Ba 2

Unit 2 The Nature of Business Activity

Types of Business Organisation: Two Sectors

The economy can be divided into two sectors: •The Private Sector •The Public Sector

The Private Sector • Private individuals and firms that are owned by private individuals • Firms in the private sector include: – Sole Traders – Private Limited Companies (Ltd) – Partnerships – Public Limited Companies (PLC)

Private Sector Firms One of the key differences is between: • Sole traders and partnerships whose liability is unlimited And • Private Limited and Public Limited Companies, who have ‘limited liability’

The Public Sector • Made up of central government, local government, and businesses that are owned by government • In the last twenty years the number of government-owned firms in the UK has shrunk massively • Now, very few examples remain: for instance, the Royal Mail

Business Ownership The Private Sector

Business Ownership • Sole Trader: – Owned, financed and controlled by one individual but can employ other staff • Common in local building firms, small shops, restaurants, butchers, etc.

Business Ownership 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

Business Ownership Sole Traders: Disadvantages • • • • •

Unlimited Liability Limited access to capital Potential for long hours Pressure of being solely responsible Lack of continuity – business ceases once owner dies

Business Ownership Partnerships:

• Owned, financed and controlled by upwards of 2 partners • Terms of Partnership agreed through contract • Bound by the terms of the Partnership Act 1890 • Common in professions – lawyers, accountants, architects, surveyors, estate agents, vets, etc.

Business Ownership Partnerships: Advantages • • • •

Greater access to capital Shared responsibility Greater opportunity for specialisation Easy to set up

Business Ownership 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

Business Ownership Limited Companies: – Private Limited Company (Ltd) Owned by between 2 and 50 shareholders – Public Limited Company (PLC) Owned by minimum of 2 but no maximum number of shareholders – Has a separate legal identity – the company can sue and be sued – More complex to set up – Minimum share capital of $60,000

Business Ownership Limited Companies:

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 trade • Shareholders have limited liability – can only lose what they agreed to put into the company – no personal liability • PLCs – shares traded on Stock Exchange • LTDs – shares only bought and sold with agreement of existing shareholders

Business Ownership Limited Companies – Issues • Divorce between ownership and control • Potential for diseconomies of scale – communication, decision making, etc. • Must publish accounts • 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 power

Business Ownership Co-operatives: Ownership, finance and control in hands of ‘members’ •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

Business Ownership

Franchises: Method of business ownership backed by established ‘brand’ name •Owner gets to run a business with less ‘risk’ •Owner buys the right to use the established company’s name, format products, logos, display units, methods, etc. •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

Other Business Types • Co-operatives are owned by their staff, who are ‘members’ of the firm • Profits are shared amongst the members • Losses too must be shared

Franchises • Many businesses today are franchises • A business idea is licensed to a franchisee • The owners of the brand receive a license fee • The franchisee gains the right to use the business brand

Not For Profit Businesses • Many charity-based business organisations are run as ‘not for profit’ operations • They typically receive donations or funds from groups or government • Any financial surplus is ploughed back into the business • The organisation does not aim to generate profits

Limited Liability – What does it mean? It all comes down to the responsibility for the debts of the business: • A sole trader or partnership can be held responsible for all the debts of the firm • The owners of limited companies can only be held responsible up to the value of their investment in the business

Ownership and Control • Owners often want to keep control of their businesses • This leads many small firms to stay as sole traders, even though this limits their funds • Taking on new partners or shareholders cuts the amount of control that owners have • If you hold the majority of shares (over 50%) you can keep some control, but not all

Legal Responsibility for sole trader • Sole traders have no legal formalities to go through, apart from registering for VAT if their turnover reaches a certain amount • Partnerships also have no legal formalities but may choose to sign a Deed of Partnership • Companies have to go through a series of legal formalities

Forming a Limited Company • Limited companies must produce two documents • Memorandum of Association and Articles of Association • If these are acceptable, the Registrar of Companies awards a Certificate of Incorporation • The company can then trade

Other Legal Requirements for limited companies • A limited company must also send a copy of its annual accounts to the Registrar • It must also hold an Annual General Meeting and invite its shareholders to attend • Becoming a Public Limited Company involves far more time and cost • It must have a minimum of £50,000 share capital

Where the Profits go in limited companies • Limited companies use part of their profits to pay a dividend to shareholders • They can choose not to pay a dividend but always have to pay interest on any borrowing the company has made • Profits can be ‘retained’ and ploughed back into the company

Profits and Losses • Any profits made (once tax has been paid) can be kept by the owners of the business • This makes Sole Trader (and partnership) businesses very attractive • But remember … whatever funds have been put into the business will be lost if it goes bust!

Sources of Finance

Sources of Finance

Business Growth

Internal Sources of Finance and Growth

Selling more goods and services to consumers is one way to grow the business. Title: Home Depot quarterly profit rises 53%. Copyright: Getty Images, available from Education Image Gallery

• ‘Organic growth’ – growth generated through the development and expansion of the business itself. Can be achieved through: • Generating increasing sales – increasing revenue to impact on overall profit levels • Use of retained profit – used to reinvest in the business • Sale of assets – can be a double edged sword – reduces capacity?

External Sources of Finance

The existence of capital markets enable firms to raise long term loans and share capital. Title: Dow up on Wall Street. Copyright: Getty Images, available from Education Image Gallery

• Long Term – may be paid back after many years or not at all! • Short Term – used to cover fluctuations in cash flow • ‘Inorganic Growth’ – growth generated by acquisition

Long Term • Shares (Shareholders are part owners of a company) – Ordinary Shares (Equities): • Ordinary shareholders have voting rights • Dividend can vary • Last to be paid back in event of collapse • Share price varies with trade on stock exchange – Preference Shares: • Paid before ordinary shareholders • Fixed rate of return • Cumulative preference shareholders – have right to dividend carried over to next year in event of non-payment – New Share Issues – arranged by merchant or investment banks – Rights Issue – existing shareholders given right to buy new shares at discounted rate – Bonus or Scrip Issue – change to the share structure – increases number of shares and reduces value but market capitalisation stays the same

Long term • Loans (Represent creditors to the company – not owners) – Debentures – fixed rate of return, first to be paid – Bank loans and mortgages – suitable for small to medium sized firms where property or some other asset acts as security for the loan – Merchant or Investment Banks – act on behalf of clients to organise and underwrite raising finance – Government/EU – may offer loans in certain circumstances •

Grants

Short Term •

•

• • •

Bank loans – necessity of paying interest on the payment, repayment periods from 1 year upwards but generally no longer than 5 or 10 years at most Overdraft facilities – the right to be able to withdraw funds you do not currently have – Provides flexibility for a firm – Interest only paid on the amount overdrawn – Overdraft limit – the maximum amount allowed to be drawn the firm does not have to use all of this limit Trade credit – Careful management of trade credit can help ease cash flow – usually between 28 and 90 days to pay Factoring – the sale of debt to a specialist firm who secures payment and charges a commission for the service. Leasing – provides the opportunity to secure the use of capital without ownership – effectively a hire agreement

Business Angels

Business Angels • Individuals looking for investment opportunities • Generally small sums up to £100,000 • Could be an individual or a small group • Generally have some say in the running of the company

Venture Capital

Venture Capital • Pooling of capital in the form of limited companies – Venture Capital Companies • Looking for investment opportunities in fast growing businesses or businesses with highly rated prospects • May also buy out firms in administration who are going concerns • May also provide advice, contacts and experience • In the UK, venture capitalists have invested £50 billion since 1983

Sources of Finance for Development

International Institutions

The World Bank • An agency of the United Nations • A group of five organisations which focus on providing funds for projects aimed at alleviating poverty, inequality and promoting development • Currently has 184 members

The World Bank • The 5 institutions: • The International Bank for Reconstruction and Development (IBRD) – provides loans and advice to poor countries to assist development • The International Development Association (IDA) – interest free credits and grants to countries who are not able to borrow through normal market channels • International Finance Corporation (IFC) – providing finance through the private sector for development • The Multilateral Investment Guarantee Agency (MIGA) – providing investors with protection against risk to promote investment in developing countries • The International Centre for the Settlement of Investment Disputes (ICSID) – arbitration service in the event of investment disputes

Special Drawing Rights (SDRs)

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) • •

Policies to attract investment Such investment often associated with multinational corporations (MNCs) • Policies need to focus on having the right conditions in place – – Infrastructure – Security – Peace – Local laws and regulation – Government corruption – Freedom of the market – Local labour supply – Legal issues – protection for the investor, property rights, etc. – Tax regime • Has been criticised as being a means by which MNCs can exploit poorer countries

Aid

Aid • Bilateral – from one country to another • Multilateral – aid distributed by an agency who co-ordinate donations Aid can be useful for important infrastructure projects such as dams which help to generate electricity as well as providing irrigation schemes. Copyright: Antijape, http://www.sxc.hu

Aid • Benefits: – Help to kick-start economic development – Used to help develop vital infrastructure needed to encourage other investment

• Costs: – Not always used for appropriate purposes – Can be linked to various ‘strings’ that may not be in the recipient countries’ interests – Crowding out of domestic investment – Creates a dependency culture – Distorts the working of the market

External environment •

•

What is an external analysis? – Differentiate between external opportunities and threats. – Describe how organizations are open systems. – Distinguish between the environment as information perspective and the environment as source of resources perspective. – Explain how an external analysis is more than scanning the environment. How do you do an external analysis? – Describe the components in an organization’s specific environment. – Explain each of the forces in Porter’s five forces model.

WHAT IS AN EXTERNAL ANALYSIS? External Analysis Scan and evaluate various external environmental sectors impacting performance

Opportunities Positive external environmental trends that improve the organization’s performance

Threats Negative external environmental trends that hinder the organization's performance

What is an external analysis? • External analysis builds upon the notion that organizations are open systems – Often success is determined by the environment around the organization and not the intelligence inside the organization

Organizations as Open Systems Environment

Processes

Outputs

Organization Functions: Production-Operations Goods Resources: Marketing Services Physical Financial-Accounting Performance Capital Human Resource Mgt. Measures: Human Research and Development Financial InformationInformation Systems Productivity Managerial Activities: Achieve Goal Planning Organization Leading Controlling Organization

Environment

Environme nt

Environment

Organization Inputs

Two Perspectives on Environment – – – – – –

Environment as Source of Information Environment viewed as source of information Environments differ in amount of uncertainty Uncertainty is determined by complexity and rate of change Reducing uncertainty means obtaining information Amount of uncertainty determines amount and types of information needed Information obtained by analyzing external environment

Two Perspectives on Environment – – – – – –

Environment as Source of Resources Environment viewed as source of scarce and valued resources Organizations depend on the environment for these resources Resources are sought by competing organizations Dependency is determined by difficulty of obtaining and controlling resources Reducing dependency means controlling environmental resources Controlling environmental resources means knowing about the environment and attempting to change or influence it

External Environmental Sectors Specific Environment – External sectors that directly impact the organization’s strategic decisions by opening up opportunities or threats General Environment – External sectors that indirectly affect the organization’s strategic decisions and which may pose opportunities and threats

An Organization’s External Environment General Environment Technologi cal

Specific Environment Industry-Competitors

Economi c Current Rivalry

Substit Organization ute Potenti Product Bargaini al s Bargaini ng Entrant Politicalng Power of s Demograp Legal Power of Supplier hic Buyers s Sociocultu ral

Ec on

hic

rap

g mo De

om ic

General Environment

ica Po lit

l ca ni

ch Te

l-L eg al

Sociocultural

Sources of External Influence

General Environment Economic All the macroeconomic data, current statistics, trends, and changes •

Interest rates

•

Monetary exchange rates

•

Budget deficit-surplus

•

Trade deficit-surplus

•

Inflation rates

•

GNP or GDP

•

Consumer income, spending, and debt levels

•

Unemployment levels

•

Workforce productivity

General Environment

Demographics Current statistical data and trends in population characteristics • Gender • Age • • •

Income levels Ethnic makeup

• Education • Family

composition

• Geographic •

location

Birth rates Employment status

General Environment

Sociocultural • Country's culture • Society's • Traditions • Values • Attitudes • Beliefs • Tastes • Patterns of behavior

General Environment Political-Legal • Federal, state, and local • Laws • Regulations • Judicial decisions • Political forces

General Environment

Technical Improvements, advancements, and innovations that create opportunities and threats • Communications • Computing • Transportation • Manufacturing • Robotics • Biotechnology • Medicine and medical • Telecommunications • Consumer electronics

External Information System

An external information system (EIS) is an information system that provides managers with needed external information on a regular basis

What is the external environment of organizations?

 Competitive advantage is a core

competency that clearly sets an organization apart from competitors and gives it an advantage over them in the marketplace.

What is the external environment of organizations?  Companies may achieve competitive advantage in many ways, including: • Products • Pricing • Customer service • Cost efficiency • Quality

What is the external environment of organizations?  The general environment — all of the

background conditions in the external environment of the organization including: – – – – –

Economic Socio-cultural Legal-political Technological Natural environment

What is the external environment of organizations?  The specific (task) environment — actual

organizations, groups, and persons with whom an organization interacts and conducts business.  Includes important stakeholders such as:

– Customers – Suppliers – Competitors – Regulators –

Model for Change Environment M3

Creativity

Consensus

Vision

Self-knowledge

Culture

Environment Vision

Momentum

Environment

Directing Team

Consensus

Self-knowledge

Culture

• You must create an overwhelming mandate for change • External world key to success –who are the customers • Connecting the dots • “Sniff and tell” • Fear and lust • Never underestimate complacency

Environment Momentum

What demands change? • Changes in the external environment. – – – – – –

Increased competition. Changing consumer demand. Constrained resources Failed performance New social values Changing technologies

Directing Team

Consensus

Vision

Self-knowledge

Culture

Environment Momentum

What demands change?

Directing Team

Consensus

• Changes in the internal environment. – – – – –

Increased expectations Erosion of authority New management structures. New technologies Competing interests

?

Vision

Self-knowledge

Culture

Connecting the dots Diversity

Consumer Demands

Rate of Change

Aging Population

Generation X

Competitive Environment

New Technology ?

Shortage of faculty ? Flexibility

More Focus on Community

Underserved populations New Work Values

More Competition for Workers

Globalization

Current Drivers –Continued Movement to Systems ⇒ Tower mentality of the guilds ⇒ Driven in part by choice of consumers ⇒ Prerogatives of incumbents remain paramount ⇒ Less of a system more a collection How did we get here? Where are we going?

When does change occur? General Theory Change = A< BCD A = benefits of maintaining status quo B = pain of maintaining status quo C = vision of a different world D = small steps to achieve the vision

Environment

Vision: The Grace of Great Things What is a vision? • Provides the heart to go against the status quo • Explains the world differently • Combines emotion and reason • Informs workers, partners and customers • Tied to values and past successes • Brief and direct

Momentum

Directing Team

Consensus

Vision

Self-knowledge

Culture

Vision: The Grace of Great Things Transformational in nature, nothing else worth doing An agenda worth advancing Drawn from core competencies and assets Developed with clear and honest assessment of environment Given adequate time to develop, mature and be realized Creates context for subsequent implementation and planning work “if you do not know where you are going, any road gets you there”

Vision: The Grace of Great Things From vision to systemic change

Vision

Strategies

• Multi-level change process • Context, Timeframe, Skills, Products • Preferences – yours and theirs • Ceilings and floors • Learn from the process “The Plan is Nothing,

Plans

Planning is Everything.” Dwight D. Eisenhower

Scale and Time

Complexity

High

Low

Start Over

Reinvent Improve Scramble

Short

Time

Source: O’Neil E, Kimball B. Health Care’s Human Crisis: Nursing. (Princeton: Robert Wood Johnson Foundation, 2002)

Long

Context of change • Focus the change efforts on the right problem

Environment System Organization Team Individual

Environment Momentum

Self Knowledge

Directing Team

Consensus

Known to Self

Unknown to Self

Feedback E Known to x Others p o s u Unknown r to Others e

Public Arena

Blindspot

Facade or Private

Unknown or Unconscious

Vision

Self-knowledge

Culture

What is change? What is conserved defines identity. But what is conserved also defines what can change. This is interesting. We are so concerned about change, yet what is most important is what is conserved… politics conserve. Even revolutionaries conserve. All systems only exist as long as there is conservation of that which defines them.” --Humberto Maturana, biologist

What is change? • • •

A replacement of the old with the new Shifts to new types of behavior Shifts to new ways of thinking and interacting

…but that’s not all

Change is also... • • • •

An extension of the old into the future Continuity and preservation By changing certain things, we preserve other things Hopefully, we preserve things that are most important to us (identity)