Topic 2 : Organisations and Firms Flashcards
How would you qualify an entrepreneur?
A person that risks WEALTH, TIME and EFFORT to develop, for profit, an innovative product or a new way of doing something.
Name 5 characteristics that an entrepreneur should possess.
Possible answers :
Intuitive, patient, frugal, fearless, creative, charismatic, innovative, productive, persistent, friendly.
What is called the process of creating and managing a business to achieve desired objectives?
Entrepreneurship
What are the requirements to succeed in Entrepeneurship?
- Risk propensity (tendancy to risk)
- Innovation
- Creativity
- Reward
- Intuition
- Persistence
Name the 4 stages of starting a business.
Stage 1 : Concept or general idea
Stage 2 : Business Plan
Stage 3 : devise strategy
to guide
planning and
development
Stage 4 : Decision making
What’s a business plan? What does it include?
Document showing the rationale for a business : a step-by-step explanation of how the business will achieve its goals.
It acts as a reference doc
It includes… an explanation of the business, the competition analysis and an Income/expanse estimation
What does it take to make money?
Money.
Explain thoroughly what a DEPT is. (financial recource)
A dept is when you borrow financial resources from a bank (or another lending institution). They can grant a line of credit or a trade credit. It sometimes require collateral
Explain thoroughly what EQUITY is as a financial resource.
It’s when the owner brings money $ and useful personal assets such as time, furnitures, cars, equipment, computers, etc. The contribution becomes part of ownership interest in the firm.
What are Business Angels and Venture Capitalists?
Entities that agrees to provide some funds for a new business IN EXCHANGE FOR AN OWNERSHIP INTEREST. They require a share of the profit or a share of the business.
You have 2 choices for entering the market : you either ____ or ____ a business.
Buy or build
What are the advantages to buy a business when entering the market?
You already have a built-in network of customers, suppliers and distributors.
It reduces guesswork
What is the main disadvantage of buy a business when entering the market?
You absorb all the existing problems that the business had.
What is required when building a business from scratch?
- A lot of financial ressources, because it’s expensive
- A lot of promotional efforts to familiarize the customers with the business
What is the main reason to create a firm?
Reducing transaction costs
What are transaction costs?
Cost incurred in making an economic exchange. Cost of participating in a market.
What do we want to minimize when creating a firm? (2)
- The costs of exchanging resources with the environement
- The bureaucratic costs of exchange within a company
How do you minimize the transaction costs.
Pursuing the quest of efficiency : we have to cooperate to reach a common goal.
you can :
- Assign tasks
- Pool employee skills to gain from specialization
- Monitor work
What kind of conflicts of interest can we encounter in a firm? Even in the quest for efficiency.
As business grows, the owner(s) have to delegate the tasks. So some decision making tasks are assigned to some employee. The individuate’s goals could be in conflict with the organisation’s goals.
What is the term that is defined by the next sentence? : “having the legal title of a resource or a good.”
Ownership
What is the term that is defined by the next sentence? : “having the ability to determine the use of those goods and resources.”
Control
What does T.M.T. stands for and what is its purpose.
Top Management Team : They make the decisions about resource allocation and the implementation of strategies in a firm.
T or F. : members of the TMT have the right to buy company stocks (shares of company ownership) at a fixed price.
True
What does the TMT recieves if the firm performs well? This is part of which solution to Agency problem
They receive high rewards. Its part of an incentive scheme.
Describe what is an AGENCY PROBLEM
A conflict of interest inherent in any relationship where one party is expected to act in the best interest of another.
How can agency problems be solved? And, In which of the principle types of firms is it mostly encountered
With incentive schemes or/and with the implantation of a Board of directors. Encountered in Corporations
T or F : Shareholders are directly affiliated with the company.
False. They are at the external of the company.
Which members or group of members are in the internal part of the company?
The Board of Directors, TMT, CEO, Management, Staff.
Who’s in the Board of Directors?
A group of individuals elected by the company’s shareholders to oversee the management of the corporation.
What is the main goal of the Board of Directors. Where are they positioned in the monarchy?
They ensure the seperation of Ownership (Shareholders) and Control (Management)
Shareholders
->Board of directors<-
TMT
Management
Staff
T or F : The “shareholders” is the entity at the highest rank in the management of the company.
False. Its the CEO. The shareholders aren’t in the management of a company, because they are external.
What are the 3 principal Firm types?
- Sole proprietorship
- Partnership
- Corporation
Connect the right Firm type with the right definition :
A.Joint venture
B.Cooperative
C.Limited Liability Company
D.Sole proprietorship
E. Partnership
F. Private Corporation
G. Public Corporation
- Association of 2 or more people as co-owners. (__)
- Partnership established for a project or limited time (__)
- Legal entity created by the state whose assets and liabilities are separate from its owners in which shares of stock can be freely purchased, sold or traded. (__)
- Company owned and operated by one person. (__)
- Formed by individuals or small firms to reap the benefits of belonging to a larger organization. (__)
- Legal entity created by the state whose assets and liabilities are separate from its owners. They aren’t required to disclose financial information. (__)
- Ownership that provides limited liability and taxation, but also has fewer restrictions. (__)
- E
- A
- G
- D
- B
- F
- C
T or F : A private corporation can be converted into a public corporation.
True
What would be the advantage of converting a private corporation into a public one?
The sale of stock on the public market can raise additional capital and grow faster.
What are the pros and cons of a Proprietorship?
Pros :
+ Easy and low cost formation
+ High level of secrecy
+ Owner keeps all the profit
+ flexibility and control
+ Gov. regulation is only minimal taxes paid once
Cons :
- Unlimited liability
- Rare external fundings
- Owner need many diverse skills
- Success is tied to the owner
- Lack of qualified employees
- Higher taxation
- Owner is the only one responsible for risks and financial obligations
Does a sole proprietorship type of firm focuses more on manufacturing or on service?
Service
What is the most common form of business organisation? (firm type)
Sole proprietorship
T or F : A partnership maximizes the disadvantages of sole proprietorship. Because twice the people : twice the problems.
False. In fact it minimizes the disadvantages
What are the pros and cons of a partnership type of firm?
Pros :
+ Easy to organize
+ Availability of capital & credit
+ Combined knowledge and skills
+Few government regulations
+ Partners report their share of profits
+ Pay taxes as individuals.
Cons :
- unlimited liability
- responsibility for others’ decisions
- have to go trough the procedures of creating a new agreement if the partnership changes
-Difficult to sell interests
-Uneven distribution of profits
-Hard to find external funds
Who owns the shares of a corporation?
Usually different individuals
What are the pros and cons of a corporation?
Pros :
+ Limited liability
+ Ease of transfer of ownership
+ Perpetual life
+ Easier to find and secure fundings
+ Potential for expansion
+ Fast growth
Cons
-Double taxation
-expensive to constitue
- disclosure of information to the government and the public
-agency problems
When a firm wants to grow, what are their options (3)?
- Organic development = Internal grow
- Alliances = Cooperation with another firm
- Mergers & Aquisitions = mutual decision to join together
What are corporate raiders?
A company or individual who wants to acquire or take over another company. Usually offers to buy some or all of its stocks at a premium in a tender offer.
What’s a White knight?
A preferred firm to acquire the company.
What’s a poison pill? (regarding acquisition)
Issue rights to stakeholders to buy stocks at lower price to pave way and eliminate an attempted hostile takeover.
What’s a shark repellent?
Different strategies to avoid takeovers
What is it called When a group of investors borrows money from banks to acquire a company. (and then uses the assets of the purchased company to repay the loan)
A leveraged buy out
