business individuals or organizations who try to earn a profit by providing products that satisfy people’s needs.
product a good or service with tangible and intangible characteristics that provide satisfaction and benefits.
profit the difference between what it costs to make and sell a product and what a customer pays for it.
nonprofit organizations organizations that may provide goods or services but do not have the fundamental purpose of earning profits.
stakeholders groups that have a stake in the success and outcomes of a business.
management involves developing plans, coordinating employees’ actions to achieve the firm’s goals, organizing people to work efficiently, and motivating them to achieve the business’s goals. Management involves the functions of planning, organizing, leading, and controlling. Effective managers who are skilled in these functions display effective leadership, decision making, and delegation of work tasks. Management is also concerned with acquiring, developing, and using resources (including people) effectively and efficiently.
Marketing includes all the activities designed to provide goods and services that satisfy consumers’ needs and wants. Marketers gather information and conduct research to determine what customers want. Using information gathered from marketing research, marketers plan and develop products and make decisions about how much to charge for their products and when and where to make them available. They also analyze the marketing environment to understand changes in competition and consumers.
Marketing focuses on the four P’s—product, price, place (or distribution), and promotion—also known as the marketing mix.
it is the primary responsibility of the owners to provide financial resources for the operation of the business. Moreover, the owners have the most to lose if the business fails to make a profit
Finance refers to all activities concerned with obtaining money and using it effectively. People who work as accountants, stockbrokers, investment advisors, or bankers are all part of the financial world
Owners sometimes have to borrow money from banks to get started or attract additional investors who become partners or stockholders.
The field of business offers a variety of interesting and challenging career opportunities throughout the world, such as marketing, human resources management, information technology, finance, production and operations, wholesaling and retailing, and many more. Studying business can also help you better understand the many business activities that are necessary to provide satisfying goods and services.
economics the study of how resources are distributed for the production of goods and services within a social system.
natural resources land, forests, minerals, water, and other things that are not made by people.
human resources (labor) the physical and mental abilities that people use to produce goods and services.
financial resources (capital) the funds used to acquire the natural and human resources needed to provide products
economic system a description of how a particular society distributes its resources to produce goods and services. A central issue of economics is how to fulfill an unlimited demand for goods and services in a world with a limited supply of resources.
Communism, socialism, and capitalism, the basic economic systems found in the world today
Communism. Karl Marx (1818–1883) first described communism as a society in which the people, without regard to class, own all the nation’s resources. In his ideal politicaleconomic system, everyone contributes according to ability and receives benefits according to need. In a communist economy, the people (through the government) own and operate all businesses and factors of production. Central government planning determines what goods and services satisfy citizens’ needs, how the goods and services are produced, and how they are distributed. However, no true communist economy exists today that satisfies Marx’s ideal.
In practice, however, communist economies have been marked by low standards of living, critical shortages of consumer goods, high prices, corruption, and little freedom. Russia, Poland, Hungary, and other eastern European nations have turned away from communism and toward economic systems governed by supply and demand rather than by central planning.
Socialism is an economic system in which the government owns and operates basic industries— postal service, telephone, utilities, transportation, health care, banking, and some manufacturing—but individuals own most businesses. For example, in France the postal service industry La Poste is fully owned by the French government and makes a profit. Central planning determines what basic goods and services are produced, how they are produced, and how they are distributed. Individuals and small businesses provide other goods and services based on consumer demand and the availability of resources. Citizens are dependent on the government for many goods and services.
Socialist economies profess egalitarianism—equal distribution of income and social services.
Socialists believe their system permits a higher standard of living than other economic systems, but the difference often applies to the nation as a whole rather than to its individual citizens.
Capitalism. Capitalism, or free enterprise, is an economic system in which individuals own and operate the majority of businesses that provide goods and services. Competition, supply, and demand determine which goods and services are produced, how they are produced, and how they are distributed. The United States, Canada, Japan, and Australia are examples of economic systems based on capitalism
There are two forms of capitalism: pure capitalism and modified capitalism. In pure capitalism, also called a free-market system, all economic decisions are made without government intervention. This economic system was first described by Adam Smith in The Wealth of Nations (1776). Smith, often called the father of capitalism, believed that the “invisible hand of competition” best regulates the economy.
Modified capitalism differs from pure capitalism in that the government intervenes and regulates business to some extent. One of the ways in which the United States and Canadian governments regulate business is through laws. Laws such as the Federal Trade Commission Act, which created the Federal Trade Commission to enforce antitrust laws, illustrate the importance of the government’s role in the economy.
Free enterprise provides an opportunity for a business to succeed or fail on the basis of market demand. In a freeenterprise system, companies that can efficiently manufacture and sell products that consumers desire will probably succeed.
Individuals must have the right to own property and to pass this property on to their heirs. This right motivates people to work hard and save to buy property.
Individuals and businesses must have the right to earn profits and to use the profits as they wish, within the constraints of their society’s laws, principles, and values.
Individuals and businesses must have the right to make decisions that determine the way the business operates. Maximum freedom like in US
Individuals must have the right to choose what career to pursue, where to live, what goods and services to purchase, and more. Businesses must have the right to choose where to locate, what goods and services to produce, w
Supply is the number of products that businesses are willing to sell at different prices at a specific time. In general, because the potential for profits is higher, businesses are willing to supply more of a good or service at higher prices.
Demand is the number of goods and services that consumers are willing to buy at different prices at a specific time. From your own experience, you probably recognize that consumers are usually willing to buy more of an item as its price falls because they want to save money
number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time is the equilibrium price
competition the rivalry among businesses for consumers’ dollars
pure competition the market structure that exists when there are many small businesses selling one standardized product.
monopolistic competition the market structure that exists when there are fewer businesses than in a pure-competition environment and the differences among the goods they sell are small.
oligopoly the market structure that exists when there are very few businesses selling a product.
monopoly the market structure that exists when there is only one business providing a product in a given market
economic expansion the situation that occurs when an economy is growing and people are spending more money; their purchases stimulate the production of goods and services, which in turn stimulates employment.
inflation a condition characterized by a continuing rise in prices
economic contraction a slowdown of the economy characterized by a decline in spending and during which businesses cut back on production and lay off workers.
recession a decline in production, employment, and income.
unemployment the condition in which a percentage of the population wants to work but is unable to find jobs.`
depression a condition of the economy in which unemployment is very high, consumer spending is low, and business output is sharply reduced.
gross domestic product (GDP) the sum of all goods and services produced in a country during a year
budget deficit the condition in which a nation spends more than it takes in from taxes.
Week 1:
Business and management as social science
Business have ajor goal of gaining profit, but not all businesses,
Maslow triangle of needs affects the choices we make as business to affect ppl
Hybrid business models-
Azerbaijani Socks is social enterprise where vulnerable group of population (women) are employed to do socks and they sell it to US market
Stakeholder theory suggests that business have to take into consideration interests of others, not only profit gaining but also consequences of our products that have effect of others. Impact of our activity in response to others (our partners, community, stakeholders, different groups that can be impacted by the result of our activities)
Week 2:
Recognizing opportunities
Where is the root of opportunities.
Small businesses and entrepreneurships
Opportunity is an idea that is based on what customers need or want and are willing to buy sufficiently often at a high enough price to sustain the business.
Business opportunity = idea + 4 keys
attractive to customers
2. Will work in business environment (econ, political, social, culture)
Can be executed in the window of opportunity that exists (timing of this apportunity matter). Problems that ppl had when covid appeared, window of opportunity was online services, who catched it they became successful businesses, faster to track this opportunity
Resources and skills to create the business
Roots of opportunity in the market that can make you successful in persuing opportunity
Problems that business can solve
Changes in laws, situation or trends
Inventions or new product services
Competitive advantage in price, location, quality, reputation, reliability
Technological advances
Train our mind to recognize business opportunity
What firsts me the most when I try to buy smth, say, taxi
What product would rally make my life better
What makes annoyed or angry
What product of service would take my aggragation
For example, pawfect match. Uni student found this app, she mapped out all foster careplaces for homeless pets and created the app for ppl who look to adopt a pet. Matching ppl looking for pet with places available. She is a social entrepreneur. Source of income came from sales of accessories that she was selling. Her business was profitable. This is a hybrid model when you have social cause in heart of business model but also earn money. That is example of successful business model
Entrepreneurship
Movement is acceleration
Come back and watch slide
Azerbaijani socks: local arts connecting hearts
Lankaran had lack of social spece for young to spend their time. coffee shop was founded. Coffee shop and o biri otaq project where he conducts different events in order to create exchange of ideas in lankaran for young people. It is also hybrid usiness, he solves the problem of lack of social space for young people.
What is a small business?
Geographically a disbalance in Azerbaijan since 46% of small businesses are located in capital
Increasing number of generation Y nad Z they tend to be striving more to recognition, not only profit oriented, competitive, need ot be better and better, be more socially active, contribute to society,
HW brainstorm on problems that we see in society in Azerbaijan, saw abroad, neighbourhood, any problem that we observe
Chapter 5 small business, entrepreneurship and franchising
we defined an entrepreneur as a person who risks his or her wealth, time, and effort to develop for profit an innovative product or way of doing something.
Entrepreneurship is the process of creating and managing a business to achieve desired objectives.
Some entrepreneurs who start small businesses have the ability to see emerging trends; in response, they create a company to provide a product that serves customer needs. For example, rather than inventing a major new technology, an innovative company may take advantage of technology to create new markets, such as Amazon.com
Entrepreneurs who have achieved success—like Michael Dell (Dell Computers), Bill Gates (Microsoft), Larry Page and Sergey Brin (Google), and the late Steve Jobs (Apple)—are some of the most well known
Many entrepreneurs with five or fewer employees are considered microentrepreneurs.
Small businesses can also form alliances with other companies to produce and sell products in domestic and global markets.
Another growing trend among small businesses is social entrepreneurship. Social entrepreneurs are individuals who use entrepreneurship to address social problems. They operate by the same principles as other entrepreneurs but view their organizations as vehicles to create social change.
small business as any independently owned and operated business that is not dominant in its competitive area and does not employ more than 500 people.
Small Business Administration (SBA), an independent agency of the federal government that offers managerial and financial assistance to small businesses. On its website, the SBA outlines the first steps in starting a small business and offers a wealth of information to current and potential small-business owners
Many small businesses today are being started because of encouragement from larger ones. Many new jobs are also created by big-company/small-company alliances.
Perhaps one of the most significant strengths of small businesses is their ability to innovate, bringing significant benefits to customers. Small firms produce more than half of all innovations
franchises make up approximately 2 percent of all small businesses.
Small businesses are found in nearly every industry, but retailing and wholesaling, services, manufacturing, and high technology are especially attractive to entrepreneurs. These fields are relatively easy to enter and require low initial financing. Small-business owners in these industries also find it easier to focus on specific groups of consumers; new firms in these industries initially suffer less from heavy competition than do established firms
Retailers acquire goods from producers or wholesalers and sell them to consumers.
Retailing attracts entrepreneurs because gaining experience and exposure in retailing is relatively easy. Additionally, an entrepreneur opening a new retail store or establishing a new website does not have to spend the large sums of money for the equipment and distribution systems that a manufacturing business requires
Nonstore retailing involves selling products outside of a retail facility. There are two types of nonstore retailing: direct marketing— which uses the telephone, catalogs, and other media to give consumers an opportunity to place orders by mail, telephone, or the Internet—and direct selling. Nonstore retailing is an area that provides great opportunity for entrepreneurs because of a lower cost of entry
Direct selling involves the marketing of products to ultimate consumers through face-to-face sales presentations at home, in the workplace, and in party environments. Well-known direct selling companies include Amway, Avon, Herbalife, and Mary Kay. The cost of getting involved in direct selling is low and often involves buying enough inventory to get started. Many people view direct selling as a part-time business opportunity.
Wholesalers provide both goods and services to producers and retailers. They can assist their customers with almost every business function. Wholesalers supply products to industrial, retail, and institutional users for resale or for use in making other products. Wholesaling activities range from planning and negotiating for supplies, promoting, and distributing (warehousing and transporting) to providing management and merchandising assistance to clients.
The service sector includes businesses that do not actually produce tangible goods. Services include intangible products that involve a performance, inauguration, or any effort to provide something of value that cannot be physically possessed. Services can also be part of the wholesale market
Manufacturing. Small businesses sometimes have an advantage over large firms because they can customize products to meet specific customer needs and wants. Such products include custom artwork, jewelry, clothing, and furniture
High technology is a broad term used to describe businesses that depend heavily on advanced scientific and engineering knowledge.
In general, hightechnology businesses require greater capital and have higher initial startup costs than do other small businesses.
sharing economy, an economic model involving the sharing of underutilized resources. Under this model, entrepreneurs earn income by renting out an underutilized resource such as lodging or vehicles.24 The ride-sharing service Uber is the company most associated with the sharing economy. Rather than employing people outright, Uber acts more as a “labor broker,” providing a mobile app that connects buyers (passengers) with sellers (drivers)
The sharing economy is often referred to as the “gig economy” because independent contractors earn income going from job to job.27 The sharing economy offers opportunities for those who want to be their own entrepreneurs or want additional income even though they have another job. Services offered through this model often cost less than more traditional services such as hotels. It is even taking market share away from established firms. For instance, Airbnb averages 22 percent more customers per night than Hilton Worldwide
Independence is probably one of the leading reasons that entrepreneurs choose to go into business for themselves. Being a smallbusiness owner means being your own boss. More often, small-business owners just want the freedom to choose whom they work with, the flexibility to pick where and when to work, and the option of working in a family setting. The availability of a company website, social media, and other Internet resources make it easy to start a business and work from home.
As already mentioned, small businesses often require less money to start and maintain than do large ones.
With small size comes the flexibility to adapt to changing market demands. Small businesses usually have only one layer of management—the owners. Decisions therefore can be made and executed quickly. In larger firms, decisions about even routine matters can take weeks because they must pass through multiple levels of management before action is authorized.
Small firms can focus their efforts on a precisely defined market niche—that is, a specific group of customers. Many large corporations must compete in the mass market or for large market segments. Smaller firms can develop products for particular groups of customers or to satisfy a need that other companies have not addressed
Reputation, or how a firm is perceived by its various stakeholders, is highly significant to an organization’s success. Small firms, because of their capacity to focus on narrow niches, can develop enviable reputations for quality and service
A small business is likely to provide a living for its owner, but not much more (although there are exceptions as some examples in this chapter have shown). There are ongoing worries about competition, employee problems, new equipment, expanding inventory, rent increases, or changing market demand. In addition to other stresses, small-business owners tend to be victims of physical and psychological stress.
Despite the importance of small businesses to our economy, there is no guarantee of success. Half of all businesses fail within the first five years
3 major causes of small-business failure: undercapitalization, managerial inexperience or incompetence, and inability to cope with growth
The shortest path to failure in business is undercapitalization, the lack of funds to operate a business normally. Too many entrepreneurs think that all they need is enough money to get started, that the business can survive on cash generated from sales soon thereafter. But almost all businesses suffer from seasonal variations in sales, which make cash tight, and few businesses make money from the start. Many small rural operations cannot obtain financing within their own communities because small rural banks often lack the necessary financing expertise or assets sizable enough to counter the risks involved with small-business loans
Poor management is the cause of many business failures
Sometimes, the very factors that are advantages for a small business turn into serious disadvantages when the time comes to grow. Growth often requires the owner to give up a certain amount of direct authority, and it is frequently hard for someone who has called all the shots to give up control.
A key element of business success is a business plan—a precise statement of the rationale for the business and a step-by-step explanation of how it will achieve its goals. The business plan should include an explanation of the business, an analysis of the competition, estimates of income and expenses, and other information. It should also establish a strategy for acquiring sufficient funds to keep the business going
A good business plan should act as a guide and reference document—not a shackle that limits the business’s flexibility and decision-making ability.
Business plans allow companies to assess market potential, determine price and manufacturing requirements, identify optimal distribution channels, and refine product selection. It is also important to evaluate and update the business plan to account for changes in the company.
After developing a business plan, the entrepreneur has to decide on an appropriate legal form of business ownership— whether it is best to operate as a sole proprietorship, partnership, or corporation
To make money from a small business, the owner must first provide or obtain money (capital) to get started and to keep it running smoothly. Few new business owners have a large amount of their own capital and must look to other sources for additional financing
The most important source of funds for any new business is the owner. Many owners include among their personal resources ownership of a home, the accumulated value in a life-insurance policy, or a savings account. A new business owner may sell or borrow against the value of such assets to obtain funds to operate a business.
Additionally, the owner may bring useful personal assets—such as a computer, desks and other furniture, a car or truck—as part of his or her ownership interest in the firm. Such financing is referred to as equity financing because the owner uses real personal assets rather than borrowing funds from outside sources to get started in a new business.
Small businesses can also obtain equity financing by finding investors for their operations. They may sell stock in the business to family members, friends, employees, or other investors.
Venture capitalists are persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock. Venture capitalists hope to purchase the stock of a small business at a low price and then sell the stock for a profit after the business has grown successful
New businesses can borrow more as they become established. Banks are the main suppliers of external financing to small businesses
The amount a bank or other institution is willing to loan depends on its assessment of the venture’s likelihood of success and of the entrepreneur’s ability to repay the loan. The bank will often require the entrepreneur to put up collateral, a financial interest in the property or fixtures of the business, to guarantee payment of the debt
Additionally, the small-business owner may have to provide personal property as collateral, such as his or her home, in which case the loan is called a mortgage. If the small business fails to repay the loan, the lending institution may eventually claim and sell the collateral or mortgage to recover its loss.
line of credit—an agreement by which a financial institution promises to lend a business a predetermined sum on demand. A line of credit permits an entrepreneur to take quick advantage of opportunities that require external funding.
trade credit—that is, suppliers allow the business to take possession of the needed goods and services and pay for them at a later date or in installments
bartering—trading their own products for the goods and services offered by other businesses.
Many small-business owners find entry into the business world through franchising. A license to sell another’s products or to use another’s name in business, or both, is a franchise.
Franchisees commonly report the following advantages: • Management training and support. • Brand-name appeal. • Standardized quality of goods and services National and local advertising programs. • Financial assistance. • Proven products and business formats. • Centralized buying power. • Site selection and territorial protection. • Greater chance for success
However, the franchisee must sacrifice some freedom to the franchiser. Some shortcomings experienced by franchisees include: • Franchise fees and profit sharing with the franchiser. • Strict adherence to standardized operations. • Restrictions on purchasing. • Limited product line. • Possible market saturation. • Less freedom in business decisions
Networking—building relationships and sharing information with colleagues—is vital for any businessperson, whether you work for a huge corporation or run your own small business.
Advances in technology have opened up many new markets to small businesses. Undoubtedly, the Internet will continue to provide new opportunities for small businesses.
intrapreneurs individuals in large firms who take responsibility for the development of innovations within the organizations
Often, they use company resources and time to develop a new product for the company
Week 3:
Understanding environment and competition
Without adapting to changes and considering environment no business can survive.
Businesses that offer different services but for the same customers (gym) these are indirect customers
Mcdonals analyse through PESTEL. Political- increasing internation trade agreements is crucial factor for mcdonalds. Also evolving public
Chapter 2 M. Business. Social Responsibility
The acceptability of behavior in business is determined by not only the organization, but also stakeholders such as customers, competitors, government regulators, interest groups, and the public, as well as each individual’s personal principles and values
For instance, Target was criticized for not having appropriate internal controls in place to prevent the theft of millions of its customers’ credit and debit card accounts.
social responsibility a business’s obligation to maximize its positive impact and minimize its negative impact on society.
The most basic ethical and social responsibility concerns have been codified by laws and regulations that encourage businesses to conform to society’s standards, values, and attitudes
Businesses should not only make a profit but also consider the social implications of their activities. In the last year, Walmart, for instance, donated more than $1.4 billion in cash and inkind donations to philanthropic causes throughout the world, and its associates volunteered 1.25 million hours in their communities.5 However, profits permit businesses to contribute to society. The firms that are more well known for their strong social contributions tend to be those that are more profitable
Regardless of what an individual believes about a particular action, if society judges it to be unethical or wrong, whether correctly or not, that judgment directly affects the organization’s ability to achieve its business goals
s important to understand that business ethics goes beyond legal issues. Ethical conduct builds trust among individuals and in business relationships, which validates and promotes confidence in business relationships
Recognizing ethical issues is the most important step in understanding business ethics. An ethical issue is an identifiable problem, situation, or opportunity that requires a person to choose from among several actions
Many business issues seem straightforward and easy to resolve on the surface, but are in reality very complex
bribes, which are payments, gifts, or special favors intended to influence the outcome of a decision
Misuse of Company Time. Theft of time is a common area of misconduct observed in the workplace. using social networking sites or watching YouTube engaging in personal activities such as online shopping and watching sports while on the job.
Abusive and Intimidating Behavior. Abusive or intimidating behavior is the most common ethical problem for employees. These concepts can mean anything from physical threats, false accusations, profanity, insults, yelling, harshness, and unreasonableness to ignoring someone or simply being annoying; and the meaning of these words can differ by person—you probably have some ideas of your own Abusive behavior is difficult to assess and manage because of diversity in culture and lifestyle
Bullying may create what some consider a hostile environment, a term generally associated with sexual harassment. Although sexual harassment has legal recourse, bullying has little legal recourse at this time.
Misuse of Company Resources. Misuse of company resources has been identified by the Ethics Resource Center as a leading issue in observed misconduct in organizations The most common way that employees abuse resources is by using company computers for personal use. Typical examples of using a computer for personal use include shopping on the Internet, downloading music, doing personal banking, surfing the Internet for entertainment purposes, or visiting Facebook
Conflict of Interest. A conflict of interest, one of the most common ethical issues identified by employees, exists when a person must choose whether to advance his or her own personal interests or those of others Conflict of interest can be particularly problematic in the finance industry because bad decisions can result in significant financial losses
Fairness and honesty are at the heart of business ethics and relate to the general values of decision makers. At a minimum, businesspersons are expected to follow all applicable laws and regulations. But beyond obeying the law, they are expected not to harm customers, employees, clients, or competitors knowingly through deception, misrepresentation, coercion, or discrimination
Communications. Communications is another area in which ethical concerns may arise. False and misleading advertising, as well as deceptive personal-selling tactics, anger consumers and can lead to the failure of a business. Another important aspect of communications that may raise ethical concerns relates to product labeling. This becomes an even greater concern with potentially harmful products like cigarettes
Business Relationships. The behavior of businesspersons toward customers, suppliers, and others in their workplace may also generate ethical concerns. Ethical behavior within a business involves keeping company secrets, meeting obligations and responsibilities, and avoiding undue pressure that may force others to act unethically.
Plagiarism—taking someone else’s work and presenting it as your own without mentioning the source—is another ethical issue.
Ethical decisions in an organization are influenced by three key factors: individual moral standards and values, the influence of managers and co-workers, and the opportunity to engage in misconduct
Whistleblowing occurs when an employee exposes an employer’s wrongdoing to outsiders, such as the media or government regulatory agencies
Why a Code of Ethics Is Important Alerts employees about important issues and risks to address. • Provides values such as integrity, transparency, honesty, and fairness that give the foundation for building an ethical culture. • Gives guidance to employees when facing gray or ambiguous situations or ethical issues that they have never faced before. • Alerts employees to systems for reporting or places to go for advice when facing an ethical issue. • Helps establish uniform ethical conduct and values that provides a shared approach to dealing with ethical decisions. • Serves as an important document for communicating to the public, suppliers, and regulatory authorities about the company’s values and compliance. • Provides the foundation for evaluation and improvement of ethical decision making.
For our purposes, we classify four stages of social responsibility: financial, legal compliance, ethics, and philanthropy (Table 2.7). Another way of categorizing these four dimensions of social responsibility include economic, legal, ethical, and voluntary (including philanthropic).
Corporate citizenship is the extent to which businesses meet the legal, ethical, economic, and voluntary responsibilities placed on them by their various stakeholders. It involves the activities and organizational processes adopted by businesses to meet their social responsibilities.
Social responsibility rests on stakeholder engagement and results in benefits to society and improved firm performance. 2. Businesses are responsible because they have the financial and technical resources to address sustainability, health, and education. 3. As members of society, businesses and their employees should support society through taxes and contributions to social causes. 4. Socially responsible decision making by businesses can prevent increased government regulation. 5. Social responsibility is necessary to ensure economic survival: If businesses want educated and healthy employees, customers with money to spend, and suppliers with quality goods and services in years to come, they must take steps to help solve the social and environmental problems that exist today.
It sidetracks managers from the primary goal of business—earning profit. The responsibility of business to society is to earn profits and create jobs. 2. Participation in social programs gives businesses greater power, perhaps at the expense of concerned stakeholders. 3. Does business have the expertise needed to assess and make decisions about social and economic issues? 4. Social problems are the responsibility of the government agencies and officials, who can be held accountable by voters. 5. Creation of nonprofits and contributions to them are the best ways to implement social responsibility.
Consumers are refusing to buy from businesses that receive publicity about misconduct. A number of studies have found a direct relationship between social responsibility and profitability, as well as a link that exists between employee commitment and customer loyalty—two major concerns of any firm trying to increase profits
A major social responsibility for business is providing equal opportunities for all employees regardless of their sex, age, race, religion, or nationality. Diversity is also helpful to a firm financially
consumerism the activities that independent individuals, groups, and organizations undertake to protect their rights as consumers. To achieve their objectives, consumers and their advocates write letters to companies, lobby government agencies, make public service announcements, and boycott companies whose activities they deem irresponsible
The right to be informed gives consumers the freedom to review complete information about a product before they buy it. This means that detailed information about risks and instructions for use are to be printed on labels and packages. The right to choose ensures that consumers have access to a variety of goods and services at competitive prices. The assurance of both satisfactory quality and service at a fair price is also a part of the consumer’s right to choose. The right to be heard assures consumers that their interests will receive full and sympathetic consideration when the government formulates policy. It also ensures the fair treatment of consumers who voice complaints about a purchased product.
sustainability conducting activities in a way that allows for the long-term well-being of the natural environment, including all biological entities; involves the assessment and improvement of business strategies, economic sectors, work practices, technologies, and lifestyles so that they maintain the health of the natural environment.
Sustainability involves the interaction among nature and individuals, organizations, and business strategies and includes the assessment and improvement of business strategies, economic sectors, work practices, technologies, and lifestyles so that they maintain the health of the natural environment.
Pollution. A major issue in the area of environmental responsibility is pollution.
Water pollution results from dumping toxic chemicals and raw sewage into rivers and oceans, oil spills, and the burial of industrial waste in the ground where it may filter into underground water supplies. Fertilizers and insecticides used in farming and grounds maintenance also run off into water supplies with each rainfall. Water pollution problems are especially notable in heavily industrialized areas. Society is demanding that water supplies be clean and healthful to reduce the potential danger from these substances. Air pollution is usually the result of smoke and other pollutants emitted by manufacturing facilities, as well as carbon monoxide and hydrocarbons emitted by motor vehicles. In addition to the health risks posed by air pollution, when some chemical compounds emitted by manufacturing facilities react with air and rain, acid rain results.
Many firms are trying to eliminate wasteful practices, the emission of pollutants,
Many businesses have turned to recycling, the reprocessing of materials—aluminum, paper, glass, and some plastic—for reuse. Such efforts to make products, packaging, and processes more environmentally friendly have been labeled “green” business or marketing by the public and media.
Community Relations. A final, yet very significant, issue for businesses concerns their responsibilities to the general welfare of the communities and societies in which they operate. Many businesses simply want to make their communities better places for everyone to live and work. The most common way that businesses exercise their community responsibility is through donations to local and national charitable organizations. For example, companies and their employees hold fundraising efforts to raise money for the United Way
Protests often occur in areas where unemployment is high, particularly when there seems to be a large gap between rich and poor
Another criticism levied against companies involves hiring standards. Some employers have been accused of having unreasonable hiring standards that most applicants cannot meet, often leaving these jobs unfilled. Critics have accused companies of not wanting to take the time to train employees.56 Employers, however, believe there is a significant lack of skills needed among job applicants.
Week 6: Legal and Organisational Structures, lecture notes
Legalize and register our business
Book: chapter 4
Sole proprietorships, businesses owned and operated by one individual, are the most common form of business organization in the United States. Common examples include many retailers such as restaurants, hair salons, flower shops, dog kennel
Sole proprietors also include independent contractors who complete projects or engage in entrepreneurial activities for different organizations but who are not employees. These include drivers for Uber and those engaged in direct selling for firms such as Mary Kay, Avon, or Tupperware
Sole proprietorships are typically small businesses employing fewer than 50 people
Sole proprietorships are generally managed by their owners. Because of this simple management structure, the owner/ manager can make decisions quickly. This is just one of many advantages of the sole proprietorship form of business
Forming a sole proprietorship is relatively easy and inexpensive.
Computers, personal copiers, scanners, and websites have been a boon for home-based businesses, permitting them to interact quickly with customers, suppliers, and others. Many independent salespersons and contractors can perform their work using a smartphone or tablet computer as they travel. E-mail and social networks have made it possible for many proprietorships to develop in the services area. Internet connections also allow small businesses to establish websites to promote their products and even to make low-cost long-distance phone calls with voice-over Internet protocol (VoIP) technology. One of the most famous services using VoIP is Skype, which allows people to make free calls over the Internet.
Sole proprietorships make possible the greatest degree of secrecy. The proprietor, unlike the owners of a partnership or corporation, does not have to discuss publicly his or her operating plans, minimizing the possibility that competitors can obtain trade secrets.
All profits from a sole proprietorship belong exclusively to the owner. He or she does not have to share them with any partners or stockholders.
The sole proprietor has complete control over the business and can make decisions on the spot without anyone else’s approval. This control allows the owner to respond quickly to competitive business conditions or to changes in the economy. The ability to quickly change prices or products can provide a competitive advantage for the business
Sole proprietorships have the most freedom from government regulation
Profits from sole proprietorships are considered personal income and are taxed at individual tax rates. The owner, therefore, pays one income tax that includes the business and individual income
A sole proprietorship can be dissolved easily. No approval of co-owners or partners is necessary. The only legal condition is that all financial obligations must be paid or resolved
The sole proprietor has unlimited liability in meeting the debts of the business. In other words, if the business cannot pay its creditors, the owner may be forced to use personal, nonbusiness holdings such as a car or a home to pay off the debts. There are only a few states in which houses and homesteads cannot be taken by creditors, even if the proprietor declares bankruptcy. The more wealth an individual has, the greater is the disadvantage of unlimited liability
Limited Sources of Funds. Among the relatively few sources of money available to the sole proprietorship are banks, friends, family, the Small Business Administration, or his or her own funds. The owner’s personal financial condition determines his or her credit standing. Additionally, sole proprietorships may have to pay higher interest rates on funds borrowed from banks than do large corporations because they are considered greater risks. More proprietors are using nonbank financial institutions for transactions that charge higher interest rates than banks. Often, the only way a sole proprietor can borrow for business purposes is to pledge a car, a house, other real estate, or other personal assets to guarantee the loan. If the business fails, the owner may lose the personal assets as well as the business. Publicly owned corporations, in contrast, can not only obtain funds from commercial banks but can sell stocks and bonds to the public to raise money. If a public company goes out of business, the owners do not lose personal assets. However, they will lose the value of their stocks or bonds.
Limited Skills. The sole proprietor must be able to perform many functions and possess skills in diverse fields such as management, marketing, finance, accounting, bookkeeping, and personnel management. Specialized professionals, such as accountants or attorneys, can be hired by businesses for help
Lack of Continuity. The life expectancy of a sole proprietorship is directly linked to that of the owner and his or her ability to work. The serious illness of the owner could result in failure of the business if competent help cannot be found.
Lack of Qualified Employees. It is sometimes difficult for a small sole proprietorship to match the wages and benefits offered by a large competing corporation because the proprietorship’s profits may not be as high. In addition, there may be less room for advancement within a sole proprietorship, so the owner may have difficulty attracting and retaining qualified employees.
Taxation. Although we listed taxation as an advantage for sole proprietorships, it can also be a disadvantage, depending on the proprietor’s income. Under current tax rates, sole proprietors pay a higher marginal tax rate than do small corporations on income of less than $75,000. However, sole proprietorships avoid the double taxation of corporate and personal taxes that occurs with corporations. The tax effect often determines whether a sole proprietor chooses to incorporate his or her business.
partnership as “an association of two or more persons who carry on as coowners of a business for profit.” Partnerships are the least used form of business. They are typically larger than sole proprietorships but smaller than corporations
There are two basic types of partnership: general partnership and limited partnership. A general partnership involves a complete sharing in the management of a business. In a general partnership, each partner has unlimited liability for the debts of the business. Professionals such as lawyers, accountants, and architects often join together in general partnership
A limited partnership has at least one general partner, who assumes unlimited liability, and at least one limited partner, whose liability is limited to his or her investment in the business. Limited partnerships exist for risky investment projects where the chance of loss is great. The general partners accept the risk of loss; the limited partners’ losses are limited to their initial investment. Limited partners do not participate in the management of the business but share in the profits in accordance with the terms of a partnership agreement. Usually the general partner receives a larger share of the profits after the limited partners have received their initial investment back
A master limited partnership (MLP) is a limited partnership traded on securities exchanges. MLPs have the tax benefits of a limited partnership but the liquidity (ability to convert assets into cash) of a corporation. Popular examples of MLPs include oil and gas companies and pipeline operators.6
Articles of partnership are legal documents that set forth the basic agreement between partners
Articles of partnership usually list the money or assets that each partner has contributed (called partnership capital), state each partner’s individual management role or duty, specify how the profits and losses of the partnership will be divided among the partners, and describe how a partner may leave the partnership as well as any other restrictions that might apply to the agreement.
Ease of Organization. Starting a partnership requires little more than drawing up articles of partnership. No legal charters have to be granted, but the name of the business should be registered with the state.
Availability of Capital and Credit. When a business has several partners, it has the benefit of a combination of talents and skills and pooled financial resources
Combined Knowledge and Skills. Partners in the most successful partnerships acknowledge each other’s talents and avoid confusion and conflict by specializing in a particular area of expertise such as marketing, production, accounting, or service. The diversity of skills in a partnership makes it possible for the business to be run by a management team of specialists instead of by a generalist sole proprietor.
Serviceoriented partnerships in fields such as law, financial planning, and accounting may attract customers because clients may think that the service offered by a diverse team is of higher quality than that provided by one person.
Decision Making. Small partnerships can react more quickly to changes in the business environment than can large partnerships and corporations. Such fast reactions are possible because the partners are involved in day-to-day operations and can make decisions quickly after consultation. Large partnerships with hundreds of partners in many states are not common. In those that do exist, decision making is likely to be slow.
Regulatory Controls. Like a sole proprietorship, a partnership has fewer regulatory controls affecting its activities than does a corporation. A partnership does not have to file public financial statements with government agencies or send out quarterly financial statements to several thousand owners, as do corporations such as Apple and Ford Motor Co. A partnership does, however, have to abide by all laws relevant to the industry or profession in which it operates as well as state and federal laws relating to financial reports, employees, consumer protection, and environmental regulations, just as the sole proprietorship does
Partnerships have many advantages compared to sole proprietorships and corporations, but they also have some disadvantages. Limited partners have no voice in the management of the partnership, and they may bear most of the risk of the business, while the general partner reaps a larger share of the benefits
Unlimited Liability. In general partnerships, the general partners have unlimited liability for the debts incurred by the business, just as the sole proprietor has unlimited liability for his or her business. Such unlimited liability can be a distinct disadvantage to one partner if his or her personal financial resources are greater than those of the others. A potential partner should check to make sure that all partners have comparable resources to help the business in time of trouble
Business Responsibility. All partners are responsible for the business actions of all others. Partners may have the ability to commit the partnership to a contract without approval of the other partners. A bad decision by one partner may put the other partners’ personal resources in jeopardy. Personal problems such as a divorce can eliminate a significant portion of one partner’s financial resources and weaken the financial structure of the whole partnership
Life of the Partnership. A partnership is terminated when a partner dies or withdraws. In a two-person partnership, if one partner withdraws, the firm’s liabilities would be paid off and the assets divided between the partners. Obviously, the partner who wishes to continue in the business would be at a serious disadvantage
Distribution of Profits. Profits earned by the partnership are distributed to the partners in the proportions specified in the articles of partnership. This may be a disadvantage if the division of the profits does not reflect the work each partner puts into the business
Limited Sources of Funds. As with a sole proprietorship, the sources of funds available to a partnership are limited. Because no public value is placed on the business (such as the current trading price of a corporation’s stock), potential partners do not always know what one partnership share is worth, although third parties can access the value. Moreover, because partnership shares cannot be bought and sold easily in public markets, potential owners may not want to tie up their money in assets that cannot be readily sold on short notice.
Partnerships also may have to pay higher interest rates on funds borrowed from banks than do large corporations because partnerships may be considered greater risks
Taxation of Partnerships Partnerships are quasi-taxable organizations. This means that partnerships do not pay taxes when submitting the partnership tax return to the Internal Revenue Service. The tax return simply provides information about the profitability of the organization and the distribution of profits among the partners. Partners must report their share of profits on their individual tax returns and pay taxes at the income tax rate for individuals. Master limited partnerships require financial reports similar to corporations, which are discussed in the next section.
A corporation is a legal entity, created by the state, whose assets and liabilities are separate from its owners. As a legal entity, a corporation has many of the rights, duties, and powers of a person, such as the right to receive, own, and transfer property
Corporations are typically owned by many individuals and organizations who own shares of the business, called stock (thus, corporate owners are often called shareholders or stockholders
As owners, the stockholders are entitled to all profits that are left after all the corporation’s other obligations have been paid. These profits may be distributed in the form of cash payments called dividends. For example, if a corporation earns $100 million after expenses and taxes and decides to pay the owners $40 million in dividends, the stockholders receive 40 percent of the profits in cash dividends. However, not all aftertax profits are paid to stockholders in dividends. Some corporations may retain profits to expand the business. For example, Google retains its earnings and does not pay out dividends. The company claims it needs cash on hand to remain flexible and competitive
A corporation is created, or incorporated, under the laws of the state in which it incorporates. The individuals creating the corporation are known as incorporators
Each state has a specific procedure, sometimes called chartering the corporation,
Most states require a minimum of three incorporators; thus, many small businesses can be and are incorporated. Another requirement is that the new corporation’s name cannot be similar to that of another business. In most states, a corporation’s name must end in “company,” “corporation,” “incorporated,” or “limited” to show that the owners have limited liability
The incorporators must file legal documents generally referred to as articles of incorporation with the appropriate state office (often the secretary of state). The articles of incorporation contain basic information about the business
corporate charter a legal document that the state issues to a company based on information the company provides in the articles of incorporation.
If the corporation does business in the state in which it is chartered, it is known as a domestic corporation. In other states where the corporation does business, it is known as a foreign corporation. If a corporation does business outside the nation in which it is incorporated, it is called an alien corporation. A corporation may be privately or publicly owned.
private corporation a corporation owned by just one or a few people who are closely involved in managing the business.
Privately owned corporations are not required to disclose financial information publicly, but they must, of course, pay taxes.
A public corporation is one whose stock anyone may buy, sell, or trade.
In large public corporations such as AT&T, the stockholders are often far removed from the management of the company
In other corporations the managers are often the founders and the major shareholders. Facebook CEO Mark Zuckerberg, for example, holds 16.5 percent of Facebook stock. While he announced that he would donate 99 percent of his shares to charity, he will retain his voting majority position in the firm.16 Publicly owned corporations must disclose financial information to the public under specific laws that regulate the trade of stocks and other securities
A private corporation that needs more money to expand or to take advantage of opportunities may have to obtain financing by “going public” through an initial public offering (IPO), that is, becoming a public corporation by selling stock so that it can be traded in public markets
Also, privately owned firms are occasionally forced to go public with stock offerings when a major owner dies and the heirs have large estate taxes to pay. The tax payment may only be possible with the proceeds of the sale of stock
On the other hand, public corporations can be “taken private” when one or a few individuals (perhaps the management of the firm) purchase all the firm’s stock so that it can no longer be sold publicly. Taking a corporation private may be desirable when owners want to exert more control over the firm or they want the flexibility to make decisions for restructuring operations.
Taking a corporation private is also one technique for avoiding a takeover by another corporation.
Quasi-public corporations and nonprofits are two types of public corporations
Quasi-public corporations are owned and operated by the federal, state, or local government. The focus of these entities is to provide a service to citizens, such as mail delivery, rather than earning a profit. Ex. NASA
Like quasi-public corporations, nonprofit corporations focus on providing a service rather than earning a profit, but they are not owned by a government entity. Red cross, museums, private schools
Nonprofits do not have shareholders, and most are organized as 501(c)(3) organizations. A 501(c)(3) organization receives certain tax exemptions, and donors contributing to these organizations may reduce their tax deductibility for their donations.
Elements of a Corporation The Board of Directors. A board of directors, elected by the stockholders to oversee the general operation of the corporation, sets the long-range objectives of the corporation.
It is the board’s responsibility to ensure that the objectives are achieved on schedule. Board members have a duty of care and loyalty to oversee the management of the firm or for any misuse of funds. An important duty of the board of directors is to hire corporate officers, such as the president and the chief executive officer (CEO), who are responsible to the directors for the management and daily operations of the firm
Directors can be employees of the company (inside directors) or people unaffiliated with the company (outside directors). Inside directors are usually the officers responsible for running the company. Outside directors are often top executives from other companies, lawyers, bankers, even professors. Directors today are increasingly chosen for their expertise, competence, and ability to bring diverse perspectives to strategic discussions. Outside directors are also thought to bring more independence to the monitoring function because they are not bound by past allegiances, friendships, a current role in the company, or some other issue that may create a conflict of interes
Because many CEOs are turning down outside positions, many companies have taken steps to ensure that boards have experienced directors. They have increased the mandatory retirement age to 72 or older, and some have raised it to 75 or even older. Minimizing the amount of overlap between directors sitting on different boards helps to limit conflicts of interest and provides for independence in decision making
Stock Ownership. Corporations issue two types of stock: preferred and common. Owners of preferred stock are a special class of owners because, although they generally do not have any say in running the company, they have a claim to profits before any other stockholders
Other stockholders do not receive any dividends unless the preferred stockholders have already been paid. Dividend payments on preferred stock are usually a fixed percentage of the initial issuing price (set by the board of directors).
This means that if the company does not pay preferred-stock dividends in one year because of losses, the dividends accumulate to the next year. Such dividends unpaid from previous years must also be paid to preferred stockholders before other stockholders can receive any dividends
Although owners of common stock do not get such preferential treatment with regard to dividends, they do get some say in the operation of the corporation. Their ownership gives them the right to vote for members of the board of directors and on other important issues. Common stock dividends may vary according to the profitability of the business, and some corporations do not issue dividends at all, but instead plow their profits back into the company to fund expansion
Common stockholders are the voting owners of a corporation. They are usually entitled to one vote per share of common stock. During an annual stockholders’ meeting, common stockholders elect a board of directors. Some boards find it easier than others to attract high-profile individuals.
Common stockholders may vote by proxy, which is a written authorization by which stockholders assign their voting privilege to someone else, who then votes for his or her choice at the stockholders’ meeting. It is a normal practice for management to request proxy statements from shareholders who are not planning to attend the annual meeting. Most owners do not attend annual meetings of the very large companies, such as Westinghouse or Boeing, unless they live in the city where the meeting is held
Common stockholders have another advantage over preferred shareholders. In most states, when the corporation decides to sell new shares of common stock in the marketplace, common stockholders have the first right, called a preemptive right, to purchase new shares of the stock from the corporation. A preemptive right is often included in the articles of incorporation. This right is important because it allows stockholders to purchase new shares to maintain their original positions.
Because a corporation is a separate legal entity, it has some very specific advantages over other forms of ownership. The biggest advantage may be the limited liability of the owners.
Because the corporation’s assets (money and resources) and liabilities (debts and other obligations) are separate from its owners’, in most cases the stockholders are not held responsible for the firm’s debts if it fails. Their liability or potential loss is limited to the amount of their original investment. Although a creditor can sue a corporation for not paying its debts, even forcing the corporation into bankruptcy, it cannot make the stockholders pay the corporation’s debts out of their personal assets.
Ease of Transfer of Ownership. Stockholders can sell or trade shares of stock to other people without causing the termination of the corporation, and they can do this without the prior approval of other shareholders.
Perpetual Life. A corporation usually is chartered to last forever unless its articles of incorporation stipulate otherwise. The existence of the corporation is unaffected by the death or withdrawal of any of its stockholders. It survives until the owners sell it or liquidate its assets. However, in some cases, bankruptcy ends a corporation’s life. Bankruptcies occur when companies are unable to operate and earn profits.
External Sources of Funds. Of all the forms of business organization, the public corporation finds it easiest to raise money, sell more stock shares or issue bonds, attract funds
Expansion Potential. Because large public corporations can find long-term financing readily, they can easily expand into national and international markets. And, as a legal entity, a corporation can enter into contracts without as much difficulty as a partnership
Disadvantages of Corporations Corporations have some distinct disadvantages resulting from tax laws and government regulation.
Double Taxation. As a legal entity, the corporation must pay taxes on its income just like you do. When after-tax corporate profits are paid out as dividends to the stockholders, the dividends are taxed a second time as part of the individual owner’s income. This process creates double taxation for the stockholders of dividend-paying corporations. Double taxation does not occur with the other forms of business organization.
Forming a Corporation. The formation of a corporation can be costly. A charter must be obtained, and this usually requires the services of an attorney and payment of legal fees.
Disclosure of Information. Corporations must make information available to their owners, usually through an annual report to shareholders. The annual report contains financial information about the firm’s profits, sales, facilities and equipment, and debts, as well as descriptions of the company’s plan for future.
Because all reports filed with the SEC are available to the public, competitors can access them. Additionally, complying with securities laws takes time
Employee–Owner Separation. Many employees are not stockholders of the company for which they work. This separation of owners and employees may cause employees to feel that their work benefits only the owners. Employees without an ownership stake do not always see how they fit into the corporate picture and may not understand the importance of profits to the health of the organization.
OTHER TYPES OF OWNERSHIP In this section, we take a brief look at joint ventures, S corporations, limited liability companies, and cooperatives—businesses formed for special purposes.
A joint venture is a partnership established for a specific project or for a limited time. The partners in a joint venture may be individuals or organizations
” Control of a joint venture may be shared equally, or one partner may control decision making. Joint ventures are especially popular in situations that call for large investments, such as extraction of natural resources and the development of new products. Joint ventures can even take place between businesses and governments.
An S corporation is a form of business ownership that is taxed as though it were a partnership. Net profits or losses of the corporation pass to the owners, thus eliminating double taxation. The benefit of limited liability is retained. Formally known as Subchapter S Corporations, they have become a popular form of business ownership for entrepreneurs and represent almost half of all corporate filings.26 The owners of an S corporation get the benefits of tax advantages and limited liability. Advantages of S corporations include the simple method of taxation, the limited liability of shareholders, perpetual life, and the ability to shift income and appreciation to others. Disadvantages include restrictions on the number (100) and types (individuals, estates, and certain trusts) of shareholders and the difficulty of formation and operation.
A limited liability company (LLC) is a form of business ownership that provides limited liability, as in a corporation, but is taxed like a partnership.
Many consider the LLC a blend of the best characteristics of corporations, partnerships, and sole proprietorships. One of the major reasons for the LLC form of ownership is to protect the members’ personal assets in case of lawsuits. LLCs are flexible, simple to run, and do not require the members to hold meetings, keep minutes, or make resolutions, all of which are necessary in corporations.
Cooperatives Another form of organization in business is the cooperative or co-op, an organization composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization.
A co-op is set up not to make money as an entity. It exists so that its members can become more profitable or save money. Co-ops are generally expected to operate without profit or to create only enough profit to maintain the co-op organization
Many cooperatives exist in small farming communities. The co-op stores and markets grain; orders large quantities of fertilizer, seed, and other supplies at discounted prices; and reduces costs and increases efficiency with good management. A co-op can purchase supplies in large quantities and pass the savings on to its members. It also can help distribute the products of its members more efficiently than each could on an individual basis. A cooperative can advertise its members’ products and thus generate demand. Ace Hardware, a cooperative of independent hardware store owners, allows its members to share in the savings that result from buying supplies in large quantities; it also provides advertising, which individual members might not be able to afford on their own.
A merger occurs when two companies (usually corporations) combine to form a new company. the combination of two companies (usually corporations) to form a new company.
acquisition the purchase of one company by another, usually by buying its stock.
The acquired company may become a subsidiary of the buyer, or its operations and assets may be merged with those of the buyer. The government sometimes scrutinizes mergers and acquisitions in an attempt to protect customers from monopolistic practices.
When firms that make and sell similar products to the same customers merge, it is known as a horizontal merger,
Horizontal mergers, however, reduce the number of corporations competing within an industry, and for this reason they are usually reviewed carefully by federal regulators before the merger is allowed to proceed.
When companies operating at different but related levels of an industry merge, it is known as a vertical merger
A conglomerate merger results when two firms in unrelated industries merge
When a company (or an individual), sometimes called a corporate raider, wants to acquire or take over another company, it first offers to buy some or all of the other company’s stock at a premium over its current price in a tender offer. Most such offers are “friendly,” with both groups agreeing to the proposed deal, but some are “hostile,” when the second company does not want to be taken over
To head off a hostile takeover attempt, a threatened company’s managers may use one or more of several techniques. They may ask stockholders not to sell to the raider, file a lawsuit in an effort to abort the takeover, institute a poison pill as Energizer did (in which the firm allows stockholders to buy more shares of stock at prices lower than the current market value) or shark repellant (in which management requires a large majority of stockholders to approve the takeover), or seek a white knight (a more acceptable firm that is willing to acquire the threatened company). In some cases, management may take the company private or even take on more debt so that the heavy debt obligation will “scare off” the raider.
leveraged buyout (LBO) a purchase in which a group of investors borrows money from banks and other institutions to acquire a company (or a division of one), using the assets of the purchased company to guarantee repayment of the loan.
In some LBOs, as much as 95 percent of the buyout price is paid with borrowed money, which eventually must be repaid
Many companies joined the merger mania simply to enhance their own operations by consolidating them with the operations of other firms. Mergers and acquisitions enabled these companies to gain a larger market share in their industries, acquire valuable assets such as new products or plants and equipment, and lower their costs.
Critics, however, argue that mergers hurt companies because they force managers to focus their efforts on avoiding takeovers rather than managing effectively
Chapter 7 Organizational culture and structure
One of the most important aspects of organizing a business is determining its organizational culture, a firm’s shared values, beliefs, traditions, philosophies, rules, and role models for behavior.
Sometimes behaviors, programs, and policies enhance and support the organizational culture. For instance, the sixth largest accounting firm, Grant Thornton, established an unlimited vacation policy to give its employees more freedom
The values and integrity of customers must always be considered
Organizational culture helps ensure that all members of a company share values and suggests rules for how to behave and deal with problems within the organization
The key to success in any organization is satisfying stakeholders, especially customers. Establishing a positive organizational culture sets the tone for all other decisions, including building an efficient organizational structure
Structure is the arrangement or relationship of positions within an organization
An organization’s structure develops when managers assign work tasks and activities to specific individuals or work groups and coordinate the diverse activities required to reach the firm’s objectives
organizational charts (visual displays of organizational structure, chain of command, and other relationships)
Growth requires organizing—the structuring of human, physical, and financial resources to achieve objectives in an effective and efficient manner. Growth necessitates hiring people who have specialized skills
holacracy, a structure in which job titles are abandoned, traditional managers are eliminated, and authority is distributed to teams.
After identifying all activities that must be accomplished, managers then break these activities down into specific tasks that can be handled by individual employees. This division of labor into small, specific tasks and the assignment of employees to do a single task is called specialization
People can perform more efficiently if they master just one task rather than all tasks
Specialization means workers do not waste time shifting from one job to another, and training is easier.
Specialization also occurs when the activities that must be performed within an organization are too numerous for one person to handle
Overspecialization can have negative consequences. Employees may become bored and dissatisfied with their jobs, and the result of their unhappiness is likely to be poor quality work, more injuries, and high employee turnover
Departmentalization After assigning specialized tasks to individuals, managers next organize workers doing similar jobs into groups to make them easier to manage. Departmentalization is the grouping of jobs into working units usually called departments, units, groups, or divisions. As we shall see, departments are commonly organized by function, product, geographic region, or customer
Functional departmentalization groups jobs that perform similar functional activities, such as finance, manufacturing, marketing, and human resources. Each of these functions is managed by an expert in the work done by the department—an engineer supervises the production department; a financial executive supervises the finance department.
A weakness of functional departmentalization is that, because it tends to emphasize departmental units rather than the organization as a whole, decision making that involves more than one department may be slow, and it requires greater coordination.
Product departmentalization, as you might guess, organizes jobs around the products of the firm
Each division develops and implements its own product plans, monitors the results, and takes corrective action as necessary. Functional activities— production, finance, marketing, and others—are located within each product division
Consequently, organizing by products duplicates functions and resources and emphasizes the product rather than achievement of the organization’s overall objectives. However, it simplifies decision making and helps coordinate all activities related to a product or product group.
Geographical departmentalization groups jobs according to geographic location, such as a state, region, country, or continent
Multinational corporations often use a geographical approach because of vast differences between different regions
However, organizing by region requires a large administrative staff and control system to coordinate operations, and tasks are duplicated among the different regions
Customer departmentalization arranges jobs around the needs of various types of customers. This allows companies to address the unique requirements of each group
Customer departmentalization, like geographical departmentalization, does not focus on the organization as a whole and therefore requires a large administrative staff to coordinate the operations of the various groups.
Delegation of authority means not only giving tasks to employees, but also empowering them to make commitments, use resources, and take whatever actions are necessary to carry out those tasks
3M believes employee ideas can have such an impact on the firm that it encourages them to spend 15 percent of their time working on and sharing their own projects.15 Delegation of authority frees a manager to concentrate on larger issues, such as planning or dealing with problems and opportunities.
Delegation also gives a responsibility, or obligation, to employees to carry out assigned tasks satisfactorily and holds them accountable for the proper execution of their assigned work
The principle of accountability means that employees who accept an assignment and the authority to carry it out are answerable to a superior for the outcome. While there can be delegation of authority with employee responsibility, the manager delegating still is accountable for oversight of the final result
The president of a firm delegates responsibility for all marketing activities to the vice president of marketing. The vice president accepts this responsibility and has the authority to obtain all relevant information, make certain decisions, and delegate any or all activities to his or her subordinates. The vice president, in turn, delegates all advertising activities to the advertising manager, all sales activities to the sales manager, and so on.
Even though the vice president of marketing delegates work to subordinates, he or she is still ultimately accountable to the president for all marketing activities
The extent to which authority is delegated throughout an organization determines its degree of centralization.
In a centralized organization, authority is concentrated at the top, and very little decision-making authority is delegated to lower levels
a vast amount of responsibility for carrying out daily and routine procedures is delegated to even the lowest levels of the organization.
Overcentralization can cause serious problems for a company, in part because it may take longer for the organization as a whole to implement decisions and to respond to changes and problems on a regional scale
Too much hierarchy can also prevent lower-level employees from providing their own perspectives or reporting problems
A decentralized organization is one in which decision-making authority is delegated as far down the chain of command as possible. Decentralization is characteristic of organizations that operate in complex, unpredictable environments.
Businesses that face intense competition often decentralize to improve responsiveness and enhance creativity. Lower-level managers who interact with the external environment often develop a good understanding of it and thus are able to react quickly to changes
Johnson & Johnson has a very decentralized, flat organizational structure
Delegating authority to lower levels of managers may increase the organization’s productivity. Decentralization requires that lower-level managers have strong decision-making skills
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