Introduction to Management

Business firms

Produce goods/services for profit, profit distributed to shareholders

Non-profit organisations

Produce goods/services without profit distribution - private/mission driven

State/public organisations

Provide services, regulate, stabilise economic activity - public authority

non-traceable good

Firms where the consumption takes place in the same geographic area as where the product or service is being provided. The demand and supply overlap geographically.

Cooperation

A collection of independent business entities that share a joint strategy and share resources, whereas a firm is a single, independent, standalone commercial enterprise under a single organisational or legal control.

Economic good

Requires limited resources and creates value for someone by satisfying a given need.

Process of firms/cooperations

Scarce resources → production (inputs into goods/services) → exchange (deliver value and receive payment/support)

Why organisation matter?

Scale (too large for one individual), specialisation (different people know different things), coordination (dividing into subtasks), risk (risk sharing), and continuity (must survive beyond individuals).

Non-rivalry

When consuming a product does not diminish how much of the good is available to others, capacity depletion

Non-excludability

You can consume without excluding others from doing the same, access control

Non-excludable and non-rivalrous

Pure public goods

Excludable and non-rivalrous

Club goods

Non-excludable and rivalrous

Congestive goods

Excludable and rivalrous

Private goods

What do non-profits do with the profit?

They reinvest into their mission, the profit cannot be distributed to shareholders as there are none.

What are the two main financial intermediates?

Private equity and venture capital

Main difference between private equity and venture capital

Private equity is for mature, established, or messy companies and 100% control is taken as they under financial stress, need a turn-around, are bankrupt

Venture capital raises capital from limited partners such as banks, insurance firms, institutional etc,, investing people’s money to later receive a return, prioritising start-ups, nearly always partnerships, take minority stakes

There are two legal ways to organise cooperations…

Partnerships and Cooperations

Partnerships

Business owned by two or more partners typically with equal power and rights.

Pros of a partnerships

Simple, trust-based, direct control, fast decision-making, works well with a limited need of taking financial risk, works well with few people

Cons of a partnerships

Fragile because partners bind each other, profit and control are shared, personal liability extends beyond investments, difficult to scale, doesn’t work with a global firm with multiple layers of management, rarely large

Why do partnerships not have limited liability?

You are trading off advantages and disadvantages. General partners keep full control of daily operations but accept unlimited personal liability for business debts. Limited partners risk only the money they invest, but they must give up the right to manage the business. Partnerships avoid corporate double taxation by passing profits directly to personal tax returns.

Can you have a passive general partner?

No

Cooperations

Legal framework we can select for a company, special shareholders have the right to intervene and block a transition, no legal liability

Do shareholder should real power in corperations?

No, shareholders generally do not have the right to directly intervene and block day-to-day business transactions in a corporation. Under corporate law, the board of directors and executive officers manage the daily operations and business decisions, not the shareholders. However, shareholders do hold voting power over fundamental corporate changes. They can step in and vote to block a transaction if it falls into specific major categories.

Do parnerships have shareholders?

No, partnerships do not have shareholders; instead, they have partners who own and manage the business, meaning the concept of shareholder rights does not apply

How can you exit a corporation?

IPO = exit by selling shares to the public

Exit by selling to another private corporation

4 core legal aspects in corporations

legal personality, limited liability, transferability of shares, and centralised management

corporations - legal personality

recognised as legal entities distinct from their shareholders/executives, so they may be sued or sue in ways distinct from the individuals involved. The company itself can own assets, have debt positions and survive as long as capital is available.

Corporations - limited liability

A very old concept that separates what the corporation owns from what shareholders own. If the corporation goes bankrupt, shareholders are not individually liable, creditors go after the firm’s assets, not the owners’ personal wealth, so shareholders’ personal assets are not at risk in case of debt.

Corporations - Transferability of shares

Shareholders are free to buy and sell company shares, the identity of the corporation is independent from that of shareholders. Therefore, shares are transferred via financial transaction between buyers and sellers.

Are ‘shares’ transferable in a partnership?

No, you cannot always sell your part of a business partnership to an outside person without your partners agreeing first.

Corporations - centralised management

Shareholders own the corporation, but its daily activities are often delegated to a few professional individuals. Therefore, there is a separation between ownership and control, making decision-making more efficient, but this can also bring about agency conflictsW

What kind of problems can centralised management create in corporations?

It can create problems if the managers take actions that are not consistent with the shareholders’ preferences.

What is management?

The set of decisions through which people acquire, allocate, and integrate resources to create value.

What kind of resources are used to create value in management?

Labour, land, capital, entrepreneurship

What do prices do?

Generate information about what people want to buy and sell

How do prices change producer behaviour?

They give producers incentives to shift production to products with high prices

How do prices change consumer behaviour?

They give consumers incentives to reduce quantity of products with high prices

To whom are goods rationed?

To those willing to pay

Is the price system centralised or decentralised?

Decentralised

Costs from using market transactions beyond the market price

search and information costs, bargaining and decision costs, policing and enforcement costs

How do we minimise transaction costs

Conducting economic activities within firms

Contract incompleteness theory

A concept that explains why it is impossible to write a perfect contract that covers every future scenario.

How do transactional costs shape the boundaries of firms and markets?

High transactional costs = lower firm reliance on transactions

Low transactional costs = higher firm reliance on transactions

How do firms keep transactional costs lower when they are higher?

By doing internal transactions, these costs stay lower

Modern business

Only became a viable institution only after the visible hand of management proved to be more efficient than the invisible hand off market. Large, modern corporations became successful only when professional managers organizing internal operations proved more efficient than independent market forces (like supply and demand) coordinating trade.

Creation of a firm

1. Founders

2. Team

3. Partnership

4. Corporation

Why does a firm exists?

People bring different resources and decisions into one organised system: founders, managers, employees, investors, and partners.