1.2 Types of organization

Globalization

Globalization is the process of international integration, which means the countries are freely trading.

Features of globalization:

1.     No government restriction

It means free access to the markets worldwide without quota, tariff, etc.

2.     Greater mobility

People from different countries living and working in the same country, like EU.

3.     Progress

Free mobility of entrepreneurs resulting mergers and takeovers across the globe.

4.     Interdependence

Globalization requires resources like raw materials, finance and technology, thus events in one economy affects the other.

Types of private sector businesses:

1.      Sole trader

2.      Partnership

3.      Limited companies (ltd):

·         Private limited company (pvt)

·         Public limited company (plc)

4.      Franchise

5.      Joint venture

6.      Multinationals (MNC)

Types of public sector businesses:

1.      Nationalized industry

2.      Public corporation

Incorporated

·         A business having a separate legal entity, e.g. limited companies

·         If anything goes wrong the business will be sued not any of its shareholders

·         During liquidation the shareholders lose the money invested

·         Corporations pay corporate tax

Unincorporated

·         A business having no separate legal entity, e.g. sole trader and partnership

·         If anything goes wrong the owner will be sued

·         During liquidation the owner not only loses the money invested but also personal belongings

·         No corporate tax is levied

Sole trader

Features of a sole trader:

1.       Ownership: Number of owner is one.

2.       Capital: Funded by personal savings, loans taken from friends, relatives and banks.

3.       Control: The owner solely manages and controls the business.

4.       Formation: No formalities are required to set up business.

5.       Allocation of profit: Owner solely enjoys profit and bears loss if incurred.

6.       Liability: Sole trader has unlimited liability during debt settlement.

7.       Taxation: Company pays no tax, only the owner pays income tax.

8.       Continuity: If the owner dies and have no successor then the business ends.

Advantages of a sole trader:

1.         Easy to establish.

2.         Low start-up costs.

3.         Single owner enjoys the independence to control and manage.

4.         All profit goes to the owner alone.

5.         No hassle of informing anyone about the changes made in operations.

6.         Can easily wind up business.

Disadvantages of a sole trader:

1.         Unlimited liability for debts.

2.         Solely managing and controlling can be a burden for the owner.

3.         Less capital is available.

4.         Low borrowing capacity.

5.         Life of the business is limited, i.e. the business dies with the owner.

6.         Can’t enjoy economies of scale due to its smaller size.

Partnership

Features of a Partnership:

1.       Ownership: Number of owner is minimum two and maximum twenty.

2.       Capital: Funded by partners, loans, etc.

3.       Control: Managerial responsibilities are shared by the partners.

4.       Formation: Deed of partnership is a legal document drawn up:

·         to help in knowing the rights of the partners

·         to settle disputes among the partners during disagreements

5.       Allocation of profit: Profits or losses are shared among the partners.

6.       Liability: Partners have unlimited liability during debt settlement.

7.       Taxation: Company pays no tax, only the partners pay income tax.

8.       Continuity: Death or retirement may ends the partnership.

Advantages of a partnership:

1.         Easy to establish.

2.         Low start-up costs.

1.         Burdens of work are shared among the partners.

2.         High-calibre employees can be made partners.

3.         More capital is available.

4.         Greater borrowing capacity.

5.         Death of a partner may not be the end as there are other partners to run the business.

Disadvantages of a partnership:

1.         Profits are shared.

2.         Unlimited liability for debts.

3.         Disagreements among the partners create disharmony.

4.         Time is wasted in decision making process.

5.         Hinders to grow bigger due to the maximum limit of twenty partners.

Sleeping/Limited/Dormant partner:

A partner who invests:

·         to earn profit without working.

·         to enjoy limited liability.

Limited companies

Features of limited companies:

1.       Ownership: Number of owner is minimum two and maximum unlimited.

2.       Capital: Funded by shareholders.

·         In private limited company share is transferred privately

·         In public limited company share is transferred publicly in the Stock Market

3.       Control:Company is controlled by a board of directors.

4.       Formation: Two documents are required to form a limited company.

·         Memorandum of Association includes name, address, share of capital, etc. It aids to the external users

·         Article of Association includes rules governing shareholders’ duties, etc. It aids to the internal users

5.       Allocation of profit: Shareholders get dividends.

6.       Liability: Shareholders enjoy limited liability.

7.       Taxation: Company pays corporate tax.

8.       Continuity: Incorporated business is perpetual.

Advantages of limited companies:

1.         Limited liability for debt payments.

2.         Greater capital is available for the business.

3.         More borrowing capacity from selling shares.

4.         Enjoys economies of scale.

5.         Managed and controlled by specialized employees.

6.         Business continues if any shareholder dies.

Disadvantages of limited companies:

1.         High setup-cost.

2.         Difficult to get legal certifications.

3.         Financial information has to be disclosed to the public.

4.         Corporate tax is burden.

Franchise

It is an arrangement where one party, the franchiser grants another party, the franchisee the right to use its trademark as well as certain business systems and processes, to produce goods or services.

·         The franchisee usually pays a one-time fee plus a percentage of sales revenue as royalty

·         The franchiser gains rapid expansion of business and earnings at minimum capital outlay

Advantages to the franchisor:

1.         Fast method of growth.

2.         Cheaper method of growth.

3.         Sharing risk with the franchisee

4.         More motivation in franchisees to be found.

Disadvantages to the franchisor:

1.         Profit is shared with franchisee.

2.         Brand reputation may be hampered by a poor franchisee.

3.         High expenses involved in supporting franchisee.

4.         Franchisee my get merchandise from elsewhere.

Advantages to the franchisee:

1.         Less risky as the idea is used.

2.         Back up support is there.

3.         Anticipated set-up cost.

4.         Marketing is organized.

Disadvantages to the franchisee:

1.         Profit is shared with franchisor.

2.         Lack of independence.

3.         High set-up cost.

4.         Strict contract to be followed.

Joint venture

Joint venture is an agreement of contract of joining together of two or more organizations. The purpose of forming a joint venture is to execute a particular business undertaking, i.e. sharing responsibilities, cost and profits of a business venture.

Advantages of joint venture:

1.         Unlike mergers companies in joint ventures do not lose their identity.

2.         Provide companies with the opportunity to gain new capacity and expertise.

3.         Mergers and takeovers are unfriendly whereas joint ventures are friendly.

4.         No heavy legal and administration cost involve like takeovers.

Disadvantages of joint venture:

1.         It takes time and effort to build the right relationship with another business.

2.         The objectives of the venture are not 100 per cent clear.

3.         There is an imbalance in levels of expertise, investment or assets.

4.         Different cultures and management styles result in poor integration and co-operation.

5.         Profit from venture is split between the investors.

Multinationals

MNC is a company that owns or controls production in more than one nation. MNCs go for such multi nation location so as to avail low cost of production from cheap labour thus earning greater profits. E.g. nearly all major multinationals are either American, Japanese or Western European, such as Nike, Coca-Cola, Wal-Mart, Toshiba, Honda and BMW.

Importance/Reasons of forming multinationals:

·        Economies of scale

Since MNCs sell globally so they produce in massive numbers, thus enjoy economies of scale.

·        Marketing

Firms that have developed a successful brand at home and then exploited it globally rely on effective marketing.

·        Technical and financial superiority

Due greater finance MNcs own their R&D (Research and Development) laboratories, where research is carried on to develop new and innovative products.

Advantages of multinationals:

1.         Access to Consumers

2.         Access to Labour

3.         Taxes and Other Costs

4.         Overall Development

5.         Technology

6.         Research & Development

Disadvantages of multinationals:

1.         Laws & Regulations

2.         Political Risks

3.         Loss to Local Businesses

4.         Loss of Natural Resources

5.         Money flows

6.         Transfer of capital

Nationalized industry

Nationalization is the process of taking over a private industry or private assets into public ownership by a national government or state.

Public corporation

Government-owned Corporation, that offers its securities for sale to the general public. E.g. municipal councils, bar councils, universities, airline or public transit company.

N.B.  “Now you can analyze different business forms”

So invest wisely!