Basic Business Concepts Dr. Meghna Goswami Business Concepts • An organization is a group of people within some structure who possess a common objective, usually expressed in a mission statement. • Organizations may be: • for profit (frequently referred to as “firms”) • not-for-profit • A market is a place (real or virtual) where potential sellers and buyers meet to exchange resources (which may be money, products, services, etc.). • An industry is a group of organizations competing in a predefined market under similar bases of competition General Bases of Competition • A “basis of competition’ is a dimension upon which companies choose to compete, e.g., • • • • • • • Price Quality Delivery Service Innovation Knowledge Others? The Organization and Its Environment • An organization operates within an environment that is in a constant state of change The Organization and Its Environment Global Public pressure groups The Specific Environment Suppliers The Organization Customers Government Competitors The General Environment Figure 3-4 Management (5th ed.) Robbins and Coulter Prentice Hall Objectives of a Firm • What is the objective of the firm? • Maximize shareholder wealth • Generate profits • Shareholder: Someone who holds stock (ownership) in the firm. • Stakeholder: Anyone who possesses an interest in the firm’s activities (govt., public pressure groups, alumni, students, etc.) Strategy • To meet the organization’s objective, managers craft a strategy. What’s a strategy? • A strategy is a plan to marshall or deploy scarce resources. • Actions undertaken to achieve organizational goals. • Levels of strategy: • Corporate (Portfolio management) • Business (Generate sustainable competitive advantage) • Functional/ Market (Support the business level strategy) Business Concepts • Diversification • Integration • Forward integration (one type of vertical): • Gaining ownership or increased control over distributors or retailers (UA buys Priceline) • Backward integration (the other): • Gaining ownership or increased control over suppliers (Amazon buys RCA records) • Horizontal integration • Seeking ownership or increased control over competitors (Amazon buys BestBookBuys.Com) Business Concepts • An asset is anything the firm owns or controls. • Loosely, “Asset” is to Accounting as “Resource” is to Management. • Types of assets: • Physical: plant equipment, location, access to raw materials • Human: training, experience, judgment, decision-making skills, intelligence, relationships, knowledge • Organizational: Culture, formal reporting structures, control systems, coordinating systems, informal relationships Business Concepts • A capability is usually considered a “bundle” of assets or resources to perform a business process (which is composed of individual activities) • • All firms have capabilities. However, a firm will usually focus on certain capabilities consistent with its strategy. • • E.g. The product development process involves conceptualization, product design, pilot testing, new product launch in production, process debugging, etc. For example, a firm pursuing a differentiation strategy would focus on new product development. A firm focusing on a low cost strategy would focus on improving manufacturing process efficiency. The firm’s most important capabilities are called competencies Business Concepts • A competency is an internal capability that a company performs better than other internal capabilities. • A core competency is a well-performed internal capability that is central, not peripheral, to a company’s strategy, competitiveness, and profitability. • A distinctive competence is a competitively valuable capability that a company performs better than its rivals. Distinctive Competencies • Sharp Corporation • • Toyota, Honda, Nissan • • Low-cost, high-quality manufacturing capability and short design-to-market cycles Intel • • Expertise in flat-panel display technology Ability to design and manufacture ever more powerful microprocessors for PCs Motorola • Defect-free manufacture (six-sigma quality) of cell phones Types of Business Organisations Private Sector Franchise Sole Trader Partnerships Companies Private limited companies Cooperatives Public limited companies Sole Proprietorship • Owned financed and controlled by one individual but can employ other staff • Traditionally common in local building firms, small shops, restaurants • Today many people are setting up their own businesses by creating small web-based companies working from home Sole Proprietorship Advantages • Requires little capital • Easy to set up • Personal incentive – • keep all the profits • make key decisions • high degree of control • Flexibility • Ability to offer personal service Sole Proprietorship Disadvantages • • • • • Unlimited Liability Limited access to capital Potential for long hours Pressure of being solely responsible Lack of continuity – business ceases once owner dies • No cover for illness Partnerships • • • • Owned, financed and controlled by between 2 & 20 partners Terms of Partnership agreed through contract Bound by the terms of the Partnership Act Common in professions – lawyers, accountants, architects, surveyors, estate agents, vets etc Partnerships Advantages • • • • Each partner contributes capital Shared responsibility Greater opportunity for specialisation Easy to set up Partnerships Disadvantages • Unlimited Liability All partners liable for the debts of the others • Partnership dissolved on death of one partner • Potential for conflict • Decisions of one partner binding on the rest • Limited access to capital Private limited companies • Usually small family business • Owned by between 2 and 50 shareholders • Directors elected by shareholders Private limited company • Advantages • Limited liability • Shareholders contribute capital • Protected from takeovers • Disadvantages • Still limited capital Public limited companies • Owned by minimum of 2 but no maximum number of shareholders • Directors elected by shareholders • Has a separate legal identity – the company can sue and be sued • Minimum share capital 5,00,000 Public limited companies • Advantages • Large amount of capital can be raised • Economies of scale • Disadvantages • Unwanted takeover possible • Can be remote from customers • Potential diseconomies of scale Co-operatives • Controlled by a committee • Ownership, finance and control in hands of ‘members’ • Exists for the benefit of ‘members’ • Consumer co-ops – members buy goods in bulk, sell to members, divide profits between members • Worker co-operatives – workers buy the business and run it – decisions and profits shared by members • Producer co-operatives – producers organise distribution and sale of products themselves Franchises • Method of Business Organisations backed by established ‘brand’ name • Franchisee – pays a fee for the purchase of the franchise • Common franchises – Body Shop, McDonalds, Costa Coffee, Subway Franchises • Advantages • Owner gets to run a business with less ‘risk’ • Owner buys the right to use the established companies name, format products, logos, display units, methods etc. • Speedy way for business to expand • Become very popular Franchises • Disadvantages • Owner – (Franchisee) responsible for debts • Franchisee pays a royalty to owners of the brand • Franchisee must adhere to pricing policy of parent company and so it can be difficult to realise high profits Thank You!
