Intro to Business Test #2

Purchasing an Existing Business

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Levels of Management

Top Management or high level Middle Management Supervisory or first line Management

Developing the Business Plan - on going

A business plan is a detailed description of the proposed business. The business plan is not just for the entrepreneur, but also for potential creditors and investors who may consider financing the business. Serves as a check list - include all the functions of the business, provide to investors or creditors, bank Serves as a guide for business owner

Corporation

A corporation is a state-chartered business entity that pays taxes and is legally distinct from its owners.

Limited LiabilityCompany (LLC)

A limited liability company (LLC) limited liability (taxed like personal, company assets up for grabs, not protected)

Sole Proprietorship

A sole proprietorship is a business owned by a single owner. The owner is called the sole proprietor.

Assessing Market Conditions

Before creating a new business for a particular market, the following conditions in that market should be considered:

Distributing Authority Among the Job Positions

Centralization & Decentralization

Centralization - more common

Centralized firms maintain most authority among the high-level managers.

Departmentalize by Customer

Departmentalize by Customer — organizes the company into departments based on the type of customer.

Methods of Departmentalizing Tasks (4)

Departmentalize by Function Departmentalize by Product Departmentalize by Location Departmentalize by Customer

Departmentalize by Function

Departmentalize by Function — organizes tasks and responsibilities according to employee functions makes sense if they produce one or few products

Departmentalize by Location

Departmentalize by Location — organizes the business by geographic regions track expenses by location

Departmentalize by Product

Departmentalize by Product — organizes tasks and responsibilities according to the type of product being produced. Many large firms departmentalize by both product and function.

Structures That Allow More Employee Input (3)

Matrix organization Intrapreneurship Informal Organizational Structure

Matrix organization

Matrix organization — employees from various parts of the firm focus on a specific project. Employeees can contribute different perspectives toward solving problems. But none of the employees may feel responsible for ensuring that goals are met. Increase employee satisfaction Time used is being taken away from other duties

Creating a New Business

Offer examples of various businesses created by one or a few people that were successful. Example: Cane's

Developing a Competitive Advantage

Once a firm has identified and assessed its major competitors, it must develop a strategy to enable it to compete successfully against them.

Planning

Planning — Planning prepares the firm for future business conditions.

Private Versus Public Corporations

Private (ownership restricted tosmall group of investors) Versus Public Corporations (shares can be easily bought or sold by investors) (first issuing stock to public - "Going public" "IPO: Initial Public Offering"

Impact of Ownership on the Return on Investment

Return on equity (ROE) is lower for a firm that uses more equity unless it invests its equity funds in a manner that will increase its net income substantially. ROE - earns as a propotion as the firms equity (earns of tax divided by equity) (compute) Equity - total investment by stockholders

Regulatory Conditions

Some industries are much more heavily regulated than others. Ex: plants, internet (protect consumer info), oil refineries

Oversight of the Internal Auditor

The auditor ensures that all departments follow the firm's guidelines and procedures. Hiring procedure

How Ownership Can Affect Return and Risk

The potential return and risk from investing in a business are influenced by the form of ownership.

Demand

There must be a strong demand for the products to be produced by the new business. Demand for any product changes over time in response to economic conditions and consumer tastes and preferences. Segments - subsets of a market they reflect a specific type of business and quality - type of customers, by customers, by quality (high end/ low end)

How Managers Manage Time

Time management represents the manner by which managers allocate their time when managing tasks. Set Proper Priorities Schedule Long Time Intervals for Large Tasks Minimize Interruptions Set Short-term Goals Delegate Some Tasks to Employees

Assessing a Business Plan

is it going to make money

Assuming Ownership of a Family Business

owner is already familiar with the business

Set Short-term Goals

to achieve consistent progress on large tasks

Characteristics of Successful Sole Proprietors

willing to accept risk, willing to work long hours, have good management skills, have experience in industry.

Line organization

• A line organization is an organization that contains only line positions and no staff positions.

Common Strategies (to developing a competitive advantage)

• Produce products efficiently — if a firm produces products efficiently, it maintains relatively low expenses and can charge a lower price. (do not lower prices unless have a cost advantage) • Produce higher-quality products — if a firm can produce a better quality product without incurring excessive costs, it has a competitive advantage over other firms in the same price range. (ease of use, last longer, better service)

Entrepreneurial Profile

• Risk tolerance - accept risk • Creativity - encourage to come up with product, satisfy customers new & improve product • Initiative - be persist

Disadvantages of a Partnership (3)

• Shared control — owners might disagree about business decisions • Unlimited liability — all general partners have unlimited liability • Shared profits — profits must be shared among partners

Disadvantages of a Sole Proprietorship (4)

• Sole proprietor also incurs all losses • Unlimited liability - is no limit on what you can be sued for, even take your house, personalli liable (biggest disadvantange) • Limited access to funds - loans, friend, family • Sole proprietors may have limited skills

Disadvantages of Being an Entrepreneur

• You may possibly incur large losses. (risk) • You are responsible for the business. • You could lose your source of income if the business fails.

Risk Management by Entrepreneurs

5.1 Reliance on One Customer The customer's decision to buy from a competitor would cause a major loss in sales. 5.2 Reliance on One Supplier The business may be severely affected if that supplier does not fulfill its obligations. 5.3 Reliance on a Key Employee The death or resignation of the employee could have a severe impact on the firm's performance. 5.4 Exposure to E-risk Electronic data could be stolen.

Managerial Skills

Conceptual Skills - analytical Interpersonal Skills (commercial) Technical Skills Decision-Making Skills

General Versus Limited Partnership

General - manage business Limited Partnership - share in profits and looses, can lose investment

Impact of Information Technology on Organizational Structure

Help to communicate from department to department

Purpose of organizational structure

How to use employees effectively, have lower costs

Organizational Structure

Identifies responsibilities of each job positions and the relationships amongst positions

Accountability in an Organizational Structure

Job descriptions can ensure accountability. High level managers held accountable of business isn't doing well

Labor Conditions

Labor costs are very high in some industries. Consider the labor environment in order to estimate the labor costs of producing the products. Northern states have more labor unions, higher labor costs

Functions of Managers

Planning Organizing Leading - willing to take action/lead by example Controlling Integration of Management Functions Use of Technology to Improve Management Functions Software to Improve Management Functions

Impact of Ownership on Risk

Risk refers to the degree of uncertainty about the firm's future earnings.

Role of the Board of Directors - select shareholders

The board is the set of executives responsible for monitoring the activities of the firm's president and other high-level managers. It approves key business proposals (major issues : layoffs, mergers) made by the firm's top management. In general, the board is not involved in managing the day-to-day activities of the firm. • Inside board members — employees of the firm (typically CEO) • Outside board members — not employed by the firm and therefore more likely to ensure that policies are consistent with shareholders interests. • Conflicts of interest — occur within the board because inside managers may make decisions that serve management rather than shareholders. Outside directors (more likely to take action against inside members) may sometimes be subject to conflicts of interest as well. (Minimize with more outside members)

Charter (incorporation the firm) and Bylaws ( general guidelines of policies to manage the firm)

The owners of a corporation are called shareholders. Since the corporation is legally distinct from its owners, shareholders have limited liability for the debts of the company. The shareholders elect a board of directors, who are then responsible for establishing the general policies of the corporation and appointing the president and other key officers of the corporation. CEO is usually the chairman of the board

Franchising

an arrangement whereby a business owner (called the franchisor) allows others (called franchisees - purchase franchise) to use its trademark, trade name, or copyright, under specified conditions

Schedule Long Time Intervals for Large Tasks

focus attention on a single task

Set Proper Priorities

focus attention on the activities that will yield the greatest added value to the firm

• Line (authority) versus staff positions (supports or assists)

line positions are established to make decisions that achieve specific business goals. Staff positions are established to support the efforts of line positions, rather than to achieve specific goals of the firm.

Controlling

monitoring and evaluation of tasks • Correcting deficiencies • Correcting standards • Control of management process • Control of reporting - S.O.X, accurate info

Advantages of franchises & Disadvantages of franchises

• Advantages of franchises — proven management style, name recognition, and financial support • Disadvantages of franchises — shared profits and less control (franchisee must agree to guidelines set by the franchisor)

Decentralization

A decentralized firm spreads authority among many groups and levels of managers. An extreme form of decentralization is autonomy, in which divisions make their own decisions and act independently.

Partnership

A partnership is a business that is co-owned by two or more people. The owners of the business are called partners.

Obtaining Ownership of an Existing Business

Assuming Ownership of a Family Business Purchasing an Existing Business Franchising

Summary of Market Conditions

Do have to be aware of all conditions that can affect your business

Downsizing

Downsizing - cutting positions - flatter chart - more customer focus • few levels of managers • more decision making on employees • remaining managers have more responsibility wider control

Competition - more competition decrease market share for each competitor

If the market has less competition, it is easier to enter. Market Share - a firms sales as a proportion of the total market (ex:apple) Your amount/ total industry amount 1 mill/5 mill = 20 % of market share

General partnership

In a general partnership, all partners have unlimited liability. In a limited partnership (investors), some of the partners have limited liability. (are some general partners) manage business

Informal Organizational Structure

Informal Organizational Structure — informal communications network among a firm's employees, called the grapevine. Advantages: It allows more interaction and friendships among employees, Disadvantages: but can sometimes be used to spread incorrect or negative information about the firm.

Using SWOT Analysis to Develop a Competitive Advantage

Internal: Strengths - technological (reputation, name recognition, higher quality & lower price (stronger & stronger) Weaknesses - don't have high quality, don't have low price External: Opportunities - explore - going into another market threats - competition - minimize / reduce risk

Intrapreneurship

Intrapreneurship — process of encouraging specific employees within an organization to create ideas, as if they were entrepreneurs who were running their own businesses. *Reward intrapreneurships; take their ideas seriously

Leading - willing to take action/lead by example

Management process where managers influence the habits of others to achieve a common goal • Autocratic leadership — retains full authority for decision making (Top Management) (UPS) • Free-rein leadership — delegates much authority to the employees Laissez-faire - allowed to do (creative/motivated employees) (ex:apple) • Participative leadership — encourages some input from employees, but uses authority to make decisions Democratic - iniative The most appropriate leadership style may be dependent on the attitudes and abilities of employees. If employees have good abilities and want to help managers improve the operations, a free-rein leadership style may be appropriate. If they do not have any interest in the firm, an autocratic leadership style may be necessary.

Organizing

Organization of employees and other resources in a manner that is consistent with the firm's goals. Once a firm's goals are established (from the planning function), resources are then acquired and arranged to achieve those goals.

Internal Control Process

The Sarbanes-Oxley Act ( keeps firms in line) requires publicly traded firms to establish processes for internal controls to more accurately monitor their financial performance over time. implementing a system that make sure any errors are detected in the data executives have to sign off (accurate)

mission statement

The first step is to establish mission statement, which describes the firm's primary goals and the strategies that will be used to achieve the firm's mission. • Strategic plan — is intended to identify the firm's main business focus over a long-term period, perhaps three to five years ( Top level management) • Tactical planning — focuses on a shorter time period, such as the next year or two. These smaller-scale plans, prepared by high-level and middle-level managers, are consistent with the firm's strategic (long-term) plans. • Operational planning — establishes the methods used for the near future (such as the next year) to achieve the tactical plans (current)- spend more money • Contingency planning — contains alternative plans of action developed for a variety of possible business conditions (as needed)

Types of franchises

Types of franchises include a distributorship (car dealership), in which a firm is allowed to sell a product produced by a manufacturer; a chain-style business, which is allowed to use the trade name of a company and follows guidelines related to the pricing and sale of the product; and a manufacturing arrangement, which allows a firm to manufacture a product using formulas or methods provided by another company.

Summary of a Business Plan

continue, adding to it

Supervisory or first line Management

includes positions such as account manager and office manager. Supervisors are highly involved with the employees who engage in the day-to-day production process. (employee absent, consumer complaints)

Top Management or high level

includes positions such as president, chief executive officer, chief financial officer, and vice-president. They each make decisions regarding the firm's long-run objectives. (Do we need to expand) (Should we issue stock?)

Middle Management

includes positions such as regional manager and plant manager - division manager. Middle managers resolve short-term problems and devise methods to improve performance. (restructuring)

Chain of Command:

organization chart: job position of whp to employee reports to, task, responsiblites

Advantages of a Partnership (3)

• Additional funding — more owners can result in more funding • Shared losses — any losses are absorbed by more than one owner • Ability to specialize — partners can focus on areas of specialization

Disadvantages of a Corporation

• Additional organizational expense — a corporation must create a corporate charter and file it with the state government • Financial disclosure — publicly held corporations must disclose more about their operations and financial condition • Agency problems — publicly held corporations are normally run by professional managers, who may make decisions that conflict with the interests of owners • High taxes — earnings of the corporation are first taxed as income to the corporation. If the corporation pays dividends to stockholders, the dividends are taxed again as the personal income of the owners of the corporation. A capital gain when the price received minus the price paid for the stock Double taxation

Decentralization: Advantages and Disadvantages

• Advantages o Reduces operating expenses, as some positions are eliminated o Shortens the decision-making process, since managers at lower levels can make decisions o Improves morale of employees at lower levels as they have more responsibilities. Help to promote to higher level position (growth) • Disadvantages o Requires decisions by lower-level managers who may lack experience to make proper decisions o Middle and supervisory managers may be overwhelmed with additional responsibilities • The proper degree of decentralization depends on the skills of the managers who could be assigned additional responsibilities.

Advantages of a Sole Proprietorship (4)

• All earnings go to the sole proprietor • Easy organization / start up - apply for liscence • Complete control / make all decisions • Lower taxes / personnel income

line-and-staff organization

• An organization that has both line and staff positions and that assigns authority from higher-level managers to employees is called a line-and-staff organization.

• Board committees: (usually outside) - oversees firm

• Board committees: (usually outside) - oversees firm o Compensation committee - look at salaries of high-level managers (CEO); make any changes o Nominating committee - make sure everyone on the board has the skills o Audit committee - oversees the external auditor; hiring practices, monitor inside the firm

How Stockholders Earn a Return

• Dividends — portion of the firm's recent earnings paid to the stockholders • Capital gain — increase in the market value of the stock over time

Assessment of the Business Environment

• Economic environment — is assessed to determine the demand for the new product • Industry environment — is assessed to determine the degree of competition - too much competition to set yourself apart • Global environment — is assessed to determine how the demand for a product may be influenced by factors such as foreign country conditions and competition from foreign firms, changes in exchange rates, and changes in trade regulations

Financial Plan

• Financing strategy — the amount of financing necessary and the proportion obtained from other owners versus investors (loan, collateral) • Feasibility of business — estimation of benefits versus costs of the business. Revenue should be forecasted based on expected sales volume and product price. Estimated expenses are based on the plans for organizational structure, location, design, and plant layout, along with the production volume. This analysis is important to creditors and owners who will only provide funding if they believe that the business will be successful.

Advantages of a Corporation

• Limited liability — unlike sole proprietors or general partners in a partnership, shareholders of corporations have limited liability • Easier access to funds — the ability to issue additional stock provides corporations with a means of raising additional funds that is not available to sole proprietorships and partnerships • Transfer of ownership — stockholders in publicly held corporations can normally sell their stock by simply calling a stockbroker. Owners of sole proprietorships and partnerships may have a difficult time selling their business interests

Organizational height

• Organizational height — number of layers in the structure from bottom to top. A tall organization has a relatively large number of layers. A flat organization has relatively few layers.

Management Plan

• Organizational structure — identifies the roles and responsibilities of the employees hired by the firm. This part of the plan should include a job description for each employee. The plan should indicate how the structure would change as the firm grows. • Production — describes the production process, such as the location of production facilities and the design and layout of the facilities • Human resources — explains how employees will be motivated, managed, and compensated to ensure that they will perform well for the firm Economies of scale - the more you have reduces the price, cost per unit goes down - quantity produced increase, price reduces

How Organizational Structure Varies Among Firms: Span of control

• Span of control — number of employees managed by each manager. A narrow span (good if have very diversified tasks, skills, among employees) of control is designed to have each manager supervise just a few employees. A wide span (similar job tasks) of control is designed to have each manager supervise a large number of employees.

Marketing Plan

• Target market — identifies the profile of customers who would purchase the products (demographics) • Product characteristics — will differentiate the new firm's product from those of competitors (yours stand out from competition) • Pricing strategy — considers prices of competing products and the cost per unit of producing the product • Distribution strategy — identifies how the product will be distributed to customers (through retailers versus wholesalers versus directly to consumers) • Promotion strategy — should consider the target market and pricing strategy

Advantages of Being an Entrepreneur

• You may earn large profits from your business and therefore have a higher income than if you worked for another business. • You can be your own boss. • You are in control and don't have to fear being mistreated or fired. • You are directly rewarded for your work. (satisfaction)