Professional Documents
Culture Documents
Learning outcomes
Understand the organizational purposes of businesses Understand the nature of the national environment in which businesses operate Understand the behaviour of organizations in their market environment Be able to assess the significance of the global factors that shape national business activities.
Categories of organization
Legal structure; Type eg: private company, public company, government, voluntary organisation, co-operative, charitable; sector (primary, secondary, tertiary)
The individual owner of an unincorporated business operates the business as an extension of himself. The profits and losses of the business are reported on the tax return of the owner there is no separate business filing. The owner is personally responsible for any liabilities of the business.
Cont.d
If someone sues the business for breach of contract, personal injury, or to collect a debt, the court can directly levy the personal bank account and other property of the owner. The major advantage of sole proprietorship is that it is the simplest and least expensive structure, as there is really nothing to set up and maintain.
Partnership
An association of two or more persons to carry on as co-owners a business or other undertaking for profit. A partnership is an entity distinct from its partners. More legal formality than with a sole proprietorship but less than with a corporation or limited liability company. Property acquired by a partnership is property of the partnership and not the partners individually.
Cont.d
Business is carried on by all or any of them acting for all. Types of partnership:
General Partnership Limited Partnership
General Partnership
Two or more people own the business jointly and share profits and losses of the business as spelled out in the partnership agreement. Each partner is potentially responsible for the full amount of all liabilities of the business, i.e., a creditor can collect the full amount of a debt of the partnership from the partner that is the easiest to collect from. Distribution of profits and losses is determined by the partnership agreement and passes through to the individual partners. It does not have to match the ownership percentages. The partnership itself is not subject to any income or franchise tax. Control of the business is determined by the partnership agreement, but unless stated otherwise, the partners control the business jointly, with each partner having an equal vote. An advantage of partnerships is that, like a sole proprietorship, no state filings are required to create the business entity, nor are there any ongoing reporting requirements.
Limited Partnership
The basic structure and tax implications are the same as for a general partnership, but the limited partnership allows for one or more limited partners, or "silent partners", to own a portion of the business, but not participate in the management of the business. The partnership must also have a general partner who has personal liability for all liabilities of the partnership. This structure allows a partnership to have outside investors without subjecting them to the liabilities of the business.
Corporation
A corporation is owned by one or more stockholders, managed by a board of directors elected by the stockholders, and run day-to-day by officers appointed by the board of directors. A single individual can be the sole stockholder, director and officer of the company. The stockholders, directors and officers of the company are protected from the liabilities of the company, including liabilities for their own negligence when acting in their corporate role, except in certain extraordinary circumstances.
Cont.d
In an ordinary corporation (a "C Corporation") the profits and losses of the corporation are not passed through to the tax returns of the owners. The corporation files its own tax return and pays its own taxes. It may also be subject to state franchise taxes or other annual fees. As for individuals, corporate income tax rates are graduated based upon the taxable income, though the rates and levels of the brackets are different than for individuals. Whether incorporating will cost you more or less in taxes than another structure varies from situation to situation, so consult with a tax professional if you are considering incorporating.
S Corporation
After the corporation has been formed, the stockholders may elect "S Corporation" status by making a filing with the IRS. An S Corporation is taxed like a partnership and the profits and losses of S Corporations flow through to the federal tax returns of the owners in proportion to their stock ownership. They are protected from the liabilities of the business as in a C Corporation. The S-corporation structure is generally preferred over a standard corporation when most of the shareholders are employed by the corporation or otherwise involved in its day-to-day activities, and the corporation distributes most of its income to its shareholders each year. In other words, for small businesses.
Activity
Mr. Tim Freddy wants to start a business. Provide suitable advice in the following situations about the form of business organization. (Specify the particular form of business) a) He wants to minimize the risk to maximum possible unit. b) He can contribute only a small amount of capital, but plans to start a big business. c) He wants the whole amount of profit.
CASE STUDY
The Hair Fashion chain was originally a simple local family business. Now it has almost 500 salons spread across the globe, many of which are on a franchise basis. In addition to this, the chain sells a range of hair care and styling Products worth hundreds of millions of pounds each year. The latest part of the strategy has been the setting up of a website to market these products.
The business started with the father, Luigi, who emigrated from Italy to England in the 1960s. He taught his two sons the hairdressing trade. They set up their own salon in London, and created the worlds best-known brand in hairdressing. The daughter, Maria, set up a Hair Fashion salon in the United States in the 1990s. The chain is now owned by the brothers and their sister.
1. At what point did Hair Fashion become an international business? 2. What benefits do you think that businesses like Hair Fashion gain from becoming national rather than local businesses? 3. What difficulties might arise from becoming an international business? 4. How might the website help the business to succeed globally?
Many people believe that businesses are run better when they are privately owned. Private owners risk their own money, so are determined for their business to succeed. However, they may take too many risks or be too greedy, as with the financial crisis in 200809 when many banks got into difficulty because they had lent too much in order to try to make higher profits. In the UK there are very few public businesses left. Most businesses have been privatised.
Government
There are government departments and government agencies. A government department like the Department for Customs and Revenue operates on behalf of the government and is staffed by civil servants, known as customs and revenue officers. Their job is to collect income and other taxes on behalf of the government, to collect repayments on student loans, and to make payments known as tax credits.
Government agencies are more independent than government departments. These are bodies that have been set up by the government to take responsibility for a particular activity. Although it is funded by government and accountable to government it has considerable freedom to manage its own affairs. These bodies are set up with tight guidelines but in the interest of fairness they need to be seen to operate in an independent way.
Local government is an important branch of government activity. Local councils are responsible for supervising and, in a small number of cases, owning local services. Local councils cover specific areas of the country. In their specific area, the local authority will give contracts to private companies to run certain services such as managing refuse collection. It is the job of the council to oversee the efficient running of these services. Local councils also own and supervise the collection of rents and repairs to social housing. They manage local parks, leisure centres and swimming pools, street lighting and other essential activities.
Worker Co-operative
A worker co-operative is a body that is owned by its members the people that work for it. A worker cooperative has limited liability. To become a member of a worker co-operative an employee would have to buy a share in the organisation. Each member has one vote in making decisions. This type of business is democratic and prevents one or a few individuals gaining control. Members receive a share of the profits of the business in the form of a dividend. When they leave the co-operative they can take their funds back. The basic principle behind a worker co-operative is that those who do the work should get the rewards. They tend to be small-scale local enterprises.
Charitable trusts
A charity is an organisation that is set up to raise funds and support other people or a good cause. The business objective of charities is to create a surplus to use for helping others. A surplus occurs when the revenue (money coming into the charity) is greater than the costs of running the charity. The management of charity work is overseen by a group of trustees, who are volunteers with a reputation as responsible citizens. Many will have a range of experience in both charity and business activities. Charities have to register as such and must produce annual accounts that are available to be viewed.
Not-for-profit/voluntary businesses
Not all businesses are set up to make a profit. Many organisations are set up for quite different purposes. The organisation runs on business lines (for example, seeking to use the money it receives in donations as efficiently as possible) and has many paid workers, but it does not seek to make a profit, just to cover the cost of running. A voluntary organisation is also a not-for-profit organisation. It is set up, organised, staffed and run by people who are working purely on a voluntary basis, usually for a good cause.
CASE STUDY
Voluntary Service Overseas (VSO) is an example of a not-for-profit global organisation. It is UKbased and seeks to match volunteers with projects in areas of the world that need help. For example, a volunteer might teach English to children in an African country, or teach them how to use computers. Many volunteers are young people, but volunteers include older people with specialist skills who can make a real difference to the lives of people in need.
1. Why do you think that voluntary organisations work on a not-for-profit basis? 2. To what extent would you say that it is important for voluntary organisations to be businesslike? 3. What sorts of people are most likely to work for voluntary organisations and why? 4. Visit the VSO website at www.vso.org.uk and set out four examples of ways in which VSO can be said to operate in a businesslike way.
The primary sector stage is concerned with extracting the primary products of nature. Oranges are grown on trees by orange farmers. Oranges typically grow in a Mediterraneantype climate in countries like Spain, Morocco or Israel. When the oranges are ripe they are transported to market.
The second stage of producing a fresh orange drink is to remove the skin and pips, and to squeeze the oranges. Bottling, packing and labeling the finished fresh orange drinks is part of this process in the secondary sector.
Bringing the finished product to your local supermarket involves the tertiary sector. Tertiary activities involve providing services both to businesses and to consumers. Examples of services involved in providing fresh orange drinks include:
transporting the oranges and the finished drinks selling the fresh orange juice in a shop or supermarket advertising the fresh orange juice providing insurance services to the transport, manufacturing and retailing companies.
Activity
Classify the following lists into primary, secondary and tertiary sector businesses:
a mining company an advertising agency a newspaper delivery business a forestry business an oyster-gathering business a furniture manufacturer a building company Poultry farming Fishing
Purposes
Mission; vision; aims; objectives; goals; values; profits; market share; growth; return on capital employed (ROCE); sales; service level; customer satisfaction; corporate responsibility; ethical issues
Many large organizations have a mission statement that briefly identifies the main purpose of the business and how it sees itself. Some businesses have a vision statement. Others have both a mission statement and a vision statement.
Many mission statements are quite short. Others are longer. They include the aims and objectives of the business, in other words, what the business is going to do and how it is going to achieve the mission.
It includes information about the aims of the business over the long and medium term.
Aims of Organizations
Organizations need to have aims and objectives to be able to focus on the clear direction needed for success in the modern business world. The aim is the overarching goal for the organization, which can then be broken down into a subset of objectives to achieve the aim.
Business organizations aims usually relate to profit, market share, return on capital employed, sales, growth, levels of service and customer and/or user perceptions. Establishing objectives may be done in a number of ways, such as by looking at what is normal in the industry, or previous years figures.
Return on capital employed is a popular one, is growth in earnings per share. Clearly, shareholders are major stakeholders in the organization and this an objective they can relate to. Of course, a danger of focusing on earnings per share is that the company may begin to borrow more money in order to maintain the level of earnings per share.
Once the organization has established corporate objectives in financial terms, then these objectives need to be segmented into divisional objectives and profit-centre objectives. The expected rate of return from each division may well depend on the amount of risk taken and on market conditions.
Management by objectives
The concept of management by objectives (MbO) in which managers set specific objectives for each area of business performance including the work and progress of subordinates, and set attainable targets at each level of the organizations agreed by consultation. These objectives need to be co-ordinated with the strategic objectives of the whole organization.
NO
Profit as an aim
Business organizations need to make profits if they are to move forward and grow. A company has responsibilities that extend well beyond its purely commercial ambitions. However, it should organise itself in such a way that it can meet all its responsibilities and still make a profit.
In a free competitive market, and in all but the shortest term, profit is the measure of how good a business is, how well-run and how effectively it meets its responsibilities to all its stakeholders. Note that there is a key difference between profit maximisation and making a profit.
Profit maximisation is concerned with making as much profit as you can over a period. Profit maximisation occurs when there is the maximum difference between the total revenue coming into a business and the total cost being paid out. If we measured profit simply in money terms, then it would seem logical to assume that in the long term the rational business will seek to maximise the difference between its total revenue and its total cost.
Organizations not only need to clarify their aims, they also need to develop a clear picture of how best to achieve those aims. Profitability is the chief spur to business activity.
Relative market share = Market share of the company Market share of the nearest competitor
If a company dominated the market it can produce on a larger scale than its rivals. It can therefore spread its costs over a larger output, and can then produce more cheaply than rivals. Profits can then be ploughed back into research, advertising and further expansion to maintain market leadership.
Unit Cost
B A
Output
Case Study
Taking advantage of market leadership In a recent statement to shareholders, the chairperson of a company producing the leading name in branded nappies made the following points. Over the last few years we have sought to drive our advantage home. Our product is recognized as being the most reliable, convenient and useful on the market. We currently have three times the sales of our nearest rival producer, and this has enabled us to pass the advantage of scale production on to customers.
? ? ? ?
We firmly believe that the road to success is to gain the lions share of the market and then watch the profits flow in. We will continue to find out what our consumers require in an ever changing marketplace in order to better meet their needs. How will the company benefit from making three times as many sales as the nearest rival? How will consumers benefit? Explain how gaining the lions share of the market will lead to a flow of profits. How can competitive advantage today lead to further competitive advantage tomorrow?
Growth as an aim
A firm that grows quickly may find it easier to attract investors and thus be able to produce on a larger scale. However, one of the biggest mistakes that business people make in the early days is that of overtrading. If that happens, there can be problems: not enough cash to pay bills in the short term, managing a large staff, and so on.
It is surprising how many people fall into this trap. Often someone will set up a new business and because of its early success, decide to expand, only to find it difficult to manage a larger business, or to bring in the extra customers that are needed. A fairly common pattern is for an entrepreneur to start with one business interest, expand to two or three interests, and then end up with no viable business interest.
Businesses that aim for growth are ones with a higher propensity to accept risks. Such organisations may be more willing to borrow, and to consider joining or taking over other existing concerns. An organisation with a growth focus will need fairly dynamic structures because people in the organisation have to learn to live with regular change.
One form of growth is to move into a no: of markets. This makes it possible to spread risks. If one market fails, another may support the loss. However, opening into new markets also exposes a business to fresh risks.
Stakeholders
Owners; customers; suppliers; employees; debtors; creditors; financial institutions (banks, mortgage lenders, credit factors); environmental groups; government agencies (central government, local authorities); trade unions Stakeholder interests; conflict of expectations; power influence matrix; satisfying stakeholder objectives
Stakeholders
People, groups or other organizations who have an interest, claim, or stake in an organization, in what it does, and in how well it performs. In general, stakeholders are motivated to participate in an organization if they receive inducements that exceed the value of the contributions they are required to make.
Inducements are rewards such as money, power, the support of beliefs or values, and organizational status. Contributions are the skills, knowledge, and expertise that organizations require of their members during task performance.
Shareholder
Governments
Trade unions
Stakeholder
Inducement to contribute
Customers
Employees Suppliers Government Trade unions Local and environmental communities Creditors Shareholders or owners
Revenue from purchase of Quality and price of goods and goods and services services
Skills and expertise High- quality inputs Rules governing good business practice Free and fair collective bargaining social and economic infrastructure Money Money or capital Wages, bonuses, stable employment and promotion Revenue from purchase of inputs Fair and free competition Equitable share of inducements Revenue, taxes, employment, quality of life, and concern for the environment Interests, prinicpal Dividends and stock appreciation
Conflicts of expectations
Interpretations of who the organization should serve Internal politics Bad management Inevitable differences in objectives
PREDICTABILITY
High Low Low
Few problems
POWER
Responsibilities of organisations
Legal responsibilities eg consumer legislation, employee legislation, equal opportunities and anti-discriminatory legislation, environmental legislation, health and safety legislation; ethical issues eg environment, fair trade, global warming, charter compliance eg Banking Code
There are various remedies open to customers who feel that they have not been treated fairly, including claims for damages.
Expenses:
There is the duty to indemnify the employee if he or she has necessarily incurred expenses in the course of employment.
Contractual rights:
The employer has a duty to provide proper information to an employee about his or her rights under the contract.
The responsibilities imposed by the HASAWA are not just upon employers, it also imposed obligations on the employee with regard to responsibility for the health and safety.
All employees to take reasonable care for their own health and safety at work and that of others who may be affected by their acts or omissions.(Sec.7(a)) All employees to co-operate with their employer in the discharge of health and safety responsibilities.(Sec.7(b)) All employees not to interfere intentionally or recklessly with or misuse anything provided in the interest of health, safety and welfare.(Sec. 8)
The Health and Safety at Work Act 1974 is to look at what the risks are in their particular workplace and take sensible measures to tackle them, so far as is reasonably practicable, taking account of the degree of risk in a particular job or workplace. The key requirement of employers is to carry out a risk assessment in their workplace and record the significant findings of the risk assessment.
The Management of Health and Safety at Work regulations 1999 covers standards of care in a number of areas:
The maintenance of the workplace and of equipment, devices and systems Ventilation, temperature in indoor workplaces, and lighting Cleanliness and the handling of waste materials Room dimensions and space Floors and organization of traffic routes Windows and transparent doors, gates and walls Ability to clean windows safely Escalators and moving walkways Sanitary conveniences Drinking water Accommodation for clothing and facilities for changing clothes Facilities for rest and to eat meals
Responsibilities to environment
Much, but not all of the destruction has been caused by the activities of businesses around the world and it is the responsibility of governments, industry, businesses and consumers worldwide to help to reduce this tremendous pressure on the environment.
Pollution:
Industry creates pollution, by-products of industrial activity that dirty our environment. air pollution, water pollution, noise pollution
Waste:
Industry creates waste, much of which is distinctly undesirable. One form of waste that causes considerable public concern is nuclear waste. Other forms of undesirable waste are chemical byproducts, slag heaps, non bio-degradable plastics and waste paper.
Environmental Audit:
Environmental auditing is a management tool used to improve practices as well as ensuring that the companys and the governments policies on the environment are fulfilled. The audit should be carried out by personnel who are expert in the technologies used at the sites to be inspected, and they should have the enthusiastic backing of top management.
Charter Compliance
The Compliance Charter defines the fundamental principles, roles and responsibilities of the Compliance function within the organisation as well as its relationship with executive management, the Board of Directors and the business and operational functions. The Charter encompasses all current and future regulatory requirements in terms of Compliance, aiming at ensuring the compliance risk management via the formal implementation of a Compliance function within the organisation. Once approved, the Charter applies to all Board and staff members as well as to external service providers of the organisation and all its subsidiaries and branches. The Charter shall be updated from time to time to reflect legal and regulatory evolution and shall be communicated to all staff.
Banking Code
This is a voluntary code which sets standards of good banking practice for financial institutions to follow when they are dealing with personal customers in the United Kingdom. It provides valuable protection for you and explains how financial institutions are expected to deal with you day-to-day and in times of financial difficulty. As a voluntary code, it allows competition and market forces to work to encourage higher standards for the benefit of customers.