Fundamentals of Business Administration PDF

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Fundamentals of Business Administration

Topic 1: Introduction to Business Administration 1. Concept and nature of business: Macroeconomic view of business- Economic activity that transforms a set of inputs (factors of production ) into outputs (goods and services aimed to satisfy customers’ needs and wants)" Circular flow of income - economic model which describes the reciprocal circulation of income between producers and consumers. The continuous interaction of the markets and productions factors determine a double flow: monetary/financial (wages, rents, dividends) and real (goods and services and factors of production)" Economic agents: • Households - owners of the production factors and consumers of output. Delivers inputs in exchange of income (wages, rents, dividends)" • Firms - use the production factors to make the good/service"

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2. The business environment • Everything that is external to the company is not under business control." • Factors of diverse nature could affect the business performance" • Success requires adaptation to environment and changing it through the strategy" What factors are relevant?" Generic environment (PEST) They affect in a similar way to all companies operating in an economic space" • Political-legal issues (monetary and fiscal policies, labour regulation, industry regulation)" • Economical issues (macroeconomic variables, business cycle, economic policy, national resources)" • Sociocultural issues (value system, education, class structure, income distribution...)" • Technological issues (basic technologies, key technologies, independent technologies" " According to Porter (1990), there are a number of reasons inherent in each country to explain that some are more competitive than others and that some sectors within each country are more competitive than others:" 1. the conditions of specific factors that explain the basis of the advantage at national level" 2. national demand conditions" 3. the one that a successful industry can create competitive advantages for other industries the context of the characteristics of the strategy of the company."

Specific or industrial environment The part of the environment closest to firms. It affects one or one group of firms in a specific way. Hall (1996) established the following components of the specific environment:" 1. Input providers (materials or services)" 2. Customers or users (consumers)" 3. Competitors" 4. Regulatory entities (unions, political entities, environmental organizations)" Porter (1982) established five forces: 1. Current competitors." 2. Potential competitors." 3. Substitute products." 4. Bargaining power of customers." 5. Bargaining power of suppliers." The current competitors are the group of companies that compete for customers in an industry sector. When the intensity of competition increases, the possibility of obtaining higher incomes decreases. The intensity of the competition is the result of:" • Number of competitors and balance between competitors." • Growth rate of the industry." • Mobility barriers." • Exit barriers." • Company cost structure." • Product differentiation." • Supplier change costs." • Diversity of competitors." • Strategic interests." Potential competitors are companies that may be interested in entering the sector. The chances that these potential competitors can compete with the current ones depend on the entry barriers. The main barriers to entry could be summarized in:" • Economies of scale and scope." • Product differentiation." • Capital needs"

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• Access to distribution channels." • Government Policy" %" Substitute products are the products that perform the same functions from the point of view of customers. The more substitute products there are less will be the attractiveness of the sector." Finally, in fourth and fifth place are the negotiating power of the suppliers and customers. The attractiveness of the industry decreases as the bargaining power of" Suppliers and customers are older, since they will be the ones who impose their conditions" in the transactions made." The provider has more power when: • There are few suppliers" • The buyer buys small volumes" • Differentiated products" • There are no substitute products" • Storable products." The client has more power: • There are few customers" • Purchase of large volumes by the customer" • Non-differentiated products" • Existence of substitute products" • Non-storable products"

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Topic 2: The enterprise: types and objectives

1. The enterprise and the entrepreneur. The role of the entrepreneur Entrepreneur: risk taker who starts and operates a business in order to make a profit" Entrepreneurship: process of bringing factors of production together and taking the risk involved in producing a good or service in the hope of making a profit" Historical evolution of the concept of “entrepreneur” • Until the modern age: entrepreneur corresponds to the merchant" • Industrial revolution: the capitalist businessman emerges" • In the classical perspective: entrepreneur and capitalist are the same person. A negative vision of the entrepreneur emerged (Marxist criticism)" Classical theory of the capital entrepreneur: S. XVIII. Adam Smith, D. Ricardo, J. Stuart Mill. The entrepreneur is the person who contributes the capital and manages the company, the functions are linked. The benefit is the reward for the capital contributed." Theory of the entrepreneur as the fourth productive factor of Alfred Marshall (1890) The employer and the owner are the same person, in addition he is the coordinator of the productive process. The benefit is identified with the coordinating function of the entrepreneur." %" Theory of the risk and uncertainty bearing by E.H Knight (1921) The business profit is justified as a reward for the assumed risk that is inherent in the figure of the entrepreneur. If the entrepreneur succeeds in his forecasts, he will obtain a benefit that will compensate the entrepreneur's ability.The risks assumed by the employer are technical (uncertainty in production) and economic (uncertainty in income) " Innovative Entrepreneur Theory by J.A. Schumpeter (1942) According to Schumpeter, the cyclical and irregular nature of economic growth is explained by the technical innovations of entrepreneurs. The entrepreneur is a central agent in the development of the capitalist system. The benefit is a reward for innovation. In the process of technological change, it is the central axis of the process of capitalist economies, three distinct phases can be distinguished: invention, innovation (applied invention), imitation." %" Theory of technostructure by J. K Galbraith (1967) According to Galbraith, throughout the twentieth century there was a process of accumulation of" capitals that led to the birth of large corporations with great power. These highly complex corporations cannot be run by a single person of so that management is reserved for technostructure, composed of a large number of professionals from various fields of knowledge" The current conception of the entrepreneur: there is a double aspect: " Entrepreneur: the person who detects a business opportunity and tries to put it into practice (Schumpeter) assuming a risk (Knight)" The professional manager: the figure that makes decisions, plans, organizes, directs and controls business activity (Marshall) and is technically qualified for this (Galbraith)" We can conclude that an entrepreneur’s functions are:" A person who coordinates and controls the productive process" A person who ensures the payment of the factors of production " A person who takes risky decisions" A person who innovates" A person who detects new business opportunities"

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Team productions need a controller. This role is usually performed by the entrepreneur. The incentives and rights to perform this task are:" • To relieve the residual income (surplus)" • To be the central party in al the contracts signed with the inputs" • To control and reassign the other factors of production" • To sell the mentioned rights"

2. Types of enterprises ! Economic criteria: • Sector: primary, secondary and tertiary" • Size: big, medium, small - depends on sector and market" • Scope of the business: one market / multi-market, national / multinational" Legal criteria • Ownership of the factors of production" - Private companies" - State owned companies" • Main forms of business ownership" - Sole Proprietorship" - Partnership" - Corporation" 2.1. Sole proprietorship A sole proprietorship is a business owned by a single person, who assumes all the risk, takes decisions and looks for business opportunities. Therefore, he owns all the rights." Advantages:" • Simple to start" • Proprietor owns all profits" • Personal satisfaction (being your own boss)& Sole decision maker" • Easy to dissolve"

Disadvantages: " • Unlimited financial liability" • Hard to raise funds for expansion" • No one to share management burden" • Impermanence (e.g if the owner dies)" • Problems surviving in the market '

2.2. Partnership A partnership is an association of two or more persons to carry as co-owners of a business for profit. People form a partnership by entering into a partnership agreement. " A partnership agreement is a written contract between the owners of a partnership that identifies the business and states the partners’ respective rights and duties (name, location, type of business, sharing of profits, dissolving the partnership, etc.)" Ownership: Shares" Responsibility: Limited liability"

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Advantages:" • Limited and joint responsibility" • Pooling of funds, talents, borrowing power…" • More chance to specialize than the soleproprietorship" Property rights can be traded" •

Disadvantages:" • Profit sharing" • Potential for personal disagreement" • Relative impermanence" • Frozen investment (there has to be an absolute agreement between two sides)'

2.3 Corporation A corporation is a legally chartered organization that is a separate and legal entity apart from its owners. It is a legal person and according to that it has most of the rights and responsibilities that a person has. It has its capital divided into aliquots called shares, freely transferable in the markets and that give their owners economic and political rights." Advantages: " • Separate legal entity from owners" • Limited financial liability of said owners" • Permanence (it can exist forever)" • Easy transfer of ownership (shares)" • Greater financial capability (selling shares)" • It favors specialization "

Disadvantages:" • Special and double taxation" • Complex and costly to form and dissolve" • Government regulation and public disclosure requirements" • Problem of separation of ownership-control'

Problem of separation of ownership - control: • In large companies, the Board of Directors guides the affairs of the business" • The directors manage the company - they are employees who assume risks and take decisions" • Directors may take decisions in their interest, disregarding their effect on shareholders" • Shareholders does not control Director’s way of acting day by day" • Shareholders and directors have different access to information and different objectives" • Shareholders do not have enough information to assess the Director’s performance, nor incentives to do it. They do not have incentives to improve the management of the business. " • TL;DR: Board of directors look for own benefit -> Conflict of interest between ownershipcontrol -> Agency Problem" Solution for the problem of separation of ownership - control: Shareholders are able to control the Director’s way of acting in order to avoid that they look for their own benefit. " The mechanisms of control are:" • Selecting the Board of Directors" • Contracts signed with Directors (goal linked)" • Requesting audits to obtain an external point of view" Shareholders owning a large percentage of shares are the ones taking most decisions " 2.4 Cooperative A cooperative association or co-op is an incorporated organization whose user-members (owners) get back any revenue left after expenses are paid. " Principles • Membership is open" • Owned and democratically controlled by its members" • Economic benefit are distributed proportionally according to each member’s participation " • Based on values of self help, self responsibility, democracy and equality" • Cooperative member believe in ethical values of honesty, openness, social responsibility…." Examples: Employee credit unions, Agricultural co-ops, Buying co-ops (buy supplies in bulk economies of scale), Consumer co-ops (customer-owned retail facilities)"

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Problems with coops: • There is no motivation to invents other than staying in the company (as soon as you leave, you won’t receive profit). Therefore it is not a solid long term investment. " • Old and new member will have the exact same rights (conflict)" • Risk concentration of the members" 2.5 Other forms of business ownership Limited partnership: business in which one or more, but not all, of the partners are liable for the firm’s debts only to the extent of their financial investment in the firm " Joint venture: special type of partnership set up by individuals or firms to accomplish a specific task or project. It is very important and usual in international business" Mutual company: corporation that issues no stock and is owned by its policyholders or depositors and whose surplus revenue, if any, is distributed among the owners in the form of dividends. Many insurance companies are mutual companies " ( "

3. Business objectives The traditional concept of a business’ objective is that it is the same as the entrepreneur’s objective - as per classical theory, this is profit maximization Limitations: • The term profit is difficult to define and quantify" • It does not take into account the risk associated to the achievement of profits" • Concept of maximization -> satisfaction" • Excessive leading role of the entrepreneur: separation of agency and control" Management and objectives In order to avoid conflict of interest, the company should align the objectives of management an shareholder. This is done by:" - Incentive programmes: the salary of the executives will depend on the result of the company" - Market of enterprises: companies with realistic salaries will have better results" - Labour market: performing badly in a company will ruin the executive’s prestige" - Market of the factors of production: if you do not choose the best supplier or do not select the best workers the company will end up firing you for not doing your job well"

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The management will try to maximize its interests, always with the limitation of achieving a minimum level of profit in order to satisfy shareholder expectations" The role of the interested parties in the definition of objectives The interested parties of an enterprise are the stakeholders." This include management, shareholders/owners, employees/labour unions, customers, supplies, the State, financial agents like banks, society (corporate social responsibility)"

4. Strategic management definition Strategic management is the continuous planning, monitoring, analysis and assessment of all that is necessary for an organization to meet its goals and objectives.%" Strategy is a plan, method or series of actions designed to achieve a specific goal or effect"

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Strategic management process 1. Look outside: industry analysis to determine the industry attractiveness (1st Key success factor)" 2. Look inside: internal analysis to determine our competitive advantages (2nd KSF)" 3. Based on the key strengths, define the business/competitive strategy: cost leadership or differentiation" 4. We define how we plan to grow: our corporate strategy: vertical integration, diversification or internationalization " After the business and corporate strategies have been defined:" 1. Strategy implementation " 2. Evaluation of performance " Strategic management process never ends, the performance has to be analyzed again and again, adjusted, or even reformulate the strategy" First step: Look outside - Industry analysis • • • • • •

To understand how industry structures drives competition" To assess industry attractiveness " To use evidence on changes in industry structures to forecast future profitability" To formulate strategies to change industry structure to improve industry profitability " The basic tool: Porter’s 5 forces model" The ouput: Industry’s Key Success Factors; all factors you must have to succeed on his business"

Second step: Look inside - Internal analysis To understand the resources and capabilities we have in hour firm" To determine what is our competitive advantage and what are the core factors derived from it" Who is appropriating value from the competitive advantage? (Most must be the company’s) " Known the internal core factors and external key success factors, determine key strengths and weaknesses" Combination of resources and capabilities: competitive advantage. Questions to know if it’s a real competitive advantage :" • Does it sustain on time?" • Can it be copied/replicated?" Types of strategy:" - Business/competitive strategy is concerned with how a firm competes within a particular market" - Corporate strategy is concerned with where a firm competes, i.e the scope of its activities (geographical, vertical, product)" • • • •

Third step: Business/Competitive Advantage Cost leadership - Economies of learning: Improved organizational routines" - Economies of scale: Specialization and division of labour" - Production techniques: Process innovation and reengineering business processes" - Product design: Standardizing designs and components" - Input costs: Location advantages, ownership of resources, non-union labor, bargaining power" - Capacity utilization: Ratio of fixed to variable costs, speed of capacity adjustment" - Residual efficiency: Motivation, company culture, managerial efficiency" Differentiation Differentiation is concerned with how a firm distinguishes its offering from those of its competitors. According to Porter, differentiation is providing something unique that is valuable to the buyer beyond simply offering a low price. "

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It is key to create value for the customer. - Tangible differentiation: observable characteristics (size, material, performance, packaging, complementary services…)" - Intangible differentiation: unobservable and subjective characteristic that appeal to customer’s image, status, identity, and desire for exclusivity" Total customer responsiveness involves differentiation not just about the product, it embraces the whole relationship between the supplier and the customer" Fourth step: Corporate strategy Corporate strategy deals with the ways a company can grow" There are 3 basis Corporate strategies:" - Diversification" - Vertical integration" - Internationalization" " Diversification Diversification decisions involves two issues:" - How attractive is the sector to be entered?" - Can the firm achieve a competitive advantage?" Motives:" • Growth: the desire to escape declining industries (e.g tobacco, newspapers)" • Risk: diversification reduces variance of profit flows" • Profit: bringing together different businesses under common ownership could increase their profitability" Types of diversification • Related diversification: when a business expands its existing product lines or markets" • Unrelated diversification: when a business adds new product lines or markets" Diversification forms • Vertical integration (seen next): along your value chain" • Horizontal diversification: moving into a new industry" • Geographical diversification: open up new markets" Vertical integration Vertical integration is a strategy whereby a company owns or controls its suppliers (backwards), distributors (forwards), or retail locations to control its value or supply chain" Disadvantages: " - Increased risk (outsourcing)" - Decreased flexibility " - Loss of s...