IB Business Management

By the end of this chapter, you should be able to:

 Distinguish between the private and public sectors.

 Compare and contrast the main features of the types of

for-profit commercial organizations (sole traders,
partnerships, limited companies), for-profit social
enterprises (cooperatives, microfinance providers,
public-private partnerships) and non-profit social
enterprises (non-governmental organizations,
charities).
Public sector
 Covers activities that are within the control or
direction of governments.
 Organizations do not have shareholders.

 They are solely accountable to the government for

their performance.
 In many countries, they cover activities such as the
state health, education, police, and prison services.
Private sector
 Organizations owned and managed by individuals.
There is no government participation in them.
 Generally operate with the main objective of
making profit.
 The capital is arranged by its owners, external
investors or by financial institutions.
Profit = Total revenues – Total costs
Revenues: the income received by the business
in a specific period of time.

Costs: expenses incurred by the business in the

same period of time.
 Sole traders or sole proprietors
 Partnerships
 Limited companies
 Set up by an individual and where that person is the
owner. The “person is the business” and the two are the
same. Ownership and control of the business is with the
sole proprietor.
 The assets and liabilities of the two are not separated,
leading to unlimited liability.
 Include some small businesses like bookstores,
libraries, cafeterias, flower shops and restaurants.
 Also include independent professionals such as
plumbers, carpenters, musicians, accountants, lawyers
and consultants.
‘The key to success is to exploit the
advantages of being a sole trader and yet to
take seriously the disadvantages.’
Business Bureau-uk
 Easy to set up the  Unlimited liability
business  Limited finance
 Complete control  Pressure of
 Keep all the profit responsibility
 Personal service  Lack of expertise
 Lack of continuity
 Privacy

Advantages Disadvantages
 Organizations where two or more individuals
choose to work together as co-workers.
 The risks are shared.
 All the owners have unlimited liability. The partners
are liable for each other’s debts.
 They can be specialized in certain tasks.
 Usually there is no distinction between the owners
and the managers of the business.
 Look more substantial to potential customers than
sole traders.
 Extra financial  Unlimited liability
capital  Shared profit
 Additional skills  Disagreements
 Shared workload  Shortage of capital

Advantages Disadvantages
 Have shareholders and directors, and they are
not always the same people.
 Separation in ownership and control.
 The shareholders are limited in their liability
to the amount of their investment.
 Have to file annual financial information to
public registrars.
 Presents a more solid and trusting image.
 The smaller of the two types of limited company.
 Suitable for a new business start-up or for an
existing sole trader or partnership seeking the
benefits of limited liability.
 The shares they issue cannot be advertised for
sale or traded on the stock market.
 Any transfer of shares must be done privately
and with the agreement of all shareholders.
 Many Ltds are family businesses, with the family
members being directors and shareholders.
 Limited liability  Legal requirements
 Sources of finance  Loss of privacy
 Continuity  Limited growth

Advantages Disadvantages
 Much larger type of company.
 Have their shares traded on the stock market.
 When a company decides to become a Plc it must
be floated on the stock exchange.
 This involves publishing a prospectus to
advertise the company to potential shareholders
and can be an expensive process.
 Once a Plc has a listing on the stock market, any
member of the general public can buy and sell
shares in the company.
 Sources of finance  Costs
 Expansion  Loss of control
 Credibility  Business size

Advantages Disadvantages
 Public limited companies are in the private sector
of the industry.
 Public organizations are not.
 When establishing a business, which type of
organization would best suit these two scenarios?
Expand your answers.

1. Two brothers were employed in a local building company that had

been struggling with a downturn in demand for new houses and had
decided to make staff redundant to cut costs, including the brothers.
They each receive compensation of $50,000 for loss of job. They
decide to set up in business together as a specialist building firm
converting old houses into small flats around the site for the 2012
London Olympics. They will employ three staff to start with and will
need to borrow $200,000 from a bank. They have very different private
wealth but are close brothers and have always wanted to work
together.
 When establishing a business, which type of
organization would best suit these two scenarios?
Expand your answers.

2. A scientist at a Swedish university has recently discovered a drug

that will stop some men losing their hair. He has patented the drug and
predicts it would have worldwide sales of up to $300 million. He is
considering selling the manufacturing rights to a large Swedish drug
company and taking annual royalties from them. An alternative is that
a private company has found a team of managers and is prepared to
set up a new technology company with an investment of around $25
million to get the business up and running. The investors believe that if
the company is successful, then it can go on to the stock market in five
years’ time or be sold at a greater value to a competitor.
 Form of business that has a social purpose.
 Aims to improve human, social, or environmental
well-being.
 The social aim takes priorities over any other aim
such as growth, maximizing sales, or making
profits.
 Can take the form of a sole-trader, partnership, or
limited company.
 Compete with other businesses in the same market
of industry.
 A favourable legal status is achieved.
 There is a strong communal identity.
 There are benefits to the stakeholder community.
 Decision making is complex and time consuming.
 There may be insufficient capital for growth.
 There may be insufficient capital for financial strength.
 Cooperatives
 Micro-financiers
 Public-private partnerships (PPP)
 Form of partnership whereby the business is owned and
run by all the “members”.
 Each member participates actively in the running of the
business.
 Group of people acting together to meet the common
needs and aspirations of its members, sharing
ownership and making decisions democratically.
 Create value for customers and
secure employment for
workers.
 A financial cooperative: a financial institution that
lends money at lower rates of interest or provides
non-lending services at lower cost than banks or
other financial institutions.
 A housing cooperative: is run to provide housing
for its members as opposed to providing rent for
private landlords.
 A workers’ cooperative: is owned and operated by
the workers themselves, which does not pay
significant higher wages or salary to managers, and
has providing employment to workers as a priority.
 A producer cooperative: is where groups of
producers collaborate in certain stages of
production. Often the aim is to maximize the
utilization of an expensive piece of equipment that
individual members, by themselves, could not
afford.
 A consumer cooperative: provides a service to its
consumers who are also part owners of the
business.
 They provide small amounts of finance to those
who traditionally would not have access to it – for
example, low-income individuals and families in
rural communities.
 The money is lent with specified conditions of use
and scheduled repayments.
 They expect to receive repayment of principal and
to make a profit on the loans (interest).
 The loan amounts are small and the interest rates
are low.
 Business created between a private sector business
and the public sector.
 Involves the construction of a facility with a social
aim (healthcare or education).
 Could also be a specific project such as the
development of a site for alternative energy or a
nature reserve.
 The business is expected to make a return on the
money invested into it, but the priority is not
profits.
 The public sector usually provides the finance and
the private business the expertise.
 Often, the government offers tax incentives to the
private sector to take part in the partnership.
 Profit is important but not the priority.
 There is collaboration between the business and the
local government.
 There is greater democracy in the business than in
other organizations.
 The business operates the same functions as any other
business.
 Created for a social purpose.
 Usually governed by a voluntary board.
 Are run as normal businesses but they generate surpluses
rather than profits.
 The surplus cannot be distributed to the owners. It is used to
advance the social purpose for which the business was set
up.
 The surplus is any extra revenue generated after subtracting
total costs.

Surplus = Total revenues – Total costs

 Non-profit organizations can take many possible forms,
and the differences between them can be subtle and
confusing.
 NPO’s include churches, hospitals, schools, social clubs,
foundations, charities and pressure groups.
 Charities include well-known international
organizations and also local fundraising groups.
 Pressure groups include political parties, trade
unionists, commercial lobby groups; and local protest
action groups.
 Profits are not generated.
 Donations are important.
 There is unclear ownership and control.
 They help people or causes in need.
 They can foster a philanthropic spirit in the community.
 They can foster informed discussions in the community
about allocation of resources.
 They can innovate.
 The lack of control but intense lobbying can lead to
socially undesirable goods.
 Sometimes the employees have a passion and zeal that
ill serve the organization or its cause.
 Funding can be irregular.
 Involved in economic development and humanitarian
issues.
 Plan and implement specific projects in developing
countries.
 Influence governments policies on areas such as poverty
and human rights.
 Work in the field where a
disaster happens and
often in places that
official government aid
does not reach.
 Their aim is to provide as much relief as possible for those in
need.
 Their focus is on philanthropy and a desire to help those who
cannot help themselves.
 Focus their objectives on money raising, education, and
lobbying.
 They also seek to educate or inform the public about their
area of expertise or concern.
 Because of their charitable status and philanthropy, they are
exempt from paying taxes.
 Can businesses be separated from a profit motive?
 Can any business be separated from a social
purpose?
 The culture of a business organization is partly dependent on
its legal form of ownership.
 The culture of a small sole-trader business is likely to be
different from that of a large public limited company, owned
by thousands – perhaps millions of shareholders.
 The cultural difference could be even greater between ‘for-
profit’ organizations and ‘non-profit’ social enterprises. The
values, attitudes and beliefs of senior management and other
employees of a social enterprise will not be the same as those
managers and employees in for-profit organizations.
 Stimpson, P., Smith, A. (2015). Business Management for the
IB Diploma. Cambridge, United Kingdom: Cambridge
University Press
 Lominé, L., Muchena, M., and Pierce, R. (2014). Business
Management. Oxford, United Kingdom: Oxford University
Press
 Clark, P. and Golden, P. (2009). Business and management
Course Companion. Oxford, United Kingdom: Oxford
University Press
 Gutteridge, L. (2009). Business and Management for the IB
Diploma. Oxford, United Kingdom: Oxford University Press
 Thompson, R. and Machin, D. (2003). AS Business Studies.
London, United Kingdom: Harper Collins Publishers