CHAPTER-1

Emergence from Economic Activities

1. Economic problems
The subject of the business stems out of economics (i.e. human needs and wants). The basic forces
that lead to making choices are human needs and wants. To have a good understanding of the
subject of business, let us start with the creation of a list of needs and wants.

Are you able to fulfill all of your needs and wants?

Most people cannot afford to buy everything they want, as we have unlimited wants but limited
resources (situation of economic problem).

Resources are of four types, often termed as factors of production:

a) Land – it covers all natural resources provided by nature (e.g. forests, gas, metals, oil, and
other mineral resources)
b) Labour – it covers the number of people available to produce goods and services
c) Capital – finance, machinery, or equipment needed to manufacture wanted goods
d) Enterprise – risk-taking ability or skill of the person who brings other factors of
production together to produce wanted goods and services (e.g. owner of business or
entrepreneur).

Issue of Scarcity and opportunity cost

In the wake of limited resources and scarcity we make choices every day, thus may sacrifice one
option for the other. This phenomenon is called Opportunity Cost

Limited Econoic Scarcity & Opportunity

resources Problem Choices Cost
•Land •Unlimited •Scarcity •The option
•Labour wants •Choices one
•Capital •Limited foregoes to
Resources get other
•Enterprise

Figure-1.1: Linking Resources and Opportunity cost

Specialization
Specialization covers the concentration on what one is best at. Specialization is everywhere from
individual to economic levels (individual, organization and country levels). A unique but common
form of specialization is the division of Labour, which covers the division of tasks in such a way
that one individual performs only one task.

2. Economic problems as basis of Business activities

Based on the so far discussion it is assumed that economics provides the basis of a business. As
Karen Collins signifies that
“economists study the interaction between households and businesses and look
at the ways in which the factors of production are combined to produce the
goods and services that people need” (p. 24). 1
Thus economics deals with decisions like:
What, how, and why certain goods and services should be produced to meet the
consumer needs?
But the question arises, what is the role of business in the given discussion? The business is directly
and indirectly linked with all aforementioned activities. A business may perform following tasks
based on principles of economi activities:
 Combining and making the best use of scarce resources (factors of production)
 Producing goods and/or services
 Fulfilling customer’s wants
 Make money through profit

Business definition:

 Business is an activity that aims at fulfilling customers’ wants by the provision of desired
goods and services, by utilizing factors of production in the befitting manners.

Based on the scope of activities a business is defined by various authors in different ways, for
instance:

According to Ferrell, Hirt & Ferrell (2020)

“a business tries to earn a profit by providing products that satisfy people’s needs” (p.
4).

Activity -
Develop an understanding that how business stems out of economic activity.

3. Creating and adding value

As discussed earlier the business activity is aimed at making a profit, which arises the question of
value.

Value-added = sales price of product/service – the cost of material utilized

Tip for success: Though it seems that value-added increases when the price is high, but it’s not
the case. An increase in sales price may probably reduce sales volume thus ultimately reduce
profits. Thus the value-added is based on customer willingness to pay for a product rather than
price.

Creating value requires effective management of resources. For value creation a business
organization should be:
 able to identify the customer’s needs and wants, and then
 make the best utilization of resources to produce products and services that may fulfill their
needs and wants.

4. Scope of business activity

Business activities include: 2
1. Primary activities – aimed at extracting factors of productions, thus covers the
extraction, agriculture, fisheries, and mining industry
2. Secondary activities – use the output of primary business activities as raw material to
produce finished/semi-finished goods
3. Tertiary activities – deliver the finished/semi-finished products of secondary industry to
customers (e.g. retailing and services industries)

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 CHAPTER-2
BUSINESS & ITS ENVIRONMENT
EXTERNAL AND INTERNAL ENVIRONMENT OF BUSINESS

1. Macro External environment of business

1.1 Political factors
 Political conditions of the country (e.g. stability)
 Political government and its interest in economic segments (e.g. Agriculture and Industry)
1.2. Economic factors
 Stage of economic cycle
 Economic conditions (e.g. GDP, par capita income)
 Inflation and tax rates
 Type os economy (planned, free market and mixed market economy)
1.3. Social forces
 Societal preferences and habits (fashion, living standards, habits)
 Demographical composition of society (age, gender, education, income level)
 Psychographic characteristics (social norms, religious affiliation, family system)
1.4. Technological changes
 Advent of new technologies
 Adoption of technology at national level
1.5. Ecological and environmental concerns
 Environmental concerns at state and individual levels
 Natural calamaties, pandemics, earthquakes
1.6. Legal forces
Legislative changes create opportunities for one and threats for other (e.g. Electric vehicle policy
would effect existing and firms intending to enter in Pakistan)
Government decision to give 3G and 4G licenses, in 2014, changed the course of work in Pakistan
(imagine how)
2. MICRO EXTERNAL ENVIRONMENT
Micro-environment refers to all the actors that are part of the immediate environment and have
a direct influence on the performance of a business organization. Micro-environment covers:
2.1 Suppliers
2.2 Distributors
2.3 Creditors
2.4 Competitors
2.5 Customers
3. INTERNAL ENVIRONMENT OF BUSINESS
Internal factors refer to the factors within the company which impact the operations and overall
performance. Unlike the external factors, these factors are well in the control of a firm. The
internal factors may be either favorable for the firm or unfavorable. Favorable internal factors
positively influence the company and are often denoted as Strength factors. On the other hand,
internal factors that negatively influence the company are denoted as Weaknesses.
Internal factors may include: 4
3.1 Managing culture
3.2 Strategic Management
3.3 Organizational structure
3.4 Financial management
3.5 Managing humans at work
3.6 Operations and production management
3.7 Marketing & Selling
Both external and environmental factors are evaluated using SWOT (strengths, weaknesses,
opportunities and threats)

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 CHAPTER-3
STARTING A BUSINESS
Enterprise & Entrepreneurship
Four factors of production :
a) Land – it covers all natural resources provided by nature (e.g. forests, gas, metals, oil, and
other mineral resources)
b) Labour – it covers the number of people available to produce goods and services
c) Capital – finance, machinery, or equipment needed to manufacture wanted goods
d) Enterprise – risk-taking ability or skill of the person who brings other factors of
production together to produce wanted goods and services (e.g. owner of business or
entrepreneur).
The fourth factor of production deals with entrepreneurship that signifies one’s abilities to
translate other factors of productions into actions.

Thus an individual who takes risks of (producing goods and services) by starting and managing a
new venture is called an entrepreneur.
1. Characteristics of an entrepreneur
1. Creativity – the ability to think new things
2. Innovation – ability to do new things
3. Idea generation – ability to generate business idea out of new thoughts
4. Risk-taking – ability to take a risk by investing money and efforts
5. Independence/Autonomy – at the beginning an entrepreneur may need to work alone
due to insufficient funds to employ others, thus high motivation and commitment may
only be the asset at that time
6. Entrepreneurial alertness – the 6th sense is often considered as the entrepreneurial
alertness and is termed as the one’s ability to notice things without engaging in deliberate
search.
7. Optimism – believing in good fate
8. Commitment and motivation – commitment with the goals and enthusiasm to work day
and night for that
9. Persistence of efforts – an entrepreneur is persistent in efforts and makes non-stop
efforts for business
10. Self-efficacy – one’s belief in his/her abilities. An entrepreneur has a high level of self-
efficacy.
11. Resilience – ability to face adversities and bounce back even in worst situations
12. Social networking – social and professional contacts of an entrepreneur

2. Types of entrepreneurs
Entrepreneurs may fall into various categories; those are discussed in details below:
1. Young entrepreneurs – A person who takes risk of starting a new venture for the first time
2. Women entrepreneurs – Women who own and operate business ventures
3. Part-time entrepreneurs – Entrepreneur who focuses on wage work while balancing it with
business4.
4. Hybrid Entrepreneurs – Entrepreneur who builds his venture gradually while still having a 6
wage work4
5. Serial entrepreneurs – an entrepreneur who starts and runs multiple businesses through his
career. Usually, these businesses fail or exit before the founder moves to the next.
6. Co-prenuers – Business partners who are in the role by their familial relationship, usually
spouse, sibling, parent, or child.
7. Minority entrepreneurs – entrepreneurs who belong to population minority (e.g. ethnic,
cultural, or religious minority)
8. Immigrant entrepreneurs – the one who is not local and has migrated and established
business
9. Intrapreneurs – it’s an entrepreneur in the skin of an employee (i.e. when an employee
possesses all the characteristics of an entrepreneur and organization allows to utilize those
capabilities, the individual would be termed as Intrapreneurs).
10. Corporate castoffs – individuals who have been at an executive-level job but due to layoff
have been downsized but uses their knowledge, understanding, and skill to establish a
business.
11. Corporate dropouts – executive-level employees who leave an organization for an
entrepreneurial career.
12. Sole entrepreneurs – individuals who generate entrepreneurial idea at their own
13. Network entrepreneurs – individuals who identify their business idea through social
contacts
14. Family entrepreneurs – an individual who owns and controls family business activities
15. Opportunity entrepreneurs – those who start a business because they spot an opportunity
in the market
16. Necessity entrepreneurs – are those entrepreneurs who start a business as they do not have
any other mean of generating income
17. Social entrepreneur – are those entrepreneurs who work on a social cause and earn profit
by serving the community

3. Entrepreneurship Process

Opportunity Idea Feasibility Business Start of

identification generation analysis plan business

Figure 3.1: Entrepreneurship Process

3.1 Opportunity Identification
3.1.1 Observing trends
 Political factors
o Political conditions of the country (e.g. stability)
o Political government and its interest in economic segments (e.g. Agriculture and
Industry)
 Economic factors
o Stage of economic cycle
o Economic conditions (e.g. GDP, par capita income)
o Inflation and tax rates
o Type os economy (planned, free market and mixed market economy)
 Social forces 7
o Societal preferences and habits (fashion, living standards, habits
 o Demographical composition of society (age, gender, education, income level)
o Psychographic characteristics (social norms, religious affiliation, family system)
 Technological changes
o Advent of new technologies
o Adoption of technology at national level
 Ecological and environmental concerns
o Environmental concerns at state and individual levels
o Natural calamaties, pandemics, earthquakes
3.1.2 Solving problems
3.1.3 Finding gaps in the market

3.2 Idea generation

3.2.1 Idea generation
 Cognitive process of idea generation
3.2.2 Idea refinement
 Brainstorming
 Focus group
 Library and internet search

3.3 Feasibility analysis

Tells viability of business and possibility of success
a. Industry and market feasibility
b. Product and service feasibility
c. Operational feasibility
d. Financial feasibility
3.4 Preparation of business plan
3.5 Launch of business

4. ECONOMIC VALUE OF ENTREPRENEURIAL BUSINESS

The importance of entrepreneurship for an economy and society was first articulated by Joseph
Schumpeter in his seminal work, “The Theory of Economic Development” in 1934. Schumpeter
argued that entrepreneurs through innovation, creating new products/services, and introducing
technologies make existing products/services and technologies obsolete; he termed it a process
of creative destruction.
Here are a few of the contributions an entrepreneurial venture (due to its nature at the
beginning, we may call it small) can contribute:
1. Entrepreneurship is a path out of poverty
2. Establishing basis of innovation culture
3. Entrepreneurs create job opportunities
4. Entrepreneurs add to national income
5. Entrepreneurs create social change
6. Entrepreneurs spur economic growth
7. Entrepreneurship as a source of sustainability
8. Community Development
9. Entrepreneurial firms’ role in the value chain for larger firms 8
 Case example:
Baba Fruits is a small vegetable and fruit seller in the walled city, Lahore. The owner, Naseer
Baba, started his shop in the 1970s and now the second generation is working with Baba. The
shop has grown to five times its original size. The youngest son of Baba, Faisal Naseer Baba,
has just qualified for his Bachelor's degree in Business from a prestigious business school. As a
final project, he presented the idea of expansion of his family business which was highly
commended by the evaluation team. He discussed the idea of business expansion with his
father and elder brothers. Ultimately, he was allowed to set up a juice, milkshake, and fruit
cocktails shop along with the mainstay business. The idea worked as the customers started
visiting their shop and were charged higher prices than the usual prices of fruits. Baba and his
sons have added value and now the fruit is sold in yet another form.
Activity # 1.3:
Using the case of Baba and his business, answer the following questions:
 What all factors of production are being used when the new venture is launched by Faisal
Naseer Baba?
 If the bananas cost Rs. 48 for six pieces and one glass of banana shake consumes two
bananas, sugar of Rs. 5, and milk of Rs. 30 what would be the valued-added if the sales
price per glass is Rs. 80.
 What would be the increase/decrease in profits, if the banana is sold for Rs. 120 per dozen
instead of converting it into a milkshake?
 What is the opportunity cost of starting the new business?
 How effectively/ineffectively four factors of production have been utilized by the Baba and
his sons?
 Which all entrepreneurial characteristics you can identify in Faisal Baba?
 Was there any creative distribution discussed in the given situation?

5. DIRTY DOZEN FACTORS CAUSING FAILURE OF ENTREPRENEURSHIP

IN PAKISTAN
1. Lack of entrepreneurial orientation at a social level
2. Obstructive educational system
3. Absence of role models
4. Half-baked ideas
5. Start of business for wrong reasons
6. Jack & Kings
7. Lack of market information
8. Pitiable marketing
9. Poor management
10. Insufficient capital
11. Lack of technical knowledge
12. Inability to make the entrepreneurial transition

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6. SOURCES OF FINANCE FOR ENTREPRNEEURS
 Sources of finance

Pesonal finance Debt financing Equity financing

Personal funds Qarz-e-Hasna Business angels

Micro financial
Friends & family Venture capitals
institutions

Bootstraping Government schemes Crowd fundings

Initial public offering

Figure 3.2: Sources of finance for an entrepreneurship

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 CHAPTER-4
SCOPE OF BUSINESS
1. CLASSIFICATION OF BUSINESS
In the previous chapter, we discussed enterprising/entrepreneurship as the basics of business
activity. While launching a business an entrepreneur is desired to select the form of business. A
business may be divided into various forms, but not all could be applied to an entrepreneur. For
instance, an entrepreneur may not belong to a public sector organization. Figure 3.1 covers a
detailed picture of forms of businesses, which divides business based on:
1. Activity – activities are the basic working of a business
2. Nature of business – the business may fall in the category of industry, commerce, or direct
services
3. Size – based on size a business may be divided into small, medium, or large businesses
4. Ownership – the business organization may be owned by the state/government or private
owners.

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 Classification of
Business
organization

On the basis of On the basis of On the basis On the basis of

activity nature of of size nature of
business ownership
Primary Cottage
Industry Direct Private Public Public
activity Commerce industry
services Sector Sector private
Genetic partnership
Secondary Aids to Small sized
activity industry Trade Sole
trade firms proprietorship
Tertiary Extraction Home Foreign Agents Medium
activity industry trade trade firms Partnershp

Construciton wholesale Import Transportation

Large firms Company
industry trade trade
Warehousing
Manufacturing Export Cooperatives
Retail trade
industry trade Banking

Insurance

Marketing

Communication

Figure 4.1: Types of Business Organizations

 CHAPTER-5
OPERATING A BUSINESS FIRM
Stakeholders and Objectives of Business Organization
The stakeholders and objectives of the businesses are as old as the business itself. The idea of
business has evolved slowly but profoundly through a series of what we can now see as definable
eras. The transition between eras is overlapped as the shift to the next era may have
characteristics prevalent from the previous era. Business is divided into six main eras shown in
figure 5.1.
1. ERAS OF BUSINESS ACTIVITIES

Colonial
era

Relationship Industrial
era revolution

Business
eras
Marketing Industrial
era entrepreneurs

Production
era

Figure 5.1: Eras of Business History

Table 5.1: Business across history and its stakeholders

Business Era Factors of production Dependence of business Major stakeholders
activities
Colonial Land & Labour as major Highly independent Mostly internal
factors
Industrial revolution Land, Labour & Capital Less dependent, more Mostly internal, less
independent external
Industrial All factors of production Increased dependence Mostly internal, less
entrepreneurship external
Production All factors of production Interdependence Internal & external
Marketing All factors of production Moderately high Internal and external
interdependence
Relationship All factors of production Highly interdependence Internal and external

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 2. Stakeholders of business

External
Stakeholders:
Internal
a) Suppliers

Organization
stakeholders:

Business
b) Distributors
a) Owners c) Customers
b) Board of d) Competitors
directors e) Society
c) Managers f) Government
d) Employees g) Community
h) Creditors

Figure - 5.2: Stakeholders of Business

As we have discussed that stakeholders are those who are influenced by the decisions of firms,
the firms try to keep up their promises to their stakeholders. Valuing such stakeholders is
important and often shown in the objectives of a business. The following section covers the
discussion on the objectives of a business.

3. OBJECTIVES OF BUSINESS
1. Traditional/conventional approach of profit maximization
2. Wealth maximization approach
3. Contemporary/Stakeholders’ welfare approach
4. Triple Bottom Line Approach

4. DETERMINANTS OF BUSINESS OBJECTIVES

Businesses do not follow the same objectives, as numerous factors influence the nature of
objectives. These factors are often internal/intrinsic rather than external, discussed below:
1. Nature of business ownership
2. Size of business
3. Life of firm
4. The legal form of business
5. Organizational culture
6. Leadership and top-level management

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