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Ency VO > chapter 14, 15, 17 > Flashcards

chapter 14, 15, 17 Flashcards

1
Q

Which patterns are common to all companies and how can they be related to business concepts we know?

A

Processes are performed (Value chain) within a structure (organizational system) under direction of management (corporate management)

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2
Q

How does structure follow strategy (sketch)?

A
  • 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
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3
Q

Which 3(+1) interpretations does term organization have in business-management?

A
  • 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
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4
Q

What is the assignment of decision authority (sketch optimal decentralization level)?

A

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.

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5
Q

What are two types of jobs and how can the assignment of tasks be done?
Important Variable

A

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

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6
Q

How can subunits be grouped?

A

Divisional organization (geography, customer, product)
business unit (functional specialty)

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7
Q

What is line organization and its (dis)advantages?

A
  • 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

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8
Q

What is functional organization (foremanship)?

A
  • System includes specialized foremen for functions
  • Direct connection between every worker and the foremen
  • separating mental and manual requirements
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9
Q

Draw a line and staff organization and explain.

A
  • 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
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10
Q

Draw a matrix organization and explain benefits and costs.

A

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

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11
Q

What is a workflow and what are its components?

A
  • 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>
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12
Q

What is the difference between organizational and operational structure?

A

Organizational structure defines who does what, while operational structure defines where, when and with which.

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13
Q

Define company’s overall planning. (Sketch)
Three functions all organizations perform:

A

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

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14
Q

What 10 decisions do operational managers make?

A
  • 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
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15
Q

What is production function?

q

A

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)

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16
Q

What are inputs/factors of productions, and how are they classified and subclassified?

A

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)

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17
Q

Explain production function with single input and law of diminishing marginal returns?

A

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

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18
Q

Draw total, average and marginal product functions.

A

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

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19
Q

Explain and draw Leontief production function.

A

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)

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20
Q

Name characteristics and draw Guttenberg production function.

A
  • 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
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21
Q

What is cost theory and cost function.

A
  • 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)
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22
Q

Which types of cost are there?

A

Fixed costs, variable costs (product-dependent costs) and total costs of production.

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23
Q

What are four process strategies and briefly explain each?

A
  • 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…
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24
Q

What are four layout strategies?

A
  • 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
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25
Q

Difference between batch and continuous production?

A
  1. Batch processing/production: manufacturing moves in groups/batches; whole batch completion required before moving to next stage (plastic products, sandwiches, jet engines)
  2. Continuous production: ideal for high-demand products; high initial cost machines with low operating cost; constant demand with no storage options (paper, electricity)
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26
Q

What do Enterprise Resource Planning (ERP) system provide to the company?

A
  • 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
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27
Q

What is Self-financing?

A

Profit retention for internal financing
Increases equity
Retained earnings increase equity, reported as “open” in balance sheet

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28
Q

What are advantages of Self-financing?

A
  • Facilitates liquidity policy
  • Flexibility in price policy
  • Avoids security payments
  • Eliminates external investor controls
  • Temporal profit distribution displacement increases liquidity
  • Strengthening equity base
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29
Q

What are disadvantages of Self-financing?

A
  • Increased risk of misinvestment
  • Creation of hidden reserves diminishes balance sheet expressiveness
  • Tendency to create excessively high cash reserves
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30
Q

What is Refinancing?

A
  • Release of company assets as capital for further investments
  • Asset reallocation and rationalization measures
  • Sale-And-Lease-Back procedure
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31
Q

What is Financing through accumulated depreciation?

A
  • 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)
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32
Q

What is Loan (credit) financing?

A
  • External capital granted by creditors
  • Delayed capital return
  • Consideration of qualitative and quantitative loan characteristics
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33
Q

What are types of loan services?

A
  • Effective loan: Lender makes money available or provides goods/services against later payment
  • Credit commitment: Lender provides creditworthiness as security
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34
Q

What are types of credit collateralization?

A
  • 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
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35
Q

What is the purpose of an overdraft credit?

A

Finance operating resources, especially during liquidity shortfall.

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36
Q

What are the costs incurred for an overdraft credit?

A

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
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37
Q

What are the advantages of an overdraft facility?

A
  • Increases company’s freedom of disposition and flexibility
  • provides a liquidity reserve
  • enables utilization of cash discounts for cost savings.
38
Q

What is a supplier’s credit?
advantages and the main disadvantage

A

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.

39
Q

What are the two versions of a customer credit?
customer -(to)> supplier

A

Customer prepayment and loan for supplier’s investments.

40
Q

What are the special forms of long-term loans?

A

Shareholder loans and profit participating loans.

41
Q

What is a mortgage loan and what is its main advantage and disadvantage?
What are the basic forms of repayment for loans/mortgage loans?

A

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).

42
Q

What is Disagio/Damnum?

A

Difference between the nominal amount of the loan and the actual disbursement amount.

43
Q

What is a Lombard loan?

A
  • 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
44
Q

What is a Loan collateralized by securities?
What is a Loan collateralized by precious metals?
What is Advance on goods?

A
  • 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
45
Q

What is a Discount credit?

A

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
46
Q

What are Bills of exchange?

A
  • Document with commitment to pay a sum of money at a specific point
  • Promotes international trade, can be discounted
47
Q

What is a Letter of credit (LC)?

A
  • 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
48
Q

What are Benefits of a letter of credit to the Exporter/Seller?

A
  • Opens doors to international trade, secure mechanism for payment
  • Bank substitutes for buyer for payment, if terms complied with
49
Q

What are Benefits of a letter of credit to the Importer/Buyer?

A
  • Payment to seller only if terms complied with
  • Controls shipping dates
  • No tie-up of cash resources
50
Q

What is the Process in a letter of credit transaction (sketch)?

A

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

51
Q

What is a Credit by way of guarantee (guarantee credit)?

A
  • 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
52
Q

What are Examples of frequently occurring guarantees?

A
  • Guaranty against defects
  • Fulfillment guarantee
  • Delivery or performance guarantee
  • Payment guarantee
  • Advance payment guarantee
  • Credit guarantee
53
Q

What are the Costs of credits by way of guarantee?

A

Commission on bank guaranty, administration fee

54
Q

What are Benefits of credits by way of guarantee?

A
  • Generally, no collateral required
  • Borrower pays commission, but no interest as no funds provided
55
Q

What is the nominal interest rate?

A
  • 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
56
Q

Name some important reference interest rates.

A
  • EURIBOR (European Interbank Offered Rate)
  • LIBOR (London Interbank Offered Rate)
  • SMR (Secondary Market Yield)
  • EONIA (Euro Overnight Index Average)
57
Q

How does the effective interest rate differ from the nominal rate?

A

Includes costs associated with credit (commissions, fees, etc.), represents actual borrowing costs.

58
Q

What is creditworthiness?

A

Borrower’s ability to repay loan, higher creditworthiness equals lower risk to lender.

59
Q

What does credit assessment examine?

A
  • Personal creditworthiness (individual’s situation)
  • material creditworthiness (economic ability to repay)
  • borrowing capacity (legal ability to conclude loan)
60
Q

Define credit substitutes.

A

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

61
Q

What services does a factor provide in factoring?

A
  • Management of accounts receivables
  • invoicing, dunning system
  • debt collection
  • creditworthiness check
  • assumes risk of doubtful debts (non-recourse factoring).
62
Q

What are some advantages and risks of factoring?

A

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.

63
Q

What is Leasing?

A
  • Equipment owner (lessor) buys equipment
  • Equipment is leased to borrowing firm (lessee)
  • Regular rental payments by lessee to lessor
64
Q

Direct vs Indirect Leasing:

A

Direct: lessee and lessor agree, lessor leases object to lessee
Indirect: lessee and seller agree, leasing company acquires and leases object to lessee

65
Q

What are the types of leasing contracts?

A

Equipment-Leasing: movable objects
Real estate-Leasing: immovable objects
Personnel-Leasing: personnel

66
Q

Factors Influencing Leasing Rate

A
  • Acquisition cost of object
  • Deposit amount
  • Contract run-time
  • Residual value at contract end
  • Other services costs (maintenance, repairs, insurance)
67
Q

Advantages of Leasing

A
  • Financed from proceeds (Einnahmen des Leasing-Objektes)
  • Tax advantage
  • Not appearing in balance sheet
  • Risk lies with leasing company
  • Sales support
68
Q

Sale and Leaseback:

A
  • Entity sells asset to lessor
  • Lessor immediately leases it back
  • Cash obtained can be used elsewhere
69
Q

Buying vs Leasing Considerations:

A
  • 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
70
Q

Borrowing vs Leasing Considerations:

A
  • Leasing requires less creditworthiness
  • Leasing obligations do not appear as liabilities in balance sheet
71
Q

What is a Bond?
Characteristics of Bonds?

A
  • 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
72
Q

Factors Influencing Bond Price:

A
  • Capital market rate
  • Issuer’s creditworthiness
  • Residual maturity period
73
Q

Types of Bonds:

A
  • 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
74
Q

Public Mortgage Bonds and Municipal Bonds

A
  • Issued by credit institutions
  • Used for mortgage loans
  • Offers double security (issuing bank and real estate loans/countries and municipalities)
75
Q

What is financing by subsidization in context of the European Union, states, countries, municipalities, or other public institutions?

A
  • Company is provided equity in form of subsidies from these entities (EU)
  • Beneficiary of subsidy fulfills a subsidy objective (employment policy, infrastructure policy, etc.)
76
Q

What are the types of subsidy financing?

A
  • Operational grants: subsidies for ongoing operations, reduction of production costs
  • Capital grants: subsidies for capacity, reduction of investment costs
77
Q

What is equity financing?

A
  • Provided by natural or legal persons
  • Investors entitled to profit participation, liquidation proceeds, can influence management
  • Investors liable for company’s debts
78
Q

What are the classifications of equity for covering risks?

A

Class 1: Hidden reserves
Class 2: Open reserves
Class 3: Directly provided equity
Class 4: Contractually restricted risk capital

79
Q

What are risk classes a company is exposed to?

A

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

80
Q

What is seed money?

A

Early investment for business until it generates cash
Options: friends and family funding, angel funding, crowdfunding

81
Q

What is an angel investor or business angel?

A
  • 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
82
Q

What is venture capital?

A
  • 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
83
Q

What is private equity?

A
  • 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
84
Q

What are vertical and horizontal financing rules?

A
  • Vertical: Ratio of equity to debt (Equity=Debt, 2:1, 1:<1)
  • Horizontal: Relationship between certain assets and capital positions (Golden balance sheet rule)
85
Q

What is leverage-effect?

A
  • 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
86
Q

What is the definition of “risk” in the context of business decision making?

A

Risk = occurrence probability of a (negative) event * extent of the damage

87
Q

What is risk management?

A
  • 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
88
Q

What is the task and objective of the risk management system?

A

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

89
Q

What are the phases of the risk management process?
(sketch)

A
  1. Risk analysis:
    * Identify individual company risks
    * Assign risks to risk areas: strategic, performance, financial, external, organizational
    * Present risks in a risk inventory
  2. 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”
  3. Risk management/resolution
  4. Risk monitoring
    * Monitor measures used for risk management
    * Supported by internal auditing, controlling
90
Q

What are the basic types of measures in the resolution of risk phase?

A
  • Risk avoidance
  • Risk reduction
  • Shifting of risk
  • Risk bearing

Ency VO (10 decks)

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