Types of Business

Types of Business and
Porters Forces
Introductions
Business activity is a fundamental and universal
feature of human existence
Most business activity takes place within an
organizational context
Types of Business organizations
 A business may be owned by one person as a
Sole Proprietor or can be owned jointly with
another person or partner as a Partnership.
 Another way in which a business could be

owned is through the establishment of a limited
liability company.
 A limited company can be privately or

publicly owned.
1.Sole Trader
Main features of Sole proprietorship
 It is a business owned by only one person who

provides all the needed capital and manages it
alone.
 It is the simplest and most common type of

business enterprise.
 The business tends to be small in size

although it is not always so.
 This type of business enterprise is not
confined to retail trade.
Advantages of a Sole Trader
 The business is easy to set up, control and
manage.
 It requires a small amount of capital to set up;

as a result many people are able to run this
type of business.
 The owner makes independent and quick

operational decisions.
 Business affairs are kept private except when

completing Tax returns. The law provides that the
sole proprietor shall pay tax.
Disadvantages of a Sole Trader
 The personal assets are at risk because the

business has unlimited liability.
 It is more difficult for a Sole Trader to source

outside finance because in most cases they luck
collateral.
 The sole trader is entirely responsible for all
aspects of the business (Marketing, Production,
Finance etc)
 Difficulty of continuing business after death or
disability and bankruptcy of the proprietor.
 The Sole Trader is responsible for all the debts
of the business.
2. Partnership
The Partnership Act, 1890, defines a partnership as a
relationship which subsists between persons carrying on
business in common with a view to profit.
Types of Partnership:
 General partnership is the commonest type of
partnership where all partners work together on daily basis
sharing all privileges, benefits, and liabilities of the
partnership.
 Limited partnership is the type of partnership in
which some partners contribute in raising capital but do not
take part in management of the business. Such a partner is
sometimes referred to as a “Sleeping Partner.”
 A partnership Agreement is a document specifying
and regulating the running of the business. It contains the
duties, responsibilities, rights, penalties and general
functions of partners towards the business.
Advantages of Partnership
 Few formalities are required to set up this
type of business.
 Sharing of partner’s knowledge and skills.
 Sharing of general management of the

business.
 No obligations to publish Accounts and

affairs of the business to the public.
 Sharing of profits (or loses) of the business.

Disadvantages of Partnership
 Each partner is liable for the debts of the
partnership, even if caused by the actions of
other partners.
 Personality crushes can affect the business

greatly if not checked.
 The death or bankruptcy of one partner will

automatically dissolve the partnership unless
otherwise provided for in a partnership agreement.
 There is less flexibility of operations as is the

case with individual proprietorship.
3. Limited Companies
Features
A Company may be defined as an association where two or
more people come together for a common business goal.
A Company has what is termed as “Corporate Personality”.

It has all the rights that are in some cases as those of a
human individual and is always treated by Law as a
“Separate person”.
 When a Limited company fails, its members or

shareholders are only required to meet their debts up to the
nominal value of their shares. This is the limited liability of
persons investing in business ventures. Limited companies are
either private or public.
PRIVATE LIMITED COMPANY
 A private company is any registered

company formed and owned by private individuals
other than the public.
 It’s name will always end with the word Limited

abbreviated as Ltd.
 The minimum number of shareholders required

for a private company is two (2) and can have
shareholders up to fifty (50).
Advantages of a Private Limited
Company
 It is a legally separate entity or personality from
the owners.
 The liability of the Shareholders is limited, so their

personal assets are not at risk.
 Shareholders have direct control over the
company’s affairs.
 It can easily raise more capital by selling shares

though not publicly.
 The company has sure continuity, as it does not
depend on one person.
Disadvantages of a Private Company
 There too many legal formalities to comply with.
 Accounts should be audited annually hence the

need to engage services of Auditors.
 The company is less flexible when compared with

a sole proprietorship.
 It is a costly exercise to form a Limited liability

than that of a sole proprietorship.
Public Limited Company
Characteristics of a Public Limited Company
 It is a company formed by at least two (2) persons

without a maximum number.
 The shareholders or members of the company elect a

Board of Directors to control it.
 The day to day running of the business is in the hands of

the Managing Director.
 The Board of Directors deal with the Managing Director

on Policy issues.
 It is a separate legal entity and is registered with the

Registrar of Companies.
Advantages of a Public Limited Company
 The company is a separate legal entity and as such the
liability of shareholders is limited to the amount of shares
they hold in the company.
 It can raise more capital by the sale of shares on the stock

exchange (i.e. LUSE).
 It can employ professionals in such fields like Marketing,

Accounting, Human Resource Management etc, which
makes it more efficient.
 Its size makes it possible for the company to buy modern

equipment and technology.
 It has assured continuity.

Disadvantages of a Public Limited
Company
 It has to comply with many regulations set to protect
Employers, Employees and other Stakeholders.
 There is little secrecy, as its accounts must be published

annually. This is a legal requirement.
 Decisions tend to be delayed because of the amount of

administration or bureaucracy involved such as those that
require the Board’s approval.
The risk of takeover bids by other companies because

shares of a public limited company can easily be bought
on the stock exchange.
Standard Techniques
Porter's Five Forces Model - used to analyze
an industry in which an organization
operates.
Porter Competitive Model
Potential
New Entrants
Bargaining Intra-Industry Bargaining

Power Rivalry Power
of Suppliers Strategic Business Unit of Buyers
Substitute
Products
and Services
Source: Michael E. Porter

“Forces Governing Competition in
Industry Figure 3-1
Harvard Business Review, Mar.-Apr. 1979
Definitions
New Entrant:
An existing company or a startup that has not
previously competed with the SBU in its
geographic market. It can also be an existing
company that through a shift in business strategy
begins to compete with the SBU.
Substitute Product or Service:
An alternative to doing business with the SBU. This
depends on the willingness of the buyers to
substitute, the relative price/performance of the
substitute and/or the level of the switching cost.
Industry Rivalry Likelihood?
• Profit margins.
• Industry growth rate and potential.
• A lack of capacity to satisfy the market.
• Fixed costs.
• Competitor concentration and balance.
• Diversity of competitors.
• Existing brand identity.
• Switching costs.
• Exit barriers.
A Buyer Has Power If:
1. It has large, concentrated buying power that enables
it to gain volume discounts and/or special
terms or services.
2. What it is buying is standard or undifferentiated and
there are multiple alternative sources.
3. It earns low profit margins so it has great incentive
to lower its purchasing costs.
4. It has a strong potential to backward integrate.
5. The product is unimportant to the quality of the
buyers’ products or services.
A Supplier Has Power If:
1. There is domination of supply by a few companies.
2. Its product is unique or at least differentiated.
3. It has built up switching costs.
4. It provides benefits through geographic proximity to
its customers.
5. It poses a definite threat to forward integrate into
its customers’ business.
6. A long time working relationship provides unique
capabilities.
Possible Barriers to Entry
• Economies of scale.
• Strong, established cost advantages.
• Strong, established brands.
• Proprietary product differences.
• Major switching costs.
• Limited or restrained access to distribution.
• Large capital expenditure requirements.
• Government policy.
• Definite strong competitor retaliation.
Substitute Threats
• Buyer propensity to substitute.

• Relative price/performance of substitutes.
• Switching costs.
The End

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Types of Business and

 Another way in which a business could be

 A limited company can be privately or

 It is a business owned by only one person who

 It is the simplest and most common type of

 The business tends to be small in size

 It requires a small amount of capital to set up;

 The owner makes independent and quick

 Business affairs are kept private except when

 The personal assets are at risk because the

 It is more difficult for a Sole Trader to source

 Sharing of partner’s knowledge and skills.

 Sharing of general management of the

 No obligations to publish Accounts and

 Sharing of profits (or loses) of the business.

 Personality crushes can affect the business

 The death or bankruptcy of one partner will

 There is less flexibility of operations as is the

A Company has what is termed as “Corporate Personality”.

 When a Limited company fails, its members or

 A private company is any registered

 It’s name will always end with the word Limited

 The minimum number of shareholders required

 The liability of the Shareholders is limited, so their

 It can easily raise more capital by selling shares

 There too many legal formalities to comply with.

 Accounts should be audited annually hence the

 The company is less flexible when compared with

 It is a costly exercise to form a Limited liability

 It is a company formed by at least two (2) persons

 The shareholders or members of the company elect a

 The day to day running of the business is in the hands of

 The Board of Directors deal with the Managing Director

 It is a separate legal entity and is registered with the

 It can raise more capital by the sale of shares on the stock

 It can employ professionals in such fields like Marketing,

 Its size makes it possible for the company to buy modern

 It has assured continuity.

 There is little secrecy, as its accounts must be published

 Decisions tend to be delayed because of the amount of

The risk of takeover bids by other companies because

Bargaining Intra-Industry Bargaining

Source: Michael E. Porter

• Buyer propensity to substitute.

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