Learning Objectives
 11.1 Describe the advantages and
disadvantages of the most common forms of
business ownership.
 11.2 Identify the stakeholders of a business and
describe why they are important.
 11.3 Discuss the impact of environmental forces
on a business.
 11.4 Understand the purpose of a business plan
and identify its key components.
 11.5 Describe how a business obtains
competitive advantage.
 11.6 Explain the manager’s role in monitoring
business profits.
Common Forms of
Business
Ownership
The most common forms of business
ownership are:
• Sole Proprietorships
• Partnerships
• Corporations
These business forms are traditional to the US
and may vary by country in terms of names,
regulations, liability and taxation.
Sole Proprietorships
•
Sole Proprietorship – a business form owned and operated by a single
individual who is often called an entrepreneur.
•
It is one of the easiest forms of business to enter and exit.
•
Sole proprietors often work long hours for little rewards, and assume
unlimited financial responsibility for debts or damages.
•
Sole proprietors often benefit from sole retention of business profits.
•
It is often the business form used by home and web-based businesses.
Partnerships
•
Partnership – a business form owned by two or more individuals who pool
resources and knowledge, and share risk and profits.
•
This form of business is subject to possible conflict due to multiple owners,
and is a difficult business to dissolve.
•
There are several forms of partnerships:
•
General Partnership – A partnership where all partners possess
unlimited liability and share in managing the business.
•
Limited Partnership – A partnership with one or more general
partners, and one or more limited partners.
•
Master Limited Partnership (MLP) – A partnership that acts like a
corporation and is traded on a stock exchange, but is taxed like a
partnership, thus avoiding corporate income tax.
Partnerships - continued
•
Limited Liability Partnership (LLP) – Limits the liability of an
individual partner to the mistakes they or people under their
supervision make and not those that a partner or people under the
supervision of the partner make.
•
Joint Venture – A partnership in which two or more companies (often
from different countries) join to undertake a major project.
•
Strategic Alliance – A long-term partnership between two or more
companies established to help each company build competitive market
advantage.
Corporations
•
Corporation – A legal entity that has been incorporated through a
legislative or registration process with authority to act and liability to
separate from its owners.
•
A common misconception is that only large businesses are corporations,
however both small businesses and individuals can incorporate.
•
Corporations limits the liability of owners to the amount of personal
investment, which means there is no risk of personal loss.
•
Corporations can raise working capital and distribute profits to people
outside the business by selling shares of stock.
•
Corporations are able to continue after an owner leaves or dies.
•
A disadvantage to corporations is that in the U.S. there is a double taxation
on corporations. Taxing at the corporate level on business earnings, and at
the individual level on profits distributed and dividends.
Corporations - continued
•
There are three types of corporations:
•
C Corporations – legal entities with the authority to act and liability
independent of its owners and shareholders. This type represents the
majority of corporations.
•
S Corporations – legal entities with preferred tax status that avoid
double taxation. Paperwork must be filed to create an S corporation
and the business must meet specific qualifications.
•
LLC or Limited Liability Corporations – legal entities that enjoy
limited liability by allowing its owners to choose the form of taxation
desired in an effort to avoid double taxation.
•
LLC’s can not sell shares of stock, and require more paperwork to
start up.
Franchises and Cooperatives (Co-op’s)
•
In addition to the three basic forms of business ownership, there are two
additional special forms:
•
Franchise – a contractual agreement whereby a business owner (the
franchisor) sells the rights to use a recognized business name and sell
a recognized product or service to another (the franchisee) in a
specific territory.
•
•
Franchises can be formed as sole proprietorships, partnerships,
or corporations.
Cooperative – a business owned and controlled by the people who
use it– producers, consumers, or workers– who pool their resources
for mutual gain.
•
Electric utilities, childcare services, farms, and housing units are
common sources of cooperative ownership.
Who are
Stakeholders?
Stakeholders – consist of all the people– internal
and external to an organization– whose interests
are affected by an organization’s activities, and
have a stake in how it performs.
• Internal Stakeholders – include employees,
owners, stockholders, and the board of directors.
• External Stakeholders – include customers,
suppliers, allies, competitors, regulators, and
interest groups.
Environmental Forces
that Impact Business
•
Environmental forces in the larger, macro environment can affect
businesses in ways which are often beyond a manager’s control. Six
environmental forces include:
•
Economic Forces. These forces consist of general economic
conditions and trends, such as unemployment, inflation, interest rates,
and economic growth.
•
Technological Forces. These forces result in new methods and
innovations for doing business and transforming resources into goods
and services.
•
Sociocultural Forces. These forces are influences and trends in
human relationships and values that may affect an organization’s
products and services.
Environmental Forces
that Impact Business - continued
•
Demographic Forces. These forces are influences on an organization
arising from changes in the characteristics of a population, such as
age, gender, family size and ethnic origin.
•
Political-Legal Forces. These forces are changes in the way politics
shape laws and laws shape the opportunities for and threats to an
organization.
•
Global Forces. These forces are changes in the global economic,
political, legal, and technological systems that may affect an
organization.
What are the Differences
Between
Goods and Service
Industries?
Goods Industries – industries that produce
goods and tangible products include
agriculture, mining, manufacturing and
construction.
Service Industries – industries that deliver
intangible products or services include banking,
transportation, utilities, wholesale and retail
trade, professional, consumer, business, and
government services.
What is a
Business Plan?
Business Plan – a written document that describes the
nature of a business in very specific terms.
• Business plans are often associated with new business
start-ups and are essential documents for businesses
seeking commercial funding.
• A good business plan takes time to write and can comprise
from 20 to over 50 pages.
• Business plans should be updated annually to document
changes in the nature of the business and to outline
current goals, the strategy for achieving them and the
standards for measuring them.
Business Plan Outline
•
Cover Letter – The cover letter should summarize the most attractive points of
a project in as few words as possible.
•
Section 1: Executive Summary – Begin with a two-page or three-page
management summary of the proposed venture. Include a short description of
the business, and discuss major goals and objectives.
•
Section 2: Company Background – Describe company operations to date,
potential legal considerations, and include past, and current balance sheets,
income and cash flow statements, and other relevant financial needs.
•
Section 3: Management Team – Include an organization chart, job
descriptions of listed positions, and detailed resumes of current and proposed
executives.
•
Section 4: Financial Plan – Provide five-year projections for income,
expenses, and funding sources. Adjust your planning to allow for funding at
various stages of the company’s growth. Explain the rationale and assumptions
used to determine the estimates.
Business Plan Outline - continued
•
Section 5: Capital Required – Indicate the amount of capital need to
commence or continue operations, and describe how these funds will be used.
•
Section 6: Marketing Plan – Review industry size, trends, and the target
market segment. Discuss strengths and weaknesses of the product or service.
Compare pricing to the competition.
•
Section 7: Location Analysis – Provide a comprehensive demographic
analysis of consumers in the area of the proposed business as well as a trafficpattern analysis and vehicular and pedestrian counts.
•
Section 8: Manufacturing Plan – Describe minimum plan size, machinery
required, product capacity, inventory and inventory-control methods, quality
control, plan personnel requirements, and so on.
•
Section 9: Appendix – Include all marketing research on the product or
service and other information about the product concept or market size. Provide
a bibliography of all the reference materials consulted.
What is a
Competitive and
First-mover
Advantage?
Competitive Advantage – a feature of a
product or service which offers customers
greater value than similar offerings from
competitors.
First-mover Advantage – the ability of a
company to increase its market share by
being first with a new competitive
advantage.
What is a
Competitive
Intelligence
Competitive Intelligence – the process of gathering
information about the competitive environment to improve a
company’s ability to succeed.
Managers use three common tools to analyze competitive
intelligence and develop competitive advantage:
•
The Five Forces Model (for evaluating industry attractiveness).
•
The Three Generic Strategies (for choosing a business focus).
•
Value Chain Analysis (for executing business strategies).
Five Forces Model
•
Analyzes the competitive forces within the environment in which a
company operates to asses the potential for profitability in an industry.
•
The five forces include:
•
Buyer Power – the ability of buyers to affect the price they must pay for an
item.
•
Supplier Power – the ability of the supplier to influence the prices they charge
for supplies (including materials, labor, and services).
•
Threat of Substitute Products or Services – the situation where there are
either many alternatives to a product or service or very few.
•
Threat of New Entrants – the situation where it is either very easy or hard for
new competitors to enter a market.
•
Rivalry Among Existing Competitors – the situation where competition is
either fierce or non-existent for a particular market.
Three Generic Strategies
•
Three generic strategies for entering a new market include:
•
•
•
Broad Cost Leadership
Broad Differentiation
Focused Strategy
•
Broad strategies reach a large market segment, while focused strategies
target a niche or unique market with either cost leadership or
differentiation.
•
It is suggested that businesses should adopt only one of the three generic
strategies.
Value Chain Analysis
•
A business tool used to determine how to create the greatest possible
value for customers.
•
The goal of value chain analysis is to identify processes in which the firm
can add value for the customer and create a competitive advantage for
itself.
•
Value chain groups a firms activities into two categories:
•
Primary Value Activities
•
Support Value Activities
Primary Value Activities
•
Primary value activities follow the following process:
•
Inbound Logistics – acquires raw materials and resources and
distributes to manufacturing as required.
•
Operations – transforms raw materials or inputs into goods and
services.
•
Outbound Logistics – distributes goods and services to customers.
•
Marketing and Sales – promotes, prices, and sells products to
customers.
•
Service – Provides customer support after the sale of goods and
services.
Support Value Activities
•
Support value activities follow the following process:
•
Firm Infrastructure – includes the company format or departmental
structures, environment, and systems.
•
Human Resource Management – provides employee training, hiring,
and compensation.
•
Technology Development – applies MIS to processes to add value.
•
Procurement – purchases inputs such as raw materials, resources,
equipment, and supplies.
What is a
Business
Process
Improvement?
Business Process Improvement
The analysis and redesign of
processes to expose inefficiencies,
bottlenecks, and outdated
procedures.
Profit,
Revenue, and
Expenses
Profit – the amount of money a business earns above and beyond
what it spends for goods, services, salaries, and other expenses.
•
Both for-profit and non-profit businesses must generate profits–
unless they are the recipients of external funding from grants, the
government, or a private funding source.
Revenue – the total amount of money a business takes in during a
given period as a result of selling its goods or services.
Expenses – the costs of making or purchasing the goods and
services that are needed to operate a business.
•
When revenues exceed expenses, a profit or gain is achieved.
When revenues are less than expenses, a loss or deficit occurs.
•
Businesses that involve more risk usually generate greater
profits.
What is a
Forecast
Modeling?
Forecast Modeling– the managerial practice of
predicting future sales revenues based on past
performance and current conditions.
Business Tools used to
Facilitate the
Operations of a
Business
Feasibility Analysis – a decision making tool that
involves gathering and objectively evaluating data
about the strengths, weaknesses, opportunities,
and threats of a new product or business venture.
Cost/Benefit Analysis – a decision making tool
that identifies and evaluates the costs and benefits
of a product, service, or course of action to
determine where the benefits outweigh the costs.
How can Managers
Protect the
Intellectual
Property of a
Business?
Trademarks and Service Marks
•
These marks are used by businesses to protect their brand.
•
Trademarks apply to products while service marks apply to services.
•
A mark can be unregistered and used to promote or brand goods; or it
can be registered and used to prevent unauthorized use of a trademark.
Copyrights
•
A form of legal protection that gives the creator of an original work
exclusive rights to it for a period of time.
Patents
•
A patent is the same as a copyright, except that it applies to an invention.