FADE (temario y prácticas) INGLES, Ejercicios de Administración de Empresas

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UNIT 1: INTRODUCTION TO THE FIRM

1. WHAT IS A FIRM?

Firm : (company, enterprise): organization that employs productive resources to obtain products and/or services which are offered in the market. Aim is maximizing profits. Micro perspective: a Black Box, a production function. We only care about outputs and inputs (production factors→ factory/transformation→ goods/services) Macro perspective: value added creation unit.

Firm as a system a) Subsystems (functional areas=not all products can be sold in all countries)

b) Continuous process of: defining goals → configuration: design of an organization → management (implementation) of required financial, technical and human elements → results → control of results → improve decision making process and adaptation to environment

2. A FIRM'S ENVIRONMENT generic ≻ specific ≻internal a) Internal : factors within an organization that influence its activities and choice. Shareholder, managers, employees
   • Resources: tangible (teacher): can be observed and quantified (financial, physical, human) and intangible (education she offers): hard to quantify and create competitive advantage (reputation, technology, human capital)

• Competencies: how we can do things. A positive combination of complementary and intangible resources of the firm. (Innovative distribution systems, marketing strategies, high-tech).

We use resources to achieve competencies.

b) External or operative : factors surrounding an organization that influence its activities and choices, and determine its opportunities and risks.

• General: factors (PEST = political, economic, sociocultural, technological / legal) that affect everyone in an industry or market in more or less similar manner.
• Specific: portion of the business situation that applies directly to an organization achieving its objectives. PORTER Porter’s five forces analysis : understand competition and attractiveness of and industry over time.

Bargaining power: power to influence the terms of a contract or transition in your favour. Switch costs: additional costs when you move from one consumer/supplier to another.

-High threat of substitutes: better price or service / switch costs are low (generic / brands) -Suppliers’ bargaining power is high: revenue doesn’t depend on the industry / few suppliers / switch costs are high to the firm -Buyers’ bargaining power is high: similar products / few buyers / switch costs are low for buyer -High threat potential entrants: low initial investment / low legal or administrative barriers / non-differentiated products / networks (distribution) don’t play important role Potential entrants: (network externalities) more people, more value Industries can be: incumbent (leader) or entrant

-High rivalry: many competitors / high exit barriers How to compete? Price, product features, service or image.

*Suppliers → input → FIRM → output → Buyers (consider switch costs)

3. MEASURES OF INDUSTRIAL CONCENTRATION

• Concentration ratio : indicator of the relative size of firms in relation to the industry as a whole. Rx = ∑ x = number of the largest firms which are going to be analysed

x k =

Sk

C oncentration ratio = %^ ofnumber^ total^ output of f irms^ produced in that^ in industry^ an^ industry

ex: Firm A=20% Firm B=30% Firm C=40% Form D=10% R (^) 2 = 0.3 + 0.4 = 0.

• Herfindahl index : measure of the size of firms in relationship to the industry and an indicator of the amount of competition among them. Informs how concentrated a market is Major benefit: gives more weight to larger firms. As the market concentration increases, competition and efficiency decrease and the chances of collusion and monopoly increase H = ∑( S )

n k =1 k

(^2) H∊ [0, 1] (^) Monopoly (Telefónica)→ H= 1

ex: Take two industries in which the largest firms produce 90% of the output: Industry A: all six firms produce 15% each Industry B: one firm produces 80%, while the five others produce 2% each In both industries the remaining 10% of the output is divided among 10 equally sized firms. Which industry shows a higher industrial concentration? Industry A: H = 6 × (0.15) 2 + 1 0 × (0.0.1) 2 = 0. Industry B: H = 1 × (0.8) 2 + 5 × (0.02) 2 + 1 0 × (0.0.1) 2 = 0.

We should choose industry A as it is less concentrated / industry B is more monopolized

*Un sector es concentrado cuando pocas empresas se reparten la mayor parte del mercado

*you need market shares (%) ∑= 100%

4. HOW TO COMBINE INTERNAL AND EXTERNAL ANALYSIS: SWOT ANALYSIS (DAFO)

Nonprofit organization : organization that serves a specific cause and is not intended to make profits. Electronic business (e-business) or electronic commerce (e-commerce) : use of electronic communications (Internet) to produce

RESOURCES USED TO PRODUCE: natural (resources can be used in natural form), human (people who are able to perform work), capital (machinery, equipment, tools…), technology (knowledge or tools used to produce), information technology (technology that enables information to be used to produce).

Entrepreneurship : the creation of business ideas and willingness to take risk; the act of creating, organizing, and managing a business. Entrepreneurs: people who organize, manage, and assume the risk of starting a business

Stakeholders : people who have an interest in a business for reasons other than stock and physical property: owners, creditors, employees, suppliers and customers.

Stock : certificates of ownership of a business Stockholders : own stock and physical property Shareholders : investors who become partial owners of firms by purchasing the firm’s stock. Dividends : income that the firm provides to its owners Creditor : financial institution or individuals who provide loans Managers : employees who are responsible for managing job assignments of other employees and making key business decisions. Suppliers Customers Employee

TYPES OF BUSINESS DECISIONS: Management : means by which employees and other resources (such as machinery) are used by the firm Marketing : means by which products (or services) are developed, priced, distributed, and promoted to customers Finance : means by which firms obtain and use funds for their business operations Accounting : summary and analysis of the firm’s financial condition Information systems : include information technology, people, and procedures that work together to provide appropriate information to the firm’s employees so they can make business decisions.

*To earn money a firm need customers KPI: Key Performance Indicator ex: -10,000 calls cost 200,000$ → 100 sales → 200$/sale → 200,000 Balance = 0 = no profit -KPI 1%, to say if this indicator is good or bad we must observe: kind of company / evolution / history / sector

Economies can be seasonal (tourism, better in summer and spring) Data (raw, unorganized facts that need to be processed) =/ Information (processed data, organized or presented in a given context)

Who makes decisions? Stockholders, owner (small comp), financial department, marketing department, CEO Companies prefer not to earn money, but to gain customers. Salary structure: fixed + variable (number of sales) CRM= Customer Relationship Management (automatize the commercial impact / fidelization)

Economies of Scope: average total cost of production decreases as a result of increasing the number of different goods produced (una empresa fabrica dos vehículos) What helps create them? Same supplier / cost / machinery / distribution / design-team / plants

UNIT 2: TYPES OF FIRMS

1. SIZE

(- Micro companies: less than 10 employees)

• Small Companies: between 10 and 49
• Medium Companies: between 50 and 249
• Big Companies: More than 250

2. ACTIVITY SECTOR

Primary sector: agriculture,livestock, mining, fishing eolic and solar energy. Secondary or transformation sector: industry Tertiary or service sector: commercial or other services

3. GEOGRAPHICAL AREA

Local / Provincial / Regional / National / European / International

4. SOURCE OF CAPITAL

Public owned company: Bank of America Private company: New Balance Mixed economy enterprise: IBERIA

5. LEGAL FORM

a) Sole proprietorship or individual company (autónomo) business owned by a single owner. Allowed contributions: not limited, not separate from corporate individual. Liabilities to third parties: unlimited Corporate Governance: owner Representation: can appoint attorney Minimum capital outlay: unlimited Advantages: all earnings to to the sole proprietor / easy organization / complete control / lower taxes Disadvantages: sole proprietor incurs in all losses / unlimited liability / limited funds / limited skills

b) Partnership : a business that is co-owned by two or more people. Must register with the state and may need an occupational license. Advantages: additional funding / losses are shared / more specialization. Disadvantages: control is shared / unlimited liability / profits are shared.

• General partnership: all partners have unlimited liability.
  • Limited partnership or limited liability partnership (sociedad comanditaria): two or more partners unite to conduct a business in which one or more of the partners is liable only to the amount of money has invested. Limited partners do not receive dividends, but are investors and do not participate in management, they share profits and losses. General partners manage the business, receive a salary, share the profits or losses of the business, and have unlimited liability. Allowed contributions: work, money, property or rights Liabilities to third parties: solidary, limited and individual responsibility Corporate Governance: all partners have corporate rights unless one of them has been attributed Representation: expressly given to one of the partners Minimum capital outlay: unlimited Advantages: owners are not liable for the debts of the company

UNIT 3: AIMS OF THE FIRM

Aim of the firm (classical economic theory): maximize profits (max difference between value of outputs and inputs), maximize customer satisfaction (customers recommend) It is easier and more effective to maintain a customer happy than to recruit a new one. F inancial or Accounting P rof it = T otal revenue − Total costs (explicit costs) Economic P rof it = T otal revenue − T otal costs − opportunity costs (implicit costs taken into account)

Opportunity cost : whatever must be given up to obtain some item. Not related to the price. Can be subjective. Best alternative use of available resources.

1. SEPARATION BETWEEN OWNERSHIP AND CONTROL Corporations : legally chartered organisation that is a separate and legal entity apart from its owner. Provides legal protection to members / issues stock certificates to shareholders who are legally owners.

*CEO: chief executive officer CFO: chief financial officer Shareholders : legally owners of the corporation, according to the number of shares acquired. The market value of the shares depend on the interaction between demand and supply in the stock exchange market.

a) The agency problem : managers and shareholder might have different interests. Managers: power, reputation, wage, survival. Shareholders: firm value, firm survival, long- and short-term return. Principal agent problem: arises when different levels of authority coexist. An economic individual ( agent ) acts on behalf of another individual ( principal ) under a contract. -Problems: different interests / contract written before observing outcome / observability (effort can’t be observed nor evaluated) / moral hazard (opportunistic behaviour of the agent having more info with respect to the principal) / control and complete contracts are costly / different levels of authority. -Solutions to the problem of separation = control mechanisms a) Internal: -Financial incentives: salary as a % of profits / % of salary paid in shares (empleado parte de la empresa) / stock options (“Te vamos a dar la posibilidad de comprar en 2020 acciones a 10$”. El CEO trabaja xa subir el precio y comprarlas más baratas) -Internal control systems: control committees / role of borrowers (banks) / concentration of property b) External: -The market for firms: initial public offering (acciones se venden más caras que el mercado) / takeovers* -The market for executives: career promotions (buena carta de presentación) -The market for products: market competition

2. TAKEOVER

Takeover : occurs when an acquiring company makes a bid in effort to assume control of a target company, often by buying a majority stake. If if goes through→ the acquiring company becomes responsible for all the target company’s company operations, holdings and debt.

When the target is a publicly traded company, the acquiring company makes an offer for all the target’s outstanding shares. Tender offer: takeover bid in form of a public invitation to shareholders to sell their stock (shares) at a price above the market value.

• Hostile : takeover which goes against the wishes of the target company’s management and board of directors
• Friendly : takeover which is supported by the management of the target company

Actors of a takeover:

• Target company: company which is the object of a takeover attempt
• Black Knight: company making a hostile takeover bid on a target company
• White Knight: company willing to acquire the firm and rescue it from the hostile takeover efforts.
• Killer Bee: an investment banker who devices strategies to make a target company less attractive for takeover.

Tools against a takeover (“shark repellents”): a) Ex-ante: ● Shark repellent : corporate activity that is undertaken to discourage a hostile takeover ○ Golden parachute: lucrative benefits (stock options, bonuses, money payments) given to top executives resulting in the loss of their jobs. ● Poison pill : attempt to make the firm less attractive to the acquirer ○ Flip-in: shareholders, except acquirer, allowed to buy shares with discount ○ Flip-over: after the acquisition or merge shareholders are allowed to buy the acquirer’s share at a discounted price ● Convince shareholders to retain their shares ● Private placement of stock, by selling shares directly (privately) to specific institutions, the target can reduce the acquiring firm’s chances of obtaining enough shares to gain a controlling interest.

b) Post-ante: ● Pac-Man : target firm turns around and tries to takeover the company that has made the hostile bid. ● Greenmail : premium paid to the raider to get him/her to terminate a takeover attempt. ● Leveraged capitalization : company makes itself less desirable by borrowing a large sum of money (to repurchase stock→buyback program). Acquirers do not want to take on so much debt. ● Antitrust : appealing at the Antitrust authority in order to discourage the acquisition.

3. CORPORATE SOCIAL RESPONSIBILITY (“CSR”)

Corporate Social Responsibility : a corporation's initiatives to assess and take responsibility for the company's effects on environmental and social well-being.

i) Stakeholders : groups of people (not only shareholders) who are affected by and share the risks of the decisions taken by managers. They have proper interest in participating in the firm’s actions. Governmental bodies / trade unions / prospective employees and customers / shareholders and providers of financial resources / suppliers / trade associations / political groups

ii) Organizations voluntarily take further steps by taking responsibility for the impact of their action on the society,

• Economic dimension: profitability, liquidity, productivity
• Social dimension: workers motivation and satisfaction, better working conditions, create employment
• Environmental dimension: saving of resources, pollution reduction, environment preservation

iii) Several stakeholders → several dimensions to consider → difficult task Some independent organisations help firms to assess their stakeholders wealth and comply with CSR.

• H-form → holding model It is an M-form where divisions are independent, legal entities. Alternatives: -main mother without production facilities (just financial, coordination and control) -main mother company involved in production. Often in vertically integrated groups. Pros: allows the organization to protect itself / org can sell and buy its individual business with no disruption Cons: average/weak performance
• Matrix form (industries)

Pros: organization is able to coordinate the advantages of both functional and product departmentalization Cons: project groups make take longer to finish

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3. DIRECTING

Directing : operationally make the everyday actuation of organizing and planning through leadership and motivation. Lewin’s leadership styles:

• Authoritarian leadership (autocratic): leader dictates policies and procedures, decides what goals are to be achieved, and directs and controls all activities without any meaningful participation by the subordinates.
• Participative leadership (democratic): leader involves subordinates in goal setting, problem solving, team building etc., but retains the final decision making authority.
• Delegative (laissez-faire): leader transfers decision making power to one or more employees, but remains responsible for their decisions.

McGregor’s theories of human motivation: a) Theory X: Assumption: employees are inherently lazy and will avoid work if they can. They show little ambition without an incentive program and will avoid responsibility whenever they can. Implications: workers need to be closely supervised and comprehensive systems of controls developed (hierarchical structure)

b) Theory Y: Assumption: employees are ambitious, self-motivated, anxious to accept greater responsibility, and exercise self-control and self-direction (they enjoy their mental and physical work activities). Implications: by giving employees more freedom to do their best, there is an opportunity for greater productivity (creativity and innovative solutions)

4. CONTROLLING

Controlling : checking the performance and/or behaviour, ¿according to the goals?, in the final term, and along the process. Controlling performance: deviation Controlling behaviour: motivation

• Optimistic approach: largest possible payoff
• Criterion of realism (Hurwicz)/weighted average: select the coefficient of realism, α, value between 0 and 1. When α is close to 1, the decision maker is considered optimistic about future When α is close to 0 the decision maker is pessimistic about future. Payoff = α x (maximum payoff) + (1-α) x (minimum payoff)
• Laplace principle or principle of insufficient reason: assigning equal probabilities to all outcomes V alue ( A (^) i ) = pV (^) i 1 + .... + pV (^) in ; where n (^) * p = 1 or Σ p = 1 Choose the alternative with the maximum payoff
• Savage minimax regret criterion or minimizing the maximum regret: choose the alternative with the smallest loss or regret.

c) Decision under risk : when all facts are not exactly specified, each action leads to several possible outcomes. However, decision maker know the probabilities of these outcomes. Choose the alternative with the largest expected value (EV).

4. DECISION TREES

Chronological representation of decision problem States of nature: ´. we calculate the expected value and choose the highest Decision alternatives: ⃞. At the end of each limb of a tree are the payoffs obtained from the series of branches making up that limb. Solution: work right to left (from end to beginning)

PRACTICE 4 (UNIT 5)

HIGH DIRECT COMP HIGH INDIRECT COMP LOW COMP

DRAMA 6 million (2 mill) 8 million (4mill) 12 million (8 mi)

COMEDY 8 million (2 mill) 8 million (2 mill) 8 million (2 mill)

REALITY 4 million (2 mill) 6 million (4mill) 14 million (12m)

PRODUCTION COSTS:

-Drama: 4 million -Comedy: 6 million -Reality: 2 million *Benefit obtained

The TV Executive producer will make a different decision depending on which approach he decides to take: a) Conservative approach (evaluates each decision alternative in terms of the worst payoff that can occur): the worst scenario is the same for all three options: earnings of 2 million; so it would be indifferent what the producer decides to produce, either drama, comedy or reality.

b) Optimistic approach (decision with the largest possible payoff): he would produce the comedy (12 million profit)

c) Laplace (each scenario has the same probability, choose the one with the highest probability): he would produce the reality

HIGH DIRECT

COMP

HIGH INDIR

COMP

LOW COMP Valor

Likelihood 1/ 3 1/ 3 1/ 3

DRAMA 2 million 4 million 8 million ⅓*(8+4+2)=4.

COMEDY 2 million 2 million 2 million ⅓*(2+2+2)=

REALITY 2 million 4 miillion 12 million ⅓*(12+4+2)=

d) Savage (alternative which will result in the smallest lost): reality has a lowest opportunity cost

HIGH DIRECT

COMP

HIGH INDIR

COMP

LOW COMP OPP costs

DRAMA 2-2=0 4-4=0 12-4=8 4

The best strategy would be to acquire new AA machinery with the basic insurance.

The best decision is to investigate, which is likely to produce the new vaccine.

The minimal value of the probability of success to make the team decide to do further

investigation:

18x0.7+0.3x(-2)=

18p+(1-p)×(-2)=0*

18p-2+2p=

20p=

p=10%

*we equal the equation to 0 because it is the result of DOING NOTHING

UNIT 6: ACCOUNTING

1. ACCOUNTING

Accounting : process of measuring, interpreting, and recording data that reflect the financial condition of a firm. It allows managers and external third parties to understand the value of a firm’s assets, the amount of profits it has generated in a certain period, its capability to pay debts. Generally Accepted Accounting Principles ( GAAPs ): in order to make the information provided reliable, the process of collecting, classifying, summarizing and reporting financial significant events.

• Double-entry Bookkeeping system: transactions and accounts
• Cycles: real ( economic ): goods → raw materials → resources debit financial : cash → debts → profits → investments credit The importance of a firm’s of a firm’s financial structure arises from: different time scheduling / actual results may differ from expectations.

2. BASIC ACCOUNTING TERMS Assets (activo): any item of value owned by a firm which could be converted into cash: a. Current assets: (activo corriente) could be converted into cash in less than a year i. Cash : currency and checking account (disponible) ii. Account receivable : credits from customers (realizable) (clientes, efectos comerciales a cobrar) iii. Merchandise inventories : stock of goods (existencias) (mercaderías) iv. Prepaid expenses : goods already paid for future need, accrual basis accounting b. Fixed assets: (activo no corriente) could be converted into cash in more than a year (Hacienda acreedora) i. Property, Plant and Equipment ( PP&E ) ii. Depreciation : cost of a fixed asset recognized for a specific fiscal year c. Intangible assets: assets that have no physical form or clearly defined value i. Goodwill : firm’s extra form or clearly defined value ii. Intellectual property rights

Liabilities (pasivo): claims that held against firm’s assets: a. Current liabilities: (pasivo corriente) debts that will be paid off within a year i. Accounts payable : debts to be paid to suppliers ii. Accrued expenses : taxes, wages… due but unpaid b. Long-term liabilities: (pasivo no corriente) debts that will not be paid off within a year i. Long-term bonds : loans ii. Pension obligations : money due to workers

Owners’ (stockholders) equity : value of the firm remaining to owner after all liabilities have been repaid a. Capital Stock: (capital social) original investment made by the firm’s owners b. Retained earnings: previous profits not distributed to the firm's owners (as dividends)

3. BALANCE SHEET Balance sheet : a financial statement that summarizes a company's assets (what a firm owns), liabilities (what it owes) and shareholders' equity at a specific point in time (snapshot).