Introduction to Business & Forms of Ownership

1. Introduction to Business & Forms of Ownership

2. Definition of ‘Business’ • A business is any organization that strives for profits by providing goods and services that meet customer needs. • A business is an organization which strives to provide an adequate return to its owners while meeting the needs of its customers and employees and balancing the impacts if its actions on secondary stakeholders • Goods – tangible items • Services – intangible items

3. Key elements of business • Business centers on the idea of exchange. • Exchange can take many forms: • money for a good • money for a service • barter • votes for political promises • ???

4. Not-For-Profit Organizations • They do not exist to make a profit • They do have revenues • these come from fees, subsidies, & donations • NFPs use volunteers as well as paid staff • May be able to accept tax deductible donations • Not-for-profits’ activities include many of the same functions as businesses: finance, sales, operations, accounting, etc.

5. Impact of Not-For-Profits • 1.1 million NFPs • 9.1 million employees • 5.5 million FTE volunteers • $111 billion in contributions • Almost 50% of all adults volunteer • (over 2/3 of college graduates volunteer)

6. Financial Performance • Revenue = price X volume • Expenses = cost of raw materials, labor, and other costs associated with producing a good or service • Profit = revenue - expenses

7. Other measures of performance • Productivity - ratio of resources used to goods and services produced • Increasing productivity - raising the level of goods and services offered without increasing the resources used • Increasing efficiency - producing the same level of output while reducing the resources

8. Meeting customer needs • Customer satisfaction is the key indicator of business health • Every business has customers • Every employee has customers • Role of customer expectations - ‘the disconfirmation paradigm’ • Satisfaction occurs when performance exceeds expectations • Delighting customers

9. Quality and Value & Service • Value - a comparison between ‘quality’ and ‘price’ • TQM - total quality management • CQI - continuous quality improvement • Customer sensitivity • awareness of customer desires and needs • anticipating changes in customer wants • proactive versus reactive • customer service is an ongoing process

10. Timeliness • “You snooze, you loose” • ‘strategic windows’ • being first has its advantages • ‘paralysis by analysis’

11. Business Organizations

12. Businesses in the U.S. • Over 21 million, including: • 9 million part-time (filing Schedule C) • 7 million self-employed • 5 million businesses with employees

13. Businesses in the U.S. • In 1999, there were 5,607,743 active businesses in the U.S. • 10.7% had 20 employees or more • 1.7% had 100 employees or more • .3% had 500 employees or more • Less than 2% of all businesses employ more than 100 people • 87% have less than 20 employees

14. The Size of Businesses

15. Who Owns these Businesses? • Sole proprietorships - • owned by a single person • Partnerships - • owned by two or more individuals • Corporations - • owned by stockholders • Limited Liability Corporations - • owned by “members’ - individuals or companies

16. ADVANTAGES Easy to form Do not share profits Direct control Taxed on individual 1040 Easy to dissolve DISADVANTAGES Only one owner Unlimited liability – no difference between sole proprietor and firm Difficulty in raising capital Limited managerial expertise Personal time commitment Losses to to owner Unstable business life Difficulties finding qualified employees Sole Proprietorships

17. Partnerships • ADVANTAGES • More owners • Easy to form • Greater capital available • Diversity of skills & expertise • Taxed on individual 1040 • DISADVANTAGES • Owner disagreements • Unlimited liability • Potential for conflicts • Share profits • Difficult to dissolve

18. Corporations • ADVANTAGES • Limited liability • Ease of raising capital • Continuity of ownership • Tax deductions • DISADVANTAGES • Expensive & complicated to form • Formalization • Double Taxation of profits • Government restrictions

19. Types of Corporations • S Corporations • Hybrid – organized like a corporation but taxed like a partnership • LLC – Limited Liability Companies • Option of being taxed as a corporation or partnership

20. Percentage of Businesses by Form

21. Specialized Forms of Businesses • Cooperatives • Legal entities formed by people with similar interests to reduce costs and gain economic power. • Examples: Ace, True Value Hardware, Sunkist Oranges, Land ‘O Lakes butter • Joint Ventures -- 2 or more companies form an alliance • Franchising

22. Franchising • Baskin Robbins/Dunkin Donuts in Chicago • $450,000 liquid assets; $800,000 net worth • Krispy Kreme – Eastern Europe • Commitment to build 10 stores in area • Minimum net worth of $5 million or $750,000 liquid assets per store

23. Franchising • ADVANTAGES • Franchisor can expand quickly • Recognized name, product & concept • Management training & assistance • Financial assistance • DISADVANTAGES • Loss of control to the franchisor • Expensive (average start-up $143,000) • Restricted operating freedom to the franchisee

24. Starting & Managing Your Own Business Entrepreneurship

25. Types of Entrepreneurs • Classis entrepreneurs – start own companies based on innovative ideas • Multipreneurs – series of companies • Intrapreneurs – applying an entrepreneurial spirit within an organization as an employee

26. How to Begin? • Idea • Type of Business Form/Ownership • Develop Business Plan • Financing • Strategy/Tactics • Implementation

27. Pleasant Company • Founder: Pleasant Rowland • Story – Founded 1986 after visit to Colonial Williamsburg & shopping for presents for her 8 & 10 year old nieces • Innovative idea: Targeted 7-12 year-old girls for dolls and offered black and Hispanic and Asian dolls and combined books & fashion • Known as “American Girl Dolls”

28. Pleasant Company • Investment - $1.2 million in 1986 • Dolls made in Germany, created books and found vendors in China to produce miniature accessories • Mailed 500,000 catalogs and between Sept. 1 and Dec. 31, 1986 sold $1.7 million worth of product • 2nd year – sales were $7.6 million • By 1990, sales were $77 million – direct mail catalogs and word-of-mouth • 1990-1995 – Sales of $300 million by$50 million each year • American Girl Place opened in 1998 – grossing $40 million/year • Restaurant, theater, museum, photo studio, retail outlet • 2002 – Sold to Mattel for $700 million