Understanding Business Structures and Economic Principles
The Role of Companies in a Resource-Limited Society
Society faces limited resources, making it crucial to maximize the comfort and welfare derived from them. This is achieved through the consumption of goods and services, which are produced using these scarce resources. Companies play a vital role in this process by making production decisions and selling goods and services in markets.
The Circular Flow of Income
The circular flow of income illustrates the exchange between companies and consumers. Consumers provide resources (like labor) to companies and receive goods and services in return. This exchange generates income for both parties, fostering economic activity, job creation, and business research.
Companies: The Engine of Production
Companies serve as the primary production units within an economy. They are organizations with defined objectives, utilizing managerial and logistical processes to transform resources into goods and services. Companies operate with human capital (employees, managers, owners) and resources (tangible and intangible).
Classifying Companies
Companies can be categorized by size:
- Small: Fewer than 50 employees
- Medium: 50 to 250 employees
- Large: Over 250 employees
They are also classified into sectors:
- Primary: Agriculture
- Secondary: Industry
- Tertiary: Services
Company Activities
Companies engage in two main types of activities:
- Primary Activities: These directly contribute to the creation and delivery of goods and services.
- Internal Logistics (handling inputs)
- Operations (transforming inputs)
- External Logistics (handling outputs)
- Marketing (transport, advertising)
- Service (maintenance)
- Support Activities: These support the primary activities.
- Supply (purchasing inputs)
- Technology Development (product or process improvement)
- Human Resource Management
- Infrastructure (general administration)
These activities contribute to the total cost of a company. Profit is generated by subtracting total costs from sales revenue.
Business Development Through the Ages
The evolution of business has been significantly shaped by industrial revolutions:
- 1st Industrial Revolution: Marked by metal production and the steam engine.
- 2nd Industrial Revolution: Introduced electricity, the telephone, and the combustion engine.
- 3rd Industrial Revolution: Ushered in the Information Age.
These revolutions led to a shift from manual to automated processes, increased flexibility, the emergence of customized consumer tastes, and the opening of new markets.
Business Expansion and Strategies
Geographic expansion has led to business integration (adding phases) and diversification (related and unrelated). Alternatives to vertical integration include:
- Outsourcing: Leveraging specialized expertise.
- Franchising: Enabling small entrepreneurs to benefit from economies of scale.
- Cooperation: Forming strategic alliances between companies.
The Ansoff Matrix
The Ansoff Matrix provides a framework for business growth strategies:
- Market Penetration: Increase sales of existing products in existing markets.
- Product Development: Introduce new products to existing markets.
- Market Development: Introduce existing products to new markets.
- Diversification: Introduce new products to new markets.
The Entrepreneur and Business Ownership
Defining the Entrepreneur
Different perspectives on entrepreneurship:
- Knight: An individual who assumes risk and expects uncertain and residual income.
- Schumpeter: An innovator who gains a temporary monopoly through innovation.
- Alchian and Demsetz: Individuals within a group who work independently and are motivated by residual income.
In large companies, senior managers often hold significant decision-making power and may share ownership with shareholders and institutional investors.
Types of Business Ownership
Businesses are typically classified as:
- Partnerships: Two or more individuals share ownership and responsibility.
- Sole Proprietorships: A single individual owns and operates the business.
Businesses can also be categorized as private or public, depending on their ownership structure and access to public funding.
Forms of Partnerships
- General Partnership: All partners contribute capital and labor, share unlimited liability, and their names are included in the company name.
- Limited Partnership: Includes both general partners (unlimited liability) and limited partners (liability limited to their investment). The company name reflects the general partners and the designation”limited partnership”
Corporations
In a corporation, the liability of partners (shareholders) is limited to their capital contribution (€60,101 in this context). Shareholders have economic and political rights, including:
- Profit distribution
- Preferential purchase rights
- Attendance and voting at shareholder meetings
- Access to company information
Shares can be classified as:
- Registered
- Nominative
- Bearer
- Preferred (with special rights)
- Ordinary
Corporate Governance
- General Meeting of Shareholders: Shareholders convene to make key decisions, such as electing managers, approving mergers or divisions, and reviewing financial statements.
- Board of Directors: Determines company objectives, represents the company, and is accountable for its performance. Board members can be internal (company management) or external.
Corporations offer advantages such as specialized management, access to financial resources, and legal separation from partners. However, they can also lead to potential conflicts of interest between managers and shareholders.
Limited Liability Company (LLC)
LLCs provide legal protection similar to corporations but are designed for smaller to medium-sized businesses. They require a minimum capital contribution (€3,005 in this context) and offer limited liability to their owners.
Cooperatives
Cooperatives are formed by individuals with a shared need, such as employees, partners, or customers. Ownership is collective, and capital is variable, based on member contributions. Cooperatives prioritize member needs and democratic decision-making.