Topic 1: Business Environment
1.2 Types of organization


Private sector and public sector
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Distinguish between organizations in the private and public sectors.

Central to the activities in the private sector is the role of the entrepreneur in a capitalist society. By being able to harness the other three factors of production, the entrepreneur creates a private market that is able to meet the needs and wants of members of society. The private ownership of the factors and production is what defines capitalism. The goods and services that are provided by those individuals is the definition of the Private sector. Therefore, the private sector can only exist in a society that has embraced capitalism. An economy functions efficiently (where the resources are distributed) with a well regulated private sector. Governments are unable to fulfill all the needs of society and therefore rely on the private sector to efficiently fill the gaps. In general private sector activity includes all activities that will provide a personal gain or profit for those individuals providing the products of services. However, there are activities that are provided by the private sector that do not profit the investor but are primarily targeted to meeting the primary needs of society such as food, shelter, clothing, education and health.

Non-for-profit activities are also in the found in the private sector and are mostly charitable organization such as Homeless shelters, Orphanages, schools and Health Clinics.

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Homeless Shelter

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Orphanage
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Health Clinic

The Public sector is where the production of goods and services is owned, operated and provided by the government or its administrative and local authorities. Generally, these are non-for-profit activities are part of the services intended for the wellbeing or welfare of society. Governments provide among others, education, health, housing, law-enforcement and defense.

HL only Analyse the relationship between organizations in the private and public sectors.


The role of the public and private sector is what distinguishes the economic positions of political philosophies. Socialists favor a greater role of Government in providing goods and services to the public, which Conservatives favor more private sector activity. However, the Government or Public sector is never able to sufficiently meet all the needs of society. Therefore, the public sector occasionally offers opportunities for the private sector to undertake various projects that are more efficiently accomplished by the private sector.

The notification of available projects, for example the construction of a road, is done through Public tendering. Private sector companies would submit their requests for the contracts know as bids and the project that meets the criteria, which are usually centered on being the most cost effective and timely in completion, will be offered the contract.

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Road Construction

Because of the size of the projects and financial rewards of the contracts, the authorities have to continually ensure that the process is fair and not manipulated by personal interests. There are usually many cases of fraud and corruption arising from contracts issued by the public to the private sector. However, the ability to complete roads, buildings, military projects, medical research and meet educational goals can not all be accomplished with the same level of efficiency through the public sector and thereby the need for private sector collaboration.
In addition to issuing Puiblic tenders, another means of encouraging private sector activity that provides a benefit to society is through public sector funding and tax relief. A special status is reserved for Organizations or institutions that apply for a Non-for-Profit status, in particular the exemption from taxation and eligibility for different types of funding is what distinguishes the organizations. An example of such an organization would be a School. Is your school a non-for-profit organization?

Starting a business

Reasons for setting up a business


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Explain the reasons for setting up a business.


Most individuals decide to start a business in order to profit or make a personal gain from the activity. Although profit maximization is sometimes not the central objective of the business organization, it is usually the prime driver as to why the individual entrepreneur decides to combine resources, take risk and exert the energy required. Are these the best reasons? They are not the only reasons, consider the argument for social business.

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As Adam Smith so clearly noted in his seminal book on An Inquiry into the Nature and Causes of the Wealth of Nations, 'it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest'.
Entrepreneurs therefore are driven by a desire to fulfill a personal gain, however, they are also other factors that may drive the enterprise for example a need that has been identified in the market place itself. In many instances an invention that may have lying in the garage of someone’s home could have been developed from pure enthusiasm of a hobby inventor. What, however, drives the hobby inventor into deciding to publicize an invention? Although recognition, accolades or funding for continued research may be the primary reason and not solely profit based, these nonetheless would be representative of a personal gain.
Identifying a market opportunity

Most business ventures begin with the identification of a need that can be filled through entrepreneurship. However, as our marketing module will show us in greater detail later, we can classify how market opportunity arises as being either Product-led or Market-led.
If you have ever been in a situation where you have said to yourself, I wish there was something that did this, that or the other, then you have identified a market opportunity. The underlying assumption here is that others are in the same situation or would have the same needs you have. If this is the case then a marketing opportunity does exist and it is indeed market-led.

Consider the telephone and the fact that we can seldom imagine not having a communication device such as the telephone. animated_telephone.gifThe natural progression of the telephone was the hand held mobile device, also difficult to imagine living without. What is the natural progression of the mobile phone? Consider also the computer itself and the fact that it has become an inseparable part of our educational and personal life. What is the natural progression from keypunching data on the keyboard? Voice recognition? Do business organizations define the needs of the market or drive needs of the market themselves?
Chocolate ice-cream bars made by Mars, Incorporated are certainly delicious products, but was there a need in the market or was the market created by the core competency of the organization? In this instance Mars has the resources to create and sensationalize the concept of ice cream chocolate bars, thereby enticing public wants. This is an example of a product-led marketing opportunity.
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By looking at other like societies and identifying successful trends in markets, entrepreneurs are also able to identify opportunities and transpose these in their home markets. We see this trend as globalization broadens marketing opportunities.
Explain the process a business will have to go through to start up.

All business organization must initiate a legalization process in order to operate in the formal sector. Although there are many business enterprises functioning illegally, they are outside of the formal sector and are in the informal or secondary market. Business organizations avoid the legalization process in order to evade taxation, licenses or set-up costs, however in doing so they and the consumers are not protected by the laws and systems in place.
Therefore, the first step all business start-ups must initiate is the creation of a legal entity. The business is separate from the individual and must thereby file application documents with the government administrative authorities in order to engage in a business activity. The intended objectives of the business will need to be identified and essentially scrutinized for approval. Depending on the nature of the business, licenses may be required before being granted authority to operate.
It is in the interest of Government to make the application process as easy as possible, thereby encouraging entrepreneurship and all its benefits. However, in order to protect the public, all businesses need to meet standards that have been identified and measures that are precautionary for the safety and health of society in general.
To own an operate a restaurant, the entrepreneur will have to meet health and safety standards that will prevent health concerns that arise in the handling of large quantities of food. Health inspections are usually done in eating establishments to enforce the regulations and control licenses to operate. These may also include not serving alcohol the under-aged .

Possible problems faced by start-ups

Analyze the problems that business start-ups may face.


A business that is just beginning is referred to as a start-up. Although problems vary, there are common obstacles that can be to starting a business. The most notable of these is start-up finance.

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During the initial phases of the business, the commercial enterprise will only experiences losses as no revenue is being earned from sales at this early stage. However in order to begin operations the costs of legalizing the business may include hiring professional organizations or lawyers. In addition filing fees, location costs, production, labor and marketing costs, labor costs can all become enough of a reason why the business will want to operate in the informal sector.
If the market is dominated by large corporations and there may be other barriers to entry such a technical or regulatory barriers. New businesses may simply not have the ability to compete effectively on the basis of price due to economies of scale achieved by large corporations, where the start-ups average costs of operation are too high relative to revenue earned.
In addition, some countries have a very complex, lengthy and costly legalization process that serves to discourage businesses from starting operations. Restrictions or excessive regulation will also curtail business initiative.
Which countries do you think have the least number of steps needed to create a business? Which countries have the most steps and what is the relationship to a successful business economy? Read this article and see the ranking.

Profit-based organizations

Distinguish between different types of business organization and identify their main features.

Analyse the extent to which ownership and control differ in organizations.

Evaluate the most appropriate form of ownership for a firm.

Analyse the impact of the division between ownership and control on internal and external stakeholders.

When discussing the legal forms of business entities, it is important for the student to note that each country has its own legal system, which in turn defines business entities differently. Students are not expected to know any one specific form of legal system, but should understand the common elements within most of the countries. The names of the business entities will also differ but the most share similarities in the underlying legal structure.
Sole Traders
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The Sole Trader also called the Sole Proprietor is the simplest form of for-profit business entity to legalize. This “single owner” form of business is only required to have the minimum of one individual operating the business. In this respect, as an advantage, decisions can be made without consultation and profits are not shared but retained by the individual operator. Therefore, decision-making is faster and because of the lack of a complex bureaucracy, even the accounting and management approach is simpler.
The disadvantage of this form of legal enterprise is that full responsibility for any legal action taken against the business falls wholly on the shoulders of the owner. In other words the Sole Trader has unlimited liability (responsibility) when it comes to action taken against the business. Actions in the form of fines, penalties, civil-law suits, and any other challenges that the business faces are passed through to the business owner.
Additionally, because of the reliance on one sole individual, in the event of the owners’ death, the business as a legal entity will also be dissolved. As a single business owner looking only to him or herself, there will be consequence be limitations when it comes to financial resources and even ideas that would potentially benefit the business.
Nevertheless, the advantages are that most small businesses that do not want the burden of the high start-up costs referred to earlier, will chose to legalize their business as a Sole Trader. Small shops, Bakeries, Newspapers Vendors are fine examples of business entities that usually decided to legalize as Sole Traders. These are sometimes referred to as Mom and Pop stores for the simple reason that they are owned by one individual, and managed by very few additional individuals.
Partnerships
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When two or more individuals come together they can decide to form a Partnership as a legal business entity. The Partnership is governed by the Partnership Agreement, which defines terms under which the partners will operate. Once the Partnership Agreement is filed with the proper Government authorities and authorized, the entity will operate under the agreed terms. Any changes will require an amendment to the Partnership Agreement. If however, a Partnership of two individuals witnesses the death of one of the partners, the Partnership is subsequently dissolved, since a minimum of two people make up the Partnership.
Partnerships as legal entities have evolved in various countries to include those that have limited liability and that have unlimited liability. A Limited Partnership therefore protects the individual partners from civil liability while an unlimited Partnership does not.
The primary difference between the Sole Trader and the Partnership is in the number of individuals involved as owners. By consequence, the Partnership would have access for more financial resources and more input when it comes to ideas and initiatives that could all serve to benefit the business. In the event of death in Partnerships of more than two members, the business will not dissolve as compared to the Sole Trader where the business must cease. Most Partnerships will also share the fate of the Sole Trader if they are unlimited Partnerships. Consequently they will also have individual members of the business facing fines, penalties, civil-law suits, and any other challenges that the owners most confront which are passed through.
Because a Partnership can have many members (depending on the laws of the country, at times limited to 20) the business can be a great source of business initiate and collaboration. Wealthy, well connected or influential members of society individuals can be invited to join the Partnership thereby increasing the potential of the entity.
As the membership grows, the complexity of the legal entity also becomes an issue as decision-making and profits are now distributed to the interests of each individual partner as defined in the Partnership Agreement. To the advantage of this form of legal entity, the tax structure is restricted to filings by individual members of the Partnership. Partnerships are usually found in highly specialized business entities where they individual members join forces in order to collectively be more effective. Therefore, most Partnerships are found among Law and Accounting firms.

Companies/ Corporations

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The most interesting form of business entity is the Corporation. This form of business entity has the central feature of being a legal person and therefore an entity separate from the owners. Also referred to as an artificial person, the business corporation has many rights accorded to members of society. Lawyers sometimes joke that the corporation can do everything a normal person can do except get married and vote! Perhaps a merger would be considered leaving out only voting.

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The corporation documentary Part 1/23

The corporation is a company that is created through an application process that eventually results in a certificate of incorporation only issued by authorized government offices. In order to qualify for a certificated of incorporation, the incorporator or individual filing the documents of application for incorporation, must specify more than one individual to be on its board of directors. Depending on the legal requirement of the country of incorporation, the incorporator must also generally specify the issue of shares, stock certificates that represent ownership, to those individuals who lay claim to the company.
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The corporation documentary Part 2/23


With the Certificate of Incorporation, shareholders are thereby empowered to elect individuals to make decisions that will govern the corporation. Relative to the laws of incorporation, the corporation must hold Annual General Meetings of Shareholders where the board members are elected. These elected individuals are members of the board of directors, who in turn elect a chairperson to guide the board. The Board or Directors under the direction of the Chairperson appoint the Chief Executive Officer (CEO) and other executive managers who are responsible for subsequent managerial and staff appointments necessary for the day-to-day operations of the business.
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The corporation documentary Part 3/23

As a legal entity the corporation is referred to as having limited liability. This implies that the directors of the corporation are not subject to any civil law suits. Members of society cannot bring any legal proceedings against individual members of the corporation (Civil Law). However, in the event that a crime against society has been committed (Criminal Law), members of the board of directors could be subject to prosecution. This is what is known as piercing the corporate veil.

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The corporation documentary Part 4/23

Limited Liability is certainly a significant advantage for a business. Consider the number of laws suits that have been brought against business for wrongful harm or even death. In many instances, these lawsuits would have brought an end to the business enterprise and the benefits to society if it were not for the limitations of liability afforded to its directors.

As a share issuing entity, the corporation has unlimited access to financial resources. In the event that the Corporation decides to issue its shares to the general public, it would become a Public Limited Corporation and its ability to raise funds would improve considerable. This is however a very complex and costly process with strict requirements. The Private Limited Corporation does not have the ability to issue its share in a public exchange such as the Stock Market and therefore does not have to comply with the complex array of rules and regulations. However, both have greater access to financial resources and an increased number of stakeholders.

As a separate legal entity, unlike the Sole Trader and Partnership, the Corporation exists perpetually. It only ceases to exits when a certificate of dissolution is filed. Many debate this advantage over mortal humans as being the reason why corporate entities unjustly wield such power and authority over society and government.

As compared to the Sole Trader, the Corporation with its widened stakeholders will also face the challenges of satisfying divergent interests. Profits must be share among the shareholders and the expectations of internal stakeholders such as management may therefore conflict. Management generally seeks to reinvest profits as opposed to distributing them to shareholders in order to expand business activity. As we shall learn later, shareholders only receive profits on their shares holdings, known as dividends, when these are declared and issued but the elected board of directors.
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The corporation documentary Part 9/23
The Corporation is therefore a more complex business entity than the other two forms we examined and requires more specialized individuals such as managers, accountants and lawyers to ensure its existence. Only corporations can operate on a Multinational level and as these entities spread globally, their level of complexity and the need for conformity in terms of legal and stakeholder interests also grows.

Multinational corporations have production and presence in more than one country and their role in globalization is unprecedented. To what extent do you think that this will broaden the prospects for countries not engaging in conflict?

Non-profit and non-governmental organizations (NGOs), including charities and pressure groups

Compare and contrast the objectives of NGOs and non-profit organizations and other organizations.

Analyse the impact of the actions of NGOs and other non-profit organizations

Organisations that pursue objectives that the government is unable to meet are referred to a as Non-Governmental Organisations or NGO. The United Nations is largest NGO that most are familiar with, and its broad mandate for trying to better the human predicament. We are also familiar with organisations such as the Save the Children Fund, Oxfam and Doctors without Borders.


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Some of these organisations are also corporations, however, with a different set of objectives. As we have noted earlier, the primary goal of most business organisations is to survive and maximise profit. Corporate status is also given to organisations that do not seek to make a profit and are thereby exempt from taxation. Organisations that provide charitable and philanthropic or humanitarian services to society would fall under this category. In addition, organisations, such as schools, that provide what economist refer to as positive externalities would also be allowed to register as non-for profit corporations.


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Non-for-profit organisations are therefore similar in all respects to Private Limited Corporations, other than the fact that they are not allowed to show a financial profit. Doing so would subject them to potentially losing their non-for-profit and tax exemption status.

When non-for-profits engage in domains such as charity, development, and activist events to raise or further awareness on particular issues that are political or social, so long as they have no participation or representation of any government, their status is also that of an NGO. The term NGO is used to distinguish the activism of the organisation from that of the Government.


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NGO’s therefore advocate a particular cause that may be in conflict with government policies or conduct. Some NGO’s act as lobbyists, or document human rights violations while others act to pressure the Government towards a specific policy direction. While serving as an alternative voice, the pressure groups hope to draw media attention and by raising public awareness these organisations are at times able to force the Governments hand into changing its course of action.

Popular activist events include those of the environmentalist group Green Peace, who occasionally put themselves in the face of face of physical danger in order to prevent corporate acts that do harm to the environment.

HL Public–private enterprise

HL only Explain the nature of public–private partnerships.

HL only Analyse the costs and benefits of cooperation between the public and private sector.

Public-private partnership are ventures between the government and the private sector. The government contracts one or more private sectors companies to provide a specific service of fulfill an objective that both parties would not have been able to accomplish alone. Usually the financial burden is borne by the government while the expertise is provided by the private sector.

An example of Public-Private Partnerships would be the International Aids Vaccine Initiative (IAVI).

Public-Private Partnerships such as the IAVI are non-for-profit organizations that bridge public- and private-sector interests. By overcoming financial barriers because of Government involvement, industry participants more rapidly develop pharmaceutical products that serve a common good.

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This week we learn about the different kinds of business' that exist and why particular legal structures are chosen by entrepreneurs.

The corporation is legally an artificial person. Consider the following facts: The corporation can be sued by members of society, fined or charged by the judicial branch of government, buy a plane ticket, rent or buy a car, open a bank account and even own a house and pay your school fees!! Of course the corporation can neither vote nor get married, but it is born (through a certificate of incorporation) and can die (through a certificate of dissolution). There are those who argue that the corporation is too powerful an entity in society and these are interesting arguments worthy of further investigation. Spend some time viewing "The Corporation " movie trailer by Mark Achbar.


1) Now of course other than Corporations there are other types of business entities such as the Sole Trader, Co-operatives and Partnerships. Lets find out more or simply said, click on the link to Mind your Business .
Answer Question 1 ONLY and submit your answer as instructed.


2) Go to the website on McDonalds franchisingand take a look at some of the (Meet the Franchisees) case studies. McDonald's effectively implemented the franchising strategy in the fast food industry. Comment on the benefits and weaknesses of this approach from the company's perspective. Post your response in the Discussion tab to this statement.


3) For further discussion on topics of interest go to Netvibes.com and comment on news article posts.

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  • What are the major differences between business organisations operating in the private sector and in the public sector
  • What are objectives of a charity.