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Chapter 1 - Nature of Business
* Qualities of Good Businessman
* Economic System of Pakistan
Chapter 1 Industry
* 1 Industry
o 1.1 Manufacturing Industry
o 1.2 Extractive Industry
o 1.3 Construction Industry
o 1.4 Genetic Industry
Manufacturing Industry converts the basis goods (raw materials) into the finished goods. In other words, industry creates form utility in the goods already produced by nature like furniture by wood, machines by iron and cloth is made by cotton.
Extractive industry is generally related with the production of Primary Gods. These industries are associated with agriculture, pastures, mining, and fish keeping or finishing. These industries produce primary goods, which are used in the manufacturing industries as raw materials. These industries get the goods from surface, beneath the surface and in the space.
Activities of the construction industry are related to the houses, buildings, dams, bridges, canals etc.
Genetic Industry is concerned with the activities, which increase the kinds of species. These industries can increases or change the kinds and species of plants, fruits, animals. etc. through genetic changes.
Qualities of Good Businessman
A well-managed business is generally a reflection of a person or persons who have inherent or acquired qualities of leadership and direction. So a businessman to succeed must be a well-balanced and full-fledged man of talent. He must have a consistent mind for clearness, steadiness and firmness in his dealings with others. Some of important and basic qualities of businessman are following:
The businessman is that who knows what he is talking about, and what he mean, because he deals with a number of simple wants. Accurate actions depends upon accurate thinking. The goods businessman must be able to grasp his problems by treating them quantitatively.
2. Time Sense
Besides quantity and the nature of his product, the businessman must appreciate time. He must always thinking in terms of time. Actions cannot be taken in complete isolation from each other. There is also a chain of actions, which must fit in with the rapidly changing desires of the ultimate consumer. This makes it vital to be able to visualize the various actions in their places in time. There are no hunches in business, but all actions depend upon figures and facts. The businessman who has given adequate attention of quality and time will always be ready to make the most of each opportunity as it arises, and to look ahead as far as he needs.
A businessman keen on success must keep in with the world, and not keep himself to himself. He should move about and see what is going on for he has to gauge new wants and new inventions for creating fresh wants. In this sense he is to be merchant. For selling goods, which have been produced requires character and knowledge. Even to decide what sort of articles to try and produce with his machinery. The producer must be something of a merchant. He must be wide-awake and meet the existing demands and be in a position to create new ones.
In order to adequately satisfy consumer demands, the businessman must be honest. Misfit sales may be forced for a time by high pressure salesmanship or misleading publicity, but they will not maintain themselves; for each sale installs in the possession of the buyer an article which begins at once to educate him as to error he made in acquiring it, and there is little likelihood of a second order. But if the seller uses all his ability to provide precisely what is wanted, he makes goodwill for himself. This honesty and optimism which goes with it are attributes of the businessman at his best.
5. Ability to Co-Operate
Another notable quality of the businessman is ability to co-operate with a large number of other. He must be able to compromise, adjust, adapt and be willing to admit that his judgment may on occasions be wrong. Besides he must be temperamentally fitted to exercise a divided authority. He shall be a goods businessman, if he can place himself in the shoes of other people inside his own business so as to see into the minds of customers who are outside it.
Having once brought an organization into existence the businessman should use every effort to hold it constant and dependable, so that those who work under it know what to expect, as it remains unfluctuating from day to day. At all times everybody knows what can and what cannot be done. What is expected of him and what somebody else will do and can adapt himself accordingly. A dependable businessman has satisfied co-workers who are inevitably loyal to him and the unit directed by him.
A bountiful endowment of physical and nervous energy is another requisite without which other qualities are hardly of any value. As in any other activity so in business, infinite capacity to taking pains is essential. In addition to possessing an abundance of energy, he should possess forcefulness enough to put across his ideas and suggestions, which he believes to be right.
All talents are greatly enhanced in value when to them is added moral character, because this gives the promise of energy, loyalty and steady growth in ability and economy in supervision. Such a person, in the words of Professor Hocking, will "through his eye, through his voice, through his gestures, through the substance of what to say, through absorption in his work and belief in his mission infuse his own, state of mind into his men." He will avoid any sort of double-dealing, either with his associates or with the rank and file. All false dealing is futile; and it is absolutely destructive of loyalty.
Any society, whether it is rural without any advancements or it is specialized, must somehow confront three fundamental and inter-dependent economic problems.
1. What and how much to produce? 2. How to produce? 3. For whom to produce?
These three questions are fundamental and common to all economic but different economic systems differ in the fact that they try to solve these differently. Over the past two hundred years, different philosophies have developed in regard to the accomplishment of the economic function. The basic nature of all economic systems is the same. It is the role of the individuals and the governments that are quite different.
Under Capitalism, all means of production are the property of private individuals and firms. They are free to use them with a view of making profit or not to use them, if it so suits them. The desire for profit is the sole consideration with the property-owners in the use of their property. Besides free and unfettered use of their property, everybody is free to enter into any contract with other fellow-citizens for his profit.
What to produce, how to produce and for whom to produce-all these central problems of economics are settled by the free working of the forces of demand and supply.
Salient Features of Capitalism
1. Right of Private Property
Everybody has a right to acquire private property, to keep it, and after his death, to pass it on to his heirs. The result of this system is that inequalities of wealth distribution are perpetuated.
2. Freedom of Enterprise
This freedom implies three things: a) freedom of enterprise b) freedom of contract and c) freedom to use one's property. Everybody is free to take up any occupation that he likes and to enter into contracts or agreements with his fellow-citizens in a manner most profitable to him. Every citizen has the freedom to form any firm or company and set up a factory anywhere hi likes.
3. Freedom of Choice by the Consumers
Every consumer enjoys a freedom of choice of the commodities and services that he wishes to consume. It is the consumers likes and dislikes which determine the magnitude and pattern of production.
4. Profit Motive
The profit motive of individuals governs business enterprise. Those commodities and services are produced under capitalism, which are expected to yield maximum profit rather than social benefit.
5. Class Conflict
The society has been divided into two classes the "Haves" and "Have-Nots" which are constantly at war with each other class conflicts is inherent in capitalism.
6. Un-Coordinated Nature
There is no conscious regulation or central direction of economic activity. Every thing seems to go on automatically. Somehow the demand and supply adjust themselves to each other. Price serves as the signpost or the signal.
7. Entrepreneurs Role
The entire productive machinery of the country is under the direction of the entrepreneur. It is he who hires the other factors of production and undertakes to pay them. Everything hinges on him.
8. Control With Risks
This has been called the Golden Rule of Capitalism. He who risks his money must also control the business.
The producers compete with one another is selling the commodity as much as they can through advertisement. On the other hand, there is also competition among the buyers to obtain the commodity who did against one another and offer higher prices for the purpose. Similarly, there is competition among workers for jobs.
10. Importance of Price System
Capitalism is said to be governed by price. It is the price which equates the demand and supply of commodities and factors of production. Price is a signal which guides the producers as to what to produce and what not to produce. A higher price is also warning to the consumers to cut down their consumption.
11. Economic Inequalities
A few are very rich indulging in all sorts of conceivable luxuries, whereas the masses are not able to get even two square meals a day. The gulf between the rich and poor is ever widening.
Merits of Capitalism
1. Automatic Working
Capitalism does not require any central directing authority for its functioning. It functions automatically through the price-mechanism. It at any time, there is some disturbance in the economy, it is rectified through price change.
2. Higher Efficiency and Incentive of Hard Working
Under capitalism workers and entrepreneurs are encouraged to work hard to earn higher profits and higher wages. Hence the entire manpower resources of the country work the hardest (In this way the national output increases and economic development is accelerated).
3. Higher Rate of Capitalism Formation
People under capitalism have the right to hold property and pass it on to then heirs and successors. Owing to this people save a part of their income so that it can be invested to earn more income and leave larger property for their heirs. This accelerates economic growth.
4. Economic Development and Prosperity
The lure of profit compels the entrepreneurs to take risks and to conquer new fields in production. Capitalism offers great incentive for saving and large opportunities for investment. It encourages innovation and technological progress. It is thus conductive to economic growth and prosperity.
5. Optimum Utilization of Resources
Every producer and entrepreneur tries to use the productive resources at his disposal in the most economical manner in order to make maximum profit. In this way, capitalism encourages the most efficient use of the resources of the country.
6. Just System
The richest reward under capitalism goes to the ablest, the most daring as well as the most prudent entrepreneur. A man who shows extraordinary resourcefulness and pluck makes the highest profits.
In the capitalistic economy an attempt is made to adjust production to the consumer wishes. They consume that they like and not what is supplied to them. The consumers constitute the general public. Hence, the system is democratic.
8. Encouragement to Enterprise
Capitalism discourages the entrepreneurs to take risks and adopt bold policies. Higher the risk greater is the profit. They also make innovations in order to cut their costs and maximize their profits. Hence, capitalism brings about a great technological progress in the country.
One of the principal advantages of capitalism is its flexibility and adaptability, which has enabled it to function from time to time according to changing circumstances and emerge victorious.
Demerits of Capitalism
1. Wasteful Competition
Competition is a sheer waste. Colossal expenditure is incurred on advertisement and salesmanship simply to defeat a rival. Resources employed by those who are defeated go to waste.
Competition results in the production of too many varieties. But too much variety is wasteful, because a small variety, but each large in quantity, can be more economically produced.
2. Human Welfare Ignored
The economic decisions made by individual entrepreneurs and producers under capitalism are based on their self-interest and not from the point of view of good of the society. However, necessary and useful the commodity may be, the producers will produced it if price does not exceed the cost, because it is only the profit motive which drives them. Social welfare is ignored altogether.
3. Economic Instability and Unemployment
Production is unplanned and is being augmented by ever increasing accumulation of capital, while the bulk of the consumers are being impoverished more and more. The result is economic instability. The workers have to live under a perpetual dread of losing their job. They have no sense of security.
4. Property Rights take Precedence Over Human Rights
Capitalism lays under emphasis on property rights as against human rights. Money, not man, rules the world and debases humanity.
Capitalism divides the society into two hostile camps of capital and labour, the "haves" and "have nots". The labour wants higher wages and short working hours, which is against the interests of capitalists. Strikes and lockouts are inevitable.
6. Economic Inequalities
A feature of capitalistic countries is the glaring inequalities of wealth and income. A few are very rich indulging in all sorts of luxuries, whereas the masses are not able to get even two square meals a day. The gulf between the rich and poor is ever widening.
7. Mis-Allocation of Resources
Capitalism is also criticized on the ground that the productive resources are utilized for the production of luxuries for the rich without producing sufficient quantity of goods for mass consummating.
The market prices are not a correct index of the wishes and needs of the general public because the rich people are able to influence the market prices by their higher income.
8. Emergence of Monopolies
I also happens under capitalism that perfect and free competition ceases to prevail and instead of big combinations of powerful producers and monopolies emerge against whom it becomes difficult for an ordinary entrepreneur to compete. The monopolists produce small quantity but charge high prices and thus exploit the consumers. There is lot of concentration of economic power in a few hands.
In recent years, the image of capitalism has been tarnished by malpractices indulged in by high industrialists and businessmen. Such practices include payment of handsome salaries to influential directors, the large-scale evasion of fiscal laws, luxurious living at nation's cost and persistent generation of black money.
10. Lack of Coordination
The in-coordinated nature of such an economic order sometimes becomes a disadvantage. Production is conducted as a result of the decisions of numerous isolated entrepreneurs and consumers, which is liable to create confusion in the system.
Socialism is an economic system, which implies state ownership of instruments of production. The management of business and industry is reduced to the monopolistic control of the government. What is produced is equally divided among those who helped produce rather than having anything into profits. Thus, economy is run for social benefit rather than private profit.
1. State Ownership of Means of Production
The means of production are the property of the state and not of private individuals. The profits of all enterprises go to the state exchequer to be utilized for the benefit of society rather than for the benefit of few private individuals.
2. No Private Enterprise
production is to be initiated and conducted by the state, which will pay wages and other costs and keep profits to itself. Interest and rent as payments respectively to the capitalists and the landlords will disappear, the for the state will by the capitalist, landlord and entrepreneur.
3. Economic Equality
Remuneration for work is to be according to the nature of work and is not to be equal. Earnings will vary according to ability.
4. Equality of Opportunity
Every individual, whether he belongs to a rich family or a poor family has an equal opportunity to rise in life under socialism. Every young person is given equal opportunity to receive education or training according to his aptitude os that he can enter a profession of his choice.
5. Economic Planning
The state is in charge of both production and distribution. The allocation of the productive resources of the community will be determined according to the direction of a central authority.
6. Social Welfare and Social Security
It is social welfare consideration, which guides productive activity in the economy rather than private profit. Commodities and services of such type and in such quantities are produced which are essential for promoting social welfare.
7. Classless Society
The socialists believe in a classless society where the distinction between the rich and the poor and the "haves" and the "have-nots" has completely disappeared.
Merits of Socialism
1. Social Justice
Under socialism, the inequalities of income are reduced to the minimum and the national income is more equitably and evenly distributed.
2. Better Allocation of Resources
The productive resources of the nation are more economically and optimally allocated among the various productive uses. A central planning authority determines the allocation of resources among the various uses who is in a better position to assess the basic needs of the people and the intensity of their desires.
3. Rapid Economic Growth
A socialist state promotes rapid economic growth. The task of promoting economic growth is not left in the hands of free private enterprise or market mechanism. A socialist state adopts economic planning and makes it possible to use potential productive resources in the most effective and fruitful manner.
4. Improving Productive Efficiency
Under socialism, improved techniques of production and scientific research are made freely available to all organizations that may need them. Also, under socialism, concentrating production in big firms results in improvement of production techniques. A socialist state makes the fullest use of productive activity.
5. Social Security and Welfare
The socialists believe that people should be given protection against uncertainties relating to income work and living conditions and the burden of this provision should be borne by the entire society. That is why modern socialists include in their programme, schemes of the social insurance covering unemployment, accidents, sickness, old age pensions, death grants, etc.
6. Economic Stability
Socialism eliminates trade cycles, We do not come across depression, unemployment and idel productive capacity in socialists economies. Since the means of production are owned and controlled by the state, the level of investment and the level of aggregate demand can also be effectively determined. This ensures economic stability.
7. Equality of Opportunity
Every individual, whether he belongs to a rich family or a poor family has an equal opportunity to rise in life under socialism. Every young person is given equal opportunity to receive education or training according to his aptitude so that he can enter a profession of his choice.
8. Social Welfare and Social Security
It is social welfare consideration, which guides productive activity in the economy rather than private profit. Commodities and services of such type and in such quantities are produced which are essential for promoting social welfare.
9. Classless Society
The socialists believe in a classless society where the distinction between the rich and the poor and the "haves" and the "have-nots" has completely disappeared.
Demerits of Socialism
1. Bureaucracy and Red Tapism
The most important set of arguments advanced against socialism is one against the bureaucratic running of the economic machinery. The civil servant does not feel the same keen self-interest as the employee of a private corporation, where his tenure is not so secure. His main concern is to lot things go on somehow without a positive break down. Bureaucracy will further mean bossism, loss of individual liberty, Gestapo, etc.
2. Not Successful in Business
The government personnel are not such as can conquer new fields. The conditions in government services are not congenial for the display of extraordinary ability.
3. Insufficient Resources
It is also urged that government cannot raise the huge amounts of capital, which are necessary for the efficient running, and expanding of all industries and trades.
4. Mis-Allocation of Resources
Under socialism, there will be no automatic indicator like price mechanism for the most economical allocation of the resources of the community among different industries. Some commodities will be produced in excess and wasted, whereas there may be a shortage of others resulting in unsatisfied demand. As such a chronic maladjustment in demand and supply is feared.
5. Lack of Incentives
It is also feared that incentive to hard work and stimulus to self-improvement will disappear altogether when personal gain or self-interest is eliminated. Inventive ability, enterprising spirit and the go-ahead attitude will languish.
6. Loss of Economic Freedom
A serious charge against socialism is that, when freedom of enterprise disappears, even the free choice of occupation will go. Workers will be assigned certain jobs and they cannot change them without the consent of the planning authority.
7. No Economic Equality
Socialism has failed to bring about economic equality. The dream of a classless society is far from being realized. Some degree of skepticism in the efficacy of socialism as a panacea for all social ills has grown and damped the armour of some enthusiastic socialists.
8. Concentration of Power in the State
Under socialism, the State is not merely a political authority but it also exercises unlimited authority in the economic sphere. The State is everything and individual is nothing. He may not count at all.
9. Loss of Personal Liberty
That under socialism there is no unemployment is conceded out. Critics regard a socialist State as one big prison-house and they do not think that employment is any compensation for the loss of liberty.
Economic System of Pakistan
In Pakistan, we have neither of the two extreme systems but our economic system is a via media compromise of both the systems of capitalistic and socialistic patterns. It can safely be said that it is a mixed economy.
Concept of Mixed Economy
Mixed Economy is an economic system, which combines in itself the elements of socialism as well as of capitalism. It is an economic system, which is planned and directed partly by the state and by private enterprise. Under the "Mixed Capitalist System" or "Mixed Enterprise System", both State and private institutions exercise economic control.
Panacea of the Defects of Capitalism and Socialism
A privately owned capitalist system cannot guarantee full employment and elimination of poverty. It may lead to unequal distribution of wealth and air and water pollution. It produces trade cycles. i.e. sometimes depression and at other times an inflationary situation. On the other hand, a government owned business system might stifle innovation and invention. It may not be quickly responsive to public desired for products and services and may even limit the freedom of the people. It is so realized that economic development cannot be achieved at the desired rate of growth without any active government help and guidance. That is why most of the capitalistic and socialistic economics of world have become mixed economics in order to minimize the evils of unadulterated capitalism and socialism to accelerate economic growth.
Salient Features of Economic System of Pakistan
1. Co-Existence of the Public and Private Sectors
In the economy both public sector and the private sector function together. In one part are those industries, the responsibility for the development of which is entrusted to the state and they are owned and managed by the state. Other industries are left under the authority and control of the private entrepreneurs. The private sector is free to develop them and start new enterprises in this sector.
2. Role of Price System And Government Directives
So far as the public sector is concerned, economic decisions relating to production, prices and investment are made by the government or authorities appointed by the government. In industries in the private sector, the decisions regarding investment, production, prices, etc, are made by private entrepreneurs with the object of making maximum profit on the basis of the price system.
3. Government Regulation and Control of Private Sector
In a mixed economy, the government adopts necessary measures to regulate and influence the private sector, so that it may function in the interests of the nation rather than exclusively in the interests of the private entrepreneurs.
4. consumer's Sovereignty Protected
The consumers are free to buy commodities of their choice and the private entrepreneurs produce commodities according to consumer's demand or preferences, although the government can control their prices in public interest so that they can be prevented from rising unduly high. Besides, the government can also ration the commodities in short supply so that the limited available quantities can be fairly distributed.
5. Government Protection of Labour
In a mixed economy, Government saves labour from exploitation by the exploitation by the capitalists. Several factory acts have been passed to regulate the working conditions of labour. The government also takes necessary steps to prevent industrial disputes.
6. Reduction of Economic Inequalities
The governments in mixed economics take necessary steps for the reduction of inequalities of income and wealth for promoting social justice and social stability and social welfare, increasing production and for providing equal opportunities for all.
7. Control of Monopoly
A charge against monopolies is that they reduce output and raise prices in order to get maximum profit leading to miss-allocation of productive resources of the community, economic inequalities, and unemployment and hampering of industrial development.
The government tries to control and regulate monopolies in order to remove the above evils and make them function in public interest. Also, when the government considers it necessary in public interest, it takes over monopolies and operates them in public interest.
8. Government Provision of Public Services
The government provides certain indispensable public services without which community life would be unthinkable and which by their nature cannot appropriately be left to private enterprises. Examples are the maintenance of national defence, of internal law and order and the administration of justice etc.
Chapter 3 - Establishing A Business
It is the form of business organization in which an individual introduce his own capital, uses his own skill and intelligence in the management of its affairs and is solely responsible for the results of its operations. He may run the business alone or may obtain the assistance of employees. It is the easiest to form and is also the simplest in organization. The sole proprietor may borrow or sue other people's money in financing his business.
"The individual proprietor is the supreme judge of all matters pertaining to his business, subject only to the general laws of the land and to such special legislation as may affect his particular business."
Advantages of Sole Proprietorship
1. Easy to Start
The formation of sole proprietorship is quite easy than partnership and joint stock Company. There are no legal formalities for starting this business, like agreement, memorandum of association or articles of association.
2. Easy to Dissolve
It is easy to dissolve because the sole trader is not required to take permission for dissolution either from shareholders in the general meeting as in the case of joint stock companies or consult all the partners in the case of partnership.
3. Freedom of Action
A sole trader has maximum freedom to take decision at his own end. His decision is final. He may expand his business by adding new products or can discontinue old ones. A sole proprietor can wind up his business or he can change his business place from one place to another.
4. Freedom from Government Control
A sole trader is free from government control a great extent than any other form of organization. A sole trader is not required to send his periodical balance sheet to the government.
5. Owner of All Profits
No other form of organization permits to retain cent percent profit they earn. But in sole proprietorship, the sole trader is the master of his business and is entitled to retain the entire profit of the business.
6. Low Taxes
He has to pay minimum income tax and other taxes than in partnership and Joint Stock Company. In this manner he saves much out of his profit.
Secrecy is he base of a business and it should not be disclosed. Success of a business is based on secrecy. A sole trader can maintain secrets of his business but it is not possible to keep secrets in partnership or Joint Stock Company.
8. Low Cost Organization
A sole trader is not required to pay registration fees as paid by Joint Stock Company and legal fees in the formation of partnership.
9. Full Control
Sole trader has got full control over his planning. No body is there to interfere in his business.
10. Immediate Action and Quick Decision
In business, it becomes very essential to take decision at particular times and for that purpose immediate action is required. Sole trader can take quick decision and immediate action but in partnership and joint stock companies action cannot be taken without the persmission of owners and meeting should be called for this purpose. In this way business cannot take the proper advantage of time.
11. Flexibility of Organization
If any change in the business is called for, the sole proprietor has a right to bring about the change. A good number of giant sized concerns fail on account of their inability to change their policies promptly with a change in the situation.
12. Social Desirabilities
From the social point of view:
1. Continuity of individual proprietorships ensures that too much wealth does not get concentrated in few hands.
2. The unlimited liability ensures sufficient responsibility to the society.
3. It brings into full play the qualities of self-confidence, diligence and tact among business people.
4. The growing number of sole proprietorship firms contribute to the commercial development of a country.
13. Personal Incentive
A man in business for himself has everything to lose if his efforts are not successful to earn profits. This fact makes him willing to devote maximum time, thought and energy to the successful prosecution of the activities of business he has organized.
14. Credit Worthiness
A sole proprietor's liabilities are unlimited as the creditor can even recover his amount from the personal belongings of the trader. Therefore, this fact makes a sole proprietor credit worthy.
Disadvantages of Sole Proprietorship
The sole proprietorship has some disadvantages, which are as follows:
1. Limited finances
the sole proprietor can face financial problems. He can depend only his own resources. It is neither safe nor easy for him to borrow large amounts of money from banks or other financial institutions.
2. Difficulties in Management
Each individual has a particular ability or aptitude in particular respect. Modern businesses full of complications arising specially from the ever-changing nature of market and the various laws that are being enacted. An individual may not be an expert in all matters, therefore, some times his decisions may be unbalanced and would lead to the failure of the business.
3. Limited Span of Supervision
A sole proprietor however qualified and clever will find it hard to supervise the work of his sub-ordinates beyond a certain limit e.g. in case of a large general store owned by single person, it will be difficult for the owner to keep an eye on all the departments and employees and to sure that the customers are treated nicely. The problem will be more acute if the store has its branches in other places.
4. Limitation on Size
Because of limitation of finance, managerial skills and span of supervision, a sole proprietor has to manage the size of the business up to a certain limit. This deprives the firm of the opportunities of reaping the economics of large-scale production.
5. Unlimited Liability
The sole proprietor assumes a great risk. It is true that he receives all the profits of the business but likewise he has to face the entire losses. Not only the assets of the business but also his private assets will be used to pay off the firms debts and losses. Unlimited liability also discourages the expansion of business.
6. Lack of Continuity
Any personal problem or illness, which is affecting the sole proprietor to, has a direct effect on his business. It ends with the retirement, death or bankruptcy o the owner. If the busines is rendering useful services to the society, the closure of such a business will be a social loss. Similarly, with the death of the proprietor, the business may pass on to his successors who may not posses the same degree of self-reliance, ability and intelligence.
7. Ease of Formation
The very ease and cheapness of entering business as a proprietor may be a disadvantage. Many people go into business with too little capital and training and are clashed by the competition of the business. As a result, a number of business failures and proprietorships.
It is rare that a person combines in himself all that is essential to make him a successful businessman. Besides, the reap the economics of large-scale operation, a sole proprietor may fail to cope up with the demands of expansion. He may possess adequate capital but he may be handicapped by the lack of experience, skill and managerial, ability. Or it may be other way round. Therefore, a combination of two or more persons, some having capital and others having skill or experience proves to be beneficial.
According to Section 4 of the Indian Partnership Act of 1932, partnership is defined as, "The relation between persons, who having agreed to share profits of a business carried on by all or any one of them acting for all.
The above definitions reveals that:
1. An agreement between the partners is necessary.
2. The agreement must be in regard to the sharing of the profits of the business.
3. The business must be carried on by all or any one of them acting for all.
Advantages of Partnership
Many of the advantages of a sole trader are also present in the partnership form of organization. Therefore, advantages which render partnership preferable to sole proprietorship are given below:
1. Large Amount of Capital
In sole proprietorship, the amount of capital is limited to the personal fortune and credit of one individual. In partnership, the capital can easily be raised according to the requirements by bringing in additional workers.
2. Combined Judgment and Managerial Skills
In partnership business, there are more than one owners, it is therefore possible to combine the abilities and knowledge of every partner to the best interest of the business. With the combined decision and judgment, business is greatly benefited and more profit is possibly earned.
3. Personal Interest
Since each general partner is responsible not only for his own act but also for the acts of his partners, he shall devote his personal attention and interest to the activities of the firm, and this will enable a firm to attain maximum efficiency.
4. High Credit Standing
A partnership has little difficulty in obtaining credit, especially if the partners have their personal wealth. If there are several partners and one or more have extensive private means, creditors have little reason to doubt that the debts of the partnership will be paid in full.
5. Ease of Formation
A partnership business is easy to start as it is free from all legal formalities, it does not suffer from legal handicaps. The business can be easily increased or reduced to suit the conditions.
6. Retaining of Valuable Persons / Provision of New Blood to the Business
New blood can be infused into the business into the business by admitting new partners. Thus the business can utilize the genius of an enterprising young men.
7. Co-Ordinated Decisions
The decisions, which take place in the partnership, are co-ordinated decisions i.e. the decisions which are jointly taken by all the partners.
8. Lighter Risk
Risk in partnership enterprise is spread over several persons who are its partners. All the partners pool together their abilities and their income.
9. Unlimited Liability
Each partner has an unlimited liability towards the firm's debts. The creditors can recover debts from the personal property of the partners.
10. Flexibility of Organization
A partnership organization is extremely mobile, flexible and elastic. The partners are at ease to carry on any legal business.
Disadvantages of Partnership
1. Divided Control / Delay in Decision Making
In partnership, more than one person is involved in every decision reached. If the partners are not active in operation, it may necessary to delay the making of important decisions.
2. Frozen or Blocked Investment
For an individual who to invest some money in business, the partnership form may prove to be a poor investment from the view-point of liquidity and transferability. It is correct to say that it is easy to invest money but is difficult to withdraw it, because it would mean the termination of business.
3. Limitation on Size
Since the maximum number of partners is 20, it might be possible that at some time the capital becomes short. If it happens, the business has to be converted into a Joint Stock Company. Therefore, a big business cannot be started even if they get a chance to expand it, because the capital of 20 persons may not be sufficient.
5. No Legal Entity
Law does not recognize a partnership as an organization having an entity or existence separate from the partners who comprise it.
6. Lack of Secrecy
Secrecy in a business is necessary for its success. It is not possible sometimes in a partnership.
7. Possibility of Disagreement Among Partners
Two or more men may start out together as close friends or as relatives. However, they may develop differences over the years that will make for unpleasantness and inability to work together for the best interest of the firm.
8. Unlimited Liability
The greatest disadvantage is that of unlimited liability of the partners. All general partners and liable personally for the partnership debts. Where there are heavy losses, the partner having much property will have to sustain the entire loss.
Partnership Deed or Partnership Agreement
A partnership deed is a document in which the terms and conditions of partnership agreement are written. Hence, contract is said to be essence of partnership business. Partnership agreement may be oral or written. The written document of partnership is known as partnership deed. Partnership may be formed and conditions of the of the contract put down into black and white. The partnership is to be free from future confusions and misunderstandings. Happy or good relations between partners may not continue for a long time.
I future there may be differences of opinions between the partners on some points. The differences may only be removed if the terms and conditions are in a document to avoid future disputes and misunderstandings between partners. A well drawn up partnership deed, usually contains the following terms.
1. Name of the firm.
2. The nature and object of the business.
3. The duration of the business.
4. The names and addresses of the partners.
5. The amount of capital of the firm and the amount contributed by each partner.
6. The ratio of sharing profits and losses of the firm.
7. The management of the firm. (The name or names of the partners who will take part in the management of the firm).
8. Salaries, if any, paid to any partner.
9. Interest on partners' capital and partners loan.
10. The rights and duties of the partners.
11. The valuation and treatment of goodwill in case of the dissolution of the firm.
12. Rules and regulations regarding the admission of a new partners and expulsion and retirement of an existing partner.
13. Appointment of an arbitrator to settle disputes if any among the partners.
14. the names of the banks where firm accounts will be opened.
15. The name of the auditors who will inspect the Bank Accounts.
16. The names of partners who will sign the important documents.
17. The procedure of the dissolution of the firm and settlement of accounts.
18. Any other clause or clauses necessary for future safety for the conveniences of the partners.
The partnership deed must be signed by all the partners. They may, if thought necessary, make alternations and additions to the provision of the deed at any time.
Memorandum of Association
The first thing in the formation of a Joint Stock Company is the preparation of the Memorandum of Association. It is a document, which sets out the constitution of the company and as such, is really the foundation on which the structure of the company rests. That is why this document has often been called the charter of the company in its relation to the outside world. The document is prepared by the promoters of the company. The memorandum of Association must contain the following clauses:
1. Name Clause
In this clause the full name of the company is shown and the last word of the name of the company must be limited. The company can adopt any name but there are certain restrictions and the words like ROYAL, IMPERIAL, EMPIRE and ESTATE etc cannot be used without the special permission of the Government.
2. Object Clause
This clause is quite important and must be very carefully drafted as it determines the activities of the company. In the object clause each and every detail of activities of the business to be carried out must be laid down. Once the object clause is completed, it become very difficult to make any amendment. The value of the shares, the allotment money must be given in detail.
3. Situation Clause
This act provides that the company must have a registered office so that the registrar may be able to send notice etc. to the Company at the registered office.
4. Liability Clause
A declaration that shares holder's liability is limited.
5. Capital Clause
This clause must contain a statement as to the amount of capital with which the company proposes to be registered and the division there of into shares at a certain fixed amount.
Articles of Association
This is another important document, which must be prepared and filed with the Registrar of the companies. The Article of Association contains rules and regulations regarding the internal working and management of the company. It defines the powers, rights and duties of Directors, shareholders and the other officers of the company. The purpose of the Article of Association is to carry out the objects set out in the Memorandum. The Memorandum limits the jurisdiction beyond which the Article of Association cannot go. The Article of Association states how the general meetings are to be held, how the voting is to be transferred, and how they are to be forfeited, how the accounts are to be kept etc. If a company does not prepare its Article of Association, it can adopt of Table A of Companies Ordinance.
The articles must be properly drafted, serially numbered and printed and then filed with the Registrar of the Joint Stock Companies. The article must be signed by the subscribers and witnessed as in the case of Memorandum. It is usual to print the Memorandum and the Article in one booklet, as the company is required to provide the copies to members on request. The articles can be altered at any time by special resolution.
Joint Stock Company
In the modern times the business and industry has been developed on a large scale the capital required for such industry and trade is huge which cannot be accumulated either in a sole proprietorship or a partnership organization. As a result of this change, a new form of organization has become quite popular in modern times which are known as Joint Stock Company. It is normally defined as;
“An association of many person who contribute money or money’s worth to common stock or employ it in some trade and business, and who share profit or loss arising from there.”
It means the joint stock company is a voluntary association of individual who contribute their money or profit to a common stock for carrying on a particular business. The money or money’s worth contributed by the member known as ‘share holders’ forms the capital of the company. The capital is divided into numbers of unit called share. Each share carries definite face value and is transferable in the market without any restriction or formalities.
A company as soon as incorporated takes a legal entity distinct from the share holder who composes it. It is managed by a group of persons known as directors. Directors are the representatives of share holders.
Formation of Joint Stock Company
All the joint stock companies whether public or private are governed by the company’s ordinance 1984 and must be formed according to the procedures laid down in that act. For the formulation of Joint Stock Company the following document must be submitted to the registrar, joint stock Company;
1. The list of directors along with their address.
2. the memorandum of association on which at least 7 person, who are promoters should sign in case of public limited company and two in case of private limited company. In addition of this it is also essential for the, to purchase the qualification share.
3. Articles of association duly signed as memorandum of association.
4. The consent of all the directors to act as directors.
5. A formal declaration by the secretary that all the formalities are duly completed.
6. A statement of normal capital.
Along with the above documents, registration fees, which varies with the amount of share capital is paid off to the treasury.
When the registrar of the joint stock companies is satisfied from all the formalities he will enter the name of the company in the register and will issue a certificate of incorporation. Now the company will have its separate existence.
Advantages of a Joint Stock Company
1. Huge Amount of Capital
It is in a position to raise large amounts of capital required for big business. The reasons are the limitations of liability and the ease of transferability of shares. The small value of shares allows a large number of persons to invest. So, due to limited liability and issuance of shares, large capital may be raised by a Joint Stock Company.
2. All People can Invest
In a Joint Stock Company, the shares are of different kinds so they are purchased by persons of different temperaments. The small value of shares allows the poor people also to purchase it. Besides, a company may also raise finance by the issue of debentures and bonds.
3. Limited Liability of Shareholders
The liability of shareholders is limited. It means that the risk is spread over a large number of shareholders and the possibility of hardship on a few is reduced. Secondly, if the business is going to be lost, the shareholders are not liable to loose anything from their private property.
4. Efficient Management
the management of the Joint Stock Company is carried out by Directors who are able, experienced and trustees of shareholders. The management is thus, the hands of a few experts. Secondly, the company can also hire efficient and qualified staff since it can pay their wages.
5. Stability of Business
The success of business also depends upon the life of the business. The Joint Stock Company is more suited in tis respect, for a company is a legal person having a perpetual succession.
A stock exchange is an organized market where secondhand listed industrial and financial securities are bought and sold at auction. The securities are bonds and debentures issued bodies or port trusts.
The securities contracts (Regulation) Act of 1956 defines stock exchange as:
"An Association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities."
An organized stock exchange is thus an association of persons that provides facilities where the securities can be traded by its members, who are referred to as owning seats on the exchange in accordance with self-imposed rules and regulations that confirm to public law. The general public is not permitted to handle security purchases and sales on the floors of these exchanges, only members of the exchange.
Role Played by the Stock Exchange in the Economic Development of a Country
A stock exchange has been variously described such as the barometer of adversity and prosperity of a nation and as the mart of the world and as "Fortresses of Finance." In the modern business world of today, stock exchanges are the important ingredients of the capital markets. They are the prime centers through which investment activities are carried by individual and business concerns.
Importance of Stock Exchange
From the View Point of the Community
* It helps in the economic development by providing a body of interested investors.
* It upholds the position of the superior enterprises and assists them in raising funds.
* It encourages capital formation.
* It helps the government to raise funds through the sale of securities for economic development.
* It portrays the prevailing economic situation of a country. All the changing political, economic and industrial conditions of the nation are reflected on the stock exchange.
* Through correct evaluation in terms of their real worth, the stock exchange helps in the orderly flow of distribution of savings as between different types of competitive investments.
From the View Point of a Company
* The maintenance of a free market, with prices established at all times by the forces of supply and demand, make listed securities more useful then unlisted stocks and bonds.
* The Securities can be used as collateral at a bank for a loan or as the security for collateral trust bonds.
* By providing a channel through which million of individuals invest their savings in long term securities, the stock exchange make possible, indirectly, the growth of hundreds of corporations.
* A member of the company of a stock exchange enjoys better reputation and credit.
* It provides one great view of business, the capital. It serves as a pivot of money market and fortress of capital.
* Due to their purchase and sale on a stock exchange, the market price of the shares of a company is likely to be higher in relation to earnings, dividends and property value. This raises the bargaining power of the company in the event of amalgamation.
From the View Point of Investors
* It is only an organized securities market, which can provide sufficient marketability and price continuity for shares so necessary for the needs of investors.
* Easily saleable security becomes a good material security for loans.
* Strict enforcement of rules safeguards the interest of the investors.
* The daily report enables him to know the exact worth of his investment.
* It is only such a market that can provide a reasonable measure of safety and fair dealing in the buying and selling of securities.
Functions Or Services of Stock Exchange
1. Distribution of New Securities
The brokers advise their clients regarding the merits of a new issue and distribute the companies prospectus among their clients, thus playing a vital role in obtaining subscription from their clients.
2. Facility of Transfer of Securities
The title to the shares is transferable. Hence those investors who do not want to block their money in the same stock can sell their shares to those who are interested in buying them through the stock exchange.
3. Mobility of Capital
A stock exchange performs the function of a continuous ready market for immediate conversion of stock into cash and vice versa, thus providing a market for capital without adversely affecting the industry.
4. Function of Evaluating Securities
It performs the evaluating function of shares by publishing the prices at which bargains are made which become price quotations. In the confidence of these quotations, investors are able to take decisions regarding their investments.
5. Function of Economic Barometer
Stock exchange is often called an economic barometer, which indicates the wealth and trends of not only the industries but also of the economy as a whole. Symptoms of any disease in the economy can be easily traced through the stock exchange. The functioning and operations of stock exchange reflect the temperament of the economy.
6. Increase in the Number of Dealings
The stock exchange provides the facility for secondary distribution of new securities after their original sale. Stocks of securities of fared for sale in a stock vary from time to time. It increases the marketability of the securities since they are bought and sold again and again.
7. Forecasting Function
The stock exchange reflects the future business conditions and trends of price. Signals of impending financial and business dooms are indicated by the stock exchange in advance.
8. Imparts A Collateral Value to Securities
The fact that the title of the shares are transferable increases the collateral value of the securities and enables the holder to obtain loan on their basis. The creditor on the other hand, can promptly liquidate these collaterals by selling in time of emergency.
9. Agency of Capital Formation
The liquidity of shares and proper publicity of securities through various means attracts the general public to invest their savings in stock and securities. Greater investment means generation of capital.
10. Clearing House of Business
Companies are required to furnish all the essential financial statements and other reports etc to ensure maximum publicity on corporate operations and working. Thus, stock exchange is an important source of information, which is valuable to the investors, to government bodies and to the company itself.
11. Regulation of Market Prices
Companies are required to furnish all the essential financial statements and other reports etc. to ensure maximum publicity on corporate operations and working. Thus, stock exchange is an important source of information, which is valuable to the investors, to government bodies and to the company itself.
12. Regulation of Market Price
Speculations in the stock exchange promotes equilibrium of demand and supply and prevent large fluctuations in prices. The price movements are made smoother by the activities of speculators.
13. Regulation of Company Management
A company, which wants its securities to be quoted and traded on a stock exchange, has to get itself enrolled according to the laws and rules of the stock exchange. Through these regulations, stock exchange exercise wholesome influence on the management and working of he company in public interest.
Investment banks perform a major role in the very important function of raising long-term capital for corporations. Such banks are also sometimes called security houses. These specialize in the marketing of new issues of common preferred stocks and bonds of old and new companies. They sell them to the general public or to pension funds, insurance companies or other large investing institutions. These are banks, which provide capital for industry usually for long period purposes of production, in return taking over shares in the borrowing companies. What they actually do is to under-write a corporation's new security issues. In other words, security houses guarantee the sale of a company's securities and deliver a check to it for these new securities. They make their profit by changing a commission which may vary from 3% to 10% or more of the proceeds of the sale.
The investment bank would make an investigation of a company prior to making any commitment regarding the proposed bond issue. The final agreement to under-write is usually not signed until a day or two before the securities are put on the market. The price that the investment bank would be willing to pay would depend on the amount that it anticipates can be realized from the sale of securities.
Financing by Leasing
Leasing houses or companies are the institutions that provide business premises, building, plants, machinery, store and office equipments and other fixed assert accessories on rent to business enterprise. They carry on rental business and their source of earning is rental income. Manufacturers and service business owners obtain their fixed asset requirements from leasing companies on rent without buying them up and getting their capital blocked for a longer period. This source is very attractive to those business enterprises that require a relatively large working capital to meet the growing challenge of increasing competition. The facility provided by leasing companies is an indirect finance for fixed capital requirements. Instead of giving loan or providing capital in csh, they offer necessary fixed assets in kinds on monthly rental basis to manufacturers and service business operators. Leasing the cost of typical lease is, as would be expected, higher than the interest on loans.
International Chamber of Commerce
It is a world trade organization founded at Atlantic City, N. J, in 1920 with headquarters in Paris. Its membership, derived from more than 70 countries, consists of Chambers of Commerce, trade and industrial associations, and individual business firms and corporations. Mr. M. A Rangoonwala has been the Vice President of I.C.C for quite some time.
It acts as a clearing house for the exchange of views in international economic policies and problems and to promote world trade. In 1946, it was granted consulative status by the Economic and Social Council of the United Nations. It gives suggestions to GATT and UNCTAD on matters of restrictions on import, shipment problems, customs tariffs etc.
International Chamber of Commerce solves the problems of international arbitration of exchange. in fact, it solves the disputes arising out of payment by a person in one country of a debt payable in another country by means of a Bill of Exchange purchased in a third country
Chapter 5 - Operating A Business
Marketing is the process by which the demand structure for econoic goods and services is anticipated and satisfied through the conception, promotion, exchange and physical distribution of such goods and services.
In words of Stanton,
"Marketing is a total system of business activities designed to plan, price, promote and distribute satisfying goods and services to present and potential customers."
1. It is a managerial system.
2. The entire system of business action should be market or customer oriented.
3. The definition suggests that Marketing is a dynamic business process.
4. The Marketing programme starts with the idea of the product and does not end until the customers wants are satisfied which may be after the sales.
5. It implies that to be successful, marketing must maximize profitable sales over the long run.
Score of Marketing
At first, the marketing department primary responsibility was for sales activities. But as marketing managers gained experience, they gradually realized that is was far more sensible to make what people wanted to buy rather than to try to make them buy what they didn't ask for. Marketing began to enlarge its scope, taking over company activities such as market research and customer services, advertisig, public relations and promotions. Product development, product servicing and forecasting also began to come under the jurisdiction of the marketing manager. The purpose was to help make the entire company more responsive to the consumer. Industries shifted from a production orientation to a marketing orientation. Thus, marketing includes not only the whole process of distribution, but also the preliminary activities before distribution. The domain of marketing grew until marketing could be defined as:
"The performance of business activities which direct the flow of goods and services from producers to consumers or users in order to satisfy customers and accomplish the company's objectives."
In short, we can say that marketing includes all efforts to:
1. Discover the present and potential requirements of consumers.
2. The evolution of the products, which would satisfy those requirements.
3. All the effective methods of product distribution.
4. All the efforts to improve and modify the products.
Importance of Marketing
Marketing is a fundamental human activity that facilitates and expedites exchange. In the following point we could find, its importance;
1. It is the Essence of Modern Business
Marketing of goods and services is the prime objective of every business. In view of growing competition and abundant supply of goods and services, marketing helps the business to face the challenge and survive. Through effective marketing activities, the producers find new outlets of the goods and services and keep the spiral of economic growth moving upward.
2. It Is A Total System of Interacting Business Activities
Marketing of today is no longer limited to the sales force. It is a total system designed to plan, price, promote and distribute want satisfying products and services to present and potential customers. Marketing activities have emerged as a total system with a closer contact with each other and integrated efforts to bring the desired result.
3. It creates Interest in the Product
Creating utility in the product and developing its usefulness is the most important role of marketing. Even the best produced goods cannot be appreciated by the customers unless they are properly introduced to them. Hence marketing helps in creating interest in the product through proper introduction.
4. It Creates Employment
Marketing is a paraphernalia of many activities like advertising, indoor and outdoor salesmanship, warehousing, transportation, communication, market research and market information. All these have opened new avenues for jobs. A good number of people have found it a profitable source of employment.
5. It Provides Customer or Consumer Satisfaction
Marketing specialist tries to find out exactly what goods and services consumers are ready to buy. Product research goes on to make it more useful and more satisfactory to people. This is what a good business enterprise aims at. Thus, we can say that the essence of marketing activities is consumer satisfaction.
A market segment is a group of individuals or firms, within a market, that share one or more common characteristics. The process of dividing a market into segments is called market segmentation.
"When the market for a product is divided into two more homogenous groups of consumers, and variations of the product are developed to satisfy each group, market segmentation has occurred."
Market segmentation is a product development strategy. It allows a marketing manager to develop a strategy that will be responsive to the needs of a unique market sector and render perfect satisfaction to a part of the market.
"A target market is a market segment towards which a firm directs its marketing efforts."
A firm may have more than one target market for a particular product. Its product may be demanded by persons who are between 20 and 34 years old and also by those who are in the 45 to 54 years age bracket.
On the other hand, a firm may develop different products for different target markets e.g. a manufacturer of athletic shoes may target the professional athlete and at the same time it may produce shoes and clothing to appeal the recreational athlete as well.
Bases of Segmentation
A company may select one common characteristic to identify a market segment. Marketers make use of wide variety of segmentation bases like:
1. Geographic Bases
For many years, marketing managers have reacted to geographical differences in markets like market density, climate, region and classification as urban, sub-urban and rural.
2. Demographic Bases
Socio-economic variables such as family income, age level, education level, family size, sex distribution, nationality, occupation, religion, social class, etc are types of demographic date often used to classify markets.
3. Psychographics Bases
Segmenting markets by identifying individuals who share common attitudinal or behavioral pattern is called psychographics market segmentation. A college professor and a skilled labourer may be earning dis-similar incomes, they may be of different ages and may have contrasting educational backgrounds, yet both may hold common attitudes towards numerous products.
4. Market Bases
One important way to segment is according to whether the purchaser is a consumer (who purchases goods and services for his own personal use) or an industrial user (who purchases products to use in producing other products). Because those two groups purchase goods and services for different reasons, marketers use different marketing strategies to reach them.
5. Product Related Bases
Target markets may be set on product related bases such as volume of usage, end use, benefit, expectations, brand loyalty and price sensitivity etc.
Marketing Mix / Marketing Strategy
Once market segmentation has identified various target markets, the firm faces the challenge of signing a marketing strategy appropriate for each. The several elements of such a strategy is known as Marketing Mix.
Marketing mix refers to the combination of decision elements in a company's marketing programme. It consists of four major components; that of product, distribution, promotion and price. Those components are called marketing decision variables, because a marketing manager can vary the type and amount of each element. It is carried to satisfy consumer's needs and to have a better and successful grip over the market.
Ingredients of Marketing Mix
1. The Product Variable
To maintain a satisfying set of products that will help an enterprise to achieve its gals, a marketing manager must be able to develop new products, modify existing ones and eliminate those that no longer satisfy buyers and yield acceptable profits. Product strategies are concerned with the design of the product, product planning, development, modification and innovation, branding, warranties and packaging decisions.
2. Distribution Variable
In dealing with the distribution variable, a marketing manager attempts to make products available in the quantities desired to as many customers as possible and to hold the total inventory, transportation, and storage costs as low as possible. He may even motivate intermediaries (wholesalers and retailers) in developing and managing transportation and storage systems.
3. The Promotion or Communication Variable
Promotion is used to increase public awareness of an enterprise about its existing or new product or brand. In addition, promotion is used to educate customers about the features of the product or renew interest in a product whose popularity is declining. Promotional strategies are concerned with communicating to consumers and the related personal, selling, advertising and sales promotion decisions.
4. The Price Variable
In the area of the price variable, marketing managers usually have a hand in establishing pricing policies and determining product prices. Since price is important to consumers, it is a delicate components of the marketing mix. If prices are too low, the company may be lost. The supply and demand of the product, transportation costs, size of the order and payment patterns etc. affect the price of a product.
Life Cycle of A Product
Every product progresses through a product life cycle, which is a series of stages in which its sales, revenue and profits increase, reach a peak and then decline. Thus products are born, they grow up, enjoy their peak years and eventually wane. Few products last forever, some products have minimum typical pattern showing a gradual increase to maturity, reaching a maturity stage and then coming to declining stage. Few periods in the life cycle of a product are generally recognized.
1. Introduction Stage
2. Growth Stage
3. Maturity Stage
4. Decline Stage
Some products pass through these stages rapidly, in a few weeks or months. Others may take years to go through each stage.
1. Introduction Stage
In the introduction stage, both the sales growth rate and the level of sales are low. The slow sales growth results from one or more of the following situation.
a) Delays in expansion of production capacity.
b) Technical problems in the product or production
c) Delays in achieving adequate distribution through retail outlets.
Profits are usual non-existent and at this stage, costs of production and the cost of marketing will be high if there is a genuine product deferential. A company may benefit in different ways e.g. by high initial pricing or by rapid market penetration.
2. Growth Stage
It is characterized by rapidly increasing sales. In this stage, price should be maintained at a high level to allow the company to improve its cash position. Advertising and other sales promotional expenditure remains high as compared to expenditures for established products. The number of competitors increase at this stage and buying resistance will build up. An imitation of the product by the competitors starts and the new product of the same style come in the market. Unit margin profit rises rapidly. Sales and profit also increases rapidly. Due to entry of the competitors in the market, the management must be ready to face in new products and adjust marketing tactics in lying with anticipated cycle.
3. Maturity Stage
During this period, sales volume continues to grow and the market reaches to full maturity. Sales may continue to increase but at a decreasing rate. Competitors share the market and their market profitability at different stages of market development. Programmes to reach more consumers and to find and promote new uses for mature products become important means of competing. Deduction in price changes in advertising and promotion techniques designing and quality may prove helpful at this stage.
4. Decline Stage
At this stage profit margin becomes very small and very effort has to be made to reduce cost and improve distribution efficiency. Price becomes a major issue and this may lead to restriction to distribution to large outlets. A product which is at the declining stage in one country may find a market in another country with a less developed economy. The cost of maintaining business at this stage of cycle must be weighed against the opportunity for investment elsewhere.
Marketers should be aware of the life-cycle stage of each product they are responsible for, and they should know how long the product is expected to remain in that stage.
Product Planning and Development
Product development is a more united term and includes the technical activities of product research, engineering and design.
Steps in Product Development
Despite the risk involved, new product development is a competitive necessity and has given incentive to many companies to adopt a formal procedure for dealing with complexities and uncertainties involved in product planning and development. Process of product planning and development consist of the following steps:
1. The Search for New Product Ideas
The starting point for the new product development process is to present ideas. Management concentrates its efforts on those product ideas that appear to be most promising. New product ideas may occur from many sources, internal and external to the organization. Primary internal designing and company personnel. The most important external sources are the customers and competitors.
2. Screening New Product Ideas
Ideas for new product must be completely screened at an early stage. This reduces the number of product ideas that can undergo further detailed analysis. Screening determines the productivity of the idea, amount of investment required, market possibilities, customers reactions and media chances of distribution to be employed.
3. Business Analysis
The basic purpose of business analysis is to determine financial aspects of new product introduction. Such an analysis is tied directly to the potential profitability of a proposed undertaking. The analysis is basically of the cost and benefit i.e. the total cost of developing a new product and increase in turnover.
4. Development and Testing
At this stage, no product has been developed. Only a product concept has been creaed. Most product concepts that successfully passed the business analysis stage are tested with potential consumers before actual development begins. When consumers are shown the concept statements, they are asked to evaluate the product idea from the stand point of their need and use of it. They are further asked to evaluated the idea, suggest improvements in the product and to indicate general features they would like to have.
5. Test Marketing
It is the introduction of a product in a limited geographical area to determine if the product should be introduced to the national market. In test marketing, a product is produced on a limited scale under rightly controlled conditions. It is the last opportunity for the company to modify the product for the marketing strategy.
6. Introduction and Evaluation
This is the last stage in product planning and development. In this stage, the product is ready for national distribution and takes its place as a part of the companies existing line and total mix. The marketing programme designed to assist the new product will be determined by the information generated in the early phases in planning and development.
Marketing Channels / Channels of Distribution
Marketing channels refer to the routes that are followed in carrying the products from manufacturers to final consumers or users or the course taken in the transfer of title of a commodity. These channels vary according to the nature of goods, the market, the character of demand and so on. It is also known as channels of distribution. In view of growing competition and desire to reach the consumers with all possible avenues, the channel of distribution adopted by a manufacturer is normally more than one.
To expedite and facilitate the flow of products of producers, middlemen or intermediaries have come up to play their positive role. Hence in usual practice we find the following marketing channels for consumer products.
Channels for Consumer Products
A. Producer - Consumer
B. Producer - Retailers - Consumers
C. Producer - Wholesalers - Retailers - Consumers
D. Producer - Agents - Wholesalers - Retailers - Consumers
E. Producer - Salesman - Consumer
Channel A as given above is followed or adopted by a producer where the product is highly perishable or fast deteriorating or where a direct personal service is desired. Channel B is chose to avoid delay in distribution and keep the producer nearer the consumers to make him understand their desire or liking with greater closeness. In all other cases, channels C and D are adopted specially where producers have to sell over a large geographical area and where they would like to transfer distribution burden to middleman. Channel E is commonly termed door-to-door selling or personal selling and typified the method selected by certain companies.
Channels for Industrial Products
F. Producer - Industrial buyers
G. Producer - Industrial Distributors - Industrial Buyers
H. Producer - Agents - Industrial Buyers
I. Producer - Agents - Industrial Distributors - Industrial Buyers
Among buyers there are industrial customers also who buy the product for industrial consumption or for use in finishing their product or for assembly purpose. Industrial customers, as such, are potential buyers of certain products. For them, producers use one or more of the above channels.
In normal case, Channel F is being followed in carrying the product to industrial buyers. But this is practicable where such buyers are in limited number. If the number of industrial buyers increases, the help of intermediaries is sought and therefore channel G can also be adopted. Where the producer wants to pay more attention to other things, channel may be placed up where agents are appointed to serve industrial buyers. In still other cases channel I may also be used to serve a large number of industrial buyers in different parts of the country of geographical area. Hence these different marketing channels are useful in their own cases and are adopted by producers according to their needs and requirements.
Importance of Price
Price is the value of a commodity expressed in terms of money. Pricing is considered by many to be the key activity within the capitalistic system of free enterprise. price, thus, is a basic regulation of the economic system. Price determines what will be produced (supply) and who will get how much of these goods and services (demand).
Management may decide to improve the quality of the products or add differentiating features. This decision can be implemented only if the market will accept a price high enough to cover the costs of these changes. Poorly made and implemented price decisions result in a weaker market position generally and in the extreme outright business failure.
No marketing job can be done properly without a goal, and pricing is no exception. Management should decide upon its pricing objectives before determining the price itself. But very few firms clearly state their specific price policies. The main goals in pricing may be classified as follows:
1. Achieve Target Return on Investment or Net Sales
A firm may price to achieve a certain percentage return on investment or on net sales. They set a percentage markup on sales that is large enough to cover anticipated operating costs plus a desired profit for the year. It was selected as a goal by manufacturers that were leaders in their industries.
2. Stabilize Prices
Price stabilization is often the goal in industries with a price leader. Price leadership does not mean that all items in the industry charge the same price as set by the leaders.
3. Maintain or Improve Share of Market
In some companies, both large and small, the major pricing objective is to maintain or increase the share of the market held by the firm, and through it, it can usually determine what shares of the market it enjoys, in some respects, it is better goal than target return especially when the total market is growing. A firm might be earning a reasonable return, but might be getting a deceased share of the market.
4. Meet or Prevent Competition
Countless firms, regardless of size, price their products simply to meet competition. When a company sells its output in this manner, we can almost say that it has no control over the goal and the means used to reach it, or either we fix the price of a commodity so that the competitors do not enter the market.
5. Maximize Profits
the pricing objective of making as much money as possible is probably followed by a larger number of companies than any other policy. A profit maximization policy if practiced over the long run. For this, the firm may have to accept short run losses. A firm producing a new product does best by setting low prices and making least profits for the first few years, but they are laying the solid foundation for adequate profits over the long run. The goal should be to maximize profits on total output rather than on each single item marketed.
Factors Influencing Price Determination
After setting their objectives, executives must determined the base price of their product or service. By base price, we mean the price of one unit of the product at the point of production or resale.
In the price determination process, several factors usually influence the final decision. Factors may be both internal and external that affects the price at which a product is offered for sale. Internal factors include the intersection of other marketing controllable like product distribution and promotion. However, following are the key factors that management should consider.
1. Demand for the Product
The first stage in pricing a product is to estimate the total demand for it. Two practical steps in demand estimation are:
a) The Expected Price
This is the price of the product at which the customers value it. It is what they think the product is worth of. If the price is much lower than what the market expects, sales may be lost.
The producer may submit their articles to experienced wholesalers or retailers or engineers and ask them to estimate its price. Another possibility is to observe prices of comparable competitive products. A third alternative is to survey potential customers by showing them the articles and asking them to determine its price.
However, a much more effective approach is to market the product in a few limited test areas. By trying different prices under controlled research conditions, the seller can determine at least a reasonable range of prices.
b) Estimates of Sales At Various Prices
It is extremely helpful to estimate what the sales volume will be at several different prices. Here experience with the product or with like products is the best source of information. A product with an elastic demand should usually be priced lower than an item with an inelastic demand.
2. Target Share of Market
the market share targeted by a company is a major factor to consider when determining the price of a product or a service. A company striving to increase its market share may price more aggressively (lower base price, larger discounts) then a firm that wants to maintain its present share.
The expected share of the market is influenced by present production capacity and ease of competitive entry.
3. Competitive Reactions
Present and potential competition is an important influence is determining a base price. The threat of potential competition is greatest when the field is easy to enter and the profit prospects are encouraging.
4. Cream Skimming Pricing Versus Penetration Pricing
While pricing a product, the management should consider, whether to enter the market with a high price or low price. These opposite alternatives are termed as skim the cream pricing and penetration pricing.
The cream-skimming strategy involves setting a price that is high in the range of expected prices. A seller may follow this policy for long, or later lower the price to tap other market segments. It is particularly suitable for new products.
In penetration pricing, a low initial price is set to reach the mass market immediately. It can also be employed at a later stage in products life cycle. If there is free duty in the market of a product, management should adopt the penetration pricing policy.
On the other hand, where the market is not large enough to attract the big competitors, it is feasible to adopt cream-skimming policy.
5. Other Parts of the Marketing Mix - The Product, Distribution Channels and Promotion
In the course of determining a base price, management should consider the other major parts of its marketing mix.
a) The Product
The price of a product is influenced by whether it is a new item or an older, established one. The importance of the product in its end use must also be considered.
b) Channels of Distribution
Often a firm sets a different price for wholesalers and retailers. The price to the wholesalers is lower because they provide facilities such as storage, granting credit to retailers and selling to small retailers.
c) Promotional Methods
The promotional methods used, and the extent to which the product is promoted by the manufacturers or the middleman are considered in pricing. If major promotion is done by retailers, they will be charged a lower price for a product.
Basic Nature of Promotion
In its promotional activities, a firm gets its chance to communicate with potential customers. It should be noted particularly that promotion and sales promotion are different. Promotion is the all inclusive term representing the broad filed and sales promotion is only a part of it. Promotion is the most criticized of all the marketing activities.
Basically, promotion is an exercise in information, persuasion, and communication. These three are related, because to inform is to persuade, and conversely a person who is persuaded is also being formed. And persuasion and information become effective through some form of communication.
Need for Promotion
A company needs promotion to aid in differentiating its products, to persuade the buyers and to bring more information into the buying decision process. Through the use of promotion, a company hopes to increase a products sales volume at only given price. Several factors point up the need for promotion.
1. Distances and Number of Consumers
As the distance between the producers and consumers increases, and as the number of potential customers grows, the problem of market communication becomes significant needs an effective promotional programme.
2. Disseminate Information
Once the middlemen are introduced in a marketing pattern they must be informed about the products. Wholesales must promote the products to retailers and retailers to consumers. Even the most useful product will be a failure, if no body knows about it. A basic purpose of promotions is to disseminate information to let the customer know.
3. Competition between the Firms
The intense competition between different industries and even between different firms within an industry needs promotional programmes. Since, variety of goods are growing in the market and since customers are more selective in their buying choices, so a good promotional program is needed to reach them.
4. Periods of Shortages
Promotion is also needed during the periods of shortages, as advertising can stress product conversation and efficient uses of the product. The sales force can also help custoemrs in solving their shortage induced programmes.
5. Economic Decline
Any economic decline quickly points up the importance of selling. During such a period, product planning, the channels and the pricing structure remain unaffected and unchanged. The key problem is selling. However, promotion is needed to maintain the high material standard of living and the high level of employment.
Methods or components of Promotion
The major components or the tools of promotion are as follows:
Advertising is the principal method of demand creation. It consists of all the activities involved in presenting to a group, a non-personal, oral or visual, openly sponsored message regarding a product, service or idea. This message, called advertisement, is disseminated through one or more media and is paid by the identified sponsor. Advertisement is the message itself while advertising is a process. The factor of payment made by the sponsor to media differentiates advertising from propaganda and publicity. It is advertising that has enabled the businessmen to make continuous mass production for the wide markets. It ensures the introduction and acceptance of a new product in the market.
Advertising, being a comparatively cheaper method, is directed to prepare the necessary ground for the activities relied upon to a great extent.
2. Personal Selling
Selling is essential to the health and well being of our economic system. The goal of all marketing efforts is to increase profitable sales by offering want satisfaction to the market. Personal selling is by far the major promotional method used to reach this goal.
Personal selling consists of individual, personal communication and it has the advantage of being more flexible in operations. In other words, personal selling is an oral representation in a conversation with one or more prospective buyers for the purpose of making sales. In personal selling, the company has an advantage to pinpoint its target market effectively.
3. Sales Promotion
Sales promotion consists of those marketing activities, other than personal selling, advertising and publicity, that stimulate consumer purchasing and dealer effectiveness, such as displays shows and expositions, demonstrations, and various non-current selling efforts not in the ordinary routine. It serves as a bridge between advertising and personal selling. These devices are very important at the point of purchase because they inform, remind or otherwise stimulate the buyer. The sales promotion department of a manufacturer may work with many different groups consumers, dealers and distributors, or other sections of the marketing department. Thus, the marketing managers must carefully consider the role played by sales promotion in the marketing mix.
Publicity is a non-personal form of demand stimulation and is not paid for by the person or organization benefiting from it. Publicity refers to any message concerning an organization appearing in the mass media as a news item for which the organization does not pay and is not generally considered to be the source.
5. Public Relations
The market target of public relations effort may be any given public such as customers, a government agency, employees, or people living near the promotional organization.
Chapter 6 - Business in the Global Market
International marketing refers to the marketing activities that are performed across the international boundaries. The planning and control of such marketing activities are carried by the parent producing company through its strategic marketing activities that are designed and established to meet the requirements of such a market. The main goal is to introduce and familiarize the product in a manner that customers get satisfied, develop liking for the product, and build a better image of the multinational manufacturer.
Marketing strategies are adopted to overcome hindrances and restraints. Greater the multinational companies pay attention to marketing mix, greater becomes the possibility of exercising effective control or better grip over the international market. Further the success of international marketing also depends upon how the producers understand social and cultural built up economic pattern, political environment, and the technological advertisement that has been acquired by the country where goods and services are to be provided. In fact, successful international marketing depends upon how the producing company gets adjusted and fully familiarized with the conditions that prevail in the country where the goods and services are to be provided.
Balance of Trade
By balance of trade we mean the difference between what a country pays for imports and what is receives for its exports. It records all visible items that are exported to and imported from other countries through sea, air and land routes. Balance of trade, as such gives an estimation of total inflow and outflow of goods that are recorded at the inlet and outlet points.
Balance of Payment
Balance of payment refers to the net results that are drawn after recording all the visible and invisible items that are imported and exported from the country. Balance of payment, as such, provides a comprehensive statement over the net results of foreign trade and gives a true picture as to where the country stands in the international trade. It clearly exposes the economic viability, strength, and in capability by correctly measuring its imports and exports, competency in goods and services as well as technical know-how. By services we mean the services of shipping lines, insurance companies, banking concerns, and others. It also includes the foreign loan that is either provided by it or accepted from other country or countries.
Arguments for Restraints on International Trade
Free international trade is hardly found today. The most popular arguments that are given for restricting foreign trade among nations are as follows:
1. Military Argument
This argument holds that all industries vital to the national defence should be kept alive through tariff protection, if necessary.
2. The Home Industry Argument
This argument holds that if foreign goods are kept out of the country. Domestic manufacturers will enjoy a larger home market. But this argument favours selfish businessmen who are thus able to free themselves from foreign competition and charge high prices for their own goods. In this view, protective tariff unnecessarily makes imported goods costlier and render local producers to enjoy a larger home market where by losing foreign buyers.
3. The Infant Industry
The tenor of this argument is that young struggling industries should be protected from foreign competition until they are matured enough to face it. But determining how long this protection is needed for each individual industry and when it should be discarded is a difficult task.
4. The Wages Argument
This argument holds that by excluding foreign goods, goods made by higher paid domestic labour are encouraged thereby raising the domestic wage level. But by doing this:
1. The domestic prices are unduly raised.
2. Since high wages do not cause high productivity, this results in subsidizing uneconomic production to the long run disadvantage of all parties concerned.
5. Favourable Balance of Trade Argument
In an attempt to have a favourable balance of trade, a country may make every effort to reduce the import burden as much as possible by resorting to increased import duty, surcharge etc. while on the other hand, to increase exports to gain as much favourable results of foreign trade as possible.
Methods of Restricting Free Trade
Some of the methods used as barriers to free foreign trade are briefly given as follows:
Tariffs are simply taxes imposed by a nation on products imported from other nations. There are two broad types of tariffs:
(a) Revenue Tariffs, which are imposed to raise revenue, not necessary to prohibit specific imports.
(b) Protective Tariffs, which are designed to protect domestic industries against foreign competition.
Revenue tariffs are specific duty tariffs and they are levied on imports of a stated amount per unit (such as per pair, per kilo, per liter and so on). The usual objective is to produce revenue. Protective tariffs, on the other hand are based on the value of imported products, rather than the quantity. They are of often known as ad valorem taxes that aim at controlling the retail prices. They thus protect the domestic producers. If the ad valorem tax is high enough, it can keep foreign products out of the domestic market altogether.
It is a trade restriction technique where a country simply sets an upper limit on the amount of a certain product that may be imported. Quota is fixed to restrict import of a certain commodity, to avoid foreign competition and the home industry operates without any major upset.
An embargo is a completed prohibition on imports of certain products or from certain countries. It is more a political motivated action that puts a ban on imports rather than an economic one. Example may be given of the United States tat prohibited the imports of products from certain communist countries.
4. Difficult Custom Procedures
The creation of complicated and expensive custom procedures can be effective in limiting imports. It can also be used to discourage exports. Importers and exporters get fed up with difficult custom procedures that are intelligently introduced by the government.
Organization for Multinational Operation
Multinational operations are conducted by companies with the help of one of different organizational structures. The four identified organizational structures are:
1. International Division
Some companies set up a separate division, which looks after the multinational operations. The international division created for the purpose assumes its own-identity apart from the principal organization.
2. Geographical Division
Some companies have separated divisions to handle business independently in different parts of the world.
3. Functional Division
A third form of organizational structure is based on function. The marketing for the world wide organization is planned by the Marketing Division. The Finance Department manages international finance along with domestic finance.
4. Product Division
A company divides its operations according to products of the company. A specific department handles the complete activity of producing and marketing its products.
Problems of Multinational Operation
Problems tend to sneak up on executives of multinational firms in the most unexpected ways, including the following:
1. Language Differences
Differences in language constitutes one of the outstanding barriers to international trade. Failure to communicate properly and adequately through correspondence, advertising and conversation retards attainment of the full possibilities of a foreign market.
2. Different Monetary Standards
Every nation has its own peculiar currency. Rupee in Pakistan yen in Japan, Lira in Italy etc. This situation requires not only a mechanism whereby the seller may be paid in his own currency while the buyer makes payment in his, but also a method whereby each of these national currencies may be value in terms of every other one. The non-existence of gold standard, which at one time served as a common denominator, has greatly complicated the problem.
3. Local Attitudes
Local attitudes about certain products may become very important. If a product is thought to be mainly for men or mainly for children, its sales could certainly be affected. Furthermore, stereotypes about foreign countries are often incorrect and misleading.
4. Difference of Tastes
Tastes vary from country to country and even within a country from person to person. This difference of taste may cause drastic problems to multinational companies, which intend to have their plan of operations in many countries.
5. Lack of Marketing Information
Lack of precise, current marketing information about most foreign countries may also cause a hindrance .Helpful data can be secured from such sources as foreign trade associations, banks etc. but this information is usually quite general and can be applied only in part to problems concerning specific products and markets.
6. Trade Barriers
Practically all countries for one reason or another, interpose barriers that tend to restrict the free flow of goods across their borders. These barriers can make the free practice of business very difficult. They consist of tariffs, quotas, exchange restrictions, barter arrangements, laws and occasionally absolute prohibitions to the import of certain commodities.
7. Climate Difference
In this area, difficulty is anticipated but still encountered. For some commodities, which are sensitive to climate conditions, special scheduling, and packaging are often required for protection from exceptional moisture, heat or cold.
8. Business Customs and Bargaining Customs
Business customs and bargaining customs are rarely part of written law. Nevertheless they are sure to affect marketing strategy.
9. Shortage of Qualified Management Personnel
There is critical shortage of qualified management personnel for multinational operations. Schools are now training for international management. Some companies are beginning to try to make overseas experience attractive and a requisite for advancement within the corporation.
10. Interface of Divisions
A final difficulty often occurs in the upper echelons of multinational companies at the critical interface of divisions. Relationships between divisions can become strained and aggressive when the competitiveness of division executives is increased by nationalistic pride. Hence great care, for detail and fairness must be tied, into the agreements and plans for marketing areas and responsibilities of each corporate arm.
Chapter 7 - Creating Goods and Services
Production control consists of a well defined set of procedures that has its objective, the coordination of all the elements of productive process men, machines, tools and materials into a smoothly flowing whole, which results in the fabrication of products with a minimum interruption.
Management is responsible to see that all business plans are properly adhered to and the standard sets are attained. production control therefore involves in control of cost, quality, and time of production. An effective system of production control minimizes the idleness of men and machines, optimizes the number of setups required, keeps in process inventories at a satisfactory level, reduces material handling and storage costs and consequently permits good quality and sufficient quantity of production at low unit cost.
Steps in Production Control
The basic steps in production control, in occur in which they occur are:
Planning is the part of production control that determines which materials and work are needed in order to produce the products offered from the manufacturing division. Each order is broken down into its basic parts on a bill of materials, which lists all the materials, parts and sub assemblies needed to complete that order. The time needed to supply all required materials must be determined, and thus must be indicated to other production control personnel. Further, the production controller has to determine whether the required equipment and trained employees are available for the job at band.
Routing is the part of production control that determines which route, or path the work will take through the factory and where and by whom the processing shall be done. This requires the production controller to know in detail how each machine operation or work process is performed. Route, sheets are prepared to show the sequence of operations for all parts and materials and for all activities. Route charts are constructed to indicate the production processes. A route file is constructed that consists of all the necessary job tickets required to move the materials out of stock to the various machine positions.
Scheduling involves the getting up o the time tables that will govern the movement of the work, which is subjected to the various fabricating processes. For this, the production controller ha to understand the nature of work and workload capability of each department. After reviewing them he prepares a master schedule, which indicates the number of finished products that will come off the assembly each month or weak until the order is completed. When the job on hand involves several departments, a weekly departmental schedule is used to show the expected production from each department for each week of the total production period. Finally load ahead schedule is prepared to indicate the amount of back work that must be processed in each department before it can handle new work.
dispatching is that part of production control that releases final work orders to the operating departments. it is the step where work order spell out which work is to be done and the amount of time estimated for its completion. Besides authorizing the department to proceed with work on the job, the work order states the priority of the work and gives necessary instructions about it.
(e) Performance Follow-up and Control
Lastly, the production controller must verify or assess the performance results. for this purpose elaborate control boards are some time set up, utilizing various printed forms that show the progress of the work section wise or department wise and serve as indicators of satisfactory or unsatisfactory performance. Many managements use schedule performance reports for this purpose. These reports are issued by the production controller, but the information on them comes from the operating departments. The report compares what was accomplished with, what was assigned and scheduled. Additional follow up control is achieved through scrap reports. They show which work was rejected by inspectors, and why and what is to be done with rejected products.
The Emerging Service Industry
Service industry has gained prominence during the last two decades. Principles of production management applicable to manufacturing industry apply to service industry also. The difference between the two types of industries is of nature of product. One producers goods (tangible) whereas the produces services (intangible). Banking, insurance, transportation, hotels and motels are engaged in production of services for customers. As such, planning is as important in banking a in steel industry. Routing must be of a major concern to a taxi driver. Scheduling should be important for doctors for listing patients.
The characteristics of most of the service industries are as follows:
* There is no inventory of completed products in stock. It is so because an unsold airline seat cannot be restored for the future.
* Preferably operated under single ownership, because the initial investment involves small capital.
* Operation area usually remains limited because it needs personal attention and supervision.
* In a service industry, skill is more important than capital.
* Labour is the largest expenditure because of the smaller investment and importance of skilled personnel.
* The product is often intangible and consists of maintenance. Haircuts, health care and entertainment need to be replaced on a regular basis
Chapter 8 - Making Goods and Services Available
Producers or manufacturers purchase raw materials to be fabricated into products that are needed in the market. These products may be purchased by industrial customers for further processing, or by distributors for eventual sale to ultimate consumers. Purchasing, as such, is a major task of a businessman. For producers, such purchases should be sufficient enough and timely to ensure uninterrupted production, and for distributors it should be at a reasonable level to avoid the risk of under or overstocking. High degree of skill, therefore, is required in making purchases.
Steps in Purchasing
1. Establishing Specification and Determining the Need For Goods
The first step in purchasing is to determine exactly the goods that are to be acquired. It is done in the light of specifications that are received by purchase office from departments concerned. For non-repetitive goods, endorsement is also obtained from engineering or technical department to determine their exactness. For repetitive goods, confirmation as obtained from production department in case of manufacturers or assemblers, and sales manager in case of distributors or middleman.
2. Investigating the Supply Market
After determining the requirements, the next step is to search out all possible sources of the supply market. Purchase officer must find out all the suppliers, their products, their prices, the quality of their wares, their terms and conditions, their reputation in the trade and other related things that would help him in deciding the list of potential suppliers.
3. Starting Purchasing Negotiations
After searching or investigating the market and picking up the names of potential suppliers the purchase officer carries negotiation with them. Through letters of inquiry, information is collected about the goods. Letters of quotation provide him facts regarding price, mode of packing, terms of sales, and the time of delivery. Purchase officer through such negotiation tries to obtain maximum facility that a supplier could give and comes in a position to decide to which he should place the order.
4. Placing the Order
Soon after deciding about the supplier, the purchase officer places the order to him for supply of the goods on terms and conditions already settled. Such order is usually placed in writing to have evidence in case of any dispute that may arise later on. Order in writing carries an exact description of the goods required, the prices, the quantities desired, the delivery date, the discount terms, shipping or dispatch instructions, billing instructions, and mode of packing etc. A copy of the purchase order is always maintained by the purchase officer.
5. Following Up the Order
In order to make sure that the order is executed by the supplier in time, following up the order becomes the usual step in purchasing. Purchase officer, therefore, monitors the progress of this order and finds out whether it is being executed by the supplier in time and as desired. This involves frequent contacts with suppliers and efforts to make certain that there are no delays in dispatch of the goods on their part and the goods so ordered will be received in time.
6. Receiving the Goods
On receiving the goods, the purchase officer immediately makes them to be compared with order form to see whether these are correctly sent by the supplier and meet the requirements as per order form. If the shipment is correct in both quality and quantity, the goods are sent to stock. If there is any differences in the order and the shipment, the matter is immediately brought to the knowledge of the supplier. Till the settlement of the discrepancy, the goods so received are held in the receiving room.
Need of Inventory Control
With few exceptions, most businesses have a considerable financial investment in materials of all kinds. Inventories are maintained in stock rooms, in process and in transit to and from the company. Such inventories really constitutes life blood of the business organization.
It is very important that this stream of materials be properly maintained without gaps and without overflows. Too little means that production will stop or those customers cannot be served. Too much means excessive storage, and investment costs, with possibilities excessive deterioration or obsolescence.
The right solution lies in steering between two disasters. It is therefore necessary to take steps to see that flow and amount material supplies throughout the operations are properly adjusted. Th steps taken are termed inventory control.
Importance of Inventory control
Such controls serve the following purpose:
1. Provide opportunities to save money and eliminate wastes in the quality of goods selected, in the quantities ordered and used and in the expenditures for transportation, storage, and distrubution to markets.
2. Replenish supplies before they are dangerously depleted.
3. Prevent accumulation of excessive supplies.
4. Allocate materials to specific needs.
5. Provide proper accounting of inventory positions.
a) Provide written record of transfer of materials from one department to another.
b) provide record of the manufacturing processes through which the materials pass.
c) Serves as an authority for such movement.
d) Serves as a source of cost data for the cost accounting department.
The details of materials control procedure vary from company to company. The basic philosophy of the operation however is much the same in all concerns.
1. When the goods are first received and placed in stock, records are made of all pertinent data.
2. All subsequent movements of the materials are accompanied by such paper work as is necessary to inform the management of their exact location at all times.
3. Periodic counts are made to e certain that cone of the items have been lost in the production process.
4. Whenever materials move from one place to another within the plenty, records are adjusted to reflect this transfer and to fix the responsibility for their custody.
5. Identifying tags accompany all goods to facilitate accurate checking.
6. As a means of providing information on the number of items of each kind in the stock room, perpetual inventory records are kept.