Mind Your Business - 9 October 2008

Answers

1. Explain what is meant by the phrase ‘legal structures’ in relation to business ownership (4 marks)

There are a number of different types of business structure, ranging from sole traders through to public limited companies. Depending on the type of structure chosen there are different legal implications. Essentially the legal status of a business means it can sue and be sued. The question is where the liability for the legal responsibility lies. With a sole trader, the business and the owner are one and the same thing; if the business fails then the owner is responsible, if the owner died then the business would also cease, and if the business was sued it would be the owner who was responsible for the legal consequences. With a private limited company, there is a distinction between the business and the individuals who own it. If the business failed then the individuals would be liable for the money they had invested but not their own personal wealth and assets - these would not, legally, be part of the business. If legal action was taken against the business then it would be the business that would be liable for meeting any legal judgement, not the owners.

2. Identify and explain two advantages and two disadvantages of setting up a business as a private limited company (8 marks)

Advantages

• A private limited company means that shareholders have the benefit of limited liability. This means that they are liable for the capital that they have invested in the business but no more than that. If the business were to become insolvent then the shareholders stand to lose their investment but would not have to give up their personal assets to pay off the debts of the business.
• A private limited company can have up to 50 shareholders. This means that the business has greater access to a larger amount of capital to invest into the business. With a larger amount of capital, the business can grow quicker and take advantage of market growth opportunities.

Disadvantages

• The benefits of limited liability can backfire on these types of business especially if they are relatively small. Some suppliers might be unwilling to set up credit accounts with private limited companies because it increases their exposure to the risk of not being paid in the event of the company going into insolvency. This means the business might not be able to get credit and supplies quickly or have to pay cash in which case their cash-flow is affected.
• The extent to which the business can grow is still going to be limited to an extent by the access to capital. Many private limited companies float on the stock market simply because they can gain access to the large amounts of funds they need to expand appropriately. Not every business owner is going to have the personal wealth of Sir Philip Green!

3. What do you think would be the most important reason for a business like Arcadia to organise its business ownership in the way that Sir Philip Green has done? (8 marks)

The four benefits outlined in the passage are economies of scale, diversification, synergies and branding. For a group of companies like Arcadia, economies of scale can give them the flexibility to be able to be more competitive. If unit costs are reduced, they have more opportunity to be able to pass these benefits on to their customers in the form of lower prices. In a business-like fashion, the access to cheap foreign supplies means that these benefits might not be as great as they first appear. In addition, Sir Philip’s businesses are all based in fashion but deal with different target markets. Having a specialist buyer implies that they need to have expertise in a range of markets to be able to gain the benefits described.

Diversification means that a business can gain some protection from the vagaries of the market. Sir Philip’s businesses are all based around fashion, however. Fashion items are more likely to have a relatively income elastic demand and so if incomes fall during an economic slowdown then all his businesses might see a fall in sales. It is not like a business such as Tesco where sales of food are unlikely to be affected anything like as much as those of fashion.

There would appear to be a number of synergies that could be gained as a result of the close links between the different businesses. They are all in fashion and, whilst they are in different markets, there are lots of similarities between the businesses. The opportunities to be able to share information and expertise, share market research information and maintain a degree of control over the direction of the businesses and their distinctive nature makes this an important factor in the decision to organise the businesses along the lines described.

Each of Sir Philip’s businesses seems to have their own brand identity, which is important for maintaining their individuality. Few people might know, or indeed be interested in the fact that Sir Philip owns all of them - what they are looking for is whether the shop they are using meets their needs. Therefore, unless Sir Philip actively promotes the Arcadia brand amongst shoppers this is not likely to be the key reason.

It can be argued, therefore, that the main reason for organizing the businesses in this way would be to take advantage of the synergies that will result from the close cooperation of staff across the businesses operations.

4. To what extent do you think that the consolidation of businesses like those of Sir Philip Green reduces choice and value for customers? (12 marks)

The degree of choice available to customers in the retail fashion industry is relatively wide. The high street does contain other stores such as River Island, Racing Green, Suits You and so on, offering fashion garments and increasingly supermarkets are entering the market place to provide additional competition and choice for consumers. This competition does mean that despite owning several well known brand names, Sir Philip still has to provide good quality items that consumers consider provide value for money.

Sir Philip would be keen to make sure that his stores do not engage in 'brand cannibalism', however. This means that each store looks to cater for a different market and may be careful to avoid too many overlaps in their target customers. Because each store tends to cater for a different market it is unlikely that too many women who have the so-called ‘fuller figure’ would also find the items that they require in a shop like Dorothy Perkins; equally, not too many people shopping in Miss Selfridge would also want to shop at Tammy. From this perspective, the choice available to shoppers is more restricted than if there were many smaller independent stores each providing a range of goods, but his is likely to be counterbalanced by the wider range of goods that stores like Burtons and Dorothy Perkins can offer.

The number of shoppers who are aware that many stores in the high street are actually all owned by a very small number of different organizations is likely to be small. If they were aware then maybe they would feel that their choice was more restricted, but the benefits that consumers get from the consolidation of businesses through economies of scale and synergies might mean that they have access to a wider range of clothing styles in the stores, higher levels of stock and lower prices than would be the case if each store was fully independent. To this extent customers may not care whether the stores are all owned by one group.

The reasons for the consolidation of business operations in this way mean that customers can have the opportunity to be able to have more choice in the retail fashion market than ever before. The global nature of such business means having a large organization to be able to take advantage of the buying opportunities that exist is almost essential to meet the growing demands of consumers. It is therefore unlikely that smaller independent businesses could provide for the needs of different markets and provide goods at the prices that large consolidated organizations with the benefits of economies of scale and synergies could do.

It would be hard to argue that the goods and the stores operated by Sir Philip Green constitute a restriction in choice, therefore. Ultimately, these stores are successful because they met the needs of consumers and in addition the level of competition in this particular industry is such that consumers have plenty of choice and get value for money.

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