchange of goods and services | There must be a transfer of goods or services for value |
Dealings on a regular basis | A single sale of a used car by an individual is not business; regular buying and selling is |
Profit earning | Profit is the main aim and is needed for survival and growth |
Uncertainty of return | Returns are not assured; profits may not be earned |
Element of risk | Business always faces risk of loss from factors beyond control |
3. Business, profession and employment
Basis | Business | Profession | Employment |
|---|---|---|---|
Mode of establishment | Entrepreneur's decision and legal formalities | Membership of a professional body and a certificate of practice | Appointment letter and service agreement |
Nature of work | Providing goods and services to the public | Personalised, expert services | Work as per the contract of service |
Qualification | None compulsory | Professional qualification and training required | As prescribed by the employer |
Reward | Profit | Professional fee | Salary or wages |
Capital investment | Required according to size | Limited capital for setting up | None |
Risk | Profits are uncertain; risk is high | Fee is fairly regular; risk is low | Fixed and regular pay; no risk |
Transfer of interest | Possible with some formalities | Not possible | Not possible |
Code of conduct | None prescribed | Professional code of conduct is followed | Rules of the employer are followed |
Example | A grocery store owner | A doctor, lawyer, chartered accountant | A bank clerk |
4. Objectives of business
Business has multiple objectives, not only profit.
Objective | Meaning |
|---|---|
Market standing | Standing of the enterprise in relation to competitors; offering competitive products to satisfy customers |
Innovation | Introducing new ideas and methods of doing work, product and process innovations |
Productivity | Comparing the value of output with inputs to measure efficiency |
Physical and financial resources | Acquiring the plant, machinery, offices and finance needed to produce and market goods |
Earning profits | Earning enough profit for survival and growth |
Manager performance and development | Developing and motivating managers |
Worker performance and attitude | Ensuring good worker performance and a positive attitude |
Social responsibility | Contributing to the solution of social problems, for example by supplying quality goods and protecting the environment |
Role of profit: profit is a source of income for the business; it provides funds for expansion; it indicates efficient working; it builds goodwill and reputation; and it rewards the risk taken by the owner.
5. Classification of business activities
Business activities fall into two broad groups: industry (production) and commerce (distribution).
Industry
Type | Meaning | Examples |
|---|---|---|
Primary: extractive | Extracting products from natural resources | Mining, farming, fishing, hunting, lumbering |
Primary: genetic | Rearing and breeding plants and animals for reproduction | Cattle breeding, poultry farms, plant nurseries, fish hatcheries |
Secondary: manufacturing (analytical) | Separating a material into different products | Refining crude oil into petrol, diesel and kerosene |
Secondary: manufacturing (synthetical) | Combining materials to make a new product | Cement, soap, paint |
Secondary: manufacturing (processing) | Passing a material through successive stages | Sugar, paper, textiles |
Secondary: manufacturing (assembling) | Putting parts together to make a product | Cars, computers, televisions |
Secondary: construction | Building infrastructure | Roads, dams, bridges, buildings |
Tertiary (service) | Services that support primary and secondary industries | Transport, banking, insurance, warehousing, communication, advertising |
Commerce includes all activities that remove hindrances in the exchange of goods:
Hindrance | Removed by |
|---|---|
Hindrance of persons (producers and consumers are far apart) | Trade (internal and external) |
Hindrance of place | Transport |
Hindrance of time (goods are produced before they are needed) | Warehousing |
Hindrance of finance | Banking |
Hindrance of risk (loss by fire, theft, accident) | Insurance |
Hindrance of information | Advertising and communication |
Trade may be internal (within a country: wholesale and retail) or external (between countries: import, export and entrepôt, which means importing to re-export). Transport, banking, insurance, warehousing, communication and advertising are called auxiliaries to trade.
6. Business risk
Business risk is the possibility of inadequate profits or even losses due to uncertainties or unexpected events.
Nature: business risks arise from uncertainties; they are an essential part of every business; their degree depends on the nature and size of the business; and profit is the reward for risk-taking (higher risk, higher potential profit).
Causes
Cause | Example |
|---|---|
Natural causes | Floods, earthquakes, droughts, unseasonal rain destroying crops |
Human causes | Dishonesty of employees, strikes, riots, management inefficiency, customers not paying |
Economic causes | Changes in demand, competition, price changes, changes in technology, interest rate changes |
Other causes | Political disturbances, mechanical failures, fluctuations in exchange rates |
7. Starting a business: basic factors
Factor | What to consider |
|---|---|
Selection of line of business | The kind and nature of business, based on market demand and the owner's skill |
Size of the firm | Depends on capital, market size and risk; start small if uncertain |
Choice of form of ownership | Sole proprietorship, partnership or company, depending on capital, liability and control |
Location of business enterprise | Availability of raw materials, labour, power, banking, transport and markets |
Financing the proposition | Fixed capital and working capital requirements |
Physical facilities | Machinery, equipment, buildings and supporting services |
Competent and committed workforce | Skilled and unskilled workers and managers |
Tax planning | Tax laws affect the choice of form, location and financing |
Launching the enterprise | Mobilising resources, completing legal formalities and starting operations |
A reliable approach to case-based questions
To decide if an activity is business: is it economic, regular, for profit, with sale of goods or services?
To classify an industry, look at what is done: extracting from nature (extractive), breeding (genetic), separating (analytical), combining (synthetical), stages (processing), parts put together (assembling).
To name an auxiliary, identify the hindrance removed: place (transport), time (warehousing), finance (banking), risk (insurance), information (advertising).
To find a cause of risk, decide whether it is natural, human, economic or other.
Connections that matter
Forms of business organisation explains the choice of form of ownership.
Business services covers banking, insurance, transport, warehousing and communication in detail.
Internal and international trade explain the types of trade.
Social responsibility expands on the social objective.
Common mistakes
Calling a one-time sale of a personal asset a business. Business requires regularity.
Treating profit as the only objective.
Confusing extractive and genetic industries. Extractive industries take from nature; genetic industries breed and rear.
Calling a refinery a synthetical industry. Refining separates crude oil: analytical.
Saying business risk can be eliminated. It can be reduced, not eliminated.
Revision checklist
I can describe India's trade history, routes, ports and indigenous banking.
I can explain the characteristics of business and compare it with profession and employment.
I can explain the multiple objectives and the role of profit.
I can classify industries and the auxiliaries to trade.
I can explain the nature and causes of business risk.
I can explain the factors for starting a business.