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CHAPTER 2

EVOLUTION AND FOUNDATION OF BUSINESS

EVOLUTION OF BUSINESS

Business is an economic activity which is concerned with earning profit and generating
wealth. The gradual development of economic activities of economic activities from the very
beginning of human civilization to present environment is known as Evolution of Business.
The evolution of business can be divided into two parts. They are:-
A) Evolution of Industry
B) Evolution of Commerce
OR,
The historical development of business and its processes of development up to now is called
evolution of business. Business was not evolved in one or two days. It can be studied in two
ways.

A) Evolution of Industry

The development of agriculture system contributed to develop industry. Industry involves

production of different products. Industrial development is the key to rapid economic
progress of a country. The gradual development of business can be study under following
stages:-

OR,

Industry is concerned with the production of goods and services when human wants
increased, they started domesticating animals. Such animals became the source of milk and
food. They gradually discovered the cultivation system. They exchange their surplus with he
neighbours for fulfillment of increased needs. Development of agriculture stage marks the
beginning of industry. The journey of industry has involved through different stages to arrive
at the present stage like:

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Hunting Age

Pastoral Age

Agricultural Age

Handicraft Stage

Guild Stage

Domestic System

Stage of Industrial
Revolution Age

Present Stage

Fig. 2.1: Evolution of Industry

OR,

It is dated with the evolution of human beings. It is as old as human civilization. It was
developed through various stages.

1. Hunting Age/Stage

Hunting was the first stage in the evolution of man. The needs of man were limited only to
food, clothing and shelter.

OR,

During ancient times, the limited human needs of fooding and clothing were satisfied by
forest and animal related activities.

OR,

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In ancient times, people used to live in the forest or near by and hunt animals for food. Their
needs were very limited. By catching fish, hunting animals and birds, collecting fruits, and so
on their food requirements are fulfilled or met. Their clothing requirements used to be
fulfilled by animal skins, leaves, and barks of trees. People at that time were engaged in
forest and animal related activities.

OR,

In ancient times people lived in caves and fulfilled their basic needs of food and clothes
through hunting the wild animals in forest. They were not civilized and hovered here and
there. Their needs were also limited.

2. Pastoral Age/Stage

After hunting age, gradually man entered into pastoral stage under which he started
domesticating animals for milk, meat and skin. He lived near the banks of lakes and rivers
because of availability of grass and water. Small cottage were made by using forest products.

OR,

People started living by the river side in small cottages. They started domesticating some
animals for milk and food.

OR,

Human beings started to settle near rivers and forests. Shelters and small cottages were built
by using forest products. People then began domesticating animals for milk, meat, wool and
skin. These activities were mainly related to domesticating animals. That was also the era of
economic self-dependency.

OR,

The stage of further development of human from barbarism is called pastoral stage. This
stage is basically called the age of keeping animals. Animals were used for milk, meat, wool,
skin and so on beyond food and clothes. The wants went on increasing and development also
started.

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3. Agriculture Stage

Soon after pastoral age or stage, man entered the agricultural stage. He began cultivating land
to grow food grains. The economy of the household remained self-sufficient.

OR,

People started forming family and live in groups. They discovered cultivation system. They
began to exchange their surplus.

OR,

Gradually, human begins became civilized and entered into the agricultural stage. They
started to live in families groups, and tribes, and began cultivating the crops. They began
exchange their surplus food grains with each other. As a result, barter system developed.
Domestication of animals and agricultural production were the main features of that period.

OR,

Slowly, human beings became a little bit civilized and got idea about farming and keeping
cattle. This stage was the major stage of development of industry. In this stage people started
to do agriculture and live in river banks. They started to cultivate crops and domesticate the
animals. The economic of the household remained self-sufficient.

4. Handicraft Stage:

This is the primary stage of the evolution of industry. Under this stage, the process of
production was simple and many machines were not used. They use local materials to
produce the handicraft products. The design of the product and its finishing was dependent
entirely on the hand worked of the artisans. Family was the unit of organization and thus the
production was carried on a small local market. Modern means of transport were not
available. Therefore, they gathered the raw materials from their neighbors and sells it to the
own local area.

OR,

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It is the beginning of industrial era. It is the stage of development of industry. Simple hands
made tools were also developed. Local resources were the major source of raw materials. In
the beginning of this stage people were only limited to their own needs but later own surplus
products were used to exchange the goods with the foods basically called barter system.
Products were exchanged with product and market was starting to develop. Capital invested
was minimized.

5. Guild Stage:

A guild may be defined as an association of craftsmen or artisans or traders. Under the age of
guilds, they join themselves into an association in order to protect and develop business
interest and commercial relations. Guilds may be classified into two groups. They are:-

i. Merchant Guilds
ii. Artisan Guilds

The merchant guilds were associations of merchants or traders whereas artisan guilds were
association of skilled workmen or artisans. The association system helps to maintain and
develop the mutual cooperation among craftsmen and merchants to protect their common
interest.

After a long period of time, the guild system suffered from many drawbacks and declined.
The important reasons of their decline were

a) Rigid outlook of craftsmen

b) Restriction on the entry of new members

c) The development of new towns without guilds

OR,

It was the beginning of organized activities. Organized groups of traders, craftsmen, artisans
used to collect various resources from the local areas and produced goods using them.

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6. Domestic System:

It is in this stage that entrepreneurs came out. Craftmen could not fulfilled the increased
demands. They now became wage earners. Capitalism (free enterprise, private enterprise,
entrepreneurship) was born. Production and marketing became two separate functions.

OR,

Entrepreneurs establish and manage the industry, employed many craftmen as employees and
supplied them raw materials and necessary equipment to produce the product. The risk and
uncertainty of production and distribution were taken by the entrepreneur. This is the starting
of industrial revolution.

OR,

With the fall of guild system new system developed which was known as Domestic System.
In domestic system, entrepreneurs established their own cottage industries. With the increase
in population the demand for goods increased considerably. The artisans were not able to
procure huge quantities of raw materials. They were also unable to purchase latest tools
because of their limited resources. Hence, a new class of entrepreneurs came into existence.
The entrepreneurs gave work to the artisans who worked in their homes. In many cases the
entrepreneurs also provided the means of production. The artisans were paid on piece wage
basis. The artisans became only wage earners. This gave birth to capitalistic system.
Ultimately the entrepreneur was the owner and manager of the production system and he was
responsible for procurement of various inputs and marketing the output.

OR,

The new class of the entrepreneur was immersed under this system. The entrepreneurs
employed the crafts men as employees and supplied them raw materials and necessary tools.
Finished products were collected by entrepreneur by the wages and sold them in the market.
Hence, the risk of production and marketing were taken by entrepreneur themselves. This is
the starting point of factory system of production.

OR,

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After the stage of guild the age of domestic system was initiated. Crafts men were not able to
fulfill the unlimited and increasing wants of people by using the limited resource. So, use of
hands and tools for producing quality goods was introduced. People were employed and were
paid according to the units of goods produced. However salary was very low because the
value of money was much higher at that time.

7. Stage of Industrial Revolution:

The period of 1760-1830 marked fundamental changes in business. Production technique
changed as a result of different inventions. Manual labour was replaced by machines.
Production of standard good increased tremendously at lower cost. Capitalism born in
domestic system took root now. Salary was increased and equality was maintained.
OR,
The second half of the 18th century marked the beginning of the revolution in industries. Then
owed a series of fundamental and remarkable changes in industries. Machines driven by
power replaced the hand driven johns. The industrial revolution first occurred in the British
pastry and quickly spread to all the countries of the world, fording to Knowles, "The so-
called Industrial Revolution six great changes or developments all of which were pendent".
These changes were: development of Engineering revolution in iron making of steam power
in textiles the of chemical industries development of coal mining ^ Solution in transport.
OR,
It began with the replacement of old system. It is the turning point of modern
industrialization. Domestic system of production was replaced by large scale factory system.
There was invention, innovation, development of scientific techniques which encouraged
mass production and distribution. There were numerous job opportunities. Salary was
increased and quality was maintained.

8. Present Stage:
Today’s modern era with industrialization, use of technology, computerization, modernization
robotizing is the most developed stage of industries. Goods are being produced meeting the
demand of large number of people. There are huge number of industries producing large
number of goods to meet large amount of needs and wants by providing many jobs and
salaries.

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B) Evolution of Commerce:

It is related with the distribution and exchange of goods and services. It is related with
transportation, communication, banking, warehousing, import, export, trade and so on. It
links between producer and consumer. It gradually develops along with the development of
human and society. There are many stages of evolution of commerce.

A. Self sufficiency stage:

It is the initial stage of commercial evolution. The wants are very limited. In this stage people
produced goods themselves to satisfy their own basic needs. They survived through hunting
and gathering foods. There was no market. There was thus no exchange of goods. They were
independent.

B. Barter system:

The wants of people increased with development of society. There was both advancement and
civilization of market. Self sufficiency stage didn’t remain with advancement. They started to
exchange the goods they produced with goods that other people produced to fulfill other
requirements. This is called barter system. There was exchange of goods and services with
goods and services.

C. Origin of money:

From the beginning of barter, people felt that there was difficulty in deferred payment,
commerce, divisibility and place of exchange .That’s why money was originated. People
developed coins but there was difficulty in large payment. So paper money was introduced.
Money was used as medium of exchange, Measurement of value, deferred payment,
redistribution of income and wealth, credit system and many more. After the origin of money,
national and international trade started.

D. National economy:

In this stage, buying and selling of goods and services was done within the country. The local
market converted into regional and city market. There was division of work and
specialization. Then goods were produce not only for local people but also for national

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market. There was also development in banking, advertising, insurance, warehouse and other
auxiliaries.

E. International economy:

International economy is called global economy. The globalization of trade introduced to

speed up the activities of trade in the international level. It is not possible for a country to
produce all demanded goods according to needs and wants. Therefore the countries started to
import the goods and other countries exported. Slowly, import and export was introduced in
all counties. Trade started to extend in world market. WTO (world trade organization) was
also established to control the level of import, export and evils associated with them.

CONSIDERATIONS BEFORE STARTING A NEW BUSINESS

Business means the art of being busy. The aim of business is to earn profit. The higher
number of industries has increased competition among the investors. Before starting the
business, promoters must consider following factor in order to survive and expand the
business.

1. Identification of Business (Selection of Business):

The first factor that businessman must consider before starting a business is the identification
of business. He has to decide about what type of business he wants to start. Identification and
selection of particular business is very important for proper involvement and profit. It helps
to give personal knowledge, interest, reduced level of risk, size and other values. It helps in
expansion of business and earning the maximum profit.

2. Detailed Investigation and Research:

Business cannot be started only by imagination. Proper and detailed study about the scope of
business is very vital. It must consider present and future risks and competition. Market
survey must be maintained. Investigation and study about raw material, finance, customer,
market, employees and interest must be done.

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3. Forms of Business Organization:

There are different natures of business. The types of business vary with the differences in
capital, interest, merits, demerits, risk sizes size and so on. It must be chosen from various
different forms of organization like sole proprietorship, partnership firm, joint stock and so
on.

4. Provision of Capital:

Capital means finance. Finance is the blood of business. Business cannot be established
without sufficient capital. Volume of capital to be invested is dependant upon size of business
firm. Source of capital must be properly taken into consideration. Capital is categorized into
two groups.

I. Fixed capital i.e. Land, building, furniture etc.

II. Working capital i.e. Raw material, transactions etc.

5. Location of business:

Location means place where the business establishes. It is very difficult to migrate from
location of business after it has been set up. Location of business where it has been
established must have better transportation. Communication, water, electricity and other
utilities. Production and distribution must have low cost and sales must be high to minimize
the profit. Selection of location must be perfect.

6. Selection of Staff:

Business deals with human activities. It is related to the utilization of people to perform
different activities. It is also called staffing function. It helps in management of human
resources. Human activities are the major source to determine the efficiency of business. Staff
should be selected according o the nature of business. Success of business depends upon
selection of staff. Capable, skilled, experienced and honest employees must be selected.

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7. Office Equipment:

Office is the place from where all administrative work of business has to be done. Therefore,
office needs proper equipments, machines and resources. For accurate, speedy performance
office setup must be good.

8. Government Policy:

Government makes business policy for the welfare of people. It must follow the policy of
government. It must know all the legal rules and regulation formulated by the government.

REQUISITES OF BUSINESS SUCCESS

There is no universally accepted formula to get success in business. There are various factors
which determine the success in a business are called requisites of business. The following are
the main requisites to get success in business.

1. Clear Cut Objectives

Every business organization is established with certain objective. This objective must
be clearly or well defined. Objectives may be short term or long term. Every member
of organization must be clear about objectives and his/her contribution towards their
achievement. Objectives are the desire result. For business success, it should have a
SMART objective not ambiguous, where:

S stands for specific

M for measurable

A for acceptable to all

R for realistic

T for time bound

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2. Efficient and Dynamic Leadership

All organization activities concentrate on the activities of manager. Leadership is the

activities of manger. Leadership is the ability to drive the organization in right
direction by guiding and influencing people for achieving the set objective. It is the
most essential element for achieving business success. A manger has to posses both
personal and managerial qualities to become a leader. Personal qualities consist of a
pleasant personality, intelligency, self confidence, honesty, courage, high morale etc.
managerial qualities are human relations skill, vision and foresight, communication
skill, decision making ability etc.

3. Sound Management

Management is an art of achieving desired results through proper utilization of

resources. It plays a very important role for the success of a business with the help of
sound management. A business performs the right work at the right time and achieves
the desired goals. Elements of sound management are planning, organizing, staffing,
motivation and controlling.

4. Cadre of Motivated Employees

Motivation is an act of inspiring and encouraging people. It is process of stimulating

people to action. The entrepreneur has to motivate and treat employees like human
beings by providing financial and non-financial incentives. Financial incentives
include better salaries and promotions. Non-financial incentives include appreciation
of work, rewards and transfers to home districts or towns.

5. Proper Location and Layout

Proper and adequate location is another important requisite for business success.
Selection of right location is getting half success in a business so, a business must be
located in such a place where all the physical facilities and infrastructure such as
electricity, banking insurance, markets, transportation, labours, raw materials and
soon on are easily available.

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6. Customers Satisfaction

Consumer satisfaction is very important for the success of business. Satisfied

consumers will help to promote business through words of mouth. Increase in number
of consumers will lead to increase in sales volume resulting in higher profits. Higher
profits reflect effective management and business success.

OR,

It is the most important operation tool affecting business success. The whole purpose
of production is to satisfy customers. For this purpose the business house must ensure
proper distribution system, constant watch of customer’s behavior towards the
product, efficient grievance handling system.

7. Adequate Finance

Finance is the life blood of business. A business must have adequate capital to meet
the requirements of fixed and working finance business operation becomes difficult
and sometimes, it has to be very profitable opportunities. Neither excess nor less
capital is desirable for business success.

8. Research and Development

Innovation of technology and strategy is essential for business success. Innovation is

obtained through research and development. Introduction of new products and
changing the existing product in look, colour, and design, addition of extra facilities is
possible only in the presence of this activity. New improved technology in production
and marketing activities have to be introduced. Business must undertake continuous
research and product development in the changing business environment. Consumers’
habits and tastes change over time and business has to keep on fulfilling these
changing needs through research and development activity.

9. Flexibility
Adaptation to changing economic, political, legal, social and cultural factors is a must
for business success. Needs and preference of consumers in the changed context has
to be closely looked upon.

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OR,

A. Establishment of Objectives:

There must be proper establishment of objectives. Objectives are the aim of business. It
determines the scope of future work. Objectives must be clearly defined. It provides
guidelines for doing work. Objectives are defined for long term and short term.

B. Proper Planning and Policy:

Proper planning classifies the works done. Planning and policy formation should be done in
efficient way. There must be clear set of policies and programs to complete the work. It helps
in minimizing risk and maximizing profit.

C. Proper Location Layout and Size of Business:

Proper location layout and size of business is needed for progress of business. Layout means
planting the business in such a way that production work can be carried out with efficiency
and true manner. It helps in determination of proper size of business. Location also should be
suitable. It must attract the market.

D. Sound Organization:

There must be division of work among employees. There must be effective use of human sills
and knowledge. Organization should help to answer various business problems. It ensures
team work. It must ensure best communication channels for proper decision making.

E. Separate Finance:

Finance is the blood of business. Business can’t be established without sufficient capital.
Volume of capital to be invested is dependent upon size of business firm. Source of capital
must be properly taken into consideration. It must be flexible. It should be suitable for both
long term and short term business.

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F. Efficient Management:

Its main objective is to manage all activities of human and other resources. It must perform
right job at right time in right place. It must use effective management technique.

G. Employees Morale:

The success of business depends upon employee’s morale. The business should be used with
intensity of employees. Employee should be encouraged, motivate. They could complete their
work heartedly,

H. Modern Technology:

It brings/ uses modern technology. It provides new idea and methods in production process.
There should be proper labor and capital adjustment.

I. Research:

It helps in improvement of product. It works under the taste, desire and preference of the
customers. In it various marketing, strategies, skills, knowledge and experts are used.
Research and development is the main way to achieve profit with customer satisfaction

BUSINESS ENVIRONMENT: CONCEPT AND COMPONENTS (INTERNAL AND

EXTERNAL)

Business environment

Business establishes, grows or operates and dies in environment. It exchanges resources in

environment. It collects inputs i.e. Man, money, materials, machines etc. And provides output
i.e. Goods and services in the environment. Environment means surrounding. Business
environment defines as a force that affects on organizational performance. It includes internal
and external factors. It provides opportunities and threats.

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1. Internal environment

It is defined as all the forces or conditions that are available within an environment that
affects on organization and business. It is also known as controllable factors because business
can control them. It includes

i. Employees

Business hires employees. It is the major internal factor. It works inside the business. It can
be controlled by the business. Employees differ in skill, knowledge, morality, and attitude and
so on. When managers and employees have difference in goals an beliefs then conflict may
arise. The task of management is to divide the work and assign the work to the suitable
employee and handle the conflict.

ii. Shareholders:

Management deals with many shareholders. Shareholders have the right of ownership, power
of management and voting right. The actual management of organization is carried out by
elected representative of shareholders jointly known as boar of directors. Boards of directors
have the responsibility of overseeing the management of organization. It plays the major role
in formation of objectives, policies, strategies of the organization as well as their
implementation.

iii. Organization structure:

It is located inside the organization. The arrangement of various facilities, pattern of

relationships among the various department, responsibility, authority and communication is
the organization structure. It also included specialization and span of control.

iv. Organization culture:

The sets of values that help the members to understand what organization stand for how it
does work, what it considers, cultural values of business forces of business and so on. It helps
in direction of activities.

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2. External environment (PEST)

All the forces and condition that cannot be controlled by the business is called external
environment. . It is also known as uncontrollable factors because business can’t control them.
It is located outside the business. It affects on organizational performance.

It includes:

i. Economic environment.

It indicates the condition of economy in which business organization operates. It has

continuous and great impact on business. It includes national income, production, inflation,
savings, investment, price, government activities. Business person must have constant watch
on this factor.

ii. Political or legal environment

It is defined as rules and regulations determined by the government. Business must fulfill
demand of government. There should be non violation of rules and regulation of government.
Business should avoid unfair trade and should provide essential information to the
government.

iii. Social environment.

Business must have good environment where a business can be established neatly. Business
also helps in employment opportunities generation. There should be socio cultural
understanding and application of anti pollution measures.

iv. Technological environment:

It defines about the methods available for converting resources into product or services. It
transforms inputs into output. Inputs means material, capital, man, machine. It affects on
business. It helps to change the level of job, skill, and product and so on. There can be
innovation, development of scientific techniques which encouraged mass production and
distribution.

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REASONS/CAUSES FOR BUSINESS FAILURE

Entrepreneurs will not always be successful. Some businesses become successful while
others fail. There are many reasons for business failure. These are broadly classified into
following two categories:

Reasons for Business Failure

HHVHJHH
Internal Reasons or Factors External Reasons or Factors
Inefficient Management Intense Competition
Inefficient Resources Change in Demand
Absence of business Morality Legal Obligations
Other Factors Natural Calamities

Fig. 2.2: Reasons for Business Failure

A. Internal Causes/ Reasons/Factors

Internal causes are those causes, which originate within the organization and are controllable
by the management by making right decisions. However, many business failures are due to
internal reasons. Such reasons can be classified as:

1) Inefficient Management

An inefficient management increases overheads, cannot implement plans and

programmes effectively, cannot market products, cannot satisfy consumers and the
result is failure.

OR,

The stems from the fact that management does not control the expenditure and
wastage of raw materials which could lead to reduction of profit or increase in
losses.

2) Insufficient Resources

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Inadequacy of business resources like capital, human, financial or physical

resources results in interruption of business.

OR,

Business also fails due to lack of adequate resources. There could be shortages of
raw materials, human, financial, or physical resources. Lack of these results in
interruptions in business operations.

3) Absence of Business Morality

Business fails due to negligence, fraud or cheating by the employees or even by

partners. They have to be sincere, hardworking and honest.

4) Other Factors

Business fails due to other reasons like inadequate capital, lack of business
knowledge, skills motivation and trained employees and absence of market study.

B. External Causes/ Reasons/Factors

Business also fails due to external causes, which are beyond the control of management.
Management has to review its plans and strategic to adjust to the external environment. The
external causes are:

1) Intense Competition

Numerous entrepreneurs establish same or similar business. This leads to cutthroat

competition. When this happens, it changes its strategies. Therefore, business must
introduce new product features, improve quality, lower costs and intensify after sales
services.

2) Change in Demand

Change in demand, consumers taste and preferences lead to business failure. If the
business cannot improve its product according to the consumers demand, it will fail.

3) Legal Obligations

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Business can fail when government takes decisions which are unfavorable to it:
excessive taxation, ban on import of raw materials, winding up of business by court
will all result in business failure.

4) Natural Calamities

Business fails due to natural calamities like fire, thunderbolts, earthquakes, tsu-nami,
floods and landslides.