Business Structures and Factors

Chapter 1.1: Defining a Business

• A business is a structured decision-making organization.
• It strategically uses inputs to produce tangible goods, provide intangible services, or both to satisfy customer demand
• Inputs are resources like labor and raw materials used in production.
• Outputs are the products (goods or services) resulting from the production process.
• Peter Drucker defines the purpose of a business as "to create a customer."

Goods vs. Services

• Products encompass both goods and services.
• Goods are physical, tangible items (smartphones, clothes, food).
• Services are intangible offerings (haircuts, transport, education, healthcare).
• Businesses may supply goods/services to individuals or to other organizations (freight, distribution, insurance).

The Entrepreneur

• An entrepreneur plans, organizes, and manages a business, undertaking financial risks.
• Richard Cantillon (1680-1734) coined the term.
• Entrepreneurship describes business leaders who are driven, innovative, and passionate, proactively seeking and capitalizing on market opportunities.

Types of Business Entities & Key Concepts

• Several factors influence the choice of business entity.
• Amount of finance is a factor to be considered, sole traders need less capital than PLC.
• A legal status change usually leads to increased finance needs.
• Business size is also a factor to be considered, larger businesses trend towards being limited liability.
• The desire for limited liability can guide the choice of business entity.
• Control and ownership influence business structure, some choose small to retain control.
• Business activity type affects legal status, industries reliant on external finance tend to be public.
• As a business changes, it may need other types of financing and this changes its legal status

Non-Governmental Organizations (NGOs)

• The UN defines NGOs as private entities that aim to relieve suffering, help the poor, protect the environment, supply basic needs or advance community development.
• NGOs are not-for-profit. Examples are Médecins Sans Frontières and Friends of the Earth.
• Coined in Article 71 of the UN Charter (1945), an NGO is independent of government influence, and structured as not-for-profit.
• Oxfam, Greenpeace, Amnesty International, and UNICEF are large NGOs.
• NGOs are typically managed by senior managers/trustees akin to a limited liability company's board.
• Operational NGOs are focused on specific objectives, often involved in relief and community projects like Oxfam and UNICEF.
• Advocacy NGOs promote a cause via direct action (lobbying, PR), like Greenpeace and Amnesty International.

The Bill & Melinda Gates Foundation

• The Bill & Melinda Gates Foundation was established in 2000
• Aim to enhance healthcare, and extreme poverty
• The Foundation is controlled by Bill Gates, Melinda Gates and Warren Buffett
• Worth over $50 billion, making it the world’s largest non-profit private social enterprise.

For-Profit Social Enterprises

• Social enterprises generate revenue with social goals at their core.
• They return surplus for social good over personal profit.
• They can operate as non-profits or for-profits, with two main goals: achieving social objectives and earning revenues beyond costs.
• Social entrepreneurs require a sustainable business to deliver social good.
• Benefits any financial surplus to aid society beyond shareholder rewards.
• They create work, thereby improving economic situations in local communities
• Social enterprises operate in a transparent way including a clean corporate conscience.

Grameen Bank

• Founded in 1983 in Bangladesh by social entrepreneur Muhammad Yunus.
• The bank offers microfinance to those in poverty to become self-sufficient.
• It does not need collateral (financial security) from its borrowers.
• 97% of borrowers are women.
• It holds over $2.8bn in assets, employing over 20,000.
• Yunus won the 2006 Nobel Peace Prize, and 2009 Presidential Medal of Freedom.

Types of For-Profit Social Enterprises

• The types are Private Sector, Public Sector and Cooperatives
• Private for-profit social enterprises are like for-profit businesses but reinvest or donate surplus.
• They utilise business practices to achieve social aims. Such private sector companies earn revenue in socially responsible methods.
• Social business conducts activities which benefit the society
• Unlike normal charities, those types of enterprises are a business
• By earning a financial, that helps enable expansion of activities
• It can also produce goods or services, and compete with all types of business
• Public, private sectors and for-profits all have 3 aims also known as triple bottom line
• Triple bottom line created by John Elkington in 1994.

Public Sector Companies

• Run by the government, aiming to provide essential services/revenues.
• For example national airline carriers, air travel, telecom, transportation, and postal.
• Some examples are Australia Post, Ontario Niagara Parks Commission or Temasek Holdings.

Publicly Held Companies

• Sells shares to the public via a stock exchange.
• Google floated on the NASDAQ in 2004, raising $2.7bn.
• Shares in google increased by 3,473% since its IPO
• Share price can be used as an example
• Porsche is a major shareholder in Volkswagen.
• Shareholder risks include no dividends for unprofitable companies and dependence on the Board of Directors.

Privately Held Companies

• Privately held companies do not sell stock to the general public, but instead privately sell them.
• Run like family businesses.
• Companies are required to hold a meeting known as AGM

AGM Processes

• Shareholders vote on company processes
• Shareholders direct questions to the leadership
• Shareholder votes must have approval of the previous years
• A privately held company is a limited company that cannot raise capital from from the public via a stock exchange
• They must be sold to private investors

Mars Inc.

• Mars is a global confectionery and food processing manufacturer with annual sales in excess of $37bn.
• It is privately held

Abbreviations for Publicly Held Companies

• Several examples here should be used as an example.
• Flotation describes when a publicly held company first sells its process

Limited Liability Companies

• Advantages and disadvantages are presented to the user.
• List of advantages such as raising finance.
• List of disadvantages such as compliance costs
• Before a limited liability companies can trade, two needs must documented to the authorities
• The documentations is memorandum of association which details the fundamental details
• and finally Articles of Association detailing the regulations of business processes
• Once authorities are happy, the business recognizes business as separate legal entity

Partnerships

• It is a private business consisting of one or two person, maximum amount of 20.
• Needs to also follow legal requirements as well
• Investors which do not take part, are silent partners who could also gain profit.
• Unlimited liability is to be shared for at least with one owner
• Disadvantages of partnerships also include unlimited liability
• Problems also exists if people want to leave the business due to the contracts etc
• Prolonged decision making is an issue because more time is dedicated and spent
• Conflict within partnerships is common

Sole Proprietorships

• Sole trader has a benefit of legal formalities, and are not complex to begin.
• The business is owned by one person
• The disadvantages include unlimited liability
• The business also has high chances of failure statistically
• Private is common factor to be considered
• Lastly business continuation can be affected if the leader is away

Types of Organizations

• Main features of the following orgs are sole traders, Partnerships, privately/publicly held companies.
• This is a key factor in types of profit and all types of businesses.
• A sole trader is an example of freelancer, decorators etc
• Some traders may choose to run business with very small capital.

Other topics

• Business models should add value to products and services to make the business more attractive. Irrespective of culture, the goal is sustainable business strategy.
• Many will not last but there is a need to plan for challenges

Challenges of starting a business

• Challenges include a lack of financing,
• An unestablished customer base, cash flow etc
• Cash flow problems will have an impact on other business aspects
• Marketing problems also create huge risks

Different Sectors

• Include Primary, Secondary, Tertiary, Quaternary, and their operations
• When countries achieve sustained economic growth, the reliance is less on the primary sector
• Economists push secondary sector because they help increase domestic income Value is extracted
• Companies are able to exploit the third sector and fourth sectors
• Quaternary sector is a sub category from last sector High tech etc are examples, it requires a highly educated workforce.