You are on page 1of 46

Business organisations

A business (also called a company, enterprise
or firm) is a legally recognized organization
designed to provide goods and/or services to
consumers.
Businesses are predominant in capitalist
economies, most being privately owned and
formed to earn profit that will increase the
wealth of its owners and grow the business
itself.
The owners and operators of a business
have as one of their main objectives the
receipt or generation of a financial return
in exchange for work and acceptance of
risk.
Notable exceptions include cooperative
enterprises and state-owned enterprises.
Businesses can also be formed not-for-profit
or be state-owned.
Basic forms of ownership
Although forms of business ownership vary
by jurisdiction, there are several common
forms:
Sole proprietorship
Partnership
Corporation
Cooperative
Sole proprietorship
A sole proprietorship also known as a sole trader, or
simply proprietorship is a type of business entity
which is owned and run by one individual and where
there is no legal distinction between the owner and the
business.
All profits and all losses accrue to the owner (subject to
taxation).
All assets of the business are owned by the proprietor
and all debts of the business are their debts and they
must pay them from their personal resources.
This means that the owner has unlimited
liability. It is a "sole" proprietorship in the
sense that the owner has no partners
(partnership).
A sole proprietor may do business with a
trade name other than his or her legal
name.
This also allows the proprietor to open a
business account with banking institutions.
Partnership
A partnership is a type of business entity in
which partners (owners) share with each other
the profits or losses of the business.
Partnerships are often favoured over corporations
for taxation purposes, as the partnership
structure does not generally incur a tax on
profits before it is distributed to the partners (i.e.
there is no dividend tax levied).

However, depending on the partnership
structure and the jurisdiction in which it
operates, owners of a partnership may be
exposed to greater personal liability than
they would as a shareholder of a
corporation.

Corporation
A corporation is a legal entity separate from the
shareholders and employees.
In British tradition it is the term designating a
body corporate, where it can be either a
corporation sole (an office held by an individual
natural person, which is a legal entity separate
from that person) or a corporation aggregate
(involving more persons).
In American and, increasingly, international
usage, the term denotes a body corporate
formed to conduct business.
Corporations exist as a product of corporate law,
and their rules balance the interests of the
management who operate the corporation;
creditors who loan it goods, services or money;
shareholders, typically in the secondary market,
who hold shares related to the original
investment of capital; the employees who
contribute their labour; and the clients they
serve.
People work together in corporations to produce
value and generate income.
In modern times, corporations have become
an increasingly dominant part of economic
life.
People rely on corporations for employment,
for their goods and services, for the value
of the pensions, for economic growth and
cultural development.

The six largest businesses of the world
in 2005 by revenue in millions of dollars
Cooperative
A cooperative often referred to as a co-op or
coop) is defined by the International Co-
operative Alliance’s Statement on the Co-
operative Identity as an autonomous
association of persons united voluntarily to
meet their common economic, social, and
cultural needs and aspirations through a jointly-
owned and democratically-controlled enterprise.
It is a business organization owned and operated
by a group of individuals for their mutual benefit.
A cooperative may also be defined as a business
owned and controlled equally by the people who
use its services or who work at it.
Cooperative enterprises are the focus of study in
the field of cooperative economics.

Also…
Economic democracy
Franchising
Joint venture
Holding companies
Holding company
A holding company is a company or firm that
owns other companies' outstanding stock.
It usually refers to a company which does not
produce goods or services itself, rather its only
purpose is owning shares of other companies.
Holding companies allow the reduction of risk for
the owners and can allow the ownership and
control of a number of different companies.
Economic democracy
Economic democracy is a socioeconomic
philosophy that suggests transfer of decision-
making authority from a small minority of
corporate shareholders to the larger majority of
public stakeholders.
While there is no single definition or approach, all
theories and real-world examples of economic
democracy are based on a core set of
fundamental assumptions.

Proponents generally agree that modern economic
conditions tend to hinder or prevent society from
earning enough income to purchase its output
production.
Centralized corporate monopoly of common
resources typically forces conditions of artificial
scarcity upon the greater majority, resulting in
socio-economic imbalances that restrict workers
from access to economic opportunity and
diminish consumer purchasing power.
Franchising
Franchising is the practice of using another
person's business model.
The franchisor grants the independent operator
the right to distribute its products, techniques,
and trademarks for a percentage of gross
monthly sales and a royalty fee.
Various tangibles and intangibles such as
national or international advertising,
training, and other support services are
commonly made available by the
franchisor.
Agreements typically last from five to thirty
years, with premature cancellations or
terminations of most contracts bearing
serious consequences for franchisees.

Franchising has been around for many centuries
but did not come to prominence until the 1930s
in the United States, when the establishment of
electricity, vehicles, and, in the 1950s, the
Interstate Highway system helped propel
modern franchising, most notably franchise-
based food service establishments.
According to the International Franchise
Association approximately 4% of all businesses
in the United States are franchises.
Joint venture
A joint venture (often abbreviated JV) is an entity
formed between two or more parties to undertake
economic activity together.
The parties agree to create a new entity by both
contributing equity, and they then share in the
revenues, expenses, and control of the enterprise.
The venture can be for one specific project only, or a
continuing business relationship such as the Fuji
Xerox joint venture.
This is in contrast to a strategic alliance, which
involves no equity stake by the participants, and
is a much less rigid arrangement.
The phrase generally refers to the purpose of the
entity and not to a type of entity.
Therefore, a joint venture may be a corporation,
limited liability company, partnership or
other legal structure, depending on a number of
considerations such as tax and civil liabilities.

Reasons for forming a joint
venture
Internal reasons

Build on company's strengths
Spreading costs and risks
Improving access to financial resources
Economies of scale and advantages of size
Access to new technologies and customers
Access to innovative managerial practices
Competitive goals
Influencing structural evolution of the
industry
Pre-empting competition
Defensive response to blurring industry
boundaries
Creation of stronger competitive units
Speed to market
Improved agility

Strategic goals
Synergies
Transfer of technology/skills
Diversification

Reasons for dissolving a joint
venture
Aims of original venture met
Aims of original venture not met
Either or both parties develop new goals
Either or both parties no longer agree with joint
venture aims
Time agreed for joint venture has expired
Legal or financial issues
Evolving market conditions mean that joint venture is
no longer appropriate or relevant
organisation - how businesses
organise themselves
All businesses are organised into groups of people.
This is so the employees can be organised and
controlled to make sure the necessary work is one
efficiently.
These groups have managers responsible for them.
There are different ways of organising the business into
groups, and each way has its advantages and
disadvantages.
There are additional benefits of organising people
into groups, such as making it clearer how
communications should be organised.
The development of team-spirit also usually
improves motivation and productivity.

Organisation by Function
Comments on this method of
organisation:
1. Specialisation by function is more efficient. Employees
get experienced in and competent at one particular
job.
2. Accountability is clear i.e. whose responsibility is it to
do what.
3. Clarity is improved i.e. it is clear who does what.
4. Communication is weakened by a lack of
communication across and between functions. HRM
may be doing things Marketing need to know about.
5. Inertia may set in where departments become over-
focussed on their own agendas and lose sight of the
overall business objectives. In extreme case the
team-spirit may degenerate into tribalism where
departments are ‘at war’ with each other and are
more concerned with ‘winning’ this war than
attending to the overall business objectives.

6. This system can become overly bureaucratic where
flexibility is lost because things have to be done ‘by
the book’.

7. This system may not be suitable for large
businesses with many different markets and/or
products.
Organisation by Product

Comments on this method of
organisation:
1. This structure gives focus on individual products, which may
be especially appropriate if different products have different
problems and concerns. The issue of focus is important
because it determines the priorities people will have, and the
way they think about those priorities.

2. Each group can be run as a separate profit centre. This way,
healthy competition and rivalry can develop between ‘teams’
which can help motivation and productivity. It is also flexible
in that poorly performing groups can be closed down without
too much disruption to the rest of the organisation.


3. Co-operation between teams will improve where it is
in the interests of both teams to do so.

4. There is a danger of duplication of resource use if
each team has a Marketing department, a Finance
department and so on.

5. Rivalry can get out of hand and become destructive.

6. Individual teams can get out of overall management
control, especially if headed by a very ambitious
person.
Organisation by Area/Region
Comments on this method of
organisation:

1. Better response to and focus on local customer needs.

2. Better communication within the locally-based department.

3. Rivalry between departments.

4. Duplication of resource use.

5. Conflict and lack of co-operation between departments.
Organisation by
Customer/Customer Type
Comments on this method of
organisation:
1. This method of organisation promotes focus on
customers and their different individual needs. This is
a major advantage and helps a business to become
market oriented as opposed to the previous product
oriented structure.

2. Departments can be organised by market segment
which adds to the focus on customer need.

3. It is sometimes difficult to define exactly which group
a particular customer belongs to.
4. Some customer groups may be small and so
individual departments may be inefficient.
5. There will be duplication of resources.
6. Individual departments may escape from
proper overall management control.

Organisation by Process
Comments on this method of
organisation:
1. This structure gives focus on production
processes which may be appropriate where,
as in the example of oil, the processes are
quite different with different problems and
needs.

2. Otherwise, this is very similar to organisation
by function.
Conclusions on organisational
structures
All these structures have strengths and
weaknesses which a business has to think
about before choosing which one to use.
Changing that decision, and re-structuring, is very
disruptive and very expensive, so it is better to
get it right the first time.
Communications and control are key issues.


The question of focus is also very important, because
the structure affects the way employees think about
themselves and their own personal objectives e.g. ‘I
am an accountant’ or ‘I am a soap-team member’ or ‘I
am a driller’.
It is natural for humans to identify with a group of people
(a ‘team’) and this can be turned to the business’
advantage by acting as a motivator and helping to
raise productivity.
But it is also an important limiting factor.
People become very defensive and territorial
about the interests of ‘their’ team and this can
get in the way of objective problem-solving.
In the extreme, a business can disintegrate into a
bunch of warring tribes where ‘revenge’ on ‘that
lot’ overrides the business’ objectives.