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Corporate economics
Lesson 1- The business and its objectives:
1.0- Basic notion:
- We’ll take a look at the income statement:
Net income
Sales – Cost of goods = Gross profit
Gross profit – Economic operations = EBITDA
EBITDA – Interests = EBT
EBT – Taxes = Earnings/Net income
1.1- Concept and types of businesses:
1.1.1- Business as production economic unit:
- A company is an agent that transports inputs into outputs.
A- MARKET THEORY:
- A perfect market has total transparency in pricing, and also has rational agents.
- It also has certain efficiency when it comes to producing goods.
- (^) Speculators try to take advantage of inefficiencies of other people that happen in the market.
- These speculators are a part of the market that gives it liquidity , which is a positive thing.
- We’ll focus on studying the market instead of the companies , because after all, the company is just a part of the market.
B- TRANSACTION COSTS THEOREM:
- We take a look at the scenario of Markets vs. Companies.
- The transaction cost is divided into 3 parts:
- Information cost: It’s difficult to (for example) find suppliers in a new place.
- Negotiation cost: If the product is standardized is standardized it’s easy to negotiate. However, if it’s not standardized, it’ll be difficult.
- Guarantee cost: You need to know you can trust your supplier, so you can get a decent level of guarantee on the products.
- (^) If you have really high costs you will get the company. If the costs are really low, you will get a market.
- The cost of these is determined when you compare it to the internal organizational costs of the company.
C- AGENCY THEORY :
- An agency contract is a contract in which a person uses another to do something.
- This theory tells us that the company is not a real person , and that it is just a link of contracts.
1.1.2- Business as an organization:
A- CONCEPT :
- (^) We can divide organizations into 2: Profit organizations and Non-profit organization.
- A non-profit organization is an organization in which profit is not the first priority.
B- CHARACTERISTICS :
- Pursue of a common objective.
- Group of resources (assets, etc.…).
- Sense of permanence (most want to stay a long time).
- Interaction with the external environment.
- A well-defined social group (the employees know they are a part of the organization).
1.1.3- Business as a system:
As an open system:
A- CONCEPT:
- A business is a system of small parts that can work separately.
B- CHARACTERISTICS:
- It’s artificial, as it is created by humans.
- It’s finalist, as it has a final objective.
- It’s open, as it interacts with the environment.
- The added value will take into account everything that you are not buying to other companies , like salaries, profit, interest of a loan, etc…
C- CHAIN VALUE:
- It’s the process for all the different parts that you got for the production of a good or service.
- For example, if you buy bread, in the beginning of the process you have wheat, which will be transformed into bread. Wheat becomes flour, which becomes bread, which goes to the bakery and will be sold to the costumer.
- So, for wheat to be sold to the costumer, we have 3 or 4 steps. In each step, the price of the product increases.
- At the end of every step in the process, we have one “added value” for every step, and the value chain is the change of the added values.
D- CIRCULAR FLOW OF WEALTH:
- Concept: It’s a diagram that shows the circulation of wealth between firms and households. The DDP is C+I+G+X-I, and takes into account the population and the productivity.
- Picture:
1.1.5- Types of businesses:
A- ACTIVITY SECTORS:
- Primary sectors: Agriculture and primary sources.
- Secondary: Manufacture and industrial works.
- Tertiary: Services.
B- SIZE:
- The SME was implanted in 2005 to classify the sizes of the businesses.
- Number of workers : Less than 10 is a micro, 10-50 is a small, 50-250 is a medium, and 250+ is a large enterprise.
- Sales : -$2M is a micro, -$10M is a small, -$50M is a medium, and +$50 is a large.
C- LOCATION:
- National companies: You sell all your products in one country, and you have all your resources and workers in this country.
- International companies: There are 2 options: A exporter (you have all your resources in 1 country but you make sales in a lot of different countries), and a multinational (A company that makes sales and has many resources in different countries).
D- OWNERSHIP:
- State owned company: It’s a company where the government has an important stake.
- Private and public companies: the public companies are listed in the stock market, and private companies are not listed in the stock market.
E-LISTED COMPANIES:
- Energy: Everything related to oil and gas.
- Materials: Mining, glass, paper. Materials and Energy are both for raw materials, so nobody can actually change the price.
- Industrial: The production of goods.
- (^) Consumer discretionary: Products that are related to the economic cycles. Examples are hotels, clothes, cars, etc.…
- Consumer staples:
- Health care: Takes care of the health and medi-care of the citizens.
- Financials:
- Information technology: In the past, this was inside the industrial. However, companies like IBM and it manages intelligence.
- Telecommunications:
- Utilities:
- Real State: Everything that has to do with houses.
F-LEGAL FORM:
G- OTHER IMPORTANT CLASSIFICATION:
- NGO : The non-profit organization’s main objective, unlike the rest of companies, does not prioritize gaining a profit.
- Family Business : It has to have the following 4 characteristics. 1 or several families have an important stake (participation) in the property (1). A family controls the company (2). Any family member is in the management (3). There is a sense of permanence, so they want to stay alive for a long time (4).
- Profit focuses on short term, not long term :
- Profit is an accounting profit but it’s better to use the economic profit :
- Amortization: It’s only a fiction that makes you save money, so in a future, you have enough money to (for example) buy new assets, but the money doesn’t leave the company.
- Opportunity cost: It’s whatever you reject when you make a decision.
- Accounting profit uses one period of time, economic profit discounts cash flow:
- Because of these problems, it’s better to look for value creation: (Example) would you prefer to have 100 euros today or 200 euros in one year? We would use a formula in which: 100 = 200/ (1+r) ^1.
1.2.2- Value creation:
A- CONCEPT: It’s how much total cash flow your company is creating.
B- IS THE COMPANY LISTED IN THE STOCK MARKET?
- This way we can see the value of the company. The formula this way would be: Stock price X Number of shares.
- This is what we would call market capitalization , in which we see the total value of a company.
- Example: 10 euros X 1.000.000.000.
- If the company is not listed in the stock market, we use discounted cash flows (in an efficient market both quantities should be the same).
- That way, we shall use the following formula: PV (present value) = (CF/1+k) + (CF2/ [1+k]^2) + (CFn/[1+k]^n) + (CF/[k-g]).
- Here k stands for discount rate.
- (DF/[k-g]) is the Residual value.
- (^) Here g stands for expected growth rate.
- The (CF/[k-g]) is used because a company is made to live forever, and we use this to be able to get a certain value.
C- FACTORS TO KNOW THE VALUE OF A COMPANY:
- Expected cash flow: We simplify the formula to (CFs x [1+g])/(k-g).
- For example, the value of a house as landlords the client gives us 10.000 euros per year with a 0.1 discount rent. The value of the house would be worth 10.000/0.1 100. euros.
Year 1 Year 2 Year 3` Year 4 Year 5 Year 6 100/1.2 200/(1.2)^2 300/(1.2)^3 0 0 100/0. $83.33 $138.88 $173.61 $ Then, we add 83.33+138.88+173.61+500 = $895.82 is the most you will invest.
- In the formula, k is the cost capital (WACC) Ke * (E/[E+D]) + Kd * (1-t) * (D/[E+D])
- Ke is the cost equity , Kd is the Cost debt , and (1-t) is the taxes savings.
- In the previous formula, we are only going to focus on the cost equity.
- Ke = (Opportunity cost) + (Risk Premium). The opportunity cost must have a minimum rate we have to ask for, which is the Risk free rate.
- Let’s imagine the Ke is a 2% from a government bond.
- The risk premium would be B(Rm-Rf).
D- VALUE CURVE :
- To calculate the value of the company not listed in the stock market, we use this, by dividing the Market value by the equity.
- If the value is bigger than 1 we’re creating value.
- If it’s the same as 1, we aren’t creating value but we also aren’t destroying it.
- If it’s lower than 1, we would be destroying value.
- We have another method: W divide the ROE (Net income/equity) by the Ke (Opportunity cost + RP).
- If the value is bigger than 1 we’re creating value.
- If it’s the same as 1, we aren’t creating value but we also aren’t destroying it.
- If it’s lower than 1, we would be destroying value.
1.2.3- Shareholders vs. Stakeholders:
A- CONCEPT: The^ shareholders^ are those who own the stock of a company, and therefore, the owners of such company. The stakeholders are the people around the company that can be affected by the activities of such company.
B- Control mechanisms:
Internal: These control the progress and activities of the company and take corrective actions if it were to go off track.
Direct supervision:
Labor market of exclusives: The labor market is the market in which the employers give a demand and employees the offer. In other words, it’s a market of work from workers and businesses.
Product market: This is the simple market of finished products.
C- Stakeholders: These are people that have an interest or a concern on the organization. These can affect or be affected by the company’s actions.
Concept: These are people that have an interest or a concern on the organization. These can affect or be affected by the company’s actions.
Types of stakeholders: Employees and customers (1), stockholders (2), partners (3), board of directors (4), and funders and donors (5).
Classification: After seeing the types, you must be able to classify the stakeholders by asking questions such as “What is its power?”, “how much influence do they have?”, “What’s its level of interest?”, etc…
Managers have to study the stakeholders:
Identify them:
Know the objectives:
Value the importance:
Power, legitimacy, and urgency: In^ this^ type^ of^ classification,^ the stakeholders are classified by their power, urgency, and legitimacy. They can either be core, dominant, dangerous, dependent, latent, discretionary, or demanding.
Picture:
Groups: Key groups, waiting groups, latent groups.
Lesson 2- Managers in the organization:
2.1- Management
Concept- Efficient vs. Effective: Being effective means doing the right things, and being efficient means doing things right.
Classifications:
Pyramid: This type of management is used when the number of workers grows, and so, is high. It’s fully based on a simple hierarchy.
Top managers: These tend to be senior-managers that hold the roles with most responsibility in a company, like the CEO, COO, and CFO.
Middle managers: They tend to be small-size managers with at least 1 subordinate, that supervises their subordinates and make directives to follow for them, to ensure the enterprise functions smoothly.
First line managers: These are the actual supervisors of the material workers, and have a great and valuable amount of information, like manufacturing production, or necessities of the workers.
Horizontal aspects:
Functional managers: These are managers for different functions of the company, such as human resources manager, accounting, financial, etc…
General Managers: It tends to be another word for COO (Chief Operating Officer).
Executive roles:
Interpersonal roles: This includes providing information and ideas.
Authority: As a manager people will look up to your leadership, and so, you must be a source of inspiration, as you have a great social and legal responsibility.
Leader: Here you’re the leader of your group, department, or the entire organization. You are the leader, and make yourself responsible for the group’s productivity.
Connection, link: Managers^ need^ to^ communicate^ with^ internal^ and external sources, and so, need to be able to network their way into representing the organization.
Types of planning:
According to their nature:
Formal: This helps the organization and the managers set a benchmark through which they measure their performance.
Informal: This type of planning is informal day-to-day decision making and execution of the tasks.
According to the importance:
Strategic: It’s a systematic process of envisioning a desired future and transplanting this vision into defined goals or objectives and a sequence of steps to achieve them.
Tactical: It’s a systematic scheduling of the short term activities required in achieving the objectives of strategic planning.
Operational: A short term highly detailed formulated by management to achieve the tactical objectives.
According to the time:
Short term: The process of setting and achieving short term goals and milestones while moving towards the overall goal. Normally these goals are for less than a year, and contribute to the overall goal.
Long term: This type of planning sets out a future goal to meet future needs, by an estimation of the present needs. It usually starts in the present looking at a future status in which the company wants to be on, and uses short term planning to help the process.
According to the general view:
Specific: Making plans for specific goals of the company to normally achieve the short term goals and be precise at the time to follow the guidelines.
General: Making long term plans to be followed in order to achieve a general goal for the company.
According to the frequency:
One use: A plan that will only be used once for a specific situation.
Permanent: A plan that’ll stay in the company for unique situations and for future use.
Elements:
Objectives: These are the goals the company wants to achieve. The goals have to be realistic, and can be prioritized in a way in which certain objectives are a lot more important and urgent than the others.
Policies: These are the principles by which the company operates, and symbolize what the company is all about. These shall not be broken as they hold a significant moral value for the owners and staff members.
Procedures: These are the actions that will be taken in order to achieve the objectives, including strategies, plans, and tactics to achieve them.
Rules: They are the rules of planning (0____0).
Budgets: These (or the resources) are the amounts of money that the company has for the completion of the tasks. They must then choose how much of it goes to each task.
2.3- Organizing:
Concept, components, and instruments:
Concept: Getting together elements into a purposeful order, and assembling the required resources to attain organizational objectives.
Aspects:
Formal aspect: Here, a set of rules is set, and it’s easy to interpret. They are to be followed by almost everyone in a strict manner.
Informal aspect: Network of personal and social relationships that arise as people associate with other people in a work environment.
Real aspect:
Elements:
Strategic apex: These are the people that actually make the decisions. They are the highest raked managers in the company.
Middle line: They are the intermediates from the strategic apex and the lower managers.
Techno structure: They are a group of technicians with a really high influence inside a company.
Support staff: These people are outside of the company’s main activities, and provide a service for them, such as administrators, carpenters, electricians.
Committee:
Coordinator:
Matrix structure:
Formal nonstructural mechanisms:
Standardization of work process:
Standardization of skills and knowledge:
Standardization of results:
Informal mechanisms:
Mutual adjustments:
Organizational culture:
Main methods of the organizational design:
Introduction:
Simple structure:
Concept, advantages, and disadvantages:
Elements- strategic apex and operational core:
Departmentalization:
Hierarchical levels:
Specialization:
Specialization:
Standardization:
Centralization:
Functional structure:
Concept:
Elements:
Departmentalization:
Hierarchical levels:
Specialization:
Specialization:
Standardization:
Centralization:
Divisional structure:
Concept: The whole company is divided into several divisions. Each division has their own resources, such as people and money. For example, you have the CEO; you’ll see he can control the many different divisions (As example) such as Division 1, division 2, and division 3. Divisions are focused on results, and the managers are focused on their own division.
Elements: Strategic apex, support staff, divisions.
Departmentalization: By market (product, customer, geographical).
Hierarchical levels: There is a tool span of control and flat structures.
Specialization: You can have a Horizontal high or a vertical low specialization. We’ll likely have the vertical low specialization.
Standardization: It all depends on the results. The managers and the CEO will see if the company is doing well thanks to seeing if the objectives have been achieved or not.
Centralization: Decentralization, as all the power is controlled by the divisions, and these are independent.
Matrix structure:
Concept: All the tasks are divided depending on the 2 departmentalization criteria. It’s a very flexible structure, and decisions can be made very quickly. However, they are really complex structures, and there can certainly be problems or conflicts, as there are a total of 2 bosses.
Elements: We’ll have a strategic apex, and a double operating core. The operating core will be divided into 2 parts.
Departmentalization: By process (by function) and by market (product, client, geography).
Hierarchical levels: Total span of control, and also flat structures.
Specialization: Horizontal high and vertical low (you control your own job).
Standardization: Of skills and knowledge, of results (it too depends on results).
Candidates proposed by employees: A total of 50% of people get their first ever job this way. It can be good, as you don’t need to advertise the job commercial.
Advertisements in newspapers: This is good because a lot of people can get the job. However, this is also bad as you can have too many, and only a few will get the job.
Private recruitment companies: This is the most expensive out of all of them. The private company gets paid by the company and they will get the right people for the job. They can look in LinkedIn, in universities, etc…
Public recruitment agencies: They are similar to the PRC but they are public, as they are owned by the government. For example, in Spain, we have the INEM, but they aren’t very good.
Educational institutions: for example, the universities can look for a job for the students.
Internet:
Advantages: It’s easy to look for a good candidate. You also get the “Know how” to how things are done in a certain company when it comes to competitors.
Disadvantages: Evaluating the candidates is very difficult. There are negative effects in regards to motivation. Also, you can have problems with the adaptation with the worker in the company.
Selection:
Concept:
Steps:
Application form: It’s when you send your CV to the place you want to work on.
Interview: If they are interested, they do an interview with the candidates. The disadvantage is that it’s very subjective, not objective.
Structure interview: The Company has prepared the questions. They know exactly what they are going to ask the candidate.
Unstructured interview: They use this to evaluate your personality.
Mixed interview: It’s a mix of the 2 previous interviews. They ask a great variety of questions, but you talk about many things.
Stress interview: The objective of these is to put you in stress situations to see how you handle them. They ask you aggressive or provocative questions, or the interviewer looks at you in a weird way.
Panel interview: It’s when there is one candidate and many interviewers.
Group interview: Many candidates are together as a group.
Phone interview: It’s only a previous interview to a normal one. They are done to set the land for a future interview.
Employment test: It’s a test to see your attitude and your knowledge. A good test must be reliable; acceptable (you need a good mark in the test to show that you would do a good job in the job).
Reference check: They will make sure that you didn’t lie on your resume, so that they check that you aren’t lying about the former jobs you had.
Training:
Concept: It’s used to improve the skills and knowledge of the workers.
Training according to the time: You can do it before, or after the incorporation inside the company. If you do it before, it’s used to show you how to perform certain necessary tasks. If you do it after, it’s used to improve your skills as a worker.
Steps:
- To identify the problems of the worker.
- Study if the training is the best possible solution or not.
- Chose the method: You need to improve the skills, have more knowledge, or change attitudes. These 3 things must be taken into account when choosing the method.
- To control the performance of the training.
Performance appraisals:
Concept: You want to see the performance of the worker.
Methods:
Personal assessment: We have a scale. It can either be personal or professional. You can’t reply anything to the boss, as it’s really subjective. The person can be biased due to personal reasons. The person can also get the wrong idea and think that to promote himself is more important than
