Topics: BU111 Exam Review Notes -Economic Factors -Technological Factors -Social Factors -Political Factors Economic Factors Elements -Inflation/ deflation -Interest Rates -Employment Rates -Exchange Rates -Balance of Trade -Productivity -Business Implication: affect costs, sales, financial uncertainty -WHY? Affect economic growth (measures: aggregate output, GDP, GNP, economic stability, employment) Bonds Characteristics -Is a contract- a promise by the issuing company or organization to pay the bondholder a certain amount of money (the principal) on a specified date, plus interest in return for use of the investor’s money? -Represents debt for issuing corporation and government -Borrowing money/ lending money -Legal, binding agreement (is a loan) -Fixed rate of return (often paid semi annually) -Fixed Term: principal repaid at maturity (day that you get paid back, stop earning interest and then you get principal plus interest back) -You receive a series of coupon payments (these are interest payments for lending your money) = annuity -You receive a principal payment (one lump sum) upon maturity, you get back what you loaned to the borrower= single payment -Priority over stockholders Types -Secured vs. Unsecured (debentures) -Secured: specified agreement of bond and maturity date -Unsecured: unspecified agreement -Canadian Savings Bonds are known as debentures -Registered vs. Bearer -Registered: one where the borrower knows who the bondholder is (registered with the company) 1 -Bearer: whoever holds the bond gets to cash it in, no name completely anonymous -Bonds that require bondholder to clip coupons from certificates and send them to the issuer to receive interest payments Features -Callable: can be paid of before its maturity date -Lose out on interest - Unattractive to consumers -Flexibility to recall bands and reissue new bonds at the lower rate -Attractive feature for companies -Serial: Less risky which interests more investors and customers -Can spread out maturity dates at different times, which spread out the burden of the company (1,5,10 years, etc.) -Convertible: Allow you to convert from a bond to a preferred stock -If you see company growing, have the ability to switch to a stock, which will allow you to gain more Determinate’s of Bond Value What impacts the Coupon Rate at Bond Issue? -Prevailing interest rates: interest rates in the general economy -Risk vs. Return Tradeoff: high risk= higher return, makes the risk worth while -Credit rating of issuer What Impacts Bond Price When Traded -Coupon rate+ prevailing interesting rates of interest -Interest rates change -Changes in credit rating -Better coupon rate- more interest (vice a versa) -Company specific factors -Economic/ Market Risk -Environment factors -Inflation -Environment factors Concept of Yield -Percentage return on any investment -Help us to compare investments 2 Yield What you made Interest + Capital Gain x% What you paid What you paid For a bond: Interest = coupon rate x face value Capital gain = face value – purchase price -For exam, always use a face value of $1000 for bonds - Approximate Yield to Maturity -Percentage return on any investment -This formula to be used only when figuring out the approximate yield value annual bond interest annual capital gain price paid for bond face value - price paid time to maturity price paid coupon rate x face value -Only thing that can change is price paid -When expected yield goes up, price goes down -When excepted yield goes down, price goes up Bond Pricing -Three scenarios to consider 1. You pay less than face value (<$1000) for the bond then “Priced as a discount” 2. You pay more than the face value (>$1000) for the bond “Priced at a premium” 3. You pay face value (=$1000) for the bond “Priced at a bar” Stocks Characteristics -Represent equity/ capital for issuing company -Voting rights -No fixed terms -No maturity date of stock -Variable Return -No promise of returns -Discretionary Payment (Dividends) -Owners entitled to a share of profits -Board of directors can decide to distribute profits to shareholders 3 -Risk -Can also reinvent made back into business -Higher risk then bonds and high losses possible Common Stocks vs. Preferred Stocks Common Stock Voting rights Yes Dividends Not necessarily Bankruptcy Price Volatility Paid after preferred Most volatile Marketability More shares, larger market Pre-emptive rightpurchase more share at a set price Other Features Preferred Stock No- unless number of dividends unpaid- in ‘arrears’ Yes- fixed % -After interest paid on debt but before common dividend Paid after debt holders Less volatile (dividends)sensitive to interest rates Thinner market Redemption-Company can but back Convertibility- to common Cumulative Participation Feature -Companies issue more common shares then preferred shares -Preferred stock affected more by interest rates What Impacts Price of Stock -Demand and supply of stock due to negative or positive perception/facts -Primary Factors -Earnings: above or below expectations, rumors -General Market Conditions- Bull vs. Bear Markets, economy, interest, (especially preferred) -Speculation: bought of sold on belief price will soon move -Price of a security is a collective expression of all opinions of those who are buying and selling -Undervalued Issue: offers higher return that stocks of similar risk -Stock whose price is below what it should be Market Conditions -Bull Market: market is increasing and rising (going long) -Beat Market: market is decreasing and falling (short selling) Other Investment Vehicles Blue Chip Stocks -High quality, low risk, companies that have been around for a while, low return 4 Small Cap Stocks -Cap= capitalization -Growing company and not worth a lot currently -More volatile it is when in the growth stage -Riskier but higher returns Penny Stocks -Stock is trading at a price bellow a dollar -Expensive stock that is now worth nothing -Stock that isn’t worth that much Canadian Savings Bonds- CSBs -Government bonds Guaranteed Investment Certificates- GICs -If you have money you want to save for the long term (1 year +) -Not going to touch money and want to earned interest on money invested -Very low risk Treasury Bills- T Bills -Government bonds -90 day maturity -By below face value -Difference between what you pay and when it mature is all interest Mutual Funds -Portfolio of different stocks complies into one -Diversified -Professional investment management -Draw back: have to pay investment manager/ mutual fund manager 5 Stocks vs. Bonds Investors Perspective Stock vs. Bonds- Company’s Perspective -Dividends are more expensive then interest payments for a company -Disadvantages with bonds is you eventually have to pay them back and you have to pay interest Margin Buying Leverage -Engaging in a transaction whose value is greater than the actual dollar amount you have available -Creates potential to make a larger return or loss than indicated by the investment you have made, make a larger return -Examples: -Short selling: deposit 50% of value of transaction -Buying on margin: invest part of value of transaction (margin requirement, broke lends the rest) 6 Margin Buying Rules -Must quality for margin account -Must sign ‘hypothecation’ agreement (Margin Account Agreement Form)- pledging of securities as collateral for loan -Must pay interest on loan -There investors % of equity (margin) in the margined stock must always be > then the minimum margin requirement -Going Long: expecting the stock to go up in value (buy low, sell high) Margin Buying Summary -What is the maximum profit you can make? -Infinite in theory -Stock can keep rising and rising -What is the maximum loss? -Price paid for stock -Risks/ Costs -Interest expense -Margin calls -What happens with money paid on margin call? -Broker uses the money to reduce your loan Interest Calculation =Margin x interest rate x 12 months (or divide amount of months held by 12 if not held for a year) Short Selling -Buy low, sell high is the going long -Sell high, buy low is for short selling Rules: -Deposit must be 150% of CMV at start -Maintenance margin must be met = 125-140% -Agreement may be terminated by either part at any time- forced to cover/buy in -Dividends declared are the responsibility of the seller Short Selling Summary -What is the maximum profit you can make? -Price of short -What is the maximum loss? -Anything goes; price can rise infinitely 7 -Risks -Unlimited losses -Forced to cover short as disadvantageous price -Dividends may be declared that you must cover -Short calls -What happens with money paid on a margin call? -Broker adds the money to your account= increases deposit Time Value of Money -Is $1 one year from today worth the same $1 today? -No it’s worth less because of: -Risk -Real Interest -Inflation -Concept important to leases, mortgages, bonds, retirement’s contributions, stocks, valuation, project selection Annuities -Annuity: multiple but equal payments made over equal periods of time -Ordinary Annuity: payment does not start today -Assume its ordinary annuity unless stated otherwise -Annuity Due: payment starts today Perpetuity -Annuity that does on forever -Example; dividends on a preferred share Payment & Compounding Periods -Payment and interest periods must be the same -N= years x ‘p’ number of payments per year -Adjust compounding rate to match payment frequency (this is now your new r) Interest and Payment Periods Same but More than Once a Year -N= years x ‘p’ number of payments per year -Divide r by p number of payments per year Interest and Payment Periods Don’t Match 8 Summary Technological Factors Elements -Internet: affects buying, selling and communication -Information technologies affect information access and inter firm cycle times -Not limited to computers and information -Business Implication: affects what we produce/ what it can do, affects how we procure and how we sell -WHY? Demands constant learning and scanning, creates significant change and challenge What is Technology? -Advancements in equipment and its uses -Often substitutes for/ magnifies human efforts -Includes human knowledge, work methods, equipment, business process systems -Includes information technology -The various devices for creating, storing, exchanging and using information -Consumers use it daily -Companies use it to gather and share information and execute activities Where does it come from? -Comes from human ingenuity -Formal and informal research and development -Basic R&D- knowledge without focus -Applied R&D-specific problem in mind -Technology Transfer: out of lab and into the world 9 Technology Shifts Electricity -Allowed to use to work longer and increase productivity -Allowed to contrast new things Trains and Ships -Enhance trade -Move things from one country to another -Access to new resources -Give more value to our resources -Populate new parts of the world -Changes habitation and where people live Assembly Line -Mass production possible -Urbanization -Change the face of what the world looked like Internal Combustion -Autos, mass transit -Airplanes Mass Media -Change sharing of information -Obtaining, sharing and using information -Movies, radio, television -Extended later into telecommunications and then the Internet -Telecommunications -Computer -Internet Smart Products/ Internet Things -Currently in this phase -Not only information-based products -Products that can make decisions for us -Internet of things takes smart products to the next level where the products can think and act for themselves Opportunities of Technology Products- innovation, uniqueness value -Innovation: many things to put intro products to make them more powerful -Uniqueness: produce products in a highly efficient matter -Value: making products that consumers find value to Management and Organizational Process -Instant access to information 10 -Used to achieve financial performance -Allow us to meet customer needs -Employees are in powered and can do their jobs better and can understand where they fit in the organization -Better service through coordination -Serve customers better with the efforts that are happening at other stores -Leaner Organization -Don’t need as many humans to do the same job -Smaller organization form human resources perspective -Smaller the team the more agile and more quickly can respond to changes in the environment -Costs less -Better able to meet customer’s needs -Improved operations efficiency -Way you operate your system, which connects people and jobs -Computer Assistant Design (CAD): used to design and develop new products, design everything on the computer -Enterprise Resource Planning (ERP)- organization use this software which acts as a master system that keeps track of companies shopping list, activity list, and what it needs (also used to create efficiency) -Greater Independence of Company & workplace -Achieving financial performance, building quality goods and services -Creating a barrier of where you work and where your company is -Gaining employee commitment as can do work at home and go into officer at other hours -Make productive use of their time even when at home -Achieving financial performance: paying employees and they maximize their time Competitiveness -Technology creates barriers to entry -Cooperation with other firms -Allow you to cooperate with the best companies instead of just the closest companies -Allow you to be more innovative -Build better quality products and services -Reduce cycle times -How long it takes to complete a business process -Build better quality products and services -Make employees more engaged and feel more valued Communication and Collaboration -Within firm and with customers -Being able to talk to each other as employees and your customers -If talk to customers better, customer more happy -Within firms is where relationships happen, innovation happens 11 Customization -Technology has allowed us to mass-produce and still customize and meet customer’s needs -Still able to build quality products and services -Not possible in the year 2000 -Has come about in the law few years -Able to customize and build thing sin mass customize -Point where you can customize on max for relatively good price Threats of Technology Imitation -Information costly to develop but cheap to share -Examples: movies, t.v shows, music New Technologies in Unfamiliar Areas -Disruptive technologies challenge the value of organizational capability and resources Unpredictable Evolution -Vhs vs. Betamax -Blue Ray vs. DVDs -Technology Standards: important whenever one product has to cooperate with another product to work (have to be compatible) Need for Constant Learning and Scanning -Takes constant effort and learning Information Overload Greater Independence of Company & Workplace Technology and Marketing Important Technology Concepts Complementary Goods -Needed for value -Creates vicious cycle -Important because they create additional value for your good -Hard for a company to product all the complementary goods but rely on other businesses to make them -Example: Apple relies on other companies to make phone cases and headphones for IPhones Technology Standards -Requires compatibility of complementary goods -Find or make compatible complementary good 12 Installed Base -# Of users Lock In -Size in investment -Not only dollars but can be time and learning in addition to money -Larger= greater resistance to switch -Lock in through relationships -When you’re invested it gives the company higher bargaining power Switching Costs -Costs of moving -Entry barrier: makes lock in worse Solution -Compatibility, alliances/ incentives with complementary goods, suppliers, build base -Lower switching costs, offer leap in performance Network Effect -Value depends on users Small installed base Less appealing standard/ product Fewer complementary goods Sustaining Technology -Presents improvements to existing products in expected ways -Sustaining Technologies: in a way that’s predictable -Whole purpose is to achieve higher margins as they chase customers 13 -At some point product becomes so good and exceeds customer expectations -Provides mainstream, high margin customers with enhancements in product functionality -Existing firms normally win Disruptive Technology -Developing somewhere else and then when they get good jump into a new market -When first come along not very good, lower performance but doesn’t cost a lot -Not very food performance wise -Example: Digital imaging -Improve at a faster rate then sustaining technology -Enter the mainstream market -Does the same job, either at a low price or same price but does the job way better Tactics for Small Companies to Succeed -Enter with a totally different product in a market that large firms wont be interested in -Not their mainstream- not interested or motivated -Not what they are good at or can easily adjust to -Margins are too small or market too small -Once you are strong, move up in the market Why do Large Firms Sometimes Fail -Organization structure and capabilities slow response time/ ability and influence choices -Do the best job in the one where meets all the factors of the diamond e -Organizational processes weed out ideas that do not address current customer needs -Managers focus on satisfying mainstream customers -Ignore new technologies that don’t initially meet needs of mainstream customer -Move ‘up market’ to higher margin opportunities -Avoid small, uncertain, unfamiliar markets -Niche markets, small and financially unattractive -Growth potential uncertain -Lower profit margins -Greater risk of being criticized if you fail managerial risk aversion Tactics for Large Companies to Avoid Failure -Design products based on task they are intended to serve rather then the customer who buy them -Monitor outside of your own industry and mainstream customer -Partner with young firms- strategic alliances -Establish ventures units that are independent of parent organization -Understanding the job, more likely to see when there are things that are changing 14 Social Factors Elements -Customs -Attitudes -Very different attitudes depending where you live -Values -Demographic characteristics -study of human characteristics and population -Business Implication: affects how we live, work, consume and produce -WHY? Affect customer preferences and worker attitudes and behaviors, standards of business conduct, and corporate social responsibility Ethics Ethics: individual standards/ beliefs regarding what is right and wrong or good and bad -Vary based on person -What each of you believe affects your business or managerial ethics -Carry those personal beliefs and values with you into the business Business or Managerial Ethics: standards of behavior that guide individual managers in their work -Ethical or unethical behaviors by a manager or employee of an organization -Personal ethics affect the decision you make in the organization and your business ethics Corporate Social Responsibility (CSR) -CSR is ethics at the corporation level -Example: is the company going to make charitable donations, get involved in charity events, volunteer, etc. How to Influence Managerial Ethical Preferences hiring criteria managerial role modeling mission statement/ code of conduct ethics booklets & training Goals/evaluati on criteria & rewards employee protection mechanisms 15 Hiring Criteria -Employee’s views will be a big part in the decisions you make -Easier to hirer someone who is right for the job rather than constantly changing employees over -Employees that have values and ethical standards that are consistent with the companies -Criteria that includes ethical standards Managerial Role Modeling -Teach by example approach -New employees to be able to see what a good ethical decision looks like -What we believe in as a good CSR choice and standard -New employees understand based on learning from other employees Mission Statement/ Code of Conduct -Communicates in writing the expectations that we have of our employees and our decision makers -What we value as an organization -Want example to be consistent with the words Ethics Booklets & Training -Helpful to train employees how to behave under certain conditions (ethical situations) -Teach how to make good decisions Goals/ Evaluation Criteria & Rewards -Make sure this ethical standard are reflected in how you evaluate them -Gives you a chance to adjust if not meeting those standards -Spend your time on things that give you the greatest reward Employee Protection Mechanism -Whistle Blowing -Company is doing something unethical and employees within the company report the wrongdoing -Employees should be protected if they report something in the company and not be at risk of getting fired and losing their job Stakeholders Who are they? -Groups, individuals, and other organizations that are significantly affected by the organizations activities -They provide business with the capacity to operate and rightfully expect something in return -Stakeholder’s importance depends on situation and the issue -Affect willingness and opportunity to act 16 -Challenge: stakeholders may have varying and conflicting expectations of an organization -How you balance them depends on your managerial ethics and approach to CSR Importance of Stakeholders -Stakeholder importance is determined by: -Its ability and willingness to act -Its relative power/ dependence or interdependence -Stakeholders can be: -Threatening: willing and able to create uncertainty -Cooperative: willing and able to support How to Strategically Manage Stakeholders -Identify key organizational stakeholders -Diagnose them along two critical dimensions of potential for threat and potential for cooperation- categorize them -Formulate appropriate strategies both to enhance or change current relationships with those key stakeholders and to improve the organizations overall situation -Effectively implement these strategies Strategic Stakeholder Categories Potential Cooperation Potential for Threat Stakeholder Management Strategies Marginal Stakeholders: monitoring- satisfying needs and/ or demands of stakeholders; no need to involve or collaborate with them Non-Supportive Stakeholders -Reduce interdependence -Use media to promote/ defend your actions -Encourage supportive stakeholder to voice their support 17 Supportive or Mixed Blessing Stakeholders -Collaborate or involve Stakeholder Type Customers & Suppliers Competitors Government Activist Groups Unions Suggested Techniques for Collaborating/ Involving Involve in product design Joint R&D, Joint Market Development Invite involvement in setting safety/ technical standards Appoint to Board of Directors Appoint to Board of Directors, seek input, consult Invite involvement in Joint Committees, appoint to board of directors, profit sharing Warning: -Stakeholders watch out for other stakeholders -Stakeholders can move form supportive to non-supportive on behalf of/ in defense of other stakeholders Corporate Social Responsibility (CSR) What is it? -Definitions: -The idea that a business should balance its commitments to individuals and groups that are directly affected by the organizations activities -Organizational Stakeholders: -Groups, individuals, and organizations that are directly affected by the practices of an organization and that therefore have a stake in its performances -What the organization does to and for the stakeholders -How business defines ethical conduct at the organizational level -How business balances its commitments to stakeholders Why focus on CSR? Make environment more manageable -Avoid adverse actions/ increases support by stakeholders -Uncertainty is created when stakeholders are unhappy with the company -Promotes favorable legislation -If you take initiative and do something good might become the standard that forces everyone else to follow you -Example: Johnson& Johnson mission to produce safe products for consumers and the ones that initiated tamper proof seal after people died from buying Tylenol bottles that have been tampered with -Became a distinctive competitive advantage for J&J and everyone else in the industry had to follow? 18 -IF government mandated, would have had a competitive advantage that is enforced by the law -Especially in todays digital media environment, allows you to complain about everything and anything, so if you make a choice society doesn’t approve of everyone will hear about it -Very easy to mobilize a negative feeling towards your company Affects ability to meet critical success factors -Improves profitability -Distinctive competitive advantage= increase in profitability -Improves trust and loyalty of customer and employees -If customer believe you are selling a safer, better, more reliable product that will serve them better they will be loyal to you -Few people want to work for an organization that are damaging to customers (unsafe working conditions, dishonest) -Promotes higher levels of operating efficiency -If produce good quality good, treat employees well, then not worrying about constantly replacing employees (not worrying about disposable employees or products) -Fewer products coming back that need repairs -Encourages continuous improvement and innovation -To be better with employees and customers requires innovation and improvements -Can be a source of distinctive competitive advantage Five Areas of CSR 1. Responsibility Towards the Natural Environment Areas: air, water, and land pollution Why are we focusing on it? a) Paradigm Shift in management thinking -Managers trained to think beyond bottom line b) Quantification of impact -Dollar value towards environment now given a reason to pay attention c) Change in societal attitudes -Society has changed and societies view on pollution and global warming has changed -Societies attitudes have changed a) Paradigm Shift in Management Thinking 1987: Bruntland defines sustainable development: “meets the needs of the present without comprising the ability of future generations to meet their own needs” -What you are leaving for the future and your children 1994: J. Elkingotn extended concept of ‘sustainable development’ to ‘Triple Bottom Line’ -Before this time only focusing on bottom line: profit 19 -Equity, environment and economy -People, plant and profit -Successful business and society doesn't just look at today but looks at tomorrow as well -Shift thinking from just thinking about bottom line to thinking about the human entities b) Quantification of Economic Impact -2012: “Clime Vulnerability Monitor: A guide to the Cold Calculus of a Hot Planet” states that climate change is costing $1.2 trillion (U.S) per year and reducing global GDP by 1.6 per cent c) Social Attitude Shift -Dominant paradigm was take, make, and waste -Everything was disposable (cellphones, electronics, cars, etc.) -Compared with 20 years ago, twice as many Americans recycle (58%), buy green products (29%), and commute in an environmentally friendly manner (185) -Business may be the primary cause of the problem but it will also likely be the solution Action: increase “corporate Greening” NOT green washing -Corporate greening involves trying to make all aspects of the product more environmentally friendly -Green washing: when you don’t really become more environmentally friendly but you pretend you do -Marketing ploy rather then legitimate improvement -Example: cleaning products 2. Responsibility Towards Society Areas: poverty, health, education -Improving wealth, health, and education -Wealth: consumers have more money to spend -Health: a healthier employee -Education: better employees, better educated is a more productive employee -A healthier employee leads to creativity and innovation of products -Human Development Index (HDI) -Analyzing Economic Growth- does everyone benefit? -Looking beyond aggregate figures and considering income inequality -Growth is not always good Why are we focusing on it? -Diffuse the issues of social decay, political chaos, terrorism and further environmental degradation -Affect human capabilities (ability to be innovative and creative) -Societal attitude shift (what we believe today, cant just pretend things aren’t occurring in other parts of the world) 20 Action: Innovative business models and leveraging business kills can contribute to social development -Social Entrepreneurship (Example: SOS) -Companies encourage employees to go volunteer during their paid time -Do this because gives back to the community and benefits their local community -Bigger business and community partnership 3. Responsibility Towards Customers Areas: pricing, advertising, rights -How we price our products, what we say in our advertisement, which we advertise to and how we advertise to people -Consumer rights Why we Focus on it? -Purchase goods and services thereby providing business with revenue -Avoid adverse actions -Avoid increased regulation Action: -Consumerism, Respect -Right to safe products (not okay to produce and sell products that you know are not safe) -Right to be informed (side effects, hazards, contents) -Right to be heard -Right to choose -Right to courtesy -Right to education -Fair pricing -Ethics in advertising -Truth, no counterfeits brands -Giving the trust about your product and what it does 4. Responsibility Towards Employees Areas: hiring, promotion, compensation, training -Give access to training so they can do their job well and have future prospects -Compensation: make sure employees are getting paid the right amount for the work they do Why we focus on it? -Provide business with talent, skills and labour -If don’t focus on it automatically lose employee commitment Action -Responsible for hiring and promotion 21 -Not being bias of discriminatory in hiring -Safe working conditions -Employees work better when in safe conditions and are more productive -If not safe, expose yourself to lawsuit -Opportunities for advancement -gives opportunities to be promoted -Protection of whistleblowers -Employee protection mechanisms -Sends the message what is important based on ethical standards -Sends message to employee that their observations and contributions matter 5. Responsibility Towards Investors Areas: financial management, reporting -Report honestly with financial performance of the company Agency Problem -Shareholders allocate decision-making authority to managers via Board of Directors because they are not qualified to manage company and/ or don’t have time or incentive -But can lead to conflict of interest and shirking -Managers (and board) may be tempted to act in their own best interest rather then the shareholders Why we focus on it? -Investors provide businesses with capital -New regulations due to repeated irresponsibility -More independence, new practices, new disclosure rules -Different social attitude- Canadian Coalition for Good Governance -Legal action against directors and managers Action -Focus on long term return on investment (ROI) -Responsible management reporting and transparency -No inside trading Four Approaches to CSR 1. Obstructionist Stance -A company that does as little as possible to solve social or environmental problems -Do as little as possible -May breach what is legal -Do the bare minimum -Don’t offer employees more than the minimum -Don’t make charitable donations -Offer bare minimum for what is safe for employees to work in -Bare minimum of what is legally required to sell to a customer 22 2. Defensive Stance -An organization that does only what is legally required and nothing more -Legally required only -Only do what is legally required of you to do 3. Accommodative Stance -A company that meets all of its legal and ethical requirements and in some cases even goes beyond what is required -Goes further in some areas -Might make donations -Might pay employees a little more then minimum wage -Might give customer a little more than what they ask for -But only do these things if you are asked and have to be asked to do something -Doing more than is legally required 4. Proactive Stance -An organization that actively seeks opportunities to be socially responsible -Looks for opportunities -Do more than minimum requirement, goes above and beyond -Don’t wait to be asked Demographics -Study of human populations Why Is It Important to Business? -Powerfully predictor of human behavior/ trends -Certainty and simplicity of age data -Change in relative proportions and participation rates of age groups have significant impact on business environment Understanding Demographics -Key factors in predicting behavior -Size of cohort= # of people in each age group -Activity participation rate -Factors affecting size of cohorts -Fertility rate: average number of children/women -Birth rate: total number of births/ size of population 23 Cohorts Canadian Demographic Trends: Aging Boomers, fewer youth -Aging baby boomers most influential demographic force shaping marketplace but declining -Shrinking youth group in comparison -Population no longer reflects traditional pyramid -Implications: -Increased paid and unpaid elder care -Increased number of vulnerable seniors Large and Influential Echo -Echo generation= children of boomers= relatively large group -More disposable income because parents provide essentials -Increasingly influence family purchases -Implications -Market impact of echo Changing Households -One-person households growing faster then one family households -Highest among seniors -Implications: -Lose economies of scale in living, shopping; aging seniors living alone+ smaller young cohort= will have smaller support network -Lone Parent families Increase; two earner families face time constrains -Implication: -Increased demand for time saves Changing Ethnic Composition 24 -Immigration increasing over past decade -Immigrants are younger and more likely to live in city than average Canadian -Interacting with marketplace difficulty -Implication: -Increased demand for multilingual consumer support/ services/ goods Geographic Distribution -Increasing urban concentration- four areas: Golden Horseshoe, Montreal, B.C. Lower mainland+ Vancouver, Calgary- Edmonton -Donut Effect -Rural living predominates in Atlantic Canada, Saskatchewan, and territories -Next exodus of youth form rural areas -Implication: -Affects median age in rural area and access to goods and services Political Factors Elements: -Laws and regulations -Taxes -Trade agreement or conditions -Political system -Political stability Business Implication: affects uncertainty, risk, and constraints/ costs faced by firms WHY? Protection of consumers, support for and protection and regulation of domestic businesses, opportunity creation in foreign markets How Governments Influences Business -Customer- buys products & services -Competitor- compete through Crown Corporations (hybrid entities between a government body and a private enterprise) such as Canada Post -Regulator/ Law Marker -Regulate many aspects of business activity through administrative boards, tribunes and commissions -Regulates business activity; influences technology standards -Purpose: -Promotes competition – Competition Act, small business support -Promotes innovation – intellectual property rights -Protects consumers – i.e. Hazardous Products Act -Achieve social goals – i.e. universal health care, education -Protect the environment – Canada Water Act, Fisheries Act -Taxation Agent -Collected by all three levels of government -Types business and personal 25 -Approaches- progressive, regressive, restrictive -Progressive: levied at a higher rate on higher income taxpayers and a lower rate on lower income taxpayers -Regressive: are levied at the same rate regardless of a person income -Restrictive: are levied partially for the revenue they provide but also because legislative bodies believe that the products in question should be controlled -Provider of incentives & financial assistance -Subsidies, tax breaks, support services for small and large businesses, research funding -Bailouts -Government steps in and saves a company fro going bankrupt -Government does this ass it saves jobs -Provider of essential services -Highways, armed forces, police & fire dept., hospitals, education Intellectual Property What: legal rights that result from intellectual activity in the industrial, scientific, literary and artistic fields -Grants exclusive rights to creator -Most common types are patents, copyright, and trademarks -Why? Creates incentives to innovate and be unique by allowing you to benefit form your innovation/ creation Types Trademarks -A word(s), a design, or a combination of these used to identify the goods or services of one person or organization -Protection for 15 years; renewable -Legislation= trade mark act -Can be a symbol/ shape/ and or words -Why? Establishes and protects reputation and brands, can be one of your most valuable assets and facilitates licensing of your trademark Copyright -Any original literary, dramatic, musical or artistic work -Subject to copyright from the moment it is create (no registration needed) -Owner is creator of the work -Created while at work= owned by employer -Duration- life of owner + 50 years -Becomes public domain after -Caution: doesn’t cover ideas, only for form in which they are expressed in (music, play, art) -Why? Receive credit and royalties for your work Patent -Government grants that give investors exclusive rights to their inventions 26 -Must be new (first in the world), useful (functional and operative) and show ingenuity (ex. is not obvious to someone skilled in that area) -Can be a product, composition, apparatus, process, or improvement of any of these -Protection- 20 years Why? Provides protection for owner, can license/ receive royalties, provides valuable information and inspiration for further research and innovation -Details disclosed to the public after 18 months Business Influence over Government Lobbyists -Hired to represent company’s/ groups interest with the government officials -Lobbying act: must register and follow rules -Trade associations: small businesses/ individuals join and lobby as an industry lobby group Collaboration with government/ decision input -CRTC consults with industry members Advertising -Corporations influence voters Forms of Business Ownership -Traditional Ownership: -Sole Proprietorship -Partnership -Corporation -Public vs. Private Corporations -Other Forms: Co-operatives -An organization that is formed to benefit its owners in the form of reduced prices and/or distribution of surpluses at year-end -Forms of ownership will likely change over life of business Sole Proprietorship -Owned and operated by one person who is responsible for all of its debts? -Business and owner= one legal entity -Important to understand in the eyes of the law the business and the owner are considered one legal entity, no distinction -Government supports and gives lots of free advice to new businesses -If business is experiencing losses and gets sued they can come after personal assets since no distinction between personal and business -Difficult to evaluate and determine the value of the business 27 Partnership -Two or more owners -Business with two of more owners who share in the operation of the firm and in financial responsibility for the firms debts -Business & Owners= one legal entity -Government gives lots of support and advice -Now you have two people to get opinions and bring money -Slightly easier to borrow money -Hard to transfer partnership, difficult to calculate and hard to find a new partner Types of Partnership: General Partnership: -Al partners have joint and several liabilities for the obligations of the business -Joint Liability: Together share liability -Several liabilities: one may be liable for all Limited Partnership -Limited partners liability= investment -A type of partnership with at least one general partner (who has unlimited liability) and one or more limited partners. The limited partners cannot participate in the day-to-day management of the business or they risk the loss of their limited liability status -Cannot lose more money then what you invested 28 -Do not have unlimited liabilities -Limited partners cannot be active in management -At leas one general partner Corporations -A business considered by the law to be a legal entity separate from its owners with many of the legal rights and privileges of a person; a form of business organization in which the liability of the owners is limited to their investment in the firm -Separate entity from owners (shareholders) -Types: -Public, Starts with IPO -Private -Crown -Interests represent by Board of Directors -Inside directors -Outside directors Private Corporation -Shares not publicly traded, <50 shareholders, owners & business= separate entities -A business whose stock is held by a small group of individuals and is not usually available for sale to the general public -In theory have limited liability since it is limited to anything you put into the business -If you put personal assets into the business then you can lose those Public Corporation -A business whose stock is widely held and available for sale to the general public -Several owners, share publicly available, business& owners= separate entities Advantages: -Can not come after you for private assets, limited liability 29 -Never lose anything more than your investment -Just because owners change does not change the business, does not matter who the owners are -Incredibly easy to transfer ownership -Go to the stock exchange and sell your stocks -Easy to raise money since you have stocks, bonds and have access to the public since you are already big -If you are a big company is easier to get bigger -Unlimited share holders Disadvantages -Profits get taxed once -Most costly form of ownership -Complicated -Make sure shareholders are protected -Lots of rules to financial disclosures -Lack of secrecy Globalization -Single interdependent system -Selling it in another market other then the domestic market -Globalization is a result of increasing trade agreements Forces: -Greater awareness of benefits -Technology makes it easier, faster, cheaper -Competitive pressure Forms of Competitive Advantage Absolute Advantage -Cheaper/ better then other countries -National Level: when you produce better or cheaper than anyone else in the world 30 Comparative Advantage -Better then other goods; lower opportunity cost -What does the country have an advantage in, what are they more productive at in comparison to other countries -Makes sense to produce in what you have a comparative advantage in and then buy what you’re not as good at producing National Competitive Advantage -Need all 4 to have comparative advantage Considerations in Going International 31 -First step: environment -Second step: Social factor -Third Step: economic factor -Fourth Step: Diamond E Capabilities -If yes to all the above considerations, go international -If no then stay domestic Barriers to International Trade Social and Cultural Differences -Adapting to customer needs -Is the kind of product you’re offering something people around the world would want? -Language barriers -If firms do not understand cultural differences in foreign market they will not be successful -Knowledge of local dos and don’ts is important in international business activity Economic Differences -Exchange rates -Comparison to Canadian dollars Legal and Political Differences -Quotas, tariffs, subsidies -Quota: number of products that can be exported into a particular market -Once the quota is met product isn’t allowed or taxed at a higher rate -Tariffs: tax put on the import to make the import more expensive -Subsidies: a government payment to help domestic business compete with foreign firms -Make it difficult for foreign companies to compete and make import products more expensive -Protectionism -Any action or policy the government takes to protect local firms -Protecting domestic business at the expense of free market competition -Local Content Laws -Laws requiring that products sold in a particular country be at least partly made in that country -What percentage of domestic products needs to be produced from Canadian sources? -Business Practice Laws: cartel and dumping -Most cartels not legal decide where they set the price and control quantity off output -Cartel: any association of producers whose purpose is to control supply of and prices for a given product -Dumping: Selling a product for less abroad than in the producing nation 32 Overcoming Trade Barriers -Government support through free trade treaties -GATT, WTO, EU, NAFTA, TPP -Employing firm strategies for next market entry -Government work actively to open their markets up -Have to open the door to your market for open countries to open their doors to their markets Firms Strategies for Entering Foreign Markets Alliances with local firms- overcome S, E but will the partnership work? -Company finds a partner in a foreign country where it would like to conduct business -Each party agrees to invest resources and capital in a new business -Help with local barriers and exchange rate problems -Help you be on the inside -Benefit from partners knowledge and they are familiar with the rules and the laws Establishment of foreign subsidiaries (buy or build) -Buying or establishing tangible assets in other countries -Overcome E and P (if allowed) -Do you know social factors? -Risky -Do you know the social context well enough? -Big investment -Manufacturing operations there, going in completely alone -Costs a lot of money and have to know a lot stuff to be able to be successful -Overcome tariffs, duties, and exchange rates but do you know enough about that market to be successful -Establishing an entire company Branch Offices -A location that an exporting firm establishes in a foreign country to sell its products More efficiently -Low risk; marketing control; overcome S? -Doesn't help with P or E since you are exporting -Compromise: manufacture in domestic market but set up sales office in foreign market and send employees to develop distribution network, and you just export product -Complete control over marketing -If employees aren't familiar with foreign market might not overcome these barriers -All setting up is the sales office Local Agents - marketing know how (overcome S) & low risk but oddest help -Is a foreign individual or organization that agrees to represent an exporters interest in foreign markets 33 -Hire local people to run the company -Local experts -Renting out the capabilities from local employees -Doesn’t have with exchange rate and doesn't help with quotas and duties Licensing- overcome S, E, P, but lower marketing control -Agreement in which firms choose foreign individual or organizations to Manufacture or market their products in another country -Someone can undermine your brand -Benefit as already familiar with the given market and will produce things that will sell in the foreign market -Overcome exchange rate, tariffs, duties, quotas, -Don’t have to set up own subsidiary -Damage could occur as you loss marketing control, as you don't know that the manufacturer won’t undermine the quality of products you produce Critical Success Factors Acheiving Finanical Performance Creating a Distinctive Competitive Advantage Meeting customers Needs Fostering Employee Comitemnt Buidling Quality products and sercies Encoruaging Innovation and Creativity Diamond-E Framework 34 Porters Five Forces 35 36
