Final Exam Notes PDF

FINAL EXAM NOTES Textbook Chapters 3, 4, 5, 8, 10, 15, 17 Chapter 3: Competing in global markets The dynamic global market: - Over 90% of companies today think that it is important for their employees to have experience from working in other count...

FINAL EXAM NOTES Textbook Chapters 3, 4, 5, 8, 10, 15, 17 Chapter 3: Competing in global markets The dynamic global market: - Over 90% of companies today think that it is important for their employees to have experience from working in other countries - There are over 7 billion potential customers from other countries - Companies are always looking for ways to grow - so why not global? - The canadian global auto industry has taken a large hit as a result of global trends Exporting → selling products to another country Importing → buying products from another country Why trade with other nations? No country is fully self sufficient and often lacks in one area or another. Due to this, they must trade in order to make up for their deficiencies. Fact: Venezuela and the Democratic Republic of Congo are natural resource rich and technology deficient, while Japan and Switzerland are technology rich and natural resource deficient. Free trade is the exchange of goods between countries without barriers - it is often debated. Here are some pros and cons of free trade: Pros Cons - Global market contains 8 billion potential - Domestic workers can lose their jobs due to customers for goods and services increased imports or production shifts - Productivity is improved when countries focus - Forces pay cuts due to threats of relocated labour on what they are good at - Moving business overseas due to loss of jobs - Global competition & less costly imports keep - Domestic companies losing comparative prices and inflation down leading to economic advantage growth - Inspires innovation and keeps competition up - Access to foreign investments - keeps interest rates low The theories of comparative and absolute advantage Comparative advantage theory → should sell its products that are produced more effectively and efficiently, and buy products from other companies the products it can’t produce effectively and efficiently Suggested in early 19th century Theorist: David Ricardo Supported free economic exchange In practice, it doesn't work as well because countries produce things anyway and then block entry from countries that produce it more efficiently Absolute advantage → a country has a monopoly on producing a product or is able to produce it more efficiently than other countries Doesn't last forever if it is natural resources Global competition makes it fade Very few instances in global markets Getting involved in global trade - There is a lot of potential in smaller businesses since they contribute 50-55% of canada's total GDP and and account for 35% of net employment growth between 2014-19 in the private sector - Small businesses account for 94% of canadian exporters - Getting started globally is a mix of observation, determination, and risk - Global trade is effective for any business or any size Importing goods and services The Canada Border services deal with all imports (articles) into the country, which have to align with certain conditions put in place by the federal and provincial government. The following are possible conditions: Is it prohibited to enter canada? Does it have to have a permit to import? Is it subject to other federal imposed conditions? (ie. labelling laws, emission control standards, health and sanitary checks) Subject to privately certified standards? Is there a provincial rule to comply with? Exporting goods and services You can sell almost any product or service in Canada in other countries. Services can always be exported to other countries as well (ie. hospitality businesses). Trading with other countries enhances the quality of life and contributes to economic well-being. Fact: Exports alone account for 1/5 Canadian jobs Goods and services can either be exported directly by Canadian companies, or be sold by a foreign-located subsidiary. Adapting products for foreign markets can be profitable but also very difficult. Fact: Canada imported $146 billion in services and $607 billion in goods in 2018. During the same year, they exported $121 in services and $585 in goods. Measuring global trade There are 2 key indicators to the effectiveness of global trade - balance of trade, and balance of payments. Balance of trade → nations ratio of exports to imports A Trade surplus is a favourable trade where the value of exports exceeds the value of imports A trade deficit is where the value of the imports is higher than the value of exports Balance of payments → different between money coming in, and money leaving plus flows of money from places The goal is to have as much money flowing in as possible Wanting to have a favourable flow of money is wanting more flowing in than flowing out Trading in global markets - Canada has abundant natural resources which is a major area for exports, but many developing countries give competition in this area  - It is projected that canada economy will increase Canada economic prosperity Canada’s priority markets - There are emerging economies due to technological advancements, tapping into these markets is crucial - The federal government developed its Global Markets Action Plan, which includes emerging markets with broad canadian interests, emerging markets with specific opportunities, and established markets with broad canadian interest - The emerging market types include 21 countries - China and india are growing fast due to size and economic transformation, which makes them an area of interest Strategies for reaching global markets - The key strategies for competing in global markets include licencing, exploring franchising, contract manufacturing, creating joint ventures and alliances internationally, and foreign direct investment - Each strategy has commitments and risks - They are ranked on a scale of least to most amount of commitment, control, risk, and profit potential Licencing (least) A companymay licence the right to manufacture its product or use a trademark internationally with another company. This is called a licence, and the fees attributed to it is called a royalty. They typically send a representative from the company to help set up operations in the other country. Licensor may also aid in distribution, promotion, and consulting. Some benefits include gaining revenues, sale of supplies and materials to the licensee, and the final advantage is that the licensor spends little to no money to produce or market the products. Exporting Many companies start exporting goods to other countries due to unsolicited orders received. However, regardless of how they first start exporting, they must develop goals and strategies. Canadian firms are hesitant to export through specialists (export trading companies) that assist in negotiating and establishing relationships. They match up buyers and sellers from different countries. Franchising Contractual agreement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or service in a given territory in a specified manner. Franchisors must be careful to adapt their product to the country they wish to sell to. Contract manufacturing A foreign company's production of private label goods, to which a domestic company then attached its brand name or trademark (outsourcing). Example - a manufacturer makes a certain part and sells it to 5 companies who all put their own label on it. Enables a company to experiment in a new market without having heavy start up costs. International joint ventures and strategic alliances Joint venture → two or more companies join to undertake a major project. Often mandated by the government but are developed for many different reasons. Some benefits include sharing technology and risk, sharing marketing and management expertise, and entry into markets where foreign companies are often not allowed unless goods are produced locally. Some cons may be that one company takes advantage of the new knowledge of shared aspects. Strategic alliance → long term partnership (2 or more companies), to help each company build competitive advantages. They do not share costs, risks, management, or even profits. They provide access to markets, capital, and technical expertise. Foreign direct investment (most) Buying a permanent property and business in foreign nations Typically to establish a foreign subsidiary which is a company owned in a foreign company by another company (parent company). Terms: home country, cost country, parent company The company maintains control over any technology or expertise it possesses. A con may be that profits are returned to the host country and not Canada, also that non-canadian companies gain more control of the economic activity in Canada. Forces affecting trading in Global Markets Sociocultural Economic and financial Legal Physical and environmental Sociocultural forces Set of values, beliefs, rules, institutions held by a group of people. Can also include social structure, religion, manners, customs, values, attitudes, language, communication. Ethnocentricity → a belief that your culture is superior to all others Different nations have different ways of doing business. - North america: like to do things quickly - japan/china and other countries may find this rude - japan : usually say maybe when they mean no - Islam: prohibits eating pork - Hindus: do not consume beef - Latin america: believe managers make decisions and are responsible for well-being of employees Economic and financial forces Different countries may have different per-capita incomes - the more economically strapped the country is, the lower the per-capita will be. Different countries may also sell in smaller quantities due to economic depressions (ex. Buying a single stick of gum). Consumption may be smaller due to smaller per-capita incomes. Differences in currencies and their values have to also be taken into consideration. Exchange rate → value of one nation's currency compared to another Change in exchange rate has important implications for global markets. Labour costs may change, and other business dealings may shift. Devaluation → lowering the exchange rate (to maybe increase export potential) Counter trading → complex bartering, where there is trading goods for goods and services for services Legal forces Federal and provincial laws heavily affect business practices. In a global market, the absence of a central system of law means many different systems of law may apply. Antitrust rules, labour regulations, patents, copyrights, trade practices, taxes, child labour, product liability, and other issues are governed differently everywhere. The organization for economic Co-operation and development (OECD) and Transparency International have led a global effort to fight corruption and bribery in foreign markets, with limited success. Physical and environmental forces Technological forces can also have an important impact. Technological constraints may make it difficult given the nature of exportable products. Computer and internet usage have improved in countries due to adaptation of cloud services - but still lags behind developed nations due to consumer inability to afford laptops. Trade protectionism: It is often a much greater barrier to trade than all of the forces mentioned previously. It is the use of government regulations to limit imports of goods and services. Some believe it allows domestic producers to survive, grow, and produce jobs. Others argue it impedes on global trade and adds millions of dollars to the price of products, costing consumers money. - Often used to guard against dumping (selling in a foreign country at a lower prices than things already sold there- usually used to avoid surplus products or gain foothold) - Come countries provide financial incentive to companies to sell products in their country at a lower price - Politics, government, and economy are all closely tied together - Tariffs → taxes on imports to make imported products more expensive to buy - Protective tariffs: import taxes used to raise the price of imported products so domestic ones would have a more competitive price - Revenue tariffs: designed to raise money for the government - Import quota → number of products in certain categories that a nation can import (clothing, agricultural products, steel, aluminium, softwood lumber) - The Canadian Export and Import Bureau sets various regulations regarding import controls and export controls in accordance with the Export and Import Permits Act (EIPA) - Embargo → complete ban on imports/exports of a certain product or the stopping of all trade with a particular country The GATT and the WTO General Agreement on Tariffs and Trade → a global forum formed in 1948 by 23 nations to reduce trade restrictions on goods, services, ideas, and cultural programs. After 8 years of meetings 124 nations voted to lower tariffs an average of 38% worldwide & expand new trade rules to areas such as agriculture, services, and protection of plants. World Trade Organization → used to mediate trade disputes among nations. Headquarters in Geneva, an independent entity of 164 members of nations, with a purpose to oversee trade issues and global business practices. The IMF and the World Bank International Monetary Fund → created in 1944 as an international bank supported by members (usually make short term loans to countries experiencing problems with their balance of trade). Its basic objectives are to promote exchange stability, maintain orderly exchange agreements, avoid competitive currency depreciation, establish a multicultural system for payments, eliminate exchange restrictions, and create standby reserves. It makes long term loans and low interest rates. World Bank → a UN agency concerned with developing infrastructure in less developed countries. Borrows from prosperous countries and lends at favourable rates to less-developed ones. To qualify, many microeconomic policies have to be implemented. Producers’ Cartels Organisation of commodity producing countries formed to stabilise or increase prices in order to optimize profits over the long term. (ex. Organization of the Petroleum Exporting Countries). Common markets Common market (trading bloc) → regional group of countries that have a common external tariff, no internal tariff, and the coordination of laws to facilitate exchange amongst each other. The United States-Mexico-Canada agreement (formerly NAFTA) ○ Facilitated trade among the 3 countries ○ FTA amongst the countries ○ Objectives to eliminate trade barriers and facilitate trade, promote conditions, increase investment opportunities, provide effective protection & enforcement of intellectual property rights, establish a framework for further regional trade co-operation, and improve working conditions ○ Maintaining independent trade agreements with other countries ○ Some believed it contributed to the employment loss ○ In 2018 the name changed and so did the agreement ○ The USMCA maintains the dispute resolution system and protection of cultural industries while providing canadian consumers with more choice through easier access to goods and services from the US & lower duties ○ USMCA still allows protective tariffs The European Union ○ Began in the late 1950’s as an alliance of 6 trade partners, and is now a group of 27 nations with a combined population of over 477 million and a GDP of $18.4 trillion. ○ The economies of five members account for the majority of the GDP (Germany, France, Italy, Spain, Netherland) Other trade agreements ○ Canada is involved in 15 free trade agreements ○ Negotiations are ongoing Globalization and Your Future ** come back to this Chapter 4: Role of Government in Business Government Affects in business (7) - There are seven categories for how the government may affect businesses - The seven categories are: Crown corporations, laws and regulations, Bank of Canada, Taxation, Government expenditures, purchasing policies, and services - Governments are trying to respond to businesses needs - The degree to which the government intervenes varies from country to country due to varying economic states Government involvement in the economy - Canada is a mixed economy - When the government was founded, John A. Macdonald created tariffs to protect canadian businesses and build a railway connecting canada and facilitating business (national policy was put in place) - Different levels of government are large employers 1. Crown corporations They are the most important aspect of the role of government These are corporations owned by the federal and provincial governments There are 47 There are several reasons they are around: ○ Providing services that aren't being provided from business s ○ Bailing out a major industry in trouble ○ Providing some special service that may otherwise not be available (ex. Bank of canada) Since the 1990’s the federal and provincial government have worked on reducing their roles in the economy Over the years many government owned operations have been sold - this is called privatization During the same time privatizations were happening, deregulation was also happening - a practice where industries began to be less regulated or completely deregulated (withdrawing laws and regulations that hinder competition) A large reason for privatization is to increase government revenue 2. Laws and regulations The power to make laws is based on the British North America Act (1867) that was passed by British parliament to create the Canadian confederation which sets the legal ground rules for canada. Laws are derived from 4 places ○ The Constitution ○ Precedents established by judges ○ Provincial and federal administrative agencies ○ Provincial and federal statutes How federal government is involved: There are several responsibilities that the federal government has that have an impact on business operations (ex. Trade regulations, incorporation of federal companies, taxation, monetary system, national defence, unemployment, etc) Some examples: ○ The Canadian Healthcare transfer (CHT) ○ Canada's long term sector - ie. The Ontario Long-Term Care Homes Act ○ Innovation, Science and Economic Development Canada (ISEDC) The Competition Bureau helps protect canadian customers Marketing boards control the supply or pricing of certain agricultural products How Provincial government is involved: There are several responsibilities of the provincial government (ex. Regulation of provincial state commerce, natural resources within boundaries, principal companies, licencing for revenue purposes, etc)  Some examples: ○ Public-private partnerships (P3’s or PPPs) ○ 62% of canadians were open to the private sector delivering services alongside the government ○ Canada has over 291 P3 projects (valued at $139.4 trillion) Interprovincial trade is difficult and barriers cost $130 billion a year (damaging the economy) The Canadian Free Trade Agreement (CFTA) was created with the purpose to reduce and eliminate barriers to the free movement of persons, goods, services, and investments within canada How municipal government is involved: Their authority is dictated by the province There are around 4000 municipal governments Municipalities provide: ○ Water supply ○ Sewage and garbage disposal ○ Roads ○ Sidewalks ○ Street lighting ○ Building codes ○ Parks & playgrounds All businesses must obtain a municipal licence in order to operate 3. The Bank of Canada It is a federal crown corporation and Canada's central bank providing services on behalf of the federal government (not to the public). Source of money for federal governments when it does not collect enough in taxes Used to promote economic and financial well-being of canada Responsible for bank notes, financial system, funds management, and retail debt Monetary policy → management of the money supply and interest rates Money supply → amount of money the BoC makes available for people to buy goods and services Bank notes issued at one time represent only a small portion of the economy The second part of monetary policy is interest rates (raising interest rates to control inflation) Controlling the money supply gives some control over the prices of goods and services The overnight rate → interest rate at which major financial institutions borrow and lend one-day funds among themselves Prime rate → interest rate that the banks charge their most creditworthy customers The transmission of monetary policy is the process where changes in the interest rate lead to inflation There are 4 types of economic activities affected by the changes of the interest rate: ○ Commercial interest rates ○ Asset prices ○ Exchange rates ○ Expectations All of which affect demand When interest rates go down, spending goes up which boosts the economy and increases demand Raising the interest rate slows down borrowing and puts a break on inflation leading to less borrowing and the paying back of existing loans 4. Taxation Taxes are how all levels of government distribute wealth. Revenue that is collected allows governments to discharge legal obligations (used to pay for public services, pay down debt, and fund government operations) Also used to encourage or discourage taxpayers (ex. Sin tax) The average canadian household spend more on taxes than basic necessities (food, shelter, clothing) The average family pays $39.299 of taxes based in an income of $88,856 Theoretically, low tax rates give the economy a boost which high tax rates slow the economy and discourage small businesses Deficit → occurs when government spending exceeds the amount of taxes gathered for a specific period (a fiscal year) National debt / Public debt → accumulation of federal government borrowing over time capturing total liabilities and what must be borrowed Surplus → reduction in the national debt due to an excess of revenues over expenditures Increased borrowing and spending stimulates economy The federal budget is a blueprint for how the government wants to set the country's annual economic agenda which reveals policies and priorities 5. Government expenditures The government provides money to the provinces and territories which help them pay for healthcare, secondary education, old-age pensions, and so on in order to increase purchasing power (creating a more viable market). Financial aid: All levels of government offer assistance to businesses that are designed to achieve certain purposes There are several reasons why the government may support certain businesses It is common to have pre and post subsidies for fossil fuels Major federal programs: Transfer payments are direct payments form a government to another government or individual (ex. Elderly benefits, employment insurance) Equalization is the federal government's transfer program for reducing fiscal disparities among provinces and territories 6. Purchasing policies In Canada, the largest buyer in the market is the government. Procurement policies are what guide how governments interact with the market keeping the best interest of Canada in mind. They use their purchasing power to favour Canadian businesses. Government procurement is a demanding bidding process that is strictly regulated ○ Can be difficult to understand ○ Difficult to properly target potential niches 7. Services The federal government has departments that provide services to businesses and consumers 1. Innovation, Science, and Economic Development Canada / Department of foreign affairs ○ The programs that the federal government has put in place to help small businesses are all part of a larger one called Canada Business Network ○ Innovation, Science, and Economic Development Canada (ISEDC) informs business people of the help available  ○ The national research council (NRC) began in 1916 to help canadian industry remain competitive and innovative 2. Trade and development / Global affairs Canada ○ The government has a large elaborate system for exporting and foreign investment activities ○ All major countries also provide support to their exporters Final thoughts about the role of Canadian government The government should develop a long-term, industrial policy of leadership to take an active role in shaping the economy. Industrial policy → government plan to guide and revitalize the economy The government always has a critical role to play and the federal government will continue to focus on international trade initiatives. Chapter 5: Ethics and social responsibility Ethics is more than legality Laws do not make people honest or reliable, so unethical things happen all of the time A problem with writing behaviours into law is that ethics becomes a legal issue rather than a moral one Ethics is a standard of moral behaviour that is accepted by society There are basic morals across many sources: integrity, respect for human life, self-control, honesty, courage, self sacrifice (right) whereas cheating, cowerice, cruelty are wrong (there is also the golden rule) A study showed a strong relationship between academic dishonesty and dishonesty in the workplace There are 3 questions you can ask yourself in an ethical dilemma: ○ Is it legal? ○ Is it balanced (fair)? ○ How will it make me feel about myself? Managing Business ethically and responsibly Ethics is caught more than taught - observation rather than words. It begins at the top and has to be an example for lower roles. Trust and cooperation must be based on fairness, honest, openness, moral integrity There are several reasons to manage a business ethically ○ Maintain a good reputation ○ Keep existing customers and attract new ones ○ Avoiding lawsuits ○ Reduce employee turnover ○ Avoid government interventions (laws and regulations) ○ Please customers, employees and society ○ Do the right thing Many people think ethics had everything to do with management Setting corporate ethical standards:  There are written codes of conduct (that are becoming more common) Compliance based ethics codes emphasize prevention of unlawful behaviour(increasing control, punishing those who break the rules) Integrity based ethics codes define the organization's values to create an ethically sound environment There is a 6 step process to help improve business ethics: An ethics code is worthless if it is not enforces An important factor in enforcement is an ethics officer who sets a positive tone, communicates effectively, and related to employees at every level (counsellors and investigators) An examples of an association that supports people in an ethics enforcer role is the Ethics Practitioners’ Association of Canada (EPAC) The Sarbanes-Oxley Act of 2002 (SOX) - Came about due to corporate and accounting scandals in the united states - It established stronger standards to prevent misconduct - Aimed to improve corporate governance practices - Applies to all publicly traded companies (shares listed on stock exchanges under jurisdiction of US securities and exchange commission) - Ensuring accuracy and reliability of published financial info - Protecting whistleblowers - Paying people back who were punished by employers for passing into about fraud to authorities Whistleblower legislation in canada - There is no legislation in place that protects all employees across canada from whistleblowing - For some public sector workers there is some protection that set up a third party officer to whom employees can raise concerns - The federal accountability act (FAA) applies to around 400,000 government employees and lists ways to make the federal government more accountable and to increase transparency in government operations - 43% of corporate frauds had been initially detected by an employee tip-off Corporate social responsibility It is the concern businesses have for the welfare for society - not just for its owners Goes beyond being ethical - Often judgement calls  It all depends on the side of the issue you are on and how you see things Ethical consumerism is the strategy where companies products that best appeal to people's best selves and therefore align shopping with ethics The challenge is to shift ethical consumerism from being niche to mainstream Social performance has several dimensions: 1. Corporate philanthropy 2. Corporate social initiatives 3. Corporate responsibility 4. Corporate policy Concepts of social corporate responsibility There are two views of corporate social responsibility to stakeholders: 1. The strategic approach Requires management's primary orientation to be toward the economic interest of shareholders. Shareholders are owners and should have the right to expect managers to work in their interest (optimizing profits). Adam smith (invisible hand) suggests maximum social gain is when managers shear to shareholders interests. Friedman argues companies can't have social responsibilities and should only focus on shareholders. 2. The pluralist approach Recognizing special responsibility of management to optimize profits but not at the expense of employees, suppliers. And members of the community. Managers don't have moral immunity. Managers must use ethics and morals in order to decide how to act. Here are some of the ways that a company may be responsible to various different parties: Responsibility to customers There are 4 basic rights that are given to a customer 1. Right to safety 2. Right to be informed 3. Right to choose 4. Right to be heard Companies must aim to give customers real value, which is difficult. The payoff for socially conscious behaviour can be new customers. A socially conscious company is likely to be viewed in better regard than one that is not. Companies may raise awareness about their efforts in order to make them known. A company cannot just brag, they have to follow through. Responsibility to investors Doing good is linked to doing well (financially). Ethical behaviour is good for shareholder wealth. Unethical behaviour does damage financially. Unethical behaviour may work in the short run but it wont in the long run. Investors want to invest in companies that think well ahead to create a better environment. Insider trading → use of private company information to further insiders’ own fortunes or those of family and friends. Responsibility to employees  One of the most powerful influences on financial performance is responsible HR management. Hard work and talent have to be rewarded. Mutual respect between employee and company makes a difference in the bottom line. Employees who are contented outgrow, outgrow, and outperform those who are not contented (“contented crowns give better milk” - Bill Catlette and Richard Hadden). Companies may give employees salaries and benefits that match their goals. When employees feel mistreated, they strike back. Responsibility to society One responsibility to society is to build new wealth (distributed to employees, suppliers, shareholders, and other stakeholders). They are partially responsible for promoting social justice. Some companies think charity is not enough - so they do more. Companies may try to reduce their carbon footprint or become more “green”. Responsibility to the environment Companies are criticised for their effects on the environment. There have been increasing efforts to reverse years of neglect on the environment (ex. Sydney Tar Ponds in Nova Scotia). The green movement provided consumers with choices - but these choices are hard to make due to complications in the buying process. Environmental efforts may increase costs but companies can also raise prices, have a higher market share, or both. There has been major job growth in the renewable energy sector (4x the rate of the average Canadian job growth in other sectors). Social auditing It is a way to measure whether companies are making social responsibility a key element of management's decision making. Social audit → systematic evaluation of an organization's process toward implementing programs that are socially responsible or responsive What should it measure? Workplace issues, environment, product safety, community relations, respecting the rights of local people. It implies commitment to a triple bottom line (TBL, 3BL, or People, Planet, Profit - framework for measuring against various parameters). There are 5 types of groups that serve as watchdogs: 1. Socially conscious investors 2. Socially conscious research organizations 3. Environmentalists 4. Union officials 5. Customers Sustainable development → implementing a process that integrates environmental, economic, and social considerations into decision making Interpersonal ethics and social responsibility Problems with social responsibility are global. Government leaders & businesses are held to high standards. Fair trade is a growing social movement to make sure developing countries are paid fairly. It's all about perspective. Chapter 8: Management and leadership Manager roles are evolving Managers must get things done through organizational resources, which is a general term including HR (employees), natural resources ( raw materials), and financial resources. This also includes the factors of production. Every business has scarce resources Managers tend to be more progressive than in the past with emphasis on team building Managers now tend to guide, train, support, motivate and coach Future managers must be more globally prepared Transparency about how managers do their jobs (corporate governance) and address social responsibility will become important Future managers have to be skilled communicators and team players The four functions of management Managers give direction to their organizations, provide leadership, and decide how to use resources to achieve goals. Management is the process used to accomplish organizational goals through planning, organizing, leading, and controlling people and other organizational resources. There are 4 things managers do: Planning Setting org goals Developing strategies Determining resources needed Setting precise standards Leading Guiding and motivating employees to work effectively to accomplish org goals and objectives Giving assignments Explaining routines Clarifying policies Providing feedback on performance Organizing Allocating resources, assigning tasks establishing procedures Preparing a structure (org chart)showing lines of authority and responsibility recruiting , selecting, training, and developing employees Placing employees where they will be most effective Controlling Measuring against corporate objectives Monitoring performance relative to standards Rewarding outstanding performance & Taking corrective action when necessary Planning and decision making Planning and decision making includes setting a vision, values, goals, and objectives. It is one of the most important elements of being a manager. Vision → a broad explanation of why an organization exists and where its trying to head Values → set of fundamental beliefs that guide a business to its decisions Vision forms values Values guide strategic planning A company must form a vision in order to manage it Mission statement → outline of organizations fundamental purposes, addressing the self-concept, philosophy and goals, survival needs, customer needs, social responsibility, and the nature of the product or service. Goals → broad long term accomplishments an organization wishes to attain Objectives → specific short term statements that detail how to achieve the organization's goals (must be measurable) Planning is a continuous process and constantly changing Planning addresses the thermostat analogy (where are we and where do we want to be? Where are we? The framing of the SWOT analysis gives a general view of the business situation. How do we get from here to there? It takes 4 forms, strategic (broad long term goals by top managers), tactical (specific short term goals by lower managers), operational (setting of work standards/schedules), and contingency (back up plans) planning Decision making → choosing between two or more alternatives There are 6 D’s of decision making ○ Define (the situation) ○ Describe (& collect needed info) ○ Develop (alternatives) ○ Decide (which is best) ○ Do (what is indicated - implementation) ○ Determine (whether the decision was a good one) It is not required to go through all 6 stages, sometimes things are one the spot Problem solving is solving everyday problems and is less formal Brainstorming generates as many solutions as possible in a short period of time with no censoring PMI is a strategy for sorting ideas into pluses minuses and interesting (developed by Edward de Bono) Organizing: creating a unified system This includes allocating resources, assigning tasks, establishing procedures. A framework is completed that is related to all workers called an organizational chart. Most organizations draw a diagram. Top management → highest level of management typically including CEO, CFO, COO, presidents, etc. Middle management → general managers, division managers, etc who are responsible for tactical planning Supervisory management → those who are directly responsible for managing workers and evaluating them Few people are trained to be good managers People are specialized and then become in charge with no managing skills then they develop them Managers must have 3 categories of skills ○ Technical skills - ability to perform tasks in a specific discipline ○ Human relations skills - communication and motivation ○ Conceptual skills - ability to picture the organization as a whole  The right kind of incentive is needed to get the right kind of people and staff Staffing → recruiting, hiring, motivating, and retaining the best people available Leading: providing continuous vision and values A person may be a good manager but not a leader. Leaders embrace and manage change while creating a vision for others to follow, establishing values and ethics, and improving effectiveness of a business. Leaders must: Communicate a vision and rally people behind it Establish corporate values Promote corporate ethics Embrace transformational change Stress accountability and responsibility There are various leadership styles as well: Autocratic → making decisions without consulting others Participative (democratic) → managers and employees working together to make decisions Free-rein → managers setting objectives and employees being free to do whatever they want to accomplish them Transformational leadership → Occurs when leaders influence others to follow them to work to achieve a goal Transactional leadership → associated with employees who are motivated by a system of reward (reinforcement) Empowerment → giving employees authority to make a decision without consulting the manger Enabling → giving workers education and tools to make decisions Knowledge management → finding the right information and keeping the information readily accessible and making the info known to the firm Controlling: making sure it works Measuring performance relative to the planned objectives and standards, rewarding people for work well done and taking corrective action when necessary. Controlling includes 5 steps: 1. Establishing clear performance standards 2. Monitor and record actual performance 3. Compare results against plans and standards 4. Communicate results and deviations to relevant employees 5. Take corrective action when needed or provide feedback The control process is ongoing, with continuous monitoring to ensure corrective action is implemented when/if needed. If action is needed managers must develop alternatives with their staff. Control systems weakest link tends to be setting the standards Standards must be specific attainable and measurable It is important to set a time goal A way to make control system work is to establish procedures for monitoring performance traditional measures of success are usually financial - but other purposes may be pleasing customers ○ External customers → dealers, ultimate customers ○ Internal customers → units within the firm that receive services from other units (ex. Marketing provides reports for sales) Chapter 10: Producing world-class goods and services Canada today Canada is one of the largest producers of forest products in the world Canada may experience significant growth when the world economies are growing As a country we face challenges in our ability to remain a modern competitive industrial country Canada ranks fairly well in world competitiveness Research and Development It is defined as work directed toward the innovation, introduction, and improvement of products and processes. In the survey of information, respondents indicated 3 most important objectives of innovation: ○ Improve product quality ○ Increase production capacity ○ Extend product range The science and electronic information division (SIEID) believes innovation is vital to economic growth The key contributors to R&D in canada are the private industry, canadian universities, hospitals, and government laboratories Magna international was the #1 spender on R&D in 2019 Canada's evolving manufacturing and services base Canadian manufacturers have done the following to regain a competitive edge against foreign manufacturers: - Focus on customers - Maintain close relationships with suppliers & other companies to satisfy customer needs - Practice continuous improvement - Focus on quality - Save costs through site selection - Rely on internet to unite companies - Adopt production techniques (ex. Enterprise resource planning, computer-integrated manufacturing, flexible manufacturing, lean manufacturing) Fact: The goods producing sector employs 21% of canada's working population Manufacturing accounted for 64% of R&D in 2014 but by 2018 it dropped to 31% despite this sector continuing to be highly innovative and tech driven. The service sector will continue to become a larger part of the overall economy The service sector employs 79% of canada's working population R&D in the service sector grew by 29% from 2014-2018 From production to operations management Production → creation of goods and services using the factors of production (land, labour, capital, entrepreneurship, and knowledge) Production management → term used to describe all of the activities that managers do to help their firms create goods Operations management → area of management that converts or transforms resources into goods and services (ie. inventory management, quality control, production scheduling, follow-up services, etc) Some organizations produce mainly good, while others prudence mainly services. Still, some produce a combination Operations management In the service sector: It is all about creating a good experience Staying innovative is important Service businesses have tripled the use of AI in the last 3 years Operations management is responsible for locating and providing amenities to make a customer happy Measuring quality: ○ Productivity is rising - this does not mean a rise in quality though ○ Things are becoming more automated ○ There is a long way to go for improvements to service Planning: Facility location It is the process of selecting a geographic location for a company’s operations. A company may decide on a location that makes it easy for customers to use the company’s services. There is a goal of providing the most convenience to the customer. Companies may conduct business online through e-commerce. In the past few years several plant closures impacted the Canadian processed food industry. Companies have started moving their facilities due to considerations about labour costs, availability of resources, access to transportation, proximity to suppliers and customers, crime rates, quality of life for employees, cost of living, etc Inexpensive resources is a major reason for moving production facilities Outsourcing goods and services has become popular in north america - dropping employment Many manufacturing companies are developing internet focused strategies that will enable them and others to compete more effectively in the future Telecommuting is becoming more popular is business Facility layout It is the physician layout of resources including people to most efficiently produce goods and provide services to customers.  It depends on the process Layouts are critical because of cost effectiveness There are several types of layouts: ○ Assembly line -workers doing a few tasks at a time ○ Modular layout - teams produce more complex units af the final product ○ Fixed-position - workers congregate around the product to be completed ○ Process layout - similar equipment and functions are grouped together (process depends on design of the item) Materials requirement planning (MRP) Computer based operations management system that uses sales forecasts to ensure that needed parts are available at the right time and place Enterprise resource planning (ERP) combines computerized functions of all the divisions and subsidiaries into one software program (resulting in shorter time between orders and payment, ess staff, reduced inventories, & better customer service) Purchasing Function that searches for high quality material resources, finds the best suppliers, and negotiated the best prices Today manufacturers deal with / rely on one of two suppliers because of the closer relationships Just-in-time inventory control JIT keeps a minimum of inventory on the premises and delivers parts, supplies, and other needs just in time to go on the assembly line It requires and accurate production schedule Delays require companies to adjust JIT It ensures the right materials, right place, right time, at the cheapest cost Quality control Maintaining quality means producing what the customer wants while reducing errors Quality control should happen throughout the process and now just at the end Companies use the Six Sigma quality test which detects potential problems to prevent their occurrence Statistical quality control (SQC) is a process to monitor at all phases of the production process Many companies use the Deming cycle where the steps are the plan, do, check, act. The ISO is the international organization for standardization and they give away awards (ISO 9000 and ISO 14000) Supply chain management Logistics → activities that focus on getting the right amount of the right products to the right place at the right time at lowest possible cost Supply chain → sequence of forms that perform activities required to create an deliver a good or service to consumers or industrial users Supply chain management → integration and organization of info across firms in a supply chain Functions and activities include forecasting purchasing, management of info and inventory, quality assurance, scheduling, production, delivery, customer service The importance of supply chain management include ○ Need for improvement to stay competitive ○ Increase in outsourcing ○ Shorter product life cycles and increased customization ○ Globalization ○ Growth of tech and e-commerce  ○ Increased complexity through JIT ○ Need for better management of inventories Production process The production process includes inputs, production control, and outputs. Form unity → the value producers ass to materials in the creation of finished goods and services Andrew S. Grove says that tasks encompass 3 basic requirements of production 1. Build and deliver products at a scheduled time (in response to customer demand) 2. Providing an acceptable quality level 3. Provide everything at the lowest possible cost Process manufacturing → physically or chemically changes materials Assembly process → puts together components to make a product Improving production techniques and cutting costs Due to global competition, many companies have had to make a wide variety of high quality custom designed products at very low costs. Several major developments have made companies more competitive: 1. Flexible manufacturing 2. Lean manufacturing 3. Mass customization 4. Robotics 5. Computer aided design and manufacturing 6. 3D printing Flexible manufacturing - Designing machines so they can do multib=ple tasks to produce a variety of products - Allen Bradley’s machines are so flexible that managers can include special order in the assembly line without slowing down the process - If a company needs to change capacity it can be done in a weekend Lean manufacturing - Production of goods using less of everything compares to mass production - Uses less human effort, less manufacturing space, less investment in tools, and less engineering - Here are some characteristics of a lean company - Half the human effort - Half the deficits in the finished product - One third the engineering efforts - Half the floor space for the same output - Carries 90% less inventory - Tech improvements are largely responsible - Employees may get frustrated with improvements Mass customization - Tailoring products to meet the needs of a large number of individual customers - It can be used in the service sector as well Robotics - They have improved productivity while also reducing available jobs - They can work 24/7 - Current studies predict almost a quarter of automated tasks will be performed by robots in the next decade Computer aided design and manufacturing - Computer aided design (CAD) has changed production techniques - The next step is computer aided manufacturing (CAM) - Both CAD and CAM made it possible to custom design products to meet needs of small markets with little increase to cost - Programs unite CAD and CAM to create computer integrated manufacturing (CIM) 3D printing and additive manufacturing - Expectations are that 3D printing could grow to a market reaching 35 billion by 2024. Using sensing, measurement, and process control - Products can be tracked from the beginning of production all the way until delivery - The moment something goes wrong the sensor can detect it immediately and notify someone to make the needed changes - Nanomanufacturing is being able to manipulate materials on a molecular level or even atomic scale - which is something that companies have been doing Control procedures: PERT and Gantt charts One popular technique for monitoring the process of production is the Program Evaluation and Review Technique (PERT). There are 4 steps: 1. Analyze sequence tasks that need to be done 2. Estimate time to complete each task 3. Draw a PERT network 4. Identify the critical path (sequence that takes the longest) The critical path identifies what sequence of tasks will take the longest to complete, which is the amount of time the whole process will end up needing. Another strategy is the Gantt chart (Henry L. Gantt) which is a bar graph which shows what projects are underway and how much has been completed. Chapter 15: Managing the marketing mix LO1: Explain the concept of a total product offer, and summarize the functions of packaging The best way to compete is to design and promote better products, meaning products that customers perceive to have the best value–good quality at a fair price ○ Value connects to MC vs MB (Relating to Microeconomics) Marketers have learned that adapting products to new competition and new markets is an ongoing need ○ Change must be monitored and products, policies, and services shall adapt to such changes A total product offer also called a value package consist of everything that customers evaluate when deciding whether to buy something ○ The basic product may be referred to as the “core product” and the total product offers the “augmented product.” ○ Different consumers may want different total product offers, so a company must develop a variety of offerings Total product offers may be evaluate on tangible or intangible dimensions ○ Tangible (Product and Package) Packaging must perform the following functions Attract the buyer’s attention Protect the goods inside, stand up under handling and storage, be tamper proof and deter theft Be easy to open and use Describe and give information about the contents Explain the benefits of the good inside Provide information on warranties, warnings, and other customer matters Give some indication of price, value, and uses Packaging may also make a product attractive to retailers UPC will help stores control inventory RFID chips sends out signals telling a company where the product is at all times Packaging changes the product by changing its visibility, usefulness, or attractiveness Packaging may make us of a strategy called bundling which groups two or more products together and prices them as a unit ○ Intangible (Producer Reputation and Advertising Image) An organization mat utilize low prices to create an attractive total product A product line is a group of products that are physically similar or are intended for a similar market ○ They usually face similar competition A product mix is the combination of product lines offered by an organisation Product differentiation is the creation of real or perceived product differences ○ Actual product differences are sometimes quite small, so marketers must use a creative mix of branding, pricing, advertising, and packaging to create a unique, attractive image ○ Sidenote – Companies have had success using the term organic or natural in their promotions A brand is a name, symbol, or design that identifies the products of one seller or group of sellers and distinguishes them from the products of competitors  ○ A brand name gives products distinction that tends to make them attractive to consumers Assures quality, reduces search time, and adds prestige to the purchase ○ A major goal of markets in the future will be to reestablish the notion of brand equity Brand equity is the value of the brand name and associated symbols The core of brand equity is brand loyalty Brand loyalty is the degree to which customers are satisfied, enjoy the brand, and are committed to further purchases – A way that manufacturers try to create more brand loyalty is sustainability Perceived quality is an important part of brand equity A product that is perceived to have better quality than its competitors may be priced accordingly Factors influencing the perception of quality include price, appearance, and reputation ○ A brand manager also known as a product manager in some firms has direct responsibility for one brand or product line They manage all elements of the marketing mix LO2: Describe the product life cycle Most ideas for new products come from employee suggestions as well as from research and development ○ Firms should also listen to suppliers and customers for such ideas Once a product has been developed and tested, it goes to market ○ There it may pass through a product life cycle of four stages 1) Introduction 2) Growth 3) Maturity 4) Decline ○ This cycle is a theoretical model of what happens to sales and profits for a product class over time Not all individual products follow this life-cycle shape, and particular brands may act differently The product life cycle may provide some basis for anticipating future market developments and for planning marketing strategies ○ Some products, like crayons and sidewalk chalk, have long product life cycles, change little, and do not seem to decline ○ Different stages in the product life cycle call for different marketing strategies At maturity, sales peak and profits are declining so a marketing manager may decide to create a new image for the product to start a new growth cycle LO3: Identify various pricing objectives and strategies, and explain why non-pricing strategies are growing in importance Pricing is so important to marketing and the development of total product offers that it has been singled out as one of the four Ps in the marketing mix Price is a critical ingredient to customer evaluations A firm may have several objectives in mind when setting a pricing strategy ○ Achieving a target return on investment or profit  The goal of marketing for profit-oriented firms is to make a profit by selling products. Naturally, one long-run pricing objective of almost all firms is to optimize profit ○ Building traffic Supermarkets often advertise certain products at or below cost to attract customers to the store, these products are called loss leaders. The long-run objective is to make profits by following the short-run objective of building a customer base ○ Achieving greater market share One way to capture a larger part of the market is to offer lower prices, low finance rates, low lease rates, or rebates ○ Creating an image Certain watches, perfumes, and other socially visible products are priced high to give them an image of exclusivity and status ○ Furthering social objectives A firm may want to price a product low so that people with little money can afford it. The government often subsidized the price of farm products to keep basic necessities affordable. A firm may have short-run objectives that differ greatly from its long-run objectives Pricing objectives should also be set in the context of other marketing decisions about product design, packaging, branding, distribution, and promotion Prices are usually set somewhat above the cost of producing the product ○ Should also include the expected costs of product updates, the marketing objectives for each product, and competitors prices Target costing is demand based ○ Designing a product so that it satisfies customers and meets the profit margins desired by the firm ○ Makes the final price an input to the product development process, not an outcome of it ○ Selling Price - Desired Profit Margin = Target Cost of Production Competition-based pricing is a strategy based on what all the other competitors are doing ○ Depends on customer loyalty, perceived differences, and the competitive climate ○ Price leadership is the strategy by which one or more dominant firms set pricing practices that all competitors in an industry then follow Break-even analysis is the process used to determine profitability at various levels of sales ○ The break even point is the point where revenue from sales equals all costs ○ Total fixed costs are all expenses that remain the same no matter how many products are made or sold ○ Variable costs change according to the level of production Included are the expenses for the materials used in making the products and direct costs of labour to make those products ○ A skimming price strategy is a strategy in which a new product is priced high to make optimum profit while there’s little competition ○ A penetration price strategy is a strategy in which the product is priced low to attract many customers and discourage competitors ○ Everyday low pricing (EDLP) is setting prices lower than competitors and then not having any special sales  ○ A high-low pricing strategy: Set prices that are higher than EDLP stores but offer many special sales where the prices are lower than competitors The problem is that this encourages customers to wait for sales, thus cutting into profits ○ Psychological pricing is pricing goods and services at price points that make the product appear less expensive than it is ○ Marketers sometimes price on the basis of customer demand rather than cost or some other calculation – This is demand-oriented pricing Non Price Competition ○ Marketers often compete on product attributes other than price You will not typically see price as a major promotional appeal on television Marketers tend to stress product images and customer benefits such as confort, style, convenience, and durability ○ Often marketers emphasize non-price differences because prices are so easy to match ○ Many small organizations promote the services that accompany basic products rather than the price in order to compete with bigger firms LO4: Explain the concept of marketing channels, and the importance of retailing Marketing intermediaries are organizations that assist in moving products from producers to businesses and from businesses to consumers ○ They are called intermediaries because they are in the middle of a series of organizations that join together to distribute goods from producers to consumers through the channel of distribution ○ A channel of distribution consists of a whole set of marketing intermediaries such as agents, brokers, wholesalers, and retailers, that join together to transport and store goods in their path from producers to consumers ○ Agents and brokers are marketing intermediaries who bring buyers and sellers together and assist in negotiating an exchange, but do not take title to the goods Agents who represent producers are either manufacturing agents or sales agents Brokers have no continuous relationship with the buyer or seller ○ A wholesaler is a marketing intermediary that sells to other organizations, such as retailers, manufacturers, and institutions They are part of the B2B system ○ A retailer is an organization that sells to ultimate consumers who buy for their own use ○ Channels of distribution help ensure communication flows and the flow of money and title to goods Intermediaries perform certain marketing tasks–such as transporting, storing, selling, advertising, and relationship building–faster and more cheaply than most manufacturers could While marketing intermediaries can be eliminated, their activities cannot if customers are to have access to products BIPOC is an acronym that stands for Black, Indigenous, and people of colour There are three categories of retail distribution ○ Intensive distribution puts products into as many retail outlets as possible, including vending machines. Products that need intensive distribution include pop, candy, gum, and popular magazines  ○ Selective distribution uses only a preferred group of the available retailers in an area. SUch selection helps assure producers of quality sales and service. Manufacturers of appliances, furnitures, and clothing use selective distribution ○ Exclusive distribution is the use of only one retail outlet in a given geographic area. The retailer has exclusive rights to sell the product and is therefore likely to carry a large inventory, give exceptional service, and pay more attention to this brand than to others. Luxury auto manufacturers usually use exclusive distribution, as do producers of specialty goods such as skydiving equipment Non-Store Retailing ○ Online retailing ○ Telemarketing ○ Vending machines ○ Kiosks ○ Carts ○ Pop-ups ○ Direct selling ○ Multi Level marketing Online retailing consist of selling products to ultimate consumers online ○ Social commerce is a form of electronic commerce that uses social media and user contribution to assist in the online buying and selling of products Brick-and-mortar stores that add online outlets are sometimes called brick-and-click Telemarketing is the sale of products by telephone Vending machines dispense convenience goods when customers deposit sufficient money in the machine ○ They carry the benefit of location Carts and kiosks have low overhead costs that stores do, so they can offer lower prices on items such as T-Shirts, purses, watches, and smartphones Pop-up stores are quickly gaining in popularity around the country, they are temporary outlets that remain open for a short amount of time in small spaces and offer items not found in traditional stores Direct selling is selling to customers in their homes or where they work Multi Level marketing are salespeople who earn commissions on their own sales, create commissions for the “upliners” who recruited them, and receive commissions from any “downliners” they recruit to sell The supply chain is longer than a channel of distribution because it includes links from suppliers that provide raw materials to manufacturers, whereas the channel of distribution begins with manufacturers All transportation modes can be evaluated on basic service criteria: cost, speed, dependability, flexibility, frequency, and reach LO5: Define promotion, and list the five traditional tools that make up the promotion mix Promotion consists of all techniques that sellers use to motivate people to buy their products Integrated marketing communication is a technique that combines all of the promotional tools into one comprehensive and unified promotional strategy ○ Marketers can create a positive brand image, meet the needs of customers, and meet strategic marketing and promotional goals of the firm Digital marketing is the promotion of products or brands via one or more forms of electronic media The combination of promotional topl;s an organization uses is called its promotion mix Promotion is an effort by marketers to inform and remind people in the target market about products and to persuade them to participate in an exchange The five traditional tools are ○ Advertising: A paid, non-personal communication through various media by organizations and individuals who are in some way identified in the message Identification of the sender separates advertisement from propaganda, which is non-personal communication that does not have an identified sponsor (Look at Figure 15.9 for Advantages and Disadvantages of Various Advertising Media) ○ Personal Selling: The face-to-face presentation and promotion of products, including the salesperson’s search for new prospects and follow-up service after the sale The B2C sales process is described in Figure 15.10 ○ Public Relations: The function that evaluates public attitudes, changes policies and procedures in response to the public’s request, and executes a program of action and information to earn public understanding and acceptance The PR department maintains close ties with company stakeholders (e.g. customers, media, community leaders, government officials, and other corporate stakeholders) Publicity is the talking arm of PR It is any information about an individual, product, or organization that is distributed to the public through the media and that is not paid for or controlled by the seller Publicity is free and reaches individuals who may not see an advertisement but marketers have no control on how or when the media will use the story ○ Sales Promotion: The promotional tool that stimulates consumer purchasing and dealer interest by means of short-term activities Can take place internally or externally for a company Includes sales training, the development of sales aids such as audiovisual presentations and videos, and participation in trade shows where salespeople can get leads ○ Direct Marketing: Any activity that directly links manufacturers or intermediaries with the ultimate customer Has become popular because shopping from home or work is more convenient for consumers than going to stores In word-of-mouth promotion, people tell other people about products they have purchased  ○ Other promotional tools include blogging, podcasting, and mobile marketing ○ A blog is an online diary (web log) that looks like a web page but is easier to create and update by posting text, photos, or links to other sites ○ Podcasting is a means of distributing multimedia digital files on the Internet for downloading to a portable media player ○ Mobile marketing – marketers can use text messaging to promote sweepstakes, send customers news or sports alerts, and give them company information Viral marketing is any strategy that encourages people to pass on a marketing message to others, cresting exponential growth in the message’s influence as the message reaches thousands to millions of potential customers Concluding Notes Each target group calls for a separate promotion mix Promotional Strategies ○ In a push strategy the producer uses advertising, personal selling, sales promotion, and other promotional tools to convince wholesalers and retailers to stock and sell merchandise ○ In a pull strategy, heavy advertising and sales promotion efforts are directed toward consumers so that they will request the products from retailers ○ Pushing VS Pulling products through the distribution system Chapter 17: Financial management LO1: Explain the role and responsibilities of financial managers The goal is to answer two main questions in this chapter. ○ What is finance? Finance is the function in a business that acquires funds for the firm and manages them within the firm Finance activities include preparing budgets, completing cash flow analysis, and planning for the expenditure of funds on assets such as plant, equipment, and machinery ○ What do financial managers do? Financial management is the job of managing a firm's resources to meet its goals and objectives ○ Accountants VS Financial Managers If a comparison is made to the medical field… An accountant is like a skilled laboratory technician who takes blood samples and other measures of a person’s health WHILE A financial manager is like the doctor that interprets the reports Financial Managers examine the financial data prepared by accountants and recommend strategies for improving the financial performance of the firm  ○ In large and medium-sized organizations, both the accounting and finance functions are generally the responsibility of a chief financial officer (CFO) A company treasurer or vice president could also take on this role ○ Figure 17.1 elaborates on the roles of a financial manager Three of the most common reasons a firm fails financially are… ○ Undercapitalization (Insufficient funds to start a business) ○ Poor control over cash flow ○ Inadequate expense control What is Financial Management ○ Financial managers are responsible for paying a company’s bills at the appropriate time and for collecting overdue payments to make sure the company does not lose too much money to bad debts Finance Functions (such as buying merchandise on credit or collecting payments from customers) are key components of a financial managers job ○ Financial managers must be aware of changes or opportunities in finance such as changes in tax laws. ○ Financial managers must analyse the tax implications of managerial decisions to minimize the taxes the business must pay The internal auditor may also check over journals, ledgers, and financial statements that the accounting department prepares, to make sure all transactions are in accordance with the GAAPs The work of the internal auditor strengthens the busines’s control environment and can reduce the work performed by external auditors LO2: Outline the financial planning process, and explain the three key budgets in the financial plan Financial planning means analyzing short-term and long-term money flows to and from a firm ○ A basic issue financial managers face is how to determine the value today of cash flows that are expected in the future ○ This requires assessing the time value of money The time value of money is the fact that a dollar in hand today is worth more than a dollar promised at some time in the future (This is because you can earn interest on the dollar) ○ While considering money flows, financial managers also assess the costs and risk of accessing money whether it is from creditors or from selling investors financial instruments, such as bonds and stock ○ The above assessment includes understanding the risk-return tradeoff The risk-return tradeoff is the principle that the level of return to be earned from an investment should increase as the level of risk increases and vice versa Understanding this contributes to stronger short and long-term financing Financial planning has three steps… (Relating to Figure 17.2) 1) Forecasting a firm’s short-term and long-term financial needs ○ A short-term forecast predicts revenues, costs, and expenses for a period of one year or less ○ A cash flow forecast may be part of short-term, this predicts the cash inflows and outflows in future periods (usually months or quarters)  ○ The inflows and outflows are based on expected sales revenues and various costs and expenses incurred, as well as when they are due for payment ○ A long-term forecast predicts revenues, costs, and expenses for a period longer than one year, and sometimes as long as five years ○ This forecast is crucial to the company’s long-term strategic plan What business are we in? Should we be in it five years from now? How much money should we invest in technology and new plants and equipment over the next decade? Will we have cash available to meet long-term obligations? ○ The long-term financial forecast gives top management, as well as operations managers, some sense of the income or profit of different strategic plans and helps prepare company budget 2) Developing budgets to meet those needs A budget sets forth management’s expectations for revenues and such expectations allow for allocation of specific resources throughout the firm There are usually several types of budgets established in a firm’s financial plan, three of the most common are… A Capital Budget: A budget that forecasts a firm's spending plans for major asset purchases that often require large sums of money, like property, buildings, and equipment A Cash Budget: A budget that estimates a firm’s cash inflows and outflows during a particular period (e.g. monthly or quarterly) An Operating or Master Budget: The budget that ties together all of a firm’s other budgets and summarizes the business’s proposed financial activities ○ 3) Establishing financial control to see whether the company is achieving its goals Financial control is a process in which a firm periodically compares its actual revenues, costs, and expenses with its budget Most companies hold monthly financial reviews as a way to ensure financial control This allows for managers to take corrective action if necessary Financial control also helps reveal which accounts, departments, and people are varying from the financial plan Financial managers may judge whether these variances are legitimate and thereby merit adjustments to the plan Economic or natural shifts may be legitimate causes to adjustments LO3: Explain why firms need operating funds In business, the need for funds never seems to end Virtually all organisations have operational needs for which they need funds. Key areas include: ○ Managing day-to-day needs of the business Funds must be available to meet the daily operational costs of a business Financial managers must ensure that funds are available to meet daily cash needs without compromising the firm’s opportunities to invest money for its future Money as time value  The interest a firm gains on its investments is important in maximising the profit it will gain That is why financial managers often try to minimize cash expenditures to free up funds for investment in interest-bearing accounts ○ They suggest the company pays its bills as late as possible unless a cash discount is available for early payment ○ They advice companies to try to collect what is owed to them quickly to maximize the investment potential of the firm’s funds Efficient cash management is important to small firms since their access to capital is much more limited than larger businesses ○ Controlling credit operations In today’s highly competitive business environment, making credit available helps keep current customers happy and attracts new ones Credit for customers can be important during tough financial times such as recession This may be because lenders are more hesitant to approve loans The problem with selling on credit is that as much as 25% of the business assets could be tied up in its credit accounts (A/R) Financial managers develop efficient collection procedures such as cash or quantity discounts to buyers who pay their accounts on time or at an earlier date Accepting bank credit card may be such a procedure but businesses must pay a fee to accept such cards ○ Acquiring needed inventory Effective marketing requires focusing on the customer and providing high-quality service and readily available goods A carefully constructed inventory policies helps manager the firms available funds and maximize profitability Just-in-time inventory control and other methods can reduce the funds a firm must tie up in inventory Poorly managed inventory can affect cash flow and drain finances ○ Making capital expenditures Capital expenditures are major investments in either tangible long-term assets such as land, building, and equipment, or intangible assets, such as patents, trademarks, and copyrights In many organizations, the purchase of major assets (land for future expansion, manufacturing plants to increase production capabilities, research to develop new-product ideas, and equipment to maintain or exceed current levels of output) is essential The need for operating funds raises many questions for financial managers How does the firm obtain funds in the long or the short term? How much will it cost to obtain these funds? Will they come from internal or external sources?  Alternative Sources of Funds ○ Debt financing refers to funds raised through various forms of borrowing that must be repaid ○ Equity financing is money raised from within the firm, from operations or through the sale of ownership in the firm (stock) ○ Short-term financing refers to funds needed for one year or less ○ Long-term financing refers to funds needed for more than one year LO4: Identify and describe different sources of short-term financing Day-to-day operations call for the careful management of short-term financial needs Firms may need to borrow short-term funds for purchasing additional inventory or for meeting bills that come due unexpectedly Short-term funds are often needed when cash reserves are low Trade Credit ○ Trade credit is the practice of buying products now and paying for them later It is the most widely used source of short-term funding, the least expensive, and the most convenient ○ Small businesses rely heavily on trade credit from firms such as Purolator, as do large firms such as the Hudson Bay Company ○ When a firm buys merchandise, it receives an invoice much like the one you receive when you purchase something with a credit card ○ Business invoices usually contain terms such as 2/10, net 30. This means the buyer can take a 2 percent discount for paying the invoice within 10 days, otherwise the total bill is due in 30 days ○ Financial managers pay close attention to such discounts because they create opportunities to reduce the firm’s costs ○ Some suppliers hesitate to give trade credit to an organization with a poor credit rating, no credit history, or a history of late payments They may insist the customer sign a promissory note A promissory note is a written contract with a promise to pay a supplier a specific sum of money at a definite time Promissory notes are not as rigid as formal loan contracts and are negotiable The supplier can sell them to a financial institution at a discount, and the business is then responsible for paying the financial institution, not the supplier Family and Friends ○ Firms often have several bills coming due at the same time with no sources of funds to pay them ○ Many small firms obtain short-term funds by borrowing money from family and friend s Such loans may create problems if all parties do not understand cash flow At time it is better to go to a financial institution that fully understands the business risk and can help analyze its future financial needs rather than to borrow from friends and relatives ○ If a firm chooses to ask family and friends for financial assistance, it is important that both parties… Agree to specific loan terms Put the agreement in writing Arrange for repayment in the same way they would for a bank loan  Commercial Banks ○ Banks, being sensitive to risk, generally prefer to lend short-term funds to larger, established businesses ○ How much a business borrows and for how long depends on the kind of business it is and how quickly it can resell the merchandise it purchases with a bank loan or use it to generate funds ○ During difficult economic times, such as recession, bank loans can virtually disappear, even for well-organized small businesses Different Forms of Short-Term Loans ○ Financial institutions offer different forms of short-term loans ○ A secured loan is backed by collateral, something valuable such as property If the borrower fails to pay the loan, the lender may take possession of the collateral An automobile loan is usually a secured loan Inventory of raw materials, like coal, copper, and steel, often serve as collateral for business loans A/R are company assets often used as collateral for a loan ○ An unsecured loan is more difficult to obtain as it does not require collateral Usually only given to highly regarded customers–long-standing businesses considered financially stable ○ A line of credit is a given amount of unsecured funds a bank will lend to a business Given if a business develops a good relationship with a financial institution This is not guaranteed to a business but it speeds up the borrowing process since a firm does not have to apply for a new loan every time it needs funds With growth and maturity of a business, the line of credit may increase ○ Commercial finance companies are organizations that make short-term loans to borrowers who offer tangible assets as collateral This often occurs when a business is unable to secure a short-term loan They often charge higher interest rates due to higher degrees of risk Evaluating Creditworthiness ○ Whether you are a business or a consumer, each time you apply to borrow money, you build a credit history ○ As you apply for credit, lenders consider your financial track record, along with information about your employment and other debts and assets you have This information is captured in your credit profile which is your financial reputation ○ Creditworthiness is observed when considering a credit application Business creditworthiness is determined by the 4 Cs of credit Character ○ Includes factors such as business size, location, number of year in business, business structure, number of employees, history of principals, appetite for sharing information about itself,m media coverage, liens, judgements or pending lawsuits, stock performance, and comments from references Capital ○ Assesses whether a company has the financial resources to repay its creditors ○ This portion is closely reviewed by the credit analyst  ○ Heavy weighting is given to such balance sheet items as working capital, net worth, and cash flow Capacity ○ Considers the ability of a business to pay its bills ○ Includes the structure of the company’s debt–whether secured or unsecured–and the existence of any unused lines of credit Conditions ○ The external factors surrounding the business under consideration, including influences such as market fluctuations, industry growth rate, legal factors, and currency rates The 4 Cs are also taken into consideration by other service providers, such as insurance companies, to set premiums A premium is the fee the insurance company charges, and it represents the cost of the policy to the insured Factoring Accounts Receivable ○ One relatively expensive source of short-term funds for a firm is factoring, the process of swelling accounts receivable for cash ○ A factor is a market intermediary that agrees to buy the firm’s accounts receivable, at a discount, for cash Often done when many A/R payments from buyers are slow The discount depends on the age of the A/R, the nature of the business, and the condition of the economy Popular among small businesses ○ While factors charge more than bank loan rates, remember many small businesses cannot qualify for a bank loan ○ A company can reduce factoring cost if it agrees to reimburse the factor for slow-paying accounts, or to assume the risk for customers who do not pay at all Factoring is not a loan, it is the sale of a firm’s assets Commercial Paper ○ Commercial paper is a type of short-term financing available yo large corporations that needs funds for just a few months and prefer not to have to negotiate with a commercial bank ○ Commercial paper consists of unsecured promissory notes, in amounts of $100,000 and up that mature in 270 days or less As it is unsecured, only financially stable firms are able to sell it ○ Commercial paper states a fixed amount of money the business agrees to repay to the lender on a specific date at a specified rate of interest Credit Cards ○ Credit cards provide a business with ready access to money theta can saver time and the likely embarrassment of being rejected for a bank loan Convenient but costly due to high interest rates Penalties if payment is not made on time LO5: Identify and describe different sources of long-term financing In a financial plan, forecasting determines the amount of finding the firm will need over various periods and the most appropriate sources for obtaining those funds Financial managers generally ask three question