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					                                         Introduction


Dear freshmen of 2011,

Hopefully you have had a nice introduction, during which you have made a lot of friends. Now your
time as a student will become more serious, because the first exams are coming up. Because starting
as a student is already hard enough, we have made a propaedeutic book for you, hopefully it will
help you during your preparations for the exams. The provision of this book is one of the benefits of
your membership of Study Association Stress.

This propaedeutic book contains a short introduction, one summary, and one exam of every course.
As every year we tried to put as much information as possible in this book. Unfortunately, we don’t
have course information, exams and summaries for every course. Sometimes, the course is new, but
sometimes no one handed in a summary or exam yet. Because all the summaries are written by your
fellow students, we depend on them and you by preparing this propaedeutic book. You can send in
your summaries to oc@stress.utwente.nl and we will put them online and probably use them for the
propaedeutic book next year. This way, you can help your fellow students, the freshmen of next year.
However you can also earn some money By doing so, for every first summary of a course we will give
a reward of € 15,- , for the second one € 10,- and the third or later summary will be rewarded with €
5,-. Handing in exams can also be really helpful, unfortunately you will not get any money for them.

When you need more study materials after reading the summary and making the exam from this
book, you can take a look at: www.stress.utwente.nl. When you look under the heading ‘Study’ you
will find ‘Exams and Summaries’ where we have a lot more exams and summaries for most of the
courses.
The Stress website is also a place where you will find information about activities or committees
organized by the study association.

The education committee is not only there to provide summaries and exams, but you can also come
to us when you have a complaint or remark about a course. When the complaint is sufficiently
supported and/or there are enough complaints, we will contact the professor and ask what
happened and what we can possibly do about it to fix it. To add a complaint go to ‘Complaints’ under
the heading ‘Study’ at www.stress.utwente.nl. After you are logged on you can add your
complaint/remark.

For everything concerning improvement of education, you can send an email to
oc@stress.utwente.nl.

On behalf of the education committee of study association Stress, I wish you lots of success and
pleasure during you study at the University of Twente!

Marjon Pol
Chairman Education Committee of Stress




                                                         Propaedeutic book 2011-2012 IBA      1
                                                          Table of Contents



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   Introduction to Research Methodology 194119120 ........................................................................... 6

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   International Business and Strategy 201000044 ................................................................................ 7

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Colofon .................................................................................................................................................... 8




                                                                                         Propaedeutic book 2011-2012 IBA                         2
                                Study-Association Stress


Dear freshman,

Even though you have only just started your study here in Enschede, the terms ‘exams’ and ‘study
hard’ probably already sound familiar after your first few lectures. However, there is more to
Enschede than just your study, and we are here to help you out.

This guide for your propaedeutics year International Business Administration is offered to you by
Study Association Stress and is composed by our education committee. In this guide you will find
course information, summaries and old practice exams for the courses that you will have to follow in
your first year. These summaries and exams will help you get an insight of what is to be expected of
you.

Besides all that, this guide also offers you a lot of information about Stress. There are numerous sorts
of meaningful and educational activities which you can organize or participate in at Stress. Moreover,
there are the parties, drinks, trips and other fun activities.

If you might encounter trouble within your study or issues related to your student life of which you
would like to have more information about or talk to someone, please don’t hesitate to drop by and
ask a Stress board member or send an email to bestuur@stress.utwente.nl. Usually we can provide
you with the information you need, and if not, we will know the people who can!

Of course we hope to see you at Stress activities, drinks and parties! But more important, we’d like to
invite you to just drop by our room and talk to some people, drink our delicious coffee and lay back
on the sofa. Enschede, the University of Twente, and Stress have a lot to offer you as a student, so
embrace those opportunities! Don’t let the idea of slowing your study down withhold you of making
the best of your time as a student, because honestly: it will be the best time of your life!

We wish you the best of luck in the forthcoming year!

On behalf of the Stress board 2011/2012,

Ivar Dorst
Commissioner educational affairs and vice president
Stress board 2011/2012




                                                          Propaedeutic book 2011-2012 IBA       3
                             International Handbook


student counselor
The student counselorcan help you with any questions or problems regarding your study. If you
hestitate about your study, a course or if you’re affraid you are too much behind and want help with
your study planning , please contant them and they will help you out.


Student counselor: Sanne Spuls (IBA)
E-mail: s.s.spuls@utwente.nl

Assignmentscoördinator: Sietie Zuidema
E-mail: s.zuidema@utwente.nl


Exam Committee
For filing a request regarding your study you have to communicate with the Exam commissie of the
faculty MB. There is a different committee for bachelors and master students. At this webpage;
http://www.mb.utwente.nl/onderwijs/gedeeld/infoexcie.doc, you can fill out an online form with a
request to the exam committee. You will also find usefull information about different requests there.
Ussually for a request to be taken into account be the exam committee, a recommendation from the
student counselor is neccesary.

Bureau of educational affairs(BOZ)
At the bureau of educational affairs you can ask questions about your scedual, about your education
and administrative issues that have to be dealt with by the faculty. They also register your study
progress. You can find them in the building “Capitool” or in the building “Spiegel” in room SP
209/211. They are opened on working days from 13:00 till 16:00.

Educational announcements:
Changes in the study or exam roster will be announcement trough the so called Educational Affairs.
They will publicate their announcement trough publication boards, the internet and possible the
University newspaper. Obviously it is important to keep up to date with these announcements.


The student statute and the Educational- and exam regulation.
You’re obligations aswell as you’re rights have been written in two documents named the Student
statutes and the Educational- and exam regulation. The website of Stress provides links to both of
these websites.


Studying nominal
If you do not study in a nominal fashion, you have to beware of a few things to prevent you of
unpleasant suprises. You can only retake a failed exam once. If you fail the exam twice, you have to
file a special request at the former mentioned exam committee with proper reasoning. Also take in
mind that to participate in an exam, you will need to bring your student-card to the examination
room.

                                                         Propaedeutic book 2011-2012 IBA      4
Make a proper longterm study scedual and don’t postpone courses. Don’t forfit exam oppertunities
and atleast make a proper effort. Do not rely on extra exam oppertunity. Also take in mind that you
will need atleast 40 of the in total 60 EC (European Credits) to be allowed to take second year
courses.

Usefull information
Use your university email adress, on that email adress you will recieve confirmations for your
enrollment for a certain exam, your grades will be email by BOZ and student counselors will contact
you on this email adress. You can also use this email adress to ask questions about certain courses to
the professor of that given course.


For more information about your study or activism please go to:




www.stress.utwente.nl




                                                         Propaedeutic book 2011-2012 IBA      5
Summaries / Exams




           Propaedeutic book 2011-2012 IBA   6
        Introduction to Research Methodology 194119120


Language    English
Description Aims:
            1. To know the general foundations of science and more specifically of the empirical
            social sciences.
            2. To know and understand the `wheel of science¿ and the ability to design a simple
            research project according to the wheel of science.
            3. Able to formulate research questions and hypothesis which form preliminary
            answers to these research questions.
            4. Able to find, use and incorporate in writing previously published social scientific
            studies
            5. to correctly use important concepts like validity and reliability, causality, theory,
            hypothesis, operationalization, measurement, data analysis.
            6. To know various types of research designs like case studies, surveys, and
            experiments
            7. Is able to recognize and able to use simple techniques for testing hypotheses
            (especially elaboration)
            8. Is able to recognize applications of social science research.
            9. To recognize and handle the context of social science research like ethical questions,
            budgetary, political and time constraints.
            Content:
            This is a general introduction in the principals of social scientific research. General
            concepts like 'variables' 'units of analysis' 'explanation' and 'causality' will be
            introduced and discussed. Attention is paid to theory construction; various research
            designs and data analysis. The various elements and the strong and weak aspects of
            various research designs like case studies, surveys, and (quasi-)experimental research
            will be studied too. Ample attention is also paid to the analysis of data when testing
            bivariate and trivariate hypotheses (elabortion). Finding and analyzing relevant
            literature is integral part of this course.

Study        International Business Administration
               Phase B1         Quartile 1A
Instructional Assignment, Lecture, Self-Study
modes
Examformat Written exam
Credits       5.0 EC
Lecturer(s) dr. R.D. Costello; H. van der Kolk (email: h.vanderkolk@utwente.nl); A. Kölln; dr. R. de
              Ruiterir
Required      Earl Babbie. The practice of social research, Belmont: Wadsworth / Thomson, 2004
materials     (12th or later edition); Reader available through Blackboard




Unfortunately,there is no example exam of this course available.


                                                         Propaedeutic book 2011-2012 IBA      7
Summary of the book “The Practice of Social Research” (12th edition) by Babbie

New Questions
Epistemology: The science of knowing. How do we know “facts” and what is meant by a “fact”?
Methodology: The science of finding out (precisely, validly and reliably)
Normative:       Statements of value (waarden, hoe iets zou moeten zijn)
Empricial:       Statements about facts. (Op ervaring berust)
Types of knowledge
    1. Agreement (told by others) such as tradition and authority
    2. “Finding out” (methodology) such as non-scientific - ignoring the rules and scientific –
        following the rules
Overgeneralization can lead to selective observation. For example racial and ethnical prejudices.
A replication (repeating research to confirm or question the findings of an earlier study) can provide
overgeneralization.
Views of reality:
    1. The Premodern View               One side is the right side, all is subjective
    2. The Modern View                  There’s no right or wrong. Just a flower, no ugly or pretty
        flower.
    3. The Postmodern View              Is what we see real? Objective

Deduction:                                        Induction:
   - General patterns lead to predicting specific     - Generalization
       observations                                   - Observations lead to general patterns
   1. All men are mortal                              All of the ice we have examined so far is
   2. Socrates is a man
   3. Therefore, Socrates is mortal                     cold.
                                                        Therefore, all ice is cold.

Research Design
    1. Exploration
        New topic, new ‘event’, many vague questions, no clear concepts etc..
        What, when, where, how, what’s so?
    2. Description
        Describe situations and events, there is no question about a relationship between variables.
        What?
    3. Explanation
        Discovery and reporting of relationships among different aspects of the phenomenon.
        Why?
        - Predictive questions (what will happen?)
        - Remedy selection (which solution works best under the circumstances?)
        - Design questions (how to solve a specific problem?)
        - Evaluation questions (did the solution indeed solve the problem?)
Nomothetic: Present a generalized understanding, key factors, general statements
Idiographic:   Present specific cases fully, multiple reasons

Theory
Early positivism
    - Comte separated his inquiry from religion “religious belief can be replaced with scientific study
        and objectivity”

                                                          Propaedeutic book 2011-2012 IBA      8
          1. < 1300: theological stage
          2. 1300-1800: metaphysical stage, replaced God with philosophical ideas such as nature and
              nature law
          3. Positivism, science would replace religion and metaphysics by basing knowledge on
              observations through the five senses rather than on belief or logic alone.
     - This philosophical system is grounded on the rational (dis)proof of scientific assertions:
          assumes a knowable objective reality
Social Darwinism
     - On the origin of species = evolution through natural selection
     - The Social Darwinist paradigm assumes that we can scientifically discover the rules governing
          social life.
Researchers looking at the social world from a feminist paradigm have called attention to aspects of
social life that other paradigms do not reveal. Feminist theory and research have focused on gender
differences and how they relate to the rest of social organization.
Social scientific theory and research are linked through the two logical methods of deduction and
induction.
Criteria for nomothetic causality
     1. Correlation
     2. Time order
     3. Non spuriousness
False criteria:
          - Complete causation
              A nomothetic explanation is probabilistic and usually incomplete
          - Exceptional cases
              Exceptions do not disprove a causal relationship
          - Majority of cases
              A causal relationship can be true even if they don’t apply in a majority of cases.

Research Design
In both natural and social sciences, the most conventional type of experiment involves three major
pairs of components: (1) independent and dependent variables, (2) pretesting and post-testing, and (3)
experimental and control groups.
In the simplest experimental design, subjects are measured in terms of a dependent variable
(pretesting), exposed to a stimulus representing an independent variable, and then remeasured in
terms of the dependent variable (post-testing). Any differences between the first and last
measurements of the dependent variable are then attributed to the independent variable.

Pre-experimental designs: they do not meet the scientific standards of experimental designs.
One-shot case study:
The researcher measures a single group of subjects on a dependent variable following the
administration of some experimental stimulus. Measure at the end.
One-group Pretest-Posttest Design
Suffers from the possibility that some factor other than the independent variable might cause a
change between the pretest and the posttest. We can’t be sure that the independent variable is what
caused reduction/increase.
Static-group comparison
Research that is based on experimental and control groups but has no pretest.
Posttest-only control group design
Four-group design rules out the interactions between testing and the stimulus, it also provides data for
comparisons that will reveal how much of this interaction has occurred in a classical experiment.


                                                         Propaedeutic book 2011-2012 IBA      9
There are several sources of internal invalidity:
   1. History
   2. Maturation
   3. Testing
   4. Instrumentation
   5. Statistical regression
   6. Selection biases
   7. Experiment mortality
   8. Causal time order
   9. Diffusion or imitation of treatments’
   10. Compensation
   11. Compensatory
   12. Demoralization

The Time Dimension
Cross-sectional studies
Based on observations made at one time. Most exploratory, descriptive and explanatory studies.
Disadvantage: they aim to understand causal processes that occur over time.
Longitudinal studies
Based on observations made at many times. Can be difficult for quantitative studies (large-scale)
    1. Trend studies             general populations
    2. Cohort studies            specific subpopulations (e.g. age group, people married in 1987)
    3. Panel studies             same sample of people each time
        - Offer most complete data on changes. Problem: panel exhaustion
How to design a research project
    1. Start with an initial interest, idea or theoretical expectation, narrow the focus so that
        concepts, methods and procedures are defined.
    2. Specify the meaning of concepts and variables (conceptualization), choose a research
        method (experiment / survey) and specify the population to be studied and how it will be
        sampled.
    3. Operationalize the concepts. Then proceed through observation, data processing, analysis
        and application.

Unobtrusive research
Content analysis
Examination of a class of social artifacts that usually are written documents such as newspaper
editorials. Common units of analysis include elements of communication (words, paragraphs, books)
        - Cluster sampling is appropriate at individual editorials.
        - Stratified sampling (select newspapers systematically)
Content analysis involves coding: transforming raw data into categories based on some conceptual
scheme. Coding may attend to manifest(often used concrete words and terms) and latent(underlying
thoughts of used words) content. Both quantitative and qualitative techniques are appropriate.
Advantage: economy, safety, ability to study processes occurring over a long time.
Disadvantages: limited to recorder communications, issues of reliability and validity
Analyzing existing statistics
        - A variety of government and nongovernment agencies provide aggregate statistical data
             for studying aspects of social life.
        - Problems of validity can often be handled through logical reasoning and replication.
        - Existing statistics often have problems of reliability, so they must be used with caution.
Comparative and historical research
                                                        Propedeusebundel 2011-2012 IBA      10
Used to discover patterns in histories of different cultures.
Qualitative and quantitative techniques can be used.
Ethics and unobtrusive measures
Even unobtrusive measures can raise the possibility of violating subjects’ privacy. But the general
principles of honest observation, analysis, and reporting apply to all research techniques.

Operationalization & measurement
Units of analysis: the what or whom being studied.
        - If you want to know how a group behave as individuals, the unit of analysis is individuals.
        - Individuals, social group, organisation, social interaction, social artefact etc.

Faulty reasoning about units of analysis
Ecological fallacy: erroneously drawing conclusions about individuals solely from the observation of
groups.
Reductionism: Strict limitation of the kinds of concepts to be considered relevant to the
phenomenon under study.
      • If … then ‘relatively more/less often’ …= probabilistic
      • If … then ‘always’ = deterministic
Progression of measurement
      1. Conceptualization:                What are the different meanings and dimensions of concept
         X.
      2. Nominal definition:               Define X
      3. Operational definition:                    How will we measure it?
      4. Measurements in the real world
Direct observables:        Physical characteristics such as sex, height, skin colour
Indirect observables: Characteristics of a person as indicated by answers given
Constructs:                Cannot be observed directly or indirectly such as IQ.
Indicator is an observation that we choose to consider as a reflection of a variable we want to study.
          An indicator of religiosity can be attending religious services
The interchange ability of indicators means that if several different indicators all represent, to some
degree, the same concept, then all of them will behave the same way that the concept would behave
if it were real and could be observed.
The dimension is a specifiable aspect of a concept.
         Religiosity: ritual dimension, belief dimension, knowledge dimension, devotional dimension.
Specification: specify the meaning of the concepts and variables to be studied.
Operationalization: how will we actually measure the variables under study?
         - Attributes
         - Define variables and attributes: nominal, ordinal, interval, ratio
         - How many indicators?
         - Range of variation (100.000 > )
         - Variations between extremes (17-18 years old or 21-65 years old)
         - A note on dimension (what is the area you want to study?)
Levels of measurements
      1. Nominal measures          No order of values.
      2. Ordinal measures          Ordered values, but unknown distances between them
                                   Low – medium - high
      3. Interval measures         Ordered with known distances, no zero-point (Fahrenheit, IQ)
      4. Ratio measures            Ordered, known distances and zero-point (Age)
Criteria of the quality of measures include precision (direction), accuracy, reliability and validity.
Reliability

                                                          Propedeusebundel 2011-2012 IBA       11
The repeatability of your measurement. Is it trustworthy. Reliability is not measured, it is estimated.
         - Test/Retest
         - Split/Half Method (Multiple indicators for the same variables)
         - Using Established Measures
         - Reliability of Research workers
Reliability is not measured, it is estimated by test/retest and internal consistency (>1 question about
the same concept)
Validity
Have you measured the right concept?
 1. Face validity                    Does it looks like it is going to measure what it is supposed to
      measure?
 2. Criterion-related validity       Can one measurement be linked to some other external
      measurements?
 3. Construct validity               Is it correctly related to other theoretically related variables
 4. Content validity                 Does it cover all aspects of the concept?
 5. Extern validity                  Refers to our ability to generalize the results of our study to other
      settings.
(a) “Criterion related validity” is based on a ‘correlational’ argument. A math test, supposed to
measure the concept ‘mathematical abilities’, for example, is supped to ‘predict’ study success when
enrolling in a mathematics bachelor, which is also closely related to ‘mathematical abilities’. Suppose
that a series of math test all show that person A ‘is not having mathematical abilities’ (meaning that
the math test is reliable), but person A is a brilliant student who finishes her mathematics bachelor in
2 years. This is an argument that the math test is not a valid indicator or mathematical abilities
(unless one wants to argue that the bachelor program is not a very good mathematics program). This
is an example of “criterion related validity”. Note that the “math test” “mathematical abilities” and
“finishing the mathematics bachelor” are supposed to be pretty much the same thing.
(b) “Construct validity” is based on a ‘causal’ or ‘theoretical’ argument, in which the variables are
NOT supposed to be ‘pretty much the same thing’. Suppose that we know, from previous research
projects that “companies having large ‘networks’ more easily survive when the economy declines
than companies without these large networks” (just suppose that this is a pretty strong finding in the
literature). And suppose we want to measure the size of the networks of a company in another way.
Now suppose that using this new measure in a test of the hypothesis about network size and
survival, leads to the conclusion that THERE IS NO LONGER a relationship. In that case we might
argue that that is because of the low validity of the new operationalization. Note that ‘network size’
and ‘survival’ are NOT supposed to be pretty much the same thing.
A respondent is a person who provides data for analysis by responding to a survey questionnaire.
Guidelines for Asking Questions:
     1. Choose appropriate questions forms
         Open-ended questions: own answers, while closed-ended questions: easily processed.
     2. Make items clear
     3. Avoid double-barreled questions
     4. Respondents must be competent to answer
     5. Respondents must be willing to answer
     6. Questions should be relevant
     7. Short items are the best
     8. Avoid negative items
     9. Avoid biased items and terms
Questionnaire constructions
     - The format of a questionnaire can influence the quality of data collected.


                                                            Propedeusebundel 2011-2012 IBA        12
   -    A clear format for contingency questions is necessary to ensure that the respondents answer
        all the questions intended for them.
    - The matrix questions is an efficient format for presenting several items sharing the same
        response categories.
    - The order of items in a questionnaire can influence the responses given.
    - Clear instructions are important for getting appropriate responses in a questionnaire.
    - Questionnaires should be pretested before being administered to the study example.
Self administered questionnaires
        - Mail distribution and return
        - Monitoring returns
        - Follow-up mailings
        - Response rates
        - A case study
Interview surveys
        - Role of the survey interviewer must be neutral
        - Interviewers must be carefully trained to be familiar with the questionnaire, follow
             question wording, follow exact question order and record responses exactly.
        - Coordination and control
Online surveys
Must be used with caution because respondents may not be representative of the intended
population.
Telephone survey
        - Can be cheaper and more efficient than face-to-face interviews, permit greater control
             data.
        - Computer-assisted telephone
        - Random-digit dailing (RDD) eliminates potential bias in selecting numbers.
        - Interviewing (CATI) computer-assisted telephone interviewing
        - Response rates in interview
        - Surveys
Comparison different survey methods
The advantages of a self-administered questionnaire over an interview survey:
        - Economy speed
        - Lack of interviewer bias
        - Possibility of anonymity and privacy to encourage candid responses on sensitive issues.
The advantages of an interview survey over a self-administered questionnaire:
        - Fewer incomplete questions
        - Higher completion rates
        - Greater flexibility in terms of sampling and special observations
The advantages of telephone surveys over face-to-face interviews:
        - Saving costs and time
        - More safety for interviewers
        - Interviewers have smaller effect
Online surveys are cheaper than mail surveys, but respondents represent a more general population
can be difficult.
Strengths of survey researches
        - Large amount of data can be collected
        - Change to sample a large population
        - Standardization of the collected data
Weaknesses of survey researches
        - Artificial, superficial, inflexible

                                                        Propedeusebundel 2011-2012 IBA      13
       - Comparative weak on validity and strong on reliability
Strengths of experimental method
       - Because they’re small, they require little money and time.
       - The isolation of the experimental variable’s over time.
Weaknesses of experimental method
       - Artificiality (what happens in an experiment may not reflect what happens in the world)

data collection methods
     Primary versus Secondary
     Obtrusive versus unobtrusive
     Qualitative versus Quantitative
     Operationalization of concepts: validity and reliability

 Unobtrusive research
 Methods of studying social behaviour without effecting it. Such methods can be qualitative or
 quantitative.
       Content analysis
 Examination of a class of social artifacts that usually are written documents such as newspaper
 editorials. Common units of analysis include elements of communication (words, paragraphs, books)
           - Cluster sampling is appropriate at individual editorials.
           - Stratified sampling (select newspapers systematically)
 Content analysis involves coding: transforming raw data into categories based on some conceptual
 scheme. Coding may attend to manifest(often used concrete words and terms) and latent(underlying
 thoughts of used words) content. Both quantitative and qualitative techniques are appropriate.
 Advantage: economy, safety, ability to study processes occurring over a long time, allowing error
 corrections.
 Disadvantages: limited to recorder communications, issues of reliability and validity.
 The process of what Barney Glaser and Anselm Strauss called analytical induction is inductive
 because it begins primarily with observations, and it is analytic because it goes beyond description to
 find patterns and relationships among variables. To avoid errors, they advice to random pick, give at
 least 3 examples in support of every assertion about the data, have your interpretation reviewed by
 others and report whatever inconsistencies you do discover.
       Analyzing existing statistics
- A variety of government and nongovernment agencies provide aggregate statistical data for
     studying aspects of social life.
- Problems of validity can often be handled through logical reasoning and replication.
- Existing statistics often have problems of reliability, so they must be used with caution.
       Comparative and historical research: The examination of societies (or other social units)
 over time and in comparison with another. Used to discover patterns in histories of different
 cultures. It overlaps somewhat with field research, content analysis and analysis of existing statistics.
 Usually qualitative, quantitative not often.
 All official documents don’t offer a direct view of reality because all have human authors and
 subjects.
 Ethics and unobtrusive measures
 Even unobtrusive measures can raise the possibility of violating subjects’ privacy. But the general
 principles of honest observation, analysis, and reporting apply to all research techniques.




                                                            Propedeusebundel 2011-2012 IBA       14
Data analysis
Paul Lazarsfeld and Patricia Kendall used the logic of elaboration model to present hypothetical
tables regarding Samuel Stouffer’s work regarding education and acceptance of induction in the
army.
Partial relationship
Relationship between two variables when examined in a subset of cades defined by a third variable.
Zero-order relationship
The original relationship between two variables, with no test variables controlled for.
    1. Replication
    2. Explanation
    3. Interpretation
    4. Specification
    5. Addition
    6. Replication
Refinements to the paradigm
    1. Suppressor variable: in the elaboration model, a test variable that prevents a genuine
         relationship from appearing at the zero-order level.
    2. Distorter variable: in the elaboration model, a test variable that reverses the direction of a
         zero-order relationship
Ex post facto hypothesis: predicting relationships that have already been observed. The confirming
data is already collected. It is a meaningless construct because there is no way for it to be
disconfirmed.

Evaluation Research
Evaluation research is undertaken for the purpose of determining the impact of some social
intervention. Had it effect?
Topics appropriate for evaluation research:
     1. Needs assessment studies
          Studies that aim to determine the existence and extent of problems, typically among a
          segment.
     2. Cost-benefit studies
          Studies that determine whether the results of a program justify its expense (financial etc.)
     3. Monitoring studies
          Studies that provide a steady flow of information about something of interest e.g. crime
          rates.
Much of evaluation research is referred to as program evaluation or outcome assessment. What
means that the determination of whether a social intervention is producing the intended result.
A careful formulation of the problem, including relevant measurements and criteria of success or
failure, is essential in evaluation research. Evaluators must carefully specify outcomes, measure
experimental context, specify the intervention being studied and the population targeted by the
intervention, and decide whether to use existing measures or device new ones.
Quasi-experimental designs
Nonrigorous inquiries somewhat resembling controlled experiments but lacking key elements such as
pre- and posttesting and/or controlgroups.
     3. Time-series Design
A research design that involves measurements made over some period e.g. Traffic accidents before
and after the speed limit.
     4. Non-equivalent control group
Similar to experimental group, but is not created by random assignment of subjects. Its control group
differs from the experimental group in terms of the dependent variable or variables related to it.
                                                          Propedeusebundel 2011-2012 IBA      15
    5. Multiple Time-Series Designs
Use of more than 1 set of data that where collected over time, as in accident rates over time in
several states or cities, so that comparisons can be made.

Ethical issues
Ethical issues in social research.
    1. Voluntary participation
    2. No harm to the participants
         Not reveal embarrassing information or information that endanger their home lives,
         friendship.
         Informed consent: subjects base their participation on understanding the possible risks.
    3. Confidentiality: the researcher can identify responses, but promise not to do so publicly
         Anonymity: achieved when the researchers and readers of finding cannot identify responses.
    4. Deception
         Debriefing: interviewing subjects about the project experience, especially if there is a
         possibility that they have been damaged by the participation.
    5. Analysis and reporting
    6. Institutional review boards
    7. Professional codes of ethics
Two ethical controversies
Trouble in the Tearoom
Laud Humphrey’s study of “tearoom” supports Stanley Milgram’s study of obedience raise ethical
issues that are debated to this day.
The politics of social research
Social research has a political and ideological dimension. Science is neutral, but scientist are not. So
social research inevitable involves the political beliefs of people outside the research community.
Researchers agree that political orientation should not unduly influence research. But separating
politics and ideology is difficult. Some researchers say that research can and should be an instrument
of social action and change. A shared ideology can affect the way other researchers receive one
research.
The norms of science cannot force individual researchers to give up their personal values. But the
inter subjective character of science provides a guard against scientific findings being the product of
bias only.

Extra
Data matrix:
       - Rows (vertical):units of observation
       - Columns (horizontal): various variables in a study
       - Cell entries: the actual observation




                                                           Propedeusebundel 2011-2012 IBA       16
        Marketing 201000073


Language    English
Description Aims:
            After this course, the student can: * explain the most important elements of the
            organisation¿s environment * explain the basic concepts of marketing and identify
            ways the organization should deal with marketing management issues * evaluate facts
            and developments in marketing and give a critical opinion on these
            Content:
            The objective of this course is that the students learn the basic marketing theory and
            become familiar to the marketing terminology. This knowledge is the basis for further
            learning about specific marketing sub-disciplines and provides the student with the
            basic tools necessary in order to analyze, understand and identify solutions to
            marketing questions and problems. Furthermore the student gets an insight on the
            importance and the role of marketing for the business and the management process.
            Subjects discussed in the course include: The Marketing Concept, Strategic Planning,
            Consumer and Industrial Buying Behavior, Marketing research, Competition, Market
            Positioning and Segmentation, New Product Development, The Marketing Mix, Direct
            and Online Marketing/E-Commerce.

Study         International Business Administration
                Phase B1         Quartile 1A
Instructional Lecture, Self-Study
modes
Examformat Written exam
Credits       5.0 EC
Lecturer(s) dr. E. Constantinides (email: e.constantinides@utwente.nl)
Required      Jim Blythe,Principles & Practice of Marketing, Second Edition Cengage Learning UK
materials

There is a good summary of this course but because of the number of pages we decide not to print
this. You could find the summary on www.stress.utwente.nl  ‘ Study’  Exames and summaries




                                                        Propedeusebundel 2011-2012 IBA      17
Example Exam




               Propedeusebundel 2011-2012 IBA   18
Propedeusebundel 2011-2012 IBA   19
Propedeusebundel 2011-2012 IBA   20
        International Business and Strategy 201000044


Language    English
Description Aims:
            After this course, the student can develop, implement and control a strategy.
            Content:
            What is strategy, strategy development, strategic position, strategic choices, strategy in
            action with focus on international and global organisations.

Study         International Business Administration
                Phase B1         Quartile 1A
Instructional Instruction/Lecture, Lecture, Self-Study
modes
Examformat Written exam
Credits       3.0 EC
Lecturer(s) prof.dr. H.E. Roosendaal (email to: h.e.roosendaal@utwente.nl); dr. K. Zalewska-Kurek
Required      G. Johnson, K. Scholes and R. Whittington (2005), Exploring Corporate Strategy, 8th
materials     edition, Prentice Hall, Harlow (ISBN 978-0-273-71191-9 or 978-0-273-71192-6)




Unfortunately,there is no example exam of this course available.

There is a good summary of this course but because of the number of pages we decide not to print
this. You could find the summary on www.stress.utwente.nl  ‘ Study’  Exames and summaries




                                                         Propedeusebundel 2011-2012 IBA       21
        Accounting and Controlling 201000049


Language    English
Description Aims:
            After this course, the student is familiar with finance, accounting and control theory
            and techniques at an introductory level, and can apply these.
            Content:
            Introduction to balance sheets, profit and loss statement, cash flow statement,
            principles of controlling (incl. balanced scorecard).

Study         International Business Administration
                Phase B1         Quartile 1B
Instructional Lecture, Self-Study
modes
Examformat Written exam
Credits       5.0 EC
Lecturer(s) dr. T. de Schryver (email to: t.deschryver@utwente.nl)
Required      "Accounting in a Business Context", Aidan Berry & Robin Jarvis, 4th Edition, 2006, ISBN
materials     987-1-84480-251-5




Example exam questions can be found on pages 242 to 244 in the book “Accounting in a business
context” (Fourth edition) by Berry & Jarvis. For further summaries look at
www.stress.utwente.nl/study under “exams and summaries”.




                                                         Propedeusebundel 2011-2012 IBA       22
Summary of the book “Accounting in a business context” (4th edition) by Berry & Jarvis.

Chapter 1 Introduction to accounting
Accounting:
     About quantitative information.
     Information is likely to be financial
     Useful for making decisions.
     Influenced by environment:
             o Increase scope to include environmental matters.
             o Challenges techniques that are needed.
Purpose:
     Planning,
     Controlling
     Decision support.
Used by:
     Internal users:
             o Management:
     External users:
             o Owners( shareholders)
                Is it going well.
                Did the management made good use of resources
                How is it going to fare in the future.
             o Lenders
                Did it made sufficient profit( income statement)
                Will the pay us back.
             o Suppliers.
                Does the enterprise stay in business
               Does it expand
             o Customers
                Profitable
                Will it stay in business
             o Employees
                How are we doing
                Do we stay in business
             o Government.
                Taxes
             o General public.
Financial accounting meets the needs of various external users by an annual report, a balance sheet,
an income statement and a cash flow statement
Limitations:
     Only one of the sources of information available to decision makers.
     Related to the past.

Chapter 2 Wealth and the measurement of profit
Income = That amount which an individual can consume and still be as well off at the end of the
period as he or she was at the start of the period.
                                                         Propedeusebundel 2011-2012 IBA      23
Income Wealth
Wealth = static measure and represents a stock at a particular point in time. This stock can change
over time. Hence, the wealth measured at the start of the period will not necessarily be equal to the
wealth measured at the end of the period. This difference between the two is the profit of loss for
that period of time.
Profit= Represents the difference between the wealth at the start and at the end of the period.
Unlike wealth, which is essentially a static measure, profit is a measure of flow that summarizes
activity over a period.
Original cost= The cost of the item at the time of the transaction between the buyer and seller
Historic cost= The cost incurred by the individual or enterprise in acquiring an item measured at the
time of the originating transaction.
Replacement cost: The amount that would have to be paid at today’s price to purchase an item
similar to the existing item.
Economic value= An ideal measure of value and wealth. The value of the expected earnings from
using the item in question discounted at an appropriate rate to give a present-day value.
Net realizable value = an alternative measure of value to economic value. The amount that is likely to
be obtained by selling an item, less any costs incurred in selling.

Chapter 3 The measurement of wealth
The balance sheet= a statement, at one point in time, which shows all the assets owned by the
enterprise and all the amounts owed by the enterprise( liabilities).
The business entity principle= States the transactions, assets and liabilities the relate to the
enterprise are accounted for separately. It applies to all types of enterprise irrespective of the fact
that the enterprise may not be recognized as a separate legal or taxable entity.
The balance sheet
Use to evaluate the financial situation of the enterprise.
Liquidity = refers to the ease with which assets can be converted to cash in the normal course of
business.
Assets
Asset= A resource controlled by an enterprise as a result of past events from which future economic
benefits are expected to flow to the entity.
So it is an asset if:
               o Controlled by the enterprise.
               o A result of past events.
               o Future economic benefits.
               o Expected to flow to the enterprise.
Only if all 4 criteria are met.
Current asset: Is an asset which is either part of the operating cycle of the enterprise or is likely to be
realized in the form of cash within one year.
If it meets one of the 4 following criteria:
      1. It is expected to be realized in, or is intended for sale or consumption in, the entities’ normal
          operating cycle.
      2. It is held primarily for the purpose of being traded.
      3. It is expected to be realized within 12 months of the balance sheet date.
      4. It is cash of cash equivalent.
Non-current asset: Includes everything that does not fall within the category of current assets.
Tangible asset: an asset that can be touched. (something physical)
Intangible asset: No physical evidence.
Fixed asset: An asset that is acquired for the purpose of use within the business and is likely to be
used by the business for a considerable period of time.

                                                             Propedeusebundel 2011-2012 IBA        24
Liabilities:
Liability: A present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow from the enterprise of resources embodying economic benefits.
(that was a business owes)
Current liabilities: Those liabilities filling due for payment with one year.
Owners’ equity:
Owners’ equity :A claim on the assets of the enterprise. It is different from other liabilities in that the
amount cannot necessarily be determined accurately. It can be viewed as a residual claim on the
assets of the enterprise.
The balance sheet
Assets= liabilities + owners’ equity.
The principle of duality = The basis of the double-entry bookkeeping system on which accounting is
based. It states thet every transaction has 2 opposite and equal sides.

Chapter 4 The income statement and the cash flow statement
Income statement
Importance:
     Relates to a period of time
     Summarizes the transactions of the period.
     Tells you if the business if profitable or not
     Mostly used by the owners, sometimes by banks.
Revenue= The gross inflow of economic benefits during the period arising in the course of ordinary
activities of the entity when those inflows result in increases in equity, other than increases relating
to contributions from equity participants.
The realization principle= States that revenue should only be recognized when (1) the earning
process is substantially complete and (2) when the receipt of payment for the goods and services is
reasonably certain.
Revenue should be recognized when:
     Significant risks and rewards of ownership have been transferred to the buyer.
     Managerial involvement and control have passed.
     The amount of revenue can be measured reliably.
     It is probable that economic benefits will flow to the enterprise.
     The costs of the transaction, including future costs, can be measured reliably.
The matching principle: We must match the revenue earned during a period with the expenses
incurred in earning that revenue.
Expenses= An expired cost, a cost from which all benefits has been extracted during an accounting
period. ( Cost= a money sacrifice or the incurring of a liability in the pursuit of the business objective)
The expenses of goods for personal use should not be seen as an expense of the business but need to
be separated out and shown as withdrawals of the owner’s capital.
In which period is the cost an expense?
Cost of this year are expenses of this year:
The item is acquired during a year and consumed during that same year.
Cost of earlier years are expenses of this year:
      Wholly expenses of this year:
          E.g. Stocks of goods in a shop at the end of the year.
          The cost of buying those goods has been incurred in the year just ended but at the year end
          the benefit has nog expired. They are assets at the year end. In the next year they will be
          sold and thus will become expenses of the next year.
      Partly expenses of this year:

                                                             Propedeusebundel 2011-2012 IBA        25
         The costs are incurred at a point in time but the benefits are expected to accrue over a
         number of years.
Cost of this year are expenses of subsequent years:
Costs in curred in the current period may be expenses of future periods.(See page 78)
The income statement
Purpose: to measure the profit of loss for the period.
Done by: summarizing the revenues for the period, matching the expenses incurred in earning those
revenues and subtracting the expenses from the revenues to arrive at the profit/loss.
R-E=p ( Revenue- expenses=profit)

Gross profit= Sales – cost of goods sold.
Net profit= Gross profit- operating costs, administrative costs and other charges.

Chapter 5 Introduction to the work sheet
Application of the principle of duality : If we increase our assets , we must have or increased our
liabilities, made profit, increased our owner’s equity, decreased another asset.
The worksheet
Title: Worksheet of (Name company) at (Date)
Colums
First 2 columns: the identification and description of the transaction. (Date & Event)
3 tm 10 : Assets
3+4 Colum: Non-current assets ( Everything that are not current assets)
3. Straight line
4. Reducing balance
5 t/m 10 Column:Current assets ( If 1.Controlled –not necessarily owned. 2.Arising from a past
economic event. 3. Providing future economic benefits. 4. The benefits are expected to flow to the
eterprise, Only if all 4 are true)
5. Current assets (other)
6. Amounts receivables/prepaids
7. Raw
8. WIP(Work in progress)
9. Finished goods
10. Cash
11 t/m 15 : Liabilities + Equity +Retained profit
11+12: Current Liabilities
11: Current Liabilities (other)
12 Accruals/Payables
13 Non current Liabilities
14 Equity
15 Revenue- Expenses
16: Control : (Liabilities + Equity +Retained profit )- Assets = 0
Liabilities: IF
1.do they give a claim on a part of the organization?
2.at fixed periods?
3.For known amounts of money?

Chapter 6 Inventory
Disadvantages of high levels of inventory:
     Money tied up in products
     Costs for space

                                                          Propedeusebundel 2011-2012 IBA      26
      If necessary: loan to buy the inventory.
Therefore JIT (Just in time) might be a good solution
Inventory =
      products held for sale in the ordinary course of business.
      Or products in the process of production
      Or products in the form of materials or supplies to be consumed in the production process.
      So you have to have the intention to sell it or use it.
Work in progress: Products that are at an intermediate stage of completion.
Finished goods: Goods that have been through the complete production cycle and are ready for sale.
The nature of business has an impact on the type of inventory held.
Cost of goods sold = (Opening inventory ( at the start of the year) + purchases)- Closing inventory(at
the end of the year)
Net profit= Operating cash flow +/- change in inventory
Operating cash flow = the cash in and out flows arising from the trading activities of the enterprise.
Net realizable value= the estimated proceeds from the sale of items – the cost of selling
The valuation rule= inventory should be valued at the lower of cast and net realizable value.
The prudence concept = Profits are not anticipated and revenue is nor recognized until it’s realization
is reasonably curtain. Provision is made for all potential losses.
Inventory approaches’:
First in, first out:
First goods bought are the first sold.
Inventory hold at the end of the period is assumed to be purchases recently.
First in, Last out:
The last goods bought are the first sold.
Charges the latest price from suppliers against revenues, leaves the closing inventory at a value
based on outdated prices.
Average cost:
Compromise between First in, first out & First in, Last out.
No assumptions, in which way goods are used.
The average prices of the inventory are used.

Chapter 7 Amounts receivable and payable
Trade receivables: Money owed TO the business for the supply of goods. Also sales on credit terms,
the payment will be received later. Is a current asset
Prepayments: payments in advance.
Important: Has the benefit been used up or is there still some future to be obtained.
Used op: expense
Future benefits: asset
Trade payables: Amount owing at a point in time TO e.g. a supplier, amount of which is known how
much.
Accruals: Amount owing at a point in time TO e.g. a supplier, amount of which is NOT known how
much.

Chapter 8 Noncurrent assets, fixed assets and deprecation
Recap of previous chapters:
Asset = A resource controlled by the enterprise arising from a past even from which economic
benefits in the future are expected to flow to the entity.
Current assets: - Part of the operating cycle
                 - Likely to be realized in cash within 1 year.
Fixed asset: Acquired for the purpose of use within the business and used for a considerable time.
                                                          Propedeusebundel 2011-2012 IBA       27
Income= Amount which a individual can consume and still be as well of at the end as at the start.
Differences between current and noncurrent assets:
                      - Intention
                      - Nature
New:
Materiality: An item that can be said to be material if its non- disclosure would lead to the accounts
being misleading in some way.
The costs of a non-current assets: If there has been an enhancement of the potential future benefits
the cost should be added to the cost of the asset. If not the costs are an expense.
Depreciation= the systematic allocation of the depreciable amount of an assets over its useful life.
We can only guess what the useful life will be.
Depreciable amount= the cost of an asset – residual value.
Why do we do this: To match the revenue with the expenses.
Carruing amount= the amount at which an asset is recognized after deducting any accumulated
depreciation
Two was to depreciated:
1. The straight line method
Assumption: The asset usage is equal for all periods of its usefull life
Depreciation = (Cost – residual value) / useful life
Preferred method
2. Reducing balance method:
Assumption: The asset declines more in the earlier years of the assets life than in the later years.
Rate of depreciation = 1-
Use if the assets are infected by the times used.
Sales of fixed asset: affected by the way of deprecation.

Chapter 9 Financing an business structures
The finance used and the period of the finance should be matched to the period for which it is
required and the purpose for which it is used.
Short term finance( less than a year):
Trade credit : The possibility given by e.g. the supplier to pay after the goods have been delivered.
Depends on
     Credit worthiness of the business
     Importance to supplier.
Few costs, no security required.
Factoring company: Companies that specialize in providing a company a service for the collection of
payments from costumers,
Costs include an interest charge and a debt management charge.
Finance is secured on the receivables.
Bank overdraft
To possibility to use money from the bank. Interest only charged if the money is used.
Some form of security.
Medium term finance:
Loan: Should have a fixed purpose and period.
        Repayment dates
        Interest an set-up fees
        Secured on assets
Hire Purchase: A finance company buys the assets and hires is to the business,
        Fixed period. If fully paid for the asset is of the hiring company.

                                                            Propedeusebundel 2011-2012 IBA     28
Leasing: Person can use the asset for a period of time in exchange for payment
         Interest charges
Two forms of leasing:
1. An operating asset: rental agreement  asset
2. A finance lease: financing agreement
Long term finance:
Debt finance: source of long-term finance that is not equity finance.
         Fixed period
         Higher interest rates
Equity finance:
Two types.
1. Use of retained profit : use in sole proprietorship and partnership.
2. Contributed capital : From shares
Two types of shares:
1. Ordinary shares: get dividend, buy a share of the company but are not a part of the management.
2. Preference shares: get a fixed dividend but are less risky.

Chapter 10 Cash flow statements
 The Cash flow statement.
Need: Where does the money come from and where does it go to?
      Regular cash flow
      One off cash flow
Types
Cash inflow:
     Money generated from trading,
     Money from new share issues or other forms of long-term finance.
     Money received from the sale of fixed assets.
Cash outflow:
     Money used to buy new fixed assets
     Money to pay tax and dividends
     Money to repay debenture holders or other providers of lon-term capital.
Subdivisions in the cash flow are made to provide information about the source and nature of the
cash flow.
Cash flows:      Cash inflows = increases in cash
                 Cash outflows = decreases in cash
        Net cash flow consist of the net effect of cash inflows and cash outflows.
Operating activities = The principal revenue-producing activities of the entity and other activities that
are not investing of financing activities.
Increases and decreases in inventory:
An increase in the level of inventory must be subtracted from the profit to arrive at the net cash
from operations.
A decrease in the level of inventory must be added back to the profit to arrive at the net cash from
operations.
Increases and decreases in receivables and prepayments:
An increase in the level of receivables and prepayments must be subtracted from the profit to arrive
at the net cash from operations.
A decrease in the level of receivables and prepayments must be added back to the profit to arrive at
the net cash from operations.
Increases and decreases in payables and accruals:

                                                           Propedeusebundel 2011-2012 IBA        29
An decrease in the level of in payables and accruals must be subtracted from the profit to arrive at
the net cash from operations.
A increase in the level of in payables and accruals must be added back to the profit to arrive at the
net cash from operations.
Depreciation and profits and losses on sales of fixed assets
The charge for depreciation for the year must be added to the profit to arrive at the cash from
operations.
A profit on the sale of fixed assets should be subtracted from the profit to arrive at the net cash from
operations.
A loss on the sale of fixed assets should be added to the profit to arrive at the net cash from
operations.
Investing activities:
Investments in non-current assets and sales of that category of assets.
Financing activities:
Money raised by issuing shares, debentures, loans etc.
Money used to redeem shares of debentures or pay back long term debt.
Anything related to the long-term financing of the business.

Chapter 11 Financial accounts & company accounts
Traditional approach of accounting:
Use a T account. Assets are shown as debit an liabilities as credit.
At the end of the period adjustments must be made:
                    - Depreciation
                    - Bad debts
                    - Accruals
                    - Pre payments
Final accounts:
For the income statement use the columns of revenue & expense
For the balance sheet use the final line.
Forms of organization:
     The sole proprietorship:
             o One owner
             o No formal guidelines for the format of accounts

       Limited companies:
            o Separate legal entity.
            o Shareholders
            o Listed or not listed
            o Companies account should consist :
                    Balance sheet
                    Income statement
                    Directors report
                    Auditors report

Chapter 12 Financial statement analysis
 Different users have different needs.
Investor group( equity investors):
      (Future) profitability
      Management efficiency
      Return on the investment
                                                           Propedeusebundel 2011-2012 IBA       30
       Risk being taken
       Returns to owners
Preference shareholders:
       (Future) profitability
       Net realizable value of the assets
       Extent by which their dividends are covered by profit.
Lenders:
       Liquidity
       Net realizable value of the assets
       Profitability and future growth
       Risk
       Security
Employees:
       Profitability
       Liquidity
Auditors:
       Trends in sale
       Variations from norms
       Accounting policies
Profitability:
Can be found in the income statement
Look at if:
Is it more profitable than last year.
Is it more profitable than a similar business
Related to :
Past for evaluation
Future for prediction
Liquidity and financial risk:
Balance sheet
Financial risk involves long-term an d short-term solvency
Requirement and norms differ widely from industry to industry.
Context that needs to be taken into account:
       Size
       Riskiness of the business
       The economical, social and political environment
       The industry trends, effects of changes in technology
Other sources for information
       Government statistics
       Trade journals
       Financial press
       Databases
       Specialist agencies
Internal
       Annual report
       Accounts
Context of the annual report:
       Main statement and explanatory notes:
             o Income statement ( revenue & expenses)
             o Cash flow statement ( origin of the cash)
                                                       Propedeusebundel 2011-2012 IBA   31
             o Balance sheet ( position one point in time)
             o Notes to the accountant
             o The accounting policies statement
      Subsidiary statement:
             o Statement of total recognized gains and losses
             o Reconciliation of movement in shareholder finds
      Supplementary information:
             o Chairman’s statement
             o Review of operations
             o Directors report
             o Operating and financial review
             o Auditors report
             o Statement of corporate governance
Techniques of analysis.
Comparison of financial statements over time
Comparison of the rate and direction of change over time.
Absolute amount or percentages
Trend analysis
Time periods of 2/3 yers.
Makes the results easier to understand and interpret
The choice of an appropriate base year is vital.
If the base year is not typical the resultant analysis will at best be extremely difficult and at worst
actually misleading.
Choose the base year and then plot the trend in sales from there on.
Index number trends
Choose a base year. Set that base year to 100 and express the other year in terms of that base year.
Percentage changes
Identify the percentage change from year to year and examine the trend in this.
Common size statements
Expresses items in the balance sheet as percentages of the balance sheet total

Chapter 13 Internal users and internal information
For the management the annual account are not sufficient ,
Because:
     Are summarized ( no details)
     Only once a year
So the need:
     More detailed information
     Up to date information.
     Frequent information
     Decision-relevant information.
External user information needs:
     Taxation authorities
     Enterprise’s bankers.
            o Two categories:
            o Routine monitoring.
            o Future needs ( cash flow statement, income statement)
Impacts of organizational size:
     More complex  more information needed.

                                                           Propedeusebundel 2011-2012 IBA       32
     More information available.
     Not involved in day-to-day businesses.
The need of information should be balanced against costs.
Nature of the products can influence what information is needed
Structure influences which information is needed.

Chapter 21 Management of working capital
Working capital = difference between assets and current liabilities measured in monetary terms.
The resources employed in the management of working capital should reflect the needs of the
business.
Liquidity= the ability of the business to meet debt when they fall due.
It is wise to keep the investment in working capital to a minimum but invest sufficiently in current
assets to keep day-to-day trading efficiently.
Cost of working capital = direct costs + opportunity costs.
direct costs: The cost of the capital invested.
opportunity costs: returns for gone by investing in working capital rather tan some alternative
investment opportunity.
Overtrading= when a business had expanded its turnover to a level not supported by its investments
in working capital.
Working capital cycle: the period of time from the investment into current assets to the inflow of
cash derived from the investment.
Working capital cycle:

Raw materials turnover:


Minus payables turnover


Plus WIP Turnover:


Plus finished goods turnover


Plus receivables turnover :

= Working capital cycle in days.
How longer the working capital cycle the greater the investment.
Ways to reduce the working capital cycle.
    Reduce the time given to customers to pay their debts
       ( Risk: The find another supplier with longer terms)
    Reduce the inventory
       (Risk: Items are out of stock)
    Delay payments to suppliers
       (Risk: loss of good will of supplier)

Trade credit:
Some suppliers offer discounts for earlier payment. It is wise to calculate if this early payment leads
to greater savings than when paying in a longer term.
Trade receivables:
                                                           Propedeusebundel 2011-2012 IBA        33
The reach the optimum level of trade receivables you should keep in mind the following:
     Make a tradeoff between:
             o Extending credit in order to increase sales and profit.
             o The opportunity costs and administrations costs of carrying increased receivables.
     The level of risk a business is prepared to extend to individual customers.
     the investment in debt collection management,
The debt collection policies:
The overall debt collection policy of a firm should be set where the margin between the benefits
from the profits generate from the sales and the administrative and other costs incurred in debt
collection is at its greatest.
Credit control:
Important is the initial investigation of potential credit customers and the continuing control of
outstanding accounts. Main points to consider:
              References to see a potential customer’s financial standing.
              The credit rating of the customer.
              Adopt a conservative credit policy
              Look at the annual accounts.
Total credit control:
What is the total level of credit to be maintained or expand.
Main points to consider:
     Extra sales that a more generous credit policy would stimulate.
     The profitability of extra sales
     The extra length of the average debt collection period
     The required rate of return on the investment in additional receivables.
     The increase of bad debts
     Additional administration costs.
Average debt collection period can be measured by the receivables turnover date:


Inventory
Important definitions:
Stock-outs= when there is a requirement for an item of inventory but none is available.
Lead time= The time which elapses between the placing of an order for inventory and the delivery.
Buffer inventory = The level of inventory held in case of unexpected high demand.
The order quantity= the number of units of an item in one order.
The reorder quantity= the balance of units remaining in inventory at which will be triggered an order
for additional inventory.
The reasons for holding inventory:
     As a buffer for unusual high demand.
     To take advantage of quantity discounts by buying in bulk.
     The delay in production caused by a lack of materials in kept to a minimum.
     To make sure that they don’t have to purchase at high prices.
     The loss of customer goodwill from not being able to meet demand.
     To take advantage of seasonal and other price fluctuations.
Inventory cost:
4 groups
The cost of the inventory self:
     Raw material
     Direct labour

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     Associated indirect costs
Holding costs:
     Capital tied up in inventory
     Warehousing and handling costs
     Deterioration costs
     Obsolescence
     Insurance
     Pilferage
Ordering cots:
     Costs of raising orders
     Delivery costs
Stock out costs:
     Loss of sales
     Loss of customers ‘goodwill
     Cost of low production
     Extra cost if inventory should be bought at higher prices.
Inventory control
Achieved y collecting for each inventory item, details of the amounts used in a period, an exceptional
busy period and an exceptionally slack period.
Also the delivery times of the supplier should be analysed.
Reorder level = maximum delivery period * maximum usage.
Economic order quantity (Economic batch quantity)
= the order quantity for an item of inventory which minimizes costs.
Assumptions made
     Demand for the inventory is certain, constant and continuous
     The supply time also
     No stock-outs are permitted
     All prices are constant and certain
     The cost of holding inventory us proportional to the quantity of inventory held.
Q= the reorder quantity
C= the cost of placing an order
D= the usage of units
H= holding costs


Q=
JIT (Just in time)
Aim to have 0 inventory.
Highly depending on the supplier, so good relationships are important.
Relatively few suppliers. Supplier is an extension of the manufacturing process.
Cash management
Reasons for holding cash
      The transaction motive
         To be able to meet payments when they fall due.
      The precautionary motive
         Cash should be kept by a business in order to meet any unexpected outgoings.
      The speculative motive
         Cash should be kept to take advantage of any unexpected beneficial opportunity.

                                                         Propedeusebundel 2011-2012 IBA       35
Cost of holding cash  the opportunity cost = the profit foregone by note employing the cash
elsewhere.
Proportion of cash held =




                                                        Propedeusebundel 2011-2012 IBA     36
       Purchasing 201000048


Language      English
Study         International Business Administration
                Phase B1         Quartile 1B
Instructional Lecture, Self-Study
modes
Examformat Written exam
Credits       3.0 EC
Lecturer(s) prof.dr. J. Telgen (email to: j.telgen@utwente.nl)
Required      reader
materials



Unfortunately,there is no example exam of this course available.

There is a good summary of this course but because of the number of pages we decide not to print
this. You could find the summary on www.stress.utwente.nl  ‘ Study’  Exames and summaries




                                                         Propedeusebundel 2011-2012 IBA     37
        Technology Development & Production Management 201000047


Language    English
Description Aims:
            After this course the student has a basic understanding on Technology Development
            and Production Management
            Content:
            Part 1, development: new product development, cross functional approach, technology
            planning of the firm. Results in: product designed
            Part 2, production: production systems, factory location, inbound logistics. Results in:
            product can be produced.

Study         International Business Administration
                Phase B1          Quartile 1B
Instructional Assignment, Lecture, Self-Study
modes
Examformat Written exam
Credits       5.0 EC
Lecturer(s) prof.dr. H. Schiele (email to: h.schiele@utwente.nl); prof.dr. J. Telgen; drs. J. Veldman
Required      Schilling “Strategic Management of Technological Innovation”; Reader
materials



Unfortunately,there is no example exam of this course available.

There is a good summary of this course but because of the number of pages we decide not to print
this. You could find the summary on www.stress.utwente.nl  ‘ Study’  Exames and summaries




                                                          Propedeusebundel 2011-2012 IBA       38
        Economics I 201000052


Language    English
Description Aims:
            After this course the student will be familiar with the basic elements of economic
            theory. He/she can apply economic tools independently to simple practical problems,
            including ones that have not been discussed during the course.
            Content:
            This course deals with the basic principles of a modern market economy and the role of
            firms within the economy. Course fundamentals include the way markets work, the
            concepts of efficiency and welfare, market failure, government intervention and non-
            market failure. More specific topics include the costs of production, perfect
            competition, elasticity, price ceilings and price floors, producer surplus, consumer
            surplus, deadweight loss, monopoly, oligopoly, monopolistic competition, externalities,
            public goods, common resources, and taxation.

Study         International Business Administration
                Phase B1         Quartile 2A
Instructional Instruction/Lecture, Lecture, Project, Self-Study
modes
Examformat Written exam
Credits       5.0 EC
Lecturer(s) mr.dr. G.J. Hospers (email to: g.j.hospers@utwente.nl)
Required      Economics for Business (3rd edition), David Begg and Damina Ward, McGraw Hill, 2009
materials     The Travels of a T-Shirt in a Global Economy, Pietra Rivoli, Wiley, 2005




Unfortunately,there is no example exam of this course available.For further summaries look at
www.stress.utwente.nl/study under “exams and summaries”.




                                                        Propedeusebundel 2011-2012 IBA      39
Summaryof the book “Economics for business” (3rd edition) by Begg & Ward

Chapter 1
Economics is the study of how society resolves the problem of scarcity.
We have infinite wants but finite resources to fulfill these wishes.
Economic factor resources: land, labor, capital and enterprise.
The production possibility frontier shows the maximum number of products that can be produced by
an economy with a given amount of resources.                Figure 1.1, page 6
Opportunity costs are the benefits/value/costs of the next best alternative.
Microeconomics focuses upon the economic decision making of individuals and firms.
Macroeconomics examines the economy as a whole. Price level, unemployment, growth etc.
In a planned economy, the government decides how resources are allocated to the production of
particular products. In a market economy, the government plays no role in allocating resources.
Instead, markets allocate resources to the production of various products. In a mixed economy, the
government and the private sector jointly solve economic problems.
GDP/Gross Domestic Product (Bruto Nationaal Product) is the value of all produced goods and
services in a specific period (year) of a country.
Positive economic studies objective or scientific explanations of how the economy works.
 What level of production will maximize the firm’s profits?
Normative economics offers recommendations based on personal value judgments.
 Firms should maximize profits
Time series economic data are the measurements of one variable at different points in time.
Cross-sectional economic data are the measurement of one variable at the same point in time, but
across a number of firms or individuals.
     - Combination: panel data
Positive relationship: both variables increase together; if X increases, Y also increases
Negative relationship: one variable increases, one decreases; X increases, Y decreases

Chapter 2
Common objectives for firms are: maximize the amount of profit made by the firm, maximize the
market share for the firm’s product and maximize the firm’s total revenues.
The demand curve illustrates the relationship between price and quantity demanded of a particular
product. Horizontal: Quantity, vertical: price.
Factors influencing demand
     1. Price of substitutes and complements
Substitutes: rival products  BMW for Mercedes
Complements: products that are purchased jointly  Cars and petrol, Printers and ink cartridges
If the price of cars increases, less cars will be demanded and less petrol will also be demanded.
     2. Consumer income
Inferior goods are products that we stop purchasing once our incomes rises and we move to more
normal types of goods.
     3. Tastes and preferences
Advertising provides consumers with information about products and thus plays a very valuable
informational role. Next to that, advertising is about trying to change consumers’ tastes and
preferences. We buy a product because we believe it says something positive about who we are.
     4. Price expectations
Beliefs about how prices in the future will differ from prices today. The law of demand states that
ceteris paribus (all other things being equal) as the price of a product falls, more will be demanded.



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Luxury have a positive relationship between price and quantity demanded. They are exclusive and that
is what people pay for. If a luxury item becomes cheap and not exclusive, consumers are less willing to
buy it.
Elasticity
Determents of elasticity are: number of substitutes, time and definition of the market
Elastic                                                                        Luxury goods
Elastic                                    E < -1 en E > 1
Perfectly elastic                          E<-∞E>∞
Inelastic                                                                      Coca Cola, salt
Perfectly inelastic                        E=0
Inelastic (relative)                       -1 < E < 0 en 0 < E < 1
Unit elasticity                            E = -1 en E = 1
If the percentage change in demand > the percentage change in price, then demand is said to be
elastic. If the percentage change in demand < the percentage change in price, demand is said to be
inelastic.
Income elasticity ( Yԑ ) =         percentage change demand / percentage change income
Cross-price elasticity ( XYԑ ) = percentage demand product X / percentage change price product Y
Companies use the concept of elasticity when setting prices. If demand is elastic, reducing prices 
rise in total revenue. When demand is inelastic, raising prices  increase in total revenue.
Cost-plus pricing: adding a mark-up to the costs of producing.
Does not take demand into account. We need to consider demand theory when setting prices.
Consumer surplus: difference between the price charges and how much a consumer would have been
willing to pay. The difference represents lost profits.
Product life cycle             Demand                         Price
Launch                         Price inelastic                High price
Growth                         Increase of elasticity         Cutting prices
Maturity                       Price elasticity               Little control, lowest possible level
Decline                        Inelastic                      Price stability, price rises might occur
Price discrimination
For price discrimination to be successful, 3 conditions must exist: the firm must have control over its
prices, be capable of identifying different groups of consumers who are willing to pay different prices
and resale of the good/service must be prohibited.
First-degree price discrimination: look for signals or cues of a consumer’s willingness to pay.
      Type of car parked or items worn.
Second-degree price discrimination: consumers are charges according to the number of units they buy.
Third-degree price discrimination: each consumer group is charges a different price. (65+ discount)

Chapter 3
If a firm needs to increase its level of output in the short run, it is easy to employ more workers. we
assume that capital is fixed and labor is variable. Only in the long run are all factors of production seen
to be variable.
The nature of productivity and costs in the long run
In the long run all factors of production are variable. costs are no longer determined by the law of
diminishing returns. Instead, they are related to economies of scale.
Returns to scale measures the change in output for a given change in the inputs.
Long-run average costs will eventually begin to rise; companies increase in size and become more
difficult to control and co-ordinate.  diseconomies of scale or bureaucracy
Minimum efficient scale (MES) is the output level at which long-run costs are at a minimum.
Costs
Fixed costs: remain the same whatever the level of output. (average: Fixed costs / Q)

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Variable costs: vary with the amount of production. (average: Variable costs / Q)
Marginal costs: change in total costs / change in output
Total product is the total output produced by a firm’s workers.
Marginal product is the addition to total product after employing one more unit of factor input.
    - ‘one more’
Task specification occurs when various activities of a production process are broken down into their
separate components. Each worker specializes in one particular tasks and becomes expert.
Law of diminishing return: as more labor is added to a fixed factor of production usually capital, then at
some point the returns to the variable factor will diminish.
In order to increase efficiency, some firms try to get as near as possible to its costs curve.

Chapter 4
A supply curve depicts a positive relationship between the price of a product and firms’ willingness to
supply the product.
The market equilibrium (evenwicht) occurs at the price where consumers’ willingness to demand is
exactly equal to firm’s willingness to supply.
     - Equilibrium is unique and ceteris paribus
     - Any other combination of price and quantity: disequilibria
     - Disequilibrium  negotiations and price changes  push market towards equilibrium
In situations of disequilibria, at the current price the willingness to demand will differ from the
willingness to supply. Quantity supplies ≠ Quantity demanded
             Demand shifts to the right                              Demand shifts to the left
      Normal goods: income ↑                                Normal goods: income ↓
      Inferior goods: income ↓                              Inferior goods: income ↑
      Increase in price of substitute                       Decrease in price of substitute
      Reduction in price of a complement                    Increase price of a complement
      Tastes and preferences for good ↑                     Tastes and preferences for good ↓

               Supply shifts to the right                         Supply shifts to the left
      More firms enter the market                        If firms exit the market
      Cost of input (labor) becomes cheaper              Cost of input becomes expensive
      Technical development  productivity ↑
If the current price is above the equilibrium, demand will exceeds demand and the market will show a
surplus (overschot).
When the current price is below the equilibrium, demand will exceed supply and the market will show
a shortage. Price ↑ because consumers seek out scarce supply and eventually the market will return
to its equilibrium.
A separating equilibrium is where a market splits into two clearly identifiable sub-markets with
separate supply and demand.  good and bad cars are sold separately
A pooling equilibrium is a market where demand and supply for good and poor products pool into one
demand and one supply.  good and bad cars are sold together
Suppliers of good-quality cars under a pooling equilibrium are disadvantaged because they are unable to
differentiate their products from the bad offerings. They need to create separating equilibrium.
Gresham’s Law states that an increasing supply of bad products will drive out good products from the
market.
Input markets are where factor inputs, such as land, labor, capital or enterprise are traded.
     - Understanding of how the market will develop is important.

Chapter 5
Average revenue is the average price charged by the firm. PxQ /Q

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Marginal revenue is the change in revenue from selling one more unit.
Average revenue (=PxQ /Q) and is therefore the same line as the demand line.
Profit maximization is the output level at which the firm generates the highest profit.
    - MC = MR, strictly and mathematically correct
Marginal profit is the profit made on the last unit and I equal to the MR-MC.
A price elastic demand line is horizontal. The consequences of a perfectly elastic demand line are that
average revenue and marginal revenue are also horizontal.
Firms do not increase output because prices rises; rather, they increases output because the marginal
revenue has risen above marginal costs.
Perfect competition is a highly competitive market.  Financial and commodity markets
       Many buyers and sellers                            No barrier to exit or entry
       Firms have no market power                         Perfect information
       Homogeneous products
    - The marginal revenue line is horizontal and equal to the average revenue line, MR=AR


If a firm accepts the market price, it is a price taker. As a price taker, the demand curve for a perfectly
competitive firm is perfectly elastic.

Whether we begin with a supernormal profit or a supernormal loss, firms in perfect competition will
always end up earning only normal profits in the long run.
The perfectly competitive firm is operating at the minimum point of the average cost curve. The firm is
productively efficient as it is producing at least cost.
Allocative efficiency occurs when price = marginal cost, or P=M
Normal economic profits: equal to the average rate of return which can be gained in the economy.
Supernormal profits: financial returns greater than normal profits.  attracts new entrants
Accounting profits = revenues - raw material costs, wages and depreciation.
Economic profits = revenues – costs of all factors of production
Monopoly: Dominant firm (>25% market control) in the market with few rivals.  Microsoft
     Licenses
     Patents
     Natural monopoly: scale economies lead to only one firm in the market
    - A monopoly has no incentive to improve efficiency, as it has no competition.

                           Perfect competition                  Monopoly
                                                         Long-term profit position
                                MR = AR                          MR ≠ AR
                         Max profit = MCpc = MRpc        Max profit = MCmp = MRmp
                                 P = MC                           P > MC

Creative destruction: a new entrant outcompetes an existing company by being innovative.
Rent-seeking behavior: the pursuit of supernormal profits.
Imperfect competition is a highly competitive market where firms may use product differentiation.
Oligopoly is a market that consists of a small number of large players.  supermarket, banking


Chapter 6
In perfect competition, the behavior of one firm will not influence its rivals. Each firm is a price taker.
There is no strategic interdependence.
Strategic interdependence exists when the actions of one firm will have implications for its rivals.
                                                            Propedeusebundel 2011-2012 IBA         43
Oligopoly is a marketplace with a small number of large players, such as banking, supermarkets and
the media.  has strategic interdependence
6.2      Monopolistic competition
A highly competitive market where firms may use product differentiation.
 Bars can be differentiated by location
Because each supplier offers a similar but not identical product, each supplier does not face a perfectly
elastic (horizontal) demand line, as they would in perfect competition. Each monopolistic firm can
influence its market share to some extent by changing its price relative to its rivals.
Excess capacity
The monopolistic long-run equilibrium has some important features.
     1. The tangency equilibrium (occurs when the firm’s average revenue line touches the firm’s
         average total cost line) results in average costs being above minimum average costs.
     2. Delivers greater choice for consumers that have varied tasted and preferences.
Market power
In long-run equilibrium, firms in monopolistic competition have some monopoly power because price
exceeds marginal costs. P>MC, always.
6.3      Oligopoly theory: natural and strategic entry barriers
Firms in oligopolies are price-setters as opposed to price-takers.
The N-firm concentration ratio, CR, is a measure of the industry output controlled by the industry’s N
largest firm.
Natural entry barriers
Exogeneous costs of the firm are outside its control. These costs are not uncontrollable; rather, the firm
does not influence the price of labor, machines, raw materials and the production technology used.
In order to enter and compete in the industry it is essential to build a plant that is at least as big as the
MES (minimum efficient scale). In oligopolies, the MES is large compared to the overall market.
      Big MES, high entry barrier
Strategic entry barriers
How do you prevent entry? – Change cost characteristics of the industry and make MES bigger.
= Endogenize the cost function. Then the firms inside the industry have strategically influenced the
level and nature of costs.
A successful brand may cost $100 million or more to buy. Therefore the entry barrier is not the cost of
the factory but the $100 million brand. If the entrant decides to exit after spending $100 on brand
development, the asset has no value to any other business and so it is a sunk cost.
The existence of sunk costs is important because without them markets are contestable
= a market where firms can enter and exit a market freely.
6.4      Oligopoly theory: competition among the big ones
     1. Cartel: all firms cooperate and act as one monopolist, this generates highest profit.
     2. Strategic interdependence: price war.
Cartels fail: large number of firms, product differentiation and instability in demand and costs.
The penalty for being found guilty of price fixing: financial penalties, imprisonment for managers.
 Legal example of price fixing: OPEC
6.5      Competition among rivals
A kinked demand curve shows that price rises won’t be matched by rivals, but reductions will be.
     - Above the price of X demand is price elastic and below demand is inelastic.
Positive: based on expected response from rivals, predicts stability in pricing because of strategic
interdependence.
Negative: does not explain how the stable price is arrived at the first place, it merely explains the
stability once the price is set.
Game theory seeks to understand whether strategic interaction will lead to competition or
cooperation between rivals. – understanding strategic interdependence.                        page 138

                                                            Propedeusebundel 2011-2012 IBA        44
Nash equilibrium occurs when each player does what is best for themselves, given what their rivals
may do in response. A dominant strategy is the best response, whatever it rival decides.
The threat to always display non-cooperative behavior, if your rival cheated in the last round, has to be
credible commitment = optimal to carry out.
If a firm, or individual, plays a game once, they should cheat. If they play repeatedly, then they should
try to cooperate for as long as their rivals cooperate.
6.7      Game theory extensions: reaction functions
Residual demand = market demand – amount produced by firm’s rivals
      1. In a Cournot model each firm treats its rival’s output as a given.
      2. Bertrand model: firm A assumes a price level for B and then chooses for itself.
A reaction function shows that a firm’s profit-maximizing output varies with the output decision of its
rival.
First-mover advantages can be examined using a Stackelberg model, which is similar to the output
approach of Cournot, but firms do not make strategic decisions simultaneously.
6.8      Auction theory
Under private values, the value of an item differs across bidders.
      - All 4 auction formats enable the bidder with the highest willingness to pay to win the auction.
         But they only pay the second-highest price. = revenue equivalence theorem
Under common values, the item has the same intrinsic value to each bidder, but bidders are unsure of
the true value of the item.
      - The bidders face the problem of the winner’s curse, they have to pay the true value.
To avoid conservative bidding under the winner’s curve, an English auction format provides bidders
with a clearer information of the item’s true value.
English auction with private values
Normal, highest bid wins
Second-price sealed bid auction with private values
      - You cannot win by lowering your bid, you can only lose
      - Raising your bid above your maximum willingness to pay can only harm you
First-price sealed bid auction with private values
it is always optimal to bid below your maximum willingness to pay. You reduce your chances of
winning, but you raise your potential gains.
Dutch auction with private values
6.9      Business applications: compete, cooperate or gain first-mover advantage?
Repeated environment – cooperation is likely

Chapter 7
7.1      Business problem: how should companies grow?
Diversified growth is an expansion of the firm’s activities into related and unrelated markets.
Growth in its various forms can be organic, where the firm grows internally by developing ties to
existing operations; alternatively growth can occur externally, where the firm either acquires, or
agrees to merge with, another firm.
    - Achieve economies of scale, bring down operating costs.
Organic growth is an increase in sales from the same or comparable retail space.
    - In a market with rapidly expanding demand, organic growth can be very sustainable.
    - In a mature market, organic growth can be slow and limited.
    - Organic growth can be reduced by competition.
     Airline buys more aircrafts, manufactures builds assembly lines or a new factory
Vertical chain of production encapsulates the various stages of production from the extraction of a raw
material input, through the production of the product or service, to the final retailing of the product.
Vertical integration increases the control over the value chain.

                                                          Propedeusebundel 2011-2012 IBA       45
7.2      Reasons for growth
Firms can grow for a variety of reasons, but if we accept that a firm is a profit-maximizer, then growth
must be linked to long-term, profit-maximizing objectives. Growth opportunities must, therefore offer
revenue enhancements or potential cost savings.
7.3      Horizontal growth
Analysis of the benefits of horizontal growth:
     1. Horizontal growth and revenue
     2. Reducing competition
     3. Exploiting market growth
     4. Horizontal growth and costs
Rationalization the fact that 2 single departments are capable of operating at a size which is less than
the sum of the 2 separate departments, achieving through greater staff utilization (merger etc). The
learning curve suggests that, as cumulative output increases, average costs fall.
Horizontal growth can promote revenue enhancements by exploiting growth in the market. As the
market size grows, the firm can seek to expand its operations. Moreover, the firm can seek to grow its
share of the market. Greater control of the market improves the potential to set prices. If greater
market share stems from merger, or acquisition of a rival than the elasticity of demand must fall and
the potential to raise prices increases.
Economies of scale are important motives for horizontal growth because average costs fall. In addition,
the positive effects of learning can motivate horizontal growth. As cumulative production increases,
the firm begins to learn how to produce more efficiently and how to reduce costs.
7.4      Vertical growth
Attempts to integrate additional value-adding activities into its existing activities. Reasons:
     1. Cost reasons
     2. Location benefits
      Steel smelting plants are often located next to steel rolling plants to reduce transport costs.
     3. Economies of scale
Problems from monopoly
Raw materials might be supplied by a monopoly, in which case the price of raw material could be
higher than under a competitive market. Solution: purchase the monopoly supplier and transfer the
raw material between divisions of the same company.
Transaction costs are the costs associated with organizing the transaction of goods/services.
     - Costs associated with writing, monitoring and enforcing contractual relationships
     - Increase when complexity and uncertainty are greater, monitoring is difficult and enforcement
         limited.
     - Can be minimized by vertical integrating and in-house production
Under a complete contract, all aspects of the contractual arrangement are fully specified. But no
contract is ever complete.
Nexus of contracts is a collection of interrelated contractual relationships, where the firm represents a
nexus or central point, at which all these interrelated contractual relationships are managed in the
pursuit of profit.
Vertical growth: strategic considerations
A specific asset has a specific use; a general asset has many uses.
 A production line designed to make bumpers for a Ford Focus
Without the flexibility to deploy the asset to an alternative use, a firm can be subject to the hold-up
problem. The hold-up problem is the renegotiation of contracts and the financial value of the specific
asset can fall. In order to avoid such problems, firms will tend to vertically integrate and thereby avoid
market negotiations.
 It can also represent a strategic opportunity when one firm is able to gain a monopoly position in the
vertical chain.

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7.5      Diversified growth
Economies of scope exist if the production of 2 goods jointly is less expensive than producing the 2
goods separately. Diversification can sometimes be understood as a process of exploiting economies of
scope, i.e. where a firm uses an asset that is has developed in its current operations to exploit
opportunities in another market.
A diversified portfolio of activities contains a mix of uncorrelated business operations, which means
that the level of profit from one business activity is not related to another.
If diversification is pursued in an attempt to create a portfolio of activities, then the firm’s overall
financial risk might be reduced. However, it is questionable whether such strategies add value for
shareholders who may already hold a diversified portfolio of shares in many different companies.
Diversification is more likely to reduce the non-diversified employment risks faced by managers.
7.6      Evidence on mergers
In examining how mergers can improve firm-level performance, the following techniques were used:
     1. Stock market studies
         Whether shareholders from the buying firm or the acquired target firm gain most.
     2. Financial and accounting studies
         Examine merger activity within similar industries. Benefits are not guaranteed..
     3. Case studies
         Examine specific merger and look for firm-specific examples of merger benefits.
Mergers are very much in the interest of managers. The pay of managers tent to increase more with
firm size than with financial performance of the firm.
7.7      Business application: horizontal growth by merger
Achieving significant scale economies often costs huge sums of money and, once you merge with a
rival, then that lowers the opportunities for other competitors to follow suit and achieve similar
economies of scale.  Fiat and Chrysler
7.9      Business application: economies of scope
Licensing the brand to other users would run the risk of a third party damaging the brand.

Chapter 8
8.1     Business problem: managing managers
Principal-agent problem: the interest of the agent and the principal may differ. Second, principals can
often find it difficult to monitor the work and effort of their agents.
Moral hazard occurs when someone agrees to undertake a certain set of actions but then, once a
contractual arrangement has been agreed, behaves in a different manner.
The costs of moral hazard-type behavior, such as inferior performance by the agent, couples with
monitoring costs, result in what are more generally termed agency costs.
    - Reductions in value to principals from using agents to undertake their work.
    - By linking pay more directly to the effort provided (piece rate), agency costs are reduced.
8.2     Profit maximization and the separation of ownership from control.
The owners of modern corporations are often very different from the managers. This is known as
separation of ownership from control. If shareholders are unable to control managers, managers can
pursue their own objectives
Free riders are individuals/firms who gain benefits from the actions of others for free.
Dispersed shareholdings leave management teams, even bad ones, in a position where they do not
have to react to shareholders’ interests.
Managerial objectives: consumption of perquisites, sales maximization, growth maximization.
    - Diversification within firms does not protect shareholders; rather, it protects managers
    - Pay is linked more closely to company size than it is to financial performance
Behavioral theories:
    - Goal setting (whichever group has greater power, will have a greater say over the targets)

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     - Target setting (set realistic and satisfactory targets, minimum performance levels, satisficing)
8.3      Principal-agent theory
Shareholders are principals when they employ managers, the agents, to run their companies.
The more a manager displays expense preference behavior (buying cars), the lower the potential buyer
will value the company.
Through the use of stock options, managers can be made shareholders which stimulates to work in the
interest of the already existing shareholders.
Financial incentives such as stock options are only useful if four criteria are met:
      Managers are not overly risk averse
      There is a link between manager effort and measured performance
      Performance is not focused on single activities to the detriment of other key activities/tasks
      Managers cannot falsely manipulate the performance measure, such as the share price
Performance contract can help to resolve the principal-agent problem, but only if:
      Workers accept the contracts, receiving greater rewards for higher risks
      There is a link between worker effort and the performance measure
      The performance can be coordinated across a number of objectives
      Workers cannot unduly influence the measure
Diversification reduces risk, so reduced diversification must increase risk and, in order to accept
greater risk, executives require a higher potential reward.
Result: size of executive stock options and executive remuneration contracts increases.
Performance pay and the public sector
Markets, prices and incentives direct the allocation of resources; and this is equally important in the
private and public sector.  Teachers: performance-related pay linked to pupil progression
8.5      Regulation of business
Pareto analysis occurs when no one can be made better off without making someone else worse off.
Therefore the wellbeing of society is at a maximum.
      Monopoly is an example of a market failure and clearly not parent efficient.
8.6      Externalities
Externalities occur when the production, or consumption, of a good/service results in costs or benefits
being passed on to individuals not involved in the production or consumption.
 Playing loud music in a car is only optimal for the driver, but not for others
      Positive externalities – costs are passed on to society or benefits are reduced
      Negative externalities – costs to society are reduced or benefits are enhanced
The existence of externalities leads to a difference between the socially optimal level of output and the
private optimal level op output.
Marginal private cost (MPC): cost to the individual of producing one more unit of output.
Marginal social cost (MCS): cost to the society of producing one more unit of output.
     - As the private firm/individual is a member of society  MSC must include the MPC
Often: MSC > MPC
MSC < MPC, when society wants to produce more than the private firm/individual deem optimal.
Marginal private benefit (MPB) is the benefit to the individual from consuming one more unit/output.
Marginal social benefit (MSB) is the benefit to the society from consuming one more unit/output.
MSB > MPS
 Vaccinations (not pass on), education (taxes paid by educated people)
8.7      Dealing with externalities
Taxation and subsidy
The optimal level of output can be targeted by the introduction of taxes and subsidies.
 Taxing firms for pollution, smoking, road tax etc  MPC=MPS
A subsidy is a payment made to producers, by government, which leads to a reduction in the market
price of the product. Used when government fears that MPB < MSB.

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8.8      Market power and competition policy
Consumer surplus: difference between the price a consumer is willing to pay and the actual price paid.
    - Important measure of welfare or wellbeing
Producers surplus: difference between the desired sales price and the actual sales price.
     Monopoly with price increase: consumer surplus ↓ and producers surplus ↑
Dead-weight loss of monopoly is the loss of welfare to society resulting from the existence of the
monopoly. Seeking out a monopoly status is known as undertaking rent-seeking activities.
Competition policy
Competition policy in the UK provides a pragmatic solution to the problems presented by monopolies.
The Competition Commission investigates whether a monopoly, or a potential monopoly, significantly
affects competition.
8.9      Business application: carbon trading
The Coase conjecture argues that monopoly providers of durable goods are incapable or exploiting
their monopoly power.
The environmental Kuznets curve shows an n-shaped relationship between the production of
greenhouse gases and GPD per capita. It provides a useful framework for examining the rise in
pollution around the world.
Through leasing, licenses become obsolete and firms are required to buy more in period 2 (pollution
licenses for example). The government is not a monopoly supplier each period. This generated an
opportunity cost as polluters are faced with a trace-off: invest in technology which is more
environmentally friendly or buy more credits.




                                                         Propedeusebundel 2011-2012 IBA      49
        Innovation & Entrepreneurship 201000051


Language    English
Description Aims:
            The student will know the basic models and literature of innovation management &
            entrepreneurship and will be able to apply these models on practical cases.
            Furthermore, the students will be able to present a business concept in written and
            oral form (combination with BECS).
            Content:
            This course introduces the students into the academic field of innovation management
            & entrepreneurship research. Furthermore, based on basic models of innovation and
            entrepreneurship processes the student will understand the development of new
            business based on new technologies or broader innovative knowledge (service
            innovation).

Study         International Business Administration
                Phase B1         Quartile 2A
Instructional Assignment, Lecture, Self-Study
modes
Examformat Written exam
Credits       3.0 EC
Lecturer(s) dr. M.L. Ehrenhard; prof.dr. A.J. Groen (email to: a.j.groen@utwente.nl)
Required      Managing Innovation. Integrating technological and organisational change. J. Tidd, J.
materials     Bessant and K. Pavitt
              Strategic Entrepreneurship, P.A. Wickham




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Summary of the book “Managing Innovation” (4th edition) by Tidd & Bessant

Chapter 3
Innovation is increasingly about teamwork and the creative combination of different disciplines and
perspectives.
There is correlation between people management and business performance.
Components of the innovative organization:
    1. Shared vision, leadership and the will to innovate
    2. Appropriate structure
    3. Key individuals
    4. Effective team working
    5. High-involvement innovation
    6. Creative climate
    7. External focus
3.1     Shared vision, leadership and the will to innovate
Innovation is essentially about learning and change and is often disruptive, risky and costly.
We have become used to seeing core competences as a source of strength within the organization, but
the downside is that mindset can block the organization from changing mind.
There need to be long-term commitment to major project, as opposed to seeking short-term returns. One
way of dealing with slowly emerging returns is to focus not only on returns on investment but also on
other considerations like future market penetration and growth or the strategic benefits which might
accrue to having a more flexible or responsive production system.
     Top management acceptance of risk is important
One of the most important roles that leaders play is to create the climate for innovation.
Leadership has some direct influence on the differences found in performance of businesses.
Expertise and cognitive-processing skills are key components of creative leadership.
     This combination is critical for the evaluation of others’ ideas.
At higher levels of management the problems to be solved are more likely to be ill-defined,
demanding leaders to conceptualize more.
Environmental uncertainty: not only build confidence, but solve problems and make appropriate
strategic decisions.
Research environment: the perception of leader’s technical skills is the single best predictor of
research group performance.
Transformational leadership: Greater impact on performance in research environment than
administrative, although both have a positive effect.
Transactional leadership: positive effect in administrative and negative in research environment.
3.2     Appropriate organization structure
Innovation is becoming a corporate-wide task, involving production, marketing, etc. This provides
strong pressure for widespread organizational change towards more organic models.
 GE moves from rigid and mechanistic structure to a looser and decentralized form
                     Mechanistic                                           Organic
                 Mature industries                                 Fast-growing industries
Rapid product innovation and improved customer responsiveness are being achieved through
extensive organizational change programs involving:
     Parallel working
     Early involvement of different functional specialists
     Closer market links
     User involvement
Size, age and company strategy  influence structure


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There is no single ‘best’ structure, bur successful organizations tend to be those which develop the
most suitable ‘fit’ between structure and operating contingencies.
      Simple structure                                      Professional bureaucracy
      Machine bureaucracy                                   Adhocracy
      Divisionalized form                                   Mission-oriented
                                                                              Table 3.2, page 111
3.3      Key individuals
To prevent the failure of a promising invention, is a key individual who is prepared to champion its
cause and to provide some energy to help it through the organizational system.
Roles of key players: (champion model)
     1. Source of critical technical knowledge (inventor/team leader)
     2. Organizational sponsor (pull strings, often board member)
Heavyweight project managers are deeply involved and have the organizational power to make sure
things come together. Lightweight project managers have more distant involvement.
Negative champions – project assassins – negative influence on outcome of innovation project.
3.4      High involvement in innovation
 Quality miracle – Japanese manufacturing – kaizen – continuous improvement – Toyota
High involvement innovation (HII)  business performance ↑  turnover per employee ↑
                                        employees become receptive (vatbaar) to change itself
      Not a quick fix but a major strategic commitment
      Misnomer, concentration still on shop-floor activities
      Most HHI takes place on an ‘in-line; basis
The five-stage high-involvement innovation model                                             page 122
Stage 1         “Unconscious HII” Little HII, no formal attempt
Stage 2         First attempt to mobilize HII, establishing the habit of HII
Stage 3         Coupling HII habit to strategic goals, makes an impact
Stage 4         Empowerment, requires understanding, commitment, training.
Stage 5         Everyone is fully involved in experimenting, improving, sharing and creating.
3.5      Effective team working
Groups have more to offer than individuals in terms of both fluency of idea generation and in flexibility
of solutions developed.  teambuilding is critical of project success
     - Bridging boundaries within the organization in dealing with inter-organizational issues
     - Enable achieving the kind of decentralized and agile operating structure
Key elements: clear task and objectives, effective leadership, balance of roles that match with individual
styles, effective conflict resolutions, continuing connection with external organization.
Effective teamwork
     1. Clear, common and elevating goal                    7. External support and recognition
     2. Results-driven structure                                Principled leadership
     3. Competent team members                              8. Appropriate use of the team
     4. Unified commitment                                  9. Participation in decision making
     5. Collaborative climate                               10. Team spirit
     6. Standards of excellence                             11. Embracing appropriate change
Challenges
     1. Group versus team (how to treat)                    4. Support structures and systems
     2. Ends versus means                                   5. Assumed competence (not assume, train)
     3. Structured freedom (be clear)
3.6      Creative climate
Creativity is an attribute which everyone possesses.
Stifle creativity: unsupporting accounting practices, unfocused innovative activity, formal vehicles for
change, top-down dictated, limited tools, poor communication.

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Building a creative climate involves systematic development of organizational structures,
communication policies and procedures, reward and recognition systems, training policy, accounting
and measurement systems and deployment of strategy.
 3M gives employees 15% of their time for innovation, if they back it up = intrapreneurship
Innovation Energy is the power behind productive change and is the confluence of three forces:
    1. Attitude
Innovation teams need a majority of people with the right attitude and others need to be at least
neutral. Money rarely motivates or affects attitude. Motivation arises when people feel good about
what they’re doing and they feel good being a part of it. A crisis will fire up people about a company’s
bold vision. Also: connect senior management with real people, their consumers.
    2. A group’s behavioral dynamic
Suspend judgment and replace it with what we call greenhousing – building ideas collaboratively. The
most useful innovation behaviors are: freshness (trying new stuff out), greenhousing, realness (quickly
making an idea into the form a customer will buy it as), bravery (guts to disagree) and signaling (helping
a group navigate between creative-analytical behavior.
Story telling:
    - Most effective way to help turn behavior into habits by articulate what’s okay
    - More powerful than any mission statement of set of values
    3. Support an organization provides
Force people into the shared space the ‘heart’. This breaks down barriers and prevents people from only
fraternizing with people in their immediate teams.
Climate versus culture
Climate: recurring patterns of behavior, attitudes and feelings that characterize life in the organization.
Culture refers to the deeper and more enduring values, norms and beliefs within an organization.
                         Climate                                                 Culture
Look at individuals and their shared perceptions        Look at entire organization
Social psychology                                       Anthropology
Normative, not looking for different but better things Descriptive, assumptions are not better/worse
                                                        than another
Quantitative research                                   Qualitative research
More easily observable and influenced
Trust and openness
Strong level of trust
     Ideas and opinions arise (motivate employees to contribute)
     More efficient decision making
     Influence effectiveness of an organization through structuring and mobilizing
    - Lack of questioning each other  mistakes  less productive outcomes
    - Cliques
Bases of organizational trust:
     Contractual                                         Network
     Goodwill                                            Competence
     Institutional                                       Commitment
Challenge and involvement
Too low: apathetic about work, not interested in development.
Too high: burn out because there’s too much of a stretch
Building and maintaining a challenging climate involves systematic development or organizational
structures, communication policies and procedures, reward and recognition systems, training policy,
accounting and measurement systems and deployment of strategy.
     Intellectual stimulation is one of the most underdeveloped components of leadership.
     Much of employee involvement in innovation focuses on incremental change
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Support and space for ideas
Idea time is the amount of time people can (and do) use for elaborating new ideas.
Low: time pressure makes thinking outside the instructions and planned routines impossible.
High: boredom, slow decision making, bureaucratic
Organizational slack identifies the difference between resources currently needed and the total
resources available. Too much: static inefficiency. When innovation and change is needed, slack can
act as a dynamic shock absorber, and allows scope for experimentation.
     - Appropriate level of organizational slack is associated with superior performance
Conflict and debate
Level of conflict too high: dislike, hate. Level of conflict too low: low motivation, deadlines not met.
Maintain a level of constructive conflict consistent with the need for diversity and a range of different
preferences and styles of creative problem solving.
Debate focuses on issues and ideas. It involves the productive use and respect for diversity of
perspectives and points of view. Where debates are missing, people follow authoritarian patterns
without questioning. When the debate level is low, people moan and complain about the way things
are.
Risk taking
In risk-avoiding climates, there is a hesitant mentality and low-energy jobs.
When there’s too much risk taking, there are too many ideas floating around, but few are sanctioned.
Strategies for dealing with risk: failure mode and effects analysis (FMEA), potential problem analysis
(PPA) and fault tree analysis (FTA). The goal is to help identify risks and payoffs, key uncertainties,
decision points and future opportunities that might be created.
Freedom
The independence in behavior exerted by the people in the organization
Much freedom: autonomy, initiative, unbalanced concern, going off in their own directions
Little freedom: guidelines and roles, demonstrate little initiative
3.7       Boundary spanning
In many companies, the focus is on technology. This does not mean that customer focus is irrelevant:
the issue here is one of building relationships which enable clear and regular communication,
providing inputs for problem solving and shared innovation.
Benefits of networking:
Powerful solution to resource problems                  A way forward for industrial development
Increase market share                                   Collaborative learning experiences (SCL)
Reducing time and costs of development
Networks are emergent property: the whole is greater than the sum of the parts.
The network culture has to be right, the following elements help build this:
      Key individuals
      Facilitation - support
      Key organizational roles
3.8       Beyond the steady stage
Organizations have to deal with innovation in the steady state (doing what they do, but better), but
also under discontinuous (do different) conditions.
Those organizations that are able to thrive and exploit innovative opportunities under these conditions
are agile, fast moving and tolerant of high levels of using their agility to probe, learn and reconfigure in
search of the dominant design which will eventually emerge.
     - Established organizations run the risk of being too slow

             Components of the innovative organization under discontinuous conditions
Shared vision, leadership and the will to innovate      Appropriate structure
Key individuals                                         Effective team working

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Continuing and stretching individual development         External focus
Extensive communication                                  Creative climate
High involvement in innovation                           Learning organization
                                                                       Table 3.8, page 154
Chapter 7
7.2     Meeting the challenge of uncertainty
Innovation management tries to turn the uncertainty into a calculated risk.
    - Requires knowledge about the architecture: components and how put together?
Decision making is often shaper by emotional forces as well as limited facts and figures.
7.3     The funnel of uncertainty
Knowledge converts uncertainty to risk. In innovation management the challenge is to invest in
acquiring early knowledge – through technological R&D, market research, competitor analysis, trend
spotting etc. – to get early information to feed decision making.
Innovation funnel: a roadmap which helps us make decisions about resource commitment



Each step involves committing more resources, but this only takes place if the risk/reward assessment
justifies it. Move from uncertainty to increasingly well-calculated risk management.
7.4      Decision making for incremental innovation
Since this involves comparing something new with something that already exists we can set up criteria
and measure against these.
Incremental innovation is important in high involvement systems. But how will we manage the large
amount of ideas from employees? – Policy deployment (inzetten)
     - Creation of a clear and coherent strategy for business
     - Deployment of it through a cascade process which builds understanding and ownership of the
          goals and sub goals.
7.5      Building the business case
Radical innovation projects have higher risk and so the business case needs to be more strongly made &
mobilize both emotional and factual components to secure buy-in from decision makers.
     - Tools: advanced computer modeling, rapid prototyping, simulation techniques
7.6      Building coalitions
Innovation problems arise from multifunctional nature of development and the lack of shared perspective
on the product being developed and the marketplace.
Formal supplier involvement programs are important. Their expertise can save you costs. It secures
acceptance and also obtains improved quality process design.
7.7      Spreading the risk – building a portfolio
Portfolio management provides a coherent basis on which to judge which projects should be undertaken,
and to ensure a good balance across the portfolio risk and potential rewards.
     - helps with both the “do what we do better” and the “do different” agenda.
Without portfolio management there may be no limit to projects taken on; lack of strategic focus in
project mix; weak or ambiguous selection criteria and weak decision criteria.
7.8      Decision making at the edge
Established incumbents often face challenges. Incumbent decision-making and underlying reward and
reinforcement systems strongly favor the status quo, working with existing customers and suppliers. This
makes it easy for new entrants to colonize new market space.
Selection and framing
     - viewing the world in different ways and changing the ways they make selection decisions.
Discontinuous innovation presents challenges which do not fit the existing model and require a reframing
– something that existing incumbents find hard to do.

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 Cognitive dissonance – interpret new situations to match.fir their established world views.
 Self-imposed barriers caused by inability to reframe which pose problems for established players. Their
 strategic resource allocation mechanisms are effective within a framework, but break down when a
 challenge comes from outside the box.
 The problem of reframing provides clues as to where and how alternative routines might be developed to
 support decision making around selection under high uncertainty.
 Wait and see – deal with early-stage uncertainty.
 Fast-second – exploiting innovation opportunities more successfully than early entrants
  Microsoft
 7.9      Mapping the selection space
 Tools to help with uncertainty decision making
1. building alternative futures
2. prototyping
3. probe and learn
4. alternative measurement/evaluation criteria
5. mobilize networks of support
6. alternative decision-making pathways
7. deploy alternative funding structures
8. mobilizing entrepreneurship
9. alternative/dedicates implementation
     structures

Chapter 11
11.1 Creating value through innovation
There is a weak relationship between innovation and performance. Decide between 2 strategies:
     1. Innovation leadership
     2. Innovation followership
Late entrant firms appear to pursue one of two very different strategies.
     1. Based on competencies other then R&D and new product development
     2. Focus on major new product development projects in an effort to compete with pioneer.
     - A pioneer strategy appears more successful in markets where the purchasing frequency is high, or
         distribution important.
Intellectual property rights (IPR) have only a minor role to play in the creation/capture of value from
innovation because:
     1. The propensity to use and enforce, IPR varies by sector.  strong in pharmaceuticals
     2. High variation in innovation and performance within the same sectors and within similar IPR
         regimes indicates that other, firm-level factors are also at work.
IPR has a negative effect on a strategy of long-term value creation, and that lead time, secrecy and the
tacitness of knowledge are more strongly associated with creating value. Only a limited level of IPR is
desirable to encourage risk taking and innovation, and that a broader repertoire of strategies is necessary
to create and capture the economic and social benefits of innovation.
11.2 Innovation and firm performance
Difficulties in constructing a model of effects of innovation:
     1. Relationship between inputs-outputs is much weaker than at the industry level
     2. Reporting behavior of firms may change in respect of any variable monitored to be used
     3. Objective of indicators may be to influence financial markets and lending behavior
     4. Financial markets will concern themselves only with the gain appropriable by the firm itself
Product R&D is less productive than process R&D.
Explanatory factors: scale, technological opportunity and management
     - The scale of R&D effort is important only in chemicals and pharmaceuticals

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    - Large firms tend to innovate more because they have a higher incentive to do so
A major problem with measuring inputs and outputs is: how do we take account of the ‘spillover’ of
innovation benefits or information to other firms or industries.
New patents – below-average performance over time
     Face high costs and uncertainty associated with emerging technology
Older patents – outperform the average over time
     Face more limited opportunity to exploit these commercially
The P/E (prince/earnings) ratio may be a better indicator of (future) innovation performance.
Profitability declines as the market evolves over time for a number of reasons:
    1. Product and service differentiation rend to be reduced
    2. Competition tends to shift to price and rates of return fall
    3. Capital intensity tends to increase, driving returns down even further
11.3 Exploiting knowledge and intellectual property
Organizations can acquire knowledge by experience (least effective), experimentation or acquisition. A
more active approach involves scanning the internal/external environments:
Searching, filtering and evaluating potential opportunities from outside the organization.
Identifying and codifying knowledge
     Data                Set of discrete raw observations
     Information         Data that has been organized, grouped or categorized into some pattern
     Knowledge           Information that has been contextualized
    1. Explicit knowledge, which can be codified
    2. Tacit/implicit knowledge, which is personal, experiential, hard to formalize
Learning how is more relevant where speed or quality is critical, but learning why will be necessary to
apply skills and know-how in new situations.
Embrained knowledge               Conceptual skills and cognitive abilities
Embodied knowledge                Action oriented, partly explicit
Encultured knowledge              Achieving shared understanding and meaning
Embed knowledge                   Systematic routines and processes
Encodes knowledge                 Represented by symbols and signs
Commodified knowledge             Embodied in outputs of an organization e.g. product/service

Transformation of individual knowledge into
organizational knowledge involves 4 cycles:

 1. Socialization     Tacit  tacit knowledge
 2. Externalization   Tacit  explicit knowledge
    (boundary objectives are critical here)
 3. Combination       Explicit  explicit knowledge
 4. Internalization   Explicit  tacit knowledge

Codifying knowledge involves taking information that
human agents carry in their heads and find hard to
articulate, and structuring it in such a way that its
complexity is reduced.



                                      C-space (culture space) enables an organization to map its
                                      resources and key linkages between them on to the C-space. And
                                      acts as an elicitation (opwekking) device to facilitate a discussion

                                                         Propedeusebundel 2011-2012 IBA        57
about the meaning and action required in terms of core competencies and knowledge resources.



Storing and retrieving knowledge
Problems: codifying tacit knowledge, retrieve and reuse relevant knowledge.
There are 2 common approaches to knowledge management:
     1. Based on investment in IT, based on groupware and intranet technologies
     2. People and process based, encourage staff to identify, store and share information
Collective attributes: intangible, positional, functional, cultural (page 548)
Sharing and distributing knowledge
      Converting data and information to knowledge  identifying patterns
      Converting text to knowledge                           synthesis, comparison, analysis
      Converting individual to group knowledge                       supportive culture, incentives
      Connecting people to knowledge                                 seminars, software agents
      Connecting knowledge to people                                 intranets, agent systems
      Connecting people to people                                    networks
      Connecting knowledge to knowledge                      common projects
If the conflict is too high, you may see information hoarding, open aggression. If conflict is too low,
individuals may lack motivation or interest, meetings are one-way, rather than debate.
Mechanisms to help knowledge transfer between different communities of practice:
     1. Organizational translator          - mediate, heavyweight product managers
     2. Knowledge broker                   - participate in different communities, rather than mediate
     3. Boundary object or practice        - shared document quality manual, something of interest
                           Knowledge management implementation strategies

Strategy                Characteristics              Requirements               Risks

Ripple                  Bottom-up, kaizen            Process tools,             Isolation from
                                                     sustained motivation       technical excellence
                        Quality management

Integration             Of functional knowledge      Early involvement,         Conformity,
                                                     overlapping phases         coordination burden
                        Product development

Embedding               Coupling systems,            Motivation, rewards,       Loss of autonomy,
                        products, service ERP        common information         system complexity

Bridge                  Novel combination            Common language and        High control needs,
                        existing competencies        objectives                 technical feasibility,
                                                                                market failure
                        Architectural innovations

Transfer                Exploiting existing          New market                 Inappropriate
                        knowledge related            knowledge                  technology, customer
                        diversification                                         support and service


Converting knowledge into innovation
                                                           Propedeusebundel 2011-2012 IBA         58
Innovation rarely involves dealing
with a single technology or market
but rather a bundle of knowledge.
Successful innovation management
required that we can get hold of an
use knowledge about the
architecture of an innovations –
how components can be put
together.

Exploiting intellectual property
IPR may provide some legal rights, but secrecy is often a more effective alternative.
Patents require certain legal tests to be satisfied
     - Novelty
     - Inventive step
     - Industrial application (must be capable of being applied to a machine, product)
     - Patentable subject (discoveries and formulae cannot be patented, software-Europe)
     - Clear and complete disclosure
Highly cited patents are of much greater importance than patents which are never cited. They can
set off a stream of follow-on inventions.
Indicators of patents:
     - Number of patents
     - Cites per patent
     - Current impact index (CII)
     - Technology strength (TS)
     - Technology cycle time (TCT) – speed of invention
     - Science Linkage (SL) – how leading edge the technology is
     - Science Strength (SS) – how much the patent applies basis science
Efficiency: how well companies translate technological and commercial inputs into new products,
processes and businesses.
Effectiveness in the sense of how successful such innovations are in the market and their
contribution to financial performance.
Copyright is concerned with the expression of ideas, and not the ideas themselves. They provide
limited legal rights for certain types of material for a specific term.
Patent strategies:
     1. Offensive                  multiple patents to prevent or limit competition
     2. Defensive                  specific for key technologies
     3. Financial                  to optimize income
     4. Bargaining                 to promote strategic alliances
     5. Reputation
Design rights are similar to copyright protection, but mainly apply to three-dimensional articles.
Excludes integral and functional features, such as spare parts.
      Cheaper and easier that patent protection, but more limited in scope
Licensing IPR
+        reach larger market, establish standards, gain access, exploit
Common methods: going market rate, 25% rule, return on investment, profit sharing
Increase in patent activity by changing in government funding, intellectual property law and
technological opportunity
11.4 Broader economic and social benefits


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Global standards and position in international value chains can constrain the ability of firms based in
emerging economies to upgrade their capabilities and appropriate greater value, but they also
present ways in which these firms can innovate to overcome these hurdles.
Different routes to upgrading through innovation:
     Process upgrading
     Product upgrading
     Capability upgrading
     Inter-sectoral upgrading
Firms in emerging economies face a reverse product-process innovation life cycle.
Dominant design:
   - locus from innovation shifts from product to process
   - radical  incremental improvements
Emerging economies
   - begins with incremental process innovations, produce existing product lower cost/quality
Innovation and social change
Social innovation:
   - Aim to create social change and value, rather than commercial innovation/financial value
   - Involves business-, public- and third-sector organizations to achieve this aim
 poverty relief, community development, heath, welfare, education, sustainability
Social entrepreneurs share most of the characteristics of entrepreneurs but are different in:
  Motives and aims - independence and health, + social means and ends
  Timeframe              - short-term growth, longer term harvesting venture + long-term change
  Resources              - reliance firm and management + network stakeholders & resources
The feasibility will be influenced by characteristics such as background and personality.
Innovation and sustainability
The most conventional approach to innovation and
sustainability focuses on how to influence the
development and application of innovations through
regulation and control.
Formal policies are used in an attempt to direct
innovation by using systems of regulations, targets,
incentives and usually punishments for non-compliance.
 slow and incremental
Innovation as solution environmental issues:
Cleaner products, more efficient processes, alternative
technologies, new services, systems innovations

Summary of the book “Strategic Entrepreneurship” (4th
edition) by Wickham

Chapter 1
Entrepreneurship is what the entrepreneur does.
Entrepreneurial describes how the entrepreneur undertakes what he does. The entrepreneurial
process in which the entrepreneur engages is the means through which new value is created as a
result of the project: the entrepreneurial venture.
The entrepreneur as a manager undertakes particular tasks
1. Owning organization
Ownership lies with those who invest in the business and own its stocks – the principals – whereas
the actual running is delegated to professional managers or agents.
2. Founding new organizations

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Task of bringing together different elements of the organization (people, property, productive
resources and so forth) and giving them a separate legal identity.
3. Bringing innovation to market
Schumpeter (creative destruction) saw innovation as fundamental to the entrepreneurial process of
wealth creation. The entrepreneur’s task goes beyond simply inventing something new. It also
includes bringing that innovation to the marketplace and using it to deliver value to consumers.
4. Identification of market opportunity
Entrepreneurs must constantly scan the business landscape watching for the gaps left by existing
players (including themselves) in the marketplace.
5. Application of expertise
Entrepreneurs have the ability in deciding how to allocate scarce resources in situations where
information is limited.
6. Provision of leadership
7. The entrepreneur as manager
The entrepreneur as an economic agent generates particular economic effects
Combination of economic factors
Value is created by combining raw materials, labor and capital. Innovation is simply finding new
combinations of these economic factors.
Providing market efficiency
Efficient means that resources are distributed in an optimal way, that is the satisfaction that people
can gain from them is maximized.
Accepting risk
If we know the probability of various possibilities then uncertainty becomes risk. Some suggest that
the primary function of the entrepreneur is to accept risk on behalf of other people. Entrepreneurs
provide a service by taking this risk off people’s hands. They are willing to buy it.
Accepting the risk is actually something that investors do, not entrepreneurs.
      Personal risk: dangerous situations  climbing mountains
      Economic risk: result from making an investment
Maximizing investors’ return
Processing of market information
They keep an eye out for information that is not being exploited. By taking advantage of this
information, they make markets more efficient and are rewarded our of revenues generated.
The entrepreneur as an individual of a particular personality.
      The ‘great person’
      Social misfit
         Economic survival and they are unable to fit into existing social situations.
      Personality type
      Personality trait
         - Ability traits are – learnt and developed (problem solving, innovativeness)
         - Temperament traits – are concerned with public actions – how do what we do
         - Dynamic traits – are concerned with internal motivation – why we do what we do
      Social develop
         - Innate – factors such as intelligence, creativity, motivation, ambition etc.
         - Acquired – learning, training, mentoring, existence of motivating role models etc.
         - Social – birth order, experience in family life, culture etc.
      Cognitive
         The branch of psychology that attempts to develop an understanding of how we as humans
         obtain and process information and use it to make sense of the world.
Entrepreneurs are not born, they are made.
Entrepreneurship: a style of management

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Characterized by: focus for change, focus for opportunity and organization-wide management.
Leadership, power and motivation are interrelated and interdependent tools which the entrepreneur
can use to control the venture and give it direction.
Leadership is the power to focus and direct the organization. Entrepreneurial leadership is based on
the communication of vision.
Power is the ability to influence the course of actions within the organization. Power is based on the
control of resources and the symbolic dimensions of the organization, particularly the vision which
drives it.
Motivation is the ability to encourage an individual to take a particular course of action. Motivation
is based upon an understanding of drives a the ability to reward efforts.
      Self-motivation                                    Motivation of others
         - Why am I doing this?                               - Understanding personal drives
         - Learning from mistakes                             - Setting goals
         - Enjoying the rewards                               - Offering support
                                                              - Using rewards
                                                              - A positive approach to sanctioning
Entrepreneurial management focuses on the whole organization, pursues opportunity and wants to
create change.

Chapter 2
Classification of entrepreneurs is important because of research, government policy and investor
analysis. There are 2 main approaches: classify entrepreneurs themselves or their ventures.
At some point all entrepreneurs are nascent and then novice. Most start with a single business. Serial
entrepreneurs start off as singular entrepreneurs.
The successful entrepreneurial venture is usually based on a significant innovation.
The small firm’s output is likely to be established and produced in an established way. So while a
small business may be new to a locality, it is not doing anything essentially new in a global sense.
Entrepreneurial venture usually have a great deal more potential growth than does a small business.
Strategic objectives relate to such things as: growth targets, market development /share /position.
                                      LOOK AT FIGURE 2.2, PAGE 40

Chapter 3
Instrumentalization refers to the methodological approach taken to defining, characterizing and
measuring a variable that plays a part in some theoretical explanation.
Using the way in which entrepreneurs are recognized by different schools of economic thinking might
me more fruitful than unifying within a single personality type.
Instrumentalization of personality
Personality must be something that can be determined independently of the individual’s specific
domain of entrepreneurial activity. Otherwise there is danger that the domain of activity
predetermines personality allocations.
Ontology is the branch of analytical philosophy that is concerned with the existence of concepts.
     Realism
A concept has an actual existence in the world independent of our understanding of it.
     Positivism
Proposes that only that which can be observed is real and that we should be suspicious of things we
cannot observe.
     Instrumentalism
Concepts exist only in the sense that they provide accounts of the world that lead to useful and
correct predictions.


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A descriptive theory is based on independent observations of an individual’s personality and their
entrepreneurial inclination, behavior and performance. It describes the correlation between the 2.
      - Concerned with how the world is
      - Require that personality is something observable, measurable and independent of
          entrepreneurial activity.
A normative theory claims that certain aspects of personality are necessary for effective
entrepreneurial behavior. Direct descriptive theories in a particular direction.
      - Aspire to make predictions
      - Are not so dependent on observable counterparts of personality
Prescriptive theories suggest that if one wants to be a successful entrepreneur then one should have
(or adopt/develop) a particular personality type.
      - Suggest pathways of development to entrepreneurs
      - Limit themselves to aspects of personality that can be developed through conscious action.
Personality: a relatively stable pattern or profile of thoughts, feelings and actions that characterize a
particular individual. What makes us unique. Personality is: organized, active, physical, causal, regular
and manifest.
Three primary processes in the anatomy of the mind (Freud):
The Id relates to basic biological urges and impulses.
The Superego manages social behavior and graces. Maintains an
individual’s moral beliefs and is imparted by parents and socialization processes. The Ego helps the
Superego keep the Id in check while making sure that the Superego is informed of the person’s deeper
wants and needs within the Id. Is rational and calculated plans ahead.
Not in harmony?            neurotic anxiety, the belief that one’s base instincts would take control
                           moral anxiety, about taken actions (guilt, regret, embarrassment etc.)
                           reality anxiety, justified beliefs that one is in some sort of danger.
Two key traits: introvert – extrovert dimension and the emotionally stable – unstable dimension
Combining these 2 independently gave rise to four basic personality types:
      Phlegmatic: stable introverts
      Melancholic: unstable introverts
      Sanguine: stable extroverts
      Choleric: unstable extroverts
Power, love, work, affect (emotionally) and intellect relate to the individual’s characterization.
Evolutionary psychology is based on the premise that modern human cognitive skills are the result of
evolution through selective forces.
Phenomenological approaches
     1. Humans are endowed with free will, the possibility of making choices for themselves.
     2. Humans are self-perfecting, drawn towards the ‘good’ in terms of health, welfare and personal
        maturity.
Personality testing has been used as both a practical and research tool for evaluating and studying
entrepreneurs. However, it is premature to suggest that such testing is unambiguously able to
distinguish entrepreneurs from non-entrepreneurs.
Cognitive approaches consider how human acquire, store and process information in order to make
decisions. Whether entrepreneurs are distinct from non-entrepreneurs in their cognitive style and
strategy is not yet clear, but it is the subject of extensive research.
Attribution-based approaches
They looked at
Consistency in the way in which an individual reacts
 we always expect entrepreneurs to react positively and embrace new opportunities
Distinctiveness in that the individual reacts differently in different situations
 entrepreneur is tough negotiator in business, but not in his family life

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Consensus in that entrepreneurs act differently from non-entrepreneurs
Entrepreneurs are decision makers. The experimental study of human decision making is a fast-growing
area that promises area to illuminate the way in which entrepreneurs think.
Psychometric tests aim to discover something about an individual’s mental architecture by having him
or her answer a specific series of questions..
        - Rorschach test: what do you see in a random pattern of ink blots?
The questions must be relevant, responses must be correlated to particular personality factors, the
subject must give honest answers, subjects must answer like they’re in real life, aspects of personality
revealed must be stable over time.  challenges
Popular tests: proactive personality disposition (PPD) and the entrepreneurial-orientation (EO)

Chapter 4
Cognitive psychology is very much an experimental science, with its findings based on repeatable
experiments and the testing of hypotheses. Cognitive processes are split into:
Perception processes
How we see the works and gather information about it.
 Complexity-simplicity, leveling – sharpening, verbalizing - visualizing
Problem-solving processes
How entrepreneurs address immediate challenges and bring creativity to bear.
 scanning – focusing, serialism – holism, adaptation - innovation
Task processes
How entrepreneurs approach and undertake actions and related performance issues.
 constricted – flexible, impulsive – reflective, uncertainty accepting – cautious
Cognitive styles and strategies may be linked to, and provide a basis for, what we consider to be
personality. They are, however, distinct from it.
Entrepreneurship and human decision making
Three types of theory that aim to explain and predict decision making:
    1. Normative theories
        Identify what is the best (optimal) decision in a particular situation and the process for
        making it. “Humans are rational”
    2. Descriptive theories
        Provide accounts of decisions people actually make. What people really do, rather than what they
        should do. May take mathematical form and are expressed in psychological terms.
    3. Prescriptive theories
        Suggest ways individuals can improve their decision-making practice. Expressed in
        pedagogical terms.
Biases are consistent, prevalent and difficult to eliminate.
    1. Anchoring bias
        Rely heavily (“anchor”) on one piece of information when making decisions
    2. Availability bias
        When confronting with a decision, humans’ thinking is influenced by hat is personally relevant,
        recent or dramatic.  afraid of airplane crash, but it’s less common than car crash
    3. Representativeness bias
        Involves judging a sample or event as being more or less likely because it is felt to be more or
        less typical of a population or process.
    4. Base-rate neglect bias
        Ignoring background information in making judgments
Other biases include framing effects – judgment changing on the basis of how information is
contextualized. Cognitive psychologist have suggested that these biases arise because individuals use


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deep-seated heuristics or practical ‘rules of thumb’ to make judgments rather than normative
methods.
Expected utility theory
The normative approach to risk behavior is referred to as expected utility theory. Deals with the
analysis of choices among risky projects with outcomes. It does a poor job of predicting and
explaining real human risk behavior.
Entrepreneurial confidence and overconfidence
A positive bias is said to occur when we make a judgment about ourselves that result in a view of
ourselves that is more positive than statical rules, or indeed basal experience, deems to be proper or
hold to a view of the world that is overly optimistic.
     - Can distort the decision making or entrepreneurs and their supporters.
Syntactic (formal) use of risk & Pragmatic (everyday) use of risk
Prospect theory
One of the best, and most successful, descriptive approaches to human risk behavior. Increasingly
influenctial in the study of managerial risk taking generally and in the study of entrepreneurial risk
taking. Human decision makers:
     - Are concerned about gains and losses
     - Make decisions for an initial reference point
     - Find that losses hurt more than gains bring pleasure
     - Avoid risk when winning, but take risks when losing
     - Distort probabilities – at low probabilities feel lucky when winning, unlucky when losing.
     - Are susceptible to framing – whether the + or – perspective on a problem is emphasized.

Chapter 5
Inventor: someone who has developed an innovation and who has decided to make a career out of
presenting that innovation to the market. Poor track of building successful businesses.
Unfulfilled manager: Desire to make a mark on the world, to leave a lasting achievement, to stretch
their existing managerial talents to their limit and to develop new ones.
Displaced manager, young professional.
The excludes: nothing else is open to them. One of the main challenges faced by ethnic
entrepreneurs is making the move from running a small business to starting a full-blown
entrepreneurial venture.
Hard work, self starting, setting of personal goals, resilience, confidence, receptiveness to new ideas,
assertiveness, information seeking, eager to learn, attuned to opportunity, receptive to change,
commitment to others, comfort with power  entrepreneurial characteristics.
Four primary types of individual become entrepreneurs:
Personal achiever                       Clear objectives, hard work and dedication. Driven to succeed
Emphatic super salesperson              Well-developed ability to understand customer needs.
Real manager                            Having an organization large enough to put demands on their
                                        managerial abilities.
Expert-idea generator                   Platform to develop and market an innovation.
Entrepreneurial performance: general management skills, industry knowledge, personal motivation
and human relationship skills.
General management skills:
    - Strategy skills
    - Planning skills
    - Marketing skills
    - Financial skills
    - Project management skills
    - Time management skills

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Human relationship skills
    - Leadership skills
    - Motivation skills
    - Delegation skills
    - Communication skills
    - Negotiation skills
Supply of entrepreneurs is determined by: pull factors,
push factors and inhibitors.
Pull factors are those which encourage managers to
become entrepreneurs by virtue of the attractiveness.
Push factors are those which encourage
entrepreneurs by making the conventional option less
attractive.
The supply of entrepreneurs will still be limited if
inhibitors are operating. Inhibitors are factors which
prevent the potential entrepreneur from following an
entrepreneurial route, no matter how attractive an opinion it might appear.
 An inability to secure start-up capital, high costs of start-up capital, risks presented by the business
environment, legal restrictions on business activity, lack of training for entrepreneurs, feeling that the
role of entrepreneurs has a poor image, lack of suitable human resource.
      Satisfaction in conventional job                             Satisfaction from entrepreneurship
        Personal development needs               Knowledge            Personal development needs
                Social needs                     Possibility                    Social needs
              Economic needs                      Valence                     Economic needs

Valence: the way in which the potential entrepreneur is willing to play off different needs against
each other. Knowledge: must know that the entrepreneurial option exists and they must be aware of
its potential. Possibility: of pursuing that option, no legal restrictions, access to necessary resources.
Valence  multi-criteria problem: requires that a wide range of factors be taken into consideration
Venture initiation:
     - Opportunity’s equilibrium
     - Inducements (balance rewards)
     - Contributions (opportunities forgone and personal efforts)
The initiation process
The nascent entrepreneur must have first engaged in a number of ‘pre-launched preparation’ task such
as gathering and processing information, identifying a new opportunity, imaging (and perhaps
designing) an innovation to take advantage of it, evaluation and valuation of the opportunity, initial
contract with key supporters, acquisition of start-up capital, and legal and contractual agreements.
4-stage model
     1. Proof-in-principle stage in which the technology is demonstrated to have potential.
     2. Prototype stage in which a working form of the technology is developed.
     3. Model shop stage in which early production runs are undertaken
     4. Start-up stage where the product is produced in commercial quantities and delivered.
Also extended into the post-start-up phase: conception and development, commercialization, early
growth and stability in market phase.

Chapter 6
Neo-classical school
Supply and demand for goods is a function of their price. Markets are costless to set up and run:
transactions are ‘free’ and ‘frictionless’. – no notion of time, but economies change!

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Austrian School
Competition is an ongoing process rather than a force that sustains an economy at a static equilibrium
(evenwicht).
      Theories prioritized the role of the firm’s external environment:
Heterogeneous demand theory points out that firms within a particular industry do not offer
homogeneous products at a market dictated price.
Differences between products offered within an industry depended on 5 things: knowledge of markets,
production process, resources, product research and development capabilities and quality control
standards.
Differential advantage theory
Firms might sacrifice short-term profits for a variety of reasons, e.g. survival of the firm.
Industrial organization economics (IOE)
Based on the idea that excess profits arise due to market imperfections which occur when classical
assumptions fail to occur. Three stages of development:
     1. Competitive context presets a different mix of market imperfections. Structure-conduct-
         performance relationship.
     - Entrepreneur perceives opportunities to acquire, mould and manage resources
     2. Managers might seek out unexploited structures – Porter’s Five Forces
     - Entrepreneur seeks opportunities presented by available market imperfections.
     3. Change in both perspective and methodology
1 suggest that if you are feeling cold, put on a coat; 2 suggests moving to somewhere warmer.
      Theories prioritized the role of the firm’s internal aspects:
Resource-based theory: resource bundles, resource heterogeneity, resource immobility
Competence-based theory places less emphasis on resource inimitability and more on the dynamic
replenishment o quickly erodible advantage.
If resource-based theory sees the winners as those who reach mountain peaks before others
competence-based theory sees tem keeping ahead in a (never-ending) race.
Transaction cost theory: when we pay a price for a good, that price must include the cost of transaction,
not just the final value of the good.

Evolutionary theories are inspired by Darwinism.
Economic sociology: concerned with the structure of populations of firms within industries.
    - Population ecology theory
The number (and total capacity) of firms within the sector is limited by its carrying capacity: the level of
resources made available, including, critically, the capita customer will provide through purchases.
                                                      Ability to change firms
Ability to                      High                              Low
Change                High      Industrial community theory New institutional economics
environmment          Low       Organization evolution theory Population ecology theory

New institutional economics: maintains that firms are limited in the degree to which they are able to
modify their internal constitution, but does suggest that firms can modify their environments.
Organizational evolutional theory regards the unit of evolution as the individual firm, rather than the
industry of population ecology. The environment is a given, managers cannot change it in any way.
New institutional economics is the most general evolutionary theory in that it allows for firms to change
both themselves and their environments.
Whether the behavior of entrepreneurs is ’hard wired’ and determined by evolutionary forces or is
learnt within a social and cultural setting is controversial.
Ethical judgments about entrepreneurs are sensitive to whether we are taking a motivist a deontological
or a consequentialist position on moral value.
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Classical economics: everyone has the same knowledge.
Informational economics has revolutionized thinking about contracts when one party knows something
the other does not. – information asymmetry, which leads to:
      Moral hazard: may look different but they are in fact variations on a theme
      Adverse selection: we are concerned with the agent having information on his abilities, that is
         not shared with the principal.
      Signaling: agent knows something the principal doesn’t know and shares it.
Economist refer to 4 features as information being: frictionless, perfect, symmetric and common.
Utility can be defined as being the usefulness of a resource of situation or the degree of satisfaction

Chapter 7
Developmental economics address how and why the we get wealthier, more democracy etc.
    - Theoretical branch that considers why productivity grows and how this leads to wealth creation
    - Empirical branch which calls upon economic techniques to develop an insight into how input
         factors are connected with economic growth.
    - Policy branch sets out to advice local, government ad supraanationaal-agencies.
There is lack of clarity as to the entrepreneur’s exact role due to
    - What is an entrepreneur?
    - Function of the entrepreneur in an economic system
    - Knowledge about how entrepreneurs interact with other aspect of the economic system such as
         government, existing commercial bureaucracy, social networks.
    - Difficulty in identifying the direction of causality
The government should:
    - Provide a supportive legislative environment
    - Restraint on the size of the public
    - Low and non-distorting taxation
    - Support for open and free international trade
    - Non-discrimination against ethnic and religious minorities
    - A zero-tolerance attitude towards corruption
National culture:
Differing cognitive scripts*, language, religious beliefs, personal relationships (power distance,
uncertainty avoidance, collectivity, masculinity), attitude towards innovation and networks.
*Arrangement scripts relate to knowledge of contracts, relationships, and asset and resource availability
Ability scripts relate to the individual’s assessment of their own technical/general managerial abilities
Willingness scripts relate to the individual’s commitment to starting or developing a venture.

Chapter 10
The entrepreneurial process is the creation of new value through the entrepreneur identifying new
opportunities, attracting the resources needed to pursue those opportunities and building an
organization to manage those resources.
The entrepreneur identifies the potential for change for the better
and exists in a state of tension between the actual and the
possible. What is – might be. 3 dimensions:
    1. The financial dimension: the potential to create new value
    2. The personal dimension: the potential to achieve personal
        goals
    3. The social dimension: the potential for structural change
The approach to the entrepreneurial process is based on 4
interacting contingencies. 


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The process is dynamic with the entrepreneur and the entrepreneurial organization learning through
success and failure.
The entrepreneur must be single-minded and focus those resources definitely and unambiguously on to
the opportunity that has been identified since the performance of the entrepreneurial organization
depends on how well the contingencies of opportunity, organization and resources are linked together.

Chapter 11
Entrepreneurs decide not only how to create wealth but also how to distribute it to the venture’s
stakeholders.
Classical economics suggest that the optimal organization is one in which individuals work to maximize
their own satisfaction from the goods available and freely exchange those goods between themselves. –
economically rational.
Key stakeholders: employees, investors, suppliers, customers, the local community and government.
Innovation is a means of exploiting a business opportunity.
     New products
     New services
     New production techniques – JIT, TQM
     New operating practices
     New ways of delivering the product or service to the customer
     New means of informing the customer about the product
     New ways of managing relationships within/between the organization(s).
     Multiple innovation – a combination of the above
     Opportunity must take priority over innovation
Entrepreneurs turn uncertainty into risk on behalf of investors, rather than take on risk themselves.
High pioneering-innovativeness (PI) – low pioneering-innovativeness
    - Based on a variety of strategic characteristics: idea management, management of autonomy,
         management of competition, growth strategy, HRM, risk management, network development.
                                                                 Table 11.1, page 241
Role of wealth creation in the entrepreneurial process
Reinvestment          Rewarding         Investment in other Personal reward         Keeping the score
                      stakeholders      ventures
Decision types are based on knowledge of three information sets:
Set of states of the world eventualities that the world may throw up in the future, outside control.
Set of acts                  choices the entrepreneur can make and has control over.
Set of outcomes              payoff expected to happen if the entrepreneur does this and that occurs.
Type of decisions
    - Decisions under certainty / uncertainty
    - Decisions under risk
    - Decisions under ambiguity (dubbelzinnigheid)  most common
    - Decisions under ignorance

Chapter 12
Resources occur at 3 levels: assets, organizational processes and organizational learning.
     - They are consumer, there is competition to get hold of them and they have a cost.
     - Cost: opportunity costs and cost of capital (cost of having an overdraft e.g. interest)
Financial resources: cash in hand (least productive, does not create new value), overdraft facilities,
loans, outstanding debtors, investment capital, investment in other businesses.
Operating resources: premises, motor vehicles, production machinery, raw materials, storage facilities,
office equipment.
Human resources

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     To be successful as an entrepreneur, you must learn to use yourself as a resource.
  Organizational learning
 Organizational processes             Guides the development of
  Tangible     Intangible
   assets        assets                    Guides the use of
Profits must be considered in relation to 2 other factors: opportunity costs and risk.
    - How well is an entrepreneur using resources?
The entrepreneur must compete with other businesses to get hold of resources by offering a good
return from using them.
Competitive advantage
     Cannot be imitated
     Difficult to trade
Dedicating resources to a particular venture exposes investors to risk, namely the possibility that the
return gained will be less than expected.
Entrepreneurs stretch and leverage their resources to make them work harder in the face of resource-
richer competitors. 10 interlinked processes:
    1. Convergence                                       6. Balancing
    2. Focus                                             7. Recycling
    3. Extraction                                        8. Co-option
    4. Borrowing                                         9. Shielding
    5. Blending                                          10. Recovery


Chapter 13
Organizations are best understood through the use of metaphors: the things they are like.
Active metaphors             Created consciously and explicitly as a strategy for developing
                             understanding.
Dormant metaphors            Those that are clear when we think about them, but we do not often do so.
                                  The word ‘organization’
Extinct metaphors            Those that are deeply embedded in our thinking that we only rarely
                             challenge them.
                                  ‘to see an opportunity’ we don’t actually see it
The organization as: a co-coordinator of actions; an independent agent; a network of contracts;
                          A collection of resources; a system; a processor of information
Controlling the resources in the organization means controlling the actions of the people in the
organization. To delegate you have to consider size, expertise and complexity.
Control mechanisms: directed action, routines and procedures, organizational strategy, organizational
culture, communicated vision and the hierarchy of resource control devices.
The open market and the closed hierarchy are pure forms of organization.
The entrepreneurial organization is best thought of as a network of relationships defined through
markets and formal hierarchies. The network lies somewhere between the two pure forms.
     - Network formation and the entrepreneurial start-up may include breaking relations of the key
          competitor with other organizations.
Extended organization is one which used the resources of other organizations in its network to achieve
its goal. Access to these resources is gained by building long-term, supportive and mutually beneficial
relationships.
Hollow organizations is one which exists not so much to do things itself but to bring other organizations
together. In effect it creates value by building a new network or making an existing one more efficient.
      Internet is encouraging the development of hollow organizations.
e-commerce: the use of the internet as an adjunct to selling and promotional activities.
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e-business: the use of the internet to enhance the performance of the organization’s entire operational
stance.

Chapter 14
Intrapreneurship is the possibility of entrepreneurial dynamism with the stability and market power of
the proven firm. The intrapreneur is an entrepreneur who works within the confines of an established
organization.
Intrapreneurship can operate at several levels:
     Managing specific projects
     Setting up new business units
     Reinvigorating the organization
     Reinventing industries
The potential for intrapreneurship is limited by:
     Existing manager’s comfort with rule-breaking intrapreneurs
        Letting go of some degree of control. Existing managers may not feel comfortable with this.
     Keeping the intrapreneur aligned with the organization’s strategy
        Unlike the entrepreneur, however, the intrapreneur must operate within some sort of
        organizational decision-making framework.
     The ability to provide the effective intrapreneur with sufficient reward
        Economic, social and developmental.


Chapter 15
While an entrepreneur may be a chief executive officer, the chief executive is not necessarily an
entrepreneur. The entrepreneur provides a bridge between the small business manager and the chief
executive of a large firm.
Entrepreneurial management is concerned with the whole organization. -> Entrepreneur may
underestimate the value of the management of particular functions  underestimate contribution
specialist  suspicious of the need for experts  difficulties giving specialist sufficient room.
                    Entrepreneurs                                        Chief executives
      Radical change                                        Incremental change
The roles of the entrepreneur and the chief executive are subtly different, although they overlap in
many ways. The entrepreneur is more interested in creating change, and may be more willing to take
risks than the role of chief executive properly calls for. This can expose the mature venture to
unnecessary risk.
Consolidation gives entrepreneurs an opportunity to specialize their roles within their organizations.
Important types of specialization:
      Chief executive
      Visionary leader
         Avoid making decisions personally, leave it to managers.
      Manager of business development
      Technical specialist
      Promoter of the venture
Effective entrepreneurs manage the process of succession (handing over power) positively and
effectively when it is time for them to move on.

Chapter 16
Vision
    - Can be defined and articulated as a management tool.
    - Can be used as the basis of a powerful leadership strategy.

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    - Entrepreneurs are managers with a vision
    - Is a picture of the new and better world that the entrepreneur wishes to create.
    - Specifies a destination rather than a route to get there. (page 322)
Vision is the starting point for giving shape and direction to the venture. Some sense of vision must exist
before strategy development and planning can start.
Visionary leadership demands communication of the vision in a way which draws stakeholders towards
the venture and motivates them to work for its success.
Approaches to communicating vision
     Describing the better world just as they see it
     Talking specific goals
     Talking strategy
     Story-telling
         1. Personal stories
             (a) Founding stories – autobiographical accounts of why the venture was started
             (b) Vision stories – stories about innovation and breakthrough
         2. Generic stories
             (a) Marketing stories
             (b) Strategy stories
         3. Situational stories
             (a) Historical stories
             (b) Conventional stories – about beliefs and attitudes of industry players and customers
     Why things can be better (emphasize wrong things in world)
     What’s in it for you
Strategic foresight is a skill in or capability for anticipating the future and predicting the long-term
effects of decisions made now. Effective strategic foresight may play a role in entrepreneurial success.

Chapter 17
A mission is a positive statement which defines what a particular venture is about and what it aims to
achieve. Developing a formalized mission can be valuable to the entrepreneurial venture because:
    1. It articulates the entrepreneur’s vision
    2. It encourages analysis of the venture
    3. If defines the scope of the business
    4. It provides a guide for setting objectives
    5. It clarifies strategic options
    6. It facilitates communication about the venture to potential investors
    7. It draws together disparate internal stakeholder groups
    8. It provides a constant point of reference during periods of change
    9. It acts as an aide-mémoire for customers and suppliers.
The mission statement can include a definition of the venture’s market scope, what it aims to do for its
stakeholders, its ambition and values. Entrepreneurs can use development of the venture’s mission as
part of their leadership strategy.
Mission
Strategic component: what the business aims to achieve
    - Product/service scope
    - Customer groups served
Philosophical component: values it will uphold
Both product/service scope and customer groups need to be specified with three things in mind:
    - Total market, the market it currently serves and the niches it aspires to serve.



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Other elements that might be included in a mission statement are: benefits offered and customer needs
served; the innovation on which the business is based and the sources of sustainable competitive
advantage; the aspirations of the business.
Developing a mission statement: relevant, stretch business, consistent with its ambitions, realistic with
opportunities, compatible with capabilities.
How will the mission be generated?
    1. Development through consensus (overeenstemming)
        Getting the whole (many parts) of the organization to contribute towards the development of
        the mission. Aim: gather information, create ideas and gain as many insights as possible. Allow
        people to be involved.
    2. Development by imposition
        Develop mission themselves, or with a small group, and then impose the organization as a
        whole.

Chapter 18
A strategy is the means by which the venture will achieve its aims.
Strategy content defines the products the venture will offer, the customer groups to be targeted and the
way in which the venture will compete within its markets.
Which strategy to adopt?
Deliberate (planned) approach to strategy is one in which the entrepreneur sets out to define a
strategic policy for the venture in which the future goals and competitive approach of the business are
clearly defines and translated into specific objectives.

An emergent approach to strategy creation is one in which future goals and strategic approach are left
more ambiguous. The entrepreneur concentrates on managing the venture’s short-term capabilities and
exploiting opportunities that present themselves as the business moves forward.
The traditional approach to strategic management emphasized the deliberate approach. Planning for
the future was the primary responsibility. Of late, there has been a reaction against this belief.
Criticism planning approach:
     - No correlation business performance and formal planning activity.
     - It only works if the future can be predicted with some certainty.
     - It suggest managers can control everything: not possible.
Become aware of the desired strategy content
      The entrepreneur’s communication of their vision
      The definition of a mission
      The setting of objectives
      Through informal discussion
The way in which entrepreneurs control the organization and ensure that it delivers that strategy
content they desire is dependent on: personal leadership style, ownership of resources, the way they
control resources, technical expertise, access to information, the way they set objectives. Page 357
The entrepreneur must make decisions, relates to the development of the mission; the development of
strategy; the control of resources; the way objectives will be set, monitored and rewarded.
Entrepreneurial entry strategies
Product-market domain
Focused entry            Addressing a single well-defined product-market domain.
Product spread           Offering a wide range of products to a single well-defined market.
Customer spread          Delivering a single or narrow range of products to a wide base of customers.
Adjacency                Offering a wide range of products to a broad customer base.
Scatter                  A variety of different product are offered to a variety of different customers.
                         No adjacent (nabijheid) segments.

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Competitive approach
   - Offering a new product or service
   - Offering greater value
   - Creating new relationships
   - Being more flexible
   - Being more responsive
 Table 18.1, page 365
A well-defined strategy aids the venture by defining the means by which it will achieve its goals in the
marketplace. A strategy acts as a guide for decision making and provides a common language for the
venture’s stakeholders. Entrepreneurs often express their venture’s strategy in the form of heuristics.

                                                                    Analysis
Chapter 19 – Business plan                                                                          Communication
                                                             Gathering and processing
There is no simple correlation between investment in       information (environment &             Gaining stakeholders'
planning and business performance, although there is                situation)                          support
evidence that planning may be important in small
business survival.                                                                       Succes
A business plan should include: mission, overview of
key objectives, market environment, strategy,
                                                                     Action                            Synthesis
financial forecasts, activity and people. Page 378          Definition of projects and        Creating an original strategy
Pyramid Principle can be adopted to produce                         objectives                   (content and process)
impactful and influential business plans.
Main heading:                Introduction

Main heading:              Supporting question 1
Sub-heading:               Argument 1 – Evidence 1
Sub-heading:               Argument 2 – Evidence 2
Sub-heading:               Argument 3 – Evidence 3

Main heading:               Support question 2
“                                        “                                  Table 19.1, page 384
The right sort of strategy can make the business more responsive:
     - Focus on ends rather than means                    - Create flexibility
     - Challenge assumptions                              - Leave space to learn
     - Model scenarios
The level of formality in planning will be influenced by the level of investment in the start-up, the
involvement of external stakeholders (especially, but not exclusively, investors), the availability and cost
of information, external support, and the entrepreneur’s personal style.

Chapter 20
Sources ad types of financial investment
   - Entrepreneur’s own capital
   - Informal investors
   - Internal capital networks
   - Retained capital
   - Business angels (individuals/small groups who offer up their own capital)
   - Retail banking
   - Corporate banking
   - Venture capital (seek investment opportunities with high rate of return >$250.000)
   - Public flotation (raising capital by offering shares >$5 million

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    - Government
    - Commercial partnerships
    - Micro-finance
How backers select investment opportunities
Deal origination             The way the entrepreneur and the investor make contact
Deal selection               Initial evaluation to make sure the deal is right for the investor
Deal evaluation              Detailed evaluation to assess risk and return
Deal structuring             Investor’s entry and exit strategy
Post-deal activity           Monitoring, control and support given by investor
The questions that investors need answering
 1. Is the venture of the right type?                6. What is the potential for the venture?
 2. How much investment is required?                 7. What are the risks for the venture?
 3. What return is likely?                           8. How does the investor get in/out?
 4. What is the growth stage of the venture?         9. What post-investment monitoring procedures are
 5. What projects will the capital be used for?           there?
                                                     10. What control mechanism will be available?

     The vast majority of investment proposals are rejected.


Effective entrepreneurs approach investors with an understanding of the questions for which they will
need answers before they decide to support the venture. Professional investors are acute to, and
dismissive of, extravagant claims in business plans.
The prisoners’’ dilemma provides an illuminating game-theoretical model of entrepreneur-investor
interactions and can explain why entrepreneurs and investors can sometimes fail to agree to mutually
rewarding deals.
    - Players are rational

Chapter 21
Why existing businesses leave gaps in the market?
    1. Established businesses fail to see new opportunities.
         Organizational inertia: resistance to change in response to changing circumstances
    2. New opportunities are thought to be too small.
    3. Technological inertia (sloomheid)
    4. Cultural inertia
    5. Internal politics
    6. Anti-trust actions by government
    7. Government intervention to support the new entrant
          tax incentive, moral liberal employment laws, cheap loans and credit
Economic perspectives on entrepreneurial gaps
Arend (1999): under some circumstances, established businesses may leave gaps for new
entrepreneurial entrants (who will become competitors) even though they are aware of the
entrepreneurial opportunity that is available and act rationally to exploit it.
Competing firms have only one optimal strategy if they wish to maximize profits.
    - Exogenous: all competitors have equal access to the technology
    - Stable technology: fixed, does not change
Static efficiency strategy: Ignore the technological advance, not face the cost of integrating it, and so
maintain short-term profitability.
Dynamic efficiency strategy: Integrate technology, which increases short-term costs but offers the
promise (with some risks) of increasing long-term profitability.

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Large business often undervalue new opportunities, are complacent (zelfingenomen) about them and
are unresponsive owing to internal inertia.
           (1) Spotting (2) Locating (3) Measuring (4) Opening (5) Moving through (6) Closing

Phase 1:      Scan the business environment and find out where the gaps, the windows are.
Phase 3:      Measure it, make sure the opportunity is big enough to justify the investment needed
       to open it.
Phase 6:      Closing the window. If not, competitors will be able to follow the entrepreneur through
              and exploit the opportunity themselves. Closing builds in competitive advantage.

Chapter 22
                            Stage 1 – Spot, screen and select opportunities

      New product                                          New distribution route
      New service                                          Improved service
      New means of production                              Relationship building
Methods of spotting opportunities
Some are so straightforward the entrepreneur may not even realize that they are using them. They may
be articulated in the form of a (1) heuristic or rule of thumb.
      Analysis heuristics
 Cognitive strategies that entrepreneurs adopt in order to gain and integrate new information about the
 world, to understand the patterns in this information and to spot market gaps.
      Synthesis heuristics
Using cognitive strategy to bring ideas developed from analysis back together again in a new and
creative way, generating a new perspective on customer needs and how they might be addressed.
(2) Problem analysis starts by identifying the needs that individuals or organizations have and the
problems that they face.  What could be better? How might this be solved?
(3) Customer proposals
(4) Creative groups
(5) Market mapping, involves identifying the dimensions defining a product category. The map may be
used to identify gaps in the market and to specify the type of product that might be used to fill them.
(6) Features stretching involves identifying the principal features which define a particular product or
service and then seeing what happens if they are changed in some way.
(7) Features blending involves identifying features which define particular products. Instead of just
changing individual features, however, new products are created by blending together features from
different product of services.  hi-fi system with features of CD player, tuner and amplifier
Screening and selecting opportunities
Entrepreneur’s decisions should be based on the answers to the following questions:
      How large is the opportunity?
      What investment will be necessary if the opportunity is to be exploited properly?
      What is the likely return?
      What are the risks?
Entrepreneurial innovation

Potential impact High     New insight innovation ‘New world’ innovation
in market        Low      Incremental innovation Specialist innovation
                          Established       Technology           New

Market knowledge
   - Concerned with customers, needs, demands
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Technological knowledge
   - Effective development and production of the product
        or service aimed at the customers.
Capability knowledge
   - Venture’s understanding of what it does and
        why it does it well.


Chapter 23
                                             Stage 2 – Locating
Positioning provides a framework for locating the venture in relation to its competitors.
      Exploit a gap in a profitable way
An effective positioning means that the business will be able to develop a competitive advantage in
serving this niche. This makes the niche defendable against competitors.
Strategic positioning looks at the way in which the business’s approach to delivering value to its
customers is distinct from that of its competitors. – located in competitive spave
Competitive space can be defined along 4 dimensions:
     1. Stage in value addition
         Value addition chain: the process whereby the outputs of one business provides the inputs for
         the next business along.
     2. Customer segments addressed
     - Geographical location
     - Industry
     - Demographics of buyer
     - Buying process
     - Psychographics – buyer’s attitude towards the product category
     3. Customer needs addressed
         Success depends on gaining customer commitment, and the best way to do that is to genuinely
         serve the needs and to solve the problems that customers have.
     4. Means of addressing needs (technology)
Market positioning describes the way its outputs, products and services are located in the marketplace
relative to those of competitors.
First stage: develop an understanding of the criteria by which buyers distinguish among the different
products on offer and the extent to which they consider them to be sustainable. General factors:
     - Price                                             - Number and type of features
     - Perceived quality                                 - Branding imagery
     - Demographic imagery                               - Service and support
     - Performance                                       - Attitude towards supplier
                                         Features of product/service which actually deliver its functional
                                         benefits.

                                         Design and branding elements which make the product/service
                                         attractive to use.

                                         Aspects of the product/service which appeal directly to the
                                         consumer’s emotional and spiritual needs rather than to their
                                         purely functional ones.

Effective positioning is a critical success factor for the new venture.


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A business opportunity is analyzed by qualitative methods which answer what and why questions and
quantitative methods which answer how much and how many questions.
Information can be expensive. Effective entrepreneurs weigh the value of information against the cost
of obtaining it. Information is regarded as an investment in the business.
There are a number of issues about which the entrepreneur must be informed if they are to make
effective decisions in relation to their venture.
    1. Existing market conditions and the opportunity they present
    2. The way in which entrepreneurs might innovate and offer something of value to market
    3. The way in which the entrepreneur can get the venture started
    4. The way in which competitors are likely to responds to the venture.
Some specific information requirements: general market conditions, attractiveness of the innovation,
the way the new ventures can be initiated and positioned in the market place and the way in which
competitors might react to the new venture.
A number of factors drive the extent to which the entrepreneur engages in formal as opposed to
informal market analysis and planning.
    - Cost of start-up                                    - Perceptions of business risk and ambiguity
    - Involvement of external stakeholders                - External support with planning activities
    - Availability and cost of information                - Entrepreneur’s personal style
Chapter 24
                                               Stage 4 - Opening
The key commitments are financial support from investors, productive support from employees and
network contacts; agreements to provide inputs by suppliers; and agreement to purchase outputs by
customers.
Competition generates an overall increase in value for all entrepreneurs:
By defining opportunity costs it provides a strong signal as to which opportunities are worth pursuing
and which are not. By offering investors a good return, it generates capital that can be used to make
further investments.
Gaining financial investment
Money is likely to take first place on the list of priorities.
     What level of investment is required?
     Where is the investment come from? (Ch11)
     What is the capital structure of the investment to be?
        Capital structure: the mix of different investment sources that are used “Equity of debt”
     How will the investors be approached?
         1. Identify suitable sources of investment – WHO
         2. Consider the HOW of the contact, formal/informal, written/verbal proposal?
         3. Consider WHAT to tell the investor.
     What proposition is to be made to the investors?
          amount, degree of risk, degree of control, level of return, nature
Gaining human commitment
What human skills are required and how do we obtain them? What can we offer them, besides a salary.
How will we contact and evaluate potential employees? (When) Should we outsource?
Establishing a presence with distributors
Distributors create real economic value: They provide logistic efficiency; they provide information to
compare; can offer support with promotion of goods; provide producers with liquidity.
Concern when max. profit: margin on goods ↑, rate of sale (how much sold) ↑, cost of storing ↓

Chapter 25
                                           Stage 6 – Closing


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Closing the window means creating a competitive advantage so that the venture can go on exploiting
the opportunity in the face of competitive pressures.
A full delivery of competitive advantage demands decisions at 3 levels:
    1. Competitive advantage – what will be offered that is unique and valuable?
         Types: low price, features, service, branding, brand imagery, access and distribution
    2. Source competitive advantage – how that offering will be maintained by business
         John Kay sees competitive advantage having sources in one of four distinct capabilities:
             - Architecture (internal structure)               - The way business innovates
             - Reputation (stakeholders view)                  - Strategic assets
         Sources of competitive advantage:
Cost sources                                          Knowledge sources
Lower input cots                                      Product knowledge
Economies of scale                                    Market knowledge
Experience curve economies                            Technical knowledge
Technological innovation
Considerations:                                       Considerations:
Important?                                            How to gain? Outsource? Patents?

Sustaining cost advantages                            Sustaining knowledge advantages
Low profit margin, cost control. Cost leadership      Patens should be used tactically to provide initial
strategy is expensive on short-term.                  advantage which can then be used to develop other
                                                      advantages based on cost and relationships.
Relationship sources                                  Structural sources
A relationship established trust and trust adds       How the business organizes itself.
value by reducing the need for contracting and        Business-coordinated by strong leader
monitoring.                                           Emphasize tasks rather than roles

Considerations:                                       Considerations:
Risk? Sense of trust? Reputation?                     Decision-making process? Leadership style?

Sustaining relationship advantages                 Sustaining structural advantages
Trust: experience, communication, reputation       Invest in human and communication systems, change.
Must have 3 interlocking aspects:
Management of expectations
Management of outcomes
Management of communication
    3. Way it will be sustained – protected from imitation

Chapter 26
Growth is dependent on the venture’s ability to attract new resources.
The larger a firm, the less risk it is exposed to. Size reflects success and the larger the firm, the more
resources it will have. Using resources to fuel growth is an investment.
Financial growth
Development of the business as a commercial entity.
     Growth in income, assets and capital are equally important
     Expenditure and profits (balance sheet, profit and loss account)
Strategic growth
Changes that take place in the way in which the organization interacts with its environment as a
coherent, strategic whole.  centre stage
     Growth in market

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     Competitive advantage
Growth and cost advantages
The main source of cost advantages are experience effects. Cost advantages have not already been
established in the market. Potential volume outputs make entry into the market worthwhile. To avoid
substitutes, innovation in the entrepreneurial success is important.
The entrepreneur is looking towards distributors as the basis for developing a non-cost competitive
advantage. Cost leadership is only an option for business which is an industry makes and which aims to
deliver its output to a wide/global market.
Growth and knowledge advantages
    - How significant is the knowledge advantage? – how valuable?
    - How will the knowledge advantage be eroded (verslechteren)?
Market research and product development have priority.
Growth and relationship advantages
When a company growths, the entrepreneur cannot longer represent the organization to all the parties
who have an interest in it. New individuals must develop the organization’s relationship on a specialist
basis.
Growth and structural advantages
Structural growth
Changes in the way the business organizes its internal systems. One well-explored approach to
understanding how the particular situation of an organization defines its structure is provided by
contingency theory. Dependent on 5 types of factor: organizational size, operational technology is uses
to create value, the strategy it adopts, the environment and the way power is utilized.
    - Company with repetitive task have more formal structures, well-defined roles & responsibilities
                                                                                         Table 26.3, page 534
Organizational growth
Changes in the organization’s processes, culture and attitudes as it grows and develops. Also changes
that must take place in the entrepreneur’s role and leadership style as the business grows.
     Growth in the organization’s culture and attitudes.
Information: technical knowledge and market intelligence
Capital: customer goodwill, investor goodwill
People: employee goodwill
The resource acquisition approach
    1. Entrepreneur attracts all resources
    2. Ad hoc delegation of resource acquisition
    3. Entrepreneur delegates resource acquisition to management team
    4. Resource acquisition managed by specialist functions coordinated by entrepreneur
The desirability of growth must be reflected in the entrepreneur’s vision, the potential for growth must
be recognized in the venture’s mission, the direction must be indicated by the venture’s strategy and
the management demands resource flows.
Effective entrepreneurs recognize that the growth of the venture provides all of its stakeholders with an
opportunity for personal growth and development.
Evolutionary growth emphasizes changing pattern of competition and cooperation with other
organizations and stakeholders.
Dialectical growth emphasizes changing pattern of alignment, conflict and resolution of different
stakeholder interest.
Trialectical growth emphasizes different possible futures and their differing attractiveness.
Teleological growth emphasizes role off entrepreneur’s vision in shaping the venture’s future.
Chaotic growth emphasizes unpredictability of future, limited control of outcomes and controllability of
situations.                                                               Figures on page 541-545


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Exam

Sample exam questions Innovation and Entrepreneurship

Multiple choice questions
An entrepreneur creates new business in the face of risk and uncertainty for the purpose of achieving
profit and growth by identifying ...
a) Products
b) People
c) Opportunities
d) Jobs

Which one of the following statements is not (!) a valid reason why small businesses are important to
a country’s economy
a) They tend to keep salaries small
b) They can provide specialist support to larger companies
c) They can be innovators of new products
d) They provide competition to large companies
Open question

1A) Wickham refers to entrepreneurship as: “Entrepreneurship is a management style”. Mention
three aspects of “entrepreneurial management” and define what they mean.
1B) Wickham mentions five different types of persons that become an entrepeneur. Mention four
types and explain.
1C) Define three push and three pull factors related to entrepreneurship and explain them with the
help of examples




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       Management & Organisation 201000050


Language      English
Study         International Business Administration
                Phase B1         Quartile 2A
Instructional Instruction/Lecture (required), Lecture (required), Self-Study (required)
modes
Examformat Written exam
Credits       5.0 EC
Lecturer(s) dr.ir. E. Hofman; dr. M.J.T. van Velzen (email to: m.vanvelzen@utwente.nl)




Unfortunately,there is no example exam of this course available.For further summaries look at
www.stress.utwente.nl/study under “exams and summaries”.




                                                        Propedeusebundel 2011-2012 IBA      82
Summary of the book “Management – An Introduction” (5th edition) by Boddy

Chapter 1
1.3      Meanings of management
Managers create value by transforming inputs into outputs of greater value: they do this by
developing competences within the organization which, by constantly adding value to resources, is
able to survive.
A manager is someone who gets things done with the aid of people and other resources.
Management is the activity of getting things done with the aid of people and other resources.
Management as a universal human activity occurs whenever people take responsibility for an activity
and consciously try to shape its progress and outcome.
Management as a distinct role develops when activities previously embedded in the work itself
become the responsibility not of the employees but of the owners/agents.
1.4      Specialization between areas of management
General managers are responsible for the performance of a distinct unit of the organization.
They depend on functional managers who are responsible for the performance of an area of
technical or professional work. Line managers are responsible for the performance of activities that
directly meet customers’ needs. Staff managers are responsible for the performance of activities
that support line managers.
Managing the business – board of directors
1.5      Influencing through the process of managing
The processes of managing
Minzberg identified 10 management roles in 3 groups:               Table 1.2, page 15
Informational: Monitor, disseminator, spokesperson
Interpersonal: Figurehead, leader, liaison
Decisional:      Entrepreneur, disturbance handler, resource allocator, negotiator
The tasks (or content) of managing.
Planning is the activity of developing the broad direction of an organization’s work, to meet customer
expectations, taking into account internal capabilities. Organizing is the activity of deciding how to
deploy resources to meet plans.
Contexts within which they and others work.
Objectives, technology, business processes, finance, structure, culture, power and people are
elements of the organizational context. The historical context also influences events, as does the
external context made up from the competitive and general environments.
1.6      Influencing through the task of managing
Management task are those of planning, organizing, leading and controlling the use of resources to
add value to them.
1.7      Influencing through shaping the context
Dimensions of context
     Internal context                                     External context
     Historical context
Managers use one of three theories of the link between their context and their action:
Determinism
Context                                  Manager’s action
Managerial choice
Context                                  Manager’s action
Interaction
Context                                  Manager’s action

1.8    Critical thinking

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Critical thinking is a positive approach to studying, as it encourages people to develop the skills of
identifying and challenging assumptions; recognizing the importance of context; imagining and
exploring alternatives; and seeing the limitations of any idea of proposal.
Managers are expected to:
     1. Achieve environmentally sustainable performance
     2. Meet expectations about governance and control
     3. Work in an increasingly international economy
Five distinct profiles: emissaries, writers, discussers, troubleshooters, committee members.

Chapter 2
2.2      Why study models of management?
A model (or theory) represents a complex phenomenon by identifying the major elements and
relationships.
Managers ignore evidence because they trust personal experience more than they trust research,
they prefer to use a method/solution which has worked before, they rely on dogma and myth and
they are susceptible to consultants who promote their solutions.
Perspectives:
Unitary perspective       - eenheid
Emphasizes the common purpose of organizational members.
Pluralist perspective
Draws attention to competing interest groups. Conflicts are inevitable.
Radical perspective
Challenge both unitary and pluralist models. Argue that they ignore the fact that horizontal and
vertical divisions of labor sustains unequal social relations within capitalist society.  managers and
employees will be in conflict as long as these exist.
Morgan’s 8 ways if seeing organizations as: machines, organisms, brains, cultures, political systems,
psychic prisons, flux and transformation and instruments of domination.
2.3      The competing values framework
The competing values framework                                              Figure 2.2, Page 41
Is a way of integrating the otherwise confusing range of theories, and between an external and
internal focus. Placing these on the 2 axes allows theories to be allocated to one of 4 types – rational
goal, internal process, human relations and open systems.
2.4      Rational goal models
Rational goal (Taylor, the Gilbreths and operational research)
Systematic work methods, detailed division of labor, centralized planning and control and low-
involvement employment relationship. An emphasis on rational analysis and measurement.
Contributed to the management agenda:
     - Techniques: time and motion study, work measurement, planning operations techniques
Internal process (Weber, Fayol)
Routinisation leads to stability, so an emphasis on defining responsibility and on comprehensive
documentation and administrative processes. Contributed to management:
     - Clear targets and measurement systems, creation of clear management structures.
2.6      Human relations models
Human relations (Follet, Mayo)
People are motivated by social needs, and managers who recognize these will secure commitment.
Practices include considerate supervision, participation and seeking consensus. Contributed to
management agenda:
     - Considerate supervision, consultation and participation in decisions affecting people.

2.7     Open system models

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Open systems (socio-technical, contingency and complexity)
Continual innovation secures external support achieved by creative problem solving. An open system
is one that interacts with its environment. Contributed to management agenda:
    - Understanding external factors and being able/willing to respond to them through individual
         and organizational flexibility.
Socio-technical system is one in which outcomes depend on the interaction of both the technical and
social subsystems.
The contingency approach implies that managers consciously look out for aspects of their
environment which they need to take into account in shaping their organization.
Complexity theory is concerned with complex dynamic systems that have the capacity to organize
themselves spontaneously. Non-linear systems are those in which small changes are amplified
through many interactions with other variables so that the eventual effect is unpredictable.
Pfeffer and Suttons’s ideas on evidence-based management offer a model which those seeking more
effective governance and control could use – challenging managers to back-up ideas with more
rigorous evidence and analysis to reduce risk.
2.5      Internal process models
Bureaucracy
Rules and regulation, impersonality, division of labor, hierarchical structure, authority structure,
rationality.

Chapter 3
3.1      Introduction
The internal environment consists of elements within the organization such as its technology,
structure or business processes.
The external environment consist of elements beyond the organization – it combines the
competitive and general environments.
A competitive environment is the industry-specific environment comprising the organization’s
customers, suppliers and competitors. – micro-environment
The general environment includes PESTEL factors that affect all organizations. – macro-environment
Managers do not passively accept their business environment, but try to shape it by actively
persuading governments and other agencies to act in their favor.
3.2      Cultures and their components.
Stages of cultural formation: shared values, shared beliefs, norms, individual and group behavior,
reinforcing outcomes.                                                               Figure 3.2, page 80
Artifacts represent the visible level
 Architecture, technology and equipment, style (clothing), rituals and ceremonies, courses
 Mac Donald’s training is also an artifact, just like the legends and myths of a company.
Espoused beliefs and values are accumulated beliefs that members hold about their work.
 Quality pays, we should stick to our core business, we depend on close team work
Basic underlying assumptions are deeply held by members of the group as being the way to work
together. Difficulties arise when groups have different assumptions and work together.
 We employ highly motivated and competent adults, people can make mistakes, as long as they learn
3.3      Types of culture
There are three ways of describing and comparing cultures
     1. Competing values framework
It reflects inherent tension between flexibility or control and between an internal or external focus.
Open systems
The external environment plays a significant role and is a vital source of ideas, energy and resources.
It also sees the environment as a complex and turbulent, requiring entrepreneurial, visionary
leadership and flexible, responsive behavior.
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    - Motivating factors: growth, stimulation, creativity and variety
 Start-up firms, new business units – organic, flexible operations
Rational goal
Organization is a rational, efficiency-seeking unit. Define effectiveness: production or economic goals
that satisfy external requirements. Leadership tends to be directive, goal-oriented and functional.
    - Motivating factors: competition and the achievement of goals
 Large, established businesses - mechanistic
Internal process
Focus on internal matters. Goal: make the unit efficient, stable and controlled. Task are repetitive
and methods stress specialization, rules and procedures. Cautious leaders.
    - Motivating factors: security, stability and order
 Utilities and public authorities – suspicious of change
Human relations
Emphasis on the value of informal interpersonal relations rather than formal structures. Define
effectiveness: well-being and commitment. Leaders tend to be participative, considerate and
supportive. Nurture members of the organization.
    - Motivating factors: attachment, cohesiveness and membership
 Voluntary groups, professional service firms and some internal support functions
    2. Charles Handy’s cultural types
Power culture is one in which people’s activities are strongly influences by a dominant central figure.
Role culture is one in which people’s activities are strongly influenced by clear and detailed job
descriptions and other formal signals as to what is expected from them.
Task culture is one in which the focus of activity is towards completing a task or project using
whatever means are appropriate.
Person culture is one in which activity is strongly influenced by the wishes of the individuals who are
part of the organization.
    3. Multiple cultures (Martin)
Integration – Focus on identifying consistencies in the data, and using those common patterns to
explains events. (CEO’s, head office managers)
Differentiation – Focus on conflict, identifying different and possibly conflicting views of members
towards events. (store managers)
Fragmentation – Focus on the fluid nature of organizations, and on the interplay and change of views
about events. (store employees)                                                     Table 3.1, page 84
3.4      The competitive environment – Porter’s five forces
A technique for identifying and listing those aspects of the five forces most relevant to the
profitability of an organization at that time.
Threat of new entrants                                 Bargaining power of suppliers
Intensity of rivalry among competitors                 Threat of substitutes
Power of buyers (customers)
3.5      The general environment - PESTEL
A technique for identifying and listing the political, economic, social, technological, environmental
and legal factors in the general environment most relevant to an organization.
Legislation and regulation does not belong to Political aspects, but are considered legal aspects.
3.6      Types of environment and stakeholders
Successful companies regularly responded more effectively to unexpected shifts in regulation,
technology, competitive or macro-environments. They did this by actively waiting:
Keeping priorities clear, keeping a reserve of cash (more page 95)
Organizations depend on their micro and macro environments for the resources they need.
Stakeholders in these environments make resources available or withhold them. Figure 3.7, page
97

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Degree of complexity: number of PESTEL factors and knowledge required
Degree of dynamism: frequency of change in PESTEL factors.                         Figure 3.6, page 94
3.7     Corporate governance
Corporate governance refers to the rules and processes intended to control those responsible for
managing an organization.
Agency theory seeks to explain what happens when one partly delegates work to another party.
Stakeholder theory tries to explain the evolving relationships between an organization and its
stakeholders.
3.8     Integrating themes
Climate change is not a theory struggling to maintain itself in the face of problematic evidence. The
opposite is true: as new information comes in, it reinforces our understanding across a whole
spectrum of indicators.
While culture has a powerful effect on what people do in an organization, when they operate
internationally it provides an opportunity to benefit from diverse perspectives.

Chapter 4
4.1       Introduction
International management is the practice of managing business operations in more than one
country.
 working as an expatriate (emigrant) manager, international team, global organization
4.2       Ways to conduct business internationally
Outsourcing                                              Exporting/importing
     - Cost-effectively
     - Cheaper staff
Foreign direct investment (FDI)
The practice of investing shareholder funds directly in another country, by building or buying physical
facilities or by buying a company.
Licensing is when one firm gives another firm the right to use assets such as patents or technology in
exchange for a fee.
Franchising is the practice of extending a business by giving other organizations, in return for a free,
the right to use your brand name, technology or product specifications.
A joint venture is an alliance in which the partners agree to form a separate, independent
organization for a specific business purpose.
Managers who want to retain close control over their company’s international activities can create a
subsidiary (dochtermaatschappij).
Different forms of organization through which to conduct their international business:
   1. Multinational companies are managed from one country, but have significant production and
        marketing operations in may others.
   2. Transnational companies operate in many countries and delegate many decisions to local
        managers.
   3. Global companies work in many countries , securing resources and finding markets in
        whichever country is most suitable.            Nestlè
4.3       The contexts of international business – PESTEL
Economic context
The theory of absolute advantage is a trade theory which proposes that by specializing in the
production of goods and services which they can produce more efficiently than others, nations will
increase their economic well-being.
Political context
Political risk is the risk of losing assets, earning power or managerial control due to political events
or the actions of host governments.

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An ideology is a set of integrating beliefs, theories and doctrines that help to direct the actions of a
society.
Pervasiveness (corruption) represents the extent to which a firm is likely to encounter corruption in
the course of normal transactions with state officials.
Arbitrariness (corruption) is the degree of ambiguity associated with corrupt transactions.
4.4      Legal context – trade agreements and trading blocs
Managers planning to enter an overseas market need to ensure that they are familiar with local laws
and regulations affecting business practice: they also need to satisfy themselves that the legal system
will protect them.
GATT and the World Trade Organization
     - General agreement on Tariffs and Trade reduces the propensity of national governments to
         put tariffs on physical goods to protect domestic companies.
European Union
The aim of the EU has been to eliminate tariffs and other restrictions that national governments use
to protect domestic industries. The European Commission is encouraging liberalization by proposing
changes in national laws to make cross-border trade easier.
4.5      Socio-cultural context
Low-context cultures are those where people are more psychologically distant so that information
needs to be explicit if members are to understand it.
 Americans, Germans, Scandinavians and other northern Europeans
High-context cultures are those in which information is implicit and can only be fully understood by
those with shared experiences, values and assumptions in the culture.
 Japanese, Arabs and Mediterranean people
4.6      Hofstede’s comparison of national cultures (dimensions)
Power distance
Power distance is the extent to which the less powerful members of organizations within a country
expect and accept that power is distributed unevenly.
Uncertainty avoidance
Uncertainty avoidance is the extent to which members of a culture feel threatened by uncertain or
unknown situations. The willingness to tolerate ambiguity.
Individualism/collectivism
Individualism pertains to societies in which the ties between individuals are loose.
Collectivism describes societies in which people, from birth onwards, are integrated into strong,
cohesive in groups which
Masculinity/femininity
Masculinity pertains to societies in which social gender roles are clearly distinct.
Femininity pertains to societies in which social gender roles overlap.
Long-term and short-term orientation
LTO stands for the fostering of virtues oriented towards future rewards. – China, Hong Kong, Japan
STO stands for the fostering of virtues related to the past and present. – GB, Australia, US, Canada
US – individualistic, rational approach, contingent design of organizations
Europe – collective, rational approach, pragmatic
Japan – collective responsibility, trust of subordinates, consensus building
Limitations of Hofstede’s work:
Basing the original sample on the employees of a single multinational; the possibility that cultures
change over time; the variety of cultures within a country; the small number of respondents in some
countries; reducing a phenomenon as complex as a nation’s culture to 5 dimensions.
4.8      Contrasting management systems
Globalizations refers to the increasing integration of internationally dispersed economic activities.


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Yip developed a model of the factors that drive globalization in particular industries. Managers can
use such a model to analyze the global potential of a business.
     Market factors        Environmental factors         Competitive factors        Economic factors
4.9     Integrating themes
Sustainable performance
Reducing global emissions of greenhouse gases depends on regulations by governments and
international bodies; while the shape of these is still uncertain managers should plan their long-term
investments in ways that anticipate these changes.
Governance and control
Governance arrangements vary between countries, reflecting the evolution of distinctive national
systems.
Internationalization
Managers are often active in influencing government policy and regulations in the countries in which
they would like to do business.

Chapter 5
5.2     Contrasts in business practice
Philanthropy is the practice of contributing personal wealth to charitable or similar causes.
    - People give to charity and other causes without expecting any specific benefit in return.
Enlightened self-interest is the practice of acting in a way that is costly or inconvenient at present,
but which is believed to be in one’s best interest in the long term.
Corporate responsibility refers to the awareness, acceptance and management of the wider
implications of corporate decisions.
Examples:
Poor treatment of suppliers or staff; wasteful uses of energy and other resources during
transformation; unfair treatment of customers. Reputations are also damaged by cases of fraud or
high compensation to failed managers.
5.3     Perspectives on individual actions
Four criteria for evaluating an action
    1. Moral principle
         The decision is consistent with generally accepted principles.
    2. Utilitarianism
        The decision that benefits the greatest number of people is the right one to take.
    3. Human rights
        Decisions that support one of several human rights (such as privacy) are right.
    4. Individualism
        Decisions that serve the individual’s self-interest are right; in the long run they will benefit
        society as well.
5.4     Perspectives on corporate actions
* Social contract consists of the mutual obligations that society and business recognize that have to
each other.

Legal responsibilities            Obey the law.
Economic responsibilities         Friedman’s view that the only function of business is to act legally
                                  in the interests of shareholders. Make a profit.
Ethical responsibilities          That business has wider responsibilities, since it depends on
                                  aspects of the society in which it operates. Do that is right, avoid
                                  harm. *
Discretionary responsibilities    Actions that are entirely philanthropic.
5.5      An ethical decision-making model

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  Ethical decision-making models examine the influence of individual characteristics and
  organizational policies on ethical decisions.                                                   
  Figure 5.4, page 114
Individual factors:
Stage of moral development        The extent to which the person can distinguish between right and wrong.
                                  The higher, the more ethical acting.
Ego strength                      The extent to which people are able to resist impulses and follow their
                                  convictions. The greater, the more likely right behavior.
Locus of control                  The extent to which the person believes he/she has control over his/her life,
                                  rather than this being determined by others. Having control  act ethical.
Contextual factors:
Work-group norms                  The beliefs within the work group about how to behave in a situation
Incentives                        Such as management policies on rewards and disciplines
Rules and regulations             Management policies about relevant ethical dilemmas

 Ethical relativism is the principle that ethical judgments cannot be made independently of the
 culture in which the issue arises.  if local and home country norms conflict, people should follow
 local norms.
 5.6      Stakeholders and corporate responsibility
 Ethical investors are people who only invest in businesses that meet specified criteria of ethical
 behavior.
 Stakeholders’ expectations and relative power will influence how managers interpret responsible
 behavior, bearing in mind Vogel’s point that this is only sustainable if its supports strategy. The
 chapter sows how this happens – when corporate responsibility is part of the mission, meets
 customer needs or otherwise supports strategy.
 Managers influence stakeholders – the lobbying business
 5.7      Corporate responsibility and strategy
 Responsible action as the corporate mission
  The Body Shop founder took a strong ethical position on issues as testing cosmetics on live
 animals.
 Responsible action to meet customer needs
 Ethical customers are those who take ethical issues into account in deciding what to purchase.
 Responsible action as part of strategy
 Using energy efficiently, avoiding waste and treating staff with respect are established daily practices
 in many companies – some of which not present such practices as part of a responsible image.
      Positive link between responsible corporate behavior and financial performance
 5.8      Managing corporate responsibility
 Managers use several methods to promote responsible behavior:
 Leading by example: senior managers set the tone for an organization by their actions.
 Codes of practice: formal statement of the company’s values, setting out general principles on
 matters such as quality, employees or the environment.
 Corporate responsibility structures and reporting
 Formal systems and roles that companies create to support responsible behavior. This may include
 staff with direct responsibilities for developing and implementing company policies and practices,
 Most companies now include a corporate responsibility statement in their AR, this may include an
 ethical audit. = the practice of systematically reviewing the extent to which an organization’s actions
 are consistent with its stated ethical intentions.
 Inclusion in the FTSE4Good Index Series
 Guides investors on companies that meet defined criteria of corporate responsibility.


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Environmental management; climate change mitigation and adaptation; countering bribery;
upholding human and labor rights; and supply chain labor standards.
5.9      Integrating themes
Sustainable performance
One set of schemes to reduce emissions are carbon trading schemes, in which industries with heavy
emissions can buy permits to continue to do so from companies that use less than their allowed
level. Although still imperfect, these schemes illustrate how companies can relate aspects of
corporate responsibility to their strategy.
Governance and control
There is evidence that some companies use environmental management schemes, intended to act as
form of governance and control, more impress customers and regulators than to change daily
practice.
Internationalization
Variations in corporate responsibility reporting between countries may have more to do with the
traditions of national management systems than with differences in practice.

Chapter 6
6.2      Purposes of planning
Planning, if done well: clarifies direction; motivates people; uses resources efficiently; and increase
control, by enabling people to measure progress against targets.
6.3      The content of plans
The act of planning may in itself add value, by ensuring that people base decisions on a wider range
of evidence than if there was no planning system.
Type of plans: strategic, operational and activity.
Enterprise resource planning (ERP): computer-based planning system which links separate databases
to plan the use of all resources within the enterprise.
6.4      The process of planning
Alternative planning processes – evaluate when suitable
A planning system refers to the processes by which the members of an organization produce plans,
including their frequency and who takes part in the process.
Plans can be formal/rational/top down in nature, or they can be adaptable and flexible (logical
incrementalism); accumulating evidence that a combination of approached most likely to suit firms in
volatile conditions.
Seven iterative steps in planning
     1. Gathering information                               5. Implementing plans
     2. Developing a mission                                6. Monitoring progress
     3. Setting goals & objectives                          7. Evaluating results
     4. Identifying actions & allocating resources
6.5      Gathering information
Five forces
SWOT analysis – strengths, weaknesses, opportunities and threats
Critical success factors: those aspects of a strategy that must be achieved to secure competitive
advantage.
Forecasting: based on an analysis of past trends in factors such as prices, sales patterns etc.
Optimism bias (judge future events more positive)
Strategic misrepresentation (underestimate costs, overestimate benefits
Sensitivity analysis: tests the effect on a plan of several alternative values of key variables.
Scenario planning: attempt to create coherent and credible alternative future stories.
6.6      Setting goals (or objectives)
Theory to evaluate the motivational effect of goals stated in a plan
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Goal setting theory predicts that goals can be motivated if people perceive the targets to be difficult
but achievable.
Stated goals are those which are prominent in company publications and websites.
Real goals are those to which people give the most attention.
Goals can be evaluated in terms of whether they are specific, measurable, attainable, rewarded or
timed. (SMART)
6.7     Identifying actions and allocating resources
Framework to evaluate whether a plan is sufficiently comprehensive
The ‘wheel’ provides a model for recalling the likely areas in an organization which a plan should
cover, indicating the likely ripple effects of change in one are on others.

Comprehensive (specific) plan           Clear-cut change in direction. Assumed success depends on
                                        driving the changes rapidly and in a coordinated way.
Incremental (directional) plan          Uncertain situations
Selective plan                          May work when neither of the other methods is the best way
                                        forward.
6.8      Implementing plans and monitoring progress
Success if heavily influenced by:
     Managers’ experience of the issue
     Organizational readiness for change
The final stage in planning is to set up a system that allows people to monitor progress towards the
goals.
6.9      Integrating themes
Sustainable performance
Long-term sustainability depends on organizations making equally long-term plans, which many
organizations, such as M&S, are beginning to do.
Governance and control
Complex, one-off, projects such as those in construction and information technology, require
effective high-level governance and control systems to ensure that the many diverse and possibly
conflicting interest work together.
Internationalization
Companies operating internationally increasingly try to customize their products for local markets to
reflect varying customer preferences. This affects not only the product but also product advice,
packaging and distribution methods – and is a significant planning activity in such firms.

Chapter 7
7.1     Introduction
Decision making involves: identifying the type of decision; identifying the conditions surrounding the
decision; using one or more models to guide the approach; selecting a decision-making style; working
through the process and implementing the decision.
7.2     Stages in making decisions
A decision is a specific commitment to action.
Decision making is the process of identifying problems and opportunities and then resolving them.
    1. Recognizing a problem or opportunity
        Which depends on seeing and attending to ambiguous signals.
    2. Setting and weighting the decision criteria
        The features of the result most likely to meet the problem requirements, and that can guide
        the choice between alternatives. Decision criteria define the factors that are relevant in
        making a decision.
    3. Develop alternatives

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        Identify existing or develop custom-built ways of dealing with the problem.
     4. Comparing alternatives and making a choice
        Decision tree helps someone to make a choice by progressively eliminating options as
        additional criteria or events are added to the tree.
     5. Implementing the choice
     6. Evaluate
Most decisions affect other interests, whose response will be affected by how the decision process is
conducted, in matters such as participation and communication.
Programmed decisions deal with familiar issues within existing policy
 Recruitment, minor capital expenditure, small price changes
Non-programmed decisions move the business in a new direction
 new markets, mergers, a major investment decision
7.4     Decision-making conditions
Certainty
Decision makers have all the information they need, especially the costs and benefits of each
alternative action.
Risk
Where the decision maker can estimate the likelihood of the alternative outcomes. These are still
subject to change, but decision makers have enough information to estimate probabilities.
Uncertainty
When people know what they wish to achieve, but information about alternatives and future events
is incomplete. They cannot be clear about alternatives or estimate their risk.
Ambiguity
When people are unsure about their objectives and about the relation between cause and effect.
                                                                          Figure 7.6, page 204
7.5     Decision-making models
Rational models are based on economic assumptions which suggest that the role of a manager is to
maximize the economic return to the firm, and that they do this by making decisions in economically
rational criteria.
The administrative model aims to describe how managers actually make decisions in situations of
uncertainty and ambiguity. Many management problems are unstructured and not suitable for the
precise quantitative analysis implied by the rational model.
The political model examines how people make decisions when conditions are uncertain,
information is limited, and there is disagreement among managers over goals and how to purse
them,. It recognizes that a organization is not only an working system, but also a political system,
which established the relative power of people and functions.
The garbage-can model identifies 4 independent streams of activities that enable a decision when
they meet. When participants, problems and solutions come together in a relevant forum (a
‘garbage’ can), then decisions will be made.
                                                           Agreement on goals
                                       High                              Low
                       Certainty       I. Computational strategy         III. Compromise strategy
Beliefs about                          Rational model                    Political model
cause-and-effect
Relationships          Uncertainty II. Judgmental strategy               IV. Inspirational strategy
                                       Administrative, incremental       Garbage-can model
                                       and intuitional models




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Managers frequently make decisions without considering the evidence about what works, and what
doesn’t. They often base decisions on: experience; solutions with which they are familiar; accepting
commercially motivated claims about a technique; dogmas/beliefs for which there is no reliable evidence.
Satisfying is the acceptance by decision makers of the first solution that is ‘good enough’.
Bounded rationality is behavior that is rational within a decision process which is limited (bounded)
by an individual’s ability to process information.
7.6       Biases in making decisions
  Representativeness bias Basing decisions on unrepresentative samples or single incidents.
                                   - Generalize
  Optimism bias                See the future in a more positive light than is warranted by experience.
  Prior hypothesis bias        Basing decisions on prior beliefs, despite evidence they are wrong.
  Illusion of control          Excessive beliefs in one’s ability to control people and events.
  Escalating commitment Committing more resources to a project despite evidence of failure.
7.7       Group decision making
Vroom and Yetton
Influence the quality and acceptability of decisions. This depends on the manager choosing how best
to involve subordinates in making a decision – and being willing to change his/her style to match the
situation.                5 leadership styles:
       Autocratic (AI)
       Information-seeking (AII)
       Consulting (CI)
       Negotiating (CII)
       Delegating (G)
Is one solution better than another?; Does the manager have enough information to make a good
decision?; Is the problem structures?; Do subordinates share organizational goals?;         page 216
Irving Janis
Groupthink is ‘a mode of thinking that people engage in when they are deeply involved in a cohesive
in-group, when the members’ striving for unanimity overrides their motivation to realistically
appraise alternative courses of action.
Symptoms that give early warming of groupthink development:
       Illusion of invulnerability                             Self-censorship
       Belief in the inherent morality of the group            Direct pressure
       Rationalization                                         Mind guards
       Stereotyping out-groups                                 Illusion of unanimity
7.8       Integrating themes
Sustainable performance
The analysis by Nutt of successful approaches to decision making, and that by Pfeffer and Sutton are
highly relevant to situations in which managers are dealing with difficult decisions about how to
improve the sustainability of their operatons..
Governance and control
There are many traps and biases that afflict decision makers – good governance can protect them
and their organizations from these by subjecting them to close external scrutiny. Groupthink is likely
to have been present in many groups of senior managers as they made bad decisions which damaged
their firms and the wider economy.
Internationalization
Those managing internationally constantly search for the best balance between central and local
decision making.

Chapter 8
8.2    Strategy – process, content and context

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Strategy is about how people decide to organize major resources to enhance performance of an
enterprise.
The strategy process sets an overall direction with information about the external environment and
internal capabilities. Defining the purpose of the organization helps to guide the choice and
implementation of strategy.
Competitive strategy explains how an organization (or unit within it) intends to achieve competitive
advantage in its market.
8.3     Planning, learning and political perspectives on strategy
Planning perspective
                              Planning                       Learning                   Political
Approach        Prescriptive                         Descriptive                Descriptive
Content         Analytical tools; forecasting        Limited use of tools;      Learning view, some
                                                     limited search for         disregarded as
                                                     options; time &            politically
                                                     resources don’t permit unacceptable
Nature of       Formalized, systematic, top-         Adaptive, top down         Bargaining, top down
process         down, centralized planning           and bottom up, learn       and bottom up, use of
                                                     by doing, emergent         power to shape
Outcomes        Extensive plans made before          Plans are made not         Plans may be left
                work begins                          realized.                  ambiguous
Context/        Stable                               Complex, dynamic           Stable/dynamic,
environment                                                                     complex,
* emergent strategies are those that result from actions taken one by one that converge in time in
some sort of consistency pattern.
8.4     How do managers develop strategies
Companies in turbulent environments follow a strategy process that is relatively informal, with
shorter planning meetings, and greater responsibility placed on line managers to develop strategy
rather than on specialist planners.
     Strategic planning has become less about strategic decision making and more a mechanism
                               for coordination and performance managing.




Strategy Loop
Describes how managers continually develop and renew their strategy.
Making sense            using information about external and internal environments
Making choices          deciding strategy at corporate and business unit levels
Making things happen ways to deliver strategy
Making revisions        reflecting on results, and taking in new information
8.5     Making sense – external and internal analysis
External analysis
     Five forces
     PESTEL
Internal analysis
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       Value chain
        Divides a firm into the discrete activities it performs in designing, producing, marketing and
        distributing its product. It is the basic tool for diagnosing competitive advantage and finding
        ways to enhance it.
    Support activities: Firm infrastructure, HRM, technology development, procurement
    Primary activities: inbound logistics, operations, outbound logistics, marketing and sales, service.
Unique resources are resources that are vital to competitive advantage and which others cannot
obtain. Core competences are the activities and processes through which resources are deployed to
achieve competitive advantage in ways that others cannot imitate or obtain. Dynamic capabilities
are an organization’s abilities to renew and recreate its strategic capabilities to meet the needs of a
changing environment.
The two sets of information can be combined in a SWOT diagram.
8.6     Making choices – deciding strategy at corporate level
A mission statement is a broad statement of an organization’s scope and purpose, aiming to
distinguish it from similar organizations.
                        Existing products/services               New products/services
Existing markets        Market penetration                       Product/service development
                            - Consolidation, withdrawal           Sony moving from audio tapes to CD
                                                                 to MP3
New markets             Market development                       Diversification
                            - Territories, segment, uses         Horizontal: Google; maps, books, search
                                                                 Vertical: backwards/forwards
                                                                 Unrelated: phone company might decide
                                                                 to go into tv/radio business.

8.7      Making choices – deciding strategy at business unit level
                                          Competitive advantage
                                  Lower cost         Differentiation
Competitive Broad target          Cost leadership Differentiation
scope           Narrow target     Cost focus         Differentiation
                                                     focus
Cost leadership strategy is one in which the firm uses low price as the main competitive weapon. It
requires economies of scale.
Differentiation strategy consists of offering a product or service that is perceived as unique or
distinctive on a basis other than price.
Focus strategy is when a company competes by targeting very specific segments off the market.
8.8      Making things happen – deciding how to deliver strategy
Strategy can be delivered by internal (sometimes called organic) development by rearranging the
way recourses are deployed.
Alternatives include acquiring or merging with another company, or by forming alliances and joint
ventures.
8.9       Making revisions – implementing and evaluating
A common mistake is to assume that formulating a strategy will lead to painless implementation.
Strategy may appear to be a rational process, it is often a political one..
8.10 Integrating themes
Sustainable performance
Sustainable performance in the environmental sense will only be sustainable in the economic sense if
it is part of the organization’s strategy: i.e., that it makes business sense as well as environmental
sense. The sources cited provide many examples of company’s which have done this.
Governance and control

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Pye found that directors were more likely to be taking responsibility for strategic direction of the
business as well as for their narrower governance responsibilities – emphasizing the benefits of the
process as such as of the final outcomes.
Internationalization
International expansion and diversification strategies often fail, probably when managers
underestimate the complexity of overseas operations.

Chapter 10
10.2      Perspectives on strategy, structure and performance
The structure signals what people are expected to do within the organization, and is intended to
support actions that are in line with strategy, and so enhance performance. Equally, a structure may
enable a new strategy to emerge which a different structure would have hindered.
10.3 Designing a structure
Organization structure describes how managers divide, supervise and co-ordinate work.
 - Formal structure consists of guidelines, documents or procedures setting out how the
     organization’s activities are divided and co-ordinate. Tasks, subdivisions, levels, lines of authority
 - Informal structure is the undocumented relationships between members of the organization
     that emerge as people adapt systems to new conditions, and satisfy personal and group need.
Organization chart shows the main departments and senior positions in an organization and the
reporting relations between them.                                           Figure 10.2, page 296
Vertical specialization refers to the extent to which responsibilities at different levels are defined.
Horizontal specialization is the degree to which tasks are divided among people and departments.
A span of control is the number of subordinates reporting directly to the person above them.
See a hierarchy in three levels: corporate, divisional and operating
Centralization is when a relatively large number of decisions are taken by management at the top of
the organization.
         + Consistency (vastheid) and efficiency
         – Danger of being slow and out of touch with local conditions
Decentralization – decisions are taken lower down the organization in the operating units.
Formalization is the practice of using written or electronic documents to direct and control
employees.  Rule books, job description, instruction manuals.
5 types of structure: functional, divisional, matrix, teams and network.          Figure 10.5, page 303
10.4 Grouping jobs into functions and divisions
Specialization by function
A functional structure is when tasks are grouped into departments based on similar skills and expertise.
         + Allow people to specialize and develop expertise and are efficient.
         – May be inward looking and prone (vatbaar) to conflicting demands.
Specialization by divisions
A divisional structure is when tasks are grouped in relation to their outputs, such as products or the
needs of different types of customers.
         + Allow focus on particular markets or customer groups, enables good internal relations.
         – Can duplicate facilities thus adding costs
10.5 Grouping jobs in matrices, teams and networks
A matrix structure is when those doing a task report both to a functional and a project or divisional
boss. It combines functional and divisional structures.
         + Try to balance the benefits of functional and divisional forms
         – Can again lead to conflicting priorities over resources.
Teams
         + Flexibility, lower costs, faster response


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Network structure is when tasks required by one company are performed by other companies with
expertise in those areas.
        + Enable companies to draw upon a wide range of expertise
        – May involve additional management and co-ordination costs.
10.6 Coordinating work
There are 5 common ways to co-ordinate work:
    1. Direct supervision
    2. Hierarchy
    3. Standardizing inputs and outputs  specification
    4. Rules and procedures
    5. Information systems
    6. (Direct personal contact)
10.7 Mechanistic and organic structures
Mechanic: people perform specialized tasks, hierarchical structure of control, knowledge located at
top of hierarchy, vertical communication, loyalty and obedience valued, top-down.
Organic: people contribute experience to common tasks, network structure of contacts, knowledge
widely spread, horizontal communication, commitment to task goals more important than to
superiors, people expect to work together, loosely job descriptions.




Strategy, environment, technology, age/size and political contingencies are believed to indicate the
most suitable form, and the manager’s role is to interpret these in relation to their circumstances.
Appropriate structures depend on the type of production system (‘technology’). – Woodward
    - Unit, small batch, process
Appropriate structure depends on uncertainty of the organizations environment. – Burns and
Stalker
    - Mechanic in stable
    - Organic in unstable
Units within a organization face different environmental demands, which implies that there will be
both mechanistic and organic forms within the same organization, raising new problems of co-
ordination. – Lawrence and Lorsch
Contingency theory implies too great a degree of determinism. Managers have a greater degree of
choice over structure than contingency theories implied. – John Child.
10.8 Learning organizations
Learning organizations are those which have developed the capacity to continuously learn, adapt and
change. This depends, according to Pedler, on evolving learning-friendly processes for looking in,
looking out, learning opportunities, strategy and structure.
10.9 Integrating themes
Sustainable performance
The drive for sustainable is another example of the dilemma between central and local control.
Decentralization may harm the company if local managers ignore corporate policy, or may lead to
more sustainable performance if local managers use their knowledge to find better solutions.
Governance and control
The financial crisis led many to call for tighter systems of governance ad control – but many troubled
banks already appeared to have such systems in place, which were not used.

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Internationalization
Managers at some firms sought to integrate worldwide operations to achieve global efficiency
through economies of scale. Others (Philips and Unilever) were more sensitive to local differences,
permitting national subsidiaries high levels of autonomy to respond to local conditions.

Chapter 11
11.1 Introduction
Human resource management refers to all those activities associated with the management of work
and people in organizations.
     Employee influence            (employee involvement in decision making)
     Work systems                  (work design, supervisory style)
     Human resource flow (recruitment, training, deployment, selection)
     Reward management (pay and other benefits)
11.2 Perspectives on HRM
Map of the territory places HRM within the wider environment of the business both by indicating the
interests of stakeholders and by the situational factors that shape HRM policy choices.  Page 329
Effect of policies will depend on the extent to which other policies support them and the extent to
which the wider context was suitable for an HRM approach.
4 propositions in a theory of HRM
    1. Integration
    2. Commitment
    3. Flexibility
    4. Quality
Examples policies: organizational and job design, managing change, recruitment, reward systems,
selection and socializing, appraisal, training and development, manpower flows through organization.
External fit is when there is a close and consistent relationship between an organization’s competitive
strategy and its HRM strategy.
Internal fit is when the various components of the HRM strategy support each other and consistently
encourage certain attitudes and behavior.
11.3 What do HR managers do?
Advisors               A facilitating role, acting as internal consultants offering expertise and advice to
                       senior managers and line managers.
Service providers Called in by line managers to provide specific HR assistance and support as
                       required. Also provide administrative services to support HR policies such as
                       recruitment, selection and training
Regulators             Formulating, disseminating and monitoring the observance of personnel or HR
                       policy and practice, including trade union agreements where relevant
Change agents          Actively promoting proposals for cultural or organizational change, including
                       those related to the strategic agenda and business performance.
                                                                             Figure 11.3, page 334
11.4 Human resource planning
Human resource planning is the process through which employers anticipate and meet their needs for
staff. Large organizations may use complex forecasting techniques to identify their staff requirements.
11.5 Job analysis
Job analysis is the process of determining the characteristics of an area of work according to a
prescribed set of dimensions. Identifies skills and level of responsibility.
It typically leads to a written job description that guides selection, training and performance appraisal.
Competencies (in HRM) refer to knowledge, skills, ability and other personal characteristics required
to perform a job well.
11.6 Recruitment and selection
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In the selection stage, managers use methods they hope will minimize:
False positive errors selection process predicts success but the applicant fails
False negative errors applicant is rejected because the process predicted failure, but he/she would
                          have succeeded
Test validity
Interviews
Problems: decisions are made too quickly, comparison applicants with idealized stereotype.
Personality test
Assessment centers are multi-exercise processes designed to identify the recruitment and
promotion potential of personnel.
11.7 Reward management
Type of systems:
      Time rate
      Payments by result
      Skill-based pay
      Performance-related pay involves the explicit link of financial reward to performance and
         contributions to the achievement of organizational objectives.
      Flexible benefits packages which based the reward upon a selection of benefits to suit
         individual’s preferences and lifestyle (healthcare or company car)
11.8 Managing diversity
Gendered segregation has led to men and women being associated with certain types of job, with
women often being confined to work with fewer opportunities for promotion.
Gender in management
Men adopt a transactional style which gives rewards for things done well and punishes failure.
Women tend to use a relational style, motivating staff by persuasion, encouragement and using
personal qualities rather than position.
The business case for a diverse workforce can bring access to a wider range of skills and better access
to a wider range of customers.
11.9 Integrating themes
Sustainable performance
An organization’s HRM practices affect many aspects of employee well-being through their effects on
matters such as working hours, stress and work-life balance. Such considerations could be included in
a assessments of the sustainability of its performance.
Governance and control
Corporate governance arrangements and modern HRM practices are both intended to support the
long-term interest of stakeholders. Few of those involved in current governance procedures are
familiar with HRM (being mainly from financial backgrounds), so these are unlikely to support the
development of modern HRM practices.
Internationalization
Companies operating internationally face the dilemma between standardizing the HRM practices of
overseas subsidiaries towards HQ practices, or favoring localization, whereby overseas subsidiaries
adopt management practices commonly used in that host country.

Chapter 14
14.1 Introduction
Influence is the process by which one party attempts to modify the behavior of others by mobilizing
power resources.
14.2 Purpose, targets and responses
Leading and managing are both essential. Leading is usually seen as referring to activities that bring
change, whereas managing brings stability and order.

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Leadership refers to the process of influencing the activities of others towards high levels of goal
setting and achievement.
Response to influence
      Resistant
      Compliance (volgzaam)
          Accept influence to achieve a favorable reaction from the other
      Identification
          Accept influence because the person feels that by doing so he/she is identifying with the
          person making the request.
      Internationalization
          Accept because they agree it’s the right thing to do.
14.3 Traits purpose
Trait is a stable aspect of an individual’s personality that influences behavior in a particular direction.
Traits theories seek to identify the personal characteristics associated with effective influencing.
The big five refers to trait clusters that appear consistently to capture main personality traits: openness,
conscientiousness, extraversion, agreeableness and neuroticism.                         Table 14.2, page 425
James Burns distinguished between a transactional leader and transformational leader.
Transactional leader is one who treats leadership as an exchange, giving followers what they want if
they do what the leader desires.
Transformational leader is a leader who treats leadership as a matter of motivation and
commitment, inspiring follower by appealing to higher ideals and moral values.
Many claim that transformational leadership styles generates higher performance than transactional
styles. A limitations of the traits model is that a trait that is valuable in one situation is not necessarily
valuable in another. Certain traits are probably necessary for effective leadership, but will not be
sufficient for all conditions.
How to measure charismatic leadership?
      Vision and articulation                Constantly generates new ideas
      Environmental sensitivity              Recognize barriers that may hinder the process
      Unconventional behavior                Uses non-traditional methods
      Personal risk                          For take of the organization
      Sensitivity to member needs            Shows sensitivity to needs/feelings of others
      Not maintaining the status quo         Advocates unusual actions to achieve goals
14.4 Behavioral models
Behavioral theories distinguish managers’ behaviors on two dimensions, such as initiating structure and
consideration.
Ohio State University model
Initiating structure is a pattern of leadership behavior that emphasizes the performance of the work in
hand and the achievement of production or service goals.
      Allocating subordinates to specific tasks                 Schedule work to be done by subordinates
      Establishing standards of job performance                 Encouraging use of uniform procedures
      Informing subordinates of job requirements
Consideration is a pattern of leadership behavior that demonstrates sensitivity to relationships and to
the social needs of employees.  expressing appreciation for a job well done, rewarding high
performance, being approachable and available for help.
University of Michigan model
Job-centered supervisors
Ensure that they worked on different tasks from their subordinates, concentrating especially on
planning, co-ordinating and supplying a range of support activities.
Employee-centered supervisors


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Combined the task-oriented behavior with human values. They were considerate, helpful and friendly to
subordinates, and engaged in broad supervision rather than detailed observation.
Managerial grid model                                                              Figure 14.4, page 429
14.5 Situational (or contingency) models
Contingency perspectives argue that the traits or behaviors required for effective influence depend on
factors in the situation, such as the characteristics of the employee, the boss and the task.
Situational (contingency) models of leadership attempt to identify the contextual factors that affect
when one style will be more effective than another.
Which of the styles a leader uses, should reflect three forces:
    - Forces in the manager
    - Forces in subordinates
    - Forces in the situation
House’s path-goal model
Directive                    Letting subordinates know what the leader expects; giving guidance;
                             scheduling and coordinating their work.
                                 - Ambiguous task, subordinates lack flexibility
Supportive                Treating them as equals; showing concern; creating a friendly climate.
                              - Repetitive, frustrating unpleasant task
Achievement oriented      Setting challenging goals and targets; seek performance improvements;
                          expecting subordinates to succeed.
                              - Non-repetitive, challenge ability task
Participate                  Consulting subordinates; taking their options into account.
                                 - Non-repetitive, confident subordinates
14.6 Sources of power to influence others
      Legitimate power                                    Expertise power
      Reward power                                       - Administrative
      Coercive power (punishment)                        - Technical
      Referent power (charismatic)
Most believed it was ethical and necessary to engage in political behavior at work. They saw five
frequent behaviors: building a network of useful contacts; using key players to support initiatives;
making friends with power brokers; bending the rules to fit the situation; and self promotion.
14.7 Using positional power to influence others
Power depends on the approval needed for non-routine decisions, relation of job to current
organizational priorities, external context and senior contact. = more power
The nature of the job and the pattern of contacts that come with give the manager access to three
‘lines of power’: supply, information and support.
Political behavior is the practical domain of power in action, worked out through the use of
techniques of influence and other tactics.
Tactics for coercive persons: getting up close and personal, being angry, keeping them guessing
(increase anxiety), know it all.
Tactics for expertise-administrative: create rules, procedures or position that sustain their power.
“To increase power, share it”- delegating by giving another authority to undertake actions/decisions.
14.8 Choosing tactics to influence others
Yukl and Falbe have identified these tactics in attempt to influence others:
      Rational persuasion                Integration                       Coalition
      Inspirational appeal               Exchange                          Legitimating
      Consultation                       Personal appeal                   pressure
                                                                           Table 14.5, page 440
Managers are most likely to use:

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    - Rational persuasion when trying to influence their boss
    - Inspirational appeal and pressure when trying to influence subordinates
    - Exchange, personal appeal and legitimating tactics when influencing colleagues
14.9 Influencing through networks
An important way to influence others is the ability to draw on a network of informal relationships.
Types of network
Practitioners                People with common training or professional interest, formal/informal.
Privileged power             People in powerful positions (usually invitation only)
Ideological                  People keen to promote political objectives or values
People-oriented              Formed around shared feelings of personal warmth and familiarity.
Strategic                    Often built to help develop links with people in other organizations.
14.10 Integrating themes
Sustainable performance
Proposals to achieve more sustainable performance depend on managers being able to influence
others – over whom they will usually have no formal authority. Like any organizational change,
sustainability projects will sometimes meet opposition: so managers or others promoting change will
need to use a variety of influencing tactics to achieve their objectives (also marketing methods).
Governance and control
Are intended to influence the behavior of chief executives and senior managers to act in the interests
of shareholders. As with most interactions between managers and their context, chief executives do
not passively accept such constraints, and the section included evidence of chief executives actively
lobbying to obstruct proposals which the chief executives thought were against their interests.
Internationalization
There is accumulating evidence that cultural values affect their influencing tactics used in different
countries, and that leadership styles vary between countries.

Chapter 15
15.2 Perspectives on motivation – ant the psychological contract
Motivation includes understanding the goals which people pursue (content), the choices they make
to secure them (process) and how this knowledge can be applied to influence others (including
through work design).
Individuals do not act in isolation but within a context that include the following elements:
     - The job itself (interesting, varied, responsible)
     - Organization (supervision, career, promotion prospects, pay systems)
     - Environment (career threats and opportunities)
Social changes affect the people managers try to motivate, so they may need to adapt their approach
to suit. “Employees leave managers, not companies”
Failed to implement a pay-for-performance system; no respect for staff knowledge and skills; not
asking for opinions  lower trust, higher absence rate
The relationship between employer and employee is expressed in the psychological contract is the
set of understandings people have regarding the commitments made between themselves and the
organization. It needs to be in acceptable balance for effective performance.
In times of great change in the business world, psychological contracts are easily broken.
Technological changes and increased competition lead senior management to change employment
policies and working conditions, or put staff under great pressure to meet demanding targets.
15.3 Behavior modification
Behavior modification theories attempt to explain that people can influence the behavior of others
by using appropriate and timely reinforcements.  eating disorders, heavy smoking
      Behaviors modification techniques focus on specific observable behaviors rather than
          attitudes and feelings.
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Several methods must be used for a method to be effective:
    1. Payoffs must be given only when the desired behavior occurs
    2. Payoffs must be given as soon as possible after the behavior
    3. Desirable behavior is likely to be repeated if reinforced by rewards
    4. Reinforcement is more effective than punishment
    5. Repeated reinforcement can lead to permanent change in behavior in the desired direction.
15.4 Content theories of motivation
Content theories seek to understand the needs which human beings may seek to satisfy at work.
Alderfer – ERG theory                                                         Maslow
Existence needs reflect a person’s requirement for
material and energy.
Relatedness needs involve a desire for
relationships with significant other people.
Expectancy theory explains motivation in terms of
valued outcomes and the subjective probability of
achieving those outcomes.
Growth needs are those that impel people to be
creative or to produce an effect on themselves or
their environment.
David McClelland: how people think and react in a
wide range of situations. Rather than being arranged in a hierarchy, individuals possess each of these
possibly conflicting needs, which motivate their behavior when activated. Human need in different
categories:
    - Need for affiliation (develop/maintain interpersonal relationships)
    - Need for power
    - Need for achievement
Herzberg related motivation to the nature of a person’s work. He believed that motivation depends
on whether a job is intrinsically challenging and provides opportunities for recognition.
    - Achievement, recognition, work itself, responsibility and advancement = motivator factors
    - Working conditions, interpersonal relations, salary, supervision, policy = hygiene factors*
* Those aspects surrounding the task which can prevent discontent and dissatisfaction but will not in
themselves contribute to psychological growth and hence motivation.
15.5 Process theories of motivation
Expectancy theory: motivation depends on a person’s belief in the probability that effort will lead to
good performance, and that good performance will lead to them receiving an outcome they value.
                                   F = (E  P) x (P  O) x V

        Page 467                     Training                   Feedback
                                     Role clarity               Appraisal policies
                                     Facilities/                Transparency and predictability
                                      support                       of reward policies
Equity theory explains motivation in terms of perceptions of fairness by comparison with others.
If people feel unfairly treated they can: reduce inputs by less effort, pressing for more salary,
generating conflict to decrease other people’s outcome etc.
         Input (A)        /       Input (B) )
         Reward (A)               Reward (B)
Goal-setting theory believes that motivation depends on the degree of difficulty and specificity of
goals. 4 propositions of motivation and performance: challenging goals, specific goals, participation
and knowledge of results (past performance).
The attraction of goal theory: goal difficulty (stretch), goal specificity, acceptance, participation, feedback.
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15.6 Designing work to be motivating
Extrinsic rewards are outcomes/benefits provided by others: promotion, pay increase, bigger car.
Intrinsic rewards are outcomes/benefits that come from the individual: satisfaction, competence.
Job characteristics theory predicts that the design of a job will affect internal motivation and work
outcomes, with the effects being mediated by individual and contextual factors.
                                                                            Figure 15.7, page 473
Three psychological states must be present to achieve high motivation:
     1. Experienced meaningfulness
     2. Experienced responsibility
     3. Knowledge of results
These psychological states are influenced by 5 job characteristics that contribute to meaningfulness:
     1. Skill variety                                     4. Autonomy (freedom and independence)
     2. Task identity                                     5. Feedback
     3. Task significance
Implementing concepts:
     1. Combine tasks                                     4. Vertical loading
     2. Form natural workgroups                           5. Open feedback channels
     3. Establish customer relations
Moderating influences: knowledge & skill; growth need strength; ‘context’ satisfaction.
15.7 Interaction of motivation and strategy
Pfeffer shows how the workforce can be a source of strategic advantage, and that successful
companies attribute this to a collection of practices they use to manage people.Management
practices: employment security, selective recruiting, high wages, employee ownership, sharing
information about performance and plans, participation and empowerment, self-managed teams,
training and skill development, symbolic egalitarianism.
Changing competitive conditions mean that critical performance indicators for many organizations
stress responsiveness, creativity and innovation – which can only be encouraged by motivational
policies that encourage these behavior. Economic and predictable performance also remain
important for many organizational functions, which raises possible dilemmas for organization-wide
motivational policies.
15.8 Integrating themes
Sustainable performance
Like any strategy, that of building a more environmentally sustainable performance depends on
people working with commitment to achieve it. Whether they do so will depend on aligning their
motivation with that of the sustainability goal. How do organizations achieve this?
Governance and control
Using spectacular levels of pay and bonus to motivate skilled (and highly mobile) professional staff
has attracted criticism from many outside the industries concerned. Managers in companies in those
industries point out that in the context of an international, market economy they need to pay the
market rate.
Internationalization
Hofstede has pointed out that discussions about McGregor’s Theory X and Theory Y is based on
observations in Western societies 0 which are different in many ways from the new economic power
in the East.

Chapter 16
16.2 Communicating to add value
It is through communication that people add value through innovation, quality, delivery and cost.
Communication about inputs, the transformation process and outputs. It enables the tasks of
planning, organizing, leading and controlling.

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16.3 Communication processes
Sender
Message                   What the sender communicates
Encoding                  Translating information into symbols for communication
Medium
Decoding receiver         The interpretation of a message into a form with meaning
Noise                     Anything that confuses, diminishes or interferes with communication
Feedback                  Occurs as the receiver expresses his/her reaction to the message
5 principles help to encode a message accurately
     Relevancy
     Simplicity
     Organization
     Repetition (restate key points at least twice)
     Focus
The quality of information depends on 4 criteria:
    1. Reliability                       3. Quantity
    2. Timeliness                        4. Relevance
Perception is the process by which individuals make sense of
their environment by selecting and interpreting information.
Selective attention is the ability, often unconscious, to choose
from the stream of signals in the environment, concentrating on
some and ignoring others. Stereotyping
16.4 Selecting communication channels
A channel is the medium of communication between a sender and a receiver.
Information richness refers to the amount of information that a communication channel can carry,
and the extent to which it enables the sender and receiver to achieve common understanding.
    - Handle many cues at the same time?
    - Support rapid two-way feedback?
    - Establish a personal focus for the communication?
Information overload arises when the amount of information a person has to deal with exceeds
his/her capacity to process it.  electronic messages
Types of blogs:
Individual/personal
News/commentary
Advertising/promotional/customer service
Business/professional
Internal/knowledge management - used within companies to share information about product/projects
16.5 Communication networks
The grapevine is the spontaneous, informal system through which people pass information and
gossip. This information is often well ahead of the information in the formal system.
    - Qualitative information, current ideas and proposals rather than policies.
    - Rumors and information might be incomplete or wrong.
Centralized communication networks:              Chain, Y, Wheel         Simple task
Decentralized communication networks:            Circle, All channel     Complex task
                                                                          Figure 16.5, page 497
     Communicating downwards
     Team briefings
     Communicating upwards
     Employee opinion surveys
     Suggestions schemes

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      Formal grievance procedures
      Horizontal communication
Circumstances that make managers unreceptive to information:
      Undirected information
      Missing communication channels
      Missing motives
      Missing oversight
16.6 Interpersonal communication skills
Communication skills for senders                      Communications skills for receivers
      Send clear and complete messages                    Pay attention
      Encode messages in symbols the                      Be a good listener
         receiver understands                              Be empathetic
      Select an appropriate medium
      Select a medium the receiver monitors
      Avoid noise
16.7 Communication and strategy – the wider context
Manager develop coherent arrangements for communicating with key constituencies in formulating
strategy, identifying the functions, objectives and channels to use.
An organization’s structure has a significant effect on the flow of communication between units, and
the same applies to the exchange of information between organizations. While technology enables
easier communication, structures can impede the flow in practice.
16.8 Integrating themes
Sustainable performance
Proposals for sustainable performance depend on effective communication with many
constituencies, which have varying interests towards the topic. Those promoting such projects could
use the Argenti model to guide them.
Governance and control
Governance and control also depend on accurate information not only being sent, but received and
attended to be those who cold act on it. The ideas in this chapter show how structural and political
factors, as well as interpersonal ones, can block the flow of information through a governance
system – as can the phenomenon of groupthink.
Internationalization
Communication between those conducting business internationally is an opportunity for enriching
the range of ideas and contributions available, provided those conducting the dialogue have the
ability to overcome the common human anxiety about differences.

Chapter 17
17.2 Types of team
Functions of teams
    1. Top management teams
    2. Task forces
    3. Professional support groups
    4. Performing groups
    5. Human service teams
    6. Customer service teams
    7. Production teams                                                Table 17.1, page 516
    1. Formal team is one that management has deliberately created to perform specific tasks to
       help meet organizational goals.
    - Vertical teams: manager and his/her subordinates within a single department/function
    - Horizontal teams: staff from roughly the same level, but different functions

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    2. Informal group is one that emerges when people come together and interact regularly.
    3. Self-managing team operates without an internal manager and is responsible for a complete
        area of work.
    4. Virtual teams are those in which the members are physically separated, using communications
        technologies to collaborate across space and time to accomplish their common task.
    - Useful with different time zones, videoconferencing, email etc.
Hackman’s typology shows the opportunities and challenges faced by top teams, human service,
taskforces, professional support, performing, customer service and production teams respectively.
17.3 Crowds, groups and teams
Structure is the regularity in the way a unit or group is organized, such as the roles that are specified.
      Groups of >12 people find t hard to operate as a coherent team. Ideal: 2-10 people
      Groups need technical, functional, professional, problem-solving and decision-making skills.
         They need interpersonal skills to hold it together.
      Common purpose, common approach, mutual accountability
17.4 Team composition
Emphasis on task                                    Emphasis on maintenance
Initiator                                           Encourager
Information seeker                                  Compromiser
Diagnoser                                           Peacekeeper
Opinion seeker                                      Clarifier
Evaluator                                           Summarizer
Decision manager                                    Standard setter           Table 17.3, page 522
Winning teams: capable coordinator, a strong plant, at least one other clever person, a monitor-evaluator
Ineffective teams: a coordinator with 2 dominant shapers, two resource investigators and 2 plants, a
completer with monitor-evaluators and implementers, probably slow to progress and stuck in detail
Preferred team roles are the types of behavior that people display relatively frequently when they
are part of a team.
Managers typically form teams on criteria of technical expertise, departmental representation or
who is available. How the team processes will work is a secondary consideration. The performance of
a team is affected by how well it moves through distinct stages of development, and by the team
processes the members establish.
17.5 Stages of team development
Forming
Storming                    Conflicts occur, uncomfortable time for the group
Norming                     Accommodate differences, develop set of shared norms
Performing                  Depends on sharing information, integrating ideas and seeking solutions
Adjourning                  Complete task, reflect on performance.
       These stages occur iteratively as new members join or circumstances change
17.6 Team processes
Effective meetings:
     - Well scheduled in advance
     - Have an agenda
     - Starting and finishing time
     - Decisions and responsibilities are recorded and circulated within 24 hours
     - Keep subgroups informed
Observing the team
Anyone can develop their ability to observe groups by concentrating on an aspect rather than on the
content of the immediate task.
Categories of communication within a group
Proposing                                           Disagreeing
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Supporting                                          Giving information
Building                                            Seeking information
17.7 Outcomes of teams – for the members
Effective managers encouraged participation by group members in all aspects of the job, including
setting goals and budgets, controlling costs and organizing work. People value a positive response
from other, which helps to build and maintain their self-esteem.
Concertive control is when workers reach a negotiated consensus on how to shape their behavior
according to a set of core value.
Members benefit from being part of a social group, from meeting performance expectations, from
experiencing an effective team, and developing transferable teamwork skills.
17.8 Outcomes of teams – for the organization
Teams can bring both high efficiency and high-quality jobs:
Providing a structure within people work together; providing a forum in which issues can be raised
and dealt with; enabling people to extend their roles; perhaps increasing responsiveness and
reducing costs; encourage acceptance and understanding by staff of a problem and the solution
proposed; promote wider learning by encouraging reflection.
Criteria for evaluating team effectiveness:
     - Has it met performance expectations?
     - Have members experienced an effective team?
     - Have members developed transferable teamwork skills
Requirements for effectiveness: effort, knowledge and skill, group processes
The organization can benefit from the combination of skills and professions, although the evidence of
the links to organizational success are mixed.
Team-based rewards are payments or non-financial incentives, provided to members of a formally
established team, that are linked to the performance of the group.
17.9 Teams in context
The usefulness of teams depends on the task:
      Simple puzzles of a technical nature
      Familiar tasks with moderate degrees of uncertainty
      A high degree of uncertainty and relatively unknown problems
Teams are not necessary for all tasks.
Teams need to be supported by suitable payment systems and by education and training and by
relevant technologies.
Teams themselves can act to manage their boundaries effectively.
17.10 Integrating themes
Sustainable performance
Designing and constructing Terminal 5 at Heathrow to meet new standards of sustainability is a good
example of how well-managed teas from diverse professional and organizational backgrounds can
contribute to this central management challenge.
Governance and control
Teams that are effective face the danger that as their success increases they become resistant to
criticism – the members themselves believe their own propaganda. This well-documented feature of
teams makes it paradoxically difficult for governance systems to control those teams which, in the
wider interest, most need to be controlled.
Internationalization
Teams working internationally face additional challenges in that they lack the nuances that come
from regular face-to-face interaction. Unique challenges:
     - Cultivating trust among team members
     - Hindrances to communication.


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 Chapter 18
 18.2 What is operations management?
 Operations management is all of the activities, decisions and responsibilities of managing the
 production and delivery of products and services. Implement systems and processes that are:
       Repeatable
       Consistent
       Reliable
 By designing and implementing systems and processes that are repeatable, consistent, reliable,
 efficient and compliant with the legislation that governs the overall environment.
 The first step in achieving an efficient, process-based organization is to understand the work of the
 organization as a transformation process which turns inputs (or resources) into the outputs that are
 the product.
      - Transforming resources: facilities, staff and capital
      - Transformable resources: material, information
 Types of feedback:
Feedback that is internal to the transformation process ensures that it results in a consistent product.
Feedback that is external to the transformation process ensures that the product is accepted.
Service - The presence of the customer has these consequences for operations managers:
       Randomness
       Heterogeneity
       Intangibility
       Perish ability
 18.3 The practice of operations management
 The craft system refers to a system n which the craft producers do everything. With or without
 customer involvement, they design, source materials, manufacture, sell and perhaps service. The
 craft system is based on workers with the embodied knowledge skill and experience to carry out all
 necessary activity.
 Factory production is a process-based system that breaks down the integrated nature of the craft
 worker’s approach and makes it possible to increase the supply of goods by dividing tasks into simple
 and repetitive processes and sequences which could be done by unskilled workers and machinery on
 a single site.
 Operations strategy is the pattern of decisions that shaped the long-term capability of the operation.
 The 4 Vs of operations                            key considerations in defining operations strategy.
       Volume
       Variety
       Variation in demand
       Visibility
 18.4 Operations processes
 Production systems                                    Service systems
 Project                                               Professional
 Job shop                                              Service shops
 Batch                                                 Mass services
 Mass or continuous                                     Figure 18.4&18.5, page 561&562

18.5 Process design
The span of processes is the variety of processes that company chooses to carry out in-house.
A break-even analysis is a comparison of fixed versus variable costs that will indicate which point in
volume of output it is financially beneficial to invest in a higher level of infrastructure.
Facility layout


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Layout planning is the activity that determines the best configuration of resources such as
equipment, infrastructure and people that will produce the most efficient process.
Layout planning occurs at three levels of detail:
Layout of departments on the site
Layout within departments
     1. Layout of workplaces
There are 4 well-established forms of facility layout:
      Fixed-position
         Low-volume, project-type operations, massive production.  Bridges, office buildings
      Process
         Job shop and small-batch operations, bring process types together. Long delivery times.
      Product
         Low unit costs, vulnerable because of the absence of work-in-progress buggers.
      Cell/Group layout
         Small- to medium-batch operations, modified form of product layout.
18.6 The main activities of operations
Providing goods and services to a customer depends on 5 key operations activities:
(1) Managing the capacity of the transformation process.
(2) Setting process and product standards to be adhered to within the transformation process.
(3) Managing the materials pipeline into and through the transformation process.
(4) Scheduling of the required resources to be used in the transformation process.
(5) Controlling the activities within the transformation process.
     - Setting objectives – setting direction and standards
     - Measuring – seeing what is happening
     - Comparing – relating what is happening to what was expected to happen
     - Acting- taking short-term or long-term actions to correct significant deviations.
18.7 Quality
Quality means conformance to the requirements of the customer.
Product or service quality can be described in relation to:
                                                      Service quality
      Functionality                                       Responsiveness
      Performance                                         Assurance
      Reliability                                         Empathy
      Durability
      Customization
      Appearance

Order-winning criteria: reason to buy the product/service. Improving these will win business.
Order-qualifying criteria: if they are not met, they will disqualify the product/service from consideration.
Total quality management (TQM) is a philosophy of management that is driven by customer needs
and expectations and focuses on continually improving work processes. Principles:
    - Philosophy         Waste reduction through continuous improvement
    - Leadership         Committed and visible from top to bottom of the organization
    - Measurement Costs involved in quality failures – the cost of quality
    - Scope              Everyone, everywhere across whole supply chain
    - Methods            Simple control and improvement techniques implemented by teams
The purpose of a quality management system is to establish a framework of reference points to
ensure every time a process is performed the same information, methods, skills and controls are
used and applied in a consistent manner.
Three levels of the documentations which makes up the quality system:

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     1. Company quality manual
     2. Procedures manual that describes function, structure and responsibilities of departments
     3. Detail work instructions, specifications, standards and methods which will support the process
Requires: top management support, team-based approach, investment in training and a clear quality
strategy that supports the company strategic objectives.
18.8 Integrating themes
Sustainable performance
All waste is the result of an operations failure, so performance depends on changes to operations to
reduce waste not just within the immediate process but across the supply chain.
Governance and control
Operations staff work in an increasingly regulated environment, so need to focus on designing
processes that are not only efficient and sustainable, but which also comply with regulatory and
control systems.
Internationalization
The growth of international trade brings challenges for operations managers as they seek to satisfy
geographically dispersed customers in conjunction with equally dispersed suppliers.

Chapter 19
19.1 Introduction
Mistakes in organizations are generally the results of a loss of control that leads to the delivery of a
sub-optimal product. Organizational control ensures that the operational process remain consistent,
repeatable and reliable.
19.2 What is control and how to achieve it?
The control process is the generic activity of setting performance standards, measuring actual
performance, comparing actual performance with the standards, and acting to correct deviations or
modify standards. A control system is the way elements in the control process are designed and
combined in a specific situation.
The control process is intended to support the achievement of objectives. Managers design specific
control systems for different organizational activities. Although their degree of formality and
explicitness varies, the control process incorporates four elements:
    1. Setting targets
         Targets provide direction and a standard of performance to aim for.
    2. Measuring – the tools of control
         Personal observation, oral reports, written reports, online information systems.
                                                                            Table 19.1, page 581
    3. Comparing
         A manager needs to know the acceptable range of variation – the acceptable limits of
         variation between actual and planned performance. Variations from standard.
    4. Correction
         Either correcting future performance or to revise the standard. Involves taking corrective
         action: correct problems to get performance back on track. Redesigning a process of
         resetting a machine or cutting prices to sell excess stocks.
Managers design a control system using their assumptions about how it will affect behavior. If
decisions are made consistently and coherently, this suggests that managers are taking a strategic
approach to control.
Which strategy to choose?
Organizations often combine both approaches, using mechanic forms in stable, predictable
organizations, and organic for more volatile, uncertain parts of the business.



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Contingency                    When                Control strategy likely to be appropriate
Competitive strategy           Cost leadership     Mechanistic, use rules and procedures and machinery to
                                                   measure quantitative output
                               Differentiation     Organic, use of HRM and cultural controls stressing
                                                   self-managing teams, and qualitative output measures.
Importance of innovation       Low                 Mechanistic “
                               High                Organic “
Employee expertise             Low                 Mechanic “
                               High                Mechanistic “

While defining the overall controls strategy is the first step in creating a control system, this has to be
supported by a set of practices that encourage their achievement.
To maintain control, organizations can use a combination of:                 Table 19.2, page 584
      Direct supervision
      Organizational structure
      Rules and procedures
      Management by objectives is a system in which managers and staff agree their objectives,
          and then measure progress towards them periodically. Partly-based on goal-setting theory.
      Machinery – direct technological controls when machines direct what people do or say.
      HRM practice
      Values and beliefs – encourage internal compliance rather than relying on external constraints
19.3 How do you know you are in control?
Input measures             An element of resource that is measured as it is put in to the transformation
                           process.
Output measures            A measurement taken after an operational process is complete
Process measures           A measurement taken during an operational process that provides data on
                           how the process is performing.
Efficiency                 A measure of the inputs required. Doing things right.
Effectiveness              How well an activity contributed to achieving organizational goals. Doing the
                           right things.
19.4 How to measure performance
5 performance objectives: quality, speed, dependability, flexibility and cost.
Problems with devising useful performance measures:
First, difficulty in achieving a balance between having a few measures on one hand and having too
many detailed measures on the other. The second is the problem of setting performance targets that
do not create the wrong behavior as employees try to find ways around them so that the target is
met but to the detriment of the overall operation.
Key performance indicators are a summarized set of the most important measures that inform
managers how well an operation is achieving organizational goals.
The balanced scorecard is a performance measurement tool
Innovation and learning process
Indicates how intangible assets such as people and information are supporting the organization.
Internal perspective
Ensure that the correct processes are being used effectively and efficiently.
       Doing the right things in the right way
Customer perspective
Indicates whether the customer is getting what they want.
Financial perspective
Represent shareholder value, measures can be profit, cost or revenue.
19.5 Situational (contingency) views on performance measures
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 Value               Criteria of effectiveness
 Rational goal       Attaining goals, output quantity, output quality
 Internal process Efficiency and costs, continuity, smooth workflow
 Human relations Employee satisfaction, interpersonal relations, involvement
 Open systems        Resources: quantity/quality, proactiveness, competitive position, adaptation, innovativeness
19.6 Human considerations in control
Control systems must be matched to the overall model that the organization is being managed with
in relation to the competing values framework.
    Control depends on influencing people, so is only effective if it takes account of human needs.
    Controls can encourage behavior that is not in the best interests of the organization.
    Controls can encourage people to supply the system with inaccurate information.
    People will resist controls that they feel threaten their ability to satisfy their needs from work.
Simons’ four levers of control
     1. Diagnostic control system                           3. Boundary systems
     2. Beliefs systems                                     4. Interactive control systems

19.7 Integrating themes
Sustainable performance
While more companies are reporting on their sustainability record, they will only make a difference
when they include sustainability criteria in their routine management control systems. So that it
becomes part of ‘business as usual’ for staff.
Governance and control
Governance and control systems need to be supported by a culture of commitment if they are to
affect behavior at the operating level.
Internationalization
Remoteness makes it difficult for international companies to exercise genuine control over distant
units, however sophisticated the information technology: cultural controls may be more effective.




                                                              Propedeusebundel 2011-2012 IBA         114
        Economics II 201000053


Language    English
Description Aims:
            After this course the student is able to understand macro-economic and regional
            economic developments, within the larger context of European integration and
            globalisation.
            Content:
            This course covers three main themes. First, the course provides students with the
            main tools to understand and assess macro-economic developments (i.e. economic
            growth, interest rates, exchange rates). Secondly, the economics of technological
            development and innovation are dealt with, including growth theory, R&D and
            intellectual property rights, economic geography and regional innovation systems.
            Thirdly, the importance of European economic integration for firms is discussed, with
            an emphasis on the single market (including underlying classic and modern trade
            theory), the monetary union, the EU2020-strategy and the impact of globalisation.

Study         International Business Administration
                Phase B1         Quartile 2B
Instructional Lecture, Project, Self-Study
modes
Examformat Written exam
Credits       5.0 EC
Lecturer(s) prof.dr. N.S. Groenendijk (email to: n.s.groenendijk@utwente.nl); dr. V.F. Rodriguez




For further summaries look at www.stress.utwente.nl/study under “exams and summaries”.




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Summary of the book “Economics for business” (3rd edition) by Begg & Ward

Chapter 9 Introduction to the macro economy
9.1 Business problem: business cycles and economic uncertainty
Firms need to think very carefully when committing themselves to investment projects, because the
business cycle will affect the success of the investment.
There is a fluctuation all the time: after
a boom, a recession will follow.
After a recession it will get better and
then a boom will follow.
An understanding of how the
economy works and how it is likely
to develop in the short, medium
and long term is of crucial
importance.
9.2 Macroeconomic issues
Inputs                           Output                 Changes in variables
Interest rates                             GDP
Government deficit                         Inflation
                                           Current amount
                                           Unemployment
9.3 The circular flow of income
Framework of macroeconomic activity:
Households are assumed to own the factors
of production = labour and capital
Firms will clearly provide householders with a
financial reward = wages
Households will buy products and services
provided by firms
Leakages                  Injection
Savings by                Investments by banks
households                (firms)
Tax payment by            Spending by
households                government
Imported products         Exported products
Total expenditure is simply all the separate sources of spending within the economy:
Consumption by households +                Investments by firms +         Public spending by
government
Increase in expenditures = increase in economic activity = boom
Decrease in expenditures = decrease in economic activity = recession




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9.4 National income determination and business cycles
Since in macroeconomics we are examining the whole economy, we need a demand and supply
curve for the whole economy.
Consumption
Investment
Government spending           Aggregate demand
Net exports

As prices increase, less is demanded = negative relationship.
Aggregate supply
The total supply in an economy  How will aggregate supply react to a change in inflation?
Real values: The nominal wage adjusted for the rate of inflation
Nominal values: Wage not adjusted for the rate of inflation
When wages fully adjust to inflation, aggregate supply remains constant.
When wages do not fully adjust to price changes, a positive relationship between inflation and
aggregate supply can exist:
      Reduction in the real wage rate = increase supply = aggregate supply increases if inflation
         increases.
Macroeconomic equilibrium:
Equilibrium for the entire economy occurs where aggregate demand and aggregate supply intersect.
Increase demand (to the right) =
inflationary boom
Decrease demand (to the left) =
deflationary recession
Increase supply ( to the right) =
deflationary boom
Decrease supply (to the left) =
Inflationary recession
9.5 Business application: predicting the business cycle
An important step for firms is to predict the business cycle and this is no easy task:
      Economic insights: how much demand and supply are changing (demand falling = recession).
      Business experience: if you know how the market works and have experience of working in
         the market for a number of years, you will have seen it move through its cycles.
9.6 Business application: profiting from recession
Even during a recession there are still many goods and services being supplied and demanded.
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How to stabilize the demand and profits in a recession?
    Income elasticity: normal goods when income rises demand will be higher, inferior goods
       when income rises demand will be lower.
    Pricing: having products at the right price in the market and even the ability to lower prices
       to gain market share are also useful tactics in a recession; price discounts
    Managing costs: a lack of fixed costs is essential for profitable performance during a
       recession.
    Diversification: having a diversified portfolio of business acitivites.

Chapter 10 Measuring macroeconomic variables and policy issues
10.1 Business problem: what are the macroeconomic policy issues?
Managers need to be capable of understanding the key macroeconomic policy issues pursued by
governments.
10.2 GDP: measurement and policy
GDP is an estimate of the amount of economic activity in an economy.
The business cycle shows the variation between recession and boom.
Measuring economic output:
By examining the circular flow of income three potential ways of measuring output exist:
     Net value of goods and services produced by firms
     Value of households earnings
     Value of spending on goods and services
If we add up all the value added in the economy, then we have an estimate of total economic
activity: GDP.
Two more complications which need to be considered when measuring output:
     Not all factors of production are domestically owned and profits from the use of these
         resources will flow to another country.
     The creation of economic output results from the use of productive capital  plant,
         machinery, buildings and shops, all of which need to be maintained, repaired or replaced as
         they wear out  depreciation.
GDP policy issues: Higher GDP means more goods and services are being produced.
There could come up some problems:
     Distribution of income (rich people will get richer, poor people poorer)
     Cost incurred in generating higher levels of GDP per capita (part-time jobs)
How to sustain GDP?
     Employment is growth
     Infrastructure like schools and health care is welfare
10.3 Inflation: measurement and policy
Variations over time:
     Rate of inflation is a measure of how fast prices are rising
     Inflationary recession
     Deflationary recession
     Economic boom
     Inflationary boom
Demand pull inflation                                Cost push inflation

When a rise in aggregate demand leads to an        When a reduction in supply leads to an increase
increase in overall prices                         in overall prices

Measuring inflation:
    Price indices

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      Price deflators
      Costs of inflation:
             o Inflation illusion: people suffer with this if they confuse nominal and real changes.
             o Menu costs: associated with the activity and cost of changing prices in shops, price
                 lists and menus
      Fiscal drag: occurs when tax-free income allowances grow at a slower rate than earnings.
         This reduces the real value of tax-free allowances, leading to high real tax receipts.
      Fear of deflation: it isn’t good when the fall in prices for goods and services also impacts
         wages
10.4 Unemployment
Frictional                  Refers to individuals who have quit one job and are currently searching
                            for another job.
                            As such, frictional unemployment is temporary.
Cyclical                    Related to the business cycle and is sometimes also referred to ass
                            demand-deficient unemployment.
                            Reflects workers who have lost jobs due to the adversities of the
                            business cycle.
Structural                  Occurs when an industry moves into decline. The structurally
                            unemployed find it difficult to gain employment in new industries
                            because of what is known as a mismatch of skills.

Classical                  Refers to workers who have prices themselves out of a job.

How to measure?
     ILO definition: count of jobless people who want to work, are available to work and are
         actively seeking employment.
     Claimant count: simply measures the number of people who are eligible and receiving the
         jobseeker’s allowance.
     Philips curve: shows that lower unemployment is associated with high inflation.
10.5 Balance of payments
The balance of payments measures the flows of money for an economy (import, export, wages,
taxes, etc.).
Short-run: a one-off deficit is unlikely to be a problem  improve the country’s productivity, type,
quality, costs
Long-run: could be a problem.
10.6 Macroeconomic policies
How do governments control aggregate demand and aggregate supply and thereby manage the
economy?
     Demand side policies
     Fiscal policies
     Monetary policies
     Supply side policies
10.7 Business application: international competitiveness and the macroeconomy
Achieving higher rates of economic growth, producing more highly paid jobs and generating
additional exports are not all about increasing aggregate demand within an economy:
     Competition
     Improving productivity
     Quality
     Investing in workers’ skills and new capital technology
10.8 Business policy: inflation targeting?
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A target goal controls the rate of inflation (in the UK +/- 2 per cent).
     Stability of economy
     Price transparency = drive for competition
     Expectations
     Deflation

Chapter 11 Expenditure and fiscal policy
11.1 Business problem: who’s spending and where?
Total expenditure:
       Customer’s consumption
       Government spending
       Firm’s investment
       Export and import
It is important to understand the macroeconomic environment to understand the business
opportunities and threats: What factors will help to drive the various categories of expenditure?
       Employment prospects
       Sales
       Stability
       Etc.
11.2 Consumption, investment expenditure and the business cycle
The equilibrium is generally defined as the situation where planned aggregate expenditure is equal to
the actual output of the firm.
Planned aggregate expenditure is the total amount of spending on goods and services within the
economy that is planned by purchasers.
       45° line
       Closed economy = assume there is no
         government sector
       PE = AD = C + I
       Consumption + investment
       Consumption is related to two factors:
             o Basic need  autonomous
             o Level of income  marginal propensity
                 to save and to consume  confidence

     C = autonomous consumption + income
     Investment is the demand for capital products
     Investment depends on future prospect
     Output > demand = increase stock
     Output < demand = decrease stock
     Multiplier measures the change in
      output following a change in
      autonomous expenditure
     Multiplier = 1 / MPS = 1 / (1 – MPC)
     The higher the MPS, the faster the
      initial injection leaks out of the circular flow

11.3 Fiscal policy
For an economist, the multiplier means that small changes in autonomous expenditure can generate
big changes in national income.


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If the government wishes to control the economy then it only has to change autonomous
expenditure by a small amount in order to generate a very large change in overall economic activity:
      Fiscal policy: the government’s decisions regarding taxation and spending;
      AD = C + I + G;
      Government spending is autonomous;
      Taxation from income: AD = C + I + G  AD = 7 + 50 + 20 + 0.8(1-t)Y;
      After-tax income  MPC;
      Flatter line  when taxed are applied an increase in income has a lower impact on
         consumption;
      Balanced budget multiplier states than an increase in government spending, plus an equal
         increase in taxes, leads to higher equilibrium output;
      How do governments in practice use government spending and taxation to control the
         equilibrium level of output?
11.4 Government’s approach to managing fiscal policy
The government’s spending and taxation decisions are reflected in the government deficit = different
between government expenditure and revenues.
      Expenditures: social security, health, education
      Revenues: taxation, insurance contributions, VAT
The continual link between the government deficit and the business cycle makes it difficult to
appraise the government’s fiscal stance.
Fiscal stance: the extent to which the government is using fiscal policy to increase or decrease
aggregate demand in the economy.
Recession: tax will be less, so greater deficit.
Better to use the level of optimal output/full employment.
Fiscal policy and implementation problems:
      Time lags: knowing when there is a boom or recession
      Uncertainty
      Offsetting changes: make more debt in order to finance its spending
Managing inflation:
     1. Manage the size of the government debt
     2. Fixed exchange rate system
Crowding out (by government) exists when the public spending will reduce the private spending.
11.5 Foreign trade and aggregate demand
International trade also has impact on the demand:
X = Export  surplus
Z = Import  deficit
AD = C + I + G + X – Z
Export = autonomous
Import = depends on income  MPZ – Marginal Propensity to Import.
Should we be troubled by a rising trade deficit? YES:
      Leakage in the circular flow of income = reduce of size of multiplier
Open economy multiplier = 1 / (MPS + MPT + MPZ)
11.6 Business application: debt funding and crowding out
Crowding out occurs when public spending stops private sector spending. Then taxation income for
the government is lower and debt will increase. The government has to borrow, but from whom?
      Households
      Overseas
      Banks
      Etc.
11.7 Business application: taxation or government spending?

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Should the form of fiscal stimulus matter to business? YES:
    Timing
    Channels of spending

Chapter 12 Money, banking and interest
12.1 Business problem: understanding how the monetary environment influences the commercial
environment
Money is a key characteristic of most economic transactions: money is commonly accepted as
payment for goods and services and is equally accepted as payment for work.
Expansion of money  provision of liquidity:
     - too much expansion = too fast growth = inflation
     - too less expansion = too slow growth
By mopping up excess liquidity, through higher rates of interest, the central bank limits the ability of
retail banks to expand credit for consumption and investment. Likewise, if the bank reduces interest
rates, then money supply needs to be increased, which enables the retail banks to expand credit to
borrowers.
12.2 What is money?
Money facilitates exchange.
If there was no money, then we had to exchange goods  barter economy.
Because not everyone has the same needs and wants, there was double coincidence of wants.
Roles of money:
     - medium of exchange
     - unit of account (the unit in which prices are quoted)
     - store of value (used to make future purchases)
     - fiat money (notes and coins guaranteed by the government rather than gold)
12.3 The banking system
The banking system consists of the central bank, retail banks and wholesale banks:
Central bank         Acts as a banker to the commercial bank, taking deposits and, in extreme
                     circumstances, making loans.

Retail bank           Takes deposits and makes loans to retail customers.

Wholesale bank        Takes large deposits and is involved in brokering very large loans to companies.

The banking system is just one part of the broader financial system:
     Insurance companies;
     Building societies;
     Hedge funds;
     Pension funds;
Most financial companies are involved with intermediation:
    - raising funds
    - lending to or investing the cash in companies or individuals
Balance sheet:
Assets  loans to households and firms, financial securities
Liabilities  capital, deposits
Deposits:
Sight deposit  provide customers with instant access to cash
Time deposit  require the customer to give the bank notice before withdrawing cash
The central problem for most banks is that they borrow short and lend long  liquidity.
Important to a well-functioning economy is the services banks offer:

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      Liquidity: Speed, price and ease of access to money
                        Credit crunch: a lack of liquidity between banks.
                        Government bonds: near-cash equivalent and therefore liquid; a government
                            pays the holder of bonds a rate of interest in return for funding the
                            government’s debt.
                        Collateralized debt obligation: A bond; the holder of the bond is paid a rate
                            of interest in return for funding a debt.
      Risk pooling: Banks have access to a large share of funds and are therefore able to fund a
          larger pool of risks  risk pooling by banks enables the economy to grow.
      Risk selection and monitoring: Bank managers are trained to assess and evaluate the merits
          of lending to individuals and companies; select risks more effectively
      Risk pricing: As experts in financial risk, banks are able to provide a good assessment of risk
          and therefore the price for taking on such risk.
12.4 Regulation
Banks are institutions which take financial risks with depositors’ money:
     - Contagion  occurs when the collapse of one bank leads to the collapse of more banks.
     - Regulation  The use of rules and laws to limit, control and monitor the activities of banks.
History:
1960  Bretton Woods agreement  Fixed exchange rate  Rate of conversion between countries
 control.
1971  Abandoning fixed exchange rate systems  Lending and investing money where the rate of
return is the highest  Globalization of financial services.
Challenge  How to embrace the opportunities offered by free currency movements?
     - Deregulation
                        Stock broking
                        Competition
These changes were followed by changes in the regulations placed on mutual deposit-taking
institutions such as building societies:
A financial organisation that is owned by its customers. This contrasts with a bank, which is owned by
shareholders.
1993  The EU opened up competition further:
     - cross-border competition
     - can take a bigger risk
Types of regulation
Capital adequacy                  Measures the value of a bank’s capital to its risk-weighted portfolio of
                                  assets;
                                  Measures the extent to which assets within the bank are back by
                                  shareholders’ funds;
                                  Measure of bank safety;
Minimum reserve                   Stipulates the ratio of deposits that must be held in reserves in liquid
requirements                      or near-liquid form;
Activity-based regulation         Enables banks and insurance companies to move into each other’s
                                  sectors;
Risk-based regulation and Provides an ongoing picture of the institutions’ financial positions and
monitoring                        the likely risks going forward;
                                  Based on firm risk (specific to the firm) and thematic risk (across firms
                                  within the same sector);
Systemic risk  Contagion  Risk which can damage the entire financial system.
If the risk is systemic, then banks have generally relied on the central bank to act as the lender of last
resort (if a bank cannot raise funds from any other lender).
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Moral hazard  Occurs when a person changes their behaviour because they are partially insulated
from risk.
12.5 Credit creation and the money supply
Banks are able to boost liquidity to borrowers by recognizing that not all depositors will withdraw
their money at the same time:
    - Credit creation  the process of turning existing bank deposits into credit facilities for
        borrowers. The process can result in an increase in the money supply.
We clearly have to make a distinction between how much money people think exists and how much
cash actually exists.
    - Money  monetary based + deposits at the bank
    - Money multiplier  The ratio of the money supply to the monetary base:
                       Willingness of individuals to deposit money in the bank;
                       The level of reserves held by the banks;
    - Technology helps to create a higher amount of cash for the banks
    - Measures of money:
                       M0  a measure of the monetary base: cash in circulation outside the banks,
                        cash in the banks and the bank’s own accounts at the Bank of England 
                        narrow measure
                       M4  M0 + easy access savings accounts at banks, time deposits at banks
                        and deposits at building societies  broad measure
12.6 The demand for money
Economists identify three motives for holding money:
Transaction motive            Recognizes that money payments and money receipts are not perfectly
                              synchronized;
Precautionary motive          Reflects the unpredictability of transactions and the need to hold
                              liquid funds in order to meet these payments;
Asset motive                  Individuals hold money as part of a diversified asset portfolio. Some
                              wealth is held in equities, some in bonds, a portion in property and
                              some in money;
12.7 Money market equilibrium
The demand for real money balances is negatively related to the rate of interest. The supply of
money is perfectly inelastic and therefore not changing with the interest rate.
Controlling the money supply:
We know that the money supply is composed of cash in circulation plus money in deposit at the
banks:
    - Regulating the credit-creation process  regulation of the minimum reserve requirements
        run by banks.
             o Printing more money
             o Open market operations
                       When the central banks buys and sells financial assets in return for money;
                       Quantitative easing: involves the central bank buying government debt,
                        corporate debt and other financial securities. In return, cash is provided to
                        the vendors of these assets. Problems:
                              Cash on reserve;
                              Qualitative easing (the central bank swaps high quality assets for
                                 poorer quality assets);
                              Haircut: discount required by the buyer of a risky asset;
    - Controlling the amount of notes and coins in circulation  interest rate
12.8 Monetary policy

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Governments and central banks across the world attempt to use money markets and the banking
sector to influence overall levels of economic activity  setting of interest rates.
Monetary transmission: interest rates affect consumers’ willingness to consume and firms’
willingness to borrow for investment.
Transmission mechanism: How changes in the base rate feed through into changes in economic
output and inflation.




At the core of the transmission mechanism is how firms and consumers adjust their spending
decisions in the light of rate changes: Change in demand for goods and services  Change in
equilibrium GDP and inflation.
Transmission mechanism:
    - Consumption:
             o Directly related to income
             o Increases  MPC/Consumption increases too
             o Interest rate is therefore related too  Price of money
                       Fall: consumers are better off
                       Fall: raise today’s value of future income
                                Net present value  the discounted value of a future cash flow
                                Permanent income hypothesis  States that consumption is
                                  determined by lifetime earnings not current income
    - Investment:
             o A firm’s willingness to invest is determined by cost-benefit analysis
                       Financial returns from investing
                                Costs  investment costs, interest costs, disruption costs

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                         Interest rate influences investment:
                               Higher rates of interest drive up the cost of borrowing and so reduce
                                   investment
                               Higher rates of interest make the value of future financial benefits
                                   smaller in today’s terms
             o Time lags: reflecting pre-committed expenditures
12.9 Business application: monetary policy and investment
Debt is a complementary good for firms seeking to invest.
     - If the interest rate falls, loans become cheaper;
     - Interest rates reflect the cost of investing, but what about the benefits?
             o Recession  reduce of business confidence
             o Uncertainty  employment prospects and inflation all damage consumer confidence
What are the effects of low inflation on the economy and, in particular, on business?
     - Stability;
     - Predictions are easier to make;
But also:
     - Reduce the need or desire to invest;
     - Raise the final price for their products;
12.10 Business application: the importance of banking to the economy
Should banking be the engine of economic growth, or the lubricant of the economic system?
     - Banking plays a facilitating role within the economy;
     - Deregulation:
             o Bancassurance  a conjunction of banking and insurance;
             o Operating internationally;
             o Technical innovations;
Banks and financial services in general have grown to be important, significant and perhaps the
largest component of growth within modern economies.
As financial services has become the engine of economic growth, it has arguably required greater
deregulation and a greater ability to take increased risk in order to achieve yet higher rates of return.
When there is a credit crunch and the collapse of many major banks, governments are required to
bail out the financial system:
     - risk of political and social objectives

Chapter 13 Inflation, output and economic policy
13.1 Business problem: why is inflation important for wage determination and debt repayment?
The macro-economy is nothing more than a vast collection of microeconomic decisions bundled up in
an enormous assortment of markets.
Inputs:
     - Labour: wages;
     - Capital: investment, debt repayments;
Inflation changes the nominal and real prices:
     - These will change from each other in the future;
     - Deflation will increase real values;
     - Inflation will reduce real values;
     - When inflation falls behind wage growth, then workers become more expensive and firms
         reduce employment and output
Short-run                                           Long-run
Unexpected changes in inflation impact the          Prices and wages have no impact on the level of
budgeted revenues and costs of firms;               employment, economic output and therefore
Likely to be temporary;                             GDP;
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The less resistance to price and wage changes, the swifter an economy will return to equilibrium.
So, wage and debt adjustments are enormously important to the functioning of the economy!
13.2 Short- and long-run macro-economic equilibrium
Short-run                                           Long-run
An economy can be shown to be in equilibrium        The level of GDP is associated with a point on
but the level of GDP can differ from potential      the economy’s production possibility frontier;
GDP  actual GDP;                                   Full employment level;
Actual GDP > Potential GDP = boom;                  Producing at its potential GDP;
Actual GDP < Potential GDP = recession;             Little need to correct;
Difference between both = Output gap;
13.3 Employment, inflation and output
Philips curve: Lower unemployment is associated with higher inflation. Simply, lower unemployment
has to be traded for higher inflation.
      Short-run
      Long-run




Short-run                                           Long-run
Trade off between unemployment and inflation;       Unemployment is constant because real wage is
                                                    constant;
                                                    Real wage = nominal wage / inflation
Rapid adjustment in prices and wages suggests that an economy needs little active fiscal or monetary
policy, while sluggish adjustments provide the possibility for fiscal or monetary intervention to move
the economy more swiftly towards its equilibrium.
13.4 Inflation, aggregate demand and supply
Aggregate demand is total demand in the economy (sum
of consumption, investment, government spending and net
exports)  Negative relationship.
As inflation rises  interest rate increases  reduction in
consumption and investment  reduction in GDP.
A shift in the macroeconomic demand schedule results from
changes in aggregate demand.

Long-run aggregate supply:
    Vertical: inflation inelastic;
    Any change in inflation do not alter employment;
    If there are more workers, then there will be an increase in full employment level;




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               Long run equilibrium                    Long run aggregate supply

If an economy benefits from a supply shock, then long-run aggregate supply moves to the right and
the rate of inflation falls the target rate:
       Relaxing interest rates;
       Allowing demand to increase;
13.5 Short-run aggregate supply
In the short run, there is no presumption that real wages
remain constant.
It is necessary to examine the short-run equilibrium of the
economy, where real wages are not held constant. If nominal
wages are held constant and the rate of inflation rise, then real
wages fall and employment increases.
In the long run, workers and firms have agreed nominal wage growth.
       Inflation increases = real wages fall = price of goods and service rises = more workers =
          inflation and GDP rise;
       Inflation decreases = real wages rise = reduce employment and output
13.6 Short- and long-run equilibrium
A drop in consumer and business confidence =
fall of consumption and investment = fall in inflation =
raise of real wages = cutting output.
Revision expectations of inflation = lower nominal
wage growth = inflation falls further = output rises =
return to full employment.
Deflation and the credit crisis:
The credit crisis led to a fall in consumption and investment.
Why avoid deflation if adjustment to full employment can be reached in the long run?
       Time to adjust;
       Impact of deflation on consumption;
       Deflation rises the real value of debt;
Permanent shock in increase of supply  Line moves to the right.
Temporary shock in supply  potential output is unaffected.
13.7 Monetary policy rules
Targeting inflation is equivalent to targeting GDP  Having full knowledge of potential GDP 
Difficult to measure  Inflation targeting seems more appropriate.
The consequences of inflation targeting in the face of supply shocks are to provide volatility in GDP
and stability in prices.
An additional problem faced by central banks is to understand the source of the macroeconomic
shock  Demand or supply based?
Reflecting these difficulties, central banks are pragmatic in their approach to managing the economy
and tend to follow what is know as a Taylor rule:
Interest rate =
π + i* + a(π – π*) + b(GDP – GDP*)
π = rate of inflation
i = real interest rate
a and b > 0
π* = target rate of inflation
GDP* = potential GDP
A Taylor rule links interest rate changes to short-term deviations in both inflation and output from
long-term equilibrium values.

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The more the central bank is concerned about inflation deviating from the target rate, the large a,
and the more interest rate will change.
The higher the value for b, the more concerned the central bank is with variations in GDP and the
more rates will change to bring about long-run equilibrium and potential GDP.
13.8 Adjustment speed
Competing macroeconomic perspectives:
New Classical        Gradual Monetarist          Moderate Keynesian           Extreme Keynesian

Markets adjust       Markets adjust quickly        Economy will eventually    Extremely concerned
instantly; leading   but not instantaneously;      return to its long-run     that prices and wages
to a clearing        Relatively short-time         equilibrium but the        are sticky;
equilibrium;         period;                       adjustment will not        Enormous duty to push
Full employment;     Flexibility in pricing;       necessarily be quick;      spending into the
No need for policy   Open labour market;           Slow to adjust;            economy;
interventions;       Policies are likely to lead                              Fiscal policy is better
Focus on long-run    to an over-correction of                                 able to do this than
                     the economy;                                             monetary policy;
                     MV = PY;                                                 Core concern is
                                                                              output;
13.9 Business application: understanding the interest rate path
For business, it is crucial to understand the future path of interest rates:
Borrowing to fund investment;
Leverage their financial returns  higher returns to shareholders;
Equity financing;
The Taylor rule enables business managers to achieve a broad understanding of where interest rates
are likely to go in the future:
     A greater divergence between actual inflation and target inflation will lead to a change in
         rates;
MV = PY
Money supply * Velocity of circulation = Price level * Real GDP
Fan charts:




13.10 Business application: understanding the formation of inflationary expectations
If growth in wages and prices is fundamental to the macroeconomic equilibrium, then it must be
important for business to understand and respond to changing inflationary expectations.
How are inflationary expectations formed?
      Inflation to the target level  future price stability;
      Variety of markets  over time tracking price changes;
      Money markets  rate of return;

Chapter 14 Supply side policies and economic growth
14.1 Business problem: assessing economic growth
The importance of growth rates becomes more apparent over time:
     Generation of individuals’ incomes;

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      Potential for companies to grow;
Economic growth and the development of sales is not the only benefit for firms:
      Aid the cost structure faced by firms;
      Understanding government policies;
      Exploiting opportunities offered by economic growth;
14.2 Growth and aggregate supply
Demand side policies are only capable of moving the economy back to full employment. Real
expansion of the economy involves an increase in potential GDP. Therefore, we can only envisage
real economic growth occurring if aggregate supply increases.
If economic growth is desirable, then moving aggregate supply, or increasing the potential productive
output of the economy, is key:
More factor input           As the economy gains more economic factor inputs (land, labour, capital
                            and enterprise), then its productive potential increases;
                            Transfer of workers;
                            Similar access to resource problems;
Greater productivity        If it is not possible to gain more factor inputs, then economic growth can
                            be achieved by producing more output with the same level of factor
                            inputs;
                            Becoming more productive;
                            A key measure of productivity is GDP per hour worked;
                            The firm is only willing to supply more output at any given price if its
                            marginal costs decrease;
Innovation                  A key driver of technological change is R&D;
                            Any implication for economic growth?!  transfer of knowledge and
                            new ideas means greater impacts on long-term economic growth;
14.3 Neoclassical growth theory
Assume we have a simple model where the economy’s output is determined by three things:
      Technical progress;                  Improving;
      Capital;                     Employment of more capital;
      Labour                       Law of diminishing goods;
How long can growth keep improving?
Economic growth would not increase for ever;
In the short term, providing all workers with more productive capital improves productivity  raises
economic growth  but in the long term these extra capital has to be maintained  slowing down
the output rate =
Growth rate convergence: states that poor countries grow more quickly than average, but rich
countries grow more slowly than average.
14.4 Endogenous growth theory
Neoclassical economists see even developments in technology as being exogenous, or determined
outside the model.
      Growth is determined by technological development, but technological development is not
         affected by economic growth;
      Constant returns to capital;
      Governments have the potential to increase technological developments and direct
         economic decision makings to investment activities with positive externalities.
Endogenous growth theory: Considers models in which the steady state growth rate can be affected
by economic behaviour and policy.




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14.5 Supply side policies
Education markets                 Bringing a broader and larger number of individuals into higher
                                  education widens the skill base of the workforce;
                                  Thinking critically  core of technological improvement;
Labour markets                    Accommodating;
                                  Trade unions vs. stakeholder perspectives;
R&D and innovation                Government can play a role in providing incentives to undertake
                                  research in new productive processes, or even encourage the
                                  exploitation of existing knowledge;
Financial services                With higher quality investments being undertaken, the capital
                                  stock can become more productive and economic growth should
                                  improve;
Tax cuts                          Less tax payment  more money for leisure;
Privatization                     Competition increases;
                                  Effective entry barriers;
                                  Economies of scale;
Private finance initiatives       Involve the private sector in financing, building and owning
                                  infrastructure projects in return for an annual leasing fee from the
                                  government;
14.6 Business application: how does innovation promote business?
Creative destruction:
     Competitive advantage;
     Generation of profits;
14.7 Business application: the BRIC economies
The BRIC economies are those of Brazil, Russia, India and China  growing fast and they are
enormous.
Factors:
     Technological expertise (C)
     Abundance of labour (C)
     Energy resources (R,B)
     Important forestry (B)
They have yet to run up against the production possibility frontier  frontier and supply are
constantly expanding:
     Rapid growth;
     Low inflation;
However, there are also notes of caution  very different stage of economic development from
other western economies:
     Product has to be right for the level of income;

Chapter 15 Exchange rates and the balance of payments
15.1 Business problem: should the UK be a member of the euro?
     Understanding of the trade-off between flexibility and stability;
     Understanding of how strong the welds are
15.2 Forex markets and exchange rate regimes
Since we are talking about a forex market, the item being traded must have a price:
‘Forex markets are where different currencies are traded.’
Who is demanding and selling currency?
     Individuals and firms buy and sell currencies whenever they undertake transactions with
        other economies;
     Import  generating supply for the currency;
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     Export  generating demand for the currency;
Exchange rate regimes:
Fixed exchange rate        Meet this excess demand by supplying an additional AC pounds to the
regime                     market;
                           When the central bank was selling currencies it will have received another
                           currency in return  reserves  buy back your own currency;
                           Devaluation: If the currency is being continually supported by the central
                           bank, it is probably the case that the fixed exchange rate has become
                           vastly different from the long-term market for the currency  speculative
                           attack (massive capital outflow from an economy with a fixed exchange
                           rate).
Floating exchange rate As demand and supply for a currency change, the equilibrium price adjusts
regime                     accordingly;
                           No impact on the central bank’s foreign currency reserves as there is no
                           intervention in the marketplace;
                           Long run: purchasing power parity  requires the nominal exchange rate
                           to adjust in order to keep the real exchange rate constant.
Dirty float                The government claims that the currency floats but in fact, through the
                           central bank, the currency is secretly bought and sold to achieve a target
                           exchange rate.
15.3 Fixed versus floating exchange rates
                                     Fixed exchange rates                Floating exchange rates
Volatility (short-term)              No volatility                       Volatility; uncertainty
Robustness (long-term)               No scope for exchange rate          Gradual adjustment
                                     adjustment
Financial discipline                 Force governments to take           Little incentive to control
                                     financial discipline seriously      inflation
15.4 The balance of payments
The balance of payments records all transactions between a country and the rest of the world.
There are 3 parts:
Current account            A record of all goods and services traded with the rest of the world;
                           visible
                           invisible
Capital account            A record among other things, net contributions made to the EU;
Financial account          Record of net purchases and sales of foreign assets  captures all
                           investments into an economy by foreign individuals and companies:
                           direct investment: foreign company which builds offices in another country
                           (e.g.);
                           portfolio investment: purchases of shares and bonds;
                           other investment: loans between banks;
Under floating exchange rate, the balance of payments must equal zero  equilibrium in the forex
market.
Under fixed exchange rate, the situation is vastly different  the balance of payment will not
necessarily be zero. In order to make the balance of payments zero, we have to incorporate the
concept of official financing (the extent of government intervention in the forex markets):
    - government must buy up the excess supply of the currency;
15.5 Exchange rates and government policy
Effectiveness of fiscal and monetary policy under fixed and floating exchange rate regimes:
    - real exchange:

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            o     international competitiveness depends upon the real and not the nominal exchange
                  rate:
                       (€/exchange rate other currency) x (price of goods / € price of goods)
     - perfect capital mobility:
              o expected returns on all assets around the world will be zero;
                         Fixed exchange rates                      Floating exchange rates
Monetary policy          Guarantee of profits;                     More powerful than fiscal policy;
                         Financial capital will flow to the        A reduction of interest rates will
                         country with the highest interest         boost internal demand 
                         rate;                                     international competitiveness;
                         Loss of monetary independence;
Fiscal policy            You cannot change the interest rate;      Demand will increase  inflation;
                         More powerful than monetary policy; Raise interest rates;
                                                                   Exchange rate must also rise;
15.6 European monetary union
The monetary union is the permanent fixing of exchange rates between member countries:
     - loss of monetary independence;
     - international competitiveness;
Potential members do have to meet the Maastricht criteria  stability.
Optimal currency zones: a group of countries better off with a common currency than keeping
separate currencies 
     - trade integration;
     - similarities in industrial sectors (macroeconomic shocks);
     - flexibility and mobility (safety)
Five tests:
     - sustainable convergence;
     - flexibility;
     - investment;
     - financial services;
     - employment;
What if you don’t join the EU:
     - lost trade;
     - lower foreign investment;
     - weaker financial markets;
     - reduced competitiveness;
     - convergence;
     - euro policy and politics;
15.7 Business application: monetary sovereignty, exchange rate depreciation and export growth
Advantages                                              Disadvantages
Trade is less complex;                                  Recessionary impact of the credit crisis;
Price transparency  common pricing and                 Abandon of monetary sovereignty;
financial risks associated with currency                No independent control;
movements are reduced;
15.8 Business application: hedging
In the forex market there is ample opportunity to hedge: the transfer of a risky asset for a non-risky
asset.
Spot price  speculation  will it be more worth in the future or not?




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Chapter 16 Globalization
16.1 Business problem: how do we take advantage of the global economy?
Globalization provides opportunities and threats for business:
     - potential access to cheaper labour, raw materials and finance;
     - willingness of customers;
     - international competition;
16.2 Why is the global economy developing?
There are many potential drivers of globalisation:
Culture                Convergence
Travel                 Promotes an acceptance of other cultures
Film and media         Seeing what is consumed abroad
Technology and         The ability to communicate with anyone, anywhere, any time, increases the
communications         perception of a global village;
                       Integrated global financial system;
Economic               Law of comparative advantage states that economies specialize in the good
rationales             that they are comparatively better at making;
                       Minimizing opportunity costs;
Terms of trade         P exports / P imports;
                       If a country’s terms of trade improve, then the price of its exports is rising
                       relative to the price of its imports;
                       Improvement means rise of command GDP;
Fundamental            Being most productive;
importance of
comparative
advantage
Factor abundance       Economies appear to produce goods for which they have an abundance of a
                       key factor input;
Two-way trade          Intra-industry trade;
                       Tastes for differentiated products;
Trade restrictions     Protectionist measures:
                       tariffs;
                       subsidies;
Non-tariff barriers    Quota
Reasons for            Defence or national interest;
protecting trade       Infant industry;
                       Way of life;
International          Number of supranational institutions:
institutions           WTO;
                       United Nations;
                       The world bank;
Trade blocs            A region or group that have agreed to remove all trade barriers among
                       themselves;
16.3 A closer look at the EU
An important feature of the EU is the limited presence of internal trade barriers:
     - reduce domestic oligopolies;
     - increase cross-border competition;
     - realization of economies of scale;
     - comparative advantage;
     - emerging corporate strategy;

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The EU is still growing:
      - opens up more markets;
      - presents an ample supply of cheap skills workers;
      - opportunity to relocate;
      - exploit cost savings;
16.4 To what extent are markets becoming global?
Globalization occurs at many levels:
       Global product markets  export and import of goods and services from domestic locations
         to international markets;
       Global operations  multinational enterprises are usually large companies with production
         and/or sales operations in more than one country:
                       Investment in foreign markets: foreign direct investment (FDI)
       Why do firms become global?  variety of reasons:
                       Revenue growth;
                       Costs;
       Sources of international competitiveness  national, industrial or firm-specific, sometimes
         also macroeconomic;
       Accessing  quality of labour, transportation costs, etc;
If a firm has a specific asset such as knowledge or branding which provides it with a competitive
advantage, the best way to exploit that asset is to retain control. Expanding the firm’s operations into
international markets enables the firm-specific competitive advantage to be exploited. Transferring
the asset to a third party is likely to increase transaction costs.
16.5 Business application: globalization – exploiting comparative advantage
A number of problems occur when opening up the trade barriers:
      1. Communication and co-ordination:
              a. Language;
      2. Legal issues:
              a. Environmental controls;
              b. Contract law;
              c. Employment law;
              d. Import restrictions;
      3. Quality of inputs:
              a. Labour;
              b. Machinery;
      4. Image and brand: meet the tastes and preferences of a global audience;
16.6 Business application: sources of international competitiveness
It is important to understand the crucial difference between competitive advantage and a
sustainable competitive advantage:
      - long-term;
      - strategy;
      - difficult to copy;




                                                          Propedeusebundel 2011-2012 IBA       135
Exam:




        Propedeusebundel 2011-2012 IBA   136
Propedeusebundel 2011-2012 IBA   137
Propedeusebundel 2011-2012 IBA   138
Propedeusebundel 2011-2012 IBA   139
        European Law 201000054


Language    English
Description Aims:
            After the course students can: - (know and understand) explain the legal institutional
            dimension of European integration - explain the key elements of European substantive
            law (the internal market and the competition rules) - (work with) apply relevant
            European legislation (treaty provisions as well as decisions) - (and know how to work
            with) apply and interpret relevant case law of the European Court of Justice.
            Content:
            The course aims to provide an introduction to European integration from a legal
            perspective. It will deal with the foundations of European Union law and discuss the
            main characteristics of the EU, also as addressed and established by the European
            Court of Justice. It will also focus on the legal relationship and interaction between the
            European and national legal orders.
            In particular it will address the functioning of the internal market: the free movement
            of goods, services, persons and capital and the basics of European competition law.
            Students will discuss the main issues at lectures and work on practical cases during a
            number of tutorials in smaller groups.

Study         International Business Administration
                Phase B1         Quartile 2B
Instructional Instruction/Lecture, Lecture, Self-Study
modes
Examformat Written exam
Credits       3.0 EC
Lecturer(s) dr. L. Marin; prof.dr. R.A. Wessel (email to: r.a.wessel@utwente.nl)
Required      P. Craig & G. De Bùrca, EU Law: Texts, Cases and Materials, OUP, latest edition available
materials     (selected chapters)




Unfortunately,there is no summary of this course, but sample exam questions are available.




                                                          Propedeusebundel 2011-2012 IBA       140
Exam

Short questions
Explain what are discriminatory restrictions to the freedoms of movement, covering also the topic of
direct and indirect or covert discriminations. Refer to the case law you know on the subject. Do not
write extensive text just to prove that you have read the book, but rather organize your ideas and
write key-words and key-concepts (for case law, the case name is enough) and relations.

Legal cases
1: Freedom of movement v. social dumping?
A Latvian company, Laval, has a contract for the construction of a building in Sweden.
It plans to fulfill this contract posting Latvian workers to Sweden. It claims it has the right to do so, in
the framework of free movement of services.
Swedish unions took industrial action against Laval to force it to sign Swedish collective agreements.
This was necessary to guarantee some rights to Latvian workers, giving them the same treatment
their Swedish colleagues would enjoy. At the same time, this would preserve local workers, without
undermining Swedish welfare standards.
The industrial action taken by Swedish unions was compromising the fulfillment of the contract by
Laval (they could not construct the building they had to), who started an action before a Swedish
court. This court referred to the ECJ for a preliminary ruling, asking whether the FM of services was
compromised by the initiatives taken by unions.
You are the ECJ, and you solve the case, pointing at:
Does this case fall within the scope of a treaty provision? If you choose in the affirmative, explain
why this falls within the scope of a given treaty provision and not another one (e.g.: why FM goods
and not FM services, etc…).
Can the measure (industrial actions) be considered a restriction to a treaty provision? (please
elaborate also on the status of Swedish unions)
Is there a justification? Is this proportionate?
Which is the status of industrial actions (e.g., strikes, etc...) in MS’ legal orders? Do you think the ECJ
can legitimately interfere on such issues?

2. Christelle L’Etoile
Christelle L’Etoile is the prima ballerina (first dancer) at the French National Ballet, Strasbourg,
France.
She lives in Germany, close to the French border. She is a French national, married to the German
Günther Jägermeister.
The French National Ballet gives her as fringe benefit a very valuable company car, because her legs
have been insured for 2,7 million euros.
The German legislation prohibited German residents from using company cars registered abroad (in
this case, France) for private purposes, in order to avoid tax evasion.
Christelle L’Etoile comes to your law firm, asking legal advice; provide an answer on how EU law
might help her. Is European Law of any help for Christelle? If so, which provisions in particular? Can
you also point at case law that might be really helpful for Christelle? (A)
(B) Would it make a difference if Christelle would not be regularly employed at the French National
Ballet? She is indeed in the process of negotiating new conditions with the French National Ballet. It
might be financially interesting for her to stop being an employee, and begin a career as self-standing
dancer, so advised her her manager, considering her high ‘cachets’ and the promising career
chances.



                                                             Propedeusebundel 2011-2012 IBA         141
3. Mr. Aaron and its “Kill the Salmon” Ltd.1
Mr. Aaron is an Italian national who used to love fishing. At one point in his life he makes up his
mind, deciding to quit his busy job as a tax manager, but also his wife and house, and moves to
Sweden to catch salmons, his favorite hobby, and set up there a travel agency (the “Kill the Salmon”
Ltd.), organizing fishing tours all-inclusive in Sweden, as well as providing fishing training and fishing
equipments.
After he made considerable investments to set up a company in Sweden, arrange offices, cars and
equipment, hire staff, etc..., the Swedish Minister of Economic Activities fines Mr. Aaron and seize his
company because Mr. Aaron is not in possession of the “Certificate of the Good Fisherman”, a
certificate issued by the “Swedish Good Fishermen Association”, at completition of a 4-years fishing
training.
Holding this certificate is a pre-requisite for carrying out activities related to fishing tourism in
Sweden, in particular for organizing fishing tours. This training teaches fishermen on how to catch
salmons in a sustainable way, minimizing suffering for salmons.
In the litigation before the Swedish administrative judge, Mr. Aaron argues that Swedish provisions
undermines his right of establishment in Sweden and his freedom to provide services to European
and non European tourists (1).
The Swedish administration, by contrast, states this legislation does not affect his rights, as this
applies also to any Swedish national holding such a company (2).
The Swedish judge decided to stay proceedings and to refer preliminary questions to the ECJ on
European Law. Before the ECJ, the Swedish administration argues further that Mr. Aaron is in
Sweden having exercised his right of establishment (3), and therefore should comply with Swedish
legislation (see Article 49 TFEU) (4).
The measure in question aims at protecting the environment (in particular: animal life) (5), and to
promote sustainable tourism (6), making tourist aware of salmons’ “well being”. The Swedish
administration, defendant, states also that its regulation is inspired by “Europe 2050: the New Eden”,
the ambitious Green Paper of the European Commission on protection of the environment,
sustainable tourism and respect for human and animal life in Europe (7).
As last information, this certificate is not asked by any other State of the EU, where usually no
certificate is required for the exercise of such activities (8).
You are legal clerk working for a judge at the European Court of Justice. You write a draft judgment
for this case, arguing it with the case law you. Quoting case law with case names (e.g.: ECJ, Reyners)
is enough. (The numbers in brackets gives you some structure.)




                                                            Propedeusebundel 2011-2012 IBA        142
        Finance 201000055


Language    English
Description Aims:
            By the end of the course students should be able to: Understand the scope of finance
            and financial management; Understand and apply the concept of the time value of
            money; Learn different methods for valuing the two key financial securities: stocks and
            bonds; Explain the relative merits of alternative capital investment appraisal methods;
            Assess the capital structure choice and dividend policy of firms; Learn how companies
            make financial planning decisions.
            Content:
            The course provides an introduction to the theory and practice of finance. The basic
            issues that will be discussed are: financial environment; valuation; capital investment
            decisions, risk and return; cost of capital; financing and payout decisions.

Study         International Business Administration
                Phase B1           Quartile 2B
Instructional Assignment, Instruction/Lecture, Lecture, Self-Study
modes
Examformat Written exam
Credits       5.0 EC
Lecturer(s) dr. X. Huang; prof.dr. M.R. Kabir (email to: r.kabir@utwente.nl)
Required      David Hillier, Iain Clacher, Stephen A. Ross, Randolph W. Westerfield, Bradford D.
materials     Jordan, Fundamentals of Corporate Finance, 1st European Edition, 2011, McGraw-Hill.




For further summaries look at www.stress.utwente.nl/study under “exams and summaries”.




                                                        Propedeusebundel 2011-2012 IBA      143
Summary of the book “Fundamentals of Corporate Finance” by Hillier and others

Chapter 1 Introduction to corporate finance
1.1 Corporate finance and the financial manager
Corporate finance must be considered with three basic types of question:
    1. What long-term investments to make
    2. Where will we get the money for those investments from
    3. How will we manage everyday financial activities
1. What long-term investment to make:
To process of planning and managing long-term investments is called capital budgeting
Capital budgeting = the process of planning and managing a firm’s long-term investments.
Managers try to indentify investment opportunities that are worth more than they cost to acquire.
Capital budgeting involves evaluating the size, timing and risk of future cash flows.
2. Where will we get the money for those investments from?
Capital structure = the mixture of long-term debt and equity maintained by a firm
Long-term debt = borrowing by the firm (> 1 year) to finance its long-term investments
Equity= the amount of money raised by the firm that comes from the owners investment
A manager has two concerns in this area:
    1. What mixture of debt and equity is the best
    2. What are the least expensive sources of funds for the firm?
3. How will we manage everyday financial activities?
Working capital = a firm’s short-term assets and liabilities
Managing the firm’s working capital is a day-to-day activity which ensures that the firm has sufficient
resources to continue its operations and avoid costly interruptions.
1.2 The goal of financial management
Possible goals for for-profit organisations:
     Survive
     Avoid financial stress or bankruptcy
     Beat the competition
     Maximize sales or market share
     Minimize costs
     Maximize profits
     Maintain steady earnings growth
Goals are or related to profitability or related to controlling risk.
The goal of financial management is to maximize the current value per share of the existing equity.
1.3 Financial markets and the corporation
Financial markets facilitate the flow of money from those that have surplus cash to those that need
financing.
See figure 1.2 for the cash flows between the firm, financial markets and the economy
Primary market: the corporation is the seller and the transaction raises money for the corporation.
Can be:
     Public offerings ( selling securities to the general public)
     Private placements( negotiated sale for specific buyers)
Secondary market: One owner sells its securities to another. It transfers ownership.
Two kinds of secondary markets:
    1. Auction markets:
              Physical location
              Matches buyers and sellers
    2. Dealer markets
              Over- the-counter (OTC) markets  can happen anywhere
                                                          Propedeusebundel 2011-2012 IBA       144
             Buying and selling is done by the dealer
The equity shares of most large European firms trade in organized auction markets. These kinds of
shares are said to be listed on that exchange.

Chapter 2 Corporate Governance
2.1 Forms of Business organization
Three legal forms of business organization:
    1. Sole proprietorship
Sole proprietorship = a business owned by a single individual
          Keeps all profit
          Unlimited liability ( also proprietor’s personal assets can be taken for payment)
          Limited to owners lifespan
          Amount of equity is limited to the amount of the proprietor’s personal wealth
          Micro companies
    2. Partnership
Partnership = a business formed by two or more individuals or entities
          Partnership agreement ( description of the way partnership gains are divided)
          General partners run the business
          Limited partners don’t actively participate in the business
Most important for the kind of businesses:
              Unlimited liability for business debts on the part of the owner
              Limited life of the business
              Difficulty of transferring ownership
Central problem: the ability to grow can be limited by an inability to raise cash for investment.
    3. Corporation
Corporation = A business created as a distinct legal entity composed of one or more individuals or
entities
     Separate legal entity
     To start a memorandum of association and articles of incorporation must be made.
             o Memorandum of association: describes how the corporation regulates its existence.
     Ownership can easily be transferred (shares)
     Limited liability for business debt
     Unlimited life of the business
     Disadvantage : must pay tax
2.2 The agency problem and control of the corporation
Type 1 agency problem = the possibility if conflict of interest between the shareholders and
management of a firm.
Agency costs: the cost of the conflict of interest between shareholders and management. These costs
can be direct or indirect:
     Indirect costs is a lost opportunity
     Direct costs are a corporate expenditure that benefits management but costs the
         shareholders.
     Direct costs is also an expense that comes from the need to monitor management actions
These problems can be solved by managerial compensation.
Control of the firm ultimately rests with shareholders. They elect the board of directors, who in turn
hire and fire managers.
Single tier board: shareholders elect the directors
Two tier board: supervisory board elects the directors


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Cumulative voting = a procedure in which a shareholder may cast all votes for one member of the
board of directors.
This permits minority participation.
Number of shares * number of directors to be elected.
1/ (n+1) =per cent of shares needed to win the election. N= number of directions up for election
Straight voting = a procedure in which a shareholder may cast all votes for each member of the board
of directors
Own more than 50% to win the seat.
Freeze out minority shareholders
Devices to minimize the impact of cumulative voting:
      Staggering: only a fraction of the directorships are up for election at a particular time
      Two effects:
              o Harder for minority to elect director.
              o Take-over attempts are less likely to be successful.
Proxy = A grant of authority by a shareholder allowing another individual to vote his or her share
Classes of shares: Different kinds of equities have different voting rights.
Other right in addition to vote for directors:
      Right to share proportionally in dividends paid.
      Right to share proportionally in assets remaining after liabilities have been paid in case of
         liquidation.
      Right to vote on shareholder matters of great importance.
Pre-emptive right: the right to share proportionally in new equity sold.
Dividends = payments by a corporation to shareholders, made in either cash or shares
      Are not liabilities
      Are no business expenses
      Are taxable
Type 2 agency problem = the possibility of conflict of interest between controlling and minority
         shareholders.
Sometimes management goals are pursued at the expense of some or all shareholders, at least
         temporarily
Stakeholder = someone, other than a shareholder or creditor, who potentially has a claim on the cash
         flows of the firm
2.3 International corporate governance
Legal environment has a big impact on the firms’ decisions.
Three law systems:
     1. Common law: the law evolves as a result of the judgment decisions
     2. Civil law: judges interpret the law
     3. Religious law: specific religious principles form the basis of legal decisions
Also the adherence to the rule of law and efficiency of law enforcement have a major impact on
corporate decision-making and regulatory compliance.
Financial environment also influences firms’ decisions
In a bank based financial system, banks play a major role in facilitating the flow of money.
In market based systems, financial markets take on the role of the main financial intermediary.

Chapter 3 Financial analysis and planning
3.1 The annual report
Annual report consists of:
     Balance sheet
     Income statement

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     Cash flow statement
Balance sheet: financial statement showing a firm’s accounting value on a particular date.
     Assets = Liabilities + Shareholders’ equity                                               (3.1)
Net working capital = current assets less current liabilities
Income statement = financial statement summarizing a firm’s performance over a period of time
     Revenues – Expenses = Income                                                              (3.2)
Non – cash items = expenses charged against revenues that do not directly affect cash flow, e.g.
depreciation.
Corporate tax rate = the rate of tax that corporations have to pay.
Average tax rate = tax bill dividend by taxable income.
Marginal tax rate = the tax paid if one euro more is earned.
Cash flow statement = financial statement summarizing all the cash flows of a firm over a period of
time
Total cash flow = the total of cash flow from operating, investing and financing activities.
     Cash flow from assets = Cash flow to creditors + cash flow to shareholders                (3.3)
       Total cash flow =             +               +                                  (3.4)

Operating cash flow = cash flows generated from a firm’s normal business activities
Cash flow from investing activities = cash generated from a firm’s long-term investments
Cash flow from financing activities= cash generated as a result of its debt and equity choices.
3.2 Ratio Analysis
Financial ratios: relationships determined from a firm’s financial information, used for comparison.
Short term solvency measures
                                                                                                (3.5)
                                                                                                 (3.6)
    
    
    
Long term solvency measures
                                                                                                 (3.7)
       Debt - equity ratio =                                                                     (3.8)
                                                                                                 (3.9)
    
                                                                                                 (3.10)
                                                                                                 (3.11)
Asset Management measures (turnover measures)
                                                                                                 (3.12)
                                                                                                 (3.13)
                                                                                                 (3.14)
                                                                                                 (3.15)
                                                                                                 (3.16)
       PPE turnover=                                                                             (3.17)
                                                                                                 (3.18)
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Profitability measures
                                                                                                    (3.19)
       Return on assets(ROA) =                                                                      (3.20)
       Return on equity(ROE) =                                                                      (3.21)

       ROE =

Market value measures
    P/E ratio =                                                                                     (3.22)

    

       Price-sales ratio=                                                                           (3.23)

       Market-to-book value=                                                                        (3.24)

       Tobin’s Q=                                                                                   (3.25)

3.3 The Du Pont identity
Du pont identity = popular expression breaking ROE into three parts: efficiency, asset use efficiency,
financial leverage.
     ROE= profit margin ×              total asset turnover ×          equity multiplier         (3.26)
                 Operating efficiency asset use efficiency              financial leverage
3.4 Using financial statement information
Financial statements are used by internal and external users.
To compare how you are doing in the market (benchmark):
     A time trend analysis
     A Peer group analysis
3.5 Financial planning
Planning:
     Examining interactions
     Exploring options
     Avoiding surprises
     Ensuring feasibility and internal consistency
Managers should think about goals and establishing priorities
3.6 Financial Planning models
Percentage of sales approach = a financial planning method in which account are varied depending
on a firm’s predicted sales.
     Dividend payout rate = the amount of cash paid out to shareholders divided by net income
Dividend payout ratio=                                                                            (3.27)
       Retention ratio/Plough back ratio = the addition to retained earnings divided by net income


        Capital intensity ratio = a firm’s total assets divided by its sales, or the amount of assets
         needed to generate £1 in sales
Capital intensity ratio:
3.7 External financing and growth
EFN = external financing needed


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Internal growth rate = the maximum growth rate a firm can achieve without external finance of any
kind
                                                         where b = retention ratio               (3.28)
Sustainable growth rate = the maximum growth rate a firm can achieve without external equity
financing, while maintain a constant debt equity ratio
                                                                                                 (3.29)
Sustainable growth depends on:
     Profit margin: an increase in profit margin will increase the firm’s ability to generate funds
         internally and thereby increase its sustainable growth
     Dividend policy : a decrease in the percentage of profit attributable to shareholders paid out
         as dividend will increase the retentions ratio
     Financial policy : an increase in the debt-equity ratio increases the firm’s financial leverage.
     Total asset turnover: An increase in the firm’s total asset turnover increases the sales
         generated for each pound in assets. This decreases the firm’s need for new assets as sales
         grow and thereby increase the sustainable growth rate.
         (Is the same as decreasing capital intensity)
3.8 Some caveats regarding financial planning models
Financial planning models rely on accounting relationships and not financial relationships. The three
basic elements of firm value tend to get left out ( cash flow size, risk, timing)
Planning is an iterative process. The plans have to be modified over and over again.

Chapter 4 Introduction to valuation: the time value of money
4.1 Future value and compounding
Future value (FV) = the amount an investment is worth after one or more periods
Compounding = the process of accumulating interest on an investment over time to earn more
interest
Interest on interest = interest is earned on the reinvestment of previous interest payments
Compounded interest = interest earned on both the initial principal and the interest reinvested from
prior periods
Simple interest= interest earned only on the original principal amount invested.
    
                                    t
        Future value = €1 * (1+r)                                                        (4.1)

4.2 Present value and discounting
Present value (PV) = the current value of future cash flows discounted at the appropriate discount
rate
Discount = calculate the present value of some future value
       Present value = €1 *[           ] =                                                       (4.2)
Discount rate = the rate used to calculate the present value of future cash flows
Discounted cash flow(DCF) valuation = calculating the present value of a future cash flow to
determine its value to day
4.3 More about present and future values
     PV= FVt * (1+r)-t                                                                          (4.3)
The rule of 72 : For reasonable rates of return, the time it takes to double your money is given
approximately by 72/r% (r between 5 & 20 %)

Chapter 5 Discounted cash flow valuation
5.1 Future and present values of multiple cash flows
Calculate future values for multiple cash flow:
    1. Compound the accumulated balance forward one year at a time
                                                           Propedeusebundel 2011-2012 IBA        149
      2. Calculate the future value of each cash flow first and then add them up
Calculate present value with multiple cash flows:
      1. Discount back one period at a time
      2. Calculate the present values individually and add them up
We almost always assume that the cash flow occurs at the end of each period.
5.2 Valuing level cash flows: annuities and perpetuities
Annuity = a level stream of cash flows for a fixed per of time.
The present value of an annuity of €C per period for t periods when the rate of return or interest rate
is r is given by:
       Annuity present value =                                                                    (5.1)
The future value of an annuity of €C per period for t periods when the rate of return or interest rate
is r is given by:
     Annuity FV factor=                                                                           (5.2)
Annuity due = an annuity for which the cash flows occur at the beginning of the period
Perpetuity = a annuity in which the cash flows continue for ever
Consol = a type of perpetuity
The present value of a perpetuity of €C per period when the rate of return or interest rate is r is given
by:
     PV for a perpetuity =                                                                        (5.3)
The present value of a growing annuity of €C per period with a growth rate of g for t periods when
the rate of return or interest rate is r is given by:
       Growing annuity present value =                                                            (5.4)
The present value of a perpetuity of €C per period with a growth rate of g when the rate of return or
interest rate is r is given by:
       Growing perpetuity present value =        )                                       (5.5)

5.3 Comparing rates: The effect of compounding
Nominal interest rate = the interest rate expressed in terms of the interest payment made ach period
Effective annual percentage rate (EAR) = the interest rate expressed as if it was compounded once per
year.
     EAR = [1 + (Quoted rate/m)]  1 , where m is the number of times the interest is
                                  m
                                                                                        (5.6)
        compounded during a year.

Annual percentage rate (APR) = the harmonized interest rate that expresses the total cost of
borrowing or investing as a percentage interest rate
     PV = C0 +                                                                                    (5.7)
                      q is the quoted rate                                                        (5.8)

5.4 Loan types and loan amortization
Pure discount loans:
     Get money today
     Repay a single lump sum ate sometime in the future that includes the interest
Interest only loans:
     Pay interest each period
     Repay the entire principal at some point in the future
A mortised loans:
     Repay parts t the loan amount over time

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            o   Pay interest + fixed amount

Chapter 6 Bond valuation
6.1 Bonds and bond valuation
Bond = corporation/ government borrows money from the public on long-term basis
     Interest only loan
     None of the principal will be repaid until the end
Coupon = regular interest payments, stated on the bond
Face/ per value = the principal amount of a bond that will be repaid at the end of the loan
Coupon rate =                *100%
Maturity = the specified dat on which the principal amount of a bond is paid.
Yield to maturity (YTM)= the rate required in the market on a bond
The value of bonds fluctuate because of changes in interest rates.
     Interest ↑ pv↓ bond value ↓ : Discount bond self for less than the value
     Interest↓ pv↑ bond value↑ : Premium bonds sells for more than its face value.

                                                                                                (6.1)

Interest rate risk = risk that arises for bond owners from fluctuating interest
How sensitive is its price to interest rate changes
Depends on:
     Time to maturity : the longer the time, the higher the risk
     Coupon rate: the lower the rate, the greater the risk.
Current yield =
Finding a yield on a bond  trial & error
If the rate ↑ bond value↓
6.2 More about bond features
                                               Securities
Equity securities                                    Debt securities
    Dividend paid out                                     Must be repaid
    Not tax deductible                                    Not an ownership interest
                                                             No voting power
                                                         Payment of interest  cost of doing
                                                            business  tax deductible
                                                         Unpaid debt = liability
                                                            o If not paid = claim on asset
                                                            o Can lead to :
                                                                Liquidation
                                                                Reorganization

Long-term debt (>1 year)
The indenture = the written agreement between the corporation and the lender detailing the terms of
the debt issue
Includes:
     Basic terms:
        o Principal value
        o Register form = the registrar of the company records ownership of each bond (payment is
            made directly to the owner of record)

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       o     Or bearer form = the bond is issued without record of the owner’s name( payment goes to
             who holds the bond)
                 o Drawbacks:
                           Difficult if lost or stolen to recover
                           Bondholders are not notified of important events.
     Security
Collateral = securities that are pledges as securities for payment of debt
Mortgage: secured by a mortgage on the real property of the borrower
Unsecured bond = an unsecured debt security usually with a maturity of >10year (no specific pledge
of property)
Note = an unsecured debt security usually with a maturity under 10 years (no specific pledge on
property )
Both have a claim on property not otherwise pledged. So the property that remains after mortage
and collateral trusts are taken into account.
     Seniority = indicates preference in position over other lenders.
     Repayment: when the bond is repaid.
             o Sinking fund: account managed by the bund trustee for early bond redemption
     The call provision = an agreement giving the corporation the option to repurchase a bond at a
        specific price prior to maturity.
             o Call premium =the amount by which the call price exceeds the par value of a bond.
             o Deferred call provision = a call provision prohibiting the company from redeeming a
                 bond prior to a certain date.
             o Call protected bond =a bond that during a certain period, cannot be redeemed by the
                 issuer.
             o During that period the call is protected
     Protective covenant = agreement that limits certain actions a company might wish to take
        during the term of the loan, usually to protect the lender’s interest.
6.3 Bond rating
Junk bonds are bonds with a low degree and have a major default risk
Factors influencing the credit ranking of sovereign bonds:
     Political risk
     Economic strength
     Growth prospects
     Government debt
     Monetary flexibility
     Fiscal flexibility
Factors influencing the credit ranking of corporate bonds:
     Financial risk
     Debt payments
6.4 Some different types of bond
Government bonds:
Treasury notes and bonds
     No default risk
     Exempt of tax
Zero coup bonds:
     Zero coupon bond = a bond that makes no coupon payments and is thus initially priced at a
        deep discount.
     Makes no coupon payments
     Priced at a deep discount

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Floating rate bonds:
      Coupon payments are adjustable
      Inflation linked bond
Other types:
      Catastrophe bond
      Warrant
      Income bond
      Convertible bond
      Put bond
      CoCo bond
      NoNo bond
6.5 Bond markets
There is no place where buying and selling of bonds take place  OTC
Two reasons why the bond market is bigger than the equity market:
     1. Only 1 ordinary equity per company
     2. Government borrowing
Clean price = price of bond net of accrued interest.
Dirty price= price of a bond including accrued interest .(Price a buyer actually pays)
6.6 Inflation and interest rates
Real rates: interest rates that have been adjusted for inflation
Nominal rates: interest rates that have not been adjusted for inflation
The nominal rate on an investment is the percentage change in the amount of cash you have
The real rate on an investment is the percentage change in how much you can buy with your cash.
The fisher effect = the relationship between nominal return, real returns and inflation.
      The fisher effect          1 + R = (1 +r) * (1 +h)                                        (6.2)
R= nominal rate; r= real rate; h= inflation rate
      Nominal rate : R =r + h + r *h                                                            (6.3)
Nominal rate without the consideration that the money earned on investment is also worth less
because of inflation:
      R = r +h                                                                                  (6.4)
6.7 Determinants of bond yields
Term structure of interest rates = the relationship between nominal interest rates on default-free, pre
discount securities and time to maturity: that, is the pure time value of money.
Bond yields represent the combined effect of:
      Real rate of interest
      Expected future inflation
      Interest rate risk
      Default risk
      Taxability
      Lack of liquidity
Inflation premium = the portion of a nominal interest rate that represent compensation for expected
future inflation.
Interest rate risk premium= the compensation investors demand for bearing interest rate risk.
Treasury yield curve = a plot of the yields on treasury notes and bonds relative to maturity.
Default risk premium = the portion of a nominal interest rate or bond yield that represent
compensation for the possibility of default.
Taxability premium = the portion of the nominal interest rate or bond yield that represents
compensation for unfavorable tax status


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Liquidity premium = the portion of a nominal interest rate or bond yield that represents compensation
for lack of liquidity

Chapter 7 Equity valuation
7.1 Share valuation
Reasons why share prices are more difficult to value than bonds:
      The promised cash flows are not known in advance
      Life of the investment is forever ( has no maturity)
      No way to observe the rate of return
                                                                                                 (7.1)
   is current equity price,                              is the cash dividend paid at the end of the
period. R is required return on the equity.
No matter what the share price is, the present value is essentially zero if we push the sale of equity
far enough away
Also possible:
Zero growth rate:
                                                                                                 (7.2)

Constant growth rate:
                                                                                                 (7.3)
Dividend growth model = a model that determines the current share price as its dividend next period
divided by the discount rate less the dividend growth rate
       Pt =         =                                                                            (7.4)
Two stage growth :
       P0 =     *                +                                                               (7.5)

       P1 =     =                                                                                (7.6)
Components of required return
    R=                                                                                           (7.7)
Dividend yield= an equity’s expected cash dividend divided by its current price
Capital gains yield = the dividend growth rate, or the rate at which the value of an investment grows
7.2 Some features of ordinary and preference shares
Ordinary equity= equity without priority for dividend or in bankruptcy
Preference shares = equity with dividend priority over ordinary shares, normally with a fixed dividend
rate, sometimes without voting rights.
7.3 The stock market
Primary market: new securities are sold to investors
Secondary market: securities are traded among investors
Dealer = buys and sells securities from inventory
Broker = arranges security transactions among investors

Chapter 8 Net present value and other investment criteria
8.1 Net present value
Investment makes sense if it is more worth in the market place than it costs to acquire
Capital budgeting is about trying to determine whether a proposed investment is worth more than it
costs
Net present value(NPV) = difference between an investment’s market value and its costs

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Discounted cash flow valuation (DCF) = the process of valuing an investment by discounting its future
cash flows
An investment should be accepted if the npv is positive and rejected if the npv is negative
8.2 The payback rule
Payback period = the amount of time required for an investment to generate cash flows sufficient to
recover its initial costs
Based on the payback rule, an investment is acceptable if its calculated payback period is less than
some pre-specified number of year,
Advantages                                         Disadvantages

Easy to understand                                 Ignores time value of money
Adjusts for uncertainty of later cash flows        Requires an arbitrary cut-off point
Biased towards liquidity                           Ignores cash flows beyond the cut-off period
                                                   Biased against long-term projects
8.3 The discounted payback
Discounted payback period = the length of time required for an investments discounted cash flows to
equal its initial costs
Based on the discounter payback rule , an investment is acceptable if the discounted payback is less
than pre-specified number of years
Advantages                                        Disadvantages

Easy to understand                                 May reject positive NPV investments
Includes time value of money                       Requires an arbitrary cut-off point
Biased towards liquidity                           Ignores cash flows beyond the cut-off period
Doesn’t accept negative estimated NPV              Biased against long-term projects
investments
8.4 The average accounting return.
Average accounting return =
Based on the average accounting rule, accept an investment if its average accounting return exceeds
a target average accounting return

Advantages                                         Disadvantages

Easy to calculate                                  Time value of money is ignored
Needed information will usually be available       Uses an arbitratry benchmark cut-off rate
                                                   Based on accounting values not on cash flows
                                                   and market values
8.5 The internal rate of return
The internal rate of return (IRR)= the discount rate that makes the NPV of an investment zero
Based on the IRR rule, an investment is acceptable if the IRR exceed the required return, it should
be rejected otherwise.
The IRR on an investment is the required rturn that results in a zero NPV when it is used a the
discount rate
Net present value profile = a graphical representation of the relationship between an investment’s
NPV’s and various discount rates
Problems with the IRR:
     Non-conventional cash flows give multiple rates of return = the possibility that more than
        one discount rate will make the NPV of an investment zero

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      Mutually exclusive investment decisions = a situation in which taking one investment prevent
       the taking of another
    Cross over rates = the discount rate that makes the NPV of two projects equal NPV (B-A)
Advantages                                        Disadvantages

Closely related to NPV, often leading to identical    May result in multiple answers
decisions
Easy to understand and communicate                    Hard to use when mutually exclusive
                                                      investments have to be made
Modified internal rate of return:
     Discounting approach:
        Discount all negative cash flows back to the future
     Reinvestment approach: compound all cash flows except the first out to the end of the
        projects life
     The combination approach negative cash flows are discounted back to the present and
        positive cash flows are compounded to the end of the projects
8.6 The profitability index
Profitability index = the present value of an investments future cash flows dividend by its initial costs.
Advantages                                           Disadvantages

Easy to understand and communicate                    May lead to incorrect decisions in comparison of
                                                      mutually exclusive investments
Closely related to NPV

Chapter 9 Making Capital investment decisions
9.1 Project cash flows; a first look
Incremental cash flow = the difference between a firm’s future cash flows with a project and those
without that project.
The incremental cash flows for a project evaluation consist of any and all changes in the firm’s future
cash flows that are a direct consequence of taking the project.
Stand alone principle = the assumption that evaluation of a projects may be based on the project’s
incremental cash flows.
9.2 Incremental Cash flows
Sunk costs = a cost that has already been incurred and cannot be removed.
      Not considered in an investment decision.
Opportunity costs = the most valuable alternative that is given up if a investment is undertake.
      Should be taken into account in an investment decision
Erosion= the cash flow of a new project that comes at the expenses of a firm’s existing projects.
      Not included in investment decision: interest paid or any financial costs
9.3 Pro forma financial statements and project cash flows
Pro forma financial statement = financial statement projecting future years ‘operations.
Projects cash flow = project operating cash flow – project capital spending
Operating cash flow = net income +depreciation – increase in net working capital
9.4 More about project cash flow
Total cash flow = operating cash flow – change in net working capital – capital spending
Reducing balance method= a depreciation method allowing for the accelerated write off of assets
under various classifications.
Equivalent annual costs – the present value of a project’s costs, calculated on an annual base
9.5 Alternative definitions of operating cash flow

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Bottom up approach for calculating operating cash flows:
     OCF = net income + depreciation                                                            (9.1)
Top down approach for calculating OCF:
     OCF= sales – costs – taxes                                                                 (9.2)
Depreciation tax shield = the tax saving that results from the depreciation deduction calculated as
depreciation multiplied by the corporate tax rate.
     OCF = (Sales – Costs) * (1-T) + Depreciation * T                                           (9.3)
9.6 Some special cases of discounted cash flow analysis
Common cases involving discounted cash flow analysis:
     Improving efficiency & cutting costs
     Submitting competitive bids
     Evaluating equipment options with different lives
Equivalent annual cost (EAC) = the present value of a project’s costs calculated on an annual basis.
Calculating by : PV of costs/ annuity factor

Chapter 10 Project analysis and evaluation
10.1 Evaluating NPV estimates
Two circumstances leading to a positive NPV:
     There is a positive NPV
     Investment appears to have a positive NPV because our estimate is inaccurate
Forecasting risk = the possibility that errors in projected cash flows will lead to incorrect decisions.
10.2 Scenario and other what-if analyses
Important to realize what the source of value for the NPV is.
What to do if you start a new project
     Estimate NPV (base case)
     Scenario analysis = the determination of what happens to NPV estimates when we ask what-
        if questions.
             o Best case
             o Worst case
     Sensitivity analysis = investigation of what happens to NPV if only one variable is changes 
        points out where forecasting errors will do damage but doesn’t tell what to do about
        possible errors.
     Simulation analysis = a combination of scenario and sensitivity analysis
             o No decision rule tells us what to do
             o Possible values aren’t equal to occur, we assume that they are
10.3 Break-even analysis
Break even analysis: how bad do sales have to get before we lose money
Variable costs =costs that change when the quantity of output changes (VC).
Fixed costs = costs that do not change when the quantity changes during a particular time period (FC).
TC= VC+FC
TC= v*Q+FC
Marginal (incremental )costs = the change in costs that occurs when there is a small (1) change in
output.
Accounting breakeven = the sales level that results in zero projects income.
     Break-even level = Q = ( FC+D)/ (P-v)                                                          (10.1)
    Q= Total units sold; FC = fixed costs; D=depreciation; P= Selling price per unit; v= Cost pet unit of
    output

Why using accounting break-even:

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     To see if the market share you need to get break even is achievable
     Easy to calculate and explain
     To see what a project will contribute to the firm’s total accounting earning
     Other opportunities
10.4 Operating cash flow, sales volume and break-even
     OCF= (P-v) * Q – FC                                                                           (10.2)
     Q=                                                                                            (10.3)
Cash break-even = the sales level that results in a zero operating cash flow
Financial break-even= the sales level that results in a zero NPV
See Table 10.1 for summary
10.5 Operating leverage
Operating leverage = the degree of which a firm or project relies on fixes costs.
High degree of operating leverage = capital intensive.
Degree of operating leverage (DOL) = the percentage change in operating cash flow relative to the
percentage change in equity sold.
     DOL = 1 +                                                                                     (10.4)
10.6 Capital rationing
Capital rationing= the situation that exists if a firm has positive NPV projects but cannot find the
necessary financing.
Soft rationing = the situation that occurs when units in a business are allocated a certain amount of
financing for capital budgeting  makes sure that the corporation as a whole isn’t short of capital.
Hard rationing = the situation that occurs when a business cannot raise financing for a project under
any circumstances.

Chapter 11 Some lessons from recent capital market history
11.1 Returns
Return on investment: gain/loss from investments.
Income component: cash you receive directly while you own the investment.
Capital gain/loss of investment:
     Total cash return = dividend income + capital gain(or loss)                                  (11.1)
     Total cash if equity is sold = initial investment + total return                             (11.2)
Percentage return =
1 + Percentage return =
Or dividend yield ( Dt+1/pt) + capital gains yield ( (Pt+1 - Pt)/Pt).
11.3 Average returns: The first lesson
Average return =
Risk premium = the excess return required from an investment in a risky asset over that required from
a risk-free investment.
Excess return = difference between risk-free returns and very risky returns.
Risky assets , on average, earn a risk premium. There is a reward for bearing risk.
11.4 The variability of returns: the second lesson
Variance = the average squared difference between the actual return and the average return.
Standard deviation= the positive square root of the variance.
Historical variance & standard deviation

Variance = the sum of the squared deviations by the number of returns -1
Var (R) = σ2

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Standard deviation =            SD(R) = σ
Sum of deviations = 0
See p.323
     Historical variance =                                                                    (11.3)
Normal distribution= a symmetric bell-shaped frequency distribution that is completely defined by its
mean and standard deviation.
The greater the potential reward, the greater the risk.
11.5 More about average returns.
Geometric average return = the average compound return earned per year over a multi-year period.
Arithmetic average return = the return earned in an average year over a multi-year period.
Use the arithmetic average if you know the true value
                                                                                              (11.4)
Which to use?
     Up to a decade: arithmetic
     Few decades: split the difference between arithmetic and geometric
     Many decades: geometric
       R(T)=    * Geometric average +      * Arithmetic average                              (11.5)

11.6 Capital market efficiency
Efficient capital market = market in which security prices reflect available information
Efficient markets hypothesis= the hypothesis that actual capital markets are efficient
See figure 11.8
Forms of market efficiency:
      Strong-form efficient= all information of every kind is reflected in share prices
      Semi- strong form efficiency = all public information is reflected in the share price
      Weak-form efficiency = at a minimum the current share price reflects the equity’s own past
         prices

Chapter 12 Return, risk and the security market line.
12.1 Expected returns and variances
Expected return = the return on a risky asset expected in the future.
     Risk premium = Expected return – risk free rate                                                   (12.1)
12.2 Portfolios
Portfolio = a group of assets such as equities and bonds held by an investor.
Portfolio weight = the percentage of a portfolio’s tot value that is in a particular asset.
     Expected return on portfolio = * E( )* *E( * ….                                                   (12.2)
12.3 Announcement, surprises and expected returns.
     Total return = expected return + Unexpected return                                                (12.3)
       Announcement = expected part + surprise                                               (12.4)

12.4 Risk: Systematic and unsystematic
Unanticipated part of the return in the true risk.
Two types of risk:
Systematic risk affects almost all assets in the economy
Unsystematic risk affects at most a small number of assets
     R= E(R) + Systematic portion + unsystematic portion                                         (12.5)
12.5 Diversification and portfolio risk
Principle of diversification = spreading an investment across a number of assets will eliminate some,
but not all, risk.

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Unsystematic risk is eliminated by diversification so a portfolio with many assets has almost no
unsystematic risk.
      Total risk = systematic risk + unsystematic risk                                             (12.6)
12.6 Systematic risk and Beta
Systematic risk principle= the expected return on a risky assets depends only on that assets systematic
risk.
The expected return on a asset depends only on that asset’s systematic risk.
Beta coefficient ß = the amount of systematic risk present in a particular risky asset relative to that in
an average risky asset.
Calculating portfolio beta:
      What part of the portfolio is share A and what part is share B
      What is the beta of that share.
      Beta = part of the portfolio A * Beta of share A + part of the portfolio B * Beta of share B
12.7 The security market line
Reward to risk ratio =
Basic argument = compare the reward to risk ratios
The reward to risk ratio must be the same for all the assets in the market
Security market line = a positively sloped straight line splaying the relationship between expected
return and beta.
SLM slope =               The market risk premium = the slope of the sml. The difference between
the expected return on a market portfolio and the risk free rate.
Capital asset pricing model(CAPM) = The equation of the SML showing the relationship between
expected return and beta.
     E( )= + [ E(         - ]*                                                                   (12.7)
Shows:
     The pure time value of money
     The reward for bearing systematic risk
     The amount of systematic risk
See p. 368

Chapter 13 Cost of capital
13.1 The cost of capital: some preliminaries
Cost of capital = the minimum required return on a new investment.
The cost of capital depends primarily on the use of the funds, not the source.
A firm’s overall cost of capital will reflect the required return on the firm’s assets as a whole 
reflects both cost of debt capital and equity capital .
13.2 The cost of equity
Cost of equity = the return that equity investors require on their investment in the firm.
The dividend growth model approach:
                   = / +g D1=Do *(1+g)                                                             (13.1)
g can be estimated by:
     1. using historical growth rates
     2. using analysts forecasts of future growth rates
Advantages                                              Disadvantages

Easy                                                  Applies only if dividend is paid
                                                      Assumes that dividend grows at a constant rate
                                                      Doesn’t consider risk

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The SML approach:
                                                                                                   (13.2)
Advantages                                            Disadvantages

Adjusts for risk                                       Estimates risk premium and beta coefficient
Applicable to companies that don’t pay steady          Relies on the past
dividend
13.3 The cost of debt and preference shares
The costs of debt the return that lenders require on the firm’s debt.
Can be:
              Interest rate
              Rating of bonds
              Coupon rate if irrelevant
The cost of preference shares:
                   = D/                                                                             (13.3)
13.4 The weighted average costs of capital
              V(value)= E(equity+D(debt)                                                            (13.4)
              100% = E/V + D/V                                                                      (13.5)
Weighted average cost of capital WACC= the weighted average of the cost of equity and the after-tax
cost of debt.
     WACC = ( E/V) *         + (D/V) * * (1- )                                                      (13.6)
     WACC = ( E/V) *         +(P/V) *     (D/V) * * (1- )                                           (13.7)
Projects that have the same risk are said to be in the same risk class
See page 394!
WACC can only be used is possible investment with risks are more or less the same from those of the
overall firm
13.5 Divisional and project costs of capital
Pure play approach = the use of a WACC that is unique to a particular project, based on companies in
similar lines of business.
13.6 Flotation costs and the weighted average cost of capital
Flotation = the issue new bonds and shares.
Divisional cost of capital – cost of capital are separated division otherwise divisions with less risk will
have no potential.
     fa= (E/V) * fe+ (D/V) * fd                                                                     (13.8)

Chapter 14 Raising capital
14.1 The financing life cycle of a firm
Venture capital (VC) = financing for new, often high risk ventures
Capital supplied by:
     Private equity firms
     Venture capital
             o Families traditionally provided start-up capital to promising businesses
             o Private partnerships and corporation
             o Venture capital subsidiaries form large corporations
             o Individual investors
Stages of financing:
     seed money
     start-up
     Later stage capital

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      Growth capital
      Replacement capital
      Buyout financing
14.2 Selling securities to the Public: The basic procedure
Selling securities to the public:
      Path finder prospectus
      Pre-underwriting conferences
      Full prospectus
      Public offering and sale
      Market stabilization
14.3 Alternative issue methods
General cash offer= an issue of securities offered for sale to the general public on a cash basis.
Right issue: a public issue of securities in which securities are first offered to existing shareholders.
Initial public offering (IPO)= a company’s fires equity issue made available to public.
Seasoned equity offering(SEO) = new equity issue of securities by a company that has previously
issued securities to the public.
14.4 Underwriters
Underwriters = investment firms that act as intermediaries between a company selling securities and
the investing public.
Tasks:
      Pricing.
      Selling.
      Formulating method to issue securities.
Syndicate = a group of underwriters formed to share the risk and to help sell an issue.
Gross spread= compensation to the underwriter, determined by the difference between the
underwriter’s buying price and offering price.
Types of underwriting:
      Firm commitment underwriting : underwriter buys entire issue, assuming full financial
         responsibility for any unsold shares.
      Best effort underwriting : sells as much of the issue as possible, but can return any unsold
         shares to the issuer without financial responsibility.
      Dutch auction underwriting: the offer price is set based on competitive bidding by investors.
Green shoe provision = a contract provisions giving the underwriter the option to purchase additional
shares from the issues at the offering price.
Lock-up agreement = the part of the underwriting contract that specifies how long insiders must wait
before an IPO before they can sell equity.
14.5 IPOs and underpricing
In Europe IPO’s are mostly offered below their true market price. Higher for firms with few o no sales
in previous years.
IPO buyers might actually lose money.
14.6 New equity sales and the value of the firm
Share prices of firms that announce that new equity issues are coming go down because of:
      Managerial information
      Debt usage
      Issue costs
14.7 The costs of issuing securities
Flotation costs:
      Gross spread: direct fees paid to the underwriting syndicate (difference between receiving
         price and offer price).

                                                           Propedeusebundel 2011-2012 IBA        162
       Other direct expenses: legal fees, tax.
       Indirect expenses: salary managers working on issuing the shares
       Abnormal returns : price of existing shares drop
       Underpricing: selling the equity below the true value
       Green shoe option
14.8 Rights
Right issue = the firm must offer any new issue of equity to existing shareholders first.
Subscription price- the price that existing shareholders are allowed to pay for a share of equity.
Standby underwriting = underwriter agrees to purchase the unsubscribed portion of the issue.
Standby fee= an amount paid to an underwriter participating in a standby underwriting agreement.
14.9 Dilution
Dilution = loss in existing shareholders ‘value in terms of ownership market value, book value or EPS.
Oversubscription privilege= privilege that allows shareholders to purchase unsubscribed shares in a
rights offering at the subscriptions pric.e
Dilution of proportionate ownership
If new shares are being issued and you don’t buy them  right issues to solve this problem
14.10 Issuing long-term debt
Term loans= direct business loans of typically one to five years.
Private placements= loans provided by a limited number of investors.
Difference with public issue of debt:
       No cost of stock exchange registration
       Has more restrictive covenants
       Easier to renegotiate
       Costs of distributing bonds are lower in the private marker
14.11 Shelf registration
Shelf registration = registration permitted by many stock exchanges that allows a company to register
all issues it expects to sell within a certain period at one time, with subsequent sales at any time
within that period.
Dribbling= a company registers the issue and hires an underwrites as its selling agent.
Arguments against:
Cost of new issues goes up  not able to provide information
Market overhang  possibility of issuing new shares has a negative impact on current prices.




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                                      Colofon


Constructed by: Svenja Johannsen

Study-Association Stress, the Education Committee as well as the constructors of this document, do
not take responsibility for possible mistakes.




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