Unit-1: Business and its forms

BUSINESS

Literally, the word “business” means the state of being busy. Generally, the term business includes all human activities concerned with earning money. In other words, business is an activity in which various persons regularly produce or exchange goods and services for mutual gain or profit. The goods and services produced or purchased for personal use are not included in “business”.

Business is an economic activity, which is related with continuous and regular production and distribution of goods and services for satisfying human wants. It is any particular occupation or employment engaged in for livelihood or gain, as agriculture, trade, art, or a profession.

Definitions

Stephenson defines business as, "The regular production or purchase and sale of goods undertaken with an objective of earning profit and acquiring wealth through the satisfaction of human wants."

According to Dicksee, "Business refers to a form of activity conducted with an objective of earning profits for the benefit of those on whose behalf the activity is conducted."

Lewis Henry defines business as, "Human activity directed towards producing or acquiring wealth through buying and selling of goods."

Thus, the term business means continuous production and distribution of goods and services with the aim of earning profits under uncertain market conditions.

Features of Business

1. Exchange of goods and services

All business activities are directly or indirectly concerned with the exchange of goods or services for money or money's worth.

2. Deals in numerous transactions

In business, the exchange of goods and services is a regular feature. A businessman regularly deals in a number of transactions and not just one or two transactions.

3. Profit is the main Objective

The business is carried on with the intention of earning a profit. The profit is a reward for the services of a businessman.

4. Business skills for economic success

Anyone cannot run a business. To be a good businessman, one needs to have good business qualities and skills. A businessman needs experience and skill to run a business.

5. Risks and Uncertainties

Business is subject to risks and uncertainties. Some risks, such as risks of loss due to fire and theft can be insured. There are also uncertainties, such as loss due to change in demand or fall in price cannot be insured and must be borne by the businessman.

6. Buyer and Seller

Every business transaction has minimum two parties that is a buyer and a seller. Business is nothing but a contract or an agreement between buyer and seller.

7. Connected with production

Business activity may be connected with production of goods or services. In this case, it is called as industrial activity. The industry may be primary or secondary.

8. Marketing and Distribution of goods

Business activity may be concerned with marketing or distribution of goods in which case it is called as commercial activity.

9. Deals in goods and services

In business there has to be dealings in goods and service.

Goods may be divided into following two categories :-

Consumer goods: Goods which are used by final consumer for consumption are called consumer goods e.g. T.V., Soaps, etc.

Producer goods: Goods used by producer for further production are called producers goods e.g. Machinery, equipments, etc. Services are intangible but can be exchanged for value like providing transport, warehousing and insurance services, etc.

10. To Satisfy human wants

The businessman also desires to satisfy human wants through conduct of business. By producing and supplying various commodities, businessmen try to promote consumer's satisfaction.

11. Social obligations

Modern business is service oriented. Modern businessmen are conscious of their social responsibility. Today's business is service-oriented rather than profit-oriented.

BUSINESS AS A SYSTEM

A system denotes a group of interrelated components or sub-systems which functions in a co-ordinate way to attain some specific objectives. A system consists of a number of sub-systems and the functioning each sub-system depends on other sub-systems. Business is regarded as system because it consists of a number of sub-systems both within the business and its environment. The sub-systems are inter-related and operated in a co-ordinate manner to make the whole as a business system. The followings are some of the sub-systems of the business:

●              Finance system concerned with finance functions of enterprise.

●              Personnel system concerned with recruitment, selection and training of personnel.

●              Production system engaged with production functions.

●              marketing system engaged with marketing functions.

●              R & D system concerned with research and development functions.

Inputs

Business system inputs involve ideas, time, funding materials, equipment, rules, data and information, concepts, beliefs and values (physical, human and conceptual). These contribute to the structuring of the business and are involved in movements across the business's boundary. Arrangements (people, structures and processes) must be created to receive and deal with such inputs, determining which are important and how they should be handled. Thus we can consider how "the receivers" regard such inputs, their urgency and significance.

The inputs can be represented by:

1. entrepreneurial ideas and decisions

2. finance

3. market and customer information

4. available technology (tools, machines, methods, forms of automation) to use

5. social and cultural values and attitudes

6. staff abilities and expectations

7. events from another system which the business must receive and respond to e.g. a budget statement, government pressure, a coup in a client country

Processes

Processes are system arrangements and mechanisms - human and technical - which are designed and implemented to organise and realise the business's purposes These may be

1. functional departments(production, marketing, finance, HR, etc)

2. transformational(machinery, etc)

3. information-based,

4. social and political

5. regulative and control-oriented.

Outputs

The outputs may be physical (goods and services) or conceptual (ideas, influences, information-based outputs) Imagine that outputs flow from the business into the external environment where they are received by "stakeholders". In addition when we consider the sub-systems of the business's internal environment, the outputs from one sub-system e.g. production become the inputs to another

In a public sector organisation - the outputs are socially and politically and socially defined. Yet value for money, cost efficiency and service delivery ratios are also used for performance measurement, evaluation and resource allocation. We can look at responsiveness to problems and the success of policies and practices which "the public" (if identifiable) find acceptable and worth paying for. Such outputs relate to social and community benefits and may be at odds with economic criteria

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Business Environment

The term Business Environment is composed of two words ‘Business’ and ‘Environment’. In simple terms, the state in which a person remains busy is known as Business. The word Business in its economic sense means human activities like production, extraction or purchase or sales of goods that are performed for earning profits.

On the other hand, the word ‘Environment’ refers to the aspects of surroundings. Therefore,Business Environment may be defined as a set of conditions – Social, Legal, Economical, Political or Institutional that are uncontrollable in nature and affects the functioning of organization. Business Environment has two components:
1. Internal Environment
2. External Environment

Internal Environment: It includes 5 Ms i.e. man, material, money, machinery and management, usually within the control of business. Business can make changes in these factors according to the change in the functioning of enterprise.

External Environment: Those factors which are beyond the control of business enterprise are included in external environment. These factors are: Government and Legal factors, Geo-Physical Factors, Political Factors, Socio-Cultural Factors, Demo-Graphical factors etc. It is of two Types:
1. Micro/Operating Environment
2. Macro/General Environment

Micro/Operating Environment: The environment which is close to business and affects its capacity to work is known as Micro or Operating Environment. It consists of Suppliers, Customers, Market Intermediaries, Competitors and Public.

(1) Suppliers: – They are the persons who supply raw material and required components to the company. They must be reliable and business must have multiple suppliers i.e. they should not depend upon only one supplier.

(2) Customers: - Customers are regarded as the king of the market. Success of every business depends upon the level of their customer’s satisfaction. Types of Customers:
(i) Wholesalers
(ii) Retailers
(iii) Industries
(iv) Government and Other Institutions
(v) Foreigners

(3) Market Intermediaries: - They work as a link between business and final consumers. Types:-
(i) Middleman
(ii) Marketing Agencies
(iii) Financial Intermediaries
(iv) Physical Intermediaries

(4) Competitors: - Every move of the competitors affects the business. Business has to adjust itself according to the strategies of the Competitors.

(5) Public: - Any group who has actual interest in business enterprise is termed as public e.g. media and local public. They may be the users or non-users of the product.

Macro/General Environment: – It includes factors that create opportunities and threats to business units. Following are the elements of Macro Environment:

(1) Economic Environment: - It is very complex and dynamic in nature that keeps on changing with the change in policies or political situations. It has three elements:           
(i) Economic Conditions of Public         
(ii) Economic Policies of the country     
(iii)Economic System    
(iv) Other Economic Factors: – Infrastructural Facilities, Banking, Insurance companies, money markets, capital markets etc.

(2) Non-Economic Environment: - Following are included in non-economic environment:-           
(i) Political Environment: - It affects different business units extensively. Components: 
(a) Political Belief of Government          
(b) Political Strength of the Country       
(c) Relation with other countries 
(d) Defense and Military Policies           
(e) Centre State Relationship in the Country       
(f) Thinking Opposition Parties towards Business Unit

(ii) Socio-Cultural Environment: - Influence exercised by social and cultural factors, not within the control of business, is known as Socio-Cultural Environment. These factors include: attitude of people to work, family system, caste system, religion, education, marriage etc.

(iii) Technological Environment: - A systematic application of scientific knowledge to practical task is known as technology. Everyday there has been vast changes in products, services, lifestyles and living conditions, these changes must be analysed by every business unit and should adapt these changes.

(iv) Natural Environment: - It includes natural resources, weather, climatic conditions, port facilities, topographical factors such as soil, sea, rivers, rainfall etc. Every business unit must look for these factors before choosing the location for their business.

(v) Demographic Environment :- It is a study of perspective of population i.e. its size, standard of living, growth rate, age-sex composition, family size, income level (upper level, middle level and lower level), education level etc. Every business unit must see these features of population and recongnise their various need and produce accordingly.

(vi) International Environment: - It is particularly important for industries directly depending on import or exports. The factors that affect the business are: Globalisation, Liberalisation, foreign business policies, cultural exchange.

Characteristics:-

1. Business environment is compound in nature.

2. Business environment is constantly changing process.

3. Business environment is different for different business units.

4. It has both long term and short term impact.

5. Unlimited influence of external environment factors.

6. It is very uncertain.

7. Inter-related components.

8. It includes both internal and external environment

BUSINESS OBJECTIVES

An objective denotes a goal for the achievement of which efforts are directed. Every business has its sets of objectives. The objectives of the business are covered under the following categories.

Organic objectives:

The Organic objectives relates to survival, growth and diversification of organization.

The followings are some of the organic objectives of the business:

I. The business should have the prime objective to survive. Steps will be taken in such a manner that the business should survive for the long period.

II. The business should experience growth in different stages of its operation. From the point of growth, the business has been compared to human anatomy. As human beings grow from infancy to childhood, adolescence, adult-hood and maturity, the business experience growth during the course of modernization and diversification.

III. The business enterprise always intends to get recognition and prestige. This can be attained when qualitative goods are supplied to the consumers at a reasonable price.

Economic objectives:

The Economic objectives aims at maximizing material wealth or financial resources of the organization.

The following are the economic objectives of a business:

●              Every business is started for earning profit because profit is the acid test of every business.

●              Earning of profit can be made when exchange of goods takes place. so every business has the objective of production of goods.

●              The primary aim of business is to effect sale for the product produced. This can be made possible through creation of market. So every business has the objective of creating market for the products.

Human Objectives:

Human objectives require careful consideration and well-being of shareholders, consumers and employees. The following are the human objectives of the business:

●              The business should render welfare to its employees.

●              The consumer should be supplied with qualitative products so that they will feel satisfied.

●              The business should have the objective of providing enough satisfaction to the shareholders. They should feel that their money is not misused by management.

●              The business should have the objective of being helpful to the government. The business is the main contribution of funds to the government.

Social Objectives:

The business has certain social responsibilities and is required to undertake those activities which are essential for the betterment of the society.

The following are some social objectives of the business:

●              To ensure continuous supply of goods to meet the requirement of the society.

●              The business should help the government in formulating the policies of socialistic pattern of society.

●              The business should create more employment opportunities.

●              It should ensure effective utilization of natural resources.

National Objectives:

The business enterprise contributes substantially for the upliftment of the nation. The followings are the national objectives of the business:

●              The business should help in the development of small scale industries.

●              The business should aim at improving the economic position of the society.

●              The business should help in providing skilled personnel for the country

STRUCTURE/COMPONENTS/SCOPE OF BUSINESS

Business structure consists of a number of components involving several activities. Business activities can be broadly classified into three categories: industry, commerce, and services.

I. Industry:

The production side of business activity is referred as industry. It is a business activity, which is related to the raising, producing, processing or manufacturing of products.

The products are consumer goods as well as producer goods. Consumer goods are goods, which are used finally by consumers. E.g. Food grains, textiles, cosmetics, VCR, etc. Producer's goods are the goods used by manufacturers for producing some other goods. E.g. Machinery, tools, equipments, etc.Expansion of trade and commerce depends on industrial growth. It represents the supply side of market.

Classification / Types of Industries ↓

There are various types of industries. These are mentioned as follows :-

1. Primary Industry

Primary industry is concerned with production of goods with the help of nature. It is a nature-oriented industry, which requires very little human effort. E.g. Agriculture, farming, forestry, fishing, horticulture, etc. Primary industry can be basically classified into

●     Genetic Industry

Genetic industries are engaged in reproduction and multiplication of certain species of plants and animals with the object of sale. The main aim is to earn profit from such sale. E.g. plant nurseries, cattle rearing, poultry, cattle breeding, etc.

●     Extractive Industry

Extractive industry is concerned with extraction or drawing out goods from the soil, air or water. Generally products of extractive industries come in raw form and they are used by manufacturing and construction industries for producing finished products. E.g. mining industry, coal mineral, oil industry, iron ore, extraction of timber and rubber from forests, etc.

2. Secondary Industry:

Secondary industries are those industries, which are generally involved in transforming raw materials or semi processed materials into finished products. They are also concerned with the construction of building, roads and canals. It depends upon the output of the primary industry.  The secondary industries are as follows

●     Manufacturing Industry

Manufacturing industries are engaged in transforming raw material into finished product with the help of machines and manpower. The finished goods can be either consumer goods or producer goods. E.g. textiles, chemicals, sugar industry, paper industry, etc.

●     Construction Industry

Construction industries take up the work of construction of buildings, bridges, roads, dams, canals, etc. This industry is different from all other types of industry because in case of other industries goods can be produced at one place and sold at another place. But goods produced and sold by constructive industry are erected at one place.

II. Commerce

Commerce is a branch of business. It is concerned with the exchange of goods and services. It includes all those activities, which directly or indirectly facilitate that exchange.

Commerce looks after the distribution aspect of the business. Whatever is produced it must be consumed, to facilitate this consumption there must be a proper distribution channel. Here comes the need for commerce which is concerned with the smooth buying and selling of goods and services.

Commerce can be classified into two broad categories namely trade and aids to trade

A. Trade:

Trade is the main part of commerce. It involves transfer or exchange of goods and services for money or money's worth. The manufacturers or producer produces the goods, then moves on to the wholesaler, then to retailer and finally to the ultimate consumer. Trade is essential for satisfaction of human wants, Trade is conducted not only for the sake of earning profit; it also provides service to the consumers. Trade is an important social activity because the society needs uninterrupted supply of goods forever increasing and ever changing but never ending human wants.

There are two types of trade namely; Internal (local/home) trade and International or foreign trade.

1. Internal Trade

Internal trade is also known as Home trade. It is conducted within the political and geographical boundaries of a country. It can be at local level, regional level or national level. Hence trade carried on among traders of Delhi, Mumbai, etc. is called home trade.

Internal trade can be further sub-divided into two groups, viz. retailing and wholesaling

Retailing is the buying and selling of goods and services in small quantities.  The trader involved in this form of trade is called a Retailer.

Wholesaling is the buying and selling of goods and services in large quantities.  The trader involved in this kind of trade is known as a Wholesaler.

2. External Trade

External trade also called as Foreign trade. It refers to buying and selling between two or more countries. For instance, If Mr.X who is a trader from Mumbai, sells his goods to Mr.Y another trader from New York then this is an example of foreign trade.

External trade can be further sub-divided into three groups, viz.,

1.    Export Trade : When a trader from home country sells his goods to a trader located in another country, it is called export trade. For e.g. a trader from India sells his goods to a trader located in China.

2.    Import Trade : When a trader in home country obtains or purchase goods from a trader located in another country, it is called import trade. For e.g. a trader from India purchase goods from a trader located in China.

3.    Entrepot Trade : When goods are imported from one country and then re-exported after doing some processing, it is called entrepot trade. In brief, it can be also called as re-export of processed imported goods. For e.g. an indian trader (from India) purchase some raw material or spare parts from a japanese trader (from Japan), then assembles it i.e. converts into finished goods and then re-exports to an american trader (in U.S.A).

B. Aids To Trade

Aids to trade are commercial services or activities that assist trade to move on smoothly with less or no difficulties at all.  There are six aids to trade namely;

Ø  Advertising

Ø Banking

Ø Transport

Ø Insurance

Ø Communication

Ø Warehousing.

Advertising helps by

– informing the members of public on the availability of goods and services on the market.

– persuading potential customers to buy the goods and services available.

– informing the public on job vacancies with a view of recruiting new staff

– spreading awareness on matters of public interest.

Banking helps by

–Financing the traders by means of loans and overdrafts

–Safeguarding the trader’s money and other valuables.

–Facilitating the payment of huge sums through cheques

Transport helps by

–Delivering equipment and raw materials to industries.

–Delivering finished goods to local and international markets.

–Moving workers to and from their workplaces to enhance production

–Carrying company executives and agents to far places in order to meet their clients.

Insurance helps to

–Compensate/ restore/indemnify traders in case of a risk occurring.

–Protect traders against financial losses resulting from fire, theft, etc

–And also against claims from third parties.

–Provide confidence or encouragement to traders to go into huge businesses without fear of making a loss.

Communication helps to

–Inform the public on the availability of goods and services on the market

–Allow customers and suppliers to contact each other speedily by means of telephone, facsimile (fax), letters, electronic mail (e-mail), etc.

Warehousing helps by

–storing raw materials awaiting processing

–storing finished goods awaiting sale

–protecting goods against bad elements such as unfavourable weather, fire, theft, etc.

–storing goods, warehousing prevents shortages

III. Service Industry

Service is a type of economic activity that is intangible, is not stored and does not result in ownership. A service is consumed at the point of sale. Examples of services include the transfer of goods, such as the postal service delivering mail, and the use of expertise or experience, such as a person visiting a doctor.

In modern times service sector plays an important role in the development of the nation and therefore it is named as service industry. The main industries, which fall under this category, include hotel industry, tourism industry, entertainment industry, etc.

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Forms of business organisation

Almost every country consists of two business sectors, the private sector and the public sector. Private sector businesses are operated and run by individuals, while public sector businesses are operated by the government. The types of businesses present in a sector can vary, so lets take a look at them.

PRIVATE SECTOR

Sole Traders

Sole traders are the most common form of business in the world, and take up as much as 90% of all businesses in a country. The business is owned and run by one person only. Even though he can employ people, he is still the sole proprietor of the business. These businesses are so common since there are so little legal requirements to set up:

●        The owner must register with and send annual accounts to the government Tax Office.

●        They must register their business names with the Registrar of Business Names.

●        They must obey all basic laws for trading and commerce.

There are advantages and disadvantages to everything, and here are ones for sold traders:

Pros:

●        There are so few legal formalities are required to operate the business.

●        The owner is his own boss, and has total control over the business.

●        The owner gets 100% of profits.

●        Motivation because he gets all the profits.

●        The owner has freedom to change working hours or whom to employ, etc.

●        He has personal contact with customers.

●        He does not have to share information with anyone but the tax office, thus he enjoys complete secrecy.

Cons:

●        Nobody to discuss problems with.

●        Unlimited liability.

●        Limited finance/capital, business will remain small.

●        The owner normally spends long hours working.

●        Some parts of the business can be inefficient because of lack of specialists.

●        Does not benefit from economies of scale.

●        No continuity, no legal identity.

Sole traders are recommended for people who:

●        Are setting up a new business.

●        Do not require a lot of capital for their business.

●        Require direct contact for customer service.

Partnership

A partnership is a group consisting of 2 to 20 people who run and own a business together. They require a Deed of Partnership or Partnership Agreement, which is a document that states that all partners agree to work with each other, and issues such as who put the most capital into the business or who is entitled to the most profit. Other legal regulations are similar to that of a sole trader.

Pros:

●        More capital than a sole trader.

●        Responsibilities are split.

●        Any losses are shared between partners.

Cons:

●        Unlimited liability.

●        No continuity, no legal identity.

●        Partners can disagree on decisions, slowing down decision making.

●        If one partner is inefficient or dishonest, everybody loses.

●        Limited capital, there is a limit of 20 people for any partnership.

Recommended to people who:

●        Want to make a bigger business but does not want legal complications.

●        Professionals, such as doctors or lawyers, cannot form a company, and can only form a partnership.

●        Family, when they want a simple means of getting everybody into a business (Warning: Nepotism is usually not recommended).

Note: In some countries including the UK there can be Limited Partnerships. This business has limited liability but shares cannot be bought or sold. It is abbreviated as LLP.

Private Limited Companies

Private Limited Companies have separate legal identities to their owners, and thus their owners have limited liability. The company has continuity, and can sell shares to friends or family, although with the consent of all shareholders. This business can now make legal contracts. Abbreviated as Ltd, or Proprietary Limited, (Pty) Ltd.

Pros:

●        The sale of shares make raising finance a lot easier.

●        Shareholders have limited liability, therefore it is safer for people to invest but creditors must be cautious because if the business fails they will not get their money back.

●        Original owners are still able to keep control of the business by restricting share distribution.

Cons:

●        Owners need to deal with many legal formalities before forming a private limited company:

o The Articles of Association: This contains the rules on how the company will be managed. It states the rights and duties of directors, the rules on the election of directors and holding an official meeting, as well as the issuing of shares.

o The Memorandum of Association: This contains very important information about the company and directors. The official name and addresses of the registered offices of the company must be stated. The objectives of the company must be given and also the amount of share capital the owners intend to raise. The number of shares to be bought b each of the directors must also be made clear.

o Certificate of Incorporation: the document issued by the Registrar of Companies that will allow the Company to start trading.

●        Shares cannot be freely sold without the consent of all shareholders.

●        The accounts of the company are less secret than that of sole traders and partnerships. Public information must be provided to the Registrar of Companies.

●        Capital is still limited as the company cannot sell shares to the public.

Public Limited Companies

Public limited companies are similar to private limited companies, but they are able to sell shares to the public. A private limited company can be converted into a public limited company by:

1         A statement in the Memorandum of Association must be made so that it says this company is a public limited company.

2        All accounts must be made public.

3        The company has to apply for a listing in the Stock Exchange.

A prospectus must be issued to advertise to customers to buy shares, and it has to state how the capital raised from shares will be spent.

Pros:

●        Limited liability.

●        Continuity.

●        Potential to raise limitless capital.

●        No restrictions on transfer of shares.

●        High status will attract investors and customers.

Cons:

●        Many legal formalities required to form the business.

●        Many rules and regulations to protect shareholders, including the publishing of annual accounts.

●        Selling shares is expensive, because of the commission paid to banks to aid in selling shares and costs of printing the prospectus.

●        Difficult to control since it is so large.

●        Owners lose control, when the original owners hold less than 51% of shares.

Control and ownership in a public limited company:

The Annual General Meeting (AGM) is held every year and all shareholders are invited to attend so that they can elect their Board of Directors. Normally, Director are majority shareholders who has the power to do whatever they want. However, this is not the case for public limited companies since there can be millions of shareholders. Anyway, when directors are elected, they have to power to make important decisions. However, they must hire managers to attend to day to day decisions. Therefore:

●        Shareholders own the company

●        Directors and managers control the company

This is called the divorce between ownership and control.

Because shareholders invested in the company, they expect dividends. The directors could do things other than give shareholders dividends, such as trying to expand the company. However, they might loose their status in the next AGM if shareholders are not happy with what they are doing. All in all, both directors and shareholders have their own objectives.

Co-operatives

Cooperatives are a group of people who agree to work together and pool their money together to buy "bulk". Their features are:

●        All members have equal rights, no matter how much capital they invested.

●        All workload and decision making is equally shared, a manager maybe appointed for bigger cooperatives

●        Profits are shared equally.

The most common cooperatives are:

●        producer co-operatives: just like any other business, but run by workers.

●        retail co-operatives: provides members with high quality goods or services for a reasonable price.

Other notable business organizations:

Close Corporations:

This type of business is present in countries such as South Africa. It is like a private limited company but it is much quicker to set up:

●        Maximum limit of 10 people.

●        You only need a simple founding statement which is sent to the Registrar of Companies to start the business.

●        All members are managers (no divorce of ownership and control).

●        A separate legal unit, has both limited liability and continuity.

Cons:

●        The size limit is not suitable for a large business.

●        Members may disagree just like in a partnership.

Joint ventures

Two businesses agree to start a new project together, sharing capital, risks and profits.

Pros:

●        Shared costs are good for tackling expensive projects. (e.g aircraft)

●        Pooled knowledge. (e.g foreign and local business)

●        Risks are shared.

Cons:

●        Profits have to be shared.

●        Disagreements might occur.

●        The two partners might run the joint venture differently.

Franchising

The franchisor is a business with a successful brand name that recruits franchisees(individual businesses) to sell for them. (e.g. McDonald, Burger King)

Pros for the franchisor:

●        The franchisee has to pay to use the brand name.

●        Expansion is much faster because the franchisor does not have to finance all new outlets.

●        The franchisee manages outlets

●        All products sold must be bought from the franchisor.

Cons for the franchisor:

●        The failure of one franchise could lead to a bad reputation of the whole business.

●        The franchisee keeps the profits.

Pros for the franchisee:

●        The chance of failure is much reduced due to the well know brand image.

●        The franchisor pays for advertising.

●        All supplies can be obtained from the franchisor.

●        Many business decisions will be made by the franchisor (prices, store layout, products).

●        Training for staff and management is provide by the franchisor.

●        Banks are more willing to lend to franchisees because of lower risks.

Cons for the franchisee:

●        Less independence

●        May be unable to make decisions that would suit the local area.

●        Licence fee must be paid annually and a percentage of the turnover must be paid.

PUBLIC SECTOR

Public corporations:

A business owned by the government and run by Directors appointed by the government. These businesses usually include the water supply, electricity supply, etc. The government give the directors a set of objectives that they will have to follow:

●        to keep prices low so everybody can afford the service.

●        to keep people employed.

●        to offer a service to the public everywhere.

These objectives are expensive to follow, and are paid for by government subsidies. However, at one point the government would realise they cannot keep doing this, so they will set different objectives:

●        to reduce costs, even if it means making a few people redundant.

●        to increase efficiency like a private company.

●        to close loss-making services, even if this mean some consumers are no longer provided with the service.

Pros:

●        Some businesses are considered too important to be owned by an individual. (electricity, water, airline)

●        Other businesses, considered natural monopolies, are controlled by the government. (electricity, water)

●        Reduces waste in an industry. (e.g. two railway lines in one city)

●        Rescue important businesses when they are failing.

●        Provide essential services to the people (e.g. the BBC)

Cons:

●        Motivation might not be as high because profit is not an objective.

●        Subsidies lead to inefficiency. It is also considered unfair for private businesses.

●        There is normally no competition to public corporations, so there is no incentive to improve.

●        Businesses could be run for government popularity.

Municipal enterprises

These businesses are run by local government authorities which might be freeto the user and financed by local taxes. (e.g, street lighting, schools, local library, rubbish collection). If these businesses make a loss, usually a government subsidy is provided. However, to reduce the burden on taxpayers, many municipal enterprises are being privatised.