Management - Appunti Esame generale

What is management?

A range of decisions associated with the acquisition, allocation and integration of resources (human, physical, financial, etc.) required to perform a certain economic activity.

• We connect decisions to processes
• Acquisition of resources (e.g., money, employees)
• Allocation put resources in a place (e.g., money is highly fungible – you can invest in a new factory or raise salaries or develop new technologies) (e.g., also allocating/assigning employees to the right department)
• Integration of resources, making sure they work well together (e.g., in the innovation lab making sure that engineers and marketing work together and are connected – there is the risk that marketing rules and doesn’t use technical resources or vice versa) (e.g., also integrating people/employees to ensure there is a healthy work environment)

Decisions e.g., build a warehouse to store products. What technology should the manager use? It can either be more labor-intensive, taking 5 days and being less expensive, or it can be capital intensive taking only 2 days but being more intensive. What should the manager do? He should prioritize, see if it is more important to save money or to build the warehouse as soon as possible – one can consider the value of waiting 3 more days and see if it is greater than the eventual money spent in the capital-intensive way. One can also consider the opportunity cost: by building the warehouse quicker we use more capital that could not be invested in something else.

Economic activity

Actions that involve production, distribution and consumption of goods and services within a society.

• The decisions managers make are linked to economic activity
• Production the making of things, not only physically speaking but also other services, such as education, are considered
• Distribution the goods and the services arrive to the customers (e.g., stores; in other cases, such as in education, there isn’t a store)
• Consumption what customers do with the good/service; sometimes they still remain connected to the company

Why do we perform economic activities? People have needs so they buy goods and services thanks to economic activity that requires management to be efficient.

Goals and needs

• Needs; dissatisfaction due to the lack of something (e.g., I’m thirsty, so I want/need water)
• Goals; what people aim to achieve; they are broader than needs (e.g., goal to grow, to have a career)
• Values; what is important to the life of people; they are linked to goals and to the individuality of people

Needs, goals and values differ across cultures and socio-economic conditions, and they evolve over time (e.g., companies should adapt what they do depending on who their customers are).

Maslow’s hierarchy of needs

In 1943, Abraham Maslow developed “a theory of psychological health predicated on fulfilling innate human need in priority”. Maslow observed that needs span from the tangible, such as food and water, to the intangible, such as self-esteem and creativity.

How can people be happier? Happiness is about satisfying needs, needs that depend on our stage of life.

• Physiological
• Safety nobody likes uncertainty, we want things to be stable (e.g., we want a shelter, we don’t want to find a place to sleep every night)
• Belonging family, friends, community; we need people around us; they are resources for our life
• Self-Esteem achievements and careers; feel good about what we do; we also want recognition (e.g., if we have results, we want people to know, that’s also why we have social media)
• Self-actualization fulfillment and the pursuit of talent

Marketing applies this model to countries according to the GDP; in poor countries, such as India, the family and the community is more important than in Western countries, such as Germany (e.g., phone companies – being connected is more important).

Maslow’s hierarchy of needs is also relevant for employees – people must progress on their needs. In the beginning only the physiological and safety needs are satisfied (the salary is just enough to pay the bills and rent), later people want targets, achievements, and challenges. Furthermore, needs are not motivating unless previous levels are satisfied (e.g., if the salary is very low, but the workplace is nice and gives you the opportunity to grow, the employee is still not satisfied because his basic needs are not satisfied).

Different types of needs

• Natural needs; A product of human biology
• Social needs; A product of self and social interaction with others:
  • Radical = fundamental to society, the human rights (e.g., justice or freedom)
  • Non-radical = (e.g., belonging, friendship, etc.)
• Essential/primary needs
• Non-essential/secondary needs
• Universal (natural + certain social needs), that must be satisfied
• Social needs that are influenced by imitation, fashion, expectations from others; nice to have

Types of goods

• Primary; Goods that satisfy essential needs (e.g., water)
• Non-essential; Satisfies non-essential needs (e.g., wine)
• Complementary goods; You need both to satisfy a need (e.g., car and fuel)
• Substitute goods; You need one to satisfy a need (e.g., car and motorcycle, Airbnb and hotels)
• Important for marginal customers, who are undecided to buy the car, so if the fuel price is too high, they may decide to use other means of transport – car manufacturers want fuel prices to be low
• Sometimes a company sells both products, even though it’s rarer. This is because a company may have technology for both products, so it could serve different customers. This has two benefits:
  • Economy of scope = if you have technologies to apply to different products you have economic advantage (you do not have to invest two times in research)
  • You are present in the industry of your competitors = you produce the substitute good at a low price, controlling the market of the competitors
• Differentiable goods; Producers can add differentiating features to the good; customers perceive an important difference in quality (e.g., prices of bags can be hugely different, ranging from $10 to thousands of $).
• Commodities; There are no differentiating features; customers don’t perceive difference in quality.
• Customers, to decide which brand to buy from, look only at the price, putting pressure on lowering the price. These are more profitable, since customers purchase the product because they want something unique and special, they do not pay much attention to which product is the cheapest.
• Consumer goods; For final use or consumption, sold to final customers to satisfy the needs of people.
• Industrial goods; Used to produce other goods, so sold to companies
• The only difference there is between consumer goods and industrial goods is in the final use, not in the product itself. If Bocconi buys a chair, it is an industrial good, if I buy a chair it is a consumer good.
• B2C - you treat customers as a mass, so for distribution you use advertising, supermarkets, stores, e-commerce, etc. However, there are some exceptions:
  • Yves Rocher uses personal sellers
  • Companies who offer services (e.g., plumber, insurance) because you need direct contact with customers – for other goods it is different because you can sell also through e-commerce
  • Folletto - the seller comes directly to the house for face-to-face interaction that attracts customers

Customers can sometimes be fooled to buy things that they don’t need (e.g., beauty products).

Disposable goods vs. Durable goods

• Disposable goods; Used once; when the consumer buys them, they disappear. You can’t postpone their purchase, so even in recession these goods are bought.
• Durable goods; Used many times. They are usually more expensive, and you already have them, since you buy them because they’re either broken or old (you’re tired and you want something new) => people can postpone buying them. This is the main reason why in recession they suffer the most (e.g., the car industry is a tragedy).

Goods for individual vs. Collective consumption

• Individual consumption; Use or consumption by single individuals
• Collective consumption; Use or consumption by many individuals at the same time (e.g., tour guides, public transportation, restaurants)

In these cases, you also look at the quality of people. Sometimes you buy something to be a part of a community (e.g., Amex cards, Ferrari) => luxury goods are expensive because they want to be selective.

Public goods

• The goods that are both non-excludable and non-rivalrous in consumption. A more economic/scientific definition:
• Non-excludable = not easy to exclude someone from using it (e.g., roads or defense or justice - you can’t exclude citizens from the service)
• Non-rivalrous = the fact I’m using the service doesn’t limit the use to other people (e.g., military is non-rivalrous). Often there is a limit (e.g., when there are too many cars on the high roads, the traffic limits the consumption to other people driving)

These goods are not easily sold at the market, they are not suitable, since they are very often in the hands of the governments.

• The goods produced by the State or its branches (rather than firms, families or non-profits) Sometimes the State produces excludable goods (e.g., electricity) where there is rivalry, but they are still primary goods.
• Excludability in consumption = it is possible to prevent people from accessing a good
• Rivalry in consumption = consumption by a consumer prevents consumption by others

Examples of goods produced by the State

• National security
• Culture
• Fresh air (non-excludable and non-rivalrous)
• Highways (excludable)
• Timber (rivalrous)

Economic activity

What does economic activity involve?

• Technical transformation; part where the good/service is made
• Physical; (i.e., manufacturing) I put the pieces together and make the physical goods; the single components don’t have much value, you need to put them together
• Spatial; (i.e., transportation) doesn’t involve any change in the good (e.g., DHL and supermarkets); it creates value, turning things with a certain value to something with a greater value (e.g., a box of pasta in a factory compared to a box of pasta in my kitchen)
• Logical; (i.e., banks) they don’t make things (just files and papers); most of the activity is logical in the forms of writing (computer code) and in this case value is created
• Transactions; to buy input and to sell output - (i.e., of financial resources, labor, private goods) link organizations to other organizations and individuals.

Input means to buy the pieces of wood to make the table, and the output is the selling of the table. In a competitive market, the purchase and the selling create value – the selling price is a mirror/a good measure of the value for the customer.

• Complementary (support) activities; organizing processes of the company
• Institutional structure design
• Organizational and human resources management: there are many employees in a company that have to be managed
• Accounting and information management

Circular flow model

Money moves through society in 2 ways:

• Flowing from producers to workers as wages
• And back to producers as payment for products
• *households = economic organizations (e.g., families and individuals)
• Supplier payments
• Investments
• Tax to the government that uses that money for public goods
• Capital income = profit for the shareholder
• Labor income = salary
• 0,40$ is the consumer surplus, the real value for the consumer (the customer would have paid it also 1,40$)
• The small lines represent the flows of corporations
• *in the end everything goes to households – all the resources should be in the hands of people, in the end you always have people
• Spillovers/externalities = negative (e.g., pollution) and positive (e.g., benefits that people get, such as personal growth that isn’t in the salary)

Economic activity links all the companies and households together: companies depend on markets and economic activity in the end is to provide services and goods to households who provide resources to economic activity.

Individuals and business activities

• Finance; organizing resources (borrowing money, investing)
• Marketing; selling products to households
• Management; making decisions

*Capital in the end comes from a household (also banks when you go there to borrow).

The role of individuals in business

• Owners; Provide resources to start a business, can manage the business themselves or hire employees to do so
• Customers; Buy goods/services offered by the business
• Employees; Responsible for the work that goes on within a business

Management

Management is concerned with acquiring, developing and using resources (including people) and it involves overseeing firm’s operations to ensure resources are transformed into goods/services.

Marketing

Focuses on the 4P’s and it involves planning and developing products that satisfy customers’ needs and making decisions about how much to charge for products and when and where to make them available. It is the team that knows the customers.

• Product; you define the product
• Price; responsibility of the price (remember the consumer surplus!) how should they calculate the price? They should maximize profits but also make customers happy
• Place/distribution; sometimes a product is found everywhere (e.g., Coca Cola), whereas other companies do not want to be everywhere (e.g. Nespresso) because the brand wants to be more desirable (it’s difficult to get it so it is more desirable, since it is rarer). The place where you buy the product is part of the perception of the brand.
• Promotion; campaigns, events and parties

Finance

Refers to all activities concerned with obtaining and effectively using money for business operations; it is the primary responsibility of owners to provide financial resources either by borrowing money from banks or attracting additional investors.

The role of entrepreneurs, governments, and non-profits

Entrepreneurs

The entrepreneur is an individual who risks his/her wealth, time, effort to develop for profit an innovative product. Free-enterprise economy provides necessary conditions for entrepreneurs to succeed. It is about risk – young people who bet and risk everything, they are important for the economy since the most important innovations are usually introduced by start-ups => real innovation requires new people.

Government

The government preserves competition and protects consumers, employees and the environment through laws and regulations (e.g., employees need protection); it takes steps to minimize disruptive effects of economic fluctuations and reduces unemployment. It spurs growth so consumers spend more money and businesses hire more employees, (it supports demand).

Non-profits

Non-profit businesses are organizations that may provide goods or services but do not have the fundamental purpose of earning profits.

• They are autonomous in choosing their people in charge (for instance, the UN is a non-profit, the EU is not)
• They are private and are not allowed to distribute profits or assets. They are technically private – managed by individuals
• They can’t have profit, sometimes there are tax benefits so some companies fake being non-profits using (illegal) tricks to transfer value
• Typical spheres of activity are culture, education, healthcare, protection of the environment, social programs, trade associations, promotion of civil rights. Universities are non-profit because they should be centered on education, research (they have a social objective). Museums can be public, private (owned by NGOs) and companies
• UNICEF is a non-profit
• WWF is a non-profit with close relationships with governments, but they want to be financed and collaborate with companies
• Greenpeace is also a non-profit but does not want to collaborate with governments and companies – they want to be independent
• They may pursue private interests of participants (e.g., trade associations) sell products or services (e.g., universities) or provide public goods (e.g., philanthropic foundations). Sometimes you have to pay (e.g., universities) and sometimes you don’t pay (e.g., Emergency)
• They need skills related to management, marketing and finance. They may have employees, volunteers or a combination of them.
• Medici senza frontiere works mainly thanks to volunteers

Why non-profit? They are seen as remedies to failures of governments and companies. [Bocconi was founded because the institutions did not provide enough/good knowledge, so governments should intervene, but citizens did not want to wait for the government, so they acted directly] Non-profit because companies want profit – they have higher prices – they want dividends instead of reinvesting all dividends.

Valeant

When the new CEO arrived, Valeant acquired new companies with drugs and their respective patents (usually pharmaceutical companies keep patents for them, so you usually have giants with patents of medicines).

Valeant Pharmaceutical International:

• Multinational specialty pharmaceutical company based in Canada
• Valeant strategy: acquisition of existing companies (and their drugs), cost cutting