How do entrepreneurs use their resources to start businesses?
Not every business enterprise falls neatly into one of the three business models described in this chapter. There are also other types of business organizations that people adopt to achieve specific goals. One model is the business franchise.
In a business franchise, a parent company grants to an independent business owner the exclusive right to use its trade name and sell its products in a designated location. This is the kind of arrangement that such companies as Holiday Inn, McDonald’s, and Dunkin’ Donuts use to distribute their products.
Under a franchise agreement. a parent company, or franchiser, grants a license to operate an outlet in return for an initial payment and ongoing fees. The business owner who buys the license and distributes the franchiser’s products is the franchisee. The franchise model is well suited to businesses whose products or services can easily be replicated, or “cloned.” Motel rooms, hamburgers, and donuts are just such products. Franchise agreements are popular because they offer advantages to both the parent company and the local franchise owner. Franchising enables a parent company to expand rapidly and more cheaply than if it had to own and operate new outlets itself.
At the same time, franchising gives people who want to own a business the opportunity to do so with some support. Franchisers help new owners get started with management training, budgets, and advertising campaigns. Moreover, many franchises have a record of profitability and a built-in customer base. For the would-be business owner, buying a franchise may be less of a financial risk than starting one’s own business.
There are also disadvantages to franchising. Franchisers charge high fees for the right to use their name. The bigger the name, the more expensive the franchise rights. Franchisees must also pay royalties, or a percentage of earnings, to the parent company. These costs are on top of the usual costs of operating a business.
In addition, being a franchise owner means giving up some independence. Franchise agreements usually require franchisees to follow strict rules and procedures. For some aspiring entrepreneurs, this lack of independence may be a big drawback.
Another popular form of business organization is the cooperative, or co-op for short. A cooperative is a business that is owned and operated by a group of individuals for their shared benefit. Some 130 million Americans were members of some type of co-op in 2013.
Cooperatives are businesses, but with some important differences. Co-ops are not in business to make a profit. Rather their goal is to meet their members’ needs for affordable goods and services. Co-ops are run democratically, with members electing other members to a board of directors.
Many people who join co-ops are consumers looking to increase their buying power. Consumer co-ops sell goods to their members at reduced prices. They can do this because they purchase bulk quantities at a lower cost. The requirements of membership in a consumer co-op vary. Some co-ops require members to work a certain number of hours, whereas others require a yearly membership fee. Food co-ops, housing cooperatives, and discount price clubs are types of consumer cooperatives.
Other kinds of consumer co-ops provide services instead of goods. Such services include health care, childcare, and insurance services. Credit unions, or financial cooperatives, make low-cost loans to their members. Electric cooperatives, found mainly in rural areas, prov ide low-cost electricity to their members. In 2010, electric co-ops delivered electricity to 42 million Americans. Producers also form cooperatives. The most common producer cooperative is the agricultural co-op, also known as a farm organization. Some agricultural co-ops function like consumer co-ops, providing
farmer members with low-cost seeds and equipment. Other agricultural co-ops help to market and sell members’ products. Some well-known food brands, such as Sun-Maid, Land 0’ Lakes, and Ocean Spray, are agricultural co-ops. Ocean Spray, the producer of juice drinks, is owned by over 600 cranberry and grapefruit growers in the United States and Canada.
Yet another common business model is the nonprofit organization. A nonprofit organization functions like a business, except that it does not operate to make a profit. Instead, nonprofits are established to support particular public or private goals. Human rights, the arts, the environment, religion, and medical research are just a few of the areas in which nonprofits arc active. Nonprofits range from global organizations like the Red Cross to local soup kitchens and animal shelters, as you can see in Figure 9.6.
Although some nonprofit groups are organized informally, many seek nonprofit status from the federal government. Nonprofit organizations may be tax exempt, which means they are not required to pay income tax. However, tax-exempt nonprofits are limited to how much income they can earn and how they may use their earnings. Most groups are funded, at least in part, by donations. A nonprofit may be organized in a variety of ways: as a corporation, a cooperative. a trust, or a foundation. Conservation nonprofits are often organized as land trusts. For example, the Nature Conservancy is a land trust that works to protect wilderness areas and waterways around the world as nature preserves.
A foundation is an organization that is created and supported by donated funds or property. Foundations are often created by people who have made fortunes in business. Bill and Melinda Gates, for example, created a foundation dedicated to “bringing innovations in health and learning to the global community.” Since its founding in 1994, the Bill and Melinda Gates Foundation has given billions of dollars to groups working to improve health care and education in developing countries and in the United States.
Other kinds of nonprofit organizations support the interests of businesses and professional people. A business association represents the interests of business people in a geographical area. Such organizations often go by the title of Chamber of Commerce.
A trade association represents the interests of people working in a particular industry. Trade associations include groups like the Alliance of Automobile Manufacturers and the Motion Picture Association of America. Such groups use advertising, education, and political lobbying to promote their interests.
People who work in a profession, such as medicine or teaching, often join a professional organization. These nonprofits establish standards of training and ethics for professionals in their fields. They also work to improve conditions for people in their profession. The American Nurses Association, for example, represents over 3 million registered nurses. It promotes the rights of nurses in the workplace and lobbies Congress on health care issues that affect nurses.
Labor unions are organizations of workers in a specific industry. A labor union seeks to improve working conditions, wages, hours, and benefits for its members. Labor unions are active in a wide range of industries. Actors, miners, police officers, and aerospace workers, for example, are all represented by unions.