TYPES OF BUSINESS FIRMS NOTES
Domestic Corporation
A firm incorporated under the laws of the country or state in which it
does business. For example, a firm incorporated in the United States is considered a domestic corporation
in the United States, but a foreign corporation elsewhere
Foreign Corporation
A firm that conducts business in states or countries other than the
state or country in which it is incorporated, For example, a firm
incorporated in Canada but conducting business throughout North America
is considered a foreign corporation in the United States. Also called an
alien corporation.
Multinational Corporations
Multinational corporations are companies that operate in more than one
country. The name “multinational corporation” is distinct from
“international corporations”. The latter name was used in the 1960s to
designate a company with a strong national identification.
The home market was the company’s primary focus. Foreign operations were
usually wholly owned subsidiaries controlled by home country nationals.
By the 1980s, international corporations had evolved into more globally
oriented companies. While still maintaining a domestic identity and a
central office in a particular country, multinational corporations now
aim to maximize profits on a worldwide basis. The corporation is so
large and extended that it may be outside the control of a single
government. Besides subsidiaries, a multinational corporation may have
joint ventures with individual companies, either in its home country or
foreign countries. Some multinationals enter foreign markets by buying
stakes in companies of a particular country.
Complex business organizations
Mergers
In business a merger is a combination of two companies into one larger
company. Such actions are commonly voluntary and involve stock swap or
cash payment to the target. Stock swap is often used as it allows the
shareholders of the two companies to share the risk involved in the
deal. A merger can resemble a takeover but result in a new company name
(often combining the names of the original companies) and in new
branding; in some cases, terming the combination a “merger” rather than
an acquisition is done purely for political or marketing reasons.
Classifications of mergers
Horizontal merger – Two companies that are in direct competition and
share similar product lines and markets (e.g. Sirius/XM)
Vertical merger – A customer and company or a supplier and company. (eg:
an ice cream maker merges with the dairy farm whom they previously
purchased milk from; now, the milk is ‘free’)
Market-extension merger – Two companies that sell the same products in
different markets (e.g. GTE and Bell Atlantic into Verizon)
Categories of mergers
Mergers may be broadly classified in Cogeneric and Conglomerate.
Cogeneric: within same industries and taking place at the same level of
economic activity- exploration, production or manufacturing wholesale
distribution or retail distribution to the ultimate consumer.
Conglomerate: between unrelated business. Two companies that have no
common business areas
Acquisition
An acquisition, also known as a takeover or a buyout, is the buying of
one company (the ‘target’) by another. An acquisition may be friendly or
hostile. In the former case, the companies cooperate in negotiations; in
the latter case, the takeover target is unwilling to be bought or the
target’s board has no prior knowledge of the offer. Acquisition usually
refers to a purchase of a smaller firm by a larger one. Sometimes,
however, a smaller firm will acquire management control of a larger or longer established
company and keep its name for the combined entity. This is known as a
reverse takeover.
The buyer buys the shares, and therefore control, of the target company
being purchased. Ownership control of the company in turn conveys
effective control over the assets of the company, but since the company
is acquired intact as a going concern, this form of transaction carries
with it all of the liabilities accrued by that business over its past
and all of the risks that company faces in its commercial environment.
Franchising is an arrangement where one party (the franchiser) sells the
rights to another party (the franchisee) to market its product or
service. There are different types of franchise relationship and this is
a possibility for international expansion. It is an attractive option
for companies seeking international expansion without having to
undertake substantial direct investments.
In recent years this has increased in numbers and in popularity. They
exist when an individual or group of individual (the franchise) raises a
sum of money to buy the opportunity to;
- Use an established model and name e.g. wimpy, steers, ken chic e.t.c.
- Sell or distribute an established or recognized product
- Take advantage of marketing and advertising which is organized
centrally by the franchise e.g. coke.
- Take advantage of marketing and advertising which is organized
A franchise is a legal contract that binds the two parties and hence
each has to meet his/her side of bargain. This type of business has
lower risk as compared to the other since the machinery and the brand
are well established and the business ride on them.
Advantages of the franchisee
- Protected environment in which to open a business
- Access to free help and advice from specialist and experts i.e. the
franchiser (proven management style) - A ready market
- Name recognition- most franchise are nationally or internationally
known this can significantly increase the demand for the product.
Examples for such include, MacDonald, Holiday Inn. - Financial support, some franchisees receive some financial support
from the franchisor.
Advantages to the franchiser
- Business expansion is achieved
- Business risk is shared
- Franchisee are self-motivated
- Access is gained to very wide market- many outlets.
Licensing is where a company (the licensor) authorizes a company in
another country (the licensee) to use its intellectual property
in return for certain considerations, usually royalties. Licensors are usually multinationals located in developed countries Joint ventures are usually a jointly owned and independently incorporated business venture involving two or more organizations. This is a popular method of expanding abroad as each party can diversify, with the benefit of the experience of the others involved in the venture and a reduction in the level of risk. Where a large number of members are involved in such an arrangement, this is called a consortium.
