1.2 Types of Organizations
Learning Goal
I can distinguish between organizations in the public and private sectors.
Public and Private Sector
One way businesses can be classified is by public or private sector.
The private sector is made up of businesses owned and controlled by individuals or groups of individuals.
The public sector is made up of organizations accountable to and controlled by central or local government.
Links Between Sectors
In most mixed economies, certain important goods and services are provided by state-run organizations in the public sector. They are considered too important to be left to the private sector. They often include health and education, defense and law and order (police). In some countries, important industries such as energy, telecommunications and public transportation are often state owned and controlled. These public sector organizations provide essential goods and services for individual citizens and organizations in the private sector, and they often have objectives other than profit.
In recent years, there has been a trend toward privatization- selling some public sector organizations to the private sector – this means that profit- making becomes one of their main objectives.
1.2 KEY TERMS
private sector
public sector
mixed economy
free-market economy
command economy
privatization
entrepreneur
sole trader
partnership
limited liability
private limited company
shareholder
share
public limited company
public corporation
non-profit organization
non-governmental organization (NGO)
pressure group
social enterprise
triple bottom line
public private partnership
private finance initiative
Starting a Business
New business ventures started by entrepreneurs can be based on a new product or customer service idea or a new way of offering a service. People who set up their own new business often have entrepreneurial skills or experience. They may have had an idea for a new business, invested some of their own savings and capital, or accepted the responsibility of managing the business and accepted the possible risks of failure.
Some of the personal qualities and skills needed to make a success of a new business are:
Innovative
Original ideas and innovation.
Commitment and self-motivation
A willingness to work hard, a desire to succeed, energy and focus.
Multi-skilled
Ability to make a product or provide a service, promote it, sell it and handle money and keep accounting records, learn technical skills and get along with people.
Leadership skills
Lead by example. Encourage people in the business to follow and motivate them.
Belief in oneself
Self-belief in abilities and business idea and resilient.
Risk taker
Willing to take risks in order to see results, often investing own savings in a new business.
"To hell with circumstances; I create opportunities." -Bruce Lee
Why start a business?
Reasons for starting a new business include some or all of the following:
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Losing a job – many people start a business by themselves providing their former employer’s product or another product, perhaps based on an interest or skill they have.
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Desire for independence – many people want to have work flexibility and control over their working lives.
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Seize an opportunity – it becomes clear that a business opportunity exists that an entrepreneur could take advantage of.
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Make more money – many people start their own business believe that they will earn a higher income working for themselves.
Identifying Market Opportunities
Taking the leap into entrepreneur-ship successfully requires identifying a market opportunity that will generate enough demand for a product or service to be profitable. The original idea for most new businesses comes from one of several sources including:
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own skills or hobbies,
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previous employment experience,
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franchising conferences and exhibitions offering a wide range of new business start-up ideas,
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small budget market research – identifying gaps in local markets that could be profitably filled using the internet to see how many businesses there are in the local area offering certain goods or services.
Problems faces by start up businesses
Even if an entrepreneur has all of the above qualities, success with a new business can never be guaranteed. Many businesses fail during their first year. Some of the most common reasons are:
Competition
Unless the business idea is unique, a newly created business will experience competition from older, established businesses with more resources and market knowledge.
Building a customer base
To survive, a new business must establish itself in the market and build up customer numbers as quickly as possible. The long-term strength of the business will depend on encouraging customers to return to purchase products again and again.
Lack of record keeping
Keeping accurate records is vital to paying taxes and bills and chasing debtors. Many new entrepreneurs often pay more attention to meeting customers’ needs or they think they can remember everything.
Lack of working capital
Running short of capital to run day-to-day business operations is the most common reason for new businesses to fail in the first year. Capital is needed for day-to-day cash, for the holding of stocks and to allow the giving of trade credit to customers, who then become debtors. Without sufficient working capital, the business may be unable to buy more stocks or pay suppliers or offer credit to important customers. Serious working capital shortages can usually be avoided if businesses take several important steps:
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Create and update a cash-flow forecast so that the working capital needs of the business can be assessed, month by month.
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Inject sufficient capital into the business at start-up for the first few months of operation when cash flow from customers may be slow to build up.
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Establish good relations with the bank so that short-term problems can be covered with an overdraft.
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Use effective credit control over customers’ accounts – do not allow a period of credit which is too long, and quickly catch up with late payers.
Poor management skills
Most entrepreneurs have had some form of work experience, but not necessarily at a management level. They may not have gained experience in all areas of business operation like:
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leadership skills
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cash handling and cash management skills
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planning and coordinating skills
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decision-making skills
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communication skills
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marketing, promotion and selling skills.
New entrepreneurs may be willing to work hard and with abilities in their chosen field, but might lack management skills. Some learn these skills very quickly once the business is up and running, but this is a risky strategy. Some entrepreneurs buy in the experience by employing staff with management experience, but this is an expensive option.
Just because a business is new, enthusiasm is strong, and there is a willingness to hard work does not mean the business will succeed. It could, but often does not. Potential entrepreneurs should work to gain some of these skills before putting their capital at risk or seek management experience through employment.
Changes in the business environment
Setting up a new business is risky and there is also the risk of change, which can make the original business idea less successful. There are many changes that cause new businesses to fail, like:
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new competitors
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legal changes, e.g. outlawing the product altogether
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economic changes that leave customers with less money to spend
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technological changes that make the methods outdated and expensive.
The business environment is a dynamic and this list of changes could be added to, with events like Covid-19. The constantly changing world makes owning and running a business a very risky enterprise.
Profit-based Organizations
SOLE TRADER
A sole trader is a business in which one person provides the permanent finance and, in return, has full control of the business and is able to keep all of the profits
This is the most common form of business organization. Although there is a single owner in this business organization, there may be employees but the business is usually small. All sole traders have unlimited liability. This means that the owner’s personal possessions and property can be taken to pay off the debts of the business should it fail. This can discourage some potential entrepreneurs from starting their own businesses.
Another problem faced by sole traders involves finance for expansion. Many sole traders remain small because the owner wishes to remain in control of their own business, but another reason is the limitations that they have in raising additional capital. As soon as partners or share-holders are sought in order to raise finance, then the sole trader becomes another form of organization altogether. In order to remain a sole trader the owner is dependent on own savings, profits made and loans for new capital.
This type of business organization is most commonly established in construction, retailing, hairdressing, car servicing and catering.
PARTNERSHIP
A partnership is a business formed by two or more people to carry on a business together, with shared capital investment and, usually, shared responsibilities. Partnerships are usually formed to overcome some of the drawbacks of a sole trader. When planning to go into partnership it is important to choose business partners carefully – the errors and poor decisions of any one partner are considered to be the responsibility of them all. This also applies to business debts incurred by one partner – in most countries there is unlimited liability for all partners should the business venture fail.
Partnerships are the most common form of business organization in some professions, such as law and accountancy. Small building firms are often partnerships too.
LIMITED COMPANY
There are three important differences between companies and sole traders and partnerships: limited liability, legal personality and continuity.
Limited liability
The ownership of companies is divided into small units called shares- certificates confirming part ownership of a company and entitling the shareholder to dividends and certain shareholder rights. People can buy these and become shareholders – that means they are part owners of the business. It is possible to buy just one share, but usually these are owned in blocks, and it is possible for one person or organization to have complete control by owning more than 50% of the shares. Individuals with large blocks of shares often become directors of the business. All shareholders benefit from the advantage of limited liability.
limited liability means that the only liability – or potential loss – a share-holder has if the company fails is the amount invested in the company, not the total wealth of the shareholder. Nobody can make any further claim against shareholders should the company fail. This has two important effects:
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People are prepared to provide finance to enable companies to expand.
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The greater risk of the company failing to pay its debts is now transferred from investors to creditors (those suppliers/lenders who have not been paid). Creditors, as a result, are very interested in both ensuring that the word ‘limited’ appears in the company name and scrutinizing the company’s accounts for signs of potential future weakness.
Legal personality
A company is legally recognized as having an identity separate from that of its owners. This means, for example, that if the products sold by a company are found to be dangerous or faulty, the company itself can be prosecuted, not the owners, as would be the case with either a sole trader or a partnership. A company can be sued and can sue others through the courts.
Continuity
In a company, the death of an owner or director does not lead to its break-up or dissolution. All that happens is that ownership continues through the inheritance of the shares, and there is no break in ownership at all.
Private limited companies
A private limited company is a small to medium-sized business that is owned by shareholders who are often members of the same family. This company cannot sell shares to the general public.
The word ‘Limited’ or ‘Ltd’ indicates that the business is a private company. Usually, the shares will be owned by the original sole trader (who may hold a majority of the shares to keep control of the company), relatives, friends and employees. New issues of shares cannot be sold on the open market and existing shareholders may only sell their shares with the agreement of the other shareholders. Legal formalities must be followed in setting up a private limited company and these can be expensive and time consuming.
Public limited companies
A public limited company (plc) is a limited company, often a large business, with the legal right to sell shares to the general public. Its share price is quoted on the national stock exchange. A plc has all the advantages of private company status plus the right to advertise its shares for sale and have them quoted on the stock exchange. Public limited companies have the potential to raise large sums from public issues of shares. Existing shareholders may quickly sell their shares if they wish to.
These can be recognized by the use of ‘plc’ or ‘inc.’ (incorporated) after the company name. It is the most common form of legal organization for really large businesses, for the very good reason that they have access to very substantial funds for expansion.
The other main difference between private and public companies concerns the ‘divorce between ownership and control’. The original owners of a business are usually still able to retain a majority of shares and continue to exercise management control when it converts to private company status. This is most unlikely with public limited companies, due to the volume of shares issued and the number of people and institutions as investors. These shareholders own the company, but they appoint, at the annual general meeting, a board of directors who control the management and decision-making of the business.
This clear distinction between ownership and control can lead to conflicts over the objectives to be set and direction to be taken by the business. The shareholders might prefer short-term maximum-profit strategies, but the directors may aim for long-term growth of the business, perhaps in order to increase their own power and status. Many private limited companies convert to plc status to gain the benefits.
The reasons for doing this are largely to overcome the divorce between ownership and control – in a private limited company it is normal for the senior executives to be the major, majority shareholders. In addition, the owner of a private limited company can take a long-term planning view of the business. It is often said that the major investors in a plc are only interested in short-term gains. ‘Short-termism’ can be damaging to the long-term investment plans of a business
Legal Forms of Business Organization
Businesses often change their legal form as they expand and as the objectives of the owners change. Many newly formed businesses are sole traders and then accept partners if the aim of the original owner is to expand and share management responsibilities. Conversion to company status is often caused by owners wanting to protect their personal wealth and encourage new shareholder investors. When further expansion is very expensive, conversion to public limited company status is common.
Public Sector Companies
The term ‘public’ is used by business organizations in two different ways, and this often causes confusion. We have already identified public limited companies as being owned by shareholders in the private sector of the economy. Thus, public limited companies are in the private sector. However, in every country there will be some enterprises that are owned by the state – usually central or local government. These organizations are therefore in the public sector and they are referred to as public corporations-- businesses owned and controlled by the state.
Public sector organizations do not often have profit as a major objective. In many countries the publicly owned TV channels have as their main priority the quality of public service programs. Selling off public corporations to the private sector, known as privatization, often results in changing objectives from socially orientated ones to profit-driven goals.
Non-profit and Non-governmental organizations
Not all organizations in the world aim to make profits. Some have objectives other than profit, like charities and pressure groups. Many of these are known as non-governmental organizations (NGOs). A non-governmental organization (NGO) is a legally constituted body with no participation or representation of any government.
A non-profit organization is any organization that has aims other than making and distributing profit and which is usually governed by a voluntary board. Non-profit organizations include charities and pressure groups. Charities may have professional managers, but often depend on the work of unpaid volunteers. Profit is not an objective, but they are still usually trying to increase their income to put more money back into achieving their charitable objectives. Apart from raising money to support and promote their work, many charities aim to inform the public, persuade them to support their causes and try to convince governments to give more attention to the problems the charities are trying to solve such as racism, poverty, gender inequality, or environmental protection.
Non-governmental organizations cover a very wide range of activities, but their common feature is that they are separate from government. They are often charities too and many of them are involved in development, health and humanitarian issues. Their work can support and add to the efforts made by government organizations, for example in disaster or poverty relief. The objectives of NGOs are not profit-based but are specifically focused on social or humanitarian objectives.
PRESSURE GROUP
Pressure groups are non-profit-making organizations that aim to change the behavior and decisions of either organizations or governments. Some examples are:
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Greenpeace – campaigns for greater environmental protection by both businesses adopting green strategies and governments passing tighter anti-pollution laws.
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Fairtrade Foundation – aims to achieve a better deal for agricultural producers in low-income countries.
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WWF – aims to improve animal welfare, especially protecting and conserving the habitat of wild animals.
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Amnesty International – rigorously opposes anti-human rights policies of governments.
Pressure groups want changes to be made in three important areas:
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governments to change their policies and to pass laws supporting the aims of the group
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businesses to change policies
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consumers to change their purchasing habits
Pressure groups try to achieve these goals in a number of ways.
Publicity through media coverage
Effective public relations are crucial to most successful pressure group campaigns. Frequent press releases giving details of undesirable company activity and coverage of ‘direct action’ events, such as meetings, demonstrations and consumer boycotts will help to constantly keep the campaign in the public eye. The more bad publicity the group can create for the company concerned, then the greater the chance of it succeeding in changing corporate policy. The pressure group may spend money on its own advertising campaign – as Amnesty International does – and the success of this approach will depend upon the financial resources of the group.
Influencing consumer behavior
If the pressure group is so successful that consumers stop buying a certain company’s products for long enough, then the commercial case for changing policy becomes much stronger. The highly successful consumer boycott of Shell Oil following a decision to dump an old oil platform in the sea led to a change of strategy. Shell is now aiming to become ‘the leading multinational for environmental and social responsibility’. Public sympathy for a pressure group campaign can increase its effectiveness significantly.
Lobbying of government
This means putting the arguments of the pressure group to government members and ministers because they have the power to change the law. If the popularity of the government is likely to be damaged by a pressure group campaign that requires government action, then the legal changes asked for stand a greater chance of being introduced.
Amnesty
International
Pens
Social Enterprise
Social enterprises are businesses with mainly social objectives that reinvests most of their profits into benefiting society rather than maximizing returns to owners. Social enterprises are not charities, but they do have objectives that are often different from those of an entrepreneur who is only profit motivated. Making a profit may be one of their objectives, but it will be much less important than the organization’s social objectives. Social entrepreneurs are not running a charity, though – they can and often do keep some of any profit made for themselves.
Social enterprises compete with other businesses in the same market or industry. They use business principles to achieve social objectives. Most social enterprises have these common features:
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They directly produce goods or provide services.
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They have social aims and use ethical ways of achieving them.
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They need to make a profit to survive because they cannot rely on donations as charities do.
Objectives of social enterprises
Social enterprises often have three main aims:
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Economic – to make a profit or surplus to reinvest back into the business and provide some return to owners.
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Social – to provide jobs or support for local, often disadvantaged, communities.
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Environmental – to protect the environment and to manage the business in an environmentally sustainable way.
The three objectives of social enterprises are often referred to as the triple bottom line, meaning profit is not the only objective of these enterprises.
Public Private Partnership
A public–private partnership (PPP) is involvement of the private sector, in the form of management expertise and/or financial investment, in public sector projects aimed at benefiting the public.
There are three main types of PPP:
Government funded
In this type of venture, the government provides all or part of the funding, but the organization is managed by a private business that uses private sector methods and techniques to control it as efficiently as possible. It is believed that private firms operate more efficiently than a government department would.
Private sector funded
In this type of venture, the private sector makes an initial capital investment. Once the project has been paid for and constructed, it is managed by a government department which pays rent or a leasing charge to the private sector business that constructed the project. This form of PPP is known as the Private Finance Initiative (PFI).
Government directed but with private sector finance and management
This type of PPP encourages both private sector funding and some private sector management control of public projects.