Chapter Summaries

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University of Waterloo
Accounting & Financial Management
AFM 131
Robert Sproule

Chapter 3: Competing in Global Markets The Dynamic Global Market • Exporting is selling products to another country • Importing is buying products from another country • Trading with other countries are beneficial for these reasons: o No country is self-sufficient – can produce all of the products needed o Other countries produce at a cheaper price due to abundance / technological advances o Global trade allows a nation to produce what it is most capable of and buying from others • Free Trade is the movement of goods and services among nations without political or economic trade barriers • Comparative Advantage Theory states that a country should sell to other countries those products that produces most effectively and efficiently, and buy from other countries those products it cannot product as effectively/efficiently • Absolute Advantage exists when a country has a monopoly on producing a certain product or can do so more effectively/efficiently than other countries Getting Involved in Global Trade • Small businesses account for 49% of the total private labour force but only 16% of exports • Balance of trade is the nation’s ratio of exports to imports – a favourable ratio is when exports exceed imports (trade surplus) • Trade Deficit is when there is an unfavourable balance of trade – imports exceed exports • Balance of Payments is the difference between inflow of money and outflow of money | inflow > outflow = favourable balance of payments Strategies for Reaching Global Markets • Key strategies include: exporting, licensing, franchising, contract manufacturing, creating international joint ventures and strategic alliances, creating foreign subsidiaries, and engaging in foreign direct investment (listed in increasing amount of commitment, control, risk and profit potential) • Licensing is the a global strategy in which a firm allows a foreign company to produce its product in exchange for a fee • Through licensing, company gains additional revenues • Licensors spend little or no money to produce and market their products • Franchising is an arrangement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or service to others in a given territory (ie. Tim Hortons) • Contract Manufacturing – a foreign country’s production of private- label goods to which a domestic company then attaches its brand name or trademark (also called outsourcing) • Joint Venture – a partnership in which two companies join to undertake a major project or to form a new company; benefits include: o shared technology and risk, shared marketing and management expertise, entry into markets of foreign companies, shared knowledge of local markets • Strategic Alliance – a long-term partnership between two or more companies established to help each company build competitive market advantages • Foreign Direct Investment – the buying of permanent property and business in foreign nations • Foreign Subsidiary – a company owned in a foreign country by another (parent) company • Multinational Corporation – a corp. that operates in many different countries and has multinational stock ownership and management Forces Affecting Trading in Global Markets • Sociocultural Forces – cultural diversity o Ethnocentricity – an attitude that one’s own culture is superior to all others o Successful companies are those who adapt and understand different cultures and develop their products/services accordingly • Economic Forces – you get the idea • Legal and Regulatory Forces – the conduct and direction of business being tied to the legal and regulatory environment (ie. Government) • Technological Forces – any technological constraints that limit a company’s ability to conduct business in global markets Trade Protectionism • Defined as the use of government regulations to limit the import of goods and services (advocates believe that if allows domestic producers to survive and grow -> produce more jobs) • Dumping is selling products in a foreign country at lower prices than those charged in the producing country • Tariffs are any tax imposed on imports Chapter 4: Role of Government in Business Crown Corporations • A company that is owned by the fed./prov. Government • They provide services that were not being provided by businesses at the time • Privatization is the process of governments selling Crown corporations Laws and Regulations • The government – elected by the people of the country • Some of federal government responsibilities: trade regulations, incorporation of federal companies, taxation, banking and monetary system, national defence, and unemployment etc… (the list is too goddamn long) • Some of provincial government responsibilities: regulation of provincial trade, national resources within province, direct taxation, licensing, etc. Taxation and Financial Policies • Taxes are a primary source of funding for government operations and programs • Some taxes are imposed to discourage additional consumption (ie. Cigarettes) • Tax credits are amounts that can be deducted from tax bill (form of encouragement to new business) • Taxes depend on level of income, sales and property • Fiscal policy is federal government’s effort to keep the economy stable by increasing or decreasing taxes or government spending Government Expenditures • Disbursement of money to pensions, allowances to low-income families, employment insurance, welfare etc. • Transfer payments – direct payments from governments to other governments or to individuals • Equalization – fed. Gov. program for reducing fiscal disparities among provinces • Marketing boards are organizations that control the supply or pricing of certain agricultural products in Canada Purchasing Policies • Most governments are very large purchasers and consumers of goods and services Chapter 5: Ethics and Social Responsibility • ETHICS – standards of moral behaviour; behaviour accepted by society as right vs wrong Managing Business Ethically and Responsibly • Compliance-based Ethics Codes – ethical standards that emphasize preventing unlawful behaviour by increasing control and by penalizing wrongdoers • Integrity-based Ethics Codes – ethical standards that define the organization’s guiding values, create an environment that supports ethically sound behaviour, and stress a shared accountability among employees Corporate Social Responsibility • CSR – a business’ concern for the welfare of society as a whole • some critics of CSR believe that a manager’s sole role is the compete and win in the marketplace • conversely, others believe that businesses owe their existence to the societies they serve • Corporate Philanthropy – dimension of social responsibility (SR) that includes charitable donations • Corporate Social Initiatives – SR that includes enchanced forms of corporate philanthropy in that they are more directly related to the company’s competencies • Corporate Responsibility – SR that includes everything from hiring minority workers to making safe products • Corporate Policy – SR that refers to the position a firm takes on social and political issues • one responsibility of business is to satisfy customers by offering them goods and services of real value • social responsibilities extend to the society, environment and even internationally Small Businesses: Chapter 6 Liability – responsibility to pay all normal debts and to pay because of a court order or law, for performance under a contract, or payment of damages to a person or property in an accident Sole Proprietorship – business owned and usually managed by one person o Advantages: ease of starting and ending, being your own boss, pride of ownership, leaving legacy, retention of company profit, no special taxes o Disadvantages: unlimited liability (personal losses), limited financial resources, management difficulties, overwhelming time commitment, few fringe benefits, limited growth and lifespan Partnerships – legal form of business with two or more owners o General partnership – all owners share in operating business and in assuming liability for business’s debts o Limited partnership – partnership with one or more general partners (owner with unlimited liability and active in managing firm) and one or more limited partners (invests money in business but does not have management responsibility or liability for losses beyond investment) o Advantages – more financial resources, shared management and pooled/complementary skills and knowledge, longer survival, shared risk, no special taxes o Disadvantages – unlimited liability, division of profits, disagreement among partners, difficult to terminate (who gets what?) Corporations - legal entity with authority to act and have liability separate from its owners o Owners are not liable for debts or any other problems of corporation beyond investment o Enables many people to share in ownerships (and profits) of business without working there o Public corporation – has right to issue shares to public so shares may be listed on stock exchange : offers possibility of raising large amounts of capital o Private corporation – not allowed to issue stock to public, limited to 50 or fewer stockholders  Advantages – benefit from small business deduction (lowest federal income tax rate, half of normal corporate), can issue stock to relatives or whoever else making them co-owners (gradually transferring ownership and responsibility to those inheriting business) o Advantage:  limited liability  more money for investment (issuing bonds, selling shares)  size (can raise large amounts of money – build factories, develop, hire people, buy other corporations)  perpetual life  ease of ownership change  ease of drawing talented employees  separation of ownership from management o Disadvantages:  extensive paperwork  double taxation (corporate income taxed twice – tax on income before it distributes to stockholders, and stockholders pay tax on dividends they receive)  size (too inflexible to respond quickly)  difficulty of termination  conflict with stockholders and board of directors  initial cost o Corporate governance – process and policies that determine how an organization interacts with its stakeholders, both internal and external  Board of directors – same responsibilities that would typically rest with sole proprietors, partners, or owners of private corporations  On behalf of stockholders – hire officers and oversee major policy issues, no control of daily operation Merger – two firms forming one company o Vertical merger – joining of two companies involved in different stages of related businesses o Horizontal merger – joins two firms in same industry o Conglomerate merger – unites firms in unrelated industries (diversifies business operations and investments) o Benefits: allows regional players to work together and compete more effectively Leveraged Buyout – attempt by employees, management or a group of investors to purchase an organization primarily through borrowing to buy out stockholders in company Acquisition – one company’s purchase of property and obligations of another company Franchising – right to use a specific business’s name and sell its goods or services in a given territory o Method of carrying on a business, not business ownership o Advantages:  Management and marketing assistance (franchisor provides assistance, management training, etc.)  Personal ownership (many profits and incentives of sole proprietor)  Nationally recognized name  Financial advice and assistance  Lower failure rate o Disadvantages:  large start-up costs, shared profit, management regulation, coattail effects (what happens if fellow franchisees fail), restrictions on selling, fraudulent franchisors o E-commerce – internet users able to obtain franchises to open online retail stores stocked with merchandise made in all parts of world Co-operatives – organization owned by members and customers, who pay an annual membership fee and share in any profis o Differ from business because different purpose, control structure, allocation of profit Chapter 7 Entrepreneurship – accepting challenge of starting and running a business Why start a business? - new idea, independence, challenge, family pattern, profit, immigrants -have to be self-directed, determined, action-oriented, highly energetic, tolerant of uncertainty, able to learn quickly Emergence of female entrepreneurs – financial need , lack of promotion opportunities, returning to workforce, family and personal responsibility (increased single and divorced women), public awareness of women in business, part-time occupations, higher rate of success Entrepreneurial teams – group of experienced people from different areas of businesses who join together to form a managerial team with skills needed to develop, make and market a new product Micropreneurs – entrepreneurs willing to accept risk of starting and managing type of business that remains small o Many are home-based , increased home based because: computer technology, corporate downsizing (no job security), change in social attitudes o Challenges: getting new customers, managing time, keeping work and family tasks separate, abiding by city ordinances, managing risk Intrapreneurs – creative people who work as entrepreneurs within corporations Incubators – centers that provide hands-on management assistance, education, information, technical and vital business support services, network resources, financial advice, as well as advice on where to go to seek financial assistance Business establishment – has at least one paid employee, annual sales revenue of $30,000 or is incorporated and has filed a federal corporate income tax return at least once in the previous three years Employer business – meets one of business establishment criteria, and maintains payroll of at least one person Small business – independently owned and operated, not dominant in its field, meets certain standards of size in terms of employees or annual revenues o Can start your own company, buy an existing, or buy franchise unit o Managing: planning – financing – marketing - human resource development – accounting  To finance there are venture capitalists (individuals or companies that invest in new businesses in exchange for partial ownership of those businesses) or angel investors (private individuals who invest their own money in potentially hot new companies before they go public  Market – people with unsatisfied wants and needs who have both the resources and willingness to buy o Going international advantages:  Overseas buyers enjoy dealing with individuals rather than with large corporate bureaucracies  Smaller companies usually can begin shipping much faster  Small companies provide wide variety of suppliers  Provide more personal service and more undivided attention, because each overseas account is a major source of business Leadership (Chapter 8) Management – process used to accomplish organizational goals through planning, organizing, leading, controlling people and other resources - Planning – anticipating trends, determining best strategies and tactics to achieve organizational goals and objectives, set precise standards - Organizing – designing structure of organization, creating conditions and systems in which everyone works together to achieve goals and objectives, recruiting - Leading – creating vision for organization and communicating, guiding, training, motivating others to work effectively, empower employees, give assignments, feedbacks, etc. - Controlling – establishing clear standards to determine whether organization is progressing toward objectives, rewarding people for good work (and action if not) Managers are educated to guide, train, support, motivate and coach employees rather than tell them what to do Planning (vision – mission statement – objectives – strategy) -creating a vision (encompassing explanation of why the organization exists and where it’s trying to head) - creating mission statement (outline of organization’s fundamental purposes), developed by top management with some input from employees depending on size of company - should address organization’s self-concept, company philosophy and goals, long-term survival, customer needs, social responsibility, nature of company’s product or service -mission statement is foundation for setting goals (broad, long-term accomplishments an organization wishes to attain, need to be mutually agreed on by workers and management -objectives – specific, short-term statements detailing how to achieve organization’s goals, must be measurable -SWOT analysis – strengths, weaknesses, opportunities, threats -how can we get from here? : strategic, tactical, operational, contingency planning - strategic – process of determining major goals of organization and policies and strategies for obtaining and using resources to achieve those goals; determines which customers to serve, what goods to sell, geographic areas to compete; done by top managers -tactical - identification of specific, short-range objectives by lower managers – what is to be done, who does it, how to do it - operational – setting of work standards and schedules necessary to implement company’s tactical objectives - contingency – preparing alternative courses of action if primary plans don’t achieve objectives Decision Making – define situation - describe/collect needed information - develop alternatives - develop agreement among those involved - decide which alternative is best (PMI –pluses, minuses, implications) - do what is indicated (begin implementation) - determine whether the decision was a good one and follow up Organizing -allocating resources, assigning tasks, establishing procedures for accomplishing organizational objectives -organization chart – visual device that shows relationship and divides the organization’s work – who is accountable for completion of specific work and who reports to whom - usually 3 levels – top management ( develops strategic plans), middle management (tactical planning and controlling), supervisory management (directly responsible for supervising workers and evaluating their daily performance) -managers need technical skills (involve ability to perform tasks in specific discipline or department), human relations skills (communication and motivation, enable managers to work through and with people), conceptual skills (ability to picture organization as whole and relationships among its various parts) -smaller organizations more responsive than larger organizations – closer ties to stakeholders, and since companies are organizing it so customers have greater influence, smaller organizations have closer contact Leading - Managers strive to produce order and stability, leaders embrace and manage change - Creating vision for others to follow, establishing corporate values and ethics - Management is carrying out of leadership’s vision - Leaders need to communicate vision and rally others around vision, establish corporate values, promote corporate ethics, embrace change Styles – autocratic – making managerial decisions without consulting others, effective with new unskilled workers who need clear direction; also in emergencies - participative (democratic)- managers and employees working together to make decisions - free rein – managers setting objectives and employees being relatively free to do whatever it takes to accomplish objectives (for professionals- doctors, engineers, etc) Knowledge management – finding right information, keeping information in readily accessible place, making information known to everyone in firm Controlling -measuring performance relative to planned objectives and standards - five steps: - establishing clear performance standards - monitoring and recording actual performance -comparing results against plans and standards - communicating results and deviations to the employees involved - taking corrective action when needed and providing positive feedback Organizational Design (chapter 9) Economies of scale – companies can reduce production costs if they purchase raw materials in bulk, average cost of goods goes down as production levels increase Fayol’s Principles of Organization – unity of command, hierarchy of authority , division of labour, subordination of individual interests to general interest (goal of team is more important than goal of individual), authority (authority = responsibility), degree of centralization, clear communication channels, order , equity, esprit de corps (pride and loyalty) Weber’s Organizational Theory – similar to Fayol’s, felt that firm would do well if employed simply did what they were told (untrained workers); also emphasized job descriptions, written rules, consistent procedures, staffin
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