ENTREPRENEURSHIP

A venture is a new business undertaking that involves risk.

intrinsically motivated

*Categories of entrepreneurs
- Classic entrepreneur: allocates resources
- Serial entrepreneur: runs one’s business in succession
- Social entrepreneur: focus on solving society’s challenges

*Why people become entrepreneur

Desire to be one’s own boss (the main reason), job security, succeed financially,
for an improved quality of life

*Personal characteristics of Entrepreneurs: persistent, risk-taking, restless,

goal-oriented, action-oriented, self-demanding, inquisitive…

*Challenges of Entrepreneurship

- Getting funds to start the business

- Being fully responsible for the business

*Risks of Entrepreneurship: overestimate their ability, underestimate the

difficulty, may not realize how much ready cash is needed

*Factors of production
- Land
- Labor
- Capital (machines, buildings…)
- Entrepreneurship
- Knowledge

Profitability = Profit / total capital

*STANDARD OF LIVING
- objective

- Factors: employment opportunities, poverty rate and environmental quality...

- Measured & defined with numbers.

- measured based on: income, poverty, life expectancy, infrastructure, climate,

cost…

*QUALITY OF LIFE

- subjective

- Factors: equal legal protection, freedom from discrimination, freedom of

religion...

-> difficult to measure & particularly qualitative.

Balancing such demands is a major role of business managers.

*Outsourcing: a method of dispersing certain work functions to an outside

vendor/party instead of having it performed by an in-house employee or
department.

 Benefits: + internal expertize development

+ access large talent pool

+ broader range of expertize

+ continuity and risk management

+ cost savings

+ focus on core competencies

*Insourcing: When foreign companies hire businesses inside a country to

perform some of their functions.

 Benefits: + direct control

 + employees of organization

+ no third-party involvement

THE BUSINESS ENVIRONMENT

Five elements in the business environment:

- economic and legal environment.

- technological environment.
- competitive environment.
- social environment.
- global business environment.

 Economic and legal environment: + freedom of ownership

+ contract laws

+ elimination of corruption

+ tradable currency

+ minimum taxes and regulation

 Technological environment: + information technology

+ databases

+ bar codes

+ the Internet

 Competitive environment: + customer service

+ stakeholder recognition

+ employee service
 + concern for the environment

 Social environment: + diversity

+ demographic changes

+ family changes

The economic system & the way government work with or against businesses can
have a strong impact on the risk of starting a new business.

*how the economic & legal environment can affect businesses:

- economic growth
- taxes & interest rate levels
- the forces of supply & demand

Technological changes that have comprehensive & lasting impact on businesses:

the emergence of information technology (IT): computers, networks, cell
phones, and esp. the Internet.

- new ways of reaching customers & suppliers (e-commerce, online

channels..):

2 major types of e-commerce transactions:

+ business-to-consumer (B2C): Eg: Amazon.com

+ business-to-business (B2B): sell goods and services to one another. Eg: IBM
selling consulting services to a local bank

- tools to be more responsive to customers (customer database...): bar codes &

scanner the checkout counter, fast shipment options…
- tools to increase productivity - > effectiveness & efficiency

+ more effectiveness -> improved products

+ more efficiency -> lower cost

Efficiency: producing goods & services using the least amount of resources.
Effectiveness: producing the desired result.

*Developing or acquiring technology

Three main options: + In-house development

+ Alliances (liên minh)

+ Acquisition (mua lại)

The competitive environment

-By exceeding customer expectations: High quality product + good service +

competitive prices

Exceed customers expectations = repeat business, referrals

Examples

1. Your customer is frustrated about a defect in your product

*BASIC SERVICE: Send a refund or new product.

*EXCEEDING EXPECTATIONS:

Send a freebie and turn a client into a loyal customer.

2. Your customer is dissatisfied with the result of a service they recently

received

*BASIC SERVICE: Issue a refund or schedule a new appointment.

*EXCEEDING EXPECTATIONS:

Send someone for immediate follow-up and discount the original service to show
you value the customer’s time.

Get someone over to rectify the situation as soon as possible.

3. Your customer is giving you feedback in real time about an area for
improvement.
*BASIC SERVICE:

Make note, assure them options will be explored, and send a follow up email as a
thank you.

*EXCEEDING EXPECTATIONS:

Find a way to implement their suggestions, and send them a thank you and
freebie for their contributions to your success.

4. Your customer is blaming you for an issue with the business that you did
not create

*BASIC SERVICE:

Assure them you will forward the concern to the appropriate department.

*EXCEEDING EXPECTATIONS:

Transfer their call to a customer success team or manager and reinforce the idea
that customer opinions do have the power to affect change in your organization.

Redirect them. Get them pointing to a solution instead of trying to identify the
source of the problem.

5. Your customer is confused about what product or service to purchase

*BASIC SERVICE:

Tell them which offerings will meet their needs so they can make a more
informed decision.

*EXCEEDING EXPECTATIONS:

Make recommendations, give offering comparisons to get the customer the best
and fairest deal possible, and offer to transfer the call to sales.

-By restructuring and empowerment

Restructuring: + Create new business organization forms

 + Find new ways to design/ control a business & increase
profitability

Empowerment: Giving frontline workers (office clerks, front-desk people at

hotels, & salespeople) the responsibility, authority, freedom, training, &
equipment they need to make decisions & respond quickly to customer requests.

The social environment: the way in which changes in society affect a business’
activity.

Diversity: means all the way in which we differ. Anything that makes us unique,
this includes visual difference (sex, race, age…) as well as those that are more
invisible (thinking styles, personalities…).

 Benefits: + Increase innovation and creativity

+ Expand the talent pool

+ Improve employees' performances, company’s reputation

The global environment

Two important changes

- the growth of global competition

- the increase of free trade among nations.

*What leads to the growth of globalization?

- The development of efficient distribution systems

- Communication advances such as the Internet

* What are the impacts of globalization? (Chapter 3)

- Benefits

- Costs
One way to lessen international tensions is to foster global economic growth
among both profit-making and nonprofit organizations.

The Ecological Environment: Climate change -> The greening trend

UNEMPLOYMENT RATE

Unemployment rate: the number of people who are able & willing to work but
cannot find work in a given period.

the percentage of civilians at least 16 years old who are unemployed and tried to
find a job within the prior four weeks.

An unemployed:
 Able: + an adult (>16 yrs old)

+ non-institutionalized civilian

+ without a job

-> Not including a minor, a retiree, a prisoner

 Willing: actively looking for work

 Must have taken some actions to find a job in the last 4 weeks.

unemployed
Unemployment rate = labor force ( employed +unemployed ) ¿ × 100
¿

Unemployment rate: + fluctuates

+ increases during recession

+ never zero
 + an important indicator of the health of the economy,
often a national average.

There are different reasons for being unemployed:

 temporary
 seasonal
 changes in industry
 economic slowdown

Four types of unemployment:

 Seasonal unemployment
 Frictional unemployment
 Structural unemployment
 Cyclical unemployment

1.Seasonal unemployment

Occurs when jobs are only available at certain times of the year. Eg: Santa Claus
impersonators.

2. Frictional unemployment

*refers to those people who:

 have quit work because they didn’t like the job, the boss, or the working
conditions and who haven’t yet found a new job.
 are entering the labor force for the first time (e.g., new graduates).
 are returning to the labor force after significant time away (e.g., parents
who reared children).

*Occurs when a worker moves from one job to another and spends time trying to
find his or her ideal job. Exists even when there is full employment.
3. Structural unemployment

Causes: Changes in an economy -> one with obsolete skills can’t get a job

Results from industrial reorganization, often due to technological change rather

than fluctuations in supply or demand

4. Cyclical unemployment

• Cause: + Recession phase of the business cycle

+ inadequate demand -> firms produce less

< demand for labor & < wages

> unemployment

The most serious type of unemployment

• Booming economy: Relates to the cyclical trends in growth and production that
occur within the business cycle. When the business cycle is at its peak, cyclical
unemployment is low.

• Temporary -> Frictional

• Seasonal -> Seasonal

• Changes in industry -> Structural

• Economic slowdown -> Cyclical

Under-unemployment/ Disguised unemployment

Disguised unemployment:
- More workers employed on a single piece of work than actually required.

- Sb who is employed & remains unproductive throughout the work

-> disguisedly unemployed

INFLATION

Inflation: a general increase in the price of goods and services

a persistent increase in the level of consumer prices

is a measure for the devaluation of the currency of a country.

2 ways to measure inflation

 CPI (consumer price index)

(from the perspective of the consumers)

 PPI (producer price index)

(from the perspective of the producers)

• The Consumer Price Index (CPI)

- is “a large survey” of the price levels of all the goods/ services in the “market
basket”.

- does not include any investments

- is only focused on general consumer purchases

- is usually calculated monthly or quarterly as a weighted average for different

components of consumer expenditure.

*Notations:

- iAB= inflation rate from year A to year B

- CPIA=CPI for year A

- CPIB=CPI for year B

*Formula:
CPI ( B) CPI ( B )−CPI (A )
iAB = CPI ( A ) – 1 =
CPI ( A)

Applications of CPI => to compare standard of living over time.

Demand-Pull Inflation (Lạm phát do cầu kéo)

"too much money chasing too few goods".

• Demand is growing faster than supply (usually in growing economies)

-> prices will increase

Cost-Push Inflation (Lạm phát do chi phí đẩy)

• Companies' costs go up (costs of imports, taxes, wages, expenses ..)

• -> they need to increase prices to maintain profit margins

Cause of inflation:

Imbalance bw supply & demand for goods

 This situation can spiral out of control & lead to hyperinflation

(siêu lạm phát).
Causes of Inflation
 War: Scarce resources used for war efforts -> higher cost
 Increase in the price of raw materials: Cost-push theory
 Increase in business expenses: Cost-push theory
 Increase in salaries: Cost-push theory
 Too much money circulating in the economy: demand-pull theory
  more money available -> people want to buy more products

Deflation
-Economy produces more goods than people want. (supply >> demand)

-Sellers lower prices.

-Sellers cut production.

-People lose jobs & have less money to buy goods.

-Demand continues to go down.

Inflation

 often in a growing economy

High demand -> increase product price -> demand for higher wages -> high cost
of production -> high product price

Deflation

 often in a recession

Low demand -> cut prices, production & wages -> high unemployment -> low
income -> low demand

THE IMPACT OF INFLATION ON AN ECONOMY

• Higher prices of goods and service within an economy

 the national currency can purchase less

 lower purchasing power of money
Stagflation (lạm phát đình trệ) occurs when the economy is slowing but prices
are going up anyhow.

HOW ECONOMIC CONDITIONS AFFECT BUSINESS

ECONOMICS: the study of how society chooses to employ resources to

produce goods & services & distribute them for consumption among various
competing groups & individuals.

There are two major branches of economics:

*MACROECONOMICS (Kinh tế vĩ mô)

looks at the operation of a nation’s economy as a whole

*MICROECONOMICS (Kinh tế vi mô)

looks at the behavior of people & organizations in markets for particular

products or services.

The topic of Macroeconomics (A) or Microeconomics (B) ?

A 1. What a country should do to lower its national debt

A 2. Gross domestic product (GDP)

B 3. Why do people buy smaller cars when gas prices go up?

A 4. The unemployment rate

Invisible hand: a phrase to describe the process that turns self-directed gain into
social and economic benefits for all

Capitalism (chủ nghĩa tư bản): An economic system in which all or most of the
factors of production and distribution are privately owned and operated for profit.

Under free-market capitalism people have four basic rights:

- The right to own private property.

- The right to own a business and keep all that business’s profits.

- The right to freedom of competition.

- The right to freedom of choice.

-> people are willing to take more risks than they might otherwise.

A free market is one in which decisions about what and how much to produce are
made by the market—by buyers and sellers negotiating prices for goods and
services.

How prices are determined

The Forces of Supply and Demand

DEMAND

• the quantity of a product desired by buyers

• the quantity demanded -> the amount of a product pp are willing to buy at a
certain price

• product price vs. quantity demanded -> the demand relationship

SUPPLY

• how much the market can offer

• the quantity supplied -> the amount of a product suppliers are willing to supply
when receiving a certain price

• product price vs. quantity supplied -> the supply relationship

PRICE is a reflection of supply and demand

The DEMAND CURVE is defined as the relationship between the price of the
good and the amount or quantity the consumer is willing and able to purchase in a
specified time period, given constant levels of the other determinants--tastes,
income, prices of related goods, expectations, and number of buyers.

Law of Demand
• Reflects the usefulness or utility from that product

• Given the price of a product or service:

• price / -> demand \

• price \ -> demand /

Explanations for the price – quantity demanded relationship

• income effect:

As the price per product “A” is lower, one can buy more products with his fixed
income without giving up buying other goods

• the substitution effect:

When a product A becomes more expensive, one might switch to buying

substitutes such as “B” or “C”

Law of supply: the higher the price, the higher the quantity supplied

Shifts in supply curve

• Changes in input prices.

• input: sth used to produce another product.

• price of steel / -> supply of automobiles \

• Changes in technology.
 • Better engineering -> supply of computers /

The supply – demand relationship

• Example:

• A special edition CD of Lady Gaga is released for $20. Because the record
company's previous analysis showed that consumers will not demand CDs at a
price higher than $20, only 10 CDs were released

• If, however, the 10 CDs are demanded by 20 people

 the price will rise

• the demand relationship: demand / -> price /

More CDs will be supplied

• the supply relationship: price / , quantity supplied /

Example 2:

• If there are 30 CDs produced and demand is still at 20

 the price will not be pushed up, the price of the leftover CDs may drop

Market equilibrium
• When price has moved to a level at which quantity demand equals quantity
supplied of that good.

• Competitive markets have many buyers and sellers and none is large enough to
individually affect the price.

Why?

• If prices are too high, there is excess supply (a surplus) and people will lower
prices.
• If prices are too low, there is excess demand (a shortage) and people will raise
prices.

Four different degrees of competition:

- Perfect competition
- Monopolistic competition

- Oligopoly

- Monopoly

PERFECT COMPETITION
* Characteristics
• There are many sellers in a market and none is large enough to dictate the
price of a product.

• Sellers’ products appear to be identical

MONOPOLISTIC COMPETITION
* Characteristics: A large number of sellers produce very similar products
that buyers nevertheless perceive as different

AN OLIGOPOLY
* Characteristics: Just a few sellers dominate a market
A MONOPOLY
* Characteristics: Occurs when one seller controls the total supply of a
product/ service, and sets the price.

Economic indicators measure things such as:

- how much a country is producing
- whether the economy is growing

- how the economy is compared to other countries

GDP
gross domestic product (GDP): the total value of final goods and services
produced in a country in a given year.

is the market value of all final/finished goods and services produced within a
country in a year.

is the most frequently used indicator of market activity

is most often measured on an annual or quarterly basis to gauge the growth of a

country's economic activity between one period and another.

GDP (Gross Domestic GNP (Gross National

Product) Product)
Definition An estimated value of the total
An estimated value of the
worth of a country’s production
total worth of production and
and services, within its services, by citizens of a
boundary, by its nationals andcountry, on its land or on
foreigners, calculated over the
foreign land, calculated over
course of 1 year. the course of 1year.
(focus: territorial boundary/ (focus: nationality/
location) ownership)
Use To see the strength of a To see how the nationals of
country’s local economy a country are doing
economically
How to calculate all income/ expenditures within GDP, plus income from
the country foreign sources, less income
paid to non-nationals
E.g.: HONDA MOTOR CORP

Honda is a Japanese based company with plants in the US. The cars they
produced and sold in the US is included in the

 GDP of the US
 GNP of Japan

Both domestic and foreign-owned companies can produce the goods and services
included in GDP, as long as the companies are located within the country’s
boundaries.

E.g.:

-production values from Japanese automaker Honda’s factory in Ohio are

included in U.S. GDP.

-Revenue generated by Ford’s factory in Mexico is included in Mexico’s GDP,

even though Ford is a U.S. company.

E.g. 2: Toyota
The output of a Toyota plant in Kentucky isn't included in the US GNP, although
it's counted in GDP of the US.

 GNP of Japan: The revenue from the sales goes to Japan, even though the
products are made and sold in the United States.
 GDP of US: It adds to the health of the U.S. economy. (It creates jobs for
Kentucky residents, who use their wages to buy local goods and services.)

Are these goods counted in GDP?

1.eggs, flour, butter bought by a baker to make cakes

NO -> they are not finished goods; they are intermediate goods that when
combined will be part of a finished product

2. eggs bought by a consumer to make cakes at home

YES -> they are finished goods because they are not sold again as part of
other goods.

3. A tractor produced and sold to a farm

-> finished good -> although it is used to make other goods, it is not sold again
as part of another goods

-> capital goods are considered finished goods

4. If an old house is sold this year, is it counted in the GDP of this year?

NO -> it wasn’t produced this year

• -> only the sale of new houses adds to GDP

• -> GDP cares about production

5. Free goods & services, charitable work, home production NO included GDP

*If goods are not bought and sold within the market, reported to the
government, they are not counted in GDP

*Without market value/ price, there’s no easy or agreed upon way to calculate
how much a good is worth

Economists include four main areas in calculating the GDP:

• Consumer goods and services

• Business goods and services

• Government goods and services

• Goods and services sold to other countries

National spending Factor income

GDP
approach approach (GDI)

=
Look at the money spent Look at the money received

consumption Eggs, massages, goods and services bought by consumers

investment Machines, tractors, ... bought by businesses

Government Pen & paper, tanks, computers, ... bought by the government

purchase

Net export Export – import

THE COMPONENTS OF GDP

Y = C + I + G + NX

Y: total demand for domestic output (GDP)

C: consumption spending by households

I: investment spending by businesses and household

G: government purchases of goods and services

NX: net exports or net foreign demand

government purchase vs government spending

E.g: when the government sends out some social security cheques, does this
add to GDP?

NO -> this is just a transfer

When the social security recipient gets the cheque and spends it on goods and
services that does add to GDP

-> gov purchases -> money must be spent directly on goods and services

*A country has a closed economy that has only 3 goods/ services (there is not
trade with other countries). In a given year, the economy produces

 3 haircuts that cost $10 each

 2 factory machines that cost $100 each
 1 highway repair that costs $500. What is the total GDP?
 GDP = C + I + G +NX = (3x$10) + (2x$100) + $500 + $0 = $730

What percentage of GDP is consumption?

 GDP = $730, C = (3x$10) =$30 => Percentage: 30/730 x 100 = 4%

What can cause an increase in GDP?

-Prices increase

-More valuable goods & services are produced

Real GDP
- measures the second type of growth (more goods and services)

- is controlled for inflation by adding all the goods & services produced in an
economy using the same set of prices over time
- tells us if the prices of goods & services hadn’t changed, how much would
GDP have increased/ decreased?

Real GDP per capita = Real GDP/ country population

-Real GDP decline accompanied by increase in unemployment

Exercise 1: nominal vs real GDP

No. of No. of
Price per Price per
Year Computer Automobile
Computer Automobile
Solds Solds
1990 500,000 $6000 1,000,000 $12,000
2000 5,000,000 $2000 1,500,000 $20,000

What is the nominal GDP in 1990 and 2000?

Calculating nominal GDP -> multiply the quantity of each final
product sold by its price and sum over all final goods and services.
-GDP in 1990: $15,000,000,000 (No.(1) × price(1) + No.(2) × price(2))
-GDP in 2000: $40,000,000,000

Calculate the real GDP in 2000, using 1990 as the base year.

Calculate GDP -> multiply that year’s quantities of goods and services by
their prices in the base year.

Real GDP in 1990:

500,000 x $6,000 + 1,000,000 x $12,000 = $15,000,000,000

Real GDP in 2000:

5,000,000 x $6,000 + 1,500,000 x $12,000 = $48,000,000,000

 (real GDP∈Year 2−real GDP∈Year 1)
Output growth = real GDP∈Year 1
× 100

 Percentage Change:

[(48,000,000,000 – 15,000,000,000)/ 15,000,000,000] x 100% = 220% increase

PRODUCTIVITY

*Definition: An increase in productivity = a worker can produce more goods &

services than before in the same time period, usually thanks to machinery or
other equipment.

*Pros and Cons of productivity

• Higher productivity -> lower production costs & lower prices

• High productivity can lead to high unemployment.

Business cycles: the periodic rises & falls that occur in economies over time.

Depression a deep recession

Prosperity an economic boom; a peak of economic activity

Recovery a rise in business activity after a recession/ depression, when the

economy stabilizes and starts to grow

Recession when economic activity slows down

A recession can affect only 1 industry, related industries, or spread to the entire
economy. -> The ripple effect

Characteristics of a Depression

 Can last for several years

 Spreads to other countries
 High number of unused manufacturing facilities
 Very rare

A depression is a severe recession, usually accompanied by deflation.

This eventually leads to an economic boom, starting the cycle all over again.

FISCAL POLICY

Fiscal policy
• The government’s efforts to keep the economy stable by increasing or decreasing
taxes or government spending.

1. TAXATION

High tax rates

 may discourage small-business ownership

 tend to slow the economy

Low tax rates -> give the economy a boost

2. GOVERNMENT SPENDING

• Government spending: on highways, social programs, education, infrastructure

(e.g., roads and utilities), defense....

• National/ budget deficit

• National/ budget surplus

• National debt
Expenditure > income Budget deficit

Expenditure < income Budget surplus

Expenditure = income Balanced budget

* budget deficit (thâm hụt ngân sách): when the government spends more on
programs than it collects in taxes.

To counter a budget deficit, governments can

• Increase government income: revenue generating activities, tax…

• Decrease government spending. Eg. expenditures on defense, social programs...

*national debt: the total amount of money a government owes. (government’s

collective deficits)

It’s also called sovereign debt, country debt, or government debt. If the national
debt gets too large, a nation can become dependent on other nations or unable to
borrow money.

2 types of national debt

a. debt held by the public:

- The government owes this to buyers of its bonds.

- Those buyers are the country’s citizens, international investors, and foreign
governments.

b. intragovernmental debt. (nội chính phủ)

*budget surplus (thặng dư ngân sách): when a government’s revenue

exceeds its expenditures during a one-year period

MONETARY POLICY
What organization adds money to or subtracts money from the economy?

• the Federal Reserve Bank (the Fed) (US)

• The central bank (Vietnam)

Monetary policy: the management of the money supply and interest rates by the
central bank.

1. INTEREST RATE

• Raise interest rate (When the economy is booming)

 money more expensive to borrow

 Businesses thus borrow less
 Business people spend less money on things (labor, machinery...)
 the economy slows

• Lower interest rates

 Businesses tend to borrow more

 the economy is expected to grow.

Raising and lowering interest rates should help control the rapid ups and
downs of the economy.

2. MONEY SUPPLY

Contractionary/tight monetary policy

 less money to go around

 less spending; less money available for credit

Vs expansionary/easy/loose monetary policy

 more money to go around

 more spending; more money available for credit
 deflation

Loose money policy -> Inflation

Tight money policy -> Recession

 *Types of monetary policies

Interest rate cut -> higher economic growth -> faster inflation

 Expansionary monetary policy: helps speed up the economy

 Contractionary monetary policy: helps slow down the economy

Interest rate hike -> lower economic growth -> slower inflation

 MONETARY POLICY: Refers to actions central banks take to pursue

objectives such as price stability and maximum employment.
 FISCAL POLICY: Refers to the government’s revenue collection and
spending decisions (Congress and the administration).

Fiscal policy Monetary policy

Definition is the record of the revenue maintains and regulates the
generated through taxes and money supply within the
its division for the different economy.
public expenditures.
Administrated by is administered and The central bank announces
announced by the Ministry
of Finance
Period Yearly basis Longer period; changes due
to changes in the economic
condition of the country

Government Role in the

Economy

Monetary Policy Fiscal Policy

Bonds Reserves Taxing Spending

Interest Rates
 Doing Business in Global Markets
GLOBAL TRADE enables a nation to produce what it is most capable of
producing and buy what it needs from others in a mutually beneficial exchange
relationship.

FREE TRADE : the movement of goods and services among nations without
political or economic barriers.

*Pros and cons of free trade?

- Pros:

• Productivity grows (when countries focus on their comparative advantage)

• Global competition and less-costly imports keep prices down.

• Inspires innovation for new products and keeps firms competitively challenged.

• access to foreign investments, which help keep interest rates low.

-Cons

• domestic workers (in manufacturing-based jobs)

+ can lose their jobs.

+ may be forced to accept pay cuts from employers

• Domestic companies can lose their comparative advantage.

ABSOLUTE vs. COMPARATIVE ADVANTAGE

WIFE HUSBAND SON

Shirts ironed 30 10 5
Dishes washed 40 20 15
Tires changed 10 25 20
Amount of work done in 30 minutes:
*The wife has an absolute advantage in

• ironing shirts

3 times better than husband= 30/10, 6 times better than son = 30/5

• washing the dishes

2 times better than husband = 40/20, 2.67 times better than son = 40/15

*The husband has an absolute advantage in

• Changing tires

2.5 times better than wife = 25/10, 1.25 times better than son = 25/20

Absolute advantage

• If one person, firm or country can produce more of sth with the same
amount of effort and resources than others

 Being the best at sth, produce sth at the lowest cost

 measure of a firm/ country’s productivity in sth

OPPORTUNITY COST: The cost of an alternative that must be forgone in order

to pursue a certain action. Put another way, the benefits you could have received
by taking an alternative action.

Wife Husband

30 minutes 4 dishes = 3 shirts 2 dishes = 1 shirt

 1 dishes = 0,75 shirts 1 dish = 0,5 shirt

 1 shirt = 1,33 dish 1 shirt = 2 dishes

What is the opportunity cost of washing 1 dish?

 The husband has the lower opportunity cost of washing 1 dish ->
Comparative advantage in washing dishes

What is the opportunity cost of ironing 1 shirt?

  The wife has the lower opportunity cost of ironing 1 shirt -> Comparative
advantage in ironing shirts.

1. A person has a comparative advantage at producing something if he can produce it at

lower cost than anyone else.

2. Someone who is the best at doing something is said to have an absolute advantage.

3. What it costs someone to produce something is the opportunity cost—the value of

what is given up.

Country A Country B

CARS 30m 35m

 TRUCKS 6m 21m

 Country B has the absolute advantage in producing both products.

* OPPORTUNITY COST

• Producing car: + A: 6/30 = 1/5 = 0.2 (truck per car)

+ B: 21/35 = 3/5 = 0.6

• Producing trucks: + A: 30/6 = 5 (cars per truck)

+ B: 35/21 = 5/3 = 1.7

* COMPARATIVE ADVANTAGE

• Producing cars: A

• Producing trucks: B

Business in Global Markets

*Why Nations trade

 Boosts economic growth

 Expands markets
 More efficient production systems
 Less reliance on economies of home nations

Exports: Domestically produced goods and services sold in markets in other

countries.

Imports: Foreign-made products and services purchased by domestic consumers.

In the global marketplace, countries

• benefit from buying one another’s products.

• compete by making the same products.

International Sources of Factors of Production

• Companies can spread their investment risk by “going global”.

Decisions to operate abroad depend upon availability, price, and quality of:

– Labor

– Natural resources

– Capital

– Entrepreneurship

-The measurement of trade allows nations to review the inflows & outflows of
trade.

*balance of trade (BOT) (trade balance): the difference between the

monetary value of a country’s imports and exports over a certain period.

 A positive trade balance (export > import) -> a trade surplus

  A negative trade balance (import > export) -> a trade deficit. Countries
usually regard this as a(n) UNFAVORABLE trade balance.

Balance of Trade = Value of Exports – Value of Imports

Why the BOT?

 help understand the strength of a country's economy in relation to other

countries.

E.g.:

 A country with a large trade deficit is essentially borrowing money to buy

goods & services
 A country with a large trade surplus is essentially lending money to deficit
countries.

The BOT is an important component in determining a country’s current account.

How Exchange Rates Affect the Balance of Trade

Weak More Trade surplus FAVORABLE

Currency exports than (leftover BALANCE OF
imports money) TRADE

Strong More imports NEGATIVE

Currency Trade deficit BALANCE OF
than exports (debt) TRADE
*Balance of Payments (BOP): The difference between money coming into a
country (from exports) and money leaving the country (from imports) plus other
money flows.

 a favorable BOP: more money flowing into a country than out

 An unfavorable BOP: more money flows out of a country.

The balance of trade determines the balance of payments.

Exchange Rates
 Values fluctuate, or “float,” depending on supply & demand
 How much the currency of a country is worth depends on how many other
countries want to buy its products.

*Currency Rates are influenced by:

– Domestic economic and political conditions

– Central bank intervention

– Balance-of-payments position

– Speculation over future currency values

Prices
-When the value of a country’s currency goes up compared to another country’s,
it has a favorable exchange rate.

-When the value of a country’s currency goes down compared to another

country’s, it has an unfavorable exchange rate.

DUMPING (bán phá giá)

 selling products in a foreign country at lower prices than those charged in

the producing country
 sometimes used to
- reduce surplus products in foreign markets
 - gain a foothold in a new market.

STRATEGIES FOR REACHING GLOBAL MARKETS

*Businesses use different strategies to compete in global markets:

• Licensing

• Exporting

• Franchising

• contract manufacturing

• International joint ventures & strategic alliances

• foreign subsidiaries

• foreign direct investment

*Different strategies reflect different levels of ownership, financial commitment,

and risk:

Contract International joint Foreign

Licensing Exporting Franchising ventures and direct
manufacturing
strategic alliances investment

LEAST Amount of commitment, control, risk, and profit potential MOST

licensing
A global strategy in which a firm (the licensor) allows a foreign company (the
licensee) to produce its product or use its trademark in exchange for a fee (a
royalty).

*A licensor:

- generally sends company representatives to the foreign company to help set up

operations.

- may assist or work with a licensee in such areas as distribution, promotion,

and consulting.

*A licensing agreement can benefit a licensor in several ways:

- gains revenues it would not otherwise have generated in its home market

- may sell start-up supplies, materials, & consulting services to foreign licensees

- spends little or no money to produce & market their products (licensees bear
the costs & generally work hard to succeed)

Licensor

PROS CONS
Quick, easy entry into foreign markets Have only a low level of control
Get product to market with very little or Lose intellectual property
no capital investment
Potential for large return on investment
Poor quality management can damage
(ROI) your brand reputation in other license
territories
The licensee’s market knowledge and Your licensee may become a competitor
experience lower the risk on the
product’s performance

Exporting
Marketing and sale of domestically produce goods in another country.

* Direct export: Producer sells directly to the importer. This mode gives the
company a greater degree of control over its distribution channels.
* Indirect export: is the process of exporting through domestically based export
intermediaries, through specialists (export trading/management companies) that
assist in negotiating & establishing trading relationships.

- An export-trading/ management company

• matches buyers &sellers from different countries

• deals with foreign customs offices, documentation, weights and measures

conversions to ease the process of entering global markets.

• assist exporters with warehousing, billing, and insuring

PROS CONS
-Relatively low financial exposure -Vulnerability to tariffs and NTBs
-Permit gradual market entry -Logistical complexities
-Acquire knowledge about local market -Potential conflicts with distributors
-Avoid restrictions on foreign
investment

Franchising (nhượng quyền)

• a contractual agreement whereby someone with a good idea for a business sells
others the rights to use the business name and sell a product/ service in a given
territory in a specified manner.

• popular domestically and globally

*Pros and cons of a franchise for a franchisee?

- Cons:

 Franchise fees or a share of the profits.

 Restrictions of business operations, low flexibility

- Pros

 Lower than capital investment

 Prior public acceptance of product
 Assistance with management & business plan.
 Licensing Franchising
- Operations can be done by own way. - Operations is done by following
- Licensing has to pay royalty fee and it licensor’s rule.
is comparatively low. - Franchisee has to pay management fee
- Products are major source of concern. and it is very high.
- Life cycle: 15-20 years - Covers all aspects of business.
- Licensee enjoys substantial measure of - Life cycle: 5-10 years
fee negotiation. - Standard fee structure.
- Licensor exercise less control over - Franchisor exerts greater control over
licensee. franchisee.

Contract manufacturing

A foreign company produces private-label goods to which a domestic company

then attaches its own brand name or trademark.

*Benefits of contract manufacturing?

- Contract manufacturing enables a company

 to experiment in a new market at low risk & without heavy start-up

costs (e.g. cost in building a manufacturing plant)
 to temporarily meet an unexpected increase in orders (often at very low
labor cost) (a form of outsourcing)

PROS CONS
- Low financial risks - Reduced control (may affect quality,
- Minimize resources devoted to delivery schedules…)
manufacturing - Reduce learning potential
- Focus firm’s resources on other - Potential public relations problems
elements of the value chain

A joint venture
a partnership in which 2 or more companies (often from different countries) join
to undertake a major project.

Why joint venture?

• to increase the companies’ global footprint & future growth

Strategic alliances
* A strategic alliance

A long-term partnership between 2 or more companies established to help

each company build competitive market advantages.

* Strategic alliances

• don’t share costs, risks, management, or even profits (unlike joint ventures)

• provide broad access to markets, capital, and technical expertise

Foreign Direct Investment (FDI)

 the buying of permanent property and businesses in foreign nations.
 The most common form of FDI is a foreign subsidiary

* A foreign subsidiary: a company owned in a foreign country by the parent

company

* A multinational corporation

 a corporation that manufactures and markets products in many different

countries and has multinational stock ownership and management

>< not all large global businesses are multinationals

* sovereign wealth funds (SWFs)

• A growing form of foreign direct investment, a state-owned investment fund used

to benefit a country’s economy and its citizens.

• Investment funds controlled by governments holding investment stakes in

foreign companies.

• Comes from central bank reserves, privatizations, transfer payments, revenues

from exporting natural resources.
  A partnership in which two or more companies (often from different
countries) join to undertake a major project. Joint venture
 A contractual agreement whereby someone with a good idea for a business
sells others the rights to use the business name and sell a product or service
in a given territory in a specified manner. Franchising
 A foreign company produces private-label goods to which a domestic
company then attaches its own brand name/ trademark. Contract
manufacturing
 A long-term partnership between two or more companies established to help
each company build competitive market advantages. Strategic alliances
 A corporation that manufactures and markets products in many different
countries. Multinational corporation
 A global strategy in which a firm allows a foreign company to produce its
product in exchange for a fee. Licensing

Demanding Ethical and Socially Responsible Behavior

The Main Idea

* Ethics:

• moral principles by which people conduct themselves personally, socially, and

professionally.

* Business ethics

• rules that guide the behavior of a business and its employees.

• generally based on moral principles

• In business, good ethics is beneficial for long-term profitability and success.

Graphic Organizer

Business Ethics

Creating Fair
safe Creating treatment of
products jobs employees
 Environmental Truthful about
protection financial status

Ethical dilemma:

• When people must decide whether or not to act in a way that benefits someone
else even if it harms others and isn’t in their own self-interest.

• when a person has to decide bw 2 different courses of action, knowing that

whichever course he/she chooses will result in harm to 1 person or group even
though it may benefit another.

Law and Ethics

*code of ethics: a set of guidelines for maintaining ethics in the workplace

*conflict of interest: a conflict between self-interest and professional obligation

is a major ethical question that is generally not illegal.

Stakeholders

People or groups of people who supply a company with its productive resources
& thereby have an interest in how the company behaves.

 external Stakeholders: Do not form part of the business

+ Suppliers

+ Society

+ Government

+ Creditors

+ Shareholders

+ Customers
  internal Stakeholders: Members of the organization

+ Employees

+ Manager

+ Owners

*A business and its stakeholders

MANAGER CUSTOMER
Wants to raise selling prices to Will not want to pay more for their
maximize profits goods
OWNER SHAREHOLDER
Wants to re-invest profits into the Will want the profits shared out to
business them
OWNER TRADE UNION
Wants to pay lower wages to their Represent the employees will not be
employees to maximize profits happy with this
OWNER SUPPLIER
Wants to buy stock from suppliers at Will want to make maximum profits
minimum prices

-Compliance-based ethics codes: Ethical standards that emphasize preventing

unlawful behavior by increasing control and by penalizing wrongdoers.

-Integrity-based ethics codes: Ethical standards that define the organization’s

guiding values, create an environment that supports ethically sound behavior, and
stress a shared accountability among employees.

HOW TO FORM A BUSINESS

Organizing a Business

• There are three main types of business organizations: sole proprietorships,

partnerships, and corporations.

• As part of a business plan, entrepreneurs must decide which type best fits their
situation and describe their choice and the reasons for it.

Major forms of ownership

 Sole Proprietorship: A business owned, and usually managed, by one

person.
 Corporation: A legal entity with authority to act and have liability apart
from its owners.
 Partnership: Two or more people legally agree to become co-owners of a
business, share its risks and rewards.

1.Sole Proprietorship

*Advantages:

– Ease of start-up & closure (with a license /permit)

– Ability to make all decisions

– Ability to keep all profit

– (usually) lower taxes

*Disadvantages:

– Unlimited liability

– Limited access to credit

– Owner’s lack of necessary skills

– End of business when owner dies

Limited Liability Company

if a company goes bankrupt,

– its creditors cannot seek the personal wealth of the stock holders for
reimbursement.

– only the money the stockholders have invested in the business is at risk
2.Partnership

*Advantages:

– Ease of start-up & closure, obtaining capital (from partner/ banks/...)

– No dependence on 1 person

– Lower tax

– Set of skills and talents of different partners

*Disadvantages:

– Share of business risks by all partners

– Possible conflicts between partners

– Unlimited legal and financial liability

– Division of profit, authority

– More difficult to terminate, find a suitable partner

Major types of partnership

General Partnership: All owners share in operating the business and in assuming
liability for the business’s debts.

Limited Partnership: A partnership with one or more general partners and one or
more limited partners.

Types of partners

General Partner: An owner (partner) who has unlimited liability and is active in
managing the firm. -> Manage With Unlimited Liability

Limited Partner: An owner who invests money in the business, but enjoys limited
liability. -> Liability = Capital Contribution

3.Corporation
To form a corporation, the owners must get a corporate charter from the state
where their main office will be located.

*Advantages:

– Limited liability

– Ability to raise money (when people buy stocks)

– Corporation does not end if an owner dies

- Deceased owner shares are sold and the business continues

– Separation of ownership & (specialized) management

– Size

*Disadvantages:

– Difficult and costly to start

– More regulations

– Double taxation

– Paperwork/ extensive record-keeping

-Most expensive to organize

Corporate Governance

Stockholders Elects Board of Directors Appoints Corporate Officers

Corporate type

 An alien corporation does business in the US but is chartered

(incorporated) in another country.
 A domestic corporation does business in the state in which it’s chartered
(incorporated).
  A foreign corporation does business in one state but is chartered in
another.
 A closed (private) corporation is one whose stock is held by a few people
and isn’t available to the general public.
 An open (public) corporation sells stock to the general public.
 A quasi-public corporation is a corporation chartered by the government as
an approved monopoly to perform services to the general public.
 A professional corporation is one whose owners offer professional
services (doctors, lawyers, etc.).
 A nonprofit (or not-for-profit) corporation is one that doesn’t seek
personal profit for its owners.
 A multinational corporation is a firm that operates in several countries.

OTHER FORMS OF OWNERSHIP

Cooperatives

A cooperative: A business owned and controlled by the people who use it—
producers, consumers, or workers with similar needs who pool their resources for
mutual gain.

Aims: Groups of businesses pool their resources to

• save money on the purchase of certain goods & services.

• make marketing of goods & services more efficient & profitable.

Nonprofit organizations

Definition: A nonprofit organization, or nonprofit, is a type of organization that

focuses on providing a service, but not to make a profit.

Franchise

*Definition: A franchise is a contractual agreement to use the name and sell

the products /services of a company in a designated geographic area.

*Cons:
– Franchise fees or a share of the profits.

– Possible loss of independence

*Pros:

– Lower than capital investment

– Prior public acceptance of product

– Assistance with management & business plan.

CORPORATE EXPANSION: MERGERS AND ACQUISITIONS

Merger: The result of two firms joining to form one company.

Acquisition: One company’s purchase of the property and obligations of another

company.

Merger Acquisition
Two or more companies join to create a Sometimes seen as an extreme case of a
new entity that often benefits from both merger.
merged parts (e.g. cost position, broader One company takes over another
product/services offering, know-how, company incorporating it into it’s own
market access etc.). entity.

Types of mergers

- Vertical Merger: Joins 2 firms in different stages of related businesses.

- Horizontal Merger: Joins 2 firms in the same industry and allows them to
diversify or expand their products.
- Conglomerate Merger: Unites firms in completely unrelated industries in
order to diversify business operations and investments.

1.Horizontal merger

* Definition: a merger between direct competitors in the same market/ industry

* Aim:

– eliminate competition -> increase market share, revenues and profits

– encourage cost efficiency & enjoys economies of scale

+ redundant & wasteful activities are removed

+ < average cost decline due to higher production volume

2.Vertical merger

* Definition: A merger between companies that operate along the supply chain.

(producer & distributor/ supplier) (different stages of related business)

* Aim:

– Create synergies

– Better quality control & information flow along the supply chain

– supply of essential good: secure supply, avoid disruption, restrict supply to

competitors

– cost saving and a higher profit margin

3.Pure conglomerate merger

* Definition

– a merger between totally unrelated companies in distinct markets.

– Vs. A mixed conglomerate merger -> companies aiming to expand product

lines / target markets. (-> market/ product extension merger)

* Aim: To diversify into other industries & reduce risks

* Risk: immediate shift in business operations as the companies offer unrelated

products/services in different markets.

4.Market-Extension Mergers
* Definition: a merger between companies that sell the same products/ services
but operate in different markets. (competitors in different markets)

* Aim: access to a larger market  bigger customer base/target market.

5.Product-extension merger

* Definition: a merger between companies that sell related products/ services in

the same market. (-> the same customers) (concentric merger)

* Aim:

– Diversify product offerings

– benefit from shared expertise (distribution channels, common/ related

production process, basic technology, supply chains...)

– group products together -> easier to sell (offer one-stop shopping, >
convenience for consumers) -> access to more consumers.

A merger between companies ...

Horizontal merger... in direct competition with each other in terms of product

lines and markets

Vertical merger... along the same supply chain (e.g., a retail company in the
auto parts industry merges with a company that supplies raw materials for auto
parts.)

Pure conglomerate merger... in unrelated business activities (e.g., a clothing

company buys a software company)

Market-extension merger... in different markets that sell similar products or

services

Product-extension merger... in the same markets that sell different but related
products or services
Small business: A business that is independently owned and operated, is not
dominant in its field of operation, and meets certain standards of size (set by the
Small Business Administration) in terms of employees or annual receipts.

A business plan

• is a detailed written statement that describes the nature of the business, the
target market, the advantages the business will have over competition, and the
resources and qualifications of the owner(s).

• forces potential small-business owners to be quite specific about the products or

services they intend to offer.

• is also mandatory for talking with bankers or other investors

Angel investors: private individuals who invest their own money in potentially
hot new companies before they go public.

Venture capitalists: Individuals/ companies that invest in new businesses in

exchange for partial ownership of those businesses.

Management and Leadership

Managers are called “bosses” and their job consisted of telling people what to do,
watching over them to be sure they did it, and reprimanding those who didn’t.

Management

The process used to accomplish organizational goals through planning,

organizing, leading, and controlling people and other organizational resources

CONTROLLING: Setting standards for work, evaluating performance, and

solving problems that prevent certain tasks’ completion

ORGANIZING: Obtaining and coordinating resources so that a business’s

objectives can be met

PLANNING: Setting objectives and making long- and short- term plans for
meeting the objectives
LEADING: Influencing, guiding, and directing people under one’s management to
carry out their assigned tasks

Empowering employees means allowing them to participate more fully in decision

making.

Forms of planning

STRATEGIC PLANNING: The setting of broad, long-range goals by top

managers

TACTICAL PLANNING: The identification of specific, short-range objectives

by lower-level managers

CONTINGENCY PLANNING: Backup plans in case primary plans fail

OPERATIONAL PLANNING: The setting of work standards and schedules

Strategic planning top management

Tactical planning (teams of) managers at lower levels

Operational planning specific supervisors, department managers and employees