U18MBT7000-ENGINEERING

ECONOMICS & FINANCIAL

MANAGEMENT

Dr.S.Kaliappan /AP - III

Department of Electrical & Electronics Engineering
CH2: CONCEPTS ON FIRMS AND
MANUFACTURING PRACTICES
CONTENTS
 Firm

 Industry

 Market

 Market structure

 Diversification

 Vertical integration

 Merger

 Horizontal integration
FIRM
 A firm is defined as an Organisation/Enterprise

 A firm is a for-profit business, usually formed as a partnership, that provides

professional services, such as legal or accounting services

 The theory of the firm posits that firms exist to maximize profits.

 A company is a business that sells goods and/or services for profit and includes
all business structures and trades

 A company is called a firm when it is a partnership of two or more persons.

MAIN OBJECTIVE:

 To maximize profit
FIRM vs COMPANY:
FIRM vs COMPANY:
 The main difference between a company and a partnership firm is that a minimum of 2 persons are
required in the firm and a maximum of 20 persons is required to register a partnership firm.

 On the other hand, a company can have the maximum number of any person or employee when it is self-
registered.

 A company can be any trade or business in which goods or services are sold to produce income.

 Further, it encompasses all business structures, such as a sole proprietorship, partnership, and
corporation.

 On the other hand, a firm typically excludes the sole proprietorship business; it generally refers to a for-
profit business managed by two or more partners providing professional services, such as a law firm.
FIRM - CLASSIFICATIONS:
 Sole Proprietorship  A firm is owned by a single individual (the

proprietor) or a family.

 Partnerships  Firms owned by several individuals who share profits

as well as liabilities of the firm according to a specified formula that

varies by the relative contribution and potential cost of each partner.

 Corporation A single entity owned by shareholders.

INDIVIDUAL OR SOLE PROPRIETORSHIP:
 The entire business owned and controlled by a single individual (the proprietor)
or perhaps by a family.

 Businessman invests capital, employs labour and machines

 All the profits enjoyed by single man

 He is fully liable for all the debts associated with the business

E.g.,
 Printing press, Automobile Repair Shops, Retail Shops, Small Fabrication Shops, Restaurant,
etc.,
INDIVIDUAL OR SOLE PROPRIETORSHIP
Advantages:
 Easy formation

 Prompt decision making

 Operation/flexibility

 Secrecy maintainability

 Easy to dissolve

 No problem of co-ordination

 Independent living

 Effort/reward
INDIVIDUAL OR SOLE PROPRIETORSHIP
Disadvantages:
 Limited capital

 Not a master of all

 Expanding business is difficult

 Sole responsibility

 Employees limited opportunity

 Limited life

 Unlimited liability
PARTNERSHIP:
 Partnerships are firms owned by several individuals who share profits as well as
liabilities of the firm according to a specified formula that varies by the relative
contribution and potential cost of each partner in the firm.

 Thus, if a partner in a law firm steals a client’s money and disappears, the other
partners may be responsible for absorbing some portion of the loss.

 To avoid complications at later stages, the partnership is written in an agreement

form.
PARTNERSHIP:
 Usually persons with good ideas and experience in running a business
make partnership with people who are financially sound.

 Thus both money and knowledge are brought together to earn profit.

NUMBER OF
TYPE OF BUSINESS
PARTNERS
Non-banking business 2 and upto 20

Banking business 2 and upto 10

TYPES OF PARTNERSHIP:
 General Partnership
 In general partnership, the liability of partners is limited and joint.

 The partner enjoys the right to participate in the management of the firm.

 Limited Partnership
 In limited partnership, the liability of at least one partner is unlimited whereas the other
partners may have limited liability.
 The limited partners do not enjoy the right to participate in the management of the firm.
TYPES OF PARTNERS:
 General partner

 Active partners

 Silent or sleeping partners

 Nominal partners

 Secret partners

 Minor partners
FORMATION OF PARTNERSHIP
 Partnership comes into existence by means of an agreement. This written
agreement is called as a “Partnership Deed”.

 It contains the following details:

 Name of the firm
 Nature of business
 Date of partnership
 Duration of partnership
 The names and addresses of each partner
 The money contributed by each partner
 Share of interest on capital invested, if any
 Maintenance of accounts and clerical work
 Basis to admit new partners
ADVANTAGES OF PARTNERSHIP:
 Easy formation

 Limited Government restrictions

 More capital

 Knowledge/skills

 Success pays

 Legal status

 Tax advantages

 Losses are shared

 Consent of all
DISADVANTAGES OF PARTNERSHIP:
 Unlimited liability

 Limited period of existence

 Limited partners-limited money

 Unstable

 Misunderstanding

 Mistake affects all partners

 Lack of public confidence

JOINT STOCK COMPANY
 A corporation is treated legally as a single entity owned by shareholders.

 The company organisation is used when a venture requires heavy capital

investment, and it takes a long period for the business to take a proper
shape.

 The ownership is thrown open to the public at large with huge capital
resources and limited liability.
CLASSIFICATION OF COMPANIES BASED ON
PUBLIC UTILITY

 Private company

 Public company

 Government company

 Foreign company
ADVANTAGES OF JOINT STOCK COMPANY
 Limited liability

 Free transfer of shares

 Division of capital

 Can undertake big projects

 Affordability

 Democratic ownership

 Provides employment
DISADVANTAGES OF JOINT STOCK COMPANY

 Complex process of incorporation

 Several regulations

 Lack of personal interest

 Scope for directors to misuse their powers

 Lack of involvement of share holders

 Not easy to dissolve

CORPORATIONS
 Corporation was bought into existence by State/Central government by
special law of the country, defining the powers, functions and form of
management and relationship to other government department.

 Fully owned by the government and are financially self supporting.

 Chief executive members of the board are nominated by the government.

TYPES OF CORPORATION
TYPE OF CORPORATION EXAMPLES

 Railways, defence, post/telegraphs, door

 Government Department
darshan etc..

 LIC of India, State power corporation, Indian

 Public corporations
Airlines, State road transport corporation etc.

 H.M.T, B.H.E.L, Hindustan Steel Limited

 Government companies
etc.,
ADVANTAGES OF CORPORATION
 Autonomous body

 Freedom of finance, management and flexibility of operation

 Opportunity for growth and diversification

 Achieves economic viability of private sector

 Not against public interest

 Service motive results in public welfare

DISADVANTAGES OF CORPORATIONS

 Antisocial activities

 No interest to improve the efficiency of enterprise

 Increased overheads

 Carelessness and inefficiency

INDUSTRY
 A more accepted definition of industry is a group of firms producing and selling
closely substitute products (services) to a common market.

 Usually, firms producing a particular type of product are grouped together and
termed as an industry.

 Thus, defining an industry precisely is difficult.

MARKET

 A market is a place where two parties can gather to facilitate the exchange
of goods and services.

 The parties involved are usually buyers and sellers.

 For instance, it may refer to the place where securities are traded—the
securities market (Share Market, Stock Market, etc.,).
MARKET-IMPORTANT TERMINOLOGY

 Market Power

 Market Conduct

 Market Performance
MARKET POWER

 Market power is defined as the degree of monopoly that a firm enjoys in

a market.

 If a firm has a high market power, it implies that the firm can control the
price, output and the nature of the product that is selling.

 But in a highly competitive market, market power is negligible.

MARKET CONDUCT

 Conduct means behaviour. Hence market conduct means market

behaviour.

 Sellers side: Pattern of decision-making that firms adopt in order to adjust

themselves for the purpose of achieving the objectives/goals of the firm.

 Buyers side: The way in which buyers behave to a market situation.

MARKET PERFORMANCE

 How far a firm has been able to achieve its goals/objectives is reflected in

its end results like profitability, growth rate, sales turnover, increase in

employment and so on.

 Comparing these end results with the objectives/goals of the firm, the

market performance of the firm can be judged.

FACTORS AFFECTING MARKET PERFORMANCE

INTERNAL FACTORS:

 Forward planning
 Controlling operations
 Managing change
 Supervision
 Labour welfare
FACTORS AFFECTING MARKET PERFORMANCE

EXTERNAL FACTORS:
 Trade union activities
 Supply of material, manpower and other resources
 Government regulations
 Level of competition
 Market structure
MARKET STRUCTURE
 MARKET STRUCTURE
 The manner in which the sellers and buyers of a market are linked together is
termed as market structure.

 It shows the relationship between:

 Various sellers in the market

 Various buyers in the market

 Sellers and buyers in the market

 Established sellers and those willing to enter the market.

 An analysis of the market structure leads to an understanding of the:

 Nature of competition in the market and

 Nature of pricing in the market

CHARACTERISTICS OF MARKET STRUCTURE

 The degree of seller concentration

 The degree of buyers concentration

 The degree of product differentiation

 The entry condition in the market

 Geographical factors, technological factors and psychological factors.

 Market structure affects both the market conduct and market performance of a
firm.
TYPES OF MARKET STRUCTURE

 Perfect Competition

 Imperfect Competition
PERFECT COMPETITION
 Perfect competition exist when certain conditions are fulfilled which are ideal
conditions and hence not realistic.

FEATURES:

 There are large number of buyers and sellers in the market.

 The products or services of each seller should be homogeneous.

 Freedom to enter or exit from the market

 Perfect information's available to buyers and sellers.

 Seller or buyer should have free access to the factors of production.

 A firm in a perfect market cannot influence the price through its own individual action.
PERFECT COMPETITION
 In this type market, no single buyer or seller play a significant role in determining the
price.

 The price is determined by the industry as a whole, which comprises both buyers and
sellers.

 The industry demand curve represents the total demand of all consumers at various
prices.

 The industry supply curve represents the total quantity supplied by all sellers at
various prices.

 A firm in perfect competition cannot influence price. It is not a price maker. It is only
a price taker.
IMPERFECT COMPETITION
 When any of the conditions of perfect competition do not exist in a given
market, it is called Imperfect Market.

 Based on the number of buyers and sellers, imperfect markets are classified as;
 Monopoly

 Monopolistic Competition

 Duopoly

 Oligopoly

 Monopsony

 Duopsony

 Oligopsony
MONOPOLY (ONE FIRM INDUSTRY)

 Monopoly market is said to exist when there is only one seller.

 A monopolist can either control the price or output, but not both.

 A single seller completely controls the entire business.

 It is the only firm producing a given product in its industry.

 State Electricity board is a perfect example for monopoly, which controls both

generation and transmission of power.

MONOPOLISTIC COMPETITION
 In this competition, there are many buyers and sellers but they are not producing
identical commodities though all are producing the same commodity.

 Thus in monopolistic competition, there is product differentiation and hence each

company charges a different price to attract customers. E.g., Soap, toothpaste, blades,
radios, T.V’s, scooters, photo-copiers etc.,

 Advertisement is the basis of monopolistic competition. Huge sum is spent on

advertisement.

 Each producer charges a different price. Due to specificity in the product, a particular
group of customers patronise that product and continue to purchase the same even if
there is some raise in price.
FORMS OF PRODUCT DIFFERENTIATION

 Colour, style, package, trademark

 Difference in technology composition

 Difference in services offered by the seller

 Difference in advertisements

 Difference in brand name, packaging etc.

OLIGOPOLY
 An oligopoly is a market form, wherein a market or industry is dominated by a small group of
large sellers.

 A market with a few sellers, each having a significant share, is said to be an Oligopoly.

 For example Car Manufacturing Companies (Maruthi Suzuki, Hindustan Motors, Toyota, etc.,) and
News Papers (The Hindu, The Times of India, The Economic Times, etc.,).

 In Oligopoly, each individual seller or firm can affect the market price.

 When The Times of India slashed the price of its daily newspaper, most other companies such as
Indian Express and The Hindu followed suit.
DUOPOLY
 Duopoly is said to exist when there are two sellers.

 A soft drink market with two companies such as Pepsi and Coke is called Duopoly.
MONOPSONY
 Monopsony market is said to exist when there is only one buyer.

 The Food Corporation of India is the only government organization that purchases agricultural
produce such as rice and so on.
MANUFACTURING PRACTICES
DIVERSIFICATION
 When a firm expands into a range of different product areas leading to its
operating in a number of markets rather than a single market.

 It is a strategy the firm adopts to reduce its exposure to business risk and
fluctuating profitability.

 Through diversification, the firm reorients its activities into new areas that
offer sustained growth and profit opportunities.

 It is a strategy to reduce the exposure to business risk.

RELATED DIVERSIFICATION
 Diversification is said to be related when the firm enters the lines of activity
with which it is already familiar or is engaged in.

 The company enters into the production of two or more products related to
each other by common manufacturing facilities, Research & Development,
marketing, sales promotion, and so on.
 Constrained or Controlled Diversification

 Linked Diversification
CONTROLLED DIVERSIFICATION
 When the strategy is to diversify into products that are closely related to the current
product, it is called Constrained/Controlled diversification.

 For the current product and the new product, the technology and markets are the
same.

Product, A Product, B

Core Business

Product, C
LINKED DIVERSIFICATION
 If the strategy is to diversify into products that are not closely related to the core
business, then it is a case of Linked Diversification.

 There is some link among each of the products as in a chain.

 Many producers of basic chemicals have extended their businesses into areas of
chemical derivatives such as paints and pharmaceuticals.

Product, C 1 2 3
UNRELATED DIVERSIFICATION
 A company diversifies into product areas that are not related to the current
product.

 For example, if a cement manufacturing company takes up manufacturing of

cars.

 Reliance company diversified into the oil and gas company.

 It is also called Conglomerate Diversification

 Main Focus  Financial Considerations. If the present industry is not offering

growth opportunities, it may move into the another industry where
opportunities are galore.
MERGER
 A merger is an agreement that unites two existing companies into one new
company.

 Merger is defined as a transaction involving two or more firms in which the

share capital is exchanged and only one of the firms survive.

 It usually occurs between friendly firms of more or less similar size.

 The surviving firm is likely to have a name derived from its composite firms.
ACQUISITION:
 An acquisition is when one company purchases most or all another
company's shares to gain control of that company.

 Acquisitions usually occur between firms of different sizes that are either
friendly or hostile.

 Hostile acquisitions are also referred to as Takeovers.

 When Merger is not agreed upon by the participating companies, then

takeover or acquisitions results.
DIVERSIFICATION-BROAD
TYPES:
 Vertical Integration
 Backward Integration
 Forward Integration

 Horizontal Integration
VERTICAL INTEGRATION:
 Vertical integration is a strategy whereby a company owns or controls its
suppliers, distributors or retail locations to control its value or supply
chain.

 It leads to vertical growth for a business.

 A wholesaler takes up the manufacturing activity also.

VERTICAL INTEGRATION-TYPES:
BACKWARD INTEGRATION:

 If a function previously performed by a supplier is taken over, then it is

called as Backward Integration.

 Expansion/Development of Firm in Backward Direction (i.e from Raw

material)

E.g.,

ITC Agro process oil  It finances farmers to buy seeds of required

variety  Gives instructions on how to raise the crops & when to cut the produce
VERTICAL INTEGRATION-TYPES:
FORWARD INTEGRATION:

 If a function previously provided by a distributor is taken over, then it is

called as forward Integration.

 The firm expands its existing markets by going forward on an industry

value’s chain.

E.g.,

XYZ Company expand its Memory Manufacturing business to make

and market its own Personal Computers.
HORIZONTAL INTEGRATION:
 Horizontal integration is the process of a company increasing production of goods or
services at the same part of the supply chain.

 When the firms specialize at a particular level in the

production/promotion/distribution of a particular product or service, they are said to
undergo Horizontal Integration.

 Each individual firm specialized in a particular product or service. The expansion of

the business is carried out with the help of Merger & Acquisition.
HORIZONTAL vs VERTICAL:
THANK YOU….!