Type of Business Organisation

Learning Intentions: Success criteria: To introduce pupils to the different business organisation types in the UK and World-wide (international). Success criteria: You should be able to: identify who owns, controls and finances different types of businesses describe and give examples of different types justify reasons for these business organisations existence.

Organisations Types of Organisation Private Sector Public Sector Profit-making Non-profit-making

Types of ownership Sole trader Partnership Private limited company Public limited company Franchise Co-operative Charity

Private Sector

Sole trader One man/woman business. Sole trader owns business. Owner and business are the same. Owner provides own capital (savings and borrowings). Profits go to the owner (but also responsible for losses). Owner controls business, all decisions are theirs.

Sole trader Negatives Limited capital Unlimited liability Commitment (long hours, every day) New ideas may be limited Positives Easy to set up Can make decisions quickly Personal attention to business Profits are not shared Can cater for local needs Business affairs kept private

Partnership A business owned by several people 2–20. Deed of partnership – contract dealing with share of profits, roles and duties, capital contributed, dispute procedures. Owned jointly but not always equally. Partnership is an extension of sole trader. Capital provided by partners. Profit goes to partners, not always equally. All partners entitled to participate in management (unless silent partners).

Partnership Negatives Actions of one partner binds all More discussion and consultation Limitation on number of partners Unlimited liability Partnership ends if a partner dies Positives More capital than sole traders Excessive hours can be cut down More ideas may be generated Specialisation can occur

Private limited company (Ltd) Organisation owned by a group of individuals (2+ shareholders). Memorandum/Articles of Association. Owned by shareholders (often family) whose main function is to elect board of directors. Money raised by share issue or borrowing. Ordinary shares and preference shares. Profit shared between shareholders or retained by company.

Private limited company Positives More capital than partnerships Limited liability Owner can retain control Company does not die if owners die Negatives Must be registered with Registrar of Companies Harder to motivate and control workers High set-up costs (legal and administrative) Diseconomies of scale

Public limited company (plc) Organisation owned by a group of individuals; has plc after name. Certificate of Incorporation approved by Registrar of Companies. Shareholders – 2+; shares sold on stock exchange; prospectus prepared to attract shareholders. Capital raised by share issue or borrowing. Profits shared between shareholders or retained by company. Board of directors = divorce of ownership and management.

Public limited company Positives More capital than private limited companies Employ specialists Limited liability Company does not die if owners die Shares can be issued through stock exchange Negatives Formation expensive (legal and administrative costs) Must publish accounts May become too large to manage effectively Decisions more difficult to arrive at Diseconomies of scale

Franchise A business/individual buys a license to operate a well-known firm. Owned by franchiser. Franchisee pays franchiser to get license as well as a royalty. Franchisees runs business on franchiser’s guidelines. Click for clip

Franchise Positives Negatives Franchiser provides a lot of support: training to start business, equipment, materials, advice, brand name Take over a successful, winning formula Negatives Franchisee doesn’t have complete freedom May not agree with decisions made by franchiser Royalties paid to franchiser

Co-operative Organisation set up to benefit workers or consumers. Retail – owned by workers and shoppers. Producer – owned by workers. Retail – every pound spent receives dividend or voucher. Producer – money comes from workers, who share profits and share a salary. Board of directors (who may also be workers).

Co-operative Negatives Positives Difficult to grow and find additional capital  New workers may not be able to raise capital needed to join co-operative Positives Less conflict between workers and managers  Workers should be more motivated

Multinational What is a multinational? A company with HQ in one country but with bases, manufacturing or assembly plants in others. Most multinationals are basically a federation of multiple national companies loosely connected across borders and managed largely by expatriates sent out from the centre. By using expatriates they miss out on learning about the culture of the local people and perhaps even alienate the market. Many multinationals may not even sell goods in the country they are in.

Multinationals A multinational operates in more than one country. It will normally have a headquarters based in one country known as the ‘home country’.

Why become a multinational? Companies may become multinationals to: increase market share secure cheaper premises and labour avoid tax or trade barriers take advantage of government grants. Increase market share – companies may find they are at saturation point in the domestic market and need a new outlet. They may start by exporting to other countries but eventually they will want to take production overseas. Coca Cola started this way, following US soldiers around the world after World War I. Secure cheaper premises and labour – the costs of land and labour will be cheaper in developing countries. Sweatshops in the Far East are an example of cheap labour, whereas production plants opening in the old Soviet Bloc nations like Poland, Bulgaria etc are examples of cheap factories. Avoid tax or trade barriers – different nations have different levels of corporation tax and may have different barriers to entry. The Japanese only allow a small percentage of foreign cars to be sold in Japan to protect their own industry. Government grants – many US companies were attracted to the UK in the 1980s because the government gave them money to open up operations here.

Multinationals: Benefits Economies of Scale Legislation (relaxed) Taxation or Grant incentives Increased sales/less chance of takeover Lower wage rates Higher skilled workforce Can operate competitively (locally) Save on costs of transportation Avoiding Trade Barriers

Multinationals: Costs Legislation may be too restrictive Cultural difficulties Lack of technical expertise Poor infrastructure Political Instability Exploitation (e.g. low wages) Forcing local businesses out

Privatisation Governments sold these companies because: Huge amounts of income for the Treasury Some public corporations were poorly managed and not profitable Wanted to increase share ownership and make public interested in the success of companies/the economy However: Public corporations were often sold off too cheaply Privatisation has not always led to greater competition

Contracting Out Examples are refuse collection and school meals Firms are invited to submit bids (competitive tendering) to provide these services Cost effective? Private Sector organisations have an incentive to keep costs low

Third Sector

Third Sector Non-profit making organisations such as charities and voluntary organisations are set up to support specific causes Charities Oxfam, Cancer Research Owned and controlled by a board of trustees They will fundraise to raise finance (TV appeals, collections, selling products) Voluntary Organisations Youth Clubs, Sports Clubs Provide a service without the profit making motive Raise funds through donations, memberships, fundraising events

Third Sector www.socialenterprisescotland.org.uk Trade in all markets selling goods/services They have a social/environmental aim rather than profit making Run like a business All of the profits must be invested in to meeting their social aim. Less regulated by Govt than charities Example Wooden Spoon Catering – provide job and education opportunities for women in vulnerable positions www.socialenterprisescotland.org.uk http://Se100.net/index

Charity An organisation formed to raise money for underprivileged people. Trustees. Charities raise money through shops, donations and lottery money. Surplus after costs goes to the ‘needy’. Board of managers.

Charity Positives If charity has status of charitable trust it doesn’t pay tax  Looks after less privileged and the environment Negatives Less money may be donated due to introduction of the National Lottery Relies on voluntary workers, who are usually not paid for work

TASK TIME

Answer a question Explain three reasons why an organisation would become a private limited company. (3 marks) 2009 You have 3 marks to achieve, the command word is explain – remember this means a good expansion for each mark. You have 6 minutes.

Peer marking You are going to swap answers. Has your partner answered well? Does the answer make sense? Is it worth a mark? Work with the class to assist them in understanding the way that questions are marked. They peer assess and discuss the answer with each other and then award the appropriate marks – teacher gives support.

Solution Owners of a private limited company (Ltd) have limited liability to others, which reduces the risk of personal loss. A private limited company is a larger organisation and this allows the business to attract finance more easily. Control of a private limited company is still not lost to complete outsiders, so owners can still make decisions and decide on the direction of the business. Experience and skills can be gained from shareholders, and can be used to improve the performance of the business. How did you do?

Introduction – Reasons why an organisation would become a private limited company (LTD) are as follows: Expansion point Owners of a private limited company (Ltd) have limited liability to others, which reduces the risk of personal loss. A private limited company is a larger organisation and this allows the business to attract finance more easily. Control of a private limited company is still not lost to complete outsiders, so owners can still make decisions and decide on the direction of the business. Experience and skills can be gained from shareholders, and can be used to improve the performance of the business. How did you do?

Public Sector

Public sector organisations Businesses set up by an Act of Parliament. Government provides capital through the Treasury. Government appoints chairman and board. May be natural monopolies. May be unattractive to private sector due to enormous capital investment.

Public Sector Organisations Public Corporations BBC and Royal Mail (prior to selling on stock market), Bank of England Local Authority Services Education, Housing, Police, Social Services Central Government Departments Treasury, Defence, Health, Employment, Social Services, Environment, Transport

Public corporations Reasons for being set-up: to avoid wasteful duplication and confusion to set up and run important non- profitable services to prevent exploitation of consumers to protect jobs and key industries.

Privatisation Is ‘the selling off of public corporations to the private sector’. British Gas, British Telecom and British Steel are examples of nationalised industries that were sold off under the Conservative government of Margaret Thatcher (Prime Minister 1979–1990).

Why privatise? Makes industries more competitive and efficient. Privatisation raises huge monies for government. The public are more willing to invest on the Stock Exchange than before.

Introduction to the different types of Learning Intentions: Introduction to the different types of BUSINESS OBJECTIVES Success Criteria: By the end of these lessons you should be able to: identify describe and give examples To allocate to specific types of organisations of Business Objectives

Business objectives Survival Maximising profits Growth Increasing market share/leader Good reputation/social responsibility Maximising sales Satisficing Providing a service/quality service Managerial objectives Customer satisfaction

Objectives Objective Description Justification Survival To continue trading Need to survive or the business would not exist Maximise Profit To have a higher income than costs Allows the business to improve/expand Customer Satisfaction Make customers happy Customer loyalty, new customers Market Leader Biggest business in a market More customers than competitors

Objectives Objective Description Justification Social Responsibility Behaving in an ethical and responsible way (marketing & operations unit) Improves the organisations reputation Satisficing Ensuring that your business operates to a satisfactory position Not always possible to reach perfection (limited resources etc.) Managerial Objectives Their own internal objectives e.g. bonuses Motivational for the manager to do well Growth Making the organisation increase in size Increases sales/profits/reputation/economies of scale

Objectives by business sector Type of business Aims/objectives Private sector Survival, profit maximisation, growth, increase returns to shareholders, increase market share, maximising sales, managerial objectives, image and social responsibility Voluntary sector Help others, maximise cash collections, offer a service to the community Public sector Help people, improve quality of service, cut costs/efficiency, raise revenue, provide a service,

TASK TIME

Objectives in exams Explain internal factors that could be taken into account prior to an organisation setting strategic objectives. (4 marks) A difficult question – what do you think it means? Groups should be given time to work out exactly what the question is asking about. Explain that some questions are not straightforward. Although this seems to be a question about objectives, it is more about internal issues.

Meaning What areas of the business would be looked at by management before they make an important decision about the direction of the business? Hint – size of the business. Can you expand and get 4 marks?

Marking… Size of the organisation would be considered - smaller firms’ strategic objectives will be of a smaller nature than those of multinational companies. Company policy on, for example social and ethical responsibility, are the company products & activities following this policy? Consider shareholders’ points of view. Consider whether a private or public sector organisation. Consider internal financial situation. Consider technological factors.