EXTERNAL ENVIRONMENT

• It consists of forces and factors outside an enterprise.

• The external factors are by and large beyond the control of a firm and are, therefore, regarded as uncontrollable.
• For example, a company has almost no control over national income, social forces, government policies, population, etc.
However, sometimes a powerful corporation may be able to change some external factors.

There are two major components of external environment:

1. Macro environment
2. Micro environment

MICRO ENVIRONMENT

• It refers to those individuals, groups and agencies with which the organisations come into direct and frequent
contact in the course of its functioning.
• Micro environment consists of the groups in the company’s immediate operating environment which have a stake in
the company.
• However, the micro forces may not influence all the firms in a particular industry in the same manner.
• For example, one firm’s supplier environment may be entirely different from that of another firm which has in house
supplies.
• Even when all the competing firms in an industry have similar micro environment, their relative success depends on
how effectively they face the micro forces.

Micro environment consists of the following elements:

• Customers
• Competitors
• Suppliers
• Marketing Intermediaries
• Financiers
• Publics
• Workers and Trade Union

1) CUSTOMERS
 The people who buy a firm’s products and services are its customers.
 A business exists to create and satisfy customers.
 A firm may have different types of customers like individuals, households, Government departments, commercial
establishments, etc.
 In order to be successful, a company must understand and meet the needs and expectations of its customers .

2) COMPETIORS

• A company may have both direct and indirect competitors.

• The direct competition takes places among sellers of the same commodity whereas Indirect competition
take place among sellers of different commodities but of the same product group.
• For example, a direct competitor of Pizza Hut will be Dominos (pizza) whereas an indirect one will
be Burger King, McDonald, etc (Burgers). Since Pizza Hut and Dominos are known for their varieties of
Pizzas, they are direct competitors.
• But, an indirect competition is with McDonald’s or Burger King as they sell products which fall into the
same category, i.e. continental snacks.

3) SUPPLIERS
• Suppliers refer to the people and groups who supply raw materials and components to the company.
• Reliable sources of supply enable the company to carry on uninterrupted operations and to minimise inventory
carrying costs.
• Suppliers also influence quality levels and costs of manufacturing.
• A strike or any other production problem of the supplier may cause interruptions in manufacturing.
• Therefore, it is advisable to develop and sustain multiple sources of supply.
4) Marketing Intermediaries
• Several marketing intermediaries help a company in promoting, selling and distributing its products to consumers.
• Middlemen like agents, wholesalers, and retailers serve as a link between the company and its customers.
• Transportation firms and warehouses assist in the physical distribution of products.
• Advertising agencies, marketing research agencies and insurance companies are other types of marketing
intermediaries.
• Countrywide retail distribution network has contributed significantly to the success of companies like Hindustan
Unilever and Dabur India.

5) Financiers
• The shareholders, financial institutions, debenture holders and banks provide finance to a company.
• Financial capacity, policies and attitudes of financiers are important factors for the company.
• For example, the company cannot raise funds through shares if the financiers are not risk taking.

6) Publics
• Publics include all those groups who have an actual or potential, interest in the company or who influence the
company’s ability to achieve its objectives.
• Media groups, environmentalists, NGOs, consumer associations and local community are examples of publics.
• These publics can have both positive and negative impact on a business firm.
• For example, media groups can be used to disseminate useful information. NGOs often organise protests against firms
suspected of being guilty for child labour, cruelty against animals and damage to nature.

7) Workers and Trade Union

• Workers and their union are an important component of micro environment.
• A firm’s relations with its workers and trade union have a significant impact on its functioning and performance.
• Company’s work environment and industrial relations system must be conducive to efficient functioning.

MACRO ENVIRONMENT

• It refers to the general environment or remote environment within which a business firm and forces in its micro
environment operate.
• In other words, it refers to the larger societal forces that affect the micro environment.
• Eg.- Changes in interest rates, disastrous weather or Governmental regulations
• A company does not directly or regularly interact with the macro environment.
• The macro environment forces are less controllable than the micro forces.
• The success of an enterprise depends on its ability to adapt to the macro environment.

*Geo-Physical

*The natural, geographical and ecological factors have a bearing on the business. These are as follows;

1) the availability of natural resources like minerals oil .etc, since setting up of industries requires availability of raw
materials.

2) the weather and climatic conditions and availability of water and other natural resources is essential for the
agricultural sector .

3) topographical factors like the terrain impacts type of business since the demand and consumption pattern may vary
in these regions. E.g in the hilly region mode of transport will have to be modified to tackle the terrain.

4) ecological factors are now gaining momentum, since the governments across the globe are framing stringent policies
for ecological conservation and prevention of pollution. The ban on use of plastic bags imposed by the Ooty corporation
is an example.

5) location of certain industries is influenced by the geographical conditions For e.g In Tamil nadu the concentration of
cotton textile industry in Coimbatore is due to conducive weather conditions. .
 6) availability of natural harbours and port facilities for transporting goods .

Macro environment consists of the following components:

P – Political

E – Economic

S – Social

T – Technological

E – Environmental

L – Legal

• Political and Legal Environment

• Economic Environment
• Social and Cultural Environment
• Technological and Physical Environment
• Financial Environment
• Natural Environment
• Global Environment

1) Political and Legal Environment:

• It comprises the elements relating to government affairs.
• It serves as the regulatory framework of business.

The main constituents of a country’s political and legal environment are as follows:

• The constitution of the country.

• Political organisation- organisation and philosophy of political parties, ideology of the Govt., nature and extent of
bureaucracy, influence of primary groups, business donations to political parties, etc.
• Political stability- structure of military and police force, election system, law and order situation, President’s rule, etc.
• Image of the country and its leaders.
• Foreign policy alignment or non-alignment, relations with neighbouring countries.
• Defence and military policy.
• Laws governing business, and legal system.
• Flexibility and adaptability of laws- constitutional amendments and direction of public policies.
• The judicial system- implementation and effectives of laws.

2) Social and Cultural Environment:

• Social environment refers to the characteristics of the society in which a business firm exists.

Social and cultural environment consists of the following:

• Demographic forces- size, composition, mobility and geographical dispersal of population.

• Social institutions and groups.
• Caste structure and family organisation.
• Educational system and literacy rates.
• Customs, attitudes, beliefs, values and life styles.
• Tastes, preferences of people and their buying behaviour.
* Family, marriage, education, religion, attitudes to work and wealth and ethics are some examples
of socio-cultural factors.
3) Economic and Financial Environment:
The economic environment comprises all those economic forces which influence the functioning of business enterprises.
Example- the nature and structure of the economy, the stage of economic development, economic resources, the level of
income, etc.

The main components of economic environment are as follows:

 The nature of economic system- capitalist, socialist or mixed economy.

 Economic structure- occupational distributions of labour force, structure of national output, capital
formation, etc.
 Economic policies- industrial policy, export-import policy, etc.
 Organization and development of capital market-banking system, securities markets, etc.
 Economic indices-GNP, rate of S&I, etc.
 Economic infrastructure and stage of development of the economy.
 Product markets and factor markets- degree of competition, market size, etc.

4) Technological and Physical Environment:

The main elements of technological and physical environment are the following:

 Sources and types of technology

 Rate of technological change.
 Approaches to production of goods and services.
 New processes and equipment.
 R&D systems.

5) Natural Environment:
The main natural forces are as follows:
o Climatic and geographical conditions.
o Agricultural, commercial and other natural resources.
o Ecological system.
o Levels of pollution

6) Global Environment:
o Certain developments such as a hike in the crude oil price have global impact.
o Developments in information and communication technologies facilitate rapid spread of culture across
countries.
o Economic conditions abroad affect Indian firms.
o For example, exports increase when markets expand abroad.
o International political factors can also affect business.
o For example, improvements in relations between two countries leads to higher trade between them.

NOTE: READ CASE STUDY FROM THE PPT (PAGE: 60 TO 65)

Conclusion: No business enterprise functions in a vacuum. Business is an integral part of the ecology and social system and,
therefore, its decisions and performance are influenced by a host of diverse factors.

Important decisions related to business such as what business to do, which should be the customer segments to target at
and what strategies be adopted, where to do the business, when to do the business, how to do the business, whether to
continue a business, whether to expand a business and if yes where and how to expand it, and so on are influenced by a
number of factors which constitute what is generally referred to as the business environment.
 1.2 Competitive Structure of Industries

Competitive Structure of Industries:

 In order to formulate appropriate strategies, a company must identify and understand the nature and degree
of competition in the industry.
 Michael Porter has developed a model identifying the forces that affect the competitive dynamics of an
industry.

According to this model, the state of competition in an industry depends upon the following five forces:

 Threats of entry.
 Bargaining power of buyers.
 Bargaining power of suppliers.
 Threats of substitute products.
 Rivalry among existing firms

1) Threats of Entry:
o Threats of new entrants tends to be high when the industry is very profitable, entry barriers are low
and the expected retaliation from the existing firms is not serious.
o New entrants to an industry bring new capacity, the desire to gain market share and substantial
resources.
o As a result, competition in the industry is intensified.

However, the following act as barriers to entry:

a) Economies of scale:
Economies of scale restrict entry by forcing the new entrants to come on a large scale or to accept a cost
disadvantage. Small players are kept out and large players are discouraged due to heavy risk.

b) Product differentiation:
o Brand image, customer loyalty and unique product attributes create a barrier by forcing new entrants
to spend heavily to overcome customer loyalty.
o Product differentiation may act as powerful barrier where brand loyalty is quite high such as
cosmetics, etc.
c) Capital requirements:
 The need to invest large financial resources and high risks due to capital intensive nature of an
industry creates a barrier to entry.
 For example, the minimum sized urea fertiliser plant requires a capital outlay of more than Rs. 1000
crore with a gestation period of 7-8 years.
 Many firms cannot cope up with these requirements
d) Cost disadvantages independent of size:
o The existing firms in an industry may enjoy certain cost advantages which are not available to new
entrants irrespective of their size or scale.
o These advantages may accrue from the effects of the learning curve, favourable location, access to
the best sources of raw materials, etc.
o New competitors, therefore, suffer cost disadvantages.
e) Access to distribution channels:

o The new entrants may not have access to distribution channels enjoyed by the established forms.
o The new entrants may gain access to the distributors at higher costs and may not remain competitive.
o This barrier will be high when the channels are limited and have tied up with the existing players.
e) Government policy:
o Sometimes, government policy and regulation act as a significant barrier to entry.
o Reservation of industries for public sector and small scale sector, industrial licensing, import
restrictions, etc were strong entry barrier before the economic liberalization in India.

2) Bargaining Power of Buyers:

 Powerful customers compete by forcing the firms to reduce prices, improve quality of product and
services.
 When there is a powerful group of buyers, profitability of the industry will suffer.

Bargaining power of the buyers will be high in the following circumstances:

 The volume of purchase is high relative to the total sales of firm.

 The industry’s products are standardized or undifferentiated. In such a case, the buyers may play one firm
against another because they can get the products from alternative suppliers.
 The products purchased from the industry constitute a significant part of the buyer’s total cost. In such a
case, the buyer is likely to shop for the most favourable price.
 Buyers are well informed about alternative sellers and their prices and quality levels.
 Buyer’s profitability is low and, therefore, pressure for price reduction is high.
 Backward integration by buyers.

3) Bargaining Power of Suppliers:

Suppliers can exert bargaining power on firms in an industry by raising prices of raw materials and
components.
A supplier group is powerful in the following circumstances:
o When the product is unique or differentiated.
o When it sells products having no substitutes.
o When the industry to which it supplies is not its important customer.
o When there is potential for forward integration by supplier.
o When the product it supplies is important for the buying industry.

4) Threat of Substitute Products:

 Firms in some industries face competition from those marketing substitute products.
 Substitutes limit the profit potential in an industry by placing a ceiling on the price firms in an
industry can charge.

5) Rivalry among Existing Firms:

 This is the most visible form of competition.
 Firms in an industry are interdependent because competitive actions of a firm usually affect others and may
be retaliated.
 Competitive actions include product improvements, new products, better customer service, price changes,
promotional measures, etc.
 The degree of rivalry among competing firms depends on the following factors:
o No. of firms in the industry, their relative market share and their competitive strengths, etc.
o Degree of differentiation in the products of rival firms in terms of product positioning, prices,
distribution channels, after sale service, etc.
o State of growth of industry,- in a stagnant or slow growth industry one firm can expand its sales only
by increasing its market share i.e. at the cost of others firms.
o Strategic stake- when a number of firms have high stake in the industry, rivalry is greater. For
example, a firm which regards a particular industry as its core business will give great importance to
success in that industry.
o High exit barriers also lead to more rivalry.

 Porter’s model of competition is helpful in understanding the competitive pressures in an industry. It

highlights the areas which can be useful for growth and diversification .
 Knowledge of the sources of competitive pressure highlights the critical strengths and weaknesses of the
company, clarifies the areas where strategic changes may yield the greatest payoffs.
 It is also useful in considering the areas for diversification.

CONCLUSION

 The competitive structure of industries is a very important business environment. Identification of forces affecting the
competitive dynamics of an industry will be very useful in formulating strategies.

 According to Michael Porter’s well-known model of structural analysis of industries, the state of competition in an
industry depends on five basic competitive forces, viz.,

1. Rivalry among existing firms

2. Threat of new entrants
3. Threat of substitutes
4. Bargaining power of suppliers
5. Bargaining power of buyers

1.3 Environmental Analysis and Strategic Management

Environmental Analysis and Strategic Management:
 Environmental analysis is the process through which an organisation monitors and comprehends various
environmental forces so as to determine the opportunities and threats that lie ahead.
 The process is also known as ‘environmental appraisal’ or ‘environmental scanning’.

Environmental analysis has two broad aspects.

 First, is environmental search or monitoring the environment.
 Second is environmental diagnosis or identifying opportunities and threats.
 Environmental search leads to the identification of various forces that may influence the enterprise.
 Environmental diagnosis, on the other hand, judges these forces for their positive and negative impact.

According to A. Sharplin, strategic management is “ the formulation and implementation of plans and the carrying out
of activities relating to the matters which are of vital, pervasive, or continuing importance to the total organisation.”

Glueck defines strategic management as “ a stream of decisions and actions which leads to the development of an
effective strategy or strategies to help achieve corporate objectives.”

 Strategic management involves formulation, implementation, review and control of strategies for
achieving the company’s objectives and mission.
  Strategies cannot be formulated and controlled without a thorough knowledge of the company’s
internal and external environment.

Therefore, environmental analysis plays a vital role in the process of strategic management which consists of the following
steps:-

1) Defining Business Mission and Objectives:

 Strategic management process begins with the formulation of mission and objectives of the
organization apart from other organizations and identifies the scope of its operations in terms of
products and markets.
 It represents business philosophy and implies the image which the organization seeks to project.
Corporate objectives are the end results which are to be realised for achieving the mission.
 Mission and objectives lay down the foundation for strategic management.
 They relate the organisation to the society, and state what the organisation stands for.

In order to define clearly its mission and objectives, an organisation must seek answers to certain basic questions:

 What business the company is in?

 Who are the company’s customers, etc?

Environmental analysis is helpful in finding answers to these questions.

Objectives help define the company in its environment. With changes in the external and internal environment, the
objectives need to be modified or redefined.

2) SWOT Analysis:
Corporate appraisal and environmental analysis are the two constituents of SWOT analysis.
o Corporate appraisal reveals the organisation’s strengths and weaknesses.
o Environmental analysis reveals the opportunities and threats before the organisation.
 The environment might entail several opportunities but the organisation might not have the strengths
to exploit all the opportunities.

 Similarly, a company might lack the strength to face environmental threats.

 In such a situation, the company might give up the line of business in which it is not competent to
survive.
 Since liberalisation and globalisation, many firms have sold off their non-core business so as to
concentrate on their core business.
 For example, Parle sold its soft drinks business (Thums Up) to concentrate on mineral water
(Bisleri).

3) Strategic Alternatives and Choice of Strategy:

 Once an organisation identifies its strengths and weaknesses and environmental opportunities and
threats, the next stage in the process of strategic management is generation of strategic alternatives
and the choice of the most appropriative strategy.
 There may be several alternatives before the organisaton, example, continue in the same business or
get out of it, expand the existing business or enter a new business, etc.
 No organisation can choose all the alternatives.
 Therefore, the organisation has to consider some of the more promising alternatives in the light of its
mission and objectives , its strengths and weaknesses , and environmental opportunities and threats.
 After proper evaluation and comparison of various alternatives, the most suitable one is chosen.
 The chosen alternative becomes the company’s strategy.
 4) Implementation of Strategy:
 A good strategy alone cannot lead to success, its effective implementation is necessary.
 Detailed plans of action are prepared and the necessary systems and resources are raised to put the
chosen strategy into action.
 Sound organisational structure, effective leadership, functional policies, resource allocation, etc. are
necessary for successful implementation of strategy.

5) Evaluation and Control of Strategy:

 In the last stage of strategic management process, the top management ascertains whether the
strategic choice as implemented is achieving the objectives of the organisation.
 The chosen strategy may fail to meet the objectives due to poor implementation, unforeseen changes
in the environment or inappropriate strategic choice.
 The corrective actions will depend upon the cause of failure.
 More effective implementation of strategy, better analysis of internal and external environmental and
changes in the organisational mission and objectives may be some of the actions.

o Evaluation and control are treated as the last stage of the strategic management process.
o However, this is an ongoing process because continuous monitoring is required for taking
suitable action in time whenever something goes wrong.
o Therefore, strategic management should be treated as a dynamic process.

CONCLUSION
 Glueck defines strategy as a “unified, comprehensive and integrated plan relating the strategic advantages of
the firm to the challenges of the environment. It is designed to ensure that the basic objectives of the
enterprise are achieved”.

 Chandler describes strategic management as “the determination of the basic long-term goals and objectives
of an enterprise and the adoption of courses of action and allocation of resources necessary to carry out
these goals”

 Strategic management or business policy is, thus, the means to achieve the organisational purpose.

1.4 Managing Diversity

Diversity is about appreciating differences between individuals, and in context with the workplace ensuring that each of
these varying attributes and characteristics are valued.

CULTURAL DIVERSITY

 Every organisation has its own culture

 How people interact in an organisation and the basic assumptions they make are part of the organisation’s
culture.
 Norms, values, attitudes and beliefs shared by the members of an organisation constitute its culture.
 Organisation culture is the framework that guides day-to-day behaviour and decision-making of employees.
 In case the culture is not aligned with managerial functions the organisation suffers.
 Culture has a strong influence on the performance of organisations.
 With globalisation and MNCs, the issue of multi-culturalism has become very significant.
  Multi-culturalism may be defined as the view that there are many different cultural backgrounds and factors
that are important in organisations, and that people from different backgrounds can coexist and flourish
within an organization.
 Multi-culturalism refers to the presence of many different cultural backgrounds within an organisation.

 Diversity means coexistence of people from different cultural backgrounds.

 Language barrier is an example of cultural diversity.
 For example, making a circle with the finger and thumb to signify “OK” can cause trouble in Japan as it
means that you are asking for a bribe.

Hofstede’s Dimensions

1. Power Distance
 It means the extent to which employees accept the authority of managers.
 In high power distance cultures, workers follow order as a matter of course.
 Managers make decisions because they are the managers, and no one questions their right to do so.
 In low power distance cultures, workers do not accept managerial power structure. Therefore, decision making is
decentralized.

2. Uncertainty Avoidance
 It implies the extent to which workers avoid or accept feelings of uncertainty.
 People with high uncertainty-avoidance feel threatened by ambiguous situations.

3. Individualism
 It means the philosophy by which people think of themselves first as individuals and give priority to their own
best interests.
 On the other hand, collectivism is based on the idea that the interest of the group or society should be given
priority over that of the individual.

4. Masculinity
 It refers to the extent to which the dominant values in a culture are success, money, and things.
 A masculine worker is aggressive, assertive, and materialistic.
 On the other hand, femininity (the opposite of masculinity) refers to nurturing, concern for others, and concern for the
quality of life.

Workforce Diversity

 Workforce diversity refers to differences in the workforce in terms of its age, gender, race/minorities,
education and productivity.
 Age structure is especially important to the distributors of such products as athletic equipment, designer
clothes, etc.
The nature of workforce diversity is illustrated as:

Gender Schedule Castes/ Tribes

The Disabled Age

Education Productivity

Importance of Managing Diversity

  Managing diversity effectively is essential for the success of an organisation.
 Prof. Taylor Cox of the University of Michigan (USA) has given the following benefits of managing
cultural diversity:

Lower Costs:
o As organisations become more diverse, lack of integrating workers from different cultural
backgrounds leads to higher costs.
o If multi-cultural issues are not managed well, employees do not feel comfortable in the work
environment.
o They spend time and energy worrying about discrimination, harassment and other issues rather
then their jobs.
o Effective management of diversity helps to reduce costs.

1) Better Staffing:
 Companies that successfully manage cultural diversity will have advantage over other companies in hiring
people.
 Such companies become favoured employers for women and ethnic minorities.
 Diversity in the workplace will help to build a great reputation for the company; especially important when
you are looking to hire and retain talent.
 Companies that only hire men, for example, are limiting themselves to the skills of half the population, this
is just one of the many benefits of gender diversity in the workplace.

2) Marketing Advantage
 Organisations that manage multi-cultural issues gain an insight into markets consisting of minority groups
and women.

3) Helps you Understand your Customers Better

 Having a more diverse team will help your company gain a broader understanding of your customers, what
they want and what they look for.
 Who knows your company could be missing out on a huge group of potential customers that could be
explored by hiring more diversely.

4) Creativity
 One of the key benefits of diversity is the vast range of ideas that can be explored.
 Groups of people from diverse backgrounds can be more creative than groups with homogenous
background.
 However, there must be a core of shared beliefs and values around which people can express their
differences.

5) Reduce Employee Turnover

 Companies with a diverse workforce will tend to retain employees for longer, because ultimately employees
who feel accepted and valued will be much less likely to leave.
 Likewise, companies who clearly value career development, and really care about their employees, will tend
to have a much higher retention rate than those who don't.

6) Problem solving
 Heterogeneous groups can produce better decisions through a wider range of perspectives and more through
analysis of problems and issues.
 7) Flexibility
 Ability to manage diversity increases the flexibility and adaptability of an organisation.
 More quick response to internal and external issues becomes possible.
 Quicker response to environmental changes provides a competitive advantage.

8) Increased confidence
 When employees' recognise that differences are embraced and celebrated in an organisation, they are likely
to also be more confident in their own unique qualities.

9) Boosts Employee Engagement

 Employees are far more likely to perform well in an environment where diversity and inclusion are top
priority.

 Management must know how to deal with workforce diversity when people from different cultures work
together.
 If managed properly, diversity can increase efficiency and creativity.
 Failure to manage diversity properly may increase labour turnover and interpersonal conflicts.

Framework for Managing Diversity

Managing diversity consists of three related tasks:

Managing Cultural Diversity:

 In order to build a more diverse and effective workforce for the success of a company, it is necessary to
manage cultural diversity.
 This will help the company by providing an advantage in recruitment, retention and motivation of workers.
 A culturally diverse workforce will maximise the company’s ability to deal with a culturally diverse
marketplace.
 Culturally-diverse work teams can better deal with culturally-diverse consumers and other groups.
 Firms must develop cross-cultural training programmes to help their employees become more sensitive to
the cultures of their fellow employees.

Managing Individual Diversity:

In addition to learning to manage cultural diversity, companies must also learn to manage individual
diversity.
 Within each culture, each individual may be different in many ways.
 Therefore, the American adage “different strokes for different folks” need to be applied carefully and
selectively.
Managing Workforce Diversity:

 As business enterprises become more global the challenges of diversity become complex.
 Success depends to a large extent on the ability to understand and manage workforce diversity.
 Many problems such as miscommunication, mistrust, poor cohesiveness and stereotyping may arise.
 These barriers of diversity can be overcome by a well-integrated system of organisation development.

A well designed programme for management of diversity will consist of the following:
  Strong and visible support from top management.
 Continuous efforts to assess the diversity management programmes.
 Flexible programmes for the recruitment, training, retention and upward mobility of a diverse workforce.
 Programmes to accommodate family needs, such as day-care and care for the elderly.
 Alternative work schedules, including part time work, flexitime, etc
 Telecommuting opportunities for non-conventional workers and foreign workers who do not wish to
immigrate.
 Diversity and language training.

1.5
 Comparison of Business, Profession and Employment
 Classification of Business Activities

Scope of Business

 Business is all around us and it is the mainspring of modern life.

 Every human being is busy in one activity or the other to satisfy his unlimited wants.
The sum total of human activities may broadly be divided into two categories-:

 economic activities ,and

 non-economic activities

 Economic activities are designed to attain and use the material resources of life.
 They are concerned with the production, distribution and consumption of goods and services.
 Human beings undertake economic activities in order to earn their livelihood.
 For instance, a worker works in the factory, a doctor operates his clinic, etc to earn a living for
himself/herself and for his/her family.

o On the other hand, non-economic activities are carried out not for earning money but on account of
the human sentiments of charity, love, sympathy, patriotism, etc.
o For example, a housewife cooks food for her family, a person goes to the temple for daily prayers
and a boy helps an old man in crossing the road.

Economic activities may be further classified into three categories:

1. Business,
2. Profession, and
3. Employment or service.

PROFESSION
 A profession is an occupation which involves rendering of personal service of a specialised nature.
 The service is based on professional education, knowledge, training etc.
 This service is provided for a professional fees charged from the clients.
 The professionals are members of professional bodies and conduct their activities according to the
standards set by those bodies.
  One must have a professional degree such as C.A., LL.B., and M.B.B.S. etc. for entering a particular
profession.
 The membership of a particular professional body is compulsory before entering that profession. A
Chartered Accountant must be a member of the Institute of Chartered Accountants of India and this
is necessary for other professions also.

Some important professional bodies working in India are as follows:

 Medical Council of India: For medical profession.

 Bar Council of India: For practising lawyers or for legal profession.
 Institute of Chartered Accountants of India: For accounting profession.
 Institute of Company Secretaries: For Company Secretary ship.
 Institute of Cost and Works Accountants of India: For Cost accountants.

SERVICE

 When a person undertakes to render personal service under an agreement of employment, he is said to be in
service or employment.
 The service is rendered for a salary or wage and/or other benefits attached to that job.
 The service may be in a government or a private organisation.

 An employment commences when a person joins some organisation for providing personal services.
 There is a relationship of employer and employee. A person taking up a job is an employee and the person
who provides the service is called an employer.
 The employer assigns duties to the employee.

BUSINESS

 Business is an economic activity as it is concerned with earning money and acquiring wealth.
 It is the human activity directed towards the acquisition of wealth through the production and exchange of
goods and services.
 A business enterprise is an economic institution as it is engaged in the production and/or distribution of
goods and services in order to earn profits and acquire wealth.
 In the words of Ownes, “business means an enterprise engaged in the production and distribution of goods
for sale in the market or the rendering of services for a price.”
 Thus, business encompasses all activities involved in the production and sale of goods and services for
profit.
Scope of Business (Classification of Business Activities):

Various business activities can be classified into two broad categories:

 Industry, and
 Commerce
Industry is concerned with the production of goods and services while commerce involves their distribution.
(A) INDUSTRY
 Industry is that branch of business which is concerned with the production of goods and services.
 According to scale of operations, industries may be classified as large scale industry and small scale
industry.
 Industries requiring huge investment and sophisticated technology, e.g., ship building, iron and steel,
petroleum refining, etc, are known as Heavy industry while Light industry which require small
investment and simple technology consists of sugar, paper, textiles, etc.
Industries may be divided into three broad categories:
 Primary
 Secondary
 Tertiary

1. Primary Industries:
These include all those activities which are connected with the extraction of natural resource and development
of living organisms, plants etc. These industries may be further subdivided as follows:

 Extractive Industries
 Genetic Industries

a) Extractive Industries:
o These industries extract or draw out various products from natural sources such as earth, soil, water, etc.
o The products raised by these industries are provided by nature and collected by human beings.
o Agriculture, mining, hunting, fishing, oil-exploration, etc are examples of extractive industries.
o The products of such industries are used by manufacturing and construction industries.
b) Genetic Industries:
o Genetic implies heredity or parentage.
o Genetic industries involve multiplication of certain species of plants and animals.
o Plant breeding nurseries, cattle breeding farms, poultry farms, etc are examples of genetic industries.

2. Secondary industries:
 These are concerned with using the materials which have already been extracted at the primary stage.
 These industries process such materials to produce goods for final consumption or for further processing
by other industrial units.
 For example, mining of an iron ore is a primary industry, but manufacturing of steel by way of further
processing of raw irons is a secondary industry.

Secondary industries may be further divided as follows:

 Manufacturing Industries
 Construction Industries

a) Manufacturing Industries:
These industries are concerned with the conversion or transformation of raw materials and semi-finished products into
finished products.

Manufacturing industries are of the following types:

 Analytical: In an analytical manufacturing industry, a basic raw material is analyzed or separated into a number of
products. For instance, an oil refinery separates crude oil into kerosene, gasoline, diesel, lubricating oil and petrol.

 Synthetical: In these industries, two or more materials are combined or mixed together to manufacture a new product.
For example, cement is produced by mixing concrete, gypsum and coal.

 Processing: These industries are engaged in the processing of raw materials through different stages of production.
Examples of processing industry include textiles, sugar, steel, etc.

 Assembling: In this case, various components or parts are brought together to produce a finished product.
Manufacture of bicycles, radios, televisions, watches, etc are examples of assembly industry.

b) Construction Industries:
o These industries are engaged in the construction of buildings, bridge, dams, etc.
o Construction industries use the products of extractive industries, eg., stone, marble, bricks, etc. and
also the products of manufacturing industries such as cement, iron and steel, wires, etc.
o These industries create the basic infrastructure for development.
o The distinguishing feature of these industries is that their products are made or fabricated at fixed
sites.
o Their products are not carried to the market for sale.

3. Tertiary industries:
 These are concerned with providing support services to primary and secondary industries as well as
activities relating to trade.
 These industries provide service facilities.
 As business activities, these may be considered part of commerce because as auxiliaries to trade these
activities assist trade.
 Included in this category are transport, banking, insurance, warehousing, communication, packaging and
advertising.
(B) COMMERCE

 It embraces all those activities which ensure a free and smooth flow of goods and services from
producers to consumers.
 It consists of:
 Trade, and
 Activities which facilitate trade
 It covers not only the function of buying and selling and handling of goods but also many services which must
be provided to finance, insure, store, and transport goods in the course of these exchanges.
 Commerce is thus an organised system for the exchange of goods and services between the members of the
business world.
 It bridges the gap between producers and consumers.

1. Trade
 Trade is that branch of commerce which is concerned with the sale, transfer or exchange of
goods and services.
 It involves the buying and selling of goods and services.

Trade is of the following types:

a) Internal or Home Trade:

 It is concerned with the buying and selling of goods within the boundaries of a country.
 Such trade is also known as domestic or inland trade.