BUSINESS

ENVIRONMENT:
The Firms
Daw Myat Thu zar
Associate Professor(Retired)
Yangon Institute of Economics
  Size and scope of organisations:
 Differences between large, medium-sized and small organisations
including objectives and goals, market share, profit share, growth and
sustainability.
 Global growth and developments of transnational, international and
global organisations.
LO1  Differences between franchising, joint ventures and licensing.
 Industrial structures and competitive analysis.
 Market forces and economic operations e.g. scarcity and choice, supply
and demand, income elasticity.
 Stakeholders and responsibilities of organisations to meet different
stakeholder interests and expectations.
The Firms

 There are different types of organization and each is subject to

particular legal obligations and constraints;
 they will have differing tax regimes and may serve society in
different ways.
 Similarly, an organization may pursue different fundamental goals
and objectives (they may emphasize profit maximization or social
responsibility for example)
 which may make aspects of the external environment more or less
relevant.
The Public Sector

 Made up of central government, local government, and businesses that are

owned by government
 In the last twenty years the number of government-owned firms in the UK has
shrunk massively
 Now, very few examples remain, for instance, the Royal Mail
Private Sector Firms

One of the key differences is between:

 Sole traders and partnerships whose liability is unlimited

And

 Private Limited and Public Limited Companies, who have ‘limited liability’
Other Business Types

 Co-operatives are owned by their staff, who are ‘members’ of the firm

 Profits are shared amongst the members

 Losses too must be shared

The Private Sector

 Private individuals and firms that are owned by private individuals

 Firms in the private sector include:
 Sole Traders
 Private Limited Companies (Ltd)
 Partnerships
 Public Limited Companies (PLC)
 Public sector organizations
 are owned, financed and controlled by institutions of the state on behalf of the public at large. They are
funded primarily by taxpayers and also raise money through selling products or service,

 for example, through the requirement to make a contribution to prescriptions for medicinal drugs or
payments of fees for planning applications, official documents such as passports or driving licences and
pest control.
 In different countries, responsibility for certain activities is split between national, regional and local
government.
 In the UK, for example, county councils have overall responsibility for provision of education and the
emergency services
 whilst district and parish councils oversee things such as parks and open spaces, planning issues, street
lighting and refuse disposal.
 National government will take responsibility for the armed forces, overall education policy, trade and
industry, prisons, health policy and so on.
 The common feature of most public sector provision, regardless of country, is in the provision of merit
 The private sector contains a range of business organizations from small one-person businesses to
massive multinational corporate enterprises.

 The essential characteristic of the private sector is that organizations are owned, controlled and
financed by private individuals and are generally run for some specific purpose such as making
profit or to promote a specific cause or policy.
 What is Business?

 Businesses are set up for two main purposes – to make profit for their owners, or "not-

for-profit" which aim instead to provide services for the benefit of (particular parts of)

society.

 For-profit businesses can have a variety of key objectives such as sales maximisation or

growth in market share, rather than being solely about profit maximisation.

 Business may be understood as the organized efforts of enterprises to supply consumers

with goods and services for a profit

Contemporary Business goals

 Profit (Bottom-line)
 Growth
 Market Leadership
 Customer satisfaction
 Employee satisfaction
 Quality Products & Services
 Service to Society
 BUSINESS GOALS
 Profit - Making profit is the primary goal of any of success.
business enterprise.
 Market Leadership - To earn a niche for oneself in
 Growth - Business should grow in all directions the market, innovation is the key factor.
over a period of time.
 Challenging - Business offers vast scope and poses
 Power - Business houses have vast resources at its formidable challenges.
command. These resources confer enormous
 Joy of creation - It is through business strategies
economic and political power.
new ideas and innovations are given a shape and
 Employee satisfaction and development - are converted into useful products and services.
Business is people. Caring for employee satisfaction
 Service to society - Business is a part of society
and providing for their development has been one
and has several obligations towards it.
of the objectives of enlightened business
enterprises.
 Quality Products and Services - Persistent quality
of products earns brand loyalty, a vital ingredient
 Business Organizations
 classified in many different ways – size, number
of people employed, legal structure and so on.
 classified including the difference between
public and private sector organizations, charities  •Extent of the liability of investors in the
and social enterprises.
 In considering different types of business
ownership, there are a number of key areas
which relate to different legal structures.
 The cost and benefit of setting up in different
ways can be broadly analyzed under the
following headings:
 •Tax liability and rules
business
 •The degree of risk taken by the
owners/investors
 •The degree of control of owners/investors
 •The extent to which the set up requires
formal structures
 •Continuity of existence in the event of the
death of owners/investors
 •The cost of set-up
Different Types of Organisations

 Business organisations can be classified in a variety of

ways, including:
 size (e.g. small, medium, large);
 type of industry (e.g. primary, secondary, tertiary);
 sector (e.g. private sector, public sector); and
 legal status (e.g. sole trader, partnership, and so on).
 These classifications help to distinguish one type of
organisation from another and to focus attention on the
implications of such differences for an individual enterprise
The Sole Trader
 Many individuals aspire to owning and running their own business – being their own boss, making their own
decisions.

 offers the simplest and easiest method of trading.

 a sole trader is a business owned by one individual who is self-employed and who may employ other people on
either a fulltime or a part-time basis.

 the type of goods or services to be produced,

 where the business is to be located,

 what capital is required,

 what staff (if any) to employ,

 what the target market should be and a host of other aspects concerned with the establishment and running
of the enterprise.

 Where the business proves a success, all profits accrue to the owner and it is common for sole traders to reinvest
a considerable proportion of these in the business and/or use them to reduce past borrowings.

 losses occur, these too are the responsibility of the sole trader, who has unlimited personal liability for the debts
of the business.
 a sole trader or sole proprietor is the owner of the business.
 Many sole traders employ other people but these people are not owners of the business.

 An important principle of there is no legal difference between the owner and the business.
 for taxation and where profit or loss is made--The sole trader is classed as being self employed and
 is responsible for the payment of national taxes such as income tax and National Insurance
Contributions (NICs) in the UK, for example.

 For a sole trader it is important that accurate records are kept of all income and payments in
relation to the business to enable them to complete accurate tax returns.
 Failure to do so can result in the presentation of tax demands that can seriously affect the ability of
the business to be able to continue.
 Equally, if the business makes any profit (which for this type of business is classed as the same as the
individual’s income) then it is the owner who is able to benefit solely from those profits. S/he keeps
all the profit as his or her own.
The Sole Trader

 In the United Kingdom, for example, it is estimated that about 80 per cent of all
businesses are sole traders and
 in some sectors – notably personal services, retailing, building – they tend to be the
dominant form of business enterprise.
 Part of the reason for this numerical dominance is the relative ease with which an
individual can establish a business of this type.
Advantages and Disadvantages
Disadvantages

 One of the main disadvantages of being a sole trader is that the owner has unlimited liability.
 This means that the owner is personally responsible and liable for all the debts of the business.

 If a sole trader had to cease trading then any debts owed to creditors, such as suppliers, landlords, the
tax authorities and so on, are the personal responsibility of the owner.
 In some cases, a sole trader has to sell personal assets to raise the funds to settle these debts.
 If this means having to sell the house, car, prized antique or any other personal possession, then this has
to be done.

 Ultimately if the sole trader cannot settle these debts then they are declared bankrupt.
 An individual can become bankrupt, a business becomes insolvent.
 The lack of legal separation between business and owner as a sole trader means that if the ‘business’
fails the sole proprietor can declare bankruptcy.
Partnership
 is a business organization that consists of two or more people.
 In many respects it has similarities with a sole proprietorship in that it is relatively simple to set up.

 A partnership has unlimited liability and so has no legal status separating the partners from the
business.
 Individuals considering entering a partnership would normally draw up some sort of partnership
agreement which clarified roles, responsibilities and liabilities.
 If, for example, five people entered a partnership but one put in 50 per cent of the capital of the
business then the agreement might state that this individual would be entitled to 50 per cent of the
profits generated by the business.

 As is the case for a sole trader, partners have to register as self employed with the tax authorities
 but in addition to individual returns the partnership as a whole has to submit a self assessment form.
 Income tax and NICs will have to be paid on profits.

 Given that a partnership is not a legal entity, if one of the partners dies or wishes to leave then the
partnership must be dissolved.
 Limited Liability Partnerships
 In recent years, changes to company law in the UK have permitted the setting up of limited liability
partnerships (LLPs).
 There are similarities to a traditional partnership but in addition similarities to the setting up of
limited companies.

 However, non-profit making charities cannot form a LLP.

 The main reason for setting up a LLP is that the partners (of which there must be at least two) can
limit their liability to the debts of the business.
 In an LLP the business is responsible for the debts of the business rather than the individual
partners.

 This person would be responsible for the preparation of accounts and acting on behalf of the LLP in
any legal negotiations.
 Limited Liability Partnerships
 The Deed of Partnership is a legally binding agreement which will include
 the personal details of the partners,

 how much capital each has put into the business,

 details of how the partnership would be terminated if one of the partners left or died as well as
 the roles and responsibilities of each partner.
 The designate partner must also contact the tax authorities to file a Partnership Statement along with
the LLP’s tax return which provides details of how any profits made in the business have been divided up
amongst the partners.
 An LLP must have at least two designated members.
 A designated member has the same duties in an LLP as a member

 but in addition is responsible for appointing auditors, signing and delivering accounts, notifying the
Registrar of Companies of changes to the business, such as change of address or name, preparing other
documents that the Registrar of Companies may require and acting on behalf of the business if it is wound
up.
Private Limited Company

 is an important and popular form of business organization because it confers the benefits of limited liability
on owners.
 A private limited company (abbreviated to Ltd) is a distinct legal entity.

 This means that the business is the entity that can sue or be sued rather than any of the individuals that may
own the business. It is this legal status that makes a Ltd company attractive.
 If the business fails then the owners risk losing the money they have invested into the company.
 However, creditors cannot seek to claim recovery of what they are owed by forcing owners to sell their
personal possessions to settle these debts.

 This is an advantage to the company owner but not to the company who may be dealing with it.
 This is why some smaller limited companies have greater problems accessing credit and supply agreements
compared to non-limited companies.
 Private Limited Company

 A limited company can issue shares as a means of raising capital,

 however, these shares cannot be sold to, or traded by, the public.
 There are normally two or more people involved as shareholders
 although there are cases of single member companies, limited by shares or guarantee, consisting of one
member.
 Such cases usually arise when a limited company is reduced to one member due to the death of a
shareholder or some other circumstance.
 Single member companies have to adhere to certain regulations given that the business could have some
continuity, for example, it might be subject to acquisition by another business.
Three Types Of Private Limited Company
1. Private company limited by shares

 The business is owned by shareholders whose liability is limited to the amount they have agreed to
invest in the business.
 If a member holds 10 000 shares with a nominal value of £1 each then this is termed ‘unpaid share
capital’.
 If the business has to close then the shareholder risks losing all or part of this sum.
 If the business closed but was able to pay back £2000 to the shareholder from the remaining assets
of the business then the amount unpaid that the owner would be liable for would be £8000.
 However, the shareholder would not be liable for any of the debts of the company in excess of the
£10 000 they have originally invested.
 2. Private company limited by guarantee

 used in cases such as social enterprises, sports associations and nongovernmental organizations (NGOs)
where the members, who are referred to as guarantors and not shareholders, wish to specify the
liability they have to the business.
 In this case the business does not have share capital and so guarantors do not contribute to the capital of
the business and as a consequence, do not, purchase shares.

 It should be noted that -there are in existence some companies limited by guarantee with share capital but
these were formed prior to 1981.
 3. Private Unlimited Company

 members may contribute share capital and be shareholders or guarantors

 the difference being that the liability of the members is unlimited.

 The trade-off for this lack of protection is that the amount of information that the members have to disclose
is less than the other types of limited company.
 The rules surrounding Ltd companies in the UK have changed in recent years as a result of the Companies Act
2006.
 Much of the change relates to the documentation that has to be submitted and the way in which the
company is organized and run.

 Two key documents are

 (1) the Memorandum of Association – a document which specifies basic details of the business and
 (2) the Articles of Association – that detail the rules for the running and regulation of the company’s internal
affairs.
Co-operatives
Consumer co-operative societies

 Consumer societies are basically ‘self-help’ organisations

 gave rise to a consumer co-operative movement dedicated to the provision of
cheap, unadulterated food for its members and a share in its profits.
 includes thousands of food stores (including the Alldays convenience chain
purchased in 2002), numerous factories and farms, dairies, travel agencies,
opticians, funeral parlours, a bank and an insurance company, and property
and development business.
 Workers’ Co-operative

 is a business in which the ownership and control of the assets are in the hands of the people working in
it,
 having agreed to establish the enterprise and to share the risk for mutual benefit.
 In Britain, workers’ co-operatives are found in a wide range of industries, including manufacturing,
building and construction, engineering, catering and retailing.
 In short, the co-operative tends to focus on people and on the relationship between them, stressing the
co-operative and communal traditions associated with its origins, rather than the more conflictual and
competitive aspects inherent in other forms of industrial organisation.
 Public Sector Organisations

 come in a variety of forms. These include:

 central government departments (e.g. Department of Trade and
Industry);
 local authorities (e.g. Lancashire County Council);
 regional bodies (e.g. Regional Development Agencies);
 non-departmental public bodies or quangos (e.g. the Arts Council);
 central government trading organisations (e.g. The Stationery
Office); and
 public corporations and nationalised industries (e.g. the BBC).
Public Corporations

 Private sector business organisations are owned by private individuals and groups who have chosen to
invest in some form of business enterprise, usually with a view to personal gain.
 In contrast, in the public sector the state owns assets in various forms,

 which it uses to provide a range of goods and services felt to be of benefit to its citizens,
 even if this provision involves the state in a ‘loss’.
 Many of these services are provided directly through government departments (e.g. social security
benefits) or

 through bodies operating under delegated authority from central government (e.g. local authorities,
health authorities).
 Others are the responsibility of state-owned industrial and commercial undertakings, specially created
for a variety of reasons and often taking the form of a ‘public corporation’.
 Public Corporations

 largely financed as well as owned by the state

 are required to be publicly accountable and

 hence they invariably operate under the purview of a ‘sponsoring’ government department, the head

of which (the Secretary of State) appoints a board of management to run the organisation.

 This board tends to exercise a considerable degree of autonomy in day-to-day decisions and operates

largely free from political interference on most matters of a routine nature.

 However, the organisation’s strategic objectives and important questions concerning reorganisation

or investment, would have to be agreed with the sponsoring department, as would the corporation’s

performance targets and its external financing limits.

 Legal structure: some implications

 For businesses in the private sector, the choice of legal structure has
important implications.
 Among the factors which the aspiring entrepreneur has to take into account
when deciding what form of business enterprise to establish are:
 the degree of personal liability;
 the willingness to share decision-making powers and risks;
 the costs of establishing the business;
 the legal requirements concerning the provision of public information;
 the taxation position;
 commercial needs, including access to capital; and
 business continuity.
Organisational Objectives Of Private Organisations
 In sole traders, partnerships and some limited companies, the
enterprise rests in the hands of the entrepreneur(s), organisational
goals will coincide with the personal goals of the owner(s), whatever
the point in the organisation’s life cycle.
 New private sector businesses, for example, are likely to be
concerned initially with survival and with establishing a position in the
marketplace, with profitability and growth seen as less important in
the short term.
 In contrast, most well-established businesses will tend to regard
profits and growth as key objectives and may see them as a means
towards further ends, including market domination, maximising sales
revenue and/or minimising operating costs.
The Objective of the Public Corporation,
 A decision by government to establish an entity which operates in the interests
of the public at large (or ‘national interest’)
 favors the creation of a state-owned-and-controlled organisation,
 with goals laid down by politicians and
 generally couched in social and financial terms (e.g. return on assets,
reinvestment, job creation) rather than in terms of profit maximization.
 In public companies, however – where ownership tends to be separated
from control –
 the goals of the owners (shareholders) may not always correspond with those
of the directors and senior managers who run the organisation,
 particularly when the latter are pursuing personal goals to enhance their own
organisational position, status and/or rewards.
 Stakeholders

 All organisations have stakeholders;

 these are individuals and/or groups who are affected by or affect the
performance of the organisation in which they have an interest.
 Typically they would include employees, managers, creditors, suppliers,
shareholders (if appropriate) and society at large.
 As Table 8.1 illustrates, an organisation’s stakeholders have a variety of
interests which range from the pursuit of private gain to the more
nebulous idea of achieving public benefit.
 All three may be seen as a means of carrying out a business
venture

 in a way that reduces some of the risks normally faced by the

entrepreneur.
Franchising

 Many businesses today are franchises

 A business idea is licensed to a franchisee
 The owners of the brand receive a license fee
 The franchisee gains the right to use the business brand
 is an arrangement where one party (the franchiser) sells the right to another party (the
franchisee) to
 market its product or service.
 but in practice it is usually the case that the franchiser is a company while the franchisee
tends to be a sole trader or partnership.
 Both parties in law have a separate legal identity,
 but the nature of the contract between them makes their relationship interdependent and
 this has important implications for the operation of the franchise.
Business Format Franchise’ (Or ‘Trade Name
Franchise’) Under Which The Franchiser
 agrees to allow the franchisee to sell the product or service with the help of
a franchise package which contains all the elements needed to set up and
run a business at a profit.
 These would typically include the brand name, any associated supplies,
promotional material and other forms of support and assistance.
 In return the franchisee usually pays an initial sum or fee for the use of the
service and its various elements, remits royalties based on sales and/or
profits, agrees to make a contribution for consultancy, training and
promotion, and undertakes to maintain standards.
 Wimpy, Kentucky Fried Chicken, Burger King are examples of this type of
franchise.
Other Forms of Franchise
 manufacturer/retailer franchises (e.g. car dealers),

 manufacturer/wholesaler franchises (e.g. Coca-Cola, Pepsi) and

 wholesaler/retailer franchises (e.g. Spar and Mace) and

 it is estimated by the industry’s trade body – the British Franchise Association – that in
retailing alone franchising accounts for over 20 per cent of sales in the United Kingdom.

 One indication of its growing significance is

 the spread of franchising into further and higher education, with universities and other
colleges of higher education franchising some of their courses to local further education
colleges, which in turn may franchise some of their courses to schools
 The Mutual Benefits From A Franchise Arrangement

 help to explain its popularity as a way of doing business in both domestic and
external markets
 proved an attractive vehicle for some companies seeking rapid overseas
expansion, without undertaking substantial direct investments –
 although this is sometimes necessary to support the operation
 (e.g. McDonald’s had to invest in a plant to make hamburger buns in the United
Kingdom).
 entrepreneurs find the security of a franchise more attractive than other methods
of starting a business,
 franchises have better survival rates than the more conventional forms of
independent enterprise (e.g. sole traders).
 Licensing
 another form of non-equity agreement under which a firm in one country (the
licensor) authorises a firm in another country (the licensee)

 to use its intellectual property (e.g. patents, copyrights, trade names, know-how)

 in return, usually royalty payments.

 Licences may be granted to

 individuals, independent companies, subsidiaries of a multinational company or to

government agencies and the rights granted may be exclusive or non-exclusive.
Advantages Of Licensing Agreements

 Reducing competition by sharing technology.

 Seeking overseas profits without direct foreign investment.
 Protecting an asset from potential ‘pirates’.
 Avoiding restrictions on foreign investment or imports
imposed by other countries.
 Recouping some research and development costs.
 Gaining a share of an overseas market.
 Joint Venture

 tends to be used in two ways: to describe a contractual agreement involving two or more
parties; or to describe a jointly owned and independently incorporated business venture
involving more than one organisation.

 Popular with international companies – can take a variety of legal forms and almost every
conceivable type of partnership may exist, ranging from two companies joining together in
the same domestic market

 (e.g. Sainsbury’s and British Home Stores set up the Savacentre chain)

 To joint private/public sector ventures between participants from different countries.

 The term ‘consortium’ is often used, as in the case of TransManche Link (TML), the
international joint venture which built the Channel Tunnel.
Not For Profit Businesses

 Many charity-based business organisations are run as ‘not for profit’ operations (Pyay Ti Oo Education
foundation)

 They typically receive donations or funds from groups or government

 Any financial surplus is ploughed back into the business

 The organisation does not aim to generate profits

Activity List