Chapter 2 : Business structure

1.2.1 Economic Sectors

1. The types of Sectors :
a) The primary sector: includes all those activities the end purpose of which consists in
exploiting natural resources: agriculture, fishing, forestry, mining, deposits.
b) The secondary sector: covers all those activities consisting in varying degrees of
processing of raw materials (manufacturing, construction industries).
c) The tertiary sector: covers a wide range of activities from commerce to
administration, transport, financial and real estate activities, business and personal
services, education, health and social work. The market services (trade, transports,
financial operations). The non-market sector (public administration, education)
d) The quarternary sector: is one that is based on new technologies and that requires
a high degree of education. In this field, people are not relying directly on their
abilities to collect raw materials or turn them into a product; instead, they are relying
on their education and intelligence to generate and operate advanced technologies.

• The public and private sectors and businesses within sectors:

✓ Private sector organisations are owned by individuals. These businesses are driven
by profit
The profit from private sector organisations benefits the owners, shareholders and investors.
They are financed by private money from shareholders and by bank loans.
✓ Public sector organisations are owned by the government. They provide goods and
services for the benefit of the community.
They are run by the government. They operate with money raised from taxes.
➢ If a government takes control of a private sector business this is called
nationalisation.
➢ If a government sells one of its organisations to the private sector this is called
privatization.
Nationalisation: occurs when government takes ownership of a business from the private
sector into the public sector
Privatisation: occurs when a government transfers ownership of a business from the public
sector to the private sector

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CASE STUDY: Cuba (students book page 15)

1.2.2 Business ownership

1. Different types of business ownership

Sole traders: A sole trader is a self-employed person who owns and runs their own business
as an individual. A sole trader business doesn’t have any legal identity separate to its owner,
leading many to say that as a sole trader you are the business
Example:
• Freelancer (designers, copywriters, marketeers, photographers and social media
consultants)
• Self-employed tradespeople (builders, plumbers, electricians, gardeners and
carpenters)
• Gig economy workers (couriers, taxi drivers, delivery drivers, tutors and nannies)
Partnerships: A business partnership is a legal relationship that is most often formed by a
written agreement between two or more individuals or companies. The partners invest their
money in the business, and each partner benefits from any profits and sustains part of any
losses.
Example:
Louis Vuitton & BMW.
Red Bull & GoPro.

Private limited Companies: LTD A private limited company, or LTD, is a type of privately
held small business entity, in which owner liability is limited to their shares, the firm is
limited to having 50 or fewer shareholders (The owners) , and shares are prohibited from
being publicly traded.
Example: Textile companies

Public limited Companies:

A Public Limited Company is a company that has limited liability and offers shares to the
general public. Its stock can be acquired by anyone, either privately through (IPO) initial
public offering or via trades on the stock market.
Example: Google
Franchises: A franchise (or franchising) is a method of distributing products or services
involving a franchisor, who establishes the brand's trademark or trade name and a business
system, and a franchisee, who pays a royalty and often an initial fee for the right to do
business under the franchisor's name and system.
Example: McDonald’s, Starbucks, Dominos, KFC, Pizza Hut, Subway.

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Co-operatives: Co-operatives are businesses owned and run by their members. Whether
the members are customers, employees or residents they are everyday people who have an
equal say in what the business does and a share in the profits. ... Co-operatives offer a
flexible model for new businesses.

• An autonomous association of persons united voluntarily to meet their common

economic, social, and cultural needs and aspirations through a jointly-owned
enterprise
Example: Common types of service cooperatives include finance, utility,
insurance, housing, and health care cooperatives

Joint ventures:
A joint venture is a commercial arrangement between two or more participants who agree
to co-operate to achieve a particular objective. Joint ventures cover a wide range of
collaborative business arrangements which involve differing degrees of integration and
which may be for a fixed or indefinite duration

• Joint ventures are usually formed by two businesses with complementary strengths.
For example, a technology company may create a partnership with a marketing
company to bring an innovative product to market.
Example: BMW and Brilliance Auto Group.
Social Enterprise (nonprofit):
A social enterprise or social business is defined as a business that has specific social
objectives that serve its primary purpose. Social enterprises seek to maximize profits while
maximizing benefits to society and the environment. Their profits are principally used to
fund social programs
Example: Bill & Melinda Gates Foundation

 Common Questions:
❖ What’s a limited liability and unlimited liability?
1- Limited Liability: Limited liability is a type of legal structure for an organization where a
corporate loss will not exceed the amount invested in a partnership or limited liability
company (LLC). In other words, investors' and owners' private assets are not at risk if the
company fails.

• The limited liability feature is one of the biggest advantages of investing in publicly
listed companies. While a shareholder can participate wholly in the growth of a
company, their liability is restricted to the amount of the investment in the company,
even if it subsequently goes bankrupt and has remaining debt obligations.

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2- Unlimited liability refers to the legal obligations’ general partners and sole proprietors
because they are liable for all business debts if the business can’t pay its liabilities. In other
words, general partners and sole proprietors are responsible for paying off all of the
company debts personally if the company can’t make its payments.
Example: if a customer slips and falls injuring himself in your store, the
customer could sue the business. If the business does not have enough money to pay the
judgment, the customer can then sue the general partners. If the general partners don’t
have enough money to pay the suit, the court can order the general partners to sell personal
assets like houses and cars to settle the suit.

 The main difference between limited and unlimited liability arises when insolvency
occurs – You could lose everything.

❖ What is a change of type of ownership?

Change of Ownership is a legal process which transfers the rights of a product or service
from one entity to another. Change of Ownership may also be referred to as Change of
Registrant (CoR), Transfer of Registrant, Account Change, Employee to Company Transfer, or
Registrant Name Change

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Chapter 3: Size of Business
1.3.1 Measurements of business size :
The size of a business unit means the size of a business firm.
It means the scale or volume of operation turned out by a single firm. The study
of the size of a business is important because it significantly affects the efficiency
and profitability of the firm.
Measures of Size
Business firms vary in size-small or micro enterprises, medium, and large. To
measure the size of a business unit, the standards of measurement can be
grouped into the following two categories.

• micro enterprises: fewer than 10 persons employed;

• small enterprises: 10 to 49 persons employed;
• medium-sized enterprises: 50 to 249 persons employed

1. Measures About Input

This includes capital employed, net worth, total assets, labor employed, and raw material
and power consumed.

a. Capital employed

The capital includes owned capital and borrowed capital. The larger the amount of capital
employed, the larger the size of the firm.

b. Net worth

Net worth is the excess of assets over liabilities, as shown in the balance sheet of a firm.

However, for all practical purposes, it refers to the amount of paid-up capital plays reserves
and surpluses built up during business.

This measure is appropriate for comparing the size of different firms in an industry or to
measure the rate of growth for a particular firm.

c. Total assets

Another measure of size if the size of the total assets of a firm.

The value of total assets is calculated by taking into account the amount invested in fixed
(land, building, plant, and machinery), current (cash, short-term securities, stock, debtors,
etc.) and intangible assets (goodwill, planet, rights, etc.).

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 d. Labor employed

The number of laborers employed in a firm is another measure commonly employed to

measure the size of the business, which is producing similar types of goods and which are in
the same stage of development.

e. Number of raw materials and power consumed.

The quantity or value of raw materials and power used is yet another measure that can be
used to adjudge a firm.

2. Measure About Output

This includes a volume of output, the value of output, and value-added.

a. The volume of output

The number of goods produced or services rendered may also serve as a good basis for
comparison between firms. The greater the number of goods and services produced, the
larger the size.

b. Value of Output

The monetary value of goods and services produced by a firm also serves as a basis for
measuring the size of a firm.

c. Value Added

A useful variation or combination of the two output criteria is the measure of net value-
added, calculated by deducting the costs of production from the value of production.

d. Market share:
Sales of the business as a proportion of total market sales

This is relative.

1.3.2 Significance of small businesses:

Small businesses will employ few people and will have low turnover compared to other firms. Small
firms are important to all economies, encouraging the development od small business can have the
following benefits:

✓ Job creation
✓ Small businesses are run by dynamic entrepreneurs, new ideas for consumer goods and
services

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 ✓ Competition small firms create for larger firms
✓ Small firms often supply specialist goods and services to important industries in a
country, by being able to adapt quickly to the changing needs of large firms, small
businesses increase the competitiveness of the larger organization

All great businesses were small at one time. Small firms that expand will benefit from large
scale organisations in the future.
Small firms, may enjoy lower average costs than larger ones and this benefit could be passed
on to consumers too.

Government assistance for small businesses used in many countries includes:

1. Reduced rate of profit tax, this will allow small company the chance to retain more
profits in the business for expansion.
2. Loan guarantee scheme government funded scheme, guarantees repayment of a
certain percentage of the business loan if the business fails.
3. Information advice and support will be provided through the small firms’ agency of
the department of trade and industry.

❖ Advantages and disadvantages of small businesses:

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❖ Advantages and disadvantages of family businesses:

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 ❖ Advantages and disadvantages of large businesses:

1.3.3 Business Growth :

Business Growth is a stage where the business reaches the point for expansion and seeks
additional options to generate more profit. Business growth is a function of the business
lifecycle, industry growth trends, and the owners desire for equity value creation.
There are 2 types of business growth:
1. Organic: is generally considered the easiest method for business growth. Thankfully,
it is also widely recognized as the most effective method.

Organic growth consists of visible and tangible company growth ranging from new
products produced to a new business storefront opening. As more products or
services are offered and sales increase, organic growth often necessitates more
physical space to serve customers.

2. Strategic: Unlike organic growth, strategic growth has a more long-term focus. A
strategic growth method is a great option upon the completion of the organic growth
stage.
One reason that it is crucial to finish the organic growth stage before entering the
strategic growth stage is due to the resources needed

3. Internal: The main objective of internal growth is to utilize and optimize available
resources. For this reason, internal growth varies significantly from strategic and
organic growth as it does not look outward to production.
Internal growth is often utilized between an organic and strategic strategy due to its
ability to optimize resource usage without necessitating a large financial investment.
Instead of investing into expanded production and business developments, internal
growth aims to use resources more purposefully.

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 4. External business growth:
Partnership, merger or acquisition: is generally considered the riskiest growth
strategy type but also the strategy with the highest potential for reward.

This strategy can facilitate an easier entry into a new market while also
expanding an existing customer base. Additionally, expanded production
capabilities can make the creation and introduction of new products go much
more smoothly.

PS: mergers and takeovers (or acquisitions) are very similar corporate actions. They combine
two previously separate firms into a single legal entity
• We have different types of mergers and takeovers:

✓ Mergers are often defined as either horizontal or vertical. A horizontal merger

occurs when two competing companies join together to form a single company,
whereas a vertical merger occurs when two companies in different stages of
production join together to form a single company. Horizontal mergers are
performed to reduce competition. Vertical mergers are performed to increase
efficiency.
✓ A conglomerate merger is a merger between firms that are involved in totally
unrelated business activities. These mergers typically occur between firms within
different industries or firms located in different geographical locations

✓ A friendly takeover:
A business combination that the management of both firms believes will be beneficia
l to stockholders.
✓ A hostile takeover : A takeover of a company (usually made by an open tender
offer to shareholders) against the wishes of the current management and the Board
of Directors by an acquiring company or raider.

 Common questions:
❖ Does a merger affect stakeholders?
The merger and acquisition will affect the shareholders of both the companies that are going
to merger. In acquisition the acquired firm shareholders will get the most benefits then the
acquiring firm because usually the acquiring firm pays a little extra than it is supposes to pay.
The degree to which the acquired firm shareholders gets the benefits the same degree
acquiring firm shareholders get affected.

❖ Why merger may or may not achieve objectives?

Benefits:

▪ Diversification of product and service offerings

▪ An increase in plant capacity
▪ Larger market share
▪ Utilization of operational expertise and research and development (R&D)
▪ Reduction of financial risk

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Failures:
▪ Not knowing the motivations of buyers and sellers
▪ Unrealistic expectations
▪ Hidden debt and financial instability
▪ Lack of communication

❖ What’s the importance of joint ventures and strategic alliances in

external growth?

Strategic alliances and JVs have become an integral part of firms' corporate and global
strategies. Cooperating with other companies facilitates access to new resources and
markets, accelerates the development of technological capabilities, reduces risks, and
enhances market power.

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Chapter 4 : Business objectives
1.4.1 Business objectives in the private and public sectors:
✓ Business objectives are the specific, measurable results that companies hope to
maintain as their organisation grows. When you create a set of business objectives,
you focus on specifics. This means analysing, assessing, and understanding where you
are now and where you want to be in the future.
1) Objectives of public sectors:
Usually, the aim of public sector business is to provide services to the community. For
example, if the transport system is owned by the government and it is running a bus
service to an interior village and it is not getting enough customers, the government
might still continue it as its main objective is to provide service and not to maximise
profits. Whereas private sectors business give priority to profits and may end the
service if it does not find it profitable to run the service.

Secondly Public sector strives to create employment whereas Private sectors main
aim is to become efficient and cut cost and, in this process, they might cut jobs.

Public sector business usually locates in regions where there is underdevelopment so

as to create jobs and income for local population. Private sectors might not keep
these things in consideration and will look for external economies of scale.

2) Objectives of private sector:

Different businesses have different objectives. Objectives are aims or targets to work
towards. These objectives can be summarised as

• Maximise profit: Common for business owned by private individuals. It involves

improving profit margins, improving the rate of return on investment
• Grow or expand: It involves increasing the operations of the business, expanding to
other regions or countries, gaining the market share.
• Survival: especially relevant for new businesses
• Provide a service: especially for public sector businesses whose main objective is to
provide services, create employment and welfare of the general public
• To increase added value: Many businesses want to add more value to their products.

3) Objectives of social enterprises:

Whether operated by a non-profit organization or by a for-profit company, a social
enterprise has two goals: to achieve social, cultural, community economic and/or
environmental outcomes; and, to earn revenue. On the surface, many social enterprises
look, feel, and even operate like traditional businesses

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 ❖ Importance of business objectives:

Setting objectives requires making tough choices and addressing realities. Where is your
business now? What are its strengths and weaknesses? Where do you want your business to
go?

➢ Create direction and guidance: Every business needs guidelines. Objectives direct the
company's activities toward achieving the goals and visions of the owners.
➢ Motivate employees: Employees become more enthusiastic and spirited in their
work when they know what is expected of them. Their work is more directed with
less wasted time
➢ Establish standards to evaluate performance: Objectives establish standards of
performance. They are measuring sticks to identify the successes and failures of an
organization and its employees.
➢ Form the basis to set budgets: Once the path for the company's development has
been defined, objectives help allocate the funds needed to achieve the goals.
Budgets set specific dollar amounts for departments that employees can use for
guidance
➢ Develop structure of project plans: Objectives form the structure for project
development and measurement of performance along the way. Applying objectives
to a project defines the timeline of activities needed to complete the plan.

❖ corporate social responsibility (CSR) and the triple bottom line:

Corporate social responsibilities fall into four groups:

1. Economic Responsibility: is the responsibility of a business to make money. "Required

by simple economics, this obligation is the business version of the human survival
instinct.
2. Legal Responsibility: is the responsibility to obey the letter and the spirit of the law.
This is not just the obligation to follow the law as it is written, but "this obligation
must be understood as a proactive duty
3. Ethical Responsibility: is the responsibility to do the right thing even when neither the
spirit nor the letter of the law apply to the situation. This is a key obligation, and it
requires the firm to act as any other citizen must
4. Philanthropic Responsibility (or social responsibility): is a responsibility "to
contribute to society's projects even when they're independent of the particular
business." This responsibility requires the business person to do some things which
stem (comes) from generosity towards the community that they exist in.

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 ❖ Triple Bottom Line:
Another theory of corporate social responsibility is the Triple Bottom Line. Like the CSR
theory we just discussed, Triple Bottom Line works on the assumption that the corporation is
a member of the moral community, and this gives it social responsibilities. This theory
focuses on sustainability, and requires that any company weigh its actions on three
independent scales: economic sustainability, social sustainability,
and environmental sustainability.

❖ What is the relationship between aims objectives strategies and

tactics?
An objective is a measurable step you take to achieve a strategy. A tactic is a tool you use in
pursuing an objective associated with a strategy

*KPI : Key performance Indicator

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1.4.2 Objectives and business decisions:
A. Different stages of business decision-making:

Step 1: Identify the decision

You realize that you need to make a decision. Try to clearly define the nature of the decision
you must make. This first step is very important.

Step 2: Gather relevant information

Collect some pertinent information before you make your decision: what information is
needed, the best sources of information, and how to get it. This step involves both internal
and external “work.”

Step 3: Identify the alternatives

As you collect information, you will probably identify several possible paths of action, or
alternatives. You can also use your imagination and additional information to construct new
alternatives. In this step, you will list all possible and desirable alternatives.

Step 4: Weigh the evidence

Draw on your information and emotions to imagine what it would be like if you carried out
each of the alternatives to the end. Evaluate whether the need identified in Step 1 would be
met or resolved through the use of each alternative. As you go through this difficult internal
process, you’ll begin to favor certain alternatives: those that seem to have a higher potential
for reaching your goal. Finally, place the alternatives in a priority order, based upon your
own value system.

Step 5: Choose among alternatives

Once you have weighed all the evidence, you are ready to select the alternative that seems
to be best one for you. You may even choose a combination of alternatives. Your choice in
Step 5 may very likely be the same or similar to the alternative you placed at the top of your
list at the end of Step 4.

Step 6: Take action

You’re now ready to take some positive action by beginning to implement the alternative
you chose in Step 5.

Step 7: Review your decision & its consequences

In this final step, consider the results of your decision and evaluate whether or not it has
resolved the need you identified in Step 1. If the decision has not met the identified need,
you may want to repeat certain steps of the process to make a new decision. For example,
you might want to gather more detailed or somewhat different information or explore
additional alternatives.

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 B. Role of objectives in decision making:
Objectives in business are the mileposts to guide you and your employees on the way to
building the business. Objectives are important because they convert visions into clear-cut
measurable targets. Employees are very clear as to what they are expected to achieve and
when

An objective specifies what a decision maker is trying to accomplish and by so doing

provides measures that can be used to choose between alternatives.
Example: if stock price maximization is the objective, a manager choosing between two
alternatives, He/She will choose the one that increases stock price more.

❖ Common questions:
How objectives might change over time?
✓ The aim of a business can changes over time. This can happen in response to internal
factors, such as business growth, or in response to external factors, such as an
economic recession.

✓ A small start-up business may aim to survive in the first year. Once successful, the
business then sets itself the objective of increasing profits or growing in size.

✓ Alternatively, a profitable business that is hard hit by an economic recession may

struggle to maintain the same level of output. Faced with declining sales, a business
may change its objective from growth or making a profit, to simply surviving.

How we translate objectives into targets and budgets?

✓ First, the long-range organisational objectives have to be translated into short-run
(usually one-year) targets of accomplishment; and secondly, functional tasks have to
be specified for attaining the short-run organisational targets.
✓ depends essentially on a number of factors: based on viable analyses of the external
situation; the designing of budget formats to ensure that in target development all
relevant bases are touched; the target review process; and the monitoring process,
recycling information into future planning

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What are the SMART objectives?

What’s the need for communication of objectives and its impact on the
workforce?
✓ Staff sometimes feel separated from senior management, but they must work
together to pursue common goals that align with the mission of the company.
Businesses progress into the future through goal-setting and putting forth the effort
of achievement, enriching morale and boosting employee development and
engagement.
✓ Both short-term and long-term goals matter for the growth of the company and
employees. Short-term goals might include launching a new line of products,
addressing particular customer service challenges or reaching a new monthly sales
goal. Long-term goals may mean regional expansion within a set period of time, such
as five years. Short-term goals should support big-picture goals.
✓ Setting SMART goals helps employees see their specific contributions in action and
makes each goal more meaningful and measurable. S.M.A.R.T goals are specific,
measurable, attainable, relevant and timely.

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How ethics influence objectives?
✓ The importance of ethics in business Ethics concern an individual's moral judgements
about right and wrong. Decisions taken within an organisation may be made by
individuals or groups, but whoever makes them will be influenced by the culture of
the company.
✓ Setting ethical goals helps keep the company acting in an ethical manner. It avoids
the damage that comes from doing the wrong thing. It builds loyalty from customers,
investors and employees (Harassment, Discrimination, Compliance with the law,
Accounting issues, Employee theft, Fairness, Product safety, Legal strategies)

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