Business Management Higher Understanding...

Golspie High School

Business Management

Higher

Understanding Business

2 Types of Business Organisation

Understanding Business Types of Business Organisation

25 August 2015 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 2015 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 Disadvantages

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

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.


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

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 2015 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


Limited liability which would reduce the

risk of personal loss to the shareholders

Profits shared amongst more people

Should attract finance easier as a larger

organisation

There is, as with a Partnership, a legal

process in setting up the company

Allows for economies of scale Shares cannot be sold to the public,

therefore, raising finance is more difficult

than for a plc

Less risk of liquidation Firm has to abide by the requirements of

the Companies Act

Control is still not lost to complete

outsiders

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.

Experience and skills can be gained from

shareholders and directors


25 August 2015 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 2015 6


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.

Initial set-up costs due to the legal

procedures necessary will be high resulting

in poorer profit results for the first few

years.

Knowledge that shares in public

limited companies can be resold on

the Stock Exchange if required

encourages people to invest.

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 often dominate their market

meaning they can force smaller

organisations out of business and dictate

market prices.

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.

Lenders are more likely to give money as

they have greater confidence it will be

paid back.

PLCs may grow so large that they

become inflexible and difficult to

manage effectively.

Investors (shareholders) will have limited

liability meaning PLCs will find it easier to

attract shareholders.

PLCs have no control over who buys

shares which might mean investors can

plan a hostile takeover.

All the above mean financial stability

for the company which enable it to

develop and expand.

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 2015 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 2015 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 2015 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


It is a quick way to enter new

geographical markets and the

franchiser’s name becomes more well

known as the business expands.

Franchisers are reliant on franchisees

to maintain the image and ‘good

name’ of the business – bad publicity

can affect the whole franchise

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.


25 August 2015 10

Franchisee


The new business can begin trading on

the established reputation and

successful business idea of the

franchiser immediately.

A percentage of the profits has to be

paid to the franchiser.

The franchisee has the advantage of a

well known (established) brand name

and back up service. The franchiser

will advertise nationally.

The franchiser may impose strict rules

on the franchisees and restrict their

ability to operate on their own

initiative.

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.

The franchisee’s reputation and

profitability depend in part on that of

the franchiser and the performance of

the other franchisees.

Reduces the risk of failure in the

marketplace

Franchiser will provide training


25 August 2015 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 2015 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 2015 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 2015 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 2015 15

TASK 1 (Source: Higher Business Management with Answers by Peter Hagan & Alistair B Wylie )

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 2015 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.

Ownership Control Finance

Sole Trader

Partnership

Private Limited

Company (Ltd)

Public Limited

Company (plc)

Franchise

Multi-national

Public Sector

Organisations

Charity

Social Enterprise


25 August 2015 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. 3


25 August 2015 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 franch ises 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 annual

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 2015 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 http://www.franchisedirect.co.uk/ 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:

http://www.franchisedirect.co.uk/


25 August 2015 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 (200-300 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 2015 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.

Business Management Higher Understanding...

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