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ECO-01: Business Organisation


April, 2016 (For January 2016 Session)

Q:-1 what are the essential requisites of an ideal form of business organization? Explain the
criteria for the selection of the form of organisation.
Ans:
1. Easy formation: An important factor for preferring a particular form of organisationto another is
the ease with which a business can be brought into existence. Thecomparative ease of difficulty in
forming a particular form of organisation mainlydepends on three factors:

formation expenses by way of registration fee, stamp duty,fees of legal experts, charges
involved in the drafting of documents, obtaining licence,etc.,

legal formalities, and

Procedural delays, etc. Unless it is very essential, it isbetter to go for an organisation which is
easy to form.

2. Scope of raising capital: The choice of organisation mainly depends on the amount ofcapital

required which is determined by the nature of business and the scale ofoperations. For example, if
you want to open a retail shop in groceries, the amount ofcapital needed will not be much. But if
you want to set up a sugar factory, you mayrequire a large amount of capital. Ideal form of
organisation is one which providesscope for raising the amount of capital as and when required.
3. Extent of liability: You know that the element of risk and uncertainty is prevalent ineach

business. In view of this, normally, the businessmen prefer limited liability.Obviously, limited
liability is considered as an important feature of a good form oforganisation. however, a certain

even dishonesty on the part ofmanagement personnel.


4. Flexibility of operations: The form of organisation should be very flexible andadaptable to

changing business conditions without much difficulty or complication. Forexample, if you want to
expand your business, diversify or modernise the plant andequipment, the organisation should be
able to meet all requirements.
5. Stability and continuity: Stability and long life of business is desirable from the pointof view of

owners, employees, and customers. Employees always prefer a stable andcontinuous employment.
If the business is stable, the owner should be able to formulateplans for the future and to make
investments paying for a considerable length of time.From the customers' point of view also,
regular supply of goods and services is expectedto meet their needs. An ideal form of organisation
is one which provides reasonableamount of stability to the business.

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involvement in business. Many times, theabsence of such spur leads to weakness, inefficiency and

amount of risk is also found to be important to providethe needed spur for initiative, drive, and

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6. Effectiveness of management: As you know that the success of any business enterprisedepends

on the efficiency of management. Managerial efficiency depends on skills,motivation, flexibility,


adaptability, etc. It is difficult for an individual to possess allthese qualities.
7. Extent of government control and regulations: If the governmental control andregulations are

too many, the enterprise may have to divert a lot of time, money andenergy for complying with
legal formalities and instructions. In some cases there may be too much interference by the
government officials in the day-to-day business of the firm.No doubt, the investors, creditors, and
customers trust the business enterprises whose Activities are properly regulated by the
government. But too much governmental Interference is not favoured by the entrepreneurs
because it mars their initiative anddisrupts the working of their business.
8.

Business secrecy: In business, it is important to maintain business secrets withoutleaking them


out to competitors. Therefore, a form of organisation which enables ,retention of business secrets
is preferred to the one wherein business secrets are difficultto preserve.

9. Tax:- Business taxes like sales tax, excise duty, and customs duty are charged products and

services. Hence, such taxes affect all forms alike and they will notaffect the choice. But the
income tax liability is different from one form of organisation Ito the other. Naturally, the form of
organisation which attract the minimum amount of Ithis tax liability is considered as an ideal
form.
10. Ownership prerogatives: Some persons have a very strong desire to control the entire business

activities themselves and place a great value upon their right of personal leadership. Some persons
are desirous of sharing the responsibilities and risks of abusiness. Some people may want to own
a part of the capital without a strong desire tocontrol the affairs of the business. You can also find

of such prerogatives ofthe owners.


2. Differentiate between the following:
(a) Commerce and Industry
(b) Wholesalers and Retailers
Wholesalers
They

are

connecting

links

Retailers
between

manufacturers and the retailers.

the They

are

connecting

links

between

the

wholesalers and the customers.

They purchase goods in large quantities from the They purchase goods in small quantities from the
manufacturers.

wholesalers.

They deal in limited number of products.

They deal in variety of products for meeting the


varied needs of consumers.

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some persons who are not ready tobear the business risk. An ideal form of organisation takes care

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They need more capital to start their business.

They can start business with limited capital.

The display of goods and decoration of premises They lay more emphasis on window display and
is not necessary for them.

proper decoration of business premises in order to


attract the customers.

Their business operations extend to different They usually localise at a particular place, area or
cities and places.

city.

They do not directly deal with the customers.

They have a direct link with the customers.

They do not extend free home delivery and after They provide free home delivery and after sales
sales services

services to the consumers.

(c) Public limited Company and Co-operative Organisation


Public Limited Company Co-operative Organisation
Formation

Specific

Quite difficult due to

Few legal formalities

many legal formalities

are Involved

Companies act 1956

Cooperative society act 1912

Minimum 7 and

Maximum and no

no maximum no limit

maximum limit

Any amount

No subseqantial

capital can be

Resources

Regulation
Membership.

Capital

raised
Management

Complete separation

Not managed by

and ownership

of management

all members

Very wide scope .

Scope for

expertise

for expertise

Expertise

Basic profit of sharing Shared by owners


in the proportion of

Volume of business
by each member

shares held
Ownership transfer

At will and

Restricted

very easy
Business

Perpetual existence

Death. Insolvency

stability

Death, insolvency of

of its members

the members docs not

does not effect

effect the life

the life

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Managerial

from ownership

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Business

Exposed to public

Exposed to members

secrets

(d) Primary Market and Secondary Market


Primary Market

Secondary Market

As the name suggests, public The auction market is a place


issue means selling securities to where

buyers

public at large, such as IPO. It convene

at

and
a

sellers

place

and

is the most vital method to sell announce the rate at which they
financial securities.

are willing to sell or buy


securities. They offer either the
bid or ask prices, publicly.
Since all buyers and sellers are
convening at the same place,
there is no need for investors to
seek out profitable options.

Whenever a company needs to In a dealer market, none of the


raise

supplementary

equity parties convene at a common

capital, the shares have to be location. Instead, buying and


offered to present shareholders selling of securities happen
on a pro-rata basis, which is through
known as the Rights Issue.

electronic

networks

which are usually fax machines,


telephones or custom order-

This is about selling securities Interested sellers deliver their

to restricted number of classy offer through these mediums,

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matching machines.

investors

like

frequent which are then relayed over to

investors, venture capital funds, the buyers through the medium


mutual funds and banks comes

of dealers. The dealers possess

under Private Placement.

an inventory of securities and


earn their profit through the
selling.

When a listed company issues The

secondary markets

are

equity shares to a selected important for price discovery.


number of investors at a price The

market

operations

are

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that

may

or

may not

be carried out on stock exchanges.

pertaining to the market price is


known

as

Preferential

Allotment.

Q:-3(1). Listing of a security on a stock exchange


all securities issued by companies and other bodies arenot traded in stock exchanges but only the
listed securities are traded. Listing means addition of new securities to theexisting list of securities
being traded on a stock exchange. If a joint stock companyor any other body who has issued new
securities want them to be traded on the floorof stock exchange and their prices duly published, it has
to get the securities includedin the list of the stock exchange. For listing, the company has to make an
applicationand furnish the prescribed information to the stock exchange. Section 19 of the
Securities Contracts (Regulation) Rules 1957 lays down the minimum requirementswith respect to the
listing of securities on a stock exchange. Listing implies that thesecurities have met the
satisfaction of stock exchange authorities, in respect of certainprescribed standards of legality,
security. When a security isadmitted to dealings on a stock exchange, it does not guarantee the
soundness orprofitability of the company, in any manner. It is also not a certificate of the
stockexchange for consideration by the investors.
2. Insurable business risk
Insurance is not effective for risks that are not insurable risks. For example, risks that are too large
cannot be insured, or the premiums would be so high as to make purchasing the insurance infeasible.
Also, risks that are not measurable, if insured, will be difficult if not impossible for the insurer to
quantify, and thus they cannot charge the correct premium. They will need to charge a conservatively

higher than ideal, and inefficient. Passing of risk involves both party to the contract. The general rule

is that unless otherwise agreed, risk passes with title. An agreement to the contrary may be either

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high premium in order to mitigate the risk of paying too large a claim. The premium will thus be

expressed or implied. An insurable risk is a risk that meets the ideal criteria for efficient insurance.
The concept of insurable risk underlies nearly all insurance decisions

3. WarehousingWarehouse is a storage structure constructed for the protection of the quality and quantity of the
stored produce. The need for a warehouse arises due to the time gap between production and
consumption of products. Warehousing or storage refers to the holding and preservation of goods until
they are despatched to the consumers. By bridging this gap, storage creates time utility. There is a
need for storing the goods so as to make them available to buyers as and when required. Storage
enables a firm to carry on production in anticipation of demand in future. Warehouses enables the

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businessmen to carry on production throughout the year and sell their products, whenever there is
adequate demand. Need for warehouses arise also because some goods are produced only in a
particular season but are demanded throughout the year. Similarly, certain products are produced
throughout the year but demanded only during a particular season.
4. Development Bank
Development banks are specializes financial institutions. They provide medium and long-term finance
to the industrial and agricultural sector. They provide finance to both private and public sector.
Development banks are multipurpose financial institutions. They do term lending, investment in
securities and other activities. They even promote saving and investment habit in public. Development
banks are those financial institutions whose prime goal is finance the primary needs of society.
Q:-4 what is channel of distribution? Discuss various factors which influence the choice of
channel of distribution.
Ans:
The path through which goods and servicestravel from the vendor to the consumer or payments for
those products travel from the consumer to the vendor. A distributionchannel can be as short as a
direct transaction from the vendor to the consumer, or may include several interconnected
intermediaries along the way such as wholesalers, distributors, agents and retailers. Each intermediary
receives the item at one pricing point and movies it to the next higher pricing point until it reaches the
final buyer.
(1) The Nature of the Product:
These factors include physical characteristics of a product and their impact on the selection of a
particular channel of distribution.
Various factors under this category are:

so that goods could be delivered to the consumers without delay. Delay in distribution of these
products will deteriorate their quality.
(b) Size and weight of product:
Bulky and heavy products like coal and food grains etc. are directly distributed to the users involve
heavy transportation costs. In order to minimise these costs a short and direct distribution channel is
suitable.
(c) Unit value of a product:
Products with lesser unit value and high turnover are distributed by employing longer channels of
distribution. Household products like utensils, cloth, cosmetics etc. take longer time in reaching the
consumers.. On the other hand, products like jewellery having high product value are directly sold to
the consumers by the jewellers.

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Products which are perishable in nature are distributed by employing a shorter channel of distribution

(a) Perishability:

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(c) Standardization:
Products of standard size and quality usually take longer time by adopting longer channel of
distribution. For example, machine tools and automobile products which are of standard size reach the
consumer through the wholesalers and retailers. Un-standardised articles take lesser time and pass
through shorter channels of distribution.
(e) Technical Nature of Products:
Industrial products which are highly technical in nature are usually distributed directly to the
industrial users and take lesser time and adopt shorter channel of distribution. In this case after sales
service and technical advice is provided by the manufacturer to the consumers.
On the other hand, consumer products of technical nature are usually sold through wholesalers and
retailers. In this manner longer channel of distribution is employed for their sales. After sales services
are provided by the wholesalers and retailers. Examples of such products are televisions, scooters,
refrigerators, etc.
(f) Product Lines:
A manufacturer producing different products in the same lines sells directly or through retailers and
lesser time is consumed in their distribution. For example, in case automobile rubber products this
practice is followed. On the other hand, a manufacturer dealing only in one item appoints sole selling
agents, wholesalers and retailers for selling the product. For example, in case of Vanaspati Ghee
longer distribution channel in undertaken.
(2) The Nature of the market:
This is another factor influencing the choice of a proper channel of distribution. The number of buyers
of the product affects the choice of af channel of distribution.
Following factors are considered in this regard:

In case of industrial markets, number of buyers is less; a shorter channel of distribution can be

adopted. These buyers usually directly purchase from the manufacturers. Marketing intermediaries are

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(a)Consumer of industrial market:

not needed in this case.


But in case of consumer markets, where there are a large number of buyers, a longer channel of
distribution is employed. Distribution process cannot be effectively carried out without the services of
wholesalers and retailers.
(b) Number of prospective buyers:
If the number of buyers is likely to be more, the distribution channel will be long. On the other hand,
if the number of consumers is expected to be less, the manufacturer can effectively sell directly to the
consumers by appointing salesmen.
(c)Size of the order:

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If the size of the order placed by the customers is big, direct selling can be undertaken by the
manufacturer as in case of industrial goods. But where the size of the order is small, middlemen are
appointed to distribute the products.
(d) Geographic concentration of market:
Where the customers are concentrated at one particular place or market, distribution channel will be
short and the manufacturer can directly supply the goods in that area by opening his own shops or
sales depot. In case where buyers are widely scattered, it is very difficult for the manufacturer to
establish a direct link with the consumers, services of wholesalers and retailers will be used.
(e) Buying habits of customers:
This includes tastes, preferences, likes and dislikes of customers. Customers also expect certain
services like credit and personal attention and after sales services etc. All these factors greatly
influence the choice of distribution channel.

(3) The Nature of Middlemen:


Marketing intermediaries are vital components in the distribution of goods. They greatly influence the
marketing of goods.
Important factors relating to the selection of a particular middleman are explained as under:
(a) Cost of distribution of goods:
Cost of distribution through middlemen is one of the main considerations to be taken into account by
the manufacturer. Higher cost of distribution will result in the increased cost of product. The
manufacturer should select the most economical distribution channel.
In finalizing the channel of distribution, services provided by the intermediaries must be kept in mind.
It may be pointed out that the manufacturer can select an expensive marketing intermediary because

Sometimes desired middlemen may not be available for the distribution of goods. They may be busy
in dealing with the competitive products. Under such circumstances the manufacturer has to make his
own arrangements by opening his branches or sales depots to distribute the goods to the consumers.
(c) Unsuitable marketing policies for middlemen:
The marketing policies of the manufacturer may not be welcomed by the middlemen the terms and
conditions may not favoursthe middlemen. For example, some wholesalers or retailers would like to
act as sole selling agents for the product in a particular area or region.
(d) Services provided by middlemen:
The manufacturer should select those middlemen who provide various marketing services viz,
storage, credit and packing etc. At the same time the middlemen should ensure various services to
customers.

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(b) Availability of desired middlemen:

that may ensure various marketing services which cannot be offered by others.

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(e) Ensuring greater volume of sales:


A manufacturer would like to appoint that middlemen who assure greater sales volume over the long
run.
(f) Reputation and financial soundness:
In appointing middleman, the manufacturer must take into consideration the financial stability and
reputation of the middleman. A financially sound middleman can provide credit facilities to customers
and make prompt payment to the manufacturer.
(4) The nature and size of the manufacturing unit:
The nature and size of manufacturing unit has a great impact on the selection of a distribution
channel.
The various considerations in this regard are as follows:
(A) Manufacturer Reputation and Financial Stability:
Reputed and financially sound manufacturing concerns can easily engage middlemen as compared to
lesser reputed and newly established units. Usually a manufacturing unit having a sound financial
base can easily distribute the goods without appointing middlemen by opening their own sales depots
and branches. A financially weaker unit cannot operate without the help of middlemen.
(B) Ability and Experience of the Undertaking:
Industrial undertakings having ample marketing ability and experience can effectively manage their
distribution activities themselves. They have lesser dependence on undertaking intermediaries. On the
other hand, marketing units possessing lesser marketing ability and experience depend more on
middlemen for the distribution of goods.
(C) Desire for Control of Channel:
A manufacturer may resort to a shorter distribution channel in order to exercise effective control over

channel of distribution.
(D) Industrial Conventions:
Industrial conventions followed influence the selection of distribution channel. If a particular mode of
distribution is adopted in an industry, the same will be followed by every manufacturing unit in that
industry in distribution their products.
(E) Services Provided By the Manufacturers:
The selection of marketing intermediaries is also influenced by various services provided by the
manufacturer. These services include extensive advertisement for the product, after sales services and
facilities of credit. The manufacturers providing these services can easily avail the services of reputed
retailers and wholesalers.
(5) Government Regulations and Policies:

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between the manufacturer and the consumer. The cost of distribution may be more by adopting such a

distribution. This is suitable in case of perishable goods and is helpful in establishing direct link

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Government policies and regulations also influence the choice of distribution channels. The
Government may impose certain restrictions on the wholesale trade of a particular product arid
takeover the distribution of certain products. All these restrictions have a direct impact in selecting the
channel of distribution.
(6) Competition:
The nature and extent of competition prevalent in a industry is another detrimental consideration in
selecting a distribution channel. Different manufacturers producing similar products may employ the
same channels of distribution.

Q (5.a):- What is stock exchange? Explain its various functions.


Stock exchange, being a part of financial market, plays a very important role in theeconomic
development of the country.These functions may be enumerated as
(a) Primary functions, and (b) secondary functions,
Primary functions:
1 Marketability and price continuity: The stock exchange provides for easymarketability of
securities as securities can be bought and sold conveniently on thefloor of the stock exchange. Since
transactions take place regularly, there iscontinuity in the dealings. Prices quoted are duly recorded
and reported in the
Newspapers for the benefit of investing public
.
2 Mobilising surplus savings: Stock exchange is an integral part of the capital marketof a country. It
is because through stock exchanges the savings from all parts ofthe country are made available to the
industrial and commercial undertakings formeeting their financial requirements.

economic. Thus, duringperiods of economic and business prosperity prices of securities tend to rise.
4 Mobility of capital: Stock exchanges furnish an open and continuous market forsecurities. Savings
invested in securities are converted into cash for reinvestmentin other securities. Thus, stock
exchanges provide mobility to capital and facilitatesound investment.
5 Contribution to capital formation: Savings are encouraged when people come to know about the
avenues of investment. Stock markets educate investors as regardswhere and how to invest their
savings for a fair return.
6 Shockabsorbers: Stock exchanges bring about equilibrium in the prices ofsecurities which are
bought and sold by speculators. Speculators generally buysecurities in anticipation of rise in the
pricesSecondary Functions

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and the corresponding rise or fall in the prices of securities reflect theinvestors' assessment of the

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3 Barometer of economic and business conditions: The intensity of buying and sellingof securities

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Safety of investment and equity in dealings: The stock exchanges do not allow trading in
each and every company's securities. Companies which want theirsecurities to be traded on
the floor of a stock exchange have to fulfil certainconditions. The stock exchange satisfies
itself about the genuineness andsoundness of the company to protect the investors from being
cheated. There area wide variety of securities.

Easy liquidity: The investors usually prefer liquidity of their investment i.e..easyconversion
into cash, besides adequate return on their investment. The stockmarkets provide that
assurance to investors. These are markets which facilitatebuying and selling of securities. As
such the investors readily come forward to
Subscribe to new issues. Thus, stock exchange assures liquidity of investmentswhich goes to
serve the investor's need.

Accurate and continuous report regarding sales: All stock exchanges maintainregular
record of the securities traded each day and the prices at which deals arefinalised. This
information is supplied to newspapers and other information mediaalongwith the prices of
important securities which ruled at closing time. Thestatistics relating to prices at which
securities were traded are published in weeklybulletins for the information of the investors.
This information helps inascertaining the trend of price fluctuations and promotes healthy
speculation.

Full information regarding listed companies: The organised stock exchanges collect
information about the companies listed with them and publish the information in the form of
"Official Year Book". This proves very useful to theinvestors in making investment decisions.

Q:-5 (b) There is no difference between money market and capital market. Comment upon

Ans:
Money Market:-

The money market is often accessed alongside the capital markets. While investors are willing to take
on more risk and have patience to invest in capital markets, money markets are a good place to "park"
funds that are needed in a shorter time period - usually one year or less. The financial instruments
used in capital markets include stocks and bonds, but the instruments used in the money markets
include deposits, collateral loans, acceptances and bills of exchange. Institutions operating in money
markets are central banks, commercial banks and acceptance houses, among others.

Capital markets are perhaps the most widely followed markets. Both the stock and bond
markets are closely followed and their daily movements are analyzed as proxies for the
general economic condition of the world markets. As a result, the institutions operating in

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the statement.

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capital markets - stock exchanges, commercial banks and all types of corporations, including
nonbank institutions such as insurance companies and mortgage banks - are carefully
scrutinized.
The institutions operating in the capital markets access them toraise capital for long-term
purposes, such as for a merger or acquisition, to expand a line of business or enter into a new
business, or for other capital projects. Entities that are raising money for these long-term
purposes come to one or more capital markets. In the bond market, companies may issue debt
in the form of corporate bonds, while both local and federal governments may issue debt in
the form of government bonds. Similarly, companies may decide to raise money by issuing
equity on the stock market. Government entities are typically not publicly held and, therefore,
do not usually issue equity. Companies and government entities that issue equity or debt are

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considered the sellers in these markets.

Branches & Contacts Details


Nangloi:-Plot. No-19, Ext- 2A,
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Road (Opp. Primary School), Near
East Metro Station, Uttam Nagar,

oppBanke-Bihari, Talabwali Road,


Nangloi, Delhi-41