Business Organizations, Competition
and Market Structure
Unit 2
This unit explains how to start a business, the
different ways businesses are organized and
investing options.
So you want to own a business?
Entrepreneur- a person who takes a risk in search of profits.
Do you have what it takes?So you want to own a business?
Levi’s Corporation
• The design is so right it
need never alter, a
timeless classic of
clothes. Adaptable, like
any well-designed object
you can wear them with
almost anything. --The designer
Margaret Howell gives her view on Levi Jeans.
Where to get business help
• Small Business Administration-Government
help for business and loans.
• Small Business Incubator-management advice,
lower rents, job creation
• Internet-search for competition, on-line
business help.
Elements of a Business Operation
• Expenses-spend $ to make $
inventory-what you sell
Receipts-$ from customers
• Advertising-promote your
business
• Recordkeeping-profit/loss
statements, income statements,
payroll, balance sheets
• Risk-no guarantee of success
• On the web
Forms of Business Organizations
• An Economic institution uses the factors of
production to satisfy consumer wants and needs.
• Business organizations are a profit seeking
enterprise that links scarce resources and
consumer wants and needs.
Four kinds of Business Organizations
• Sole proprietorship
• Partnership
▫ General
▫ Limited
▫ Joint venture
• Corporation
• Franchise
Sole Proprietorship
• Normally run by 1 person.
• You take all risks and rewards
• Obtain licenses, permits,
location and inventory
• Proprietor is from Latin
meaning “property”
• Most numerous form of
business in the USA.
• There are more than 17 million
which account for over 73% of
all businesses in the USA.
Sole
Proprietorship
Advantages
Disadvantages
Profits and
Losses
All go to owner
Assume all risk
Liability-who is
responsible?
Management
Responsible for
all debt.
Quick decision
making
May not make
good decisions
Taxes
Usually lower
Solely responsible
for all taxes
Personal
Satisfaction
Own boss
Shape business
Demanding and time
consuming, can be a huge
burden.
Financial Growth
Owner must
finance growth or
get loans.
Rely on own
money, borrowing
can be difficult.
Life of business
Close business
when owner
decides
Owner dies/cannot work,
business closes
Pass on or sell business?
Partnership
• Formed by drawing up a legal document called
the partnership agreement. This document
defines duties, pay, investment, profit sharing,
etc.
• Partnerships are 7.1% of all businesses in the
USA.
Assumed-name Statute
• A law requiring
persons to make a
public filing of their
identities if their
partnership
operates under a
name that does not
reveal the owner’s
identity.
Types of Partnerships
• General-both partners are involved in the
day to day operations.
• Limited-one partner may be a “silent
partner”
• Joint venture-partnership formed for a
short period of time then dissolved.
Partnership
• Avoid partnerships
with friends and family.
• Partnerships are like a
marriage, some work
and some don’t.
Partnerships
Advantages
Disadvantages
Profits and losses Share losses
Share profits
Liability
Both partners
liable for debt
Unlimited
Management
Specialization of
skills
Slow to make
decisions
Taxes
Generally lower
Personal
satisfaction
Goal oriented
Disagreement
between partners
Financial growth
More $ available
Creditors more
willing to lend
Combine assets
and debt
Life of business
Reorganize if 1
partner leaves or
dies.
Theft by a partner
Selling of partners
share.
• Advertising and you
commerical songs
Coca Cola
• “A billion hours ago,
human life
appeared on earth.
A billion Coca-Colas
ago was yesterday
morning.
--Roberto Goizueta,
CEO 1981-97.
What is a Corporation?
• A business that can own property, pay taxes,
make contracts, sue and be sued.
• Registering a corporation
▫ Articles of incorporation-a legal document filed in
the state where the corporation operates.
▫ Corporate charter-granted by the state.
▫ Each corporation must have a unique name.
I ♥ Bill
• Microsoft commericial
Corporations
19.9% of all businesses in
the USA.
Generate 88% of all
business revenue.
Corporations can issue
stocks and bonds.
Stocks and bonds
• Two kinds of stock:
▫ Common and preferred
▫ Stock represents ownership in the company.
▫ Dividends can be earned based on stock
ownership.
• Bonds- Bond owners loan money to the company, and will be
repaid when the bond matures.
Corporations
Advantages
Disadvantages
Stockholders are investors, and
expect stock value to increase.
Profits divided among investors.
Stock prices can be influenced by
corporate profits/losses.
Liability
Limited liability
Sue corporation
Cannot lose personal
property
Corporations are subject
to unsubstantiated
lawsuits
Management
Specialized
Large,
complicated
Shareholder interests may be
different than those of
management.
Not all management may agree
with company direction.
Profits/losses
Subject to double taxationcorporate income tax,
shareholder profits from
stock are taxed.
Taxes
Personal
satisfaction
Shareholders own part of
the company
Stockholders have little
say in company.
Can become
unmanageable
Financial Growth
Sell stocks/bonds Bonds must be
to raise capital.
repaid.
Life of business
Unlimited
Can outlive founder, steer
away from founders vision.
Can lose control of company if
voted out by shareholders.
Corporate Structure
•
•
•
The Board of Directors is responsible for
supervision and controlling the corporation.
The Board does not run the business on a day
to day basis.
Instead it hires officers for the company,
President, VP, etc. who run the business and
hire other employees.
Corporate structure
Stockholders elect the
Board of Directors select the CEO
•Corporations
• Articles of incorporation
must be filed with the
state.
• Each corporation must
have a unique name
within the state they are
incorporated.
• LLC-Limited Liability
Corporation-has
characteristics of a
partnership and
corporation as the
owners are limited in
liability to their capital
contributions
• S-corporations are small
corporations
Corporations
• Publicly held
businesses have
hundreds or thousands
of owners who
exchange their
ownership on public
exchanges.
• Answering to
shareholders.
IBM
• IBM under Thomas Watson
Snr imposed a rigorous
dress code on employees:
blue suits, white shirts and
ties.
• Beards were prohibited until
1945, when the bearded
Herbert Grosch was taken
on as IBM’s second scientist.
• How times have changed
Franchises
• A franchise is the right
to use a business name
and sell their product.
• A franchise fee is
money paid to the
parent company for
those rights.
So you would like a franchise?
•
Advantages of
Franchises:
1. Established name,
advertising
2. Established product
• Disadvantages:
1. May not be able to pick
location
2. Monthly fees due to
parent organization
3. Costs and corporate
guidelines.
Chapter 3, Section 3
•
•
•
•
Businesses grow for several reasons
Businesses grow through investment.
Cash flow allows reinvestment.
When cash is reinvested, businesses can produce
additional products.
▫ Reinvestment includes factories, equipment,
technology, R&D, increased locations.
Growth through Mergers
1.
Businesses cannot grow as fast as they would like by using
internally generated funds.
2. Efficiency-reduce management, advertising, volume purchasing
3. Acquire new product lines-Disney purchases Marvel Comics.
4. Catch up or eliminate with rivals-Sirius and XM Radio
5. Merge to lose corporate identity. Airtran and Valuejet. Valuejet
had a crash and 110 were killed.
Two kinds of mergers:
Example
Continental merges with
United Airlines
Horizontal Mergers:
Two or more who produce
the same product merge
Two kinds of mergers
• Mrs. Baird’s purchases
a wheat farm
a plastics company
a trucking firm
Vertical Merger:
Companies merge within
the various stages of
manufacturing.
Conglomerate
Four or more unrelated
businesses merge, each
one is not responsible for
a majority of sales.
Diversification is the main
reason to form a
conglomerate.
An example of a conglomerate:
Multinational Corporation
A corporation located in
more than one nation.
Multinationals have faced
criticism in recent years.
Strengths of multinationals
New technology products and services
Generate jobs/income
Generate tax revenue for host country
Lobby for tariffs and environmental concerns
Many developing as micro-multinationals, such as
software companies.
Weaknesses of multinationals
 Influence politics in host
country
 Threat of market withdrawal
 Exploit workers/low pay
 Exploit scarce resources
 Hold patents to keep
competitors from arising
 Create false needs in
consumers
 Invasive advertising
Agree?
Chapter 3, Section 3
Other business organizations
Non-profit organization -promote interest of
others not financial interests.
Organized as a 501(c)(3) by the IRS
Examples in Alvin:
Manvel Maverick Booster Club
Other business organizations
Civic Organizations-serve a community
Examples in Alvin:
Rotary Club
Noon Lion’s Club
Other business organizations
Co-operative associations
are a voluntary
association of people
formed to carry on an
economic activity for
members.
• Consumer co-op-Sam’s
• Service Co-op’s-Dow
Employees Credit Union
• Producer Co-op-Florida
Orange Growers
Labor and professional associations
• Labor unions-formed to represent it’s members
in labor/job related matters. Example:
International Garment Workers Union
• Professional Associations-formed for specialized
occupations. Example: American Medical
Association
• Business Associations-Chamber of Commerce
Government
The federal government
is a really large
corporation.
The government collects
and spends money.
Government’s role in Economy
• Direct role is a supplier of
goods and services to
compete with private
business.
• Indirect role is to make
sure that the market
economy operates
smoothly and efficiently.
• Post Office, TVA-generate
power
• Regulator of cable TV,
minimum wage, social
security
Government’s Current Role
• Each President influences
the role of government in
the economy.
•
•
•
•
•
•
•
Bailout of AIG
Bank bailouts
Stimulus checks
Cash for clunkers
Expanding role of The Fed.
Social Security raises?
Healthcare reform?
Chapter 7, Section 1
Competition and
Market
Structure
Let’s go back to 1776
• Factories were small,
there was a high level of
competition
• Adam Smith called for
“laissez-faire”,
government should not
interfere with business
By the 1800’s
• Competition was
weakening. Mergers
and acquisitions had
combined many small
firms into large firms.
• Trusts began,
Rockefeller, Morgan,
Vanderbilt and
Carnegie built fortunes
Industries are competitive
• Industry refers to the “supply” side of the
market, those who produce.
• Market structure refers to the nature or degree
of competition among firms in the same
industry.
• Economists classify markets according to the
conditions that prevail in that market.
Microsoft
• “A fundamental new
rule for business is
that the internet
changes
everything”.-Bill
Gates
Apple as
competition?
Economists ask the following questions
1.
2.
3.
4.
5.
6.
How many buyers and sellers are there?
How large are they?
Does either have influence over price?
How much competition exists between firms?
What kind of product is involved?
Is everyone trading the same product or are they just
similar?
7. Is it easy or difficult for a new firm to enter into the
market?
Businesses need to ask themselves?
1. Can someone overseas do it cheaper?
2. Can a computer do it faster?
3. Is what I am offering in demand in
the age of abundance?
Economists group industries into six
different market structures
Pure/perfect competition
Monopolistic Competition
Oligopoly
Monopoly
Monopsony
Oligopsony
Pure or perfect competition
• A market structure in which the following five criteria
are met:
1. All firms sell an identical product.
2. All firms are price-takers.
3. All firms have a relatively small market share.
4. Buyers know the nature of the product being sold and
the prices charged by each firm.
5. The industry is characterized by freedom of entry and
exit.
Pure or Perfect Competition
Pro’s:
Ease of entering and exiting
business.
Identical products
No need to advertise
Con’s:
Advertising and name
brands have no affect on
consumer selections.
In most instances no
substitute goods are
available.
Pure or Perfect Competition
• Perfect competition is a theoretical market
structure. It is primarily used as a benchmark
against which other market structures are
compared. The industry that best reflects perfect
competition in real life is the agricultural
industry.
Examples of perfect competition
Imperfect Competition
The competitive situation in any market where the
conditions necessary for perfect competition are
not satisfied. It is a market structure that does
not meet the conditions of perfect competition.
The remaining market structures represent
imperfect competition.
Monopolistic Competition
Monopolistic competition differs from perfect
competition in that production does not take
place at the lowest possible cost. Because of this,
firms are left with excess production capacity.
Monopolistic Competition
A type of competition within an industry where:
1. All firms produce similar yet not perfectly substitutable
products.
2. All firms are able to enter the industry if the profits are
attractive.
3. All firms are profit maximizers.
4. All firms have some market power, which means none
are price takers.
Monopolistic Competition
• Pro’s
Products sell within a
narrow price range
Ease of entry into market.
• Con’s
Once supply of good
becomes stable, no great
profits or losses.
Consumers are responsive
to price changes, brand
loyalty may not exist.
Techniques to attract customers
Product differentiation-real or imagined
differences between products.
Non-price Competition-promotions, coupons,
rebates, something other than price.
Advertising-differentiate between products.
Advertising gone too far?
Name brand-use of logos, labels and snob
appeal
Monopolistic Competition-ad
Oligopoly
A situation in which a particular market is controlled by a
small group of firms.
Sellers are so few that the actions of any one of them will
materially affect price and have a measurable impact on
competitors
An oligopoly is much like a monopoly, in which only one
company exerts control over most of a market. In an
oligopoly, there are at least two firms controlling the
market.
Oligopoly
• Pro’s
Products are either differentiated
or standardized.
Advertising is important to
enhance their product to
enhance new customers.
Customer loyalty exists in this
market to some degree.
• Con’s
Number of firms is less important than
their ability to cause a change in
output, sales and pricing industry
wide.
Historically have been accused of
collusion, price fixing, bait and switch.
Difficult to enter the market due to costs
of entry—expensive to enter this
market.
Oligopoly
• Examples within this
industry include:
Coke anyone remix
Classic commercials
• diet coke is the best
• Diet Coke part 2
• frogs vs. lizards
Monopoly
• Formerly known as ‘trusts” in the 1800’s.
• Americans tend to dislike monopolies and want
to “outlaw” them.
Monopoly
A situation in which a single company or group
owns all or nearly all of the market for a given
type of product or service.
For a strict academic definition, a monopoly is a
market containing a single firm.
Monopoly is the extreme case in capitalism.
Monopoly
• Pro’s
Charge whatever the
market will bear for the
product.
No need to advertise.
Some types can legally exist
in the USA.
• Con’s
High prices and inferior
goods can result.
Many firms can start as a
monopoly and as the
market evolves they
become monopolistic
competition.
Four monopolies that can legally exist
Natural Monopoly
Geographic Monopoly
Single firm producing in an area. A
local phone company, local bus service
Absence of sellers in an area due to
location.
Only grocery store in a town.
Government Monopoly
Technological Monopoly
Owned and operated by the
government. Daily mail service,
uranium processing.
Granted by law, patent, copyright, trademark.
MS*Dos, coca-cola formula, copyright of a
book.
Monopoly
• Benefits
Economies of scale, lower
production costs
Lower advertising costs
Lower equipment and
factory costs
• Dangers
Sloppy and inefficient due
to no competition.
Price maker
Real or artificial shortages
can exist
Control market, political
power.
Monopsony
• A market similar to a
monopoly except that a large
buyer not seller controls a
large proportion of the market
and drives the prices down.
Sometimes referred to as the
buyer's monopoly.
• People have accused Ernest
and Julio Gallo (the big wine
makers) of being a
monopsony. They had such
power buying grapes from
growers, that sellers had no
choice but to agree to their
terms.
• The federal government is a
monopsony in the United
States for machine guns or F16s.
Oligopsony
• This is a market in which there are
only a few large buyers for a
product or service.
• This allows the buyers to exert a
great deal of control over the
sellers and can effectively drive
down prices.
• A good example of an oligopsony
would be the U.S. fast food
industry, in which a small number
of large buyers (i.e. McDonald's,
Burger King, Wendy's) controls
the U.S. meat market.
• Such control allows these fast
food mega-chains to dictate the
price they pay to farmers for meat
and to influence animal welfare
conditions and labor standards.
Chapter 7, Section 2
Market Failures
• Why businesses can
fail.
• A market is said to have
failed when certain
conditions are not met.
Inadequate Competition
• Mergers have resulted in larger and fewer firms
controlling various industries. The results include:
▫ Inefficient use of resources, resources not available.
▫ Higher prices and reduced output, artificial shortages
▫ Economic and political power-exploit workers in high
unemployment areas, tax breaks.
▫ Both sides of the market. High demand for consumer goods, low
demand for items like skyscrapers.
Inadequate Information
 Resources must be allocated efficiently.
 Company information, sales, prices, CEO salary in stock options, bonuses.
Some easy to get, some difficult.
Public disclosure requires businesses to reveal certain information like:
profit/loss, overseas ownership, board of directors, CEO salary.
 Steve Jobs of Apple is worth $ 5.7 billion. One year his bonus was a jet
worth $50-80 million, nice!!!!!!!
Resource immobility
• Land, labor and capital
do not move to markets
where returns are
highest. They tend to
stay put, remain
unused or sometimes
remain unemployed.
Externalities
• Externalities are economic side effects that
either benefit or harm persons.
• They are considered market failures because
their costs and benefits are not reflected in the
market price of activities that caused the side
effect.
Externalities
• Positive
A helpful side effect
• Negative
A harmful side effect
Example: road
construction creates jobs,
workers spend money in
area for food.
Flu shots are an individual
and group positive
externality.
Example: inconvenience
during road construction.
Public Goods
Public goods are consumed collectively by
everyone. Individual wants are satisfied but this
may fail to satisfy them on a collective basis.
Examples include: police, fire, 911 service and
schools.
Role of Government
• Since the 1800’s the
government has passed
laws to restrict
combinations in
restraint of trade,
protect consumers
from bad business
practices.
Excerpt from The Jungle
• As they work in their respective wings of the packinghouses, Jurgis
and Elzbieta see the swindles first hand. For instance, whenever
meat is so spoiled that it can't be used for cuts, it is canned or made
into sausages. The workers are instructed to fill these spoiled and
discolored sausages with chemicals that make the spoilage less
apparent. Elzbieta has to trim the spoiled sausages, which have
been treated with borax and glycerine, as well as trim meat that
has fallen on the rat-infested floor. When the shovelers come by,
they shovel the bread, rats and spoiled meat into the sausage vats.
"This is no fairy story and no joke; the meat will be shoveled into
carts and the man who did the shoveling will not trouble to lift out
a rat even when he saw one." Chapter 14, pg. 162
Major pieces of government legislation
• 1890-Sherman Anti-trust Act-It was the first
Federal statute to limit cartels and monopolies,
and today still forms the basis for most antitrust
litigation by the United States federal
government.
• 1914-Clayton Anti-trust Act-eliminated price
discrimination between different purchasers. A
person may not be a director for two or more
competing corporations
Major pieces of government legislation
• 1914-Federal Trade Commission Act-Unfair
methods of competition in or affecting
commerce, and unfair or deceptive acts or
practices in or affecting commerce, are hereby
declared unlawful.
• Publishes the industry guide-which defines the
agencies view of the legality of an industries
trade practices
Major pieces of government legislation
• Securities Act of 1933-It was the first major
federal legislation to regulate the offer and sale
of securities. Prior to that time, regulation of
securities was chiefly governed by state laws.
• Securities Exchange Act of 1934-regulates the
resale of securities through brokers or
exchanges.
Major pieces of government legislation
• Robinson Patman Act-1936--Prohibits manufacturers
and suppliers from providing price discounts and other
forms of preferential treatment to some buyers and not
to others, if the effect of such discrimination is to lessen
competition or injure individual competitors. Volume
discounts are allowed only to the extent that they reflect
actual differences in the cost of manufacture or sale of
the product
Major pieces of government legislation
• Occupational Safety and Health Administration
(OSHA)-To assure safe and healthful working
conditions for working men and women.
Consumer Products Safety Commission-1972
• Consumer Products Safety Commission-It established the agency,
defines its basic authority, and provides that when the CPSC finds
an unreasonable risk of injury associated with a consumer product it
can develop a standard to reduce or eliminate the risk. The CPSA
also provides the authority to ban a product if there is no feasible
standard, and it gives CPSC authority to pursue recalls for products
that present a substantial product hazard. (Generally excluded from
CPSC's jurisdiction are food, drugs, cosmetics, medical devices,
tobacco products, firearms and ammunition, motor vehicles,
pesticides, aircraft, boats and fixed site amusement rides.)
Sarbanes-Oxley-2002 (SOX)
• The Sarbanes-Oxley Act of 2002 is mandatory.
ALL organizations, large and small, MUST
comply.
• The legislation came into force in 2002 and
introduced major changes to the regulation of
financial practice and corporate governance.
• This law was passed as a reaction to Enron and
corporate fraud.
Ad substantiation program
• FTC demands that an advertiser substantiate
any claims in their ads.
• Crest toothpaste—9 of 10 dentists recommend.
Crest must be able to prove this statistic.
Class Action Lawsuit
• One or more plaintiffs to file a lawsuit on behalf of a larger group.
All plaintiffs have a common interest in the lawsuit.
Example:
T-Moble Early Termination Fees
If you were charged a flat-rate early termination fee instead of a
prorated one when canceling your T-Mobile contract between July
23, 1999 and February 19, 2009, you're eligible. However, you're
also eligible if you happened to be under a T-Mobile contract with a
flat-rate ETF during that period, whether you canceled the contract
or not. The claim form is located here. Deadline: September 25,
2009.
Convention on the International Sale of
Goods (CISG)
• Treaty adopted by most major trading nations
that outline standard commercial rules for
international contracts.