Business 101 Course Book PDF

BUSINESS 101 DLBBAB01_E BUSINESS 101 MASTHEAD Publisher: IU Internationale Hochschule GmbH IU International University of Applied Sciences Juri-Gagarin-Ring 152 D-99084 Erfurt Mailing address: Albert-Proeller-Straße 15-19 D-86675 Buchdorf [email protected] www.iu.de DLBBAB01_E Version No.: 001-2023-0608 N.N. © 2023 IU Internationale Hochschule GmbH This course book is protected by copyright. All rights reserved. This course book may not be reproduced and/or electronically edited, duplicated, or dis- tributed in any kind of form without written permission by the IU Internationale Hoch- schule GmbH (hereinafter referred to as IU). The authors/publishers have identified the authors and sources of all graphics to the best of their abilities. However, if any erroneous information has been provided, please notify us accordingly. 2 PROF. DR. ANDREAS HERRMANN Mr. Herrmann is Professor of Business Administration at IU International University of Applied Sciences since 2020. His major research interests lie in growth strategy and corporate finance. Mr. Herrmann holds a PhD in Biochemistry from the University of Cambridge (UK) and an MBA from INSEAD (France). He worked as a management consultant for the Boston Consult- ing Group and Monitor Deloitte. As managing director of Healthways Inc. (USA), he was responsible for all business in the DACH (German speaking) region and was one of the co- founders of an innovative software company. As part of his practical projects, Mr. Herrmann offers consulting advice to companies on gen- eral management and digital innovation issues. 3 TABLE OF CONTENTS BUSINESS 101 Module Director.................................................................. 3 Introduction Signposts Throughout the Course Book............................................. 8 Basic Reading.................................................................... 9 Further Reading................................................................. 10 Learning Objectives.............................................................. 12 Unit 1 Businesses and Their Environment 13 1.1 Concepts of Business......................................................... 15 1.2 A System of Economic Relationships........................................... 18 1.3 Business Environment........................................................ 26 Unit 2 Types of Business Organizations 33 2.1 Companies in Production and Service.......................................... 35 2.2 Divisions of Companies....................................................... 43 Unit 3 Management and Structure of Business 45 3.1 Basics of Business Management............................................... 47 3.2 Functions of Organizations, Managers, and Control.............................. 48 3.3 The Decision-Making Process................................................. 53 3.4 Organizational Structures of Business.......................................... 55 Unit 4 Production of Goods and Services 63 4.1 Origin and Development of the Production Process............................. 66 4.2 Industrial Strategy of Business................................................ 69 Unit 5 Marketing of Goods and Services 73 5.1 Goals and Types of Marketing................................................. 77 5.2 Marketing Mix............................................................... 80 4 Unit 6 Management of Labor 83 6.1 Process of Management of Labor.............................................. 85 6.2 Demand for Labor........................................................... 90 6.3 Human Relations in Organizations............................................. 91 Unit 7 Accounting in Business 93 7.1 Functions and Goals of Accounting............................................ 95 7.2 Spheres of Accounting........................................................ 97 7.3 Fundamental Principles of Accounting......................................... 98 Appendix List of References............................................................... 104 List of Tables and Figures........................................................ 115 5 INTRODUCTION WELCOME SIGNPOSTS THROUGHOUT THE COURSE BOOK This course book contains the core content for this course. Additional learning materials can be found on the learning platform, but this course book should form the basis for your learning. The content of this course book is divided into units, which are divided further into sec- tions. Each section contains only one new key concept to allow you to quickly and effi- ciently add new learning material to your existing knowledge. At the end of each section of the digital course book, you will find self-check questions. These questions are designed to help you check whether you have understood the con- cepts in each section. For all modules with a final exam, you must complete the knowledge tests on the learning platform. You will pass the knowledge test for each unit when you answer at least 80% of the questions correctly. When you have passed the knowledge tests for all the units, the course is considered fin- ished and you will be able to register for the final assessment. Please ensure that you com- plete the evaluation prior to registering for the assessment. Good luck! 8 BASIC READING Collins, J. (2011). Good to great: Why some companies make the leap…and others don’t. Harper Business. Covey, S. R. (2020) The 7 habits of highly effective people: Powerful lessons in personal change. Simon + Schuster. Miller, J. (2004). QBQ! The question behind the question. Penguin. 9 FURTHER READING UNIT 1 Gollier, C., & Straub, S. (2020, April 2). Some micro/macro insights on the economics of coronavirus. Part 1: Impact assessment and economic measures. VoxEU. Available online. International Monetary Fund. (2020). World economic outlook update, June 2020: A crisis like no other, an uncertain recovery (pp. 1—20). Available online. UNIT 2 Stverkova, H., & Pohludka, M. (2018). Business organisational structures of global compa- nies: Use of the territorial model to ensure long-term growth. Social Sciences 7(6), 98— 106. Herr, H., & Nettekoven, Z. M. (2017). The role of small and medium-sized enterprises in development. Friedrich–Ebert–Stiftung (FES). Available online. UNIT 3 Gollier, C., & Straub, S. (2020, April 2). Some micro/macro insights on the economics of coronavirus. Part 1: Impact assessment and economic measures. VoxEU. Available online. International Monetary Fund. (2020). World economic outlook update, June 2020: A crisis like no other, an uncertain recovery (pp. 1—20). Available online UNIT 4 European Commission. (2020). Questions & answers: European industrial strategy package. Available online. UNIT 5 Gennaro, L. (2020, July 17). 99+ mind-blowing digital marketing statistics (2020). WPForms. Available online. UNIT 6 Meister, J. (2020, January 15). Top 10 HR trends that matter most in the 2020 workplace. Forbes. 10 UNIT 7 Ministry of Education Singapore. (2020). Principles of accounts: Teaching and learning syl- labus. Curriculum Planning & Development Division, Ministry of Education Singapore. Available online. 11 LEARNING OBJECTIVES The course Business 101 will enhance your understanding of introductory business con- cepts. These concepts, theories, and definitions are the foundational building blocks for organizational success and strengthening your own management knowledge and skills. You will learn about businesses and their environments, as well as types of organizational structures, what companies require to properly function, and what companies consider best practices. Globally, there is an array of different models related to business adminis- tration. This course will help you understand the most widely used management methods and practices. It is likely that you have already encountered one or more of these in your own working environment, whether a small or mid-sized enterprise, a multinational cor- poration, or a not-for-profit firm or public institution. Furthermore, you will gain insights into the complexities associated with the decision- making process and allocation of scarce resources, which, in turn, leads to our strategic exploration of how goods and services are produced and marketed to the public. Lastly, you will become familiar with the international business environment’s demand for man- agement and labor and the fundamental principles of finance, without which making money would not be possible. By the end of this course, you should have a strong founda- tional understanding of the basic business concepts, theories, and definitions outlined in this book, thereby helping you prepare for future learning and career opportunities. 12 UNIT 1 BUSINESSES AND THEIR ENVIRONMENT STUDY GOALS Upon completion of this unit, you will have learned… – to explain the nature, purpose, and goals of a business. – to compare the characteristics of different economic systems. – to understand the impacts of today’s business environment on managing a business organization. 1. BUSINESSES AND THEIR ENVIRONMENT Case Study Figure 1: SpaceX Launch Source: Free-Photos, 2016. Space Exploration Technologies Corporation (traded as SpaceX) is an aerospace manufac- turer and space transportation services firm. The American firm is in Hawthorne, Califor- nia, and was founded in 2002 by Elon Musk with the goal of reducing costs associated with space transportation to enable the colonization of Mars. SpaceX has many notable ach- ievements, beginning in 2006 with the initial flight of the Falcon 1 rocket (which did not successfully reach orbit until the fourth attempt almost 18 months later) (SpaceX, n.d.). Becoming the world’s first commercial spacecraft would be no easy task. In order to accomplish this extraordinary feat, it was crucial for SpaceX to have the right plan for suc- cess. This meant understanding how the external business environment functions and effectively planning the allocation of scare resources, such as money, people, places, things, time, and space. Following the launch of Falcon 1, NASA granted SpaceX an initial $278 million dollar investment (Junod, 2012). Fast-forward approximately six years later to the Spring of 2012, and SpaceX was prepar- ing to launch the Falcon 9 rocket at Cape Canaveral Air Force Station in Florida, USA. The goal was to deliver cargo to the International Space Station (ISS) and prove to NASA that 14 commercialized space transportation was worth the investment (National Aeronautics and Space Administration & SpaceX, 2015). The mission was a success! In fact, Falcon 9’s success helped SpaceX achieve many more successes since then. Most recently, on May 30th, 2020, SpaceX became the first private firm to send humans into space (SpaceX, n.d.). SpaceX’s winning nature can be attributed to a strong understanding and implementation of business concepts. They began with a dream, or as we call it in business, vision, from Vision statement which, the company’s mission was created. To fulfill their vision and mission, SpaceX nee- A vision statement describes what a com- ded a plan that established objectives, strategies, and tactics in the form of a road map to pany desires to achieve in success (Corporate Finance Institute, n.d.-a, n.d.-b). Visit the official SpaceX website. Can the long-run, generally in you identify the company’s vision and mission? What do you attribute to the success of a time frame of five to ten years. SpaceX? Mission statement A mission statement defines what line of busi- ness a company is in, why 1.1 Concepts of Business it exists, and what pur- pose it serves. Think about the various organizations we interact with on a typical day. From the time we get up in the morning to the time we go to bed, we are engaging in commerce. Imagine if your phone and Wi-Fi only worked on weekends. How would you survive the other five days without digital access to friends, families, shopping, and banking? The good news is that everyone would, indeed, survive! The global business environment, like mother- nature, is a strong and adaptive force. Successful organizations are adaptable, agile, and can change with their environment. Successful firms adapt by introducing a new product or improving upon an existing one. A large component of daily life is transactional in nature; therefore, we do not always think about the fact that we are engaging in an array of business principles and concepts dis- cussed throughout this course. Every day, we interact with people and typically conduct commerce to exchange goods and services. Goods are tangible products that can be seen, Commerce touched, felt, or consumed, for example, electronics, medication, and food. Services, such This is the exchange of goods or services as education, health insurance, and 5G networks, are inanimate in nature. between one or multiple parties. This includes Education, healthcare, and the internet have tangible sub-components. For example, the legal, economic, social, cultural, and technologi- knowledge you learn from this course book cannot be physically seen or touched. How- cal ecosystems. ever, it can be tested, measured, and graded as you will receive a degree (tangible), which indicates that you have successfully completed your undergraduate studies. This enables you to show others your credentials in the form of a physical diploma and official recorded transcript. Over time, as people’s needs have changed, so has the interpretation and definition of the term “business”. In the past, a business’s goal was simply to generate profit through multi- ple forms of commerce, yielding profitable returns. Today, business is defined as a unified set of tasks and assets that can be managed with the intent of creating products or serv- ices for clients, investment income generation (dividends and interest, for example), and income generation from other typical tasks (Carroll, 2019). 15 To further understand the definition of business in the twenty-first century, let us look at the following concept, called the 3Ps, designed to stimulate thought about the future of capitalism: 1. People. An organization has an impact (both positive and negative) on its most impor- tant assets, the stakeholders. A stakeholder is anyone with a personal stake in the organization. This includes internal stakeholders, such as managers and employees, as well as external stakeholders, such as customers, suppliers, shareholders, invest- ors, and the government. 2. Planet. Organizations affect the economic environment and our natural environment. It is an organization’s responsibility to use resources effectively and reduce their car- bon footprint. 3. Profit. An organization has an impact (both positive and negative) on the microeco- nomic and macroeconomic economy. This includes job creation, innovation, wealth creation, and tax generation (Kraaijenbrink, 2019). Therefore, we can say that organizations of all shapes and sizes have an obligation to peo- ple, the planet, and profit. Because organizations have a responsibility to the planet, peo- ple, and themselves, we could also say that an organization’s corporate social responsi- Corporate social respon- bility (CSR) may affect people’s quality of life and standard of living. These terms are sibility (CSR) defined as follows: Also known as corporate citizenship, CSR is a busi- ness model used to assist 1. Quality of life is an index that generalizes varying levels of personal happiness with companies with social the intention of measuring intangibles. Some examples are health and wellness, accountability to them- selves and the public (Fer- resources, such as education, freedoms, and healthcare. nando, 2020a). 2. Standard of living refers to the level and quality of products and services (tangibles) available within a given population. Factors included may be income levels, job opportunities, healthcare, and gross domestic product (GDP) (Fontinelle, 2019). Let us examine the way standards of living and quality of life are linked. The United States has one of the highest standards of living in the world. Although countries such as Ger- many have higher wages than the US on average, their standard of living is not higher. This is because the prices of goods are significantly higher (OECD, n.d.). As a result, the same amount of money will not go as far. For example, if Elon Musk buys all of his SpaceX employees an extra value meal from McDonald’s in Cape Canaveral, Florida, after a suc- cessful satellite launch, it will cost less than $5.00 per employee. When Mr. Musk goes to Berlin for the opening of his new Tesla giga-factory and decides to buy his employees that same extra value meal, it will cost about $10.00 per employee (Numbeo, n.d.-a). Although a certain geography’s (country or city) standard of living is high, that does not necessarily mean that they have a higher quality of life. Creating a high quality of life is a Not-for-profit organiza- collaborative effort of governments, businesses, and not-for-profit organizations (Ken- tions ton, 2020b). Through mid-2020, Denmark and Switzerland ranked highest in quality of life, These organizations do not earn profits for their followed by Finland and Australia. It may come as a surprise that the United States is not owners. All of the money in the top 10, in fact, as of July 2020 the US is ranked fifteenth (Numbeo, 2020). Even more earned by or donated to a interesting is the fact that the US fell one spot, from fourteenth, within the first six months not-for-profit organiza- tion is used to pursue the of 2020. Fluctuations like these can be attributed to many factors, such as the economic organization’s objectives and keep it running. 16 state of a nation, political stability, and access to education and healthcare. At the oppo- site end of the spectrum, countries such as Kenya, Bangladesh, and Nigeria ranked lowest in quality of life (Numbeo, n.d.-b). It is no easy task for people, organizations, and governments to create a superior quality of life and standard of living. There are many moving pieces and parts that take careful consideration, planning, and risk. The easiest way to think about risk is with the following Risk formula: risk = a potential reward or loss. In financial terms, risk is the chance that an out- come or an investment’s Pretend the year is 2002, you are preparing for the business pitch of your life! Your goal is actual gains will differ to convince a group of investors of the following ideas: from an expected out- come or return. Risk includes the possibility of 1. Colonizing Mars is possible and profitable. losing some or all of an original investment. 2. You are the visionary that can make it happen. Imagine how Elon Musk felt putting together a business plan that outlined his intention to launch humans further into space than anyone before. Now, put yourself in the place of the investors that are hearing this for the first time. You think to yourself that this guy is reaching for the moon (no pun intended) if he thinks he can pull this off. Then, you think about all of his successes and one of his first most recognizable firms, PayPal. This man knows what he is doing. You have to make a choice between the following options: 1. Invest in this new company called SpaceX with a big dream, but a big price tag. If you fail, you will not get that money back. If you succeed, the return on investment (ROI) was worth it (Fernando, 2020b). Return on investment 2. Do not invest in a brand-new company that will cost millions of dollars up-front, and (ROI) This is a performance decide to spend your money elsewhere. measure used to evaluate If you do not spend money, it is not a loss. the efficiency of an invest- Regret your decision for life not to invest in SpaceX as the ROI would have been ment or compare the effi- ciency of a number of dif- worth it. ferent investments. ROI tries to directly measure the amount of return on a Risk comes down to making choices (good choices to mitigate the risk). A best practice in particular investment, rel- business is to examine all of the facts and decide on the upside of the investment and the ative to the investment’s losses associated with it. Funds that an organization receives by selling goods or supply- cost. ing a service to customers is called revenue. Expenses for rent, salaries, supplies, coordi- nation, etc., that a firm incurs from creating and selling goods and services are considered cost. For example, some of the costs incurred by SpaceX when developing Falcon 1 inclu- ded expenses for salaries, facilities, and materials. If SpaceX has money left over after it pays for all costs, it has a profit. A company with greater costs than revenues makes a loss (Boyte-White, 2020). When a firm, such as SpaceX, uses resources intelligently, they can often increase sales, earn a profit, and reduce costs; however, not all companies earn profits, thus the risk of being in business. Publicly traded companies, such as Apple and Tesla, face the risk of fall- ing short of shareholder obligations. All institutional entities (government, public, or organization) have stakeholders. Both shareholders and stakeholders have a personal stake in the organizations success as they are a part of its ecosystem. The major difference 17 between the two is that a shareholder has a monetary interest in the form of dividends, whereas a stakeholder could be an employee that relies on a paycheck, or a customer that has purchased a trip aboard a commercial spacecraft (Banton, 2020b). 1.2 A System of Economic Relationships Organizational success (in part) is dependent on the location and its economic systems. A Economic system country’s economic system is made up of laws, policies, and procedures that have been This is a system of pro- set up by the local government. Their purpose is to set up guidelines about how goods duction, resource alloca- tion, and distribution of and services are produced and distributed. goods and services within a society or a given geo- The study of how society uses global resources to manufacture and distribute goods and graphic area. services is called economics. Governmental, commercial, and personal resources are limi- Economics This is a social science ted in nature, thus, governments, organizations, and people choose from a portfolio of concerned with the pro- available resources. All economies are concerned with the types of goods and services duction, distribution, and consumption of goods that are produced, the amounts, how they should be manufactured, and for whom. These and services. decisions are generated by the marketplace, the government, or both. In the United States, the free-market system and the government guide the economy in tandem. It’s likely that you are more familiar with economics than you know. Every day, a plethora of news stories dealing with economic issues cascades through the world: $9 billion in pay raises for healthcare workers in France, Wall Street has a record day, the Federal Reserve Board (FEDS) lowers interest rates, etc. (Kennedy & Durie, 2020). In today’s world, major economic systems fall into two broad categories: free market (or capitalism), and planned economies, which include communism and socialism. All EU member states, alongside other countries, use a mixed system, incorporating elements from various economic sys- tems (Gitman et al., 2018). The biggest difference among economic systems is what the individual or the government decide when considering the following aspects: How is the allocation of resources conducted from production factors to societal cus- tomer satisfaction? Which goods and services are to be produced, and in what quantities? How will goods and services be manufactured, and by whom? How are goods and services distributed among customers? It is important for business leaders to understand and adapt to the economic systems in which the businesses are run. Firms that conduct business internationally, often referred Multinational enterprise to as multinational enterprises (MNEs), may quickly discover that they must work in a (MNE) new economic system and make changes that align with a specific country’s laws, pro- A multinational enter- prise produces goods or cesses, and procedures. They may have to make alterations to production, human resour- delivers services in more ces, processes, and methodologies to accommodate a country’s particular economic sys- than one country. tem (Eurostat, 2019). 18 Let us look again at Elon Musk’s company, Tesla. By the end of 2021, Tesla will have four giga-factories worldwide. The figure below depicts the production capacity and the stage of development of the factories as of July 2020. Currently, Tesla has functional operations in the US and China. They are expected to open their first European facility in Berlin-Bran- denburg, Germany in 2021 (Kane, 2020). Table 1: Installed Annual Capacity Installed annual capacity Current Status Fremont Model S / Model X 90,000 Production Model 3 / Model Y 400,000 Production Shanghai Model 3 150,000 Production Model Y — Construction Berlin Model 3 — In development Model Y — In development North America Tesla Semi — In development Roadster — In development Cybertruck — In development Source: Kane, 2020, p. 18. The economic systems in the US, Germany, and China are quite different from one another. This means that Tesla must adapt to the economic systems of each country if they want to conduct business there. However, before we look at the major economic sys- tems of the world, let us simplify this Tesla example and look specifically at several legal differences between the US and Germany. 19 United States of America Employees in the private sector typically have no contracts. ◦ Since contracts are limited, it is easy for the workforce to start a job and find another if they are not happy. The legal notice period is two weeks, which also makes it easier for companies to end their relationship with employees (Raines, 2019). All 50 states have at-will employment systems. ◦ The term at-will employment is a legal term used in the United States. This term means that an employer can fire an employee for any legal reason without warning. Examples of illegal reasons for firing someone are because of their gender, race, or religion (UpCounsel, n.d.). Benefits are important when making career choices. ◦ Benefits include salary, retirement plan, vacation time (two weeks is the legal mini- mum), medical benefits, education, career advancement, and an array of other options (U.S. Department of Labor, n.d.). Part-time employees typically do not have benefits, such as healthcare or a retirement plan. The legal guidelines for minimum wage are $7.25 per hour (U.S. Department of Labor, n.d.). Germany Regardless of the business sector, employees are given contracts with a duration. Typi- cal durations are six months, one to three years, and unlimited. Germany has a different outlook on benefits. ◦ Benefits include salary, retirement plan, such as profit sharing or pension plan, vaca- tion time (five weeks is the minimum legal amount), medical benefits (Germany has both public and private healthcare systems, so it is not typically a concern), educa- tion (higher education is free for the most part, although there are exceptions), and career advancement. Depending on the firm, more benefits may be offered (Statis- tisches Bundesamt, n.d.-b). Part-time employees are often offered many of the same benefits as full-time workers. The legal guidelines for minimum wage are $10.79 per hour (Statistisches Bundesamt, n.d.-a). Based on the fact that one goal of capitalistic and mixed economies is to grow, there is a global “war for talent”. Keeping the word talent in mind, let us think about Tesla’s success. In 2004, Elon Musk served as chairperson of the company and contributed 30 million dol- lars in funding as a co-founder. Fast-forward to the summer of 2020, Musk is still CEO, the company appears to be rocketing-skyward, and it is one of the most talked about stocks on Wall Street (Schreiber & Gregerson, 2018). Let us tie the concept of “the war for talent”, back to the definition of economic systems to see relevance. Organizations like Space X and Tesla do not get to where they are by acci- dent. They know the secret to success and are exceptionally skilled workforces with satis- fied employees that yield results. 20 No single person would be able to send a commercial spacecraft into orbit or create an innovative and profitable organization like Tesla all by themselves. Part of Elon Musk’s suc- cess can be attributed to his leadership and the leadership of his executive teams. From what we can see, both companies’ successes can be attributed to the fact that SpaceX and Tesla team members work in tandem with colleagues and leadership to achieve the organ- izations missions and visions. Major Economic Systems of the World As previously stated, MNEs are typically headquartered in their home countries and abide by its economic systems. SpaceX and Tesla are headquartered in the United States, thus, Elon Musk’s firms operate within the scope of the American legal system (SpaceX, n.d.). So, what exactly does that mean for Tesla in terms of differences when opening a giga factory in the United States versus in Germany? Non-contract system (US) The following list describes the main features of a non-contract system and how they affect the way Tesla does business in the US: California, the home and headquarters of Tesla, Inc., has greater employee protection than its state counterparts, but it is still not at the same level as Germany. The automo- tive industry happens to be one of the few business segments with these protections; however, Tesla happens to be the only major car manufacturer in the US without a labor union. While this may not be ideal for employees, it does help the organization in Labor union terms of time and money. A labor union, also called a trade union or worker’s Tesla can make their own decisions about employee salaries, benefits, and whom they union, is an organization choose to hire and fire, as long as their decisions fall within the scope of US law (U.S. that represents the collec- Department of Labor, n.d.). tive interests of employ- ees (Staff Author, 2020). Although the previous points may seem unfair to employees, it does come with advan- tages to business owners. Thus, the law of human capital kicks in. It is expensive to onboard an employee, and it costs the company money if they leave, so hiring the right talent is key. Within the capitalistic system, a company like Tesla has figured out the rec- ipe for success, which includes obtaining and keeping the best talent. Due to the flexible system in the US, organizations can adapt and invest in their most costly and asset: people! Helping team members achieve professional and personal goals that contribute to the organization’s success gives employees purpose and instills loyalty (Boldt, 2017). Contract system (Germany) Berlin-Brandenburg, future home of Tesla’s European giga factory in Germany, requires employee protections in the form of formalized contracts. German contracts can be bro- ken down into the following four segments, all of which Tesla must adhere to: 21 minimum requirements. These requirements contain ten minimum provisions, includ- ing collective bargaining agreements, something Elon Musk has not yet had to work with. fixed term and open ended contracts. Generally, employment contracts in Germany are unlimited. Fixed-terms contracts also exist; however, terms of the agreement must be in writing prior to the employee start date. Essentially, this means it is much more difficult to part ways with an employee than in the US. trial period. An agreement of a trial period may be reached by both the employer and employee; this is limited to a six-month period. Within a trial period, the notice period is two weeks (Pusch Wahlig Workplace Law, n.d.). notice period. The length of a notice period can vary from four to seven months depending on an employee’s seniority (Pusch Wahlig Workplace Law, n.d.). Although similarities between Germany and the US exist in terms of negotiable pay struc- tures and safe working conditions for employees, the overall cost of having a production facility in Germany may be higher due to employment law and other regulatory factors related to business standards. It is unlikely that all international firms are subject matter experts on the economic and legal systems of every country in which they operate; many MNEs typically partner with a consulting or integration firm because the partner firm understands local cultural systems and norms. Many times, the partner firm will handle all legalities, which include everything from human resources to operational guidelines, thus, alleviating legal recourse and smoothly integrating into Germany’s economic system. Now, let us dig deeper into the major economic systems of the world. The table below summarizes the key factors of the world’s economic systems. Table 2: The Basic Economic Systems of the World Capitalism Communism Socialism Mixed economy Ownership of Businesses are The government Basic industries, There is private business privately owned owns all or most such as railroads ownership of land with minimal enterprises. and utilities, are and businesses, government owned by the but the govern- ownership or government. ment controls interference. There is very high some enterprises. taxation as the The private sector government is typically large. redistributes income from suc- cessful private businesses and entrepreneurs. 22 Capitalism Communism Socialism Mixed economy Control of mar- There is com- There is com- Some markets Some markets, kets plete freedom of plete govern- are controlled, such as nuclear trade and no or ment control of and some are energy and the little govern- markets. free. There is sig- post office, are ment control. nificant central- controlled or government plan- highly regulated. ning. State enterprises are managed by bureaucrats. These enterprises are rarely profita- ble. Worker incentives Workers have There is no Private-sector Private-sector strong incentive incentive to incentives are the incentives are the to work and work hard or same as capital- same as capital- innovate produce quality ism, and public ism. There are because profits products. sector incentives limited incentives are retained by are the same as in in the public sec- owners. a planned econ- tor. omy. Management of Companies can There is central- There is signifi- Private-sector enterprises operate under ized manage- cant government management is private owner- ment by the gov- planning and reg- similar to capital- ship and control ernment ulation. Bureau- ism. The public most of their bureaucracy. crats run govern- sector is similar means of pro- There is little or ment enterprises. to socialism. duction, but no flexibility in within govern- decision-making ment regula- at the factory tions. There is a level. large degree of flexibility in decision-making at the factory level. Forecast for 2020 Continued No growth and Stable with prob- Continued steady growth perhaps disap- able slight growth growth pearance Examples United States Cuba, North Finland, India, Great Britain, Korea Israel France, Sweden, Canada Source: Wade, n.d., p. 13. Capitalism Over the past several decades, more countries in the world have shifted their economic focus away from planned economies and towards free-market economic systems. For example, East Germany transitioned to capitalism after the fall of the Berlin Wall on November 9, 1989. Russia, Germany’s neighbor to the east, moved to a free-market system after the fall of the Soviet Union in 1991 (Maier, 2009). 23 A private enterprise system (another term for capitalism or a free market) is based on the premise of competition within the marketplace. In a competitive economic system, large numbers of people and businesses buy and sell products. In pure capitalism, all produc- tion factors are privately owned and the companies set the prices and coordinates the market’s activities (Trading Economics, n.d.). Capitalistic systems guarantee the following economic rights: the right to make free choices the right to compete the right to own property The core incentive of this system is profit. The system encourages entrepreneurship and innovation. The freedom to choose is a foundation principle of capitalism, so people can choose to become an entrepreneur or work for an organization. There are many professio- nal directions people can take based on their personal interests, education, and career aspirations (Wade, n.d.). The government does not define job quotas for each industry or figure out areas of the economy in which people must work. Competition is considered the main driver for busi- nesses and customers. It leads to better and more diverse products, keeps prices stable, and increases production efficiencies. Companies try to produce goods and services at the lowest possible cost and sell them at the highest possible price. When profits are increas- ing, competition enters the market with the intent to take a share of those profits. This results in greater competition, which typically lowers prices. As competition increases, smart businesses continually evolve in order to differentiate themselves from the compe- tition while still being relevant to consumers. Communism On the opposite end of the economic system’s spectrum, there is communism. This eco- nomic system is centralized and is predominantly run by the government. Typically, they own most resources and control the market. This includes controlling measures within the marketplace, such as types of goods and services that will be produced, where production will occur, and where the goods will be sold. In essence, a communistic system is predomi- nantly controlled by the government and mandates tight control over businesses and the lives of people. Early in the twentieth century, both China and the former Soviet Union chose commu- nism. They believed it would help increase their country’s standard of living. However, tight control over major aspects of life can demotivate people. Without the freedom of choice, workers had no reason to work hard or produce quality goods because there were no rewards for success. This led to errors in planning, incorrect allocation of resources, and consistent shortages of food and other products (Wade, n.d.). These factors were among the reasons for the collapse of the Soviet Union in 1991. Since that time, various reforms in China, Russia, and most countries in Eastern Europe have moved their eco- nomic systems to a free-market approach that is closer to capitalism (Wade, n.d.). 24 Socialism Within this economic system, basic industries are owned by the government or the private sector under strict government control. A social state controls what they consider to be large-scale industry, such as utilities, transportation, and communication. Small busi- nesses considered less critical, for example, clothing and apparel, may be owned pri- vately. To varying degrees, the state still decides the goals of the business, the price and selection of goods, the selection of goods, and the workers’ rights. Socialist countries often provide their citizens with elevated levels of service in terms of healthcare, education, and unemployment benefits, most of which capitalistic countries do not provide. As a result, taxes and unemployment may also be higher in a socialized economic system that has greater benefits for its citizens (Wade, n.d.). For example, in 2020 the top individual tax rate in France was 45 percent, compared to 39.6 percent in the US. Several countries, such as the United Kingdom, Israel, India, and Denmark have socal- ist systems; however, each country has its own economic system and approach. For exam- ple, two-thirds of the population in Denmark are sustained by governmental and social programs, yet most businesses are privately owned and operated (Josephson, 2020). Mixed Economic Systems On the spectrum of real-world economic systems, the majority fall somewhere in between the extremes of pure capitalism and communism. The United States leans toward a pure economic system; however, they have governmental policies intended to keep economic stability, stimulate growth, and appropriately distribute funds. Ideally, these funds are reinvested back into the economy where it is needed. For example, allocation of taxpayer money to social programs such as unemployment benefits, the poor, and healthcare for the elderly. American capitalism has produced some powerful organizations, such as Amazon and Facebook. In order to protect small businesses that account for 99.9 percent of the 30+ million US firms, legislation requires giants to compete fairly against weaker competition and mandates government entities to buy a certain minimum amount from small busi- nesses when obtaining goods or services (U.S. Department of Labor, n.d.). Germany, the United Kingdom, and Canada are examples of the world’s mixed economies. In Canada, the government owns the utility, communication, transportation, healthcare industry, and portions of the national resources. Canada also supplies universal health- care for its citizens. However, the remaining industries are run by the private sector, much like in the US (Lauckner, 2020). The UK is a good example of an economic system in transition. As of January 2021, the UK will officially gain its sovereignty. As of mid-2020, the UK and EU have yet to reach a free- trade agreement. The convergence of Brexit and COVID-19 can be referred to as a black swan, which is a large-scale catastrophic and unforeseen event that affects the economy. Black swan All of these factors will play a part in how the United Kingdom’s economic system evolves A black swan is an unpre- dictable event that has (Investopedia Staff, 2020a). potentially severe conse- quences. 25 Macroeconomics and Microeconomics The state of the economy affects people and businesses. How we choose to spend, save, and invest our money is a personal economic choice. Your decision to attend school, whether you work part-time, and what groceries you buy are examples of your own per- sonal economic system. Businesses decide what products and services to produce and how to price them based on economic expectations. The economic outlook, or forecast, also helps businesses figure out how many people to employ, the pay structure, and how much to expand. Economics focuses on two main sub-areas: macro- and microeconomics. Macroeconomics is the eco- nomic study of the marketplace, and it uses aggregate data for large groups of people, businesses, companies, and products. Microeconomics is the economic study of house- holds and firms. Both macro- and microeconomics supply valuable insights about economic outlook, and, as an example, Tesla may utilize both when deciding whether to introduce a new line of vehicles. Tesla would consider macroeconomic factors, such as the national aggregated level of personal income, unemployment data, interest rates, fuel costs, and the national level of sales within the automotive industry (Rodrigo, 2020). From a microeconomic view- point, Tesla would analyze customer demand for new vehicles versus the existing supply, competing brands, material availability, and labor costs. They would also examine current prices and sales incentives. 1.3 Business Environment Businesses do not operate within a vacuum, but rather within a dynamic global environ- ment. The ever-changing dynamics of today’s global economic systems directly affect how businesses choose to operate and achieve their goals. The external business environment is made up of many organizations, factors, and forces that can be grouped into seven sub- environments as illustrated below. 26 Figure 2: The Dynamic Business Environment Source: Wade, n.d., p. 9. Each of these sectors creates unique challenges and opportunities for organizations. When it comes to day-to-day decision making, business owners and managers have a large degree of control over their internal business environment. They can choose what products to sell, where to sell them, what supplies to purchase, from who, and which employees they hire. Leaders also utilize their skills and resources to meet existing and prospective customer wants and needs. Externally, the environmental conditions that affect organizations are constantly changing beyond the control of management. There- fore, in order to compete successfully in the open market, business leaders must continu- ally analyze their environment and adapt to its changes (Wade, n.d.). External forces, such as natural disasters and pandemics, can also have a significant impact on commerce. In 2005, Hurricane Katrina devastated the US Gulf Coast, and three years later, the 2008 Global Financial Crisis occurred, followed by the Gulf Coast Deepwa- ter Horizon (an oil rig explosion) disaster in 2010. The explosion killed eleven workers and distributed over three million oil barrels into the Gulf of Mexico (Dupont, 2014). The event played out for three months and critically wounded the environment, businesses, tour- ism, and people’s livelihood. The global oil conglomerate, British Petroleum, handled the disaster and spent upwards of $60 billion (about twice the value of the gross domestic product (GDP) of Jamaica) in cleanup. A decade later, businesses and tourism were almost fully recovered when COVID-19 began to spread, reaching the same Gulf Coast region pre- 27 viously affected by disaster. This region, which includes the states of Florida, Alabama, Louisiana, Mississippi, and Texas has been drastically affected by the pandemic (OECD, 2020). Environmental Influences It is not possible for one business to be large and powerful enough to create extreme change in the external environment. Therefore, managers are agile and adaptive rather than change-agents as global competition is an externally uncontrollable issue. However, organizations can be strategically influential, for example, the five largest companies on the S&P Index (Google, Facebook, Amazon, Microsoft, and Apple) have spent upwards of $50 million on lobbying activities in Washington, D.C. to help policy makers understand the importance of digital innovation and an “open” internet. Let us now take a brief look at the seven varied environmental influences. Economic influences Assessing levels of economic fluctuations that affect people and businesses in a variety of ways is crucial in business, for example, when the economy is growing unemployment rates decrease and income levels typically rise. Interest rates and inflation also change according to economic activities, as policies set about taxes and interest rates are a gov- ernment’s way of stimulating or curtailing economic activity. Additionally, the forces of supply and demand decide price fluctuations within a free market. Political and legal influences A country’s political climate is another critical factor for leaders to consider in daily opera- tions. How much government activity and oversight occurs is a component that contrib- utes to a political environment. For example, an MNE such as Tesla will evaluate the politi- cal climate before entering a foreign market, by asking questions. For example, is the government stable, or might there be too much uncertainty? How restrictive are the regu- lations for foreign businesses, including foreign ownership of business property and taxa- tion? Import tariffs, quotas, and export restrictions also must be considered (Wade, n.d.). In the US, laws passed by Congress and the many regulatory agencies cover competition, minimum wages, environmental protection, worker safety, copyrights, and patents. For example, in 1996 when Congress passed the Telecommunications Act to deregulate the industry, the result was increased competition and new opportunities. Today’s acceler- ated growth in mobile technology has changed the focus of the telecommunications industry. Their challenges are now associated with broadband access and speed, stream- ing content, and improvements in infrastructure to tackle the continual increase of data transmissions (Wiggington, 2017). Government agencies play a crucial role in business operations. When a large pharma- ceutical company wants to bring a new medication to market, they must follow proce- dures set by the Food and Drug Administration (FDA) for testing and clinical trials, and secure FDA approval (Healy, 2017). Before issuing stock as a publicly traded company, the company would need to register with the Securities and Exchange Commission. Other- 28 wise, The Federal Trade Commission would legally penalize the company if its advertise- ments promoting the drug’s benefits were misleading. These are only some of the ways the political and legal climate impact organizational decisions (U.S. Securities and Exchange Commission, 2019). Demographic factors Demographic factors are uncontrollable variables in the business environment that are extremely important to leaders. The study of people’s vital statistics, such as their age, gender, race, and ethnicity, and location, is known as demography. Demographics help organizations to define which markets are best for their products and decide the size and composition of the workforce. Demographics are at the center of many business decisions (Wade, n.d.). Organizations in today’s world deal with the unique shopping preferences of varying gen- erations. For example, more than 75 million members of the millennial generation in the US were born between the years 1981 and 1997, making them America’s largest genera- tion (Lutz, 2016). The marketing impact of millennials continues to be immense. Typically, this generation is technologically savvy, and, although millennials have not yet reached their peak income and spending years, they tend to buy quite freely (Lutz, 2016). Other generations, such as Generation X (born between the years of 1965 and 1980), along with the baby boomers (born between the years 1946 and 1964), have their own types of con- sumer behavior. Many baby boomers are nearing retirement and have money that they are willing to spend on their health, comforts, leisure pursuits, and cars (Wade, n.d.). As the population ages, businesses have started to offer more products appealing to mid- dle-aged and senior members of the population. Additionally, minorities represent almost 40 percent of Americans, with immigration bringing millions of new residents to the coun- try over the past several decades (Fry, 2020). In years to come, minorities are likely to make up more and more of the population, and organizations recognize the value of hiring a diverse labor force that reflects our society. Buying power has increased significantly for minorities, and companies are continually developing new goods and marketing cam- paigns that target minority groups. Social factors In essence, social factors are our attitudes, values, ethics, and lifestyles. These factors influence what, how, where, and when consumers spend their money; however, they are challenging to predict, define, and measure as they can be extremely subjective. Social factors also change as people move through stages of their life, and people of all ages have varying interests that defy traditional consumer behavioral patterns. Changing roles has also increased the number of women in the workforce. This develop- ment heightens family incomes, which increases demand for time-saving products and services. This new demand has changed family purchasing patterns. A renewed emphasis on ethical behavior within organizations at all levels of the business encourages managers 29 and employees to search for the right approach when it comes to gender inequality, sex- ual harassment, and other social behaviors that affect the potential for success (Wade, n.d.). Technological factors The application of science and engineering skills and knowledge to solve production and organizational problems is defined as technology, and the application of technology can stimulate growth. The amount of goods and services one worker can produce is known as productivity. New equipment and software, which increase productivity while reducing costs, can be among a businesses most valuable assets. A country’s ability to keep and build wealth largely depends on the speed and effective- ness with which technology is used to innovate and adapt. Many businesses, both big and small, utilize technology to create change, improve efficiencies, and streamline opera- tional processes. Advances in cloud computing have provided companies with the ability to store and access data without having to use a physical computer or server (Rock, 2016). Such programs and applications can now be accessed through the internet. Additionally, mobile technology helps companies communicate with employees, customers, and sup- pliers with the swipe of a finger on a tablet or smartphone. Automation and artificial intel- ligence (AI) help businesses to complete repetitive tasks, therefore freeing up workers to focus on more tasks critical to operations (Wade, n.d.). SUMMARY Businesses try to make profits by providing products and services that consumers either want or need. Not-for-profit organizations, though not striving for profits, still deliver many necessary services for our society. Our standard of living is measured by the output of goods and services, thus, businesses and not-for-profit organizations help create our stand- ard of living. Our quality of life is not simply the number of goods and services available for consumers, but rather the society’s general level of happiness. The study of how individuals, businesses, and governments use scarce resources to produce and distribute goods and services is called eco- nomics. Today, there is a global trend toward capitalism, which is based on marketplace competition and private ownership of the factors of pro- duction. Competition leads to more products and services offered, sta- bilizes prices, and pushes businesses to become more efficient. In a communistic economy, the government owns almost everything, and all resources and economic decision-making are conducted by the government. Socialism is also a centralized economic system in which the basic industries are owned by the government or by the private sec- 30 tor under strong government control. Today, most economies are a com- bination of capitalism and socialism. There are two major areas in eco- nomics: macro- and microeconomics. The external business environment includes seven subcategories: eco- nomic, political, and legal, demographic, social, competitive, global, and technological segments. 31 UNIT 2 TYPES OF BUSINESS ORGANIZATIONS STUDY GOALS Upon completion of this unit, you will have learned… – to explain the main characteristics of organizations in the production and service sec- tor of an economy. – to classify the different types of organizations in an economy. – to understand the importance of small and mid-sized companies as the backbone of an economy. 2. TYPES OF BUSINESS ORGANIZATIONS Case Study Figure 3: Successful Businesswoman Source: FotografieLink, 2013. One morning, you wake up with an idea and decide to start a business. However, prior to starting, you realize it would be an innovative idea to ask yourself a series of questions. The reason: to aid your decision about what type of organization best suits your expected wants and needs. Do you like to work alone? A sole proprietorship may be the right struc- ture for you in this case. Or would you prefer others share your challenges and rewards? In this instance, a partnership is the best choice. Would a corporation or the flexibility of a Limited liability limited liability company (LLC) be most logical? There are also other questions you need company (LLC) to consider: Do you need financing now or will you in the future? How easy would it be to An LLC is a hybrid legal entity that has the char- obtain financing? acteristics of both a cor- poration and a partner- When people hear the term “business owner”, they typically think about a certain level of ship. prominence and power. This has led to the stereotype of rich, career-driven business own- ers, often leaving little room in our minds to think about the fact that most small business owners in the world are just trying to make a living, trying to make the world a better place then they left it, and enjoy life! However, Alex Wolfson, a small business owner who works as consultant with a primary focus on corporate and business strategy would be quick to say that, as with many stereotypes, that is only one side of the story. Alex was on their way to becoming a successful business executive in corporate America. However, they realized that money did not buy happiness and that it was time to make a change. For a decade, following completion of their Bachelor of Business Administration (BBA), they worked for a Fortune 500 firm within the industrial distribution and wholesale segment of the American market. After ten years of climbing the corporate ladder, Alex 34 decided to walk, or rather, fly away to try something new. They packed their bags, boar- ded a plane, and moved to Berlin, Germany. They had three goals that they wanted to complete within three years: 1. Start their own business 2. Complete their MBA 3. Enjoy life more Prior to leaving the US, they set up a sole proprietorship because they are simple to form and designed for individuals that want to work alone, prefer close control of the organiza- tion, and want flexibility to open and close as they so choose. In Germany, Alex was able to work as a freelancer and filed taxes in both countries. For them, it was the best choice because they did not want responsibility for, or to, anyone else. They could easily dissolve the business if they found that it was not going to plan. While completing their Master of Business Administration (MBA), they turned their sights toward academia with a greater focus on researching human and social dimensions of science and technology. With their newfound interest in research, Alex made two important decisions: to pursue their PhD and to move the focus of their consulting company toward academia. By owning a sole proprietorship, Alex was quickly able to change the focus of their con- sulting firm to help them learn and gain further experience within the higher education market. Alex had yet to decide where to pursue their PhD but wanted to do it in the US, the UK, or Germany. As they transitioned to academia, Alex said that they would end up in the public or government sector if they pursue their research at a public university. Alex enjoyed the rewards of working in corporate America for over a decade, and they are soon planning to move to the public or government sector as they pursue a doctorate degree. It is evident that Alex’s life-needs changed over time; as their personal needs changed, so did the type of business organization they worked for. Visit your country, region, or state department or ministry of commerce website. Can you find your country’s equivalent to a sole proprietorship and corporation? What are two things you think attribute to an individual’s decision to work for different organizational structures during their career? What does the term “business owner” mean to you (think in business terms)? 2.1 Companies in Production and Service There is an array of ways to classify companies. For the purposes of this unit, we will focus on the classification of firms according to their legal structure. We can distinguish three models: sole proprietorship, partnerships, and corporations. Each model has both advan- tages and disadvantages, which we will explore in more detail. An overview is available in the table below. 35 Table 3: Classification of Companies According to their Legal Structure Sole proprietorship Partnership Corporation Business owned by only one Business owned by two or more Business organization with a person people separate legal personality from its shareholders Entire profit for the sole proprie- Profit sharing among business Profit sharing among sharehold- tor partners ers Unlimited liability by sole pro- Unlimited liability by all busi- Limited liability of shareholders prietor ness partners Source: Created on behalf of IU (2020). Sole Proprietorship A sole proprietorship is the most common business structure and is chosen by many indi- viduals when starting a business. Sole proprietorships are unincorporated business enti- ties run by one owner, with no distinction between the firm and the individual (owner). Owners are entitled to profits and are responsible for all business debts and liabilities (U.S. Small Business Association, n.d.). In many developed countries, no formal action is required to start a sole proprietorship. If you are the only owner, this status automatically comes from your firm’s activities. For example, if you are a freelance writer, then you are a sole proprietor, and, like all busi- nesses, licenses and permits must be obtained. Regulations vary by country, industry, state, and locality (U.S. Small Business Association, n.d.). Advantages of sole proprietorships Sole proprietorships have several advantages that make them popular: They are not expensive and are easy to form. Sole proprietorships have few legal requirements (local license) and are inexpensive to form, making them the business system of choice for many small companies and start-ups (U.S. Small Business Associa- tion, n.d.). All profits go directly to the owner. Sole proprietorships actively work to get all start-up investments associated with the business, however, they receive all profits earned. The amount of profits earned depends on a firm’s ability to work effectively and operate efficiently. They enable business control. Organizational choices are made by the owner without having to ask anyone else. They have regulatory freedom. A sole proprietorship has more freedoms than other types of organizational systems with respect to the regulatory environment. Sole pro- prietorships do not pay corporate taxes or franchise fees. Taxed as personal income, profits are reported by the business owner on their tax return. They are simple to dissolve. Without partners or colleagues, the business owner can close their doors or sell the business at any time. The flexibility of this business organi- zation is an ideal way to test out innovative ideas. 36 Disadvantages of sole proprietorships Sole proprietorships also have several disadvantages: They have unlimited liability. Legally, a sole proprietor and the organization are the same, meaning there is not a legal distinction between the two. This makes the busi- ness owner personally liable for all debts incurred, even if the debts exceed the value of the business. As a result, it is possible that the owner might need to sell private prop- erty, such as their car, home, or other investments, in order to satisfy claims against the business. They have difficulty raising capital. Due to assets being unprotected against personal liabilities, financial institutions typically view sole proprietorships as higher risk. Expanding can be affected by a lack of ability to raise additional funds (U.S. Small Busi- ness Association, n.d.). They lead to limited experience as a business leader or manager. The success of a sole proprietorship rests upon the skills and competencies of the owner, who must make 100 percent of the decisions. It is difficult for business owners to be equally skilled in all areas of business operations. For example, an amazing artist might also be a terrific interior designer but have no clue how to accurately keep account records, how to man- age a production plant, or even how to market themselves in the digital age. It is challenging to find qualified talent. Sole proprietorships usually cannot match the pay or benefits packages that big companies can offer. This makes working for a sole proprietorship less appealing to individuals who want more opportunities. They take up a lot of time. Deciding to become a business owner takes more time and sacrifices than people realize. The business is often the dominant part of a sole proprie- tor’s life. They are not always stable. Predicting all business lifespans can be difficult. Sole pro- prietorships are even more unpredictable because everything is dependent on the owner. Therefore, all issues can directly affect the success of the business. The owner is responsible for all losses. Sole proprietorships handle all losses; however, tax law allows losses to be deducted from personal income. Sole proprietorships could be a good decision for an individual just starting out because someone can start with no employees and minimal risk. However, for many sole proprie- tors, this is a temporary decision; as business increases, the owner may be unable to oper- ate with limited financial and managerial resources. At this point, the owner may decide to take in one or more partners to ensure that the business continues to thrive (U.S. Small Business Association, n.d.). Partnerships Partnerships are defined as the association of two or more individuals who form an agree- ment to operate a business together and split profits and liability. However, could partner- ships endanger a company’s health? Let us assume partners Ahmed and Rachael own a spa. After several years running the company, they find that both of their end goals for the company have changed. Ahmed feels good about current business levels, but Rachael aspires to grow the business by finding investors and opening new spa resorts. How can Ahmed and Rachael resolve their differences? They must ask themselves tough questions 37 and be honest. Whose view of the future is more realistic? Does the firm have potential to expand and earn a profit like Rachael thinks it can? Where can Rachael find angel investors that can help turn her dream into reality? Is Rachael okay with dissolving the partnership and beginning a new venture alone? Who holds the legal rights to their current customer base? Rachael has an epiphany; growing the company in a way that aligns with her dreams may have great financial risk, and her partnership with Ahmed gives her advantages that Rachael would miss in a sole proprietorship. After careful consideration, she chooses to leave the business in status quo condition. A partnership may be a desirable choice for those individuals that do not want to “go it alone”. Overall, it is easy to create and offer shared ownership. This is a popular organizational choice for professional-service firms like attorneys, architects, bankers, and real estate brokers. In a business partnership, the individuals agree to share the profits and losses of a joint enterprise. This can be done in writing or orally and prevents conflicts later down the road; however, it is recommended to have formal agreements in writing. These agree- ments usually include the business name and what each partner will bring to the table (money, network, talent, etc.). These agreements also outline the compensation structure (salary, profit sharing, etc.) and the responsibilities of both owners. Agreements should contain addendums for additional business partners, the sale of a partner’s part of the business, conflict-resolution planning, and how to dissolve the business and distribute assets accordingly. Advantages of partnerships Partnerships have several advantages: An agreement is easily drafted after partners agree on how they wish to conduct busi- ness together. Overall, partnerships are not overly complex to create and are flexible in nature. Two revenue streams are typically better than one. In a partnership, both people con- tribute financial resources and have the choice to find investors. Combined financial strength can be a good sign to investors, which can increase a partnerships ability to fundraise. Partners share the responsibilities of running a firm. Combining skillsets and goal set- ting can help lead the business to overcome obstacles and increase the partnership’s chances for success. They are flexible. Typically, partners are hands-on when overseeing daily operations and can respond quickly to changes in the environment. They are relatively free from government regulation. Except for state and local laws, the federal government has minimal control over partnership activities. Disadvantages of partnerships Partnerships also have several disadvantages: 38 They have unlimited liability. All general partners handle the firm’s debts. In fact, any partner could be personally liable for all partnership debts and legal judgments, such as malpractice lawsuits, regardless of who caused them. Sole proprietorships are the Malpractice same in the essence that business failure may result in the losses of personal assets for This refers to misconduct or negligence conducted general partner. To avoid such losses, a limited liability partnership (LLP) can be by a business professio- formed. An LLP individually protects business partners from responsibility of negative nal in the areas of law and acts conducted by another partner, thereby mitigating the harm their actions may have medicine (Legal Diction- ary, n.d.-b). caused. There is the potential for partnership conflicts. It is likely that partners will have differ- ent ideas about how to operate and organize the firm, who to hire, how to structure var- ious roles, and when to expand. Conflicts tend to arise when communication does not travel freely. Usually, this breakdown in communication occurs due to different work styles or personality types. Profits must be shared. Profit division is not an overly complex task, assuming all part- ners contribute equal amounts of time, competencies, and monetary funds. However, if one partner puts in more money and the others more time, agreeing to a fair profit- sharing formula can be difficult. Dividing or exiting may not be straightforward. In essence, it is simple to create a part- nership; however, they can be difficult to dissolve or leave. If a partner decides to exit the firm, a valuation of their shares needs to be calculated. Who will buy the shares? Is the replacement a good fit with other partners? In the case that a partner, who owns a more than 50 percent of a business leaves, becomes unable to work or dies, the partner- ship has no choice but to restructure or dissolve. Such issues can be avoided by imple- menting a partnership agreement. Just like a marital contract, buying and selling con- tracts should include clauses related to living partners and their ability to buy the former partner’s company shares. Like a marriage, or good friendship, choosing the cor- rect partner is an important ingredient for success. Should you decide to form a partner- ship, give yourself time to consider the potential partner’s personality, areas of exper- tise, life objectives, and work style prior to agreeing to move forward in a formal partnership (Legal Dictionary, n.d.-c). Corporations Typically, when people think about corporations, they think of large and well-known com- panies, such as Amazon, Apple, Boeing, and Tesla. However, corporations differ in size from large multi-national enterprises (MNEs) with thousands of employees and billions of dollars in sales. Corporations are legal entities that are subject to the national and local laws where the corporation was formed. Corporations have the power to own property, enter legal contracts, sue, be sued, and engage in commercial operations set in the terms of its charter. Unlike sole proprietor- ships and partnerships, corporations are taxable entities that exist separately from their owners. In a corporation, the owner or owners are not personally liable for its debts. When launching their company, Growing Edge Property Management Services, Inc., 35-year-old Jamie realized they would need liability protection for their business organization. Jamie’s firm focused on supplying a customized property management service to senior level business executives on extended work assignments away from home, often for six months to three years. Taking care of properties worth millions of dollars was not a small 39 responsibility, so, it was crucial for Jamie to protect the business by setting it up as a cor- porate business structure and creating extensive contract agreements outlining company obligations. This provided the business with the necessary liability protection, not to men- tion peace of mind (which, as a business owner, is priceless) to focus on running the busi- ness. Note that an LLC does not supply unlimited protection; you can still get in trouble for things such as mixing personal and business funds (Legal Dictionary, n.d.-a). The Corporate Structure Corporations have a unique organizational structure encompassing three main compo- nents: shareholders, the directors, and officers. Shareholders (or stockholders) own the corporation because they hold stock, which gives them unique rights. These rights could Dividend include a part of the profits or dividends. This gives shareholders the ability to transfer or This is the disbursement sell their piece of the business whenever they choose to do so. Shareholders may attend of a portion of the firm’s earnings to their share- conferences or vote on issues affecting the business, as long as they act in accordance holders, as decided by an with the organizational charter and its by-laws (Chen, 2020). organization’s board of directors. Typically, one stock share carries the weight of one vote. Shareholders elect their directo- rial board to lead the corporation and the directors create strategic goals, policies, and procedures. They oversee hiring the corporate officers and lead company operations, which includes accounting. Small to medium-sized businesses may have as little as two directors, while big businesses may have as many as 20. The board of directors (BOD) in large corporations typically includes executives and directors (from outside the organiza- tion) picked because of their experience. Directors from outside the organization can bring new viewpoints when the company needs them because they are independent of the business and therefore more neutral. The officers of the corporation are hired by the BOD and include the president, CEO, vice presidents, and other executive level leaders with responsibility to the BOD. Officers can also be shareholders and members of the board. Corporate advantages A corporate system gives businesses the following competitive advantages: Liability is limited. Corporations are unique in that they are separate legal entities that exist apart from their owners (shareholders). Liability is limited to the number of shares a person owns. If a corporation goes bankrupt, creditors can only look to corporate assets for payment. Shares are transferable. Shareholders of publicly traded companies may sell shares as they like without affecting the status of the firm. For a corporation, life is unlimited; however, corporate charters specify rules and regu- lations. Since corporations are entities separate from their owners, the absence or death of an owner will not affect its existence. 40 They are tax deductible. Certain liberties are given to corporations, such as these in the form of taxable deductions. For example, expenses related to operating reduce taxable income. They are attractive for investors. Corporations can raise funds by selling new stock. They could also choose to divide ownership, increasing the affordability for more investors who are able to buy one or several thousand shares. Immense size and stable climates make corporations appealing to banks for financing. These funds allow corpo- rations to invest in facilities and human resources in order to grow. Corporate disadvantages Although corporations have their benefits, they also have disadvantages: Profits are doubly taxed. Corporations are legally bound to pay federal and state income taxes on all profits. Additionally, profits (or dividends) paid to stockholders are taxed as personal income; however, this is done at a semi-reduced rate. Business formation is complex and costly. Formation of a corporate structure has signif- icantly more steps than other business types. It can also be expensive and require mil- lions of dollars in foreseen and unforeseen costs. Regulations are stricter. Corporations must abide by a plethora of legal regulations and requirements. They must register in every state within the US where they conduct busi- ness. Additionally, corporations must register with the Securities and Exchange Com- mission (SEC) prior to selling stock. Publicly traded firms, by law, publish financial reports on a yearly cadence. They must also follow protocols dictated by the SEC and all other regulating state agencies (Internal Revenue Service, 2020). Differences in Products and Services Now that you have been introduced to various ways to legally structure a company, let us take look at the organizational differences between production and service firms. The fol- lowing main differences exist: 1. Output tangibility. The simplest way to think about the distinction between a produc- tion or manufacturing firm and a services firm is output tangibility. Production facili- ties produce goods that consumers can physically touch, whereas service firms do not. Examples, such as education, consulting, and facility maintenance, fall into the services side of business. 2. Product demand. Production and manufacturing facilities keep inventory on the premises while service firms do not. Manufacturing facilities try to accurately predict customer demand and use the just-in-time method in relation to inventory levels. Services are created based on customer needs and requests (Banton, 2020a). 3. Production specificity (customer specific needs). It is possible for production facilities to manufacture products without forecasting customer demand; however, it is not a recommended strategy. Services are produced by firms on an as needed basis and are less costly. Companies in the service industry typically create a service tailored to cus- tomer specific needs; for example, an interior design firm may create a customized solution including ten hours of consultancy, ten hours of design, and ten hours of implementation and installation. 41 4. Labor and automation. Many processes and procedures within manufacturing and production can be automated in order to reduce the need for excess labor. This tends to be more difficult to carry out within the service industry. Organizations rooted in the service sector must recruit employees with specific skillsets and areas of knowl- edge that are relevant to their product portfolio offering. The service industry is more labor intensive than the manufacturing sector. 5. Location. Due to the nature of manufacturing and production, it is a requirement that these businesses have a physical presence (anywhere in the supply chain) in order to operate. The opposite holds true for service firms, for example, consultancies, as they do not require a physical location to perform operations. The people delivering the service or product can be located anywhere. These large international firms use global communications and the cloud network to access relevant knowledge systems worldwide (Linton, 2019). Companies in production and service are relevant to segments in business because many advanced economies generate 70 percent or more of their total GDP via services (The World Bank, n.d.). The figure below provides an overview of the share of services based on total GDP worldwide, as well as in high-income and low- to middle- income countries. For example, more than 70 percent of Germany’s GDP is currently made up of services, almost 30 percent comes from manufacturing and production, while only 1.5 percent comes from agriculture (Pelcher, 2020). Figure 4: Share of Services According to Total GDP Source: Created on behalf of IU, based on Buckley & Majumdar, 2018. 42 2.2 Divisions of Companies Prior to exploring divisions (sizes) of companies according to global standards, it is impor- tant to familiarize ourselves with The Organization for Economic Cooperation and Devel- opment (OECD). The OECD is an organizational forum, used for the collaboration of world governments in order to work towards a brighter future. It consists of 36 member states and 70 non-member states. Topics range from sustainability to the economic impact of COVID-19 on small and medium sized businesses. OECD member countries make up a whopping 63 percent of the global GDP and 75 percent of trade. Over 50 percent of global energy use is consumed by OECD members who make up 18 percent of the global popula- tion. Also, 95 percent of global development aid (financial) goes to these countries. The OECD divides organizational structures into the following four categories (OECD, n.d.): 1. Micro enterprises (10 employees or fewer) 2. Small enterprises (10—49 employees) 3. Medium enterprises (50—249 employees) 4. Large enterprises (250 employees or more) Small and Medium-Sized Enterprises (SMEs) After reading the above statistics about OECD member countries, it is time to talk about what each of these economies has in common: their central engine of growth originates from small and medium sized businesses. In the Euro zone, SMEs account for 99 percent of all businesses. It is important to note the precise definition of a small or medium sized business because SMEs receive access to financial support programs focused solely on helping these businesses succeed (European Commission, n.d.). The following factors should be considered when deciding whether a business is an SME: 1. Number of employees 2. Turnover, or the total listed on the balance sheet The table below is only representative of individual businesses. A business that is part of a larger company may also have to include employee headcount, turnover, and the balance sheet data for the company. Table 4: Categorization of Small- and Mid-Sized Enterprises (SMEs) Company category Staff headcount Turnover or Balance sheet total Medium-sized < 250 ≤ € 50 m ≤ € 43 m Small < 50 ≤ € 10 m ≤ € 10 m Micro < 10 ≤€2m ≤€2m Source: European Commission, n.d. 43 Small and medium-sized businesses are the economic engine of growth for most coun- tries of the world. Worldwide (not just OECD countries), SMEs account for approximately 50 percent of the global working population and represent more than 90 percent of busi- nesses worldwide. Within emerging markets, SMEs contribute upwards of 40 percent of national income (GDP). According to World Ba

Business 101 Course Book PDF

Document Details

Tags

Related

Summary

Full Transcript

Upgrade to continue