Introduction to Management I: Course Notes

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Management (MGT)
Phani Radhakrishnan

13 September 2012 Business is an organized effort to make or sell goods and services to what customers want or need in order to make a profit. Profit is the difference between revenue or sales (money in) and cost or expenses (money out). [PROFT = REVENUE – EXPENSE] It is the fundamental reason for a business to exist – it rewards the owner for taking the risks involved in investing their time and money. Not all organisations are businesses (IE: hospitals, universities, churches), these provide services but not for profit. Among the most profitable in 2005 were the Royal Bank of Canada, Manulife Financial, and Imperial Oil Ltd. Expenses are the money a business spends producing its goods and services and generally running the business, also referred to as “costs.” Revenue is the money a business earns selling its products and services, also referred to as “sales.” Loss is when expenses are greater than revenues (i.e. It costs more money to produce the products and run the business, than the business can generate through sales). Some loss-making businesses are Air Canada, General Motors and Chrysler. Top line = revenue, bottom line = expenses. Reasons for losses may be competition, salaries and union contracts, higher labor costs etc. Economics is the study of how businesses, people make choices about: What things to produce/consume How best to produce things How best to distribute wealth They constantly consider work VS leisure choices. For example: If minimum wage was increased, would it make people desire a job more? Economic System is the way in which a nation allocates its resources among its citizens, it differs in terms of who owns and controls these resources. Factors of Production are the resources used to produce goods and services:  Natural Resources are raw materials used in the production of goods and services (IE: land, water, mineral deposits and trees)  Labour is the mental and physical training and talents of people aka human resources (IE: Imperial Oil require a labour force with a ride variety of skills ranging from managers to geologists to truck drivers)  Capital is the fund needed to operate an enterprise. Assets such as machines and technologies that money can buy are also included. A major source of capital for small businesses is personal investments by owners. Revenue from sale of products is also a key ongoing source of capital.  Entrepreneurs are the people who organizes and manages labour, capital, and natural resources to produce goods and services to earn a profit, but who also run the risk of failure.  Information Resources are information such as market forecasts, economic data, and specialized knowledge of employees that is useful to a business and that helps it achieve its goals (IE: AOL is in the information business, it does not produce tangible products, instead it provides numerous online services for its millions of subscribers in exchange for monthly access fees). 20 September 2012 The way different countries try to answer basic economic questions:  Who should own or control the factors of production?  What should be produced and allocated with the available factors? Command or Planned Economies Governments control all or most factors of production and it makes all or most production decisions  Communist Economies Government owns and operates all industries IE: North Korea  Socialist Economies The government owns and operates the main industries, while individuals own and operate less crucial industries. IE: Cuba Market Economies Individuals control all or most factors of production and they make all or most production decisions  Capitalist Economies Offering private ownership of the factors of production and of profits from business activity. It encourages entrepreneurship by offering profits as an incentive. Mixed Market Economies Have elements of both a command economy and a market economy; in practice, typical of most nations’ economies. Individuals own or controls majority of factors and make most of economic decisions. Governments regulate and tax, run some business. Privatization is the transfer of activities from the government to the public sector – post offices, air traffic control system. Deregulation is the reduction in the number of laws affecting business activity and in the powers of government enforcement agencies – this frees companies to do what they want without government intervention, simplifying the task of management – Airlines, pipelines, banking, trucking and communication (IE: Canada, USA, UK, France). Canada is a mixed economy as majority of factors (farmland, forests, mines) owned by private individuals. Most of decisions about factors (how many workers to hire, how much to pay them, how much technology to buy) made by individuals. But, government does intervene and is involved in the economy (through taxation, and regulation, provides some services). Elements of a market system: It is not a place but an exchange process between buyers and sellers (IE: housing market, labour market). How Government Influences Business  As Customer: Government buys thousands of different products and services from business firms, including office supplies, office buildings, computers, etc. It is also the largest purchaser of advertising.  As Competitor: Through Crown corporations, which is accountable to a minster of parliament for their conduct.  As Regulator: Through administrative boards, tribunals, or commissions – Canadian Radio- television which issue and renew broadcast licences. The reasons for regulating include protecting competition, protecting consumers, achieving social goals, and protecting the environment.  As Taxation Agent: Taxes are imposed. Revenue Taxes (IE: income taxes) whose main purpose is to fund government services and programs. Progressive Revenue Taxes is tax levied at a higher rate on higher-income tax players and at a lower rate on lower-income taxpayers. Regressive Revenue Taxes (IE: sales tax) are taxes that cause poorer people to pay a higher percentage of income than richer people pay. Restrictive Taxes (IE: taxes on alcohol, tobacco, and gasoline) are taxes levied to control certain activities that legislators believe should be controlled.  As Provider of Incentives: Offer incentive programs that help stimulate economic development (IE: Toyota received millions of dollars in incentives in the form of training incentives, interest- free loans, and suspension of custom duties). Also offer through the many services provided to business firms through government organizations (IE: Export Development Corporation – which assist Canadian exporters by offering export insurance against nonpayment by foreign buyers and long term loans to foreign buyers of Canadian products). Others include municipal tax rebates  As Provider of Essential Services: Through highways, the postal services, the minting of money etc. It tries to maintain stability through fiscal and monetary policy. The Law of Supply is when producers will offer (supply) more of a product for sale as its price increases and less as it drops. The Law of Demand is when buyers will purchase (demand) more of a product as its price drops and less as it rises. Not all markets are the same, ability of buyers to negotiate "good" prices, depends on number of sellers in the market, some markets have lots of sellers, some markets have few sellers and some markets have only one seller. Lots and lots of suppliers all are small; more or less the same must sell at the same price. (IE: carton of milk). Demand and Supply Schedule is the assessment of the relationships between different levels of demand and supply at different price levels. Surplus is the situation in which quantity supplied exceeds quantity demanded. Shortage is the situation in which quantity demanded exceeds quantity supplied. Market economies rely on a Private Enterprise system – one that allows individuals to pursue their own interests with minimal government restriction. In turn, private enterprises require the presence of four elements:  Private Property Rights: Ownership of the resources used to create wealth is in the hands of individuals  Freedom of Choice: Selling labor to any employer you choose, which products to buy, and whom to hire  Profits  Competition Perfect Competition The two conditions: (1) all firms in an industry must be small and (2) the number of firms in the industry must be large. The four principles are:  Products of each firm are so similar that buyers view them as identical to those of other firms  Both buyers and sellers know the prices that others are paying and receiving in the marketplace  Because each firm is small, it is easy for firms to enter or leave the market  Going prices are set exclusively by supply and demand and accepted by both sellers and buyers  (IE: Canadian agriculture – wheat) Monopolistic Competition Have a large number of large or small firms supplying products that are similar but distinctive enough from one another to give firms some ability to influence price, it can still enter or leave the market easily. Differentiating strategies include brand names, design or styling, and advertising. Product differentiation gives sellers some control over prices, big suppliers can charge extra (IE: coffee shops vs. Starbucks). Oligopoly Have small number of very large firms that have the power to influence the price of their product and/or resources. Industry is hard to enter because it requires a large capital investment (IE: Airline, airmobile). It has more control over their strategies, but the actions of one firm can significantly affect the sales of every other firm in the industry. Each tries to differentiate themselves. These businesses watch each other closely, matching price increases and decreases, in an attempt to hold on to their existing customers and gain new ones (IE: Canadian banking industry). Monopoly Has only one producer and can set the prices of its product and resources (IE: LCBO). Its only constraint is how much consumer demand will fall as its price rises. Natural Monopolies is in which having only one producer is most efficient because it can meet all of consumer’s demand for the product. Canadian laws such as the Competition Act forbid many monopolies and are closely watched by provincial utilities boards. Characteristic Perfect Monopolistic Oligopoly Monopoly Example Local Farmer Stationery Store Steel Industry Public Utility # of Competitors Many Many, but fewer Few None than in PC Ease of Entry Relatively Easy Fairly Easy Difficult Regulated by Gov’t Similarity of Identical Similar Similar/Different No Direct Goods Competition Level of Control None Some Some Considerable 27 September 2012 Understanding the Environment of Business The purpose of an economic system is to assemble or organise resource and make things people want so people will buy them creating profits for businesses so everyone will be better off. We measure economic performance by evaluating whether the economic system is producing lots of things that people want with more things every year as quickly and efficiently as possible using all available resources at reasonable prices. External Environment is everything outside an organization’s boundaries that might affect it. Economic Environment is the conditions of the economic system in which an organization operates. Business Cycle is the pattern of short-term ups and downs (expansions and contractions) in an economy. The four phases are: peak, recession, trough, and recovery. Recession is the period during which aggregate output declines. Depression is a prolonged period of recession (2 quarters). The main measure of growth in the business cycle is aggregated output. Aggregated Output is the total quantity of goods and services produced by an economic system during a given period – increase in aggregated output is growth. When output grows more quickly than the population, output per capital (the quantity of goods and services per person) goes up and the system provides relatively more of the goods and services that people want which results in a higher standard of living. Standard of Living is the 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) is the dollar total value of all goods and services produce within a given period by a national economy through domestic factors of production. The larger the GDP the more workers are working, the more use of resources, and the more production of things of value. Countries with Largest GDP – 2010 1 United States 14,799 billion 2 China 9,711 billion 3 Japan 4,267 billion 4 India 3,862 billion 5 Germany 2,859 billion 14 Canada 1,333 billion Growing GDP is more people making more stuff. Falling GDP is fewer people making less stuff aka recession. (Any value above 0 is good). Long Term GDP Growth Canada: 1 - 4% US, UK, Germany, France: 1 - 4% China and India: 8 – 10% Small, poor countries (above) have greatest capacity for growth, starting from a low base. Countries with richest GDP per Capita are Liechtenstein and Luxembourg. Countries with poorest GDP per Capita are Congo and Zimbabwe. Gross National Product (GNP) is the 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 – profits earned by Canadian company abroad are included in GNP, but not GDP (IE: Canadian-owned manufacturing plant in Brazil. Profits earned by factory are included in Canadian GNP – but not in GDP – because its output is not produced domestically. GDP IS THE PREFERRED METHOD OF CALCULATING NATIONAL INCOME AND OUTPUT Real Growth Rate of GDP is the growth rate of GDP adjusted for inflation and changes in the value of the country’s currency. GDP per Capital is “per person.” GDP = total size of an economy. GDP per Capita = relative wealth. This is figured by dividing the total GDP by the total population of a country. Real GDP means that GDP has been adjusted, calculated to account for changes in currency values and price changes (IE: Pizza in one year costs $10 and $11 in another. If 1000 pizzas were made in both years, the GDP would be $10,000 and $11,000 respectively. Has the economy grown? No, because 1000 pizzas were produced in both years). Nominal GDP is GDP measured in current dollars or with all components valued at current prices. Purchasing Power Parity is the principle that exchange rates are set so that the prices of similar products in different countries are about the same. It gives a better sense of standard of living around the world. Productivity Some countries richer than others. Why? It is because there are more and cheaper natural resources which in turn result to more money allowing a gateway for better technology, education and trained labor. Productivity is a measure of economic growth that compares how much a system produces with the resources needed to produce it – the ability to make things quickly and efficiently. It is the ratio of inputs (time and money) to outputs (products and services. It evaluates how many man-hours, money and natural resources it takes to create things. US GDP is 12 times Canada’s. US population is 10 times Canada’s. US productivity is 1.2 times Canada’s. In other words, US workers, on average, produce goods or services with a value that is 20% more than what Canadian workers produce. If your entire economic system increases its productivity, then standard of living has improved. Real growth in GDP reflects growth in productivity. Balance of Trade is the economic value of all the products that a country exports minus the economic value of its imported products.  Positive Balance is when a country’s exports is more than its imports – helps economic growth  Negative Balance is when a country’s imports is more than its exports – inhibits economic growth (aka trade deficit) Canada usually has a positive balance of trade – therefore a creditor nation rather than a debtor nation. National Debt is the total amount of money that the government owes its creditors. Budget Deficits is the result of the government spending more in one year that it takes in during that year. Stability is the condition in which the amount of money available and the quantity of goods and services produced are growing at about the same rate. Unemployment Labour (a key factor of production) is under-utilised. Unemployment is the level of joblessness among people actively seeking work. Canada’s unemployment rate is typically higher than rate in USA. The larger % of population is not working to full capacity – this is one cause to our lower wealth. Countries with the lowest unemployment rate (in 2007) are Nauru, Liberia and Zimbabwe. Frictional Unemployment is when people are out of work temporarily while looking for a new job. Seasonal Unemployment is when people are out of work because of the seasonal nature of their jobs. Cyclical Unemployment is when people are out of work because of a downturn in the business cycle. Structural Unemployment is when people are unemployed because they lack the skills needed to perform available jobs. Inflation When there are widespread price increases throughout an economic system (IE: People have more money to spend, but same quantity of products available, they compete with one another to buy available products, and prices go up. The prices will become so high that purchasing power declines). This hurts people on fixed incomes (pensioners) as this suggests shortages of things people want. Countries with the highest inflation rates are Zimbabwe and Ethiopia. Canadian inflation is quite low, typically less than 3.00% per year. Inflation measured by Consumer Price Index (CPI). CPI is Stats Canada’s tracks of retail price of representative shopping basket of goods and services from an average household's expenditure: food, housing, transportation, furniture, clothing, and recreation. Inflation decreases the purchasing power of your money. Deflation During recessions, when demand falls, and prices can fall. Banks reduce interest rates in an attempt to increase consumer demand. Prices can fall because industrial productivity is increasing and cost savings can be based on to customers (good). It can also fall because consumers have high levels of debt and are therefore unwilling to buy very much (bad) (IE: Cost of houses in USA 2007 – 2010). Country (%) Japan -1.7 Ireland -1.3 United States -0.7 Fiscal Policies are policies by means of which government collect and spend revenues (IE: tax increases – increases revenue, tax cuts – stimulate renewed economic growth). Monetary Policies are policies by means of which the government controls the size of the nation’s money supply (IE: Bank of Canada increases interest rates to make money more expensive to borrow and thereby reduce spending by both those who produce goods and services and by those who buy those goods and services aka tight monetary policies, lower interest rate makes money less expensive to borrow and thereby increase spending by both those who produce goods and services and by the consumers who buy those goods and services aka easy monetary policies). Stabilization Policy is where the government embraces both fiscal and monetary policies, whose goal is to smooth out fluctuations in output and unemployment and to stabilize prices. Three most serious issues facing Canadian business are  Taxation  The value of the Canadian dollar  Need for educated/skilled workforce As businesses try to differentiate themselves, there has been a trend toward higher quality products, planned obsolescence, and product life cycles measured in weeks or months rather than years. Examples of effective competitive strategies: Wal-mart’s satellite based distribution system, West Jet’s unique management system to help minimize aircraft turnaround time thus keeping costs lower than its competitors. Managers try hard to find a competitive strategy for their form, because doing so will slow down or stop new competitors from entering the industry. Michael Porter’s five forces model helps managers analyze five important sources of competitive pressure, and then decide what their competitive strategy should be.  Rivalry among Existing Competitors can be seen in activities like intense price competition, elaborate advertising campaigns, and an increased emphasis on customer service. Firms respond to this by trying to attain more market power, cutting costs, making pricing deals with clients, and trying to find ways to differentiate themselves from their competitors.  Threat of Potential Entrants when competitors enter an industry, they may cause big changes (IE: Microsoft introduced Encarta, caused the sale of hard copy encyclopedias by companies like Encyclopedia Britannica to drop sharply). It is easy for new competitors to enter a market, competition will be intense and industry will not be attractive. Some industries (IE: automobile manufacturing) are very capital intensive, therefore difficult to enter, but others (IE: home cleaning) are easy.  Suppliers the amount of bargaining power suppliers have in relation to buyers helps determine how competitive an industry is. Few suppliers in industry mean greater bargaining power. Power of suppliers is influenced by the number of substitute products available. Few substitute products, suppliers have more power.  Buyers when there are a few buyers and many suppliers, the buyers have a great deal of bargaining power (IE: Wal-mart puts pressure on suppliers to reduce prices, they can do this because they buy a lot).  Substitutes are products that perform the same or similar functions. If there are more substitutes, the industry is more competitive. Core Competencies are skills and resources with which an organization competes best and creates the most value for owners. They outsource non-core business processes, paying suppliers and distributors to perform them and thereby increasing their reliance on suppliers. Outsourcing is a strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or services (IE: Cafeteria in a museum is not the museum’s main line of business, museums usually outsource cafeteria operations; as a result, more attention to museum exhibits and better food service for customers. 11 October 2012 Small Business  Number of people business employed: more than 1, less than 100 employees  Company’s sales revenue: annual sales revenue of $30,000+  Size of investment required  Type of ownership structure the business has In reporting Canadian small business statistics, the government relies on Statistics Canada: the Business Registrar (which tracks businesses) and the Labour Force Survey (which tracks individuals). Must have at least one paid employee, annual sales revenue of $30,000 or more, or be incorporated. There are 2.2 million business establishments in Canada, about 2.5 are self employed. Small Business is an owner managed business with less than 100 employees. Close to 98% of all businesses in Canada are small. All business establishments in Canada are located in Ontario and Quebec. Small businesses account for 2/3 of employments in four industries: health care, construction, other services, and accommodation and food. New Venture/Firm is a recently formed commercial organization that provides goods and/or services for sale. Is a main source of job creation but also responsible for vast majority of new products and services.  When it was formed: considered new within the previous 12 months  Whether it was incorporated: if it adopts any of the main organizational forms (proprietorship, partnership, corporation, or cooperative)  If it sold goods and/or services Most of the growth in firms occurred in the services-producing sector. Women are playing a far more prominent role than ever before in terms of responsibility of growth of new firms. Entrepreneurship is the process of identifying an opportunity in the marketplace and accessing the resources needed to capitalize on that opportunity. Entrepreneurs are people who recognize and seize opportunities. The two main things entrepreneurs need to do are to identify an opportunity and access resources. Intrapreneurs are people who exhibit entrepreneurial characteristics and create something new within an existing large firm or organization (IE: Swiffer mop launch). Entrepreneur Personality Traits  High “Need for Achievement  “Internal” locus of control  Risk tolerance  Self Confident “Needs Motivation” Theory, the three basic human motivations:  Need for power (N-Pow) are the people who are 'authority motivated'. They need to be influential. N-Pow produces a need to lead. These people need personal status and prestige.  Need for affiliation (N-Aff) are the people who need friendly relationships, motivated by interaction with others. N-Aff produces need to be liked, held in high regard. Team players.  Need for achievement (N-Ach) are the people who seek achievement, want to attain challenging goals. N-Ach produces people who need accomplishment. Entrepreneurs seek challenges, set goals, take risks and have a very high need for achievement. Locus of Control A person's belief about what causes good or bad results in his or her life. The extent to which people believe that they can control events that affects them. Internal are people belief that events result from their own behavior and actions. “Internals” try to influence others. “Internals” assume their efforts will succeed External are people who believe that powerful others, fate, or chance determine events. Less likely to be leaders, take risks, and start their own business. Entrepreneurs are internal, they recognize opportunities, assemble and mobilize resources, and assume risks to realize rewards. Risk Tolerance Risk is the uncertainty of outcome. People see risk from new situations, complexity, or the unknown. Risk Intolerance is new or previously unknown situations seen as threatening. Risk Tolerance is when people see new or previously unknown situations as desirable. Entrepreneur Demographic Traits  Kids of entrepreneurs  Immigrants/kids of immigrants  Older than average worker  Not always the greatest students Kids of Entrepreneurs Entrepreneur in family: single most telling indicator of successful entrepreneurs, 80% of entrepreneurs have heritage of family business, importance of role models (“Nurture”), and genetic predispositions (“Nature”). Immigrants/Kids of Immigrants Immigrants / their children thought to make good entrepreneurs. Immigrants to Canada are economic migrants. Packed up lives, belongings, families, to improve economic well-being. Immigrants need confidence, willingness to take reasonable risks, high need to achieve Entrepreneurs Older Than Employees Typical Canadian employee: 34 Typical Canadian entrepreneur: 42 Why? It takes experience, confidence, contacts, and money to start a business. Average Student Entrepreneurs are “doers” not “thinkers.” They prefer action to contemplation. “A” students more likely to become academics, researchers, or professionals (doctors, lawyers). The Entrepreneur is focused on creation (not money, not time, not what is owed), they look for value, examines opportunities from own experience: new product or better product or franchise. Private Sector is the part of the economy that is made up of companies and organizations that are not owned or controlled by the government. Idea Generation Common source of ideas, personal interest or hobby, and a chance of happening. Screening deciding which ideas are dead ends and which you can devote your effort to.  Idea creates or adds value for the customer: product or service that solves a significant problem or meets significant need in new or different ways.  Idea provides a competitive advantage that can be sustained: when customers see product or service as better than that of competitors.  Idea is marketable and financially viable: must determine whether sales will lead to profits. Sales Forecast is an estimate of how much of a product or service will be purchased by prospective customers over a specific period. Total sales revenue is estimated by multiplying the units expected to be sold by the selling price.  Idea has low exit costs: if venture can be shut down without a significant loss of time, money, or reputation Developing the Opportunity New ventures use one or more of three main entry strategies: Introduce a totally new product or service, introduce a product or service that will compete directly with existing competitive offerings but add a new twist, or franchise. Franchise is an arrangement in which a buyer (franchisee) purchase the right to sell the product or service of the seller (franchiser). Business Plan is a document that describes the entrepreneur’s proposed business venture; explains why it is an opportunity and outlines its marketing plan, its operational and financial details, and its manager’s skills and abilities. Accessing Resources The two main types of financing are debts and equity. Debt finance refers to money that is borrowed. Equity financing refers to money that entrepreneur (or others) invests in a business in return for an ownership of interest. At start-up equity is more appropriate and accessible than debt. Collateral refers to assets that a borrower uses to secure a loan or other credit, and that are subject to seizure by the lender if the loan isn’t repaid according to the specified repayment terms. Common sources of debt financing include:  Financial institutions (commercial banks, trust companies, equipment companies, credit unions etc.). Banks are risk averse, personal loans are obtained through mortgage of house or cash value of life insurance policy.  Suppliers: provide goods (inventory) or services to the entrepreneur with an agreement to bill them later (trade credit). Common sources of equity financing include:  Personal savings  Love money: includes investments from friends, relatives, business associates  Private investors: angels, financially well off individuals who wish to recycle wealth by investing in new business  Venture capitalists: professionally managed pools of investor money (venture capital), only deals that present an attractive high growth business opportunity are considered. Equipment can be leased rather than purchased, office furniture can be rented, premises can be shared, and manufacture of products can be subcontracted. Deciding whether to share ownership by forming a venture team involves considering whether having a team is desirable or necessary. Whether a team is necessary depends upon the size and scope of venture and the personal competencies. Starting Up a Small Business From scratch, buying an existing business, or buying a franchise. Buying an Existing Business Advantages  Proven ability to attract customers  Established relationships with lenders, suppliers, and other stakeholders  Existing track record gives potential buyers a much clearer picture of what to expect Disadvantages  May not be able to avoid certain problems (IE: Poor reputation, location) Taking Over a Family Business Advantages  Provide unobtainable financial and management resources  Strong reputation or goodwill  Employee loyalty Disadvantages  Disagreements  Expectations of family members Buying a Franchise Franchising Agreement stipulates the duties and responsibilities of the franchisee and the franchiser. Advantages (for Franchiser)  Attain rapid growth of chain  Share cost in advertising  Benefits from franchisees motivation to work hard, more revenue franchisee generates, more money franchiser makes  Free from all details of local operation Advantages (for Franchisee)  Own a small business with access to big business management skills  Does not have to build up a business from scratch  Failure rates are lower than starting one’s own business  Lower prices for raw materials they must purchase  Financial assistance provided by franchiser  Franchisees are own bosses and get to keep most of profit they make Success and Failure in Small Business CIBC World Markets found that small businesses with above average revenue growth were run by owners with more education, used professional advisors, adopted the corporate form of ownership, did outsourcing work for other companies, had a high level of internet connectivity, and used the internet to sell outside of Canada. Reasons for Success  Hard work, drive, and dedication  Market demand for the product or service  Managerial Competence (know how to manage a business – taking courses)  Luck Reasons for Failure  Managerial incompetence or inexperience  Neglect (unwillingness to put in time and effort)  Weak control systems (failure to alert managers to potential troubles)  Insufficient capital 18 October 2012 Sole Proprietorship is a business owned and operated by one person. Advantages  Freedom, own boss  Easy to form  Low start-up costs  Tax benefits Disadvantages  Unlimited liability  Lack of continuity (dissolves when owner dies)  Depends on resources of one person whose managerial and financial limitations may constrain business Partnership is 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. General Partnership is a partnership in which all partners are jointly liable for the obligations of the business. Limited Partnerships a type of partnership with at least one general partner and one or more limited partners. Limited partners cannot participate in day to day management of the business or they risk the loss of their limited liability status. Advantages  Additional resources (talent and money)  Easy to form Disadvantages  Unlimited liability  Lack of continuity  Difficulty in transferring ownership  Conflicts of partners Corporation is a business that is a separate legal entity that is liable for its own debts and whose owner’s liability is limited to their investments. Shareholders are persons who own shares in a corporation. Board of Directors is a group of individuals elected by a firm’s shareholders and charged with overseeing, and taking legal responsibility for, the corporation’s actions. Inside Directors are members of a corporation’s board of directors who are also full-time employees of the corporation. Outside Directors are members of a corporation’s board of directors who are not also employees of the corporation. Chief Executive Officer (CEO) is the person responsible for the firm’s overall performance. Public Corporation is a business whose shares are widely held and available for sale to the general public. Private Corporation is a business whose shares are held by a small group of individuals and is not usually available for sale to the general public. Initial Public Offering (IPO) is the sale of shares in a company for the first time to the general investing public. Two most widely used methods to form a corporation are federal incorporation under the Canada Business Corporations Act and provincial incorporation under any of the provincial corporations acts. Advantages  Limited liability  Continuity  Shares of stock may be sold or passed on to heirs  Raising money by selling shares Disadvantages  Expensive  Heavily government regulated Redrawing Corporate Boundaries Joining together with other companies to develop new goods and services. Acquisition is when one firm buys another firm and absorbs it into its operations (IE: Air Canada buying Canadian Airlines International). Merger is the union of two companies to form a single new business (IE: Canadian National Railways merged with Illinois Central Railroad). Horizontal Merger is a merger of two firms that have previously been direct competitors in the same industry. Vertical merger is a merger of two firms that have previously had a buyer-seller relationship. Conglomerate Merger is a merger of two firms in completely unrelated businesses. Friendly Takeover is an acquisition in which the management of the acquired company welcomes the firm’s buyout by another company. Hostile Takeover is an acquisition in which the management of the acquired company fights the firm’s buyout by another company. Divestiture occurs when a company sells part of its existing business operations to another company. Spinoff is a strategy of setting up one or more corporate units as new, independent corporations (IE: PepsiCo spun off Pizza Hut, KFC, and Taco Bell into a new separate corporation called Tricon Global Restaurants). 25 October 2012 International Business Business activities that involve exchanges across national boundaries. (IE: Canadian business selling to US customer or Swiss business selling to Canadian customers). Total volume of world trade is around $ trillion year. Globalization is the integration of markets globally. Capital mobility is the movement of money from country to country. International trade can be traced back as far 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 spices. Christopher Columbus’s voyages of discovery were motivated by the search for new trade routes. Governments and businesses have simply become more aware of the benefits of globalization to their countries and shareholders and new technologies make international travel, communication, and commerce increasingly easier, faster, and cheaper than ever before; however, there are competitive pressures, a firm must enter foreign markets just to keep up with its competitors. The contemporary world economy revolves around three major market places: North America, Europe, and Asia-Pacific known to the world’s largest economies, biggest multinational corporations, most influential financial markets, and highest income consumers. Canada is an "Open Economy.” Canada is open to trade, open to flow of goods and have services across border because it raises living standards. Canada is a major player as the 7th largest exporter and 7th largest importer. “G8” Countries are our biggest customers and suppliers. International trade is approximately 30% of Canadian GDP. Exports 2009 Imports 2009 USA 270 billion 236 billion Japan 8 billion 9 billion UK 13 billion 8 billion Per Capita Income is the average income per person of a country.  High income countries are those with per capita income greater than U.S. $10,065 (IE: Canada, USA, Europe, Australia)  Upper middle income countries are those with per capita income between U.S. $3,255 and $10,065 (IE: Czech Republic, Greece, Hungary, Poland)  Low middle income countries are those with per capita income between U.S. $825 and $3,255 (IE: Colombia, Guatemala, Samoa, Thailand). Some of these, including China and India, have huge populations and are seen as potentially attractive markets for international business  Low income countries, often called developing countries, are those with annual per capita income with less than U.S. $825 due to low literacy rates, weak infrastructures, unstable governments, and related problems, these countries are less attractive to international business (IE: East African nation of Somalia) North America Free Trade Agreement The USA dominates the North American business region. It is the single largest marketplace and enjoys the most stable economy in the world. USA and Canada are major trading partners (IE: GM, Bombardier). Mexico has also become a major manufacturing centre where cheap labour and low transportation costs have encouraged many firms from the USA and other countries to build manufacturing plants. Treaty involves Canada, USA and Mexico and includes c. 450 million people. Must have no trade barriers or protection; thus, promotes trade between the three. Europe Regarded as two regions, Western Europe and Eastern Europe, The European Union (EU) unified the marketplace and gained importance as a producer. Major international firms (IE: Shell, Michelin, Nestle) are all headquartered in Western Europe. Ecommerce and technology has become increasingly important in this region. Government instability has hampered economic development in Russia, Bulgaria, Albania, Romania and other countries in this region. Asia-Pacific Includes Japan, China, Thailand, Malaysia, etc. Fuelled by strong entries in the automobile, electronics, and banking industries, the economies of these countries grew rapidly in the 1970s and 1980s, unfortunately, a currency crisis in the late 1990s generally slowed growth in virtually every country of the region. Asia-Pacific is an important force in the world economy and a major source of competition for North American firms. Japan dominates this region (IE: Toyota, Toshiba, Nippon Steel). South Korea (IE: Samsung, Hyundai), Taiwan (IE: Chinese Petroleum and manufacturing home of many foreign firms, and Hong Kong (IE: as a major financial centre) are also successful players in the international economy. Chinese economy is now the third largest, behind the United States and Japan. The emergence of technology firms has been hampered by a poorly developed electronic infrastructure, slower adoption of computers and information technology, a higher percentage of lower-income consumers, and the currency crisis. Association of Southeast Asian nations (ASEAN) was founded in 1967 as an organization for economic, political, social, and cultural cooperation. Import and Export Competitive Advantage  No country can make everything quickly, cheaply and well  Some countries better equipped than others to make particular products  Faster, cheaper, and easier to make some things here  Faster, cheaper, and easier buy other things from elsewhere  Some things you can make, other things you can't  Focuses narrowly on factors such as natural resources and labour costs Two sources of competitive advantage:  Absolute Advantage is a nation’s ability to produce something more cheaply or better than any other country. The things we make and sell, because others CAN’T (IE: A product that Canada can harvest, extract, make or supply more quickly, more easily, more plentifully than other country can simply because it’s here: timber, Brazilian coffee beans, Saudi oil)  Comparative Advantage is the nation’s ability to produce some products more cheaply or better than it can others (IE: specialise). The things we make and sell, because we can and CHOOSE TO. Specialise and make some products more cheaply and better than anyone one else can (IE: Canada has a comparative advantage in faming because of fertile land and a temperature climate while South Korea has a comparative advantage in electronics and manufacturing because of efficient operations and cheap labour – Canadian firms export grain to South Korea and import VCRs and stereos from South Korea) National Competitive Advantage is when a country will be inclined to engage in international trade when factor conditions, demand conditions, related and supporting industries, and strategies and structures and rivalries are favourable.  Factor Conditions are the factors of production  Demand Conditions reflect a large domestic consumer base that promotes strong demand for innovative products  Related and Supporting Industries include strong local or regional suppliers and or industrial customers  Strategies, Structures, and Rivalries refer to firms and industries that stress cost reduction, product quality, higher productivity, and innovative new products International Competitiveness is the ability of a country to generate more wealth than its competitors in world markets. The ranking of global competitiveness is based on hard economic data and a poll of th business leaders in many countries. Switzerland, Finland and Sweden were top 3 while Canada was 16 because of high taxes, regulated industries, and overly conservative capital market institutions. Imports Are products that are made or grown abroad and sold in Canada, product or service that we can’t or don’t make particularly quickly, cheaply or well so we buy it from another country. Money leave Canada, goes to other country. We get stuff, made by folks who are good at it; they get jobs, investment, profits (IE: We get French perfume, they get Canadian money). Exports Are products made or grown in Canada that are sold abroad, product or service that we make in abundance, quickly, cheaply or well so others buy it from us. Money leaves other country and comes to Canada. They get stuff, made by folks who are good at it; we get jobs, investment, profits. Balance of Trade The difference in value between a country’s total exports and its total imports. We want foreign stuff and Canadian jobs. [BALANCE OF TRADE = EXPORTS – IMPORTS] Historically, Canada’s balance of trade is positive, we exported more than we import. Trade Surplus occurs when a country exports more than it imports. Trade Deficit occurs when a country imports more than it exports. Canada has a trade surplus with USA but a deficit with many other countries in the EU and Japan. USA accounts for 85% of Canada’s merchandise exports and 2/3 of its imports leaving Canada vulnerable. Balance of Payments Is the difference between money flowing in to and out of a country as a result of trade and other transactions – the money a nation pays for imports and receives for exports (IE: money spent by tourists, foreign aid programs, and buying and selling of currency all affect balance of payment). Balance of payments is historically negative meaning unfavorable where money flows out of Canada. For Canada to have a favorable balance: Exports, foreign tourist spending, foreign investment here, earnings from overseas investments > Imports, Canadian tourist spending, foreign aid grants, military spending abroad, investments made by Canadian firms abroad and earnings of foreigners from their investments in Canada. Value of US $ to Canadian $ Exchange Rates The ratio of one currency to another. As Canadian dollar appreciates (more valuable) we can buy more US products. As US dollar depreciates (less valuable) they buy fewer Canadian products. Strong Canadian dollar is good for consumers but bad for business. Fixed Exchange Rates the value of any country’s currency relative to that of another country remains constant. Floating Exchange Rates are the norm, and the value of one country’s currency relative to that of another country varies with market conditions. Euro is a common currency shared among most of the members of the European Union (excluding Denmark, Sweden, and the UK). When the country’s domestic currency rises, it becomes stronger, making it harder to export products to foreign markets and easier for foreign companies to enter local markets. It makes it more cost efficient for domestic companies to move production operations to lower-cost sites in foreign countries. Like balance of trade, but includes more items:  Tourist spending (more money out than money in)  Foreign aid (money out)  Profit of Canadian business overseas (in)  Profit of foreign business in Canada (out) International Organizational Structures Independent Agents is a foreign individual or organization who agrees to represent an exporter’s interest in foreign markets (IE: sales representatives – selling exporter products, collecting payments, and ensuring customers are satisfied) Licensing Agreement is an arrangement by an owner of a process or product to allow another business to produce, distribute, or market it for a fee or royalty. This is a more substantial involvement in international business. Royalties are calculated as a percentage of the license holder’s sales (IE: Franchising). Branch Offices is a location that an exporting firm establishes in a foreign country in order to sell its products more effectively – sending managers overseas. It gives a more visible public presence in foreign countries. Strategic Alliances is an enterprise in which two or more persons or companies temporarily join forces to undertake a particular project. Gives firms greater control over their foreign activities than independent agents and licensing arrangements. Alliances allow firms to benefit from the knowledge and expertise of their foreign partners (IE: Microsoft). Foreign Direct Investment (FDI) is buying or establishing tangible assets in another country. Foreign Investment Review Agency (FIRA) was designed to ensure that FDI benefited Canadians. After FIRA was established, the proportion of various industries controlled by foreign firms declined from a high of 38% to 21%. Barriers to International Trade Social and Cultural Differences  Language barriers (IE: Naming and advertising of products)  Physical stature (IE: Japan and French are slimmer and shorter than Canadians, important for selling clothes)  Average age (IE: Growing populations have more young people – electronics and fashion would do well, countries with stable or declining population have more old people – generic pharmaceuticals would do well)  Value differences (IE: Europeans shop daily, Canadians weekly trips)  Behavioural differences (IE: Crossing your legs in Saudi Arabia is inappropriate) Economic Differences  Government involvement (IE: French government heavily involved in all aspects of airplane design and manufacturing) Legal and Political  Quota is a restriction by one nation on the total number of products of a certain type that can be imported from another nation increasing prices of those imports by reducing their supply  Embargo is the ultimate form of a quota which forbids exportation and or importation of a particular product (IE: Controlling disease by banning certain plants)  Tariff is a tax levied on imported products raising the price of imports to consumers o Revenue Tariff is imposed strictly to raise money for the government o Protectionist Tariff is meant to discourage the importation of a particular product  Subsidy is a government payment to help domestic business compete with foreign firms (IE: cotton farms). When the government of a country pays a subsidies to one of its domestic industries, it can have a negative effect on other producers in other countries  Protectionism is protecting domestic business at the expense of a free market competition o For: Tariffs and quotas protect domestic firms and jobs o For: Argue that nation must be able to produce goods needed for its survival in the event of a war and that advanced technology should not be sold to p
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