World Business, BUS101

Instructor: Prof. E. Van Genderen

The Nature and Scope of Business

• Business- Any organization that strives for profit by offering goods and services that meet customer needs.

• How do we measure success?

• Does success = $$$?

• Who benefits from business, and how?

Market Economies

• What is a market?

• What constitutes a theoretically perfect market?

• Supply

• Demand

• What happens when we implement price controls?

Participants

• Stakeholder- Anyone with a financial interest in the firm.

• The Business Environment consists of both the external and internal environments

• The external environment is made up of the following six influences: societal, Economic forces, global influences, financial markets,

regulatory bodies, and industry competition.

Indicators of Success

• Financial performance

• Meeting customer needs/wishes

• Quality

• Innovation and creativity

• Employee commitment

• What constitutes “quality”?

8 Dimensions of Quality

• Performance

• Features

• Reliability

• Conformance

• Durability

• Serviceability

• Aesthetics

• Perceived Quality

Product Performance and Tech Discontinuity

• Performance vs. Research effort/Expenditure (Richard Foster, McKinsey & Company)

• When to shift efforts/investment to new technology – or competitor will

Financial Performance

• Revenue- the capital raised through the sale of goods and services.

• Expenses- the costs incurred through the running of an enterprise

• Profit- The income left over after all expenses have been paid

• Productivity- The relationship between resources used and product/services rendered

New Companies – unmet needs

Southwest

• Low fares

• Quality on-time service

• Core competence – its employees’ commitment

• Selective secondary airports

• Low-cost high-profitability strategy

Small Businesses find niches

• A niche

• A propitious niche – a niche is propitious to the extent that it is just large enough for one firm to satisfy the demand.

• A strategic window – A unique market opportunity that is available for a limited period of time.

• Example: the Zamboni (1949)

Vision and Mission

• Vision – a picture of the future with some implicit or explicit commentary on why people should strive to create that future.

• Clarifies corporate direction

• Motivates people to take action in the right direction

• It coordinates the actions of people

Characteristics of an Effective Vision

• Imaginable

• Desirable

• Feasible

• Focused

• Flexible

• Communicable

Example

• It is our vision to become the world leader in our industry within ten years. As we use this term, leadership means more revenue, more profit, more innovation that serves our customers’ needs, and a more attractive place to work than any other competitor.

• Achieving this ambitious objective will probably require double-digit revenue and profit growth each year. It will surely require that we become less US oriented, more externally focused, considerably less bureaucratic and more of a service instead of a product company.

• We sincerely believe that if we work together we can achieve this change, and in the process create a firm that will be admired by our stockholders, customers, employees, and communities.

Mission Statement

• Mission – the purpose or reason for a firm’s existence.

Characteristics of an effective mission:

• It clarifies what the company is providing to society

• It explains how it is different from competitors

• Identifies scope of firm’s products

Example

• “To improve the quality of home life by designing, building, marketing, and servicing the best appliances in the world.”

• “We shall build good ships here-at a profit if we can-at a loss if we must-but always good ships.”

Example

• “We stand for integrity, safe products, a clean environment, good salaries and employee relations, and always being in harmony with society.”

Financial Indicators

• “Bottom line”

• Customer sensitivity: IBM

• Customer satisfaction

• Time-to-market

• Making decisions

• Risk and return

Employee Satisfaction

• Motivation

• Empowerment

• Compensation

Strategic Model

• Vision and mission

• Environmental scanning

• Strategy formulation

• Strategy implementation

• Evaluation and control

Small Business Competitiveness

• Core competences

• Distinctive competences

• Coordinated effort

• Strong leadership

• Don’t imitate

• Don’t attempt a frontal assault

Mergers and Acquisitions

• Drivers of…

• Synergy: Va+Vb<Vab

• Northwest/KLM

• KLM/Air France?

• Daimler/Chrysler?

• Horizontal

• Vertical

• Conglomerate

Small Business Contributions

• Economic:

• Employment

• Innovation (technological and other)

Entrepreneurship

• Start a business (traditional)

• Take over an existing firm

• Purchase an existing firm

• A Franchise

The Size of Businesses

• 21 million in US

• 2% have more than 100 employees

• About 15,000 have 500 or more employees

• Capital vs. labor intensive businesses

• A franchise

• Non-profit organizations

• A diversified company

• Mergers and Acquisitions

Forms of Businesses

• Sole-Proprietorships

• Partnerships

• Corporations

• Subchapter S Corporation

• Limited Liability Company (LLC)

Characteristics

• Ownership

• Manager/owner separation

• Liability

• Taxation

Entrepreneurship Activity

• Type of organization

• Most direct competitors

• Mission

• Core competence(s) (hopefully distinctive)

• Explanation of how the above compliment each other

Case: Panasonic

• Q1: Matsushita specifically addressed employee commitment and motivation. This seems to work well with Japanese employees. Do you think this technique would be particularly effective in a Bulgarian company?

• Q2: Matsushita believes in finding out what customers really need in terms of product features. What are some ways it might obtain such information?

• Q3: How does Matsushita’s approach to business success compare with what you have read in this chapter?

Corporate Governance

• Refers to the relationship between shareholders, the board of directors, and top management

• Shareholders

The Board of Directors

• Function of…

• Responsibilities of:

• Approving and overseeing corporate strategy, vision, and mission

• Hiring/firing of top management

• Supervising top management

• Reviewing/approving use of resources

Continuum

• Phantom-No degree of involvement; never knows what to do

• Rubber stamp-Approves all directives made my management.

• Minimal review-Formally reviews selective issues brought by management

• Nominal participation-Selectively participates in decisions or review

• Active participation-active in reviewing management decisions, participates in strategic decision making, and vision, mission determination

• Catalyst-proactive in reviewing management decisions, participates in strategic decision making, and vision, mission determination

Level of Board Participation

• 30% actively worked with management to determine strategic direction

• 30% worked to revise as well as ratify management’s proposals

• 40% merely supported all proposals

Boards of Directors

• Average large firm=13 members

• Small/medium=7 or 8 members

• Agency theory-states that the agents within a company need a direct incentive for them to act in the best interests of the owners

• Agency problems-conflicts between top management and owners due to differing interests

Top Management

• The CEO

• The COO

• The CFO

• The Treasurer and the F. Controller

• Vice Presidents

• Middle managers

Organizational Structures

• Simple

• Functional

• Divisional (Conglomerate)

• Matrix

Strategic Decisions

• Rare-are unusual and have no precedent to follow

• Consequential-commit substantial resources and demand a great deal of commitment from all levels

• Directive-set precedents for lesser decisions and future actions throughout the organization

Decision Making

• Who makes decisions in a company?

• Who makes strategic decisions?

• Reasons for strategic decisions:

• New leader

• External intervention

• External threat

• Performance gap

Decision Making Model

• Define the issue

• Gather/analyze info about the issue

• Develop alternative solutions (strategies)

• Select the best strategy

• Implement the strategy

• Evaluate results

Social Responsibility.?

• There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud. –Milton Friedman

Carroll

• 4 Responsibilities

• Economic (Must Do)

• Legal (Have to Do)

• Ethical (Should Do)

• Discretionary (Might Do)

Ethical

Ethical-conforming to accepted and esp. professional standards of conduct

Example: Is it ethical for a the members of a jury to communicate with witnesses and defendants?

Is it ethical for teachers (or professors) to give grades based on subjective criterion?

Is it ethical for a doctor to pass by an injured person, because they haven’t enough money to pay for the treatment?

Moral

• Moral-having to do with right or wrong behavior, usually within the context of a community or society

Is it moral to allow prostitution?

Is it moral to legalize drugs?

Ethical Behavior

• Kohlberg’s Levels of Moral Development:

• Pre-conventional

• Conventional

• Principled

Ethical Decision Making

• “When in Rome…” (Moral Relativism)

• The “American Express” Approach

• Utilitarian

• Individual Rights

• Justice

• Is there such a thing as universal truth?

Ethical Approaches continued

• Cavanagh

• Utility-does it optimize the satisfaction of all stakeholders?

• Rights-does it respect the rights of the individuals involved?

• Justice-is it consistent with the tradition of justice?

Immanual Kant

• A person’s action is ethical only if that person is willing for that same action to be taken by everyone in the same situation

• A person should never treat another human being as a means, but always as an end

Activity for Small Groups

A young woman was promised to wed a handsome rich foreigner. The man sent for her to come to his neighboring country. The wedding was set for the next day. While the young lady made her way through the thick jungle, she came upon a beautiful little cabin. Out of interest, she opened the door and went in. She was beaten, robbed, and left by the road. After regaining her senses, she continued her journey, until she reached a wide river, that was infested with crocodiles. She noticed two boatmen, approached the first, and explained her dilemma. “Not my business”, he replied, and left. She then asked the second boatman for help. He agreed, but insisted she spend the night with him. Not wanting to miss the wedding, she agreed. The next day, the boatman took her across the river, and she made her way to her fiancés town. There were many festivities. That night, out of guilt and shame, the young woman related her tragic story to her future spouse. Furious, he woke his family, announced that the wedding was cancelled, and ordered that the bride be thrown out of the town.

Business and Stakeholders

• Stakeholders – anyone with a financial interest in an organization: owners, employees, suppliers, customers, creditors, government, etc.

• Direct vs. Indirect

• Owners and investors

Owners vs. Customers vs. Employees

• What is a company’s responsibilities to its owners/investors?

• What are the company’s responsibilities to customers?

• What are a company’s responsibilities to its employees?

• Prioritize the three stakeholders above from most important to least.

Macroeconomic Factors

• Economic Growth

• Inflation

• Interest Rates

• Unemployment

In Hot Pursuit of the Wi Fi Wave

Q: 1, 2, and 3 (p.s 65-66)

Are There Just Too Many Stores? (p.90)

Q: According to this article, what characteristic of the retailing industry created problems for many retailers in 2001-2002? What could have been done to avoid this?

Q: What business strategies seem to work in American retailing? What don’t?

Q: How will the changes affect the manufacturers who supply the retailers?

3M: A Lab For Growth? (p. 39)

Q: How did McNerney’s predecessors define 3m’s mission? How does McNerney?

Q: What indicators of success seem to figure most prominently in McNerney’s mind?

Q: Name one feature of the global environment that represented an opportunity. Name one that represented a threat.

Economic Growth

• Increase in total spending in the economy GDP boosted

• Growth CAN be bad

• Overheating economy

• Prices

• Costs

Inflation

• CPI

• Inflation and interest rates

• Inflation, interest rates, and the forex market

• Borrowing and lending

Monetary and Fiscal Policy

• Fiscal (taxes and G. spending)

• Monetary (money supply; interest rates, inflation, growth, and unemployment)

• Milton Friedman

Business and the Business Cycle

• The market

• Recession vs. expansion

• Recession

• Trough

• Expansion

• Peak

Micro-factors

• PxQ=TR

• Profitability; two paths

• Supply

• Demand

• Equilibrium

• Markets and Free trade

Price Ceilings and Floors

• Example:Bread in France

• Example: Fisheries in Canada

• Example: Rent Controls in New York

Price Elasticity of Demand

• Elastic D=price sensitive; stereos, clothing, restaurants (flatter curve)

• Inelastic D=not price sensitive; medicine, hospitals, government services, salt

Competition

• Pure vs. Monopolistic

• Direct vs. Indirect

• A Monopoly

• An Oligopoly

• Free market vs. Regulated

• Externalities

Group Task

• 1. Microsoft was considered to be a monopoly according to US antitrust laws. Did Microsoft’s monopolistic capacity hurt consumers? Did it in any way help consumers?

• 2. Can you think of any monopolies that are beneficial to communities?

Group Task

• 1. Read the profile on p. 210, and answer the three questions.

Unemployment

• Frictional

• Structural

• Seasonal

• Cyclical

Financial Markets

• A market where financial assets are bought and sold

• Capital market – Long-term

• Money market – Short-term

• Primary market – market for the sale of new securities

• Secondary market – market where already issued securities are traded among investors

• Securities – financial assets

• Financial assets-Claims to the income generated by a firm’s real assets

• Real Assets – Assets used to produce goods and services

• NYSE – New York Stock Exchange

Financial Markets

• OTC market

• NASDAQ

• International Stock Exchanges

• Hong Kong

• Moscow

• Kiev

• Cyprus

Going Public

• IPO-Initial public offering

• Why?

• How?

• Who?

Stock vs. Bonds

• Stocks

• Bonds

• Loans

• Venture Capitalists

Financial Institutions

• Financial Intermediary – Firm that raises money from many small investors and provides financing to businesses or other organizations by investing in their securities.

• Commercial Banks

• Investment Banks

• Insurance Companies

• Pension funds

Functions

• The Payment Mechanism

• Borrowing and Lending

• Pooling Risk

Borrowing and Lending

• Credit history

• Collateral

• Interest

Risk Management

• Financial Futures Market (CME)

• Futures contracts

• ForEx Market

• Forward contracts

Merger and Acquisition Tactics

• Takeover

• Hostile takeover

• Tender

• White Knight

• Shark repellent

• Poison pills

• Golden parachute

Interest Rates

• Nominal Interest Rate

• Real Interest Rate

• Formula: 1+rr=1+nr/1+I

• Approximation: n-i

Firm’s Raising Capital

• Capital Markets

• Money Markets

• Going public (IPO)

• The Value of a firm no. of shares x mp

• The Value of a firm’s stock=market price

China

• 1.2 billion people

• Beijing’s growing economy

• Third world labor; low wages

• The North/South dispute

Economic Drivers of Globalization

• Imports, Exports, and the Balance of Trade

• Balance of Trade: deficit or surplus

• Balance of Payments: deficit or surplus

• ForEx market : London $460 bn, New York + Tokyo = $400 bn – per day

• NYSE $15 bn per day

ForEx continued

• Exchange Rate – the value of a currency compared with another

• Indirect vs. Direct (usually indirect)

• A strong currency vs. a weak one

• Which is better?

• Floating rates vs. fixed

• “pegged” rates

ForEx

• Direct quotes

• Indirect Quotes

• GBP

Foreign Trade Barriers

• Regional trade areas: EU, NAFTA, ASEAN, Mercosur

• Free trade

• Trade barriers: tariffs and quotas

• Favored nation status

• Multinational companies

Global Markets

• Globalization – the internationalization of markets and companies

• “pros” and”cons”.?

• Driving forces: foreign competition, cost control, new markets

Global vs. Multi-domestic

• Industry dependant

• Benefits: cost reduction, improved quality of products, enhanced customer preference/service

• Impediments: product standardization, activity concentration, uniform marketing

Group Questions

• What are the “pros” and “cons” of globalization?

• How do you think globalization affects large and small companies?

• What are the “pros” and “cons” to trade regions?

• How will Bulgaria be affected by joining the EU?

International Entry Strategies

• Exporting

• Licensing

• Joint ventures (JVs)

• Acquisitions

• Green-field development

Environments

• Three environments:

• Societal Environment; Socio-cultural forces, economic forces, technological forces, political-legal forces

• Industry Environment; suppliers, employees/labor unions, competitors, shareholders, customers, creditors

• Internal Environment – structure, culture, resources

Environment Scanning

• The monitoring, evaluating, and disseminating of information from the external and internal environments to key people within the corporation.

• The purpose is to identify strategic factors those external and internal elements that will determine the future of the organization

SWOT Analysis

• Strengths, Weaknesses, Opportunities, and Threats

• O’s and T’s; external environment

form the context within which a firm operates

• S’s and W’s; internal environment

form the context within which work is done

Continued

• Environmental uncertainty: the degree of complexity + the degree of change in an organization’s external environment.

• Determine external environmental variables

External Environmental Variables

• Economic- forces that regulate the exchanges of materials, money, energy, and information

• Technological- forces that generate problem-solving inventions

• Political-legal- forces that allocate power and provide constraining and protecting laws and regulations

• Socio-cultural- forces that regulate the values, mores and customs of a society

Internal Environment

• Core Competences or Core Capabilities – something a corporation can do exceedingly well

• Distinctive competence – A core competence that is superior to those of competitors

Distinctive Competence

• Must be:

• Valued by customers

• Competitor Unique

• Extendible; it must be something that can be used to create new products, services, or to enter new markets

• Distinctive competences are used to establish sustainable competitive advantages

Group Task

• Your companies are now at the point where international expansion is desirable. You need to determine:

• Where you will be expanding, and why.

• What kind of international entry strategy you will use, and why.

• Conduct a “SWOT” analysis.

Michael Porter’s Generic Competitive Strategies

• Low-cost Leadership; is the ability of a company to design, produce, and market a comparable product more efficiently than its competitors

• Differentiation Strategy; is the ability to provide unique and superior value to the buyer e.g. product quality, special features, after sale servicing

Points to Consider

• Range of products to provide

• Distribution channels

• Types of customers

• Geographic area of operation

• Possible other industries in which it will compete

Corporate Strategies

• Cost Leadership

• Cost Focus

• Diversification

• Diversification focus

Cost Leadership

• Requires aggressive construction of efficient-scale facilities

• Vigorous pursuit of cost reduction from experience

• Tight cost/overhead control

• Cost minimization in areas like: R&D, service, sales force, advertising, etc…

Example

• Southwest Airlines

• Benefits include:

• Higher profitability

• High market share

• High level of bargaining power with suppliers

• Safety net during recessions

Differentiation

• Offers a product that is perceived as being unique (within its industry)

• Benefits incl:

• The ability to charge higher price(s)

• Can create strong brand loyalty

• Increased costs can be passed on to customers

Cost Focus

• Is a low-cost competitive strategy that focuses on a particular buyer group or geographic market, and attempts to serve only this niche. Cost is used as the advantage within the market segment.

• Some of the charter airlines

Differentiation Focus

• Concentrates on a particular buyer group, product line segment, or geographic area.

• Examples incl: convenience stores, health food stores, health spas, etc…

• Morgan Motor Cars

Cooperative Strategies

• Strategic Alliances

• Collusion

• Licensing

• Joint Ventures (J.V.’s)

Thinking Strategically

• Strategic Decisions – deal with the long-range future of the organization:

• Rare- unusual and follow no precedents

• Consequential – commit substantial resources and demand a great deal of commitment from people at all levels of the organization

• Directive – Strategic decisions set precedents for lesser decisions and future actions throughout the organization

Strategy Defined – 3Q’s

• Where have we been?

• Where are we going?

• How will we get there?

Strategic Management Model

• Four Phases:

• Vision/mission

• Environmental Scanning

• Strategy Formulation

• Strategy Implementation

• Evaluation and Control

Strategy Formulation

• Vision

• Mission – reason for existence; product(s) offered and market served

• “To improve the quality of home life by designing, building, marketing, and servicing the best appliances in the world”

• “We shall build good ships here-at a profit if we can-at a loss if we must-but always good ships”

• Objectives are the end results of planned activity. They state what, by whom, and when:

• To achieve 10% annual growth in earnings per share

• To lower expenses by 20% over the next two quarters

• Quantifiable

3 Levels of Strategy

• Corporate – overall direction of corporation

• Business – how products/services will be competitively positioned

• Functional – how each functional department can best utilize its resources to support the other two strategies

Examples

• Corporate strategy: Growth, stability, or retrenchment

• Business strategy: Differentiation or low-cost

• Functional strategy: (for R&D) Technological follower or technological leader

Market Association

• Mass market vs. niche market

Examples:

GM vs. Morgan Motor Cars

British Airways vs. Southwest Airlines

Intellectual Property

• An intellectual property is any product of the human intellect that is unique, novel, and unobvious (and has some value in the marketplace).

• an idea

• invention

• expression or literary creation

• unique name

• business method

• industrial process

• chemical formula

• computer program process

• presentation

Protecting Intellectual Property

• Copyrights – The exclusive legal rights to the use of intellectual property such as books, photographs, music, and cartoons.

• Trademark - The exclusive legal right to the use of a name, symbol, or design.

• Patent – A government-protected legal monopoly on a product or product design.

Regulation vs. Deregulation

• A form of control over a segment of the market or industry that may control entry, prices, operations, and perhaps even exiting from the market or industry.

• The removal of some or all forms of regulation

Group Questions

• Is it just to impose intellectual property laws on less-developed countries? (Explain)

• Should medical drugs be regulated by government (prices)? (Explain)

• What industries should be regulated by the government? (Why, and to what extent?)