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Business and Management (De Andreis)

Università degli Studi di Torino, Business and Management, 2nd yea r.

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Lecture One – 9 April

What is business?

Business is the activity of production or transformation of goods or services and the sale of such goods or

services produced or transformed, with the expectation of a net profit generation.

What is management?

Management is the process of planning, organizing, leading and controlling the efforts of companies (or a

business) to achieve their goals of business activities.

What is business management?

We refer to business management as a continuous, ongoing, systematic process to conduct the entire

company (or a part of the company business) to achieve the planned goals.

Business management is strictly related to conduct a single business or a company/enterprise.

The Enterprise as an open social system:

All the companies, large or small, have some features in common. They operate in order to achieve the

same goal: create and sell a product or service to a customer.

All companies have different exchanges with the outside world:

• Market needs

• Marketing strategies for potential customers

• Raw materials and financial resources needs

• HR – skills and competences

• Compliances to regulations, law and other obligation or social context

For all these reasons, enterprise is an open social system.

The company system is strictly related to the outside environment and this relationship is created by

market transactions in the following stages:

1. Purchasing of the factor of production (materials, technologies, human resources)

2. Selling of the result of the production, goods and services (marketing ndr.)

3. Purchasing or refund of capital

To analyse the enterprise system there are two main steps:

• Company general environment

o Country political and legislative background, cultural background etc…

• Company specific sector

o Agrofood, automotive, aerospace, pharma, textile, IT services etc…

So, the price should be able to cover costs of production and marketing and generating revenues. However,

this won’t be the market price, but a bit higher and so I won’t be able to reach the level of sale of goods I’ve

produced. 1

This because the market price is not able to repay the cost of production and the company is not

competitive.

The best thing is to stay in equilibrium, repaying cost of production and at the same time be competitive

with a bit higher price than the market level.

There can also be the strategy to lower the price (generating a loss) to enter a new market even if you do

not meet the repaid of the production costs: this is sustainable for few years and it’s just a way to gain

customers and market share.

Here we have to keep in mind that we have different type of economy:

• Linear: where wastes are out of the market, we take, make dispose and we do not care about

wastes.

• Circular: here wastes return to the market as, for example, raw materials.

Market Arena:

In a theoretical condition of market perfect competition (microeconomics) the supply and demand model

describe how process vary as a result of a balance between product and service availability at each price

(supply) and the desire of people to buy that product or service (demand) at each price.

Perfect competition implies that there are many buyers and sellers in the market and no one have the

capability to influence the prices.

Supply and Demand is made by many buyers and sellers (market competition).

Company Stability in the market:

A company is an open social system that act in the global market.

There is no static status for a company but always dynamic market situations.

Because all the key elements (production, prices, interest rates, human resources, laws and regulations,

capital needs etc…) constantly changing according to the different market situation.

One of the most important thing for managers is to find stability (equilibrium) for their company in 4

aspects:

1. Competitiveness stability

2. Economic stability

3. Financial stability

4. Equity stability

Competitiveness stability:

Means the ability to get, maintain and develop a profitable company position's in a competitive market

context selling at a price able to be competitive in the market and also to assure a net profit generation for

the company.

Economic stability:

Means the relation between:

• The flow of costs, that is the amount of money spent to buy the factors of production

• The flow of revenues from the selling of goods or services and other revenues

2

If revenues are bigger than costs the company is in a stable economic situation and members, shareholders

and stakeholders can be repaid (net profit generation).

Financial stability:

The financial stability depends on the relation between cash inflow and cash outflow.

The company is a stable position when the cash inflow is equal or bigger than the cash outflow.

The cash inflows derive from revenues and from the funds the company receives in financing activities from

outside subjects (e.g. borrowing from banks, mortgage, capital management).

Equity stability:

The equity stability depends on the relation between the different sources of financing: capital/equity and

loans.

If a company has 60% of capital and 40% of loans, it’s in a positive situation and it has been capitalized

properly. If the majority of sources of finance are loans (e.g. 80% loans and 20% equity) the company is

“under-capitalized” with high risk in terms of cost of capitals and financial stability.

Management is the process of planning, organizing, leading and controlling the efforts of companies to

achieve their goals of business with the aim to reach profitable equilibrium (stability) position in the

dynamic market arena.

So, management has four main phases which are:

1. Planning

2. Organizing

3. Directing

4. Controlling

Planning:

Planning implies that managers think trough their goals and actions in advance and that their actions are

based on some method and analysis.

The first step in planning is the selection of goals for the organization (both the company and the single

units). Relationship, hierarchy and time are central to the planning activities. Planning produces a picture of

desirable future situations.

• Top manager: prepare long term plans and strategic plans

• Middle level managers: prepare medium term plans

• Front line managers: prepare operational plans

• Workers: actually, do the work and carry out the plan

New business management theories underline the importance for top managers to involve workers, front

line and middle line managers in the preparation of long terms and strategic plans (better success).

Organizing:

It is the process of arranging and allocation work, authority, hierarchy and resources to better achieve

company goals. Relationship, costs and time are central to organizing activities.

3

Directing:

It involves influencing and motivating workers, employees, staff and management to perform planned

tasks. Leadership is an essential part of directing activities.

Controlling:

Finally, the manager must be sure that the actions he has decided will be done. This activity touches the

control and involves these elements:

• Establishing standards of performances

• Measuring and performances and comparing with standards

• Taking corrective action if deviations are detected

From Linear economy to the Circular Economy:

As we’ve said, linear economy concerns the production activity from natural resources, to raw materials to

the final goods, which, once consumed, produce wastes.

The circular economy is a different paradigm, which concern first of all other form of resources (solar and

renewable energies), we use different materials both for agri-food and manufacturer sector (biological and

technical).

Its scope is to decouple businesses and countries development from the exploitation of finite natural

resources:

1. Re-design of processes and products to ensure that all the components are reusable at the end of

the cycle of use

2. Use of renewable energy for the preservation and re-establishment of natural capital

3. Production processes to generate zero-waste, in order to minimize the negative externalities.

So, we are trying to pass from the standard way to make business, which considers just ROI maximization

and efficiency gains to a new design which concern sharing method, recovery and refurbishing wastes and

materials.

Five Business Model:

Accenture, a primary consulting firm, in its report Circular Advantage, has identified five circular business

models companies can leverage – singly or in combination – to generate revenue and enhance customer

value and differentiation:

1. Circular supply-chain: it provides fully renewable, recyclable or biodegradable resources inputs that

underpin circular production and consumption systems (DELL, Coca Cola).

2. Sharing platform: it promotes a platform for collaboration among product users either individuals

or organizations (DHL, Airbnb).

3. Product life-extension: it allows companies to extend the lifecycle of products and assets. Value

that would otherwise be lost through wasted materials are instead maintained or even improved

by repairing, upgrading, remanufacturing or remarketing products (Caterpillar).

4. Recovery & Recycling: It enables a company to eliminate material leakage and maximize the

economic value of product return flows (H&M).

5. Product as a Service: provides an alternative to the traditional model of “buy and own”. Products

are used by one customers through a lease or pay for use arrangements (Vodafone, Zipcar).

For example, Renault, in Choisy-le-Roi, resells, reuses, refurbishes and recycle old cars. The savings are 80%

less energy, 88% less water, 92% less chemicals and 70% less waste. No waste into the landfill!

4

On the other hand, FCA developed the production of Biomethane vehicles in Europe. More than 700000 cars

sold since 1997 with 12 different models. It obtains biomethane from agriculture sub products.

Ford is developing many different solutions for cockpit parts, using bio-plastic.

Forms of Business:

Form of business vary by jurisdiction and national law, but there are several common forms throughout the

world and particularly at OECD country level:

• The sole proprietorship: is a business owned by one person. The owner may operate on his own or

may exploit others. The owner of the business has personal liability for the debts incurred by the

business.

• A partnership: is a form of business in which two or more people operate for the common goal of

making profit. In most forms of partnerships, each partner has personal liability for the debts

incurred by the business.

• A corporation: a limited liability entity that has a separate legal personality from its members. A

corporation can be organized for profit or not for profit. It is owned by multiple shareholders and is

overseen by a board of directors, which hires and fires the business’s managerial staff. In addition

to privately-owned corporate models, there are state-owned corporate models like: Alitalia, Enel,

Eni.

• A cooperative: a limited liability entity that can be organized for profit or not for profit. A

cooperative differs from a corporation because it has members, as opposed to shareholders, who

share decision-making authority. Cooperatives are typically classified as either workers’ or

consumers’ cooperatives (e.g. Coop).

Corporation:

It is a legal entity separate from the people who own it (shareholders) or the people who manage or

operate it. In British tradition it is the term designating a body corporate, where it can be either a

corporation sole (an office held by an individual “natural” person, which id s legal entity separate from that

person) or a corporate aggregate (involving more people). In American and increasingly, international

usage, the term denotes a body corporate formed to conduct business.

In the US a company is a corporation – or less commonly, an association, partnership or union – that carries

out an industrial enterprise. In English Law, a company is a form of body corporate or corporation,

generally registered under the Companies Acts or similar legislation.

Italy recognizes three types of companies with limited liability:

• SRL – società responsabilità limitata

• SPA – società per azioni

• SAPA – società in accomandita per azioni

The legal key point of a corporation is its juridical independence from the people who create it. If a

corporate fail, shareholders normally only stand to lose their investments and employees will lose their

jobs, but neither will be further liable for debts that remain owing to the corporation’s creditors (limited

liability, ndr.).

Despite not being natural persons, corporations are recognized by the law to have rights and

responsibilities identical to real people. Corporations can exercise rights against real individuals, other

corporations or firms and the state. 5

Just as they are born into exercise through their members obtaining a certificate of incorporation, they can

die when they lose money into insolvency.

Modern corporations share some common characteristics, according to different national corporate laws:

• Control of the company is placed in the hands of the board of directors and managers.

• Limited liability of the shareholders (so that when the company is insolvent, they only owe the

money that they subscribed for in shares).

• Separate legal personality of the corporation.

• Transferrable shares (usually on a stock exchange market).

The organizational setup for corporation is determined by different factors:

1. The Country: regulation and cultural issues which impact on the organizational aspect are very

different according to national rules and laws

2. The sector of activity: there are many specific rules depending on the different business sector;

3. The size and aim of the business: generally, a smaller business is more flexible, while larger

businesses or those with wider ownership or more formal structure (like multinational), will usually

tend to be organized as partnership or more commonly corporations. In addition, a business which

wishes to raise money on a stock market or to be owned by a wider range of people […]

4. Limited liability: corporations, limited liability partnerships and others protect they owners from

business failure etc.

5. Tax advantages: different structures are treated differently under tax law and may have advantages

for this reason.

6. Disclosure and compliance requirements: different business structures may be required to make

more or less information public (or reported to relevant authorities) and may be bound to comply

with different rules and regulations.

Legal implications of the role of Capital:

When businesses need to raise money (called capital), several laws come into play. A highly complex set of

laws and regulations govern the offer and sale of investments securities (the means of raising money) in

most western countries.

These regulations can require disclosure of considerable specific financial and other information about the

business. Because securities are a very road term, most investment transactions will be potentially subjects

to these laws.

Initial public stock offering (IPO) referred to simply as an "offering" or "flotation," is when a company issues

common stock or shares to the public for the first time.

After the financial crisis of 2008-2009, a strong revision of the international laws and regulations for

financial assets has been implemented by the Financial Stability Forum and International Financial Bodies.

Initial Public Offering (IPO):

Business that have gone public are subject to extremely detailed and complicated regulations about their

internal governance and when and how information is disclosed to the public and their shareholders.

In the US, these regulations are primarily implemented and enforced by the United States Securities and

Exchange Commission (SEC). Other Western nations have comparable regulatory bodies. In Italy the

“Commissione Nazionale per le Società e la Borsa”, CONSOB is the national authority.

6

The Commisione Nazionale per le Società e la Borsa (CONSOB) is the public authority responsible for

regulating the Italian securities market. Its activity is aimed at the protection of the investing public. In this

connection, the CONSOB is the Italian competent authority for ensuring:

• Transparency and correct behaviour by securities market participants;

• Complete and accurate information

• Correct description of the facts represented in the prospect used

• Compliance with regulations

• It conducts investigations with respect to potential infringements of insider dealing and market

manipulation law.

Budget and financial requirements:

According to national and international financial rules and regulations, among the various obligations that

managers of a company must comply with, there is also the preparation of a series of financial reports or

financial statements that are formal records of its financial activities. Financial statements provide an

overview of a company or business for an interim period (interim financial statement) or for the fiscal year.

There are four basic financial statements:

• Balance sheet: also referred to as statement of financial position or condition, reports on a

company’s assets, liabilities and ownership equity as of a given point in time.

• Income Statement: also referred to as profit and loss statement, reports on a company’s income,

expenses and profits over a period of time. Profit & Loss accounts provide information on the

operation of the enterprise. These include sales and the various expenses in a certain period of

time.

• Statement of retained earnings: explains the changes in a company's retained earnings over the

reporting period.

• Statement of cash flows: reports on a company's cash flow activities, particularly its operating,

investing and financing activities.

For large corporations, these statements are often complex and may include an extensive set of notes to

the financial statements and management discussion and analysis. The notes typically describe each item

on the balance sheet, income statement and cash flow statement in further detail. Notes to financial

statements are considered an integral part of the financial statements.

Financial statements should be understandable, relevant, reliable and comparable. Reported assets,

liabilities and equity are directly related to an organization's financial position. Reported income and

expenses are directly related to an organization's financial performance in a certain period of time.

The accounting period, consisting of 12 months runs, generally from January 1st to December 31st and

normally coincides with the fiscal year.

Financial Statements may be used for different purposes:

• Owners and managers require financial statements to make important business decisions that

affect their continued operations. These statements are also used as part of the management's

annual report to the stockholders.

• Prospective investors make use of financial statements to assess the viability of investing in a

business. 7

• Financial institutions (banks and other lending companies) use them to decide whether to grant a

company fresh capital or extend debt securities (such as bank loans) to finance expansion and

other significant expenditures.

• Employees also need these reports for Labour Unions negotiations or for individuals in discussing

their compensation, promotion and ranking.

• Government entities (tax authorities) need financial statements to ascertain the propriety and

accuracy of taxes and other duties declared and paid by a company.

• Vendors who extend credit to a business require financial statements to assess the

creditworthiness of the business.

• Media and the general public are also interested in financial statements for a variety of reasons.

8

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Lecture Two – 16 April

Business Management and the macroeconomic scenario:

Management, intended as management of business activities, whether a SME or a large corporation,

requires the ability to have an overall view. It also requires the ability to understand how macro events

(countries ‘economic performances, political decisions, new laws, new technologies etc.) can positively or

negatively influence the conduct of our business.

For being a good manager, you need to combine the company business (“micro dimension”) with a

strategic vision of economic, political and social perspectives (“macro dimension”).

Monetary policy:

One of the key element to analyse the relations between macro economy and business management is the

monetary policy.

The 2008 fiscal crisis was, in a large part, the result of a wrong monetary policy. Economists, central

bankers and politicians clearly understand that interest rates were too low during good times.

To understand the relationship between the macroeconomic dimension and business management (the

micro dimension) we should investigate the relationship between the level of interest rates and investment

and we should consider that all the Financial Plans for new investments must estimate the IRR (internal rate

of return).

Relationship between interest rates and level of investment:

The IRR gives managers and entrepreneurs the expectation of the financial return of the investment that

they are planning to make.

The IRR is a rate of return used in capital budgeting to measure and compare the profitability of

investments. It is also called the discounted cash flow rate of return or simply the rate of return.

The internal rate of return on an investment or potential investment is the annualized effective (NET)

return rate that can be earned on the invested capital.

The Business Plan:

At the meeting point between “macro” and “micro” dimension there is the Business Plan: the document in

which a manager or an entrepreneur should develop a business project with a detailed plan, covering all

aspects from the global scenario to the specific issues of the market segment in which the business is

located.

There are several characteristics and requirements for a correct Business Plan:

1. The business plan is not only for start up company: companies at all stages of development need

to prepare business plans either for the planning and financing of a specific project, general

expansion financing, mergers and acquisition and the overall improvement of the company’s

financial and managerial performance.

2. The business plan must be concise, sophisticated investors will not have time to review hundreds

of pages of text. It must be well-written and should focus on the lender’s or investor’s principal

areas of concern. Companies should typically prepare an Executive Summary, a 10 pages version

and a 30- to 40-pages version. Investors will commit funds based on the quality and clarity of the

document, not its thickness. 9

3. Many entrepreneurs fear that if the success of a company depends too heavily on any specific

person, an investor will shy away. Although this is partially true, banks and venture capitalists alike,

actually would prefer to invest in a company that has great people and only a good concept, rather

than one with a great concept and a weak management team.

4. The business plan should be developed by a team of managers within the company and then

reviewed by qualified experts such as accountants, lawyers and the board of directors. It should

never be prepared solely by outside advisors without the input of the internal management. A

veteran investor will be quick to recognize a “cooked” plan or one that reflects the views and

efforts of professional advisors rather than the company’s management team who are responsible

for running the company on a day-to-day basis.

5. The Business Plan will inevitably contain information that is proprietary and confidential to the

company. Therefore, distribution should be controlled, and careful records kept about who has

received a copy of the plan. The cover sheet should contain a management disclaimer reminding

the reader that these are only the plans of the company, the success if which cannot be assured, as

well as a notice of proprietary information. All applicable federal and state securities laws must be

carefully considered if the business plan is intended as a financing proposal.

6. Companies at different stages of growth (facing different problems) and those operating in

different industries will require that different sets of topics be included in the business plan.

7. The business plan should demonstrate the enthusiasm of the founders of the company as well as

generate excitement in the reader; however, it should be credible and accurate. Investors will

want to know all of the company’s strengths and weaknesses. In fact, a realistic discussion of the

company’s problems, along with a reasonable plan for dealing and mitigating these various risks

and challenges, will have a much more positive impact on the prospective investor.

8. Institutional investors are exposed to hundreds of business plans and as a result will initially only

devote a few minutes to the review of each business plan. The Executive Summary (generally one

to three pages in length) will be the first and possibly the last impression that the company makes

on the investors. The executive summary should contain all of the information that will be critical in

the investment decision. Thus, the summary must be prepared after the entire business plan, with

all the idea in it, in order to capture the attention of the reader with all the critical points.

9. A well written business plan will serve a variety of beneficial purposes to the company and its

management team, a management tool to use as a road map for growth. So, it is not just written

when a company needs to raise capital.

The most common form for a Business Plan:

Business plans have many different presentation formats and typically cover five major content areas:

a) Executive Summary

b) Background information

c) Marketing Plan

d) Operational Plan

e) Financial Plan

The Executive Summary:

Should present a brief description of the business. It should be detailed but succinct, presenting the

product and service offered including a discussion of new products (with technological and innovation

developments), new markets and customers, and any other trends that could affect the business. It is

better to prepare it after and not before the whole plan.

10

The Background information:

It is basically composed of six points that should be analysed in an accurate and appropriate way:

1. Analysis of the legal form of the business

2. Description of the product or service

3. Market size and trends

4. Clear identification of the target customers

5. Analysis of competitors

6. Potential market share

1. Analysis of the legal form of the business:

As we’ve seen for any business there is a different set of laws and legal form that vary according to the

different country legislation. It is essential for a good business plan to identify the legal form of the business

according to the type and location of the business activities.

It is also essential to describe in the business plan patents, trade secrets or other proprietary features and

to investigate the legal form of the new business from all anglers.

If necessary is good to indicate a legal firm as primary consultant.

2. Description of the product or service:

Description of the product/service to be sold, as well as the application of the product or service with

emphasis on the differences between what is currently on the market and what the new business will offer.

3. Market size and trends:

Almost all the sections of a business plan depend on sales forecasts (sales levels, based on market research

and analysis, amount of debt and equity capital required). It is essential to analyse any seasonal

fluctuations and the potential annual growth of the total market for the product or service, and to discuss

the major factors affecting that macroeconomic growth.

4. Clear identify the target customers:

Who are the customers for the product/service? What is the basis for their purchase decision: price,

quality, service, personal contact or combinations of these factors? A business plan should clearly identify

the target customers and analyse their purchase decisions.

5. Analysis of competition:

A strong business plan should make a realistic assessment of the strengths and weaknesses of competitive

products and services and to compare the competing products or services on the basis of price,

performance ì, service and other features. It is important to closely analyse the current advantages and

disadvantages of competing products and services.

6.The potential market share:

What us the key element that makes the product or service sellable in the face of current and potential

competitors? The business plan should assess the market and sales in unit and currencies and the potential

market share and trends of the new business. 11


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DETTAGLI
Corso di laurea: Corso di laurea in economia aziendale
SSD:
Università: Torino - Unito
A.A.: 2018-2019

I contenuti di questa pagina costituiscono rielaborazioni personali del Publisher Friz28 di informazioni apprese con la frequenza delle lezioni di Business management e studio autonomo di eventuali libri di riferimento in preparazione dell'esame finale o della tesi. Non devono intendersi come materiale ufficiale dell'università Torino - Unito o del prof Deandreis Massimo.

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