Business organisationsBusiness organisationsA A businessbusiness (also called a (also called a companycompany, , enterpriseenterprise

or or firmfirm) is a ) is a legally recognized organizationlegally recognized organization designed to designed to provide goods and/or servicesprovide goods and/or services to to consumersconsumers..

Businesses are predominant in capitalist Businesses are predominant in capitalist economies, most being privately economies, most being privately ownedowned and and formed to formed to earnearn profit that will increase the profit that will increase the wealthwealth of its owners and grow the business of its owners and grow the business itself. itself.

The owners and operators of a business The owners and operators of a business have as one of their main objectives have as one of their main objectives the the receipt or generation of a financial returnreceipt or generation of a financial return in in exchangeexchange for work and acceptance of for work and acceptance of risk.risk.

Notable exceptions include cooperative Notable exceptions include cooperative enterprises and state-owned enterprises.enterprises and state-owned enterprises.

Businesses can also be formed not-for-profit Businesses can also be formed not-for-profit or be state-owned. or be state-owned.

Basic forms of ownershipBasic forms of ownership

Although forms of business ownership vary Although forms of business ownership vary by jurisdiction, there are several common by jurisdiction, there are several common forms: forms:

Sole proprietorshipSole proprietorship

PartnershipPartnership

CorporationCorporation

CooperativeCooperative

Sole proprietorshipSole proprietorship

A A sole proprietorshipsole proprietorship also known as a also known as a sole tradersole trader, or , or simply simply proprietorshipproprietorship is a type of business entity is a type of business entity which is owned and run by which is owned and run by one individualone individual and where and where there is there is no legal distinctionno legal distinction between the between the ownerowner and the and the businessbusiness. .

All profits and all losses accrue to the owner (subject to All profits and all losses accrue to the owner (subject to taxation). taxation).

All assets of the business are owned by the proprietor All assets of the business are owned by the proprietor and all debts of the business are their debts and they and all debts of the business are their debts and they must pay them from their personal resources. must pay them from their personal resources.

This means that the This means that the owner has unlimited owner has unlimited liability.liability. It is a "sole" proprietorship in the It is a "sole" proprietorship in the sense that the owner has no partners sense that the owner has no partners (partnership).(partnership).

A sole proprietor A sole proprietor maymay do business with a do business with a trade name other than his or her legal trade name other than his or her legal name. name.

This also allows the proprietor to open a This also allows the proprietor to open a business account with banking institutions.business account with banking institutions.

PartnershipPartnershipA A partnershippartnership is a type of business entity in is a type of business entity in

which which partnerspartners (owners) share with each other (owners) share with each other the profits or losses of the business. the profits or losses of the business.

Partnerships are often favoured over corporations Partnerships are often favoured over corporations for taxation purposes, as the partnership for taxation purposes, as the partnership structure does not generally incur a tax on structure does not generally incur a tax on profits before it is distributed to the partners (i.e. profits before it is distributed to the partners (i.e. there is no dividend tax levied).there is no dividend tax levied).

However, depending on the partnership However, depending on the partnership structure and the jurisdiction in which it structure and the jurisdiction in which it operates, owners of a partnership may be operates, owners of a partnership may be exposed to greater personal liability than exposed to greater personal liability than they would as a shareholder of a they would as a shareholder of a corporation. corporation.

CorporationCorporationA A corporationcorporation is a is a legal entity separatelegal entity separate from the from the

shareholders and employees. shareholders and employees. In British tradition it is the term designating a In British tradition it is the term designating a

body corporate, where it can be either a body corporate, where it can be either a corporation sole (an office held by an individual corporation sole (an office held by an individual natural person, which is a legal entity separate natural person, which is a legal entity separate from that person) or a corporation aggregate from that person) or a corporation aggregate (involving more persons).(involving more persons).

In American and, increasingly, international In American and, increasingly, international usage, the term denotes a body corporate usage, the term denotes a body corporate formed to conduct business. formed to conduct business.

Corporations exist as a product of Corporations exist as a product of corporate lawcorporate law, , and their rules balance the interests of the and their rules balance the interests of the management who operate the corporation; management who operate the corporation; creditors who loan it creditors who loan it goods, services or moneygoods, services or money;;

shareholders, typically in the secondary market, shareholders, typically in the secondary market, who hold shares related to the original who hold shares related to the original investment of capital; the employees who investment of capital; the employees who contribute their labour; and the clients they contribute their labour; and the clients they serve. serve.

People work together in corporations to produce People work together in corporations to produce value and generate income. value and generate income.

In modern times, corporations have become In modern times, corporations have become an increasingly dominant part of economic an increasingly dominant part of economic life. life.

People rely on corporations for employment, People rely on corporations for employment, for their goods and services, for the value for their goods and services, for the value of the pensions, for economic growth and of the pensions, for economic growth and cultural development. cultural development.

The six largest businesses of the world The six largest businesses of the world in 2005 by revenue in millions of dollars in 2005 by revenue in millions of dollars

CooperativeCooperativeA A cooperativecooperative often referred to as a often referred to as a co-opco-op or or

coopcoop) is defined by the ) is defined by the International Co-International Co-operative Alliance’s Statement on the Co-operative Alliance’s Statement on the Co-operative Identityoperative Identity as an autonomous as an autonomous association of persons united voluntarily to association of persons united voluntarily to meet their common meet their common economic, social, and economic, social, and cultural needscultural needs and aspirations through a jointly- and aspirations through a jointly-owned and democratically-controlled owned and democratically-controlled enterprise.enterprise.

It is a business organization owned and operated It is a business organization owned and operated by a group of individuals for their mutual benefit. by a group of individuals for their mutual benefit.

A cooperative may also be defined as a business A cooperative may also be defined as a business owned and controlled equally by the people who owned and controlled equally by the people who use its services or who work at it. use its services or who work at it.

Cooperative enterprises are the focus of study in Cooperative enterprises are the focus of study in the field of cooperative economics. the field of cooperative economics.

Also…Also…

Economic democracyEconomic democracy

Franchising Franchising

Joint ventureJoint venture

Holding companiesHolding companies

Holding companyHolding company

A A holding companyholding company is a company or firm that is a company or firm that owns other companies' outstanding stock.owns other companies' outstanding stock.

It usually refers to a company which does not It usually refers to a company which does not produce goods or services itself, rather its produce goods or services itself, rather its onlyonly purpose is owning shares of other companies. purpose is owning shares of other companies.

Holding companies allow the reduction of risk for Holding companies allow the reduction of risk for the owners and can allow the ownership and the owners and can allow the ownership and control of a number of different companies. control of a number of different companies.

Economic democracyEconomic democracyEconomic democracyEconomic democracy is a socioeconomic is a socioeconomic

philosophy that suggests transfer of decision-philosophy that suggests transfer of decision-making authority from a small minority of making authority from a small minority of corporate shareholders to the larger majority of corporate shareholders to the larger majority of public stakeholders.public stakeholders.

While there is no single definition or approach, all While there is no single definition or approach, all theories and real-world examples of economic theories and real-world examples of economic democracy are based on a core set of democracy are based on a core set of fundamental assumptions.fundamental assumptions.

Proponents generally agree that modern economic Proponents generally agree that modern economic conditions tend to hinder or prevent society from conditions tend to hinder or prevent society from earning enough income to purchase its output earning enough income to purchase its output production. production.

Centralized corporate monopoly of common Centralized corporate monopoly of common resources typically forces conditions of artificial resources typically forces conditions of artificial scarcity upon the greater majority, resulting in scarcity upon the greater majority, resulting in socio-economic imbalances that restrict workers socio-economic imbalances that restrict workers from access to economicfrom access to economic opportunity and opportunity and diminish consumer purchasing power.diminish consumer purchasing power.

FranchisingFranchising

FranchisingFranchising is the practice of using another is the practice of using another person's business model.person's business model.

The The franchisorfranchisor grants the independent operator grants the independent operator the right to distribute its products, techniques, the right to distribute its products, techniques, and trademarks for a percentage of gross and trademarks for a percentage of gross monthly sales and a royalty fee.monthly sales and a royalty fee.

Various tangibles and intangibles such as Various tangibles and intangibles such as national or international advertising, national or international advertising, training, and other support services are training, and other support services are commonlycommonly made available by the made available by the franchisor. franchisor.

Agreements typically last from five to thirty Agreements typically last from five to thirty years, with premature cancellations or years, with premature cancellations or terminations of most contracts bearing terminations of most contracts bearing serious consequences for franchisees. serious consequences for franchisees.

Franchising has been around for many centuries Franchising has been around for many centuries but did not come to prominence until the 1930s but did not come to prominence until the 1930s in the United States, when the establishment of in the United States, when the establishment of electricity, vehicles, and, in the 1950s, the electricity, vehicles, and, in the 1950s, the Interstate Highway system helped propel Interstate Highway system helped propel modern franchising, most notably franchise-modern franchising, most notably franchise-based food service establishments. based food service establishments.

According to the International Franchise According to the International Franchise Association approximately 4% of all businesses Association approximately 4% of all businesses in the United States are franchises. in the United States are franchises.

Joint ventureJoint venture

A A joint venturejoint venture (often abbreviated (often abbreviated JVJV) is an entity ) is an entity formed between two or more parties to undertake formed between two or more parties to undertake economic activity together. economic activity together.

The parties agree to create a new entity by both The parties agree to create a new entity by both contributing equity, and they then share in the contributing equity, and they then share in the revenues, expenses, and control of the enterprise.revenues, expenses, and control of the enterprise.

The venture can be for one specific project only, or a The venture can be for one specific project only, or a continuing business relationship such as the Fuji continuing business relationship such as the Fuji Xerox joint venture. Xerox joint venture.

This is in contrast to a This is in contrast to a strategic alliancestrategic alliance, which , which involves no equity stake by the participants, involves no equity stake by the participants, and is a much less rigid arrangement. and is a much less rigid arrangement.

The phrase generally refers to the The phrase generally refers to the purposepurpose of the of the entity and not to a entity and not to a typetype of entity. of entity.

Therefore, a joint venture may be a Therefore, a joint venture may be a corporationcorporation, , limited liability companylimited liability company, , partnershippartnership or or other legal structure, depending on a number of other legal structure, depending on a number of considerations such as tax and civil liabilities. considerations such as tax and civil liabilities.

Reasons for forming a joint Reasons for forming a joint ventureventure

Internal reasonsInternal reasons

Build on company's strengths Build on company's strengths

Spreading costs and risks Spreading costs and risks

Improving access to financial resources Improving access to financial resources

Economies of scale and advantages of size Economies of scale and advantages of size

Access to new technologies and customers Access to new technologies and customers

Access to innovative managerial practicesAccess to innovative managerial practices

Competitive goalsCompetitive goals

Influencing structural evolution of the Influencing structural evolution of the industry industry

Pre-empting competition Pre-empting competition

Defensive response to blurring industry Defensive response to blurring industry boundaries boundaries

Creation of stronger competitive units Creation of stronger competitive units

Speed to market Speed to market

Improved agility Improved agility

Strategic goalsStrategic goals

Synergies Synergies

Transfer of technology/skills Transfer of technology/skills

Diversification Diversification

Reasons for dissolving a joint Reasons for dissolving a joint ventureventure

Aims of original venture met Aims of original venture met

Aims of original venture not met Aims of original venture not met

Either or both parties develop new goals Either or both parties develop new goals

Either or both parties no longer agree with joint Either or both parties no longer agree with joint venture aims venture aims

Time agreed for joint venture has expired Time agreed for joint venture has expired

Legal or financial issues Legal or financial issues

Evolving market conditions mean that joint venture is Evolving market conditions mean that joint venture is no longer appropriate or relevant no longer appropriate or relevant

organisation - how businesses organisation - how businesses organise themselvesorganise themselves

All businesses are organised into All businesses are organised into groups of peoplegroups of people. .

This is so the employees can be This is so the employees can be organisedorganised and and controlledcontrolled to make sure the necessary work is one to make sure the necessary work is one efficiently.efficiently.

These groups have These groups have managersmanagers responsible for them. responsible for them.

There are different ways of organising the business into There are different ways of organising the business into groups, and each way has its advantages and groups, and each way has its advantages and disadvantages. disadvantages.

There are additional benefits of organising people There are additional benefits of organising people into groups, such as making it clearer how into groups, such as making it clearer how communications should be organised. communications should be organised.

The development of team-spirit also usually The development of team-spirit also usually improves motivation and productivity.improves motivation and productivity.

Organisation by FunctionOrganisation by Function

Comments on this method of Comments on this method of organisation: organisation:

1.1. Specialisation by function is more efficient. Employees Specialisation by function is more efficient. Employees get experienced in and competent at one particular get experienced in and competent at one particular job.job.

2.2. Accountability is clear i.e. whose responsibility is it to Accountability is clear i.e. whose responsibility is it to do what.do what.

3.3. Clarity is improved i.e. it is clear who does what.Clarity is improved i.e. it is clear who does what.

4.4. Communication is weakened by a lack of Communication is weakened by a lack of communication across and between functions. HRM communication across and between functions. HRM may be doing things Marketing need to know about.may be doing things Marketing need to know about.

5.5. Inertia may set in where departments become over-Inertia may set in where departments become over-focussed on their own agendas and lose sight of the focussed on their own agendas and lose sight of the overall business objectives. In extreme case the overall business objectives. In extreme case the team-spirit may degenerate into tribalism where team-spirit may degenerate into tribalism where departments are ‘at war’ with each other and are departments are ‘at war’ with each other and are more concerned with ‘winning’ this war than more concerned with ‘winning’ this war than attending to the overall business objectives.attending to the overall business objectives.

6.6. This system can become overly bureaucratic where This system can become overly bureaucratic where flexibility is lost because things have to be done ‘by flexibility is lost because things have to be done ‘by the book’.the book’.

7.7. This system may not be suitable for large This system may not be suitable for large businesses with many different markets and/or businesses with many different markets and/or products.products.

Organisation by ProductOrganisation by Product

Comments on this method of Comments on this method of organisation: organisation:

1.1. This structure gives focus on individual products, which may This structure gives focus on individual products, which may be especially appropriate if different products have different be especially appropriate if different products have different problems and concerns. The issue of focus is important problems and concerns. The issue of focus is important because it determines the priorities people will have, and the because it determines the priorities people will have, and the way they think about those priorities.way they think about those priorities.

2.2. Each group can be run as a separate profit centre. This way, Each group can be run as a separate profit centre. This way, healthy competition and rivalry can develop between ‘teams’ healthy competition and rivalry can develop between ‘teams’ which can help motivation and productivity. It is also flexible in which can help motivation and productivity. It is also flexible in that poorly performing groups can be closed down without too that poorly performing groups can be closed down without too much disruption to the rest of the organisation.much disruption to the rest of the organisation.

3.3. Co-operation between teams will improve where it is Co-operation between teams will improve where it is in the interests of both teams to do so.in the interests of both teams to do so.

4.4. There is a danger of duplication of resource use if There is a danger of duplication of resource use if each team has a Marketing department, a Finance each team has a Marketing department, a Finance department and so on.department and so on.

5.5. Rivalry can get out of hand and become destructive.Rivalry can get out of hand and become destructive.

6.6. Individual teams can get out of overall management Individual teams can get out of overall management control, especially if headed by a very ambitious control, especially if headed by a very ambitious person.person.

Organisation by Area/RegionOrganisation by Area/Region

Comments on this method of Comments on this method of organisation:organisation:

1.1. Better response to and focus on local customer needs.Better response to and focus on local customer needs.

2.2. Better communication within the locally-based department.Better communication within the locally-based department.

3.3. Rivalry between departments.Rivalry between departments.

4.4. Duplication of resource use.Duplication of resource use.

5.5. Conflict and lack of co-operation between departments.Conflict and lack of co-operation between departments.

Organisation by Organisation by Customer/Customer TypeCustomer/Customer Type

Comments on this method of Comments on this method of organisation:organisation:

1.1. This method of organisation promotes focus on This method of organisation promotes focus on customers and their different individual needs. This is customers and their different individual needs. This is a major advantage and helps a business to become a major advantage and helps a business to become market oriented as opposed to the previous product market oriented as opposed to the previous product oriented structure.oriented structure.

2.2. Departments can be organised by market segment Departments can be organised by market segment which adds to the focus on customer need.which adds to the focus on customer need.

3.3. It is sometimes difficult to define exactly which group It is sometimes difficult to define exactly which group a particular customer belongs to.a particular customer belongs to.

4.4. Some customer groups may be small and so Some customer groups may be small and so individual departments may be inefficient.individual departments may be inefficient.

5.5. There will be duplication of resources.There will be duplication of resources.

6.6. Individual departments may escape from Individual departments may escape from proper overall management control.proper overall management control.

Organisation by ProcessOrganisation by Process

Comments on this method of Comments on this method of organisation:organisation:

1.1. This structure gives focus on production This structure gives focus on production processes which may be appropriate where, processes which may be appropriate where, as in the example of oil, the processes are as in the example of oil, the processes are quite different with different problems and quite different with different problems and needs.needs.

2.2. Otherwise, this is very similar to organisation Otherwise, this is very similar to organisation by function.by function.

Conclusions on organisational Conclusions on organisational structuresstructures

All these structures have strengths and All these structures have strengths and weaknesses which a business has to think weaknesses which a business has to think about before choosing which one to use. about before choosing which one to use.

Changing that decision, and re-structuring, is very Changing that decision, and re-structuring, is very disruptive and very expensive, so it is better to disruptive and very expensive, so it is better to get it right the first time. get it right the first time.

Communications and control are key issues. Communications and control are key issues.

The question of focus is also very important, because The question of focus is also very important, because the structure affects the way employees think about the structure affects the way employees think about themselves and their own personal objectives e.g. ‘I themselves and their own personal objectives e.g. ‘I am an accountant’ or ‘I am a soap-team member’ or ‘I am an accountant’ or ‘I am a soap-team member’ or ‘I am a driller’.am a driller’.

It is natural for humans to identify with a group of people It is natural for humans to identify with a group of people (a ‘team’) and this can be turned to the business’ (a ‘team’) and this can be turned to the business’ advantage by acting as a motivator and helping to advantage by acting as a motivator and helping to raise productivity. raise productivity.

But it is also an important limiting factor. But it is also an important limiting factor.

People become very defensive and territorial People become very defensive and territorial about the interests of ‘their’ team and this can about the interests of ‘their’ team and this can get in the way of objective problem-solving. get in the way of objective problem-solving.

In the extreme, a business can disintegrate into a In the extreme, a business can disintegrate into a bunch of warring tribes where ‘revenge’ on ‘that bunch of warring tribes where ‘revenge’ on ‘that lot’ overrides the business’ objectives.lot’ overrides the business’ objectives.