Chapter 3 - Business Organization

1 The Contemporary Business World
Business
Essentials
6e
Ronald J.
Ebert
Ricky W.
Griffin
3
BUSINESS ORGANIZATION
© 2007 Prentice Hall, Inc. PowerPoint Presentation by Charlie Cook

All rights reserved. The University of West Alabama
What Is a “Small” Business?
Small Business is a business that
is independent (not part of a larger
business) and that has relatively little
influence in its market.
Examples:
 locally owned and operated restaurants
 dry cleaners
 automobile repair shops
© 2007 Prentice Hall, Inc. All rights reserved. 3–2

The Importance of Small Business
1.Job creation
 Important source of new (and often well-paid)
jobs
 For example, in the U.S.
 Accounted to 40 percent of all new nobs in high
technology sectors
 Hire at a faster rate than big firms
 First to hire in times of economic recovery
 But, tend to cut jobs at a higher rate than big
firms
2. Innovation
 As likely to come from small businesses as
from big ones
 For example, individuals, small groups of
people, or people working for small
businesses invented:
 the personal computer
 Stainless-steel razor blade
 The photocopier
 The jet engines
 Self-developing photograph
3.Contributions to Big Business
 Most of the products made by big businesses
are sold to consumers by small businesses
 For example:
 Dealers selling Mitsubishi, Toyota, Honda are
independently operated
 Online retailers outsource the creation of their Websites
and distribution of their products to small or regional firms
 Small businesses also provide services and raw
materials for large businesses
 Microsoft relies on hundreds of small firms located
around the world to write most of its code

Popular Areas of Small-Business Enterprise
1. Services
 About 50% of businesses with
fewer than 20 employees are
involved in the service industry
 For example:
 Computer software
 Event planners
 Management consulting
 Require few resources
 Fastest growing segment of
small business

2. Retailing
 13% of all U.S. businesses
 Selling products made by other
firms directly to consumers
 Usually, favoring specialty shops
 for example:
 Clothing
 Gourmet coffees
 Allows them to focus limited
resources on narrow or small
market segments
3. Construction
 Accounts for about 13%
of all U.S. businesses
 Many construction jobs
are small local projects
 For example:
 House remodeling or
renovations or extension
 Local contractors are best
suited to do handle them
4. Wholesaling
 Accounts for 6% of
businesses in wholesaling
 Buying in bulk from
manufacturers or other
producers
 Products are then stored in
quantities and locations
convenient for selling them
to retailers
5. Finance and insurance

 Accounts for about 4%
 Most of them are affiliates
of or agents for larger
national firms
 Small locally owned banks
are also common in
smaller communities and
rural areas
6. Manufacturing
 4% of the total businesses
involved in manufacturing
 Small manufacturers and they
sometimes outperform big ones
especially in innovation- driven
industries
 Examples:
 electronics
 Equipment
 Machine parts
 Computer software
7. Transportation
 About 3% of these
companies are in
transportation and related
businesses
 Examples:
 Taxi
 Limousine
 Charter airplane services
 Tour operators

8. Others
 The remaining 7%
 Small research-and-
development laboratories
 Independent media
companies
 Small-town newspapers
 Radio broadcasters

FIGURE 3.2 Small Business by Industry

ENTREPRENEURSHIP

Entrepreneurship
Entrepreneurship
 The process of seeking businesses opportunities
under conditions of risk
Entrepreneur
 One who accepts the risks and opportunities of
creating, operating and growing a new business
Small Business Owner
 Does not always have growth of the business as a
primary entrepreneurial goal

Entrepreneurial Characteristics
Successful Entrepreneurs:
 are resourceful
 are concerned for good customer relations
 desire to be their own boss
 can deal with uncertainty and risk
 are open-minded
 rely on networks, business plans, and consensus
 have different views on how to succeed, to automate
a business, and when to rely on experience or
business acumen

Starting and Operating a New Business
Crafting a Business Plan
 Conveys a description of the business strategy for
the new venture and how it will be implemented
 A business plan should address:
 The entrepreneur’s goals and objectives
 The strategies that will be used to obtain them
 The implementation of the chosen strategies
Preparing a Business Plan

 Setting goals and objectives
 Sales forecasting
 Financial planning

Starting the Small Business
Buying an Existing Business
 Less risk in purchasing ongoing, viable
business
Franchising
 Advantages
 Proven business opportunity for franchisee
 Access to management expertise of
franchisor
 Disadvantages
 Start-up costs for franchise purchase
 Ongoing payments to the franchisor
 Management rules and restrictions on the
franchisee

Starting the Small Business (cont’d)
Starting from Scratch
 Disadvantage: Higher risk of business failure
 Advantage: Avoids problems of an existing business
Questions to Be Answered:
 Who and where are my customers?
 How much will those customers pay for my product?
 How much of my product can I expect to sell?
 Who are my competitors?
 Why will customers buy my product rather than the
product of my competitors?

Trends in Small-Business Startups
Emergence of
E-commerce
Crossovers from
Big Business
Opportunities for
Minorities & Women
Global
Opportunities
Better
Survival Rates

Emergence of E-commerce
•
Rapid emergence of electronic
commerce
•
The internet provides new ways of
doing business
•
New businesses have been created
and expanded faster and easier than
before
Crossovers from Big Business

•
More businesses are being
started by people who have
opted to leave big
corporations and put their
experience to work for
themselves
Opportunities for Minorities & Women

•
Small businesses are also being started
by minorities and women
•
For example in the U.S. a number of
businesses are owned by:
• African Americans
• Hispanics
• Asians
• women
Global Opportunities
• Many entrepreneurs
are also finding new
opportunities in
foreign markets
Better Survival Rates

•
More people are encouraged
to test their skills as
entrepreneurs because the
small business failure rate
has decline

SUCCESS AND FAILURES
IN NEW BUSINESS

Reasons for Failure and Success
Failure
1. Managerial incompetence
 not knowing how to make basic
business decisions
 Not understanding basic management
principles
 Putting too much faith in common
sense
 Overestimate their own managerial
skills
 Believing that hard work alone
ensures success
Failure
2.Neglect
• Starting a small business
demands commitment of time
and effort
• Will not succeed if owners try to
launch ventures in their spare
times or devote limited time to
new businesses
Failure
3.Weak control systems
• Effective control systems keep a
business on track
• It alerts managers to potential
problems before they become
serious

Failure
4.Insufficient capital
• It take months or even years for
companies to start earning profits

Success
I. Hard work, drive, and
dedication
 Owners must be
committed to succeeding
 Willing to spend the time
and effort to make it
happen

Success
2.Market demand
Market demand for
the products or
services being
provided
Careful analysis of
market conditions

Success
3.Managerial competence
• Owners may acquire
competence though
training or experience
• May also draw on the
expertise of others

Success
4.Luck!!!
• Being at the right
place at the right
time

NONCOPRORATE
BUSINESS
OWNERSHIP

Noncorporate Business Ownership
Forms of Legal Ownership
 Sole proprietorship: Owned and operated by one
person
 Partnership: Sole proprietorship multiplied by the
number of partner-owners
 Corporation
Choice of Ownership Form
 Based on the entrepreneur’s needs/desires for
control, ownership participation, financing sources,
and appropriateness of the chosen form for the
industry in which the firm will compete

Forms of Legal Ownership
1. Sole proprietorship
 Owned and operated by one person
2. Partnership
 Sole proprietorship multiplied by the
number of partner-owners
3. Corporation

Choice of Ownership Form
Based on the entrepreneur’s
needs/desires for control
ownership participation
financing sources
appropriateness of the chosen form for
the industry in which the firm will
compete

1.
Sole Proprietorships

1. Sole Proprietorships
Usually owned and operated by
one person

1. Sole Proprietorships
Advantages: Disadvantages:
1. More talent and 1. Unlimited liability for
money general partner
2. More fundraising 2. Disagreements among
capability partners
3. Relatively easy to 3. Lack of continuity
form
4. Limited liability for
limited partners
5. Tax benefits
2. Partnerships
Two types of partnerships:
i.General Partnership
ii.Limited Partnership

2. Partnerships
i. General Partnership
• Similar to the sole proprietorship but is
owned by more than one person
• Partners may share equal sums of
money
• Partners may share profits equally OR
in proportion to their investment OR
other things (for lending their name)

2. Partnerships
1. The ability to grown 1. Unlimited liability for each
partner
by adding new
2. Lack of continuity
talent and money
3. Difficulty in transferring
2. Easier to borrow ownership
(obtain bank loans)
3. Can invite new
partners to invest
as business
expands
2. Partnerships
Alternatives to General Partnerships
1. Limited Partnership
 Allows for limited partners
 The limited partners can invest money BUT are
liable for debts only to the extent of their
investments
 Must have at least one general (or active)
partner
 The general or active partner is usually the
person who runs the business and is responsible
for its survival and growth
2. Partnerships
Alternatives to General Partnerships
2. Master Limited Partnership
 Organization sells shares (partnership
interests) to investors on public exchange.
 Investors are paid back from profits
 The master partner retains at least 50
percent ownership and runs the business
 The minority partners have no
management voice

3. Cooperatives
Combine the freedom of sole
proprietorships with the financial
power of corporations
Groups of sole proprietorships or
partnerships agree to work together
for their common benefit

4. Corporations
“An artificial being, invisible, intangible,
and existing only in contemplation of the
law”
Corporations may:
 Sue and be sued
 Buy, hold, and sell property
 Make and sell products
 Commit crimes and be tried and punished for
them

4. Corporations
1. Limited liability: 1. Double taxation of
• The owners’ dividends
responsibility for the 2. Fluid control
debts of a business
is limited to their
3. Complicated and
investment in a expensive to form
business
2. Continuity
3. Stronger fundraising
capability
4. Corporations
Types of Corporations
Closely Held (Private) Corporation
Publicly Held (Public) Corporation
Subchapter S Corporation
Limited Liability Corporation (LLC)
Professional Corporation
Multinational (Transnational) Corporation

4. Corporations
Corporate Governance
 The roles of shareholders, directors, and other
managers in corporate decision making and
accountability
 Corporate governance is established by the firm’s
bylaws and involves three bodies:
 Stockholders (shareholders): Investors who buy
ownership shares in the form of stock
 The board of directors: Group elected by stockholders to
oversee corporate management
 Corporate officers: Top managers hired by the board to run
the corporation

4. Corporations
Stock
A share of ownership in a corporation
Dividends
Profits distributed among stockholders

4. Corporations
Special Issues in Corporate Ownership
Joint Ventures and Strategic Alliances:
 Strategic alliance: Two or more organizations collaborate
on a project for mutual gain
 Joint venture: Partners share ownership of a new
enterprise
Employee Stock Ownership Plans
 Allows employees to own a share of the corporation through
trusts established on their behalf
Institutional Investors
 Control enormous resources and can buy huge blocks of
stock

END OF CHAPTER 3

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1 The Contemporary Business World

© 2007 Prentice Hall, Inc. PowerPoint Presentation by Charlie Cook

© 2007 Prentice Hall, Inc. All rights reserved. 3–2

© 2007 Prentice Hall, Inc. All rights reserved. 3–5

© 2007 Prentice Hall, Inc. All rights reserved. 3–6

5. Finance and insurance

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Preparing a Business Plan

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Crossovers from Big Business

Opportunities for Minorities & Women

Better Survival Rates

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