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Business Volume 1: Custom 2

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Chapter 1: Understanding the Canadian Business System

o Business: an organization that produces or sells goods or services in an effort to
make a profit
o Profit is what remains after a businesss expenses have been subtracted from its
revenues
o Businesses exist to earn profits

Economic Systems Around the World
o Allocates a nations resources among its citizens
o Factors of production: the basic resources that a countrys businesses use to
produce goods and services
o Four factors of production: labour, capital, entrepreneurs, and natural resources

Labour:
o People who work for a company
o Human resources
Capital
o Financial resources needed to operate an enterprise
o Personal investment by owners for small businesses
Entrepreneurs
o People who accept the opportunities and risks involved in creating and operating
businesses
Natural Resources
o Land, water, mineral deposits, and trees
o Include all physical resources
Information Resources
o Specialized expertise and knowledge of people
o Various forms of economic data for their work
o Creation of new information or the repackaging of existing information for new
users and different audiences

Types of Economic Systems
o Manage factors of production
o Ownership can be private or by government
o Can differ in the way that decisions are made about production and allocation
o Command economy: relies on a centralized government to control all or most
factors of production and to make all or most production and allocation decisions
o Market economy: individuals producers and consumers control production
and allocation decisions through supply and demand

Command Economies
o Communism and socialism
o Communism is a system in which the government owns and operates all sources
of production
o Socialism: the government owns and operates only selected major industries
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Market Economies
o Mechanism for exchange between the buyers and sellers of a particular good or
service
o Capitalism: sanctions the private ownership of the factor of production and
encourages entrepreneurship by offering profits as an incentive
o Operation of demand and supply

Mixed Market Economies
o Command and market economies are viewed as opposites
o Mixed market economy: system featuring characteristics of both command and
market economies
o Privatization: the process of converting government enterprises into privately
owned companies
o Deregulation: the reduction in the number of laws affecting business activity and
in the powers of government enforcement agencies

Interactions Between Business and Government
Government as Customer
o Buys thousands different products and services from business firms
o Largest purchaser of advertising in Canada

Government as Competitor
o Competes with business through Crown corporations
o Exists for provincial and federal level

Government as Regulator
o Regulate through many administrative boards, tribunals, or commissions
o Provincial boards and commissions also regulate business through their decisions
o Protecting competition, protecting consumers, achieving social goals, and
protecting the environment

Government as Taxation Agent
o Revenue taxes are levied by governments primarily to provide revenue to fund
various services and programs
o Progressive revenue taxes are levied at a higher rate on higher-income taxpayers
and at a lower rate on lower-income taxpayers
o Regressive revenue taxes are levied at the same rate regardless of a persons
income
o Restrictive taxes are levied partially for the revenue they provide, but also
because legislative bodies believe that the products in question should be
controlled

Government as Provider of Incentives
o Help stimulate economic development
Business Volume 1: Custom 2
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o Offer incentives through the many services they provide to business firms through
government organizations
o Municipal tax rebates for companies

Government as Provider of Essential Services
o Facilitate business activity through the wide variety of services they supply
o Examples: highways, postal service and minting money
o Maintain stability through fiscal and monetary policy
o Sewage, hospitals and police
o These activities create the kind of stability that encourages business activity

The Canadian Market Economy

Demand and Supply in a Market Economy
o Inputs used by a business and the products created by business have their own
markets
o Decide what inputs to buy, what to make and in what quantities, and what prices
to charge
o Customers decide what to buy and how much they want to pay

The Laws of Demand and Supply
o Decisions about what to buy and what to sell are determined primarily by the
forces of demand and supply
o Demand is the willingness and ability of buyers to purchase a product or a service
o Supply is the willingness and ability of producers to offer a good or service for
sale
o Law of demand: buyers will purchase more of a product as its price drops and less
of a product as its price increases
o Law of supply: producers will offer more of a product for sale as its price rises
and less as its price drops

The Demand and Supply Schedule
o Obtained from marketing research and other systematic studies of the market
o Understand the relationships among different levels of demand and supply at
different price levels

Demand and Supply Curves
o Demand curve shows how many products will be demanded at different prices
o Supply curve shows how many units of a product will be supplied at different
prices
o When the demand and supply curves are plotted on the same graph, the point at
which they intersect is the market price or equilibrium price the price at which
the quantity of goods demanded and the quantity of goods supplied are equal

Surpluses and Shortages
o Surplus: a situation in which the quantity supplied exceeds the quantity demanded
Business Volume 1: Custom 2
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o Shortage: the quantity demanded will be greater than the quantity supplied
o Finding the equilibrium point

Private Enterprise and Competition in a Market Economy
o Private enterprise: allows individuals to pursue their own interests with minimal
government restriction
o Requires private property rights, freedom choice, profits, and competition
1. Private property rights: ownership of the resources used to create wealth is in the
hands of individuals
2. Freedom of choice: the choice to buy, sell and hire
3. Profits: the lure of profits leads some people to abandon the security of working
for someone else and to assume the risks of entrepreneurship. The anticipated
profits also influence individuals choice of which goods or services to produce
4. Competition: if profits motivate individuals to start businesses, competition
motivates them to operate those businesses efficiently. It occurs when two or
more businesses vie for the same resources or customers

Perfect Competition
o All firms in an industry must be small
o The number of firms in the industry must be large
o No single firm is powerful enough to influence the price of its products
o Prices are determined by supply and demand
o The products of each firm are so similar that buyers view them as identical to
those of other firms
o Both buyers and sellers know the prices that others are paying and receiving in the
marketplace
o Easy to leave or enter the market
o Prices are set exclusively by supply and demand and accepted by both sellers and
buyers

Monopolistic Competition
o Fewer sellers involved than perfect competition

o Many sellers try to make products at least seem to differ from those of
competitors
o Businesses may be large or small
o Can still enter or leave the market easily
o Gives sellers some control over prices

Oligopoly
o When an industry has only a handful of sellers
o Sellers are quite large
o It is difficult for a new competitors to enter the industry because large capital
investment is needed
Business Volume 1: Custom 2
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o Have more control over their strategies than monopolistically competitive firms,
but the actions of one firm can significantly affect the sales of every other firm in
the industry

Monopoly
o When an industry or market has only one producer
o Gives a firm complete control over the price of its product
o Consumer demand will fall as its price rises
o Competition Act forbid many monopolies, and the prices charged by so called
natural monopolies are closely watched by provincial utilities boards
o Natural monopolies are found in industries in which are company can most
efficiently supply all the product or service that is needed

Chapter 2: Understanding the Environments of Business
The Economic Environment
o External environment: which consists of everything outside an organizations
boundaries that might affect it
o Economic environment: refers to the conditions of the economic system in which
an organization operates

Economic Growth
o Less than 2.5% of the population works in agriculture

o Increased because we have been able to increase total output in the agricultural
sector

The Business Cycle
o Pattern of short-term ups and downs in an economy
o Has 4 phases: peak, recession, through, and recovery
o Recession is a period during which aggregated output declines
o Long-term recession depression

Aggregate Output and the Standard Living
o Main measure of growth is aggregate output: the total quantity of goods and
services produced by an economic system during a period
o An increase in aggregate output is growth
o When output grows more quickly than the population, two things follow: output
per capita the quantity of goods and services per person goes up and the
system provides relatively more of the goods and services that people want
o People living in an economic system benefit from a higher standard of living

Gross Domestic Product
o Refers to the total value of all goods and services produced within a given period
by a national economy through domestic factors of production
o Increase GDP = economic growth

Business Volume 1: Custom 2
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Gross National Product
o Gross national product (GNP) refers to the total value of all goods and services
produced by a national economy within a given period regardless of where the
factors of production are located
o Profits earned by foreign firms in Canada are included in GDP
o Redefining Progress has proposed a more realistic measure to assess economic
activity the Genuine Progress Indicator (GPI)
o GPI treats activities that hard the environment or our quality of life as costs and
gives them negative values

Real Growth Rates
o Growth rate of GDP adjusted for inflation and changes in the values of the
countrys currency
o Growth depends on output increasing at a faster rate than population

GDP per Capita
o GDP per capita means GDP per person
o Dividing total GDP by the total population of a country

Real GDP
o Nominal GDP: GDP measured in current dollars or with all components valued at
current prices
o Real GDP: GDP calculated to account for changes in currency values and price
changes

Purchasing Power Parity
o The principle that exchange rates are set so that the prices of similar products in
different countries are about the same

Productivity
o Measure of economic growth that compares how much a system produces with
the resources needed to produce it
o If more products are being produced with fewer factors of production, what
happens to the prices of these products? They go down
o Standard of living improves only through increases in productivity
o Factors that can help or hinder the growth of an economic systems: balance of
trade and the national debt

Balance of Trade
o The economic value of all the products that a country exports minus the economic
value of its imported products
o A positive balance of trade results when a country exports more than it imports
helps economic growth creditor nation
o Negative balance of trade results when a country imports more than it exports
inhibits economic growth trade deficit

Business Volume 1: Custom 2
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National Debt
o Amount of money that the government owes its creditors
o Government takes in revenues and has expenses
o Budget deficits: the government spent more money each year than it took in
o Sells bonds
o Competes with every other potential borrower

Economic Stability
o Stability: a condition in which the amount of money available in an economic
system and the quantity of goods and services produced in it are growing at about
the same rate
o Factors that threaten stability: inflation, deflation, and unemployment

Inflation
o Occurs when there are widespread price increases throughout an economic system
o Occurs when the amount of money injected into an economy outstrips the
increase in actual output
o Decreases the purchasing power of your money
o Measure inflation by price increases
o Consumer price index (CPI) measures changes in the cost of a basket of 600
different goods and services that a typical family might buy

Deflation
o Falling prices
o May fall because industrial productivity is increasing and cost savings can be
passed onto costumers, or because consumers have high levels of debt and are
therefore unwilling to buy very much

Unemployment
o Level of joblessness among people actively seeking work
o Fictional unemployment: people are out of work temporarily while looking for a
new job
o Seasonal unemployment: people are out of work because of the seasonal nature of
their jobs
o Cyclical unemployment: people are out of work because of a downturn in the
business cycle










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o Structural unemployment: people are unemployed because they lack the skills
needed to perform available jobs
o If government cut taxes or spending more money on the economy, prices in
general may go up because increased consumer demand, but then inflation sets in,
and purchasing power declines

Managing the Canadian Economy
o Government acts to manage the Canadian economic system through two sets of
policies: fiscal and monetary
o Manages the collection and spending of its revenues through fiscal policies
o Tax increases can function as fiscal policies, not only to increase revenues but to
manage the economy as well
o When the growth rate of the economy is decreasing, tax cuts will normally
stimulate renewed economic growth
o Monetary polices focus on controlling the size of the nations money supply
o Higher interest rates make money more expensive to borrow and thereby reduce
spending tight monetary policy
o Lower interest rates make money less expensive to borrow and thereby increase
spending easy monetary policy
o Fiscal policy and monetary policy make up stabilization policy: government
economic policy whose goal is to smooth out fluctuations in output and
unemployment and to stabilize prices

The Business Environment
o Three most serious issues facing Canadian businesses:
1. Taxation
2. The value of the Canadian dollar
3. The need for an education/skilled workforce

The Industry Environment
o Managers must understand the companys competitive situation, and then develop
a competitive strategy to exploit opportunities in the industry

Rivalry Among Existing Competitors
o Rivalry in intense price competition, elaborate advertising campaigns, and an
increased emphasis on customer service

Threat of Potential Entrants
o If it is easy for new competitors to enter a market, competition will likely be
intense and the industry will not be very attractive
o Some industries are very capital-intensive and are therefore difficult to enter

Suppliers
o The amount of bargaining power suppliers have in relation to buyers helps
determine how competitive an industry is
Business Volume 1: Custom 2
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o The power of suppliers is influenced by the number of substitute products that are
available

Buyers
o When there are only a few buyers and many supplies, the buyers have a great deal
of bargaining power

Substitutes
o Many substitute products industry is more competitive

Emerging Challenges and Opportunities in the Business Environment
o Most successful firms are dealing with challenges and opportunities in
todays business environment by focusing on their core competencies the
skills and resources with which they compete best and create the most value
for owners
o They outsource non-core business processes, paying suppliers and
distributors to perform then and thereby increasing their reliance on
suppliers
o Often involve globally dispersed processes and supply chains
o Most publicized steps that companies have taken to respond to challenges
and opportunities in the business environment: outsourcing

Outsourcing
o The strategy of paying suppliers and distributors to perform certain business
processes or to provide needed materials or serviced

Chapter 3: Understanding Entrepreneurship, Small Business,
and New Venture Creation
Small Business
o Industry Canada is the main federal government agency responsible for small
business
o Relies on two distinct sources of information, both provided by statistics Canada:
the Business Register and the Labour Force Survey
o To be included in the register, a business must have at least one paid employee,
annual sales of $30 000 or more, or be incorporated
o Goods-producing business in the register is considered small if it has fewer than
100 employees
o Service-producing business is considered small if it has fewer than 50 employees
o LFS uses information from individuals to make estimates of employment and
unemployment levels
o Individuals are classified as self-employed if they are working owners of a
business that is either incorporated or unincorporated, if they work for themselves
but do not have a business, or if they work without pay in a family business
o Industry Canada reports that there are 2.2 million business establishments in
Canada and about 2.5 million people who are self-employed
Business Volume 1: Custom 2
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Edition Textbook Notes (MGTA01 2013)

o Unincorporated business operated by a self-employed person would not be
counted among the 2.2 million businesses
o Majority of businesses in Canada have no employees, nor are they incorporated
o Small business: an owner-managed business with less than 100 employees

The New Venture/Firm

o It is considered to be new if it has become operational within the previous 12
months, if it adopts any of the main organizational forms and if it sells goods or
services
o A new venture as a recently formed commercial organization that provides goods
and/or services for sale

Entrepreneurship
o Entrepreneurship is the process of identifying an opportunity in the marketplace
and accessing the resources needed to capitalize on that opportunity
o Entrepreneurs are people who organize and seize opportunities
o Small businesses often provide an environment to use personal attributes
o People who exhibit entrepreneurial characteristics and create something new
within an existing large firm or organization are called intrapreneurs

The Role of Small and New Businesses in the Canadian Economy
Small Businesses
o Close to 98% of all businesses in Canada are small
o Small: >100 employees
o Medium: 100-499
o Large: <500
o Private sector generally refers to the part of the economy that is made up of
companies and organizations that are not owned or controlled by the government
o Small businesses account for over 2/3 of employment in four industries: non-
institutional healthcare (90%), the construction industry (77%), other services
(73%), and accommodation and food (69%)
o Contribution small businesses make to the economy in terms of GDP

New Ventures
o Most of the growth in firms occurred in the services-producing and goods-
producing sector
o Women are playing a bigger role
o Increasing more than men
o Can only be classified as a new business when the employees were acquired

The Entrepreneurial Process
o Entrepreneur must identify a business opportunity and access the resources
needed to capitalize on it
o Three key process elements: the entrepreneur, the opportunity, and resources
Business Volume 1: Custom 2
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o Ventures next phase of development will result in one of the following outcomes,
growth, stability, decline, or demise

The Entrepreneur
o Varied characteristics
o Identify an opportunity and access resources

Identifying Opportunities
o Generating ideas for new or improved products, processes, or serviced, screening
those ideas so that the one that presents the best opportunity can be developed,
and then developing the opportunity

Idea Generation
o Involves abandoning traditional assumptions about how things work and how they
ought to be, and seeing what others do not
o Majority originate from events relating to work or everyday life
o Work experience is the most common (45-85%)
o Personal interest/hobby (16%)

Screening
o Key part of process
o Weed out the dead-end venture ideas, more time and effort you can devote to
the ones that remain
o A product or service that creates or adds value for the customer is one that solves
a significant problem, or meets a significant need in new or different ways
o Competitive advantage exists when potential customers see the product or service
as better than that of competitors
o Longer markets are in a state of flux, the greater the likelihood of being able to
sustain a competitive advantage
o Absence of a competitive advantage or developing a competitive advantage that is
not sustainable constitute two fatal flaws of many new ventures
o Determining whether sales will lead to profits
o Requires an initial understanding of who the customers are, what their needs are,
and how the product or service will satisfy their needs better than competitors
products will
o Requires a thorough understanding of the key competitors who can provide
similar products, services, or benefits to the target customer
o Sales forecast: an estimate of how much of a product or service will be purchased
by the prospective customers for a specific period of time typically one year
o Total sales revenue is estimated by multiplying the units expected to be sold by
the selling price
o Sales forecast forms the foundation for determining the financial viability of the
venture and the resources needed to start it
o Typically consist of an estimate of start-up costs, a cash budget, an income
statement, and a balance sheet

Business Volume 1: Custom 2
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Edition Textbook Notes (MGTA01 2013)

The Idea has Low Exit Costs
o Exit costs are low if a venture can be shut down without a significant loss of time,
money, or reputation

Developing the Opportunity
o For new ventures it is important to be responsive to new information and be on
the lookout for opportunities that were not originally anticipated
o Three main strategies:
1. Introduce a totally new product or service
2. Introduce a product or service that will compete directly with existing competitive
offerings but add a new twist
3. Franchise

o Franchise is an arrangement in which a buyer (franchisee) purchases the right to
sell the product or service of the seller (franchiser)
o When capital requirement are high need for considerable research and planning
o Costs associated with effectively coordinating tasks will be minimized
business plan required
o Business plan is a document that described the entrepreneurs proposed business
venture; explains why it is an opportunity, and outlines its marketing plan, its
operational and financial details, and its managers skills and abilities
o If market conditions are changing rapidly, the benefits gained from extensive
research and planning diminish quickly
o If the product is highly innovative, market research is of less value since the
development of entirely new products involves creating needs and wants rather
than simply responding to existing needs

Accessing Resources
o Use few resources as possible and use other peoples resources whenever they can
o Bootstrapping can also refer to the acquisition of other types of resources such as
people, space, equipment, or materials that are loaned or provided free by
customers or suppliers

Financial Resources
o Two main types of financing:
1. Debt financing refers to money that is borrowed
2. Equity financing refers to money that the entrepreneur or others invent in a
business in return for an ownership interest

o To obtain debt financing the entrepreneur must have an adequate equity
investment in the business typically 20% of the businesss value and collateral
o Collateral refers to items or assets owned by the business or by the individual that
the borrower uses to secure a loan or other credit
o These items can be seized by the lender if the load isnt repaid according to the
specified terms

Business Volume 1: Custom 2
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o To lenders, equity investment demonstrates the commitment of the entrepreneur
o Most common source of debt financing include:
Financial Institutions
o Banks are risk averse
o New businesses are considered risky
o Businesses has yet to establish ability to repay loan
Suppliers
o Who provide goods or services to the entrepreneur with an agreement to bill them
later
o Trade credit
o Short-term

The most common sources of equity financing include:
1. Personal Savings
2. Love Money
3. Private Investors (angels)
4. Venture Capitalists

Other Resources
o Partners, employees, customers, suppliers, professionals, consultants, government
agencies, lenders, shareholders, and venture capitalists
o Sometimes ownership is shared with one or more of these stake holders in order
to acquire the use of their resources
o Form of legal organization chosen affects whether ownership can be shared and
whether resources can be accessed
o Whether a team is necessary depends upon:
a) The size and shape of the venture how many people does the venture require?
b) Personal competencies what are the talents, know-how, skills, track record,
contacts, and resources that the entrepreneur brings to the venture?

o Most teams tend to be formed in one of two ways:
1. One person has an idea and then several associates join the team over the first few
years of the ventures operation
2. An entire team is formed at the outset based on such factors as a shared idea, a
friendship, or an experience











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Starting Up a Small Business
Buying an Existing Business
o 1/3 of all new businesses that were started in the past decade were bought from
someone else
o Odds of success are better
o Established relationships with lenders, suppliers, and other stakeholders
o Gives potential buyers a much clearer picture of what to expect
o Downside? May not be able to avoid certain problems

Taking Over a Family Business
o Unobtainable financial and management resources because of the personal
sacrifices of family members
o Goodwill or strong reputation
o Employee loyalty is often high
o Unified family management and shareholders group may emerge
o Downside? Disagreements over which family members assume control

Buying a Franchise
o Operating under licenses issues by parent companies to local entrepreneurs who
own and manage them
o Accounts for 43% of retail sales in Canada
o 30 B in annual sales revenue
o Gives franchisees the right to sell the product of the franchiser
o Franchising agreement outlines the duties and responsibilities of each party
o Stipulates the amount and type of payment that franchisees must make to the
franchiser
o Royalty payments

Reasons for Success
1. Hard work, drive and dedication
2. Market demand for the product or service
3. Managerial competence
4. Luck

Reasons for Failure
1. Managerial incompetence or inexperience
2. Neglect
3. Weak control systems
4. Insufficient capital







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Chapter 4: Understanding Legal Forms of Business
Organization

The Sole Proprietorship
o A business owned and operated by one person
o Extension of yourself
o Usually small
o Majority in Canada are sole proprietorship
o Accounts for only a small proportion of total business revenues

Advantages:
o Freedom
o Easy to form
o You dont need to register your business name to start operating
o Simplicity of legal procedures
o Low start-up costs
o Tax benefits

Disadvantages:
o Limited liability: responsible for all debts and legal liabilities incurred by the
business
o Dissolves when the owner does
o Depends on the resources of one person whose managerial and financial
limitations may constrain the business
o Hard to borrow money to start-up or expand
o Unable to recover loans if the owner becomes disable

The Partnership
o Formed when two or more persons operate a business for profit
o Pool their financial, managerial and technical resources
o Two types of partnership:

General partnership
o All the partners share in the profits of the business and have a say in managing the
business
o All are responsible for the debts and other liabilities

Limited partnership
o At least one general partnership and one or more limited partners
o General partners run the business and have unlimited personal liability for its
debts and liabilities
o Limited partners do not participate in managing the business
o Share some profit, but they have no personal liability for the debts and liabilities
Business Volume 1: Custom 2
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o A limited partner can lose only the original investment in the partnership, while a
general partner can lose much more if the partnership business does not make
profits

Advantages:
o Ability to grow by adding talent and money
o Somewhat easier time borrowing funds
o Can also invite new partners to join by investing money
o Simple to organize
o Few legal requirements
o Must begin with an agreement
o Partners are taxed as individuals

Disadvantages:
o Unlimited liability
o Each partner may be held responsible for all debts
o All liable if the offending partner cant pay up
o Lack of continuity
o Difficulty of transferring ownership
o Provides little or no guidance in resolving conflicts between the partners

The Corporation
o All corporations share legal status as a separate entity, property rights and
obligations, and an definite lifespan
o Liable for its own debts and whose owners liability is limited to their investment
o Shareholders: investors who buy shares of a corporation are the real owners of
the corporation
o Profits may be distributed to stock holders in the form of dividends
o Board of directors is the governing body of a corporation
o Ensure that the corporation is run in a way that is in the best interests of the
shareholders
o Chooses the president and other officers of the business and delegates the power
to run the day-to-day activities of the business to those officers
o Sets policy on paying dividends, on financing major spending, and on executive
salaries and benefits
o Large companies may have 20-30
o Smaller, have no more than 5

o Inside directors are employees of the company and have primary responsibility
for the corporation
o They are also top manager (president and CEO)
o Outside directors are not employees of the corporation
o Corporate officers are the top managers hired by the board to run the corporation
on a day-to-day basis
o CEO is responsible for internal management
o Vice president oversees functional areas such as marketing or operations
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Types of Corporations
o Two types of private sector corporations
o Public corporation is a business whose shares stocks are widely held and available
for sale to the general public
o Private corporations are held by only a few shareholders, are not widely available
for purchase, and may have restrictions on their sales
o Most new corporations start out as private because few investors will buy an
unknown stock
o As it develops it may issue shares to the public initial public offering (IPO)

Formation of the Corporation
o Two most widely used methods to form a corporation are federal incorporation
under the Canada business Corporation Act and provincial incorporation under
any of the provincial corporations act
o Former is use if the company is going to operate in more than one province; the
latter is used if the founders intend to carry on business in only one province
o Articles of incorporation must be drawn up

Advantages:
o Limited liability: liability of investors is limited to their personal investment in the
corporation
o Continuity
o Selling shares, they expand the number of investors and the amount of available
funds

Disadvantages:
o New firm in forming a corporation is the cost ($2 500)
o Need legal help in meeting government regulations
o Heavily regulated

Redrawing Corporate Boundaries
o Successful companies are responding to challenges in the environment by
redrawing traditional organizational boundaries, and by joining together with
other companies to develop new goods and services

Acquisitions and Mergers
o In an acquisition, one firm simply buys another firm
o A merger is a consolidation of two firms, and the arrangement is more
collaborative
o When companies are in the same industry horizontal merger
o When one of the companies in the merger is a supplier or customer to the other
vertical merger
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o In a friendly takeover, the acquired company welcomes the acquisition perhaps
because it needs cash or sees other benefits in joining the acquiring firm
o Hostile takeover, the acquiring company buys enough of the other companys
stocks to take control even through the other company is opposed to the take over
Divestitures and Spinoffs
o Divestitures occurs when a company decides to sell part of its existing business
operations to another corporation
o Spinoff: a company might set up one or more corporate units as new, independent
businesses because a business unit might be more valuable as a separate company


Chapter 5: Understanding International Business


Terms:
o globalization: the integration of markets globally
o imports: products that are made or grown abroad and sold in Canada
o exports: products made or grown in Canada that are sold abroad.
o per capita income: the average income per person of a country

The Major World Marketplace:
o the contemporary world economy revolves around three major market-places:
North America, Europe and Asia-Pacific.
o high income countries are countries with per capita income greater than US
$10,065. The list includes Canada, the U.S, most countries in Europe, Australia,
Japan, South Korea, Kuwait, the United Arab Emirates, Israel, Singapore, Hong
Kong and Taiwan.
o upper-middle income countries are those with per capita between US $3255 and
US $10, 065, include the Czech Slovakia, Greece, Hungary, Poland, Turkey, most
countries comprising the former Soviet Bloc, Mexico, Argentina and South Africa
o low middle income countries are those with per capita between U.S $825 and U.S
$3255. Among the countries in this group are Colombia, Guatemala, Samoa, and
Thailand. Some of these countries such as China and India possess high
populations and are seen as potentially attractive markets for international
business.
o low income countries (called developing countries) are those with annual per-
capita income of less than US $825. Due to low literary rates, weak
infrastructures, unstable governments and related problems, these countries are
less attractive to international businesses. For example, the nation of Somalia is
plagued by drought, civil war and starvation, and plays virtually no role in the
world economy.

Forms of Comparative Advantage

Terms:
Business Volume 1: Custom 2
nd
Edition Textbook Notes (MGTA01 2013)

o absolute advantage: a nations ability to produce something more cheaply or
better than any other country.
o comparative advantage: a nations ability to produce some products better or more
cheaply than it can others.
o international competitiveness: the ability of a country to generate more wealth
than its competitors in world market.

National Competitive Advantage:
o a country will be inclined to engage in international trade when factor conditions
demand conditions related to and supporting industries and
strategies/structures/rivalries are favourable. It is derived from four conditions.
o factor conditions are the factors of production identified in Chapter 1.
o demand conditions reflect a large domestic consumer base that promotes strong
demand for innovative products.
o related and supporting industries include strong local or regional suppliers and/or
customers.
o strategies, structures and rivalries refer to firms and industries that stress cost
reduction, product quality, higher productivity and innovative new products.

Import-Export Balances

o exchange rates: the rate at which the currency of one nation can be
exchanged for that of another.
o euro: a common currency shared among most of the members of the
European Union.

o Exchange rates and competition:
o companies that conduct international operations must watch exchange rate
fluctuations closely because these changes affect overseas demand for
their product and can be a major factor in international competition
o in general, when the value of a countrys currency rate rises (becomes
stronger), companies based there find it harder to export products to
foreign markets and easier for foreign markets to enter local markets.
o it also makes it more cost-efficient for domestic companies to move
production operations to lower cost sites in foreign countries.
o the value of the countrys currency declines (becomes weaker), the
opposite reaction occurs.
o as the value of a countrys currency falls, its balance of trade should
improve because domestic companies should experience a boost in
exports.
o there should also be a corresponding decrease in the incentives for foreign
companies to ship products into the domestic market.

International Business Management

Gauging International Demand:
Business Volume 1: Custom 2
nd
Edition Textbook Notes (MGTA01 2013)

o Two questions a company should consider when considering international
expansion:
o Is there a demand for my products abroad?
o If so, must I adapt those products for international consumption?
o products that are successful in one country may be useless in another. (example:
snowmobiles are useless in Central America, due to climatic lack of snow)
o foreign demand for a product may be greater, the same as, or weaker than
domestic demand.
o market research and/or prior market entry of competitors may indicate whether
theres an international demand for a firms products.

Adapting to Customer Needs:
o if there is international demand for its product, a firm must consider whether and
how to adapt that product to meet the special demands of foreign customers.
(example: dubbing movies into foreign languages)

Levels of Involvement in International Business

Terms:
o exporters: a firm that makes products in one country and then distributes
and sells them in others.
o importers: a firm that buys products in foreign markets and then imports
them for resale in its home country.
o international firm: international firm conducts a significant portion of its
business abroad and maintains manufacturing facilities overseas.
o multinational firm: controls assets, factories, mines, sales offices and
affiliates in two or more foreign countries.

International Organization Structures

Terms:
o independent agents: a foreign individual or organization who agrees to
represent an exporters interests in foreign markets.
o licensing arrangement: an arrangement by an owner of a process or
product to allow another business to produce, distribute or market it for a
fee or royalty.
o branch office: a location that an exporting firm establishes in a foreign
country in order to sell its products more effectively.
o strategic alliance: an enterprise in which two or more persons or
companies temporarily
o foreign direct investment(FDI): buying or establishing tangible assets in
another country.

Barriers to International Trade

Social and Cultural Differences:
Business Volume 1: Custom 2
nd
Edition Textbook Notes (MGTA01 2013)

o language barriers are an obvious cause, resulting in inappropriate naming of
products.
o physical stature in different nations can also make a difference, especially in
terms of clothing.
o differences in the average age of the local population can also have ramifications
for product development and marketing.
o countries with growing populations tend to have a lot of young people, thus
causing an increased desire for electronics and clothing, while countries with
stable or declining populations have more older people, thus causing increased
demands for general pharmaceuticals.
o -subtle value differences can also have an important impact on international
business. A grocery trip to Canadians is seen as buying food.
o however to Europeans it is seen as an opportunity to relax and meet friends.

Economic Differences:
o economic differences are more pronounced.
o in dealing with economies like those, firms must be aware of when and to
what extent the government is involved in a given industry.

o Legal and Political Differences:

o Terms:
o quotas: a restriction by one nation on the total number of products of a
certain type that can be imparted from another nation.
o embargo: a government order forbidding exportation and/or importation of
a particular product.
o tariff: a tax levied on imported products.
o subsidy: a government payment to help domestic business compete with
foreign firms
o protectionism: protecting domestic business at the expense of free market
competition.
o local content laws: laws requiring that products sold in a particular country
be at least partly made in that country.
o business practice laws: laws or regulations governing business practices in
given countries.
o cartel: any association of producers whose purpose is to control the supply
and price of a given product.
o dumping: selling a product for less abroad than in the producing nation;
illegal in Canada.

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