chapter 14, 15, 17 Flashcards
Which patterns are common to all companies and how can they be related to business concepts we know?
Processes are performed (Value chain) within a structure (organizational system) under direction of management (corporate management)
How does structure follow strategy (sketch)?
- Organizational architecture: Structure that enables a company to meet requirements of the business environment and stakeholders’ demands
- Business environment: Includes factors such as technology, markets, and regulations
- Strategy: Influenced by the business environment, aligns with organizational architecture
- Incentives and actions: Derived from the organizational architecture, aimed at creating value for the firm
Which 3(+1) interpretations does term organization have in business-management?
- Design aspect: Action of organizing something
- Instrumental aspect: Company has an organization - a conscious regime of rules
- Institutional: Company is an organization, entity with people and common goal
- Different approaches:
- Organizational structure
- Operational structure
What is the assignment of decision authority (sketch optimal decentralization level)?
centralized: most major decisions by individuals at the top
decentralized: many decisions made by lower level employees
* advantages: local knowledge, less senior management time, motivation/training for lower level
* disadvantages: coordination costs due to organizational complexity, less effective use of central information
Optimal decentralization level (D*) occurs when the tangent of the costs line is parallel to the benefits line.
What are two types of jobs and how can the assignment of tasks be done?
Important Variable
Specialized and Broad Task Assignment:
Benefits of Specialized:
* Higher output (competitive advantage)
* Reduced cross-training costs
Costs of Specialized:
* Coordination costs, Functional myopia (focus on indivisual function rather than overall), Reduced flexibility.
Important Variable: relative degree of complementarity among tasks within functional areas
How can subunits be grouped?
Divisional organization (geography, customer, product)
business unit (functional specialty)
What is line organization and its (dis)advantages?
- Top-down orders and instructions, Bottom-up requests and suggestions
- Worker accountability to single boss
- Functional subunits group jobs into departments
- Ideal for smaller firms with limited product range
- Multidivisional (M form) allows decentralized operating decisions to business unit level
Benefits/Problems
* Benefits: coordination within functional areas, expertise enhancement
* Problems: High management costs, coordination failures between departments, Functional myopia, communication issues
What is functional organization (foremanship)?
- System includes specialized foremen for functions
- Direct connection between every worker and the foremen
- separating mental and manual requirements
Draw a line and staff organization and explain.
- Balancing issues in line organization (too much control) and functional organization (too much division)
- Staff supports line managers, provides valuable information, advisory role, no decision making
- Staff responsible for planning/control
- Planned specialization, expert knowledge to line managers
Draw a matrix organization and explain benefits and costs.
Matrix organizations have functional departments such as finance and marketing.
Members of the departments are assigned to cross-functional product teams (subunits).
Team members report to both a product manager and a functional supervisor.
Advantage:
* Individuals are more likely to focus on the overall business process
* Functional departments help to ensure functional excellence
* Provide more clearly identified opportunities for development
Potential problem:
* Intersecting lines of authority
What is a workflow and what are its components?
- Workflow: orchestrated and repeatable patterns of activities enabled by systematic organization of resources
- Workflow definition includes:
- Spatial assignment (where an action should be performed)
- Timely assignment (when an action should be performed)
- Assignment of action executor (person or subunit)
- Equipment/machine assignment for action execution
- Example of workflow/flowchart: Start -> Action -> <Decision> (Yes\no) -> Action -> End</Decision>
What is the difference between organizational and operational structure?
Organizational structure defines who does what, while operational structure defines where, when and with which.
Define company’s overall planning. (Sketch)
Three functions all organizations perform:
Types of plans:
* Financial plan
* Investment plan
* Sales plan
* Production/operations plan
Three functions all organizations perform:
* Marketing
* Production/operations
* R&D and Finance/Accounting
What 10 decisions do operational managers make?
- Product design support (product selection, design for low production cost)
- Quality management
- Process and capacity design
- Location strategy (facility placement)
- Layout strategy (facility arangement)
- Human resources and job design
- Supply-chain management
- Inventory and material requirements planning
- Intermediate and short-term scheduling
- Maintenance
What is production function?
q
Production function: maximum quantity of output firm can produce given input (Q = f(L, K); Q = quantity of output, L = labor quantity, K = capital employed)
What are inputs/factors of productions, and how are they classified and subclassified?
Factors of production: all inputs used in product productionn
* Labor: managerial work (objectives defining, planning, deciding, leading) and operational work (completion of tasks specified by leading position)
* Materials:
* Direct materials (identifiable with product, high value)
* Auxiliary materials (identifiable with product, low value)
* Operating materials (used to run production machines, unidentifiable)
* Production facilities: tools, company estate and building
Classification of factors of production:
* Consumable resources: changed in production process (materials, short lifespan tools, electricity)
* Non-consumable resources: produce goods over longer time (employees, machines, buildings)
Explain production function with single input and law of diminishing marginal returns?
Law of return or law of diminishing marginal returns: decreasing marginal return when quality of one input increases, other inputs held constant
Stage I: Output Q rises with additional labor at an increasing rate
Stage II: Output Q rises with additional labor but at a decreasing rate
Stage Ill: Output Q rises with additional labor, Average returns (APL) and marginal returns (MPL) to labor decrease
Stage IV: When the quantity of labor exceeds L *, an increase in the quantity of labor results in a decrease in total return
Draw total, average and marginal product functions.
Stage I: Output Q rises with additional labor at an increasing rate
Stage II: Output Q rises with additional labor but at a decreasing rate
Stage Ill: Output Q rises with additional labor, Average returns (APL) and marginal returns (MPL) to labor decrease
Stage IV: When the quantity of labor exceeds L *, an increase in the quantity of labor results in a decrease in total return
Explain and draw Leontief production function.
Limitational relation between production factors
Linear relation between input and output quantity
Fixed proportion production functions
inputs are perfect complements (e.g., every bicycle needs 2 tires and one frame)
Name characteristics and draw Guttenberg production function.
- limitationality of production factors division of resources into potential factors (mainly machines and equipment) and consumption factors
- Consumption factors need not directly dependent on output quantity (operating materials)
- Coefficients of consumption factors not constant with change of aggregate production factors
What is cost theory and cost function.
- Cost theory: aims to find the most economical input combination from production functions
- Cost function: mathematical relation between quantity of input factors and costs (sum input quantity of factor * price per unit of factor)
Which types of cost are there?
Fixed costs, variable costs (product-dependent costs) and total costs of production.
What are four process strategies and briefly explain each?
- Process focus: low volume, high variety; high variable costs, low facility utilization (restaurants, hospitals, machinery production)
- Product focus: high volume, low variety; high fixed costs, low variable costs, high facility utilization (bread, glass, copper)
- Repetitive: medium volume and variety; often use modules; classic assembly lines (automobiles, household appliances)
- Mass customization: high volume and variety; makes what customer wants when wanted; products often variation of core product; needs tight linkage of sales, marketing, logistics…
What are four layout strategies?
- Job Shop (process oriented layout): aggregation of similar-function machines/workplaces
- Work cells: reorganization of people and machines into groups for single/several products
- Fixed-position layout: project stays in one place; workers and equipment come to work area (ship, highway, bridge)
- Repetitive and product oriented layout: high volume low variety; includes fabrication line and assembly line
Difference between batch and continuous production?
- Batch processing/production: manufacturing moves in groups/batches; whole batch completion required before moving to next stage (plastic products, sandwiches, jet engines)
- Continuous production: ideal for high-demand products; high initial cost machines with low operating cost; constant demand with no storage options (paper, electricity)
What do Enterprise Resource Planning (ERP) system provide to the company?
- Focus on what market requires and production can deliver; connection between supply and demand for smooth production
- EPR systems: computer-integrated production, automate and integrate business processes; share common database; real-time information production
What is Self-financing?
Profit retention for internal financing
Increases equity
Retained earnings increase equity, reported as “open” in balance sheet
What are advantages of Self-financing?
- Facilitates liquidity policy
- Flexibility in price policy
- Avoids security payments
- Eliminates external investor controls
- Temporal profit distribution displacement increases liquidity
- Strengthening equity base
What are disadvantages of Self-financing?
- Increased risk of misinvestment
- Creation of hidden reserves diminishes balance sheet expressiveness
- Tendency to create excessively high cash reserves
What is Refinancing?
- Release of company assets as capital for further investments
- Asset reallocation and rationalization measures
- Sale-And-Lease-Back procedure
What is Financing through accumulated depreciation?
- Depreciations used for replacement procurement
- Process called “capital release (freeing) effect”
- Earned depreciations represent equity (self-financing)
- Expansion effect if reinvested in investment goods (Lohmann-Ruchti-Effect)
What is Loan (credit) financing?
- External capital granted by creditors
- Delayed capital return
- Consideration of qualitative and quantitative loan characteristics
What are types of loan services?
- Effective loan: Lender makes money available or provides goods/services against later payment
- Credit commitment: Lender provides creditworthiness as security
What are types of credit collateralization?
- Personal securities
- Guaranty: Third party pays debts if principal debtor fails
- Contract of guaranty: Guarantor vouches for the achievement of a certain success
- Letter of responsibility: Parent company provides funds for debts of subsidiary
- Real securities
- Retention of title: Title to goods remains with seller until obligations fulfilled
- (Right of) Lien: Pledged item handed over to lender
- Mortgage: Lien on immovable property
- Assignment for security: Claim of borrower assigned to creditor
- Covenants
- Contractual ancillary agreements
- Oblige borrower to provide additional services or restrict freedom of action
- Aim to prevent a credit loss
- Credit insurance
What is the purpose of an overdraft credit?
Finance operating resources, especially during liquidity shortfall.
What are the costs incurred for an overdraft credit?
The overdraft credit is an effective credit and is usually used to finance the operating resources (working capital credit).
- Debit interests -> from the balance; These are flexibly adapted to the current interest rate level
- Credit commissioning -> of the claimed credit frame
- Commitment charge -> of the entire credit line
- Turnover commission -> from the larger turnover account side
- Overpayment commission -> of the amounts exceeding the credit limit
- Account management fees, cash expenses such as postage and expenses
What are the advantages of an overdraft facility?
- Increases company’s freedom of disposition and flexibility
- provides a liquidity reserve
- enables utilization of cash discounts for cost savings.
What is a supplier’s credit?
advantages and the main disadvantage
Short-term effective credit, provided through delayed payment or a loan from the supplier for client’s investments.
Advantages - formless, no creditworthiness check, possible “last” credit resource. Disadvantage - costs from waiving use of cash discount.
What are the two versions of a customer credit?
customer -(to)> supplier
Customer prepayment and loan for supplier’s investments.
What are the special forms of long-term loans?
Shareholder loans and profit participating loans.
What is a mortgage loan and what is its main advantage and disadvantage?
What are the basic forms of repayment for loans/mortgage loans?
Long-term financing secured by a mortgage.
Advantage - real estate as collateral offers more favorable conditions.
Disadvantage - makes sale of real estate more difficult, incurs higher costs.
Repayment: Interest loan (fixed loan), repayment loan (installment loan), and redeemable loan (annuity loan).
What is Disagio/Damnum?
Difference between the nominal amount of the loan and the actual disbursement amount.
What is a Lombard loan?
- Lombard loan is a secured loan (collateral = Sicherheit)
- Collateral includes securities, precious metals, goods, bills of exchange, rights
- Costs: interests, manipulation charges, storage charges
- if the borrower fails to repay, the lender can seize the collateral
What is a Loan collateralized by securities?
What is a Loan collateralized by precious metals?
What is Advance on goods?
- Securities pledged, lending limit: 70 - 90% fixed-interest securities, 50 - 70% shares market value
- Precious metals, jewelry, precious stones pledged, lending limit: 80% precious metal value
- Products with exchange price pledged, lending limit: 40 - 70% of exchange price
What is a Discount credit?
credit granted by credit institution with discount applied to the principal amount (purchase of not yet due bill of exhange)
- Credit institution credits exchange amount minus remaining term interest, commissions, expenses
- Advantages: immediate available credits, typically no collaterals required
What are Bills of exchange?
- Document with commitment to pay a sum of money at a specific point
- Promotes international trade, can be discounted
What is a Letter of credit (LC)?
- Bank commitment for buyer’s payment if terms met, buyer pays bank for this service
- Protects buyer, payment obligation arises only when proof of goods delivery is presented
- Can have discrepancies, needs well-trained documenters or outsourcing
What are Benefits of a letter of credit to the Exporter/Seller?
- Opens doors to international trade, secure mechanism for payment
- Bank substitutes for buyer for payment, if terms complied with
What are Benefits of a letter of credit to the Importer/Buyer?
- Payment to seller only if terms complied with
- Controls shipping dates
- No tie-up of cash resources
What is the Process in a letter of credit transaction (sketch)?
Sales contract
Application & Agreement: Payment, reimbursement contract, customer’s instruction to bank
Issuance: Issuing bank prepares LC and forwards to advising bank
Advising: Advising bank forwards LC to beneficiary
What is a Credit by way of guarantee (guarantee credit)?
- Lender (credit institution) guarantees to external that current or future customer liability exists
- Lender provides only his creditworthiness, not liquid assets/funds
- Funds of lender are only used if borrower does not perform according to rules
What are Examples of frequently occurring guarantees?
- Guaranty against defects
- Fulfillment guarantee
- Delivery or performance guarantee
- Payment guarantee
- Advance payment guarantee
- Credit guarantee
What are the Costs of credits by way of guarantee?
Commission on bank guaranty, administration fee
What are Benefits of credits by way of guarantee?
- Generally, no collateral required
- Borrower pays commission, but no interest as no funds provided
What is the nominal interest rate?
- interest rate before accounting for any additional fees or other factors influencing return
- calculation basis for loan interest (which is composed of a reference interest rate and a premium)
- influenced by loan duration, credited amount, borrower’s creditworthiness
Name some important reference interest rates.
- EURIBOR (European Interbank Offered Rate)
- LIBOR (London Interbank Offered Rate)
- SMR (Secondary Market Yield)
- EONIA (Euro Overnight Index Average)
How does the effective interest rate differ from the nominal rate?
Includes costs associated with credit (commissions, fees, etc.), represents actual borrowing costs.
What is creditworthiness?
Borrower’s ability to repay loan, higher creditworthiness equals lower risk to lender.
What does credit assessment examine?
- Personal creditworthiness (individual’s situation)
- material creditworthiness (economic ability to repay)
- borrowing capacity (legal ability to conclude loan)
Define credit substitutes.
Constructions similar to credits.
Factoring: Sales financing method, assignment of open trade claims to a factor bank (Silent - debtor not informed, open - debtor informed and pays directly to factor)
Leasing
What services does a factor provide in factoring?
- Management of accounts receivables
- invoicing, dunning system
- debt collection
- creditworthiness check
- assumes risk of doubtful debts (non-recourse factoring).
What are some advantages and risks of factoring?
Advantages
* Prepayment of claims
* outsourcing of claims management
* increase in profitability
* reduction of insolvency losses
* increase in liquidity
Risks
* Potential loss of image if customers interpret collection by a factor as a sign of poor financial situation.
What is Leasing?
- Equipment owner (lessor) buys equipment
- Equipment is leased to borrowing firm (lessee)
- Regular rental payments by lessee to lessor
Direct vs Indirect Leasing:
Direct: lessee and lessor agree, lessor leases object to lessee
Indirect: lessee and seller agree, leasing company acquires and leases object to lessee
What are the types of leasing contracts?
Equipment-Leasing: movable objects
Real estate-Leasing: immovable objects
Personnel-Leasing: personnel
Factors Influencing Leasing Rate
- Acquisition cost of object
- Deposit amount
- Contract run-time
- Residual value at contract end
- Other services costs (maintenance, repairs, insurance)
Advantages of Leasing
- Financed from proceeds (Einnahmen des Leasing-Objektes)
- Tax advantage
- Not appearing in balance sheet
- Risk lies with leasing company
- Sales support
Sale and Leaseback:
- Entity sells asset to lessor
- Lessor immediately leases it back
- Cash obtained can be used elsewhere
Buying vs Leasing Considerations:
- Leasing reduces profit and income tax
- Lease term is usually shorter
- Leasing rates are to be paid instead of full purchase price
- Duration of leasing contract adaptable to lessee needs
Borrowing vs Leasing Considerations:
- Leasing requires less creditworthiness
- Leasing obligations do not appear as liabilities in balance sheet
What is a Bond?
Characteristics of Bonds?
- Contract with multiple investors
- Investors provide capital to issuer
- Limited maturity period and interest rate
Characteristics of Bonds:
- Nominal value: Amount to which the rights from the bond are related.
- Initial offering price, redemption exchange rate
- Nominal interest rate: basis for determining current interest payments
- (residual) maturity period
Factors Influencing Bond Price:
- Capital market rate
- Issuer’s creditworthiness
- Residual maturity period
Types of Bonds:
-
Straight bonds: Regular interest payments
- Fixed rate bonds: Fixed interest rate
- Floater: Reference interest rate + spread
- Step up/down bonds: Pre-determined varying interest rates
- Zero bonds No ongoing interest payments, Interests paid in full at the end
Public Mortgage Bonds and Municipal Bonds
- Issued by credit institutions
- Used for mortgage loans
- Offers double security (issuing bank and real estate loans/countries and municipalities)
What is financing by subsidization in context of the European Union, states, countries, municipalities, or other public institutions?
- Company is provided equity in form of subsidies from these entities (EU)
- Beneficiary of subsidy fulfills a subsidy objective (employment policy, infrastructure policy, etc.)
What are the types of subsidy financing?
- Operational grants: subsidies for ongoing operations, reduction of production costs
- Capital grants: subsidies for capacity, reduction of investment costs
What is equity financing?
- Provided by natural or legal persons
- Investors entitled to profit participation, liquidation proceeds, can influence management
- Investors liable for company’s debts
What are the classifications of equity for covering risks?
Class 1: Hidden reserves
Class 2: Open reserves
Class 3: Directly provided equity
Class 4: Contractually restricted risk capital
What are risk classes a company is exposed to?
Risk Class 1: R&D
Risk Class 2: Market development measures, new services
Risk Class 3: Investments in fixed assets
Risk Class 4: Supply of stocks
Risk Class 5: Financing of receivables
What is seed money?
Early investment for business until it generates cash
Options: friends and family funding, angel funding, crowdfunding
What is an angel investor or business angel?
- Affluent individual who provides capital for business start-up in exchange for convertible debt or ownership equity
- Investment volumes between 50,000.00 and 250,000.00 euros
What is venture capital?
- Provided by firms or funds to small, early-stage, emerging firms with high growth potential
- Focus on innovative industries, young companies
- High risk for donors
- High investor return-expectation due to high risk
- Limited period of investment (usually 5 to 8 years)
- financing occurs in stages: Seed, Start up, First Stage, Second Stage, Third Stage, Fourth Stage
What is private equity?
- Given to longer-established companies that are not publicly traded on a stock exchange in traditional industries with lower growth prospects
- Provided by a private equity firm, a venture capital firm or an angel investor
What are vertical and horizontal financing rules?
- Vertical: Ratio of equity to debt (Equity=Debt, 2:1, 1:<1)
- Horizontal: Relationship between certain assets and capital positions (Golden balance sheet rule)
What is leverage-effect?
- Technique involving the use of borrowed funds in purchase of asset
- Can result in positive or negative leverage effect depending on interest rate and profitability of total capital
What is the definition of “risk” in the context of business decision making?
Risk = occurrence probability of a (negative) event * extent of the damage
What is risk management?
- Systematic process of identifying, assessing, controlling threats
- Aimed at protecting organization’s capital and earnings
- Deals with variety of sources: financial uncertainty, legal liabilities, strategic errors, accidents, natural disasters
What is the task and objective of the risk management system?
Task:
* Reduce decision risk
* Plan, implement measures to minimize risk consequences
* Ensemble of organizational, technical, personnel, procedural arrangements for risk management
Objective:
* Identify, objectively assess risks considering damage extent, occurrence probability
* Aim to avoid, reduce, shift costs or bear the costs effectively
* Re-evaluate risk situation regularly, communicate results to management
* Increase planning security, safeguard corporate objectives, secure company survival
What are the phases of the risk management process?
(sketch)
- Risk analysis:
* Identify individual company risks
* Assign risks to risk areas: strategic, performance, financial, external, organizational
* Present risks in a risk inventory - Risk assessment/aggregation
* Quantify and aggregate identified risks to company’s overall risk position
* Calculate risk consequences for success
* Quantify risks considering occurrence probability, damage extent
* Present aggregated risks in a “risk map” - Risk management/resolution
- Risk monitoring
* Monitor measures used for risk management
* Supported by internal auditing, controlling
What are the basic types of measures in the resolution of risk phase?
- Risk avoidance
- Risk reduction
- Shifting of risk
- Risk bearing
