Comm 103Chapters 1 + 2 Study Notes!

Chapter 1: Understanding the Canadian Business SystemThe Concept of Business and Profit Economic Systems Around the WorldBusiness: An organization that seeks to earn profit by providing goods and services.Profit: What remains (if anything) after a business’s expenses are subtracted from sales revenue.Economic System: The way in which a nation allocates its resources among citizens.

Factors of ProductionFactors of Production: The resources used to produce goods and services: labour, capital, entrepreneurs, and natural resources. Labour: The mental and physical training and talents of people, sometimes called human resources.Capital: The funds needed to operate and enterprise.Entrepreneur: An individual who organizes and manages labour, capital, and natural resources yo produce goods and services to earn a profit, but who also runs the risk of failure.Natural Resources: Items used in the production of goods and services in their natural state, including land, water, mineral deposits, and trees. Information Resources: Information such as market forecasts, economic data, and specialized knowledge of employees that is useful to a business and that helps it achieve its goals.

Types of Economic SystemsCommand Economy: An economic system in which government controls all or most factors of production and makes all or most production decisions. Communism: A type of command economy in which the government owns and operate all industries.Socialism: A kind of command economy in which the government owns and operates the main industries, while individuals own and operate the less crucial industries.Market Economy: An economic system in which individuals control all or most factors of production and make all or most production decisions

Economic basis is supply & demand Political basis is capitalism Ownership of the factors of production is open to all Buyers and sellers have freedom of choice The market is the mechanism for the exchange of goods and services

Market: A mechanism for exchange between the buyers and sellers of a particular good or service.Capitalism: An economic system in which markets decide what, when, and for whom to produce.*No country has a pure communist, socialist, or capitalist system.Mixed Market Economy: An economic system with elements of both a command economy and a market economy; in practice, typical of most nations’ economies. (A combination of both freedom and government intervention). Eastern Europe moved to a mixed economy through:

Privitization: The transfer of activities from the government to the public sector.Deregulation: A reduction in the number of laws affecting business activity.

Global Market Systems:

Circular Flow in Market Economy

Input Market: Frims buy resources that they need (from households?) in the production of goods and services.Output Market: Fiirms supply goods and services in response to demand on the part of consumers.

Interactions Between Business and GovernmentHow Government Influences Business (Economic Administration and Regulations)The many roles of governments include Customer, Regulator, Competitor, Taxation Agent, Provider of Incentive, and Provider of Essential Services.

Revenue Taxes: Taxes whose main purpose is to fund government services and programs.

Progressive Revenue Taxes: Taxes levied at a higher rate on higher-income taxpayers and at a lower rate on lower income taxpayers.Regressive Revenue Taxes: Taxes that cause poorer people to pay a higher percentage of income than richer people pay. Restrictive Taxes: Taxes levied to control certain activities that legislators believe should be controlled.

How Business Influences GovernmentLobbyist: A person hired by a government or industry to represent its interests to government officials.Trade Association: An organization dedicated to promoting the interests of a particular industry.

The Canadian Market EconomyDemand and Supply in a Market EconomyDemand: The willingness and ability of buyers to purchase a product or service.Supply: The willingness and ability of a producer to offer a good or service for sale.Law of Demand: The principal that buyers will purchase (demand) more of a product as price drops.Law of Supply: The principal that producers will offer (supply) more of a product as price rises.Demand and Supply Schedule: Assessmen of the relationship between different levels of demand and supply at different price levels.Demand Curve: Graph showing how many units of a product will be demanded (bought) at different prices. Supply Curve: Grph showing how many units of a product will be supplied (offered for sale) at different prices.Market Price (or Equilibrium Price): Profit-maximizing price at which the quantity of goods demanded and the quantity of goods supplied re equal.Surplus: Situation in which quantity supplied exceeds quantity demanded.Shortage: Situation in which quantity demanded exceeds quantity supplied.

Private Enterprise and Competition in a Market Economy:Competition: The vying among businesses in a particular market or industry to best atisfy consumer demands and earn profit.Private Enterprise: An economic system characterized by private property rights, freedom of choice, profits, and competition.Perfect Competition: A market or industry characterized by a very large number of small firms producing an identical product so that none of the firms has any ability to influence price.Monopolistic Competition: A market or industry characterized by a large number of firms supplying products that are similar but distinctive enough from one another (differentiated) to give firms some ability to influence price.Oligopoly: A market or industry characterized by a small number of very large firms that have the power to influence the price of their product and/or resources.Monopoly: A market or industry with only one producer, who can set the price of its product and/or resources.Natural Monopoly: A market or industry in which having only one producer is most efficient because it can meet all the consumers’ demand for the product.

A Brief History of Business in CanadaThe Early YearsEuropean mercantilism made Canadian manufacturer slow to develop.

The Factory System and the Industrial Revolution (1750 - mid/late 1800s)Industrial Revolution: A major change in goods production that began in England in the mid-eighteenth century and was characterized by a shift to the factory system, mass production, and specialization of labour.Factory System: A process in which all the machinery, materials, and workers required to produce a good in large quantities are brought together in one place.Mass Production: The manufacture of products of uniform quality in large quantities.Specialization: The breaking down of complex operations into simple tasks that are easily learned and performed.-Advent of steam power in the early 1800s and railroad building boom in mid-late 1800s.

The Entrepreneurial Era (late 1800s)Adam Smiths book “The Wealth of Nations”Risk EntrepreneurshipIncome disparity growth (many individuals became very wealthy).

The Production EraProduction Era: The period during the early twentieth century when businesses focused almost exclusively on improving production and manufacturing methods.

The Sales and Marketing EraSales Era: The period during the 1930’s and 1940s when businesses focussed on sales forces, advertising, and keeping products readily available.Marketing Era: The period during the 1950’s and 1960s when businesses began to identify and meet consumer wants to make a profit.

The Finance EraFinance Era: The period during the 1980s when there were many mergers and much buying and selling of business enterprise.

The Global EraTechnological advances in production, computer technology, information systems, and communication capabilities. The emergence of a truly global economy! GLOBALIZATION!

Foreign imports have hurt some Canadian industries while others have profited from opportunities in foreign markets.

The Internet EraInternet use went from 10% in 1995 to 75% in 2005.

1. The internet will give a dramatic boost in trade.2. Will level the playing field between large and small firms.3. Is a effective and efficient networking mechanism between businesses.

Chapter 2: Understanding the Environments of BusinessOrganizational Boundaries and EnvironmentsOrganizational BoundariesExternal environment: Everything outside an organizations boundaries that may affect it.Organizational boundaries: That which separates the organization from its environment. Multiple Organizational EnvironmentsEconomic environment: Conditions of the economic system in which an organization operates.

The Economic Environment Economic GrowthBusiness Cycle: Pattern of short-term ups and downs (expansion and contractions) in an economy. Recession: Period during which aggregate output, as measured by real GDP, declines.Depression: Particularly severe and long-lasting recession. Aggregate Output: Total quantity of goods and services produced by an economic system during a given period.Standard of living: Total quantity and quality of goods and services that a country’s citizens can purchase with the currency in their economic system.

Economic Trends:

Measuring Economic GrowthGross domestic product (GDP): Total value of all goods and services produced within a given period by a national economy through domestic factors of production. Gross national product (GNP): Total value of all goods and services produced by a national economy within a given period regardless of where factors of production are located. Nominal GDP: GDP measured in current dollars or with all components valued at current prices.Real GDP: GDP calculated to account for changes in currency values and price changes.Purchasing power parity: Principal that exchange rates are set so that the prices of similar products in different countries are about the same.Productivity: Measure of economic growth that compares how much a system produces with the resources needed to produce it.

- Increase in productivity = increase in standard of living- Growth reflected in real GDP growth

Balance of trade: The total of a country’s exports (sales to other countries) minus its imports (purchases from other countries).

- Positive balance = more exports = economic growthNational debt: The total amount of money that the government owes its creditors. Budget deficit: The result of the government spending more in one year then it takes in during that year.

- Increases by amount of budget deficit- Can decrease when there is a budget surplus- Lower debt = more $ for private investment

Economic Stability:Stability: Condition in an economic system in which the amount of money available and the quantity of goods and service produced are growing at about the same rate. Consumer Price Index (CPI): Measures the changes in price of typical products purchased by consumers. Threats to economic stability:Inflation: Occurrence of widespread price increases throughout an economic system.Deflation: A period of generally falling prices.Unemployment: Level of joblessness among people actively seeking work in an economic system. Types of unemployment include:

- Frictional- Seasonal- Cyclical- Structural

Managing the Canadian EconomyFiscal policies: Policies by means of which governments collect and spend revenues. Monetary policies: Policies by means of which government controls the size of a nation’s money supply. *Determines the size of a nations monetary supply!

- High interests rates = tight monetary policy- Low interests rates = easy monetary policy

Stabilizing policy: Government policy, embracing both fiscal and monetary policy, whose goal is to smooth out fluctuations in output and unemployment and to stabilize prices.

The Technology EnvironmentTechnology: All the ways firms create value for their constituents.

Research and Development (R&D)Research and Development: Those activities that are necessary to provide new products, services, and processes. Basic (or pure) R&D: Improving knowledge in an area without a primary focus on whether any discoveries that might occur are immediately marketable.Applied R&D: Focussing specifically on how a technological innovation can be put to use in the making of a product or service that can be sold in the marketplace.

Product and Service TechnologiesR&D intensity: R&D spending as a percentage of a company’s sales revenue.Technology transfer: The process of getting a new technology out of the lab and into the marketplace.

Process TechnologiesEnterprise resource planning (ERP): Large-scal information system for organizing and managing a firm’s processes across product lines, departments, and geographic locations.

The Political-Legal Environment Reflects the relationship between business & government, e.g. regulations

Pro- or anti-business sentiment Canadian government has put a halt to bank mergers

Political stability International relations

The Socio-Cultural Environment Customs, values, attitudes & demographic characteristics of the society in which

an organization functions Customer preferences and tastes

vary across & within national boundaries

vary within the same country change over time affects job significance

Ethical Compliance and Responsible Behaviour

The Business EnvironmentThe Industry Environment

Porter’s “five forces” model can be used to analyze the competitive situation in an industry.

Rivalry Among Existing Competitors Threat of Potential Entrants Suppliers Buyers Substitutes

Emerging Challenges and Opportunities in the Business EnvironmentCore competencies: Skills and resources with which an organization competes best and creates the most value for owners. *The most successful firms are getting leaner by focussing on their core competencies.

Outsourcing: Strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or services. Viral marketing: Strategy of using the internet and word-of-mouth marketing to spread product information.Process: Any activity that adds value to some input, transforming it into an doutput for a customer (whether external or internal).Business process management: An approach by which firms move away from department-oriented organization and toward process-oriented team structures that cut across old departmental boundaries.

Redrawing Corporate BoundariesAcquisitions and MergersAcquisition: One firm buys another firm and absorbs it into its operations.Merger: The union of two companies to form a single new business.Horizontal merger: A merger of two firms that have previously been direct competitors in the same industry.Vertical merger: A merger of two firms that have previously had a buyer-seller relationship.Conglomerate merger: A merger of two firms in completely different industries.Friendly takeover: An acquisition in which the management of the acquired company welcomes the firm’s buyout by another company.Hostile takeover: An acquisition in which the management of the acquired company fights the firms buyout by another company.Poison pill: A defence that management adopts to make a firm less attractive to an actual or potential hostile suitor in a takeover attempt.

Divestures and SpinoffsDivesture: Occurs when a company sells part of its existing business operations to another company. Spinoff: Strategy of setting up one or more corporate units as new, independent corporations.

Employee-Owned CorporationsEmployee Stock Ownership Plan (ESOP): An arrangement whereby a corporation buys its own stock with loaned funds and holds it in trust for its employees. Employees “earn” the stock based on some condition such s seniority. Employees control the stock’s voting rights immediately, even though they may not take physical possession of the stock until specific conditions are met.

Strategic Alliances Strategic alliance: An enterprise in which two or more persons or companies temporarily join forces to undertake a particular project.

Subsidiary and Parent CorporationsSubsidiary corporation: One that is owned by another corporation.Parent corporation: A corporation that owns a subsidiary.