Chapter 6-Forms of Management

Sole Proprietorships
A business that is owned and operated by one person, without forming a corporation

Advantages Disadvantages
1. Ease of starting and ending the business. No 1. Unlimited Liability-the risk of personal
one to consult or to disagree with about such losses. Any debts or damages created must be
decisions paid by you, since you are the only owner
2. Being your own boss 2. Limited financial resources
3. Pride of ownership 3. Management difficulties
4. Retention of company profit. All the money 4. Overwhelming time commitment
earned is your own, except money owed to 5. Few fringe benefits, no health insurance, no
the government such as taxes sick leave
5. No special taxes 6. Limited growth
6. Less regulation 7. Limited lifespan
8. Possibly pay higher taxes

Partnership
General partnership – in which all owners share in operating the business and in assuming liability for
the business debts.
Limited partnership – with one or more general partners and one or more limited partners
General partner – an owner who has unlimited liability and is active in managing the firm
Limited partner – an owner who invests money in the business but does not have any management
responsibility

Advantages Disadvantages
1. More financial resources 1. Unlimited liability
2. Shared management and 2. Division of profits
pooled/complementary skills and knowledge 3. Disagreements among partners
3. Longer survival 4. Difficult to terminate
4. No special taxes 5. Possibly pay higher taxes
5. Shared risk
6. Less regulation
Corporations
A federally or provincially chartered legal entity with authority to act and have liability separate from its
owners

Advantages Disadvantages
1. More money for investment 1. Initial cost
2. Limited liability-owners are responsible to 2. Paperwork
only pay back what they invested in 3. Two tax returns-one for corporation and
3. Separation of ownership/management another for the income of the individual
4. Ease of ownership change 4. Termination difficult
5. Perpetual life-since really big, one death does 5. Stockholder and board conflict
not affect business 6. Double taxation-first corporation pay tax
6. Size and then stockholders pay tax

Private – not traded on any stock exchange – limited to 50 or fewer stockholders

Public – shares are traded on one or more stock exchanges
Non-profit – performs public service, has special tax considerations to encourage formation
Other types of corporations:

 Professional corporations
 Non-resident – has its head office outside of Canada
 Personal services – for an athlete or entertainer to take advantage of corporate tax rates
 Non-profit – universities, hospitals, charities, etc.

Corporate Expansion: Mergers and Acquisitions

Acquisition – one company’s purchase of the property and obligations of another company
Merger – two firms forming one company

 Vertical merger – the joining of two companies involved in different stages of related businesses
o Example: soft drink and artificial sweetener
 Horizontal merger – joining two firms in the same industry
o Example: soft drink and mineral water
 Conglomerate merger – the joining of firms in completely unrelated industries
o Example: soft drink and snack food company

Benefits of merging

 Allows regional firms to work together and compete more effectively

 New company will have more leverage when negotiating with other companies
 Leveraged buyout (LBO) – an attempt by employees, management, or a group of investors to
purchase an organization primarily through borrowing
Franchising
Franchise Agreement – an arrangement whereby someone with a good idea for a business sells the
rights to use the business name and sell its goods and services in a given territory
Franchisor – a company the develops a product concept and sells others the rights to make and sell the
products
Franchise – the right to use a specific business’s name and sell its goods/services in a given territory
Franchisee – a person who buys a franchise

Advantages Disadvantages
1. Management and marketing assistance 1. High start-up costs
2. Personal ownership 2. Shared profit
3. Recognized name 3. Management regulation
4. Financial advice and assistance 4. Coattail effects
5. Lower failure rate 5. Restrictions on selling
6. Fraudulent franchisors

Co-operatives
 Owned by the members and customers
 Profits are shared amongst the members who pay an annual membership fee
 Co-workers, farmers, fisherman, consumers, etc. band together to form “co-ops”
 A different purpose – meets the common needs of their members
 A different control structure – one member/one vote system
 A different allocation of profits – share profits among their member-owners on the
basis of how much they use the co-op, not how many shares they hold
 Chapter 7 – The Business Environment
How economic environment affects business?
The economic environment looks at income, expenditures, and resources that affect the cost of running a
business
Businesses review the results of major economic indicators such as consumer spending, employment
levels, and productivity
 Tradable currency
 Minimum taxes and regulation
 Imports and exports
 Employment levels and productivity

The Economic Environment

3 Fundamental Market Composition Principles:

1. The Law of Supply and Demand
2. Allowance for private ownership, entrepreneurship, and wealth creation
3. Extent of government in influencing economic activity and direction

The Micro Economics Environment

LAW OF SUPPLY & DEMAND refers to the ability of the market, independent of external influences,
to determine the price for which a product or service will be bought and sold

DEMAND reflects the number of purchasers who are willing to pay for a product or service at various
price points; generally as price increases, demand decreases
1. Inelastic Demand – Movement in price does not result in significant changes in demand (i.e.
gas)
2. Elastic Demand – Quantity demanded does change significantly due to a change in price (i.e.
electronic readers)

SUPPLY reflects how much of a product or service producers are willing to provide the market at various
price points; as price increases, supply usually increases

PRICE EQUILIBRIUM = the point at which the supply curve intersects the demand curve; no surplus
or shortage of goods

The Economic Systems

OPEN SYSTEM = an economic system that adheres to the principles of economic freedom
CONTROLLED SYSTEM = An economic system where the fundamentals of the law of supply and
demand, private ownership, entrepreneurship and wealth creation are largely restricted or absent, and the
government fully controls the economic direction and activity
In Canada:

MIXED ECONOMIC SYSTEM = an economic system that contains components of both open and
controlled systems. It includes the core principles of economic freedom with some degree of centralized
economic planning and government regulation and involvement
 Canada, like most fully developed economies, is considered to be a mixed economic system
 The Canadian economy allows the law of supply and demand to significantly influence the
market
 The principles of private ownership, entrepreneurship, wealth creation and their corresponding
risk and return opportunities are present and supported
 The Canadian government is an active participant in the economy but attempts to manage
economic activity through a cooperative/competitive model using its powers of taxation,
regulation, national debt targets, provincial transfers and monetary policy control

Bank of Canada
 Is Canada’s central bank
 Created in 1934; became a Crown corporation in 1938
 Typically meets 8 times per year to assess the status of the economy and related inflationary
pressures
 Its fundamental responsibility is to develop and manage the monetary policies and financial
systems associated with Canada’s economic activity
 Has the following core areas of responsibility:
o Managing inflation and currency supply
o Developing and managing financial systems and safeguards
o Providing fund management services to chartered banks
 Interest rate adjustment is its primary weapon in controlling inflationary pressures in the short
term

CHARTERED BANKS

 are financial institutions regulated under the Canada Bank Act

 Their primary responsibility is to bring together borrowers and lenders by accepting deposits and
lending out money – all in a manner that safeguards the interests of their customers
 Canada’s largest chartered banks are BMO, CIBC, RBC, Scotiabank and TD Canada Trust
 The strong Canadian currency coupled with strong managerial and financial controls has enabled
Canadian chartered banks to grow outside of Canada through acquisitions
 RBC has been purchasing US banks in the Southern US; BMO has focused on the Chicago area;
TD Canada Trust recently opened in New York; Scotiabank has been building its presence in
Latin America

Four Pillars of Economic Activity

 Economic Activity = Expenditures + Savings + Investment + Credit

The Economic Growth Cycle

 The total value of a nation’s economy is measured by its GROSS DOMESTIC PRODUCT
(GDP) which is the total market value of the goods and services (economic output) a nation
produces domestically over a period of time (generally one calendar year)
  GDP includes all the economic activity generated by individuals, businesses and government
including:
o Goods and services produced and purchased domestically for consumption
o Business investments within the economy
o Goods produced for export purposes
o Government spending
 Economists track the movement of GDP (upward or downward) over a period of time to see if the
economy is growing or contracting
 RECESSION = A period of time that marks a contraction in the overall economic activity within
an economy; occurs when the economy experiences 2 or more quarters of negative GDP
movement

The Business Environment

 Economic growth needs to be managed in a way that stimulates investment yet maintains control
of inflation and other inefficient economic influencers
 INFLATION = A rise in the level of prices of goods and services within an economy over a
period of time
 Growth that is taking place needs to be real growth not masked by inflation
 The Government of Canada and the Bank of Canada seek to maintain equilibrium between
growth and inflation to provide an environment that makes the best use of the capacity and
capabilities of the Canadian economic platform without allowing it to overheat
 Given the geographic distribution of Canada’s economic clusters, regional disparity exists in
growth rates and economic potential
 Alberta, Saskatchewan, BC, and Newfoundland/Labrador have experienced tremendous growth
due to the increasing demand for natural resources and energy
 Growth needs to be stimulated in Central and Eastern Canada without compromising the growth
rates of the Western provinces

Canadian Trends

 The Canadian economic market is a complex entity that continues to evolve and change as
internal and external influences impact both its direction and composition
 Prominent trends include:
o Inflation
o Geographic Clustering
o Currency Exchange Rate Impact: US Parity of Canadian $
o Branch Market Impact: Purchasing Power Parity & Takeovers
o Sustainability and Green Initiatives
o Aging Workforce, Immigration and Multiculturalism
o Long-Term Competitiveness
o Small Business Emphasis: 90% of the total 2.4 million Canadian businesses have less
than 20 employees
o Globalization: Growing interconnectivity of the world

What Managers need to analyze?

  As managers, it is fundamentally important that we understand what is happening in both our
domestic economy and within those global economies that influence our overall economic
activity/prosperity
 3 fundamental questions:
1. What are the general indicators saying about the current economy and the relationships
among the key variables governing our mixed economic system?
2. What broad-level changes (political, economic, social, technological, environmental
and legal) are occurring with the sectors of the economy that directly impact an
organization’s future growth and market position?
3. What specific current competitive actions may disrupt the way in which business is
done within an organization’s particular market sector?

The Primary Economic Indicators

Unemployment rate Price per Barrel of Crude Oil
Inflation Rate Stock Market Indexes (TSX, S&P 500, Dow
Consumer Price Index (CPI) Jones)
New Housing Starts Currency Exchange Rate
Manufacturing Inventory Monthly Retail Sales
Consumer Confidence Index Industry-Specific Indexes

Macro Analysis

PESTEL ANALYSIS
 A macro-level assessment of the political, economic, social, technology, environmental, and legal
trends that can or will impact the markets within which an organization competes
 Managers look for trends in:
o Government intervention or regulation such as protectionism
o Demographic and cultural shifts as well as behavioural changes
o Changes to laws that could impact overall business risk
o Changes in environmental compliance regulations
o Speed and direction of technology shifts that could render products, services and/or
processes obsolete
 Managers must constantly look to see where and how their markets are changing in light of
competitive influences

Legal and Regulatory Environment

Part of that decision of starting a new business is affected by how governments work with businesses
 Freedom of ownership
 Contract laws
 Elimination of corruption
 Governments can do a lot to lessen the risk of starting and running a business through laws
o examples of laws include the Competition Act, Canada Small Business Financing Act,
the Consumer Packaging and Labelling Act, and the Trade Unions Act
Technological Environment

The use and application of technology affects productivity

Productivity is the amount of output you generate given the amount of input
o The more you can produce in any given period of time, the more money you are worth to
companies.
 Effectiveness means producing the desired result.
 Efficiency means producing goods and services using the least amount of resources
 Risk involved is Identity Theft

E-Business
 refers to a wide range of business activities on the web from simple posting of product photos to
B2B marketplaces

E-commerce
 refers to the websites that allow transactions to customers to buy products online

Generally speaking e-commerce is considered a subset of e business

 business-to-consumer (B2C)
 business-to-business (B2B)

Competitive Environment

All the environments are important, but the degree to which you need to deal with them depends on
whether you do or do not have competition
 Customer service-Exceed customer expectations
 Stakeholder recognition
 Employee service: responsibility, authority, freedom, training, empowerment
 Concern for the environment

Social Environment
Particularly relevant to Canadian businesses
Demography: the statistical study of the human population with regard to its size, density, and other
characteristics such as age, race, gender, and income.
 Diversity
 Demographic changes
 Family

The Aging Population

More people are living longer due to:
 better medical knowledge and technology
 better health habits, including:
o proper nutrition
o more exercise
o a reduction in the number of people who smoke

Managing Diversity
 Canada has a strong multicultural population.
 Since the 1980s, it has welcomed approximately 6 million immigrant
 Chapter 8 – Ethics and Corporate Social Responsibility
4 fundamental sources of ethical interpretation with respect to business decision-making:
1. Individual – personal values, spiritual influences, past experiences, cultural influences, social
image
2. Societal – Societal interpretation, Societal conditioning, legal and regulatory guidelines
3. Professional – Professional designation and association influences, Industry practices (GAAP)
4. Business Culture – Pressure to meet company objectives, structure of “reward” systems ,
pressure from superiors
In business we need to think in terms of what is in the best interests of the stakeholders and the public at
large
Need to recognize where the boundaries lie and be able to live with the decision made, using the “Triple
Yes” Rule

 Does the decision fall within the accepted values or standards that apply to all organizational
environment?
 Will I be willing to have this decision communicated to all the organizations stakeholders, or
have it on the front page of a newspaper?
 Will my family as well as managers of other organizations approve and support the decision?

Ethical Decision-Making Process

To get a manager to slow down and think through all the consequences of a decision they are about to
make
2 key elements:

 Ensuring that you have done research to fully understand the ethical dilemma + consequences
that may permeate the decision
 Testing your interpretation with a mentor or advisor to ensure you correctly interpreted the
situation and that decision-making frame of reference is complete
Integrity = honesty, reliability, ethics, moral judgment
If people can’t trust you, they will not want to work with you
Model of the Ethical Decision-Making Process
Ethics and Culture
A critical component of an organization’s culture is defining the boundaries of acceptable behaviour for
management & employees.
The responsibility for developing policies relating to values, ethics, and financial integrity lies with the
organization’s Board of Directors
Management needs to execute the policy but first the Board needs to define the parameters of what is
meant by ethics and integrity and develop the necessary structure and processes that will enable it to
gauge the conscience of the organization.
Role of the Board of Directors
Must commit to the following:
1. Must clearly define and establish boundaries of acceptable behaviour and financial integrity
2. Boundaries must be clearly understood and communicated in the form of policy or code of
conduct
3. Must appoint a representative whose responsibility is to audit performance in all critical areas of
the policy
4. Must create and support a “whistleblowing” mechanism for reporting ethical concerns within the
organization
5. Must interact with senior management and external agencies monitoring the activities to discuss
issues arisen
Regulating Ethics
Focus is on protecting the interests of investors/stakeholders by heightening the financial operational
requirements in areas such as auditor independence, audit committee responsibility, CEO and CFO
accountability, public disclosure and penalties

 For example: in the US – The Sarbanes-Oxley Act of 2002

 In Canada – Ontario bill 198

CORPORATE SOCIAL RESPONSIBILITY (CSR)

The understanding that the purpose of an organization is to create shared value (business and society) by
strategically integrating into its actions a partnership mentality with society where the objectives of both
parties are met
CSR means treating the public interest as a key stakeholder in an organization’s operational
success and shifting attitudes from “winning for me” to one of participating in activities that enable
the organization to win while serving the public good
CSR creates shareholder value by actively partnering in environmental, social, and public policy
programs and initiatives that contribute to the long-term health of society

Why is CSR becoming so important?

Consumers have different opinions as to what they believe CSR should represent:
 Giving back to local communities
 Self regulating their actions
 Being willing to be held accountable for their decisions
 Helping others
 Operating ethically, honestly, and lawfully
 Being environmentally responsible
 Offering quality products and services at fair prices
 Treating employees fairly

Areas where consumers feel companies are doing an unsatisfactory job:

 Transparency about business practices and product/service risks

 Development of socially and environmentally responsible products/services
 Fair pricing and appropriate accessibility levels
 Issues associated with political influence, acceptable profit levels, and senior management
compensation

Key Conclusions: customers are paying attention, and companies need to demonstrate and communicate
CSR to win public trust

The interdependency of CSR and Corporate Strategy

The CSR Pyramid illustrates four primary views associated with the integration of CSR into an
organization:
1. Personal Projects by a business leader (base level)
2. Philanthropy through cash or in-kind donations (base level)
3. Operational Initiatives (middle level) – Transition from arm’s length social issues to that of
social issues impacted as a result of the organization’s daily operations; an awakening within the
organization of a desire to mitigate social harm as a result of its business system activities;
seeking to enhance efficiencies while minimizing environmental harm
 4. Strategic Partnering (top level) – True integration of social responsibility into the
organization’s strategy development and execution process; requires a cultural shift within the
organization

Achieving Strategic Partnering

 The transition to true CSR (top level of the CSR Pyramid) is identified by two fundamental
shifts in the integration of strategy and social agenda:
1. The organization’s decision-making process evolves from one that responds to identified
pertinent social issues to a process that treats CSR as a core root of the organization’s
strategic planning process
2. The organization recognizes that certain social issues impact the key drivers of its
competitiveness and therefore seeks to actively develop the necessary social partnerships
to leverage such competitiveness
 For many companies, this is a 2-step process that requires leadership from the top and a complete
risk/reward audit of the full business system and strategic approach to social partnership
 Key social interactions and areas of responsibility that occur on a daily basis need to be identified
followed by identification of the social impacts that are critical to the organization’s success
Organizations that make it to the top of the pyramid recognize that the long term health of society
is fundamental to the long term health of the organization; the two are interconnected, not separate
and distinct

The Challenge behind CSR Implementation

 Transitioning to the top of the CSR Pyramid requires significant change in operating procedures,
processes and culture
 Such change will necessitate significant investment upfront and potentially an additional cost
layer to the operating budget
 CSR research indicates that customers are willing to pay more but the unanswered question is just
how much more
 An equally pressing problem lies in quantifying the benefits of CSR initiatives – just how much
are they worth?
 Considerable uncertainty also exists in creating realistic metrics to evaluate very subjective areas
 Management and the Board need to create the necessary data to enable investors to understand
the value of CSR and to see how a conscious effort toward the “triple bottom-line” of people,
planet, and profits really does enhance the final ‘P’ - Profits

A Note Pertaining to Not-For-Profits (NFPs)

 For NFPs and charities, the goodwill associated with the work they do and the integrity with
which they conduct themselves are fundamental to their existence
 NFPs are heavily dependent on monetary gifts (donations) from others to keep their operations
rolling
 Canadians are generous supporters of the not-for-profit sector but recent surveys show a growing
uneasiness with the industry as a whole
 NFPs and charities must earn and maintain the trust of Canadians in order to be the recipients of
their generosity
 This means that NFP managers must be able to communicate to Canadians the legitimacy of their
organizations, be able to provide clear program/service outcomes, and be fully able/credible in
accounting for how their organizations spend donors’ money
Management Reflection – It IS all about Trust

 Organizations need to encourage entrepreneurship, innovation and risk-taking

 The common thread in making this happen successfully is trust
 Trust is fundamental to all we do and everyone we interact with
 The best asset you can bring to work on a daily basis is your integrity
 Integrity means being honest, respecting the dignity of others, listening before you speak, being
accountable for your mistakes, doing what you say you are going to do, demonstrating
transparency in the decisions you make, not presuming you have all the answers, and thanking
people for their feedback
 Successful managers are open and authentic. They encourage open discussion, communicate their
concerns, and do not manipulate people or distort facts
 The same holds true for organizations. Managers have an obligation to employees, society and
the planet to make decisions that benefit all, and to do the right thing
Chapter Summary

 Ethics in Management
 What is Ethics?
o Ethics and the Individual: Ethics Wheel & The “Triple-Yes” Rule
o The Ethical Decision-Making Process
o Ethics and Culture: Zones of Decision-Making & Board Role
o Regulating Ethics: Forensic Accounting
 What is Corporate Social Responsibility (CSR)?
o Why is CSR Becoming So Important?
o The Interdependency of CSR and Corporate Strategy
o The CSR Pyramid
o Achieving Strategic Partnering
o The Challenge Behind CSR Implementation
 Not-For-Profits CSR
 Management Reflection – It is All About Trust