Practise evaluating legal structures by ownership, liability, finance, and stakeholder consequences for for-profit organisations in IB Business Management HL.
Office Supplies (OS)
Office Supplies (OS) is a family-owned private limited company that, for 40 years, has operated three retail office supply stores in a small city. OS offers a wide range of office products (such as computer paper and stationery) and office machinery (such as computers and printers). When each store opened, OS purchased the buildings using long-term loan capital. OS's objective is to have enough profit to finance the company's working capital and pay annual dividends.
OS has no clear marketing strategy. Traditionally, OS competed with several other office supply stores operating in the same city. The market was not competitive, however, and most customers went to the nearest office supply store. OS's prices were comparable to those of other retail office supply stores, and the company did little promotion.
Nationally, the retail office supply store industry is declining. Many retail office supply stores have had to close, and new competitors have entered the market, many of which benefit from some or all of the following:
- Specialization in particular office products
- Economies of scale leading to more competitive prices
- Greater convenience, including e-commerce with door-to-door delivery
Like other physical retail stores, OS has seen its sales decline. Gross and net profit margins have fallen. Last year, to ensure enough funds for capital expenditure and revenue expenditure, OS's board of directors chose not to pay dividends. OS also anticipates the need for additional finance next year. OS's board is considering changes to the company's marketing mix in response to new competitors.
With reference to O S, explain one advantage and one disadvantage of operating as a private limited company.
Advantages of operating as a private limited company include:
- Compared to sole traders and partnerships, private limited companies typically can raise more capital.
- Control of the company cannot be lost to outsiders.
- Members of the board of directors, many/most of whom are major shareholders in the company, can make decisions with fewer concerns about shareholder and/or market reaction.
- Owners have limited liability.
- Private limited companies do not have to disclose fully their financial information.
- The business continues if one of the owners dies.
For OS, one advantage to operating as a private limited company is that OS could make changes in dividend policy without affecting perceptions of the company in the marketplace. When OS realized that it needed to preserve cash, it suspended dividend payments for one year and said it possibly would for a second year. When a publicly traded company lowers or eliminates dividend payments to preserve cash, the share price typically falls, sometimes significantly, which can make capital sufficiency issues even worse.
Disadvantages of operating as a privately limited company include:
- If a shareholder wants to sell their shares, finding a suitable buyer may take time. Also, other shareholders must agree to the sale and some are opposed.
- Private limited companies cannot sell shares to the public, thus limiting the amount of capital than be raised. OS may need to raise capital to invest in new marketing strategies.
- Often (though not always) private limited companies are relatively small organizations which possesses lesser expertise than large, publicly traded companies Nevertheless OS is currently facing a difficult moment, as its industry is changing, a situation that has led to a decline in sales and a contraction of margins. As a private limited
company, O S may not have the expertise to face this situation even though OS has been operating for 40 years so presumably has a lot of experience of the industry. Currently, the company has no real marketing strategy and may not have the marketing expertise to make appropriate adjustments most specifically in areas like e
commerce or possible diversification.
Additionally, many potential adjustments OS may make will require capital, which, as a private limited company, O S has less access to than if it were public.
Mark as [2 + 2].
Award [1] for identification of an advantage and an additional [1] for an explanation thereof with application to the stimulus.
Award [1] for identification of a disadvantage and an additional [1] for an explanation thereof with application to the stimulus.
Maximum award: [4].