Enterprise or organisation is a business unit which undertakes production by bringing together the other three factors of production viz. land, labour and capital. The person who runs the organisation is the organiser or the entrepreneur. The organisation is the pioneer, the controller and the risk bearer of an enterprise. The organiser controlling the enterprise, makes all economic decisions pertaining to it. He buys the different factors, assigns tasks to each of them, co-ordinates them and supervises them. An organiser may be a single person or a group of persons.
Labour and Organisation
The classical economists gave no separate status to organisation as it is but a specialised form of labour. Modern economists, however, have pointed out the distinct features of the organiser and hence treat him as a separate and the most important factor of production in the context of modern economy. This is because; organiser though a specialised form of labour has to perform several functions not performed by labour. These functions are :
1. The organiser performs the important task of co-ordinating the other factors of production whereas labour only helps him in physical and mental work.
2. The organiser bears the cost of production as he is the one who pays the different factors. Labour in fact receives its share of payment from the organiser.
3. Organisers take the decisions regarding production, sales, etc. while labour only follows and works according to these decisions.
4. Organisers bear the risk of production and also assume all business responsibilities. Labour assumes no risks or responsibilities in production.
5. The wages of labour are contractually paid by the organiser, whereas the organiser’s reward is always uncertain. The organiser gets only residual payment which may sometimes be negative also. i.e. the organiser may have to bear a loss whereas labour always receives a positive payment.
6. The organiser directs while the labour is directed.
Functions of the organiser as a factor of production
Organising Functions -
1. The organiser initiates the new undertaking. For this he decides about what goods to produce, how to produce, how much to produce, after going into the profitability, availability of raw materials, etc. of the goods he wants to produce. He thus chalks out a plan or prepares a blue print of the business and gives it a practical shape.
2. He decides the size of the business and nature of output. He makes important decisions regarding the policies of the firm.
3. He then decides the location of his firm. He does this on the basis of availability of electricity, availability of raw materials, degree of development of transport and communications, availability of different facilities, etc. He chooses an ideal place.
4. He decides the technique of production to follow. This is usually dependant on the size of the market.
5. When to produce, the time for production is decided in such a way that the commodity is ready for being marketed at just the right time. The entry of rival producers into the market etc. is also considered while deciding the time of production.
6. He also co-ordinates the factors of production in such a manner that profits earned are maximum.
7. He supervises all stages in the process of production in order to see to it that the work is done as he wants.
8. He makes the decisions regarding the distinction of profit to the different factors of production i.e. the rewards to land, labour and capital.
Earlier, producers knew in advance how much demand their product would have as they produced on the basis of orders already received. But now producers cater to a very large market and hence do not know how much demand their product will have. They now produce in anticipation may be different from the actual demand for the product due to various factors affecting demand in the market. The organiser today therefore faces a lot of risk and uncertainty. He has to shoulder all these risks in business. Risks can be classified into two types :
i) Insurable risks: Risks of goods being stolen or lost by fire etc. can be covered to varying extents by insurance policies through insurance companies. The loss due to such risks, hence can be avoided.
ii) Non-insurable risks: The organiser has to bear the risk of his products losing demand in the market due to changes in fashions, new products, better substitutions, etc.
These risks cannot be covered by insurance policies and are hence called non-insurable risks. It is due to these risks that producers sometimes make heavy losses. These risks can be avoided by the use of the organiser’s foresight and judgement and wise organisers make big profits in spite of facing many uncertainties in business.
A true organiser is an innovator. He introduces the fruits of technical progress, the work of scientists and inventors of new products, new methods, etc. into his production. He does this to increase his profits and to keep up with the times.
He may undertake product innovation or production of a new product : market innovation i.e. add another place to his size of market or change his method of production for the better.
The organiser innovates and assumes further risks involved in new methods of production and new products. That is why he is regarded as the captain of industry.
In short, the organiser initiates, directs, organises, supervises, controlls business, undertakes risks, uncertainties and innovations and in general has a hand in everything going on in business.
Earlier the owner and the manager of an enterprise were the same person that is the capitalists himself organised the enterprise.But in a modern economy, where large scale production has become necessary for every enterprise to follow the distinction between the management and the ownership. Today the capitalists only provides the finance with the help of which the organiser performs all the functions to be performed in running an enterprise. It is hence the organisers role that assumes a more difficult and significant position in the modern economic system.
Profit is the reward earned by an organiser for his contribution to the process of production.
According to Tausig, Profit is a mixed and vexed income. Profits are earned from the contribution of different factors of production and hence payment for these factors go into making up profit. As it is still not clear as to which of the factor payments must be included in profit, Tausig calls profit a vexed income.
Marshall and such other classical economists have defined profit as Profit is the composite income of a composite factor and is residual.
The concept of profit entails several different meanings.
Profit may be the compensation received by a firm for its managerial function. It is called normal profit which is a minimum essential to induce the firm to remain in business.
Profit may be looked upon as reward for true organisational function. It is the reward earned by the organiser for bearing risks. It is termed as a supernormal profit as it is earned over and above the normal profit.
Profit may imply monopoly profits. It is earned by a firm through extertion, because of its monopoly power in the market. It is not related to any useful, specific function. Hence it is not a functional reward.
Profit may sometimes be in the nature of a windfall. It is an unexpected reward earned by a firm just by a mere change, an inflationary boom, etc.
Nature of Profits :
Profit is the return to the organisers ability. However a minimum amount essential to retain the organiser in his time of production, is turned as normal profit. This normal profit is treated as a part of the cost of production. Because without it, the cost of production for the next year cannot be borne. Hence normal profit is not true economic profit. Profit in the true economic sense i.e. pure profit is the total revenue left after all costs of explicit including normal profits are paid. Implicit costs like those costs incurred for the organisers efforts etc. must also be considered. Profit in the economic sense is thus looked upon as a surplus i.e. a surplus of a firm’s total receipt over its total cost.
Another important feature of profit is that, being a residual income, it may even be negative profit. Negative profit is called loss. It is only the organiser that has to suffer a negative reward.
Characteristics of profit
i) not a predetermined contractual payment ii) not a fixed remuneration iii) residual surplus iv) uncertain v) may be negative vi) widely fluctuating vii) depends on factors like skill efficiency, ability.
Changes in market demand, innovationsand other dynamic changes in the economy.
Gross Profit & Net Profit :
Gross profit is not profit in the real sense. It includes the following items.
i) Input costs like maintenance and depreciation charges.
ii) Implicity returns such as implicit rent, wages and interest for factor land, labour and capital owned and supplied by the organiser himself.
iii) Normal profit is also the implicit cost of organisation and input. It is the inputed minimum return for the organisers function.
iv) Non-organisational profit – It includes windfall and gain monopoly gains etc.which occur to the organiser not due to his organisational ability.
v) Net profit – It is the pure economic profit earned by the organiser for services and efficiency.
G. P. = N. P. + (i + ii + iii + iv) N. P. = G. P. – (i + ii + iii + iv)
Qualities of a good organisor