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A share in an undertaking that can be categorized as one or more of the following: ... best prospects: a sequential process of screening four key environments ... – PowerPoint PPT presentation

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Title: to

  • Introduction
  • to
  • Business

Topics covered
  • Organization of a Business
  • The Business Environment
  • Management
  • Managing Employees
  • Marketing
  • Financial Management
  • Special Topics

I. Organization of Business
  • Planning a Business
  • Stakeholders
  • Creating a Business Idea
  • Key Functions of a Business
  • Developing the Business Plan

Origins of the stakeholder concept
  • What is a stake?
  • A share in an undertaking that can be categorized
    as one or more of the following
  • an interest
  • a right (either legal or moral)
  • ownership

Attempting to define stakeholders
  • Stakeholders Individuals groups with a
    multitude of interests, expectations, demands
    as to what business should provide to society
  • If the corporation is the institutional
    centerpiece of a complex society
  • who do companies belong to in whose interests
    should they be run?

Interdependencies exist whereby some stakeholders
may be unknowing and/or unwilling participants
(more on this later).
Creating a business idea
  • Identify a Competitive Advantage
  • Recognize experience and skills
  • Differentiate the Product
  • Distinguish product or service from others
  • Determine Necessary Resources
  • Employees, workspace, materials, etc.
  • Assess the Feasibility
  • Will profits be sufficient?

Functions of a business
  • Management
  • Means by which resources are used
  • Marketing
  • Means by which products or services are
    developed, priced, distributed, promoted
  • Finance
  • Means by which firms obtain and use funds
  • Accounting
  • Summary analysis of financial condition
  • Information Systems
  • Technology people that bring information to
    people for decision-making

Developing the business plan
A business plan is a detailed description of the
proposed business, including the product or
service, resources needed for production,
marketing to sell the product, and financing
requirements. It typically contains the
following sections
  • Description and proposed ownership structure
  • Assessment of the Business Environment
  • Economic, the specific industry, the global
  • Management Plan
  • Organizational structure, production, human
  • Marketing Plan
  • The target market, product characteristics,
    pricing, promotion, distribution
  • Financial Plan
  • Financing overall financial feasibility

I. Organization of Business
  • Selecting a Form of Ownership
  • Sole Proprietorship
  • Partnership
  • Corporation

Selecting a form of business ownership
Sole proprietorship owned by a single owner
  • All earnings go to sole owner
  • Easy to establish
  • Complete control
  • All losses go to sole owner
  • Unlimited liability
  • Limited funds and skills

Partnership owned by two or more people or
  • Access to additional funds
  • Losses are shared
  • More specialization
  • Control is shared
  • Unlimited liability
  • Profits are shared

Corporation tax-paying, state-chartered entity
that is legally distinct from owners
  • Limited liability
  • Access to funds
  • Transfer of ownership
  • Expensive to establish
  • Financial disclosure
  • Agency problems taxes

I. Organization of Business
  • Business Ethics Social Responsibility
  • Ethical Decision Making
  • Stakeholder Perspectives

Key questions in stakeholder management
  • What economic, legal, ethical, philanthropic
    responsibilities does our firm have to its

Philanthropic ResponsibilitiesBe a good
corporate citizen. Ethical ResponsibilitiesBe
ethical. Legal ResponsibilitiesObey the
law. Economic ResponsibilitiesBe profitable.
Must it be hierarchical?

Business is the collection of private,
profit-oriented organizations ranging in size
from sole proprietorships to corporate giants.
Should our expectations
differ based on size? Society is a broad group
of people other organizations, interest groups,
a community, a nation. Business society
interrelate in a macroenvironment as
The Earth
Trade Partners
Who are businesses really responsible to?
  • Fundamentally, businesses are responsible to
    their resource base. Without a healthy
    environment there are no shareholders, no
    employees, no customers, no business.
  • Do your business like you plan to be here for the
    next 100 years.
  • Patagonia, Inc., 2003

Strategic benefits of moving toward a sustainable
business model
  • Reduced costs
  • New revenue sources
  • Competitive advantage
  • Access to capital
  • Mitigation of risk
  • Better relationships with stakeholders
  • Improved organizational effectiveness
  • Strengthened governance

II. Business Environment
  • Economic Conditions
  • Macroeconomic Factors
  • Market Price Determination
  • Government Influence

Assessing economic conditions
Macroeconomic factors growth, inflation,
interest rates
  • Indicators of growth gross domestic product
    (GDP), unemployment, industrial production index,
    new housing starts, personal income level
  • Inflation the increase in the general level of
    prices of products/services over a specified
    period of time
  • Interest rate the cost of borrowing money

Assessing economic conditions
How market prices are determined
  • Supply demand conditions
  • Equilibrium the price at which the quantity
    supplied equals the quantity demanded
  • Factors that influence market prices
  • Consumer income and preferences
  • Production expenses

Assessing economic conditions
Governmental influences
  • Monetary policy decisions on the money supply
  • Government purchase of Treasury securities
    reduces interest rates through increasing supply
    of available funds (assuming demand is stable)
  • Government raises interest rates by reducing
    money supply by taking its funds out of banks
  • Fiscal policy decisions on how government sets
    tax rates spends money

II. Business Environment
  • Industry Conditions
  • Demand
  • Competition
  • Labor Issues
  • Regulatory Concerns

Industry traits that influence business
  • Industry demand
  • The total demand for the products in an industry
  • Industry competition
  • Firms competing for market share
  • Labor environment
  • Some industries have highly specialized labor
  • Regulatory environment
  • Government-imposed rules regulating practices

Exposure to industry conditions
  • Market share
  • Firms with larger market share benefit more from
    increase in demand and suffer more when demand
    declines than small firms
  • When focus is narrow
  • Diversification reduces exposure

Competing within an industry
  • Assessing competitors
  • Segments (subsets) narrowly defines industry
  • Develop a competitive advantage
  • Low-cost production
  • Better quality
  • Product differentiation

Porters Five Force Competitive Model
Threat of Mobility (Potential Entrants)
Industry Competitors (Segment Rivalry)
Supplier Power
Buyer Power
Threat of Substitutes
Porters Five Force Competitive Model continued
  • Each force represents a threat in a particular
    business aspect
  • Threat of intense segment rivalry
  • Threat of new entrants
  • Threat of substitute products
  • Threat of buyers growing bargaining power
  • Threat of suppliers growing bargaining power
  • Together the five forces determine the intrinsic
    long-run profit attractiveness of the market

Competitive Situation Analysis
  • Identification of competitors
  • Consider strategic tactical differences and
  • Gain insight into potential defensive or
    offensive strategies to curtail or exploit
    competitors strengths and weaknesses
  • Review terms of sales, target market,
    positioning, marketing strategies, pricing,
  • Use primary secondary research methods

Competitive Situation Analysis, continued
  • Business Element Your Co. Firm A Firm B
    Firm C Firm D
  • Market Share/Sales
  • Target Market
  • Mktg Objectives
  • Positioning
  • Product/Brand/Pkg
  • Distribution
  • Promotional Mix
  • Research Devlpmt
  • Summary of Strengths
  • Weaknesses

II. Business Environment
  • Global Considerations
  • External Internal Factors
  • Systematic Assessment
  • Four Key Environments
  • Foreign Entry Modes
  • Exchange Rate Considerations

The Complexity of Foreign Market Entry external
internal considerations
EXTERNAL Target Country Factors
Home Country
Foreign Market Entry Mode Decision
Resources Commitment
INTERNAL Company Factors
Assessing best prospects a systematic approach
Step 1 Sequentially screen each environmental f
Step 2 Select and rank countries for
further investigation
Assessing best prospects a sequential process of
screening four key environments
  • Demographic/Physical
  • Population
  • Distribution
  • Climate
  • Distance
  • Demographics
  • Communication
  • Natural resources
  • Political
  • System of government
  • Political stability
  • Ideology
  • Govt. involvement
  • Attitudes
  • Economic develop-
  • ment priorities

Assessing best prospects a sequential process of
screening four key environments, continued
  • Economic
  • Level of development
  • Growth (GNP)
  • Role of foreign trade
  • Currency stability
  • Per capita income
  • Income distribution
  • Disposable income
  • Socio-Cultural
  • Literacy rate
  • Educational level
  • Presence of middle class
  • Similarities differences
  • to home market
  • Language
  • Culture

Choosing a Foreign Entry Mode considering the
  • Using Agents
  • Goods are consigned
  • Greater risk of loss
  • Exclusive marketing
  • territories
  • Non-transferable
  • Termination may be
  • difficult
  • Using Distributors
  • Distributor buys goods
  • Less risk of loss
  • Antitrust laws may limit
  • control of distribution
  • Transferable
  • May be easier to
  • terminate

Choosing a Foreign Entry Mode considering the
attributes, continued
  • Joint Ventures
  • Access to financing, raw
  • materials talent
  • Fewer barriers to entry
  • Broadened distribution
  • Shared risk
  • R D cost is shared
  • Investment support
  • Strategic Alliances
  • Complementary strengths
  • Strategic advantages
  • Franchise agreements
  • Performance-based
  • contracts
  • Clear roles goals
  • Progress monitored

Exchange Rate Considerations
  • Exchange rates move in ways that affect firms
  • Importers benefit from strong local currency
  • Exporters benefit from weak local currency
  • Example

  • Korean stores must pay more won for Russian
  • As cost of imported goods increases, demand for
    Russian goods decreases
  • Demand for Korean goods increases

Hedging against foreign exchange rate movements
  • Forward contracts
  • Provides for an exchange of currencies at a
    specified rate at a future point in time
  • Does not guarantee rate will be more favorable
  • Overall, foreign exchange rate movement
    represents a form of risk that always exists in
    global business operations

III. Management
  • Managing Effectively
  • Levels Functions of Managers
  • Managerial Skills
  • Time Management

Functions of managers
  • Top Management
  • Sets plan to expand or revise products, borrow
    funds, change pricings and advertising strategies
  • Communicates plans to all managers
  • Middle Management
  • Decides how to increase sales, resolves
    complaints, adds personnel, changes production
  • Supervisory Managers
  • Provides job assignments training, resolves
    conflict, improves quality

Planning, organizing, leading, controlling
  • Planning for the future
  • Setting objectives
  • Organizing employees resources to
  • meet goals
  • Occurs continuously throughout the life of the
  • Leading
  • Providing instructions on how the task should be
  • Controlling
  • Monitoring and evaluating employee tasks

Important managerial skills
  • Conceptual
  • To understand relationships between tasks
  • Interpersonal
  • To communicate with employees other
  • Technical
  • To perform specific day-to-day tasks
  • Decision-making
  • To assess alternative choices on resource

Guidelines for effective time management
  • Set priorities
  • Focus on whats important
  • Schedule appropriate time intervals
  • Allow sufficient time to focus on large tasks
  • Minimize interruptions
  • To allow for completion of assignments
  • Set short-term goals on long-term projects
  • To successfully move toward completion
  • Delegate tasks
  • Allow employees to assist enhance their skills

III. Management
  • Organizational Structure
  • Achieving the Strategic Plan
  • Assessing Decentralization
  • How Structure Affects the Control of Foreign
  • Methods of Structuring

A traditional organizational structure
Board of Directors
VP Mfg
VP Finance
VP Marketing
VP Human Resources
Info Systems
In todays information-based environment,
business is moving away from a hierarchy toward
flatter structure
Chain of command some definitions
  • Span of control
  • The number of employees each manager manages
  • Centralized
  • Most authority is held by high-level managers
  • Decentralized
  • Authority spread among several divisions or
  • Whether to decentralize authority depends on
    managers skills and level or responsibility
  • Autonomy
  • Divisions make their own decisions act

Forms of structure
  • Line and staff
  • Includes positions for make decision-making
    (line) those designed to support the efforts of
    line positions (staff)
  • Two alternatives for greater employee input
  • Matrix
  • Enables various parts of the firm to interact and
    focus on specific projects
  • Intrapreneurship
  • Employees generate ideas as if they were running
    their own firms

Four main methods of departmentalizing are by
  • Function
  • Tasks are separated by employee functions
  • Product
  • Tasks are separated by product
  • Location
  • Tasks are concentrated in a division to serve a
    specific geographical location
  • Customer
  • Tasks are separated by customer type

III. Management
  • Improving Productivity Quality
  • Production Process Resources
  • Site Selection
  • Design Layout
  • Production Control
  • The Role of Technology

Production process resources
  • Resources
  • Key resources used for production are human
    resources, materials, equipment, buildings (the
  • Production (or conversion) process
  • Where resources (both human otherwise) are used
    to produce products/services
  • Production (or operations) management
  • Management of the process of resource conversion

Plant site selection many factors influence
  • Cost of workspace
  • Cost supply of labor
  • Tax incentives
  • Source of demand for the product/service
  • Access to transportation
  • A site evaluation matrix can be used to rate key

Sites Land Cost Labor Supply
Transportation Site 1
_________________________________________ Site 2
Rating percent of total weight filled in
for each Site 3 ___________________________
Plant design layout considerations
  • Site characteristics
  • Cost of land, slope, etc. guide design
  • Production process
  • Assembly-line, fixed position, flexible
    manufacturing all point to distinct layout plans
  • Product line
  • Narrow versus broad has implications on layout
  • Desired production capacity
  • Planning for growth and off-site work options

Production control considerations
  • Purchasing materials
  • Selecting supplier negotiating discounts
    production components with supplier (outsourcing)
  • Inventory control
  • Managing to minimize cost maximize efficiency
  • Routing
  • Identifying sequence of tasks to complete
  • Scheduling
  • Setting time periods for tasks based on critical
  • Quality control (by technology, employees,
  • Identifying improvements in the production process

Key methods to improve production efficiency
  • Benchmarking
  • Evaluating through comparison to a specified
  • Technology
  • Automating tasks to increase speed of the
    production process eliminate the use of
  • Economies of scale
  • To reduce the average cost per unit through
  • Restructuring
  • Revising the production process to reduce
  • Downsizing (reducing the number of employees)
  • Integration of the production tasks
  • Managing the entire supply chain (start to finish)

IV. Managing Employees
  • Motivating the Workforce
  • Theories on Motivation
  • Compensation Programs
  • Enhancing Job Satisfaction
  • Motivating Across Countries

Main theories on motivation
  • Maslows Hierarchy of Needs
  • People rank their needs by category
  • As they progress up a hierarchy they are
    motivated to reach the next category

Main theories on motivation, continued
  • Hawthorne Studies
  • Employees are motivated by attention
  • Herzbergs Job Satisfaction Study
  • Factors that prevent job dissatisfaction are not
    the same as those that enhance job satisfaction
  • Expectancy Theory
  • Employees motivated if compensation is aligned
    with goals, are achievable, offer some reward

Main theories on motivation, continued
  • McGregors Theories X Y
  • X When supervisors believe employees dislike
    work they give them less responsibility
    employees are not motivated
  • Y When supervisors believe employees prefer
    responsibility they delegate more, which
    motivates employees
  • Theory Z
  • Employees are more satisfied when involved in
    decision-making, therefore more motivated

Main theories on motivation, continued
  • Equity Theory
  • Employees more motivated if compensation is
    aligned with relative contribution to firms
  • Reinforcement Theory
  • Employees are more motivated if rewarded for high
    performance (positive reinforcement) penalized
    for poor performance (negative reinforcement)

Ways firms can motivate employees by providing
  • Adequate compensation that is aligned with
  • Reasonable measure of job security
  • Flexible work schedules
  • Employee involvement programs

IV. Managing Employees
  • Hiring, Training, Evaluating
  • Human Resource Planning
  • Equal Opportunity
  • Employee Benefits
  • Training Development
  • Evaluating Performance

Human resource planning
  • Forecasting HR needs
  • Influenced by retirements, downsizing, expansion
  • Job analysis
  • Determines tasks necessary credentials
  • Used to develop job description
  • Recruiting
  • Internal (from within through promotions or
    lateral assignments) external (outside sources)
  • Involves multiple screening steps for applicants

Equal opportunity
  • Discrimination hurts a firm in 3 ways
  • Deprives the firm of creativity through diversity
  • Deprives potential employee(s) of meaningful work
  • Such discrimination is illegal, if not locally,
    quite likely in countries with which many firms
    do business now or in the future

Compensation packages
  • Salary
  • Pay for a job over a specific period
  • Stock options
  • Allows employees to purchase shares of firms
    stock at a specific price
  • May create conflict of interest (temptation to
    inflate earnings)
  • Commissions
  • Based on meeting sales goals
  • Bonuses
  • One-time payment based on performance

Compensation packages, continued
  • Profit sharing
  • Sharing a portion of firms earnings with
  • Employee benefits
  • Additional privileges beyond payments, such as
    paid vacations, medical life insurance,
  • Perquisites (Perks)
  • Other non-monetary privileges
  • Free parking
  • Company car
  • Club memberships
  • Expense account

Employee development
  1. Technical
  2. Decision-making
  3. Customer Service
  4. Safety
  5. Human Relations

The firm benefits through providing ongoing
training development in 5 key skill sets
Employee performance evaluation
  • Five key steps
  • Segmenting into clear criteria
  • Assigning rating to each criteria
  • Weighing each criteria
  • Determining overall performance rating using the
    weighted average of all criteria
  • Discussing evaluation with employees to identify
    strengths developing a plan to address

V. Marketing
  • Creating Pricing Products
  • Product Line Mix
  • Identifying a Target Market
  • Pricing Strategies
  • The Marketing Plan

Marketing the perspective
  • The Four Ps become the Four Cs

Four Ps Four Cs
Customer solution
Customer cost
From Kotler, 2000
Product Line Mix
  • Product analysis questions to ask
  • What products are sold, industry-wide?
  • What products does your firm sell?
  • How are they made?
  • What do they look like?
  • Advantages strengths?
  • Disadvantages weaknesses?

Why form product lines?
  1. Advertising economies as several products are
    advertised under the umbrella of the product
  2. Package uniformity through common look yet
    individual product identities
  3. Standardized components reduce manufacturing and
    inventory costs
  4. Efficient sales distribution as retailers take
    full product line
  5. Equivalent quality perception through brand

Product Width, Depth, and Consistency
  • Product mix width refers to the number of
    products offered
  • Product line depth is the number of products in a
    particular product line
  • Product mix consistency refers to the extent
    product lines are similar in terms of
  • End use
  • Distribution outlets
  • Target markets
  • Price range

Consumer Behavior Trends
  • Analyze demographic trends related to age, work
    status, educational level, income trends and
    averages, family composition, ethnic background
    look at total product usage by segment note
    shifts and how they will affect the business
  • Monitor demographic aspects of geographic trends
  • Psychographic analysis, the study of consumer
    lifestyles and attitudes, provides insight into
    disposable income availability, health and
    environmental concerns, clothing preferences, etc.

  • geographics

Consumer Behavior Trends Lifestyle dimensions

Market Segmentation, Targeting, Positioning
  • Identify basis
  • for segmentation
  • 2. Develop profiles
  • Develop measures
  • of target
  • effectiveness
  • 4. Select segments

  • 5. Develop positioning
  • for each segment
  • Develop marketing
  • mix for each segment

Requirements for effective segmentation
  • Existence of customers with similar wants
  • Segment members are identifiable
  • Segment members are accessible
  • Segment responds to marketing efforts
  • than market as a whole
  • Specialized communication media are available
  • Seller has competitive advantage in target
  • Segment is large enough to produce substantial

Requirements for effective positioning
  • Assessing current competitor positions
  • Determining dimensions underlying these positions
  • Selecting a position where marketing efforts have
    greatest impact

Positioning may be base on one or more aspects
  • Attribute
  • Price Quality
  • Use or Application
  • Product/Service User
  • Product Class
  • Competitor

Steps necessary to create a new product
  • Develop a product idea which may be in response
    to changes in consumer needs or preferences
  • Assess feasibility through comparison of expected
    benefits with the proposed cost do market
  • Design test the product with some consumers in
    the target market
  • Distribute promote for access awareness
  • Post-audit the product to determine whether
    revisions are needed

Factors affecting pricing decisions
  • External factors
  • Nature of market
  • demand
  • Competition
  • Economy
  • Government
  • Resellers
  • Internal factors
  • Marketing objectives
  • Marketing mix strategy
  • Costs

Pricing Decisions
Factors affecting pricing decisions, continued
  • Price considerations
  • What is the pricing structure in the product or
    service category? Is there a range?
  • Your pricing structure relative to the
  • Are discounts, promotional allowances, return
    policies, etc. important selling tools in the
    product category?

9 marketing mix price point strategies on
Factors affecting pricing decisions, continued
  • Price Elasticity Diagrams

Inelastic demand
Elastic demand
P 2 P 1
P 2 P 1
Q 2 Q 1
Q 2 Q 1
Factors affecting pricing decisions, continued
  • Price elasticity considerations
  • When you raise or lower prices, how does it
    effect demand?
  • Are consumers price sensitive in this product or
    service category?
  • Where is your product or service priced in
    relation to competitors?

Factors affecting pricing decisions, continued
  • Cost structure considerations
  • Fixed variable costs associated with sales
  • Costs of goods/services sold
  • Margin profit expectations/requirements
  • Gross price or sales figures

Marketing plan
  • The marketing plan ties it all together
  • Target market the customer profile (age, income
    level, etc.)
  • Product characteristics features benefits
  • Pricing the price relative to competitors
  • Distribution how customers will access the
  • Promotion how customers will know of the product

V. Marketing
  • Distributing Products
  • Channels
  • Market Coverage
  • Transportation Choices
  • Accelerating the Distribution

Distribution Pushing or pulling through the
channel system
  • Pushing a product through the channel means using
    normal promotion efforts
  • Personal selling
  • Advertising
  • Pulling means getting consumers to ask
    intermediaries for the product
  • Aggressive promotion to final consumers through
    use of coupons or samples

Distribution channel considerations by business
  • Retail operations
  • Where do consumers shop?
  • What importance do various types of outlets have
    related to the product?
  • What new channels are emerging?
  • What channels does the competition use?
  • Do you have adequate penetration of outlets to
    maximize sales in any given market?
  • Does expansion into new territories make sense?
  • Is the product best suited for mass, selective,
    exclusive, or a combination of distribution

Distribution channel considerations by business
  • Service firms
  • Where do the consumers of your service shop?
  • What are current emerging methods of delivery?
  • How does the competition deliver services? Why?
  • Does expansion make sense?
  • Does the product best lend itself to mass,
    selective, exclusive, or a combination of
    distribution methods?
  • Do company-owned office, franchises, or
    dealerships provide the best service delivery

Market coverage exclusive, selective, or
Transportation considerations
  • Truck
  • Usually quick and can make several stops but cost
    can fluctuate with fuel prices has environmental
  • Rail
  • Useful for heavy products when sender receiver
    are located close to stations
  • Air
  • May be relatively inexpensive for light weight
    itemsstill involves truck for door to door
  • Water
  • Often used for bulk still involves trucks

Accelerate the distribution process
  • Streamline the channels
  • Bypass regional warehouse and ship direct to
  • Integrate production and distribution
  • Provides for quick response to market changes
    through closed interaction between production and
  • Vertical channel integration
  • 2 or more levels of distribution are managed by a
    single firm such as when a manufacturer also does
    retailing (or a retailer begins manufacturing)
  • Cost/benefit analysis should guide decisions

V. Marketing
  • Promoting Products
  • Promotion Mix
  • Advertising
  • Personal Selling
  • Sales Promotion
  • Public Relations
  • Evaluation Promotional Efforts

Promotional Strategy Elements of the promotional
  • Impersonal, 1-way
  • Multi-media options
  • Builds awareness
  • Locates customers
  • Free samples
  • Contests
  • Trade shows
  • Coupons, bonuses
  • Short-term tool

Sales Promotion
Appro aches
  • Face-to-face
  • Provides feedback
  • Employs telephone sales
  • (telemarketing)
  • For industrial goods
  • Builds image
  • Evaluates attitudes
  • Identifies public interest
  • Executes program to
  • generate publicity/news

Public Relations
Personal Selling
Subsets of advertising
  • Pioneering
  • Intended to create demand
  • Heavy during introductory stage of product life
  • Offers in-depth information on benefits
  • Competitive
  • Intended to influence demand for brand
  • Used as product enters growth phase
  • Less informative, more emotional appeal
  • Price may be key promotional weapon
  • Comparative
  • Compares attributes of two or more specific
  • Makes claims of superiority over competing brand

International Product/Promotion Strategy
  • International communication adaptation involves
  • adapting to local markets on four levels
  • One message used everywhere with minor variation
    in language, name, and colors
  • One theme used everywhere with copy adapted to
    local market
  • A global pool of ads is developed for use as
  • Media sales promotions techniques are fully
    adapted to different markets

Evaluating the effects of promotion
  • Compare sales to pre-established goal
  • Track sales activity by promotional method
  • Provide a way for customers to let you know how
    they learned about your product or service
  • Use coupons coded by promotional activity
  • Include questionnaires with product offer
    complementary service or discount for completion
  • Provide incentive for referrals
  • Change methods as appropriate

VI. Financial Management
  • Accounting Financial Analysis
  • How Firms Use Accounting
  • Interpreting Financial Statements
  • Responsible Reporting
  • Ratio Analysis

Overview The financial structure of an

Board of Directors
VP Sales
VP Mfg
VP Finance
Tax Dept
Cost Acctg
Inventory Mgr
Credit Mgr
Financial Acctg
Dir Capital Budgeting
How firms use accounting
  • Reporting to shareholders
  • Reporting to creditors
  • Certifying accuracy
  • Decision support
  • Control through auditing
  • Accounting
  • Summary analysis of a firms financial
  • Bookkeeping
  • Recording of a firms financial transactions
  • Financial accounting
  • Accounting performed for reporting purposes

Interpreting financial statements
  • Income statement
  • Reports costs, revenue, earnings over a
    specified period
  • Balance sheet
  • Reports book value of assets, liabilities,
    owners equity at a given point in time
  • Ratios help evaluate 4 aspects of financial
  • Liquidity ability to meet short-term
  • Efficiency how a firm utilizes its assets
  • Financial leverage firms relative use of debt
  • Profitability net income relative to various
    size levels

Ratio analysis
  • Definition
  • An evaluation of relationships between financial
    statement variables
  • Comparison with industry averages
  • Can be difficult as firms operate in more than
    one industry distortion can occur
  • Accounting practices vary among firms
  • Firms with seasonal swings show deviations (less
    if annual figures are used)
  • Sources for industry data
  • Robert Morris Associates Annual Statement
  • Dun Bradstreet

Ratio analysis, continued
Liquidity Current Ratio Current Assets Current
Liquidity Quick Ratio CashMktbl SecAccts
Recv Current Liabilities
Efficiency Inventory Turnover Cost of Goods
Sold Inventory
Efficiency Assets Turnover Cost of Goods Sold
Leverage Debt-to-Equity Long-Term Debt Owners
Leverage Times Interest Earned Earnings before
Intr Taxes Annual Interest Expense
VI. Financial Management
  • Financing
  • Methods of Debt Financing
  • Methods of Equity Financing
  • Issuing Securities
  • Other Funding Methods
  • Deciding the Capital Structure

Overview The financial decision-making process

Sources of money Debt
  • Commercial loan from a bank
  • Loan from friends and family
  • Issuance and sale of bond
  • Advantages
  • Provides opportunity to develop credit history
  • Ownership is not diluted
  • Disadvantages
  • Collateral and/or co-signers may be required
  • Cost of capital may be high
  • Restrictions may apply

Sources of money Equity
  • Personal funds and sweat equity in the form of
    time and labor
  • Utilization of owner equipment and other
  • Non-loan infusions from friends and relatives
  • Employee investors
  • Customer membership fees and prepayments
  • Venture capitalists and other impersonal
  • Joint venture partnerships

Sources of money Equity
  • Advantages
  • Equity is risk capital that carries no
    guarantee or protection regarding the original
  • Usually has no requirement regarding payback or
    interest payments
  • Disadvantages
  • Represents dilution of ownership that affects
    entrepreneurs claim to profits and control

Sources of money Trade Credit
  • Advantages of using suppliers as a credit source
  • Often easily obtained
  • Amount of credit usually expands and contracts
    with the needs of the firm
  • Often take the form of credit terms and cash
  • Typically does not involve a formal agreement or
  • Fosters supplier commitment in the success of the

Sources of money Barter Arrangements
  • Definition and considerations
  • Trade of goods and/or services
  • Often linked by exchange or service organizations
    that may charge a fee plus take a percentage of
    the cash value
  • Transactions are often taxable at cash value

VI. Financial Management
  • Expanding the Business
  • Investment Decisions
  • Capital Budgeting Tasks
  • Mergers Buyouts
  • Global Investing

Basics of capital budgeting sales and cost
  • Construction of pro forma statements
  • Latest financial statements
  • Sales forecast
  • Cost accounting forecast
  • Financial market data
  • Preliminary projections
  • Modifications revisions
  • Evaluation are more revisions needed?
  • Capital rationing identification of projects to

Time Value of Money Money has different value
today than in the future
  • Reasons
  • Inflation/deflation
  • Opportunity costs the foregone investment
  • Risk factors
  • Less flexibility re time preference for
  • Financial management remedy
  • Cash flow is discounted to reflect the
    reduction of value

Investment appraisal using discounted cash flows
  • Firms rarely have the resources to accept all
    good capital projects investment opportunities
  • Rationing capital for investment in a project or
    business requires careful analysis
  • Two of the most common methods for ranking
    investments in projects are 1) net present value
    2) internal rate of return calculations
  • Both methods take into consideration the time
    value of money

Investment appraisal using discounted cash flows,
  • Net present value
  • Weighs the investment in absolute dollars against
    its return in discounted cash
  • Formula is discounted incoming cash flows minus
    outgoing initial cash flows
  • Requires assumption about the prevailing cost of
    money, also called a hurdle rate
  • Discount rate varies for each period
  • Typically uses calculator function or table
  • Investment or project with highest NPV is deemed
    most desirable

Investment appraisal using discounted cash flows,
  • Internal rate of return
  • Weighs the investment relative to the cost of
    money (interest rate)
  • Solves an equation
  • Determines rate of interest that would cause the
    discounted (incoming) cash flows to be equal to
    the investment (i.e., zero difference)
  • Typically uses calculator function or table
  • The investment option or project with the highest
    IRR is deemed most desirable

Investment appraisal using discounted cash flows,
  • Internal rate of return calculation drawbacks
  • Assumes cash flows can be reinvested at an IRR
    which may not be a reasonable assumption
  • There may be multiple IRRs, requiring additional
    calculation using NPV before decision can be made
  • Can lead to mistaken accept/reject decisions when
    evaluating mutually exclusive projects when there
    are differences in scale, size, or differences in
    the time patterns of cash flow

Investment appraisal using discounted cash flows
  • The main difference between NPV and IRR
    calculations is the interest rate used and the
    form of the answer (dollars versus rate)
  • Whichever method is used, the goal should be to
    maximize NPV for the overall budget that is
  • Firms using IRR therefore frequently also
    calculate NPV

Lease/buy/rent decision criteria
  • Cash flow to lease or rent requires smaller
    payments over time versus immediate cash outlay
    for purchase
  • Commitment becoming locked in through
  • Cost overall cost for each method, including
    interest, down payments, transfer costs, etc.
  • Tax consequences purchases and leases are
    eligible for depreciation offsets to income cash
    outlays for rentals are usually deductible
  • Obsolescence risk related to commitment leases
    and rental agreements usually allow for upgrade

Lease/buy/rent decision criteria, continued
  • While some decisions may be based on NPV
    comparisons between the cost of debt to purchase
    and the cost of leasing, a decision matrix
    ensures consideration of all relevant variables
  • Matrix scores are dependent on specific tax
    consequences and other situational conditions
  • Important functional area perspectives include
    accounting and marketing

A hypothetical lease/buy/rent decision matrix
showing positive and negative aspects, depending
on the specifics of the item
Expanding a business through mergers
  • Reasons to merge
  • To achieve immediate growth
  • To create economies through volume
  • To combine resources and expertise
  • To reduce taxable income through loss

Short-term investment decisions
  • Liquidity management
  • Management of short-term assets and liabilities
    to assure adequate liquidity
  • Accounts receivable management
  • Sets the limit on credit available to customers
    length of period for repayment
  • Inventory management
  • Determines amount of inventory held
  • Cash short-term securities
  • Typically generate lower returns

Financing small firms and startups
  • Business start-ups fail largely due to inadequate
  • Owner usually is required to commit savings,
    mortgage assets, and borrow from friends and
  • Government agencies often have targeted loan
    programs that provide funds and technical support

VII. Special Topics
  • Using Information Technology
  • Computers Managing Information Technology
  • The Internet
  • Emerging Technologies and Implications

Managing information technology
  • Most common uses of computers
  • Computational models
  • Data processing systems
  • Interorganizational systems
  • Interorganizational systems (IOS)
  • Using computers technology to move information
    across the firm
  • Enterprise resource planning systems (ERP)
  • Software programs that automate all procedures
    support flow of information

Managing information technology, continued
  • Some key information systems challenges
  • Managing the architecture
  • Acquiring software
  • Managing development
  • Managing implementation
  • Managing the security
  • Two key developments
  • Evolution of the worldwide network
  • Emergence of truly intelligent systems

VII. Special Topics
  • Managing Risk
  • Identifying Exposure
  • Hedging Economic Risk
  • Firm-Specific Risk
  • Losses, Liabilities Lawsuits
  • Remedies for Business Failures

Managing risk
Business risk the possibility a firms
performance will be lower than expected due to
exposure to specific conditions
  • Types of economic exposure
  • Industry conditions
  • Economic growth interest rates
  • Demand for firms product
  • Expenses incurred through production
  • Global economic growth exchange rates
  • Hedging economic risk
  • Derivative instruments whose values are derived
    from values of other securities, indices, or
    interest rates
  • Interest rate swap from fixed rate to adjustable

Managing risk, continued
  • Firm-specific characteristics
  • Limited funding
  • Reliance on one product or service
  • Reliance on one customer or supplier
  • Reliance on a key employee
  • Ways to reduce exposure
  • Diversification of products, suppliers,
    customers, funders
  • Provide safe products working conditions

Managing risk, continued
  • Losses, liabilities, lawsuits
  • Property losses related to damage
  • Liability losses related to damage caused by the
    firms actions to others or their property
  • Lawsuits related to product defects employee
  • Ways to protect against risk
  • Eliminate the business operations causing the
  • Shift the risk through purchase of insurance
  • Assume the risk by creating self-insurance (a

Managing risk, continued
  • Remedies for business failures
  • Extension, providing additional time to generate
    the necessary cash to cover payments
  • Composition, specifying a firm will provide
    creditors with a portion of what they are owed
  • Private liquidation, whereby assets are
    liquidated funds distributed to creditors
  • Reorganization liquidation under bankruptcy,
    whereby the court system directs sale and payment

but, of course, you will never experience this!
VII. Special Topics
  • Synthesis of Business Functions
  • Valuation of a Business
  • How Decisions Affect Value
  • Relationships Among Strategies

  • A firms value is equal to the present value of
    its expected future cash flows
  • Cash flows in any period are the difference
    between inflows (revenue) outflow (expenses)
  • Decisions affecting value
  • Management, marketing, financial decisions that
    increase cash flows enhance value
  • Management decisions related to resource
    consumption affect cash outflows (expenses)
  • Marketing decisions focus on increasing revenue
  • Finance decisions affect interest expenses

Relationship among strategies
  • Management, marketing, finance decisions lead
    to strategies
  • Decisions in one area are made only after
    considering information from one or more of the

Management decisions
Marketing decisions
Finance decisions
Some parting words
Now that you have had your Introduction to
Business it is on to the development of your
most excellent business plan. Good luck!
Introduction to Business Reference Sources
  • Introduction to Business, Jeff Madura, Mason, OH
    South-Western/Thompson Learning, 2004
  • Marketing Management The millennium edition,
    Philip Kotler, Upper Saddle River, NJ Prentice
    Hall, 2000
  • R. Scott Marshall, professor of business,
    Portland State University, Portland, Oregon, 2002
  • Michael Sisavic, professor of business, Portland
    State University, Portland, Oregon, 2002

Introduction to Business Reference Sources
  • Financial, Budgeting Cost Control (1996). Les
    Anderson, PhD., Portland, OR Portland State
  • Financial Management Theory and Practice (1999).
    Eugene F. Brigham, Louis C. Gapenski and Michael
    C. Ehrhardt, Stamford, CT The Dryden Press
  • Lecture notes from BA 561 Financial Management
    (2001). Janet Hamilton, PhD., Portland, OR PSU
  • The Essentials of Financial Management (1998).
    Omer L. Carey, PhD and Musa M.H. Essayyad, PhD.,
    Piscataway, NJ Research and Education Association
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