Topic 1: The Firm- Types and Objectives

UC3M introduction to business

The Firm

An institution in which a team of people transform resources in products and services satisfying necessities. We organize and structure tangible and intangible resources in order to obtain products and services generating added value.

Macroeconomic view

The business in the economic system

• an economic activity that transforms a set of inputs (factors of production) into outputs (goods and services aimed to satisfy customers needs and wants

Circular flow of income

Refers to a simple economic model that describes the reciprocal circulation of income between producers and consumers.

Economic agent as a household - what is the role

They play a double role. On one side they are the owners of the production factors (land, labor, capital, technology, and “know how”

On the other side they are the elemental units of consumption

Economic agent of firms - what is their role

Firms use the production factor from households

To produce goods and services households demand

What are the two types of flows in the economic system

Real flows: goods services andfactors

Financial flows: the monetary compensations

What are economic activities

Processes carried out to produce goods or services by means of factors of production that satisfy the needs of society to make a profit. Economic activities serve to generate wealth and contribute to a country’s economy.

What is economic activity in terms of the Spanish Tax Agency

Any work that a taxpayer orders on its own account means of production and human resources with the objectives of participating in the market of goods and services

Primary economic activities

Those that are in the first phase of the production process (livestock, agriculture, fishing..)

Secondary economic activities

Those that are responsible for producing goods and services through the production and transformation of raw materials into products available for sale (textiles, footwear,food…)

Tertiary economic activity

Bring the goods obtained through primary and secondary activities to the final consumer

What activities are considered economic activities

• S

What incomes are except from filing corporate income tax

Donations, to support the purpose of the association; membership dues, which do not entitle members to recieve non exempt farm benefits, subsidies for excempt activities

Do non profit associations (NGOs) have to file Corporate Income Tax?

Yes, they must file corporate income tax returns (unless their income is less than 75,000 euros) and the income from non exempt income does not exceed 2000 euros

Top Five Companies in the world by market capitalization

1. NVIDIA market cap 4.29 trillion, 176$ share price

2. Apple market cap 4.03 trillion, 273$ share price

3. Alphabet market cap 3.72 trillion, 308$ share price

4. Microsoft market cap 3.52 trillion, 474$ share price

5. Amazon market cap 2.38 trillion, 223$ share price

Top five companies in Spain by market cap and share

Inditex - 174B (Zara, Massimo Dutti, Mango, etc)

Banco Santander- 142 B, largest bank in spain and one of the biggest in EU

Iberdrola- 119B, leading renewable energy company

BBVA (banco bilbao) 109B major spanish bank

CaixaBank 70B large domestic bank in spain

Who is the entrepreneur according to Schumpeter

The entrepreneur is the individual who drives tech advancement, introducing innovations that transform industries. Not necessarily an owner or manager but an agent of change

Why does Steve Jobs fit Schumpters definition of an entrepreneur

He was not just a manager; he was a driver of innovation, he impulsed tech change through new products, not just inventions. He led the commercialization of the innovations. His innovations caused disruptive change in multiple sectors

• iPod → music industry

• iPhone → phones, cameras, apps

• iPad → PCs, publishing, education

Steve Wozniak at Apple

The tech genius and inventor behind apples early products, he focused on invention and engineering, creating the hardware and softwarem he was less involved in driving the business and he says Jobs didnt really do much, but really he was everything. He made it so that the market looked at phones and their positioning was Apple, not Samsung. Samsung has phones but peoples go to is Apple. If Apple didnt have such good marketing people would go to Samsung because its a better phone.

What are the entrepreneurs functions

A person who coordinates and controls the productive process, a person who ensures the payment of the factors of production, a person who takes risky decisions, a person who innovates, a person who detects new business opportunities.

What are real functions in business processes

Related to supply (acquisition of inputs)

Functions related to production

Functions related to marketing

What are financial functions

Financing and investing

What are management functions

Planning, control, and organization

What are management positions in a company

CEO- chief executive officer

CFO - chief financial officer
COO- chief operating officer
CTO - chief technology officier
CMO- chief marketing officer
CIO- chief information officer
CCO- chief communications officer

CHRO -chief human resources officer

What are business processes

Interrelated activities that, together with the inputs, allow the development of outputs. The activities are integrated coherently. Business functions may feed several processes.

How can you test if a Business Idea is a viable Business Opportunity?

Necessity: Is there evidence that a real need or problem exists to be satisfied?

Market size: How large is the potential market?

Potential clients: Who are the target customers?
Competitors: Who else is the market and how do they operate

What is a juristic personality in business?

A business can be a legal person independent from its members, meaning:

• exists separately from its owners

• Allows continuity regardless of membership changes

What does limited liability mean?

Members are not personally liable for the debts or obligations of the business entity

What is transferability in business ownership

Some business types allow free transfer of ownership or shares, while others require approval from remaining members/partners

Do different types of business require the same legal form?

No, different businesses have different legal form needs, depending on size, risk, ownership structure, and regulatory requirements.

Sole proprietorship

A business owned by one person who assumes the risks, makes decisions, and looks for business opportunities, he/she owns all the rights

Advantages: simple to start, owns all profits, sole decision maker

Disadvantages: unlimited financial liability, hard to raise funds for expansion, (not permanent)

Partnership

An association of two or more persons to carry on as co-owners of a business for profit. People form a partnership by entering into a partnership agreement.

Partnership agreement

written contract between the owners of a partnership that identifies the business and states the partners’ respective rights and duties (name, location, type of business, sharing profits, dissolving the partnership)

Advantages and Disadvantages of partnership

+Few restrictions on starting, no tax on business as distinct from owners, pooling of funds talents and borrowing power, more chance to specialize than the sole proprietorship

-Unlimited and joint financial liability, potential for personal disagreements, relative impermanence, frozen investment

Cooperative association

Incorporated organization whose user members (owners) get back any revenue left after expenses are paid

• membership is open

• owned and democratically controlled by its members

• Economic benefits are distributed proportionally according to each members level of participation in the cooperative

• Based on the value of self help, self responsibility, democracy and equality

• Cooperative members believe in the ethical values of honesty, openness, social responsibility, and caring

Employee credit unions

They accept savings deposits from members who own shares in the co-op. Members can borrow from the co-op. Savers receive interest and borrowers pay interest.

Agricultural co-ops

They help farmers market their products

Buying co-ops

Help members buy their products at lower prices

Customer co-ops

They operate customer-owned retail facilities. Consumers get together and form a buying pool to get quantity discounts and to replace the wholesalers and retailers.

What is a limited partnership

A business in which one or more of the partners are liable for the firms debts only to the extent of their financial investment in the firm

What is a joint venture

A special type of partnership set up by individuals or firms to accomplish a specific task or project. It is very important and usual in international business.

What is a mutual company

A corporation that issues no stock and is owned by its policyholders or depositors and whose surplus revenue, if any, is distributed among the owners in the form of dividends. Many insurance companies are mutual companies.

Define corporation

A legally chartered organization that is separate and a legal entity apart from its owners. Most of the rights that a person has.

Separate legal entity, shareholders are the owners

Limited financial liability to owners

Performance (can exist forever)

Easy transfer of ownership (shares)
Greater financial capability

Special and double taxation, complex and costly to form and dissolve, government regulation and public disclosure requirements

The agency relationship

A contract by which one or more persons commission another person to perform a certain service on their behalf that involves delegating some degree of decision making authority

Example: Employer and employees (principal and agent)

Agency problem: Differences between principals and agent objectives

What are shareholders goals

Create value

Obtain present and or future returns on the investment

What are the manager goals

Grow the company, even if non-profitable, higher renumeration, travel and per diems, continuity, prestige, power

What are the main internal mechanisms of corporate governance

Internal Control Rules

• Board of Directors: Elected by shareholders to supervise management and approve key decisions

• Types of directors: Executive (managers and interns)- permanent employees

• Non-executive (external/independent): represent shareholders, not involved in daily management.

• Codes of good governance: Voluntary guidelines recommending board composition and practice

Q: What are internal incentive schemes in corporate governance?

• Compensation linked to company performance (profit sharing, shares, options)

• Aligns goals of owners and managers

• Challenge: Designing incentives that clearly assign responsibility for results at all levels