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Management (MGT)
Chris Bovaird

Chapter 1 Understanding the Canadian Business System 11/25/2013 11:41:00 AM THE CONCEPT OF BUSINESS AND PROFIT Business An organization that seeks to earn profits by providing goods and services. Profit The money that remains (if any) after a business’s expenses are subtracted from its revenues. Expenses The money a business spends producing its goods and services and generally running the business. Also referred to as “costs.” Revenues The money a business earns selling its products and services. Also referred to as “sales”. Profits reward the owners of businesses for taking the risks involved in investing their time and money. Among the most profitable companies in 2005 were the Royal Bank of Canada(3.3 million), Manulife Financial and Imperial Oil Ltd. In Canada’s economic system, businesses exist to earn profits for owners who are free to set them up. But consumers also have freedom of choice. Businesses must take into account what consumers want or need, otherwise they won’t survive if there are no demand. ECONOMIC SYSTEMS AROUND THE WORLD A Canadian business is different in many ways from China, and both Canada and China are different from businesses in Japan, France, or Peru. Economic system The way in which a nation allocates its resources among its citizens. Economic systems differ in terms of who owns and controls these resources, known as the “factors of production”. Factors of Production Factors of production the resources used to produce goods and services: labour, capital, entrepreneurs and natural resources. Labour The mental and physical training and talents of people; sometimes called human resources. E.g. Imperial oil Company. Managers to geologists to truck drivers. Capital The funds needed to operate an enterprise. E.g. Inco needs millions of dollar in cash and millions more in equipment and other assets to run its operate. -For small businesses, owners personal investment is a major source of capital. -Investments can come from individual entrepreneurs, from partners who start business together, or from investors who buy stock. -Once business has opened, revenue from the sale of products is a key and ongoing source of capital. Entrepreneurs An individual who organizes and manages labour, capital, and natural resources to produce goods and services to earn a profit, but who also runs the risk of failure. Natural resources Items used in the production of goods and services in their natural state, including land, water, mineral deposits, and trees. E.g. Imperial Oil makes use of a wide variety of natural resources. Oil and land. Types of Economic Systems Different types of economic systems manage the factors of production in different ways. Command Economies Command Economies An economic system in which government controls all or most factors of production and makes all or most production decisions. - The two most basic forms of command economies are communism and socialism. - Proposed by the 19 th century German economist Karl Marx. - Communism A type of command economy in which government owns and operates all industries. North Korea - Socialism A kind of command economy in which the government owns and operates the main industries, while individuals own and operate less crucial industries. E.g. clothing store, restaurant could be operated by individuals. A large portion of people work for government, management positions are mostly filled based on political considerations rather than on ability. Vast public welfare systems have also resulted high taxes. Cuba Market Economies Market A mechanism for exchange between the buyers and sellers of a particular good or service. Capitalism A kind of market economy offering private ownership of the factors of production and of profits from business activity. No examples. Mixed Market Economies; Canada, USA, UK, France Mixed market economy An economic system with elements of both a command economy and a market economy; in practice, typical of most nations’ economies. Privatization The transfer of activities from the government to the public sector. -E.g. the post office are mostly owned by government regardless of whether the country has a command or market economy, the Netherlands recently began the process of privatizing its TNT post Group N.V., already among the world’s most efficient post office operations. -e.g. Canada has recently privatized its air traffic control system. Deregulation A reduction in the number of laws affecting business activity. In most cases, deregulation frees companies to do what they want without government intervention, thereby simplifying the task of management. i.e. airlines, pipelines, banking, trucking, and communication. INTERACTIONS BETWEEN BUSINESS AND GOVERNMENT Government as Customer. Government buys thousand of different products and services from business firms, such as office supplies, office buildings, computers, battleships, helicopters, hwy… Government as Competitor Government as Regulator Government as Taxation Agent Government as Provider of Incentives Government as Provider of Essential Services THE CANADIAN MARKET ECONOMY Demand and Supply in a Market Economy The Laws of Demand and Supply Demand The willingness and ability of buyers to purchase a product or service. Supply The willingness and ability of producers to offer a good or service for sale. Law of demand The principle that buyers will purchase (demand) more of a product as price drops. Law of supply The principle that producers will offer (supply) more of a product as price rises. The Demand and Supply Schedule Demand curve Graph showing how many units of a product will be demanded (bought) at different prices. Supply curve Graph showing how many units of a product will be supplied (offered for sale) at different prices. Market price or Equilibrium Profit-maximizing price at which the quantity of goods demanded and the quantity of goods supplied are equal. Surpluses and Shortages Surplus Situation in which quantity supplied exceeds quantity demanded. Shortage Situation in which quantity demanded exceeds quantity supplied. -Shortage could increase in criminal behavior. E.g. Price of stainless steel rose during the past five years, thieves began stealing items such as railroad tracks, light poles and guard rails along highways. These items were them sold to scrap yards for cash. Private Enterprise and Competition in a Market Economy Private enterprise An economic system characterized by private property rights, freedom of choice, profits and competition. Competition The vying 竞争的 among businesses in a particular market or industry to best satisfy consumer demands and earn profits. Degrees of Competition Perfect competition -Lots and lots of suppliers -All firms are small -Products are same -Must sell at the same price -Easy to enter or leave Example: carton of milk Monopolistic Competition -Lots and lots of suppliers -Most are small -Most products are same, try to make differences. -Some are big, can differentiate themselves -Most sell at the same price -Big suppliers can charge extra -Easy to enter or leave Example: coffee shops vs. Starbucks Oligopoly -Small number of suppliers (e.g. 4 or 5) -All are “large” -Each tries to differentiate themselves -Industry hard to enter, hard to exit -They watch/ follow each other closely Example: Canadian banking industry Monopoly -Only one supplier -(By definition) 100% market share -Can set whatever price it likes Example: LCBO Understanding the Environments of Business 11/25/2013 11:41:00 AM THE ECONOMIC ENVIRONMENT External environment Everything outside an organization’s boundaries that might affect it. Economic environment Conditions of the economic system in which an organization operates. Economic Growth The Business Cycle Business cycle Pattern of short-term ups and downs (expansions and contractions) in an economy. It has four recognizable phases: peak, recession, trough, and recovery. Recession Period during which aggregate output, as measured by real GDP, declines During recessions, when demand falls, some prices fall. (houses) Depression Particularly severe and long-lasting recession. Can vary from several months to several years. -During later half of the 1990s, the Canadian economy was continuously expanding, leading some people to believe that the business cycle was a thing of the past. This belief was particularly evident among people who invested in high-tech stocks. They learned a hard lesson when tech stocks crashed in 2000. Aggregate Output and the Standard of Living Aggregate output Total quantity of goods and services produced by an economic system during a given period. -When output grows more quickly than the population, 2 things usually follow: Output per capita- the quantity of goods and services per person- goes up and the system provides relatively more of the goods and services that people want. -When these two things occur, people living in an economic system benefit from a higher standard of living. Standard of living Total quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic system. Gross Domestic Product GDP Total value of all goods and services produced in a country in one year, -Growing GDP: more workers, making more stuff. GDP going up, the nation is experiencing economic growth. -Falling GDP: fewer people making less stuff. Falling GDP called recession. USA 15684bl, China 8227bn, Japan5959bn, 11 thCanada 1821bn Poor countries have the greatest capacity for growth. They start from a low base. Gross national product (GNP) Total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located. E.g. A Canadian-owned manufacturing plant in Brazil. The profits earned by the factory are included in Canadian GNP, not GDP. Those profits are included in Brazil’s GDP. Real Growth Rates The real growth rate of GDP- the growth rate of GDP adjusted for inflation and changes in the value of the country’s currency- is what counts. Remember that growth depends on output increasing at a faster rate than population. GDP per Capita GDP per person. A measure of relative wealth of “average citizen”. st nd rd 1 Luxembourg $108,921. 2 Norway $84,840 3 Switzerland Real GDP Real GDP GDP calculated to account for changes in currency values and price changes, E.g. Assume that pizza is the only product in an economy. Assume that in 2005, a pizza cost $10, and in 2006 it cost $11. In both years, exactly 1000 pizzas were produced. In 2005, the GDP was $10000; in 2006 the GDP was $11000. The economy has not grown, since 1000 pizzas were produced in both years, aggregate output remained the same. GDP for 2006 is nominal GDP GDP measured in current dollars or with all components valued at current prices. Purchasing Power Parity Some countries are richer than others, because the productivity. Productivity Measure of economic growth that compares how much a system produces with the resources needed to produce it. Output(products or services)/ inputs (people or $$$) Real growth in GDP reflects growth in productivity, increases in productivity improves standard of living. High productivity is produced by: better educated, better trained labour. More $$$ and better technology. More and cheaper natural resources. Factors that can help or hinder the growth of an economic system: balance of trade and national debt. Balance of Trade Balance of trade The total of a country’s exports minus its imports. A positive balance of trade results when a country exports more than it imports, which helps economic growth, A negative balance of trade results when a country imports more than it exports, which inhibits economic growth. Commonly called trade deficit. Canada usually has a positive balance of trade, it is therefore a creditor nation. USA usually has negative balance of trade, it is therefore a debtor nation. A trade deficit negatively affects economic growth because the money that flows out of a country can’t be used to invest in productive enterprises, either at home or overseas. National Debt National debt The total amount of money that the government owes its creditors. The government takes in revenues (form of taxes) and has expenses (military spending, social programs…). Budget deficit The result of the government spending more in one year than it takes in during that year. Canada is the only highly industrialized country in the world that continues to have a budget surplus. Economic Stability Stability Condition in an economic system in which the amount of money available and the quantity of goods and services produced are growing at about the same rate. Factors that threaten stability: inflation, deflation, and unemployment. Inflation Prices for goods going up. Money slowly loses its value. People can afford to buy less. Hurts people on fixed incomes. (pensioners) How it happens: government prints too much money. Suggests: Shortage of things people want. The comparison of your increased income to the increased price of a hamburger- is all that counts if you want to consider inflation when you’re making a buying decision. Inflation can be harmful to you as a consumer because inflation decreases the purchasing power of your money. Hyper inflation Money quickly loses its value. Money has no real value, Measuring Inflation: The CPI Consumer price index (CPI) Measure of the prices of typical products purchased by consumers living in urban areas. Statistics Canada measures price of 600+ goods and services bought by 1000s of “average” household. (food, clothing, housing, transport, furniture, recreation, etc.) CPI slow and steady price rises. Deflation A period of generally falling prices. Prices may fall because industrial productivity is increasing and cost savings can be passed on to consumers. (THIS IS GOOD) Or because consumers have high levels of debt and are therefore unwilling to buy very much (THIS IS BAD). Unemployment % of people who are actively looking for work, but can’t find any. Labour is under-used. Historically- Canada’s unemployment rate higher than rate in USA Large % of work force not working This is one cause to our lower wealth Recently (since 2008): US rate higher st nd rd 1 South Africa 23.9% 2 Spain 22.9% 3 Greece 20.7% There are 4 types of unemployment: Frictional unemployment people are out of work temporarily while looking for a new job Seasonal unemployment people are out of work because of the seasonal nature of their jobs Cyclical unemployment people are out of work because of a downturn in the business cycle Structural unemployment people are unemployed because they lack the skills needed to perform available jobs. When unemployment is low, there is a shortage of labour available for businesses. As these businesses compete with one another for the available supply of labour, they raise the wages that they are willing to pay. Then, because higher labour costs eat into profit margins, businesses raise the prices of their products. Thus, although consumers have more money to inject into the economy, this increase is soon erased by higher prices. Purchasing power declines. If wage rates get too high, businesses will respond by hiring fewer workers and unemployment will go up. If this happened, demand may decline because unemployed workers don’t purchase as much. Because reduced sales, companies may further cut back on hiring and unemployment will go even higher. Managing the Canadian Economy Fiscal policies Policies by means of which governments collect and spend revenues. Monetary policies Policies by means of which the government controls the size of the nation’s money supply. Stabilization policy Government policy, embracing both fiscal and monetary policies, whose goal is to smooth out fluctuations in output and unemployment and to stabilize prices. Starting Up a Small Business Buying an Existing Business Taking over a Family Business Buying a Franchise SUCCESS AND FAILURE IN SMALL BUSINESS Reasons for Success Hard work, drive and dedication. Market demand for the product or service. Managerial competence Luck Reasons for Failure Managerial incompetence or inexperience, Neglect Weak control systems Insufficient capital. Understanding Entrepreneurship, Small Business, and New Venture Creation 11/25/2013 11:41:00 AM THE LINKS AMONG SMALL BUSINESS, NEW VENTURE CREATION, AND ENTREPRENEURSHIP Canada is market economy, anyone may start a business. No fees, No government permission. To be incorporated in the registry a business must have: -at least 1 employee -annual sales revenues of at least $30,000 or more. Small Business A goods-producing business considered small if it has fewer than 100 employees. A service-producing business is considered small if it has fewer than 50 employees. The majority of businesses are small businesses in Canada. Annual contribution has been scaled at 25%. Approximately 2.4 million small businesses in Canada It’s easy to start a small business. It’s easy for a small business to fail. The New Venture /Firm New venture/firm A recently formed commercial organization that provides goods and/or services for sale. Entrepreneurship Entrepreneurship The process of identifying an opportunity in the marketplace and accessing the resources needed to capitalize on it. Entrepreneurs People who recognize and seize opportunities. Are Internals. Entrepreneurs recognize opportunities, assemble and mobilize resources, are self confident, and risk tolerance. Risk intolerance: New or previously unknown situations seen as threatening Risk tolerance: People see new or previously unknown situations as desirable High “Need for Achievement” “Needs Motivation” Theory (Three Basic Human Motivations) 1.Need for power (N-Pow)- People who are ‘authority motivated’. They need to be influential. N-Pow produces a need to lead. These people need personal status and prestige. 2.Need for affiliation (N-Aff)-People who need friendly relationships, motivated by interactions with others, N-Aff produces need to be liked and held in high regard. Team players. 3.Need for Achievement (N-Ach)-People who seek achievement, want to attain challenging goals. N-Ach produces people who need accomplishment. Locus of Control A persons belief about what causes good or bad results in their life. Internal Locus of Control (Leaders): people belief that events result from their own behavior and actions. Internal try to influence others. External Locus of Control (Not likely to be LEADERS): People who believe that powerful others, fate, or chance determine events. Less likely to be leaders, take risks or start their own business. Psychological Characteristics They seek challenges, set goals, take risks, have a very high need for achievement. Kids of Entrepreneurs 80% of entrepreneurs have heritage of family business Importance of Role Models (“Nurture”) Genetic Predispositions( “Nature” ) Immigrant Entrepreneurs Entrepreneurs Older Than Employees Typical Canadian employee is 34, typical Canadian entrepreneur is 42. Because it takes experience, confidence, contacts, and $$$ to start a business. Women are more successful. Women start business with fewer $$$. THE ROLE OF SMALL AND NEW BUSINESSES IN THE CANADIAN ECONOMY Small and new businesses play a key role in the Canadian economy. - Small Business Close to 98% of all businesses in Canada are small. Understanding Legal Forms of Business Organization 11/25/2013 11:41:00 AM ORGANIZING OPTIONS (FORMS OF BUSINESS OWNERSHIP) The Sole Proprietorship A business owned and operated by one person. Most common form of ownership. Easiest way to form a business. Sole proprietor: Supplies all the capital, makes all decisions, keeps all profits, and responsible for all debts. Sole proprietor can have employees (can have many employees) But only one boss! Advantages of a Sole Proprietorship: Freedom(don’t need to ask anyone, make all decisions), easy to form (no regulatory requirements, no mandatory accounting needs.) Cheap to form ($60-$70 if registered/ $0 if not. Doesn’t need to be registered. Management/ ownership clear.), tax benefits. Disadvantages of a Sole Proprietorship Limits to owner’s skills, limits to owner’s resources, hard to get finance (bank loans), personal liability, unlimited liability (major drawback.). Unlimited liability Personal liability for all debts of the business. How much you might have to pay is unlimited. Your financial responsibility: Not limited to value of the job. Not limited to value of assets used on job. If things go wrong, you can be sued for $$$ you could lose your house, car, life savings. Personal Liability You are personally responsible to pay any bills, settle and lawsuits, and pick up all the pieces if things go wrong. The Partnership A form of organization established when two or more persons agree to combine their financial, managerial, and technical abilities for the purpose of operating a business for profit. Two basic types of partnerships: General partnerships: A type of partnership in which all partners are jointly liable for the obligations of the business. -Simplest form of partnership -All partners share in ownership -All partners share in management -All partners: unlimited liability for debts -All partners: personal liability for debts Limited partnerships A type of partnership with at least one general partner (who has unlimited liability) and one or more limited partners. The limited partners cannot participate in the day-to-day management of the business or they risk the loss of their limited liability status. -partnership with: partners who take no part in management of business -Limited partners supply $$$ only -Limited partners have limited liability (Can lose only their investment) General partners Partners who are actively involved in managing the firm and have unlimited liability Limited partners Partners who don’t participate actively in the business and whose liability is limited to the amount they invested in the partnership. Advantages of a Partnership -Two (or 3) heads better than one -More resources (human and financial) -More credibility (more than 1 owner) -More contacts (potential customers) Disadvantages of Partnership -Conflict (more than 1 owner) -Personal liability -Unlimited liability -Joint and several liability. Each partner responsible for debts of partnership, even when incurred by another partner. Partnership Agreements Agreement between partners Normally includes: How much money each partner contributed. What each partner must do. How the partners paid. How profits distributed. Between partners only. Not binding on others. Corporations -Most sophisticated way to organize -Appropriate for businesses that want: larger number of owners, split between owners/ manager, limited liability for owners. -A legal entity, authorized to operate a business. -Responsible for its own debts. -Owned by shareholders with limited liability. Types of Corporations There are two types of private sector corporations Public corporation A business whose shares are widely held and available for sale to the general public. E.g. Air Canada, Canadian Pacific. Private corporation A business whose shares are held by a small group of individuals and is not usually available for sale to the general public. E.g. owned by nine members of one family. -Most new corporations start out as private corporations, because few investors will buy an unknown stock. As the corporation grows and develops a record of success, it may issue shares to the public as a way of raising additional money. This is called its initial public offering (IPO). Initial Public Offering (IPO) Sale of shares in a company for the first time to the general investing public. Formation of the Corporation -Does require paperwork and fees. Founders of business must complete all necessary legal documents. -Right to create corporation granted by the legal authority e.g. prov of Ontario “Articles of Incorporation” outlines name, address, purpose of Corporation. -Province issues a “certificate of Incorporation” “Certificate” creates legal entity called the “corporation” -Names of corporations must include one of the following: limited, ltd, incorporated, corporation. Shares: Worth What You Pay A share has no fixed or inherent value A share is worth what you pay for it People will pay more if they think the business is well-managed and growing. The value of a share goes up and down every day, with changing news, and market developments. Advantages of Incorporation -Limited Liability The liability of investors is limited to their personal investments in the corporation. In event of failure, the courts may seize a corporation’s assets and sell them to pay debts, but the courts cannot touch the investors’ personal possessions. Continuity. Because it has a legal life independent of its founder and owners, a corporation can, in theory continue forever. Raising money by selling shares, they expand the number of investors and the amount of available funds. Disadvantages of Incorporation Cost. Approximately $2500 Corporations also need legal help in meeting government regulations because they are far more heavily regulated than are proprietorships or partnerships. Corporation-Attributes (Many of the same rights as people): -The right to own property -Right to enter into contracts -Right to hire/fire employees -The right to sue and be sued -The obligation to pay taxes How they are managed -Shareholders own the corporation -A share is a piece of paper, evidence ownership (investors pay $ for ownership) (1 share= 1 vote) -Owners (“shareholder”) elect directors -Directors run corporation for owners -Directors hire officers and employees for corporation Role of directors -Directors run a corporation for its owners -Directors are like MPs: Too many Canadians to run the country. So, we vote for people who we hope (believe) are qualified, to represent us. -Directors stand for election, for fixed terms (e.g. 2-3 years) -Directors hire the CEO, who reports to them, -Directors might hire other Senior Officers (Chief Financial Officer, Chief Operating Officer) -Many CEOs sit on the Board of Directors. Make sense: CEO knows the business best. Doesn’t make sense: CEO is his/her own “boss”. Understanding International Business 11/25/2013 11:41:00 AM THE RISE OF INTERNATIONAL BUSINESS Globalization The integration of markets globally. Imports Products that are made or grown abroad and sold in Canada. Exports Products made or grown in Canada that are sold abroad. The Contemporary Global Economy International trade can be traced back as afar as 2000 BCE, when North African tribes took dates and clothing to Assyria and Babylonia in the Middle East and traded them for olive oil and spice. The Silk Route 700 years ago. China, India, Persia, Arabia, Europe… The first Europeans who came to Canada came for fish, lumber, and fur. 500 years ago. Canada is an “Open Economy”: open to trad
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