Summary: Understanding Business (Nickels)

Summary of Understanding Business written in 2011

Author of the book: Nickels, McHugh& McHugh, Edition: 2009

Chapter 1: Business Environments

A business provides goods and/or services with the main goal of making profit. Profit is the difference between revenue and expenses. The person who risks time and money to manage and start a business is named an entrepreneur. Entrepreneurs might risk losing time and money on a business. The reward of taking risk is profit. On the contrary, if the company has done not so well, this occurs in a loss (expenses>revenues). Secondly, there is another type of organization, called a non-profit organization. It´s goal is not making a personal profit for its owners or organizers.
Besides the entrepreneur , the stakeholders have a great interest in the development and profit of the company as well. Stakeholders are for example; customers, employees, stockholders and bankers. The challenge is to balance the needs of the stakeholders as best as possible. A decision of management can be ‘outsourcing’. This means that several functions are assigned outside organizations. This can be an example for conflict between stakeholders and management in a company (employment versus maximum profit).
The quality of life is the general well-being of a society in terms of education, health care, safety and political freedom. The standard of living is the amount of goods and services people can buy with the money they own. These are important factors which can create satisfaction/joy and determine the level of quality in your life.
Running a business can increase the standard of living as well as the quality of life. First of all, businesses can increase the level of wealth/quality in life because they provide employment for people. Secondly, tax is being paid by employees as well as by businesses. The government uses this money to build hospitals and for example schools. The wealth that businesses generate and the taxes that they pay, may help everyone in their communities. Which can lead to an increased quality of life.
Factors of production
Several factors of production are considered as the “building stones” of a company:

• Land: Natural resources
• Labour: Workers
• Capital: Everything that is used for production (i.e. tools, machines)  except for money
• Entrepreneurship: People who are willing to take risk and invest time/money in a business
• Knowledge: Determining wants and needs and to respond to them efficiently

The business environment consists of surrounding factors that either develop or hinder business:

1. The global business environment: The global business environment is very important because it surrounds all other environmental influences (economic and legal etc). Two major environmental changes in the last years have been (1) the increase of free trade among nations and (2) the growth of international competition.
2. Economic and legal environment: The government can influence the level of risk of starting a business and can therefore increase entrepreneurship and wealth in a country. This is done by:, - (1) keep taxes and regulations to a minimum, (2) allow private ownership (3) establish a tradable currency. (4) eliminate corruption (5) establish laws that enable people to create contracts that are enforceable in court
3. Technological environment: Good technology has to be available and easily accessible. The use of internet, bar codes or databases can improve productivity significantly. On top of that, using technology can increase your responsiveness to customers. For example, bar codes can be used to display what products a consumer bought. This information is inserted in a database. A database is an electric storage file where information is kept about customers and their past purchases. Companies trade database information to know what the local population wants.
4. Social environment: Business have to respond to (1) demographic changes because they can affect business and can lead to new opportunities and threats. On top of that, businesses have to (2) hire a diverse workforce which represents the diversity of the customers and what they want. Finally, (3) the changing situations of families have a major effect on businesses as well. If you are a single parent, for example, it cost a lot of effort to work full-time and raise a family. Therefore businesses have to take such thing into account and offer special programs.
5. Competitive environment:  If a business wants to stay competitive, it has to (1) meet stakeholders’ and employees’ wishes. On top of that, it is important that (2) the products or services exceed customers’ expectations. These days, an important goal for many companies is offering high quality products at competitive prices (3) with excellent customer service. Restructuring the organization and emphasizing on empowerment of frontline workers is also a part of customer service. It is not allowed to make mistakes in products (zero defects).

To meet the needs of customers, empowerment can be used. Empowerment is that you give employees more freedom, authority and responsibility to do their work.
E-commerce is purchasing and selling of goods and services over the internet. It can be divided in two major types of transactions; Business-to-consumer(B2C) and Business-two-business (B2B).

Technology is everything that makes business processes more effective, efficient and productive. That are for example software progams, phones and computers. You reach the highest efficiency if you use the least amount of recourses, when producing goods and services. Effectiveness is producing the desired result that you wanted to have. The third factor, productivity is the amount of output you generate, given the amount of input.
Goods are concrete products (which you can touch) such as a bike or for example pizza. However, services are intangible. Examples of services are education or treatment in a hospital.
 

Chapter 2: Economics and business

Economics
Economics is the social science that studies the distribution, production and consumption of goods and services. Some economics have the perception that economics is the allocation of ‘scarce’ recources. They think that there are only limited resources available which have to be cautiously divided among people, primarily by the government. Economics can be divided in two branches. Macroeconomics deals with the economy of a country as a whole, whereas microeconomics analyzes the behaviour of individuals and organizations in certain markets.

Neo-Malthusians believe that there will be too many people on earth and there won’t be sufficient recources and food. They think that the cure for poverty is birth control and adoption. However, many macroeconomist are in the opinion that a large population can be a valuable resource in a way that better educated people will lead to economic growth.

On the contrary, Adam Smith did not believe that resources had to be divided among individuals. He created a vision that when there were more recources created, the wealth would increase and the lives of everyone would improve. The theory of Adam Smith’s says that people do not automatically, consciously set out to help others. Instead, they are working for themselves. However, the effort that everyone puts in individually to improve their situation, will lead to a better social and economical situation for everyone.
Capitalism

The population under free-market capitalism have 4 basic rights:

1. The right to own a business and to keep the profit they gain
2. The right to private ownership (Individuals can sell, buy and use things, pass property on to their inheritants)
3. The right to have freedom of competition (businesses need laws and regulations, i.e. contract laws which make sure that people stick to their word.
4. The right to have freedom of choice

Capitalism is a economic and social system in which the means of production and distribution are owned privately. The price of a product or service is determined by demand and supply. If the quantity demanded is high and the quantity supplied is low, the prices increase and vice versa. The equilibrium point is the point where quantity demanded and quantity supplied are the same.
One of the most significant characteristics of capitalism, is competition. These are the various types:
-    Perfect competition: (1) Market consists of a lot of suppliers (2) It is a homogeneous (uniform) product (3) The market is easily accessible (4) Market is fully transparent and (5) You can not determine price, you only have influence on the quantity that you produce.
-    Monopolistic competition (1) Market consists of a lot of suppliers (2) It is a heterogeneous product (product is seen as different by consumers) (3) The market is easily accessible. (4) The market is not transparent. Product differentiation is a common used strategy in monopolistic competition.
-    Oligopoly: (1) It is a heterogeneous product (2) Market consist of only a few suppliers (3) The market is not easily accessible, it is difficult to entry.
-    Monopoly: (1)There are no competitors. (2) Producer determines price (3) Transparant market (4) Market is difficult accessible
A free-market economy like capitalism may have many advantages. For example, (1) people may work themselves out of poverty or (2) there is more competition between companies. However, it also has its disadvantages. For example, companies tend to move their production to countries which have cheap labour cost. On top of that the inequity can increase in a free-market economy because there will be a greater difference in poor and wealthy people.
Socialism
Another economic system is called socialism. Socialism is based on the perception that most businesses must be owned by the government. The governments task is to equally distribute profit of governmental businesses and profit of taxes paid by private owned businesses, among the people. A command economy exists if the government , to a large extent, determines what goods and services will be produced in that country, who will get them and how the economy will grow.
Advantages of socialism:
-    More social equality than in capitalism
-    Free education and social programs paid with profit of governmental businesses and taxes of private businesses
-    Employee benefits such as longer vacations and fewer working hours because of governmental restrictions
Disadvantages of socialism:
-    Less profit for entrepreneurs because of higher taxes
-    Less entrepreneurship because of higher taxes and more governmental restrictions
-    Fewer innovation because of fewer rewards
-    Brain drain: Socialist countries lose their brightest entrepreneurs to capitalistic countries because of lower taxes and higher income.
Communism
Communism is a economic and political system in which the government determines almost everything. They make economic decisions and own the major factors of production. There is little personal freedom, entrepreneurship is not allowed and therefore competition does not exist in a communist country. The government decides what and how much to produce. Therefore, production is not based on supply and demand.

Mixed Economies
Today, most of the countries allocate their resources partly by government and partly by the market. This is called a ‘mixed economy’.
Key Economic Indicators
-    Unemployment Rate: The percentage of people who are at least 16, unemployed, and do not have found a job within the prior four weeks.
-    Consumer price index (CPI): The CPI measures if there is a general rise in the prices (inflation) or a general decline of the prices (deflation) over a month.
-    Producer Price Index (PPI): The PPI measures the changes in wholesale prices.
-    Gross Domestic Product (GDP):  The total value of all goods and all services that were produced in one year.
The Business Cycle: periodic falls and rises that arise in economies over time.
Boomà Recession à Depression à Recovery
Boom : when the economy is growing
Recession:  when the GDP declines for two or more quarters.
Depression:  an intense recession
Recovery : economic growth is increasing again, after this, there will be another economic boom.
 
-    Fiscal policy: The intervention of the government to keep the economy stable. The government can intervene by changing the taxes and government spending.
-    National debt: The total of deficits of the government.
-    Monetary policy: The management of money supply and the interest rates.
 

Chapter 3: International trade and competition

There are various reasons why countries trade with other countries. To begin, (1) no nation can produce all the products demanded themselves. Furthermore, (2) even if a country determines to become self-sufficient, other countries would seek trade to fulfil the demand of their population. On top of that, trade enables a nation to produce what it is most capable of. Import is buying products or resources from a different country. On the contrary, export is selling products or resources to other countries. E-commerce has made it possible to access distant global markets. Because of the internet, companies can bypass the normal distribution channels.
Theories about international trade:
-    Comparative advantage: This means that countries should sell what they can produce most effective and efficiently or that a country has a monopoly on a certain product. Other products, which can’t be produced in such a manner, should be imported from other countries.
-    Absolute advantage: The advantage that occurs when a country has a monopoly on producing a certain product or is able to produce it, in comparison with other countries, more efficiently.
The balance of trade is the total value of a country’s import compared with the import over a certain period of time. There is a favourable balance of trade if the total value of the export surpass the total value of the import.  The balance of trade is unfavourable, or the country has a trade deficit, when the value of the imports is higher than the value of the export.If the balance of payments is unfavourable and a nation owes other countries more than other countries owe the nation, it is called a deptor nation.
Strategies for global trade
Licensing: Allowing another company to produce your product or use your trademark for a royalty, a financial compensation.
-    Advantages: more revenue; the royalty income; foreign licensees have to buy start-up supplies, component materials and consulting services.
-    Disadvantages: licensing happens for a long period in which the value of the product could increase without the opportunity for the licensor to benefit from it. The licensee could also break the agreement and the licensor could lose its’ trade secrets.
Franchising: Sell the rights to use a business idea and the business name.
Contract manufacturing: A domestic company attaches its brand name ore trademark to a product that was produced by a private-label in a foreign country. A company can also use contract manufacturing temporarily to achieve an not expected increase in orders. On top of that, labour cost are often very low.
Joint venture: Joint venture is a short-term partnership of two or more companies that undertake a common project. In some countries it is mandatory to participate in a joint venture in order to do business in that country.
-    Advantages: shared technology, shared management and marketing expertise, entry in new markets, shared risk, faster growth.
-    Disadvantages: loss of flexibility, one company learns from the other, and takes advantage or steals the ideas of the other company
Strategic alliances: A long-term partnership of two ore more companies that help each other to establish competitive market advantages. The difference between strategic alliances and a joint-venture is that strategic alliances do not typically involve sharing risk, costs, management or even profits.
Foreign subsidiaries: A company owned in a foreign country by another company. All technology and expertise will stay in direct control of the parent company. The advantage of subsidaries is that the company maintains the complete control over any expertise or technology it possesses.
Foreign direct investment: Buying of permanent property and businesses in a foreign country.
Multinational corporation: A company that has branches in many different countries, that are producing and selling products. Multinationals have multinational stock ownership and multinational management.
Obstacles in world trade:
1.)    Sociocultural forces: Cultural differences such as: religion, language, values, social structures.
2.)    Economic and financial forces: To understand economic situations, countertrade opportunities and currency fluctuations are crucial to a businesses success in the global market.
3.)    Legal and regulatory forces: Bureaucratic barriers, restricting laws and regulations
4.)    Physical and environmental forces: differences in technological systems and difference in access to technological systems. For example, computer and internet usage in developing countries is non-consistent or barely used which is a obstacle in world trade.
Ethnocentricity is a point of view that their own culture is superior to all others.
Floating exchange rates is a system which shows how financial markets operate. It shows which currencies ‘float’ according to the supply and demand in the global market for the currency. The exchange rate is the value of a countries currency in comparison with currencies of other countries. Devaluation means that the value of the countries currency has decreased relatively to other currencies.
Bartering is the exchange of service for service or merchandise for merchandise with no money involved. Countertrading is a more complex form of bartering in which various countries may be involved.
The Foreign Corrupt Practices Act is a law which specifically prohibits ‘dubious’ or ‘questionable’ payments to foreign officials to secure business contracts.
Trade Protectionism
Trade protectionism means that government regulations are used to limit the import of goods and services. This is seen as a great barrier to global trade.
There are different tools to limit import. First of all, you can impose tax on products from foreign countries, which is called tariffs. There are two types of tariffs.. Protective tariffs are used in order to raise the retail price of foreign products. In this way, (1) jobs are saved and (2) industries are kept in that particular country. Whereas revenue tariffs are used to raise money for the government. Import quotas allow a limited amount of certain imported products. An Embargo is an entire ban on the trade (import and export) of a certain product or stopping all trade with a certain country. Non-tariff barriers are restrictive standards that detail exactly how a product must be sold in a country.

International organizations, agreements and markets
General Agreement on Tariffs and Trade (GATT), 1948: An agreement that created an international forum for negotiating mutual reductions in trade restrictions (founded in 1948)
World Trade Organization (WTO), 2005: An international organization that replaced the GATT and has the duty to mediate international trade disputes among nations.
North American Free Trade Agreement (NAFTA), 1994: An agreement between The United States, Canada and Mexico which created a free trade area among this nations.
Common markets (i.e. EU, Mercosur): Common markets are trading blocks between a group of countries. The countries have no internal tariffs but have a common external tariff. On top of that they have  a coordination of law to facilitate exchange.
Outsourcing is the purchasing of goods and services from sources outside a firm rather than providing them within the company. A benefit of outsourcing is that (1) outsourced work allows businesses to create efficiencies that in fact let them hire more workers. On top of that, (2) less-strategic tasks can be outsourced globally so that businesses can focus on areas in which they can grow and excel. Furthermore, (3) consumers benefit from lower prices generated by effective use of global resources and developing nations grow, thus increasing economic growth.
Disadvantages of outsourcing are (1) Offshore outsourcing reduces product quality and can therefore cause permanent damage to a company’s reputation. Besides,(2) jobs are lost permanently and wages fall due to low-cost competition offshore. Also, the communication among company members, with customers and with suppliers become much more difficult.

Chapter 4: Ethics and social responsibility

Behaving ethically includes taking into consideration the moral standards which are accepted by society. Legal laws do not always cover how you should behave ethically. Ethics means to act responsibly according to unwritten, moral values that contribute to the wealth of a society. Laws are written statements that protect ourselves from fraud, theft and violence. The following statements are seen as basic moral values: self-control, respect for human life, honesty, self-sacrifice, courage. On the contrary, cruelty, cowardice and cheating is seen as wrong.
When is something ethical?
It is not easy to know if a decision you made is ethical or not, because moral values are unwritten and therefore have no general definition. That is because ethics is rather subjective than objective. There are a couple of questions you can ask yourself to find out whether a decision is ethical:
1)    Is it legal?  If it is not legal, it is not ethical either. ( Do I violate a law or company policy?)
2)    Is it balanced? (Will I win everything at the expense of another party? )
3)    How will it make me feel about myself? (Would I feel proud about myself, or do I feel ashamed.)
A busines should be managed ethically because (1) it maintains his good reputation, (2) reduce employee turnover, (3) to avoid lawsuits and (4) to avoid government intervention. On top of that, (4) it will attract new customers (5) keep existing customers, and (6) please customers, society and employees.
Corporate ethical behaviour
The managers have to set formal standard about what is acceptable and what is not. A corporate code of conduct sets corporate ethical standards. It has to be understood and respected by both, the managers and the employees. There a two different ways to enforce a code of conduct:
Compliance-based ethics codes: Compliance-based ethics code emphasizes on prevention of unlawful behaviour. This is done by increasing control on the employees and penalizing anyone who doesn’t obey the rules.
Integrity-based ethics codes: Integrity-based ethics code emphasize on stimulating ethically correct behaviour. If anything goes wrong, the employees are equally accountable.
The business ethics can be improved by the following:
1)    Managers and others must be trained to consider the ethical implications of all decisions in business.
2)    The employees must understand that expectations for ethical behaviour begins at the top. All employees have to respect the code of conduct and act appropriately.
3)    The top management must accept and support the code of conduct.
4)    An ethics office must be set up to process any complaints about the ethical matters in that company. Whistleblowers must feel protected from revenche.
5)    Outsiders like suppliers, distributors, consumers, etc should be informed about the corporate code of conduct.
6)    The code must be enforced and actions have to be taken if the rules are broken.
The people who report illegal or unethical behaviour are called whistleblowers. The Corporate and Criminal Fraud Accountability Act contains historic protections for wistleblowers..
Corporate social responsibility
Corporate social responsibility (CSR) is a companies concern for the welfare of society. Critics of CSR say that a manager’s role only is to compete and win in the marketplace (make money for stakeholders). They invest money to make more money and not to improve the society. On the contrary, defenders of CSR think that businesses owe their existence to the societies they serve. Without a succesfull society, businesses can not succeed as well. -> It is important to realize that there is a positive correlation between corporate social performance and corporate financial performance!
There are different dimensions of corporate social performance:
Corporate philanthropy: Charitable donations to non-profit groups of all kind. Strategic philantrophy involves businesses making commitments to one cause on a long-term basis.
-    Corporate social initiatives: Philanthropic activities that are related to the business’ competencies.
-    Corporate responsibility: Everything that includes how to act responsible within society like, providing social programs, minimizing pollution, hiring minorities , etc.
-    Corporate policy: The position a firm takes on political and social issues.
To understand social responsibility, we look at how businesses have responsibilities towards their stakeholders:
-    Employees: (1) Create jobs, (2) Maintaining job security (3) rewarding hard work (4) chance for upward mobility in job.
-    Customers: Offering customers goods and services of significant value is a responsibility. On top of that, honesty is very much appreciated. Furthermore, social conscious behaviour is a powerful competitive instrument to attract customers.
-    Investors: To make profit.
-    Society and Environment: promoting social justice, supporting non-profit organizations, creating wealth for society, improve own environment.
Insider trading is an unethical behaviour in which insiders use private business information to higher their own fortunes or those of their friends and family. It is not legal. To counteract insider trading the SEC adopted a new rule called ‘Regulation FD for ‘fair disclosure’. If a business releases information, they have to tell everyone at the same time, not just a select group of people.

Measurement of social responsibility
There are various ways to measure in what extent a business has integrated his social responsibilities. Social Auditing is a systematic evaluation of an organization’s progress toward implementing programs that are socially responsible and responsive. Businesses have to behave responsible and have to convince the outsiders that they do. The net social contribution can be measured by subtracting the negative effects of business from the company’s social contribution.
There are certain groups that can force a company to be more socially responsible:
-    Environmentalists: They will overawe companies by naming them and mention that they do not abide by the environmentalists’ standards.
-    Socially conscious investors: They insist companies to extend its own high standards to all its suppliers. This is a form of social responsibility investing. (SRI)
-    Union officials: Force companies to change behaviour to avoid negative publicity
-    Customers: do not want to do business with companies whom services are socially and ethically irresponsible.
International Ethics
Multinational companies often face the difficult question if it should apply its own standards or the standards of the country where it operates. Because many standards in development countries are not ethical,  multinational companies can influence other companies by behaving socially responsible. For instance, a company can refuse to deal with a foreign company that doesn’t obey the corporate code of conduct.

Chapter 5: Business ownership

Before you start a business you have to consider which of the three basic forms of ownership suits you and your company. You can choose from (1) partnerships, (2) sole proprietorship and (3) corporations.
(1)Partnership:
A partnership is a legal form of business with at least two or more owners.
Types of partnership:
-    Limited partnership: Partnership between one or more general partners and one or more limited partners. A limited partner is an owner who invests money in the business but does not have any management responsibility or liability for losses beyond the system. Limited liability means that limited partners are not responsible for the debts of the business beyond the investment made in to the company. A limited partnership is especially designed to help raise money.
-    General partnership: All the owners share in operating the business. All the owners are equally responsible and liable. The three elements of any general partnership are (1) common ownership, (2)sharing profits and losses and (3) sharing the right to get involved in managing the business. A general partner is an owner who has unlimited liability and is active in managing the firm. Every firm consist of at least one general partner.
-    Master limited partnership (MLP): Acts like a corporation on the stock market but is taxed like a partnership. It avoids the corporate income tax.
-    Limited liability partnership (LLP): A partnership that limit the partners’ risk of losing their personal assets to only their own performances and omissions and to the performances and omissions of people under their supervision. This means that if a partner may betrade you, you won’t lose all your personal assets, as in a general partnership.
Advantages:
-    More financial resources
-    Sharing management and combined knowledge
-    Longer survival
-    No special taxes: Owners pay the normal income tax
Disadvantages:
-    Unlimited liability: each general partner is liable for the debts of the firm, no matter who caused those debts. Partners can loose their homes, cars etc.
-    Sharing profits: possible conflicts
-    Disagreements among the partners
-    More difficult to end (terminate)
(2) Sole proprietorship
This is a business that is owned, and usually managed, by one person. On top of that, it is the most common form of business ownership.
Advantages:
-    You are your own boss
-    Starting and ending a sole proprietorship is easy
-    No special taxes: You just pay the normal income tax, however this depends in which country you live.
-    Pride of ownership: You deserve all the credit for taking risks and providing demanded goods and services.
-    Legacy for future generations (business owners have something to leave behind for future generations)
-    You don’t have to share your profit
Disadvantages:
-    Limited financial resources
-    Unlimited liability (this is the responsibility of business owners for all of the debts of the business) the companies debts, are your debts..
-    Management difficulties: Not everything can be done efficiently by one person. On top of that, it is difficult to attract skilled employees because you can’t compete with the benefits offered by big companies.
-    Overwhelming time commitment: hard to have time for anything else in life. It is a way of life.
-    Few fringe benefits: You can’t take a paid vacation, no sick leave and health insurance you have to pay yourself as well.
-    Limited growth: Because all creativity, funding and know-how comes from one person
-    Limited life span: When the owner dies, retires or becomes incapacitated the company often ends to exist
(3) Corporation
A corporation is a legal entity with the power to act and to have liability separate from its owners. A convetional (c) corporation is a state-chartered legal entity with the power to act and to have liability separate from its owners as well.
Advantages of a conventional corporation (C-corporation):
-    There is a separation of ownership from management: the stockholders/owners have some say in who runs the corporation, but they have no control over the daily operations.
-    Limited liability (Ltd.) means that the owners of the company are responsible for losses only up to the amount they invest
-    Size: Because they have the chance to raise large amounts of money to work with, corporations can build, for example, modern factories with the latest equipment available.
-    Perpetual life of the company: The death of one or more owners does not terminate the corporation because corporations are separate from those who own them.
-    Furthermore, it is easy to change ownership, you just have to sell your stock.
-    Easy to attract talented employees: by offering nice benefits as stock options.
-    More money for investment: To raise money a corporation can (1) sell ownership(stock) to everyone who is interested, (2) corporations can also borrow money from individual investors through issuing bonds. And last, corporations can borrow money from financial institutions.
Disadvantages of a conventional corporation (C-corporation):
-    Initial high cost: incorporation costs a lot of money, involves expensive lawyers and accountants.
-    Extensive paperwork: The tax laws forces a corporation to prove all the deductions and expenses are legitimate. Corporations therefore must process many forms.
-    Double taxation: First the corporation pays tax on the income and then the stockholders pay tax on the dividends.
-    Two tax returns for individual incorporates: If an individual incorporates, he or she must file both an individual tax return and a corporate tax return.
-    Size: Sometimes corporations become too inflexible and too limited to respond quickly to market changes.
-    Difficult to terminate: In a sense that it is hard to terminate a whole corporation.
-    Possibility of conflict with board of directors: If the stockholders elect a board of directors that disagrees with the present management.
It is also possible for people to incorporate their business. The main reasons for doing so are the special tax advantages and the limited liability.
S corporations are created by the government and are taxed like sole proprietorships or partnerships. A company who wants to become a S corporation has to fulfil these criteria:
-    The shareholders have to be individuals or estates and some of them have to be citizens or permanent residents of the USA.
-    Have no more than 100 shareholders
-    The company should have only one class of outstanding stock
-    The company is not allowed to have more than 25 percent of the income derived from your passive resources such as rents, royalties, interest, etc
The limited liability companies (LLC)
This type of ownership is similar to the S-corporation but does not have the special demands. Advantages:
-    Limited liability: personal assets are protected
-    Choice of taxation: (1) taxed as partnerships or as (2) corporation
-    Flexible ownership rules: LLC’s don’t have to comply with ownership restrictions as S corporations do.
-    Flexible distribution of profit and losses: profit does not have to be distributed in a proportion to the money each person invests.
-    Operating flexibility: LLC’s do not have to be that precise in describing how the company operates ( file written resolutions, annual meetings etc)
Disadvantages:
-    Limited life span: LLC’s are required to formulate dissolution dates in the articles of organization. By death: LLCs dissolve automatically.
-    No stock: LLC ownership is not transferable. LLC members need the approval to the other members in order to sell their interests. (S corporations and regular corporations can sell shares.)
-    Fewer incentitives: you cannot use stock options as a stimulus for employees
-    Taxes: LLC members must pay self-employment taxes on profits. The difference in comparison with a s corporation is that they pay the self-employment tax on salary but not on the entire profit.
-    Paperwork: More than sole proprietors, less than corporations.
Corporate Expansions
Merger: When two firms form/become a new company
There are several types of mergers:
-    Vertical mergers: When the two companies which operate in different stages of related businesses become one.
-    Horizontal mergers: When two companies which operate in the same stage of related businesses become one.
-    Conglomerate mergers: When two companies which operate in different businesses become one. The major purpose of a conglomerate merger is to diversify business operations and investments.
Acquisition: When a company purchases obligations and property of another company.

A leveraged buyout (LBO): When a group of people or an individual buys all the stock of a company and takes a firm private.
Franchise
A franchise is an arrangement in which a person buys the right to use a business name and to sell its products in a certain area. If you want to start a franchise in another country you have to make sure you adapt to the countries culture. The person who buys a franchise is called a franchisee. The person who sells the idea to the franchisee is called the franchisor.
Advantages:
-    Personal ownership: your store, you are your own boss, enjoy incentives and profits.
-    Nationally recognized name
-    Financial advice and assistance
-    Lower failure rate:
-    Management and marketing assistance: A franchisee has several benefits. First, they possess a nationally recognized franchise with an already established reputation. Secondly, they get assistance in all phases of operation such as; promotion and a choosing location.
Disadvantages
-    Franchise fees can be very high
-    Management regulations: you have to obey limitations and orders.
-    Share of profits
-    Coattail effect: If other franchisees fail, you could be forced out of business.
-    Restrictions on selling
-    Fraudulent franchisors
A cooperative is an organization, which is owned by members/customers. One of the reasons to form a cooperative is to gain more economic power.

Chapter 6: Entrepreneurship

Entrepreneurship is the acceptation of the risk of starting and running your own business. The reasons for entrepreneurship are the following:
-    Opportunity: Starting an own business offers more opportunities than working for others (i.e. people with disabilities)
-    Profit
-    Independence: Be your own boss
-    Challenge: take moderate, calculated risks.
Characteristics of entrepreneurs
-    Self-nurturing: You have to stay optimistic and believe in your ideas even if no one else does
-    Self-directed: Being your own boss requires self-discipline and responsibility
-    Action-oriented: You have to realize your dreams
-    Highly energetic: Have to be able to emotionally, mentally and physically cope with hard work
-    Tolerate the insecurities: tolerate that you have to take risk
-    Skilled at organizing: You have to be able to keep an overview
Entrepreneurial teams: A group of experienced and skilled people from different business areas who are taking the entrepreneurial challenge together.
A Micropreneur is an entrepreneur who starts a business that stays small, lets them do the kind of work they want to do and offers a balanced lifestyle. Many micorpreneurs have a home-based businesses because it can be a way to combine career and family. Bigger firms often outscore work to smaller, home-based businesses.
One of the reasons for the growth of home-based businesses is that computer technology allows home-based businesses to look and act as big as their corporate competitors. Secondly, new tax lawes have loosened the restrictions regarding deductions for home offices.
Micropreneurs have to deal with different challenges as well. First of all, they might have problems with getting new customers. Second, it might be more difficult to manage your time wisely because it takes a lot of self-discipline to do so. Third, it is a real challenge to combine your family and business life when they are all in the same house. Furthermore, the government may restrict certain types of business in the community. Finally, it is important to be sure that your insurance allows business-related activities in your house.
Intrapreneur: An entrepreneur working in an entrepreneurial centre within an already existing company to develop new innovative ideas.
Another way to encourage entrepreneurship is through enterprise zones.  An enterprise zone is a specific geographic area to which governments try to attract private business investment by offering lower taxes and other support by the government.
An incubator  provides assistance in the critical stage of early development of companies. It is a center that offers new businesses low-cost offices with basic business services.
Starting a small business
Small business means that the business is privately owned and operated. It is not dominant in its markets and meets certain standards of size in terms of a certain amount of employees and annual receipts. To start-up, manage and bring your business to a succes, the following sections are very important.
(1) Planning
(2) Financing
(3) Marketing(knowing your customers)
(4) HMR (managing your employees)
(5) Accounting (keeping records.
With starting your own business you can always ask help from others. Lawyers, accountants, college professors, consultancy firms, etc can help you get started.
Working for a firm in a related business field helps you to learn the basic managerial knowledge.
Another way to become an entrepreneur is to work for a company and take over the established firm after some time.
Business Plan
The planning part of your business begins by writing a business plan. In a statement consisting of 25 – 50 pages every aspect of your company should be described. A business plan is a detailed written statement that describes the nature of the business, the advantages the business will have in relationship to the competition, the target markets and the recources and qualifications of the owner(s).
A good business plan is composed of:
cover letter: contains the most attractive points of your project in a few words.
1.    executive summary
2.    company background
3.    management team
4.    financial plan
5.    capital required
6.    marketing plan
7.    location analysis
8.    manufacturing plan
9.    appendix
To carry out your plans you need initial capital which you can get from different sources of capital:
-    relatives
-    savings
-    former employers
-    banks
-    government agency
-    a finance company
-    venture capital organization
Angel investors are private individuals who invest their own money in potentially new, succesfull companies before they go public. Another type of investor is a venture capitalist. This is an individual or company that invests in new businesses in exchange for partial ownership of those businesses.

Going global
When you want to make your business global you face various difficulties. Even if you are more flexible and if you can provide personal service than bigger companies it is challenging to get the global business started. The major problems are difficulties in financing, time-consuming bureaucracy and cultural differences.
 

Chapter 7: Management

The Internet, the rapid technological changes and the growing global market created the need for a new type of management. Managers do no longer have to act like a ‘boss’ in the old-fashioned sense of the word. They are more open for the employees’ input. The interaction between employees and management make new innovations possible. Authority becomes more and more decentralized and the main tasks of the managers is guiding, training, supporting and motivating workers to make customers happy. Also teamwork has become one of the most important tasks.
Management is the process used to accomplish organizational goals through planning, organizing, leading, and controlling people and other organizational resources.
The four main tasks of modern managers are explained shortly:
1.    Planning: As a manager you have to anticipate trends and determining the best strategies and tactics to achieve organizational goals. Besides, the manager has to emphasize the common values in order to reach common goals.
2.    Organizing: This is a management function that includes designing the structure of the organization and creating conditions and systems in which everyone and everything work together to achieve the objectives and goals of the organization.
3.    Leading: This means that the manager has to create a vision for the organization and communicating, guiding, training, coaching and motivating others to work effectively to achieve the organization’s objectives and goals.
4.    Controlling: A management function that involves establishing clear standards to determine whether an organization is progressing toward its goals and objectives, rewarding people for doing a good job, and taking corrective action if they are not.
Planning
A company needs common values to reach common goals. That is why it is important to have a clear organizational vision. The vision explains why the organization exists and where it’s trying to head. Goals are broad, long-term accomplishments to reach a vision. Goal-setting is often a team process because goals need to be mutually agreed on by workers and management.The objectives are specific, short-term statements that say how the company will achieve the goals. A company often outlines its fundamental purposes such as vision, goals or objectives in the mission statement.
 A mission statement should include:
(1) long-term survival
(2) the organization’s self concept
(3) company philosophy and goals
(4) customer needs
(5) social responsibility
(6) the nature of the company’s product or service
The following questions can help to define a mission:
-    How is it now?
-    What do we want?
-    How can we realize that?
To complete a mission,  the company has to analyze strengths, weaknesses, opportunities and threats (SWOT-analysis) and plan ahead carefully. The company begins such a process with an analysis of the business environment in general. Then it identifies the strengths and weaknesses. As a result of the environmental analysis, it identifies opportunities and threats.
Which forms of planning are there?
1)    Strategic planning: determines the major goals major goals of the organization. It provides the basic for the policies, procedures and strategies for obtaining and using recources to achieve these goals. In this context, policies are broad guides to action and strategies determine the best way to use recources.
2)    Tactical planning: the process of developing detailed, short-term statements about what is to be done, who is to do it and how it is to be done. On top of that, it involves setting annual budgets and deciding on other details and activities necessary to meet the strategic objectives. Tactical planning is mostly done by managers at lower levels of the firm. On the contrary, strategic planning, is done by the top managers of the organization.
3)    Operational planning: process of setting work standards and schedules necessary to implement the firm’s tactical objectives. Strategic planning looks at the firm as a whole. On the contrary, operational planning focuses on specific supervisors, managers and individual employees.
4)    Contingency planning: In case the primary plans fail, you have to have some back-up plans. This describes the process of preparing those back-up plans.
Making decisions
The decision making process goes according to the seven D’s:
1)    Define the situation: What is the current status of the business and market?
2)    Describe and collect needed information  
3)    Develop alternatives: Make more than one plan
4)    Develop agreements among those involved: What are the demands of everyone involved?
5)    Decide which alternative is best: How can you reach all demand?
6)    Do what is indicated: Starting to put your plans into action.
7)    Determine if you made the right decision: Do a follow up
Problem-solving techniques are (1) brainstorming, (2) PMI. PMI is making a list of all the pluses for a solution in one colomn and the minuses in another. Finally, the implications stand in the third column.

Organizing
There are three levels of management. First, top management develops the strategic planning. Second, the.middle management is responsible for tactical planning and controlling. Third, the supervisory management is directly responsible for supervising workers and evaluating their daily performance. The employees do not have managerial possibilities. They are called “non-supervisory”.
A manager must have three types of skills. He/she has to have technical skills.This means that he/she has o have the ability to perform tasks in a specific discipline. Second, he/she has to have human relations skills. This means that you have to communicate with your people and motivate them. Finally, conceptual skills involve the ability to picture the organization as a whole and the relationships among its various parts.
A function that becomes increasingly important is staffing. This is a management function that includes hiring, retaining and motivating the best people available to accomplish the company’s objectives. With international trade, management has become global and people from different generations, strengths, sexual orientation, abilities and religions, etc work together in a firm. This requires the ability to manage diversity. Besides that management has to take into consideration the needs and demands of the stakeholders (stakeholder-oriented management).
Leadership
For executives it is not enough to manage a company. They have to be leaders. The manager plans and organizes. In the contrary, an executive has to give the employees a vision and makes the employees understand the corporate values and ethics of that company. On top of that a leader’s most important job may be to transform the way the company does business so that it’s more effective and efficient.
There are different kinds of leadership:
-    Autocratic: The manager takes decisions without consulting others. Effective in emergencies.
-    Participative (democratic) leadership: Managers and employees collaborate to make decisions.
-    Free-rein leadership: Managers set the objectives but leave employees the freedom how to accomplish them. Often used with working with professionals.
Empowerment means giving employees the authority and responsibility to respond quickly to requests of customers. Enabling is the term used to describe to give workers the education and tools they need to make decisions. Directing is the opposite of empowerment. You give explicit instructions to workers, telling them exactly what to do and how to meet the goals and objectives of the company.
Knowledge management tries to find the right information, keeps the information in an readily accessible place and makes the information known to everyone in the firm.

Controlling
1.    Establish clear performance standards (ties planning -to control function. No standards, no control)
2.    Monitor and record actual performances (results)  
3.    Compare results against standards and plans (this is why the standards need to be clear, otherwise you can’t record or compare the employees performances with them)
4.    Communicate results to the employees (they have to know if they’re doing good or bad)
5.    If needed, take corrective action.  (and provide positive and negative feedback)
A new development is looking at the customer satisfaction as a measurement of success. This is often combined with the more traditional standards: profit and return on investment.

Chapter 8: Restructuring organizations

During the period of mass production the first organization theories emerged.
Mass production: Production in large quantity à economy of scale: the production cost of a company goes down as it produces more. This is possible because they buy the materials in large quantities.
Traditional organization concept
Summary of the principles of organization theory elaborated by Henri Fayol and Max Weber
10.    Unity of command: every worker has only one boss
11.    Hierarchy:  the chain of command with one decision-making person at the top of the organisation
12.    Division of labour: the work has to be divided among individuals or departments
13.    Authority: You have to obey the orders that are given by someone higher in the hierarchy
14.    Degree of centralization: part of the decisions is made by the top managers and the other decision-making is delegated to lower-level managers
15.    Communication channels: employees of a firm reach each other easily, this stimulates efficiency and productivity
16.    Order: employees and materials are put in the right place
17.    Equity: a manager should treat employees with fairness and respect
18.    Esprit de corps: create common values and goals within a company
19.    Subordination of individual interest to the general interest: individual goals are less important than the goals set in a team
20.    Bureaucracy: determine rules and procedures, be consistent in applying them and keep records
21.    Clear job description: staffing and promotion based on qualifications
Global competition, new technologies and changing customer demands in a capitalist society require the reorganisation of a company.

Traditional versus modern organization concepts
1)    Centralized versus decentralized authority
Centralized authority keeps the decision-making process at the level of the top-managers.
Decentralized authority gives managers and employees the authority to make decisions. The act of delegating responsibility is called empowerment.
2)    Tall versus flat organization structure
A tall organization structure consists of many layers of managers, a lot of paperwork and therefore slower communication. This means more control, more costs and less empowerment than in the flat organization structure.
A flat organization structure consists of fewer layers of manager but a broader span of control (one manager supervises more people) than in the tall organization structure. This means less control, less costs and more empowerment. These companies are more able to adapt to changes because their communication goes faster.
3)    Traditional versus modern management structures
Traditional structures:
22.    Line organization: workers correspond directly to a manager at higher level on the chain of command who acts on the behalf of a top-manager
23.    Line-and-Staff organization: more interaction between line personnel (authority who makes decisions and give commands) and staff personnel (give advice to line personnel but have no influence on the decision-making process)
Modern structures:
24.    Matrix organizations: Line personnel and staff personnel cooperate. A manager “borrows” experts from departments to organize a temporary team (responding directly to the mangager) in order to create a new product/service. The experts still remain part of the Line-and-Staff organization, the have two bosses.
25.    Self-Managed Teams: Experts from different departments work together on long term basis and they are empowered to make decisions on their own.
4)    Traditional versus inverted organization
Traditional organization: chief executive manager on top of the pyramid makes decisions and gives commands; hierarchy and chain of command
Inverted organization: chief executive manager is on the bottom of the pyramid; he supports (with trainings) and assists (with transparency) the empowered frontline workers
5)    Formal versus informal organization
Formal organisation: structure of the company regarding authority, responsibility and positon
Informal organisation: system of relationships within an organization

Other organizational tools and techniques
1)    Departmentalization
Departmentalization is the division of labour in groups. There are different ways to departmentalize:
26.    Separation by function (production, design, accounting, finance, marketing, human resource)
27.    Separation by product
28.    Separation by customer group (customer, institutions, manufacturers, commercial users)
29.    Separation by geographical location
30.    Separation by process (peeling, cooking, cutting, serving)
On the one hand workers in labour groups specialize and develop skills in depth but on the other hand there is a lack of communication between the departments à solution: matrix organizations and self-managed teams
2)    Virtual Corporation
Virtual corporation is a temporary, network organization made up of replaceable firms that join the network and leave it if needed.
3)    Networking
Communication technology is used to link companies with workers and other companies.
The employees of one firm are linked by an intranet. This is a database that registers functions and assignments of everyone in the firm.
The different firms are linked by an extranet. This makes sure that the people of the different firms know what the others are doing à transparency (electronic information that is shared and facilitates collaboration) and communication in real time (the moment something happens) are possible
4)    Organizational/corporate culture
Widely shared values within an organization that lead to unity within the workers and identification with the firm in order to achieve common goals
5)    Benchmarking and Core Competencies
Benchmarking means to compare one company’s services to another company and learn from the competitor in order to improve the own services and products.
Core competencies are functions that are done by a company because it does as well as or better than the competitors à if a other companies do tasks better than the company it outscores tasks (delegates tasks)

Chapter 9: Operational management

Operations management is a specialized area in management that converts or transforms resources (including human resources) into goods and services. It is used by companies that either produce goods or services or a combination of both. Operations management is very important, it is the implementation phase of management.
Facility location: determine what the best geographic location is for your company’s operations.
Issues that influence the geographic location:
1)    labour and land costs  
2)    ability to train/retrain the local workforce
3)    presence of skilled and/or trainable workers
4)    convenient tax laws and support from local government
5)    high quality of life and education (necessary to attrack non-local employees) low crime rates
6)    presence of water and electricity  
7)    Access to transportation
8)    Proximity to suppliers
9)    Proximity to customers cuts costs of distribution and makes communication easier.
10)    Costs of living
One strategy in facility location is to find a site that makes it easy for consumers to acces the company’s services and to create a dialogue about their wants/needs.
Facility lay-out is how you arrange the resources you have in the production process. Many businesses are moving from an assembly line layout (product layout), in which teams of workers do only a few tasks at a time, to modular (cellular) layout, in which teams of workers combine to produce more complex units of the final product.
Quality control:
The international Organization for standardization (ISO) is a worldwide federation of national standards bodies from more than 140 countries. They set the global measures for the quality of individual products. The ISO 9000 stands for quality management and assurance standards. The standards require that a business must determine what customer needs are, (1) including regulatory and legal requirements. On top of that, other standards must involve process control, product testing, complaints etc. ISO 14000 is a collection for the best practices for managing an organization’s impact on the environment. On top of that, it doesn’t prescribe a performance level, it is an environmental management system(EMS).
Service sector
Difficulties arise in measuring the productivity of the service sector. This is difficult because according to the new control system, the quality of the service is very important. But how do you measure the quality of a non-tangible good?
The technological developments of the recent years have enabled the service sector to perform faster and more accurately.
Manufacturing sector
With operations management in the manufacturing sector you’ve got process planning. This means using the best way to turn the resources that you have into the goods and services that you need.
Production process: how do you get your output?
Input (factors of production à production control à Outputs (ideas, goods and services)
Process manufacturing is part of the production process that physically or chemically changes materials. In addition, the assembly process contains putting together the components to make a product. A continuous process is when long production runs, turn out finished goods over time. On the contrary, a intermittent process is when the production run is short and the machines are changed frequently to make different products. This process is customer oriented.
The goal during the process manufacturing and the assembly process is adding value to the creation. Form utility is the value that is added by the creation of finished goods and services.
The use of both computer-aided design(CAD) and computer-aided manufacturing(CAM) makes it possible to custom-design products to meet the needs of small markets with little increase in costs. Computer-integrated manufacturing is the uniting of CAM and CAD.
Materials Requirement Planning or MRP is a computer system that makes sure that there are enough materials and resources available to make the products. These amounts are based on sales forecasts.
You also have a later version of the MRP, the ERP or Enterprise resource planning. This system has the ability to link several companies together and keeps track of all the data at all the companies. One of the advantages is that it enables you to register the customers’ satisfaction and have that data at the same time available in the manufacturing plant. This saves a lot of time.
New production techniques
The production techniques can always be improved to save money and time. This has lead to several new production techniques.
1)    Just-in-time (JIT); having the needed parts delivered at the exact time that you need them. This means that you don’t have to pay for storage, but it is risky because what if the delivery is delayed?
2)    Internet purchasing; made possible by new manufacturing techniques. The internet makes the process more efficient because you go directly to the customer.
3)    Flexible manufacturing; This involves designing machines to do multiple tasks so that they can produce a variety of products.
4)    Lean manufacturing; is the production of goods using less of everything compared to mass production; less investments in tools, less human effort etc.
5)    Mass customization; is tailoring products to meet the needs of a large number of individual customers. Customize is making a unique product to a specific individual.
6)    Competing in time; making sure your product is available sooner than your competitor. Bringing out a new product before your competitor brings out a similar one.
7)    Computer aided design/ manufacturing (CAD/CAM); using computers in the designing and manufacturing process of the production. CAD and the CAM system together is called computer-integrated manufacturing (CIM) which makes the entire production process more efficient.
8)    Program Evaluation and Review Technique (PERT) estimating the time you need to complete the tasks involved in a given project by estimating the minimum time needed to complete the total project.
9)    Grant chart: is a bar graph that shows production managers what projects are being worked on and what stage they are in at any given time.

Chapter 10: Motivating

There are two different approaches for motivation: the intrinsic and the extrinsic reward. The intrinsic reward is the personal feeling of pride and satisfaction when you performed well and completed your goals. The extrinsic reward is the recognition for good work given by someone else. This can include pay increases, promotions and praise.
Frederick Taylor is considered the “father of scientific management” because he was the first person looking for a method to increase efficiency. Taylor’s time motion studies say that managers have to determine the best way to do a task and teach people the method. The time motion studies lead to the principle of motion economy that says that people work is more efficient if a job is broken down in several motions. Scientific management sees people more as machines than human based management.
The Hawthorne studies by Elton Mayo instead concluded that the efficiency of work increases with the motivation of the employees. This is the fundamental idea of human based management. The studies showed that people behave differently when they know that they are being studied. This phenomenon is called the Hawthorne effect. That is because people work harder if they feel special, respected and are involved in decision-making.
Frederick Herzberg distinguished between motivators and hygiene factors (maintenance). Hygiene factors are job factors that can cause dissatisfaction if missing, however they do not motivate people if increased or present.
Abraham Maslow came up with the pyramid of needs. Maslow’s hierarchy of needs says that needs are motivators. A person with and unfilled need will be motivated to satisfy the need however a satisfied need no longer serves as a motivator.
The needs from the bottom to the top  (!) of the pyramid are:
1.)    Psychological needs: Fulfilling basic needs (i.e. food and housing).
2.)    Safety needs
3.)    Social needs
4.)    Esteem needs: Getting extrinsic reward.
5.)    Self-actualization needs: Developing oneself.
Other motivational strategies
Goal-setting theory: To set ambitious but attainable goals that can motivate workers and improve performance if the goals are accepted, accompanied by feedback, and facilitated by organizational conditions
Management by objectives (MBO): A system of implementation and goal setting. It involves a cycle f discussion, reviews and evaluations.
Expectancy theory: The task has to be worth the effort and the effort has to live up to the expectations of the employees in order to keep them motivated.
Reinforcement theory: Positive reinforcers,(praise) and negative reinforcers (punishment) motivate a person to behave in particular ways.
Equity theory: Employee’s tasks and rewards should be comparable to others in their position in order to keep them motivated.
The people who advocate job enrichment think that five characteristics of work is important in affecting individual motivation and performance:
1 Task identity: the degree to which the job requires doing a task with a visible outcome from beginning to end.
2 Skill variety: the extent to which the job demands different skills
3 Task significance: the extent to which the job adds an important value on the lives or work of others in the company
4 Autonomy: Degree of independence, freedom, discretion in scheduling work and determining procedures.
5 Feedback
Job enrichment theory contains that you have to motivate the workers through the job itself by introducing job enlargement and job rotations.  Job enlargement is another type of job enrichment used for motivation. It contains a strategy that involves combining a series of tasks into one challenging and interesting assignment. Secondly, job rotation makes work also more interesting. This involves moving employees from one job to another.
Theories about management
There are three theories that are often applied by managers: Theory X, Theory Y and Theory Z. The first two were developed by Douglas McGregor and the last one by William Ouchi.
Assumption of theory X management:
-    Employees prefer to be controlled and directed
-    Employees dislike work and will try to avoid it.
-    Employees must be intimidated by managers to perform
-    Employees are motivated by financial rewards.
-    They also seek security, not responsibility.
Assumptions of theory Y management:
-    Employees prefer limited control and direction
-    Employees view work as a natural part of life
-    Employees will seek responsibility
-    They also perform better in work environments that are nonintimidating
-    Last, they are motivated by many different needs.
Theory Z:
This theory is a mix between Type A (American) and Type J (Japanese). It emphasizes on long-term employment. The decisions are made collectively but the people do have individual responsibilities. The promotion and evaluation is rather slow but you follow a moderately specialized career path.
Motivation in the future
Individual motivation of employees will become more important because different people from different generations and cultures with different expectations will work together. More and more managers will empower their employees and strengthen communication and cooperation. Supervisors and managers will be trained to listen and barriers between management and employees will be removed (i.e. such as different ways of addressing each other).

Chapter 11: Human Resource Management

Human resource management means looking for the right people for vacancies and making them perform at the best of their abilities by providing the right job environment.  
Through recent developments in the demographic of workers, human resource managers now face new challenges. Some of those demographic changes are: older workers, a lot more women want to work, rising amount of immigrants and etc.
Human resource management has several steps, first you start by analyzing the objectives of the organization. After that you start the planning process (will be discussed later). After you know what you are looking for, you try to find the right people (recruiting). Of all the people you found, you make a selection and train these people for a position. When they start working, you have to motivate them and keep them motivated. After some time you evaluate the employee with a reward or give negative feedback.
Planning
Human resource management starts with planning. In this planning process you can define six steps:
1)    think about the human resource need that are most likely to develop in the future
2)    make an inventory of the current employees of the company
3)    Make a job analysis by making a job description and specification. The job description contains the job objectives and for what kind of work the employee is hired. The responsibilities and obligations are also mentioned. With the job specification you determine what kind of skill future employees should have
4)    Also assessing future demand is necessary. Making sure that as soon as new demand arises, you already have employees with the needed skills.
5)    Assessing future supply is also important. The work force is also changing due to demographic changes and changes in education and etc.
6)    Create a strategic plan to obtain the right employees.
Recruiting
Recruiting people means gathering as much people as possible with the needed skills so you have a lot of options. You can use several different methods to recruit people. You have got the internal and external hiring. Internal hiring means that the person applying for the job already has a different job in the same company. External hiring happens through advertisements employment agencies or college placements bureaus. You can also be referred to the company by someone else.
The recruiting of personnel has become more difficult because of legal restrictions. These make it more difficult to hire or fire an employee. Also a shortage of educated people in certain markets makes it difficult to find good staff. The company’s image is very important because people will respond sooner to an advertisement of a well known and respected company than one that has a questionable reputation.  
Other difficulties are:
-    not having the needed skills, so this person has to be trained before he can be productive
-    the person has to fit in with the company’s style of management and culture
-    some union regulations can prohibit you from offering a good wages to a new (non-union) employee
 
Selecting
The selection process contains several steps:
1)    let the recruited people fill in an application form
2)    have two interviews with each person
3)    possible to let the person take a test
4)    check the background of the applicant
5)    you can let the applicant take a physical exam, but this is criticized more and more
6)    offering a trial period
contingent workers: all the workers that do not work full-time
Training
After you have selected someone, you have to start training that person. You can train an employee in several different ways. You have apprentice programs or job simulations, on-the-job training or off-the-job training.
If you want to train an employee in managerial skills, you can do this by giving him an understudy position or a job rotation. Also off-the-job courses and trainings have to be followed. But one of the most important skills you have to learn if you want to become a manager is networking. You have to get in touch with the managers of your company and also those of other companies.
Evaluation
In the process of evaluating an employee, there are six steps
1)    first you have to set the standard for the employees
2)    make sure that the employees know about the standards and understand them
3)    after some time you can look at the employees work and evaluate it
4)    very important is to let the employee know the results of the evaluation
5)    if an employee works far below the standards, there should be some corrective action
6)    if the evaluation shows that the employee works far above standards, you could give him a promotion
Compensating
The compensation that employees receive is one of the biggest costs for a company. You have different ways of compensating; you have got the salary or hourly wages. Another way is compensating according to piecework or stock options. These are good ways to compensate individual people.
If you work with teams, you have to use different ways of compensating. The gains-sharing and skill-based compensations are used most often. With the skill-based compensations the pay is depended on the growth of both team and individual. The gain-sharing systems issue bonuses for the teams with the greatest improvement.
Another way of compensating is the fringe benefits. These are “extras” like sick leave and being able to go on a paid vacation. Another fringe benefit is the pension plan. Some companies “give” their employees a certain amount of money, which they can spend, on putting together their fringe benefit packet. This is called cafeteria-style fringe benefits.

Flexibility
At this moment it is very important for most employees to have flexible working hours. A lot of companies have a flextime plan. This means that the employee can choose when he wants to work, as long as he works the required amount of hours. Most of the times, the company wants the employees to be at work for a core time every day.
 These hours are fixed and compulsory. Another possibility is for the employee to work a compressed workweek. Here you work the full amount of hours, but plan them in fewer days.
An employee could also discuss the possibility of working at home. Or participate in a job sharing program, where two part timers share the job of one full timer.
Changing positions
When an employee starts a job at a company it is very likely that he will not stay in that position for ever. If he works well, he can be promoted. But there is also the possibility of being reassigned. If you don’t meet the standards of the company, there is the possibility of being fired. Another way to leave the company is to retire or to leave it in order to find another job.
Laws
There are laws that human resource managers have to follow. The three most important ones in the USA are the Civil Rights Act of 1964; the Equal Employment Opportunity Act of 1972 and the Americans With Disabilities act of 1990.  
The Civil Rights Act makes it illegal to discriminate in any way at the company. The Equal Employment Opportunity Act covered what sort behaviour was considered acceptable (from the employer) and emphasized the equal employment of the different people.

Chapter 12: Employee – management relationships

Over time, workers learned that strength trough unity (unions) could lead to improved job conditions, better wages and job security.
A good management-employee relationship is crucial for successful and responsible business.
In order to represent workers’ interest in negotiations between managers and employees unions emerged in the 19th century. The first national union of the U.S. was the Knights of Labour. Now almost every developed country has labor unions.
The common issues of labor disputes:
1.    Equal pay: Equal pay for equal work à male and female employees have to be paid the same
2.    Equivalent pay: The wages of employees with similar skills, jobs and level of education have to be the same à comparable worth
3.    Minimum wages
4.    Hours of work
5.    Union recognition
6.    Child care: Many companies arrange day care for children, or give discounts for regular childcare services to keep female employees, who have essential skills and experience in the company.
7.    Elder care: Elder care is a new issue the companies face. A lot of employees have elderly parents and/or relatives who they have to care for. Those employees are often absent and therefore expensive for the company. However, the company invests in elder care to keep the employees, who have essential skills and experience in the company.
8.    Sexual harassment
9.    Executive compensation: The salary of the managers can be an issue if the union believes that they are too high.
10.    Drug testing: Employers perform tests, because employees who are abusing drugs are more likely to have accidents at work and file more often a worker’s compensation claim.
11.    Job security
12.    Child labor
13.    Violence in the workplace
14.    Global agreements
15.    Immigration policies
16.    Employee stock ownership plans (ESOP): Can raise moral but do not give the employees more influence in the management of a company.

Craft Union: An organization of skilled specialists in a particular craft or trade.
Knights of labor:The first national labor union; formed in 1869
American Federation of Labor:An organization of craft unions that championed fundamental labor issues; founded in 1886.
Industrial unions: Labor organizations of unskilled and semiskilled workers in mass-productions industries such as automobiles and mining.
Congress of Industrial Org.: Union organization of unskilled workers; broke away from the American Federation of Labor (AFL) in 1935 and rejoined it in 1955.
Before a union becomes the representative for employees, it has to follow a process called certification. It is also possible that employees don’t want the union to represent them anymore. In that case they have to follow the decertification process.
Certification: Formal process whereby a union is recognized by the NLRB as the bargaining agent for a group of employees The union makes contact with employees of a company. They collect signatures from people who want that union to represent them. If they collect more than 30% of the employees’ signatures, they get permission to have a campaign. After this campaign all the employees have to vote in favour of or against the union. If the union does not get more than 50%, it is not allowed to represent the workers.
Decertification: This process can only start after the union has represented the employees for at least 12 months. Now somebody has to collect signatures of employees who don’t want the union anymore. If the employee gets 30% of the signatures, he is allowed to have a campaign. After this campaign all the employees have to vote in favour of or against decertifying the union. If more than 50% is in favour of, the union is not allowed to represent the employees anymore.
All the employees who benefit from a union have to pay money to the union or join the union. This is also called the union security clause. There are several types of agreements between union, employees and management. The first one is the now illegal closed shop agreement, where workers have to be member of a union to be hired for a job. The open shop agreement instead says that workers must not be members of a union but they have to join one within a certain period when they are hired. The agency shop agreement allows employers to hire anyone they want, but all employees (members and non members) have to pay dues to the union.
Nowadays many states have right to work laws which give employees the freedom to join or not join a union without being forced to pay dues.
The negotiated labor-management agreement: more informally referred to as the labor contract, sets the tone and clarifies the terms and conditions under which management and organized labor will function over a specific period.
Union security clause: Provision in a negotiated labor-management agreement that stipulates that employees who benefit from a union most either officially join or at least pay dues to the union.
Labor Legislation and Collective Bargaining
The growth and influence of organized labor in the US. Have depended primarily on two major factors: the law and public opinion.
Collective bargaining: The process whereby union and management representatives form a labor-management agreement, or contract, for workers.
If, after a certain bargaining zone the union and management still do not come to an agreement, they will look for a third party, a mediator, to make suggestions, or an arbitrator, to make a decision.
Bargaining zone: Range of options between the initial and final offer that each party will consider before negotiations dissolve or reach an impasse.
Mediation:The use of a third party called mediator, who encourages both sides in a disputed to continue negotiation and often makes suggestions for resolving the dispute.
Arbitration: The agreement to bring in a impartial third party (a single arbitrators or a panel of arbitrators) to render a binding decision in a labor dispute.
Even if an agreement is found there could still be conflicts à i.e. the agreement is interpreted in different ways.
In this case an employee makes a complaint, which is called grievance to the shop steward who tries to resolve it. If there is no resolution, the complaint is passed on to a higher level of union officials. This level negotiates with a higher level of the management.
Grievance: A charge by employees that management is not abiding by the terms of negotiated labor -management agreement.
Shop stewards: Union officials who work permanently in an organization and represent employee interests on a daily basis.
Labor-management disagreements can lead to strikes, picketing or a boycott on the union’s side. The managers used to use a yellow-dog contract before this was prohibited. It is possible that a company issues out a lockout. This means that the business closes for a time in which the employees are not paid. The company can also go to court to get an injunction, so that a judge forces the employees to go back to work. A third option managers have is to hire strike-breakers, who replace the striking employees.
Strikebreakers: Workers hired to do the job of striking workers until the labor dispute is resolved.
Injunction: A court order directing someone to do something or to refrain from doing something.
Primary boycott: When a union encourages both its members and the general public not to buy the products of a firm involved in a labor dispute.
Secondary boycott: An attempt by labor to convince other to stop doing business with the firm that is the of a primary boycott; prohibited by the Taft-Hartley Act.
Cooling-off period: When workers in a critical industry return to their jobs while the union and management continue negotiations.
Lockout    : An attempt by management to put pressure on unions by temporarily closing the business.
Strike: A union strategy in which workers refuse to go to work; the purpose is to further workers’ objectives after an impasse in collective bargaining.
Yellow-dog contract: A type of contract that required employees to agree as a conditions of employment not to join a union; prohibited by the Norris-LaGuardia Act in 1932.
Givebacks: Concession made by union members to management; gains from labor negotiations are given back to management to helpemployers remain competitive and thereby save jobs.
Comparable worth: The concept that people in jobs that require similar level of education training, or skills should receive equal pay.

Nowadays unions have to become more flexible and adapt to a more competitive environment. They have to cooperate with management in order to maintain the competitiveness and their working places. Sometimes unions are willing to give back some of the concessions that management made during negotiating in order to save jobs Furthermore unions will have to include more foreigners, women and white-collar workers in order to keep on growing and operating.

Chapter 13: Marketing

Marketing is the process of planning and executing the conception, pricing, promotion, and distribution of services and goods. This will facilitate exchanges that satisfy individual and organizational objectives. The marketing concept contains of three parts. First of all, it contains customer orientation. This means that you have to find out what consumers want and also provide it to them. Secondly, the marketing concept contains service orientation. This means that everyone from the organization has to have the same objective, namely customer satisfaction. Third, profit orientation is also part of the story.
It took a while until businesses implemented the marketing concept. Eventually, this implementation led to a focus on customer relationship management. Customer relationship management (CRM) is the process of learning as much as possible about customers and doing everything you can to satisfy them. On top of that you try to exceed their expectations with goods and services over time.
Four Ps / Marketing mix
Marketing managers have divided this process in four parts (a.k.a.: marketing mix)
-    Product : A product is any physical service, good or idea that satisfies a want or need plus anything that would enhance the product in the eye of consumers, such as the brand.
-    Price (what is the price potential customers are willing to pay and what is the price you need in order to make a profit and be competitive)
-    Place (What is the best way to get the product to the customer? i.e. At the restaurant or delivery)
-    Promotion consists of all the techniques sellers use to inform people and motivate them to buy their services/products. How to make customers aware of their products.
To understand the entire marketing process, you have to take a product or a group of products and follow the process that led to development and sale. To begin,  (1) you have to find opportunities. Afterwards, (2)  it is important to conduct research, followed by (3) identifying a target market. Furthermore (4) you have to design a product to meet the need based on research. Continually, (5) the product has been tested. Afterwards, (6) it is common to determine a brand name, design a package, and set a price. Continually, a (7) distribution system has been selected following by the (8) designing of a promotional program. At last, you build a (9) relationship with customers.
Test marketing is the process of testing products among potential users. Concept testing is if you for example, develop a thoroughly description of your business and ask people(online or in person) whether the concept appeals to them.
Intermediaries (middlemen) are organizations that are in the middle of a series of organizations that distribute goods from producers to consumers.
Marketing Research
Marketing Research is the analysis of markets to determine challenges and opportunities. Furthermore, it finds the information needed to make good decisions.
1)    Have to define the question (problem or opportunity) On top of that, the present situation is also determined.
2)    Collect data
3)    Analyze the research data
4)    To choose the best solution and implement it.
Secondary data is information that has already been compiled by others and published in journals and books or made available online. It is wisely to gather secondary data first, before focusing on primary data to avoid unnecessary expenses. Primary data are the results of new studies or the data you gathered yourself. An example of primary data is a focus group. A focus group is a small group of people who meet under the direction of a leader to communicate their opinions and perspectives about an organization, its products etc.

Marketing Environment
The market environment consists of several factors. These are the social; competitive; economic; global and technological changes. The process of identifying the factors that can affect marketing success is called environmental scanning.
-    Competitive;  marketers must adjust their pricing policy accordingly to stay competitive(1) speed (2) service (3) price (4) selection
-    Sociocultural factors: There are various social trends, that marketers must follow to maintain their close relationship with customers. (1) population shifts (2) values (3) attitudes (4) trends. moral values, fashion/trends, changes of demographic factors
-    Global factors; For example, because of the development of the internet, businesses can reach a lot of consumers in the world relatively easily and can communicate with them about their needs.
-    Technological; (1) computers (2) telecommunications (3) bar codes (4) data interchange and (5) internet changes.
-    Economic;  Environmental scanning is critical to a company’s success during the rapid change of the economic situation. Marketers have to pay attention to (1) GDP (2) Disposable income (3) competition (4) unemployment.
There are two major markets in business. First of all, the consumer market consists of all the individuals or households that want goods and services for personal use or consumption. They also have the resources to buy them. Second, the business-to-business(B2B) market consists of all the individuals and organizations that want goods and services to use in producing other goods and services or to sell, rent or supply to others. The buyer’s reason for buying-that is, the end use of the product- determines whether a product is a B2B product or a consumer product.
Consumer market:
The total consumer market consists of a lot of people. Because consumer groups differ greatly in for example, age, income, taste and education, a business usually can’t fulfil the needs of everyone. So, it must decide which group to serve. There exist different types of segmentation:
Market segmentation: dividing the total market into groups whose members have similar characteristics.
Target marketing Selecting which groups(market segments) an organization can serve profitably is called
Geographic segmentation:. This occurs when the market is divided by geographic areas. (countries, cities, areas etc)
Demographic segmentation: Divide the market by age, education level and income
Psychographic segmentation: Divide the market using the group’s values, interests and attitudes.
Benefit segmentation: Divide the market by determining which benefits of the profit to talk about.
Usage/Volume segmentation: Divide the market by usage(volume of use)
Niche marketing is finding small but profitable market segments designing or finding products for them. One-to-one marketing means developing a unique mix of goods and services for each individual customer. If you develop products and promotions to please large groups of people, you talk about mass marketing. It tries to sell products to as many people as possible using mass media such as, radio, tv etc. On the contrary, relationship management is not into mass production. It leads more toward custom-made goods and services. The goal of relationship management is to keep individual customers over time by offering them new products that exactly meet their requirements.
Influences that effect consumer buying:
1 Situational influences ( 1 type of purchase 2 social surroundings 3 physical surroundings 4 previous experience)
2 Marketing mix influences ( 1 product 2 price 3 place 4 promotion)
3 Sociocultural influences (1 reference groups 2 family 3 social class 4 culture 5 subculture)
    
4 Psychological influences (1 perception 2 attitudes 3 learning 4 motivation
Other factors that are important in the consumer decision-making process are:
1 Reference group (is the group that an individual uses as a reference point in the formation of his or her attitudes, values, beliefs or behaviour.
2 Learning (tried a pizza that you didn’t like, you probably not going to buy it next time)
3 Culture
4 Subculture
5 Cognitive dissonance ( a type of psychological conflict that can occur after a purchase. Example: consumers who bought an expensive car could have doubts whether they bought the best one at the best price. Therefore, marketers must reassure such consumers.
The difference of B2B and Consumer market:
1 Size of business customers is relatively large (few large organizations provide most goods/services)
2 Number of customers in B2B market is relatively few (businesses in comparison to households)
3 B2B markets tend to be geographically concentrated (oil)
4 Business buyers are generally thought to be more rational
5 B2B sales tend to be direct, but not always (tires directly to car manufacturars)
6 There is much more emphasis on personal selling in B2B markets than in consumer markets.

Chapter 14: Production

The value of a product is determined by looking at the benefits and subtract the costs to see if the benefits exceed the costs. A different description of value is that a product/service has to have good quality at a fair price. When customers want to make the decision to buy or not to buy a product, they judge the total value package. The value package (or total product offer) is everything that consumers evaluate when deciding whether to buy something.
When people buy a product, they may evaluate and compare total product offers on all these dimensions:
-    Brand name
-    Price
-    Convenience
-    Package
-    Store surroundings
-    Service
-    Internet acces
-    Buyer’s past experience
-    Guarantee
-    Speed of delivery
-    Image created by advertising
-    Reputation of producer
 
A product line is a group of products that are physically similar or are intended for a similar market and often face similar competition. For example chocolate. (milk chocolate, white chocolate etc) The productmix is a combination of product lines offered by a manufacturer.
Product differentiation is the creation of perceived or real product differences. The producer can change the price, packaging, use a creative mix of pricing and can also use advertising to create an appealing, original image. These forms of differentiation are called value enhancers.
You have a classification system for the goods and services that are available for consumers.
Customer goods and services:
1)    Shopping goods and services; the decision to buy these products is based on comparing the price, value, quality and style from various sellers. Shopping goods are sold largely through shopping centres (clothes, shoes, auto repair services) Promote through a combination of price, quality, and service.
2)    Unsought goods and services; are products that consumers are unconscious of, did not necessarily plan to buy, or find that they need to solve an unexpected problem. Example: emergency car-towing, insurance. Promoting takes place through personal selling.
3)    Specialty good and services; are products with unique characteristics and brand identity. Perceived is that they do not have a proper substitute. Therefore, the consumer puts forth a special effort to purchase them. They rely on reaching special market segments through advertising. (promotion)
4)    Convenience goods and services; the everyday goods and services you need. Like food and drinks. The customer wants to buy it frequently with a minimum of effort. (1) Location, (2) brand awareness, and (3) image are important for marketers of convenience goods and services. The best way to promote convenience goods is to make them readily available and create a proper image.
On the contrary, industrial goods(B2B goods or business goods) are products used in the production of other products. Advertising is not an important factor for selling industrial goods. You can divide industrial goods/services in two categories: (1) Production goods and (2) Support goods. Production goods include (1) Raw materials (2) component parts and (3) Production materials. Support goods include (1) installations (2) Accessory equipment (3) supplies (office supplies, paperclips) (4) service (maintenance en repair).
-    Capital items àexpensive products that last a long time. (computers, photocopy machines)
-    Accessory equipment à capital items that are not quite as long-lasting or as expensive as installations.
-    Installations à cost major capital equipment such as new factories and heavy machinery. (buildings, equipment and capital items)
Packaging
The way the product is packaged influences the consumer. The package has several different functions:
-    Giving a description of the content
-    Explaining the benefits of the product
-    Explanation about how to use it, warnings and information about the guarantee
-    Information about the price and how to use it
-    Attracting the attention of potential customers
-    Protecting the product
Branding
A brand is a name, symbol, or design(or combination) that identifies the goods or services of sellers and distinguishes them from the goods and services of competitors. A trademark is a brand that has been given exclusive legal protection for both the brand name and the design. They have to be protected from other companies thay may want to trade on the trademark holder’s reputation and image. For the buyer a brand name assures quality, add prestige to purchases and reduces search time. The benefit for the seller is that brand names facilitate new-product introductions, differentiate products, help promotional efforts so that prices can be set higher.
A generic name is the name for a product category. Example: aspirin was once a brand name, now it is used as a name for the product. Generic goods are nonbranded products that usually sell at a sizable discount compared to national or private-label brands. Knock-off brands are illegal copies of brand-name goods
Brand equity is the combination of factors-such as loyalty, awareness, perceived quality, images and emotions- that people associate with a given brand name. Brand loyalty is the core of brand-equity. It is the degree to which customers are satisfied, are committed to further purchases and like the brand. Brand awareness refers to how quickly or easily a given brand name pops up in someone’s mind when a product category is mentioned. Brand association is the linking of a brand to other images. To for example link it to a famous celebrity. A brand manager has direct responsibility for one brand or one product line. This responsibility includes all the elements of the marketing mix.
Products go through a life cycle consisting of four stages.
1    Introduction
2    Growth
3    Maturity
4    Decline
Reference to : page Threehundred-ninety-one of the IB book, are sample strategies followed during the product life cycle. These are quite important.
A product life cycle is a theoretical model of what happens to sales and profits for a product class over time. It is of tremendous importance for marketers to recognize what stage a product is in so that they can make intelligent and efficient marketing strategies. Interestingly, profit levels start to fall before sales reach their peak. This is due to increasing price competition.
Product development process
Before you have a completely finished product, it must have been developed.
This process consists of six steps:
1)    Generating ideas: Most ideas come from company sources other than research and development. Employees are a major source, just as suppliers for new-product ideas.
2)    Screening products: This is designed to reduce the number of new-product ideas being worked on at any one time. Criteria are (1) the product has to fit in well with present products, (2) the profit potential, (3) marketability and (4) personnel requirements
3)    Analysis of product: This takes place after product screening. It is a matter of sales forecasts and cost estimates to get a notion for profitability of new-product ideas.
4)    Development : If the product has passed the screening and analysis phase, the firm begins to develop it further. The idea can be developed into various product concepts.
5)    Testing of the prototypes: Continually, the product is being tested. Concept testing involves taking a product idea to consumers to test their reactions. Different samples are tested using different branding, packaging.
6)    Commercialization (bring product to the market) This includes (1) promoting the product to distributors and retailers to get wide distribution and (2) developing strond advertising and sales campaigns to generate and maintain interest in the product among distributors and consumers.
A company may have several objectives in mind when setting a pricing strategy:
1    Achieving greater market share: by uses of: offer low finance rates, low lease rates, rebates
2    Achieving a target return on investment or profit
3    Building traffic: loss leaders: supermarkets who often advertise certain products to attract people to the store.
4    Creating an image: some products are priced high to give them an image of exclusivity/status
5    Furthering social objectives: Social/ethical goal, let poor people be able to buy the product.
Approaches to pricing strategy:
·    Cost-based Pricing: (price as output)
·    Demand-based Pricing/Target costing: designing a product so that it satisfies customers and meets the profit margins desired by the firm. Price as input.
·    Competition-based Pricing: is a strategy based on what all the other competitors are doing.
·    Skimming price strategy: a new product is priced high to make optimum profit while there’s little competition. Obviously, those large profits will attract competitors.
·    Penetrations strategy: a product is priced low to attract many customers and discourage competition
·    Everyday low pricing (EDLP): setting prices lower than the competition does. However, you do not have any special sales.
·    High-low pricing strategy: To set prices that are higher than EDLP stores, but have many special sales where the prices are lower than the competition.
·    Bundling is when you group two or more products together and price them as a unit.

Chapter 15: Distribution

When a product is manufactured, you have to move it to businesses and consumer users. The so-called marketing intermediaries do this moving, which consist of wholesalers, retailers and the transport. The way the product gets to the customers is called the channel of distribution. These marketing intermediaries perform certain marketing functions. You can minimize the marketing intermediaries to reduce costs, but you can’t eliminate them all, because you would have to fulfil the marketing functions yourself thus adding costs.
Several channels of distribution are possible for industrial goods and for consumer goods.
Industrial goods:
-    From the manufacturer directly to the industrial users
-    From the manufacturer first to the wholesaler before it goes to the industrial users.
-    The manufacturer produces the industrial goods and delivers it to the consumers.
-    The manufacturer delivers the industrial goods to a retailer. The consumers buy it at the retailers.  
Consumer goods:
-    The manufacturer brings it to the wholesaler who subsequently brings it to the retailers, and the retailer makes it available to the consumers.
-    The farmer brings it to the broker who sells it to the retailers. The retailers make it available to the consumers.
-    The service organizations go to the broker, where the products are sold to the consumers.
-    A non-profit organization (and museums, government services, zoos) delivers directly to the consumers.

Intermediaries
A big benefit of the intermediaries is efficiency; in stead of every manufacturer going to every retailer to sell its product, the manufacturer brings the product to the wholesaler where it’ll be available for all the retailers. This saves time and money.
The intermediaries add value to the products to change certain things. (Utilities)
-    Time; they make the product available for people at the moment it is needed.
-    Place; placing the products at locations where consumers have easy access to it.
-    Form; changing the form of the product to make it more useful for consumers.
-    Possession; task to make the product change owners. (Offer delivery guarantees and etc.)
-    Service; friendly and fast service makes the customers more satisfied.
-    Information; providing a two-way information flow between the market and all the participants.
Wholesalers
We have already mentioned the wholesalers; this is the companies that are the link between manufacturers and retailers (not consumers). You have got different types of wholesalers:
-    The merchant; these companies are owned independently and buy goods from the manufacturers. You have got Full-service wholesalers and Limited-function wholesalers. The first one arranges the transportation credit, transportation and etc. The limited-function does not have all those services.
-    Cash-and-carry; are smaller because they deliver to smaller retailers with less diversity in their assortment.
-    Rack jobber; these wholesalers put their product on the shelves of a retailer and stay the owner until the product is sold. The retailer gets part of the profit.
-    Drop shippers; arranging the products to go directly from the manufacturer to the buyer.
-    Freight forwarder; these arrange for several small shipments with the same destination to be sent together to minimize costs.
Competition between wholesalers
Off course there is also competition between the wholesalers. They can compete on several aspects:
-    Service; trying to satisfy the customer as much as possible
-    Selection; a lot of products of the same category
-    Location; having a good location is vital. You must be easily accessible for the customers.
-    Entertainment; making sure that the store or the internet-site looks good
-    Price
Retailers have different distribution strategies:
-    Exclusivity; only one retail store in a certain area. This creates better service and more inventories.
-    Selectivity; the products are send to only a couple of retailers in a certain area.
-    Intensity; placing the products in as many stores as possible.
One way of selling product is through the non-store retailing such as E-tailing (E-business). Selling your products over the internet has become possible because of  technological developments. Another well known non-store retailing manner is  Telemarketing, where products are sold over the phone. You also have Direct Selling where you go to the customers’ home to sell the products.
Multilevel marketing: you get a commission for every product you sell, but also for every product sold by someone you recruited. Vending machines, carts and kiosks are also non-store retailing facilities. Direct marketing is relatively new. This aspect covers everything that links the manufacturer, intermediary and the consumer together and also catalogs sales. It differs from direct selling in the way that direct selling is done by a person and direct marketing doesn’t require personal contact.
Distribution systems
The link between the manufacturer, wholesaler, retailer and consumer are the distribution systems.
-    contractual distribution; the distribution agreements are written in a contract
-    corporate distribution; the distribution in the entire channel of distribution is done by one distributor
-    supply chain; all the companies involved in the distribution chain and also the suppliers of the manufacturer, are electronically linked and share their information
-    administered distribution; the manufacturers manage all the marketing functions at the retailers level
Supply chain
The supply chain is everyone involved in getting the product to the consumer. The chain starts with the suppliers of the manufacturers, followed by the manufacturers, wholesalers, retailers and at the end the consumers. It is necessary to keep track of the products, whether they’re still raw material or are already finished goods.
There are several different distribution modes, such as ships, railroad, trucks, airplanes and pipelines. Ships are used mostly for moving goods internationally, the costs are low but it is also slow. Railroads are very suitable for larger shipments. Trucks are more flexible in their location. Airplanes are very expensive and are therefore only used for quick shipments. The pipelines are only good for moving fluids.
When a product is moved within a factory, store or etc. it is called material handling.

Chapter 16: Promotion

After getting the product from the manufacturer to the store, you have to make the potential consumers aware of the product. This is done by several promotional tools that together make up the promotion mix. The traditional promotion mix consists of personal selling, sales promotion advertising and public relations. Also the product is a promotional tool if you hand out samples. However this promotion mix is changing the entire time because the market is changing too.
You can place an advertisement in various media. You can place an ad on television or on the internet. But you can also place them in newspapers and magazines. Direct mail, the yellow pages and placing an ad in the outdoors are also possibilities. All of which have different advantages and disadvantages. You have to look at the costs, visibility, exposure time, is the target group able to keep the advertisement and etc.
On television you have a growing number of infomercial programs. During these programs people talk about the product and show how it works. They also let people talk who actually tried the product.
Personal selling
Personal selling means that a salesperson has face-to-face contact with the customer and tries to sell the product. This process consists of several steps:
1)    Prospecting and qualifying; research the potential customers and determine which one might be willing to buy your product. After this you have to research whether they have a need which can be fulfilled with this particular product and if they are willing to listen to you.
2)    Pre-approach; find more information about the potential customers. If they would want this product, what would they use it for?
3)    Approach; make the call and make sure that you give a good first impression.
4)    Presentation; during the presentation you should emphasize how the product meets the customers’ needs.
5)    Answer questions
6)    Close the sale
7)    Follow up meeting; handling complaints and answering questions.
A consultative salespersons’ objective is to solve the customer’s problems. This is done by first finding out what the need is, researching all the aspects of the situation and finding the best solution.
 
Public relations (PR)
Because the market changes almost every day the manufacturers and retailers have to be aware of those changes in order to provide the right products. This is done by the Public Relations department of the company.
There are three things a good PR department does (the integrated marketing communication system):
1)    Research the market and listen to the consumers
2)    Make new policies and procedures that agree with the public’s needs.
3)    Let the consumers know that you can fulfil their needs.
Sales promotion
Sale promotions stimulate the interest of the consumer and the dealer to make them want to buy the product.
The internal sales promotions are aimed at keeping the employees enthusiastic about the company and its products.
One way people get to know about a product is by word of mouth. A recent development is companies paying people to go to internet-chatrooms and talk about their products. The pay is usually done by swag articles, like free tickets or backstage passes. This is also called viral marketing.
Strategies
There are several promotional strategies. One of them is the pull strategy. In this there is a lot of advertisement for a certain product to make people aware of it. The people go to the retailers and request that product.
Another strategy is the push strategy where the producer tries to sell its products to the retailers. The retailers have to make the consumers aware of the product.
A new development is the interactive marketing program. Hereby the consumers and the company exchange information. The company gives information about itself or the products and the consumers also give information about themselves.
The interactive marketing program consists of three steps:
1)    Collecting data about all the people who are influenced by the company
2)     Evaluating the data found and in necessary change the policies that influence the stakeholders and/or customers
3)     Making sure that the (potential) customers can reach the information about your company or the changes that you’ve made. Let them know that there’re new ways for them to contact you.

Chapter 17: Accounting

Accounting is the recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions.
One purpose of accounting is to help managers evaluate the financial condition and the operating performance of the firm so that they can make well informed decisions. Another major purpose is to report financial information to people outside the firm such as owners, creditors, suppliers, investors, and the government (for tax purposes). In basic terms, accounting is the measurement and reporting of financial information to various users regarding economic activities of the firm.
There are several different types of accounting;
1 Financial Accounting
Financial accounting: Accounting information and analyses prepared for people outside the organization.
Annual report is a yearly statement of the financial, condition, progress and expectations of the company.
Private accountants: Accountants who work for a single firm, government agency, or non profit organization.
Public accountant: An accountant who provides his or her accounting services to individuals or business on fee basis.
Certified public accountant is an accountant who passes a series of examinations established by the American Institute of Certified public accountants.
2  Managerial accounting
Managerial accounting: Accounting used to provide information and analyses to managers within the organization to assist them in decision making.
Certified Management Acc.:  CMA, A professional accountant who has met certain educational experience requirements, passed a qualifying exam in the field and been certified by the Institute of Certified Management Accountants.
3  Auditing
Auditing: The job of reviewing and evaluating the records used to prepare a company’s financial statements.
Independent audit: An evaluation and unbiased opinion about the accuracy of a company’s financial statements.
Certified internal auditor: CIA, an accountant who has a bachelor’s degree and two years of experience in internal auditing, and who has passed an exam administered by the Institute of Internal Auditors.
After accounting scandals such as the ones previously mentioned, legitimacy of allowing a company to do both auditing and consulting work for the same firm was questioned. E.g., Enron scandal.
4 Tax Accounting
Tax accountant: An accountant trained in tax law and responsible for preparing tax returns or develop tax strategies.
Government and Not-For-Profit accounting
Accounting system for organizations whose purpose is not generating a profit but serving taxpayers, ratepayers, and others according to a duly approved budget.
Government Accounting Standards are set by the Governmental Accounting Standards Board (GASB).
Accounting versus Bookkeeping
Bookkeeping: The recording of business transactions. Bookkeeping is the part of accounting that actually deals with recording the data.
Journal: A computer program or record book where accounting data are first entered.
Double-entry bookkeeping:The concept of writing every business transaction in two places. In double-entry bookkeeping, two entries in the journal and the ledgers are required for each company transaction.
Ledger: A specialized accounting book or computer program in which information from accounting journals is accumulated into specific categories and posted so that managers can find all the information about one account in the same place. e.g. the Quicken computer program.
Accounting cycle: A six step procedure that results in the preparation and analysis of the major financial statements.
The first three steps of the accounting cycle are continual:
1.    Analyzing and categorizing documents.
2.    Putting the information into journals
3.    Posting that information into ledgers.
4.    The 4th step involves preparing a trial balance. A trial balance is a summary of all the financial data in the account ledgers to check whether the figures are correct and balanced.
5.    The 5th step (in case 4 is correct) is to prepare the financial statements, including a balance sheet, income statement, and statement of cash flows.
6.    The 6th step is when the accountant analyzes the financial statements and evaluates the financial condition of the firm. This is mostly combined with computers and accounting software.

Key Financial Statements
Financial statement:  This is a summary of all the transactions that have occurred over a particular period.
The following are key financial statements of a business:
·    The balance sheet, which reports the firm’s financial condition on a specific date.
·    The income statement, which summarizes revenues, costs of goods, and expenses (including taxes), for a specific period of time and highlights the total profit or loss, the firm experienced during that period.
·    The statement of cash flows, which provides a summary of money coming into and going out of the firm that tracks a company’s cash receipts and cash payments.
The fundamental Accounting Equation
Imagine that you don’t owe anybody money. That is you don’t have any liabilities (debts). Assets = Liabilities + Owner’s Equity.
This is called the fundamental accounting equation and is the basis for the balance sheet.
Assets: Economic resources (things of value) owned by a firm. E.g., equipment, buildings, land     etc. Or intangibles e.g., patents, trademarks, copyrights)
Liquidity: Refers to how fast an asset can be converted into cash.
Three categories:
1.    Current assets: Items that can or will be converted into cash within one year. Current assets include cash, accounts, receivable, and inventory.
2.    Fixed assets: Are long-term assets that are relatively permanent such as land, buildings, and equipment. (These assets are also referred to on the balance sheet as property, plant and equipment)
3.    Intangible assets: Are long-term assets that have no real psychical form but do have value. Patents, trademarks, copyrights and goodwill. All examples of intangible asses.
Liabilities
The following are common liability accounts recorded on a balance sheet:
·    Accounts payable: Current liabilities involving money owed to others for merchandise or services purchased on credit but not yet paid.
·    Notes payable: Short-term or long-term liabilities (e.g., loans from banks) that a business promises to repay by a certain date.
·    Bonds payable: Are long-term liabilities that represent money lent to the firm that must be paid back.
Owners equity: The amount of the business that belongs to owners minus any liabilities owed by the business.
Retained earnings: The accumulated earnings from a firm’s profitable operations that were kept in the business and not paid out to stockholders in dividends.
Income statement: The financial statement that shows a firm’s profit after costs, expenses and taxes; it summarizes all of the resources that have come into the firm (revenue), all the resources that have left the firm, and the resulting net income.
Net income or net loss: Revenue left over after al costs and expenses including tax, are paid.
Revenue - costs of sold goods = Gross profit (or gross margin)
Gross profit - Operating expenses = Net income before taxes.
Net income before taxes - Taxes = Net income (or loss)
Revenue: The value of what is received for goods sold, services rendered and others financial recourses. Most revenue comes from sales but there are other types such as rent received, money paid for using patents or interest earned.
Cost of goods sold: A measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale.
Operating Expenses and Net Profit or Loss
Operating expenses: Costs involved in operating a business, such as rent, utilities and salaries.
Selling expenses: e.g., marketing and distribution of the firm’s and services.
General expenses: Administrative expenses of the firm e.g.,office salaries, depreciation, insurance and rent. Accountants can help you how to record and deduct these expenses.Net income can also be referred to as net earnings or net profit.
Statement of cash flows: Financial statement that reports cash receipts and disbursements related to a firm’s three major activities: operations, investments and financing.
Cash flow: The difference between cash coming in and cash going out of a business.
The cash flows mentioned are these:
-    investments; (cash) money used for investments
-    financing; (cash) money that is used to pay expenses, debts
-    operations; (cash) money used for the transactions that regularly occur with running your business
Depreciation: The systematic write-off of the cost of a tangible asset over its estimated useful life.
First in, first out (FIFO) An accounting method for calculating cost of inventory; it assumes that the first goods to come in are the first to go out. (only on an administrative basis)
Last in, first out (LIFO): An accounting method for calculating costs of inventory: it assumes that the last goods what come in are the first that also leave the firm. (on an administrative basis)
Analyzing Financial Statements: Ratio Analysis
When accountants analyze the financial information, they use ratios. The ratios used are: profitability, activity, liquidity and leverage ratios. The ratios provide information about the company’s position compared with firms alike. It also shows the state of the company compared to prior years.
Ratio analysis: The assessment of a firm’s financial condition and performance trough calculations and interpretations of financial ratios developed from the firm’s financial statements.
Profitability ratio:
Basic income per share = net income after taxes / number of shares
Return on sales = net income /net sales
Return on equity = net income after taxes / total owners’ equity
Activity ratio:
Inventory turnover ratio = cost of sold goods / average inventory
Liquidity ratio:
Current ratio = current assets / current liabilities (considered to be good at 2 or higher) The speed in which an asset can be converted to cash.
Acid-test ratio:    cash + accounts receivable + marketable securities / current liabilities. E.g., $265 / $288 = 0.92 Current liabilities (should be higher than 1)
Leverage Ratios
Debt to owners’ equity ratio: Total liabilities / Owners’ equity
Above the 1 (= 100%) a company can be considered risky because it has more debts than equity.
In this example it seems somewhat high, but it’s always important to compare a firm’s debt ratio to those of other firms in its industry because debt financing is more acceptable in some industries than it is in others.
Profitability ratio: Measures how effectively a firm is using its various resources to achieve profits.
Basic earnings per share : Net income after taxes / Number of common stock shares outstanding e.g., $49,000 / $1000,000 = $ 0.49$ per share.
Another reliable indicator of performance is obtained by using a ratio that measures the return on sales:
Return on sales: Net income / Net sales = $49,000 / $700,000.
Return on equity:Net income after tax / Total owners’ equity = $49,000 / $213,000
The inventory turnover ratio measures the speed of inventory moving trough the firm and its conversion into sales.
Inventory turnover : costs of goods sold / average inventory = $410,000 / $215,000 = 1.9 times.
A lower-than-average inventory turnover ratio in an industry often indicates obsolete merchandise on hand of poor buying practices.

Chapter 18: Financing

Financial Management
Finance: The function in a business that acquires funds for the firms and manages those funds within the firm.
Financial management: The job of managing a firm’s resources so it can meet its goals and objectives.
Financial managers: Managers who make recommendations to top executives regarding strategies for improving the financial strength of a firm.
Both the accounting and finance functions are generally under the control of a chief financial officer (CFO). A comptroller is the chief accounting officer.
The finances of a company have a great impact on whether the company will survive or not. The following are three of the most common ways for a firm to fail financially:
·    Under capitalization (lacking enough funds to start the business).
·    Poor control over cash flow.
·    Inadequate expense control.
What is financial management?
Financial managers are responsible to control that the company pays its bills. Finance functions such as buying merchandise on credit (accounts payable) and collecting payments from customers (accounts receivable) are responsibilities of financial managers. These functions are particularly critical to small and medium-sized businesses, which typically have smaller cash or credit cushions than large corporations.
Usually a member of the firm’s finance department, the internal auditor checks on the journals, ledgers, and financial statements prepared by the accounting department to make sure that all transactions have been treated in accordance with generally accepted accounting principles (GAAP). If such audits where not done, accounting statements would be less reliable.
Forecasting financial needs
Financial planning is one of the most important things. Financial planning involves analyzing short-term and long-term money flows to and from the firm. Financial planning involves 3 steps:
 
·    Part of the short-term forecast may be in the form of a cash flow forecast which predicts the cash inflows and outflows in future periods, usually months or quarters.
·    Short-term forecast: Forecast that predicts revenues, costs, and expenses for a period of one year or less.
·    A long-term forecast predicts revenues, costs, and expenses for a period longer than 1 year, and sometimes as far as 5 or 10 years into the future.
Make a forecast of the short-term and the long-term financial needs of the company. These are based on data acquired by accounting. The financial plan consists of these two forecasts.
The financial plan is the bases of the budget plan. The budget plan has three different budgets, capital, cash and operating budget. The capital budget is for larger expenditures. The cash budget shows how much cash there will be available and the operating /master budget provides a link between all the other budgets and costs.
Working with the budget process
Budget:A financial plan that sets forth management’s expectations, and, on the basis of those expectations, allocates the use of specific recourses throughout the firm.
Capital budget: A budget that highlights a firm’s spending plans for major asset purchases that often require large sums of money.
Cash budget: A budget that estimates a firm’s projected cash inflows and outflows that the firm can use to plan for any cash shortages or surpluses during a given period.
Operatings (master) budget: The budget that ties together all of the firm’s other budgets; it is the projection of dollar allocations to various costs and expenses needed to run or operate the business, given projected revenues.
How much the firm will spend on supplies, travel, rent, advertising, salaries, and so forth is determined in the operating (master) budget.
Financial control: A process in which a firm periodically compares its actual revenues, costs and expenses with its projected ones.
Financial needs
A company has four major areas that determine how much money it needs. These areas are:
-    Inventory; the company must have enough inventory. The money used to purchase the inventory, is a temporary investment because the goods will be sold. But you should now how much inventory is needed.
-    Accounts receivable; this means how much a company can afford to sell on credit. If there is bought too much and sold on credit, the company will have no cash left and that means no more credit at the banks.
-    Daily Business operations; there has to be enough money for basic regular costs such as salaries and taxes.
-    Capital expenditures; the larger investments needed to remain competitive.
We have already mentioned the short-term and the long-term finances. These refer to the period of time in which they have to be repaid. But you also have the debt capital and equity capital. This refers to how they obtained the money. To receive debt capital means going into debt for it. Equity capital is money the company gets from issuing stocks or by selling ownership of the company to venture capitalists.

Alternative Sources of Funds
Short-term financing is borrowed capital that will be repaid withinone year. Long-term financing is borrowed capital that will be repaid over a specific period longer than one year. Third, debt financing is funds raised trough various forms of borrowing that must be repaid. Last, equity financing is funds raised from operations within the firm or trough the sale of ownership in the firm.
Capital expenditures: Major investments in either tangible long-term assets such as land, buildings, and equipment or intangible assets such as patents, trademarks, and copyrights.
Obtaining Short-Term Financing
Many small firms obtain short-term funds by borrowing money from family and friends.
Trade credit: practice of buying goods and services now andpaying them later.
It is least expensive and most convenient form of short-term financing. E.g. 2/10, net 30 means that the buyer can take 2 percent discount for paying the invoice within 10 days. Total bill is due 30 days.
Promissory note: A written contract with a promise to pay a supplier a specific sum of money at a definite time.
Commercial paper: Unsecured promissory notes of $100.000 and up that mature (come due) in 270 days or less.
Secured loan is a loan backed up by something value such as property (collateral). On the contrary, Unsecured loan is a loan that’s not backed by any specific assets. An unsecured loan is the most difficult kind of loan to get from a bank or other financial institute. Normally, a lender will give unsecured loans only the highly regarded customers. E.g., long-standing costumers or costumers considered financially stable.
Accounts receivable are assets that are often used by businesses as collateral for a lineal the process is called pledging.
Line of credit: A given amount of unsecured short-term funds a bank will lend to a business, provided the funds are readily available. The primary purpose of a line of credit is to speed the borrowing process so that the firm does not have to go trough the hassle of applying for a new loan every time it needs funds.
Revolving credit management: A line of credit that is guaranteed by the bank.
Commercial finance companies: Organizations that make short-term loans to borrowers who offer tangible assets as collateral. These organizations are often called non-banks. Since commercial finance banks are willing to accept higher degrees of risk than commercial banks, they usually charge higher interest rates than banks.
Factoring: The process of selling accounts receivable for cash.
Factoring dates as far back as 4000 years, during the days of ancient Babylon. And while it’s true that discount rates charged by factors are usually higher than loan rates charged by banks or commercial finance companies, remember that many small businesses cannot qualify for a loan.
Obtaining Long-Term Financing
In setting long-term financing objectives, financial managers generally ask three major questions:
1.    What are the organization’s long-term goals and objectives?
2.    What are the financial requirements needed to achieve these long-term goals and objectives?
3.    What sources of long-term capital are available, and which will best fit our needs.
Debt Financing by Borrowing Money from Lending Institutions
A major advantage of a business using this type of financing is that the interest paid on the long-term debt is tax deductible.
Term-loan agreement: A promissory note that requires the borrowerto repay the loan in specified installments.
Risk/return trade-off: The principle that the greater the risk a lender takes in making a loan, the higher the interest rate required.
Indenture terms    :The terms of agreement in a bond issue.
A secured bond is a bond issued with some form of collateral. An unsecured bond is a bond backed only by the reputation of the issuer; also called a debenture bond.
Equity Financing
Equity financing from retained earnings involves that the profit the company made is reinvested in the firm.
The first time a company offers to sell its stock to the general public is called an initial public offering (IPO).
Venture capital: Money that is invested in new or emerging companies that are perceived as having great profit potential.
Leverage: Raising needed funds trough borrowing to increase a firm’s rate of return.
Cost of capital: The rate of return a company must earn in order to meet the demands of its lenders and the expectations of its equity holders.

Chapter 19: Trading with securities

Security markets are marketplaces where investors can buy and sell securities. Securities such as stocks, bonds and funds are long-term funding for companies and a possibility to make money for investors. By selling securities companies can raise money to begin or expand a business or buy goods and services. The security market consists of two parts: the primary and the secondary markets. The primary markets handle the sales of new stocks. When a firm sells its securities for the first time this is called initial public offering. The secondary market is for trading securities between the investors. The sale is going to the investor, not to the corporation.
Bond
Bond is a certificate with a denomination (amount of debt). A company does dept-financing by lending money from an institution. The face value of the bond is called the principal. The company has to pay interests over a certain period of time and repays the principal at a certain date, the maturity date. There are several advantages and disadvantages:
Advantages
-    A bond is a temporary debt.
-    A interest is tax deductible.
-    The company stays independent of the institution issuing the bond. The management decides and owns the company.
Disadvantages:
-    Interests do legally have to be paid.
-    The principal has to be paid back at the maturity date. This can cause financial problems if the company does not plan the repay beforehand à to reduce the risk that the bond cannot be repaid companies often establish a reserve account called sinking fund.
There are secure and insecure bonds. The unsecured bonds (or debenture bonds) do not have any collateral. Just well-respected companies with good credit ratings can issue unsecured bonds. The secure bond does have collateral.
The company can opt for special bond features such as the convertible bond, which can be changed into a stock and the callable bond, which can be paid off before the maturity date or a. Consequently the company can issue a bond with a lower interest rate. However, if a company calls a bond before the maturity date it often has to pay a price above the bond’s value.
If you have bought a bond and want to sell it again, you can either sell it at a discount or at a premium. If a bond is sold at a discount it means that the bond is sold in a security market for a lower price than its face value.
A bond sold at a premium means that the bond is sold at a security market for a higher price than its face value.
Whether it is sold at a discount or at a premium depends on how your bond is valued. If the interest rates go down, the prices of bonds go up. Aspects that determine how much your bond is worth on the market are high interest rate and early maturity date.
Stocks
The sale of common stocks is another form of financing. Stockholders have to right to vote for the company’s board directors and important issues and, if approved by the board directors, they can share the profit by a certain percentage, which is called dividend. There are several advantages and disadvantages:
Advantages:
-    The dividends do not legally have to be paid.
-    The stock price does not have to be paid back.
-    When the company sells shares it makes more money in the beginning.
Disadvantages
-    A stock is not temporary.
-    A dividend is not tax deductible.
-    The company is dependent on the stockholders. They have own a part of the firm (the have the right to vote and make decisions).
Common stockholders also have the pre-emptive right, which is the first right to purchase new stocks.
Another type of stock is the preferred stock. These stocks give stockholders a preference in assets if the company stops doing business or in the payment of dividends. If the company cannot pay the dividends the unpaid dividends are accumulated and paid in full later on. However, owners of preferred stocks do not have voting rights in a company and they can be required to sell their stocks back to the company (preferred stocks are callable).
The stock exchange
Stock exchanges are national and regional organizations that enable its members to buy and sell stocks. Furthermore the over-the-counter market provides a list of companies which are not listed on the international markets.
A company can enter the stock exchange if it is getting an approval of a commission. Investments bankers help the company to obtain the required standards necessary to gain the approval. Trading at the stock market happens with the help of market intermediaries, the so-called stockbrokers. With the possibility to invest online, however, an investor is no longer required to consult a stockbroker.
Floor-based exchange is the trade of stocks at a stock exchange and a telecommunication network is the electronic trade of stocks.
Before making the decision to buy a particular stock, several aspects should be considered:
-    Yield: How much profit can you make?
-    Liquidity: How long does it take to get the invested money back?
-    Duration: Is there an amount of time you have to keep the share before you can resell it?
-    Risk: What is the chance of the stock will be worth less at some future time?
-    Consequences for taxes: Does owning stock change your tax situation?
There are some important terms considering stocks:
-    Capital gains: The profit at which you sell a stock.
-    Bull: An investor who expects stock prices increasing.
-    Bears: An investor who expects stock prices decreasing.
-    Growth stock: Stocks of companies which are expected to rise.
-    Blue-chip stocks: Stocks of companies which have experienced consistent growth.
-    Penny stocks: Cheap stocks of high-risk industries.
-    Market order: Tells a broker to sell or buy a stock at the best price available.
-    Limit order: Tells a broker to buy or sell a stock for a certain price.
-    Insider trading: The trading with inside information so that an individual gains an unfair benefit.
-    Round lots: Purchase of 100 stocks.
-    Odd lots: Purchase of less than 100 stocks.
-    Stock splits: To divide a stock in smaller shares because the demand of cheaper stocks is greater.
-    Load versus no-load fund: Is commission to either buy or sell shares charged or not?
Mutual fund
A mutual fund combines the finances of several individual investors and buys stocks and bonds that would be too expensive for individuals. To minimize risk the fund invests in different stocks. By investing in a mutual fund you are able to invest in various companies with a specific common purpose at the same time. So a fluctuation of the value of one of them doesn’t have such a big impact and your investment risk is reduced. Funds are distinguished in open-end and closed-end funds. A closed end fund has a limited number of investors and open end funds accept investments of any investor.
You can also diversify by investing in several types of securities at the same time to reduce the risk. This strategy is called diversification, portfolio strategy or allocation model.
High-risk investments
Some people prefer to invest in high-risk investment because these investments can have a higher return. Ways of doing that is by investing in junk bonds, by buying stock on margin or by investing in commodities.
Junk-bonds: Bonds are companies with a high-risk and a high-interest rate bond.
Buying stock on margin: Investing in stocks with borrowed money from a brokerage firm. The margin is the amount of money borrowed and invested. Investors must pay interest and repay the account’s loss à margin call.
Investing in commodities: Investing in article of commerce. Investors make profits form the rise and fall of the items such as precious metals (incl. currencies), minerals and agricultural goods.
Ups and downs of stock markets
In order to avoid crashes in the stock market the average is always compared to the Dow. The Dow Jones Industrial Average (Dow) gives the general direction (up or down) of the stock market over time by using 30 selected companies of different sectors as indicators. If the Dow goes up or down a certain number of points a program trading curb, circuit breakers or a trading close is put in effect.
Program trading means that investors give their computer the instruction to sell a security at a certain minimum price. If too many holders of securities sell at the same time the Dow goes down and “curbs in” is put in effect. Investors cannot sell their securities electronically anymore. They have to sell it at a floor-based exchange. If the Dow drops further the circuit breaker is put in effect and trading halts at floor-based exchange and telecommunication network for up to two hours. If the Dow falls more than 30 percent trading closes for the entire day.

Chapter 20: Money

Money is used for the payment of goods and services. How much you can purchase for your money depends on its value. The value rises and sinks with the money supply. Too much money causes inflation and too little money causes deflation, unemployment and recession. As the proper supply of money is so important the Federal Reserve was formed in the U.S. to control it. The money supply is defined by different types of money ranked according to their accessibility (M1, M2 and M3).
To be able to control the money supply the Federal Reserve uses the following methods:
-    Collecting data on the money supply and economic activities.
-    Reserve requirements: Keeping funds à a decrease in the reserve requirements increases the funds of banks.
-    Lending money to banks at a discount rate (interest rate charged for a loan)
-    Open-market operations: Buying and selling government securities à if the Federal Reserve sells government securities the reserve requirements are increased because the money gained from the sale is no longer in circulation.
-    Buying and selling foreign currencies.
As the Federal Reserve supervises and gives loans to various financial institutions in the banking system it is also called the banker’s bank.
The banking system
Commercial banks and savings and loan associations: Nowadays they offer similar services such as:
-    Demand deposit: Checking account, where the depositor can withdraw money on demand.
-    Time deposit: Savings account, where the depositor can withdraw money with prior notice to the bank.
-    Certificate of deposit: Money is paid regularly and can be withdrawn at a certain maturity date (i.e. individual retirement account).
-    NOW account: Depositors have to maintain a minimum balance on the account and receive an annual interest rate.
-    International banking: Facilitates international business with letter of credit (promise by the bank to pay the seller if certain conditions are met), banker’s acceptance (bank pays without conditions at a certain date) and currency exchanges.
-    Online-banking
-    Loans and stocks
-    Safe-deposit boxes
-    Insurances
-    Traveller’s checks
Credit unions: They are member-owned cooperatives that offer the same services as banks. A credit union is non-profit organisation and can therefore give higher interest rates and lower loan rates.
Nonbanks: Organizations that provide many services a bank offers but do not accept deposits (i.e. life insurance companies, pension funds, brokerage firms).
If people deposit money on a bank they want to know that it is save there. Various institutions guarantee the safety of money. In the U.S. the Federal Deposit Insurance Corporation guarantees the safety of the money in commercial banks, the Savings Association Insurance Fund guarantees the safety of savings and loan associations and National Credit Union Administration guarantees the safety of credit unions.
International financial institutions
World Bank: An international bank that lends money to less developed economies in order to improve productivity and raise living standards.
International Monetary Fund: An organisation that allows free exchange between nation’s currencies in order to enhance world trade.
Coming changes in banking
In the future banks will probably offer more services and are therefore likely to merge with insurance and security firms. Internet banking will become more important and banks will allow customers electronic access to their accounts. Electronic funds transfers systems will enable people to buy services and goods online and electronic check conversions will replace paper checks. It is most likely that the smart card, an electronic fund transfer tool that can combine various functions (credit card, debit card, driver’s license, etc) will become more popular.

Bonus Chapter A: Personal Finances

It is very important to know the state of you personal finances. This has to be done by according to a certain plan.

1. make an inventory of all your assets to get an overview of what you have
2. make a list of all your expenses and also put any new expenses you make on the list
3. make a budget
4. pay off any outstanding debt you may have
5. make a savings plan
6. only borrow money if you can earn money with it

To become financially secure you have to save money. But that is not it, you can use the money you save to create more money by investing in the right things. If you start investing it is wise to begin with real estate, this because the value increases and the interest is in some countries deductible from tax. Saving money is good. But if you don’t use it for a long time, you can also invest it in stocks. Over time you almost always earn more money. This is not always the case with bonds.

Also a thing you have to invest in is life insurance. This is necessary because in most relationships both people have a fulltime job. If one of them dies, the other will get financial problems. You can get a term insurance; this is a life insurance that is valid for a couple of years. After these years you have to renew your policy. The older you get, the higher the new policy will be. Other insurances you need are health, liability and car insurance.

Besides savings investments and insurances you also have to plan your pension. Make sure that you get a tax free saving pension.

Bonus Chapter B: Manage information

The information technology has already had several different names and uses. When it was first introduced it was called Data Processing and its goal was to make all the financial information more understandable. After that it was called information System. Now it was used for improving the production process. From the 1990s it’s called Information Technology and its purpose is to change the way of doing business. It changed doing business in the sense that the businesses are no longer time or place bounded. You can deliver a service at the time and place which is most convenient for the customer.
There already is a new shift taking place from information technology toward knowledge technology. The knowledge technology emphasizes the importance of using intelligence with the filtering of information.
Networks
Companies use information networks to manage all the information they get and to make it available to the employees and/or customers.
There are several types of networks used by companies:

• Intranet; a network that is only available to the employees
• Extranet; several companies that have access to the same information network (also know as a semiprivate network)
• Internet; this can create a virtual private network by creating secure lines for information. But you can also make a company web-site available to potential customers.
• Internet 2; available for government and some universities and runs 22.000 times faster than the regular internet.

Because companies have access to increasingly more information, they have to make sure to manage it correctly. This means deleting all the information you don’t need. Too much information will make you unable to find what you need.

Good information has to meet certain standards.

• timelessness; the information that you gather today has to be accurate for a longer period
• completeness; having the right amount of information
• relevance; separating the data you need from the data that’s available
• quality; make sure that the information is accurate and that you can rely on it

Networks have several benefits because it saves time and money, it gives a complete picture about a topic or customer to the employees. Also very important is the possibility to ask input from employees from other departments with the help of bulletin boards and e-mail.
Effect of information technology
Information technology influences the business management on several aspects. It has eliminated several middle management functions and thus made the companies more efficient. It has also created the possibility to let employees work out of their own homes. However, with new developments there are always negative sides. One of these is hackers. Your information is not always secure.
The use of new technological developments often leads to eliminating certain jobs, but at the same time creating new jobs.
Bonus Chapter C: Risks
Risk means how much money you can loose, how likely it is and how big the change is for it actually to happen.
There are two types of risks, speculative risks and pure risks. Pure risks are the change of loss without the possibility for profit. With speculative risk you can either gain or loose money.
Every businessman will try to reduce or avoid risk if possible. Reducing risks is possible with loss-prevention programs. Avoiding risks means that you look for an alternative.
A company also has to self-insure, meaning putting away money to cover losses yourself. Or you could buy an insurance to cover any risks of loss.
 However an insurance company has certain uninsurable risks that they do not cover. Insurance companies always have a rule of indemnity stating that a company can not collect any more than the losses form the insured risks.
The insurance companies are mostly stock insurance companies or mutual insurance companies. The first one is owned by stockholders and the second one by the policyholders.