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.

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• 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.

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• 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 traffic-pattern 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.