class-11-business-studies

88 BUSINESS STUDIES the savings of people and makes funds stake and they usually need to available to business financing their emphasise on social objectives than on capital and revenue expenditure. It profitability. Private sector banks are also deals in financial instruments and owned, managed and controlled by provides financial services for a price, private promoters and they are free i.e., interest, discount, commission, etc. to operate as per market forces. There Banking and Social Objectives In the recent past there has been a concerted effort by the policy makers in reorienting banking towards achieving social objectives. There has been a major shift in the banking policy of the country: from to (i) Urban orientation — Rural orientation (ii) Class banking — Mass banking (iii) Traditional — Innovative practices (iv) Short term objectives — Development objectives 4.4.1 Type of Banks are a number of public sector banks like SBI, PNB, IOB etc., and other The focus of banking is varied, the private sector banks represented by needs diverse and methods different. HDFC Bank, ICICI Bank, Kotak Thus, we need distinctive kinds of Mahindra Bank and Jammu and banks to cater to the above mentioned Kashmir Bank. complexities. (ii) Cooperative Banks: Cooperative Banks are governed by the provisions Banks can be classified into the of State Cooperative Societies Act and following: meant essentially for providing cheap credit to their members. It is an 1. Commercial banks important source of rural credit, i.e., 2. Cooperative banks agricultural financing in India. 3. Specialised banks (iii) Specialised Banks: Specialised 4. Central bank banks are foreign exchange banks, industrial banks, development banks, (i) Commercial Banks: Commercial export-import banks catering to banks are institutions dealing in specific needs of these unique activities. money. These are governed by Indian These banks provide financial aid to Banking Regulation Act 1949 and industries, heavy turnkey projects and according to it banking means foreign trade. accepting deposits of money from the (iv) Central Bank: The Central bank public for the purpose of lending or of any country supervises, controls and investment. There are two types of regulates the activities of all the commercial banks, public sector and commercial banks of that country. It private sector banks. Public sectors banks are those in which the government has a major 2018-19

BUSINESS SERVICES 89 also acts as a government banker. It provide loans and advances out of the controls and coordinates currency and money received through deposits. credit policies of any country. The These advances can be made in the form Reserve Bank of India is the central of overdrafts, cash credits, discounting bank of our country. trade bills, term loans, consumer credits and other miscellaneous advances. The 4.4.2 Functions of Commercial funds lent out by banks contribute a Banks great deal to trade, industry, transport and other business activities. Banks perform a variety of functions. (iii) Cheque facility: Banks render a Some of them are the basic or primary very important service to their functions of a bank while others are customers by collecting their cheques agency or general utility services in drawn on other banks. The cheque is nature. The important functions are the most developed credit instrument, briefly discussed below: a unique feature and function of banks (i) Acceptance of deposits: Deposits for the withdrawal of deposits. It is the are the basis of the loan operations most convenient and an inexpensive since banks are both borrowers and medium of exchange. There are two lenders of money. As borrowers they types of cheques mainly (a) bearer pay interest and as lenders they grant cheques, which are encashable loans and get interest. These deposits immediately at bank counters and are generally taken through current (b) crossed cheques which are to be account, savings account and fixed deposited only in the payees account. deposits. Current account deposits can (iv) Remittance of funds: Another be withdrawn to the extent of the salient function of commercial banks balance at any time without any prior is of providing the facility of fund notice. transfer from one place to another, on account of the interconnectivity of Savings accounts are for branches. The transfer of funds is encouraging savings by individuals. administered by using bank drafts, pay Banks pay rate of interest as decided orders or mail transfers, on nominal by RBI on these deposits. Withdrawal commission charges. The bank issues from these accounts has some a draft for the amount on its own restrictions in relation to the amount branches at other places or other banks as well as number of times in a given at those places. The payee can present period. Fixed accounts are time the draft on the drawee bank at his deposits with higher rate of interest as place and collect the amount. compared to the savings accounts. A (v) Allied services: In addition to premature withdrawal is permissible above functions, banks also provide with a percentage of interest being allied services such as bill payments, forfeited. locker facilities, underwriting services. (ii) Lending of funds: Second major activity of commercial banks is to 2018-19

90 BUSINESS STUDIES They also perform other services like buying allows, a customer to conduct banking and selling of shares and debentures transactions, such as managing savings, on instructions and other personal checking accounts, applying for loans services like payment of insurance or paying bills over the internet using a premium, collection of dividend etc. personal computer, mobile telephone or handheld computer (personal digital 4.4.3 e-Banking assistant) The range of services offered by e-banking are: Automated Teller The growth of Internet and e-commerce Machines (ATM) and Point of Sales (PoS), is dramatically changing everyday Electronic Data Interchange (EDI) and life, with the world wide web and Credit Cards Electronic or e-commerce transforming the world Digital cash and Electronic bank into a digital global village. The latest transfer (EFT). The two ways in which wave in information technology is EFT can be done are: NEFT (National internet banking. It is a part of virtual Electronic Fund Transfer) and RTGS banking and another delivery channel (Real Time Gross Settlement). for customers. Benefits In simple terms, internet banking means any user with a PC and a There are various benefits of e-banking browser can get connected to the banks provided to customers which are: website to perform any of the virtual banking functions and avail of any of (i) E-banking facilitates digital the bank’s services. There is no human payments and promotes operator to respond to the needs of the transparency in financial customer. The bank has a centralised statements. data base that is web-enabled. All the services that the bank has permitted (ii) e-banking provides 24 hours, on the internet are displayed on a 365 days a year services to the menu. Any service can be selected and customers of the bank; further interaction is dictated by the nature of service. (iii) Customers can make some of the permitted transactions from office In this new digital market place or house or while travelling via banks and financial institutions have mobile telephone; started providing services over the internet. These type of services provided (iv) It inculcates a sense of financial by the banks on the internet, called discipline by recording each and e-banking, lowers the transaction cost, every transaction; adds value to the banking relationship and empowers customers. e-banking is (v) Greater customer satisfaction by electronic banking or banking using offering unlimited access to the electronic media. Thus, e-banking is a bank, not limited by the walls of the service provided by many banks, that branch and less risk and greater security to the customer as they can avoid travelling with cash. 2018-19

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92 BUSINESS STUDIES The banks also stand to gain by Insurance is thus a device by which e-banking. The benefits are: the loss likely to be caused by an uncertain event is spread over a (i) e-banking provides competitive number of persons who are exposed to advantage to the bank; it and who prepare to insure themselves against such an event. It is a contract (ii) e-banking provides unlimited or agreement under which one party network to the bank and is not agrees in return for a consideration to limited to the number of branches, pay an agreed amount of money to Any PC connected to a modem and another party to make a loss, damage a telephone having an internet or injury to something of value in connection can provide cash which the insured has a pecuniary withdrawl needs of the customer; interest as a result of some uncertain event. The agreement/contract is put (iii) Load on branches can be in writing and is known as ‘policy’. The considerably reduced by person whose risk is insured is called establishing centralised data base ‘insured’ and the firm which insures the and by taking over some of the risk of loss is known as insurer/ accounting functions. assurance underwriter. 4.5 INSURANCE 4.5.1 Fundamental principle of Insurance Life is full of uncertainties. The chances of occurrence of an event causing losses The basic principle of insurance is that are quite uncertain. There are risks of an individual or a business concern death and disability for human life; fire chooses to spend a definitely known and burglary risk for property; perils of sum in place of a possible huge amount the sea for shipment of goods and, so involved in an indefinite future loss. on. If any of these takes place, the Thus insurance is the substitution of individuals and/or, organisations may a small periodic payment (premium) for suffer a great loss, sometimes beyond a risk of large possible loss. The loss of their capacities to bear the same. It risk still remains but the loss is spread is to minimise the impact of such over a large number of policyholders uncertainties that there is a need for exposed to the same risk. The premium insurance. Investment in factory paid by them are pooled out of which buildings or heavy equipments or other the loss sustained by any policy holder assets is not possible unless there is is compensated. Thus, risks are shared arrangement for covering the risks, with with others. From the analysis of past the help of insurance. Keeping this in events the insurer (an insurance mind, people facing common risks come company or an underwriter) knows the together and make small contributions probable losses caused by each type to a common fund, which helps to of risk covered by insurance. spread the loss caused to an individual by a particular risk over a number of persons who are exposed to it. 2018-19

BUSINESS SERVICES 93 Insurance, therefore, is a form of risk arise, in exchange for a fee (known as management primarily used to safe premium). guard against the risk of potential financial loss. Ideally, insurance is Insurance is a social device in which defined as the equitable transfer of the risk a group of individuals (insured) of a potential loss, from one entity to transfers risk to another party (insurer) another, in exchange for a reasonable in order to combine loss experience, which fee. Insurance company, therefore, is provides for payment of losses from an association, corporation or an funds contributed (premium) by all organisation engaged in the business members. Insurance is meant to protect of paying all legitimate claims that may the insured, against uncertain events, which may cause disadvantage to him. Sector of Economy and GDP of India The Indian economy is classified in three sectors — Agriculture and allied, industry and services. The services sector is the largest sector of India. The Gross Value Added (GVA) at current prices for the services sector is estimated at 73.79 lakh crore INR in 2016-17. The services sector accounts for 53.66% of India’s total GVA of Rs. 137.51 lakh crore. With GVA of Rs. 39.90 lakh crore, the industry sector contributes 29.05%. While, agriculture and allied sector shares 17.32% and the GVA is around of 23.82 lakh crore INR. At 2011-12 prices, the composition of agriculture and allied, industry, and services sector are 15.11%, 31.12%, and 53.77%, respectively. GVA (Rupees in Crore) at current prices Sector 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 % share 1 Agriculture Sector 1,501,816 1,680,798 1,932,692 2,067,935 2,172,910 2,382,289 17.32% 1.1 Agriculture, forestry & 1,501,816 1,680,798 1,932,692 2,067,935 2,172,910 2,382,289 17.32% fishing 2,921,262 3,188,270 3,455,221 3,683,358 3,989,791 29.02% 2 Industry Sector 2,635,052 2.1 Mining & quarrying 261,035 285,776 295,716 313,844 296,041 309,178 2.25% 2.2 Manufacturing 1,409,986 1,572,830 1,713,445 1,883,929 2,065,093 2,278,149 16.57% 2.3 Electricity, gas, water 186,668 215,164 259,840 279,456 321,765 338,396 2.46% supply & other utility 777,363 847,492 919,269 977,992 services 2.4 Construction 1,000,459 1,064,068 7.74% 3 Services Sector 3,969,789 4,603,255 5,245,305 5,947,260 6,595,670 7,378,705 53.66% Trade, hotels, 3.1 transport, 1,413,116 1,664,083 1,874,443 2,095,337 2,294,367 2,538,162 18.46% communication and 1,530,691 1,776,023 2,069,386 2,363,328 2,632,432 2,896,300 21.06% 1,025,982 1,163,149 1,301,476 1,488,595 1,668,871 1,944,243 14.14% services related to 8,106,656 9,205,315 10,366,266 11,470,415 12,451,938 13,750,786 100.00% broadcasting 3.2 Financial & real estate Public 3.3 Administration, defence and other services GVA at basic prices 2018-19

http:statistimes.com/economy/sectorwisedgp 94 BUSINESS STUDIES Source: http://statisticstimes.com/economy/sectorwisegdpcalculationofindia.php 4.5.2 Functions of Insurance made by the insured are invested in various income generating schemes. The various functions of insurance are as follows: 4.5.3 Principles of Insurance (i) Providing certainty: Insurance provides certainity of payment for the The principles of insurance are the risk of loss. There are uncertainties of rules of action or conduct adopted by happenings of time and amount of loss. the stakeholders involved in the Insurance removes these uncertainties insurance business. The specific and the assured receives payment of principles of utmost significance to a loss. The insurer charges premium for valid insurance contract consists of the providing the certainity. following: (ii) Protection: The second main (i) Utmost good faith: A contract of function of insurance is to provide insurance is a contract of uberrimae protection from probable chances of fidei i.e., a contract found on utmost loss. Insurance cannot stop the good faith. Both the insurer and the happening of a risk or event but can insured should display good faith compensate for losses arising out of it. towards each other in regard to the (iii) Risk sharing: On the happening contract. It is the duty of the insured of a risk event, the loss is shared by all to voluntarily make full, accurate the persons exposed to it. The share is disclosure of all facts, material to the obtained from every insured member risk being proposed and the insurer to by way of premiums. make clear all the terms and conditions (iv) Assist in capital formation: The in the insurance contract. Thus, it is accumulated funds of the insurer binding on the proposer to disclose all received by way of premium payments 2018-19

BUSINESS SERVICES 95 material facts about the subject matter property on behalf of others has an insurable interest in the property. of the proposed insurance. Any fact, (iii) Indemnity: All insurance contracts of fire or marine insurance which is likely to affect the mind of a are contracts of indemnity. According prudent insurer in deciding to accept to it, the insurer undertakes to put the insured, in the event of loss, in the same the proposal of insurance or in fixing position that he occupied immediately before the happening of the event the rate of premium is material for this insured against. In other words the insurer undertakes to compensate the purpose. Failure to make disclosure of insured for the loss caused to him/her material facts by the insured makes the due to damage or destruction of property insured. The compensation contract of insurance voidable at the payable and the loss suffered are to be measured in terms of money. The discretion of the insurer. principle of indemnity is not applicable (ii) Insurable Interest: The insured to life insurance. must have an insurable interest in the (iv) Proximate Cause: According to subject matter of insurance. One this principle, an insurance policy is fundamental fact of this principle is designed to provide compensation only that ‘it is not the house, ship, for such losses as are caused by the machinery, potential liability of life that perils which are stated in the policy. is insured, but it is the pecuniary When the loss is the result of two or interest of the insured in them, which more causes, the proximate cause is insured.’ Insurable interest means means the direct, the most dominant some pecuniary interest in the subject and most effective cause of which the matter of the insurance contract. The loss is the natural consequence. In case insured must have an interest in the of loss arising out of any mishap, the preservation of the thing or life insured, most proximate cause of the mishap so that he/she will suffer financially on should be taken into consideration. the happening of the event against (v) Subrogation: It refers to the right which he/she is insured. In case of of the insurer to stand in the place of insurance of property, insurable interest of the insured in the subject the insured, after settlement of a claim, matter of the insurance must exist at as far as the right of insured in respect the time of happening of the event. In order to name insurable interest however, it is not necessary that one should be the owner of the property. For example, a trustee holding Examples of facts to be disclosed Fire insurance: Construction of building, fire detection and fire fighting equipment; nature of its use. Motor insurance: Type of vehicle; driver details. Personal Accident insurance: Age, height, weight, occupation, previous medical history. Life insurance: Age, previous medical history, smoking/drinking habits. 2018-19

96 BUSINESS STUDIES of recovery from an alternative source 4.5.4 Types of Insurance is involved. After the insured is compensated for the loss or damage to Various types of insurance exist by the property insured by him/her the virtue of practice of insurance right of ownership of such property companies and the influence of legal passes on to the insurer. This is enactments controlling the insurance because the insured should not be business. Broadly speaking, insurance allowed to make any profit, by selling may be classified as follows: the damaged property or in the case of lost property being recovered. LIFE INSURANCE (vi) Contribution: As per this principle it is the right of an insurer who has paid Since life itself is uncertain, all claim under an insurance, to call upon individuals try to assure themselves of other liable insurers to contribute for a certain sum of money in the future to the loss of payment. It implies, that in take care of unforeseen events or case of double insurance, the insurers happenings. Individuals in the course are to share the losses in proportion to of their life are always exposed to some the amount assured by each of them. kind of risks. In case there is a loss, when there is more than one policy on the same The risk may be of an event which property, the insured will have no right is certain that is death. In that case, to recover more than the full amount what will happen to the other members of his actual loss. If the full amount is of the family who are dependent on a recovered from one insurer the right to particular individuals income. The obtain further payment from the other other risk may be living too long in insurer will cease. which an individual may become too (vii) Mitigation: This principle states old to earn i.e., retirement. In this case that it is the duty of the insured to take also, the earnings will decline or end. reasonable steps to minimise the loss Under such circumstances, individuals or damage to the insured property. seek protection against these risks Suppose goods kept in a store house and life insurance companies offer catch fire then the owner of the goods protection against such risks. should try to recover the goods and save them from fire to minimise the A life insurance policy was loss or damage. The insured must introduced as a protection against the behave with great prudence and not uncertainity of life. But gradually its be careless just because there is an scope has widened and there are insurance cover. If reasonable care is various types of insurance policies not taken like any prudent person then available to suit the requirements of an the claim from the insurance company individual. For example, disability may be lost. insurance, health/medical insurance, annuity insurance and life insurance proper. 2018-19

BUSINESS SERVICES 97 Life insurance may be defined as a in one lump sum, or periodically i.e., contract in which the insurer in monthly, quarterly, half yearly or consideration of a certain premium, yearly. At the same time, the company either in a lump sum or by other promises to pay a certain sum of money periodical payments, agrees to pay to either on the death of the person or on the assured, or to the person for whose his attaining a certain age (i.e., the benefit the policy is taken, the assured expiry of certain period). Thus, the sum of money, on the happening of a person is sure that a specified amount specified event contingent on the will be given to him when he attains a human life or at the expiry of certain certain age or that his dependents will period. Thus, the insurance company get that sum in the event of his death. undertakes to insure the life of a person in exchange for a sum of money called This agreement or contract which premium. This premium may be paid contains all the terms and conditions is put in writing and such document is 2018-19

98 BUSINESS STUDIES called the policy. The person whose life (iii) In life insurance, the insured must is insured is called the assured. The have insurable interest in the life insurance company is the insurer and assured. Without insurable interest the consideration paid by the assured the contract of insurance is void. In is the premium. The premium can be case of life insurance, insurable paid periodically in instalments. interest must be present at the time when the insurance is affected. It is This insurance provides protection not necessary that the assured to the family at the premature death or should have insurable interest at gives adequate amount at old age when the time of maturity also. For earning capacities are reduced. The example, a person is presumed to insurance is not only a protection but have an interest in his own life and is a sort of investment because a certain every part of it, a creditor has an sum is returnable to the insured at insurable interest in the life of his the time of death or at the expiry of a debtor, and a proprietor of a drama certain period. company has an insurable interest in the lives of the actors; Life insurance also encourages savings as the amount of premium has (iv) Life insurance contract is not a to be paid regularly. It thus, provides contract of indemnity. The life a sense of security to the insured and of a human being cannot be his dependents. compensated and only a specified sum of money is paid. That is why The general principles of insurance the amount payable in life discussed in the previous section apply insurance on the happening of the to life insurance also with a few event is fixed in advance. The sum exceptions. The main elements of a life of money payable is fixed, at the insurance contract are: time of entering into the contract. A contract of life insurance, (i) The life insurance contract must therefore, is not a contract of have all the essentials of a valid indemnity. contract. Certain elements like offer and acceptance, free consent, Types of life insurance policies capacity to enter into a contract, lawful consideration and lawful The document containing the written object must be present for the contract between the insurer and the contract to be valid; insured alongwith the terms and conditions of insurance is called the (ii) The contract of life insurance is a Policy. After the proposal form is filled contract of utmost good faith. The by the insured (or the proposer) and assured should be honest and the insurer (insurance company) truthful in giving information to the accepts the form and the premium, a insurance company. He must policy is issued to the insurer. disclose all material facts about his health to the insurer. It is his duty to disclose accurately all material facts known to him even if the insurer does not ask him; 2018-19

BUSINESS SERVICES 99 People have different requirements assured sum or policy money is payable and therefore they would like a policy upon the death of any one person to the to fulfill all their needs. The needs of other survivor or survivors. Usually this people for life insurance can be family policy is taken up by husband and wife needs, children’s needs, old age and jointly or by two partners in a special needs. To meet the needs of partnership firm where the amount is people the insurers have developed payable to the survivor on the death of different types of products such as either of the two. Whole Life Assurance, Endowment type (iv) Annuity Policy: Under this policy, plans, combination of Whole Life and the assured sum or policy money is Endowment type plans, Children’s payable after the assured attains a Assurance plans and Annuity plans. certain age in monthly, quarterly, half Some of these are explained below: yearly or annual instalments. The premium is paid in instalments over a (i) Whole Life Policy: In this kind of certain period or single premium may policy, the amount payable to the be paid by the assured. This is useful insured will not be paid before the to those who prefer a regular income death of the assured. The sum then after a certain age. becomes payable only to the (v) Children’s Endowment Policy: beneficiaries or heir of the deceased. This policy is taken by a person for his/ her children to meet the expenses of The premium will be payable for a their education or marriage. The fixed period (20 or 30 years) or for the agreement states that a certain sum will whole life of the assured. If the premium be paid by the insurer when the is payable for a fixed period, the policy will children attain a particular age. The continue till the death of the assured. premium is paid by the person entering (ii) Endowment Life Assurance into the contract. However, no premium Policy: The insurer (Insurance wil be paid, if he dies before the maturity Company) undertakes to pay a specified of the policy. sum when the insured attains a particular age or on his death which FIRE INSURANCE ever is earlier. The sum is payable to his legal heir/s or nominee named therein Fire insurance is a contract whereby in case of death of the assured. the insurer, in consideration of the Otherwise, the sum will be paid to the premium paid, undertakes to make assured after a fixed period i.e., till he/ good any loss or damage caused by fire she attains a particular age. Thus, the during a specified period upto the endowment policy matures after a amount specified in the policy. limted number of years. Normally, the fire insurance policy is (iii) Joint Life Policy: This policy is for a period of one year after which it is taken up by two or more persons. The to be renewed from time to time. The premium is paid jointly or by either of premium may be paid either in lump them in instalments or lump sum. The 2018-19

100 BUSINESS STUDIES sum or instalments. A claim for loss insurance is a contract of utmost by fire must satisfy the two following good faith i.e., uberrimae fidei. The conditions: insured should be truthful and honest in giving information to the (i) There must be actual loss; and insurance company regarding the (ii) Fire must be accidental and non- subject matter of the insurance. He is duty-bound to disclose intentional. accurately all facts regarding the The risk covered by a fire insurance nature of property and risks contract is the loss resulting from fire attached to it. The insurance or some other cause, and which is the company should also disclose the proximate cause of the loss. If facts of the policy to the proposer. overheating without ignition causes (iii) The contract of fire insurance is a damage, it will not be regarded as a fire contract of strict indemnity. The loss within the meaning of fire insured can, in the event of loss, insurance and the loss will not be recover the actual amount of loss recoverable from the insurer. from the insurer. This is subject to A fire insurance contract is based the maximum amount for which the on certain fundamental principles subject matter is insured. For which have been discussed in general example, if a person has insured his principles. The main elements of a fire house for Rs. 4,00,000 the insurer insurance contract are: is not necessarily liable to pay that (i) In fire insurance, the insured must amount, although the house may have insurable interest in the subject have been totally destroyed by fire; matter of the insurance. Without but he will pay the actual loss after insurable interest the contract of deducting depreciation within the insurance is void. In case of fire maximum limit of Rs. 4,00,000. The insurance, unlike life insurance purpose being that a person should insurable interest must be present not be allowed to gain by insurance. both at the time of insurance and at (iv) The insurer is liable to compensate the time of loss. For example, a only when fire is the proximate person has insurable interest in the cause of damage or loss. property he owns, a businessman has insurable interest in his stock, MARINE INSURANCE plant, machinery and building, an agent has an insurable interest in A marine insurance contract is an the property of his principal, a agreement whereby the insurer partner has insurable interest in the undertakes to indemnify the insured property of a partnership firm, and in the manner and to the extent thereby a mortgagee has insurable interest agreed against marine losses. Marine in the property, which is mortgaged. insurance provides protection against (ii) Similar to the life insurance loss by marine perils or perils of the sea. contract, the contract of fire 2018-19

BUSINESS SERVICES 101 Difference between Life, Fire and Marine Insurance Basis of Life Insurance Fire insurance Marine Insurance difference Subject The subject matter of The subject matter The subject matter Matter 1. insurance is human is any physical is a ship, cargo or life. property or assets. freight. 2. Element Life Insurance has the Fire insurance has Marine insurance elements of protection only the element of has only the protection and not element of and investment or protection. both. the element of investment. 3. Insurable Insurable interest Insurable interest Insurable interest interest must be present at the on the subject must be present at matter must be time of effecting the the time when policy but need not be present both at the claim falls due or necessary at the time time of effecting at the time of loss when the claim falls policy as well as when the claim only. due. falls due. Life insurance policy 4. Duration usually exceeds a year Fire insurance Marine insurance and is taken for longer policy usually does policy is for one or periods ranging from not exceed a year. period of voyage or 5 to 30 years or mixed. whole life. Fire insurance is a contract of Marine insurance Life insurance is not indemnity. The is a contract of based on the principle insured can claim indemnity. The of indemnity. The only the actual insured can claim 5. Indemnity sum assured is paid amount of loss the market value of either on the from the insurer. the ship and cost happening of certain The loss due to the of goods destroyed event or on maturity fire is indemnified at sea and the loss of the policy. subject to the will be maximum limit of indemnified. the policy amount. 6. Loss Loss is not Loss is Loss is measurement measurable. measurable. measurable. Surrender Life insurance policy Fire insurance Marine insurance 7. value or paid has a surrender value does not have any does not have any surrender value or surrender value or up value or paid up value. paid up value. paid up value. 2018-19

102 BUSINESS STUDIES One can insure for any In fire insurance, In marine insurance the amount of the the amount of the 8. Policy amount amount in life policy cannot be policy can be the market value of the insurance. more than the ship or cargo. value of the subject matter. The event i.e., There is an element of destruction by fire The event i.e., loss certainity. The event may not happen. at sea may not occur 9. Contingency i.e., death of maturity There is an and there may be no of risk or policy is bound to element of claim. There is an happen. Therefore a uncertainity and element of claim will be present. there may be no uncertainty. claim. Marine perils are collision of ship with indemnifying the insured for losses the rock, or ship attacked by the caused by damage to the ship. enemies, fire and captured by pirates (b) Cargo insurance: The cargo while and actions of the captains and crew of being transported by ship is subject the ship. These perils cause damage, to many risks. These may be at port destruction or disappearance of the i.e., risk of theft, lost goods or on ship and cargo and non-payment of voyage etc. Thus, an insurance freight. So, marine insurance insures policy can be issued to cover against ship hull, cargo and freight. Thus, it is such risks to cargo. a device wherein the insurer undertakes (c) Freight insurance: If the cargo does to compensate the owner of a ship or not reach the destination due to cargo for complete or partial loss at sea. damage or loss in transit, the The insurer gurantees to make good the shipping company is not paid freight losses due to damage to the ship or cargo charges. Freight insurance is for arising out of the risks incidental to sea reimbursing the loss of freight to the voyages. The insurer in this case is known shipping company i.e., the insured. as the underwriter and a certain sum of money is paid by the insured in The fundamental principles of consideration for the guarantee/ marine insurance are the same as the protection he gets. Marine insurance is general principles. The main elements slightly different from other types. There of a marine insurance contract are: are three things involved i.e., ship or hull, cargo or goods, and freight. (i) Unlike life insurance, the contract of marine insurance is a contract of (a) Ship or hull insurance: Since the indemnity. The insured can, in the ship is exposed to many dangers at event of loss recover the actual sea, the insurance policy is for amount of loss from the insurer. Under no circumstances, the 2018-19

BUSINESS SERVICES 103 insured is allowed to make profit communicate with others for out of the marine insurance transmission of ideas and information. contract. But cargo policies provide Communication services need to be commercial indemnity rather than very efficient, accurate and fast for them strict indemnity. The insurers to be effective. In this fast moving and promise to indemnify the insured competitive world it is essential to have “in the manner and to the extent advanced technology for quick agreed.” In case of ‘Hull Policy’, the exchange of information. The electronic amount insured is fixed at a level media is mainly responsible for this above the current market value; transformation. The main services (ii) Similar to life and fire insurance, the which help business can be classified contract of marine insurance is a into postal and telecom. contract of utmost good faith. Both the insured and insurer must Postal Services disclose everything, which is in their knowledge and can affect the Indian post and telegraph department insurance contract. The insured is provides various postal services across duty-bound to accurately disclose India. For providing these services the all facts which include the nature whole country has been divided into 22 of shipment and the risk of damage postal circles. These circles manage the it is exposed to; day-to-day functioning of the various (iii) Insurable interest must exist at the head post offices, sub-post offices and time of loss but not necessary at the branch post offices. Through their time when the policy was taken; regional and divisional level (iv) The principle of causa proxima will arrangements the various facilities apply to it. The insurance company provided by postal department are will be liable to pay only if that broadly categorised into: particular or nearest cause is (i) Financial facilities: These facilities covered by the policy. For example, are provided through the post office’s if a loss is caused by several savings schemes like Public Provident reasons then nearest cause of loss Fund (PPF), Kisan Vikas Patra, and will be considered. Refer to page National Saving Certificates in addition 105 for types of insurance and to normal retail banking functions of social secuirty scheme. monthly income schemes, recurring deposits, savings account, time 4.6 COMMUNICATION SERVICES deposits and money order facility. (ii) Mail facilities: Mail services consist Communication services are helpful to of parcel facilities that is transmission the business for establishing links with of articles from one place to another; the outside world viz., suppliers, registration facility to provide security customers, competitors etc. Business of the transmitted articles and does not exist in isolation, it has to 2018-19

104 BUSINESS STUDIES insurance facility to provide insurance the dream of doing business across cover for all risks in the course of continents will remain a dream in the transmission by post. absence of telecom infrastructure. There have been far reaching Postal department also offers allied developments in the convergence of facilities of the following types: telecom, IT, consumer electronics and media industries worldwide. 1. G r e e t i n g p o s t — A r a n g e o f Recognising the potential in enhancing delightful greeting cards for quality of life and to facilitate India’s every occasion. vision of becoming IT super power by the year 2025, new Telecom Policy 2. Media post — An innovative Framework 1999 and Broadband and effective vehicle for Policy 2004 were developed by the Indian corporates to advertise Government of India. Through this their brand through postcards, framework the government intends to envelopes, aerograms, tele- provide both universal services to grams, and also through all uncovered areas and high-level letterboxes. services for meeting the needs of the country’s economy. 3. Direct post is for direct advertising. It can be both addressed as well The various types of telecom as unaddressed. services are: 4. International Money Transfer (i) Cellular mobile services: These are through collaboration with all types of mobile telecom services Western Union financial services, including voice and non-voice USA, which enables remittance of messages, data services and PCO money from 185 countries to India. services utilising any type of network equipment within their service area. 5. Passport facilities — A unique They can also provide direct inter partnership with the ministry of connectivity with any other type of external affairs for facilitating telecom service provider. passport application. (ii) Fixed line services: These are all types of fixed services including voice 6. Speed Post: It has over 1000 and non-voice messages and data destinations in India and links with services to establish linkages for long 97 major countries across the globe. distance traffic. These utilise any type of network equipment primarily 7. e-bill post is the latest offering of connected through fiber optic cables the department to collect bill laid across the length and breadth of payment across the counter for the country. The also provide inter BSNL and Bharti Airtel. connectivity with other types of telecom services. Telecom Services World class telecommunications infrastructure is the key to rapid economic and social development of the country. It is in fact the backbone of every business activity. In today’s world 2018-19

BUSINESS SERVICES 105 (iii) Cable services: These are (iv) VSAT services: VSAT (Very Small linkages and switched services within Aperture Terminal) is a satellite-based a licensed area of operation to operate communications service. It offers media services, which are essentially businesses and government agencies one-way entertainment related a highly flexible and reliable services. The two-way communication communication solution in both including voice, data and information urban and rural areas. Compared to services through cable network would land-based services, VSAT offers emerge significantly in the future. the assurance of reliable and Offering services through the cable uninterrupted service that is equal to network would be similar to providing or better than land-based services. It fixed services. can be used to provide innovative Different Types of Insurance 1. Health Insurance Health Insurance is a safeguard against rising medical costs. A health insurance policy is a contract between an insurer and an individual or group, in which the insurer agrees to provide specified health insurance at an agreed-upon price (the premium). Depending upon the policy, premium may be payable either in a lump sum or in instalments. Health insurance usually provides either direct payment or reimbursement for expenses associated with illness and injuries. The cost and range of protection provided by health insurance depends on the provider and the policy purchased. In India, presently the health insurance exists primarily in the form of Mediclaim policy offered to an individual or to any group, association or corporate bodies. 2. Motor Vehicle Insurance Motor Vehicle Insurance falls under the classification of General Insurance. This insurance is becoming very popular and its importance increasing day-by- day. In motor insurance the owner’s liability to compensate people who were killed or insured through negligence of the motorists or drivers is passed on to the insurance company. The rate of premium under motor insurance is standardised. 3. Burglary Insurance Burglary insurance falls under the classification of insurance of property. In case of burglary policy, the loss of damages of household goods and properties and personal effects due to theft, larceny, burglary, house-breaking and acts of such nature are covered. The actual loss is compensated. (i) Insurable interest must exist at the time of loss but not necessarily at the time when the policy was taken. 2018-19

106 BUSINESS STUDIES (ii) The principle of causa proxima will apply to it. The insurance company will be liable to pay only that particular or nearest cause that is covered by the policy. For example, if a loss is caused by several reasons then the nearest cause of loss will be considered. 4. Cattle Insurance A contract of cattle insurance is a contract whereby a sum of money is secured to the assured in the event of death of animals like bulls, buffaloes, cows and heifers. It is a contract against death resulting from accident, disease, or pregnant condition as the case may be. The insurer usually undertakes to pay the excess in the event of loss. 5. Crop Insurance A contract of crop insurance is a contract to provide a measure of financial support to farmers in the event of a crop failure due to drought or flood. This insurance covers against all risks of loss or damages relating to production of rice, wheat, millets, oil seeds and pulses etc. 6. Sports Insurance This policy assures a comprehensive cover available to amateur sportsmen covering their sporting equipment, personal effects, legal liability and personal accident risks. If desired the cover can also be made available in respect of the named member of insured’s family residing with him. This cover is not available to professional sportsmen. The cover is available in respect of any one or more of the following sports: angling, badminton, cricket, golf, lawn tennis, squash, use of sporting guns. 7. Amartya Sen Siksha Yojana This policy offered by the General Insurance Company secures the education of dependent children. If the insured parent/legal guardian sustains any bodily injury resulting solely and directly from an accident, caused by external, violent and visible means and if such injury shall within twelve calendar months of its occurrence be the sole and direct cause of his/her death or permanent total disablement, the insurer shall indemnify the insured student, in respect of all covered expenses to be incurred from the date of occurrence of such accident till the expiry date of policy or completion of the duration of covered course whichever occurs first and such indemnity shall not exceed the sum insured as stated in the policy schedule. 8. Rajeswari Mahila Kalyan Bima Yojana This policy has been designed to provide relief to the family members of insured women in case of their death or disablement arising due to all kinds of accidents and/or death and/or disablement arising out of problems incidental to women only. 2018-19

BUSINESS SERVICES 107 Social Security Schemes 1. Atal Pension Yojana : This scheme is offered to individuals in the age group of 18 to 40 years. The individual is expected to contribute in the scheme until he/she attains the age of 60 years. The scheme acts as an investment for availing old-age pension. 2. Pradhan Mantri Suraksha Bima Yojana : This scheme offers accidental and disability cover of Rs. 2 lakh at a premium of Rs. 12 per year. Any individual holding a savings account can be enrolled under this scheme. 3. Pradhan Mantri Jan Dhan Yojana : The scheme offers savings account with no minimum balance. The Rupay ATM-cum-Debit card has in-built accident and life cover of Rs. 1,00,000 and Rs. 30,000, respectively. The scheme, suitable for economically weaker sections of society. 4. Pradhan Mantri Jeevan Jyoti Bima Yojana : The scheme offers a protection term insurance cover of Rs 2,00,000 to the dependents of the policy holder in the event of his/her death at a premium of Rs. 330 per year. Any individual in the age group of 18-70 years having a savings account can opt for this scheme. applications such as tele-medicine, You have already studied the newspapers-on-line, market rates and comparative advantages and tele-education even in the most remote disadvantages of different modes of areas of our country. transportation in earlier classes. Their (v) DTH services: DTH (Direct to services are considered to be important Home) is again a satellite-based media for business since speed is of essence services provided by cellular in any business transaction. Also companies. One can receive media transportation removes the hindrance services directly through a satellite with of place, i.e., it makes goods available the help of a small dish antenna and a to the consumer from the place of set top box. The service provider of DTH production. We need to develop our services provides a bouquet of multiple transportation system to keep pace channels. It can be viewed on our with the requirements of our economy. television without being dependent on We need better infrastructure of roads the services provided by the cable with sufficient width and high quality. network services provider. We have few ports and they too are congested. Both government and 4.7 TRANSPORTATION industry needs to be proactive and view the effective functioning of this service Transportation comprises freight as a necessity for providing a lifeline to services together with supporting and a business services. In sectors like auxiliary services by all modes of agriculture and food, there are massive transportation i.e., rail, road, air and losses of product in the process of sea for the movement of goods and transportation and storage. international carriage of passengers. 2018-19

108 BUSINESS STUDIES Infrastructure in Transportation In the first, 50 years of independence, India saw the construction of around 13, 000 kilometers of national highways. The ambitious NHAI, Government of India’s project consisting of Golden Quadrilateral connecting Delhi-Kolkata- Chennai-Mumbai and the North-South, East-West corridors linking Srinagar to Kanyakumari and Silchar to Porbandar will see the construction of 13,151 kms of National Highways within a span of eight years. This project will not only change the face of road transport in India, but it will also have a lasting impact on our economy. The Ministry of Railways have also done massive innovations in their movement and monitoring of goods trains to facilitate the needs of the business community. The Government of India is also serious in ensuring better and more facilities at the seaports and airports to provide an impetus to business activities. The government plans not only to enhance capacities of existing ports but also to develop modern and new ports at strategic locations. Warehousing for moving goods and also usage of logistics automation software’s for Storage has always been an important warehouse management. aspect of economic development. The warehouse was initially viewed as a Types of Warehouses static unit for keeping and storing goods in a scientific and systematic (i) Private warehouses: Private manner so as to maintain their original warehouses are operated, owned or quality, value and usefulness. leased by a company handling their The typical warehouse received own goods, such as retail chain merchandise by rail, truck or bullock stores or multi-brand multi-product cart. The items were moved manually companies. As a general rule an efficient to a storage within the warehouse and warehouse is planned around a hand piled in stacks on the floor. They material handling system in order to are used by manufacturers, importers, encourage maximum efficiency of exporters, wholesalers, transport product movement. The benefit of business, customs etc., in India. private warehousing includes control, flexibility, and other benefits like Today’s warehouses have ceased to improved dealer relations. be a mere storage service providers and (ii) Public warehouses: Public have really become logistical service warehouses can be used for storage of providers in a cost efficient manner. goods by traders, manufacturers or That is making available the right any member of the public after the quantity, at the right place, in the right payment of a storage fee or charges. time, in the right physical form at the The government regulates the operation right cost. Modern warehouses are of these warehouses by issuing licences automated with automatic conveyors, for them to private parties. computer operated cranes and forklifts 2018-19

BUSINESS SERVICES 109 The owner of the warehouse stands The importer need not block funds as an agent of the owner of the goods for payment of import duties before the and is expected to take appropriate care goods are sold or used. Even if he of the goods. wishes to export the goods kept in the bonded warehouse he may do so These warehouses provide other without payment of customs duty. facilities also, like transportation by rail Thus, bonded warehouses facilitate and road. They are responsible for the entrepot trade. safety of the goods. Small manufacturers (iv) Government warehouses: These find it convenient as they cannot afford warehouses are fully owned and to construct their own warehouses. managed by the government. The government manages them through The other benefits include flexibility organisations set up in the public in the number of locations, no fixed cost sector. For example, Food Corporation and capability of offering value added of India, State Trading Corporation, and Central Warehousing Corporation. services, like packaging and labelling. (v) Cooperative warehouses: Some (iii) Bonded warehouses: Bonded marketing cooperative societies or warehouses are licensed by the agricultural cooperative socities have government to accept imported goods set up their own warehouses for prior to payment of tax and customs members of their cooperative society. duty. These are goods which are imported from other countries. Functions of Warehousing Importers are not permitted to remove goods from the docks or the airport till The functions of warehousing are customs duty is paid. discussed as follows: (a) Consolidation: In this function At times, importers are not in a position to pay the duty in full or does the warehouse receives and not require all the goods immediately. consolidates, materials/goods from The goods are kept in bonded different production plants and warehouses by the customs authorities dispatches the same to a particular till the customs duty is paid. These customer on a single transportation goods are said to be in bond. shipment. These warehouses have facilities for Plant A branding, packaging, grading and blending. Importers may bring their Plant B Consolidation A/B/C buyers for inspection of goods and Plant C Warehouses repackage them according to their requirements. Thus, it facilitates marketing of goods. Goods can be removed in part as and when required by the importers and buyers, and import duty can be paid in instalments. 2018-19

110 BUSINESS STUDIES (b) Break the bulk: The warehouse throughout the year also need to be performs the function of dividing the stored and released in lots. bulk quantity of goods received (d) Value added services: Certain from the production plants into value added services are also smaller quantities. These smaller provided by the warehouses, such quantities are then transported as in transit mixing, packaging and according to the requirements of labelling. Goods sometimes need to clients to their places of business. be opened and repackaged and labelled again at the time of Customer A inspection by prospective buyers. Grading according to quantity and PLANT A Break -Bulk Customer B dividing goods in smaller lots is Customer C another function. Warehouse Central Warehousing Corporation At present, a Central Government undertaking CWC i.e., Central Warehousing Corporation provides these services for businessmen across the country. Private warehousing companies, like TCI, Shanker International, Blue Dart, DHL, etc., are providing cargo facilities of both transportation and warehousing. (c) Stock piling: The next function of (e) Price stablisation: By adjusting warehousing is the seasonal storage the supply of goods with the of goods to select businesses. Goods demand situation, warehousing or raw materials, which are not performs the function of stabilising required immediately for sale or prices. Thus, prices are controlled manufacturing, are stored in when supply is increasing and warehouses. They are made available demand is slack and vice versa. to business depending on customers’ demand. Agricultural products (f) Financing: Warehouse owners which are harvested at specific times advance money to the owners on with subsequent consumption security of goods and further supply goods on credit terms to customers. 2018-19

BUSINESS SERVICES 111 Key Terms Insurance Subrogation Fire insurance Insurable interest Contribution Marine insurance Business services Indemnity Mitigation Telecom services Banking Proximate cause Life insurance Warehousing e-Banking Commercial banks SUMMARY Nature of services: Services are those separately identifiable, essentially intangible activities that provide satisfaction of wants, and are not necessarily linked to the sale of a product or another service. There are five basic features of services. These features also distinguish them from goods and are known as the five Is of services i.e., Intangibility, Inconsistency, Inseparability, Inventory (less), Involvement. Difference between services and goods: While goods are produced, services are performed. A service is an act which cannot be taken home. What we can take home is the effect of the services. And as the services are sold at the consumption point, there are no inventories. Types of services: Business Services, Social Services, Personal Services. Business services: In order to be competitive, business enterprises are becoming more and more dependent on specialised business services. Business enterprises look towards banks for availability of funds; insurance companies for getting their plant, machinery, goods, etc., insured; transport companies for transporting raw material and finished goods; and telecom and postal services for being in touch with their vendors, suppliers and customers. Banking: A banking company in India is one which transacts the business of banking which means accepting, for the purpose of lending and investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise. Type of banks: Banks can be classified into the following i.e., commercial banks, cooperative banks, specialised banks, central bank. Functions of commercial bank: Some of them are the basic or primary functions of a bank while others are agency services or general utility services in nature. Acceptance of deposits, lending of funds, cheque facility, remittance of funds, allied services. e-Banking: The latest wave in information technology is internet banking. It is a part of virtual banking and another delivery channel for customers. e-banking is electronic banking or banking using the electronic media. Thus, 2018-19

112 BUSINESS STUDIES e-banking is a service provided by many banks, that allows a customer to conduct banking transactions, such as managing savings, checking accounts, applying for loans or paying bills over the internet using a personal computer, mobile telephone or handheld computer (personal digital assistant) Insurance: Insurance is thus a device by which the loss likely to be caused by an uncertain event is spread over a number of persons who are exposed to it and who are prepared to insure themselves against such an event. It is a contract or agreement under which one party agrees in return for a consideration to pay an agreed amount of money to another party to make good a loss, damage or injury to something of value in which the insured has a pecuniary interest as a result of some uncertain event. Fundamental principle of insurance: The basic principle of insurance is that an individual or a business concern chooses to spend a definitely known sum in place of a possible huge amount involved in an indefinite future loss. Insurance, therefore, is a form of risk management primarily used to safe guard against the risk of potential financial loss. Functions of insurance: Providing certainty, Protection, Risk sharing, Assist in capital formation. Principles of Insurance Utmost good faith: A contract of insurance is a contract of uberrimae fidei i.e., a contract found on utmost good faith. Both the insurer and the insured display good faith towards each other in regard to the contract. Insurable interest: The insured must have an insurable interest in the subject matter of insurance. Insurable interest means some pecuniary interest in the subject matter of the insurance contract. Indemnity: According to it, the insurer undertakes to put the insured, in the event of loss, in the same position that he occupied immediately before the happening of the event insured against. Proximate cause: When the loss is the result of two or more causes, the proximate cause means the direct, the most dominant and most effective cause of which the loss is a natural consequence. Subrogation: It refers to the right of the insurer to stand in the place of the insured, after settlement of a claim, as far as the right of the insured in respect of recovery from an alternative source is involved. Contribution: As per this principle it is the right of an insurer who has paid claim under an insurance, to call upon other liable insurers to contribute for the loss payment. Mitigation: This principles states that it is the duty of the insured to take reasonable steps to minimise the loss or damage to the insured property. 2018-19

BUSINESS SERVICES 113 Types of Insurance Life insurance: Life insurance may be defined as a contract in which the insurer, in consideration of a certain premium, either in a lump sum or by other periodical payments, agrees to pay to the assured, or to the person for whose benefit the policy is taken, the assured sum of money, on the happening of a specified event contingent on the human life or at the expiry of a certain period. This insurance provides protection to the family at premature death of an individual or gives adequate amount at an old age when earning capacities are reduced. The insurance is not only a protection but is a sort of investment because a certain sum is returnable to the insured at the time of death or at the expiry of a certain period. The main elements of a life insurance contract are: (i) The life insurance contract must have all the essentials of a valid contract. (ii) The contract of life insurance is a contract of utmost good faith. (iii) In life insurance, the insured must have insurable interest in the life assured. (iv) Life insurance contract is not a contract of indemnity. Types of life insurance policies: People have different requirements and therefore they would like a policy to fulfill all their needs. The needs of people for life insurance can be family needs, children’s needs, old age and special needs. To meet the needs of people the insurer’s have developed different types of products such as Whole Life Assurance, Endowment type plans, combination of Whole Life and Endowment type plans, Children’s Assurance plans and Annuity plans. Fire insurance: Fire insurance is a contract whereby the insurer, in consideration of the premium paid, undertakes to make good any loss or damage caused by a fire during a specified period upto the amount specified in the policy. The main elements of a fire insurance contract are: (i) In fire insurance, the insured must have insurable interest in the subject matter of the insurance. (ii) Similar to the life insurance contract, the contract of fire insurance is a contract of utmost good faith i.e., uberrimae fidei. (iii) The contract of fire insurance is a contract of strict indemnity. (iv) The insurer is liable to compensate only when fire is the proximate cause of damage or loss. Marine insurance: A marine insurance contract is an agreement whereby the insurer undertakes to indemnify the insured in the manner and to the extent thereby agreed against marine losses. Marine insurance provides 2018-19

114 BUSINESS STUDIES protection against loss by marine perils or perils of the sea. Marine insurance is slightly different from other types. There are three things involved i.e., ship or hull, cargo or goods and freight. The main elements of a marine insurance contract are: (i) Unlike life insurance, the contract of marine insurance is a contract of indemnity. (ii) Similar to life and fire insurance, the contract of marine insurance is a contract of utmost good faith. (iii) Insurable interest must exist at the time of loss. (iv) The principle of causa proxima will apply to it. Communication services: Communication services are helpful to business for establishing links with the outside world viz., suppliers, customers, competitors etc. The main services which help business can be classified into postal and telecom. Postal services: Various facilities provided by postal department are broadly categorised into financial facilities, mail facilities. Telecom services: The various types of telecom services are of the following types: Cellular Mobile Services, Radio Paging Services, Fixed line services, Cable Services, VSAT Services, DTH services. Transportation: Transportation comprises freight services together with supporting and auxiliary services by all modes of transportation i.e., rail, road, air and sea for the movement of goods and international carriage of passengers. Warehousing: The warehouse was initially viewed as a static unit for keeping and storing goods in a scientific and systematic manner so as to maintain their original quality, value and usefulness. Today’s warehouses have ceased to be mere storage service providers and have really become logistical service providers in a cost efficient manner. Types of warehouses: private warehouses, public warehouses,bonded warehouses, government warehouses, cooperative warehouses. Functions of warehousing: The functions of warehousing are normally discussed as follows : consolidation, break the bulk, stock piling, value added services, price stablisation, financing. EXERCISES Multiple Choice Questions 1. DTH services are provided by________. a. Transport companies. b. Banks c. Cellular companies d. None of the above 2018-19

BUSINESS SERVICES 115 2. The benefits of public warehousing includes_______. a. Control b. Flexibility c. Dealer relationship d. None of the above 3. Which of the following is not a function of insurance? a. Risk sharing b. Assist in capital c. Lending of funds formation d. None of the above 4. Which of the following is not applicable in life insurance contract? a. Conditional contract b. Unilateral contract c. Indemnity contract d. None of the above 5. CWC stands for_______. a. Central Water Commission b. Central Warehousing Commission c. Central Warehousing Corporation d. Central Water Corporation Short Answer Questions 1. Define services and goods. 2. What is e-banking. What are the advantages of e-banking? 3. Write a note on various telecom services available for enhancing business. 4. Explain briefly the principles of insurance with suitable examples. 5. Explain warehousing and its functions. Long Answer Questions 1. What are services? Explain their distinct characteristics. 2. Explain the functions of commercial banks with an example of each. 3. Write a detailed note on various facilities offered by Indian Postal Department. 4. Describe various types of insurance and examine the nature of risks protected by each type of insurance. 5. Explain in detail the warehousing services. Projects/Assignments 1. Identify a list of various services you use on a regular basis and identify their distinct characteristics. 2. Do a project on banking services. Approach a nearby bank and collect information about various services offered by them and also collect leaflets about salient features of different schemes. Compile and suggest what extra services you may like to propose. 3. Visit a nearby bank branch in your locality and collect information about various types of account available for customers to open as per their requirement. 2018-19

116 BUSINESS STUDIES In the second part of the activity match the information given in column A with the information given in Column B. S. No. Column A Column B 1. Multiple Option It is a temporary pass through account held by a third party during the process of a transaction between two Deposit parties unless the transaction is completed. 2. Savings Account A kind of deposit scheme introduced by different banks, where the excess amount in the savings bank account is transferred to fixed deposit account and the account holder earns more rate of interest. If the bank receives a cheque for this account and the balance is not sufficient, the amount will be transferred from fixed deposit account to savings bank account to clear the cheque. In short, it gives the account holder the interest of a term deposit with the flexibility of partial withdrawal, whereas, the remaining cash will get better interest. 3. Current Account It is also called cumulative deposit scheme. Any resident, individual, association, club, institution/ agency is eligible to open this account in single/joint names. The account can be opened for any period ranging from 6 months to 120 months, in multiple of 1 month for monthly installment. The amount selected for installment at the start of the scheme is payable every month and the number of installments once fixed, cannot be changed. The rate of interest is compounded quarterly and the final amount is paid on maturity. 4. Fixed Deposit Any resident, individual, association, club, etc., is Account eligible for this account. It is a kind of modest credit option available to the depositor. Two free cheque books will be issued each year. Internet banking facility will be provided without any charge. Balance enquiry, NEFT, bill payment, mobile recharge, etc., are provided through mobile phones. Students can open this account with zero balance by providing the required documents. 5. Demat Account This account can be opened by any resident, individual, association, limited company, religious institution, educational institution, charitable institution, club, etc. Payments can be done unlimited number of times. Funds can be remitted from any part of the country to the corresponding account. Overdraft facility and Internet banking facility are available. 2018-19

BUSINESS SERVICES 117 6. Escrow Account It is classified as short deposit receipt and fixed deposit receipt 7. Recurring Deposit Account a. Short Deposit Receipt (i) Banks accept deposits from customers varying from 7 days to a maximum of 10 years. (ii) The period for ‘short deposits’ can vary from 7 days to 179 days. (iii) The minimum amount that can be deposited under this scheme is Rs. 5 lakh for a period of 7-14 days. b. Fixed Deposit Receipt (i) Any resident, individual, association, minor, society, club, etc., is eligible for this account. (ii) The minimum FDR in metro and Urban branches is Rs. 10,000 and in rural and semi-urban and for senior citizens is Rs. 5000. (iii) Interest rate differs from bank to bank depending upon the tenure of the deposits and as bank changes the rate. (iv) Additional interest of 0.50% is offered to senior citizens on deposits placed for a year and above. (i) This account offers stress-free transactions on the shares. (ii) An individual, Non-Resident Indian, foreign institutional investor, foreign national, corporate, trusts, clearing houses, financial institution, clearing member, mutual funds, banks and other depository account. (iii) For opening this account, an applicant requires to fill a form, submit his/her photo along with a photocopy of Voter ID/Passport /Aadhar Card/Driving Licence and a Demat account number will be provided to the applicant immediately after the completion of processing of the application. 2018-19

CHAPTER 5 EMERGING MODES OF BUSINESS LEARNING OBJECTIVES After studying this chapter, you should be able to: • state the meaning of e-business; • explain the process of online buying and selling as a part of e-business; • distinguish e-business from traditional business; • state benefits of switching over to electronic mode; • explain requirements for a firm’s initiation into e-business; • identify major security concerns of electronic mode of doing business; • discuss the need for business process outsourcing; and • appreciate the scope of business process outsourcing. 2018-19

EMERGING MODES OF BUSINESS 119 “Let us do some shopping,” Rita woke up Rekha, her friend from the home- village who had come to Delhi during the vacations. “At this hour well past midnight,” said Rekha rubbing her eyes, “Who would be sitting with his shop open for you?” “Oh! Perhaps I could not convey it properly. We are not going anywhere! I am talking about online shopping over the internet!” told Rita. “Oh yes! I have heard of online shopping, but have never done any,” Rekha said, “What would they be selling over the internet, how will they deliver, What about payment… and why is it that internet has not yet become as popular in the villages? As Rekha was grappling with these questions, Rita had already logged on to one of India’s largest online shopping mall. 5.1 INTRODUCTION responsible for these two new modes of business would be in order. The way business is done has undergone fundamental changes The newer modes of business are during the last decade or so. The not new business. These are rather manner of conducting business is simply the new ways of doing business referred to as the ‘mode of business,’ attributable to a number of factors. and, the prefix ‘emerging’ underlines You are aware that business as an the fact, that these changes are activity is aimed at creating utilities or happening here and now, and, that value in the form of goods and services these trends are likely to continue. which the household and industrial In fact, if one were to list the buyers purchase for meeting their three strongest trends that are needs and wants. In an effort to shaping business, these would be: improve the business processes — be (i) digitisation — the conversion of text, it purchase and production, sound, images, video, and other marketing, finance or human resources content into a series of ones and zeroes business managers and business that can be transmitted electronically, thinkers keep evolving newer and better (ii) outsourcing, and, (iii) inter- ways of doing things. Business firms nationalisation and globalisation. You have to strengthen their capabilities of will read about international business creating utilities and delivering value in Chapter 11. In this chapter, we will to successfully meet the competitive be familiarising you with the first two pressures and ever-growing demands developments, i.e., digitisation (a term of consumers for better quality, lower from electronics) of business — also prices, speedier deliveries and better referred to as electronic business customer care. Besides, the quest for (e-business), and Business Process benefitting from emerging technologies Outsourcing (BPO). Before we do so, a means that business as an activity brief discussion about the factors keeps evolving. 2018-19

120 BUSINESS STUDIES 5.2 e-BUSINESS transactions and functions conducted electronically, including the more If the term business is taken to mean popular gamut of transactions called a wide range of activities comprising ‘e-commerce.’ e-commerce covers a industry, trade and commerce; firm’s interactions with its customers e-business may be defined as the and suppliers over the internet. conduct of industry, trade and e-business includes not only commerce using the computer e-commerce, but also other networks. The network you are most electronically conducted business familiar with as a student or consumer functions such as production, is the internet. Whereas internet is a inventory management, product public thorough way, firms use more development, accounting and finance private, and, hence more secure and human resource management. networks for more effective and efficient e-business is, therefore, clearly much management of their internal functions. more than buying and selling over the e-business versus e-commerce: Internet, i.e., e-commerce. Though, many a times, the terms e-business and e-commerce are used 5.2.1 Scope of e-Business interchangeably, yet more precise definitions would distinguish between We have mentioned above that the the two. Just as the term ‘business’ is scope of e-business is quite vast. a broader term than ‘commerce’, Almost all types of business functions e-business is a more elaborate term such as production, finance, marketing and comprises various business and personnel administration as well Figure 5.1 Business to Business e-Commerce 2018-19

EMERGING MODES OF BUSINESS 121 as managerial activities like planning, of computers is used for placing orders, organising and controlling can be monitoring production and delivery of carried out over computer networks. components, and making payments. The other way of looking at the scope Likewise, a firm may strengthen and of e-business is to examine it in terms improve its distribution system by of people or parties involved in exercising a real time (as it happens) electronic transactions. Viewed from control over its stock-in-transit as well this perspective, a firm’s electronic as that with different middlemen in transactions and networks can be different locations. For example, each visualised as extending into three consignment of goods from a warehouse directions viz., (i) B2B which is a firm’s and the stock-at-hand can be monitored interactions with other businesses, and replenishments and reinforcements (ii) B2C i.e., a firm’s interactions with can be set in motion as and its customers and (iii) intra-B or a firm’s when needed. Or else, a customer’s internal processes. specifications may be routed through the dealers to the factory and fed A brief discussion of various into the manufacturing system for constituents of e-business and inter- customised production. Use of and intra-transactions among them is e-commerce expedites the movement of given as below: the information and documents; and of (i) B2B Commerce: Here, both the late, money transfers as well. parties involved in e-commerce transactions are business firms, and, Historically, the term e-commerce hence the name B2B, i.e., business-to- originally meant facilitation of B2B business (see Figure 5.1). Creation of transactions using Electronic Data utilities or delivering value requires a Interchange (EDI) technology to send business to interact with a number of and receive commercial documents like other business firms which may be purchase orders or invoices. suppliers or vendors of diverse inputs; or else they may be (ii) B2C Commerce: As the name a part of the channel through which implies, B2C (business-to-customers) a firm distributes its products to transactions have business firms at the consumers. For example, the one end and its customers on the other manufacture of an automobile requires end. Although, what comes to one’s assembly of a large number of mind instantaneously is online components which in turn are being shopping, it must be appreciated that manufactured elsewhere — within the ‘selling’ is the outcome of the marketing vicinity of the automobile factory or even process. And, marketing begins well overseas. To reduce dependence on a before a product is offered for sale and single supplier, the automobile factory continues even after the product has has to cultivate more than one vendor been sold. B2C commerce, therefore, for each of the components. A network entails a wide gamut of marketing 2018-19

122 BUSINESS STUDIES Benefits of e-Commerce 1. Business Organisation: (i) Expands the marketplace to national and international markets, (ii) Gradual decline in the cost of operations, (iii) Facilitates ‘pull’ supply chain management, (iv) Competitive advantage over competitors, (v) Proper time management and support business processes, and (vi) Small firms co-exist with big firms (win-win). 2. Benefits to Consumers and Society (i) Flexibility, (ii) Competitive price/discounts/waive offs, (iii) More options and choices and Customised products, (iv) Quick and Timely delivery (digitised products), (v) Employment potential, (vi) Facilitate e-Auctions and e-Tenders, (vii) Interaction with consumers, (viii) Wider outreach. activities such as identifying activities, features to be tailor-made to suit their promotion and sometimes even delivery requirements, but also the convenience of products (e.g., music or films) that of delivery and payment at their are carried out online. e-Commerce pleasure. With the onset of e-commerce, permits conduct of these activities at a all this has become a reality. much lower cost but high speed. For example, ATM speeds up withdrawal Further, B2C variant of e-commerce of money. enables a business to be in touch with its customers on round-the-clock Customers these days are basis. Companies can conduct online becoming very choosy and desire surveys to ascertain as to who is individual attention to be given to them. buying what and what the customer Not only do they require the product satisfaction level is. ATM speeds up Withdrawal of Money e-Commerce greatly facilitates and speeds up the entire B2C process. Withdrawal of one’s own money from banks was, for example, a tedious process in the past. One had to go through a series of procedural formalities before he or she was able to get the payment. After the introduction of ATMs, all that is fast becoming a history now. The first thing that occurs is that the customer is able to withdraw his money, and the rest of the back-end processes take place later. 2018-19

EMERGING MODES OF BUSINESS 123 By now, you might have formed the requirements of the individual opinion that B2C is a one-way traffic, customer. In a similar vein, closer i.e., from business-to-customers. But computer-based interactions among do remember that its corollary, C2B the other departments makes it commerce is very much a reality which possible for the firm to reap provides the consumers with the advantages of efficient inventory freedom of shopping-at-will. Customers and cash management, greater can also make use of call centres set utilisation of plant and machinery, up by companies to make toll free calls effective handling of customers’ to make queries and lodge complaints orders, and effective human resource round the clock at no extra cost to management. them. The beauty of the process is that one need not set up these call centres Just as intercom facilitated voice or help lines; they may be outsourced. communication within the office, We shall discuss this aspect later in the intranet facilitates multimedia and even section devoted to Business Process 3-D graphic communication among Outsourcing (BPO). organisational units for well- (iii) Intra-B Commerce: Here, parties informed decisions, permitting better involved in the electronic transactions coordination, faster decisions and are from within a given business firm, speedier workflows. Take for example, hence, the name intra-B commerce. As a firm’s interactions with its employees, noted earlier too, one critical difference sometimes referred to as B2E between e-commerce and e-business commerce. Companies are resorting to is that, e-commerce comprises a personnel recruitment, interviewing business firm’s interaction with its and selection, training, development suppliers, and distributors/other and education via e-commerce business firms (hence, the name B2B) (captured in a catch-all phrase and customers (B2C) over the internet. ‘e-learning’). Employees can use While e-business is a much wider term electronic catalogues and ordering and also includes the use of intranet forms and access inventory information for managing interactions and for better interaction with the dealings among various departments customers. They can send field reports and persons within a firm. It is largely via e-mail and the management can due to use of intra-B commerce that have them on real time basis. In fact, today it has become possible for Virtual Private Network (VPN) the firms to go in for flexible technology would mean that employees manufacturing. Use of computer do not have to come to office. Instead, networks makes it possible for the in a way the office goes to them and marketing department to interact they can work from wherever they are, constantly with the production and at their own speed and time department and get the customised convenience. Meetings can be held products made as per the online via tele/ video conferencing. 2018-19

124 BUSINESS STUDIES (iv) C2C Commerce: Here, the buyer can instead send the money to business originates from the consumer Pay Pal. From there, PayPal notifies the and the ultimate destination is also seller that they will hold the money for consumers, thus the name C2C them until the goods have been shipped commerce (see Figure 5.2). This type and accepted by the buyer. of commerce is best suited for dealing in goods for which there is no An important C2C area of established market mechanism, for interactive commerce can be the example, selling used books or clothes formation of consumers’ forum and either on cash or barter basis. The vast pressure groups. You might have heard space of the internet allows persons to of Yahoo groups. Like a vehicle owner globally search for potential buyers. in a traffic jam can alert others via Additionally, e-commerce technology message on radio (you must have provides market system security to heard traffic alerts on FM) about the such transactions which otherwise traffic situation of the area he is stuck would have been missing if in; an aggrieved customer can share his the buyers and sellers were to experience with a product/service/ interact in anonymity of one-to-one vendor and warn others by writing just transactions? An excellent example of a message and making it known to the this is found at eBay where consumers entire group. And, it is quite possible sell their goods and services to other that the group pressure might result consumers. To make this activity in a solution of this problem. more secure and robust, several technologies have emerged. Firstly, From the foregoing discussion eBay allows all the sellers and buyers concerning scope of e-business, it is to rate one another. In this manner, clear that e-business applications are future prospective purchasers may see varied and many. that a particular seller has sold to more than 2,000 customers — all of whom e-Business versus Traditional rate the seller as excellent. In another Business example, a prospective purchaser may see a seller who has previously sold By now, you must have formed an idea only four times and all four rate the as to how e-enabling has radically seller poorly. This type of information transformed the mode of doing is helpful. Another technology that has business. Table 5.1 (page 129) provides emerged to support C2C activities is a feature on comparison between that of the payment intermediary. traditional business and e-business. PayPal is a good example of this kind. Instead of purchasing items directly A comparative assessment of the from an unknown, untrusted seller; the features of traditional and e-business as listed in Table 5.1 points towards the distinct benefits and limitations of e-business that we shall discuss in the following paragraphs. 2018-19

EMERGING MODES OF BUSINESS 125 e-commerce makes flexible Manufacturing and Mass Customisation possible Customised products have traditionally been made to order by craftsmen and have, therefore, been expensive and delivery times have been long. Industrial revolution meant that organisations could engage in mass production and could sell homogeneous products rolled out of the factory at a lower cost due to the economies of scale. Thanks to e-commerce, now organisations can offer customised products/ services at lower costs, that previously were only associated with mass produced commodity items. Here are a few examples: 401(k) Forum (US) Customises educational content and investment advice based on individual interviews. Acumin Corp. (US) Customises vitamin pills specified by using the Internet. Customers fill in lifestyle and health questionnaire. Dell (US) Build your own PC. Green Mountain Electricity supplier (but not generator). Customers could select Energy Resources sources for their electricity, e.g., hydro, solar, etc. (US) Levi Jeans Tailored jeans service. Web service suspended after complaints (Original Spin) by retailers but service now offered through retailers. Offers (US) 49,500 different sizes and 30 styles for a total of nearly 1.5 million options for a cost of just $55. Orders are sent by net and jeans are produced and shipped in 2-3 weeks. N.V. Nutsbedrijf Westland supplies natural gas to many tulip growers in the Westland Netherlands. Computers in the greenhouse help greenhouse (Newzealand) owners maintain temperature, CO2 output, humidity, light and other factors in the most cost-efficient manner. National Bicycle Custom built bicycles within 2/3 days of taking the order. (Japan) Simon and Teachers can order customised books specifically matched to Schuster (US) individual course and student needs. Xerox DocuTech printers are generating in excess of 125,000 customised books a month. Skyway (US) Skyway is a logistics company offering whole order delivery. Shipments from multiple origins with different modes of transport can be merged in transit and delivered as a single order with one set of paperwork to the store or consumer. SmithKline Creates customised stop smoking programme for customers. Beecham (US) Uses call centre questionnaire to generate a series of personalised communications. Source: Adapted from http://www.managingchange.com 2018-19

126 BUSINESS STUDIES Place advertisement Want to sell products Receives products Want to buy products Customer Receives money Customer Figure 5.2 Consumer to Consumer e-Commerce (C2C) 5.3 BENEFITS OF e-BUSINESS is routed to the restaurant located closest to his location. The food is (i) Ease of formation and lower delivered and the payment collected by investment requirements: Unlike a the restaurant staff and the amount due host of procedural requirements for to you as a client solicitor is credited to setting up an industry, e-business is your account through an electronic relatively easy to start. The benefits of clearing system. internet technology accrue to big or small business alike. In fact, internet (ii) Convenience: Internet offers the is responsible for the popularity of the phrase: ‘networked individuals and convenience of ‘24 hours × 7 days a firms are more efficient than week × 365 days’ a year business that networthed individuals.’ This means that even if you do not have much of allowed Rita and Rekha to go for the investment (networth) but have shopping well after midnight. Such contacts (network), you can do flexibility is available even to the fabulous business. organisational personnel whereby they can do work from wherever they are, Imagine a restaurant that does not and whenever they may want to do it. have any requirement of a physical Yes, e-business is truly a business space. Yes, you may have an online as enabled and enhanced by ‘menu’ representing the best of cuisines electronics and offers the advantage from the best of restaurants the world- of accessing anything, anywhere, over that you have networked with. The anytime. customer visits your website, decides (iii) Speed: As already noted, much of the menu, places the order that in turn the buying or selling involves exchange of information that internet allows at 2018-19

EMERGING MODES OF BUSINESS 127 Box A Some e-Business Applications e-Procurement: It involves internet-based sales transactions between business firms, including both, “reverse auctions” that facilitate online trade between a single business purchaser and many sellers, and, digital marketplaces that facilitate online trading between multiple buyers and sellers. e-Bidding/e-Auction: Most shopping sites have ‘Quote your price’ whereby you can bid for the goods and services (such as airline tickets!). It also includes e-tendering whereby one may submit tender quotations online. e-Communication/e-Promotion: Right from e-mail, it includes publication of online catalogues displaying images of goods, advertisement through banners, pop-ups, opinion poles and customer surveys, etc. Meetings and conferences may be held by the means of video conferencing. e-Delivery: It includes electronic delivery of computer software, photographs, videos, books (e-books) and journals (e-journals) and other multimedia content to the user’s computer. It also includes rendering of legal, accounting, medical, and other consulting services electronically. In fact, internet provides the firms with the opportunities for outsourcing of a host of Information Technology Enabled Services (ITES) that we will be discussing under business process outsourcing. Now, you can even print the airlines and railway tickets at home! e-Trading: It involves securities trading, that is online buying and selling of shares and other financial instruments. For example, sharekhan.com is India’s largest online trading firm. the click of a mouse. This benefit hand, it allows the seller an access to becomes all the more attractive in the the global market; on the other hand, case of information-intensive products it affords to the buyer a freedom to such as softwares, movies, music, choose products from almost any part e-books and journals that can even be of the world. It would not be an delivered online. Cycle time, i.e., the exaggeration to say that in the absence time taken to complete a cycle from the of internet, globalisation would have origin of demand to its fulfilment, been considerably restricted in scope is substantially reduced due to and speed. transformation of the business (v) Movement towards a paperless processes from being sequential to society: Use of internet has becoming parallel or simultaneous. considerably reduced dependence on You know that in the digital era, money paperwork and the attendant ‘red tape.’ is defined as electronic pulses at You know that Maruti Udyog does bulk the speed of light, thanks to the of its sourcing of supplies of materials electronic funds transfer technology of and components in a paper less fashion. e-commerce. Even the government departments and (iv) Global reach/access: Internet is regulatory authorities are increasingly truly without boundaries. On the one moving in this direction whereby they 2018-19

128 BUSINESS STUDIES allow electronic filing of returns and the division of society on the basis of reports. In fact, e-commerce tools are familiarity and non-familiarity with effecting the administrative reforms digital technology. aimed at speeding up the process of granting permissions, approvals and (iv) Increased risk due to anonymity licences. In this respect, the provisions and non-traceability of parties: of Information Technology Act 2000 Internet transactions occur between are quite noteworthy. cyber personalities. As such, it becomes difficult to establish the identity of the 5.4 LIMITATIONS OF e-BUSINESS parties. Moreover, one does not know even the location from where the parties e-business is not all that rosy. Doing may be operating. It is riskier, therefore, business in the electronic mode suffers transacting through internet. from certain limitations. It is advisable e-business is riskier also in the sense to be aware of these limitations as well. that there are additional hazards of (i) Low personal touch: High-tech it impersonation (someone else may may be, e-business, however, lacks transact in your name) and leakage of warmth of interpersonal interactions. To confidential information such as credit this extent, it is relatively less suitable card details. Then, there also are mode of business in respect of product problems of ‘virus,’ and ‘hacking,’ that categories requiring high personal you must have heard of. If not, we will touch such as garments, toiletries, etc. be dealing with security and safety (ii) Incongruence between order concerns of online business. taking/giving and order fulfilment (v) People resistance: The process of speed: Information can flow at the click adjustment to new technology and new of a mouse, but the physical delivery of way of doing things causes stress and the product takes time. This a sense of insecurity. As a result, incongruence may play on the patience people may resist an organisation’s of the customers. At times, due to plans of entry into e-business. technical reasons, web sites take (vi) Ethical fallouts: “So, you are unusually long time to open. This may planning to quit, you may as well quit further frustrate the user. right now”, said the HR manager (iii) Need for technology capability showing her a copy of the e-mail that and competence of parties to she had written to her friend. Sabeena e-business: Apart from the traditional was both shocked and stunned as to 3R’s (Reading, WRiting, and how her boss got through to her e-mail ARithmetic), e-business requires a account. Nowadays, companies use an fairly high degree of familiarity of the ‘electronic eye’ to keep track of the parties with the world of computers. computer files you use, your e-mail And, this requirement is responsible for account, the websites you visit etc. what is known as digital divide, that is Is it ethical? 2018-19

EMERGING MODES OF BUSINESS 129 Table 5.1 Difference between Traditional and e-Business Basis of distinction Traditional business e-business Ease of formation Difficult Simple Physical presence Required Not required Locational requirements Proximity to the source of raw None materials or the market for the products Cost of setting up High Low as no requirement of physical facilities Operating cost High due to fixed charges Low as a result of reliance associated with investment in on network of procurement and storage, relationships rather than production, marketing and ownership of resources distribution facilities Nature of contact with the suppliers and the Indirect through intermediaries Direct customers Nature of internal Hierarchical - from top level Non-hierarchical, communication management to middle level allowing direct vertical, management to lower level horizontal and diagonal management to operatives communication Response time for meeting Long Instantaneous customers'/internal requirements Shape of the organisational Vertical/tall, due to hierarchy or Horizontal/flat due to directness of command structure chain of command and communication. Business processes and Sequential precedence- Simultaneous length of the cycle succession relationship, i.e., (concurrence) different purchase - production/operation processes. Business - marketing - sales. The, process cycle is, business process cycle is, therefore, shorter therefore, longer Opportunity for inter- Much more Less personal touch Opportunity for physical Much more Less. However, for pre-sampling of the digitable products such products an opportunity is tremendous. You can pre- sample music, books, journals, software, videos, etc. Ease of going global Less Much, as cyber space is truly without boundaries 2018-19

130 BUSINESS STUDIES Government patronage Shrinking Much, as IT sector is among the topmost Nature of human capital Semi-skilled and even Transaction risk unskilled manpower needed. priorities of the government Low due to arm's length transactions and face-to-face Technically and professionally qualified contact. personnel needed High due to the distance and anonymity of the parties Despite limitations, e-commerce 5.5 ONLINE TRANSACTIONS is the way Operationally, one may visualise three It may be pointed out that most of the stages involved in online transactions. limitations of e-business discussed Firstly, the pre-purchase/sale stage above are in the process of being including advertising and information- overcome. Websites are becoming seeking; secondly, the purchase/sale more and more interactive to overcome stage comprised of steps such as price the problem of ‘low touch.’ negotiation, closing of purchase/sales Communication technology is deal and payment; and thirdly, the continually evolving to increase the delivery stage (see Figure 5.2). It may speed and quality of communication be observed from Figure 5.2 that, except through internet. Efforts are on to the stage relating to delivery, all other overcome the digital divide, for stages involve flow of information. The example, by resorting to such information is exchanged in the strategies as setting up of community traditional business mode too, but at telecentres in villages and rural areas severe time and cost constraints. In face- in India with the involvement of to-face interaction in traditional government agencies, NGOs and business mode, for example, one needs international institutions. In order to to travel to be able to talk to the other diffuse e-commerce in all nooks and party, requiring travel effort, greater time corners, India has undertaken about and costs. Exchange of information 150 such projects. through the telephone is also cumbersome. It requires simultaneous In view of the above discussion, it presence of both the parties for verbal is clear that e-business is here to stay exchange of information. Information and is poised to reshape the can be transmitted by post too, but this businesses, governance and the again is quite a time consuming and economies. It is, therefore, appropriate expensive process. Internet comes in as that we familiarise ourselves with how the fourth channel which is free from e-business is conducted. 2018-19

EMERGING MODES OF BUSINESS 131 Information Technology Act 2000 paves way for Paperless Society Below are given some of the provisions of Information Technology Act 2000 that have made it possible to have paper less dealings in the business world as well as in the government domain. Legal recognition of electronic records (Section 4): Where any law provides that information or any other matter shall be in writing or in the typewritten or printed form, then, notwithstanding anything contained in such law, such requirement shall be deemed to have been satisfied if such information or matter is rendered or made available in an electronic form; and accessible so as to be usable for a subsequent reference. Legal recognition of digital signatures (Section 5): Where any law provides that information or any other matter shall be authenticated by affixing the signature or any document shall be signed or bear the signature of any person, hence notwithstanding anything contained in such law, such requirement shall be deemed to have been satisfied, if such information or matter is authenticated by means of digital signature affixed in such a manner as may be prescribed by the Central Government. Use of electronic records and digital signatures in Government and its agencies (Section 6-1): Where any law provides for the filing of any form, application or any other document with any office, authority, body or agency owned or controlled by the appropriate Government in a particular manner; the issue or grant of any licence, permit, sanction or approval by whatever name called in a particular manner; the receipt or payment of money in a particular manner, then, notwithstanding anything contained in any other law for the time being in force, such requirement shall be deemed to have been satisfied if such filing, issue, grant, receipt or payment, as the case may be, is effected by means of such electronic form as may be prescribed by the appropriate Government. Retention of electronic records (Section 7-1): Where any law provides that documents, records or information shall be retained for any specific period, then, that requirement shall be deemed to have been satisfied if such documents, records or information are retained in the electronic form. Source: Information Technology Act, 2000 most of the problems referred to above. discussing the seller’s perspective in the In the case of information-intensive paragraphs on resource requirements products and services such as software for e-business. So, are you ready with and music, even delivery can take the shopping list or would you like to place online. rely on your instincts as you take a tour of the shopping mall? Let What is described here is the us follow Rita and Rekha browsing process of online trading from a indiatimes.com. customer’s standpoint. We will be 2018-19

132 BUSINESS STUDIES (i) Registration: Before online Payment Services (IMPS), NEFT shopping, one has to register with the and RTGS. In this case, therefore, online vendor by filling-up a the buyer may transfer the amount registration form. Registration means for the agreed price of the transaction that you have an ‘account’ with the to the account of the online vendor online vendor. Among various details who may, then, proceed to arrange that need to be filled in is a ‘password’ for the delivery of goods. as the sections relating to your • Credit or Debit Cards: Popularly ‘account’, and ‘shopping cart’ are referred to as ‘plastic money,’ these password protected. Otherwise, anyone cards are the most widely used can login using your name and shop in medium for online transactions. In your name. This can put you in trouble. fact, about 95 per cent of online (ii) Placing an order: You can pick consumer transactions are and drop the items in the shopping cart. executed with a credit card. Credit Shopping cart is an online record of card allows its holder to make what you have picked up while purchase on credit. The amount browsing the online store. Just as in a due from the card holder to the physical store you can put in and take online seller is assumed by the card items out of your cart, likewise, you can issuing bank, who later transfers do so even while shopping online. After the amount involved in the being sure of what you want to buy, transaction to the credit of the seller. you can ‘checkout’ and choose your Buyer’s account is debited, who payment options. often enjoys the freedom to deposit (iii) Payment mechanism: Payment the amount in instalments and at for the purchases through online his convenience. Debit card allows shopping may be done in a number of its holder to make purchases ways: through it to the extent of the amount lying in the corresponding • Cash-on Delivery (CoD): As is account. The moment any clear from the name, payment for transaction is made, the amount the goods ordered online may be due as payment is deducted made in cash at the time of electronically from the card. physical delivery of goods. To accept credit card as an online • Cheque: Alternatively, the online payment type, the seller first needs vendor may arrange for the pickup a secure means of collecting credit of the cheque from the customer’s card information from its customer. end. Upon realisation, the delivery Payments through credit cards can of goods may be made. be processed either manually, or through an online authorisation • Net-banking Transfer: Modern system, such as SSL Certificate (see banks provide to their customers the box on, History of e-commerce). facility of electronic transfer of funds over the Internet using Immediate 2018-19

EMERGING MODES OF BUSINESS 133 • Digital Cash: This is a form of exchange, are prone to a number of electronic currency that exists only risks. Risk refers to the probability of in cyberspace. This type of any mishappening that can result currency has no real physical into financial, reputational or properties, but offers the ability to psychological losses to the parties use real currency in an electronic involved in a transaction. Because of format. First you need to pay to a greater probability of such risks in bank (vide cheque, draft, etc.) an the case of online transactions, amount equivalent to the digital security and safety issues becomes cash that you want to get issued the most crucial concern in in your favour. Then the bank e-business. One may broadly discuss dealing in e-cash will send you a these issues under three headings: special software (you can transaction risks, data storage download on your hard disk) that and transmission risks, and will allow you to draw digital cash threat to intellectual property and from your account with the bank. privacy risks. You may then use the digital funds (i) Transaction risks: Online to make purchases over the web. transactions are vulnerable to the following types of transaction risks: 5.6 SECURITY AND SAFETY OF e-TRANSACTIONS: e-BUSINESS RISKS • Seller denies that the customer ever placed the order or the customer Online transactions, unlike arm’s denies that he ever placed the length transactions in physical order. This may be referred to as ‘default on order taking/giving.’ 2018-19

134 BUSINESS STUDIES • The intended delivery does not default on delivery and reimburse the take place, goods are delivered at payments made up to some extent. wrong address, or goods other than ordered may be delivered. As for the payments, we have This may be regarded as ‘default already seen that in almost 95 per cent on delivery’. of the cases people use credit cards for their online purchases. At the time of • Seller does not get the payment for confirming the order, the buyer is the goods supplied whereas the required to furnish the details such as customer claims that the payment the card number, card issuer and card was made. This may be referred validity online. These details may be to as ‘default on payment’. processed offline; and only after satisfying himself or herself about the Thus, in e-business risk may arise availability of the credit limits, etc., the for the seller or the buyer on account seller may go ahead with the delivery of default on order taking/giving, of goods. Alternatively, e-commerce delivery as well as payment. Such technology today permits even online situations can be averted by providing processing of the credit card for identity and location/address information. For protecting the credit verification at the time of registration, card details from being misused, and obtaining authorisation as to the shopping malls these days use the order confirmation and payment encryption technology such as realisation. For example, in order to Netscape’s Secure Sockets Layer (SSL). confirm that the customer has correctly You can gain some information about entered his details in the registration SSL from box on history of e-commerce. form, the seller may verify the same In the succeeding section, we will from the ‘cookies’. Cookies are very familiarise you with the encryption or similar to the caller ID in telephones cryptography — an important tool that provide telemarketers with such used for safeguarding against data relevant information as: the consumer’s transmission risks in online name, address and previous purchase transactions. payment record. As for customer’s protection from anonymous sellers, it (ii) Data storage and transmission is always advisable to shop from well- risks: Information is power indeed. But established shopping sites. While think for a moment if the power goes allowing advertisers to sell their into the wrong hands. Data stored in products online, these sites assure the systems and en-route is exposed customers of the sellers’ identities, to a number of risks. Vital information locations and service records. Sites such as eBay even provide for rating of may be stolen or modified to pursue the sellers. These sites provide protection to the customers against some selfish motives or simply for fun/ adventure. You must have heard of ‘virus’ and ‘hacking’. Do you know the 2018-19

EMERGING MODES OF BUSINESS 135 full form of the acronym ‘VIRUS?’ It 5.7 RESOURCES REQUIRED FOR means Vital Information Under Siege. SUCCESSFUL e-BUSINESS Actually, virus is a program (a series of IMPLEMENTATION commands) which replicates itself on the other computer systems. The effect of Setting up of any business requires computer viruses can range from mere money, men and machines (hardware). annoyance in terms of some on-screen For e-business, you require additional display (Level-1 virus), disruption of resources for developing, operating, functioning (Level-2 virus) damage to maintaining and enhancing a website target data files (Level-3 virus), to where ‘site’ means location and ‘web’ complete destruction of the system means world wide web (www). Simply (Level-4 virus). Installing and timely speaking, a website is a firm’s location updating anti-virus programmes and on the world wide web. Obviously, scanning the files and disks with them website is not a physical location. provides protection to your data files, Rather, it is an online embodiment of folders and systems from virus attacks. all the content that a firm may like to provide to others. Data may be intercepted in the course of transmission. For this, one 5.8 OUTSOURCING: CONCEPT may use cryptography. It refers to the art of protecting information by Outsourcing is yet another trend that transforming it (encrypting it) into an is radically reshaping business. It unreadable format called ‘cyphertext’. refers to a long-term contracting out Only those who possess a secret key can generally the non-core and of late even decipher (or decrypt) the message into some of the core activities to captive ‘plaintext’. This is similar to using ‘code or third party specialists with a words’ with some one so that others do view to benefitting from their not understand your conversation. experience, expertise, efficiency and, (iii) Risks of threat to intellectual even investment. property and privacy: Internet is an open space. Once the information is This simple definition leads one to available over the internet, it moves out the salient features of the concept that of the private domain. It then becomes are not peculiar to an industry/ difficult to protect it from being copied. business or country, but have become Data furnished in the course of online a global phenomenon. transactions may be supplied to others (i) Outsourcing involves contracting who may start dumping a host of out: Literally, outsourcing means to advertising and promotional literature source from outside what you have into your e-mail box. You are then at hitherto been doing in-house. For the receiving end, with little respite from example, most companies have so far receiving junk mails. appointed their own sanitation staff for maintaining neatness, cleanliness and overall housekeeping of their premises. 2018-19

136 BUSINESS STUDIES That is, sanitation and housekeeping (iii) Processes may be outsourced to functions were being performed in- a captive unit or a third party: Think house. But of late, many companies of a large multinational corporation have started outsourcing these that deals in diverse products and activities, i.e., they have entrusted markets them to a large number of outside agencies to perform these countries. A number of processes such activities for their organisations on a as recruitment, selection, training, contractual basis. record and payroll (Human Resources), management of accounts receivable (ii) Generally non-core business and accounts payable (accounting and activities are outsourced: Sanitation finance), customer support/grievance and housekeeping functions are non- handling /troubleshooting (marketing) core for most organisations. Of course, are common to all its subsidiaries for municipalities and sanitations operating in different countries. If these services providers, these activities processes could be centralised and comprise the core of their business parcelled out to a business unit created activity. Housekeeping is a core activity especially for this purpose, this would for a hotel. In other words, depending result in avoidance of duplication of upon what business a company is in, resources, realisation of efficiency and there will be some activities that are economy’s performance of same activity central and critical to its basic business on a large scale at one or a few select purpose. Other activities may be locations, thereby resulting in regarded as secondary or incidental to substantial reduction in costs. Clearly, fulfilling that basic purpose. The therefore, if the task of performing some purpose of a school, for example, is to activity internally is sufficiently large, develop a child by means of curricular it may be beneficial for the firm to have and co-curricular activities. Clearly, a captive service provider, i.e., a service these activities comprise the ‘core’ provider set up for providing services activities. Running a cafeteria/canteen of a given kind to only one firm. General or a book store is non-core activity for Electric (GE) is, for instance, the largest a school. captive BPO unit in India for providing certain kinds of services to the parent As the organisations venture to company in the United States as well experiment with outsourcing, they may as to its subsidiaries in other countries. initially outsource only the non- Or else, these processes may be core activities. But later on, as they parcelled out to third party service become comfortable with managing providers who operate independently interdependencies, they may start in the market and provide services to getting even the core activities other firms too. performed by the outsiders. For example, a school may tie-up with some Figure 5.4 provides a synoptical computer training institute to impart view of how a firm can outsource some computer education to its students. of its activities to the captive and third 2018-19

EMERGING MODES OF BUSINESS 137 Figure 5.4 Types of Outsourcing Service Providers party service providers. The hired party Little wonder that outsourcing is service providers are the persons/firms fast becoming an emerging mode of which specialise in some processes business. Firms have started such as Human Resource Management increasingly outsourcing one or more (HRM) and provide their services to a of their processes which can be more wide base of clients, cutting across efficiently and effectively carried out by industries. Such service providers are others. What qualifies outsourcing called ‘horizontals’ in the outsourcing as an emerging mode of business terminology. Else, they may specialise is its increasing acceptance as a in one or two industries and scale up fundamental business policy and to doing a number of processes from philosophy, as opposed to the earlier non-core to core. These are called philosophy of ‘doing it all by yourself ’. ‘verticals.’ As the service providers mature, they move simultaneously 5.8.1 Scope of Outsourcing horizontal and vertical. Outsourcing comprises four key The most important reason segments: contract manufacturing, underlying the use of outsourcing is contract research, contract sales and to benefit from the expertise and informatics (see Figure 5.5). experience of others. Institutions like schools, companies and hospitals can The term outsourcing has more outsource the cafeteria activity to the popularly come to be associated with catering and nutrition firms for whom IT -enabled services or Business these activities comprise the core or Process Outsourcing (BPO). In fact, heart of their operations. The idea of even more popular term is ‘call centres’ outsourcing is valuable as you tend to providing customer-oriented voice gain not only in terms of their expertise based services. About 70 per cent of and experience and the resultant the BPO industry’s revenue comes efficiency, but it also allows you to limit from call-centers, 20 per cent from your investment and focus attention to high-volume, low-value data work and what your core processes are. the remaining 10 per cent from higher- value information work. ‘Customer Care’ 2018-19