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Apuntes Fundamentals of Business Administration
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TOPIC 1 - CURRENT BUSINESS ENVIRONMENT1. The firm
Organization → transforms productive resources into products or services desired by customers →
commercialize to make profit → decision to create it depends on → type of customers, resources
needed, environment, expected performance, alternatives…
1.1 Main factors of production
● Natural resources - land, forests, water
● Human resources - workers
● Capital - buildings, tools, equipment, machinery (invest in these and use them to produce)
● Entrepreneurship - innovative ideas
● Technology - social media, AI, Internet (knowledge used in the production of goods; explains
differences in efficiency and competitive advantages; facilitates usage of other factors)
1.2 Functional areas of the firm
● Finance/accounting - obtaining and managing monetary resources (cash-flow analysis,
financial statements, investment decisions)
● Human resource - hiring, managing and firing employees (training, salaries)
● Production/sales - manufacturing and selling the products (acquisition of inputs, inventory
management, distribution, customer service)
● Marketing - promoting demand (market analysis, sales forecast, marketing mix)
1.3 Goals of the firm
● For-profit firms - maximize the profits and distribute them among shareholders
● Non-for-profit organizations - serve the community and reinvest profits for the social cause
1.4 Types of profit
Profit = value outputs - value inputs = revenue - costs
● Accounting profit - net income of the firm (money left after subtracting the explicit costs)
● Economic profit - additionally subtracts the opportunity cost (the profit of the most valuable
forgone alternative)
A firm has two business options. By choosing A, the firm would incur in a cost of $50 and would
make $100 in revenues. Option B has a cost of $40 and an expected revenue amount of $80.
Option A: Accounting profit = 100 − 50 = 50 // Economic profit = (100−50)−(80−40)=50−40= 10
Option B: Accounting profit = 80 − 40 = 40 // Economic profit = (80−40)−(100−50)=40−50= −10
1.5 Stakeholders
Any group of interest on which a company can cause an impact (suppliers, society, creditors,
managers, shareholders (accionistas), customers, owners, employees…)
1.6 Business decisions
● Strategic decisions - long-term; top-level managers; wide scope (values, identity, mission)
● Tactical decisions - medium-term; middle-level managers; narrower decisions (resources)
● Operational decisions - short-term (day-to-day operations); low-level managers; routine tasks
2. The dynamic business environment
2.1 Macro environment (entorno global)
Factors affecting all businesses in the economy
● Economic factors - economic growth, unemployment & interest rate, inflation, development
● Socio-cultural factors - affect demand (education, consumption habits, traditions, lifestyle)
, ● Political and legal factors - trade regulations, minimum wage, competition law, tax regulation
● Technological factors - businesses need to adopt them to not become obsolete
2.2 Micro environment
Factors affecting specific firms due to the industry or region they belong to (entorno específico)
● Bargaining power - suppliers (the more, the better for the firm; provide inputs); customers
(types, number, total sales; buy products and services)
● Competitors - fight for the same customers (actual and potential)
● Intermediaries - help promote and sell products (distribution, media agencies)
● Public and media - any group which can shape the opinion of potential customers
3. Factors affecting the current environment
3.1 Globalization
Process of interaction and integration among people, companies, and governments worldwide →
reduction of barriers to international trade:
● Reduction of legal barriers - import tariffs, import quotas, regulation obstacles
● Reduction of economic barriers - transport and communication costs
● Trade agreements - MERCOSUR, EU-28
Consequences of globalization for businesses:
● Expansion of market → increased competition → lower prices, more quality products,
tougher to choose market segment, difficult to differentiate
● Recent trends against globalization in some developed countries (protectionist measures)
● More and better suppliers available, wider market, new regions
● Financial deregulation → increased competition for funds
● Delocalization of production, outsourcing, increased competition → need for more flexible
organizational design
3.2 Digitalization
Reduction of costs related to storing, processing, transmitting, and analyzing information as a result
of the development of new information and communication technologies:
● Increased storage capacity and processing speed
● Development of the internet and advanced mobile devices
● Cheaper, easier and faster transmission of information (wireless)
Consequences of digitalization for businesses:
● E-commerce - economies of scale, no need for stores, cheaper logistics, big data
● Organization - cheaper and faster communication → decentralization, flexible structures
● Human resources - more data about employees and potential candidates
● Finance - easier to make decisions, blockchain technology, cryptocurrencies
● Marketing - new ways to advertise and distribution of channels
3.3 Diversity
● Increased immigration (especially from non-occidental countries)
● Women into labor market → increased gender diversity, decreased gender segregation
● Cultural changes promoted by governments and media → polarized society, diverse opinions
Consequences of diversity for businesses:
● Marketing - more types of customers and opportunities, harder to design and advertise
● Human resource - discrimination, unconscious bias, homophobia, teamwork (different
cultures, background, points of view), personal enrichment, intolerance
,3.4 Sustainability
Causing little or no damage to society or environment → concern increased sharply in 21st century
● Social welfare - employees' well-being, care for community, local development
● Environmental problems - climate change, pollution, water and land contamination…
Consequences of sustainability for businesses:
● Human resource - working conditions, flexible schedules, work-life balance
● Production - efforts to reduce pollution, treatment of residuals, cleaner production
processes, fair trade, avoid abusive suppliers…
TOPIC 2 - CORPORATE SOCIAL RESPONSIBILITY
Business ethics → follow set of principles when conducting a business
Social responsibility → firm’s recognition of how its business decisions can affect society
Firms → increase firm value without violating ethics and social responsibilities
1. Responsibility to customers
● Responsible production practices → customer safety (instructions and warning labels)
● Responsible sales practices → avoid aggressive sales strategies and deceptive advertising
(especially when employees benefit from commissions)
● Good customer treatment → code of responsibility → monitor complaints (receive and react
accordingly) reactive → customer feedback (satisfaction surveys) proactive
If firms do not behave responsibly:
● Role of consumerism (collective demand by customers)
● Role of government regulations:
○ Product safety (drugs, toys, alcohol)
○ Advertising (laws against deceptive advertising, hard to implement)
○ Industry competition (promote competition, regulate monopolies, prevent collusion)
○ Deregulation (more lenient laws to make entrance easier and increase competition)
2. Responsibility to employees
● Ensure safety:
○ Monitor production process (check machinery, safety materials and precautions)
○ Safe working environment (necessary cost, prevent injuries)
● Proper treatment by other employees → diversity & avoid harassment → integrate, promote
● Equal opportunity:
○ Recruiting bias (unconscious, monitor hiring process, anonymous CVs)
○ Affirmative action (increase opportunities for minorities and women)
● Code of responsibility:
○ Describe firm’s policies regarding treatment of employees and hiring procedures
○ Guidance for appropriate interactions with and between employees
○ Competitive disadvantages sometimes
● Grievance policy:
○ Chance to express discontent, and resolve complaints to alleviate mistreatment
○ Costly if too many complaints
● Conflicts with employee layoffs → necessary to reduce costs, but harm firm’s image → no
easy solution (reducing hours, help to find another job)
, ● Employees’ satisfaction:
○ Increases productivity, and reduces absenteeism and turnover
○ Happy workers → more productive → better job → happy customers → happy firm
3. Responsibility to stockholders
Employees (including managers) may be tempted to satisfy their own interests (conflict of interests).
Compensation tied to firm performance may solve this, but it can create other conflicts:
● CEOs → incentive to over-report firm performance or hide information (sell shares before
bad information is disclosed, and investors become suspicious of firm’s financial reports)
● Owners and shareholders concerned about excessive CEO compensation
Shareholders can ensure responsibility by:
● Laws to ensure accurate information and prosecute managers for wrong financial reporting
● Shareholder activism (supervise and influence management decisions)
● Institutional investors (purchase large amounts of stock, bargaining power)
4. Responsibility to creditors
● If firm does not pay back, it may be forced into bankruptcy (financial obligations)
● Inform creditors if it is experiencing financial problems
● Creditors may extend payment deadlines and offer financial advice
Firms may be tempted to violate this responsibility:
● Mislead creditors through over-optimistic financial reports, who may extend loans believing
the firm will be able to pay back eventually
5. Responsibility to the environment
Responsible for potential harm that production processes and products may cause to environment:
● Preventing air pollution:
○ Firms → modifying production processes (less CO2 emissions)
○ Governments → enforcing guidelines to limit emission levels
● Preventing land pollution:
○ Revise production and packaging processes to reduce the amount of waste
○ Store toxic waste and deliver it to specific sites
○ Recycle plastic and limit use of damaging materials
However, there is conflict of interests:
● It is costly (residual management, process redesign) → lower profits, higher prices
● Cannot spend too much money on this → satisfy customers and shareholders
● Firms do not always agree with guidelines imposed by governments
6. Responsibility to the community
● Sponsoring local events or donating to local charities
● Multinational corporations → international environment → international donations
● Can help improve the firm’s image, especially if it is closely related to the firm’s activity
There is conflict:
● Maximizing firm value or CSR?
● Costs involved in maximizing responsibility will be passed as higher prices
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