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1 Chapter 2 © Cambridge University Press 2010

Business structure22Activity 2.1 (page 21): Dulip’s business is a success

Would you advise Dulip to convert his business into a partnership? Explain all of the potential advantages and disadvantages before giving your recommendation. [15]

Advantages Disadvantages

Forming a partnership would increase • the fi nance available for expansion and enable the business more easily to fund the furniture-making factory.Th ere would be less reliance on debt fi nance • to fund expansion. Borrowing money from fi nancial institutions increases the costs of the business, as interest must be paid on all borrowing.Dulip is unsure whether he would be • able to undertake all of the management responsibilities for the expanded business. Th e new partner(s) may be able to fulfi l these responsibilities and may also bring skills to the business that Dulip lacks. A partnership is easy to set up, requiring no • legal formalities to be completed. However, Dulip would be advised to draw up a Deed of Partnership if he proceeds.

Dulip will continue to have • unlimited liability and, moreover, will be responsible for the decisions that his new partner(s) make(s). All partners are bound by the decisions of any one of them. If he were to form a company, then he would benefi t from limited liability.He will have to share profi ts with • his new partner(s).He wishes to leave the business • to his sons. However, there is no continuity with a partnership as it is dissolved on the death of any one of the partners.

If Dulip is determined to expand his business, then he has three options: remain a sole trader and seek fi nancial support from the bank; form a partnership; or form a limited company.

Activity 2.2 (page 24): Footie Ltd to stay private after ruling out fl oat

1 Explain two diff erences between a private limited company and a public limited company. [4]

Answers may refer to:Th ere is greater disclosure of fi nancial information with a• public limited company (plc). A limited company must send its accounts to Companies House, whereas a plc must also publish its accounts.A plc is listed on the stock exchange and, therefore, it is easy to buy and sell • shares. In contrast, it is more diffi cult to buy and sell shares in a limited company.A plc can raise capital more easily as it is able to issue a prospectus and off er shares • to the public. In contrast, a limited company cannot sell shares to the general public.


2 Is Footie Ltd in the private or public sector? Explain your answer. [3]

Th e text refers to Footie Ltd’s planned ballot of the owning family; therefore, it is in the private sector as it is owned by shareholders. Businesses in the public sector are owned and controlled by the state.

3 Which industrial sector(s) does Footie Ltd operate in? Explain your answer. [5]

Footie Ltd operates in both the secondary and the tertiary sector. • Th e business is in the secondary sector as it manufactures shoes in its own • factories. Its involvement in the secondary sector has declined in recent years; it is implied in the case material that Footie Ltd is outsourcing the manufacture of shoes to fi rms in Asia.Footie Ltd is also in the tertiary sector as it is a retailer and wholesaler, owning • or franchising some 650 shops.

4 Examine possible reasons for the directors deciding to keep Footie Ltd a private limited company. [6]

Reason Analysis

To maintain current shareholder control of the business

Footie Ltd is a long-established family business. It is likely • that the directors are shareholders and have decided that along with the other shareholders they wished to retain control of the future direction of the business. In a plc there is a greater divorce between ownership and control.If Footie Ltd became a plc, then the threat of takeover • would be greater than it currently is. Existing shareholders had already rejected a takeover when the business was in decline; now that the business has recovered, and profi ts are rising, they may believe that, fi nancially, they are better off maintaining the status quo.

Need to raise fi nance As the company has ‘no need of further capital to fund • further expansion’, there would be little incentive to pursue a public fl otation with its attendant costs. A public fl otation is usually motivated by a need to raise capital.

5 Analyse the main benefi ts to the business and to existing shareholders if the company did ‘go public’. [6]

Benefi t to the business Benefi t to existing shareholders

It would raise more capital. Th is could • be used to expand the fi rm more rapidly and consolidate its position as the largest conventional shoe brand in the world.Th ere would be no need to use debt • fi nance for expansion. Borrowing increases gearing and means that the business has more debt to service (pay interest on). Th is increases the risk to the business if there is an economic downturn as the interest will still have to be paid.

It will be easier to sell shares • that are held and realise a capital gain. Th is would enable shareholders to release their wealth into a more liquid form.If shareholders held on to their • shares, then they could benefi t from a rapidly increasing share value if Footie plc used the capital eff ectively.


6 Explain what appear to be the main reasons for the recent growth in profi ts at Footie Ltd. [6]

Four reasons may be identifi ed from the text:Reduced reliance on own manufacture − Footie Ltd has moved production of • its shoes from its European factories to factories in lower-cost countries. Lower costs of production will have enabled Footie Ltd either to become more price competitive, thus increasing sales, or to increase profi t margins.Investment in brand − this may have enhanced their brand image, which could • enable them to increase profi t margins on sales. It could also develop greater brand loyalty amongst customers leading to greater repeat purchase of products and a willingness to pay relatively higher prices.Investment in shops − this may have improved the shop environment, gaining • Footie Ltd a competitive edge and increasing sales due to more satisfi ed consumers.Change in focus toward being a retailer fi rst and foremost rather than a • manufacturer and a retailer − it is possible that Footie Ltd has focused on its core strength as a retailer, thus enabling the business to grow and become more profi table. Footie Ltd is now ‘expanding rapidly in nearly all markets’.

Activity 2.3 (page 25): Shah’s Garage

1 Assume that Salman’s garage is located in the area where you live. He can only aff ord to choose one of the possible ways of expanding. Which would you suggest and why? [6]

Answering this question in the context of where you live requires you to evaluate some of the local factors that would aff ect the decision, such as:

extent of competition within the taxi market• degree of regulation of bus and taxi businesses• wealth of the area that would have an eff ect on the demand for taxi and bus • services.

2 For the option you have suggested in 1, make and justify an assumption about how much capital you think the business will need. [4]

Assumptions will relate to:cost of purchasing a new taxi or purchasing a second-hand vehicle• possibility of buying a bus from one of the current bus companies intending to • leave the marketsize of the extension and stock required to start trading as a shop.•

3 Advise Salman on ways in which capital might be obtained, making clear the options open to him if he changed the form of business organisation. [6]

In considering fi nance questions, it is generally important to match the duration of the fi nance with the type of asset being purchased. As all three options involve acquisition of fi xed assets, it may be argued that fi nance should be medium to long term rather than short-term fi nance. In particular an extension, as an asset generating income over many years, could even be fi nanced by a mortgage.


Appropriate options will include:

Source of fi nance Comments

Loan Th e term of the loan should refl ect the purchase. As a • taxi/bus would provide income over a number of years, a loan term of three to fi ve years would be appropriate. Interest rates will be important in determining the desirability of increasing the business’s borrowing.

Mortgage Th is would be suitable for property as a way of • spreading the cost. Useful if the shop requires signifi cant investment.

Retained profi t Using profi t does not add to the debt of the business • and is a cheap source of fi nance. However, if there is ‘little profi t in petrol retailing’, Salman may not be able to fi nance any of the options in this way. If profi t is reinvested, it leaves Salman less profi t for • himself and family.

Hire purchase Th is is similar to a loan but ownership of the asset does • not pass to Salman until all repayments are made.

Convert to a limited company

Salman could convert his business, at little cost, to • a private limited company. Th rough issuing shares, it would be possible to raise fi nance. However, it is possible that family and friends have the money and may desire to invest in the business.Salman would also lose some control over his business • if he off ers shares to other investors. As he wants to leave the business to his children, he is unlikely to want to bring in outside investment.

When answering questions on fi nance, it may often be appropriate to observe that a number of different sources should be used in combination.To

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4 Which form of business organisation would you suggest for Salman’s business, and why? [9]

Consider the benefi ts of diff erent forms of organisation with reference to information provided in the case. Some key issues are suggested below:

Sole trader Salman retains complete control of the garage.• Unlimited liability is an issue. Expansion may expose • Salman to greater risk due to increased level of fi nance required within the business.

Partnership with sons and daughter

Th is is appropriate in achieving the goal to involve the • children in the business.A Deed of Partnership should be drawn up.• It is a source of fi nance if the children have savings to • invest. However, this could expose his children to the risk of unlimited liability.


Private limited company

It is not expensive to form a limited company. • Incorporation provides the major benefi t of limited • liability. If Salman has savings to invest, then he can remain in complete control by being the only shareholder, or he could off er shares to his children. Th is would be considered a more suitable form if the • business is to continue to expand.

Salman’s decision will be infl uenced by his attitude to risk, desire to retain control and the amount of fi nance needed to expand the business.

Activity 2.4 (page 28): Harry goes it alone

1 Explain three potential benefi ts to Harry of opening a franchised Pizza Delight restaurant. [6]

Pizza Delight is an established brand with 100 restaurants in other countries. • Th is could save Harry from having to spend heavily on marketing as the brand is already known. Th e case suggests that Pizza Delight will be providing national advertising of their business.Harry will not have to worry about designing a look for his business as Pizza • Delight will fi t out the restaurant in a standardised and tested way.Harry has no business experience, so the advice and help from Pizza Delight • will be useful and help prevent mistakes being made.

2 Explain three potential drawbacks to Harry of agreeing to the terms of the franchise contract. [6]

He has to pay a percentage of the total revenue each year. Th us if he has a poor • year’s trading, when profi t is low or non-existent, he will still have to make payments to Pizza Delight.Th e initial franchise fee is signifi cant and represents only part of the total • investment needed as Harry will have to fi nd and pay for his own property.Th e franchise contract restricts Harry’s decision making within the business. • Th us, Harry will not fully achieve his desire to be free from taking orders from others and is restricted in using his talents to prepare food.

3 If he decided to open his own restaurant, but under his own name, why might the risks of failure be greater than for a Pizza Delight franchise? [4]

He does not have an established identity in the market. Th erefore, it will take more time and money to build a strong reputation from scratch. Th ere may, therefore, be a greater risk of failing to build sales whilst also facing higher costs. Th e franchiser is providing a business model that is already working in other restaurants; food and decor are already tried and tested.

4 Using all of the evidence, would you advise Harry to take out a franchise with Pizza Delight? Justify your answer. [9]

Th e arguments already presented in questions 1–3 are all relevant.


You will need to identify critical argument(s) through discussing a range of issues suggested by the case.

In favour of a franchise Against a franchise

Th e franchise will be • supported by national advertising.It has an established brand • name in the market.It partially meets Harry’s • objective to be in control of his work, but reduces the burden and risk of opening an entirely new business. Th e text refers to Harry’s lack of business experience as being his main problem.

Pizza Delight is well established in other • countries. If it is relatively unknown in Harry’s country, then the benefi t of being a franchisee is signifi cantly reduced.Th ere is the initial high cost of $100,000 and • the requirement to pay a percentage of profi ts each year.Th ere are restrictions on the design of the • restaurant and the sourcing of supplies, which limit the control that Harry would have.Franchiser is asking for a lot and Harry will • need to consider if it off ers value for money.Harry would still have to fi nd premises and • recruit and motivate staff .

Evaluation may consider: If Harry is concerned about his lack of business expertise, then, clearly, the

franchise off ers a signifi cant advantage. However, taking the franchise will severely restrict how the business is run and Harry will not even control what is sold. His experience as the second chef at an upmarket hotel and his desire to prepare food for his own customers suggest that Harry might be dissatisfi ed with having to prepare pizzas to Pizza Delight’s recipe. Th us Harry should set up his own restaurant rather than take out a franchise.

Activity 2.5 (page 29): Ford teams up with Chinese auto maker

1 What seem to be the main reasons for the joint venture between Ford and Chang’an? [4]

Key reasons are:

Ford’s desire to gain a foothold in the Chinese car market is important to Ford • as the sales growth potential of the Chinese market is signifi cant. Market sales are predicted to reach 6 million cars by 2010.Chang’an produced 400,000 cars in 2004, so will need to expand rapidly if it is • to take a signifi cant share of future car sales in China. Th us a joint venture with Ford may off er the benefi t of signifi cant additional investment in capacity.Although not stated in the case, it is likely that Chang’an is seeking to benefi t • from the technical expertise of Ford.

2 Which business, in your opinion, seems to gain most from this venture? Explain your answer. [5]

As indicated above, both businesses have something to gain. Which business has the most to gain is open to interpretation, e.g. it may be argued that Ford will gain most by gaining access to the Chinese market, which, if current economic growth rates continue, will in the future become the biggest market in the world. Th us, it is vital that Ford establishes itself in China as an early mover in the market. Th is is best achieved in partnership with Chang’an, as it is already the leading manufacturer of small cars in China.


3 What problems might these two businesses have in dealing with each other in this venture? [4]

Th ere are likely to be signifi cant cultural diff erences between the two • companies. Th is can lead to misunderstanding in discussions about the direction of the venture.As each party holds 50% of the joint venture’s shares, there may be confl ict that is • diffi cult to resolve regarding key strategic decisions within the business.

4 Evaluate the likely advantages to both Nestlé and Fronterra of their new joint venture in Trinidad and Tobago. [12]

Advantages may include:Th e two fi rms will bring complementary strengths to the joint venture. Nestlé • is a leading marketer of branded dairy products, so has particular strength as a marketing organisation. Nestlé’s expertise will be in recognising customer needs and building brand value within the market. In contrast, Fronterra has production and processing facilities, so will be able to produce high-quality chocolate products.Th e two companies will be able to take advantage of economies of scale by • operating together. For example, there may be increased opportunities for bulk buying milk, sugar and cocoa. Th rough bulk buying, the joint venture may be able to negotiate lower unit costs, leading to improved price competitiveness or higher profi t margins for the end product.

Evaluation may consider:You should consider the extent to which these benefi ts are likely to materialise. Th is will depend on factors such as how well the new management team works together. In turn, this may depend on how diff erent the respective cultures are within the two businesses.

Activity 2.6 (page 30): Pakistan steels itself for sell-offs

1 Defi ne the term privatisation. [2]

Defi nition of privatisation: when the assets of a state-owned business are transferred to the private sector.

2 Identify two possible advantages of privatisation referred to in the articles. [2]

source of revenue for the government• increased effi ciency through rationalisation, that is, cutting jobs• allows the business to access private-sector fi nance for investment purposes•

3 Explain one reason why the South African government appears keen to keep a stake in South African Airways aft er the stock exchange listing. [4]

By keeping a stake in South African Airways, the government retains some power to directly aff ect the decisions of the business. Th is may be helpful with respect to achieving some of the government’s objectives regarding e.g. unemployment and

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the balance of payments. If the business were transferred completely into private hands, the government would not be able to directly infl uence employment within the business.

4 Explain one possible problem resulting from the Pakistani government’s decision to privatise Pakistan Steel. [4]

Th e most likely problem in the short term is that there would be a restructuring of the company and a shake-out of excess jobs. Trade unions are clearly fearful that the new Russian owner will axe jobs. Th is is a problem for the government as there is already the existing problem of unemployment, so any further increase will place further demands on public spending to create jobs and/or support the unemployed. Th e human cost will be great as it will be diffi cult for those losing their jobs to fi nd alternative work and this will cause hardship for many families.

5 Discuss the impact of one of these proposed privatisations on the consumers and the government. [8]

Pakistan steel

Consumers Government

Th e private sector owner, • motivated by profi t and subject to market forces, will seek to reduce operating costs through shedding labour and modernising working practices. Th is will benefi t consumers as prices will fall.Consumers may also benefi t • from improved customer service as effi ciency increases within the business.Short-term disruption to • supplies could be caused as a result of any industrial action by unions.

Th ere will be the benefi t of a one-off cash • infl ow of $362 million. Th is can be spent on key government projects or help balance the government books.Profi t made by Pakistan Steel will be • taxed. Th is will generate revenue for the government in the future.As a nationalised industry, Pakistan Steel • may have had an operating surplus (i.e. profi t). Th e government will lose that surplus.Any increase in unemployment will lead to • increased pressure on government fi nances.Lower prices through increased effi ciency • will benefi t the economy as a whole.

Evaluation may consider:Evaluation could centre on which outcome is the most likely or most important to each stakeholder.

Activity 2.7 − answer provided on Student’s CD-ROM.

Revision case study 1 (page 38): Multinational to produce in Malaysia

1 Explain why ETG could be described as a multinational business. [3]

ETG has operations in 12 countries and is not simply selling its products outside Britain where its headquarters are located. ETG clearly has manufacturing capacity in a number of countries such as Mexico.

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2 Outline four possible disadvantages to Malaysia that might result from the operation of the new ETG factory. [8]

Th e key concerns highlighted in the case material are that:ETG pays low wages in its factories. Th us, workers will not be lift ed out of • poverty. In eff ect, ETG is accused of exploiting workers.ETG’s factories have a poor record on pollution. If ETG cuts costs through • having low environmental standards, then its factory in Malaysia will impose signifi cant external costs on Malaysian society, such as the impact on children’s health of increased levels of pollution.Th e Malaysian Tyre Group may be forced out of business, as it will be unable • to compete with ETG. MTG may be disadvantaged through smaller-scale production and inferior technology. If MTG is unable to compete on price, then it will lose business.ETG has demonstrated that it is quite prepared to quit a country if it faces • problems. It is closing its loss-making factory in Mexico despite the group as a whole making record profi ts. Th ere is no guarantee that the jobs being created in Malaysia will remain in the long term.

3 Analyse three possible reasons why ETG is expanding its production facilities outside Europe. [12]

To access new and developing markets such as Malaysia and Mexico − by • locating in those countries, they are near to potential consumers.To cut costs of production − in many European countries there are strict • labour laws and the existence of minimum wage legislation. Th us, it is relatively expensive to employ workers and this pushes up the costs of production, leading to higher prices for consumers.To avoid environmental standards applied in the European Union − strict • controls on emissions and disposal of waste will add to costs. Locating in developing countries may avoid such environmental controls, enabling ETG to be more price competitive.

4 Discuss the extent to which a government should control the operations of multinational companies within its own country. [10]

A discussion of the advantages and disadvantages that multinationals bring to a country is the simplest approach to answering this question. However, note that the question refers to the extent to which multinationals should be controlled, not simply whether they are good or bad. Most answers are likely to conclude that some control of multinationals is necessary, whilst recognising that too much control would lead to a loss of investment with detrimental eff ects to the economy.

Aspects of multinational activity that may require some form of control:Multinationals will have impact on local fi rms. Th e competition from • multinationals may drive national fi rms out of the market. Multinationals have greater resources and strong brand identity, thus national producers may be unable to compete. Countries may have competition laws to prevent this negative aspect of multinational activity.

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Multinationals may stifl e the development of entrepreneurial skills in the • economy as local businesses cannot compete.Th e profi ts of the multinationals may be repatriated to their country of origin, • benefi ting shareholders abroad rather than the citizens.Multinationals may take their investment elsewhere if market conditions • change or opportunities arise. Multinationals may exploit the local workforce, paying lower wages and off ering • few of the benefi ts off ered to employees in their base country.

Research task − research activity.

Revision case study 2 (page 38): Joe to expand his business

1 In which sector of industry is Joe’s business currently operating? Explain your answer. [3]

Joe’s business currently operates in the secondary sector. He buys in raw materials (coff ee beans and tea leaves) and processes them.

2 In which sector of industry is Joe planning to set up his new business? Explain your answer. [3]

Th e tertiary sector − Joe is considering setting up cafés and tea shops. Th ese provide a service and are, therefore, part of the tertiary sector.

3 Why do you think he is planning to set up this new business? [5]

Th ere is greater potential growth in the café sector due to rising incomes and • changing consumer spending patterns. Th ere is therefore greater profi t potential.People are buying less tea/coff ee from retailers, so Joe is facing decreasing • demand from retailers for his business’s processed coff ee and tea. Further, he is being squeezed out of the market by much larger processing companies with which he cannot compete. Th ere is greater opportunity for smaller independent businesses to succeed in the café market, as there are fewer opportunities for economies of scale.

4 Analyse the problems Joe might face in switching from making tea and coff ee products to entering the café / tea shop market. [6]

Diff erent skills are required. As a manufacturing business, Joe was selling his • product to retailers; as a café, he will be selling to consumers. Building customer relationships will require a diff erent approach to marketing.Joe will need to recruit new staff and may have to make existing staff redundant. • Existing staff will not have appropriate skills for Joe’s new business.Raising capital will be a problem, as the sale of his current factory will not • provide suffi cient fi nancial backing. As his business is facing increased competition and falling demand, it may be diffi cult to realise the full value of his assets; it may be diffi cult to fi nd a purchaser for his factory.

5 Advise Joe, giving your reasons, on the most suitable form of legal structure for the business, given that extra capital will be required. [8]

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Partnership Private limited company

Unlimited liability will remain and • Joe’s personal assets will be at risk if the partnership incurs signifi cant debt. Profi ts will have to be shared.• A Deed of Partnership will be • necessary to clearly identify how profi ts are to be shared.Th ere may be disputes between Joe • and his new partner(s) about the future direction of the business.Partners will bring capital into the • business and potentially valuable skills to complement Joe’s.It is a simple legal structure to set • up.Taxation will be diff erent from that • of a limited company – partners will pay income tax on profi ts rather than corporation tax.

Joe will benefi t from limited liability. • Th us, if the new cafés are not successful, Joe’s liability for debts will be limited to the money he has invested in the business.Joe can invite a number of investors • to buy shares in the business to raise the necessary capital. It may be easier to attract investors because liability is limited. A partnership is more limited in its ability to raise capital as there is a limit on the number of partners.Th ere are more legal formalities to • complete when establishing a limited company. For example, a Memorandum and Articles of Association must be submitted to the relevant authorities.Financial disclosure is greater for • a limited company. Th e public and competitors will be able to access fi nancial documents.Th e business will have legal personality. • Th us, in case of injury to a customer, it is the business, rather than the owners, that is sued.

Evaluation may consider:Th e degree to which Joe wishes to retain control of the business − although both • legal structures will dilute his control over the business, if he chooses a limited company he can retain overall control by ensuring he has a majority of the shares.Th e risk involved in his plans − if purchasing the cafés is risky, then he may prefer to • benefi t from limited liability.Th e amount of capital needed − it may be easier to attract investors to a limited • company.Th e requirements of potential investors − what do they wish to invest in?•

Revision case study 3 (page 39): Waste – a good case for privatisation?

1 Explain the terms:public sector• organisations that are accountable to and controlled by the stateprivatisation• the transfer of state-owned assets into the private sectorpublic limited company• a limited company whose shares may be purchased by the public and traded on the stock exchangeprivate limited company• [8]

a company that has issued shares but whose shares cannot be traded on the stock exchange.

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2 Explain two likely reasons why the city government decided to privatise this organisation. [4]

Th e service was subsidised and was thus costing the city government money. • Privatisation would off er an opportunity to the government to cut subsidies and use that money for other services.Th e service was ineffi cient due, in part, to overstaffi ng. It may be politically • diffi cult for the city government to tackle this ineffi ciency. By transferring the business to the private sector, the government is no longer responsible for staffi ng levels. Effi ciency would also increase, as with privatisation the government also allowed other fi rms to set up in competition.Th e sale of the business would raise revenue for the city government.•

3 Examine the likely impact of this privatisation, in the short run and the long run, on:

customers• shareholders• workers.• [6]

Short-run impact Long-run impact

Customers Th ere will be an increase in • prices as there is no longer a government subsidy.Th ere will be a reduction in • the quality and frequency of service as the business is forced to make cuts to become profi table.

Increased competition will • lead to a better-quality service at more competitive prices as Capital Waste Disposal plc has to fi ght for customers.Access to private fi nance • may enable the business to make investment in the business. Th is could lead to improved service.

Shareholders Th ere will be a capital gain • aft er the privatisation. Shares may be sold relatively cheaply to ensure the privatisation is a success. Th us, the share price will rise aft er the business is listed on the stock exchange.

As profi ts rise, there will be • an increase in the dividends paid.

Workers Th ere will be job losses as • effi ciency gains are sought. As a public-sector business, it had been overstaff ed and ineffi cient.Th ere will need to be tighter • control of wages as the business has to remain price competitive.

Growth of the business • may make jobs more secure and lead to new job opportunities. Th is will depend on how successful the business is in gaining contracts.

4 Compare the likely objectives of this organisation when it was in the public sector with those it is likely to pursue in the private sector. [5]

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Objectives in the public sector Objectives in the private sector

provide a high-quality public service at • a low pricebe a good employer• break even.•

provide a competitive service at a • price that will make a profi tgrowth of the business• profi t.•

5 Recommend to the chief executive whether he should maintain the business as a public limited company (plc) or not. Justify your answer. [12]

Remain a plc Convert to a private limited company

Th ere will be greater access to equity • fi nance. Future expansion may require access to large sums of fi nance. Th is may be easier to obtain from issuing shares. If the business is a private limited company, this possibility is severely compromised. Remaining a plc reduces risk as there will be less reliance on debt fi nance from fi nancial institutions. Th us, interest payments on borrowing will be lower.If the chief executive borrows money • from the bank, this will increase the interest burden on City Waste Disposal (there is more debt to service). Th us, there is increased risk in the event of a downturn in the company’s market fortunes.If the chief executive becomes the • majority shareholder, he will gain many of the benefi ts he is seeking, e.g. control over the direction of the company. He does not need to convert the business to a private limited company.

Even though there is a divorce • between ownership and control, the chief executive is unable to develop the business as he sees fi t due to the infl uence of the major shareholders (fi nancial companies). Th is may stifl e the growth of the business as shareholders are more concerned with short-term gain, that is dividends rather than the long-term growth of the business.If the chief executive gains complete • control of the business, there will no longer be a need for AGMs or for glossy annual reports to be sent to outside shareholders.As the sole or major shareholder, • the chief executive can enjoy the dividends from the profi t of the business.Th ere is a reduced risk of takeover • from other businesses. Th e business will not be subject to the disruption caused by volatile stock markets.

Evaluation may consider:Evaluation may focus on the desire of the chief executive to gain complete control over the direction of the business. He thus needs to buy shares in the business. However, there is signifi cant risk to the chief executive of this borrowing, even though it will be secured against the assets of the company he is purchasing.

Further reading‘Why do we need stock markets?’, http://news.bbc.co.uk/1/hi/magazine/7672274.stm

Essay2 Examine the possible consequences for a business and its stakeholders following the

privatisation of the business. [25]

Defi nition of privatisation: the transfer of state-owned assets to the private sector.

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Stakeholder Impact of privatisation

Consumer Subjecting the business to market forces and removing • the support of the government may force the business to become more effi cient and consumer oriented. Th us, prices will fall and quality will improve.As the privatised business faces competition, it will • have to become more effi cient and off er better quality in order to be successful.A public monopoly may be replaced by a private • monopoly and thus the consumer is vulnerable to an abuse of monopoly power. Th e monopolist can increase prices. For example, a privatised rail service will not face competition from other train operators, so can charge rail users more.A private-sector business is motivated by profi t, • whereas a public-sector organisation usually has provision of a public service as a key priority. Th us, privatisation may lead to the closure of loss-making services, e.g. a privatised railway will not wish to off er train services to rural communities where there is insuffi cient demand to make the service economical.

Employees Th ere will be loss of jobs due to the drive to • raise effi ciency. Some nationalised industries are characterised by overmanning.Th ere will be less-favourable conditions of employment. • Typically, the government may act as a model employer, setting a high standard of employee welfare. A privatised business will aim to cut costs.Th e private sector has to pay going market rates to • recruit staff . Some employees may see wages rising, particularly at managerial and board level.

Local community Th ere will be loss of jobs.• Th ere will be loss of public services.• Th ere will be increased share ownership in the • community.

Government Th e government will raise revenue through the sale of • shares.Th ere will be increased corporation tax as the business • increases profi ts following privatisation.

Shareholders Shareholders may benefi t from the opportunity to gain • a stake in strong companies at below market prices. Th is was the case in Indonesia’s privatisation programme in the late 1990s, in which the government sold stakes in a number of key companies.

Th e business Th e business will face greater competitive pressure. • Th ere will be increased access to private-sector fi nance • through the stock market. Th is will fund expansion and introduction of new technology.Th ere will be the increased costs of hiring managers/• directors.Th ere will be the increased threat of takeover as shares • are listed on the stock exchange.


Evaluation may consider:Evaluation may recognise that much depends on the state of the industry when it is privatised and the extent to which the newly privatised fi rm faces competition. It will also depend on whether privatisation involves subsequent scrutiny from a government-appointed regulator. In the UK, privatisation of the public utilities has involved creation of regulatory authorities to ensure that the consumer is not exploited.

business structure - peterhouse boys' schoolrevision.peterhouse.co.zw/business studies/as...

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