Business and Management (Prof. Deandreis)

Business and Management (De Andreis)

Università degli Studi di Torino, Business and Management, 2nd year

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 analyze the enterprise system there are two main steps:

• Company general environment: Country political and legislative background, cultural background, etc.
• Company specific sector: Agrofood, automotive, aerospace, pharma, textile, IT services, etc.

The price should cover the costs of production and marketing and generate 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. This is 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 the cost of production and at the same time being competitive with a bit higher price than the market level.

There can also be a strategy to lower the price (generating a loss) to enter a new market even if you do not meet the repayment of the production costs: this is sustainable for a 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 types of economy:

• Linear: where wastes are out of the market, we take, make, dispose, and 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 describes how processes 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 has the capability to influence the prices.

Supply and demand are made by many buyers and sellers (market competition).

Company stability in the market

A company is an open social system that acts 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 change according to the different market situations.

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

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 in a stable position when the cash inflow is equal to 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 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

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 a 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 through 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-term and strategic plans (better success).

Organizing

It is the process of arranging and allocating work, authority, hierarchy, and resources to better achieve company goals. Relationship, costs, and time are central to organizing activities.

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 concerns first of all other forms of resources (solar and renewable energies), we use different materials both for agri-food and manufacturer sectors (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 concerns sharing method, recovery, and refurbishing wastes and materials.

Five Business Models

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 is 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 customer through a lease or pay-for-use arrangements (Vodafone, Zipcar).

For example, Renault, in Choisy-le-Roi, resells, reuses, refurbishes, and recycles old cars. The savings are 80% less energy, 88% less water, 92% less chemicals, and 70% less waste. No waste into the landfill! On the other hand, FCA developed the production of Biomethane vehicles in Europe. More than 700,000 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

Forms 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 a 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 is a 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. 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 a 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 their 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 investment 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 broad category, this legal framework is crucial for the protection of investors and the integrity of the financial markets.