MGT101

• Definition of wealth creation according to Adam Smith 1776

  The annual produce of the land and labour of society
• Definition of 'Wealth Creation'

  Combining materials, ideas, labour, technology so that the output can be sold for more than costs. This profit brings wealth to the people and society involved in production
• Contributors to wealth creation

  1. Combination of inputs

  2. Supportive environment

  3. Means of production

  4. Someone who will pay more than costs
• Requirements of wealth creation

  The interdependence of business and society

  The diamond
• Four forms of private business ownership

  1. Sole proprietorships

  2. Partnerships

  3. Corporations

  4. Not-for-profit Corporations
• Sole Proprietorship definition


  A business ownership in which the sole proprietor's status as an individual is not legally separate from his or her status as a business owner

  
  

  Single owner, owner takes personal responsibility for everything
• Partnerships definition


  An association of two or more persons who operate a business as co-owners by voluntary legal agreement

  
  

  Partnership can consist of more than two people splitting the revenue of the business (does not have to be equally split)
• Corporations definition

  A legal organization with assets and liabilities of its owners
• Not-for-profit Corporations


  Organisations whose goals do not include pursuing a profit
• Partnership advantages and disadvantages

  Benefits - Sharing the risk, working together

  
  

  Limitations - Falling outs, disputes amongst partners
• Sole prop advantages and disadvantages

  Limitations - if business goes bankrupt banks are able to take personal assets such as your personal home

  
  

  When sole prop dies so does their business
• Advantages of Corporations


  Limited liability

  
  

  ease of raising capital

  
  

  ease of transfer of ownership

  
  

  able to delegate work,

  
  

  might be easier to grow business as a corporation

  
  

  if in a corporation's they are not able to take personal assets

  
  

  perpetual life in comparison to sole proprietors
• Two taxation


  Two tax returns
• Limitations of Corporations

  Harder to dissolve corporations

  
  

  More possibiliy of conflict between share holders
• Shareholders (Corporate management)


  There are two types of share holders - COMMON shareholder and PREFFERED share holders

  
  

  Shareholders are part of corporate management

  
  

  Preffered - get there guaranteed dividend before common share holders, no voting rights, if a company goes under preferred share holders get their investment back

  
  

  Common share holder - voting rights for the board of directors, returns are not fixed , whatever money is left after preferred share holders got their money is sometimes even more than prefered share holders , stand to gain the most and lose the most as well
• Features of a preferred share holder

  Convertible -

  
  

  Redeemable - they could get their money back

  
  

  Cumulative - in the years they don't pay a dividend there would be a pay in the years missed

  
  

  Callable - the company has the option to buy back the share

  
  

  Callable vs Redeemable - R is the option of the share holder and C is in the option of the company

  
  

  Participating - preferred do not participate in the running of the business but they participate in getting the divident, after the preferred share holders get their money and by exception a share of what is left over after
• Board of directions


  The way to influence a business is by being a common share holder

  
  

  Board of directions are elected by shareholders to oversee corporation
• Corporate officers and managers

  Make major corporate decisions and handle ongoing operations
• Franchising definition


  A contract-based business arrangement between a manufacturer or other supplier and a dealer to produce and market the supplier's good service

  
  

  E.g Mc Donalds, Starbucks
• Franchising (Franchisee perspective) - Advantages (past mid term question)

  Brand recongition (people feel they know what there getting so opt for known brands)

  
  

  They tell you where to source for items, they give a lot of guidance (e.g recipes, training, they tell you where to set up)

  
  

  Better deal in supply

  
  

  Prior performance record

  
  

  Recognisable company

  
  

  Proven business model

  
  

  Tested management program

  
  

  Savings through volume purchases
• Disadvantages of franchising (franchisee perspective)

  Limited flexibility

  
  

  Anual royalties

  
  

  Initial franchise fees- Have to pay money to set up the business

  
  

  Linked to reputation and management

  
  

  Tight control

  
  

  Franchise agreement restrictions
• Finding Financing

  Seed Capital
• Debt and Equity


  Debt is money borrowed which you have to pay back

  
  

  Equity - giving some of your business to someone else, does not have to be repaid

  
  

  
  

  Advantage of debt financing - get a tax reduction for the interest that you pay on the debt, dont lose control of your business.

  
  

  D of debt financing - have to pay the debt back out of interest

  
  

  
  

  A of Equity -

  
  

  D of equity - it is possible to lose some control of your business
• Reasons why businesses fail

  No good business plan e.g who are computers, what market is it
• Entrepreneurship


  Certain characteristics

  
  

  - High energy level

  - Vision

  - Need to achieve

  - Higher tolerance for failure

  - Internal locus of control

  - Takes a certain time of mindset

  - Have to be creative and invent something which is not there

  -
• Why people become entrepreneurs

  - Desire to be one's own boss

  - Desire to succeed financially

  - Desire for job security

  - Desire for an improved quality of life
• What does the term entrepreneurship mean

  It means several things:

  
  

  - Working for oneself, rather than someone else

  
  

  - Entering a new market with or new existing products/services

  
  

  - Operating a firm in which there is no separation between owner/manager

  
  

  - The process of discovering, evaluating and exploiting oppurtunites

  
  

  - Creating new organisations of any type not-for-profits as well as businesses 'social entreprenuers
• Entrepreneurial Challenges


  - Entrepreneurship is the highest risk/highest return activity in business

  
  

  
  

  - Appeals to certain kinds of people - the possibility of bringing inventive ideas to life
• Difference between small business and enterprenuial business

  Small business wants to stay small

  
  

  Enterprenuial business intend to expand
• David birch model


  Looks at 3 types of business

  
  

  Mice

  
  

  Elephant

  
  

  Gazelles - in between, more agile than elephant and more faster than.a mouse
• Starbucks case study on their recent challenges

  Recent challenges - main reasons for Starbucks recent challenges

  
  

  - consumers are becoming more price sensitive

  - global competition e.g in China

  - boycotts

  
  

  Options Starbucks can use to address their current challenges

  
  

  - Streamlining operations

  - Renegotiating supply contracts

  - Closing underperforming stores in order to potentially increase profit

  - Expanding digital and mobile offerings

  - Addressing Labour issues

  - Diversifying product offerings - this is done in order to attract new customers, catering more

  - Global expansion - going into different markets that they haven't been in, dis is hard to break into markets could lead to cultural misalignment

  - Lowering prices - in order to become more appealing for consumers , however this could change their experience

  - Increase differentiation/exclusivity

  
  

  Limitations of closing stores - can anger union, can cause consumers not to buy from their any more, loss of jobs

  
  

  Starbucks is not a franchise its all company owned
• Reasons why small businesses fail

  Management Inexperience

  
  

  Inadequate financing

  
  

  Meeting government regulations
• Why is a business plan important

  A business plan is important as it is the foundation for success
• How to create a business plan

  Written documentation that provides orderly statement of goals, methods and purpose

  
  

  Discusses the company's mission and vision

  
  

  Analyzes unique advantage, customers and competition
• What is "The Wealth of Nations"?


  foundation document for capitalism, free enterprise, free trade and wealth creation
• Who is Adam Smith?


  The "father of capitalism", author of "The Wealth of Nations"
• What is money?


  A measure of value
• When will one hire someone else to do labour for them?


  cost of service < cost of own labour
• What is "Market Price"?


  The actual price at which any commodity is commonly sold
• Why is setting a common wage difficult to settle?


  Workmen desire to get as much money as possible, masters desire to give as little as possible