management midterm review chapter 1-5 notes

Business Volume 1: Custom 2 nd Edition Textbook Notes (MGTA01 2013)

Chapter 1: Understanding the Canadian Business System

o Business: an organization that produces or sells goods or services in an effort to make a profit

o Profit is what remains after a business’s expenses have been subtracted from its revenues

o Businesses exist to earn profits

Economic Systems Around the Worldo Allocates a nation’s resources among its citizenso Factors of production: the basic resources that a country’s businesses use to

produce goods and serviceso Four factors of production: labour, capital, entrepreneurs, and natural resources

Labour:o People who work for a companyo Human resources

Capitalo Financial resources needed to operate an enterpriseo Personal investment by owners for small businesses

Entrepreneurso People who accept the opportunities and risks involved in creating and operating

businessesNatural Resources

o Land, water, mineral deposits, and treeso Include all physical resources

Information Resourceso Specialized expertise and knowledge of peopleo Various forms of economic data for their worko Creation of new information or the repackaging of existing information for new

users and different audiences

Types of Economic Systemso Manage factors of productiono Ownership can be private or by governmento Can differ in the way that decisions are made about production and allocationo Command economy: relies on a centralized government to control all or most

factors of production and to make all or most production and allocation decisionso Market economy: individuals – producers and consumers – control production

and allocation decisions through supply and demand

Command Economieso Communism and socialism


o Communism is a system in which the government owns and operates all sources of production

o Socialism: the government owns and operates only selected major industries

Market Economieso Mechanism for exchange between the buyers and sellers of a particular good or

serviceo Capitalism: sanctions the private ownership of the factor of production and

encourages entrepreneurship by offering profits as an incentive o Operation of demand and supply

Mixed Market Economieso Command and market economies are viewed as oppositeso Mixed market economy: system featuring characteristics of both command and

market economieso Privatization: the process of converting government enterprises into privately

owned companieso Deregulation: the reduction in the number of laws affecting business activity and

in the powers of government enforcement agencies

Interactions Between Business and GovernmentGovernment as Customer

o Buys thousands different products and services from business firmso Largest purchaser of advertising in Canada

Government as Competitoro Competes with business through Crown corporationso Exists for provincial and federal level

Government as Regulatoro Regulate through many administrative boards, tribunals, or commissionso Provincial boards and commissions also regulate business through their decisionso Protecting competition, protecting consumers, achieving social goals, and

protecting the environment

Government as Taxation Agento Revenue taxes are levied by governments primarily to provide revenue to fund

various services and programso Progressive revenue taxes are levied at a higher rate on higher-income taxpayers

and at a lower rate on lower-income taxpayerso Regressive revenue taxes are levied at the same rate regardless of a person’s

incomeo Restrictive taxes are levied partially for the revenue they provide, but also

because legislative bodies believe that the products in question should be controlled


Government as Provider of Incentiveso Help stimulate economic developmento Offer incentives through the many services they provide to business firms through

government organizationso Municipal tax rebates for companies

Government as Provider of Essential Serviceso Facilitate business activity through the wide variety of services they supplyo Examples: highways, postal service and minting moneyo Maintain stability through fiscal and monetary policyo Sewage, hospitals and policeo These activities create the kind of stability that encourages business activity

The Canadian Market Economy

Demand and Supply in a Market Economyo Inputs used by a business and the products created by business have their own

marketso Decide what inputs to buy, what to make and in what quantities, and what prices

to chargeo Customers decide what to buy and how much they want to pay

The Laws of Demand and Supplyo Decisions about what to buy and what to sell are determined primarily by the

forces of demand and supplyo Demand is the willingness and ability of buyers to purchase a product or a serviceo Supply is the willingness and ability of producers to offer a good or service for

saleo Law of demand: buyers will purchase more of a product as its price drops and less

of a product as its price increaseso Law of supply: producers will offer more of a product for sale as its price rises

and less as its price drops

The Demand and Supply Scheduleo Obtained from marketing research and other systematic studies of the marketo Understand the relationships among different levels of demand and supply at

different price levels

Demand and Supply Curveso Demand curve shows how many products will be demanded at different priceso Supply curve shows how many units of a product will be supplied at different

prices


o When the demand and supply curves are plotted on the same graph, the point at which they intersect is the market price or equilibrium price – the price at which the quantity of goods demanded and the quantity of goods supplied are equal

Surpluses and Shortageso Surplus: a situation in which the quantity supplied exceeds the quantity demandedo Shortage: the quantity demanded will be greater than the quantity suppliedo Finding the equilibrium point

Private Enterprise and Competition in a Market Economyo Private enterprise: allows individuals to pursue their own interests with minimal

government restrictiono Requires private property rights, freedom choice, profits, and competition 1. Private property rights: ownership of the resources used to create wealth is in the

hands of individuals2. Freedom of choice: the choice to buy, sell and hire3. Profits: the lure of profits leads some people to abandon the security of working

for someone else and to assume the risks of entrepreneurship. The anticipated profits also influence individuals’ choice of which goods or services to produce

4. Competition: if profits motivate individuals to start businesses, competition motivates them to operate those businesses efficiently. It occurs when two or more businesses vie for the same resources or customers

Perfect Competitiono All firms in an industry must be smallo The number of firms in the industry must be largeo No single firm is powerful enough to influence the price of its productso Prices are determined by supply and demando The products of each firm are so similar that buyers view them as identical to

those of other firmso Both buyers and sellers know the prices that others are paying and receiving in the

marketplaceo Easy to leave or enter the marketo Prices are set exclusively by supply and demand and accepted by both sellers and

buyers

Monopolistic Competitiono Fewer sellers involved than perfect competition

o Many sellers try to make products at least seem to differ from those of competitors

o Businesses may be large or smallo Can still enter or leave the market easilyo Gives sellers some control over prices


Oligopolyo When an industry has only a handful of sellerso Sellers are quite largeo It is difficult for a new competitors to enter the industry because large capital

investment is neededo Have more control over their strategies than monopolistically competitive firms,

but the actions of one firm can significantly affect the sales of every other firm in the industry

Monopolyo When an industry or market has only one producero Gives a firm complete control over the price of its producto Consumer demand will fall as its price riseso Competition Act forbid many monopolies, and the prices charged by so called

“natural monopolies” are closely watched by provincial utilities boardso Natural monopolies are found in industries in which are company can most

efficiently supply all the product or service that is needed

Chapter 2: Understanding the Environments of BusinessThe Economic Environment

o External environment: which consists of everything outside an organization’s boundaries that might affect it

o Economic environment: refers to the conditions of the economic system in which an organization operates

Economic Growtho Less than 2.5% of the population works in agriculture

o Increased because we have been able to increase total output in the agricultural sector

The Business Cycleo Pattern of short-term ups and downs in an economyo Has 4 phases: peak, recession, through, and recoveryo Recession is a period during which aggregated output declineso Long-term recession depression

Aggregate Output and the Standard Livingo Main measure of growth is aggregate output: the total quantity of goods and

services produced by an economic system during a periodo An increase in aggregate output is growtho When output grows more quickly than the population, two things follow: output

per capita – the quantity of goods and services per person – goes up and the system provides relatively more of the goods and services that people want


o People living in an economic system benefit from a higher standard of living

Gross Domestic Producto Refers to the total value of all goods and services produced within a given period

by a national economy through domestic factors of productiono Increase GDP = economic growth

Gross National Producto Gross national product (GNP) refers to the total value of all goods and services

produced by a national economy within a given period regardless of where the factors of production are located

o Profits earned by foreign firms in Canada are included in GDPo Redefining Progress has proposed a more realistic measure to assess economic

activity – the Genuine Progress Indicator (GPI)o GPI treats activities that hard the environment or our quality of life as costs and

gives them negative values

Real Growth Rateso Growth rate of GDP adjusted for inflation and changes in the values of the

country’s currencyo Growth depends on output increasing at a faster rate than population

GDP per Capitao GDP per capita means GDP per persono Dividing total GDP by the total population of a country

Real GDPo Nominal GDP: GDP measured in current dollars or with all components valued at

current priceso Real GDP: GDP calculated to account for changes in currency values and price

changes

Purchasing Power Parityo The principle that exchange rates are set so that the prices of similar products in

different countries are about the same

Productivityo Measure of economic growth that compares how much a system produces with

the resources needed to produce ito If more products are being produced with fewer factors of production, what

happens to the prices of these products? They go downo Standard of living improves only through increases in productivityo Factors that can help or hinder the growth of an economic systems: balance of

trade and the national debt


Balance of Tradeo The economic value of all the products that a country exports minus the economic

value of its imported productso A positive balance of trade results when a country exports more than it imports

helps economic growth creditor nationo Negative balance of trade results when a country imports more than it exports

inhibits economic growth trade deficit

National Debto Amount of money that the government owes its creditorso Government takes in revenues and has expenseso Budget deficits: the government spent more money each year than it took ino Sells bondso Competes with every other potential borrower

Economic Stabilityo Stability: a condition in which the amount of money available in an economic

system and the quantity of goods and services produced in it are growing at about the same rate

o Factors that threaten stability: inflation, deflation, and unemployment

Inflationo Occurs when there are widespread price increases throughout an economic systemo Occurs when the amount of money injected into an economy outstrips the

increase in actual outputo Decreases the purchasing power of your moneyo Measure inflation by price increaseso Consumer price index (CPI) measures changes in the cost of a “basket” of 600

different goods and services that a typical family might buy

Deflationo Falling priceso May fall because industrial productivity is increasing and cost savings can be

passed onto costumers, or because consumers have high levels of debt and are therefore unwilling to buy very much

Unemploymento Level of joblessness among people actively seeking worko Fictional unemployment: people are out of work temporarily while looking for a

new jobo Seasonal unemployment: people are out of work because of the seasonal nature of

their jobso Cyclical unemployment: people are out of work because of a downturn in the

business cycle


o Structural unemployment: people are unemployed because they lack the skills needed to perform available jobs

o If government cut taxes or spending more money on the economy, prices in general may go up because increased consumer demand, but then inflation sets in, and purchasing power declines

Managing the Canadian Economyo Government acts to manage the Canadian economic system through two sets of

policies: fiscal and monetaryo Manages the collection and spending of its revenues through fiscal policieso Tax increases can function as fiscal policies, not only to increase revenues but to

manage the economy as wello When the growth rate of the economy is decreasing, tax cuts will normally

stimulate renewed economic growtho Monetary polices focus on controlling the size of the nation’s money supplyo Higher interest rates make money more expensive to borrow and thereby reduce

spending tight monetary policyo Lower interest rates make money less expensive to borrow and thereby increase

spending easy monetary policyo Fiscal policy and monetary policy make up stabilization policy: government

economic policy whose goal is to smooth out fluctuations in output and unemployment and to stabilize prices

The Business Environmento Three most serious issues facing Canadian businesses:1. Taxation2. The value of the Canadian dollar3. The need for an education/skilled workforce

The Industry Environmento Managers must understand the company’s competitive situation, and then develop

a competitive strategy to exploit opportunities in the industry

Rivalry Among Existing Competitorso Rivalry in intense price competition, elaborate advertising campaigns, and an

increased emphasis on customer service


Threat of Potential Entrantso If it is easy for new competitors to enter a market, competition will likely be

intense and the industry will not be very attractiveo Some industries are very capital-intensive and are therefore difficult to enter

Supplierso The amount of bargaining power suppliers have in relation to buyers helps

determine how competitive an industry iso The power of suppliers is influenced by the number of substitute products that are

available

Buyerso When there are only a few buyers and many supplies, the buyers have a great deal

of bargaining power

Substituteso Many substitute products industry is more competitive

Emerging Challenges and Opportunities in the Business Environmento Most successful firms are dealing with challenges and opportunities in

today’s business environment by focusing on their core competencies – the skills and resources with which they compete best and create the most value for owners

o They outsource non-core business processes, paying suppliers and distributors to perform then and thereby increasing their reliance on suppliers

o Often involve globally dispersed processes and supply chains o Most publicized steps that companies have taken to respond to challenges

and opportunities in the business environment: outsourcing

Outsourcingo The strategy of paying suppliers and distributors to perform certain business

processes or to provide needed materials or serviced

Chapter 3: Understanding Entrepreneurship, Small Business, and New Venture CreationSmall Business

o Industry Canada is the main federal government agency responsible for small business

o Relies on two distinct sources of information, both provided by statistics Canada: the Business Register and the Labour Force Survey

o To be included in the register, a business must have at least one paid employee, annual sales of $30 000 or more, or be incorporated


o Goods-producing business in the register is considered small if it has fewer than 100 employees

o Service-producing business is considered small if it has fewer than 50 employeeso LFS uses information from individuals to make estimates of employment and

unemployment levelso Individuals are classified as self-employed if they are working owners of a

business that is either incorporated or unincorporated, if they work for themselves but do not have a business, or if they work without pay in a family business

o Industry Canada reports that there are 2.2 million “business establishments” in Canada and about 2.5 million people who are “self-employed”

o Unincorporated business operated by a self-employed person would not be counted among the 2.2 million businesses

o Majority of businesses in Canada have no employees, nor are they incorporatedo Small business: an owner-managed business with less than 100 employees

The New Venture/Firm

o It is considered to be new if it has become operational within the previous 12 months, if it adopts any of the main organizational forms and if it sells goods or services

o A new venture as a recently formed commercial organization that provides goods and/or services for sale

Entrepreneurshipo Entrepreneurship is the process of identifying an opportunity in the marketplace

and accessing the resources needed to capitalize on that opportunityo Entrepreneurs are people who organize and seize opportunitieso Small businesses often provide an environment to use personal attributeso People who exhibit entrepreneurial characteristics and create something new

within an existing large firm or organization are called intrapreneurs

The Role of Small and New Businesses in the Canadian EconomySmall Businesses

o Close to 98% of all businesses in Canada are smallo Small: >100 employeeso Medium: 100-499 o Large: <500 o Private sector generally refers to the part of the economy that is made up of

companies and organizations that are not owned or controlled by the governmento Small businesses account for over 2/3 of employment in four industries: non-

institutional healthcare (90%), the construction industry (77%), other services (73%), and accommodation and food (69%)

o Contribution small businesses make to the economy in terms of GDP

New Ventures


o Most of the growth in firms occurred in the services-producing and goods-producing sector

o Women are playing a bigger roleo Increasing more than meno Can only be classified as a new business when the employees were acquired

The Entrepreneurial Processo Entrepreneur must identify a business opportunity and access the resources

needed to capitalize on ito Three key process elements: the entrepreneur, the opportunity, and resourceso Venture’s next phase of development will result in one of the following outcomes,

growth, stability, decline, or demise

The Entrepreneuro Varied characteristicso Identify an opportunity and access resources

Identifying Opportunitieso Generating ideas for new or improved products, processes, or serviced, screening

those ideas so that the one that presents the best opportunity can be developed, and then developing the opportunity

Idea Generationo Involves abandoning traditional assumptions about how things work and how they

ought to be, and seeing what others do noto Majority originate from events relating to work or everyday lifeo Work experience is the most common (45-85%)o Personal interest/hobby (16%)

Screeningo Key part of processo Weed out the “dead-end” venture ideas, more time and effort you can devote to

the ones that remaino A product or service that creates or adds value for the customer is one that solves

a significant problem, or meets a significant need in new or different wayso Competitive advantage exists when potential customers see the product or service

as better than that of competitorso Longer markets are in a state of flux, the greater the likelihood of being able to

sustain a competitive advantageo Absence of a competitive advantage or developing a competitive advantage that is

not sustainable constitute two fatal flaws of many new ventureso Determining whether sales will lead to profitso Requires an initial understanding of who the customers are, what their needs are,

and how the product or service will satisfy their needs better than competitor’s products will


o Requires a thorough understanding of the key competitors who can provide similar products, services, or benefits to the target customer

o Sales forecast: an estimate of how much of a product or service will be purchased by the prospective customers for a specific period of time – typically one year

o Total sales revenue is estimated by multiplying the units expected to be sold by the selling price

o Sales forecast forms the foundation for determining the financial viability of the venture and the resources needed to start it

o Typically consist of an estimate of start-up costs, a cash budget, an income statement, and a balance sheet

The Idea has Low Exit Costso Exit costs are low if a venture can be shut down without a significant loss of time,

money, or reputation

Developing the Opportunityo For new ventures it is important to be responsive to new information and be on

the lookout for opportunities that were not originally anticipatedo Three main strategies:1. Introduce a totally new product or service2. Introduce a product or service that will compete directly with existing competitive

offerings but add a new twist3. Franchise

o Franchise is an arrangement in which a buyer (franchisee) purchases the right to sell the product or service of the seller (franchiser)

o When capital requirement are high need for considerable research and planning

o Costs associated with effectively coordinating tasks will be minimized business plan required

o Business plan is a document that described the entrepreneur’s proposed business venture; explains why it is an opportunity, and outlines its marketing plan, its operational and financial details, and its managers’ skills and abilities

o If market conditions are changing rapidly, the benefits gained from extensive research and planning diminish quickly

o If the product is highly innovative, market research is of less value since the development of entirely new products involves creating needs and wants rather than simply responding to existing needs

Accessing Resourceso Use few resources as possible and use other peoples’ resources whenever they cano Bootstrapping can also refer to the acquisition of other types of resources such as

people, space, equipment, or materials that are loaned or provided free by customers or suppliers


Financial Resourceso Two main types of financing:1. Debt financing refers to money that is borrowed2. Equity financing refers to money that the entrepreneur or others invent in a

business in return for an ownership interest

o To obtain debt financing the entrepreneur must have an adequate equity investment in the business – typically 20% of the business’s value – and collateral

o Collateral refers to items or assets owned by the business or by the individual that the borrower uses to secure a loan or other credit

o These items can be seized by the lender if the load isn’t repaid according to the specified terms

o To lenders, equity investment demonstrates the commitment of the entrepreneuro Most common source of debt financing include:

Financial Institutionso Banks are risk averseo New businesses are considered riskyo Businesses has yet to establish ability to repay loan

Supplierso Who provide goods or services to the entrepreneur with an agreement to bill them

latero Trade credito Short-term

The most common sources of equity financing include:1. Personal Savings2. Love Money3. Private Investors (angels)4. Venture Capitalists

Other Resourceso Partners, employees, customers, suppliers, professionals, consultants, government

agencies, lenders, shareholders, and venture capitalistso Sometimes ownership is shared with one or more of these stake holders in order

to acquire the use of their resourceso Form of legal organization chosen affects whether ownership can be shared and

whether resources can be accessedo Whether a team is necessary depends upon:a) The size and shape of the venture – how many people does the venture require?b) Personal competencies – what are the talents, know-how, skills, track record,

contacts, and resources that the entrepreneur brings to the venture?

o Most teams tend to be formed in one of two ways:


1. One person has an idea and then several associates join the team over the first few years of the venture’s operation

2. An entire team is formed at the outset based on such factors as a shared idea, a friendship, or an experience

Starting Up a Small BusinessBuying an Existing Business

o 1/3 of all new businesses that were started in the past decade were bought from someone else

o Odds of success are bettero Established relationships with lenders, suppliers, and other stakeholderso Gives potential buyers a much clearer picture of what to expecto Downside? May not be able to avoid certain problems

Taking Over a Family Businesso Unobtainable financial and management resources because of the personal

sacrifices of family memberso Goodwill or strong reputationo Employee loyalty is often higho Unified family management and shareholders group may emergeo Downside? Disagreements over which family members assume control

Buying a Franchiseo Operating under licenses issues by parent companies to local entrepreneurs who

own and manage themo Accounts for 43% of retail sales in Canadao 30 B in annual sales revenueo Gives franchisees the right to sell the product of the franchisero Franchising agreement outlines the duties and responsibilities of each partyo Stipulates the amount and type of payment that franchisees must make to the

franchisero Royalty payments

Reasons for Success1. Hard work, drive and dedication


2. Market demand for the product or service3. Managerial competence4. Luck

Reasons for Failure1. Managerial incompetence or inexperience2. Neglect3. Weak control systems4. Insufficient capital

Chapter 4: Understanding Legal Forms of Business Organization

The Sole Proprietorshipo A business owned and operated by one persono Extension of yourselfo Usually smallo Majority in Canada are sole proprietorshipo Accounts for only a small proportion of total business revenues

Advantages:o Freedomo Easy to formo You don’t need to register your business name to start operatingo Simplicity of legal procedures o Low start-up costso Tax benefits

Disadvantages:o Limited liability: responsible for all debts and legal liabilities incurred by the

businesso Dissolves when the owner doeso Depends on the resources of one person whose managerial and financial

limitations may constrain the businesso Hard to borrow money to start-up or expando Unable to recover loans if the owner becomes disable

The Partnership


o Formed when two or more persons operate a business for profit o Pool their financial, managerial and technical resourceso Two types of partnership:

General partnershipo All the partners share in the profits of the business and have a say in managing the

businesso All are responsible for the debts and other liabilities

Limited partnershipo At least one general partnership and one or more limited partnerso General partners run the business and have unlimited personal liability for its

debts and liabilitieso Limited partners do not participate in managing the businesso Share some profit, but they have no personal liability for the debts and liabilitieso A limited partner can lose only the original investment in the partnership, while a

general partner can lose much more if the partnership business does not make profits

Advantages:o Ability to grow by adding talent and moneyo Somewhat easier time borrowing fundso Can also invite new partners to join by investing moneyo Simple to organizeo Few legal requirementso Must begin with an agreemento Partners are taxed as individuals

Disadvantages:o Unlimited liabilityo Each partner may be held responsible for all debtso All liable if the offending partner can’t pay upo Lack of continuityo Difficulty of transferring ownershipo Provides little or no guidance in resolving conflicts between the partners

The Corporationo All corporations share legal status as a separate entity, property rights and

obligations, and an definite lifespan o Liable for its own debts and whose owners’ liability is limited to their investmento Shareholders: investors who buy shares of a corporation – are the real owners of

the corporationo Profits may be distributed to stock holders in the form of dividendso Board of directors is the governing body of a corporation


o Ensure that the corporation is run in a way that is in the best interests of the shareholders

o Chooses the president and other officers of the business and delegates the power to run the day-to-day activities of the business to those officers

o Sets policy on paying dividends, on financing major spending, and on executive salaries and benefits

o Large companies may have 20-30o Smaller, have no more than 5

o Inside directors are employees of the company and have primary responsibility for the corporation

o They are also top manager (president and CEO)o Outside directors are not employees of the corporationo Corporate officers are the top managers hired by the board to run the corporation

on a day-to-day basiso CEO is responsible for internal managemento Vice president oversees functional areas such as marketing or operations

Types of Corporationso Two types of private sector corporationso Public corporation is a business whose shares stocks are widely held and available

for sale to the general publico Private corporations are held by only a few shareholders, are not widely available

for purchase, and may have restrictions on their saleso Most new corporations start out as private because few investors will buy an

unknown stocko As it develops it may issue shares to the public initial public offering (IPO)

Formation of the Corporationo Two most widely used methods to form a corporation are federal incorporation

under the Canada business Corporation Act and provincial incorporation under any of the provincial corporations act

o Former is use if the company is going to operate in more than one province; the latter is used if the founders intend to carry on business in only one province

o Articles of incorporation must be drawn up

Advantages:o Limited liability: liability of investors is limited to their personal investment in the

corporationo Continuityo Selling shares, they expand the number of investors and the amount of available

funds


Disadvantages:o New firm in forming a corporation is the cost ($2 500)o Need legal help in meeting government regulationso Heavily regulated

Redrawing Corporate Boundarieso Successful companies are responding to challenges in the environment by

redrawing traditional organizational boundaries, and by joining together with other companies to develop new goods and services

Acquisitions and Mergerso In an acquisition, one firm simply buys another firmo A merger is a consolidation of two firms, and the arrangement is more

collaborativeo When companies are in the same industry horizontal mergero When one of the companies in the merger is a supplier or customer to the other

vertical mergero In a friendly takeover, the acquired company welcomes the acquisition perhaps

because it needs cash or sees other benefits in joining the acquiring firmo Hostile takeover, the acquiring company buys enough of the other company’s

stocks to take control even through the other company is opposed to the take overDivestitures and Spinoffs

o Divestitures occurs when a company decides to sell part of its existing business operations to another corporation

o Spinoff: a company might set up one or more corporate units as new, independent businesses because a business unit might be more valuable as a separate company

Chapter 5: Understanding International Business

Terms:o globalization: the integration of markets globallyo imports: products that are made or grown abroad and sold in Canadao exports: products made or grown in Canada that are sold abroad.o per capita income: the average income per person of a country

The Major World Marketplace:o the contemporary world economy revolves around three major market-places:

North America, Europe and Asia-Pacific.o high income countries are countries with per capita income greater than US

$10,065. The list includes Canada, the U.S, most countries in Europe, Australia, Japan, South Korea, Kuwait, the United Arab Emirates, Israel, Singapore, Hong Kong and Taiwan.


o upper-middle income countries are those with per capita between US $3255 and US $10, 065, include the Czech Slovakia, Greece, Hungary, Poland, Turkey, most countries comprising the former Soviet Bloc, Mexico, Argentina and South Africa

o low middle income countries are those with per capita between U.S $825 and U.S $3255. Among the countries in this group are Colombia, Guatemala, Samoa, and Thailand. Some of these countries such as China and India possess high populations and are seen as potentially attractive markets for international business.

o low income countries (called developing countries) are those with annual per-capita income of less than US $825. Due to low literary rates, weak infrastructures, unstable governments and related problems, these countries are less attractive to international businesses. For example, the nation of Somalia is plagued by drought, civil war and starvation, and plays virtually no role in the world economy.

Forms of Comparative Advantage

Terms:o absolute advantage: a nation’s ability to produce something more cheaply or

better than any other country.o comparative advantage: a nation’s ability to produce some products better or more

cheaply than it can others.o international competitiveness: the ability of a country to generate more wealth

than its competitors in world market.

National Competitive Advantage: o a country will be inclined to engage in international trade when factor conditions

demand conditions related to and supporting industries and strategies/structures/rivalries are favourable. It is derived from four conditions.

o factor conditions are the factors of production identified in Chapter 1.o demand conditions reflect a large domestic consumer base that promotes strong

demand for innovative products.o related and supporting industries include strong local or regional suppliers and/or

customers.o strategies, structures and rivalries refer to firms and industries that stress cost

reduction, product quality, higher productivity and innovative new products.

Import-Export Balances

o exchange rates: the rate at which the currency of one nation can be exchanged for that of another.

o euro: a common currency shared among most of the members of the European Union.

o Exchange rates and competition:


o companies that conduct international operations must watch exchange rate fluctuations closely because these changes affect overseas demand for their product and can be a major factor in international competition

o in general, when the value of a country’s currency rate rises (becomes stronger), companies based there find it harder to export products to foreign markets and easier for foreign markets to enter local markets.

o it also makes it more cost-efficient for domestic companies to move production operations to lower cost sites in foreign countries.

o the value of the country’s currency declines (becomes weaker), the opposite reaction occurs.

o as the value of a country’s currency falls, its balance of trade should improve because domestic companies should experience a boost in exports.

o there should also be a corresponding decrease in the incentives for foreign companies to ship products into the domestic market.

International Business Management

Gauging International Demand:o Two questions a company should consider when considering international

expansion:o Is there a demand for my products abroad?o If so, must I adapt those products for international consumption?

o products that are successful in one country may be useless in another. (example: snowmobiles are useless in Central America, due to climatic lack of snow)

o foreign demand for a product may be greater, the same as, or weaker than domestic demand.

o market research and/or prior market entry of competitors may indicate whether there’s an international demand for a firm’s products.

Adapting to Customer Needs:o if there is international demand for its product, a firm must consider whether and

how to adapt that product to meet the special demands of foreign customers. (example: dubbing movies into foreign languages)

Levels of Involvement in International Business

Terms: o exporters: a firm that makes products in one country and then distributes

and sells them in others.o importers: a firm that buys products in foreign markets and then imports

them for resale in its home country.o international firm: international firm conducts a significant portion of its

business abroad and maintains manufacturing facilities overseas.


o multinational firm: controls assets, factories, mines, sales offices and affiliates in two or more foreign countries.

International Organization Structures

Terms: o independent agents: a foreign individual or organization who agrees to

represent an exporter’s interests in foreign markets.o licensing arrangement: an arrangement by an owner of a process or

product to allow another business to produce, distribute or market it for a fee or royalty.

o branch office: a location that an exporting firm establishes in a foreign country in order to sell its products more effectively.

o strategic alliance: an enterprise in which two or more persons or companies temporarily

o foreign direct investment(FDI): buying or establishing tangible assets in another country.

Barriers to International Trade

Social and Cultural Differences:o language barriers are an obvious cause, resulting in inappropriate naming of

products.o physical stature in different nations can also make a difference, especially in

terms of clothing.o differences in the average age of the local population can also have ramifications

for product development and marketing.o countries with growing populations tend to have a lot of young people, thus

causing an increased desire for electronics and clothing, while countries with stable or declining populations have more older people, thus causing increased demands for general pharmaceuticals.

o -subtle value differences can also have an important impact on international business. A grocery trip to Canadians is seen as buying food.

o however to Europeans it is seen as an opportunity to relax and meet friends.

Economic Differences: o economic differences are more pronounced.o in dealing with economies like those, firms must be aware of when and to

what extent the government is involved in a given industry.

o Legal and Political Differences:

o Terms:o quotas: a restriction by one nation on the total number of products of a

certain type that can be imparted from another nation.


o embargo: a government order forbidding exportation and/or importation of a particular product.

o tariff: a tax levied on imported products.o subsidy: a government payment to help domestic business compete with

foreign firmso protectionism: protecting domestic business at the expense of free market

competition.o local content laws: laws requiring that products sold in a particular country

be at least partly made in that country.o business practice laws: laws or regulations governing business practices in

given countries.o cartel: any association of producers whose purpose is to control the supply

and price of a given product.o dumping: selling a product for less abroad than in the producing nation;

illegal in Canada.

management midterm review chapter 1-5 notes

Documents

environment government

canada government

government enterprises

centralized government

factor of production

citizens factors of

business activity

business volume