Business Foundations Exam 1

Business

An organization that is engaged in commercial, industrial, or professional activities that produce and/or sell goods or services for the creation of economic and social value

negative profit

when a firm’s expenses are greater than its sales revenue, aka loss

bankruptcy

a legal process that helps people or businesses get relief from debts they can't pay

stakeholders

All the different people or groups of people who are affected by an organization’s policies,decisions, and activities

shareholder’s theory

Milton Friedman: Company’s only concern is to increase profit for the shareholders

stakeholder’s theory

Edward Freeman : Companies should account for multiple stakeholders impacted by business

mixed economy

an economic system that combines elements of capitalism and socialism. It's a combination of free markets and government intervention. 

capitalism

An economic system in which individuals own and operate the majority of businesses that provide goods and service

inflation

A general rise in the level of prices

CPI

A monthly index that measures the changes in prices of a fixed basket of goods purchased by a typical consumer in an urban area

GDP

The total dollar value of all goods and services produced by all people within the boundaries of a country during a specified time period—usually a one-year period

monetary policy

Federal Reserve’s actions to promote maximum employment,
stabilize prices, and increase or decrease interest rates

fiscal policy

Government influence on the amount of savings and expenditures; accomplished by altering the tax structure and by changing the levels of government spending

perfect competition

The market situation in which there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product

monopolistic competition

A market situation in which there are many buyers
along with a relatively large number of sellers who differentiate their products from the products of competitors (Examples: Clothing, shoes, soaps,furniture)

oligarchy

A market (or industry) in which there are few sellers (Examples: automobile, airline,and car rental industries)

monopoly

A market (or industry) with only one seller, and customers can only buy the product or service from that seller

product differentiation

The process of developing and promoting differences
between a company’s products and all competitive products

absolute advantage

The ability to produce a specific product more efficiently (more productively) than any other nation (= best country

comparative advantage

The ability to produce a specific product at a lower opportunity cost than another country

balance of payments

The total flow of money into a country minus the total flow of money out of that country over a specified period of time (Inflow – outflow = Balance of payments)

balance of trade

The total value of a nation’s exports minus the total value of
its imports over a specified period of time (Export – Import = Balance of trade)

liscencing

A contractual agreement in which one firm permits another to produce and market its product and to use its brand name in return for a royalty or other compensation

outsourcing (offshoring)

An arrangement in which one firm hires another company to be responsible for a business activity that is or could be done internally (e.g., IT service, call center)

contract manufacturing

joint venture

A business entity (company) formed to achieve a specific goal or to operate for a specific period of time

strategic alliance

A partnership formed to create competitive advantage on a worldwide basis

direct investment

provides complete operational control but carries greater risk than a joint venture
− The firm builds manufacturing and other facilities in a foreign country and uses these facilities to produce its own established products and market them in that country.
− A firm purchases an existing firm in a foreign country under an arrangement that allows it to operate independently of the parent company

tariff

A tax or duty paid on imported goods

protectionism

a set of government policies designed to defend domestic industries against foreign competition

trade embargo

a trade restriction that bans the exports or imports of certain goods and services to or from one or more countries

import quota

a type of trade restriction that sets a limit on the quantity of particular goods being imported into a country during a given period of time

effectuation

the idea that the future is unpredictable yet controllable

growth mindset

people believe that their abilities can be developed through dedication, effort, and hard work

grit

a personality trait that describes someone's ability to keep working toward their goals, even when faced with obstacles. (courage, conscientiousness, perseverance, excellence)

intrapeneurship

(corporate entrepreneurship): a process of creating new products,
ventures, processes, or renewal within large corporations

franchisor

An individual or organization granting a franchise
− Supplies a known and advertised business name (brand),
management skills, the required training and materials, and a
method of doing business

franchisee

A person or organization purchasing a franchise
− Supplies labor and capital, operates the franchised business, and agrees to abide by the provisions of the franchise agreement

business format franchising

A franchisor supplies brand names, techniques, or other services instead of a complete product

product distribution franchising

Authorize a a number of retail stores to sell a certain brand-name item

manufacturing franchising

Allows franchisees to produce items using their brand name and sell products to retailers

solo proprietorship

A business that is owned (and usually operated) by one person

partnership

A voluntary association of two or more persons to act as co-owners of a business for profit

unlimited liability

There’s no maximum amount of debt that is capped, so any involved partners and owners are legally responsible for the
full amount
Sole proprietorships,partnerships (general partner)

limited liability

A person's financial liability is limited to a fixed sum, most commonly the value of a person's investment
Corporations

corporation

(sometimes referred to as a regular or a C corporation):
An artificial person, created by law, with most of the legal rights of a real person

incorporation

the legal process of forming a business as a corporation, which is a separate legal entity from its owners; a contract between a corporation and the state in which the state recognizes the formation of the artificial person that is the corporation

syndicate

A temporary association of individuals or firms organized to perform a specific task that requires a large amount of money

double taxation

income tax being paid twice on the same source of income. This can occur when income is taxed at both the corporate and personal level, as in the case of stock dividends.

horizontal merger

A merger between firms that make and sell similar products or services in similar markets

hostile takeover

A situation in which the management and board of directors of a
firm targeted for acquisition disapprove of the merger

vertical merger

Acquiring a supplier or distributor of one or more of its products or services (expanding value chain)

conglomerate merger

A merger between firms in completely different industries

aggregator business model

connecting vendors and buyers on the same platform and selling its services under its own brand

advertising business model

Relies on the amount of revenue gained through advertising products and service

essence of strategy

The essence of strategy is choosing what not to do (Michael Porter)

strategic planning

The establishment of an organization’s major goals and objectives and the allocation of resources to achieve them

cost leadership strategy

A strategy used by organizations to seek competitive
advantage and gain market share by offering low priced
products

differentiation strategy

A strategy used by organizations to seek competitive
advantage by providing goods and services that are
significantly different from the competition

cost focus strategy

A strategy used to gain competitive advantage by keeping
costs and prices lower than their rivals while targeting a
narrow market where products meet a very specific need,
often referred to as “a niche market.”

differentiation focus strategy

A strategy used by organizations to achieve competitive
advantage by providing better value products or services to
a narrow or niche target market

the five forces model

is an external strategic analysis tool to help companies analyze the
industry as whole and establish whether it is worth entering or
remaining in.

5FM: competitive rivalry

Rivalry competition is high when just a few competitors offer the same products and services in a growing industry and customers have the benefit of switching from one to the other

5FM: bargaining power of suppliers

This force analyzes the level of power suppliers holds and how easily they
could raise their prices

5FM: bargaining power of customers

Fewer consumers with the opportunity to easily switch sellers tend to have
the most power

5FM: threat of new entrants

The easier it is for new competitors to enter an industry, the greater threat it
is for established businesses’ market share

5FM: threat of substitute

Certain industries can be threatened by new products and services that
meet the same need in a different way

SWOT Analysis

Strengths, Weaknesses, Opportunities, Threats

The identification and evaluation of a firm’s strengths, weaknesses, opportunities, and threats (both internal and external factors)

Resource Based View

Suggests that resources that are valuable, rare, inimitable, and nonsubstitutable lead to long-term success (source of competitive advantage)
▪ Intangible vs. tangible assets