Other Types of Business Organization

Posted by Abd. Ghafar ARM

Some types of business organizations are a result of co-operation between businesses, either as a joint venture or as one business operating in the name of and providing the products of another. These spread the risks involved between one or more businesses. In a co-operative, all members share the risks and the benefits of the business.

Franchises

A franchise is an agreement allowing one business to trade under the name of and sell the products or services of another. The business granting the franchise is called the franchiser; the business taking put the franchise is called the franchisee.

Taking out a franchise is a way of avoiding many of the risks involved with starting up a business. For the business granting the franchise, it is a way of developing the business and expanding without committing the resources of the business. Success of both franchiser and franchisee depends on close co-operation between both businesses.

The business is owned and run by the franchisee. However, the franchiser usually retains some control over the franchisee in matters of product design and brand name, advertising and service. Some franchisers, such as McDonald’s, control almost the whole of the franchise operation, supplying equipment, ingredients, staff uniforms, training, and setting menus, prices, portion sizes, cooking times and so on.

Where does the money come from?

Sole traders, partnerships or limited companies may own and run franchise, and the sources of finance to purchase the franchise are largely the same as for these types of business. The initial cost of a franchise varies according to the product, type of premises and other equipment required, and the company selling the franchise. Sometimes the franchisers may help with finance for the franchises.

Besides the original purchase price of the franchise, the franchisee has to pay an annual fee, usually based on percentage of sales. This must be paid even if the franchisee has made a loss. In this case the franchisee must apply to his or her bank for a loan or overdraft.

What happens if things go wrong?

The success of a franchise is the responsibility of the franchisee. If the franchisee is a sole trader or partnership they will have unlimited liability (see unit 6) which means they could lose everything if the business goes wrong and they are left with large debts.

However, the success and reputation of the franchiser depends on its franchisees succeeding. It is therefore in the interests of the franchiser to help the franchisee as much as possible.

What are the main advantages of a franchise?

By operating under the name and logo of a well-known company, a franchise business has a much greater chance of success. Apart from providing a proven product, the franchiser may well provide national and local advertising and training in business and other important areas.

Although they are small businesses, franchises operate as though they were part of a large business. This means that they are often able to benefit from bulk purchasing arrangements. Banks, too, are often prepared to make loans to franchisees on the basis that they carry less risk.

There are advantages, too, for the franchiser. By selling franchises, a business is abler to expand without committing its own resources. The risk is spread between businesses, and both benefit from the arrangement in that their success is in part dependent on the other. In addition, by franchising a part of its operation, a business is able to concentrate on its core activity.

What are the main disadvantages of a franchise?

There are also some disadvantages for both franchiser and franchisee. The franchiser is dependent on the franchisee for the success of the business. The franchisee, on the other hand, has less control of their own business than they would if they remained an independent sole trader or partnership. They are tied to the franchiser and their success depends on the success of the franchiser’s product. Franchisers have little control over areas such as product development. The franchisee also has to pay a continuing annual fee, regardless of any loss the business may make.

Co-operatives

Co-operatives are business enterprises that are owned jointly by members, who may be private individuals or other business organizations. They exist for the mutual benefit of members, who share equally in the decision-making and management of the co-operative. Finance is raised by the members, who generally receive a share in the profits of the co-operative.

There are four main types of co-operative:

• Retail co-operatives, which buy goods in bulk at an advantageous price and re-sell them to members as cheaply as possible;
• Trading co-operatives, which are formed to distribute and sell  the products or services of their members (members are usually small businesses, which join together as a co-operatives in order to gain the benefits normally associated with larger businesses – see unit 31) where economies of scale are discussed);
• Worker co-operatives, which are businesses owned and run by their employees;
• Housing co-operatives, which develop, maintain and manage low-cost housing on behalf of their members.

In some countries, where there are a large number of small businesses in an industry, such as farming and agriculture, the formation of co-operatives is encouraged. In India, for example, the government encourages growers in some agricultural industries such as sugar, jute and cotton, to form co-operatives to ensure the sharing of techniques and technology so as to improve efficiency and productivity in farming. However, they are expensive, and often quite beyond the reach of a small farmer. Several small farmers forming a co-operative, however, may well be able to afford one between them. Each farmer in the co-operative can then share use of the combine harvester.

Joint ventures

Increasingly, large projects are being undertaken as joint ventures. Joint ventures may be between two or more businesses in the private sector, or in the private sector and the public sector. For example, new hospital or railway may build as a joint venture between the government and private enterprise. Sometimes a joint venture, such as the development of a new aeroplane, may involve businesses in more than one country. In this way, each business only has to find part of the cost of the project, and the risk is spread between all the businesses in the joint venture.

Public sector organizations

Public sector organizations are owned and run by local or national government. They are mainly large organizations that are either expensive to run and need a considerable amount of capital investment, or are essential services considered too important to be left to private enterprise. In recent years there has been considerable debate over whether the government should be involved with running businesses or whether this is best left in the hands of private individuals.

What types of organization does the government own?

The main types of organizations that the government owns are: centralized organizations that provide essential services, such as security, health and education; nationalized industries, such as steel or coal; and public corporations such as the Post Office.

Many countries are now pursuing policies of privatization (returning nationalized industries to private ownership). Privatized companies are responsible to shareholders, just like any other public limited company. In Brazil, for example, the government has been pursuing a policy of privatizing state-owned companies since the early 1990s. formerly state-owned companies that have now been privatized include the Companhia Vale do Rio Doce (a mining company), the Companhia Siderurgica Nacional (the national steel mill), Rede Ferroviaria Federal SA (the national railway line), and Mafersa ( a manufacturer of railroad  equipment).

Summary

·         Running a franchise operation removes some of the risk involved in a small business.

·         A franchise operates under the name of another company, using their business idea and selling their products or services.

·         Sole traders, partnerships or limited companies may own and run franchises.

·         Co-operatives are owned and run by members for their mutual benefits.

·       Joint ventures can enable businesses to pool resources and spread the risk involved in an enterprise.

·        Organizations owned by the government on behalf of the general public are in the public sector.

·        The government owns different kinds of organizations that are considered to provide essential services that would not be adequately provided if left to private sector businesses.

·       There is considerable debate over whether government should be involved with running businesses.

Glossary

Co-operative: a business organizations formed by members for their mutual benefits.

Joint ventures: an enterprise undertaken by two or more business organizations which pool resources.

Franchise: an agreement allowing one business to trade under the name of and sell the products or services of another.

Franchiser: a business granting a franchise.

Franchisee: a business taking out a franchise.

Resource: Chris J. Nuttall, IGCSE Business Studies, Cambridge University 2002