Golspie High School. Business Management Higher Understanding Business. 2 Types of Business Organisation

Transcription

1 Golspie High School Business Management Higher Understanding Business 2

2 TYPES OF BUSINESS ORGANISATION National 5 Their differing aims, objectives, sources of finance, industrial and economic sectors they operate in sole trader partnerships private limited company social enterprises charities public organisations and how enterprising skills and qualities help business development Higher Be aware of the structure of each and be able to describe the similarities and differences between these structures: Private sector organisations private limited companies (ltd), public limited companies (plc), franchises, multinational organisations public sector organisations third sector organisations 25 August

3 PRIVATE SECTOR ORGANISATIONS Private-sector organisations are owned and controlled by private individuals and investors. The most common private sector organisations are discussed below: Sole Trader/Self-employed A sole trader is a business which is owned and managed by one person (eg small shops, hairdressers, trades people). Advantages It is very simple to set up no legal formalities to go through You get to make all the decisions You get to keep all the profits Disadvantages Borrowing from the bank is more difficult, and it may charge higher rates of interest on loans to sole traders Unlimited liability if the business runs up debts, the owner could lose not only the business, but his/her home, car and possessions to pay off these business debts Sole traders have to run their business without help. Taking time off or falling ill would mean that there is no income, but the costs continue. Partnership A partnership is a business which is owned and controlled by 2 or more people but less than 20 (except for legal and accountancy firms which are allowed more). Again, it is usually a small business, but is the type of organisation preferred by the professions. Advantages Partners share the responsibilities of running the business, so taking holidays or falling ill will not be so much of a problem Partners can specialise More money can be invested in the business because there are more owners Disadvantages Unlimited liability (except for certain types of sleeping partners) Arguments may arise between the partners on how to run the business Partners can leave or new partners taken on, which can upset the running of the business Profits have to be shared between partners 25 August

4 Private Limited Company (Ltd) Features Owned by shareholders Controlled by a board of directors (BOD) Finance is available from: shareholding, company profits from previous years, borrowing, government grants, trade credit, debt factoring, etc Objectives To maximise profits, by selling at a higher price than cost and keeping expenses low. Sales maximisation To survive in times of recession or threat of takeover. To grow or expand by moving into a different country. To increase market share by taking customers from your competitors. To be cost effective not waste money and eat into potential profits. To be socially responsible to have a good image in the eyes of consumers or local communities Advantages Limited liability which would reduce the risk of personal loss to the shareholders Should attract finance easier as a larger organisation Allows for economies of scale Less risk of liquidation Control is still not lost to complete outsiders Experience and skills can be gained from shareholders and directors Disadvantages Profits shared amongst more people There is, as with a Partnership, a legal process in setting up the company Shares cannot be sold to the public, therefore, raising finance is more difficult than for a plc Firm has to abide by the requirements of the Companies Act Scottish-based firms must provide Companies House in Edinburgh with a copy of the annual accounts. They are then available to anyone who requests a copy. 25 August

5 Public limited company (plc) Features A PLC is generally a large company it must have a minimum of 50,000 share capital. The shares of PLCs can be bought and sold on the stock exchange large amounts of capital can be raised by selling shares to investors. Therefore the shareholders are the owners of a plc. They will elect a Board of Directors at the AGM to run and control the company for them. PLCs must also complete a Memorandum of Association and Articles of Association. PLCs must also be registered with the Registrar of Companies. Finance is available from: company profits from previous years, selling shares to the public, bank loans, bank overdraft, issue debentures, government grants, trade credit, debt factoring, etc Objectives To maximise profits To expand output To grow To have a higher sales revenue than in previous years To dominate their market To have a strong image 25 August

6 Advantages Shares can be sold on the stock exchange meaning large amounts of finance can be raised huge sums of capital can be raised from individuals and institutional investors such as Pension Funds and Insurance Companies. Knowledge that shares in public limited companies can be resold on the Stock Exchange if required encourages people to invest. PLCs often dominate their market meaning they can force smaller organisations out of business and dictate market prices. Lenders are more likely to give money as they have greater confidence it will be paid back. Investors (shareholders) will have limited liability meaning PLCs will find it easier to attract shareholders. All the above mean financial stability for the company which enable it to develop and expand. Disadvantages Initial set-up costs due to the legal procedures necessary will be high resulting in poorer profit results for the first few years. There is a large amount of legislation which must be complied with (the Companies Act) or the company may be fined or have legal action taken against them. PLCs are required by law to publish annual accounts which are costly to produce. Members of the public can examine this financial information which is lodged with the Registrar of Companies. PLCs have to make more information available to the public than private limited companies for example, they must publish Annual Reports. PLCs may grow so large that they become inflexible and difficult to manage effectively. PLCs have no control over who buys shares which might mean investors can plan a hostile takeover. In very large companies employees may feel out of touch ( alienated ) from those at the top and it may be difficult to take a personal approach to customer service. Examples of public limited companies include Legal & General plc, Marks and Spencer plc, Manchester United plc and the Boots Company plc. 25 August

7 Multi-national companies Many large PLCs operate as multi-national corporations. Multi-national corporations have branches (called subsidiaries) in more than one country. Many companies establish sales outlets for their products in various countries. However, the distinguishing feature of an MNC is that it sets up production facilities in more than one country. British multi-nationals include BP and ICI. MNCs are major employers in many countries. Reasons for establishing MNCs: to increase market share to secure cheaper premises and labour to avoid or minimise the amount of tax which has to be paid to take advantage of government grants available to save on costs of transporting goods to the market place to avoid trade barriers like the EU Common External Tariff to enable their products to be sold globally without having to rely on other companies to sell them in some areas, under licence. Characteristics of a multi-national corporation: Will involve operations in several different countries Has a distinct home base country Has a global brand Can dominate markets across many countries Can have budgets that are larger than many individual countries Can greatly influence local economies Cultural variations 25 August

8 Advantages of operating as a multinational An organisation may be given grants from governments to locate in that country and the grants will not require to be paid back improving their financial position Organisations will become larger which may result in them being safer from takeovers Can allow organisations to increase their sales which in turn should increase their overall profits Will allow organisations to take advantage of economies of scale and reduce unit costs of products Could allow organisations to employ cheaper staff which will result in greater profitability May help avoid legal restrictions in the organisation s own country which could allow them to sell/produce their products abroad Could allow for tax advantages which will increase profitability Will mean the organisation can avoid restrictions on imports into a country which will help overall sales Disadvantages of operating as a multinational Legislation may be different in other countries which may require the organisation to alter its product/service Legislation may exist on how a product/service is marketed and may result in some marketing techniques having to be changed Cultural differences will mean that organisations have to be sensitive to different countries cultures Different languages will exist and this may mean that organisations have to employ specialist linguists to work with the organisation Disadvantages of MNCs for the host country: They can be very powerful some of them earn more than some small countries in the course of a year and can therefore exert quite a strong influence on the governments of host countries for example, by threatening to close down their operations there. They can be accused of exploiting labour in low wage countries. They may use up non-renewable resources in the host country. Because they are so powerful and able to take advantage of economies of scale, they may force local firms out of business. Profits go back to the parent company in which ever country it has its headquarters. All the major functions tend to remain at headquarters so that, in times of difficulty, it is relatively easy for the MNC to close down a subsidiary causing many job losses. 25 August

9 Franchise Definition: a business run by one firm under the name of another. The franchiser gives the franchisee a licence permitting them to sell goods or services under the franchiser s brand name, usually in return for a share of the franchisee s profits. The franchisee s licence permits him/her to use the franchiser s name, publicity materials, decor, uniforms, etc. Many individuals use franchising as a means of starting up their own business. There is less likelihood of failure as support and guidance is provided by the franchiser to the franchisee. Businesses such as McDonald s operate some branches directly and others as franchises. Other examples of franchises: Kentucky Fried Chicken, the Body Shop and the British School of Motoring (BSM). Franchiser Advantages It is a quick way to enter new geographical markets and the franchiser s name becomes more well known as the business expands. Can increase market share without investing further capital Is paid a percentage of profits or sales or a royalty Can control the way the business is run. Disadvantages Franchisers are reliant on franchisees to maintain the image and good name of the business bad publicity can affect the whole franchise 25 August

10 Franchisee Advantages The new business can begin trading on the established reputation and successful business idea of the franchiser immediately. The franchisee has the advantage of a well known (established) brand name and back up service. The franchiser will advertise nationally. Product innovation is shared all franchisees can benefit from ideas generated by each of them. For example, when a McDonald s franchisee thought up the Egg McMuffin, the recipe was circulated to all the other franchisees and the product became very successful. Reduces the risk of failure in the marketplace Franchiser will provide training Disadvantages A percentage of the profits has to be paid to the franchiser. The franchiser may impose strict rules on the franchisees and restrict their ability to operate on their own initiative. The franchisee s reputation and profitability depend in part on that of the franchiser and the performance of the other franchisees. 25 August

11 PUBLIC SECTOR ORGANISATIONS Publicly-funded organisations which are owned and controlled by the government and funded through the taxpayer. These organisations set up and owned by the government to provide services to the public. These are services which the private sector could not provide very well or could not provide at all. Making a profit is not always that important, however, keeping within the budget (money they are allocated from the government) is very important. In recent years, this has led to many public organisations having to change to more private sector-like practices in terms of target setting and cost cutting. Public corporations These organisations are businesses which are owned and run by the government for us. The best known example of a public corporation is the BBC. The government appoints a chairman and board of directors to run them on their behalf. There used to be many more but these were 'Privatised', (sold on the stock market), such as British Telecom, BP, and the gas and electricity companies. Public corporations receive grants from the government and also raise finance from the public. For example the BBC charges the public for a TV licence and also sells videos/merchandise for programmes it produces. Government-funded service providers The government provides us with some services such as the National Health Service, Social Security and Defence. These are services which the private sector would be unlikely to offer to the public in ways that the government or the public would find acceptable. They are financed by the government in order to carry out their policies in these areas. Each year they are given a set amount of money to spend. Each usually has its own appointed government minister who has supervisory control and provides guidelines to managers as to how the service should be run. The managers then make many of the decisions as to how the money could be best spent to meet the government objectives. 25 August

12 Local authorities These provide us with services such as education, housing, leisure and recreation, refuse collection and street lighting. They get their money from council tax, government grants, and from fees for things like using facilities at sports centres. Local authorities either set up their own departments to provide these services, or they 'contract out' to private companies who receive a fee for providing these services, such as cleaning or meals for schools. The local authority has to do this, as national government legislation insists that some services have to be put out to 'compulsory tendering', where private companies are invited to bid for the work. Those who offer the best value for money are given the contract for a number of years. It is argued that this will result in a more cost-effective service for the community because, unlike government-run enterprises, private firms have an incentive to keep costs low and efficiency high in order to survive and to maximise profits. Public Sector Organisations Features owned by the taxpayer/government controlled by local or central government (or an elected party or minister) financed by taxation Public Sector Organisations Objectives To provide their local area with a wide range of efficient services. To be cost effective use taxes wisely, stick to a budget. To improve the standard of living in an area. To meet the needs of their constituents/serve public interest. To improve society. Public Sector Organisations Sources of Funding Taxation Council Tax Charging for some services, eg, leisure centres Business Rates Grants from lottery 25 August

13 THIRD SECTOR ORGANISATIONS Non-profit making organisations These consist of charities and voluntary organisations which are set up to support specific causes. Charities are regulated by the government and the income they make is put towards a specific cause. For example, the RSPCA uses the income they make to prevent animal cruelty and to promote animal welfare. To be recognised officially as a charity, the organisation must have one or more of 4 main objectives: to relieve poverty to advance education to advance religion to carry out activities beneficial to the community. The Charity Commissioners are appointed by the government to regulate the activities of charities. They keep a Register of Charities. Recognised charities are given charitable status which means that they are exempt from paying certain taxes, such as VAT. Voluntary organisations such as community football clubs or youth clubs aim to provide a service to people, but without a profit-making motive. Run and staffed by a committee of elected volunteers, they bring together people with similar interests. These organisations can raise finance by applying for grants from the Lottery, Sports Council or local authorities. They may also charge a fee to become a member of their organisation or to use their facilities. Social Enterprises These have a main social or environmental aim rather than to make profit for owners or shareholders but they are run in a business-like way. People know what social enterprises try to do and who they are trying to help. At least half of the profit that social enterprises make, through selling goods and services, must be invested into meeting the stated aim of the social enterprise. Unlike some charities, they don t rely on grants and donations but some social enterprises do become charities. The main difference between a social enterprise and a charity is its legal structure and the fact that social enterprises are less regulated by the government. Examples of Social Enterprises include Ness Soap (Inverness) and BlindCraft (Inverness). 25 August

14 Co-operatives Today, whilst we still see co-operatives, we also buy fair-trade produce, and see lots of smaller local organisations - like credit unions or small local childcare groups which are set up to benefit the buyers and users of the service, not just to make profit for the owners. These organisations may make a profit, however instead of these profits being returned to the owners, the profits are either shared between the members of the society, or reinvested into the business to provide future benefits for the community. The co-operative society is a common form of social enterprise found throughout Scotland. A co-operative society (like Scot-Mid or the Co-operative chain in Scotland, which has food stores and funeral homes throughout the country) functions like any other business, until it comes to the issue of profits. In the case of the Co-operative Society, profits are shared amongst their members (customers) in the form of a dividend. 25 August

15 TASK 1 (Source: Higher Business Management with Answers by Peter Hagan & Alistair B Wylie Page 15) For each of the following examples, identify which would be the best type of business organisation to use. Justify your decision for each. (a) Firm of solicitors (b) Window cleaner (c) Garage repair and sales TASK 2 Public or Private? (Source: Higher Business Management with Answers by Peter Hagan & Alistair B Wylie Page 17) Which of the following services are provided by government and are publicly funded? You should also identify whether they are provided by local or national (Scottish or UK) government. (a) University education (b) Local bus service (c) Water supply (d) Sheltered housing (e) Letter postal service TASK 3 Public & Private (Source: Scholar Study Guide) Q1: What is the name of the process by which a new or existing business is converted into a corporate body. Q2: A memorandum of association gives: a) the names of associated companies. b) the company's name, location and what it will do. c) a list of the company's products. Q3: A public limited company must have at least: a) one director and one company secretary. b) two directors and one company secretary. c) one director and two company secretaries. Q4: What is the difference between a public limited company and a private limited company? a) Public limited companies have to declare all their activities - private limited companies can be secretive. b) Public limited companies do not need a minimum share capital - private limited companies must have a minimum 50,000. c) Public limited companies can raise money by selling shares on the stockmarket - private limited companies cannot. 25 August

16 TASK 4 Control, Ownership and Finance For each of the types of organisations listed, summarise who owns them, controls the running of them and the sources of finance available to each of them. Sole Trader Partnership Private Limited Company (Ltd) Public Limited Company (plc) Franchise Multi-national Public Sector Organisations Charity Social Enterprise Ownership Control Finance 25 August

17 TASK 5 Past Paper Questions Question 1 (Source: 2012 SQA Section 2 Question 5) (a) Describe the main characteristics of a multi-national corporation. 4 (b) Describe the possible objectives of a private limited company. 4 Question 2 (Source: 2011 SQA Section 2 Question 3c) Explain advantages and disadvantages of becoming a public limited company. 5 Question 3 (Source: 2010 SQA Section 2 Question 2e) Many companies are now classed as multinationals. Explain the advantages and disadvantages of operating as a multinational. 5 Question 4 (Source: 2010 SQA Section 2 Question 3e) Discuss the effects of becoming part of a franchise. 5 Question 5 (Source: 2009 SQA Section 1 Question 2a) Explain 3 reasons why an organisation would become a private limited company. 3 Question 6 (Source: 2007 SQA Section 2 Question 2b) Public sector organisations are owned and controlled by Central Government. (i) Describe 2 strategic objectives of a public sector organisation. 2 (ii) Identify 2 sources of funding for a public sector organisation. 2 Question 7 (Source: 2006 SQA Section 3c) Explain the advantages of franchising for the franchiser August

18 TASK 6 Activity 2 Your friend tells you she wishes to become a self-employed hairdresser. Describe two types of business organisation she might establish to achieve this aim, pointing out at least two advantages and two possible disadvantages of each. Activity 3 Explain why a local authority might find it cheaper to contract out the provision of school meals to a profit-making organisation rather than provide them itself. Activity 4 How might the objectives of an NHS hospital differ from those of a private hospital? TASK 7 Franchising Read the case study below and answer the questions which follow. McDonald s has had great success with franchises in Scotland, Wales and Northern Ireland, but until 1994 most of their branches in England were company-owned. In that year they embarked on a plan to double the number of franchises within ten years, and by 1997 almost half of McDonald s outlets were operating as franchises. McDonald s takes great care in selecting its franchisees. Each year it receives thousands of enquiries about franchises. Before even being considered as a franchisee candidates have to work in a McDonald s for several days. Training for franchisees takes 9 months and includes a stint at Hamburger University in London where, at their own expense, franchisees learn how to motivate their staff and satisfy cus tomers in the McDonald s way. Franchisees use McDonald s materials and equipment so that the meals offered are of a standard quality in all outlets. In return franchisees have to finance 40% of the cost of setting up their branch, and pay McDonald s an a nnual royalty. 1. Describe the advantages of becoming a McDonald s franchisee. 2. Identify three advantages to McDonald s of franchising some of its outlets. 3. In which sector of industry is franchising most common? Give examples of actual businesses and explain why this sector is particularly suited to being organised via franchises. 25 August

19 TASK 7 Multinational Companies Your teacher will name a multinational company for you to investigate and fill in the details below: Name: Founder(s): Base Country: Global Revenues: Type of Company (what does it sell?): Operating Countries: Number of Employees (globally): Brief History: AG Barr SAS NetApp C&C Group FedEx Express Vodafone Marriott McDonald s Kimberly-Clark SC Johnson Diageo American Express Medtronic Intel Hilti Colgate Telefonica National Instruments Mars Accenture Roche Novo Nordisk The Coca-Cola Company Hewlett Packard Unilever Shell TASK 8 Choose Your Own Franchise Access the webpage and spend some time choosing a business franchise to invest in. Name of Company: Area/Industry: Minimum Investment Required: Brief Description of Business: Location of Business: Justify why this franchise business would suit you and how you would make a success of it: 25 August

20 TASK 9 Social Enterprises (Source: Scholar Study Guide) Are there any social enterprises in your own local community? You may use the Internet to carry out this research. Write a short report ( words) detailing what these organisations do, and how they distribute/reinvest their profits, and submit to your teacher. TASK 10 - The Dean Tavern (Source: Scholar Study Guide) The Dean Tavern in Newtongrange is (and has always been) a busy local pub. Founded in 1899, it has always operated as a "Gothenburg System" pub, where profits are used for the good of the local community. In the early days of the pub, the profits were shared between the residents of the village - most of whom were employed as miners at the local pit, the Lady Victoria Colliery. Today, although the mine is long gone and the village is much larger in size, there is still a strong community spirit, and whilst the pub profits are not split between local families, they are used for the good of the local people. This means that a number of local voluntary organisations, for example the children s gala, the pipe and brass bands, and Brownie and Scout groups, all receive an annual donation towards their running costs. They can also apply for an extra grant if they require funding for a special project for example, a local football team tour to Germany. 1. Can you suggest a reason why the Dean Tavern would choose to operate as a Gothenburg and redistribute any profits to the local residents? 2. Taking into account the changes that have happened in society, can you suggest a reason for the change in profit distribution, so that profits are given to local voluntary organisations rather than individual residents? 25 August

21 TASK 11 (Source: Scholar Study Guide) Complete the sentences using following options. a) meaning they can force smaller organisations out of business. b) meaning PLCs will find it easier to attract shareholders. c) which will be costly to produce. d) meaning large amounts of finance can be raised. e) as they have greater confidence it will be paid back. f) or the company may be fined/have legal action taken against them. g) resulting in poorer profit results for the first few years. h) which might mean investors can plan a hostile takeover. 1. Shares can be sold on the stock exchange 2. PLCs often dominate their market/dictate market prices 3. Lenders are more likely to give money 4. Investors will have limited liability 5. Initial set-up costs will be high 6. There is a large amount of legislation which must be complied with 7. PLCs have no control over who buys shares 8. PLCs are required by law to publish annual accounts TASK 12 (Source: Scholar Study Guide) Copy and complete the sentences using the following words. taxes private donations trustees government ministers 1. A public sector organisation is owned by the whereas a third sector organisation is owned by (but does not benefit) individuals. 2. A public sector organisation like the NHS is controlled by government or their appointed managers whereas a charity operating in the third sector is controlled by a board of. 3. A public sector organisation is mainly funded through whereas a third sector organisation is funded through or fundraising activities. 25 August