CHAPTER 7 Types of Industries and Business Organizations LEARNING OBJECTIVES Atthe end ofthis chapter thelearness will be able to 1. distinguish the ferent services and products of business and industry in the locality; 2. ident the types of ndusty: 3. differentiate between agribusiness, manufacturing, real and service industries “4. enumerate the different types of business organizations; and 5, _dtethe advantages and dsadvantages of business organizations. Industry clasifcationthatreferstogrompsof companies thitae relat sed on ther primary business modern ecenomis, tere are doze of falustyclasieations, which ae typically grouped into larger categorie ell ‘on their largest sources of revenue. While an automobile manufacturer might havea fisucing division, contrnting 10% to oe evens, the company til afied as an auto maker for atrbuton purposes Industries group similar business based onthe primary product proce and canbe sed to Solute businesses from those who parcpate in deren activites. Investors ad economists often study sectors, with individual companies being clasifed into an iktry haved the industries sociated with businesses to better understind the factors and limitations to corporate profit growth, Companies operating in the same industry can aso be compared to each other to evaluite the relative attractiveness ofa company within that incntry:While both sectors and industries are classification systems used to group similar business operations, sectors ae seen as broader definitions than those assigned by indutries, Stocks within the stme industry ‘often rise and fll asa group because the same overlying fctors exist forall members, These can include ‘anges in market sentiment on the part of investors, such as those based on a response to a particular ‘event or piece of nev, as well as changes directed specially towards the specific industry, such as new regulations or increased vaw material cots, However, events relating to just one particular business can cause the associate stock to rise or fall separately from others within the industry This can be the result of evens including but not limited to, a lifer ng product release, a corporate scandal inthe news, oF a change in leadership structures Types of Industry Agribusiness Industry [Agribusiness is defined asthe business sector encompass ig and farming. related commercial activities, Agrbusinest involve al he steps required to send an agricultural goo to market production, Processing, and distribution, Kt isan important component of countries with arable land, since agricultural agricultural products as an integrated syste, Farmers raise animale and harvest fruits and vegetables with the help of sophisticated products can be exported. Agribusiness test the different aspects of raisin harvesting technique, including the use of GPS to direct harvesting operations. Manufacturers devclop more efficient machines tht cn drive themselves, Processing plants determine the best way to clean and package livestock for shipping While each subset ofthe industry is unlikely to Interact directly with the ‘consume, each is focused on operating efficiently in order to keep prices reasonable, Market forces have a significant impact on the agribusiness sector. Changes in consumer taste alter with what peoduets are grown and raised, For € le, shift tn contumer tate rom red mest may cause lemand (and prices) for beet to fall, while increased demand for produce may shift the mix of ruts an ‘vegetables that farmers raise. Business unable to rapidly change in accordance to domestic demands ‘nay look into exporting their products abroad, but ithat fl, they may not beable to stay in business. Countries with farming industries face consistent pressures from global competition, Products such a ‘command rice tend to be similar in diferent locations, making them commodities. Remaining competitive requires agribusiness to operate more efficlenty, which can require Investments in new technologies, new says of fertilving and watering crops, and new ways of connecting tothe global market. Glabal prices of agricultural products may change rapidly, making production planning a complicated activity. Farmers may also fce a reduction in usable land as suburban and urban arcas move into their ars Manufacturing Industry Manufacturing isthe creation and assembly of components an hed product forsale, Examples of ‘manufacturers inthe Philippines are Alaska Milk Corporation, Universal Robina, Zest-O, and San Miguel Corporation‘Types of Manufacturing Production According ta Investopedia (2016), the fllowing are the types of manufacturing production: 1. Make to Stock (MTS). This strategy is based on demand forceasts, soit makes the most sense when. vith this strategy if demands can be predicted with reasonable accuracy, Companies can lose money they manuficture too much oF too hile, 2, Make to Order (MTO). It allows customers to order products bull wo their specifications ‘Companies alleviate inventory problems with MTO, but customer wait time is usally longer 3, Make to Assemble (MTA). I hybrid ofthe two: companies stock basic parts based on demand predictions, but do not assemble therm until customersplac their orders and can offer customization Retail Industry Retail refers to individual investors who buy and sell securities for their personal account, and not for another company oF organization, Ie is known as an indivial investor” of “xmall investor” Retail investors buy in much smaller quantities than larger institutional investors (Investopedia 2016).Service Industry ‘The service industry is that part ofthe ecomoany that creates services rather than tangible objet, Economists divide all economic activities into two broad categories, goods and services. Goods-producing industries are agriculture, mining, manufacturing, and construction; each of them creates some kindof tangible object, Service industries include everything else ~ banking, communications, wholes and retail trade, ll professional services sch ax enginccring, computer software devclopment, and medicine, nonprofit economic activities, all consun ‘nbalnsration of justice. A serviced services, and all government services, including defense and ated economy Is characterietic of developed countries In les dlexclope countries, most people are employe in primary activities such as agriculture ad mining The simplest explanation forthe growth of service industries Is that goods production has become Increasingly mechanized, Because machines allow a smaller workforce to produce more tangible goods, the service functions of distribution, management, finance, and sales become relatively more important Growth inthe service sector also results from a large increase in government employment (britannica ‘com 2016), Business Organizations Prospective entrepreneurs necd to identity che legal structure that will best suit the demands of the of ‘aptal, an the complexity of business Formation, When examining these forms of business organizations, situations, the asailabi venture, The necesty for this derives fr changing tax laws, Ubi “entrepreneurs ned to considera few important fctors ike how easily the form of busines organization ‘car be implemented, the amount of capital required to implement the form of busines organization, and legs considerations that might limit the options available to the entrepreneur Types of Business Organizations According to Kurtko 2012), the thee primary legal forms of ongaiation are sle proprietorship, porter, and corporation, Besa each for has pec advantages ac adentags, tis inponable fo recommend pn firm evr the the The entrepenets pec atnion, concerns sel desire wl dicate this chic. Sole Proprietorship Sole proprietorship iss business that is owned and operate by one person. The enterprise docs not ‘exist apart from its owner. This individual ha aright to al of the profits and bears all ofthe lability for ability, which means that his the debts and obligations ofthe business. The individual als has un ‘or hor business and personal asets stand behind the operation. the company cannot mest ts inancal ‘obligations, the owner may be forced to sell the family car, house and whatever ast that would sti the creditors. To establish a sole proprietorship, a person merely need to obtain whatever local and state ta begin operations, Because ofits case of formation, soe proprietorship ithe most widely used legal form of organization. An example of sole proprietorship ia saris storeAdvantages of Sole Proprietorship 1, Ease of formation, Less formality and fewer restrictions are associated with establishing 2 sole proprietorship than with any other legal form. The proprietorship necds little or no governmental approval, and it usually is Tess expensive than a partnership or corporation, 2, Sole ownership of profits. The proprctor is not required to share profits with anyone. 4. Decision making and control vested in one owner, No co-owners or partners must be consulted in the running of the operation 4. Flexibility. Management is able to respond quickly to business needs in the form of day-to-day ‘management decisions as governed by various laws and good sense. 5. Relative freedom from governmental control, Except for requ very litle governmental interference oecurs inthe operation. ing the necessary licenses, 6, Freedom from corporate business taxes. Proprctors are taxed as individual taxpayers and not ss businetes, Disadvantages of Sole Proprictorships 1, Unlimited liability. The individsl propritor i personally responsible forall business debts, This Tibility extends toall ofthe proprictors assets 2, Lack of continuity. The enterprise may be cripple or terminate if the owner becomes ill cs, 4, Less available capital. Orinarily, proprictorhips have lee ay business organizations, such as partnerships and corporations. ble capital than other types of 4. Relative difficulty in obtaining long-term financing, Because the enterprise rests exclusively ‘on one person, i often has ificulty raising long-term capital. 5, Relatively limited viewpoint and experience. The operston depends on one person, and this individual's bility, training, and expertise wil limit its direction and scope Partnerships {A partnership isan association of to oF more persons who act as co-owners of a business for profit Each partner contributes money, property, labor, or skills, and each has a share inthe profits ax well as the losses ofthe busines. Though not specially required, written articles of partnership are usually executed and are always recommended. This i because, unless otherwise agreed to in writing, the courts assume equal partnership that ofthe business equal sharing of profits, loses assets, management, nd other aspects “The atices of partnership clearly outline the nancial and managerial contributions of the partners and «refill delineate the rolesin the partnership relationship, including such tems as duration of agreement, character of partners, division of profit and loses, salaries, deth ofa partner, authority, settlement of disputes, and additions, alterations or modifications of partnershipInadaitionto the written articles, entrepreneurs must consider a numberof different types of partnership arrangements, Depending on the needs of the enterprise, one or more ofthese may be used. Examples Include the percentage of inal investment of each pa the amount of managerial control ofeach partner, and the actual duties assigned to each partner. Iti important to remember that, in atypical Partnership arrangement, at last one partner must bea general partner whois responsible forthe debts ‘of the enterprise and who has unlmlted labilty Examples of partnerships are law firms and accounting Firms Advantages of Partnerships 1. Ease of information. Lega formalities and expenses ate few, compared with those ereatinga more complex enterprise sch a corporation, 2, Direct rewards, Partners are motivated to put forth their best farts by direct sharing of the profs, 3. Growth and performance are facilitated, Itoften x posible to obtain more espital and better range of kills a partnership than in a sole propritorship, 4. Flexibility. A partnership oft «hay decisions. able to respond quickly to business needs in the for of day-t 5. Rela re freedom from governmental control and regulation. Very litle governmental Interference occur in the operation of «partnership, 6. Possible tax advantage. Most partnerships pay taxes as individuals thus escaping the higher rate sensed againt corporations, Disadvantages of Partnerships | Unlimited liability of at least one partner, Although some partners can have limited liability at least one must be a general partner who assumes unlimited Kability 2, Lack of continuity. partner dis, adjudged insane, or simply withdraws from the busines, the partnership arrangement ceases. However, operation of the business can continue selon the right of survivorship and the posible creation ofa new partnership bythe remaining members or bythe Addition of new m 3, Relative difficulty in obtaining large sums of capital, Most partnerships have some problems raising a great deal of capital, especially when long-term financing i involved. Usually the collective ‘wealth ofthe partners dictate the ansount of total capital the partnership can ruse especially when First starting 4. Bound by the acts of just one partner. A genera partner can commit the enterprise to contracts and obligations that may prove distros to the enterprise in general and to the other partners in particular5. Difficulty of disposing partnership interest. The buyout of «partner may he dificult unless specifically arranged for ina written agreement Corporations A corporation is an artificial being, invisible, intangible, and existing only law. As such, a corporation i a separate legal entity apart from individuals who own it. A corporation is created by the authority of state laws and usually & formed when a transfer of money or property by prospective shareholders (owners) takes place in exchange for eaptal stock (ownership certifiates) in the corporation. The procedures ordinarily required to form a corporation are (1) subseriptions for capital stock must be taken and a tentative organization created, and (2) approtal must be obtained from the government. This approval i inthe form of the charter forthe corporation, which states the powers and limitations of the particular enterprise. Corporations that do business in more than one country ‘must comply with aws that cover foreign corporations. Inthe Philippines, a corporation is governed by corporate lw of the Philippines, Examples of corporations are Jollibee Food Corporation and Fortune “Tabacco Corporation in contemplation of the Advantages of Corporations 1, Limited liability. The stockholders lability i limited tothe individual's investment, This isthe ost money perton can lose. 2, Transfer of ownership, Ownership can be transferred through the sale of stock to interested buyers 4, Unlimited life. The company has life separate and distinct from that of its owners and can continue for an indetnite period of time, 4. Relative ease of securing capital in large amounts, Capital can be acquired through the fssuance of bonds and shares of stock and through short-term loans made against the assets of the business or personal guarantees of the major stockholders 5. Increased ability and expertise The corporation is able to draw on the expertise and skills of 2 numberof individuals, ranging from the major stockholders to the professional managers who are brought on board, Disadvantages of Corporations 1, Activity restrictions. Corporate activities ate limited by the charter and by various ws 2, Lack of representation, Minority stockholders are sometimes outvoted hy the majority, who force thee will on the others 3, Regulation. Extensive governmental regulations and reports required by local and national agencies ‘often result ina great deal of paperwork and red tape. 4. Organizing expenses. A multitude of expenses ae involved in forming a corporation 5. Double taxation, Income taxes ae levied both on corporate profits and on indivi salaries and Alividend,Multinationals |A multinational corporation is 3 corporation that has manuficturing oF service operations in a number of different countris. Other lage corporations are multinational in scope. A multinational i, in effect, a citizen of several countries at one tine, As such, a multinational is subject tothe laws of, and islikly to pay taxes in, each country where i ha operations, Multinationals ae important because they have the ability to move resources, good, services, and financial capital across borders. Examples of multinational companies are Tayota and Ford, Advantages of Multinationals 1. Help spread new technologies. Multinationals help spread new technologies worldwide, 2, Help generate new jobs a country. They generat sy Jobs in areas where jobs are needed 3, Pradluce tax revenues, They generate tax revenues forthe host country. Many developing nations Find the new revenues ad improve thei economies, Disadvantages of Multinational Corporations 1. Political influence in host nation, Hecause multinationals are large and wealthy they may influence the political ie of «host nation, 2. Can exploit the economy of host nation. Multinationals may exploit the cconomy ofthe host ration by paying low wages to workers, or by exploiting searce natural resources 3, Take away jobs. Workers in major industrialized nations sometimes argue that when multinationals bull a plat abroad, they take away jobs at home Conglomerates {A conglomerate isa firm that as at least four businesses, cach making unrelated products, none of Which is responsible for a majority of ts sales, A corporation may become so lage through acquisitions that t becomes a conglomerate. Diversification is one ofthe main reason for conglomerate rergers. Firms believe that f they do not "put all ther egs in onc basket,"ther overall sles andl profits willbe protected. Isolated economic happenings, such a bad weather othe sudden change in consumer tastes, may affect some product lines at some point, but not all tone time, Example of conglomerates are JG Summit and SM Holdings (Clayton 1995), MK Ayala The Ayala Corporation The Ayala Corporation sone the Phippines oles and biggest conglomerates, which has busines interests nel eta yala Land), bankng, 8, ‘elecommuricatons (Gabe Telecom) and intasructre Mana Wate Source: busnesinewisa.com rger andAdvantages of Conglomerates |, Helps the company in diversification, The first and foremost advantage of a conglomerate smcrger is that it helps the company in diversification, hence, a company isles vulerabl due to decline sales in one sector or industry 2. Enough opportunities for growth, Buying 2 company ovtsde of the industry isthe best bet for such companies that have excess cah ait results in good utilization of cash rather than company siting on idle cas, 4. Increases the number of customers. Company can cros-ll its product to the new customer bse which in turn leads to increase in sales, Disadvantages of Conglomerates 1, Chances of mismanagement forlack of experience. The biggest disadvantage of eonglomerate fsthat a company takes over another company without having any experience. 2. Shifting of focus from its core business. This might res other areas, in the company performing poorly in 4. Difficulty in merging cultural value, In conglomerate mergo, iis dificult to merge cultural ‘value, employees, and other factors as compared to merger between companies working inthe same industry,Sectors of the Economy Primary (raw materials) Extraction of raw materials Farming/fishing Secondary (finished goods) Manufacturing Utilities - electricity, gas Construction Tertiary (service sector) Retail Financial services Communication Hospitality and leisure Real estate Information technology ‘Quaternary Education Public sector Research and development www.economicshelp.org