1.

GENERAL CONCEPTS
1.1 Concept and nature of business

ORGANIZATION:
A set of persons grouped to reach a target
For doing it, they work through a set of procedures and rules with the appropiate means or
resources
3 main characteristics of the organizations:
o Set to reach specific goals
It can be one or more goals such as cultural, educational, sports, financial or lucrative
o There is a need of resources (goods, human, financial)
o They operate following procedures and rules

Examples (according to their goals):

o Non- profit organizations
o Educational (Universidad Carlos III)
o Humanitarian (Save the Children, Red Cross)
o Political (political parties)
o Cultural, ecological, sportive, laboral, etc.
o To get economical profits: Enterprises.

All Enterprises are organizations but not all organizations are enterprises.
Difference: the aim for which they had been created.
In organizations the purpose can be educational, cultural, social, medical…
In the enterprises the main purpose is always of economic nature to obtein profits.

The enterprise
ENTERPRISE:
It is an organization that transforms a set of inputs (factors of production) into outputs (goods
and services) aimed to satisfy customers’ needs and wants and generate an economical profit for
the owners
Resources:
o Tangible resources: the physical elements that can be located
o Physical resources: lands, buildings, equipment, raw materials,..
o Financial resources: the money you have available for spending. This includes
cash, liquid assers, equity funding and loans
o Intangible: Patents, brands, reputation,...
o Relationships: the value of the company’s relations with the outside world
o Human: is the set of the workers’ knowledge
o Structural: organization systems, procedures, databases…
o Human resources
Another classification: active and passive
 Characteristics:
o Economic unit: transformation of raw material in goods or services is done by adding an
economic value in this process, without it the entreprise could not continue working
o Technical unit: Transform resources into goods and services
o Social unit: an enterprise works because there are people who work, collaborate, take
decisions and accept the risk
o Political unit: Conciliation of personal interest of the people with the ones of the
enterprise
o Decision unit: the managers lead and manage the company

Open system
The enterprise is conceived as a system, specifically an open system
o System means the existence of interrelated parts or elements where each part influences
the functioning of the system
The company, by virtue of being a system, has a series of properties:
o Synergy: value of the whole is different from the sum of the valid of the parts
o Possibility of breaking down the system into subsystems that share the same properties
There are several characteristics that define open systems:
o Import some type of energy from their environment (inputs) for their operation, no self-
sufficient
o Transform the energy of the environment through some type of activity
o Input are not only materials but also information (feedback)
o They are equifinal, you can reach the same final state following different paths
The company is divided into functional subsystems, that is, there is a subsystem with each of the
functions that are performed in the company
Purpose
The principal aim of the enterprise is to generate goods and services to obtain a profit.
This purpose can be divided in many others:
o Purchase function: the enterprise needs to buy the raw materials and goods
o Assets generation function (generación de bienes): produce goods and services for the
clients
o Distribution function: aims to bring the product closer from its manufacture to the final
consumer
o Reasearch and technological development function: allows improving the quality of
products and increasing their technological capacity
o Management function: controls all the others
o Human resources function: its purpose is the recruitment, motivation and development
of the people who work in the company

MACROECONOMIC FOCUS:
The Enterprise is an economical unit that, through the production of goods and services,
generates wealth and income

Creation of Wealth: it is accounted by the added value

 Added value: Difference between the monetary value of enterprise production
(output) and the monetary value of all goods and services acquired to other
productive units (inputs)

Generation of Income: Enterprises and domestic economies (consumers/households)

interacts with goods and services markets and the factors of production markets, creating
a continuous process that generates a circular flow of income
o Good and services market
o Production factor’s market: buy and sell factor of production (land, work,
capital).

Circular flow model: money moves from

producers to workers as wsges and then
back from workers to producers as
workers spend money on products and
services
The circular flow model demonstrares
how money moves from producers to
households and back again in an
endless loop

There are 2 basic economic agents:

o Households: play a double role
o Owners of the production factors (land, labor, capital, technology and ‘know
how’)
o Elemental units of consumption
o Firms
o Use the production factors from households to produce goods and services that
households demand

Exhanges between firms and households happen in the markets.

1. Households deliver inputs to firms and get incomes: wages, rents, dividents
2. The exchange is done in the market of production factors: labor market, stock exchange
market
3. Firms produce goods and services
4. Firms exchange these with households in the markets of goods and services getting the
money spent by households

In the economic system we can distinguis two types of flow:

o Real flows: goods, services and factors
o Financial flows: their monetary compensation
The management of an enterprise
COMPANY OWNERSHIP:
The person or persons who have the ownership title
The can contribute with momey, goods or both the start the company
- They can manage the business and become entrepreneurs
- Or they can hire professional managers

MANAGEMENT:
The rationalization and systematization of business practices (processes, activities,...) in order
to reach the targets
Who?
o Persons with managerial roles
o Organization and coordination of the whole transformation process done by the
enterprise
What do they do?
o Efficient utilization of all resources
o Create and maintain the relationships with all external agents related with the
enterprise (customers, suppliers, financial institutions, Administration, etc.)

MANAGERS
Persons with managerial skills to take decisions and to manage the work of other persons
Managers are people with authority to set goals and make decisions to achieve them, as well as
to organize and direct the work of other people. They must say what must be done, how, who and
when.
They perform three functions:
o Planning: determine the main lines of actions necessary to achieve the goals
o Organization: design the appropiate organizational structure to achieve the objectives
o Control: allows the organization to be kept within the limits that make it possible to
achieve the objectives set
All managers performs the three functions but the extense of their decisions is different
depending their level.
In addition to these three functions, they perform others that are difficult to include within some
of these tree. Are all those that involve the relationship with the company’s environment
There are three main blocks
o Interpersonal roles: relationships of the manager with other people from inside and
outside
o Information roles: the use of information that they had obtained
o Decision-making roles: information is the heart of the decision
Management levels:
o Senior management, responsability for the entire company
o Middle management, managers between senior management and employees

ENTREPRENEUR:
Owners involved into business management
The person who leads, coordinates, manages and controls the business proccess.
 o OWNER (Capital) not the same as ENTREPRENEUR (Operations)
The owner contributes with capital to the company
The entrepreneur is in charge of its operation.
o ENTREPRENEUR (Innovator) not the same as MANAGER (worker)
Entrepreneur has the character of innovator or creator
Manager is more of professional administrator

PROBLEMS OF SEPARATION OF OWNERSHIP

The creation of large companies may cause the separation between the owners and those who
direct it
When one or more people run the company, it is not possible to ensure that they will serve the
interests of the owners
While the owner runs his company, he will ensure to obtain the maximum benefit. But the
separation between ownership and control creates a conflict of interest between the owners of
the company and those who run it
In this context, interesr arises in the concept of corporate governance, this is a set of
mechanisms implemented in order to ensure the loyal and honest bahavior of managers in favor
of owners. These people are in charge of supervising the behavior of managers and ensuring the
survival of the company,

Goverment bodies of capital companies

o General meeting of shareholders: supreme body. Responsible for managing and
representing the company.
o Board of directors: people who run the company and are the representatives. They are
elected by the shareholders
o Executive committee or managing directors: a small board that does some of the
functions of the board of director

Problem:
o Companies are managed by Directors, who are employees and who take decisions and
assume risks (professional)
o Directors may take decisions in their interest, disregarding their effect on
shareholders
o Shareholder does not control Directors’ way of acting day by day
o Shareholders and directors have different access to information and different
objectives
o Shareholders do not have enough information to assess the Directors’ performance, nor
incentives to do it. They do not have incentives, either, to improve the management of
the business

o Board of directors looks for its own benefit

o Conflict of interest among ownership and control
o Agency problem
Solution:
o Shareholders are able to control the Directors’ way of acting in order to avoid that they
look for their own benefit
Mechanisms of control
- Selecting the Board of Directors
- Contracts signed with Directors (goal linked)
- Requesting Audits
- Additional mechanisms of control: Indicators
- More and more, shareholders owning lots of shares are the ones taking
decisions

MISSION, VISSION AND STRATEGY

Mission: what do Strategy: action plan aimed to reach

Vission: what do
we do? Who are the vision and fulfill the mission of the
+ we aim to be? =
we? company → HOW to do it?
Where do we want
to go?

THE STRATEGY
The strategy consists in optimizing the efficacy and efficiency of the enterprise to succeed on
the proposed objective (profits)
o Efficacy: Reach the defined targets or goals
o Efficiency: (productivity or yield): Reach the defined targets or goals with the minimum
consumption of resources (material, human, time, etc.)

Strategic analysis
1. The context
o Market: competitors
o Competitor’s structure
o Risk of new competitors
o Characteristics of actual competitors
o Threat of substitute products
o Providers
2. The organization’s resources, analyze the origin and sustainability over time of our
competitive advantage over consumers
o It must be important for the consumer
o It must be perceived by the consumer
o It must be sustainable
SWOT analysis helps with the two first points
3. Stakeholders expectations and the influence of organizational culture

SWOT analysis
A SWOT analysis is a compilation of your company’s strengths, weaknesses, opportunities and
threats.
It helps to identify and analyze the factors to reach the target

Internal (enterprise)
resources and experience
readily available to you
Helpful to achiving the
objective
Strengths -> Reinforce
What do you do well? What
unique resources can you
draw on? What do others
see as your stregths?
Harmful to achiving the
objective
Weakness -> Solve
What could you improve?
Where do you have fewer
resources than others?
What are others likely to
see as weakness?

External (enviromment) Opportunities -> Take Threats -> Be protected

advantage
What opportunities are
open to you? What trejds
could you take advantage
of? How cannyou turn your
strengths into
opportunities?
What threats could harm
you? What is your
cokpetition doing? What
threats do your weaknesses
expose to you?

Example:

Helpful to achiving the objective Harmful to achiving the

objective
Internal Strengths Weakness
(enterprise) -Number 1 provider of high speed -Older company
mobile network services - Leadership team has
- Succesfully launched a new handser recently charged
and three new content initiatives

External Opportunities Threats

(enviromment) -Worked closely with providers to -Increase competition
secure exclusive distribution - Changes in government
- Capitalise on our ownership of an regulation
ultra-high-speed network

Choose an strategy
o Cost Leadership strategy: firm prices its products at the lowest possible cost. The
appeal of the product is for cost-conscious people
o Differentiation strategy: the product is differentiated with its unique feature or unique
selling point in order to compeat and win effectively
o Focus strategy: the strategy is to apply only for a selected audience of the small
market with needs
 1.2 The business environment
The company can not act with total independence as if it were alone in the market, since there
are external elements that limit and condition its performance.
Everything that is external to the company, it is not under business control.

GENERAL ENVIRONMENT
Affect in a similar way to all those companies operating in each economic space at a given
moment of time

Pestle analysis
Objectives
o Improve management decisions
o Help to identify external risks
o Better adaptability to changes

P
Political factors all the actions of different governments and public administrations
that affect the market in which the company operates (monetary and fiscal policies,
labour market regulations, industry regulation…)

E
Economical issues: such as economic growth, type of interest, inflation measures,
exchange rates, unemployment rate, public deficit or fiscal and tax policy

S
Sociological issues:
Demographic conditions: births, death rates, urban or rural nature…
Cultural aspects: customs, uses, fashiones….
Sociological aspects: values, lifestyles…

T
Technological issues (basic technologies, key technologies…)
Influence of technology on the comoany
Speed of change in technology

Comju

L Legal factors: laws involving issues such as employment, health and safety,
discrimination...

E Environmental factors as natural disasters, weather patterns…

The difference between legal and political factors:

o Legal factors: laws and regulations on competition, employment, security
o Political factors: governmental stability, social welfare policies and all the elements
dependent on the political colition that exists in a country
SPECIFIC ENVIRONMENT
Part of the environment closest to firms.
Variables that affect one or one group of firms in a specific way
o Suppliers of raw materials and other products: price of material, quality and delivery
deadlines
o Distributors
o Clients: purchasing decisions
o Competitors
o Financial intermediaries: lend money in form of credit
o Governments and public administrations
o Entry barriers: obstacles to overcome to enter in a sector
o Existence of economies of scale: companies with higj volume and therefore,
cheap products
o Product differentiation: companies with different products to mantain a loyalty
in costumers
o Existence of legal prmadministrative barriers
o Provileged access to distribution channels pr customers
o Investment required to enter

PORTER’S FIVE FORCES

Model that identifies and analyzes five competitive forces that shape every industry
The goal is to find a position in the industry where the company can better defend itself
1. Competiton in the industry: number of competitors and their ability to undercut a
company.
Big number of competitors = lesser power of a company.
Competitive rivalry low = company has greater power to charge higher prices and
set the terms of deals to achieve higher sales and profits.
Depends on
- Number of competitors and concentration
- Industrial sector growth
- Degree of differentiation of the sector
- Fixed costs
- Exit barriers
2. Potential of new entrants into the industry:
Objective is to evaluate the possibility that new companies enter to compete in an
industrial sector amd wish to do so
The less time and money it costs for a competitor to enter a company's and be an
effective competitor = the more an established company's position could be
significantly weakened.
Strong barriers to entry is ideal for existing companies = the company would be
able to charge higher prices and negotiate better terms.
Depends on
- Entry barriers: obstacles that must be overcome by companies that want
to enter
o Existence of economies of scale
o Product differentiation
 o Existence of legal barriers
o Privileged access to distribution channels or customers
o Investment required to enter
o Other cost advantages
- Expected consumer reaction
3. Power of suppliers: how easily suppliers can drive up the cost of inputs.
Number of suppliers of key inputs of a good or service, how unique these inputs are,
and how much it would cost a company to switch to another supplier
Fewer suppliers to an industry = the company would depend on a supplier = the
supplier has more power and can drive up input costs and push for other
advantages in trade.
There are many suppliers or low switching costs between rival suppliers = company
can keep its input costs lower and enhance its profits.
Depends on:
- Number of suppliers and concentration
- Degree of differentiated
- Existence of substitute products to the supplier’s product
- Importance that the industrial sector has for suppliers
- Threat of forward vertical integration (expanding the activity by doing
things that until then their client did)
- Importance of the supplier on the final cost
4. Power of customers: ability that customers have to drive prices lower or their level of
power
How many buyers or customers a company has, how significant each customer is,
and how much it would cost a company to find new customers
A smaller client base = each customer has more power to negotiate for lower prices
and better deals.
- Number of clients and concentration
- Importances of the product on client’s costs
- Degree of differentiation
- Degree of profitability of client’s industrial sector
- Threat of backward vertical integration
- Information that the client has
5. Threat of substitute products
Companies that for which there are no close substitutes = more power to increase
prices and lock in favorable terms.
Close substitutes are available = customers will have the option to forgo buying a
company's product, and a company's power can be weakened.
Depends on
- Degree of substitution
- Relative prices
 1.3 Types of enterprises
Economic criteria
o Sector:
o Primary sector: its activity is based on extraction of raw materials from nature.
For example, agriculture, fishing, etc.
o Secondary sector: transformation of raw materials. Examples such as textil
industry, transports…
o Tertirary or service sector: includes those activities that involves the provision
of a services to the consumer. Example, public transport, hospitality…
o Size:
o Large: more than 250 workers
o Medium: between 250 and 50 workers
o Small: less than 50
o Micro: less than 10
o Business scope:
o National: one country
o International: more than one country
o Exporting companies: carry out all the productive activity in the country but sell
it in a foreign market
o Multinationals: assets and employees in more than one country
o one market / multibrand; national/multinational

LEGAL CRITERIA
Sole propietorship
Is a business owned by one person, who assumes all the risk, takes decisions and looks for
business opportunities. Therefore, he/she owns all the rights
General partnership and Limited liabilty partnership

DISADVANTAGES
ADVANTAGES
o Unlimited financial liability
o Simple to start
o Hard to raise funds for expansion
o Proprietor owns all profits
o Often have no one to share
o Personal satisfaction (being your own
management burden (one person’s
boss)
talents & skills)
o Sole decision makimg
o Impermanence (it is not permanent)
o Easy to dissolve

Partnership
Is an association of two or more persons to carry on as co-owners of a business for profit.
People form a partnership by entering into a partnership agreement
A partnership agreement is a written contract between the owners of a partnership that
identifies the business and states the partner’s respective rights and duties location,
type of business, sharing of profits, dissolving the partnership, etc.
 ADVANTAGES
o Limited and joint responsibility
o Pooling of funds, talents and borrowing DISADVANTAGES
power
o More chance to specialize than the sole- o Profit sharing
proprietorship o Potential for personal disagreements
o Property rights can be traded (publicly or o Relative impermanence
privately) o Frozen investment
o Sole decision making
o Easy to dissolve

Corporation
Is a legally chartered organization that is a separate and legal entity apart from its owners.
It is a legal person and according to that it has most of the rights and responsibilities that a
person has.

ADVANTAGES
DISADVANTAGES
o Separate legal entity (shareholders are the
owners)
o Special and double taxation
o Limited financial liability of owners
o Complex and costly to form and dissolve
o Permanence (it can exist forever)
o Government regulation and public
o Easy transfer of ownership (shares)
disclosure requirements
o Greater financial capability

Others
o Cooperative associations
A cooperative association is an incorporated organization whose user-members
(owners) get back any revenue left after expenses are paid
Principles
1. Membership is open
2. Owned and democratically controlled by its members
3. Economic benefits are distributed proportionally according to each member’s
level of participation in the cooperative
4. Based on the values of self-help, self-responsibility, democracy and equality
5. Cooperative members believe in the ethical values of honesty, openness, social
responsibility and caring for others
Examples:
- Employee Credit Unions: they accept savings deposits from members who
own shares in the co-op. Members can borrow from the co-op. Savers
receive interest, and borrowers pay interest
- Agricultural co-ops: they help member farmers market their products
- Buying co-ops: they help members buy their supplies at lower prices
- Consumer co-ops: they operate customer-owned retail facilities. Consumers
get together and form a buying pool to get quantity discounts and to replace
the wholesalers and retailers
o A limited partnership is a business in which one or more, but not all, of the partners are
liable for the firm’s debts only to the extent of their financial investment in the firm
o A joint venture is a special type of partnership set up by individuals or firms to
accomplish a specific task or project. It is very important and usual in international
business
o A mutual company is a corporation that issues no stock and is owned by its
policyholders or depositors and whose surplus revenue, if any, is distributed among the
owners in the form of dividends. Many insurance companies are mutual companies