lecturenotes_unit 5 and 6_updated

UNIT 5

Business Units

• _{An organization which uses resources to produce goods and}

services to satisfy human needs and wants.

• _{The term Business means any legal activity carried out with a}

Types of Business Units

BUSINESS UNITS

PRIVATE

ENTERPRISE

PUBLIC

Private and Public

Enterprises

•

_{Public Enterprises}

• _{Business organisation owned and managed by the state or any}

other public authority.

• It is an undertaking owned and controlled by the local or state or central government.

• _{The whole or most of the investment is made by the}

government.

•

_{Private Enterprise}

• _{Business unit where economic activities are in private hands and}

• _{Public Enterprises}

• These are established with the objective of rendering service to the people.

• It minimizes concentration of wealth in the hands of few persons.

• _{These are formed with social}

interest.

• It is free from exploitation motive and as such the consumers and the employees are given a fair dealings.

• _{It undertakes all sorts of}

industries irrespective of its nature.

• _{Private Enterprises}

• These are established with the predominant objective of earning profit.

• It lends to concentration of wealth in the hands of few persons.

• _{These are formed with personal}

interest.

• It is not free from exploitation motive and the consumers and the employees are not given a fair dealings.

• _{It undertake those consumer}

Types of Business Units

BUSINESS UNITS

Types of Business Units

• _{A local business unit is a domestically – owned independent}

firm

• Most resources and revenues are acquired in the domestic country

• _{An international Business unit is any firm that engages in}

International trade or Investment.

• _{A business that is primarily based in a single country but acquires}

some meaningful share of its resources or revenues (or both) from other countries

• _{International business refers to business activities that involve}

Sole Trader

• _{The sole trader is a business unit where one person in in}

business on his own , providing the capital and taking the profit and standing all losses on his own.

• Types of commercial activity: • _Retail

• Building

• Hairdressing

• Dressmaking

• Non capital intensive

Sole Trader

Characteristics

• _{Has unlimited liabilities/Has no separate legal existence}

• _{When the liability is unlimited, there is a chance that the personal}

assets of the principal parties can be drawn upon to settle debts or claims against the business.

• _{Lacks continuity.}

• _{There is a problem of continuity if the sole trader retires or dies –}

what happens to the business next?

• _{Little capital}

• _{Generally, only a small amount of capital needs to be invested,}

which reduces the initial start-up cost.

Sole Trader

Advantages

:

• _{Easy to set up.}

• _{Easy to control and manage.} • _{The owner makes independent}

and quick decisions.

• _{Requires a small amount of}

capital.

• _{The owner takes all profits as a}

reward.

• _{Business affaires are kept}

privately.

Disadvantages:

• _{The Business has unlimited}

liabilities, hence personal assets are at risk.

• _{There is no continuity when the}

owner dies.

• _{Division of labour is difficult.} • _{Little borrowing capacity.} • _{Does not enjoy economies of}

Partnership

•

A partnership is a voluntary association of two or

more people for the purpose of operating a business

• _{A contract called a deed of partnership is normally drawn up. This}

states the type of partnership it is, how much capital each party has contributed, and how profits and losses will be shared

•

Types of Partners

• _{Founding partners}

• Limited liability / Unlimited Liability

• _{Sleeping- this a partner who invests in the business but does}

not have dealings in the day to day running of the enterprise.

•

Partnerships are common in law firms, doctors

Partnership

Advantages

:

• _{pooling of resources, assets}

and human capital

• possibly enhanced credibility

• _{Complimentary skills}

• sharing of responsibilities

• _{Specialization of function}

possible

Disadvantages:

• _{potential disagreements} • At least one partner must

Limited Companies

•

_{Businesses are owned by investors called shareholders}

who contribute money to a common fund called share

capital

•

_{It exists as a legal entity separate from the owners. The}

corporation can enter contracts, own property, and

borrow money as if it were a person.

•

_{Limited Liability-Shareholders only loose their}

investment if business goes bankrupt LTD

•

_{Profits are shared among the shareholders in the form of}

dividends

•

_{Private limited company (PLC) - shares freely bought &}

Private vs. Public Companies

PLC

•

_{May offer shares to the}

public

•

_{Often smaller or medium}

size companies

•

_{Fewer shareholders}

Ltd

•

_{Cannot offer shares to}

the public

•

_{Often very large}

companies

Limited companies

Advantages:

•

_{Limited liability for}

owners

•

_{Easy to grow}

•

_{Separation of ownership}

and management

•

_{Continuous life}

Disadvantages:

•

_{More complicated}

administrative

requirements

Co-operative Societies

• It is a voluntary association of persons who work together to promote their economic interest.

• It works on the principle of self-help as well as mutual help. The main objective is to provide support to the members.

• _{A cooperative society is not geared at earning profit.}

• _{People come forward as a group, pool their individual resources,}

Co-operative Societies

1. Consumers’ Co-operative Society: These societies are formed to protect the interest of general consumers by making

consumer goods available at a reasonable price.

• They buy goods directly from the producers or manufacturers and thereby eliminate the middlemen in the process of

distribution.

3.

Co-operative Marketing Society: These societies are

formed by small producers and manufacturers who find it

difficult to sell their products individually.

• _{The society collects the products from the individual members and}

takes the responsibility of selling those products in the market.

4. Co-operative Credit Society: These societies are formed to provide financial support to the members. The society accepts deposits from members and grants them loans at reasonable rates of interest in times of need.

•_{Example co-operative credit unions}

Co-operative Societies

5. Co-operative Farming Society: These societies are formed by small farmers to work jointly and thereby enjoy the benefits of large-scale farming.

Co-operative Societies

Advantages:

• _{Equal voting regardless of no.}

of shares

• Easier to qualify for grants & loans than sole traders & partnerships

• Limited Liability

Disadvantages:

• More complex ,

time-consuming & expensive than sole trader or partnership.

• Difficult to cash in shares without member approval

Characteristics of

Co-operative Societies

• Open membership: The membership of a Co-operative Society is open to all those who have a common interest.

• _{Sources of Finance: In a co-operative society capital is contributed}

by all the members.

• Democratic Management: Co-operative societies are managed on democratic lines.

• _{The society is managed by a group known as “Board of Directors”. The}

members of the board of directors are the elected representatives of the society. Each member has

• _{Separate Legal Entity: the cooperative is a separate legal entity,}

with limited liability of its members.

Growth of Firms

This is when a firm becomes larger in terms of its production, sales and profits.

1. INTERNAL GROWTH

•This means that the firm grows without joining with another firm.

2. EXTERNAL GROWTH

•_{In this case the firm grow as a result of having some}

The Growth of Firms

Internal Growth:



_{Generated through}

increasing sales



_{To increase sales firms}

need to:

 _{Market effectively}

 _{Invest in new equipment}

and capital

 _{Invest in labour}

External Growth:



_{Through amalgamation -}

merger

or takeover (acquisitions)



_Mergers

_{– Two firms join}

together and have equal

ownership



_Takeover

_{– One firm}

takes over another firm

and has the ownership of

that business. It is

probably against the

wishes of the other

business.

 _{Could be ‘friendly’ or}

Types of Mergers

 _{Horizontal mergers combine two or more firms competing in} the same market with the same good or service.

 _{Vertical mergers combine two or more firms involved in} different stages of producing the same good or service.

 _{Firms can expand backwards towards its sources of supply or}

forwards towards its markets

Backwards Integration

Primary

Secondary

Tertiary Retail Stores

Manufacturer

Vertical Integration Backwards –

Forward Integration

Secondary

Tertiary

Dairy Farming Co-operative

Cheese Processing Plant

Horizontal Integration

Secondary

Tertiary

Soft Drinks Manufacturer Confectionery

Reasons for Mergers and

Takeovers

•

_{Cost Savings}

• _{External growth may be}

cheaper than internal growth – acquiring an underperforming or young firm may represent a cost effective method of growth

•

_{Managerial Rewards}

• _{External growth may satisfy}

managerial objectives – power, influence, status

•

_{Control of Markets}

• _{Gain some form of monopoly}

power

• _{Control supply} • _{Secure outlets}

•

_{Shareholder Value}

• _{Improve the value of the overall}

business for shareholders

•

_{Asset Stripping}

• _{Selling off valuable assets of the}

business, this is done when a firms sole purpose of taking over the business is to liquidate the assets.

•

_{Economies of Scale}

• The advantages of large scale production that lead to lower unit costs

•

_{Risk Bearing}

Economies of Scale

• The benefits gained from producing on a large scale. It usually means that the average cost of making a good is lowered.

• As a number of the costs are fixed it is beneficial to produce on a larger scale. Number of Cars Total Cost (¥) _{Average Cost (¥)}

1 1,000 1,000

100 30,000 300

1,000 100,000 100

Example

TYPES OF ECONOMIES OF SCALE

• _MANAGERIAL

• Employ specialist managers e.g. accountants.

• _FINANCIAL

• Easier to get a loan from the bank

• _DIVERSIFY

• _{Sell a range of products. Reduces the risk of failure.}

• _ADVERTISING

• They can afford to advertise nationally on TV

• _{BULK BUYING}

Diseconomies of Scale

• _{This is when the increase in a firms size or scale of production}

leads to a higher per unit cost.

• _{This is unlikely to reflect any technical problems but may be}

caused by administrative problems • _{Lose touch with the customers}

• _{not aware of customer needs}

• _{Managers lose touch with the workers}

• inablility to monitor effectively the performance of workers in large organisations.

Division of

Labour/Specialization

• _{The DIVISION OF LABOUR is a system whereby workers}

concentrate on performing a few tasks. This is an example of specialisation.

Advantages of Specialization

• To the business:

• _{- Specialist workers become} quicker at producing goods - Production becomes

cheaper per good because of this

- Production levels are increased

- Each worker can

concentrate on what they are good at and build up their expertise

• _{To the worker:}

• - Higher pay for specialised work

Disadvantages of

Specialization

•

_{To the business:}

•

_{- Greater cost of training}

workers

- Quality may suffer if

workers become bored

by the lack of variety in

their jobs

•

_{To the worker:}

•

_{- Boredom as they do}

the same job

- Their quality and skills

may suffer