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Location of Business & Business Risk


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All about locations of Business and risk associated with businesses. Unit 3 (BBA 104: Business Organisation) as per the syllabus of Jiwaji University, Gwalior.

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Location of Business & Business Risk

  1. 1. Location of Business & Business Risks RAHUL PRATAP SINGH KAURAV
  2. 2. What is Industrial Location?  It is an important decision.  Helps in achieving objective of firm.  If not chosen correctly, it would result in heavy losses.  It is faced by new and old units. 2
  3. 3. Problem of location arises under the following condition?  At starting of business  While increasing volume of business; Expansion  Lease has expired  Lack of power and electric supply  Social & economic factors 3
  4. 4. Theories of location  Traditional approach  Weber’s deductive theory of location  Andreas Predohl’s Approach  Sargant Florance’s Inductive Theory 4
  5. 5. Traditional Approach  Personal Choice  Local Loyalty of entrepreneur  Availability of raw material  Labor  Market  Transport 5
  6. 6. Weber’s deductive theory of location [Alfred Weber [1909] (1868-1958]  Primary Factors Which influence distribution of industrial units over the different regions. 1. Transport cost 2. Labor cost  Secondary Factors a) Element of cost Building, labor, machines, fixed assets, power & fuel a) Agglomerative b) Deagglomerative 6
  7. 7. 7
  8. 8. Critics of Weber’s theory  It is over simplified and unrealistic.  Assumptions for fixed labor centers is wrong.  Assumptions of fixed consumption centers is also not good.  Transportations and labor cost is not measures in monetary terms.  Government factors are ignored. 8
  9. 9. 9  Andreas Predohl’s approach  He suggested that every change in location of industry involves an change of combination of means of production  Sargant Florence’s approach  Explained as the degree of dissimilarities between geographical distribution of the industry and population of the country
  10. 10. Hotelling 1929: Locational Interdependence  This is the impact of demand upon location  The interaction of entrepreneurial decisions  He used two ice cream sellers on a beach as an example 10
  11. 11. Factors influencing location 11  Raw material availability  Nearness to market  Government policy  Availability of labor.  Financial facilities  Fuel and power  Political and economic policies  Transport facilities  Future expansion  Soil and climate  Competition nearby  Personal factors
  12. 12. Government policy towards the localization  Positive Approach  Provision of public utility services in selected areas. These services include electricity, water, gas transport, etc.  Provision of socio- economic amenities like recreation, education, health, etc.  Certain ancillary economic facilities, like institutions for imparting technical knowledge to the workers and marketing organizations for the benefit of localized industries.  Granting of direct and indirect subsidies.  Direct subsidies  Indirect subsidies 12
  13. 13. Government policy towards the localization  13 Positive Approach  Granting of income tax exemption to the units set- up in backward areas.  Giving assurance by the State to purchase the products of the industrial units established in backward areas.  Providing adequate and cheap financial facilities directly by the Government or through the financial institutions.  Liberal issue of licenses on a preferential basis for setting up industrial units in backward areas.
  14. 14. Government policy towards the localization  Negative Approach  Enhanced rates of local taxes may be introduced.  Licensing policy may be so designed that it discourages new units in highly developed regions.  The Industrial Policy, 1977 stated that no more licenses should be issued to new industrial units within certain limits of big cities having a population of more than ten lakhs and urban areas with a population of more than 5 lakhs. 14
  15. 15. Balanced regional development “ A country can only develop if there is over all development of all regions.” “It should be done to remove regional disparities.” 15
  16. 16. Objectives of regional development  Use of local resources  Creation of employment  Proper use of overhand facilities  Social problems  Strategic considerations 16
  17. 17. Causes of regional imbalances  Historic factors  Resource availability  Infrastructure facilities  Technical factors  Social factors  Development strategies 17
  18. 18. Business Combinations
  19. 19. Meaning of business combination  Business combination is a method of economic organization where in a common control, of greater or lesser completeness, is exercised over a number of firms which are operating in competition or are independent.  Whenever two or more business units engaged in the same line of business or in different relate processes or stages of the same line of their business federate or unit or associate together with a view to carry on their activities and shape their polices on common coordinated basis for mutual benefit, they are said to form a business combination. 19
  20. 20. Causes of combination  Elimination of the competition and price war.  Economies of large scale business.  Rise of joint stock company.  Improved mean of transport and communication.  Requirement of huge capital.  Desire to enjoy monopoly.  Personal ambition.  Government pressure. 20
  21. 21. Types of combinations  Horizontal  Vertical  Circular  Diagonal 21
  22. 22. Horizontal combination “ It takes place where units carrying identical business activities join hands to achieve common objectives.” Eg. :- Association of cement manufacturers, sugar syndicate Features of horizontal combination  Combination of firms with same business  Common policies & common management  Firms face problems together 22
  23. 23. Horizontal combination Advantages  To minimize the Cost per unit.  To eliminate competition.  To hire the services of experts.  To supply the goods at lowest price.  To avoid over production.  To achieve the benefits of large scale.  To find proper market for their product.  To reduce the middleman commission. Disadvantages  Exploitation of customer  Manipulation in prices 23
  24. 24. Vertical Combination “In this combination such firms which are inter-dependent for the supply for processing.” “The firm operates at successive stages of same industry.” Characteristics of vertical combination: One finished material becomes raw for another.  All process are compulsory.  Important for balanced production and control over it. 24
  25. 25. Vertical Combination Advantages Disadvantages  Assurance of raw material.  Limited Utility  To minimize the cost per unit.  Mutual dependence  To eliminate competition.  Less coordination  To hire the services of experts.  To supply the goods at lowest price.  To avoid over production.  To use improved methods of production.  To find proper market for their product.  To reduce the middleman commission.  To earn maximum profit. 25
  26. 26. Circular or Mixed Business Combination Concept  When different types of business units combine themselves under the one management it is called circular combination. 26 Objectives  The main object of mixed combination is to secure the benefits of administrative ability through common management.
  27. 27. Diagonal Business Combination Concept  When two or more than two business units performs subsidiary services, if they combine themselves under the main industry it is called diagonal combination. Objective  The main object and advantage f this combination is that it makes the business unit very large and self sufficient. 27
  28. 28. Risk and Business Risk  Risk – the possibility of loss or injury  Business risk – risk of loss that is naturally incurred by owing and operating a business 28
  29. 29. Types of Business Risk  Insurable vs. uninsurable risk  Controllable vs. uncontrollable risk 29
  30. 30. Other types of risk  Pure risk  Economic risk  Human risk  Natural risk 30
  31. 31. Pure Risk o Threat of loss with no opportunity for gain Examples: Employee theft Accidents 31
  32. 32. Economic risk  Occurs when there is likelihood of financial loss  May result from changes in overall business conditions 32
  33. 33. Human risk  Risk of harm caused by human mistakes, dishonesty or other factors attributed to people 33
  34. 34. Natural risk  The possibility of a catastrophe caused by natural elements that can cause damage of loss or property 34
  35. 35. EXAMPLE  Floods  Tornados  Hurricanes  Fires  Lightning  Droughts  Earthquakes etc. 35
  36. 36. Types of businesses and their risk Small scale businesses Medium scale businesses Large scale businesses 36
  37. 37. Common risks in small businesses 37  Breakdown of machinery and equipment  High employees turnover or loss of key staff members especially if they have unique skills  Security of data and intellectual property  theft
  38. 38. Common risks  Bad debts creating customers  Increase in competition  Negative cash flow  Natural disasters such as fires and storms 38
  39. 39. Common risks  Intellectual property  Theft  Increased competition 39  Operational risk  Political risk  Country risk  Technological risk  Environmental risk  Economic risk  Financial risk  Terrorism risk
  40. 40. 40 Causes of Business Risk
  41. 41. Human causes  Strikes, dishonesty, carelessness are examples of human causes of business risk.  Dishonesty of employees, misappropriation of cash and theft of goods may also become a cause of loss for business 41
  42. 42. Economic causes  Which is caused mainly due to fluctuation in the market prices of various commodities  Inflation and unemployment are examples of economic causes of business risk  Trade cycle and other unforeseen changes in the economy may also create business risks Physical causes  Assets used in business may depreciate in value  Technical changes and mechanical defects also result in business risks 42
  43. 43. Political causes  Some political events can change the business scenario  A major policy change by government can change the business environment  Changes in the taxation policies create uncertainty and loss  political disturbances such as fall of government and civil war etc. may lead to heavy loss in business 43
  44. 44. Methods Of Risk Protection Reducing or eliminating the risk Efficient management A reserve cash Shifting of risks 44
  45. 45. 45 Thank You!