Case Study

The Economist magazine has asked you to a two-page article (the equivalent of around 10 – 12 pages of A4 script) on Russian competitiveness and effort by the Russian government to improve it. The following structure of your article is suggested:

1. A brief introduction explaining what is competitiveness and a summary of recent trends in Russia.

2. A detailed examination of Russian economic performance through time in comparison with major overseas competitors.

3. Economic performance indicators may include: GDP, price inflation, levels of investment, exchange rates, shares of world trade, productivity. You should explain what each of these indicators are and why they are important.

4. A discussion of how the WTO may affect Russian export markets and GDP growth.

5. A discussion of Russian government strategies and policy measures aimed at improving competitiveness

6. A detailed discussion of how government measures to improve competitiveness are affecting one business organisation of your choice.

7. An examination of the strategies the same organisation has devised itself to improve its ability to fight international competition. How successful have these strategies been for the firm?

The article should include relevant computer generated graphs and tables using data from a variety of sources.

Unit 3. Business Organisations

Key words: limited liability, profit, joint stock (limited) company, private limited company, public limited company, multinational, organisational structure, organisation chart, department, line authority, staff functions, staff authority, hierarchy, chain of command, unity of command, span of control, flat organisation, tall organisation, delegation, centralized organisation, decentralized organisation, matrix organisation.

3.1. Types of Business Organization

Starting business

To start a business, an entrepreneur will need capital. This is the money used to buy premises, machinery, equipment, and materials. If a person cannot raise enough money on his/her own, he or she may need to find other people, or partners, who will help finance the business and share in its ownership.

Running a business on your own will often require working long hours and being a ‘jack of all trades’. Setting up in business with other people can help to spread the load and have someone to manage the business, do the accounts, advertise, employ staff if necessary, pay the bills, etc.

The owner of any business is entitled to a share of any profit made. However, if the business fails, he or she may also be responsible for paying any debts. Some business owners have unlimited liability. This means that the owner is liable to pay all business debts and may have to sell his/her personal possessions – house, car, furniture, and jewellery – to do so. Business owners can be taken to Court and declared bankrupt if debts are not repaid.

However, some business owners enjoy limited liability. This means that if their business fails, they only stand to lose the money they invested in it. They will not have to sell personal possessions to raise money to clear business debts. This reduces their risk. Entrepreneurs must therefore decide when financing a business whether they are willing to risk everything they own if the business fails. This will influence their choice of business organisation.

The Objectives of Business Organisations

The overriding objective of any business is to produce goods or services that satisfy consumer wants and needs. A business that fails to satisfy will not survive. However, simply satisfying consumers will not be enough. Different organisations will set themselves specific aims and objectives they hope to achieve through their activities:

• The profit motive allows a business to continue and expand. Profit is the main measure of business success. Loss-making firms are inefficient and uneconomic: output is low and costs are high. They may also have failed to identify what their consumers want, either producing the wrong product, or offering the right product at the wrong price or place.

• Expanding sales and market share, i.e. trying to sell more than rival firms. This may be especially important if the firm is promoting a new product or entering a new market, perhaps overseas. In the short run, they may have to make price cuts and spend heavily on advertising and promotion, both of which can reduce potential profit.

• Providing a public service. Organisations owned and controlled by the government have an objective to provide a service that is in public interest. Some services may be provided free at the point of use, others may be charged for, but operate at a loss. Losses made by these services are subsidized by profits made by other services provided by the organisation, and from general tax revenues.

• Charity. A number of private business organisations belong to what is called voluntary sector of the economy which consists of charities and other non-profit-making organisations. Charitable organisations rely heavily on donations of money and endowments to provide help and care for people and animals in need.

Private sector business organisations

The sole trader

The oldest and the most popular type of business is the sole trader – a business that is owned and controlled by one person. A sole trader is someone who is self-employed. To start their business, they will usually dip into their own savings or borrow from family or friends. Sole traders will also tend to rely on an overdraft facility at the bank in order to make payments, obtain credit from their suppliers, hire purchase for the purchase of equipment, and credit card companies. Sole traders may grow to employ several people or have a number of branches, but so long as there is only one owner the business will remain a sole trader.

Advantages of being a sole trader:	Disadvantages of being a sole trader:
Easy to set up – there are no legal formalities or fees The owner is his/her own boss and can make all the decisions The owner keeps all the profits Can be set up with relatively little capital Personal contact with customers can encourage consumer loyalty	The owner may have limited funds and may find it difficult to borrow money from banks The owner may have to work long hours and cannot afford to be off sick The owner has unlimited liability The owner must be a ‘jack of all trades’ Small businesses are often unable to benefit from bulk purchase discounts

Partnerships

A partnership is defined as an agreement between 2 to 20 people providing capital and working together in a business with the objective of making a profit. Partnerships are common in professions such as doctors, insurance brokers, and vets, although they can also be found in other occupations such as builders, garages, and in small factories.

Although it is not required in law, most partnerships operate according to terms drawn up in a Deed of Partnership. This is a document that sets out matters such as how much capital each partner has invested in the business and therefore how much they own; how profits (and losses) are shared among the partners, and procedures for accepting new partners. If no agreement is drawn up, the rights and obligations of partners are determined by law.

To become a partner in a firm, it is necessary for the prospective partner to buy his or her way into the partnership, thus providing existing partners with additional capital. Banks may be more willing to lend money to a partnership because the security offered by a group of partners is likely to be more than that of sole trader.

Advantages of a partnership:	Disadvantages of a partnership:
Easy to set up. There are few legal formalities More capital can be injected into the business Partners can have a variety of useful skills, bring new ideas and help decision-making Partners can cover for each other during periods of sickness and holidays	Partners may disagree Partners have unlimited liability Partnerships may still lack capital Profits have to be shared A partnership will automatically end, or is dissolved, if one partner resigns, dies, or is made bankrupt

Ordinary partnerships can be turned into limited partnerships where at least one partner, known as a sleeping partner, has limited liability. Sleeping partners provide capital for the business and take a share of the profits but take no active part in the day to day running of it.

Joint Stock Companies

Joint stock companies are also known as limited companies. They differ significantly from sole traders and partnerships in the way in which they are financed, owned, and controlled.

Limited companies raise most of their capital through the sale of shares. Money raised from the sales of shares is known as permanent capital. That is, shareholders’ money never has to be repaid. If shareholders wish to get back the money they invested, they must sell their shares to someone else.

Limited companies are owned by their shareholders. Each shareholder has limited liability. The liability to pay company debts should the business fail is limited to the amount each shareholder invested in the company. This gives people the confidence to buy shares in the knowledge that their personal possessions are not at risk.

The day-to-day running of a limited company is undertaken by a board of directors. These are elected by shareholders to run and control the company on their behalf. In a small company, shareholders may be directors. However, in very large companies there may be many thousands of shareholders. In these companies there is a ‘separation of ownership from control’.

In addition, limited companies will have:

• A separate legal identity – that is, the business exists in law separately from its owners (the shareholders). Unlike sole traders and partnerships, the owners of a limited company cannot be sued for damages, recovery of debt, etc.

• Strict legal requirements. Law requires all companies to publish financial accounts each year and make these available to all shareholders at an annual general meeting (AGM). In addition, all limited companies must be registered with the authorized government bodies, to whom copies of the financial accounts should be sent. Companies are also required to make their accounts available to any member of the public.

There are two main types of limited companies – a private limited company (Ltd) and public limited company (plc). Each must have a minimum of two shareholders. Most of the smaller joint stock companies are private limited companies. Plcs tend to be much larger in size but fewer in number.

Private limited companies

The founder members of a private limited company are able to sell shares to raise capital but can only do so to family, friends, and associates. This may limit the amount of money they are able to raise.

Selling shares also means that founder members can lose control of their company unless they retain over 50% of the shares they issue. Because there is one vote per share, the shareholder with over 50% of shares is said to have a controlling interest. They are able to outvote all other shareholders on matters such as company policy and the election of directors.

A shareholder who wants his or her money back must sell his or her shares to another person with the prior agreement of all the other business owners.

Advantages of a private limited company:	Disadvantages of a private limited company:
The sale of shares can raise capital Owners have limited liability The company has a separate legal (id)entity from its owners Owners can appoint directors on their record of achievement and business knowledge Capital raised from the sale of shares never has to be repaid	Founder members may lose control Shares cannot be advertised or sold on the stock exchange Setting up can be expensive because of the legal requirements Financial information must be published An annual general meeting (AGM) of shareholders must be held each year

Public limited companies (plcs)

Plcs are among the largest and most successful organisations in the UK. Examples include British Gas plc, Unilever plc and Tesco plc.

Unlike a private limited company, a plc is able to advertise the sale of shares and sell them to members of the general public through the Stock Exchange.

In addition to the advantages and disadvantages of a private limited company, the plc also has a number of others:

Advantages of a public limited company:	Disadvantages of a public limited company:
Owners have limited liability Shares can be advertised Shares can be sold through the Stock Exchange Large plcs may find it easier to borrow from banks	‘Going public’, i.e. initial public offering (IPO) can be expensive Some plcs can grow so large that they may become difficult to manage effectively Risk of take-over by rival companies who have bought shares in the company

Co-operatives

A co-operative is an organisation formed by people joining together for mutual interest to organise production, make decisions, and share profits. All members have an equal say in running the business and share equally in the profits. There are many different types of co-operative but two main types can be distinguished:

• Producer (or worker) co-operatives. These are groups of people who have organized themselves collectively to produce goods or services, as in a farming co-operative. They are able to pool their resources to buy expensive equipment and share equally in decision-making and any business profits.

• Retail co-operatives. The first retail co-operative society was formed in 1844 when a group of workers who were dissatisfied with low pay and high food prices joined together to buy food from wholesalers and take advantage of bulk discounts. The principles of modern retail co-operatives are much the same:

• The co-operative is owned by its members

• Any person can become a member by buying a share (for as little as £1 in the UK)

• Members elect a board of directors to run the co-operative

• Each member is allowed one vote regardless of the number of shares he or she holds

• Profits are shared between members and customers

Today many of the smaller retail co-operative shops have been forced out of business by large supermarkets. In order to compete, a number of co-operatives have formed into larger superstores selling a wide variety of goods and services, normally located on large out-of-town sites. The co-operative movement has also successfully expanded into other activities, such as banking, insurance, travel agents, funeral direction, and bakeries.

Franchises

This form of business ownership was first introduced in the USA but is now fast growing in popularity in other countries. A franchise is an agreement between two parties:

• The franchiser – an existing, usually well known company with an established market for its product

• The franchisee – a person, or group of people, who buy the right to use the trading name of the franchiser and either manufacture, service, or sell its product in a particular location.

Well-known examples of franchise operations include McDonalds, Sock Shop, Wimpy, Prontoprint, and BSM. It is also increasingly common for smaller organisations to franchise parts of their operations. For example, milkmen sometimes franchise their round from the local dairy. Department stores will also franchise space within their stores to other retailers.

To buy a franchise in the UK, a business can pay around £15,000 – 20,000, plus a percentage of the turnover known as royalty. In return, the established company will often provide training, equipment, materials, marketing, and help finding premises. The advantage to the franchiser is an increase in the market for their product without the need to expand the firm.

Advantages of buying a franchise:	Disadvantages of buying a franchise:
Product name and market likely to be well established Franchiser will often market and promote the product Banks may be more willing to lend money to a well known franchise Risk of business failure is low	Cost of buying franchise could be high A proportion of business profits is paid to the franchiser Franchise agreement can be withdrawn Role of business owners reduced to ‘branch manager’ Most aspects of business will be dictated by franchiser

Multinational Corporations

A multinational is an organisation that owns and controls productive activities in more than one country. These companies are some of the largest firms in the world, producing many billions of pounds’ worth of goods and services and often employing many thousands of workers.

Imperial Chemical Industries (ICI) is one of the world’s largest chemicals groups. The parent company is UK-owned and has manufacturing interests in over 40 countries and sales organisations in more than 60.