UNIT 1: BUSINESS

ORGANIZATION
1. WHAT IS A BUSINESS?

Companies: organizations that build, create and sell things to households

(consumers), using factors of production as an input. Through transformation
processes these create an output that can be producing raw materials, creating
products or providing services. The products that are sold to the households
generate income and profit.

1.1 BUSINESS TRANSFORMATION PROCESS

1. INPUT: FACTORS OF PRODUCTION

⇒ capital (the non-natural resources, money, machinery)

Interests: remuneration of capital (lending money to the bank or to a company that
comes back but higher)

⇒ labour ( workers and their skills)

Wage: when you are paid by the hour

Salaries: regular payments (per month)

⇒ land (any natural resource, raw materials)

Rent: remuneration of land

⇒ enterprise (leadership, expertise, skills and knowledge)

team management: entrepreneurship- people leading the company

Profit: remuneration of enterprise when the company is successful.

2. TRANSFORMATION: ADDING VALUE

companies create and sell (revenues)

3. OUTPUTS: GOODS, SERVICES, RAW MATERIALS

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 these are purchased by households (expenses)

produce → raw materials

create→ products

provide→ service

1.2 HOW DOES THE ECONOMY WORK?

CIRCULAR FLOW OF INCOME (REVENUES)

Closed economy (local): households/consumers provide FP to firms(producers),

they remunerate, firms provide goods and services and households purchase them.

Open economy (International): households save money and put it in banks, taxes
go to the government,

CHOICE OPPORTUNITY COST

There are infinite wants but finite resources ⇒ scarcity⇒ we need to make choices
the thing you don't choose is the opportunity cost

TAXES

Households get salaries but they have to pay taxes.

Before taxes: gross (≠ net)⇒ they'll keep some of it to the government so they have
money.

Two taxes: income taxes (paid from the salary- the employee)and the 30%.

This means that it costs more for companies to pay employees, because they need
to pay the 30% to the government.

EXCHANGE

Import: when buying and bringing things from abroad

Exporting: selling things abroad and money goes back to the local good

Arancel/custom taxes: taxes for bringing products from abroad and selling them
(salchichón)

Government expenditure: the government giving money to companies

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 1.3 BUSINESS ORGANIZATIONS

COO: OPERATIONS

In charge of input and transformation.

stock (inventory) control and management

establishing quality management processes

MARKETING

In charge of selling the output. And the finance managment human resources is in
charge of everything.

setting prices for the firm's products

decide where a product should be sold

researching the needs, preferences and wants of customers

strategies to attract customers

FINANCE

allocating resources to purchase capital equipment.

HUMAN RESOURCES

recruitment of staff

hiring a new production manager

financial and non-financial methods of motivation of staff

1.4 SECTORS
Depending outputs of the company it can work on different fields:

PRIMARY SECTOR

acquires raw materials: agriculture

SECONDARY SECTOR

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 manufacturing and assembly process: it involves converting raw materials into
components → making plastic from oil, building houses…

TERTIARY SECTOR

services: commercial services that support the production and distribution process

QUATERNARY SECTOR

research and development (provides information): information ICT (informatics, AI,

softwares)

support activities from other sectors

PRODUCTION CHAIN

1. raw materials

2. manufacturing

3. delivery

4. shop

GDP (gross domestic product): a measurement to we evaluate the development of a

country according to their sector.

1.5 BUSINESS TYPES

KEY WORDS

Unlimited liability: if something happens you pay with your personal money.

Limited liability: If you don't want to be responsible for paying back yourself, you
only have to pay back the capital (share capital) and assets (building, money… the
company has) you invested in the company.

Shares: a title that gives you a percentage of the company, you own a portion.

CSR (corporate social responsibility): when the activities that companies do need to
protect the environment, the people…

Lobby: group of people putting pressure on the government to get what they want.

PRIVATE SECTOR

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 owned and controlled by individuals.

if a private becomes public ⇒ nationalization

there are different types of private businesses:

Type of company Characteristics Advantages Disadvantages/challenges

- its easy to start a

business. - no paper
- you're alone - Unlimited
Autonomous, you work or sharing
liability - overworking -
Sole Trader create the company responsibilities. -
sources of finance are
and work alone. you make decisions
limited.
and have control.
-100% profit.

- more skills brought

on. - more people
When you partner and - less control and profit. -
invest in the
Partnership work with other people Unlimited liability. -
business. - covering
and their skills. disagreements.
each other during
holidays.

- then owner
A company divided
decides who
into - less control. - profit
Privately held participates in the
shares/shareholders divided into more people
company. - limited
with restrictions.
liability.

a company that
accepts money from
- more money. - less
Publicly held anyone, it's open to - anyone can participate.
risk. - limited liability.
the public (money
belongs to everyone)

PUBLIC SECTOR

Owned and controlled by the government

a public company becoming public (it can happen because its not profitable, to gain
more more) ⇒ privatization.
usually run organizations that involve:

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 merit goods: things good for society (hospitals) ≠ demerit: things bad for society
(tobacco).

have strategic importance for the country (defense).

essential services (energy, water).

SOCIAL COMPANIES
they have a social purpose, when they aren't aiming to make money (cosas de ciegos, o
d niños con cancer)

others are social but want to make a profit: for-profit

cooperative: working together, depending on the social purpose, owned and ran
by the members.

financial: people together to get a loan

housing

producers: associate

companies that can't make money: non-profit, NGO

1.6 ENTREPEREURSHIP

Entrepreneur: an individual who develops and runs a business, assuming all the
risks and rewards of that given business. He is able to see opportunities where
others are not ⇒
has the skills and initiative necessary to take good new ideas to
market and can make the right decisions that lead to profitably.

≠ Manager/director: runs the business.

REASONS TO CREATE A COMPANY

passion to make a change

new business idea

market need

earning a living

greater financial reward

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 control

work-life balance

CHALLENGES

Lack of funds

strong competition

no market/too smaller the product

unskilled employees

Lack of managment skills

Economic, environmental or political shocks

1.7 BUSINESS OBJECTIVES

1. VISION:

Inspiring or aspirational declaration of what an organization ultimately strives to be

or wants to be, por wants to achieve in the distant future. Provides purpose,
direction, motivation, values, guide. Broad, abstract

2. MISSION:

More concrete, and short term. the purpose (why it exists), what they do, not what
they want to be, rather what they are. Narrow, specific.

disadvantages: vague, very long term, unquantifiable, used sometimes for public
relations, it can be ignored.

3. OBJECTIVES:

Clearly defined and measurable targets of an organization, used to achieve its

overall goals (profits, growth…)

Provides motivation, team spirit.

SMART objectives: Specific, Measurable, Achievable, Realistic/relevant and Time-

bound.

depending on the time

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 long term: strategic, aligned to shareholders' aims

short term: tactical, easy to change, specific, timelines.

depending in which level of organization:

corporate(the whole company),

functional(HR, COO, marketing, CFO),

individual (people within the function)

dynamic: for external or internal reasons and should be ethical

4. STRATEGIES:

how it will be achieved, actions required to achieve the objectives and targets (long
term)

5. TACTICS:

same but short term

1.8 STAKEHOLDERES

Owners: shareholders (have all control, over CEO)

Stakeholders: people that have an interest in the company's actions/outcomes, they

are directly affected by the performance of the business, that's why they should be
taken into account when making decisions.

Internal: shareholders, employees

External: suppliers, investors, government, banks, competitors, community,

trade unions (buscar en internet), pressure group (people outside the company
that want to influence what the company is doing, environmental organizations,
green peace…).

the aims may be different, when it is→ conflict

example: Investors want lower costs to increase profits→ lower pay increases
for employees.

1.9 GROWTH AND EVOLUTION

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 Internal growth: growth strategies to grow within the company (long term, mid term
objectives, we want it to be smart). you're using your own resources to grow.

External growth: when companies get together (integration) and grow.

Vertical Integration: in the process of the production (all sectors), this process is
called a value chain, with each step it adds value: it buys other companies in the
process, it joins/partners to grow or increase profit.

Backward: when the business joins with a supplier, so the firsts sectors.

Gaining control over supplies – this may improve coordination, improve

quality and reduce costs.

Forward: when a business joins with a business closer to the customer, such as
a distributor or retailer.

Gaining access to the market, for example by joining with retailer.

Horizontal: This occurs when one business joins with another at the same stage of
the same production process; for example, a car manufacturer acquires another car
manufacturer.

Greater market power.

Economies of scale.

Conglomerate diversification: This occurs when a business joins with another

business operating in a different sector; for example, a car manufacturer joins with a
confectionery business.

Spreading risk by operating in different markets; less vulnerable to a change in

conditions in one market.

GROWTH: REASONS
Reasons to grow externally

economies of scale: the bigger the company is, the more efficient (the ratio between
output and input)

if you are using moren efficiently the FP then the output will increase

gain market share

sources of finance

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 recruitment and retention of employees

spreading risks

Growing internally

brand awareness and brand loyalty

maintain corporate culture

maintain ownership and control

avoid expenses and risks of external growth

Reasons to stay small

privacy

ownership and control

autonomy

individuality

maintenance

specialization (boutique, niche)

Reasons to grow externally

grow faster

diversity product portfolio

gain customers in additional markets

reduce competition

GROWTH: TYPES
Merge: two companies become 1

friendly: acquisition

unfriendly: takeover (”hostile-acquisition”), against the shareholders (having more

than 50 % you take control).

Joint Venture

two companies join together and create another company, becoming 3.

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 Strategic alliances

when two companies give a little of each (they share materials, money…→ new
product), remaining two

benefits:

businesses can share skills, resources, expertise and experience; this can
benefit both parties.

businesses can collaborate on projects that are mutually beneficial without

having to merge all their operations. This makes the process easier, less difficult
to manage and less expensive than a full joining together (called a merger).

Disadvantages:

agreeing on the division of the profits; there may be disagreements over the
relative contribution of each business

different views on how decisions should be made and what the priorities are

different views on whether and how to end the venture.

Franchise

a commercial agreement when companies allow others use their marketing, name,
products… but the other company is directed by someone else.

The franchisor sells the right to the product in return for an initial fee and a
percentage of the franchisee’s turnover.

The franchisee receives the right to the name and the systems used by the
franchisor(access to materials and training methods).

advantages of the franchisor

its not a risk because its not them. disadvantages- reputational damage.

franchisee advantages:

Any advertisement for the brand helps all the franchisees.

Buying a franchise is less risky than setting up completely on your own.

problems:

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 paying for the right to use the name and products + proportion of profits to the
franchisor→ reduces the profits you make.

if one of the franchises falls→ damages overall brand and hit your sales as
well→ dependent on others and vulnerable if there are problems elsewhere.

you're not completely free to decide what to sell, what to charge or how to
promote the business (restrictive)

1.10 ECONOMIES AND DISECONOMIES OF SCALE

INTERNAL ECONOMIES OF SCALE

They occur when the cost of producing a good falls as the company increases its
scale of production. Because they are producing in larger scales the purchase is
cheaper (but one its 20$, but 40 and its 5$). The lower the cost the higher the profit.

Types of internal economies of scale

marketing: the cost of a media campaign is divided over more sales→ reducing the
costs pf campaigns.

technical: different production techniques to reduce the unit cost of production.

purchasing: better deals with suppliers and reduce prices.

managerial: employing managers to specialize in different areas of the

organization→ better decision making + productivity .

financial: if the company is successful the bank will trust it to lend it money at lower
interest rates.

INTERNAL DISECONOMIES OF SCALE

they occur when a firm expands its capacity and the cost per unit increases. As
organizations grow, they have more products, operate in more regions and have
more staff, keeping everyone focused and working together can be difficult.

Types of internal internal diseconomies of scale:

motivation problems: As a firm gets bigger, there is less complexity and closeness,
not everyone feels like a part of the organization, people might feel less involved.

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 coordination and control: it's difficult to agree on standard policies, cultural clashes,
different priorities and strategies.

communication problems: difficult to ensure that messages get to the right people at
the right time.

EXTERNAL ECONOMIES OF SCALE

External economies occur when at each and every level of output the unit cost falls.
This happens due to factors outside of the business.

Different reasons for this to happen:

suppliers expand and benefit from internal economies of scale→ their unit costs fall
and this might be passed on to the business they are supplying

investment in infrastructure: ex- the government reduces costs such as

communication or transports costs.

economies of agglomeration: the business locates in a particular area specialized in

this industry, they cluster together (Hollywood, Silicon Valley).

in these areas→ more development of other similar businesses because they

can help each other (share resources and facilities).

Attracts other businesses linked to the industry. A business will have access to
specialist suppliers and also employees at a lower cost than if it had to buy
them in from elsewhere.

EXTERNAL DISECONOMIES OF SCALE

Diseconomies occur when at each and every level of output the unit cost rises → to
factors outside of the business.

Reasons it might happen:

suppliers have become too big and experienced internal diseconomies, which
increased their unit costs→ increase prices→ businesses buying from them have
higher prices (external diseconomies of scale).

1. MULTINATIONALS

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 Directors: group of people chosen by the owners to tell the managers what to do, can
be people outside the company.
Headquarters: main office of the company
Multinacional Companies: an organization that has headquarters in a country but has
operations in a range of different countries. that they operate in different countries
doesn't mean they're necessarily selling them in that country ≠ if you sell in multiple
countries it doesn't mean your multinational, you need a company in that country.
Advantages for the host countries to MNCs

economic growth and employment

improve production and workforce quality

availability of quality goods and services

improvements in infrastructure

Disadvantages for the host country

The effect on employment may be minor: If the multinational uses skilled

employees, many jobs might go to skilled workers from other countries rather than
to domestic workers.

Footloose MNCs: abusing regulations- locating in countries that have advantages

such as lower rates of taxation/tax regulations.

Taxes → the company does not pay taxes in the country that operates (Tax
avoidance →Sell the products to another country to achieve the profit they want so
the country that sells the product to the public does not have such a big profit so
they have to pay less taxes)

Tax evasion → illegal way to avoid paying taxes

Tax avoidance → legal way to avoid paying taxes

There may be pollution and environmental damage.

are able to exploit workers + resources

Profits might go back to the headquarters of the multinational rather than being
reinvested within the host country.

They might exploit the countries resources and workers.

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 why do companies want to become multinationals?

Reduce transport + distribution costs by producing nearer to markets.

To be able to sell in new markets by locating in them.

To secure supplies of raw materials or markets→ locating in the country to avoid

regulations.

Cost advantages, most often in terms of low labour costs.

To overcome barriers to trade.

To reduce risk (natural disasters, political problems)

Relations between MCNs and governments

tax issues

part-ownerships: the government forces the company to give them a share of the
company so they can have some control

government customers of MNCs: dependent on the goods and services that are
supplied by multinationals.

havens: para refugiarte de un país que abusa de sus impuestos

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