Chapter 1 :The context of Business
I. Business basics
1. What is a Business ?
1.1. The Goals of a Business
Profit Maximization
According to economist Milton Friedman, the main purpose of a business is to maximize profits
for its owners, and in the case of a publicly-traded company, the stockholders are its owners.
Others contend that a business's principal purpose is to serve the interests of a larger group of
stakeholders, including employees, customers, and even society as a whole. Philosophers often
assert that businesses should abide by some legal and social regulations. Anu Aga, ex-chairperson
of Thermax Limited, once said, "We survive by breathing but we can't say we live to breathe.
Likewise, making money is very important for a business to survive, but money alone cannot be
the reason for business to exist".
Profit Maximization
This chart depicts profit maximization using the totals approach, where TR = Total Revenue and
TC = Total Cost. The profit-maximizing output level is represented as the one at which total
revenue is the height of C and total cost is the height of B; the maximal profit is measured as CB.
, Social Benefit
Many observers would hold that concepts such as economic value added are useful in balancing
profit-making objectives with other ends. They argue that sustainable financial returns are not
possible without taking into account the aspirations and interests of other stakeholders such as
customers, employees, society and the environment. This concept is called corporate social
responsibility (CSR).
This conception suggests that a principal challenge for a business is to balance the interests of
parties affected by the business, interests that are sometimes in conflict with one another. Former
President Bill Clinton stated adamantly that major multinational companies must put their
customers and employees' interests before those of shareholders in order to promote economic
development and growth, especially in emerging markets. For example, Alibaba, a Chinese
Internet venture, strives to operate in the zone that Clinton calls "double-bottom line capitalism".
The emerging new mantra is to create social progress as well as create profits. In a sense,
corporate social responsibility highlights the fact that business, consumers and society are part of
a shared ecosystem, and that the long-term health of this ecosystem must be maintained above all
else.
Innovation as a Goal
Rohit Kishore persuades that business can also be viewed to exist for the purpose of creative
expansion. Successful firms like Google manage to align their activities towards the purpose of
creative expansion from the perspective of all stakeholders, especially employees. This also
validates the growing importance of innovation as a core principle for corporation survival and
success.
Contract Theory
Advocates of business contract theory believe that a business is a community of participants
organized around a common purpose. These participants have legitimate interests in how the
business is conducted and, therefore, they have legitimate rights over its affairs. Most contract
theorists see the enterprise being run by employees and managers as a kind of representative
democracy.
Stakeholder Theory
Stakeholder theorists believe that people who have legitimate interests in a business also ought to
have voice in how the business is run. However, stakeholder theorists take contract theory a step
further, maintaining that people outside of the business enterprise ought to have a say in how the
business operates. Thus, for example, consumers, even community members who could be
affected by what the business does (for example, by the pollutants of a factory) ought to have
some control over the business.
Business as Property
Some people believe that a business is essentially someone's property, and, as such, that its
owners have the right to dispose of it as they see fit (within the confines of the law and morality).
They do not believe that workers or consumers have special rights over the property, other than
the right not to be harmed by its use without their consent. In this conception, workers voluntarily
exchange their labor for wages from the business owner; they have no more right to tell the owner
how he will dispose of his property than the owner has to tell them how to spend their wages.
Similarly, assuming the business has purveyed itsgoods honestly and with full disclosure,
consumers have no inherent rights to govern the business, which belongs to someone else.
, People who subscribe to this view generally point out that a property owner's rights are
constrained by morality. Thus, a homeowner cannot burn down his home and thereby jeopardize
the entire neighborhood. Similarly, a business does not have an unlimited right to pollute the air in
the manufacturing process.
1.2. Benefits of Organization
Organization and Goal Orientation
Organizations have their own purposes and objectives. An organization employs the function
of organizing to achieve its overall goals. It can serve to harmonize the individual goals of the
employees with the overall objectives of the firm. Individuals form a group, and the groups form
an organization. Organization, therefore, is the composition of individuals and groups. Individuals
are grouped into departments, and their work is coordinated and directed towards organizational
goals. Effective organization allows a firm to achieve continuity, effective management, and
growth and diversification, and optimize the use of resources and provide proper treatment to
employees.
Specialization and Division of Work
The philosophy of organization is centered on the concepts of specialization and division of work.
Division of work refers to assigning responsibility for each organizational component to a specific
individual or group. Specialization occurs when the responsibility for a specific task lies with a
designated expert in that field. Certain operatives occupy positions of management at various
points in the process to ensure coordination.
Efficiency
To make optimum use of resources such as labor, material, money, machine, and method, it is
necessary to design an organization properly. Work should be divided and specific people should
be given specific jobs to reduce the wastage of resources in an organization. In other words,
effective organization promotes a high level of efficiency.
Delegation
Delegation is the process managers use to transfer authority and responsibility to positions below
them. Today, organizations tend to encourage delegation from the highest to lowest possible
levels. Delegation can improve an organizations flexibility to meet customers' needs and help
organizations adapt to competitive environments.
Departmentalization
Departmentalization is the basis on which individuals are grouped into departments, and
departments into total organizations. Departmentalization allows organizations to simultaneously
work on various projects and tasks. Approach options include:
• Functional - by common skills and work tasks
• Divisional - common product, program, or geographical location
• Matrix - combination of functional and divisional
• Team - to accomplish specific tasks
• Network - departments are independent, providing functions for a central core
breaker.
I. Business basics
1. What is a Business ?
1.1. The Goals of a Business
Profit Maximization
According to economist Milton Friedman, the main purpose of a business is to maximize profits
for its owners, and in the case of a publicly-traded company, the stockholders are its owners.
Others contend that a business's principal purpose is to serve the interests of a larger group of
stakeholders, including employees, customers, and even society as a whole. Philosophers often
assert that businesses should abide by some legal and social regulations. Anu Aga, ex-chairperson
of Thermax Limited, once said, "We survive by breathing but we can't say we live to breathe.
Likewise, making money is very important for a business to survive, but money alone cannot be
the reason for business to exist".
Profit Maximization
This chart depicts profit maximization using the totals approach, where TR = Total Revenue and
TC = Total Cost. The profit-maximizing output level is represented as the one at which total
revenue is the height of C and total cost is the height of B; the maximal profit is measured as CB.
, Social Benefit
Many observers would hold that concepts such as economic value added are useful in balancing
profit-making objectives with other ends. They argue that sustainable financial returns are not
possible without taking into account the aspirations and interests of other stakeholders such as
customers, employees, society and the environment. This concept is called corporate social
responsibility (CSR).
This conception suggests that a principal challenge for a business is to balance the interests of
parties affected by the business, interests that are sometimes in conflict with one another. Former
President Bill Clinton stated adamantly that major multinational companies must put their
customers and employees' interests before those of shareholders in order to promote economic
development and growth, especially in emerging markets. For example, Alibaba, a Chinese
Internet venture, strives to operate in the zone that Clinton calls "double-bottom line capitalism".
The emerging new mantra is to create social progress as well as create profits. In a sense,
corporate social responsibility highlights the fact that business, consumers and society are part of
a shared ecosystem, and that the long-term health of this ecosystem must be maintained above all
else.
Innovation as a Goal
Rohit Kishore persuades that business can also be viewed to exist for the purpose of creative
expansion. Successful firms like Google manage to align their activities towards the purpose of
creative expansion from the perspective of all stakeholders, especially employees. This also
validates the growing importance of innovation as a core principle for corporation survival and
success.
Contract Theory
Advocates of business contract theory believe that a business is a community of participants
organized around a common purpose. These participants have legitimate interests in how the
business is conducted and, therefore, they have legitimate rights over its affairs. Most contract
theorists see the enterprise being run by employees and managers as a kind of representative
democracy.
Stakeholder Theory
Stakeholder theorists believe that people who have legitimate interests in a business also ought to
have voice in how the business is run. However, stakeholder theorists take contract theory a step
further, maintaining that people outside of the business enterprise ought to have a say in how the
business operates. Thus, for example, consumers, even community members who could be
affected by what the business does (for example, by the pollutants of a factory) ought to have
some control over the business.
Business as Property
Some people believe that a business is essentially someone's property, and, as such, that its
owners have the right to dispose of it as they see fit (within the confines of the law and morality).
They do not believe that workers or consumers have special rights over the property, other than
the right not to be harmed by its use without their consent. In this conception, workers voluntarily
exchange their labor for wages from the business owner; they have no more right to tell the owner
how he will dispose of his property than the owner has to tell them how to spend their wages.
Similarly, assuming the business has purveyed itsgoods honestly and with full disclosure,
consumers have no inherent rights to govern the business, which belongs to someone else.
, People who subscribe to this view generally point out that a property owner's rights are
constrained by morality. Thus, a homeowner cannot burn down his home and thereby jeopardize
the entire neighborhood. Similarly, a business does not have an unlimited right to pollute the air in
the manufacturing process.
1.2. Benefits of Organization
Organization and Goal Orientation
Organizations have their own purposes and objectives. An organization employs the function
of organizing to achieve its overall goals. It can serve to harmonize the individual goals of the
employees with the overall objectives of the firm. Individuals form a group, and the groups form
an organization. Organization, therefore, is the composition of individuals and groups. Individuals
are grouped into departments, and their work is coordinated and directed towards organizational
goals. Effective organization allows a firm to achieve continuity, effective management, and
growth and diversification, and optimize the use of resources and provide proper treatment to
employees.
Specialization and Division of Work
The philosophy of organization is centered on the concepts of specialization and division of work.
Division of work refers to assigning responsibility for each organizational component to a specific
individual or group. Specialization occurs when the responsibility for a specific task lies with a
designated expert in that field. Certain operatives occupy positions of management at various
points in the process to ensure coordination.
Efficiency
To make optimum use of resources such as labor, material, money, machine, and method, it is
necessary to design an organization properly. Work should be divided and specific people should
be given specific jobs to reduce the wastage of resources in an organization. In other words,
effective organization promotes a high level of efficiency.
Delegation
Delegation is the process managers use to transfer authority and responsibility to positions below
them. Today, organizations tend to encourage delegation from the highest to lowest possible
levels. Delegation can improve an organizations flexibility to meet customers' needs and help
organizations adapt to competitive environments.
Departmentalization
Departmentalization is the basis on which individuals are grouped into departments, and
departments into total organizations. Departmentalization allows organizations to simultaneously
work on various projects and tasks. Approach options include:
• Functional - by common skills and work tasks
• Divisional - common product, program, or geographical location
• Matrix - combination of functional and divisional
• Team - to accomplish specific tasks
• Network - departments are independent, providing functions for a central core
breaker.
