Business in Action Chapter 5 PDF

Chapter 5 Forms of Ownership Business in Action 8e, Global Edition Bovée/Thill  Learning Objectives 1. Define sole proprietorship, and explain the six advantages and six disadvantages of this ownership model. 2. Define partnership, and explain the six advantages and three d...

Chapter 5 Forms of Ownership Business in Action 8e, Global Edition Bovée/Thill  Learning Objectives 1. Define sole proprietorship, and explain the six advantages and six disadvantages of this ownership model. 2. Define partnership, and explain the six advantages and three disadvantages of this ownership model. 3. Define corporation, and explain the four advantages and six disadvantages of this ownership model. Copyright © 2017 Pearson Education, Ltd. 5-2  Learning Objectives (cont.) 4. Explain the concept of corporate governance, and identify the three groups responsible for ensuring good governance. 5. Identify the potential advantages of pursuing mergers and acquisitions as a growth strategy, along with the potential difficulties and risks. 6. Define strategic alliance and joint venture, and explain why a company would choose these options over a merger or an acquisition. Copyright © 2017 Pearson Education, Ltd. 5-3 Exhibit 5.1 Forms of Business Ownership Copyright © 2017 Pearson Education, Ltd. 5-4  Sole Proprietorships Sole proprietorship  A business owned by a single person  Examples: Many farms, local retail establishments, small service and home-based businesses Unlimited liability  A legal condition under which any damages or debts incurred by a business are the owner’s personal responsibility Copyright © 2017 Pearson Education, Ltd. 5-5  Advantages of Sole Proprietorships Simplicity Single layer of taxation (all profits ‘flow through the owner’ and treated as personal income) Privacy Flexibility and control Fewer limitations on personal income Personal satisfaction Copyright © 2017 Pearson Education, Ltd. 5-6 Copyright © 2017 Pearson Education, Ltd. 7 Disadvantages of Sole Proprietorships Financial liability (it is an unlimited liability) Demands on the owner (potentially long hours of work, stress of making all decisions) Limited managerial perspective Resource limitations No employee benefits for the owner Finite (limited) life span Copyright © 2017 Pearson Education, Ltd. 5-8  Partnerships Partnership  An unincorporated company owned by two or more people.  It is appropriate for firms that need more resources and leadership talent  Many partnerships are small with a handful of owners Copyright © 2017 Pearson Education, Ltd. 5-9  Partnerships Many partnerships are small with just a handful of owners, although a few are immense. The global accounting and consulting firm PwC (www.pwc.com) has nearly 300,000 employees, several thousand of whom are partners in the business Copyright © 2017 Pearson Education, Ltd. 5-10 Copyright © 2017 Pearson Education, Ltd. 11  Partnerships Limited liability  A legal condition in which the maximum amount each owner is liable for is equal to whatever amount each invested in the business  General partnership => all partners have unlimited liability  Limited partnership => only general partners have unlimited liability Copyright © 2017 Pearson Education, Ltd. 5-12  Partnerships (cont.) General partnership  A partnership in which all partners have joint authority to make decisions for the firm and joint liability for the firm’s financial obligations Limited partnership  A partnership in which one or more persons act as general partners, run the business, and have the same unlimited liability as sole proprietors Copyright © 2017 Pearson Education, Ltd. 5-13  Advantages of Partnerships Simplicity Single layer of taxation More resources Cost sharing Broader skill and experience base Longevity (new partners can replace old ones) Copyright © 2017 Pearson Education, Ltd. 5-14  Disadvantages of Partnerships Unlimited liability Potential for conflict Expansion, succession, and termination issues Copyright © 2017 Pearson Education, Ltd. 5-15 Copyright © 2017 Pearson Education, Ltd. 16  The Partnership Agreement A partnership agreement should address:  Type of partnership, investment percentages, profit-sharing percentages, management responsibilities and other expectations of each owner, decision-making strategies, succession and exit strategies, criteria for admitting new partners, and dispute-resolution procedures. Copyright © 2017 Pearson Education, Ltd. 5-17  Corporations Corporation  A legal entity, distinct from any individual persons, that has the power to own property and conduct business. Shareholders  Investors who purchase shares of stock in a corporation Copyright © 2017 Pearson Education, Ltd. 5-18  Corporations (cont.) Private Public corporation corporation  A corporation in  A corporation in which all the stock which stock is sold is owned by only a to anyone who has few individuals or the means to buy it companies and is  publicly held OR not made available publicly traded for purchase by the public Copyright © 2017 Pearson Education, Ltd. 5-19  Corporations (cont.) The annual revenues of the world’s largest corporations, such as Walmart, Toyota, Royal Dutch Shell, Apple, and Sinopec Group, are larger than the entire economies of many countries. Copyright © 2017 Pearson Education, Ltd. 5-20  Advantages of Corporations Ability to raise capital Liquidity  A measure of how easily and quickly an asset such as corporate stock can be converted into cash by selling it Longevity (long life span) Limited liability Copyright © 2017 Pearson Education, Ltd. 5-21  Disadvantages of Corporations Cost and complexity Reporting requirements Managerial demands Possible loss of control Double taxation Short-term orientation of the stock market Copyright © 2017 Pearson Education, Ltd. 5-22  Special Types of Corporations S (Subchapter) Corporation  A type of corporation that combines the capital-raising options and limited liability of a corporation with the taxation advantages of a partnership  Maximum 100 investors Copyright © 2017 Pearson Education, Ltd. 5-23  Special Types of Corporations (cont.) Limited liability company (LLC)  A structure that combines limited liability with the pass-through taxation benefits of a partnership  It is the same as S Corporation without the limitation on the number of investors  Members’ participation in management is not as restricted as it is in limited partnerships Copyright © 2017 Pearson Education, Ltd. 5-24  Special Types of Corporations (cont.) Benefit Corporation  A profit-seeking corporation whose charter specifies a social or environmental goal that the company must pursue in addition to profit  It has most of the attributes of a regular corporation but adds the legal requirement that the company must also pursue a stated nonfinancial goal Copyright © 2017 Pearson Education, Ltd. 5-25 Exhibit 5.2 Corporate Structures Copyright © 2017 Pearson Education, Ltd. 5-26 Copyright © 2017 Pearson Education, Ltd. 27 Comparison of Ownership Types Copyright © 2017 Pearson Education, Ltd. 28  Corporate Governance Corporate Governance  Describes all the policies, procedures, relationships, and systems in place to oversee the successful and legal operation of the enterprise.  Also refers to the responsibilities and performance of the board of directors specifically. Copyright © 2017 Pearson Education, Ltd. 5-29 Exhibit 5.3 Corporate Governance Copyright © 2017 Pearson Education, Ltd. 5-30  Shareholders Proxy  A document that authorizes another person to vote on behalf of a shareholder in a corporation Shareholder activism  Activities undertaken by shareholders to influence executive decision making in areas ranging from strategic planning to social responsibility Copyright © 2017 Pearson Education, Ltd. 5-31  Board of Directors Board of directors  A group of professionals elected by shareholders as their representatives, with responsibility for the overall direction of the company and the selection of top executives.  They are usually composed of major shareholders, their representatives and executives from other corporations. Copyright © 2017 Pearson Education, Ltd. 5-32  Board Related Issues Composition of the board Education of board members Liability of board members  Legal and financial liability for company failures Independent board chairs Recruiting challenges  Difficulty to find good board members Copyright © 2017 Pearson Education, Ltd. 5-33  Corporate Officers Corporate officers  The top executives who run a corporation Chief executive officer (CEO)  The highest-ranking officer of a corporation Other «C-level» executives:  CFO, CIO, CTO, COO Copyright © 2017 Pearson Education, Ltd. 5-34 How Ownership Structure Changes? Mergers Acquisitions Divestitures Strategic alliances Joint ventures Copyright © 2017 Pearson Education, Ltd. 5-35  Mergers and Acquisitions A company can purchase (acquisition) or partner (merger) with a firm that has the resources and capabilities it needs. Businesses can combine permanently through either mergers or acquisitions (M&A) Copyright © 2017 Pearson Education, Ltd. 5-36  Mergers and Acquisitions Merger Acquisition  An action taken by  An action taken by two companies to one company to combine a single buy a controlling entity interest in the voting stock of another company Copyright © 2017 Pearson Education, Ltd. 5-37  Mergers and Acquisitions (cont.) Hostile takeover  Acquisition of another company against the wishes of management Leveraged buyout (LBO)  Acquisition of a company’s publicly traded stock, using funds that are primarily borrowed (debt), usually with the intent of using some of the acquired assets to pay back the loans used to acquire the company Copyright © 2017 Pearson Education, Ltd. 5-38  Types of Mergers Vertical merger  A company purchases a complementary company at a different stage or level in an industry. Horizontal merger  Merger of two similar companies at the same level. Conglomerate merger  A parent company buys companies in unrelated industries. Copyright © 2015 Pearson Education, Ltd. publishing as Prentice Hall 5-39 Exhibit 5.4 Common Types of Mergers Copyright © 2017 Pearson Education, Ltd. 5-40  Advantages of Mergers and Acquisitions Increase their buying power as a result of their larger size Increase revenue by cross-selling products to each other’s customers Increase market share by combining product lines Gain access to new expertise, systems, and teams of employees Copyright © 2017 Pearson Education, Ltd. 5-41  Disadvantages of Mergers and Acquisitions Executives have to agree on how the merger will be financed (and come up with the money) Managers need to decide who will be in charge after they join forces. Marketing departments need to figure out how to blend product lines, branding strategies, and advertising and sales efforts. Incompatible information systems may need to be rebuilt or replaced Companies must often deal with layoffs. Organizational cultures of the firms must be harmonized Copyright © 2017 Pearson Education, Ltd. 5-42  Corporate Divestitutres A company may decider to divest parts of itself as separate companies, sometimes to the point of splitting an entire corporation in two. These new entities are often call spin-offs Common reasons for splitting of:  increasing shareholder value in the belief that the parts of the company will collectively be more valuable as separate companies  giving parts of a company more freedom to pursue strategic goals  refocusing a firm’s strategy if its lines of business have evolved over the years Copyright © 2017 Pearson Education, Ltd. 5-43  Corporate Divestitutres Johnson & Johnson is known for its many iconic consumer health and skincare brands, including Tylenol, BAND-AID, and Johnson’s Baby Shampoo. However, as the company’s pharmaceutical and medical technology business grew over the years, those consumer products eventually made up less than 20% of the company’s revenue, so leadership decided to spin them off as a new company and focus on the pharmaceutical and medical technology business. General Electric, another iconic U.S. company and one that has struggled for several decades after expanding with numerous acquisitions, recently split itself into three independent companies Copyright © 2017 Pearson Education, Ltd. 5-44  Strategic Alliances and Joint Ventures Strategic alliance  A long-term partnership between companies to jointly develop, produce, or sell products.  It accomplished many of the same goals as M&A, but with less risk and work.  Can help the companies to expand its market presence, gain access to technology and share best practices Copyright © 2017 Pearson Education, Ltd. 5-45  Strategic Alliances and Joint Ventures Joint venture  A separate legal entity established by two or more companies to pursue shared business objectives  It creates a unified entity that functions with a single management and organizational structure  Creates an operation that is tightly integrated  Ex: Three banks launching clearXchange company Copyright © 2017 Pearson Education, Ltd. 5-46 Exhibit 5.5 Options for Joining Forces Copyright © 2017 Pearson Education, Ltd. 5-47 Exhibit 5.5 Options for Joining Forces (cont.) Copyright © 2017 Pearson Education, Ltd. 5-48 Exhibit 5.5 Options for Joining Forces (cont.) Copyright © 2017 Pearson Education, Ltd. 5-49 Copyright © 2017 Pearson Education, Ltd. 50  Thriving in the Digital Enterprise: Big Data and Analytics Big data: The massive data sets that companies collect and analyze to find important trends and insights  Volume. Big data is big, often to the point of requiring specialized computer systems to handle the huge data files  Velocity. Big data comes at you fast, so to speak, with continuous, real-time, and near real-time streams from social media, IoT sensors, point-of-sale terminals  Variety. These data records come in a wide variety of formats from all manner of sources Copyright © 2017 Pearson Education, Ltd. 5-51  Thriving in the Digital Enterprise: Big Data and Analytics Analytics: Computing tools and techniques used to analyze big data; major types include data mining, text mining, and predictive analytics Three important analytics capabilities (business intelligence):  data mining (finding patterns in numerical data)  text mining (extracting meaning from text files)  predictive analytics (identifying the most likely outcomes of a decision or scenario) Copyright © 2017 Pearson Education, Ltd. 5-52  Applying What You’ve Learned 1. Define sole proprietorship, and explain the six advantages and six disadvantages of this ownership model. 2. Define partnership, and explain the six advantages and three disadvantages of this ownership model. 3. Define corporation, and explain the four advantages and six disadvantages of this ownership model. Copyright © 2017 Pearson Education, Ltd. 5-53  Applying What You’ve Learned (cont.) 4. Explain the concept of corporate governance, and identify the three groups responsible for ensuring good governance. 5. Identify the potential advantages of pursuing mergers and acquisitions as a growth strategy, along with the potential difficulties and risks. 6. Define strategic alliance and joint venture, and explain why a company would choose these options over a merger or an acquisition. Copyright © 2017 Pearson Education, Ltd. 5-54  Class Exercise Mergers, acquisitions and divestitures are commonplace in the business world. Search online and select two recent cases. 1. Why do you think it took place? 2. What internal and external factors may have influenced the outcome? 3. What impact did it have in the long term, both internally and externally? Consider what you think the future impact will be on (a) the company, (b) consumers, and (c) the industry the company is part of. Copyright © 2017 Pearson Education, Ltd. 5-55