Nature, Objectives, and Risk of Business
Objectives Of Business
While the primary economic objective of any business is to earn profit, a business operates within a complex environment and interacts with various stakeholders. Therefore, modern businesses pursue a variety of objectives, which can be economic, social, and human. These objectives are often interrelated and must be pursued simultaneously for the long-term survival and success of the enterprise.
Multiple Objectives
A business needs to have multiple objectives because:
- It operates in a multi-dimensional environment (economic, social, political, legal, technological).
- It has various stakeholders with different expectations (owners, employees, customers, suppliers, government, community).
- Focusing solely on profit can lead to unethical practices and ultimately harm the business's reputation and sustainability.
- Pursuing multiple objectives helps in balancing the interests of different groups and ensuring harmonious functioning.
Prominent objectives of business include achieving market standing, innovation, productivity, optimal utilisation of physical and financial resources, earning profits, and fulfilling social responsibility.
Objectives Of Business
Here is a detailed look at some of the key objectives that businesses strive to achieve:
Market Standing
Market standing refers to the position of an enterprise in relation to its competitors. It means achieving a significant market share and building a good reputation among customers and stakeholders. A business must aim to supply better quality goods and services at reasonable prices to gain customer satisfaction and loyalty, which ultimately strengthens its market standing.
This objective is crucial because, in a competitive market, the survival and growth of a business depend on its ability to attract and retain customers and maintain a favourable position compared to rivals.
Innovation
Innovation is the introduction of new ideas, methods, products, or processes. In today's dynamic world, innovation is essential for the survival and growth of any business. This can involve:
- Developing new products or services.
- Improving existing products or services.
- Introducing new and more efficient methods of production.
- Finding new markets or distribution channels.
- Improving management techniques.
Businesses must constantly innovate to stay ahead of competitors, meet changing customer demands, and improve efficiency.
Productivity
Productivity refers to the measure of efficiency. It means achieving maximum output with minimum effort or resources (inputs). Higher productivity leads to lower costs per unit and improved efficiency.
Productivity can be measured in terms of output per employee, output per machine hour, output per unit of raw material, etc. Businesses must aim to increase productivity through better technology, skilled labour, efficient processes, and effective management.
Physical And Financial Resources
Every business needs physical resources (like plant, machinery, building, land) and financial resources (capital, funds). One of the key objectives is to acquire these resources at competitive costs and use them efficiently.
- Ensuring optimal utilisation of installed capacity.
- Managing working capital effectively.
- Maintaining machines and equipment properly.
- Raising finance at a reasonable cost.
Proper management of physical and financial resources is essential for maintaining the smooth functioning and profitability of the business.
Earning Profits
Profit earning is the most important economic objective of business. Profit is the excess of revenue over expenses. It is essential for several reasons:
- Survival: Profit is the reward for the risk undertaken by the businessman. Without profit, a business cannot survive in the long run.
- Growth and Expansion: A significant portion of profits is reinvested in the business for expansion, modernisation, and diversification.
- Indicator of Efficiency: Profit serves as an indicator of how efficiently the business is being managed. Higher profits generally reflect better performance.
- Reward for Risk: Profit compensates the business owner for the various risks undertaken.
- Building Reputation: Consistently earning good profits enhances the goodwill and credibility of the business in the market.
While profit is crucial, pursuing it through ethical and socially responsible means is increasingly important.
Social Responsibility
Social responsibility refers to the obligation of a business to make decisions and take actions that are desirable in terms of the objectives and values of society. Businesses operate using resources from society and depend on society for their functioning; hence, they have certain responsibilities towards it.
Examples of social responsibility include:
- Supplying good quality products and services at fair prices.
- Avoiding unfair trade practices (e.g., black marketing, hoarding).
- Providing fair wages and good working conditions to employees.
- Avoiding pollution and protecting the environment.
- Contributing to the welfare of the community (e.g., setting up schools, hospitals).
- Paying taxes honestly and on time.
- Ensuring safety of workers and products.
Fulfilling social responsibility helps in building a positive image, earning public goodwill, and ensuring long-term sustainability of the business.
Business Risk
Business risk refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. It is an inherent and unavoidable part of business.
Risk arises because the future is uncertain, and businesses have to operate with imperfect knowledge about future market conditions, consumer preferences, competition, government policies, natural events, etc.
Nature Of Business Risks
The key characteristics or nature of business risks are:
1. Business Risks Arise Due to Uncertainties
Risk is caused by factors that are uncertain and unpredictable, such as changes in demand, government policy, technology, natural disasters, etc.
2. Risk is an Essential Part of Every Business
Risk is inherent in all businesses, though the degree of risk may vary. It cannot be completely eliminated, but it can often be reduced or managed.
3. Degree of Risk Depends Mainly upon the Nature and Size of Business
The level of risk varies across different industries (e.g., fashion industry vs. essential commodities) and different scales of operation (large business vs. small business). Generally, a large-scale business and a business dealing with fashionable goods face higher risk.
4. Profit is the Reward for Risk Taking
Businesses undertake risks with the expectation of earning profit. Higher the risk, generally higher is the potential for profit. Conversely, low-risk businesses tend to have lower profit potential. A businessman bears risk to earn profit.
Cause Of Business Risks
Business risks can arise from various sources:
1. Natural Causes
These are risks arising from natural forces over which human beings have little control. Examples include:
- Floods, earthquakes, cyclones
- Lightning, heavy rains
- Famines, droughts
These can cause extensive damage to property, loss of life, and disruption of production.
2. Human Causes
These risks arise from human actions or negligence. Examples include:
- Dishonesty, carelessness, or negligence by employees (e.g., theft, damage to assets).
- Strikes, riots, or lockouts by labour.
- Mismanagement or inefficiency by management.
- Actions by competitors or customers.
3. Economic Causes
These risks arise from changes in the economic environment and market conditions. Examples include:
- Fluctuations in demand and supply.
- Changes in consumer tastes and preferences.
- Increase in competition.
- Changes in prices of raw materials or finished goods.
- Changes in interest rates and credit conditions.
- Changes in technology (making existing products or processes obsolete).
- Changes in government policies (taxation, licensing, trade policies).
- Impact of global economic events.
4. Political Causes
These risks stem from political events and instability. Examples include:
- Political instability in the country or region.
- Changes in the ruling party and their policies.
- Civil unrest or political agitations.
5. Other Causes
Risks not covered by the above categories. Examples include:
- Mechanical failures or breakdowns in machinery.
- Changes in exchange rates (for international businesses).
- Unforeseen events or crises.
Understanding the potential causes of risk helps businesses to anticipate, mitigate, and manage them to the extent possible, although complete elimination of risk is usually impossible.