Fundamentals of Business Administration Canale 1, 1st + 2nd Midterm

Books: Capitalism at Risk

Fundamentals of Business Administration

Chapter I - Economic Problem, Organizations and Aziende

All the organizations have stakeholders (people that have interest in the company, for example, the owner) and have to satisfy some needs for different motivations —> maximize profit or other aspects —> different kind of entrepreneurs —> sometimes the profitability becomes the main and only aim of the organizations, sometimes not, so the company cares about all the other aspects.

Human genre has unlimited needs and wants to satisfy, but limited resources: problem economic activity: all the organizations have to face —> action that involves the production, distribution, and consumption of goods and services at all levels within a society in order to satisfy the needs and wants. We also have to consider how these organizations' production affects people’s happiness —> entities that carry out the economic activity that has the goal of the well-being of society by producing goods to make a profit —> an organization with three attributes:

• Systematic activity in the time
• Decision-making autonomy
• Economicità: efficient and effective (sustainable)

Economic Problem in Capitalist Countries and Planned Economy

The states that solve the economic problem are capitalist countries —> in:

• There is freedom of choice: we can choose what to produce on the basis of market demand (wants and needs).
• Individuals are more important than the community: individual interest prevails over collective interest (Adam Smith’s invisible hand): this hand of market will solve collective problems automatically once that individual are solved.

Competition:

• Strong for the market because of the improving of the goods.
• Weak because there can be a loss of equality, some consumers may not have enough money for the goods, or the production can damage the environmental aspects and become not sustainable.

The problem of capitalism is that it has no limit and aims too much for profit. In capitalist countries, the market flourishes in the resources because they place where they are needed. One of the negative sides of capitalism is that there is no limit to freedom, so entrepreneurs have no limits: responsibility is fundamental to avoid damages due to freedom without limits.

Planned economy —> in:

• There is no freedom because the individuals are egoistic and opportunistic (in capitalism this is seen as an advantage for profit and improving of society) so the aim is ensuring greater social equality to avoid market failures: collective interests prevail over individual ones, so the individual practically disappears; the problem is that also who has the power is a human being, so he will take actions that bring his interests and not the community’s interests.

Result: individuals destroy the collective harmony, so

Conscious Capitalism, the Third Plan

• The key is to introduce human interactions to reach happiness, so every human being has to be responsible for two things:

1. Responsibility toward people
2. Responsibility toward community

The creation of a community is fundamental, where everyone has rights and duties.

Needs and Wants

Needs: necessities

Wants: things people desire but don’t need —> companies transform wants into needs

Maslow’s hierarchy of needs:

1. Physiological needs: food… —> basic needs
2. Safety needs —> basic needs
3. Belongingness and love needs: relationships, friends —> psychological needs
4. Esteem needs: prestige and feeling of accomplishment —> psychological needs
5. Self-actualization: reaching full potential including creative activities —> self-fulfillment needs

—> If you are free (capitalism) there are the conditions to achieve the full potential of a person.

Economic Activity

The economic activity is conducted for the satisfaction of human needs through the production of economic goods and services. This concept is born as a consequence of the economic problem: the needs are unlimited, but resources to satisfy them are not.

We have to consider the factors of production:

• Land: what we receive from nature, we can capture a part of the market by our respect for the environment —> circular economy (take, make, recycle) vs. linear economy (take, make, dispose)
• Capital: investments and resources used to produce the final product
• Labour: human effort to produce goods and services, it can be physical or mental; according to Marx, it will always enter into conflict with the capital (in planned economy, we find only labour); human being as an instrument and an end —> they have to be treated well to allow them to have the conditions to grow, the risk of putting social relationships into business is the obstruction of the firm’s end and interests
• Entrepreneur: he can be the only owner or one of the many, “entrepreneur is someone who takes resources from a lower level of productivity and raises them to a higher level”, (where you create profit, you solve problems), “entrepreneurs are risk-takers, willing to roll the dice with their money or reputation on the line in support of an idea or enterprise. They willingly assume responsibility for the success or failure of a venture and are answerable for all its facets”, “an entrepreneur is the ultimate innovator and earns his profits, however temporary, from successful innovations”

Sometimes firms fail because they don’t meet the needs of the market, or because their activity is not efficient (earn>spendings), or because of conflicts with governments or among the owners.

Through the production process, inputs are transformed into output. There are different kinds of consumers: the final one or other companies that will reach them.

Input (resources) —> transformation process —> outputs (goods and services).

The transformation process has to be viewed also in the value creation through the transfer of goods all over the world.

Business model: system of transforming inputs, through its business activities, into outputs and outcomes that aims to fulfill the organization’s strategic purposes and create value over the short, medium, and long term.

We have to find an equilibrium between profit and sustainability; Directors are different from managers because they depend only on the law. The most important of the managers is the CEO (Chief Executive Officer), he orients the organization toward the goals to achieve; usually, the board of directors is controlled by the owners.

Productivity: measures the amount of output produced by a given number of inputs over a period of time, it is increased by the efficient use of production —> cost of production of goods or services should be as low as possible, this also has a good impact on the environment and creates a higher standard of living; anyway, there are limits, for example, the ones about costs.

Business Idea —> Organization —> Product —> Needs and Wants Satisfied

Organization: the term applies correctly to stable associations of persons engaged in concerted activities directed to the attainment of specific objectives, we distinguish two kinds of organizations, both of them solve the economic problem: profit organization and non-for-profit organization —> both create goods and services to satisfy needs and wants.

Stakeholders: “any group or individual that can affect, or is affected by, the performance of the organization” (Freeman, 1987), there are primary and secondary: the primary are the ones who have daily transactions with the firm, which without them would not survive, the secondary are represented by the community itself, media.

• Owners earn money only when the company has profits and are the only stakeholders who are not protected by a contract, which is the reason they “govern” the company.
• Lenders are the ones who finance the company.
• Suppliers create interests by providing companies what they need to produce their goods or services.
• Employees must be seen as an end and not an asset, this will also improve their performances.
• Customers obviously create profits by acquiring goods and services to satisfy their needs, it is fundamental to treat them in the best way possible and not see them as only assets.
• Government receives money from the company by taxes and provides services like infrastructure, it is in its interest the increase of the company because it causes an increase also of the taxes.
• Environment has to be considered a stakeholder because it influences the company’s activities.

But why is it important to create value for stakeholders? In an ethical point of view, we must see every person as an end and not an instrument —> There are three kinds of goods:

• Extrinsic goods: goods received from an external agent, they can be material or non-material.
• Intrinsic goods: goods that we feel coming from inside of us and that we want egoistically for us.
• Transcendent goods: are goods that we want for others, responsibility in taking care of others —> characteristic of a virtuous person, there is always a limit (giving without receiving back) that avoids destroying your activity for example.

Organization must be seen as another stakeholder that, with all the stakeholders previously written, makes the interest of the governance.

Code of ethics: gives guidance to employees on how to deal with certain ethical situations, sets out the company’s values, ethics, objectives, and responsibilities, it should reflect the company’s ethos, values, and business style; it can be very short or a large manual. A company must create its own culture that distinguishes her from the others —>

The intersection between “the equilibrium theory”, “the stakeholders theory” and “the common good theory” is the solution according to the professor.

Common interest: survival and growth of the organization, intersection between internal stakeholders' particular interests, external stakeholders' particular interests, and non-stakeholders' particular interests.

Azienda is an “economic institution intended to last for an indefinite length of time and that, with the aim of meeting human needs, manages the production, procurement, or consumption of resources in continuous coordination” and always according to the “studies of economia aziendale is a real entity and as a social institution, the company has necessary to contribute to the human being, to promote the development of his personality and to better achieve the purposes of human life associated with it, which they are essentially of ethical nature”.

An organization wants to survive forever and exists to meet human needs and has three attributes:

• Is a system
• Has decision-making autonomy
• It operates with economicità (effectiveness and efficiency)

The azienda is a system formed by people who work together to reach their objective, which is their interest —> the system must be coordinated and if the azienda succeeds to reach its objective then the azienda is contributing to the common good; it isn’t possible to focus on a single part of the system or it will fail, everyone has to collaborate to reach the same purpose.

System Coordination Characteristics

The coordination is characterized by some adjectives:

• Dynamic: to survive we have to change in order to adapt to the environmental changes, for example, during a pandemic, only business which adapted to the situation survived.
• Long-lasting: the firm is like a real creature, it wants to survive as long as possible and to grow as much as possible, and the entrepreneur like a parent has to provide what the firm needs to survive (in indefinite time) and to grow.
• Complex: because it is made of humans and humans are complex, the economia aziendale gives us the instruments to analyze.