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Lesson 1
• Categories of organisations:
size, sector/type-private, public,
objectives and responsibilities to
stakeholders , legal, and
environmental responsibilities
• Types of economic systems
Lesson Aims/ learning Outcomes
1.To help students to learn the objectives of
2. Identify the mission, values and key objectives
of an organization and assess the influence of

3. Explain the responsibilities of an organisation

and strategies employed to meet them.

4. Explain how economic systems attempt to

allocate and make effective use of resources.
Categories of business organization
Organization : It refers to an arrangement of people, perusing common
goals, achieving results and standards of performance.

Any business involves people and resources to do one of the following

(a) To make (produce) items or goods to be sold

(b) To provide service to be sold

Characteristic of business organization
•Profit or non profit orientation
•Legal Status
•Source of finance
Business Markets, Activity
& Ownership
Consumer Markets
• Consumers interact with sellers to buy
goods and services
Commodity markets often have their
centres in developed countries (UK, USA,
• The commodities themselves often
originate in the developing world (Latin
America, sub-Saharan )
Capital Markets
• Small firms may borrow or sell shares to
family and friends
• Larger companies use the stock market to
sell shares known as ‘equity’ capital
Business Activity
• Primary Sector – extraction of raw
materials from the earth – mining, quarrying,
fishing, agriculture, forestry
• Secondary Sector – Processing of raw
materials into finished or semi-finished
products – manufacturing
• Tertiary Sector –Service industries –
leisure, transport, finance, distribution,
retailing, wholesaling, communications
• Quarternary Sector – Hi tech industries,
training, health, education
Objectives of Public Sector

• Access
– available to all regardless of location or income
• Quality
– high quality services that do not cut corners
• Affordability
– services offered at prices that are cheaper than
private sector or free at the point of use
• Equity
– available to anyone whatever their background,
status, income, class, race, religion, etc.
Objectives of Private Sector

• Profit
• Growth
• Satisficing
• Market share
• Survival
What Businesses do

• Meet the needs of stakeholders.

• Buy inputs – raw materials, labour, machinery and

equipment, land

• Produce outputs – goods and services

• Focus on efficient use of resources

• Generate profit/surplus
Who are the stakeholders?

• Anyone who has an interest in the

success of a business and can influence
the organisation
– Customers
– Managers
– Employees
– Owners
– Local Community/Environment
– Suppliers
– Government
– Creditors
Business Ownership
The Private Sector

• Sole Traders
– Owned, financed and controlled by one
individual but can employ other staff

– Common in local building firms, small

shops, restaurants, butchers, etc.
Sole Traders: Advantages

• Easy to set up
• Personal incentive –
• keep all the profits
• Make key decisions
• High degree of control
• Flexibility
• Ability to offer personal service
• Owned, financed and controlled by
upwards of 2 partners
• Terms of Partnership agreed through
• Bound by the terms of the Partnership Act
• Common in professions – lawyers,
accountants, architects, surveyors, estate
Partnerships: Advantages

• Greater access to capital

• Shared responsibility

• Greater opportunity for specialisation

• Easy to set up
Partnerships: Disadvantages

• Unlimited Liability
(However since 2001, Partnerships can apply to
be Limited Partnerships)
• All partners liable for the debts of the others
• Partnership dissolved on death of one partner
• Potential for conflict
• Decisions of one partner binding on the rest
• Limited access to capital
Limited Companies

• Private Limited Company (Ltd) Owned by

between 1 and 50 shareholders
• Public Limited Company (PLC) Owned by
minimum of 2 but no maximum number of
• Has a separate legal identity – the company
can sue and be sued
• More complex to set up
• Minimum share capital of £50,000
• Must Register with Registrar of Companies at
Companies House
Memorandum of Association

• Details of the nature, purpose and

structure of the company
Articles of Association

• Details of the internal rules of the company

• Certificate of Incorporation – allows the company to
• Shareholders have limited liability – can only lose what
they agreed to put into the company – no personal
• PLCs – shares traded on Stock Exchange
• LTDs – shares only bought and sold with agreement of
• existing shareholders
• Divorce between ownership and control
• Potential for diseconomies of scale – communication,
decision making, etc.
• Must publish accounts
Articles of Association
• PLCs – shareholders may be large institutions –
pension funds, insurance companies, etc.
• PLCs - Share value subject to volatility – affects
company value
• PLCs – can be large, complex, possess market
Disadvantages (1)

• Legal formalities make it costly to set up

• Subject to takeover bids as shares are
openly traded
• May become large and bureaucratic
Private limited company:

• The business has its own legal identity so

that continuity is more likely
• Accounts only published in summarised
form, preserving some privacy
Public Limited liability

• Economies of scale and can specialise by

setting up separate departments
• Limited liability
Public sectors

• Institutions established by the government

• 20% of all UK workers in public sector
• Less likely to follow a profit motive, though may
deliver services using private companies, who
• Public corporations e.g. nationalised industries
• Government departments e.g. Department of
• Local government services e.g. Council run
leisure centres
Principal-Agent Problem

• Objectives of principals likely to involve

• Objectives of agents may be more varied;
e.g. salary and status of managers may be
more closely linked to sales revenue or
Private limited company:
• There is a limit to the amount of capital
that can be raised from friends and family
• Unless the founder members own the
majority of shares, they may lose control
• Method of business ownership backed by
established ‘brand’ name
• Owner gets to run a business with less
• Owner buys the right to use the
established company’s name, format
products, logos, display units, methods,
• Speedy way for business to expand
• Become very popular
• Owner – (Franchisee) responsible for
debts, pays a royalty to owners of the
brand, keeps any remaining profit
• Franchisee – pays a fee for the
purchase of the franchise
• Common franchises – Body Shop,
McDonalds, Costa Coffee, Subway
• Ownership, finance and control in hands of
• Exists for the benefit of ‘members’
– Consumer co-ops – members buy goods in bulk, sell
to members, divide profits between members
– Worker co-operatives – workers buy the business and
run it – decisions and profits shared by members
• Producer co-operatives – producers organise
distribution and sale of products themselves
• sole charge
• Can make decisions quickly and so is
flexible in responding to change
Joint ventures
• Involve separate firms coming together for
a specific business purpose

Benefits include:
• Share and lower costs of high-risk projects
• Economies of scale and scope
• Secure access to a partner’s technology
Joint Venture
• Create a basis for more effective future
competition in the industry involved
• Often involve a legal contractual arrangement
between two separate firms for a specific
• Specialised joint ventures: each partner
brings a specific competence
• Example: one firm might take responsibility
for R & D, the other for production
Success factors in joint ventures

• Takes time to assess partners

• Understand that collaboration may involve
• Learn from partners whilst limiting unintended
information flows
• Establish specific rules at the start of the joint
• Give managers freedom to act independently
• Firm Size, Mergers and the ‘Public Interest’
Free or Market Economy

• Operate by price.
• Consumers decide how they would spend
the money they have.
• The producers of favoured products
receive a large income than producers of
less favoured products and would
therefore be in a better position to buy the
products that they would
• Consumer sovereignty-consumers
decide on the allocation of resources by
an accumulation of million of decisions.
• It also responds to changes in
consumer’s wishes. i.e., it is flexible.
• All resources are owned by private
individuals and private organizations
• No need to use additional resources to
change decisions, record and check
whether they are or not in use.
Free market
• The size of the civil service is
• Competition leads to efficiency-
producers have financial and
survival incentive to make sure they
get the maximum output for the
smallest possible input of resources
Free market Advantages

• Resources are not distributed equitably.

• Public goods are not excludable.
Government should provide this.
• It’s response may not be acceptable for
sometime. New technology could create
unemployment and threaten the political
security of the government.
• Slow in political and social terms.
• Consumer sovereignty can be seen as ideal rather
than the reality of a market economy.
• Many businesses produce in advance of consumer
demand and then use advertising to persuade
people to buy the goods they have made.
• Competition can lead to duplication of products and
resources that they would be able to sell what they
• If they see the risk as being unacceptable they
would not employ resources including labour and
the general standard of living of people would fall.
Planned economy
• Resource owned by the state.
• Decisions on use made by the state.
• The collection of statistical information
relating to the resource available
• The setting of overall objectives is made
by the state.

• The setting of targets at the regional

• Resources can be distributed more equitably
according to the values of society.
• Duplication and waste of resources can be
• The state can use its economic power to achieve
its own social and political objectives, which may
reflect the collective, will of the majority of the

• The collection of data, the planning process and

the control of planning would all use resources.
• Lack of incentives could lead to lack of
• Lack of profit means no opportunity for
• Once basic needs have been obtained people
may abstain from consumption rather than buy
goods, which are of poor quality.
Mixed Economy

• -Most economic decisions are made by the

• -Some Free enterprises permitted e.g. sale of
fresh vegetables where decision is difficult.
• -State has a minimal role. e.g. providing basic
welfare services.
Arguments for privatisation
• Without profit there is a lack of incentive and no
drive to increase efficiency.
• Increased competition leads to improved
standards of customer service.
• Increased participation and gives greater
interest in the way business is made.
• Wider range of capital sources could lead to
higher levels of investment and increased
productivity and lower prices.
• People at risk- Goods and services produced for
only those who can afford
Arguments Against privatisation

• Service may be discontinued because

they are not profitable
• Selling the family’s silver- shares
undervalued money is moved from one
group to another.
• Nationalised industries in UK achieved
efficiency during the 80s
• Some areas are too important to be
subject to profit motive.