AMERICAN BUSINESS 3 MAJOR TYPES –SOLE PROPRIETORSHIP –PARTNERSHIP –CORPORATION.

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AMERICAN BUSINESS

• 3 MAJOR TYPES–SOLE PROPRIETORSHIP

–PARTNERSHIP

–CORPORATION

SOLE PROPRIETORSHIPS

• A business owned and operated by one person

• Advantages–Relatively easy to begin

–Claims all of the profits

–Your own boss

SOLE PROPRIETORSHIPS

• DISADVANTAGES–Unlimited liability –

responsible for all of the debts of the company

–Responsible for all aspects of the business

–Difficult to raise revenue

PARTNERSHIPS

• 2 or more individuals agree to own and operate a business together

• ADVANTAGES– They pool their resources and their

business skills

– Relatively easy to create

PARTNERSHIPS

–Share business responsibilities–Can have some sort of

specialization–Share risks

• DISADVANTAGES–Relatively difficult to raise

revenue–Must share profits

PARTNERSHIPS

–Partnership has unlimited liability

–Decision making can lead to conflict among partners

CORPORATIONS

• A legal creation that can

– Acquire resources

– Own assets

– Produce and sell products

– Incur debts (sell bonds)

– Sue and be sued

CORPORATIONS

• ***A CORPORATION IS SEPARATE FROM THE STOCKHOLDERS THAT OWN IT

CORPORATIONS

• ADVANTAGES–Effective at raising revenue

• Selling stocks

• Issuing bonds

STOCKS

• Part ownership in a corporation

• Stock owners vote for the corporate officers (those who run the corporation)

• Vote is in proportion to percentage of stocks owned

• Stock owners get a share of the corporate profits (dividends)

• If you purchase a corporate bond, you are lending money to the corporation

• The corporation promises to pay the value of that bond plus interest

• Stocks and bonds are also known as

SECURITIES

The Dow Jones Industrial Average

• The Dow

• A single measurement of 30 top U.S. companies

• Indication of how the stocks of these companies are doing

• ****Serves as a barometer of the health of U.S. stocks in general

The Dow Jones Industrial Average

• AT&T

• Coca-Cola

• Boeing

• Caterpillar Inc.

• Chevron

• Exxon

• GE

• Hewlett Packard

• Home Depot

• McDonald’s

• Microsoft

• Walmart

• Walt Disney

History of the Dow

• http://stockcharts.com/charts/historical/djia1900.html

CORPORATIONS

• LIMITED LIABILITY – Stockholders only risk what they have invested– The corporation can be sued but the

stockholders cannot

• Can mass produce product and specialize human resources

• Tend to have a longer life than partnerships and proprietorships

CORPORATIONS

• DISADVANTAGES–Some red tape and expense to

get a corporate charter

–Double taxation• Corporate profits are taxed

• Dividend income is taxed

CORPORATIONS

• Separation of ownership and management–Can lead to conflicting views

on the running of the corporation

Legal Forms of Business•Sole Proprietorship•Partnership•Corporation

Domestic Output by Business Type

Percentage of Firms Percentage of Sales

Sole Proprietorships

Partnerships

Corporations

Sole Proprietorships

Partnerships

Corporations

Source: U. S. Census Bureau

FORTUNE 500

• Annual listing of the top corporations in America in terms of sales

• What companies do you think were on the 2010 list?http://money.cnn.com/magazines/fortune/fortune500/2009/full_list/

America’s Top Corporations2010

• Walmart - $408 billion in sales; $14 billion in profits

• Exxon Mobil - $285 billion in sales; $19 billion in profits

• Chevron - $164 billion in sales; $10 billion in profits

• General Electric (GE) - $157 billion in sales; $11 billion in profits

• Rest of the top 10• 5 – Bank of America• 6 – Conoco Phillips• 7 – AT&T• 8 – Ford Motor• 9 – JP Morgan Chase & Co.• 10 – Hewlett-Packard

• Other notables• 13 - Verizon

Communications• 15 – General Motors• 18 – CVS Caremark• 23 – Kroger• 25 – Costco• 30 – Target• 36 – Microsoft• 45 – Best Buy• 50 – Pepsi Co

• 56 – Apple• 57 – Walt Disney• 72 – Coca-Cola• 87 – Tyson Foods• 100 – Amazon.com• 102 – Google• 108 – McDonald’s• 124 – Nike• 241 - Starbucks

America’s Top Corporations2009 (last year’s list)

• 1. Exxon Mobil - $443 Billion in sales; $45.2 billion in profits

• 2. Walmart - $406 Billion in sales; $13.4 Billion in profits

• 3. Chevron - $263 Billion in sales; $23.9 Billion in profits

• 4. Conoco Phillips - $231 Billion in sales; LOST $17 Billion

• Rest of the top 10• 5. General Electric

• 6. General Motors (GM) Lost $30.8 B

• 7. Ford Motor Lost $14.6 B

• 8. AT&T

• 9. Hewlett Packard

• 10. Valero Energy

• Other notables• 17. Verizon

• 19. CVS

• 22. Kroger

• 24. Costco

• 25. Home Depot

• 28. Target

•33. Dell

•35. Microsoft

•36. Walgreens

•52. Pepsi

•56. Best Buy

•60. Disney

REALLY BIG BUSINESS

• Sometimes corporations merge together with other corporations

• These mergers can create more efficient firms that produce goods at lower prices

• The mergers can also create monopolies!

TYPES OF CORPORATE MERGERS

• Horizontal Merger–2 or more firms competing in

the same market–Example – McDonald’s

purchases Wendy’s

• Vertical Merger–2 or more firms involved in the

production of the same product

–Example – McDonald’s buys the trucking company that delivers its meat and buns

• Conglomerates–When firms buy other firms that

make unrelated products

–More than 3 businesses merged

–No one business in the conglomeration makes a majority of the firm’s profits

• Which of these types of mergers (horizontal, vertical, conglomerate) do you think government regulators have their closest eye on? Why?

THE MULTINATIONAL

• Corporations that produce and sell their goods throughout the world

• Headquartered in one country with branches in many other countries

THE MULTINATIONAL

• They must follow the laws and pay taxes in whatever country they are operating in

• 30 years ago, only the U.S. and England had the largest multinationals

• Now, the largest multinationals are multinational!

• Toyota, Shell, BP

Clever, eh?

OTHER TYPES OF BUSINESS ORGANIZATIONS

• Franchise–An entrepreneur pays a fee to a

“parent company” for the right to sell that company’s product

–Usually associated with fast food restaurants but is more broad than that (H&R Block, 7-Eleven, Ace Hardware, Jiffy Lube)

FRANCHISE ADVANTAGES

• Name recognition

• Standardized quality

• Parent company trains and supports the franchise employees

• National advertising

• Financial assistance

• Buying from large parent company can mean lower prices

FRANCHISE DISADVANTAGES

• Must pay a franchise fee and share profits with the parent company

• Must strictly follow the parent company guidelines for running the business

• Non-Profit Organizations – an organization that exists for the purpose of benefiting society, NOT for making a profit

• Examples – YMCA, American Red Cross, Bill and Melinda Gates Foundation, The Better Business Bureau

• Almost all of them provide services instead of goods

• They are exempt from income taxes by government

LEVELS OF COMPETITION

• Some businesses compete in a market with large numbers of sellers

• Some businesses compete in a market with relatively few sellers

• Some businesses “compete” in a market with no competition

LEVELS OF COMPETITION

• Thus, the MARKET STRUCTURE for an American business depends on their unique competitive situation

• There are 4 basic levels of market competition – Pure Competition– Monopolistic Competition– Oligopoly– Pure Monopoly

PURE COMPETITION

• Sometimes called PERFECT COMPETITION

• CHARACTERISTICS– Relatively large number of independently

acting sellers in the market– All the sellers produce the same,

homogeneous product; Consumers make no difference between Product A, B, C, D, etc… (No differentiation)

PURE COMPETITION

• Sellers make no attempt to differentiate their product from their competitors

• Because there are so many sellers, no one business can increase or decrease their output to affect the market price

• In other words, businesses do not control the price of their product

PURE COMPETITION

• It is very easy to enter and to leave this type of market

• In other words, no significant legal, financial or technological obstacles exist

• Relatively rare market structure – agricultural goods (farmer’s market)

MONOPOLISTIC COMPETITION

• Characteristics– Relatively large numbers of sellers

– Sellers try to differentiate their product from others; usually through advertising

– Easy entry to and exit from this market

• The 1st and 3rd characteristics (many sellers, easy entry) represent the “competition” part of monopolistic competition

• The 2nd characteristic (differentiation) represents the “monopolistic” part of monopolistic competition

• Monopolistically competitive industries are more competitive than monopolistic

• How do businesses try to differentiate (other than price) their product from competitors?

• In other words, what is the NONPRICE COMPETITION that takes place among businesses?

• Product Quality – businesses try to convince consumers that there is a real difference in the quality of their product

• Services Offered – Pizza delivery? Same day furniture delivery? Polite workers?

• Location, Location, Location and accessibility –Open 24 hours, close to the interstate, MiniMarts

• Advertising and Packaging – companies try to create brand name loyalty; attractive packaging

OLIGOPOLY

• A market dominated by a few large producers (they control 75% or more of a market)

• Breakfast Cereals–Big Three

–Kelloggs, Post, General Mills

OLIGOPOLY

• Automobile Industry– Big Six– Ford, GM, Chrysler, Toyota, Honda, Nissan

• Tobacco• Motion Pictures• Passenger aircraft• Sellers try to differentiate their

products

OLIGOPOLY

• Oligopolies can form when there are significant barriers to entering a market

• Why is the automobile industry an oligopoly?

OLIGOPOLY

• Oligopolistic companies have greater control over the price of their product than monopolistic competition or pure competition companies

OLIGOPOLY

• However, these companies must take into account the reaction of their rivals

• 3 oligopolistic practices that are of concern to government regulators– Price Leadership– Collusion– Cartels

OLIGOPOLY

• Price Leadership – an influential company takes the lead in announcing price increases that lead the other companies to do the same.

– Sometimes the effect is a price war that hurts producers (but helps consumers)

OLIGOPOLY

• Collusion – an agreement among the companies to fix prices at a high level in order to maximize profits

• Collusion is illegal in the United States

OLIGOPOLY

• Cartels – a formal organization of producers that fix output and prices

• Illegal in the U.S.

• OPEC

Pure Monopoly

• Characteristics–Single Seller – the firm IS the

industry

–Total control over price and output (restrained by the law of demand)

–Entry to this market is not possible

Pure Monopoly

• Pure monopoly is relatively rare

• “Near” Monopolies exist when a single firm controls 75% or more of a market

• Intel

• Wham-O (frisbees)

• Cable TV companies like Comcast

• Microsoft operating systems

Types of Monopoly

• Government issued patents – gives a single firm exclusive rights (20 years) to sell a product

• Why?

• Incentive to invent and create

Types of Monopoly

• Geographic Monopoly – gas station in the middle-of-nowhere Texas

AMERICAN BUSINESS 3 MAJOR TYPES –SOLE PROPRIETORSHIP –PARTNERSHIP –CORPORATION.

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