Business Organizations, Competition and Market StructureUnit 2This unit explains how to start a business, the different ways businesses are organized and investing options.

So you want to own a business?

Entrepreneur- a person who takes a risk in search of profits.

Do you have what it takes?So you want to own a business?

Levi’s Corporation• The design is so right

it need never alter, a timeless classic of clothes. Adaptable, like any well-designed object you can wear them with almost anything. --The designer Margaret Howell gives her view on Levi Jeans.

Where to get business help

•Small Business Administration-Government help for business and loans.

•Small Business Incubator-management advice, lower rents, job creation

•Internet-search for competition, on-line business help.

Elements of a Business Operation

• Expenses-spend $ to make $inventory-what you sellReceipts-$ from customers

• Advertising-promote your business

• Recordkeeping-profit/loss statements, income statements, payroll, balance sheets

• Risk-no guarantee of success

• On the web

Forms of Business Organizations•An Economic institution uses the factors

of production to satisfy consumer wants and needs.

•Business organizations are a profit seeking enterprise that links scarce resources and consumer wants and needs.

Four kinds of Business Organizations

• Sole proprietorship• Partnership

▫ General▫ Limited▫ Joint venture

• Corporation• Franchise

Sole Proprietorship

• Normally run by 1 person.• You take all risks and

rewards• Obtain licenses, permits,

location and inventory• Proprietor is from Latin

meaning “property”• Most numerous form of

business in the USA.• There are more than 17

million which account for over 73% of all businesses in the USA.

Sole Proprietorship

Advantages Disadvantages

Profits and Losses

All go to owner Assume all risk

Liability-who is responsible?

Responsible for all debt.

Management Quick decision making

May not make good decisions

Taxes Usually lower Solely responsible for all taxes

Personal

Satisfaction

Own boss

Shape business

Demanding and time consuming, can be a huge burden.

Financial Growth Owner must finance growth or get loans.

Rely on own money, borrowing can be difficult.

Life of business Close business when owner decides

Owner dies/cannot work, business closes

Pass on or sell business?

Partnership•Formed by drawing up a legal document

called the partnership agreement. This document defines duties, pay, investment, profit sharing, etc.

•Partnerships are 7.1% of all businesses in the USA.

Assumed-name Statute

•A law requiring persons to make a public filing of their identities if their partnership operates under a name that does not reveal the owner’s identity.

Types of Partnerships•General-both partners are involved in the day to day operations.

•Limited-one partner may be a “silent partner”

•Joint venture-partnership formed for a short period of time then dissolved.

Partnership

• Avoid partnerships with friends and family.

• Partnerships are like a marriage, some work and some don’t.

Partnerships Advantages Disadvantages

Profits and losses Share losses Share profits

Liability Both partners liable for debt

Unlimited

Management Specialization of skills

Slow to make decisions

Taxes Generally lower

Personal satisfaction

Goal oriented Disagreement between partners

Financial growth More $ available

Creditors more willing to lend

Combine assets and debt

Life of business Reorganize if 1 partner leaves or dies.

Theft by a partner

Selling of partners share.

•Advertising and you

commerical songs

Coca Cola

•“A billion hours ago, human life appeared on earth. A billion Coca-Colas ago was yesterday morning.

--Roberto Goizueta, CEO 1981-97.

What is a Corporation?

•A business that can own property, pay taxes, make contracts, sue and be sued.

•Registering a corporation▫Articles of incorporation-a legal document

filed in the state where the corporation operates.

▫Corporate charter-granted by the state.▫Each corporation must have a unique

name.

I ♥ Bill

•Microsoft commericial

Corporations

19.9% of all businesses in the USA.

Generate 88% of all business revenue.

Corporations can issue stocks and bonds.

Stocks and bonds•Two kinds of stock:

▫Common and preferred▫Stock represents ownership in the

company.▫Dividends can be earned based on stock

ownership.•Bonds- - Bond owners loan money to the company,

and will be repaid when the bond matures.

Corporations Advantages Disadvantages

Profits/losses Stockholders are investors, and expect stock value to increase.

Profits divided among investors. Stock prices can be influenced by corporate profits/losses.

Liability Limited liability

Sue corporation

Cannot lose personal property

Corporations are subject to unsubstantiated lawsuits

Management Specialized

Large, complicated

Shareholder interests may be different than those of management.

Not all management may agree with company direction.

Taxes Subject to double taxation-corporate income tax, shareholder profits from stock are taxed.

Personal satisfaction

Shareholders own part of the company

Stockholders have little say in company.

Can become unmanageable

Financial Growth Sell stocks/bonds to raise capital.

Bonds must be repaid.

Life of business Unlimited Can outlive founder, steer away from founders vision. Can lose control of company if voted out by shareholders.

Corporate Structure

• The Board of Directors is responsible for supervision and controlling the corporation.

• The Board does not run the business on a day to day basis.

• Instead it hires officers for the company, President, VP, etc. who run the business and hire other employees.

Corporate structure

Stockholders elect theBoard of Directors select the CEO

•Corporations• Articles of

incorporation must be filed with the state.

• Each corporation must have a unique name within the state they are incorporated.

• LLC-Limited Liability Corporation-has characteristics of a partnership and corporation as the owners are limited in liability to their capital contributions

• S-corporations are small corporations

Corporations

• Publicly held businesses have hundreds or thousands of owners who exchange their ownership on public exchanges.

• Answering to shareholders.

IBM

• IBM under Thomas Watson Snr imposed a rigorous dress code on employees: blue suits, white shirts and ties.

• Beards were prohibited until 1945, when the bearded Herbert Grosch was taken on as IBM’s second scientist.

• How times have changed

Franchises

• A franchise is the right to use a business name and sell their product.

• A franchise fee is money paid to the parent company for those rights.

So you would like a franchise?• Advantages of

Franchises:

1. Established name, advertising

2. Established product

• Disadvantages:1. May not be able to

pick location2. Monthly fees due to

parent organization3. Costs and corporate

guidelines.

Chapter 3, Section 3

•Businesses grow for several reasons•Businesses grow through investment.•Cash flow allows reinvestment.•When cash is reinvested, businesses can

produce additional products.▫Reinvestment includes factories,

equipment, technology, R&D, increased locations.

Growth through Mergers1. Businesses cannot grow as fast as they would like by

using internally generated funds.2. Efficiency-reduce management, advertising, volume

purchasing3. Acquire new product lines-Disney purchases Marvel

Comics.4. Catch up or eliminate with rivals-Sirius and XM Radio5. Merge to lose corporate identity. Airtran and Valuejet.

Valuejet had a crash and 110 were killed.

Two kinds of mergers:Horizontal Mergers:Two or more who

produce the same product merge

ExampleContinental merges

with United Airlines

Two kinds of mergersVertical Merger:Companies merge

within the various stages of manufacturing.

• Mrs. Baird’s purchases a wheat farm

a plastics company a trucking firm

ConglomerateFour or more unrelated

businesses merge, each one is not responsible for a majority of sales.

Diversification is the main reason to form a conglomerate.

An example of a conglomerate:

Multinational CorporationA corporation located in

more than one nation.

Multinationals have faced criticism in recent years.

Strengths of multinationalsNew technology products and servicesGenerate jobs/incomeGenerate tax revenue for host countryLobby for tariffs and environmental

concernsMany developing as micro-multinationals,

such as software companies.

Weaknesses of multinationals

Influence politics in host country

Threat of market withdrawal

Exploit workers/low pay Exploit scarce resources Hold patents to keep

competitors from arising Create false needs in

consumers Invasive advertising

Agree?

Chapter 3, Section 3Other business organizationsNon-profit organization -promote

interest of others not financial interests. Organized as a 501(c)(3) by the IRS

Examples in Alvin:Manvel Maverick Booster Club

Other business organizations

Civic Organizations-serve a community

Examples in Alvin:Rotary ClubNoon Lion’s Club

Other business organizationsCo-operative

associations are a voluntary association of people formed to carry on an economic activity for members.

• Consumer co-op-Sam’s

• Service Co-op’s-Dow Employees Credit Union

• Producer Co-op-Florida Orange Growers

Labor and professional associations

•Labor unions-formed to represent it’s members in labor/job related matters. Example: International Garment Workers Union

•Professional Associations-formed for specialized occupations. Example: American Medical Association

•Business Associations-Chamber of Commerce

Government

The federal government is a really large corporation.

The government collects and spends money.

Government’s role in Economy• Direct role is a

supplier of goods and services to compete with private business.

• Post Office, TVA-generate power

• Indirect role is to make sure that the market economy operates smoothly and efficiently.

• Regulator of cable TV, minimum wage, social security

Government’s Current Role

• Each President influences the role of government in the economy.

• Bailout of AIG• Bank bailouts• Stimulus checks• Cash for clunkers• Expanding role of The Fed.• Social Security raises?• Healthcare reform?

Chapter 7, Section 1

Competition and Market Structure

Let’s go back to 1776

• Factories were small, there was a high level of competition

• Adam Smith called for “laissez-faire”, government should not interfere with business

By the 1800’s

• Competition was weakening. Mergers and acquisitions had combined many small firms into large firms.

• Trusts began, Rockefeller, Morgan, Vanderbilt and Carnegie built fortunes

Industries are competitive

•Industry refers to the “supply” side of the market, those who produce.

•Market structure refers to the nature or degree of competition among firms in the same industry.

•Economists classify markets according to the conditions that prevail in that market.

Microsoft

•“A fundamental new rule for business is that the internet changes everything”.-Bill Gates

Apple as competition?

Economists ask the following questions

1. How many buyers and sellers are there?2. How large are they?3. Does either have influence over price?4. How much competition exists between firms?5. What kind of product is involved?6. Is everyone trading the same product or are

they just similar?7. Is it easy or difficult for a new firm to enter into

the market?

Businesses need to ask themselves?

1. Can someone overseas do it cheaper?

2. Can a computer do it faster?3. Is what I am offering in demand

in the age of abundance?

Economists group industries into six different market structuresPure/perfect competitionMonopolistic CompetitionOligopolyMonopolyMonopsonyOligopsony

Pure or perfect competition• A market structure in which the following five

criteria are met:

1. All firms sell an identical product. 2. All firms are price-takers. 3. All firms have a relatively small market share. 4. Buyers know the nature of the product being sold and the prices charged by each firm. 5. The industry is characterized by freedom of entry and exit.

Pure or Perfect CompetitionPro’s:Ease of entering and

exiting business.Identical productsNo need to advertise

Con’s:Advertising and name

brands have no affect on consumer selections.

In most instances no substitute goods are available.

Pure or Perfect Competition

•Perfect competition is a theoretical market structure. It is primarily used as a benchmark against which other market structures are compared. The industry that best reflects perfect competition in real life is the agricultural industry.

Examples of perfect competition

Imperfect Competition

The competitive situation in any market where the conditions necessary for perfect competition are not satisfied. It is a market structure that does not meet the conditions of perfect competition.

The remaining market structures represent imperfect competition.

Monopolistic Competition

Monopolistic competition differs from perfect competition in that production does not take place at the lowest possible cost. Because of this, firms are left with excess production capacity.

Monopolistic CompetitionA type of competition within an industry where:

1.All firms produce similar yet not perfectly substitutable products.

2.All firms are able to enter the industry if the profits are attractive.

3.All firms are profit maximizers.

4. All firms have some market power, which means none are price takers.

Monopolistic Competition• Pro’sProducts sell within a

narrow price rangeEase of entry into

market.

• Con’sOnce supply of good

becomes stable, no great profits or losses.

Consumers are responsive to price changes, brand loyalty may not exist.

Techniques to attract customersProduct differentiation-real or imagined

differences between products.Non-price Competition-promotions,

coupons, rebates, something other than price.

Advertising-differentiate between products.

Advertising gone too far?Name brand-use of logos, labels and snob

appeal

Monopolistic Competition-ad

OligopolyA situation in which a particular market is

controlled by a small group of firms.

Sellers are so few that the actions of any one of them will materially affect price and have a measurable impact on competitors

An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. In an oligopoly, there are at least two firms controlling the market.

Oligopoly• Pro’s Products are either

differentiated or standardized.

Advertising is important to enhance their product to enhance new customers.

Customer loyalty exists in this market to some degree.

• Con’sNumber of firms is less important

than their ability to cause a change in output, sales and pricing industry wide.

Historically have been accused of collusion, price fixing, bait and switch.

Difficult to enter the market due to costs of entry—expensive to enter this market.

Oligopoly

• Examples within this industry include:

Coke anyone remix

Classic commercials• diet coke is the best

• Diet Coke part 2

• frogs vs. lizards

Monopoly

•Formerly known as ‘trusts” in the 1800’s.

•Americans tend to dislike monopolies and want to “outlaw” them.

Monopoly

A situation in which a single company or group owns all or nearly all of the market for a given type of product or service.

For a strict academic definition, a monopoly is a market containing a single firm.

Monopoly is the extreme case in capitalism.

Monopoly• Pro’sCharge whatever the

market will bear for the product.

No need to advertise.Some types can legally

exist in the USA.

• Con’sHigh prices and inferior

goods can result.

Many firms can start as a monopoly and as the market evolves they become monopolistic competition.

Four monopolies that can legally exist

Natural Monopoly

Single firm producing in an area. A local phone company, local bus service

Geographic Monopoly

Absence of sellers in an area due to location.

Only grocery store in a town.

Government Monopoly

Owned and operated by the government. Daily mail service, uranium processing.

Technological Monopoly

Granted by law, patent, copyright, trademark.

MS*Dos, coca-cola formula, copyright of a book.

Monopoly• BenefitsEconomies of scale,

lower production costs

Lower advertising costsLower equipment and

factory costs

• DangersSloppy and inefficient

due to no competition.Price makerReal or artificial

shortages can existControl market,

political power.

Monopsony

• A market similar to a monopoly except that a large buyer not seller controls a large proportion of the market and drives the prices down. Sometimes referred to as the buyer's monopoly.

• People have accused Ernest and Julio Gallo (the big wine makers) of being a monopsony. They had such power buying grapes from growers, that sellers had no choice but to agree to their terms.

• The federal government is a monopsony in the United States for machine guns or F-16s.

Oligopsony• This is a market in which

there are only a few large buyers for a product or service.

• This allows the buyers to exert a great deal of control over the sellers and can effectively drive down prices.

• A good example of an oligopsony would be the U.S. fast food industry, in which a small number of large buyers (i.e. McDonald's, Burger King, Wendy's) controls the U.S. meat market.

• Such control allows these fast food mega-chains to dictate the price they pay to farmers for meat and to influence animal welfare conditions and labor standards.

Chapter 7, Section 2Market Failures

• Why businesses can fail.

• A market is said to have failed when certain conditions are not met.

Inadequate Competition• Mergers have resulted in larger and fewer firms

controlling various industries. The results include:▫ Inefficient use of resources, resources not available.▫ Higher prices and reduced output, artificial shortages▫ Economic and political power-exploit workers in high

unemployment areas, tax breaks.▫ Both sides of the market. High demand for consumer

goods, low demand for items like skyscrapers.

Inadequate Information Resources must be allocated efficiently. Company information, sales, prices, CEO salary in stock options,

bonuses. Some easy to get, some difficult.Public disclosure requires businesses to reveal certain information like: profit/loss, overseas ownership, board of directors, CEO salary.

Steve Jobs of Apple is worth $ 5.7 billion. One year his bonus was a jet worth $50-80 million, nice!!!!!!!

Resource immobility

• Land, labor and capital do not move to markets where returns are highest. They tend to stay put, remain unused or sometimes remain unemployed.

Externalities

•Externalities are economic side effects that either benefit or harm persons.

•They are considered market failures because their costs and benefits are not reflected in the market price of activities that caused the side effect.

Externalities• PositiveA helpful side effect

Example: road construction creates jobs, workers spend money in area for food.

Flu shots are an individual and group positive externality.

• NegativeA harmful side effect

Example: inconvenience during road construction.

Public Goods

Public goods are consumed collectively by everyone. Individual wants are satisfied but this may fail to satisfy them on a collective basis.

Examples include: police, fire, 911 service and schools.

Role of Government

• Since the 1800’s the government has passed laws to restrict combinations in restraint of trade, protect consumers from bad business practices.

Excerpt from The Jungle• As they work in their respective wings of the

packinghouses, Jurgis and Elzbieta see the swindles first hand. For instance, whenever meat is so spoiled that it can't be used for cuts, it is canned or made into sausages. The workers are instructed to fill these spoiled and discolored sausages with chemicals that make the spoilage less apparent. Elzbieta has to trim the spoiled sausages, which have been treated with borax and glycerine, as well as trim meat that has fallen on the rat-infested floor. When the shovelers come by, they shovel the bread, rats and spoiled meat into the sausage vats. "This is no fairy story and no joke; the meat will be shoveled into carts and the man who did the shoveling will not trouble to lift out a rat even when he saw one." Chapter 14, pg. 162

Major pieces of government legislation

•1890-Sherman Anti-trust Act-It was the first Federal statute to limit cartels and monopolies, and today still forms the basis for most antitrust litigation by the United States federal government.

•1914-Clayton Anti-trust Act-eliminated price discrimination between different purchasers. A person may not be a director for two or more competing corporations

Major pieces of government legislation

•1914-Federal Trade Commission Act-Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.

•Publishes the industry guide-which defines the agencies view of the legality of an industries trade practices

Major pieces of government legislation

•Securities Act of 1933-It was the first major federal legislation to regulate the offer and sale of securities. Prior to that time, regulation of securities was chiefly governed by state laws.

•Securities Exchange Act of 1934-regulates the resale of securities through brokers or exchanges.

Major pieces of government legislation

• Robinson Patman Act-1936--Prohibits manufacturers and suppliers from providing price discounts and other forms of preferential treatment to some buyers and not to others, if the effect of such discrimination is to lessen competition or injure individual competitors. Volume discounts are allowed only to the extent that they reflect actual differences in the cost of manufacture or sale of the product

Major pieces of government legislation

•Occupational Safety and Health Administration (OSHA)-To assure safe and healthful working conditions for working men and women.

Consumer Products Safety Commission-1972• Consumer Products Safety Commission-It established the

agency, defines its basic authority, and provides that when the CPSC finds an unreasonable risk of injury associated with a consumer product it can develop a standard to reduce or eliminate the risk. The CPSA also provides the authority to ban a product if there is no feasible standard, and it gives CPSC authority to pursue recalls for products that present a substantial product hazard. (Generally excluded from CPSC's jurisdiction are food, drugs, cosmetics, medical devices, tobacco products, firearms and ammunition, motor vehicles, pesticides, aircraft, boats and fixed site amusement rides.)

Sarbanes-Oxley-2002 (SOX)

•The Sarbanes-Oxley Act of 2002 is mandatory. ALL organizations, large and small, MUST comply.

•The legislation came into force in 2002 and introduced major changes to the regulation of financial practice and corporate governance.

•This law was passed as a reaction to Enron and corporate fraud.

Ad substantiation program

•FTC demands that an advertiser substantiate any claims in their ads.

•Crest toothpaste—9 of 10 dentists recommend. Crest must be able to prove this statistic.

Class Action Lawsuit• One or more plaintiffs to file a lawsuit on behalf of a larger

group. All plaintiffs have a common interest in the lawsuit.Example: T-Moble Early Termination Fees

If you were charged a flat-rate early termination fee instead of a prorated one when canceling your T-Mobile contract between July 23, 1999 and February 19, 2009, you're eligible. However, you're also eligible if you happened to be under a T-Mobile contract with a flat-rate ETF during that period, whether you canceled the contract or not. The claim form is located here. Deadline: September 25, 2009.

Convention on the International Sale of Goods (CISG)•Treaty adopted by most major trading

nations that outline standard commercial rules for international contracts.