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The Extracted MBA

extractedmba.com


The Extracted MBA

The extracted mba • A topical reference for the contemporary MBA

Kelly Vinal

FIRST EDITION

Universal Publishers Parkland, Florida Upublish.com


Kelly Allen Vinal

Copyright ď›™ 2000 by Kelly Allen Vinal All rights reserved. No part of this book may be reproduced in any form or by any means, electronic, or mechanical, including photocopying, recording, or by any information storage or retrieval system, without written permission from the author. Inquiries should be made to reproduce@extractedmba.com.

Vinal, Kelly Allen. 1967The Extracted MBA : A topical reference for the contemporary MBA / by Kelly Allen Vinal ISBN 1-58112-735-9

Printed in the United States of America First Edition 1 2 3 4 5 6 7 8 9 10


The Extracted MBA

EXTRACTED ACKNOWLEDGEMENTS

To my fellow MBAs out there who tirelessly manage the industries and organizations that have made the American economy the most powerful in the history of the world. To the professors, staff, students, and alumni of the University of Phoenix. An innovator in the field of continuing education, the success of UOP graduates is proof that the UOP's high standards and programs make their cutting-edge educational philosophy a template for others to follow.

Finally, to my peers, subordinates, and superior officers of the United States Army. The greatest asset of any organization is its people. Those who serve in the defense of our way of life are the clearly best that America has to offer. MAINTAIN!

Questions, comments, or suggestions? Visit the companion site to this book at www.extractedmba.com, or e-mail the author at author@extractedmba.com. All inquiries will receive a response by the author, and all accepted suggestions will be acknowledged in future editions.

Cover by Matt Sorenson


Kelly Allen Vinal

For Henry G. Vinal My Extracted Father


The Extracted MBA

EXTRACTED CONTENTS

Extracted Introduction

vii

Extracted Management

1

Extracted Human Resources Management

20

Extracted International Business and Global Competition

39

Extracted Organizational Behavior

56

Extracted Marketing

72

Extracted Strategic Management

95

Extracted Business Law

107

Extracted Information Management

151

Extracted Electronic Commerce

167

Extracted Accounting

177

Extracted Statistics

198

Extracted Economics

211

Extracts About the Author

236

Extracted Bibliography

237


Kelly Allen Vinal

EXTRACTED INTRODUCTION The Extracted MBA represents the culmination of a decade's worth of undergraduate and graduate study, as well my practical management experiences, both in my work and in the courses I teach. Upon being awarded my MBA in 1998, I searched for a book that could concisely provide a reference, a recap if you will, of what I had learned in my years of study. Sure, there were books out there that professed to make MBAs out of lay folk, but they were the literary equivalent of snake oil. There simply wasn't a book written for MBAs that provided what I desired, and what I truly believed that the MBA community needed. I sat at my computer one night and began transcribing the four boxes of notes I had accumulated in the course of my studies. It would be three weeks before I completed the first section of the first management course I had ever taken. Aptly, that was Extracted Management! I read through it and realized that I had an opportunity to create a reference that myself and my fellow MBAs could really use! The Extracted MBA was born. I hope these series of extractions serve you well as you recount the topics that whizzed-by in the torrent of information to which we were exposed. With this tool, may your MBA skills remain as fresh as the day you walked across the stage and received your degree! Please note that the extracts are organized in a quasi-outline format, with indentations that expound on preceding notes.

Kelly A. Vinal, MBA May 15th, 2000 Fayetteville, North Carolina


Extracted MANAGEMENT

www.extractedmba.com/mgt.html


The Extracted MBA

Defined Planning, organizing, leading and, controlling resources for the purpose of achieving organizational goals. Management functions • Conceived by Henri Fayol in 1917. Planning: Defining the goals as directed by executive management; developing strategy; conceptualizing coordinated efforts. Organizing: Establishing the tasks that will achieve the goals; defining lines of leadership; determining where decisions will be made. Leading: Motivating and directing subordinates; establishing effective communications; resolving conflicts quickly and equitably. Controlling: Ensuring tasks are accomplished as planned and correcting deviations. The optimized organization Organization: A collective social unit that is goal oriented and formally structured. Performance: An organization’s actions that measurably contribute to the achievement of organizational goals. Efficiency: The achievement of organizational goals with the minimal consumption of resources. Effectiveness: The extent to which an organization achieves established goals. Management skills Technical Skills: The ability to apply specialized expertise. Human Skills: The ability to work with and motivate individuals or groups of individuals. 2


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Conceptual Skills: The ability to mentally analyze abstract and/or complex challenges. Core concepts Organization: A coordinated group of individuals that functions on a continuing basis for the purpose of achieving one or more goals. Executives: Individuals who set organizational goals and policies. Managers: Individuals in an organization who achieve goals through subordinates. Commonly referred to as administrators in non-profit organizations. Supervisors: People who provide direct leadership over line employees for the purpose of achieving management’s goals. Supervisors are typically individuals with expertise in all of the tasks of their subordinates, and are generally promoted from the ranks of the employees they oversee. Workers: Individuals employed to accomplish specific tasks for the purpose of achieving the organizational goals set by executive management. Management roles • Conceived by Henry Mintzberg in 1973. • Also known as Mintzberg’s Managerial Roles. Interpersonal Roles Figurehead: Symbolic chief; performs routine ceremonial functions and solicitations. Leader: Directs and motivates subordinates. Liaison: Maintains internal and external contacts of individuals and groups that are of benefit to the functioning of the organization. Informational Roles

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Monitor: Serves as central figure in obtaining and categorizing internal and external information relating to the organization. Disseminator: Communicates information obtained from outside sources, as well as from subordinates, to appropriate members of the organization. Spokesperson: Transmits information relating to the organization to external entities; is an expert in virtually all aspects of the organization, as well as its respective industry. Decisional Roles Entrepreneur: Scours the organization in search of opportunities to bring about positive, if not profitable results. Disturbance Handler: Implements corrective action to counter important and unexpected turmoil within the organization. Resource Allocator: Makes or approves important decisions, and ensures they are adequately staffed and funded. Negotiator: Represents the organization in negotiations. Activities of successful managers • Conceived by Fred Luthans in 1988. Luthans determined that a study of 450 managers showed that the successful ones all engaged in the following activities: Traditional Management: Decision-making, planning, and controlling. Communication: Exchanging information and processing paperwork. Human Resource Management: Motivating, disciplining, staffing, training, and resolving conflict. Networking: Socializing, politicking, and interacting with outsiders.

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The learning organization: An organization in which problem solving is encouraged at all levels that results in increased operational capability. Interwoven characteristics: • Conceived by Peter Senge in 1990. • • • • • •

Leadership Empowered employees Shared information Horizontal structure Emergent strategy Strong culture

Paradigm: A widespread and ingrained conceptualization of the operational environment. Paradigm shift: A change in environmental circumstances that leads to an altered understanding of the world. Evolution of the learning organization Classical perspective: Management philosophies that emerged in the late 19th and early 20th century, embracing scientific and rational approaches to forging efficient and productive organizations. Scientific management: Management perspective that relied upon early research and emphasized scientifically demonstrated measures to change management and increase productivity. • Conceived by Frederick Taylor in 1898. • Significantly refined by Lillian and Frank Gilbreth in the early 1900s. Bureaucratic organizations: Concept that touts impersonal and rational management that is characterized by clearly defined authority, meticulous record keeping, and separation of management and shareholders. • Conceived by Max Weber in 1927. Administrative principles: Focused on the organization as a whole by delineating planning, organizing, coordinating, and controlling. 5


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• Conceived by Henri Fayol in 1930. Humanistic perspective: Management philosophies that emerged concurrently with the classical perspective that focused upon employee needs, behavior, and attitudes. The human relations movement: Sparked by the Hawthorne studies in 1924 and involved management in focusing upon the basic needs of employees as the primary factor in increased productivity. The human resources perspective: Philosophy that embraces designing jobs that challenge employees to maximize their potential. Maslow’s Hierarchy of Needs : A hierarchy of five needs that represent human drive, based on the premise that once a need is met, the next higher need becomes dominant. • Conceived by Abraham Maslow in 1954. 1. Physiological: Includes hunger, thirst, and shelter. 2. Safety: Includes security and defense from physical and emotional harm. 3. Social: Includes affection, acceptance, friendship, and belonging. 4. Esteem: Includes self-respect, autonomy, achievement, status, recognition, and attention. 5. Self-actualization: Is reached when an individual become what he or she or she is capable of. Theory X and Theory Y • Conceived by Douglas McGregor in 1960. Theory X: Is the assumption that employees are inherently lazy, abhor work, and must be coerced into performing. Theory Y: Is the assumption that employees enjoy working, desire responsibility, and can work without direction. The management environment: All factors that exist within and beyond an organization’s boundaries that can affect the organization. 6


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Internal environment: The environment within an organization’s locus of control. • Employees • Management • Organizational culture General environment: The environmental layer that indirectly influences the organization’s operations • • • • • •

Technological Sociocultural Economic Legal Political International

Task environment: The external layer of the management environment that directly affects the organization. • • • •

Customers Labor market Suppliers Competitors

Ethics in management Ethics: Code of moral values that govern the fundamental behaviors of individuals, groups, and organizations. Ethical dilemma: A condition that arises when a decision must be made, and the alternatives are ethically undesirable, causing difficulty in determining right from wrong. Utilitarian approach: The ethical principle that morally positive actions invariably result in overall good. Moral-rights approach: States that moral decisions are best made by those affected by them.

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Individualism approach: The concept that acts are moral when they serve in the best interest of the individual’s long-term interests. Justice approach: The concept that moral acts must be based on equity and impartiality. Distributive justice: States that people should be treated according the differences between them. Procedural justice: All ethics should be derived from clearly defined rules that are consistently applied. Entrepreneurship: The process of engaging in business ventures that require acquiring and organizing resources, assuming risks, and reaping rewards. Entrepreneur: An individual who recognizes a business opportunity and acts to capitalize upon it. Intrapreneur: An individual who seeks and acts upon opportunities within an organization. Organizational planning Goal: A future state an organization desires to achieve. Plan: A design of the actions, resources, and personnel that will achieve a goal. Planning: Determining actions that will achieve an organization’s goals. Organizational goalsetting Mission: An organization’s purpose. Mission statement: A broadly stated expression of an organization’s unique business scope and operations. Strategic goals: Broad statement of the desired future position of an organization as a whole.

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Strategic plans: Actions an organization intends to take to achieve its strategic goals. Tactical goals: Goals set for major departments in an organization designed to achieve strategic objectives. Tactical plans: Actions that major departments must accomplish to achieve tactical goals. Operational goals: Specific results expected from departments, groups, and individuals within an organization. Operational plans: Specific actions developed to support tactical goals. Management by Objectives: A system by which specific goals are set by the entire workgroup, a timeline is established, and feedback on progress is ongoing. • Also known as MBO. • Conceived by Peter Drucker in 1954. Shewhart cycle: Quality management planning cycle used for organizational improvement that includes: • Plan: Determine desirable changes and prepare for implementation. • Do: Execute the changes. • Check: Observe the result of the changes. • Act: Perform analysis of the changes and implement broadly. Single-use plans: Plans developed for goals that will only be set once. Standing plans: Plans developed for guiding tasks that are performed repeatedly. Contingency plans: Plans that spell-out an organization’s response to specific, pre-determined events.

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Strategic management: Actions and guidance that serve to formulate organization-level strategy for the purpose of achieving competitive success. Strategy: Plan of action that details resource allocation, labor, marketing, and capitalization required to achieve organizational goals. Core competence: A business aspect upon which an o rganization identifies itself. Synergy: Occurs when the elements of an organization produce an outcome that is greater than all of the elements acting independently. Situation analysis: The evaluation of strengths, weaknesses, opportunities, and threats affecting the organization. • Also known as SWOT analysis. Differentiation: Competitive strategy whereby an organization strives to distinguish its products from its competitors’. Cost leadership: Cost-control strategy an organization undertakes to maximize efficiency and minimize costs to increase competitiveness. Focus: Competitive strategy that is characterized by concentration on a particular group of potential customers. Product life cycle: The stages a product endures, from development and introduction, through maturity and growth, and finally to decline. Decision-making and problem solving Decision: A choice made from various alternatives. Decision-making: The process of identifying problems and plausible solutions. Programmed decision: A decision made as a result of a situation that occurs on a regular basis. Nonprogrammed decision: A decision made as a result of a unique situation. 10


Kelly Allen Vinal

Risk: The possibility that a decision may prove to be the wrong one, as well as the possibility that the potential gain plus additional resources may be lost as a result. Certainty: The level of confidence the decision-maker has in the information available to him or her. Uncertainty: The level of confidence a decision-maker lacks as a result of incomplete or suspected inaccurate information. Ambiguity: The goals or problems are unclear, with uncertain alternatives, and incomplete information. Classical model: A decision-making model that assumes that managers make decisions in the best interests of their organizations. Normative: The approach that shows how a manager should make decisions, with guidelines for reaching solutions in the best interest of the organization. Administrative model: A decision-making model in which managers make decisions in situations involving ambiguity and uncertainty. Bounded rationality: States that individuals are limited in their decision-making abilities due to their cognitive capacity to process only a certain amount of information. Intuition: An understanding of a decision situation based unconsciously on past experience. Organizational structure Organizing: Employing resources for the purpose of attaining organizational goals. Organization life-cycle: An organization’s progress from inception through decline. Birth stage: The creation of the organization. Youth stage: Characterized by rapid growth and market success. 11


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Midlife stage: Characterized by substantial size and prosperity. Maturity stage: The decline of the organization due to inefficiency, excessive size, and an overly mechanistic structure. Structure: Framework whereby an organization clearly defines roles, leadership, resource allocation, task division, and departmental coordination. Organization chart: The visual depiction of an organization’s structure. Division of labor: The subdivision of labor into specialized tasks and individual jobs. • Also known as work specialization. Authority: The legitimate power accorded managers to make decisions, allocate resources, and otherwise act within his or her authorized purview. Chain of command: An unbroken supervisory link that connects all employees within an organization, from the line worker to the CEO. Accountability: The requirement for those subject to authority to justify outcomes to superiors. Responsibility: The implicit duty of an employee to perform an assigned task. Delegation: The transfer of authority from a manager to a subordinate. Span of management: The number of employees reporting to a manager. • Also known as span of control. Centralization: Decision authority is concentrated at the top of the organizational hierarchy.

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Decentralization: Upper management pushes decision-making authority to lower organizational levels. Tall structure: Characterized by a large number of hierarchical levels and a relatively narrow span of management. Flat structure: Characterized by few hierarchical levels and a broad span of management. Organizational change: The adoption and implementation of innovations and new behaviors by an organization. Reactive change: Changes that occur after external forces have affected organizational performance. Proactive change: Changes initiated in anticipation of future events and opportunities. Sequence of organizational change • Environmental and internal forces → Need for change → Initiate change → Implement change Performance gap: The gulf between desired and actual performance. Initiating change Search: Discovering developments internally and externally that can satisfy a need for change. Creativity: The creation of innovative solutions for organizational problems. Idea champion: An employee who determines a need exists within an organization and actively strives to satisfy it. New venture team: A temporary task force assigned to solving organizational problems and developing innovations. New venture fund: A fund established to provide resources for individual and group-developed innovations.

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Implementing change Force field analysis: Determining which forces drive or resist proposed changes. Communication and education: Providing employees with detailed information on impending organizational changes through presentations and info papers. Participation: Involves employees with the organizational change process. Negotiation: A formal bargaining process between management and subordinate business units and employees that serves to set changes in terms that are mutually acceptable. Coercion: The use of formal managerial power to force changes upon an organization. Top management support: The public expressions by executive management in support of organizational changes. Categories of organizational change Technology changes: A change that incorporates developing technology that improves communication, management, and production. Product changes: A significant change in a company’s product or service. Structural changes: Any adjustment of an organization’s management or functional structure. Cultural changes: A change in employee beliefs, values, and norms. Leadership: An individual’s ability to influence a person or group of people to perform functions that reach goals. Trait theories: Theories that promote individual personality traits as factors that determine leadership effectiveness.

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Behavior theories: Theories that promote behaviors as factors in determining leadership effectiveness. Ohio State Studies • Conceived by R. M. Stogdill and A. E. Coons in 1951. Initiating structure: The structuring by a manager of roles to best achieve goals. Consideration: The propensity of a manager to form professional relationships based on trust, respect, and regard for subordinates’ feelings. University of Michigan Studies • Conceived by R. Kahn and D. Katz in 1960. Employee-oriented leader: A leader who promotes interpersonal relationships. Production-oriented leader: A leader who promotes taskorientation. The Managerial Grid: A matrix that graphically illustrates leadership styles by identifying 81 different leadership styles. • Conceived by R. R. Blake and J. S. Mouton in 1964. Scandinavian Studies • Conceived by G. Ekvall and J. Arvonen in 1976. Development-oriented leader: A leader who is willing to take risks, experiments, and develops new ideas to accomplish goals. Contingency Theories of Leadership Fiedler contingency model: States that effective groups require a match between a leader’s style and his or her subordinates’ personalities. • Conceived by F. E. Fiedler in 1967. 15


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Cognitive resource theory: States that by first making plans, decisions, and strategy, a leader’s effectiveness is enhanced. • Conceived by F. E. Fiedler and J. E. Garcia in 1987. Hersey and Blanchard’s Situational Theory: States that leadership effectiveness is greatly influenced by subordinates’ readiness. • Conceived by P. Hershey and K. H. Blanchard in 1974. • • • •

Telling (high task – low relationship) Selling (high task – low relationship) Participating (low task – high relationship) Delegating (low task – low relationship)

R1: R2: R3: R4:

People are both unwilling and unable accomplish a task. People are unable but willing to accomplish a task. People are able but unwilling to accomplish a task. People are both able and willing to accomplish a task.

Leader-Member Exchange Theory: States that leaders form “in” and “out” groups and that individuals in the “in” groups will perform better than those who are not. • Conceived by F. Dansereau, J. Cashman, and S. G. Green in 1973. Path-goal theory: States that subordinates accept a leader’s behavior, as they view it, as a source of satisfaction. Attribution theory of management: Postulates that leadership is an attribution made by individuals of others. Charismatic leadership theory: A subcomponent of attribution theory that states followers attribute heroism or extraordinary leadership skills based on observing certain behaviors. Characteristics of charismatic leaders: • Self-confidence • Ability to articulate vision 16


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• • • •

Strong convictions about the vision Extraordinary behavior Perception as an agent of change Environment savvy

Transactional leaders: Those who are goal-oriented and motivate by clarification of roles and tasks. Transformational leaders: Achieve by providing individualized direction, intellectual stimulation, and demonstrating charisma. Power: The ability of an individual to influence behavior in others to perform functions they would otherwise not perform. Dependency: The relationship between two entities where one possesses something the other requires. Basis of power Coercive power: Based on fear. Reward power: Based on the ability to provide rewards for desired behavior. Legitimate power: Based on the position one holds as bestowed by an organization. Expert power: Based on specialized skills or abilities. Referent power: Based on the possession of resources or traits. Elasticity of power: The impact of power in variable alternatives. Power tactics: Means by which individuals exercise their power into action. • • • • • •

Reason Friendliness Coalition Bargaining Assertiveness Higher authority 17


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• Sanctions Politics: Behaviors that are distinct from formal roles and seek to influence the distribution of resources within an organization. Legitimate politics: Using sanctioned lines of communication and command to influence leadership. Illegitimate politics: Circumventing the system and using unfair tactics to influence leadership. Communication: The transmission, receipt, and understanding of information. Communication model • • • • •

Encoding: The conversion of a message to symbolic form. Message: The actual information. Channel: Medium that carries the message. Decoding: The deciphering of the message by the recipient. Feedback: Communicating that the message was understood.

Communication networks: Routs by which information flows. Formal networks: Authority-based information links. Informal networks: The “grapevine". Nonverbal communications: Information conveyed by body movements and expressions. Barriers to communication Filtering: Information distorted by a sender to gain a more favorable reaction by the receiver. Selective perception: Information distorted by the receiver to suit his or her own needs. Managing quality and productivity

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Total Quality Management (TQM): A management system that focuses on continuous achievement of customer satisfaction by perpetually improving all organizational processes. Elements of TQM: Intense focus on the customer: Involves the customer’s needs and satisfaction. The drive to continual improvement: Central to the TQM philosophy is the commitment to never being satisfied with progress. There is always room for improvement. Improvement of quality: TQM mandates an improvement in quality in all functions of the organization. Accurate measurement: Statistical analysis of performance benchmarks is compared against standards and the industry. Employee empowerment: Focuses on all levels of employees to suggest improvements and participate in managerial decision-making. Reengineering: A process of restructuring an organization from scratch to improve quality and productivity.

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Extracted hrm

www.extractedmba.com/hrm.html

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Defined Activities and programs of an organization designed to attract, develop, educate, and maintain an effective workforce. Environmental influences on HRM Downsizing: An effort designed to reduce costs and increase efficiency by reducing the ranks of management and employees. • Also known as rightsizing. Discrimination: The hiring and promotion of employees on bases that are independent of job criteria. Affirmative action: Government-imposed policies that guarantee equal representative employment of minorities and other protected groups. Federal laws significantly affecting HRM Equal Pay Act of 1963: Prohibits pay differences between sexes where employees perform substantially equal work. Civil Rights Act of 1964 (Title VII): Prohibits discrimination in employment on the basis of race, religion, color, sex, or national origin. Executive Orders 11246 and 11375: Requires federal contractors to eliminate discrimination through affirmative action programs. Age Discrimination Act of 1967: Prohibits age discrimination and imposes restrictions on mandatory retirement. Occupational Safety and Health Act of 1970 (OSHA): Establishes mandatory safety and health standards in organizations. Health Maintenance Organization Act of 1973 (HMO): Requires employers with 25 or more employees to provide an HMO alternative to regular insurance, if an HMO is available in the organization’s area. Vocational Rehabilitation Act of 1973: Prohibits discrimination based on physical or mental impairments. 21


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Employee Retirement Income Security Act of 1974: Prescribes rules of eligibility, vesting standards, and insurance programs for private pension plans. Vietnam-era Veterans Readjustment Act of 1974: Prohibits discrimination against disabled veterans and veterans of the Vietnam War era. Pregnancy Discrimination Act of 1978: Prohibits discrimination against pregnant employees. Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA): Requires continued employee-funded health insurance coverage following termination. Immigration Reform and Control Act of 1986: Prohibits employers from knowingly hiring illegal immigrants and prohibits employment on a basis of national origin or citizenship. Older Workers Benefit Protection Act of 1990: Requires that waivers of the Age Discrimination Act of 1967 be voluntary. Americans with Disabilities Act of 1990: Prohibits discrimination of otherwise-qualified handicapped individuals by employers and provides that “reasonable accommodations� be provided for employees with disabilities. Civil Rights Act of 1991: Shifts the burden of proof under the civil rights act of 1964 from the employee to the employer. Family and Medical Leave Act of 1993: Requires employers to provide up to 12 weeks of unpaid leave for childbirth, adoption, or family medical emergencies. Uniformed Services Employment and Reemployment Act of 1994: Protects the rights of individuals who enter military service for short periods of time. Human resource manager essential competencies: Business mastery 22


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• Business acumen • Customer orientation • External relations Human resource mastery • • • • •

Staffing Performance appraisals Rewards system Communications Organizational design

Change mastery • Interpersonal skills • Problem solving skills • Innovation and creativity Personal credibility • • • •

Trust Personal relationships development Adherence to corporate values Courage and conviction

HRM trends Globalization: The expansion of companies across national borders that requires strategic employment consideration. Workforce diversity: The increased saturation of employees of varying ethnic and social backgrounds. Labor supply: Fluctuations due to regional economic conditions that require addressing in HRM strategy. Employment at will: The increased propensity of employers and employees to contract and terminate employment contracts, with notice and no cause.

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Outsourcing: Hiring outside an organization to perform jobs that were previously done by employees. Employee leasing: Employees who are hired by an external company, but continue to perform their jobs. Industrial engineering: Field of study focused on the analysis of work methods and the establishment of job time standards. Ergonomics: The design of work equipment to accommodate human operators in a comfortable and healthy manner. Attracting an effective workforce Matching model: An approach that an organization uses to match an applicant’s skills to labor needs. Human resources information system (HRIS): Computerized system that places accurate HRM information in the hands of managers. Human resource planning: The forecasting of anticipated HRM needs and the matching of prospective employees to those needs. Cultural audits: Assessments of organizational culture and quality of life in an organization. Trend analysis: An approach to forecast labor needs based upon organizational performance indexes. Management forecasts: Forecasts of labor needs by managers who use their own experience in the organization and/or industry. Recruiting: The active efforts of an organization to seek-out desired candidates for employment. Realistic Job Preview (RJP): A recruiting tactic that gives a prospective employee all pertinent information about the job and the organization. Job market: The regional area from which applicants will be actively recruited.

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Sources of recruits (in order of effectiveness) • • • • • • • • •

Employee referrals College recruiting Executive search firms Professional search firms Want ads Direct applications Private employment agencies Public employment agencies Unions

Employee selection: The process of hiring a qualified employee by matching skills with job requirements. Employment interviews Nondirective interview: An interview in which an applicant is given broad discretion in guiding the course of the conversation and that is characterized by minimal interviewer intervention. Structured interview: An interview in which an applicant is asked standardized questions for which there are established acceptable answers. Situational interview: An interview in which an applicant is given hypothetical situations and is gauged upon how he or she responds. Behavioral description interview (BDI): An interview in which an applicant is asked how he or she responded to actual events. Panel interview: An interview in which an applicant is questioned by a board of interviewers. Job description: A narrative description of duties that pertain to a particular job that includes the requirements to fill the position. Job characteristics model: Job design that identifies task characteristics that result in improved performance and lower absenteeism. 1. Skill variety 25


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2. 3. 4. 5.

Task identity Task significance Autonomy Feedback

Validity: The relationship between an applicant’s score on a preemployment examination and his or her future job performance. Criterion-related validity: Extent to which a selection tool relates to actual job requirements. Concurrent validity: Extent to which a selection tool matches criterion data obtained from employees already performing prospective jobs. Predictive validity: The correlation between selection tool results and the performance of employees who have been on the job for a period of time. Cross-validation: The verification of selection tool results by comparison with different groups of individuals from the same population. Content validity: The extent to which a selection tool adequately samples the knowledge and skills relating to the performance of a particular job. Construct validity: The extent to which a selection tool measures theoretical models or traits. Application form: A device for collecting pertinent information from an applicant that relates to a particular job opportunity. Assessment center: A technique for selecting candidates with high managerial potential based upon their performance in simulated managerial scenarios. On-the-job training (OJT): A form of employee education in which a seasoned employee “adopts” a trainee and develops him or her through actual performance of tasks.

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Apprenticeship training: A form of employee education in which an entry-level worker is given a thorough education in his or her tasks, both on and off the job. Internships: Programs sponsored by large organizations that allow students to gain real experience in their prospective fields. Developing an effective workforce Continuing training and development: A formal education program intended to facilitate positive enhancement of employee job-related behaviors. Orientation training: Initial training whereby new employees are introduced to the organization, its culture, and its structure. Classroom training: Lectures, films, and simulations in a structured setting. Computer aided instruction: Self-paced program that involves employees learning on computers. Conference groups: Forums in which participants analyze problems and scenarios in team efforts. Performance appraisal: The process of a supervisor documenting employee performance for use in promotion consideration, administrative actions, employee feedback, and employee development. Behaviorally anchored rating scale (BARS): A rating technique that links an employee’s performance to specific job-relates tasks. Performance appraisal interview: A formal review of an employee’s performance that takes place between a supervisor and the employee. Self-appraisal: Evaluation of one’s own job performance and significant contributions. Subordinate appraisal: Evaluation of a manager’s performance by subordinates.

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Peer appraisal: Evaluation of an employee’s performance by coworkers at the same level. Team appraisal: TQM-based appraisal that evaluates team performance rather that that of individuals within the team. Customer appraisal: Evaluation of an employee solicited from internal and external customers. Appraisal errors Halo effect: A rating error that occurs when a supervisor rates an employee the same across the board, regardless of actual performance. Homogeneity: A rating error that occurs when a supervis or rates all of his or her subordinates similarly, regardless of actual performance. • Also known as error of central tendency. Leniency or strictness error: A rating error where an appraiser gives unusually high or low marks, regardless of actual performance. Recency error: A rating error where an appraiser bases the bulk of an employee’s rating on recent events. Contrast error: A rating error where an employee is rated either higher or lower because of comparison with an employee who was just evaluated. Similarity error: A rating error where an appraiser inflates an employee’s ratings based upon personal mutual connections or similarities. Maintaining an effective workforce Compensation: Money and benefits used to reward employees for performance. Human capital: The contributions of employees that have economic value to an organization.

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Job valuation: The process of placing a value on a job through an examination of job tasks. Point system: A job valuation system that assigns points for each compensable job factor that results in a determination of a job’s overall value. Pay-trend line: A graphical representation of the relationship between job point values and pay rates. Pay-for-performance: A standard by which managers tie compensation to employee performance. Pay equity: A perception by employees that compensation received is commensurate to the value of performed work. Hourly employees: Employees who are paid based upon the number of hours worked. Salaried employees: Employees who are paid based upon positions they hold. Piecework: Pay that is based upon units of production. Nonexempt employees: Employees covered by the overtime provisions of the Fair Labor Standards Act. Exempt employees: Employees not covered by the overtime provisions of the Fair Labor Standards Act. Job enrichment: The enhancement of a particular job that makes it more challenging, rewarding, and satisfying for the employee. Transfer: Placement of an employee in another job for which skills, duties, responsibilities, and pay are similar to the previous job. Promotion: An assignment to a higher level of in the organization that is characterized by increased responsibility and compensation. Relocation services: Services provided by an employer for transferred employees that are intended to ease transitions.

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Outplacement services: Services provided by an employer for terminated employees that assist in finding replacement jobs outside the organization. Job progression: A schedule of positions an employee may attain as they prove themselves in an organization. Career paths: Graphically depicted lines of advancement in an occupational field within an organization. Fast-track program: A program that identifies young managers with high potential and provides opportunities for accelerated advancement over other less talented employees. Work Schedules Compressed workweek: The shortening of the workweek and extending of the workday (example: 4 days @10 hours a day, as opposed to 5 days @8 hours a day). Flextime: Adjustable working hours that allows employees the opportunity to set start and quit times, provided they work a certain amount of hours a day or week. Telecommuting: Enabling an employee to accomplish work at a convenient location, such as a telecommuting center, or at a home office. Exit interviews: Interviews conducted with departing employees to determine the reasons for their resignations for the purpose of identifying potential organizational problems. Incentive programs Straight piecework: Incentive plan that rewards in direct correlation to units produced. Differential piecework: Compensation for units of production above a standard production rate. Bonus: Incentive that supplements a base wage and is generally based upon the prosperity of the organization.

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Spot bonus: Unplanned bonus for an employee for performance unrelated to regular job functions. Group incentive pl an: Incentive plan where a group of employees earns additional compensation for producing above standards. Standard hour plan: Incentive plan that compensates based upon completion of tasks within set amounts of time. Merit raises: Incentive raises tied to outstanding performance and/or acquisition of new skills. Profit sharing: Incentive that distributes a portion of the organization’s profits to the employees. Gainsharing: Incentive that distributes a portion of the organization’s market gains to the employees. Scanlon plan: Incentive program that uses employee-management teams to gain cost-reducing improvements. Employee stock ownership plans (ESOPs): Stock plans in which corporations set aside certain amounts of shares for employees to purchase at discounted prices. Incentives for sales employees Straight salary plan: Compensation is paid regularly without consideration of sales. Straight commission plan: Compensation is paid based upon a percentage of sales made. Combined salary and commission plan: Compensation that includes a relatively low salary that is supplemented by a percentage of sales made. Incentives for professional employees Career curves: Incentive plan in which performance or experience increases compensation.

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• Also known as maturity curves. Incentives for executives Perquisites: Special benefits that symbolize an executive’s importance to an organization. • Also known as perks. Bonus for performance: Incentive plan that ties bonus amounts to corporate earnings growth. Stock for performance: Incentive plan that offers stock options to executives for corporate earnings growth. Pension plans Contributory plan: Pension plan into which both employer and employee contribute. Noncontributory plan: Pension plan in which the employer alone makes contributions. Defined-benefit plan: Pension plan that specifies the amount an employee receives upon retirement. Defined-contribution plan: Pension plan that establishes the basis by which an employer contributes. Vesting: A guarantee of accrued benefits to be disbursed at retirement age regardless of employment status at the time of retirement. Employee services Employee assistance programs (EAPs): Programs provided by employers to assist workers in dealing with problems that may affect work performance. • • • • 32

Child care referral Elder care referral Time off for children’s school activities On-site child care


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• • • • • • • • • • • • • • • • •

Flexible work hours Employee-accrued dependent care leave Dependent care subsidies Extended leave policies for family emergencies Sick child program Telecommuting Subsidized child care Food services On-site health clinics Legal services Financial planning Housing and moving expenses Transportation pooling Purchase subsidies Credit unions Recreational services Awards programs

Job safety OSHA inspection levels First level: Inspection of imminent dangers. Second level: Investigation of catastrophes, fatalities, and accidents that result in hospitalization of five or more employees. Third level: Investigation of valid employee complaints of alleged violations of OSHA standards. Fourth level: Special-emphasis inspections targeting hazardous industries, occupations, or substances that are potentially hazardous to health. Voluntary protection programs (VPPs): Programs that encourage organizations to go beyond the OSHA-mandated requirements. Employee OSHA rights • Right to know laws • Material safety data sheets (MSDSs)

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The Extracted MBA

Workplace violence OSHA guidelines: • Managers are responsible for preventing workplace violence. • Managers must analyze the workplace for signs of potential violence. • Managers must design safe workplaces and work practices. • Managers must provide violence awareness and prevention training. Violence response teams: Teams organized within corporations to conduct violence investigations, develop action plans, and implement crisis intervention plans. Factors affecting job performance Depression: Negative emotional condition that is characterized by sadness, gloominess, loss of pleasure, and low spirits. Alcoholism: Addiction to alcoholic beverages that results in absenteeism, sickness, and mistakes on the job. Drug abuse: The abuse of controlled substances that results in absenteeism, sickness, and mistakes on the job. Stress: Any adjustive demand rooted in physical, mental, or emotional grounds that requires coping mechanisms. Eustress: Positive stress that often accompanies achievement. Distress: Negative stress often characterized by feelings of pressure and insecurity. Alarm response: Response to distress that is characterized by elevated heart rate, adrenaline, respiration, and perspiration. Burnout: Most severe case of distress that surfaces as depression, frustration, and significant loss of productivity. 34


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Employee rights: The guarantee of fair and equitable treatment by employers. Negligence: Failure to provide reasonable measures to ensure care where such failure results in measurable injury to employees or customers. Due process: An employees right to present his or her side of a case during disciplinary actions. Wrongful termination • Violation of public policy • Violation of implied contract • Implied covenant Employee discipline Discipline • Treatment that punishes. • Orderly behavior in an organizational setting. • Training that reinforces desirable behavior. Progressive discipline: Application of correction measures that increase in degree of effect. Nonpunitive discipline: Discipline that focuses on early intervention and empowers the employee to resolve the problem. • Also known as Positive discipline. Disciplinary sequence of events Organizational discipline policy → violation of policy → Investigation by management → disciplinary interview → progressive disciplinary action → due process → just cause → termination Appealing disciplinary actions

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The Extracted MBA

Step review system: Appeals that elevate to higher levels of management for consideration. Peer review system: Appeals are adjudicated by peer “jurors” who are elected by secret ballot, weigh evidence, and render a final decision. Hearing officer: An impartial full-time “judge” hired by an organization to settle disciplinary issues and grievances. Unfair labor practices (ULPs): Illegal actions by employers or unions that deny employees their rights under federal labor law. • Interfering with, restraining, or coercing employees in their exercise of guaranteed rights. • Interfering with the formation or operation of any labor organization, to include making financial contributions. • Discriminating in employment practices with the effect of discouraging participation in a labor organization. • Termination or repercussions against employees because they file charges under the act. • Refusing to collectively bargain with duly appointed labor representatives. The dynamics of labor relations Labor relations process 1. Workers desire collective representation. 2. Union begins organization. 3. Collective negotiations result in a contract. 4. The contract is enacted. Union shop: Provisions of a labor contract that requires all employees of a company to be members of the representative union.

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Authorization card: A statement signed by a unionized employee that authorizes a union to bargain on his or her behalf. Bargaining unit: A group of two or more employees who join forces under the banner of common interests for the purpose of bargaining as a more powerful entity. Consent election: A National Labor Relations Board (NLRB) election option that allows a representation election when neither the union nor the employer contest it. Stipulation election: NLRB election option where the employer and the union must come to agreements over disputed portions of representation. Compulsory binding arbitration: Binding method of collective bargaining dispute resolution resolved by a neutral third party. Final offer arbitration: Method of arbitration where a neutral third party must accept a final offer of one side over another. Pattern bargaining: Bargaining that includes elements commonly found in contracts across an industry. Bargaining zone: Areas where the union and the employer are willing to concede in the bargaining process. Boycott: Union bargaining tactic to persuade external parties to not patronize an organization. Strike: Union bargaining tactic where union members walk off the job, refuse to work, and picket their employer to resolve collective bargaining issues. General strike: A strike in which union members of an industry, region, or nation walk out en masse. Wildcat strike: An unauthorized walkout by employees who are generally protesting a disagreeable event or condition. Outsourcing: Employer tactic of subcontracting to operate nominally during a strike. 37


The Extracted MBA

Lockout: Employer tactic of denying union employees access to their work.

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extracted INTERNATIONAL BUSINESS AND GLOBAL COMPETITION

www.extractedmba.com/intl.html

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The Extracted MBA

International business: Business with operations that span across national borders. Foreign business: A business operating in a country other than the one of its origin. Multinational company (MNC): An organization that operates affiliates in two or more countries, with each formulating its own strategy based on local market characteristics. Global company: An organization that operates worldwide under standardized conditions in all functional areas. Uncontrollable elements of international operations • • • • • • • • •

Competition Distribution Economics Financial markets Laws Political forces Culture Labor markets Technology

International trade and investment Foreign investment Portfolio investment: The purchase of stocks and bonds for the purpose of obtaining a return on investment. Direct investment: The purchase of enough stock in a firm that significant management control is obtained. In-bond plants: Production plants in Mexico that import raw materials and parts, assemble them, and then export the final product to the United States. • Also known as maquiladoras.

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Passive processing: The completion of manufacturing by European nations of American goods that are returned to the U.S. Indirect exporting: The exporting of goods through organizations that operate in the countries to which a company sells products. Manufacturer’s export agent: Sells under contract for the manufacturer. Export commission agent: Purchases from the manufacturer for domestic customers. Export merchant: Purchases from the manufacturer for his or her own resale profit. International firms: Import goods from the manufacturer as a component to a finished product. Direct exporting: The international sale and delivery of goods by the manufacturer. Sales company: A suborganization of the manufacturer created to sell goods in a foreign country. Foreign manufacturing: The development and production of products in a foreign country. Wholly owned subsidiary: A branch of a company that operates remotely as an integrated corporate entity. Joint venture: A partnership between two or more companies who share a common interest in the manufacturing and distribution of products. Management contract: An arrangement whereby one organization agrees to undertake the management of another. Licensing: A contractual agreement that grants a foreign company access to patents, trade secrets, and technology in return for profit share.

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The Extracted MBA

Franchising: A contractual agreement that allows a foreign company to operate a business under strict the rules and controls of a franchising entity. Contract manufacturing: An arrangement whereby a manufacturer contracts a foreign manufacturer to produce its products. Strategic alliance: A partnership between competitors that allows for shared markets, manufacturing bases, and market segmentation. The economics of international business Mercantilism: Economic theory that embraces the concepts that a nation’s prosperity is directly correlated with its accumulated treasures and that imports should be discouraged, while exports should be encouraged. Absolute advantage: The ability of one country to produce more product than another country, given identical resources. • Conceived by Adam Smith in 1776. Comparative advantage: Exists when a country experiencing an absolute disadvantage in the production of two goods in relation to another nation, and specifically refers to the product the disadvantaged country produces more of. Factor endowment: Theory that countries generally export more goods that require larger amounts of their production resources, and tend to import commodities that require lesser amounts. • Conceived by Hecksher and Owen in 1933. Exchange rate: The price of one currency stated in terms of another. Devaluation: The lowering of one currency’s value in relation to other currencies. International product life cycle (IPLC): The theory that states that a product that begins as the export of a nation eventually becomes an import of that nation.

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1. United States exports a product. 2. Foreign manufacturers produce a similar product cheaper. 3. Foreign competition manifests for the product. 4. United States imports the product. Retaliation: Acts by or sanctioned by foreign governments designed to right perceived wrongs or inequities. Dumping: The act of exporting a product and selling it for less than manufacturing costs for the purpose of eliminating competition. Subsidies: Government contributions to domestic corporations that are intended to reduce costs and make products more competitive in the global marketplace. Countervailing duties: Additional taxes imposed by importing countries that eliminate subsidy benefits. Tariffs: Taxes imposed on imports designed to drive up their prices and provide competitive advantages to domestically produced items. Ad valorem duty: Import tax calculated based on invoice price. Specific duty: A fixed tax levied per imported item. Compound duty: A mix of ad valorem and specific duties upon an imported product. Variable levy: A duty calculated by determining the difference between the world market value of an imported item and the governmentcontrolled prices. Nontariff barriers (NTBs): All forms of discrimination against imports that are not taxes. Quotas: Limits that are placed on the number of items imported. Voluntary export restraint (VERs): Export quotas willingly imposed by an exporting government. 43


The Extracted MBA

Orderly marketing arrangements: Agreements between nations that stipulate import and export quotas. Economic development Classifications of development Developed: The most industrialized nations in the world. The United States Western Europe Japan Australia New Zealand Canada Newly industrialized economies (NEIs): Nations with economies that are fast growing and whose populaces maintain a moderate GNP. South Korea Taiwan Hong Kong Singapore South China Newly industrializing countries (NICs): Nations with economies characterized as establishing production facilities and expanding per capita incomes. Mexico Malaysia Chile Venezuela Brazil Thailand Argentina Developing countries: All other noncommunist countries that have few resources, little income, and are poorly technically developed.

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Underground economies: The aspect of economics in which significant unreported transactions are made and untaxed. Purchasing power parity (PPP): The number of currency units required to purchase the same amounts of goods and services as one dollar in the United States. Human needs approach: The definition of economic development as the elimination of poverty and unemployment. Import substitution: The domestic production of goods for the purpose of replacing imports. Theories of international investment Monopolistic advantage theory: Direct foreign investment by oligopolies that possess technical and resource advantages over indigenous competition. Cross investment: Direct foreign investment by oligopolies in each other’s home nation, intended as a defensive measure. International organizations The United Nations (UN): A representative body of world nations chartered to promote world peace, stability, and economic growth. General assembly: Deliberative body comprised of each member state, where each state is granted one vote, regardless of size or relative economic status. Security council: Permanent body of the UN composed of 15 members (5 permanent and 10 chosen to serve two year terms) where each member has the power to veto any measure brought by the general assembly. Permanent members The People’s Republic of China France Russia The United States 45


The Extracted MBA

The United Kingdom

Specialized agencies of the UN UN Children’s Fund World Health Organization Food and Agriculture Organization UN Industrial Development Organization International Labor Organization UN Educational, Scientific, and Cultural Organization UN development Program International Civil Aviation Organization International Telecommunications Union Universal Postal Union World Meteorological Organization International Atomic Energy Agency International Fund for Agricultural Development UN Conference on Trade and Development The World Bank: A world-governed banking institution that predominately makes loans to developing economies. International Monetary Fund: Chartered in 1944 at the Bretton Woods Conference. • Fosters orderly foreign exchange agreements. • Promotes convertible currencies. • Reduces the imbalance of unpaid international debt. Group of seven (G7): The major industrialized countries. Canada France The United Kingdom Germany Italy Japan The United States

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Debt default: Occurs when a debtor nation, for whatever reason, refuses to or cannot repay a loan when due. Debt rescheduling: An agreement by the debtor nation and the creditor agency that allows for longer payment periods, lower interest rates, or forgiveness of a portion of loans. European Bank for Reconstruction and Development (EBRD): Created in 1990 to assist the countries of the former Soviet Union and its satellites. Regional development banks: Regional equivalents of the World Bank. Bank for International Settlements (BIS): A discreet forum for central bank governors to meet 10 times a year to discuss global financial systems. World Trade Organization: A global organization chartered to lower economic trade barriers and promote free markets. • Formerly known as the General Agreement on Tariffs and Trade (GATT). Organization of Petroleum Exporting Countries (OPEC): A cartel of oil rich nations that influence petroleum prices by raising and lowering crude oil production. Iran Iraq Kuwait Saudi Arabia Venezuela Qatar Libya Indonesia Abu Dhabi Algeria Ecuador Gabon The European Union (EU): Cooperative market designed to provide economies of scale on par with Japan and the United States.

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The Extracted MBA

France Denmark Belgium Greece Ireland Italy Luxembourg The Netherlands Portugal Spain The United Kingdom Austria Finland Sweden Germany North American Free Trade Agreement (NAFTA): Eliminates tariffs on approximately 4,500 goods traded between its signatory nations. The United States Canada Mexico Association of Southeast Asian Nations (ASEAN): Cooperative agreement between the nations of the southeast Asian economic development zone. Brunei Indonesia Malaysia The Philippines Singapore Thailand Vietnam International monetary system Convertible currencies: Currencies that are exchangeable for any others using standard rates at financial centers worldwide. Gold standard: An agreement between countries to purchase gold at established rates. 48


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Central reserve assets: Gold or hard currencies held in a nation’s central treasury. Balance of Payments (BOPs): A financial statement that compares payments made by citizens of one country to citizens of another with payments to domestic residents by foreign residents. Market measures: The efforts to quell a BOP deficit by deflating an economy or devaluing a currency. Nonmarket measures: Steps taken to end a BOP deficit by establishing tariffs, setting quotas, or controlling currency exchange. Monetary policies: Policies enacted to regulate the growth and contraction of a nation’s currency supply. Fiscal policies: Policies enacted to regulate a government’s income through taxes and expenditures. Fixed exchange rates: The setting of currency rates between two or more countries. Floating exchange rates: The setting of currency rates by markets. Money markets: Institutions where currency can be bought, sold, and borrowed. European Monetary System (EMS): A cooperative agreement between European nations designed to fix exchange rates between them. Eurodollar: The standard convertible currency of the European Union. Financial forces Vehicle currency: A currency used as a standard in international trade or investments. Intervention currency: A currency used by a nation for the purpose of affecting foreign exchange rates.

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The Extracted MBA

Safe haven: A reference to the stability of the United States dollar, based on the likely continued stability thereof. Cross-rates: Currency exchange rates between countries that are done in local monetary units. Spot rate: The exchange rate between two currencies for delivery in two business days. Forward rate: The futures market in currency rate speculation that is typically delivered in 30, 60, 90, and 180 days. Trading at a discount: Occurs when a currency’s forward rate quote is weaker than spot. Trading at a premium: Occurs when a currency’s forward rate quote is stronger than spot. Net negative international investment position: The U.S. international debt. Socioeconomic forces Gross domestic product (GDP): The total value of all goods and services produced by a nation. Income distribution: The measure of which segments of a nation receive what amount of national wealth. Discretionary income: Income left over after the payment of taxes and the purchase of essential items. Unit labor costs: Total labor costs divided by units produced. Vertically integrated: A firm that produces inputs from subsequent manufacturing processes. Socioeconomic dimensions Population density: The number of inhabitants per given unit of surface area.

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Population distribution: The level of dispersion of a population across a nation’s landmass. Rural to urban shift: The movement of a nation’s population into cities. National economic plans: Government plans stating economic goals the means for achieving them over a period of time. Indicative plans: Government-industry collaborative economic forecasts. Sociocultural forces Religion and international commerce Protestant work ethic: The Christian doctrine of hard work and thrifty living that glorifies God. • This same ethic is embraced by the Confucian work ethic. Asian religions Hinduism: The belief that everything on earth is subject to the eternal process of death and rebirth, and that souls migrate from one body to another. Caste system: A cornerstone of the Hindu culture in which society is divided into four castes and untouchables. An individual is born into a caste, and the prospect of moving up a caste is only possible in a different lifetime. Brahmins Warriors Merchants Peasants Untouchables Buddhism: Derived from Hinduism, and is of importance to international business because Buddhists believe that if they have no desires, then they will not suffer.

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The Extracted MBA

Sikhism: Derived from Hinduism, Sikhism is the religion of an Indian Punjabi ethnic group, a military brotherhood, and a political secessionist movement. Confucianism: The belief that all existence is based upon a mandate from the heavens that honors respect for the elderly, gentle decorum, politeness, and ritual courtesies. Islam: Based upon Allah’s revelations to Muhammad, as captured in the Koran, all Muslims are expected to accept the confession of faith, make five daily prayers while facing the holy city of Mecca, giving charity, fasting during the holy month of Ramadan, and making a holy pilgrimage to Mecca at least once in their lifetimes. Labor forces Labor quality: The skill levels of indigenous employees. Labor quantity: The abundance of individuals available with requisite skills to satisfy employer needs. Labor mobility: The migration of people from one nation to another in search of employment. Refugees: People who flee one country due to political or economic reasons. Guest workers: People who legally work in another country. Labor force composition: The demographic make-up of potential employees. Labor productivity: A measure of the average output for a typical worker in a region. Unit labor costs: The amount of capital required to produce a unit of goods. Competitive forces National competitiveness: The ability of a country to compete effectively in world markets. 52


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Super 301: Section 301 of the 1988 trade bill that requires the U.S. trade representative to compile a list of unfair trade practices of foreign countries. If, after a year of negotiation, an offending nation does not address the wrongs listed, the United States may impose economic sanctions. Keiretsu: A group of Japanese companies that tend to do business amongst themselves. Industrial targeting: Occurs when a government assists selected industries. Chaebol: Large South Korean conglomerates that have found success in international markets. Counterfeiting: The illegal reproduction and sale of well-known products. Market Analysis Market screening: A market selection technique that involves assessing environmental factors and eliminating the less desirable markets. Environmental scanning: A procedure whereby an organization searches the world for environmental changes that might affect operations. Market indicators: Economic data that is used to make comparative analyses of market strengths and weaknesses. Market factors: Economic data that directly correlates with product demand. Estimation by analogy: The use of a successful market factor in one region and using it to predict success in another. Trade mission: A group of business and government leaders that visits a market in search of opportunities.

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Trade fair: A typically recurring large exhibition where companies promote their products. Export and import procedures Terms of sale: Transaction conditions that state at what point all risks and costs are the responsibility of the buyer. Letter of credit: A letter issued by a buyer’s bank that promises to pay the seller for merchandise. Confirmed: An agreement by a bank in the seller’s country that accepts the terms of the issuing bank’s letter of credit. Irrevocable: A stipulation that a letter of credit cannot be withdrawn. Air waybill: A bill of lading issued by an air cargo company. Pro forma invoice: A formal written statement by an exporter that states all relevant information relating to the sale and delivery of goods. Banker’s acceptance: A time draft with a maturity of nine months or less that has been accepted by the bank upon which the note was drawn. • This draft may be traded at discount on the open market. Factoring: Discounting without recourse an account receivable with terms of 90 to 180 days. Forfaiting: Purchasing without recourse an account receivable with terms in excess of 180 days. Foreign freight forwarders: Businesses that perform export services for manufacturers. Bonded warehouse: A storage area authorized by customs authorities to hold imported goods, with payment of duties due upon removal. Customhouse brokers: For-profit businesses that handle importing for organizations.

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Export documentation General export license: A license that covers all commodities that do not require a special validated license. Validated export license: A required document issued by the government for specified export items. Export bill of lading: A contract between shipper and carrier to deliver goods. Marketing plan: A detailed document that encompasses the major facts surrounding a business proposal. Executive summary and table of contents: A brief description of the proposal and a detailed table of contents. Current market situation: Data drawn from the product fact book maintained by the product manager that describes the macroenvironment of the subject proposal. Market situation: Data that describes the target market, its size and prospective growth, and statistical data on consumer needs and wants. Product situation: Describes contribution margins, sales, prices, and net profiles. Competitive situation: Describes the environment in terms of competitors, their sizes, assets, market share, strategies, and other characteristics that describe their competitive intentions. Distribution situation: An analysis of the size and means of delivering products.

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Extracted ORGANIZATIONAL BEHAVIOR

www.extractedmba.com/ob.html

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Defined The field of study that involves the analysis of individuals, groups, and structures within organizations, focused on optimizing and improving organizational effectiveness. Disciplines involved with OB Psychology: The science that measures, explains, and changes human behavior. Psychology influences: • • • • • • • • • • • •

Learning Motivation Personality Training Perception Leadership effectiveness Job satisfaction Individual decision-making Performance appraisal Attitude measurement Employee selection Work design

Sociology: The study of social systems that focuses on analyzing human interaction. Sociology influences: • • • • • • • • • • •

Group dynamics Work teams Communications Power Conflict Intergroup behavior Formal organization theory Bureaucracy Organizational technology Organizational change Organizational culture 57


The Extracted MBA

Social Psychology: Sub-section of psychology that includes elements of sociology. It is focused on the influence of people upon each other. Social psychology influences: • • • • •

Behavioral change Attitude change Communication Group process Group decision-making

Anthropology: The study of societies aimed at gaining an understanding about the human species and its activities. Anthropology influences: • • • • •

Comparative values Comparative attitudes Cross-cultural analysis Organizational culture Organizational environment

Political science: The study of interpersonal and group power in a competitive environment. Political science influences: • Conflict • Intraorganizational politics • Power Organizational behavior model • Also known as the OB Model. Model: An abstract and simplified representation of actuality. Dependent variables: Responses that are directly affected by one or more independent variables. • Productivity 58


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• Absenteeism • Turnover • Job satisfaction Independent variables: The cause of change in dependent variables. • Individual-level • Group-level • Organization system-level Contingency variables: Situational factors that affect the relationships between the independent and dependent variables. Global relations Multinational Corporations: Organizations with substantive operations in two or more countries. Cooperative Alliances: Arrangements between nations that lessen or eliminate economic barriers to trade. International challenges National cultures: Characteristics and practices unique to individual countries. Cross-cultural barriers Parochialism: Inability to adopt or understand foreign perspectives and customs. Ethnocentrism: Belief that one homogenous population’s values and characteristics are superior to others. Kluckhohn-Strodtbeck Framework: An analytical process that studies cultural variations in six cultural perspectives: • Conceived by K. Kluckhohn and F.L. Strodtbeck in 1961. • Relationship to the environment (domination, harmony; subjugation)

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• Time orientation (past, present; future) • Nature of people (good, mixed; evil) • Activity orientation (being, controlling; doing) • Focus of responsibility (individualistic, group; hierarchical) • Conception of space (private, mixed; public) The Hofstede Framework: A thorough cultural analysis of the differences between employees of a single multinational corporation: • Conceived by Geert Hofstede in 1983. • • • • • •

Individualism Collectivism Power distance Uncertainty avoidance Quantity of life Quality of life

Individual behavior Biographical characteristics: Basic traits that define an individual. • • • • • • •

Age Sex Marital status Tenure Health Lifestyle Dependents

Ability: One’s capacity to accomplish tasks. Intellectual Ability: Capacity to analyze and process information. Number aptitude: Ability to calculate arithmetic Comprehension: Ability to understand written and verbal instructions. 60


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Perceptual efficiency: Ability to make visual associations quickly and accurately. Inductive reasoning: Ability to sequence information to solve complex problems. Deductive reasoning: Ability to assess information and arrive at logical conclusions. Spatial visualization: Ability to imagine an object in a position other than the one it is in. Memory: Ability to retain and recall information and experiences. Physical ability: Capacity to accomplish tasks that require strength, stamina, accuracy, and/or flexibility. Dynamic strength: Ability to use muscular force continuously. Trunk strength: Ability to exert abdominal and lower back muscles. Static strength: Ability to exert force on an object. Explosive strength: Ability to exert all potential force in a single effort. Extent flexibility: Ability to move the trunk of the body forward and backwards. Dynamic flexibility: Ability to make repetitive stretching movements. Coordination: Ability to simultaneously move different parts of the body to accomplish an action. Balance: Ability to counter external force and maintain equilibrium. Stamina: Ability to continuously exert physical force.

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Ability-job fit: The alignment of an individual’s physical and mental abilities to his or her assigned functions. Personality: Concept that describes an individual’s psychological system. Personality Determinants: • Heredity • Environment • Situation Personality traits: Pervasive individual characteristics that define one’s behavior. Myers-Briggs Type Indicator: 100-question personality test that categorizes an individual into four situational areas and determines 16 unique traits. Situational areas: • • • •

Introverted or extroverted Sensing or intuitive Perceiving or judging Thinking or feeling

Sixteen primary traits: • • • • • • • • • • • • • • 62

Reserved vs. outgoing Less intelligent vs. more intelligent Emotionally unstable vs. emotionally stable Submissive vs. dominant Serious vs. aloof Expedient vs. conscientious Timid vs. venturesome Tough-minded vs. sensitive Trusting vs. suspicious Practical vs. imaginative Forthright vs. shrewd Self-assured vs. apprehensive Conservative vs. experimenting Group-dependent vs. self-sufficient


Kelly Allen Vinal

• Uncontrolled vs. controlled • Relaxed vs. tense The Big 5 Model: A popular unifying personality framework: • Conceived by J. M. Digman in 1990. • • • • •

Extraversion Agreeableness Conscientiousness Emotional stability Openness to experience

Personality in Organizational Behavior Locus of control: Amount an individual believes they control their destinies. Internals: Believe that they control their lives. Externals: Believes external forces control their lives. Machiavellianism: Level of pragmatism. Self-esteem: One’s liking or disliking of one’s self. Self-monitoring: A person’s ability to make behavioral adjustments to external influences. Risk taking: One’s ability to take actions despite the chance of failure. Learning: A permanent change in behavior due to an experience. Classical conditioning: Results in reactions to stimuli that would otherwise not occur. • Conceived by Ivan Pavlov in 1902. Operant conditioning: Results in reactions to stimuli as the result of voluntary behavior that is rewarded or punished.

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• Conceived by B. F. Skinner in 1971. Social learning theory: States that people are able to learn by their experiences and by observing other people. Shaping behavior: A system of reinforcement of positive behavior that results in attaining a behavioral objective. Continuous reinforcement: Positive behavior is reinforced every time it is demonstrated. Intermittent reinforcement: Positive behavior is not always reinforced, but enough so to encourage desired behavior. Fixed-interval schedule: Rewards for behavior are given at evenly spaced times. Variable-interval schedule: Rewards for behavior are given at unpredictable times. Fixed-ratio schedule: Rewards for behavior are given after a certain behavior is demonstrated a given number of times. Variable-ratio schedule: Rewards are correlated directly with demonstrated behavior. Perception: An interpretation of sensory input that gives meaning to an individual or group of individuals. Perceiver: The person making a determination based upon what they sense. Target: That which is being perceived. Situation: The context in which the perceiver experiences the target. Attribution theory: States that individuals attempt to determine whether an observed behavior was caused internally or externally. Fundamental attribution failure: The proclivity of individuals to overestimate internal influences on observed behavior, while underestimating external influences. 64


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Self-serving bias: The tendency to attribute one’s success to internal factors, while blaming failure on external factors. Selective perception: Individuals filtering observations to suit their own beliefs and experiences. Halo effect: A generalized perception of a person based upon a single characteristic. Contrast effects: Impressions of a person’s characteristics that are tainted by perceptions of other individuals with similar characteristics. Projection: Attaching one’s characteristics to other people. Stereotyping: Attributing characteristics to a person based upon that person’s affiliation with a group of people. Decision-making Decision: Choosing between two or more options. Problem: An undesired situation that requires a solution to achieve a desired state. Optimizing Model of Decision-Making • Also known as the Optimizing Model. Step 1: Step 2: Step 3: Step 4: Step 5: Step 6:

Ascertain the need for a decision. Identify the decision criteria. Allocate weights to the criteria. Develop the alternatives. Evaluate the alternatives. Select the best alternative.

The Satisficing Model: A decision-making model that chooses the first acceptable alternative. Step 1: Ascertain the need for a decision. Step 2: Simplify the problem. Step 3: Set minimum standards to solve the problem. 65


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Step 4: Identify alternatives. Step 5: Compare alternatives to minimum standards. Step 6: Select the first alternative to meet minimum standards. The Implicit Favorite Model: A decision-making model in which the decision maker implicitly selects a favorite alternative and skews the alternatives. Step 1: Step 2: Step 3: Step 4: Step 5: Step 6:

Ascertain the need for a decision. Identify alternatives. Select implicit favorite. Confirm the implicit favorite as viable. Establish decision criteria that are biased towards favorite Select implicit favorite alternative

The Intuitive Model: A decision-making model that relies upon the decision maker selecting an alternative based upon experience. Values and attitudes Values: Fundamental internal convictions that result in a state of existence that is personally or socially preferable to an alternative. Value system: A hierarchy of values ranked by their importance to the individual. Attitudes: Internal judgments concerning individuals, items, or situations. Cognitive component: The belief portion of an attitude. Affective component: The emotional portion of an attitude. Behavioral component: An intention to act in a certain manner toward someone or something. Job satisfaction: A general feeling, on the part of the employee, that can include challenge, equity, support, and coworkers. Job involvement: How actively and deeply an employee dedicates him or herself with their work.

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Organizational commitment: The degree to which an employee attaches him or herself to their company. Cognitive dissonance: An incompatibility between two or more attitudes and/or behaviors where the individual is aware of the incompatibility. Motivation: The level of willingness to exert effort to attain a goal or set of goals. Motivation-hygiene theory: Intrinsic factors are associated with job satisfaction, while extrinsic factors are associated with dissatisfaction. • Conceived by Frederick Herzberg in1959. ERG theory: The three groups of core needs are existence, relatedness, and growth. • Conceived by Clayton Alderfer in 1969. McClelland’s Theory of Needs: Three important needs drive motivation: • Conceived by David McClelland in 1974. • Achievement need: The need to excel. • Power need: The need to influence others. • Affiliation need: The need for interpersonal relations. Cognitive evaluation theory: States that extrinsic rewards for behaviors that have already been intrinsically rewarded will decrease motivation. • Conceived by R. de Charms in 1968. Goal-setting theory: Specific and difficult goals will result in increased motivation. • Conceived by Edwin Locke in 1968. Equity theory: The comparison, by employees, of productivity and rewards results in the elimination of inequities. 67


The Extracted MBA

Expectancy theory: The tendency to act in a certain way is the result of anticipated outcome. Behavior Modi fication: A program that identifies performance behaviors of employees and allows management to institute policies that improve performance, while lessening undesirable behavior. • Also known as OB Mod. • Conceived by F. Luthans and R. Kreitner in 1985. Employee involvement: The inclusion of employees in organizational operations. Participative management: Whereby employees share a significant amount of decision-making authority with management. Representative participation: Decision-making is shared with selected groups of employees. Work councils: Employees elected by co-workers to represent them in personnel matters. Board representation: Employees elected by co-works to sit on the board of directors to represent their interests. Quality circles: Employee-based groups that address qualitative issues. Employee Stock Ownership Plans: A part of an employee’s benefit package that distributes ownership of the organization. • Also known as ESOPs. Variable-pay programs: A system by which a portion of an employee’s compensation package is tied to performance. Piece-rate: Pay is directly correlated to units of production. Profit sharing: A portion of the organization’s net income is distributed to the employees.

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Gain sharing: An incentive that rewards increased group productivity. Skill-based pay: An incentive payment plan that rewards employees for upgraded professional skills. Flexible benefits: A plan that allows employees to select benefits that best suit their needs. Group behavior Group: Two or more individuals who come together to achieve a common objective. Formal group: A working unit designated by the organizational structure. Informal group: A socially determined group of individuals. Command group: A manager and his or her immediate subordinates. Task group: A unit formed to accomplish a specific objective. Interest group: Individuals collaborating on a cause that is of concern to each of them. Friendship group: Individuals brought together by common interests and characteristics. Stages of group development: • • • • • group.

Forming: The first, uncertain stage of development. Storming: The second, conflicted stage of development. Norming: The third, bonding stage of development. Performing: The fourth, functional stage of development. Adjourning: For temporary groups, the fifth stage dissolves the

Sociometry: An analytical tool used in studying group dynamics. Sociogram: A diagram that maps-out social interactions in a group. It is created with data obtained via interviews and questionnaires. 69


The Extracted MBA

• Social networks: The links between a set of individuals. • Clusters: Groups within networks. • Prescribed clusters: Formal groups. • Emergent clusters: Informal groups. • Coalitions: A cluster that comes together to accomplish a prescribed task. • Cliques: Usually permanent informal friendship group. • Stars: Individuals with the most links in a social network. • Liaison: Individual who is not a member of any cluster who links two or more clusters. • Bridges: Individuals who belong to two or more clusters. • Isolates: Individuals who are not connected to any social network. Group structure Formal leader: Individual designated by organizational structure to lead subordinates. Roles: Expected behaviors of an individual in a given position. Role identity: Characteristic identified with a given role. Role perception: An impression by an individual of how he or she or she should behave in a certain role. Role expectations: An impression by others of how an individual should behave in a certain role. Role conflict: A clash between an individual’s role expectations. Norms: Behavioral characteristics that are standardized and expected in a group. Status: A social ranking imposed upon an individual by a group. Group demography: Similarities and differences between members of a group. Cohorts: Individuals in a group who share common characteristics.

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Cohesiveness: Degree of unity within a group. Nominal group technique: A decision-making mode by which group members meet and combine their judgments to make a decision. Delphi technique: A decision-making mode by which group members independently contribute their determinations. Conflict: Arises between individuals or groups when there is a disparity between goals, paths, ideas, and/or resources. Traditional view of conflict: Conflict is always counterproductive. Human relations view of conflict: Conflict is the inevitable product of human interaction. Interactionist view of conflict: Conflict is necessary for progress. Functional conflict: That which supports achieving organizational goals. Dysfunctional conflict: That which hinders progress. Five stages of the conflict process: 1. 2. 3. 4. 5.

Incompatibility Cognition and personalization Intentions Behavior Outcomes

Negotiation: A process by which two parties resolve conflict by compromise. Distributive bargaining: Negotiations that aim to divide up resources. Integrative bargaining: Negotiations that seek one or more settlements.

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The Extracted MBA

Extracted MARKETING

www.extractedmba.com/mkt.html

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Defined The process of executing the planned conception of advertising, pricing, and delivering goods and services, in return for money or other consideration. Product: Anything that can be marketed to satisfy a want or need. • • • • • •

Physical goods Services Persons Places Organizations Ideas

Market: All potential customers who share a common need or want and may be persuaded to make exchanges to satisfy those needs or wants. Production concept: The concept that consumers will show a preference for products that are readily available and competitively priced. Selling concept: Holds that in the absence of advertising, consumers will not purchase sufficient quantities of a manufacturer’s product. Marketing concept: The concept that by being more effective than competitors in advertising and delivery of goods, that an increased market share can be obtained. Customer needs • • • • •

Stated needs Real needs Unstated needs Delight needs Secret needs

Societal marketing concept: An organization’s analysis of societal trends, changes in needs, and targeting changing markets ahead of competitors.

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The Extracted MBA

Building customer satisfaction Customer delivered value: The difference between total customer value and total customer cost. Total customer value: The benefits a customer expects from a product or service. Total customer cost: The cost customers expect to incur in obtaining goods. Satisfaction: A customer’s feeling of pleasure or lack thereof in comparing the customer's actual product experience versus expectation. Core business processes • • • •

New product realization process Inventory management process Order to remittance process Customer service process

Customer relationship-building investments • • • • •

Basic marketing Reactive marketing Accountable marketing Proactive marketing Partnership marketing

Profitable customer: Is a purchasing entity that, over the course of the customer-business relationship, generates more revenue than the costs associated with supporting them. Opportunity and threat analysis Marketing opportunity: An area in which a company can operate profitably. Environmental threat: An unfavorable market trend or development that, if not addressed, will lead to deteriorating revenue flow.

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Marketing mix: The marketing tools employed to achieve marketing objectives. Marketing mix matrix Sales promotion Advertising Products Sales force Services → Public relations → Distribution channels → Customers Prices Direct mail Telemarketing E-commerce Marketing plan: Executive summary: Contains a summary of the marketing plan, including target market, marketing mix, bottom-line anticipated results, and a table of contents. Current market situation: Describes the target market and the organization’s current standing therein. Includes a comprehensive market description, product reviews, competitor analysis, and available distribution options. Threats and opportunity analysis: An assessment of untapped market resources as well as hazards that face the marketing plan. Objectives and issues: Highlights the desired end-state of the marketing plan, as well as milestones the organization will need to achieve to get there. Marketing strategies: Sets forth specific tasks that will achieve the objectives of the marketing plan. Action programs: Details how marketing strategies will be implemented (what to do; when it will be done; by whom). Budgets: A list of organizational resources that will be required to achieve the objectives, as well as the anticipated return on these investments.

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The Extracted MBA

Controls: A set of quantifiable benchmarks against which progress can be measured. Market Information System (MIS): A systematic information system that involves people, equipment, and procedures in the gathering, analysis and employment of market information. Scientific market research model • • • • • • • • •

Define the objective Analyze market situation Select information sources Identify problem-specific data Gather data Analyze data Prepare report Solve market problem Follow up

Methods of information gathering Primary sources • • • • •

Focus groups Surveys Market observations Interviews Experiments

Secondary sources • Internal reports • External reports (Internet, libraries, universities, etc.) Scanning the marketing environment Trend: A sequence of events that show a durable movement in a general direction. Fad: An unpredictable trend that generally surges then ends.

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Megatrend: A large, social, political, and technological change that form over a long period of time and substantially influence large groups of people. The demographic environment Global population growth: 6.2 billion people in 2000. Population age mix: Divided into six age groups • • • • • •

Preschool School age Teens Young adults age 25-40 Middle aged adults 40-65 Older adults 65+

Age subgroups • • • • • •

SKIPPIES: School Kids with Income and Purchasing Power MOBYS: Mother Older, Baby Younger DINKS: Double Income, No Kids DEWKS: Dual Earners with Kids PUPPIES: Poor Urban Professionals WOOFS: Well-Off Older Folks

Ethnic markets: Markets characterized by homogenous ethnic populations with needs and wants that differ from theirs. Educational groups: Markets characterized by groups of people of substantially similar levels of education and literacy. Domestic relations groups: Markets characterized by groups of people with similar relationship patterns (divorced, single parents, etc.). Natural environment: Resources that vary from region to region that have an impact on manufacturing and marketing operations. Raw materials: Materials that are processed into manufactured products.

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The Extracted MBA

Energy: The availability of cost-effective power sources to effect the manufacturing process. Laws that affect marketing Sherman Antitrust Act of 1890: Prohibits monopolies and efforts to compete unfairly in the marketplace. Federal Food and Drug Act of 1906: Prohibits false and misleading labeling. Federal Trade Commission Act of 1914: Established the Federal Trade Commission and chartered it to investigate and enforce under unfair competition legislation. Clayton Act of 1914: Supplemented the Sherman Act by specifying certain illegal anti-competitive actions. Wheeler-Lea Act of 1938: Placed advertising under the jurisdiction of the Federal Trade Commission. National Traffic and Safety Act of 1958: Established compulsory safety standards for automobiles and components thereof. Fair Packaging and Labeling Act of 1966: Requires manufacturers to state what exactly composes products they sell. Child Protection Act of 1966: Prohibits the manufacture and sale of hazardous toys and items children may use. Federal Cigarette Labeling and Advertising Act of 1967: Requires cigarette manufacturers to place the following statement on all packs of cigarettes they make: "Warning: The Surgeon General Has Determined That Cigarette Smoking Is Dangerous To Your Health." Truth-in-Lending Act of 1968: Requires lenders to state the actual costs of loans; outlaws the use of threats to collect on loans; restricts levels of allowable wage garnishment. Fair Credit Reporting Act of 1970: Ensures that consumer credit reports contain only accurate and pertinent information.

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Consumer Product Safety Act of 1972: Established the Consumer Product Safety Commission and charged it with establishing product safety standards, as well as setting fines for violations. Consumer Goods Pricing Act of 1975: Prohibits the use of price maintenance agreements among manufacturers and resellers. Equal Credit Opportunity Act of 1975: Prohibits discrimination in credit transactions based on age, sex, race, national origin, religion, or receipt of public assistance. Fair Debt Collection Practice Act of 1978: Prohibits creditors from making false statements or using unfair methods in debt collection activities. Toy Safety Act of 1984: Gives the government the power to swiftly recall dangerous toys. Consumer markets and consumer behavior Social class: Homogenous and enduring division in society that is characterized by a hierarchical structure, and whose members share similar values, interests, and behaviors. Upper uppers (<1%): The social elite as characterized by immense inherited wealth. Lower uppers (2%): People who have accumulated enormous wealth through exceptional achievement. Upper middles (12%): Career-oriented people who have neither significant family status nor unusual wealth. Middle class (32%): Average-earning white and blue collar workers. Working class (38%): Average-earning blue collar workers who lead a working-class lifestyle. Upper lowers (9%): Below average-earning people who earn wages above the poverty line and rely on little or no public welfare.

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The Extracted MBA

Lower lowers (7%): People on welfare rolls who are poverty stricken, with incomes below the poverty level. Reference group: A group of individuals that has a direct or indirect influence on a person’s behavior. Membership group: A group that has a direct influence on an individual’s behavior. The consumer buying process Problem recognition: The consumer identifies a difference between a current and desired state. Information search: The consumer seeks information on satisfying the identified need. • Personal sources: Family, friends, neighbors, associates. • Commercial sources: Advertising, salespersons, dealers, displays, packages. • Public sources: Media, consumer rating sources, Internet. • Experiential sources: Product use and handling. Evaluation of alternatives: Identifying the product that best satisfies the identified need at the best price. Purchase decision: The elimination of alternatives and the process of product selection. • Attitudes of others: Affects the purchase decision by encouraging or dissuading to or from prospective products. • Unanticipated situational factors: Events that may alter the purchase decision because of changed circumstances that alter the identified need, or the ability to afford the selected product. • Perceived risk: Higher perceived risk in product selection may discourage a buyer, while lower perceived risk may encourage a purchase. Business markets and organizational buying behavior

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Organizational buying: The decision-making function by which organizations determine needs and the means of satisfying them. Characteristics of business versus individual consumption • • • • • • • • • • • •

Fewer buyers Larger buyers Close buyer-supplier relationship Geographically concentrated buyers Derived demand Inelastic demand Fluctuating demand Professional purchasing Several buying influences Direct purchasing Reciprocity Leasing prevalence

Buying circumstances Straight rebuy: A situation where the purchasing manager reorders goods on a routine basis. Modified rebuy: A buying situation where the purchasing manager alters specifications and/or delivery terms New task: A buying situation where the purchasing manager orders goods for the first time. People involved in the buying process Initiators: The individuals who make requests for goods. Users: Those who use requested products. Influencers: Individuals who have a say in purchase decisions. Deciders: Those who determine product requirements and those who will supply them. Approvers: Managers who authorize proposed purchases.

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The Extracted MBA

Buyers: People charged with making purchases. Gatekeepers: People who are in a position of blocking purchases due to their control over information flow. Industry analysis Industry: A group of companies that offer products or product classes that are close substitutes for each other. Monopoly: The control of an industry by a single company. Regulated monopoly: A government-sanctioned and controlled monopoly, such as utility companies. Unregulated monopoly: An illegal monopoly characterized by high product prices that are offered with few or no alternatives. Oligopoly: The control of an industry by a few large companies. Monopolistic competition: Occurs when many companies operating in the same geographic region are able to differentiate to the extent that they are able to control market segments and command premiums for products and services. Pure competition: Occurs when many companies offer the same products or services at the same prices. Product saturation Share of market: The percentage of a target market that a company controls. Share of mind: The percentage of consumers who primarily associate a brand with a product or product class. Share of heart: The percentage of consumers who would purchase a particular brand if price was not a consideration. Identifying competitors

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Brand competitor: A competitor who offers similar products to the same customers at similar prices. Industry competitor: A competitor who offers products in the same class, regardless of price. Form competitor: A competitor who offers products that perform similar functions. Generic competitor: A competitor who competes for the same consumer dollars. Competitor reaction characteristics Laid-back competitor: A competitor who does not react quickly or with much intensity to a rivalâ&#x20AC;&#x2122;s actions. Selective competitor: A competitor who reacts only to certain types of marketing attacks, and not to others. Tiger competitor: A competitor who reacts quickly and aggressively to marketing attacks. Scholastic competitor: A competitor who reacts in an unpredictable pattern. Selecting target markets Mass marketing: The mass production, mass distribution, and mass promotion of a product to all buyers. Segment marketing: The production, distribution, and promotion of products to groups of buyers in a market. Niche marketing: Entails marketing to a narrow field of consumers whose needs are viewed as unsatisfied. Local marketing: The selection of a relatively small geographical area to promote and distribute products and services. Individual marketing: The one-to-one selling of customized products, tailored to meet the needs of individuals. 83


The Extracted MBA

Mass customization: The mass production of goods that meet the needs of individual consumers. Self-marketing: The action of consumers to seek-out goods and services that satisfy their needs. Patterns of market segmentation Homogenous preferences: A market segment where all of the consumers share similar preferences. Diffused preferences: A market segment characterized by consumers who share few preferences. Clustered preferences: A market where groups therein exhibit various homogenous preferences. • Also known as natural marketing segments. Stages of market segment identification 1. Survey stage 2. Analysis stage 3. Profiling stage Bases for market segmentation Geographic: The division of markets into regions, such as nations, states, and cities. Demographic: The division of markets into groups based upon societal factors. • • • • •

Age Gender Income Generation Social class

Psychographic: The division of markets based upon how they live.

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• Lifestyle • Personality Behavioral: The division of markets based upon product knowledge, attitudes, product use, and responses to products. • • • • •

Occasions Benefits User status Usage rates Loyalty status Hard-core loyals: Consumers who buy a single product all the

time. Split loyals: Consumers who are loyal to a few brands. Shifting loyals: Consumers who shift their loyalties from one brand to another. Switchers: Consumers who show no brand loyalty. Deal prone: Buy based on best price. Variety prone: Buy different brands every time. • Buyer-readiness stage • Attitude Upbeat enjoyers: Consumers who feel they are living in their best years. Insecures: Consumers who have had little success in life and believe that their best years are behind them. Threatened actives: Consumers who worry about crime but maintain an optimistic outlook. Financial positives: Consumers who are financially secure and comfortable with the prospect of change. Market positioning

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The Extracted MBA

Volume industry: An industry in which competitors can gain few but substantial advantages. Stalemated industry: An industry in which there are few available opportunities for gaining advantages. Fragmented industry: An industry where competitors encounter many opportunities for differentiation, but the potential gains are small. Specialized industry: An industry where competitors face many opportunities, many of which have potentially significant gains. Competitive differentiation: The designing of a set of substantive differences in one’s product to make it more appealing to discriminating consumers. Features: Characteristics that augment a product’s basic function. Performance quality: The level at which a product operates in comparison to the competition. Conformance quality: The degree to which products meet stated qualitative levels of performance. Durability: Describes a product’s life-span in comparison with others’. Reliability: The measure of probability that a product will not malfunction within a specific time. Reparability: The measure of the relative ease of restoring a product to operation. Style: Describes the products look and feel to the consumer. Design: The specifications of the products construction. Service differentiation: The value-added services that promote a product and increase its worth to the consumer. Ordering ease: The measure of effort required, on the part of the consumer, to order products and services. 86


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Delivery: Describes how well and timely a product is delivered after ordering. Installation: Describes what is done to make the product fully operational after delivery. Customer training: The level of expertise imparted to customer employees on the operation of the delivered product. Customer consulting: Refers to the advice support system the retailer or manufacturer offers for installed equipment. Maintenance and repair: Describes the service program offered with the purchased product. Personnel differentiation: The level to which emp loyees are trained and motivated. Competence: The employees have the requisite skills and knowledge. Courtesy: The employees treat customers with respect and consideration. Credibility: The level of confidence the customer has in the employees’ trustworthiness. Reliability: The employees perform accurately and consistently. Responsiveness: Describes how quickly employees react to customers’ problems and inquiries. Communication: The effort employees make to effectively relay information to customers. Product management Customer value hierarchy • Potential product • Augmented product 87


The Extracted MBA

• Expected product • Basic product • Core product benefit Product hierarchy • Need family: The core needs that drive the existence of a product family. Example: Mobility • Product family: The product classes that can satisfy core needs and possess a certain amount of functional congruity. Example: Mass transit • Product class: A group of products within a product family that reasonably can satisfy the core need. Example: Air transportation • Product line: A group of products within a product class that perform functionally similar tasks. Example: Airlines • Product type: A group of items within a product line that share one or more common characteristics in function. Example: Passenger airlines • Brand: The name that distinguishes one or more items in a product line. Example: American Airlines • Item: A distinct unit within a brand that actually performs the need-satisfying function. Example: American Airlines flight 995 nonstop from New York to Paris. Product classes Durability • Nondurable goods: Goods that are sold to be consumed. • Durable goods: Tangible goods that are designed to survive repeated usage. • Services: Intangible, variable, and perishable performed functions.

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Consumer goods • Convenience goods: Goods that are purchased on a regular basis, with little effort. • Shopping goods: Goods that are typically purchased based on quality, suitability, price, and style. • Specialty goods: Goods with distinguishing characteristics, such as brand identity, that consumers make an effort to purchase. • Unsought goods: Goods that consumers are unaware of until they are seen physically or through advertising. Industrial goods • Manufacturing materials • Raw materials: Farm products and natural resources. • Manufactured materials: Component materials and parts that are used in producing final products. • Capital items: Installations and durable machinery that enables an organization to produce finished products. • Supplies and business services: Short-lived products and professional services that aid in the manufacturing process. Service management Service: A function that one party can perform for another that satisfies a need. Pure tangible good: A tangible good that is offered with no accompanying service. Tangible good accompanied by service: A product that is offered with supporting service. Hybrid good: A product that is offered equally as a good and a service. 89


The Extracted MBA

Service accompanied by minor goods and services: A performed act that affords the consumer with items and services incidental thereto. Pure service: A performed function that has no tangible characteristics.

Pricing strategy Selection of pricing objective → Determination of demand → Estimating costs → Analysis of competing prices → Selection of pricing method → Determination of price Selection of pricing objective • • • • • •

Survival Profit maximization Revenue maximization Maximizing sales growth Maximizing market skimming Product quality leadership

Determination of demand • • • • • • • • •

Unique value Substitute awareness Difficult comparison Total expenditure End benefit Shared costs Sunk investment Price quality Inventory

Estimating costs • Variable costs • Fixed costs • Accumulated production costs

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Analysis of competing prices • Competitor pricing • Industry research Selection of pricing method • • • • • •

Markup pricing Target-return pricing Perceived value pricing Value pricing Going rate pricing Sealed-bid pricing

Determination of price • The aggregate of the above procedure. Marketing channels: Interdependent organizations that work together to bring a product to the consumer. Channel functions Information: The collection and distribution of marketing research. Promotion: The creation and presentation of advertising designed to make potential customers aware of products. Negotiation: The process by which final prices on goods and services are agreed upon. Ordering: The process of communicating to the manufacturer the intent to order products. Financing: The procurement and allocation of money to support maintaining inventories at different points in the marketing channel. Payment: The buyer’s settling of bills for items received. Channel levels Zero-level: Manufacturer sells directly to the buyer. 91


The Extracted MBA

One-level: Manufacturer sells through a single intermediary. Two-level: Manufacturer sells through two intermediaries. Ad nauseum…

Marketing logistics Retailing: The selling of products to consumers for predominately nonbusiness uses. • Specialty stores • Department stores • Supermarkets • Convenience stores • Discount stores • Off-price retailers: Buy at less than wholesale and pass the savings on to consumers. • Factory outlets • Independent off-price retailers • Warehouse clubs • Superstores: Stores with more than 35,000 square feet of space designed to meet consumer needs in one location. • Combination stores • Hypermarkets • Catalog showrooms • Web-based retailing Nonstore retailing • • • • • • •

Direct selling One-to-one selling Party selling Multilevel marketing Direct marketing Automatic vending Third-party buying service

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• • • • • •

Central business districts Regional shopping centers Community shopping centers Strip malls Malls Within larger stores

Wholesaling: The selling of products to retailers, usually in large quantities. • Merchant wholesalers • Full service wholesalers: Provide a full line of services, from product procurement to delivery to the retail level. • Wholesale merchants • Industrial distributors • Limited service wholesalers: Offer fewer services than the full service variety. • Cash and carry wholesalers • Truck wholesalers • Drop shippers • Rack jobbers: Serve grocery and drug stores with non-food items. • Producers’ cooperatives • Mail order wholesalers • Brokers • Agents • Manufacturers’ agents • Selling agents • Purchasing agents • Commission merchants Advertising: Any form of paid promotion of ideas, goods, or services. Informative advertising: Designed to acquaint a market with a product, particularly a new one. Persuasive advertising: Designed to convince consumers to select a particular brand or product over that of a competitor’s. Reminder advertising: Designed to keep mature products in the consumers’ minds. 93


The Extracted MBA

Advertising styles • • • • • • • • • •

Slice of life Lifestyle Fantasy Mood Image Musical Personality symbol Technical expertise Scientific evidence Testimonial evidence

Reach, frequency, and impact Media selection: The process of determining the media that will provide the broadest dissemination and return the most on investment. Reach: The number of consumers exposed to a particular media at a given time. Frequency: The number of times within a specified time that consumers are exposed to advertising messages. Impact: The value of the advertising in terms of the effect it has on consumers. Sales promotion: A diverse set of short-term incentives to encourage consumers to visit retail locations and purchase merchandise. • • • • • • • • • • • 94

Free samples Coupons Cash refund offers Cents-off deals Free gifts Prizes Patronage awards Free trials Tie-in promotions Cross-promotions Point-of-purchase (POP) displays


Kelly Allen Vinal

Extracted STRATEGIC MANAGEMENT

www.extractedmb a.com/strat.html

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The Extracted MBA

Defined The formulation and implementation of broad plans for the purpose of achieving the organization’s goals. • Formulation of the organization’s mission statement. • Development of the organization’s profile that demonstrates internal conditions and capabilities. • Assessment of the organization’s external environment that includes identifying threats and other entities that affect operations. • Assessment of organizational options by contrasting resources with what exists in the external environment. • Identification of the most effective options in light of the organization’s mission statement. • Selection of long-term objectives that will best capitalize on the selected options. • Development of short-term strategies that best achieve long-term objectives. • Implementation of strategic choices by employing organizational resources. Characteristics of strategic issues • Require executive decisions • Consume substantial organizational resources • Significantly affect long-term prosperity • Are future-oriented • Have significant multifunctional impact • Require careful consideration of the organization’s external environment. Strategic levels • Corporate 96


Kelly Allen Vinal

• Business • Functional Defining the organizational mission Purpose • Establishes unanimity of purpose within the organization. • Provides a basis for allocating resources. • Establishes the organizational climate. • Serves as means by which employees can identify with the organization’s reason for existence. • Enables managers to implement tasks in support of goals. Mission statement components • • • • • • • •

Market identification Product/service identification Geographic market area Applied technology Organizational philosophy Organizational self-image Concern for the social responsibility Survivability through growth and profitability

Environmental forecasting Critical forecasting steps • Determine which environmental variables sustain the organization. • Select the most reliable and comprehensive sources of information relating to the operational environment. • Examine forecasting procedures. • Incorporate forecasts into strategic management program. • Monitor critical elements of the forecasts and adjust long-term strategic objectives accordingly. Forecasting approaches 97


The Extracted MBA

Quantitative models • Econometric: Simultaneous groups of multiple regression equations. • Single and multiple regression: Variations in the dependent variables are accounted for by variations on one or more independent variables. • Time series: Linear, exponential, or other types of statistical projections. • Trend extrapolation: Linear or exponential smoothing by averaging past performance. Qualitative models • Sales force estimates: The averaging of salespersons’ forecasts. • Executive force estimates: The joint preparation of forecasts by department heads. • Customer surveys: Gathering projection data from potential customers. • Scenario development: Forecasts based upon potential reactions to potential events. • Delphi method: Consensus that is achieved with assistance from experts. • Brainstorming: The creation of ideas in a group setting. Long-term strategic objectives • • • • • 98

Profitability Productivity Competitive position Employee development Employee relations


Kelly Allen Vinal

â&#x20AC;˘ Technology leadership â&#x20AC;˘ Social responsibility Speed as a function of strategic competitive effectiveness Customer responsiveness: Responding to consumer complaints and issues more rapidly and efficiently than the competition. Product development: Minimizing the amount of time it takes from the drawing board to the marketplace. Product improvements: Gaining competitive advantage by rapidly developing and implementing product design enhancements. Delivery and distribution: Strategically implementing programs that minimize order-to-ship times. Information flow: Strategically capitalizing on technology to maintain a competitive edge by offering more communication channels. Keys to success in emerging industries Influence: The ability to set standards and manipulate paradigms. Quality: Improving product quality more rapidly than emerging competition. Relationships: Forging enduring supplier /customer relationships at the earliest possible point in the emerging industry. Technology: Establishing the dominant technology early in the emerging market. Competitive forecasts: Anticipating what entities may enter the emerging market. Keys to success in maturing industries Product discipline: Eliminating low-yielding product lines and concentrating on more profitable ones.

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The Extracted MBA

Process innovation: Designing low-cost product improvements to reinvigorate the market. Cost reduction: Downsizing, streamlining, and eliminating bloated programs. Buyer selection: Choosing loyal customers who are likely to purchase large quantities of product for the long-term. Horizontal integration: Purchasing weaker competitors to increase market vitality. Expansion: Moving to domestic and international markets that are less developed. Keys to success in mature and declining industries Opportunity: Focusing on market segments that show the most potential for growth. Quality: Differentiate from competitors by improving product and support quality. Efficiency: Analyze the organization and implement programs to increase efficiency and reduce costs. Important elements of strategic consideration The competitive environment • • • •

Quantity of competitors Size of competitors Price wars Multi-dimensional competition

Bargaining power of customers • Size of customer organizations • Size of customer purchases • Ability to vertically integrate

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Substitute product threats • • • • •

Technological maturity Product complexity Market diversity Barriers to entry Distribution system effectiveness

Economics • Sales volatility • Demand cyclicality • Market growth Financials • Average profitability • Average leverage • Credit environment Sociopolitical elements • Government intervention/regulation • Local community • Ethical environment Cost position • • • • •

Economies of scale Local manufacturing costs Overhead Production waste Labor rates

Market differentiation • • • •

Promotion effectiveness Product quality Corporate image Brand awareness

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The Extracted MBA

Response time • Production flexibility • Order-to-ship times • Customer service focus Financial strength • • • • • •

Solvency Liquidity Break-even point Cash flows Profitability Growth in revenues

Human resources • • • • • •

Turnover Employee skills Employee compensation packages Morale Managerial competence Unionization

Public standing • Goodwill • Reputation • Image Implementation through action plans Functional tactics in Production/Operations Management (POM) Facilities and equipment • • • •

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Centralization of facilities Integration of separate processes Automation of production Optimization of production


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Purchasing • Identifying sources or raw materials • Establishing long-term supplier relationships • Hedging on commodities Operations planning and control • • • •

Establishing an optimum inventory levels Controlling inventory (LIFO/FIFO) Maintenance program geared for repair or prevention Establishing effective safety program

Functional tactics in strategic marketing Product/service • • • •

Promotion of flagship products Capitalizing on the most profitable products Selection of the most effective product/service image Promoting the product/service as needs-satisfying

Price • • • •

Identifying price-competition intensity Selection of appropriate rebates/discounts Pricing commodities commensurately with local standards Determining gross profit margins

Location • Selection of geographic target market • Positioning optimally for consumers and distributors • Organizing sales force to target key geographic sub-areas Promotion • Selecting the most effective advertising channel • Identifying media that best support strategic plans

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The Extracted MBA

Functional tactics in strategic HRM Recruitment • Identifying organizational vacancies • Establishing methods of recruitment • Introducing new employees to the organization Career development • Determining future HRM needs • Establishing in-class and computer-based training • Developing career tracks and training to fill them Compensation • Providing appropriate compensation packages • Establishing pay-scales that align with career tracks • Providing adequate incentive to retain productive employees Evaluation and discipline • Establishing formal periodic review system • Disseminating rules and enforcing them equitably • Controlling performance and providing feedback Labor relations • Establishing a positive working relationship with unions • Enforcing strict equal opportunity programs • Providing safe and ergonomic working conditions Functional tactics in strategic R&D Basic research • Emphasizing breakthrough research or improvement • Focusing R&D assets on improving lagging operations • Determining which projects will yield the greatest returns

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Time horizon • Establishing long and short-term priorities • Setting time standards for generic research processes • Focusing on either marketing or production orientation Organizational position • Determining what research is to be done in-house • Establishing lines-of-communication between R&D and the organizational matrix • centralizing or decentralizing R&D, as appropriate Functional tactics in strategic finance Capital acquisition • • • •

Determining the acceptable cost of capital Establishing optimum proportional short and long-term debt Balancing between internal and external funding Pursuing the most cost-efficient lease terms

Capital allocation • Prioritizing capital expenditure programs • Formalizing capital-outlay authority • Investing in durable equipment Dividend and working capital management • • • •

Determining earnings/dividend ratios Establishing liberal/conservative credit policies Establishing effective debt-collection policies Limiting accounts to minimums and maximums

Strategic control: Tracking strategy to ensure success by addressing problems, and making adjustments as necessary. Premise control: Periodic review of the strategic process to ensure the premise thereof is still valid.

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Environmental factors: Ensuring that the implementation of the strategy accounts for changes in the strategic environment. Industry factors: Ensuring that the strategy is adjusted as changes occur in the industry. Implementation control: Assessing and adjusting the implementation of the strategy at key points in the timeline. Monitoring strategic thrusts: Analyzing the sub tasks involved in strategy implementation. Milestone reviews: Analyzing progress at predetermined points in the implementation process. Special alert: A policy of thorough reconsideration upon the occurrence of significant events that affect the strategic plan. Operational control systems • • • •

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Set performance standards Measure performance Target deviations of strategic standards Correct deviations


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Extracted business law www.extractedmba.com/law.html

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Types of laws Constitution: The fundamental law of a nation or state that establishes a structure of government and prescribes the limits of power of said government. Statutes: Laws that are created by Congress and state legislatures. Case law: Laws created and implemented by judges. Administrative regulations and decisions: Laws created by agencies empowered by congress or state legislatures to do so. Treaties: Agreements between the president and foreign nations that are ratified by 2/3 vote in the Senate. Ordinances: Laws passed by governmental organizations subordinate to state governments. Executive orders: Laws issued by the president and state governors. Priority Rules 1. The Constitution and its pursuant federal laws, as well as treaties reign supreme over all other laws. â&#x20AC;˘ Known as the Supreme Law of the Land. 2. Constitutions defeat all conflicting laws in their respective domains. 3. Treaties that conflict with federal statutes in domestic matters win or lose based upon which was enacted most recently. The most recent normally wins. 4. Statutes defeat administrative regulations and decisions. 5. Statutes and delegated regulations defeat inconsistent case law.

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Law classifications Criminal and Civil law Criminal law: Statutes that define criminal offenses and prescribe punishments. Civil law: Statutes that apply to civil rights and remedies. • Also known as municipal law. Substantive and Procedural law Substantive law: Sets the rights and obligations of individuals. Procedural law: Rules that control government behavior. Public and Private law Public law: Addresses the relationships between governments and citizens. Private law: Establishes legal frameworks for conduct between citizens. Jurisprudence: Legal philosophical schools of thought. Legal Positivism: Law is the command of a recognized political authority. Natural Law: Law that is not unjust is the command of a recognized political authority. American Legal Realism: What lawmakers actually do. Sociological Jurisprudence: Law is shaped by the dominant social culture. Functions of law: • Peacekeeping • Checking government power 109


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• • • •

Facilitation of planning Promotion of economic growth Promotion of social justice Defense of the environment

Role of courts in private disputes State Courts Courts of limited jurisdiction: Courts that adjudicate minor criminal matters and civil complaints involving relatively little money. • Small Claims Court • Municipal Court • Justice of the Peace Court Trial courts: Courts that adjudicate major criminal infractions and civil complaints, characterized generally unlimited civil damages. State Appeals Courts: Courts that issue legal opinions in matters submitted by appeal in trial courts, either affirming findings or remanding cases for further hearings. State Supreme Courts: Highest of state courts that issue constitutional opinions on matters submitted by appeal in appellate courts. United States Supreme Court: Issues constitutional opinions on matters submitted on appeal from state supreme courts. State court jurisdiction: The power to hear a case and make a determination that is binding upon the parties. Subject-matter jurisdiction: The court’s power to adjudicate the type of case. In personam jurisdiction: Based on location of defendant in relation to the scope of the court. In rem jurisdiction: Based on location of property in relation to the scope of the court.

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Quasi in rem jurisdiction: Based on assets of a defendant that are not in the jurisdiction of the court, but may be attached if the plaintiff prevails. Venue: Place where suits may be brought, as determined by statute. Federal Courts Federal District Courts: Federal trial courts that exist in every state and are grouped in one of 13 Federal Judicial Circuits. Specialized courts: Federal courts that adjudicate matters that focus on narrow sections of U.S. Code. Claims Court: Hears cases presented against the United States. Courts of International Trade: Adjudicates litigation relating to international commerce. Tax Court: Hears cases involving the IRS. Bankruptcy Courts: Serve as adjunct courts to district courts in settling financial matters between debtors and creditors. Federal Courts of Appeals: Situated in one of the 13 circuits, these courts issue opinions on appeals from the district courts, the Tax Court, and the Bankruptcy Court. Court of Appeals for the Federal Circuit: Hears matters from the Claims Court, the Court of International Trade, as well as other specialized issues. United States Supreme Court: Issues constitutional opinions on matters submitted on appeal from the Federal Appeals Courts. Civil procedure Adversarial system: System where plaintiffs and defendants, usually through their attorneys, present contrary facts and interpretations of law before an impartial judge and/or jury. Summons: Issued by the court to a defendant upon filing, by the plaintiff, of a complaint. It notifies the defendant of the fact that a 111


The Extracted MBA

complaint has been filed, by whom, and that the defendant is required to make an appearance before the court. Pleadings: Documents filed by litigants that state their initial positions in the case. Complaint: Shows the plaintiff’s facts that entitle them to legal relief by the court. Response: A denial or admission to the allegations in the complaint by the defendant. Affirmative defense: affirms the allegations in the complaint but denies culpability based on a breach of contract by the plaintiff. Counterclaim: denotes a response that declares the complaint is fraudulent, and seeks relief in damages caused by a breach by the plaintiff. Reply: Point-by-point response by the plaintiff to a defendants response or counterclaim. • Allowed in few jurisdictions. Motion to Dismiss: A motion by the defense that states that the plaintiff has no case and asks the judge to dismiss it. If successful, the defendant wins. If not, the case proceeds. Discovery: The sharing of evidence between the plaintiff and the defendant. Depositions: Oral examination, administered under oath, of a party or a party’s witnesses. Interrogatories: Written questions answered under oath and in writing by a party or a party’s witnesses. Stipulations: Agreements between the litigants of facts and legal interpretations. Requests for evidence: Copies of documents and other items of relevance to the case. 112


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Expert examinations: Requests for examinations of the witnesses or evidence by tenured professionals. Summary judgment: A ruling before trial in the case based upon the evidence presented. Pretrial Conference: An informal meeting between the judge and attorneys at which stipulations are agreed to and trial rules are set. Trial Jury selection: Process by which jurors are screened by opposing attorneys to determine suitability for judging the case. Only necessary in jury trials. â&#x20AC;˘ Known as voir dire. Removal for cause: Occurs when an attorney convinces a judge that a particular potential juror harbors a bias that might render them unable to be impartial in the case. Peremptory challenges: Allows each attorney to remove potential jurors without cause. Opening statements: Brief statements by each side outlining their opposing positions. Case presentation: The plaintiff first states his or her case by presenting evidence and witness testimony, as legally allowed by the judge. The defense then presents a rebuttal case, with its own evidence and witness testimony. Closing arguments: Statements by attorneys that summarize their respective cases. Charge to the jurors: Instructions by a judge that inform the jurors of their legal responsibilities in deciding the case. Used only in jury trials. Verdict: A determination of the outcome of a case that identifies one of the parties as victorious. 113


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General verdict: A verdict that requires only that a jury declares a winner, and if appropriate, the relief granted. Special verdict: A verdict in which the jury is charged to make findings based on the facts and the judge then applies the law to those findings. Directed verdict: Occurs when the judge removes the case from the jury and makes a judgement for the defendant or plaintiff. Judgment notwithstanding the verdict: A finding by the judge that reverses that of a jury. â&#x20AC;˘ Known as the judgement non obstante veredicto, or judgement n.o.v. Appeal: Motion for consideration of an appellate court to reverse findings based on errors by the trial judge in applying the law. Appellate courts can affirm, reverse, or do a combination of both on different arguments in a case. Judgment enforcement: If the losing defendant refuses to pay the damages awarded by the court, the plaintiff obtains a writ of execution that enables the sheriff to seize property for auction. Class action: A lawsuit that involves several plaintiffs and one or more defendant that combines many potential cases into one. Alternative dispute resolution Settlement: Compromise that is reached by the litigants at any point in the trial that ends the case. Arbitration: Case outcome is determined by an unbiased, mutually agreed-upon third party (the arbitrator). Arbitration clause: A contractual agreement that defines arbitration as the chosen method of dispute settlement. Compulsory arbitration: Assignment of an arbitrator that is statutorily required of certain government employee unions. 114


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Court-annexed arbitration: Occurs when a judge orders arbitration over civil litigation. Mediation: Negotiation between the parties that is guided and facilitated by a neutral third party (the mediator). Mediation agreement: The successful resolution of mediated talks that is enforceable under contract law. Court-annexed mediation: Occurs when a judge compels parties to settle disputes through mediation. Minitrial: An informal private trial based on mutually accepted rules that usually includes a neutral advisor as judge and senior management sitting on the jury. The United States Constitution Separation of powers The President: Chief executive officer granted powers, by Article II, to sign into effect or veto laws passed by Congress. The President is also charged with enforcement of existing laws, signing treaties, and commanding the armed forces. The President is elected by electoral college for four-year terms, with a limit of two terms. The Congress: Legislative branch of government established by Article I. The House of Representatives: Lower chamber of Congress comprised of 435 members and elected by districts for two-year terms. The Senate: Upper chamber of Congress comprised of 100 representatives with two members representing each of the 50 states, elected for six-year terms. The Judiciary: Legislative branch of government vested with judicial power, established by Article III. Justices are appointed by the President and confirmed by the Senate. How bills become laws: 115


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First reading: When a Senator or a Representative introduces a bill, he or she or she sends it to the clerk of his house, who gives it a number and title. Tabling: A bill is tabled when the committee debating it determines that it is unnecessary. Second reading: After committee approval, the clerk reads the bill sentence by sentence to the house. Members may then debate the bill and offer amendments. Cloture rule: Specified amount of time the House has to debate a bill. Filibuster: In the Senate, where there is no cloture rule, a filibuster occurs when one or more senators holds the floor until a bill dies. Third reading: Where the bill is put to a vote by voice or roll call. Submission: The bill then goes to the other house of Congress, where it may be defeated, or passed with or without amendments. If the bill is defeated, it dies. If it is passed with amendments, a joint Congressional committee must be appointed by both houses to iron out the differences. Submission to the President: After its final passage by both houses, the bill is sent to the president. Approval: The bill becomes law if the President signs or retains it for a period of 10 days (with the exception of Sundays) without signature while congress is in session. Veto: The bill is rejected and sent back to congress. Pocket veto: Occurs when the president refuses to sign a bill within 10 days, and congress has adjourned. Override: When both chambers of congress approve a bill by a 2/3 supermajority, the bill becomes law. Criminal Justice

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Crime: A public wrong as prohibited by state or federal law. Felony: A serious crime that requires significant moral culpability by the perpetrator and is punishable by severe sanctions. Misdemeanor: A lesser crime, involving much less moral culpability than a felony, and is punishable by less severe sanctions. Infraction: A minor offense that is generally characterized as a quasi-crime. Elements of a crime: The government must establish the following in pursuing a criminal in court: • That the act violated a criminal statute, • That the crime was committed by the accused, beyond a reasonable doubt, and • That the accused possessed the capacity to form criminal intent. Prior Statutory Prohibition: The Constitution prohibits retroactive prosecution for violations of enacted statutes. • Also known as ex post facto criminal laws. Criminal procedure Arrest: Apprehension of a suspect in a crime by a police agency where a suspect is restrained and made aware of his or her constitutional rights. Booking: Administrative procedure that documents an arrest. Bail: Often granted after booking or the initial appearance in court for suspects based upon the likelihood of flight from prosecution, as well as the seriousness of the crime. Initial appearance: A prompt appearance before a magistrate where the suspect is read his rights, informed of the nature of the charges, and given an opportunity to make a pleading (in misdemeanor cases only).

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Preliminary hearing: A hearing before a judge or grand jury where the prosecutor seeks to establish probable cause as to the guilt of the defendant. Information: Charges filed by a prosecutor after the determination by a judge that probable cause exists. Indictment: Returned by a grand jury after they determine that probable cause exists. Arraignment: Court hearing where the defendant is charged and given the opportunity to plead guilty, not guilty, or no contest. Trial: Identical to that of civil procedure, with the exception that the jury must unanimously find guilt beyond a reasonable doubt. Sentencing phase: Hearing before the jury, or if appropriate, the judge, where evidence is presented by the prosecution and defense to establish the appropriate sanctions to be imposed upon the convicted party. Constitutional safeguards Fourth Amendment: Protects against unreasonable searches and seizures. Fifth Amendment guarantees: • • • • • •

Due process Presumption of innocence Prohibition of vague criminal statutes Procedural fairness Double jeopardy clause Right to silence

Eminent domain: Allows for government taking of property, provided that the taking is for public use, and the owner must receive just compensation. Sixth Amendment guarantees: • Speedy trial 118


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• Impartial jury • Confrontation and cross-examination of prosecutorial witnesses • Right to counsel Miranda rights: A requirement of law enforcement officials to inform suspects of their rights before they submit to questioning. Eighth Amendment: Forbids cruel and unusual punishment. Corporate crime White-collar crime: Depicts nonviolent criminal activity engaged in by business organizations and businesspeople. Regulatory offences: Violations of regulatory statutes that can result in criminal and civil sanctions. Fraud: Obtaining money or property by willful misrepresentation. Bribery: Attempting to influence official decisions by offering money, gifts, favors, or any other inducements. Racketeer Influenced and Corrupt Organizations Act of 1970: Known as the RICO, designed to counter organized crime. Broadly written, RICO has been applied over the years to many cases of unethical business practices. Criminal RICO: Prohibits more than 30 corrupt activities and requires proof of the following predicate offenses: • Use of income derived from a pattern of racketeering activity to acquire an interest in an enterprise. • Acquire or maintain an interest in an enterprise through a pattern of racketeering activity. • Conduct or participate in the affairs of an enterprise through a pattern of racketeering activity. • Conspire to commit any of the preceding offenses.

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Civil RICO: Allows for compensation of victims of businesses engaging in activity prohibited by the RICO act. Intentional torts Tort: An intentional civil wrong against an individual and his or her property that requires compensation by the offending party for resulting damages. • Denial of personal rights • Assault: The apprehension of battery. • Battery: The intentional, harmful, or offensive touching of another without consent. • False imprisonment: The intentional confinement of an individual for any amount of time, without his or her consent. • Defamation: The unprivileged willful publication of false and defamatory statements that damage the reputation of another. • Libel: Defamatory statements in physical form, such as in writing or in picture form. • Slander: Oral defamation that generally requires one of the following false statements to presume injury: • • • •

That a person has committed crimes. That a person has a loathsome disease. That a person is professionally incompetent. That a person engaged in serious sexual misconduct.

• Defense: Truth is an absolute defense to the tort of defamation. • Invasion of privacy: The infringement on a person’s right to be left alone. • Intrusion on solitude: The intentional intrusion on a person’s solitude where that intrusion would be construed by a reasonable person to be highly offensive. 120


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• Publicity concerning private facts: Making public personal facts of an individual where that publicity would be construed by a reasonable person as being highly offensive. • False light: Casting a person in the public in a false light where that image would prove highly offensive to a reasonable person. • Appropriation of name or likeness: The use of a person’s name or likeness for commercial purposes without authorization. • Infliction of emotional distress: The infliction of severe emotional harm, as validated by competent medical authorities. • Misuse of legal proceedings: The use of legal proceedings to cause harm to an individual. • Malicious prosecution: False criminal prosecution. • Wrongful use of civil proceedings: False civil proceedings. • Abuse of process: Initiation of legal proceedings for a purpose other than the relief sought. • Fraud: False statements of material facts that cause harm to an individual due to their reliance on them. • Scienter: An element of fraud that establishes that the maker of the false statement knew the statements to be wrong. • Denial of property rights • Trespassing: A person is liable for trespassing if he or she or she commits one of the following acts: • Intentionally and without consent enters another person’s property. • Unlawfully remains on land legally entered.

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• Unlawfully causes anyone or anything to enter someone else’s property. • Refuses to remove anything he or she or she has a duty to remove. • Nuisance: Unlawful and unreasonable denial of a person’s right to use and enjoy his or her property. • Conversion: The intentional act of dominion over someone else’s property. Negligence and strict liability Negligence: The plaintiff must prove the following elements to prevail in a negligence suit: • Duty: That the defendant had an obligation to not injure the plaintiff. • Breach: That the defendant breached the duty to not injure the defendant. • Injury: That the defendant’s breach of duty was the proximate cause of the plaintiff’s injury. Negligence per se: The doctrine that provides that someone who violates a statute designed to protect others and injures someone as a result, is guilty of negligence. Res ipsa loquitur: “The thing speaks for itself.” Holds that: • The defendant possessed total control over the instrument that caused injury. • The harm that was caused would not have normally occurred in the absence of the defendant’s negligence. • The plaintiff in no way caused his or her own injury.

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Defenses to negligence Contributory negligence: Plaintiffs who failed to exercise reasonable and prudent care for their own safety are barred from recovery if their own negligence was a significant factor in their injury. Comparative negligence: Provides a percentage of damages in inverse proportion to a plaintiff’s contributory negligence. Assumption of risk: That a plaintiff voluntarily exposed themselves to a known risk. Strict liability: Defendants who participate in harm-producing activities are strictly liable for injuries caused, even if all possible measures to protect from injury were taken. Patents, copyrights, and trademarks Patent: An agreement between an inventor and the government that gives an inventor a protected monopoly to produce and sell the invention in return for giving the government all of the details of the invention. Patentability: An inventor may patent the following: • • • • • • •

A product A process A composition of matter A machine An improvement to any of the above A plant An ornamental design for a product

Obtaining a patent: The Patent Office issues patents if invention submissions meet certain criteria: • Specifications: A description of the invention in sufficient detail that anyone capable of reproducing it could do so.

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• Illustration: A picture of the invention that serves to provide understanding of the invention. Patent ownership and transfer: A patent holder may, for 17 years (14 years for design patents), transfer the title to whole or part of his or her invention by assigning or licensing them. Patent infringement: The violation of the patent holder’s rights to an invention: Direct infringement: The defendant made, used, or sold the plaintiff’s invention, or substantial equivalent, without authorization. Contributory infringement: The act of providing components for the use in direct infringement of a patent. Defenses to patent infringement Subject matter: That the defendant’s alleged patent infringement was not within the scope or substantially equivalent to the invention. Patent validity: That the patent was inappropriately issued. Patent misuse: That the patent holder unjustifiably abused his or her monopolistic powers. Copyright: Gives the creator of original intellectual work exclusive rights for its use. Creation and notice: For works after 1978, a copyright is established upon the creation and fixing of a work and lasts for the life of the author plus 50 years. Copyright holder’s rights • • • •

To reproduce the work. To prepare works derived from the work. To distribute copies of the work. To perform or display the work in a public forum.

Copyright infringement: Violation of a copyright holder’s exclusive rights to a work. 124


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Direct infringement: Exactly duplicating copyrighted material. Substantial similarity infringement: That the defendant’s work substantially resembled the copyrighted work. Copyright infringement defenses • The purpose and character of use. • The nature of the copyrighted work. • The substantiality of the work in relation to copyrighted material. • The effect on the market for the copyrighted work. Protected marks Trademark: Word, name, symbol, or device that identify a company’s products from those of its competitors. Service mark: Distinguishes a company’s services from another’s. Certification mark: Proprietary certification of products. Collective mark: Trade or service mark that identifies an organization as the source of particular products or services. Distinctiveness: How unique and identifiable a mark is to consumers: Arbitrary marks: Marks that are independent of the actual product or service of the holder. Suggestive marks: Marks that convey the nature of the company’s products or services. Descriptive marks: Marks that directly refer to the products or services of the company. Not protected unless they acquire a secondary meaning.

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Generic marks: Unprotected marks that refer to the general class of merchandise or services of a company. Duration of Protection: Federal registration of trademarks lasts for 10 years, with renewal thereafter for 10-year periods. Trademark infringement: Occurs when the defendant uses a registered mark, or one that is substantially similar, without the plaintiffâ&#x20AC;&#x2122;s consent. Trade secret: A secret formula, pattern, process, program, device, method, or technique that gives its owner a competitive advantage over those who donâ&#x20AC;&#x2122;t know it. Contracts: Legally binding promises or sets of promises. Unilateral contract: Contract in which one party makes a promise to another. Bilateral contract: Contract in which parties make promises to each other. Contract validity Valid contract: A contract that meets all of the legal binding requirements, and is thus enforceable in court. Unenforceable contract: A contract that meets the basic legal binding requirements, but is not enforceable by some legal cause. Example: A contract with a minor. Voidable contract: A contract that can be cancelled due to misrepresentation, fraud, duress, and undue influence. Void contract: A contract that fails to meet one or more legal standards. Express and implied contracts Express contract: A contract where the parties have stated the terms.

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Implied contract: A contract where the circumstances surrounding the facts indicate formation of an agreement.

Executed and executory contracts Executed contract: A contract in which all of the promises made by all the parties have been accomplished. Executory contract: A contract that is being executed. Quasi-contract: An obligation, imposed by law to avoid an injustice, that is not entered into by mutual consent. • Also known as a contract implied by law. Promissory estoppel: A promise in which the promisor should see that it will create a reliance on the part of the promisee, as well as the resulting injustice. The Uniform Commercial Code (UCC) A collection of nine articles that were designed to promote uniformity and equity in commerce. • • • • • • • • • • •

1: General Provisions 2: Sales 2a:Leases 3: Negotiable instruments 4: Bank deposits and collections 4a:Funds transfers 5: Letters of credit 6: Bulk transfers and sales 7: Warehouse receipts, bills of lading, and other documents of title 8: Investment securities 9: Secured transactions, sales of accounts, and Chattel paper

• Created by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. • Universally adopted by all states, with the exception of Louisiana, which has adopted only some of the provisions.

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Restatement (Second) of Contracts: Created by the American Law Institute in 1932 and revised in 1979 to promote good faith and fairness in contracts. The offer: The desire and willingness to enter into a contract, communicated so that another person understands and is able to entertain it. Offeror: The person making the offer. Offeree: The person given the power by the offeror to bind into a contract. Communication to offeree: The communication of an intent and willingness to enter into a contract. Offer disputes • Advertisements: Not considered offers, but rather invitations to make offers. • Rewards: Advertisements offering financial inducements for specific acts are considered unilateral contracts, payable when a person aware of the award performs the advertised act. • Auctions: Bids are treated as invitations to offer that the seller may withdraw at any time before acceptance of the highest bidder’s offer. Lapse of time: Offers are valid for a reasonable time, determined by the court, for those that have no specific expiration. Revocation: Offerors may generally terminate the offer at any time prior to acceptance, even during the time the offer is valid. Conditions where offerors may not terminate the offer: Options: A contract by which an offeror promises to not revoke an offer for a period of time, in return for consideration. Firm offers: An irrevocable offer that requires no consideration. A firm offer is: • Made by an offeror who is a merchant; 128


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â&#x20AC;˘ Contained in a signed writing; â&#x20AC;˘ Assured to be kept open. Unilateral contracts: Irrevocable once the offeree has begun performing the required act. Promissory estoppel: Irrevocable when the offeree foresees and relies on the offer remaining valid, and will suffer injustice if revoked. Rejection: The offeree may reject the offer outright, or by issuing a counteroffer. Death of either party: Automatically terminates an offer. Insanity of either party: Upon determination of insanity, the offer is automatically terminated. Destruction of property or material: The offer automatically terminates if the subject matter of the offer is destroyed. Intervening illegality: Offer terminates if a statute is passed that makes it illegal for consideration. Acceptance: A communication by the offeree that denotes entry into a contract. Intent to accept: A determination made by the court that the offeree possessed the same present intent to contract as did the offeror. Unilateral contracts: Performance of the acts required by the offeror is acceptance. Bilateral contracts: Making a promise as requested by the offeror is acceptance. Silence: Silence alone in no way construes acceptance. Ambiguous offers: Promise to perform, or performance, if reasonable, given the circumstances of the offer, is acceptance. Shipment: Promise of shipment or shipment of goods as requested by the offeror is acceptance. 129


The Extracted MBA

Communication of acceptance Manner of communication: The offeror determines the mode of acceptable communication of acceptance. Deviations on the part of the offeree void the offer. Instantaneous communication: When the offeror and offeree communicate via the telephone, face-to-face, or by any other means of communication that provide immediate transmission and feedback, the offer can be construed as accepted. Noninstantaneous communication The Mailbox rule: States that an offer, if authorized to be accepted by mail, is considered accepted at the time of mailing. Consideration: Something of legal value, bargained for and given in exchange for an act or promise. Illusory promises: In a bilateral contract, the promisee must promise to give something for there to be consideration. Exclusive contracts: For consideration, the manufacturer must, in good faith, supply the goods that the seller has promised, in good faith, to sell. Preexisting duties: A failure of any contracting party to perform on preexisting duties is not consideration. Debt settlement agreements Liquidated debt: A debt that is due and the parties have no dispute in its existence. Unliquidated debt: Debt about which there is a good faith dispute. An accord and satisfaction: Occurs when the unliquidated debt is settled. 130


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Composition agreements: Agreements between debtor and more than one creditor, who agree to accept a percent of their liquidated claims. Forbearance to sue: An agreement by the promisee to refrain from suing in return for a promise to pay. Bargained exchange Past consideration: An act or promise given in the past that was not given in exchange for the promise in question. It is not consideration. Moral obligation: Promises to satisfy past moral obligations merit no consideration. Exceptions to consideration Promissory estoppel: A promise that the promisor should reasonably expect reliance on by the promisee, and the injustice inflicted upon the promisee by that reliance. Statutes of limitations: A lack of effort, on the part of the creditor, to collect on a debt for a statutorily specified time, bars the debt. Bankruptcy discharge: Upon the discharge of debt by a bankruptcy judge, the debt ceases to exist. Consent Misrepresentation: Statements asserted as factual that are, in fact, untrue and may serve to void a contract. Innocent: Good faith representations that are factually flawed. Fraudulent: Assertions made with the intent to deceive. Fraudulent representations may incur damages for the tort of deceit. Concealment: Active withholding of facts that are material to the agreement. Nondisclosure: Failure to offer information material to the agreement. 131


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Grounds for rescission for misrepresentation: To rescind a contract, the plaintiff must establish each of the following: • That a false representation was made; • That the misrepresentation was material or fraudulent; • That the plaintiff agreed to the contract based upon the misrepresentation; • The reliance on the part of the plaintiff was reasonable. • In pursuing damages for the tort of deceit, the plaintiff must also demonstrate injury. Mistake: In contract law, a belief about a fact that is untrue. Mistakes of law: A belief about a law that is in error. Nature of mistake Unilateral: The mistake was made by one of the parties. Bilateral: The mistake was made by both parties. Basic assumptions: Material effect on identity, existence, quality, or quantity of contractual material that is adversely affected by the mistake. Duress: Illegal coercion that forces a person to enter into an agreement. Elements of duress • The agreement was induced via a threat. • The plaintiff had no reasonable alternative but to enter the agreement. Undue influence: Illegal persuasion on a basis of trust that induces a person to enter into an agreement.

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Elements of undue influence â&#x20AC;˘ The relations between the parties are one of confidence or one in which a person exercising dominance induces the plaintiff into an agreement. â&#x20AC;˘ The persuasion is unjust. Capacity: The ability to incur obligations and acquire rights. Minors and contracts Disaffirmance: A minorâ&#x20AC;&#x2122;s right to terminate contractual obligation. Exceptions: Minors may not disaffirm contracts related to marriage, child support, educational loans, life and medical insurance, transportation by carrier, and special contracts as determined by the court. Emancipation: The termination of parental rights to control the actions of an individual. Ratification: A declaration of intent to remain bound, by a person who has reached the age of majority, to a contract made as a minor. Mental incapacity: Condition that causes disadvantage to the afflicted to the extent they are unable to protect their best interests. Incapacity and contracts: An agreement entered into by a plaintiff while mentally impaired is voidable. Intoxication: Deprives a person of the ability to contract, and renders a contract void if a) the plaintiff was intoxicated, and b) the defendant used the intoxication as an advantage. Writings Statute of Frauds: That part of law that requires certain instruments, such as deeds, real estate sales contracts and certain leases, to be in writing to be legally enforceable. Exceptions to statute of frauds 133


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Main purpose, or leading object rule: The rule states that where the object or purpose of the promisor is to obtain an economic benefit for himself, the promise is not within the statute. Full performance by the vendor: An oral contract to sell land that has been completely performed by the vendor is enforceable without writing. Part performance by the vendor: Under the doctrine of part performance, a party (either buyer or seller) who has taken action in reliance on the contract may be able to gain at least limited enforcement of it. Requirements of the statute of frauds Memorandum: The minimum requirement to meet the intent of statute of frauds. Contents: To fall under the statutes of frauds, a memorandum must, at a minimum, contain the following: • • • •

Essential elements of the contract; Identity of the parties; The subject matter of the contract; Signature, at a minimum, by the defendant.

The parole evidence rule: Oral testimony will not be permitted to modify or contradict the terms of a complete, written contract unless evidence of fraud, accident, or mistake exists to show that the writing is not a contract or is not complete. Admissibility: Evidence of statements made beyond a written contract may be admissible to explain written substance, or challenge the language of the contract: • • • • •

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Additional terms in a partially integrated contracts. Explaining ambiguities of the contract. Circumstances that invalidate the contract. Existence of a condition in the contract Subsequent agreements


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Illegality of contracts: A contract that violates public policy to the extent that it impacts public welfare. Violations of statute Usury statutes: Obtaining interest beyond that which the legislature authorizes. Wagering statutes: A contract between parties of an uncertain outcome in which neither party has any interest. Agreements to commit crimes: A contract in which the subject matter entails the violation of a criminal statute. Agreements that promote violation of statutes: A contract that, on its own merits is legal, but through execution, enables a party to commit a violation of a statute. Licensing laws: An agreement to perform work in a regulated industry for which a party is not properly licensed. Antitrust: Contracts entered into that exist for the sole purpose of stifling competition. Unfair agreements Unconscionability: A general concept interpreted to mean the absence of reasonable choice coupled with terms unreasonably advantageous to one of the parties. Procedural unconscionability: Unfairness in the bargaining process, to include, fine print, inconspicuously placed terms, complex or legalistic language, and high-pressure sales tactics. Substantive unconscionability: Agreements that are oppressive, one-sided, or harsh. Performance of contracts Condition: An uncertain, future event that affects a partyâ&#x20AC;&#x2122;s ability to perform an agreement.

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The Extracted MBA

Condition precedent: An uncertain future event that, if it occurs, creates a duty to perform. Concurrent condition: A contract that is conditioned on the parties to perform at the same time. Condition subsequent: An uncertain future event that, if it occurs, discharges a party from the duty to perform. Express condition: A condition that is expressly written in the contract. Implied-in-fact condition: A condition that is not expressly written, but is clearly implied. Constructive condition: Condition that is imposed by statute. â&#x20AC;˘ Also known as implied-in-law condition. Expected performance Strict performance standard: Requires virtually perfect performance of the agreement. Substantial performance: Requires performance of the agreement that is not necessarily bound by a strict standard. Good faith performance: A broad and flexible standard that requires fairness and honest performance of agreements. Breach of contract: Failure, without excuse, to perform an agreement. Material breach: Performance of an agreement that substantively fails to meet the terms in the contract, for which the plaintiff is entitled to damages. Nonmaterial breach: Breach that entails a good faith effort to make right. Time for performance: Failure to perform by a stipulated time, or by a time that is reasonable for the circumstances.

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Anticipatory breach: Occurs when the promisor declares an intent to not perform as agreed in a contract. Defenses to breach of contract Impossibility: A change in conditions, not due to the promisor, that makes performance objectively impossible. Illness or death of promisor: Discharges performance obligation if the agreement cannot be performed by delegation. Supervening illegality: Occurs when a statute is passed, after the binding of a contract, that makes performance illegal. Property: Possessions over which the right of dominion exists. Classifications of property Personal property: All possessions under the dominion of an individual, other than real estate. Real property: Land, and anything that is attached to it, including structures and plants. Gifts: A voluntary transfer of property by a donor to donee given without consideration in return. Elements of a valid gift â&#x20AC;˘ The donor must intend to give the gift; â&#x20AC;˘ The donor must deliver the gift; â&#x20AC;˘ The donee must accept the gift. Wills and inheritances: Transfer of property upon the death of the owner. Accession: Increasing the value of property by adding materials and/or labor. Bailments: Delivery of personal property by a bailor to a bailee with the express or implied agreement that the property will be returned to the bailor or a person designated by the bailor. 137


The Extracted MBA

Landlords and tenants Lease: A contract by which the owner of a property (landlord) extends to the lesee (tenant) the exclusive right to exercise dominion over the property for a period of time, in return for consideration. Tenancies Tenancy for a term: The landlord and tenant agree on a specific period of a lease, with a fixed date for termination. Periodic tenancy: The landlord and tenant agree that rent will be paid on a recurring interval until a notice of termination is given. Tenancy at will: A lease that is entered into for an indefinite period of time, but may be terminated by either party without cause. Tenancy at sufferance: Occurs when a tenant remains in possession of property after the expiration of a lease. The landlord has two options: • Treat the holdover tenant as a trespasser and bring action to evict. • Continue to collect rent, despite the expiration of the lease. Estates and trusts Estate: All of the property owned by a person. Wills: Mechanisms by which an estate is disposed after death, as determined by the testator (maker of the will). Components common to wills • Bequest: A gift of property or money. • Devise: A gift of real property. • Residuary: The remainder of an estate after disbursal of bequests and devises. • Issue: A testator’s lineal descendants. • Per capita: Each person of a group share equally. • Per stirpes: Property is distributed to the testator’s issue. 138


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â&#x20AC;˘ Testamentary capacity: The ability of the testator to execute a will. â&#x20AC;˘ Incorporation by reference: Extrinsic documentation that the testator declares as part of a will. Informal wills: Wills that are not executed with traditional formality. Nuncupative will: A will that is witnessed and made orally. Holographic will: A will that is handwritten. Limitations on disposition Creditors: Have primary rights to property before beneficiaries. Dower or curtsey rights: Common law presumption that widow or widower has a right to a life estate. Pretermitted children: Children that are born or adopted after the execution of a will are presumed beneficiaries. Codicil: An amendment to a will. Revocation: Wills are revocable at any point up do death or mental incapacity. Living wills: Documents in which a person declares his intention to receive or forgo life-sustaining medical procedures, in the event that the individual becomes incapacitated. â&#x20AC;˘ Also known as advance directives. Durable power of attorney: Gives power to another individual to make binding decisions in the event of incapacitation. Intestacy: Occurs when a person dies without executing a will. Trusts: A legal relationship in which one person maintains legal title to property for the use or benefit of another. Components common to trusts

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The Extracted MBA

• Equitable title: The recognition of the person for whom the trust is being maintained. • Trustor: Person who creates the trust. • Also known as the settlor. • Trustee: The person who holds the trust for the benefit of another person. • Beneficiary: The person for whom the trust was created. Requirements for creation of a trust Capacity: The trustor must have the legal capacity to create a trust. Intent: The trustor must have the specific intent to create a trust. Conveyance of property: The trustor must specify what property is to be transferred. Proper purpose: The trust cannot be created for a purpose contrary to public policy. Identity of beneficiaries: The trustor must identify the beneficiaries of the trust. Charitabl e trusts: Trusts created for the benefit of society. Cy pres: Doctrine applicable to charitable trusts when the property of the trust becomes impossible or illegal to apply. Totten trust: A revocable trust created by a deposit of money in a financial institution, in the name of the depositor, for a named beneficiary. Credit policy Credit: The ability of a person or business to borrow money or obtain goods, with a promise of repayment at a later date. Unsecured credit: Credit that is extended without collateral. Secured credit: Credit that is extended against collateral that guarantees compensation for money borrowed. 140


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Surety: Denotes a person who is responsible for payment of anotherâ&#x20AC;&#x2122;s debts or performance of anotherâ&#x20AC;&#x2122;s duties. Subrogation: The right of the surety to all the rights the original creditor had to the debt. Reimbursement: The right of the surety to reimbursement by the principal for payment of debt. Contribution: The right of the surety to collect from other sureties in the same debt, for a proportional portion of the debt paid. Guarantor: Denotes a person or entity that guarantees payment of the debts of another if the other person defaults on payment.

Liens: Court-granted security interest in property for debt owed. Possessory lien: The right of lienholder to keep property until reasonable debt has been paid. Foreclosure: The right of the lienholder to seize property for settlement of a lien. Deed of trust: Instrument by which the holder maintains a security interest in property. Mortgage: A security interest in real property that is given to the owner for a debt owed to the creditor. Land contracts: A device that secures a balance due on the purchase of real estate. Bankruptcy The Bankruptcy Act: Federal law that institutes procedures for adjudicating cases that deal with insolvent debtors. Chapter 7: Voluntary or involuntary liquidation proceedings that distribute assets to creditors and discharge most remaining debt.

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The Extracted MBA

Procedure • • • by priority; •

Appointment of trustee; Debtor retains exempt property; Nonexempt property is sold with proceeds going to creditors, Dischargeable debt is cancelled.

Chapter 11: Voluntary or involuntary proceedings that reorganize the debtor’s financial affairs. Procedure • Appointment of trustee and committees of creditors; • Debtor submits reorganization plan; • An approved plan is implemented and remaining debts are discharged. Chapter 12: Voluntary proceedings in which farm owners may adjust their debts. Procedure • Trustee is appointed; • Debtor submits a plan in which unsecured creditors receive at-least liquidation value; • Once a plan is fulfilled, the debtor is entitled to a discharge. Chapter 13: Voluntary proceedings in which individuals may adjust their debts. Procedure: • Debtor indicates he or she or she is seeking a composition of debts or extensions; • Approved plan is submitted to creditors; • Trustee is appointed; • Once fulfilled, debts covered by plan are discharged. Negotiable instruments: A contract for payment of money in the form of commercial paper.

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Forms of negotiable instruments Promise to pay money: Refers to extended credit. Order to pay money: Refers to an immediately payable paper. Types of negotiable instruments Promissory note: A two-party paper in which one person (maker) promises to pay a second person (payee) in writing, in specified amounts and terms. Certificate of deposit: A note of a bank that acknowledges a deposit and promises to pay the depositor a fixed sum of money. Drafts: An order by one party, ordering a financial institution to pay a third person. Check: A draft payable on demand and drawn on a financial institution. Requirements for negotiability • Be in writing; • Be signed by issuer; • Contain an order to pay a fixed amount of money; • Be payable to the bearer at the time of issuance; • Not state any other undertaking by ordering that the issuer to perform any other act in addition to payment of money. Agency: A two-party relationship in which one party (agent) is authorized to act on behalf of another (principal). Formation: An agreement between parties that authorizes one party to act in the benefit of another. Capacity: An agent or principle who entered into an agency while mentally incapacitated may release themselves from the agreement. Nondelegable obligations • Making statements under oath. 143


The Extracted MBA

• Voting in public elections. • Signing wills. • Certain contracts by: • Lawyers • Doctors • Artists • Entertainers Agency concepts Authority: An agent’s ability to affect the principal’s legal processes. Actual authority: Consent of agency is directly communicated to the agent. Implied authority: Consent of agency is communicated through a third party. General agent: A person continuously employed to perform acts on behalf of a principal. Special agent: A person employed to perform a single act or simple group of acts. Gratuitous agent: An agent who receives no compensation for his or her services. Subagent: An agent of an agent. Employees and independent contractors: Employees are always agents, while independent contractors may or may not be, depending on the situation. Agent duties Loyalty: The result of trust and confidence a principal must have in an agent. Conflicts of interest: It is a agent’s loyal duty to avoid conflicts of interest with the objectives of the principal.

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Confidentiality: It is an agent’s loyal duty to not disclose confidential information obtained through the agency. To obey instructions: The agent is under the principal’s control, and thus must diligently exe cute instructions therefrom. To act with care and skill: The agent has the responsibility to act competently. To notify the principal: The agent must communicate all material information to the principal. To account: To provide the principal with accurate accounting of property and money used in the agency. Principal duties To compensate: To pay the agent for duties performed. To reimburse: To remunerate for costs incurred in the process of performing duties. To indemnify: To not hold the agent accountable for losses incurred in the performance of official duties. Termination of agency Termination by the parties • Upon arrival of a time, as stated in the agreement. • When a specific goal is achieved, as per agreement. • At any time, by mutual agreement. • At the option of either party: • Revocation: Termination by the principal. • Renunciation: Termination by the agent. Termination by law 145


The Extracted MBA

• Death of the principal. • Death of the agent. • Principal’s permanent incapacitation. • Agent’s inability to perform the contract. • Significant changes in the agent’s subject matter. • Changes in business conditions. • Bankruptcy of the principal. • Bankruptcy of the agent • Agent’s impossibility to perform Contract liability: The principal is contractually bound to agreements entered into by an agent. Forms of business Sole proprietorship: The simplest form of business. A sole proprietorship is not a separate entity itself. Rather, a sole proprietor directly owns the business and is directly responsible for its debts. Unlimited Personal Liability for Loss: The owner is personally liable for the company, thus placing his or her entire personal assets and wealth at risk. If an owner is married, that owner puts the community property at risk as well. Management and Control: The sole proprietor has total management and control over the company. However, the price for total management and control is that the owner is at risk for personal liability incurred through the acts of the owner's agents or employees. No Formalities: With the exception of complying with any applicable licensing requirements, there are no formalities required of a sole proprietorship.

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Transferability: The owner can sell the business as he or she pleases. Duration: The sole proprietorship remains in existence for as long as the owner is willing or able to stay in business. Joint venture: A General Partnership typically formed to undertake a particular business transaction or project rather than one intended to continue indefinitely. Most often, joint ventures are used in real estate matters where 2 or more persons undertake to develop a specific piece of real property. Partnership: A form of business entity in which 2 or more co-owners engage in business for profit. For the most part, the partners own the business assets together and are personally liable for business debts. Sharing Profits: In the absence of a partnership agreement, profits are shared equally amongst the partners. A partnership agreement, however, will usually provide for the manner in which profits and losses are to be shared. Unlimited Personal Liability for Partnership Losses: Each partner is, jointly and severally, personally liable for debts and taxes of the partnership. For example, if the partnership assets are insufficient to satisfy a creditorâ&#x20AC;&#x2122;s claims, the partnersâ&#x20AC;&#x2122; personal assets are subject to attachment and liquidation to pay the business debts. Liability for Co-Partners' Debts: Each general partner is deemed the agent of the partnership. Therefore, if that partner was apparently carrying on partnership business, all general partners can he or she held liable for his dealings with third persons. Liability for Co-partners' Wrongdoing: Each partner may be held jointly and severally liable for a co-partnerâ&#x20AC;&#x2122;s wrongdoing or tortious act. Duration: Generally, a partnership terminates upon the death, disability, or withdrawal of any one partner. However, many partnership agreements provide for these types of events with the share of the departed partner being purchased by the remaining partners in the partnership.

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The Extracted MBA

Management and Control: In the absence of a partnership agreement, each general partner has an equal right to participate in the management and control of the business. Disagreements in the ordinary course of partnership business are decided by a majority of the partners. Disagreements of extraordinary matters and amendments to the partnership agreement require the consent of all partners. Transferability: Unless otherwise provided in the partnership agreement, no one can become a member of the partnership without the consent of all partners. However, a partner may assign his share of the profits and loses and right to receive distributions ("transferable interest"). Further a partnerâ&#x20AC;&#x2122;s judgment creditor may obtain an order charging the partnerâ&#x20AC;&#x2122;s "transferable interest" to satisfy a judgment. Limited Liability Company: The Limited Liability Company or LLC is a relatively recent business structure created exclusively under state law. Because there is no model LLC Act, there is no uniformity among states. As a result, some of the characteristics of LLCs are not completely defined and are subject to change. Legal Status: An LLC is considered a separate legal entity because it can own property and execute documents. However, an LLC is not a separate entity when it comes to life span and taxation. Formation: Articles of organization must be filed with the state. The owners/investors of an LLC are called members. Life Span: An LLC does not have a "perpetual life." Agreement or state law can set a time limit for the life of an LLC. Otherwise, an LLC is dissolved at the retirement, disability, death, or consent of any member. Sale or Transfer of Ownership: The sale or transfer of ownership interests during lifetime is allowed if permitted by the articles of organization. Because of potentially adverse tax consequences, a transfer will dissolve the LLC unless the remaining members agree to the new member. Liability: Liability is limited to the assets of the business. The members' personal assets are protected from liability. Taxation: An LLC is usually not a separate taxable entity. Net

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profits or losses from the LLC pass through to the members. There is no corporate-level tax. However, if a business were to lose its "pass through" status, it would be taxed like a C corporation. Corporation: A legal entity, separate from its owners or shareholders. A corporation can own property, enter into contracts, and pursue business activities. S Corporation: A type of corporation that is taxed under subchapter S of the Internal Revenue Code. Formation: Articles of incorporation must be filed with the secretary of state. In some states, the articles must also be recorded with the register of deeds in the county in which the corporation is located. An S corporation must also file a special S election with the tax authorities.

Life Span: Because a corporation is a separate legal entity, it has a perpetual life. There is no specific time limit on how long a corporation can exist. Also, there is no relationship between the life of a corporation and the lives of its owners. Sale or Transfer of Ownership: Shares of stock can easily be transferred in an S corporation during the lifetime of an owner or at the owner's death. However, there are restrictions that limit the transferability of stock. An S corporation can have no more than 75 shareholders. Also, shareholders can only be individuals, estates, certain tax-exempt organizations, and certain trusts. Management: A corporation consists of shareholders and a board of directors. The directors usually employ officers and other employees to oversee the day-to-day operation of the business. In a small business, there is often little distinction between the shareholders, the board, and the officers. Frequently, these roles and responsibilities are carried out by the same people. Liability: The corporation is liable for its own debts and other business liabilities. Liability is limited to the assets of the corporation. This means that the owners of a corporation do not expose their personal assets to corporate liability.

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The Extracted MBA

Taxation: An S corporation is generally not a separate taxable entity. As a result, the corporation does not pay taxes on its net income. The net profits or losses of the corporation pass through to the owners. An S corporation can deduct the cost of employee benefits as a business expense. However, more than 2% shareholders are generally not considered employees for income tax purposes. C Corporation: A type of corporation that is taxed under subchapter C of the Internal Revenue Code. Sale or Transfer of Ownership: Shares of stock can easily be transferred in a C corporation during the lifetime of an owner or at the owner's death. Taxation: A C corporation is a separate taxable entity. As a result, the corporation pays taxes on its net income. Reasonable salaries are deductible to the corporation and taxable to the employees, including shareholder/employees. Because a C corporation is a taxable entity, the income is exposed to the possibility of double taxation. One way to avoid double taxation is to retain corporate earnings and profits in the corporation for reinvestment. However, this can lead to higher taxation and to a penalty tax called the accumulated earnings tax.

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Extracted INFORMATION MANAGEMENT

www.extractedmba.com/cis.html

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The Extracted MBA

Information technology: Electronic systems invoked to automate processes, improve efficiency, facilitate internal and external communication, augment management, and enhance commerce. Information system: Consists of organizations, individuals, and the electronic tools by which they exchange information. Open system: Relies upon information from its external environment to operate. Closed system: Self-contained and not interactive with its environment to the extent that it eventually becomes useless. Entropy: A benchmark that denotes the level of chaos and disorder present in a system, against which an IT professional works to minimize. Operational system: Provides information on the day-to-day operations of an organization. Tactical system: Provides information, in the form of reports to assist managers in achieving organizational goals. Summary reports: Provide management with averages, totals, key data, and abstracts of organizational activities. Exception reports: Provide managers with reports that highlight performance indicators that either exceed or fail to achieve organizational goals. Ad hoc reports: Reports that are generated on demand and intended to solve unique problems. Strategic system: Provides information to senior management that enables planning of strategic objectives. System infrastructure: The elements that comprise an information system. Hardware: The physical equipment of an information system, to include computers, terminals, and peripheral devices.

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Software: The encoded instructions that direct the hardware to perform tasks. System software: Controls the basic functions of the information system; the operating system. Application software: Runs on top of system software to support specific functions, such as accounting, inventory, and Internet applications. Firmware: Software encoded in non-volatile memory that controls the actual hardware in the information system. Information systems in strategic planning Three-level effect: A framework that facilitates a manager’s assessment of the effects of information systems on organizational goal planning. • Conceived by Gregory Parsons in 1983. Industry level: IT manipulates an industry’s: • Products and services • Production economics • Markets Firm level: IT affects the following key competitive forces: • • • • •

Buyers Suppliers Alternative products New entrants Rivals

Strategic level: IT supports the following strategic objectives: • Low-cost leadership • Product differentialization • Market specialization

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The Extracted MBA

Computer hardware Supercomputer: A large, powerful, and customized computer system comprised of hundreds of processors, capable of extremely rapid processing of tremendous amounts of complex data. Used predominately by the military and academia. Mainframe computer: Now-obsolete system that, until the advent of large-scale server systems, served the information needs of large organizations. Minicomputer system: A system smaller than a mainframe system, also made obsolete by modern server systems. Network server system: The dominant force in intranet and Internet information systems, that, depending upon configuration, is highly customizable to an organizations needs. Microcomputer system: Stand-alone capable computers that connect to a network server via LAN or dial-up, and are identified to the network by an assigned IP (Internet Protocol) address. â&#x20AC;˘ Also known as Personal Computers. Computer architecture Central Processing Unit (CPU): The â&#x20AC;&#x153;brainsâ&#x20AC;? of the computer that performs the primary arithmetic computations as instructed by software. Main memory: Known as Random Access Memory; the storage area that holds parts or all of the data that operates on a computer. Motherboard: The basic unit of hardware that holds the CPU, RAM, ROM, chipsets, and other microprocessors that form the physical core of a computer. Hard disk: Magnetic media that stores the operating system, applications, and data. CDROM: Read-only, removable optical media that stores 650 megs of data. 154


Kelly Allen Vinal

CD-R: Write-once, read-many removable optical media that is otherwise compatible with CDROM. CD-RW: Rewriteable optical media that stores 650 megs of data and is only useable on CD-RW systems. Digital Versatile Disk (DVD): Replacement technology for CDROM that holds up to 17 gigs of data. Floppy disk: Magnetic media that is stores 1.44 megs of data on a removable 3.5” disk. Zip disk: Rapid-access removable media that stores 100 or 250 megs of data. Superdisk: Rapid-access removable media that stores 120 megs of data and is backwards compatible with 1.44 meg 3.5” disks. • Also known as LS-120. Memory stick: Solid state portable memory device that stores 4, 8, 16, 24, or 64 megs of data. Disk controller board: Operates the system disk drives. Video board: Outputs text and graphics to the computer monitor. Expansion slots: Allow for the addition of custom hardware to the system. Power supply: Converts wall current into the various DC voltages required by the motherboard and attached devices. Sound card and speakers: Generate system and software sounds. Monitor: Passive device that displays text and graphics. Keyboard: Interface that allows human-computer interaction. Mouse: Control device central to the Graphical User Interface (GUI). 155


The Extracted MBA

Network Interface Card (NIC): Connects a computer to an ethernet. Units of memory: • Bit: Binary digit that represents either 0 or 1. • Byte: An 8, 16, or 32-bit string that represents a character. • Kilobyte (KB): 1,000 bytes. • Megabyte (Meg): 1,000 kilobytes. • Gigabyte (Gig): 1,000 megabytes. • Terabyte (Tera): 1,000 gigabytes. System software: Programs that manage and utilize computer and network resources. Operating system: A program package that manages and controls computer hardware, peripherals, main memory, and secondary storage. Supervisory programs: Instructions that control basic computer resources, such as memory allocation, disk drive operation, CPU process control, and peripherals. Job management programs: Schedules tasks in prioritized order for processing by the CPU. Input/Output (IO) management programs: Directly access and manage the data flow between the CPU, input devices, secondary storage devices, and output devices. Multiprogramming: Function of an operating system that enables more than one program to reside in main memory at one time. Timesharing: Gives multiple programs periods of time for use of CPU resources that emulates a multi-tasking system.

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Multiprocessing: Enables multiple programs to run simultaneously on systems with more than one CPU. Parallel processing: Enables a single program to run on systems with more than one CPU. Virtual storage: Utilizes secondary storage devices as main memory to increase apparent capacity. • Known as VMS. Communication software: Effects data exchange between computers and peripheral devices. Graphical User Interface (GUI): An interface overlay of an operating system that allows users to “point and click” with a mouse, or similar device, to perform system functions. Application software: Programs that run under an operating system that perform specialized tasks. Word processing: Allows users to create, edit, manipulate, and distribute text material. Spreadsheet software: Allows users to input data in a structured environment for analysis and computation. File management software: Allows users to organize, store, rename, copy, and delete computer files. Database management systems software (DBMS): Stores, sorts, and makes files and data available to multiple users. • Creation of a database: Bit → byte → field → record → file → database. Graphics software: Allows users to create, capture, edit, manipulate, and store images. Presentation software: Allows users to create slides for print, projection, or web dissemination.

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The Extracted MBA

Multimedia software: Utilizes multiple computer resources in conjunction, such as sound, graphics, and CDROM. Desktop publishing: Allows users to create documents ready for print or web browsing. Electronic mail: Allows users to create and exchange electronic messages via a network. Internet browser: Allows users to access Internet resources. Programming languages First generation: Machine languages written in binary form. Second generation: Assembly languages written in simple mnemonics, hexadecimal, and octal. Third generation: High level languages written in simplistic terms that are compiled to create programs. Fourth generation: Languages written in easily understood terms and involves relatively little technical computer knowledge. Distributed systems communications Communications devices: Peripherals that transform data into standard forms that may be sent and received by commonly equipped comp uter systems. Communications channels: The medium through which data is transmitted and received. Dialup: Allows a computer to remotely connect to a network by using a modem and telephone line. Wireless: Utilizes radio or infrared transmissions to connect to a network. Twisted pair: Allows for direct network connection for short distances over inexpensive sets of wires.

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Coaxial cable: Allows for wide-bandwidth network connections. Fiber optic cable: Allows for virtually limitless bandwidth network connections over slim glass cables. Local Area Network (LAN): Small network that connects several computers in a building or office. Wide Area Network (WAN): Large network that connects many LANs over a large geographical area. Internet: Global network that connects millions of computers and networks utilizing a common set of protocols. Network topologies Star topology: Consists of a centralized server with direct connections to client workstations. Bus topology: Consists of workstations and a server that are connected to a common carrier in which the ends are not connected. Ring topology: Consists of workstations and a server that are connected to a common carrier in which the ends are connected. Mesh topology: Consists of workstations and servers that are connected over multiple carriers between nodes. Financial and accounting information systems Operational financial accounting systems: A series of modules that work together to automate an organization’s accounting structure, and includes: • • • • • • • •

General ledger. Fixed assets. Sales order processing. Accounts receivable. Accounts payable. Inventory control. Purchase order processing. Payroll. 159


The Extracted MBA

Tactical finance and accounting information systems • • • •

Budgeting. Cash management. Capital budgeting. Investment management systems.

Strategic finance and accounting information systems • Financial condition analysis system. • Long range forecasting system. Marketing information systems Operational marketing systems • • • • • • • • •

Prospect systems. Contact systems. Inquiry systems. Web storefronts. Document systems. Telemarketing systems. Credit systems. Direct mail and e-mail systems. Distribution channel decision systems.

Tactical marketing systems • Sales management systems. • Product pricing systems. • Advertising systems. Strategic marketing systems • Sales forecasting. • Product planning. Manufacturing information systems Operational manufacturing systems

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• • • • • •

Purchasing systems. Receiving systems. Quality control systems. Shipping systems. Cost accounting systems. Inventory management systems.

Tactical manufacturing systems • • • • •

Materials requirements systems. Just-in-time (JIT) inventory systems. Capacity planning systems. Production scheduling systems. Product development systems.

Strategic manufacturing systems • • • •

Site selection and development. Technology assessment and planning. Process positioning. Plant design.

Personnel information systems Operational personnel systems • • • • • •

Employee information systems Position control systems Applicant screening systems Performance management systems Government compliance and regulations systems Payroll information systems

Tactical personnel systems • • • •

Job design systems Recruiting information systems Employee compensation systems Training and development systems

Strategic personnel systems

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The Extracted MBA

• Workforce planning systems • Labor negotiation support systems

Decision support systems (DSS) Unstructured decision support: The ability of an information system to provide relevant data on variable events that require specialized attention. Structured decision support: The combined information resources of data analyses, databases, recurring events, and established operational modes that are used to assist managers in decision-making. Status access: Read-only information relating to operational data that generates decision-pertinent reports. Personal analysis: A manager’s evaluation of operational reports. Model-based analysis: The use of computer-generated models of organizational performance. Decision support system development: The process that requires an adaptive design involving the user and the manufacturer with the information system. Adaptive design framework: A conceptual view of the decision development process. • Conceived by Peter Keen and Thomas Gambino in 1982. Cognitive loop: The first element in the adaptive design framework that illustrates cognitive links between the user, designer, and system. Implementation loop: The second element that illustrates the modes of decision implementation by the user and the designer. Evolution loop: The third element that illustrates the manager’s increased understanding of the system’s functions, and the consequential increase of the system’s capabilities.

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DSS development lifecycle: • • • • • • • • • • •

Planning Application research Analysis Design Construction Testing Evaluation Training Operation Maintenance Adaptation

Artificial intelligence (AI) Natural language processing: The programmed ability of a computer to make logical inferences from spoken or written language. Robotics: Machines controlled by computers. Machine vision: Computers that are able to accurately identify items using input from video sources. Expert systems: The application of complex computer systems to solve difficult or cumbersome problems. Expert systems are comprised of: • Knowledge base: Contains the basic rules and information that the expert system uses to make decisions. • Inference engine: The core of the expert systems that assesses inputs, applies the knowledge base, and draws a conclusion from each situation encountered. • Knowledge acquisition subsystem: Process of building prototype solutions and improving upon them until an expert system is perfected. • Explanation subsystem: Explains the procedures used to arrive at decisions.

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The Extracted MBA

Information system planning Gathering information requirements Critical success factor (CSF) method: Manager-determined prioritized hierarchy of measures deemed most essential to achieving goals. • Conceived by John Rockart in 1979. Business system planning (BSP) method: A formal and objective method of establishing information system priorities that support organizational goals. • Conceived by J. Cougar, Mel Colter, and Robert Knapp in 1982. Steps in the BSP method: • • • • • • • • • • • •

Make a commitment. Prepare for a study. Hold initial meeting. Define business process. Define data classifications. Determine executive guidance. Assess business problems. Define the information architecture. Determine priorities. Review IS management operations. Develop action plans. Report results to management.

Information security Threats: Potential conditions that could disrupt communications, destroy information, or compromise sensitive data. Natural disasters: Catastrophic acts of God that could destroy an organization’s information system. 164


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Employee errors: Mistakes caused by employees with access to network resources that generally result from carelessness and/or poor training. Computer crime: Organized and intentional unauthorized efforts to subvert information systems. Industrial espi onage: Spying over computer networks intended to retrieve information beneficial to the operations of the offending entity. Cracking: The unauthorized entry into a computer network for any reason, innocent or malevolent. â&#x20AC;˘ Also known as hacking. Toll fraud: The intrusion of an outsider into a telephone computer system that results in the intruder gaining access to phone lines or phone card numbers. Data diddling: The use of computer resources by employees to alter records for the purpose of personal gain. Trojan horses: Unauthorized code added to a program that executes upon a set condition, usually without the computer operatorâ&#x20AC;&#x2122;s knowledge until damage has been done, or resources have been compromised. Salami slicing: Code added to financial accounting system that rounds down fractions of pennies in transactions and routes them to a third accounts. Computer viruses: Hidden programs that insert themselves into systems with the intent of disrupting them and/or causing damage. Electronic warfare: The use, by adversaries, of technology to physically disrupt information systems. Software piracy: The unauthorized duplication of copyrighted software.

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The Extracted MBA

Program bugs: Unintentional flaws in computer code that inadvertently cause disruptions or loss of services. Security controls: Measures invoked to minimize threats. Physical controls: Conventional measures that physically isolate information systems from harm. Electronic controls: The utilization of sensors and tracking devices to detect unauthorized access to computer hardware. Software controls: Code written to correct errors, keep sensitive data safe, and control system access to authorized persons. Management controls: Policies established by management that serve to protect data and the information structure.

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Extracted ELECTRONIC COMMERCE

www.extractedmba.com/ec.html

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The Extracted MBA

Defined The buying and selling of products and services by businesses and consumers over the Internet. • Also known as E-Commerce (EC). Business-to-business: Electronic commerce between businesses, such as between Cisco Systems and Internet Service Providers. Business-to-consumer: Electronic commerce between web retailers and individual consumers, such as between Cdnow.com and music fans. Consumer-to-consumer: Electronic commerce between individual consumers facilitated by a third party, such as is done on Ebay.com. Electronic commerce standards Electronic Data Interchange (EDI): Predominate document structure designed that allows large organizations to transmit information over private networks. • Created by the U.S. government in the early 1970s. Open Buying on the Internet (OBI): Created by the Internet Purchasing Roundtable, OBI ensures that different e-commerce systems can talk to one another. The Open Trading Protocol (OTP): OTP standardizes a variety of payment-related activities, including purchase agreements, receipts for purchases, and payments. • OTP was created to compete with OBI. The Open Profiling Standard (OPS): Allows users to create a personal profile of preferences and interests that they want to share with merchants, without compromising their private information. Secure Sockets Layer (SSL): A protocol designed to create secure server connections using a powerful public key encryption system.

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â&#x20AC;˘ Created by Netscape in the mid-1990s. Secure Electronic Transactions (SET): Encodes credit card numbers stored on merchant servers for processing by financial institutions. â&#x20AC;˘ Created by MasterCard and Visa in the late 1990s. Electronic cash: Forms of payment that enable web-based commerce. Electronic checks: Takes money directly from customer checking accounts to settle utility, phone, and other bills. Electronic wallet: Stores credit card numbers on customer hard drive in an encrypted form that may be accessed by web merchants who support electronic wallet transactions. Extranet: Extension of a corporate intranet that connects the internal network of one company with the intranets of its customers and suppliers to enable secure financial transactions. Micropayments: Non-recurring transactions in amounts between 25 cents and $10, typically made in order to download or access graphics, games, and information. E-Commerce programming languages Hypertext Markup Language (HTML): The fundamental tool for designing websites that allows webmasters to define the characteristics of pages and its components. HTML basics <HTML>: Identifies the document as an HTML page. <HEAD>: Denotes the beginning of the header. <TITLE>: The beginning of the page title. </TITLE>: The end of the page title. </HEAD>: Denotes the end of the header.

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The Extracted MBA

<BODY>: The beginning of the information contained in the HTML document. </BODY>: The end of the information contained in the document. </HTML>: Tells the browsing computer that the HTML document has ended. Minimal HTML document: <HTML> <HEAD> <TITLE> Minimum Document </TITLE> </HEAD> <BODY> Sample Document </BODY> </HTML> HTML tags that define the <BODY> <br>: Inserts a line break <p>: Start a new paragraph <hr>: Insert a horizontal rule <Hn>: Defines a heading level, where n is a number 1 to 6. <font>: Defines the font to be used Lists <ul>: Defines the beginning and end of a unordered list <li>: Marks the beginning of an item in the list <ol>: Defines the beginning and end of a ordered list 170


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<li>: Marks the beginning of an item in the list <dl>: Defines the beginning and end of a definition list <dt>: Marks the beginning of a term to be defined <dd>: Marks the beginning and end of the definition Inline images: Images that are embedded within the document. Text can be positioned around the images. <IMG SRC="http://www.example.com/pic.jpg"> Hyperlinks: Words or phrases that move the user from the current document to another one. <A HREF=" www.example.com"> </A> Java: Platform-independent programming language that is objectoriented and prevalent in providing specialized content on EC systems. Perl: Programming language designed for processing form data, and is the most commonly used language for web-based applications. Cold Fusion Markup Language (CFML): A tool that allows you to create web applications that are interactive and that interface with databases. E-Commerce corporate imperatives Appeal of e-commerce Cost Advantage: Costs related to transactions, communication, etc. Product Growth: Broaden markets (almost any organization) Product Differentiation: Added feature/service (package tracking, on-line financial calculators) Product Innovation: New services (service providers, consultants, virtual malls) 171


The Extracted MBA

Operations: Includes activities necessary to create the product/service. Marketing and Sales: Activities aimed at promoting and selling the product/service. Outbound Logistics: Concerned with activities that related to processing orders and delivering the product/service to the customer. Customer Service: Refers to activities that support the product/service after the sale. Technology Development: Research and development activities concerned with improving products/services and organizational processes. Human Resources Management: Encompasses activities aimed at managing the firms human resources. Public Relations: focuses on activities aimed at presenting the organization and it's products/services in the best light to those outside the organization. Firm Infrastructure: includes activities that are required to manage and administer the organization's internal activities.

Electronic Commerce Plan (ECP) I. Business Analysis A. Organization Mission and Strategy 172


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B. Analysis of Internal Environment 1. Strengths 2. Weaknesses C. Analysis of External Environment 1. Opportunities 2. Threats D. Cost-Benefit Analysis 1. Costs 2. Benefits II. EC Mission A. Role and Mission Statement B. Applications III. Implementation Strategy A. Design Guidelines 1. General principles 2. Standards 3. Page layout 4. Navigation tools B. Project Management 1. Roles 2. Project Teams 173


The Extracted MBA

3. Project Schedule Business analysis Organizational Goals and Strategy: Organizing the business and formulating strategies that will best capitalize on competitive opportunities in the e commerce marketplace. • Identifying products/services that the organization will sell. • Determining the characteristics of the target market. • Establishing the best marketing strategy to achieve organizational goals. SWOT Analysis Internal factors • • • • • • •

Executive management’s attitude towards technology. Current employment of information technology. Organizational history of implementing new technology. Qualities of the internal users of EC applications. Employee technical education and skills. Organizational reaction to new technology. Availability of required technical skills and expertise

External factors • Competitor use of EC resources. • Market availability of necessary technology and skills. • Access to the Internet EC business roles Efficiency: Reducing costs by eliminating conventional sales infrastructure. Effectiveness: Increasing inventory diversity and delivering goods and services in a more timely manner.

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Competitiveness: Providing unique solutions through innovations and effective EC applications employment. Trend-setting: Establishing an EC storefront in a manner that outpaces the competition in their migration to the Internet. EC implementation team Technical webmaster: Establishes and maintains the Internet connection, configures and operates the hardware and operating environments (Unix, Linux, windows NT), and sets up and configures the server storefront software. Content webmaster: Develops and implements the Electronic Commerce Plan by managing the content and layout of the web storefront. Copy writer: Writes and organizes text and graphics to achieve the greatest impact upon visitors to the website. Multimedia designer: Creates multimedia products by using graphics, sound, audio, and video, for use on the web storefront. Characteristics of effective EC website design • • • •

Intuitive User friendly Efficient Consistent

Security of web-based commerce • Implementation of security controls that precludes unauthorized access to EC infrastructure. • Use of security tools that ensure that the privacy of users and their information is not compromised. • The employment of fall-back systems that can assume control of EC applications in the event of compromise or malfunction. EC security policy 175


The Extracted MBA

• Aggressive security policies: firewall configurations, access controls and employee communications. • Security awareness campaigns: Continual employee education program designed to emphasize organizational security policies. • Firewalls: Placed at all interfaces between networks, including between organizational units and between the organization's network and the Internet. • Intrusion detection software: Detects and logs unauthorized accesses and attempts. • Antivirus software: Detects and eliminates viruses that may affect operations.

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Extracted ACCOUNTING

www.extractedmba.com/acct.html

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The Extracted MBA

Defined The classification, analysis, and interpretation of the financial records of an organization for the purpose of determining the financial condition thereof. Accounting equation: Assets = Liability + Ownerâ&#x20AC;&#x2122;s Equity Accrual basis accounting: Reflects that the economic effect of a revenue occurs when it is earned, rather than when it is received. Cash basis of accounting: Holds that revenues are reported when they are received and expenses are reported when there are paid, regardless of whether or not they have been earned or owed. Generally Accepted Accounting Principles (GAAP): The body of principles that governs accounting for financial transactions, which result in the preparation of financial statements. â&#x20AC;˘ Set by the Financial Accounting Standards Board and the American Institute of Certified Public Accountants. Business entity principle: Requires that businesses be accounted for separately and distinctly from its stakeholders. Objectivity principle: Requires financial statements to be supported by empirical evidence, rather than opinion. Cost principle: Requires financial statements to be based upon costs incurred as the result of business transactions. Going-concern principle: Requires financial statements to be prepared under the assumption that the organization will continue to operate in the future. Revenue recognition principle: Requires that revenue be recognized only at the time it is earned. Financial accounting: Accounting system that utilizes specified economic variables and processes to generate financial statements for external users. 178


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Managerial accounting: Accounting system that generates financial reports based upon relevant inputs and outputs to satisfy specific management objectives. General accounting: Recording and processing transactions. Cost accounting: Identifying and measuring operating costs. Budgeting: Developing formal financial plans to accomplish organizational goals. Internal auditing: Analyzing and evaluating organizational financial and inventory management practices to ensure compliance with internal and external standards. Financial statements Income statement: Depicts the net income (or loss) of an organization. Revenues: Inflows of assets received in exchange for goods and services, as well as reductions in liabilities. Expenses: Outflows of assets due to operations, as well as increases in liabilities. Balance sheet: Provides information relevant to the financial status of an organization. • Also known as the statement of financial position. Assets: Economic resources owned by the organization. Liabilities: Debts of the organization. Owner’s equity: An organization’s residual interest in assets after subtracting liabilities. • Also known as net assets. Statement of changes in owner’s equity: Shows the events that increased and decreased owner’s equity during a period of time. 179


The Extracted MBA

Statement of cash flows: Shows where cash was paid as well as from where cash was acquired during a period of time. Accounting transactions Asset accounts Cash: Money or any convertible medium that is accepted for deposit by financial institutions at face value. Accounts receivable: Money earned for goods and services sold, to be paid at a future date. Notes receivable: Promissory notes for earned cash on which the promisor unconditionally guarantees to pay in the future. Prepaid insurance: Insurance against uncertain potential future events that is paid up-front and is consumed as an expense over the life of the coverage. Office supplies: Expendable items purchased for office use that become expenses as they are consumed. Business supplies: Expendable items purchased for use in the course of performing business functions that become expenses as they are consumed. Prepaid expenses: Up-front payments for products or services that are to be delivered or acted-upon in the future and become expenses as they are performed. Office equipment: Durable items purchased for office use. Business equipment: Durable items purchased for business use. Buildings: Structures owned by the organization. Land: Land owned by the organization. Liability accounts

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Accounts payable: Money promised for goods and services acquired, to be paid at a future date. Notes payable: Promissory notes for cash on which the organization unconditionally guarantees to pay in the future. Unearned revenues: Money received for products or services sold, to be delivered or performed at a future date. Short-term payables: Typically recurring near-term financial obligations, such as wages payable, interest payable, and taxes payable. Ownerâ&#x20AC;&#x2122;s equity Capital account: Additional funds invested by a proprietor in the equity of his business. Withdrawals account: An account from which the owner removes funds for such things as living expenses and personal uses. â&#x20AC;˘ Also known as the personal account. Revenue and expense accounts: Accounts that document income and expenditures. Ledger: The physical form in which business accounts are documented. Chart of accounts: A numerical ordering of accounts in a ledger. T-accounts: Simple representations of accounts that show increases and corresponding decreases in contra-accounts. Debit side: Left side of a T-account where funds are debited. Credit side: Right side of a T-account where funds are credited. Double-entry accounting: Refers to the accounting practice of balancing transactions in accordance with the accounting equation. General journal: Accounting workbook where transactions are first posted and subsequently posted to the ledger. 181


The Extracted MBA

Posting: The act of copying information from the general journal to the ledger. Trial balance: Working process by which accounting accuracy is tested. Steps in creating the trial balance: 1. 2. 3. 4. 5.

Determine the balance of each ledger account, List all non-zero balance accounts by debits and credits, Add the debit balances, Add the credit balances, Compare debit sums with credit sums.

Time period principle: Holds that businesses conduct operations in recurring time periods for accounting purposes. Accounting period: Typically a one-year period of time that an organization captures its financial performance for reporting purposes. Interim financial reports: One-month or three-month accounting reports that give managers financial performance feedback. Fiscal year: The 12-month period an organization selects as its primary accounting period. Internal accounting Internal control system: Establishment and enforcement of basic internal measures designed to ensure compliance with accounting standards. • • • • • • •

Clearly established responsibilities Adequate records maintenance Adequately insured assets and bonded employees Separation of record keeping and asset control Division of responsibilities for related transactions Maximized use of computerized inventory and accounting systems Regular independent internal reviews

Cash control 182


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• Separate cash handling and cash bookkeeping responsibilities • All cash receipts should be deposited in the bank daily • All cash payments should be made by check Cash from sales: Cash received should be registered electronically by the cash register and cross-referenced at the end of each shift. Cash via mail: Mail-handling responsibilities should be performed by two individuals who receive the cash, and a third who safeguards and compares receipts against receivables. Cash di sbursements: With the exception of petty cash payments to settle small accounts, cash disbursements should always be made in the form of check or voucher. Voucher system: Set of procedures that control the incurrence of obligations and the outflow of cash. • Sets controls on who is authorized to make cash commitments. • Establishes procedures for verifying, recording, and approving cash purchases. • Requires that every obligation be treated as a distinct transaction registered against the general journal. Purchase requisitions: Procedures that require department managers to provide lists of purchase needs to approving officials for action. Purchase orders: Issued to sellers or vendors and authorizes them to ship or deliver items according to stated prices and terms. Invoices: Itemized statements provided by vendors that list the customers’ contact info, the items sold, the prices, and terms of sale. Reconciling the bank balance Elements of a monthly bank statement 183


The Extracted MBA

• • • • •

Beginning month balance Deposits to the account during the month Checks presented and paid during the month Cash withdrawals made during the month Ending month balance

Need for account reconciliation: Bank statements use a cashbased system, while most accounting systems use the accrual system. Outstanding checks: Payments issued that have been deducted from the cash account, but have yet to clear the bank. Unrecorded deposits: Deposits made to the bank and annotated on the cash account that have yet to be posted. Uncollectible items charges: Charges posted to bank accounts for returned checks. Credits for notes paid and interest: Cash paid on deposits and note investments. Inventories Assigning inventory costs Specific inventory prices: Each item in the inventory is priced according to its invoice. Weighted average: Assigning a per-unit price based upon the average invoice price of merchandise on-hand. First in, first out (FIFO): Assumes that the items on-hand first will be sold first at the original invoice prices, with the ending inventory deducted from the beginning inventory to determine cost of goods sold. Last in, first out (LIFO): Charges the cost of goods sold to the inventory prices of the last goods received. Property, plant, and equipment

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Depreciation: The process of allocating the costs of property by distributing expenses over the course of productive life. Service life: The length of time a piece of equipment will last. Inadequacy: Shortens equipment service value due to inability to keep pace with organizational needs. Obsolescence: Occurs when technology expands more rapidly than the equipment can perform economically to justify its continued operation. Salvage value: The residual value an organization can expect to sell equipment after its useful life has expired. Straight-line method: Equipment is depreciated as an expense in equal amounts for its service life. • Cost-Salvage/Service Life = Depreciation Expense per year Units of production method: Equipment is depreciated as an expense in direct correlation with the units produced by the equipment. • Depreciation per unit = Cost-Salvage/Predicted units of production. Depreciation for partial years: Fractional multiplier that accounts for equipment purchased during the year. • (Chosen depreciation formula) X Months/12 Accelerated depreciation: Depreciation methods that grant larger depreciation expenses in the early years of service life, and smaller depreciation expenses in later years. Declining balance: Up to twice the straight-line rate is allowed in the early years of depreciation accounting. Double-declining balance: Twice the straight-line rate is applied in the early years of depreciation accounting.

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The Extracted MBA

Sum-of the years'-digits: Multiplies the asset's depreciable cost (minus salvage value) by a series of decreasing fractions over useful life. â&#x20AC;˘ Denominator = Sum of years; numerator = reverse amount of service years.

Example: Service life = 5 Denominator = 15 (1+2+3+4+5) Year 1 numerator = 5 Year 2 numerator = 4 Year 3 numerator = 3 Year 4 numerator = 2 Year 5 numerator = 1 Year 1 depreciation expense = 5/15 cost Year 2 depreciation expense = 4/15 cost Year 3 depreciation expense = 3/15 cost Year 4 depreciation expense = 2/15 cost Year 5 depreciation expense = 1/15 cost Present value: The current value of currency stated in relation to anticipated future economic conditions. â&#x20AC;˘ PV=1/(1+i) n; i = interest rate; n = number of years to expected receipt. Payroll records Federal Insurance Contributions Act (FICA) taxes: Social security taxes withheld by the employer and paid quarterly to the government. Federal Unemployment Tax Act (FUTA) taxes: Paid annually if Taxes amount to less than $100, and quarterly if they amount to more. State Unemployment Tax Act (SUTA) taxes: Paid in accordance with state laws. Stocks 186


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Common stock: Class of stock that combined represent ownership that has no preference over other classes of stock. Common stock equivalent: Securities issued that are convertible to common stock in accordance with detailed rules in force by the issuing corporation. Common stock subscribed: Shareholdersâ&#x20AC;&#x2122; equity account in which the corporation records the par value of unissued stock that investors have contracted to purchase. Preferred stock: Class of stock that gives owners priority status for dividend payment and other benefits over other classes of stock. Call price of preferred stock: The amount of money that must be paid to call and retire a preferred stock. Callable preferred stock: Preferred stock that the issuing corporation may, at its will, retire by paying the specified call price plus any dividends in arrears. Dilutive securities: Convertible securities that, if converted, have a negative impact on earnings-per-share. Convertible preferred stock: Preferred stock that the holder may exchange for common stock. Cumulative preferred stock: Preferred stock in which undeclared dividends accumulate until paid, and are always paid before common stock. Noncumulative preferred stock: Preferred stock that forfeits dividends for all years in which they are not declared. Participating preferred stock: Preferred stock that enables owners rights to share in dividends in excess of the stated amount. Dividends: A distribution by a corporation of profits to shareholders, given without consideration. Dividends in arrears: Unpaid dividend on cumulative preferred stock 187


The Extracted MBA

that must be paid before other classes of stock. Book value of stock: The declared value of stocks as percentages of corporate ownership. Par value of stock: Arbitrary value given to a stock when initially issued. Premium on stock: The difference between a stockâ&#x20AC;&#x2122;s par value and issue price when the stock is issued above par value. No-par stock: Class of stock that has no declared value and can be issued at any price, without creating a discount. Stated value of no-par stock: Arbitrary value given to no-par stock by the board of directors and is credited to the no-par account when issued. Preemptive right: The right of common stockholders to protect proportional interests in ownership by having the first opportunity to purchase newly-issued common stock. Appropriated retained earnings: Retained earnings set-aside for special purposes by the board of directors that are unavailable for dividends. Restricted retained earnings: Retained earnings not available to stockholders due to contractual or legal restraints. Stock split: The act of a corporation to reduce stock prices by issuing one or more additional stocks to standing shareholders per stock owned. Reverse stock split: The act of a corporation to raise stock prices by calling in stocks and reissuing a new share in place of more than one previously outstanding. Treasury stock: Stock that has been repurchased and held by the issuing corporation. Bonds Bond: Long-term liability issued by a corporation or government that 188


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is normally issued in denominations of $1,000 that requires periodic interest payments and payment of par value upon maturity. Bearer bond: A bond that is unregistered and payable to whoever holds it. Bond indenture: A contract between the issuing party and bondholders that states the obligations and rights of each. Bond sinking fund: Assets that are committed to repaying bond holders that are covered by a bond indenture that requires the issuing company to establish to establish the fund. Debenture: Unsecured bond that is valued according to the credit standing of the issuer. Coupon bond: A bond that is issued with coupons, which are detached and paid as they become due. Registered bond: A bond that has the ownerâ&#x20AC;&#x2122;s name and address recorded by the issuer. Serial bonds: An issue of bonds that mature at different dates. Callable bond: A bond that may be retired prior to maturity at the option of the issuer. Convertible bond: A bond that may be exchanged for stocks of the issuer at the holderâ&#x20AC;&#x2122;s option. Installment notes: Promissory notes that require periodic payments consisting of interest and a portion of the principal. Discount on bonds payable: The difference between the par value and issue value of a bond when it is sold at less than par value. Par value of a bond: The money a borrower agrees to pay at bond maturity as well as the interest payments. â&#x20AC;˘ Also known as face amount. Interpreting financial statements 189


The Extracted MBA

Statement of cash flows Financing activities: Transactions with shareholders or transactions with creditors to finance operations or pay on loans. Investing activities: Transactions involving making loans, purchasing or selling assets, or investments other than cash equivalents. Operating activities: Activities involving the purchasing or production of products, and the sales of goods and services to customers, to include outlays for business administration. Statement of cash flow: Statement that illustrates organizational cash inflows and outflows. Stock investments, consolidations, and international operations Long-term investments: Investments that are not intended for short-term financial needs and that contribute to long-term financial stability of the organization. Parent corporation: A corporation that owns a controlling share of another corporation. Consolidated financial statements: Financial statements that show all financial operations under the parent organizationâ&#x20AC;&#x2122;s control. Marketable equity securities: Common and preferred stock owned by the organization that is openly convertible on the open market. Minority interest: Portion of a subsidiaryâ&#x20AC;&#x2122;s shareholdersâ&#x20AC;&#x2122; equity that is not owned by the parent company. Ratios and performance measurements Quick assets: Cash, short-term investments, accounts receivable, and note receivable. Quick ratio: The relationship between quick assets and current liabilities. 190


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• Also known as the acid test ratio. • Quick assets / current liabilities = Quick ratio Current ratio: The relationship between the organization’s current assets and current liabilities. • Current assets / current liabilities = Current ratio Price earnings ratio: An evaluation of alternate common stock investment profitability. • Market price per share / earnings per share = Price earnings ratio Debt/equity ratio: Shows total liabilities as a percentage of total assets. • Long term debt / equity capital = debt/equity ratio Days’ sales uncollected: The average number of days credit sales remain outstanding. • Accounts receivable / credit sales X 365 Merchandise turnover: The average number of times an organization’s inventory is sold in an accounting period. • Cost of goods sold / average merchandise inventory = merchandise turnover Times fixed interest charges earned: Measures a company’s ability to pay fixed interest charges. • Income before interest and taxes / interest expense = Profit margin: Describes a company’s ability to earn income from sales. • Net income / net sales = profit margin Total asset turnover: Describes a company’s ability to use assets 191


The Extracted MBA

to generate sales. â&#x20AC;˘ Net sales / average total sales = total asset turnover Return on total assets employed: Measures operating efficiency and management performance. â&#x20AC;˘ Profit margin X total asset turnover = Return on assets employed Dividend yield: Annual cash dividends paid per share of stock. â&#x20AC;˘ annual dividend declared / market price per share = dividend yield Managerial accounting General accounting system: Accounting for manufacturing operations using periodic inventories. Cost accounting system: Accounting for manufacturing operations Using perpetual inventories. Manufacturing statement: Financial report that details the amounts and types of costs associated with the manufacturing process. Direct labor: Labor that is integral in converting raw materials into finished products. Direct materials: Raw materials that comprise finished products. Factory overhead: Costs that result from the manufacturing process, but are not directly associated with finished products. Indirect labor: The labor component of factory overhead that is characterized by labor costs that are not directly associated with the manufacture of finished products. Indirect materials: The material component of factory overhead that refers to materials consumed in support of the manufacturing process. Product costs: Costs that are accounted for in inventory because they produce benefits that are expected to have future value.

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Period costs: Costs charged as expenses because their benefits appear to expire as the costs are incurred. Raw materials: Materials purchased for the purpose of the manufacture of finished products. Job order cost accounting Job order cost accounting system: Designed to track the accumulated costs associated with each manufacturing job or job lot. Job cost sheet: Tool used in job order cost accounting to track job costs. Job order manufacturing: Manufacturing process that produces customized products for each customer. Predetermined overhead application rate: Overhead rate determined prior to production, based on historical data and cost considerations. Underapplied overhead: The amount that actual overhead costs exceed predetermined application rates. Overapplied overhead: The amount that the predetermined overhead rate exceeds actual overhead costs. Throughput: The rate and added value of products as they pass through points in the manufacturing process. Theory of constraints: Asserts that managers strive to eliminate impediments to efficient product throughput. Process cost accounting Process cost accounting system: Designed to track the costs of each manufacturing process separately and assign them to products as they pass through the system. Equivalent units of production: Measure of productivity of a manufacturing process with respect to its use of direct materials, direct material, and overhead. 193


The Extracted MBA

Process cost summary: Managerial accounting report that illustrates costs per department, equivalent units of production by departments, and how costs were assigned to output. Materials consumption report: Details raw materials issued to each manufacturing entity in the organization. Departmental accounting Department accounting system: Designed to track departmental activity and determine profitability and cost effectiveness thereof. Departmental contribution to overhead: The amount by which a departmentâ&#x20AC;&#x2122;s income contribution exceeds its direct costs and expenses. Activity-based costing: System of assigning costs to departments based upon a variety of functions rather than only one. Controllable costs: Costs that managers have the power to determine or influence. Uncontrollable costs: Costs over which department managers have no control. Cost center: A department that incurs costs without having a direct contribution to revenues. Profit center: A department that incurs costs, but also generates revenue. Cost driver: A factor that affects a component of overhead costs. Direct expenses: Expenses that are directly attributable to a departmentâ&#x20AC;&#x2122;s operations. Indirect expenses: Expenses incurred by one or more departments that are attributable to the operations of the organization. Escapable expenses: Expenses that would disappear after the elimination of a department.

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Inescapable expenses: Expenses that would remain despite the elimination of a department. Joint costs: A single cost resulting from the purchase of two or more different products. Cost-volume-profit analysis: The initial step in planning a business operation that enables managers to anticipate the effects of cost changes and sales fluctuations on revenues. CVP chart: A graphical representation of CVP analysis where sales volumes are plotted on the X axis and revenues are plotted on the Y axis. Estimated line of cost behavior: A scatter diagram that shows whether or not there is correlation between cost and sales volume. High-low method: A simplified method of estimating cost behavior done by drawing a straight line from the highest to the lowest cost. Break-even point: The sales level at which neither a profit nor loss is incurred. Margin of safety: The expected sales in excess of the break-even point. Contribution margin per unit: The amount that the sale of a single unit contributes in recovering fixed costs and profit. Contribution rate: The contribution per unit as a percentage of the productâ&#x20AC;&#x2122;s price. Fixed cost: A cost that remains unchanged regardless of volume. Semi-variable cost: A cost that changes with volume, but not at a steady rate. Step-variable cost: A cost that remains constant over a range of volumes, but changes when certain preset volumes are achieved. Variable cost: A cost that changes in direct proportion to volume. Budgeting 195


The Extracted MBA

Master budget: A comprehensive organizational budget that includes specific plans for sales, production goals, purchases, expenses, borrowing, loan payment, the budgeted income statement and the budgeted balance sheet. Budgeted balance sheet: Managerial accounting report that highlights predicted assets, liabilities, and shareholdersâ&#x20AC;&#x2122; equity. Budgeted income statement: Managerial accounting report that highlights predicted revenues and expenses. Continuous budgeting: Preparing budgets for future accounting periods and adjusting them as conditions change. Capital expenditures budget: A plan that shows cash expected from the sale of equipment as well as expected outlays for additional equipment. General and administrative expense budget: A plan that shows the anticipated costs of general and administrative expenses during the accounting period. Merchandise expense budget: A plan that states the amount or cost of merchandise purchases expected during the accounting period. Production budget: A plan that states how many units are to be produced during each future period covered by the master budget. Manufacturing budget: A plan that shows predicted costs of materials, direct labor, and overhead to be incurred under the production budget. Safety stock: An amount of merchandise or materials over the minimum needed to satisfy production. Fixed budget: Planning budget based on a single sales or production estimate. Flexible budget: Planning budget based on historical fixed and variable costs.

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Historical costs: Amounts paid in prior transactions. Flexible budget performance report: Internal management report that allows managers to compare actual performance with budgeted expectations. Cost variance: The differences between actual incurred costs and standard amounts. Controllable variance: The difference between budgeted overhead and overhead costs actually incurred. Overhead cost variance: The difference between actual overhead incurred for the period and the standard applied overhead. Price variance: The difference between actual and budgeted revenue caused by fluctuations in budgeted vs. actual market prices. Quantity variance: The difference between actual and budgeted revenue caused by fluctuations in programmed and actual product quantities. Management by exception: Analytical technique whereby management focuses their attention on areas with the most significant variances, while paying less attention to areas that demonstrate satisfactory performance. Standard costs: The costs expected to be incurred for specific products under normal conditions. Variance analysis: The process of examining actual versus programmed budget variable performance. Capital budgeting: Process of analyzing alternative investments and deciding which assets to acquire or sell. Net present value: Calculated by subtracting future cash flows from long-term investments at a reasonable interest rate and subtracting the initial cost of the initial investment. Sunk cost: An unavoidable cost incurred by a prior commitment.

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Extracted STATISTICS

www.extractedmba.com/stats.html

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DEFINED The science of making inferences about certain characteristics of a population based on information contained in a random sample from the entire population.

Greek Letters Commonly Used as Statistical Notations alpha beta ki-sqre delta mu nu pi rho sigma tau theta α

β

χ2

δ

µ

ν π ρ

σ

τ

θ

Population: Consists of the set of all measurements in which statistical analysis investigates. 199


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â&#x20AC;˘ Also known as the universe. Sample: A subset of measurements selected from a population. Random sample: A sampling done in such a way that each element has an equal chance of selection. Quartiles: Values that separate a ranked data set into four equal classes. Percentiles: Values that separate a ranked data set into 100 equal classes. Median: The middle value in an ordered array of observations. If there is an even number of observations in the array, the median is the average of the two middle numbers. If there is an odd number of data in the array, the median is the middle number. Mean: Computed by summing all numbers in an array of numbers (xi) and then dividing by the number of observations (n) in the array.

Weighted mean: Applied in circumstances where the data in the sample or population should not be weighted equally, but rather according to importance. Mode: The most frequently occurring value in a set of observations. Bimodal: Data that has two modes. Multimodal: Data that has more than two modes. Range: The difference between the largest and smallest observations in a population. Variance: The average squared deviation of the data points from their mean. ÎŁ (xi - 1) 2 / (n - 1), n 2

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Analysis of Variance: Corresponds to a determination of the fluctuations observed in a sample, and their dependencies. • Also known as ANOVA.

Standard deviation: The square root of the variance of a set.

• Conceived by Karl Pearson in 1900. Chi-square: Follows the probability density of the distribution with N degrees of freedom.

Entropy measure: Inequality coefficients used in sociology, economy, biostatistics, ecology, physics, image analysis, and information processing. E= - Σ p i ln(p i) Central limit theorem: Holds that the average of a sample of observations drawn from some population is approximately distributed as a normal distribution if certain conditions are met. Skewness: Measure of the degree to which the sample population deviates from symmetry with the mean at the center. Σ (xi - ) 3 / [ (n - 1) S 3 ], n

2

Standard error: Statistic indicating the accuracy of an estimate. Z score: The number of standard deviations an observation is above or below the mean. Z = (X -

X ) / standard deviation of X

Coefficient of variation: the relative deviation with respect to size.

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Kurtosis: Measure of the relative peakedness of the curve defined by the distribution of the observations. ÎŁ (xi - ) 4 / [ (n - 1) S 4 ], n

2

Scales of measurement Nominal scale: The use of numbers as labels for groups or classes. Ordinal scale: The ordering of data elements by size. Interval scale: The ordering of data elements by distances between them. Ratio scale: The ordering of data elements by relative comparison. Probability: measure the likelihood of the occurrence of an event.

Bayes theorem: Provides a way of transforming information relating to the probabilities of premises given certain conclusions into the probabilities of conclusions given certain premises

Binomial distribution: Gives probability of exact successes in independent trials, when probability of success in a single trial is a constant.

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Multinomial distribution: An extension of the binomial distribution in cases where there are more than two classes into which an event can fall.

Uniform distribution: Probability that observation will occur within a particular interval when the probability of occurrence within that interval is directly proportional to interval length. P(X = x) = n x(n - 1) (Log[1/xn])(n -1) / (n - 1)! Exponential distribution: distribution of time between independent events occurring at a constant rate.

Normal distribution: Continuous, bell-shaped distribution which is symmetric about its mean and can take on values from negative infinity to positive infinity.

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Random variable: A variable that takes on different numerical values, as determined by chance.

Discrete random variable: A random variable that can be counted. Continuous random variable: A random variable that can take on any integer value to positive and negative infinity. Probability density function: If a random variable X has a cumulative distribution function F(x) which is differentiable:

Joint probability density function: Performed for two or more variables:

Expectation value: Mean of a random variable X or a function H(X):

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Chebyshev norm: States that the distance between two sets of points or two lines is the largest distance between any pair of points, or the separation between two lines at the point where they are the farthest apart. Binomial distribution: Gives probability of exact successes in n

independent trials, when probability of success p on a single trial is a constant. c = (1-6pq)/(npq) +3

Poisson distribution: Gives probability of exactly x independent occurrences during a given period of time, if events take place independently and at a constant rate.

Exponential distribution: Gives distribution of time between independent events occurring at a constant rate.

Uniform distribution: Gives probability that observation will occur within a particular interval when probability of occurrence within that interval is directly proportional to interval length.

Student t distributions: A class of distributions in which the investigator must specify the degrees of freedom. T density curves are symmetrical and bell-shaped like the normal distribution, and have their peak at 0. Degrees of freedom: Symbolized by df, is a parameter of the t distribution which can be any real number greater than zero. Setting the value of df defines a particular member of the family of t distributions. 205


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Correlation: The measure of the degree of linear relationship between two variables.

Scatterplot: Graphical illustration of how the correlation coefficient changes as the linear relationship between two variables is altered.

Regression analysis: Method of determining mathematical relationships between dependent and independent variables.

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Linear regression: Corresponds to a straight line fitted to measurements characterized by identical variances. Least squares: Process that gives a linear fit in the slopeintercept form (y=mx+b). y-predicted = yhat = mx + b Coefficient of determination: The amount of the squared deviation which is explained by the points on the least squares regression line. r2 = Syhat yhat / Sy y Karhunen-Loeve transform: Mathematical process of determining the linear transformation of a sample of points in N-dimensional space, 207


The Extracted MBA

which exhibits the properties of the sample most clearly along the coordinate axes. Hypothesis testing: Mathematical proof by contradiction and acceptance of a null hypothesis. P value: A measure of the strength of the results of a test for the null hypotheses.

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Statistical tables used in analysis T-table: Used for tests concerning Âľ for one or two-population based on with small random sample size(s). df = n - 2. Z-table: Used for tests concerning Âľ for one or two-population based on their large random sample(s), (typically > 30, to invoke the Central Limit Theorem). Test concerning proportions, with large size random samp le size n (typically n> 50, to invoke a convergence theorem). 209


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Chi-square table: Used for tests concerning σ2 for one population based on a random sample from the entire population. Contingency tables (test for independence of categorical data). Goodness of fit test for discrete random variables. F-table: Used for tests concerning µ for three or more populations based on their random samples. Tests concerning σ2 for two-population based on their random samples. Overall assessment in regression analysis using the F-value. • Used for ANOVA.

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Extracted ECONOMICS

www.extractedmba.com/econ.html

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Defined The science that studies human behavior in relation to the use of limited resources to satisfy unlimited needs. Microeconomics: The study of economic behavior in specific economic markets. Macroeconomics: The study of the economic behavior of entire economies. Resources Land: Geographic areas and other natural resources used to produce goods and services. Labor: The physical and mental efforts that are used to produce goods and services. Capital: Buildings, processes, equipment, and human skill used to produce goods and services. Entrepreneurial ability: Special component of human skill that combines managerial ability, organizational skills, and the propensity to take risks. Rent: Payment resource owners receive in exchange for the use of their property. Wages: Payment resource owners receive in return for their labor. Interest: Payment resource owners receive in exchange for the use of their capital. Profit: The return resource owners receive for their entrepreneurial skill. Goods and services Good: A tangible item that satisfies wants.

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Service: An intangible activity that satisfies wants. Scarce: Occurs when demand exceeds supply at zero price. Economic actors Market: Set of arrangements in which buyers and sellers make exchanges at mutually agreeable terms. Product market: A market in which goods and services are exchanged for money. Resource market: A market in which resources are exchanged. Economic analysis Rational self-interest: The concept that consumers invariably act in their best self-interests. Marginal: Describes incremental or decremental changes that result from small changes in the economy. Economic theory: Simplification of reality used to make real-world economic predictions. â&#x20AC;˘ Also known as the economic model. The scientific method: A four-step process of theoretical economic investigation: 1. Definition of key economic variables. 2. Specification of key assumptions under which the theory is to be applied. 3. Formulation of economic hypothesis. 4. Validation of hypothesis based upon confronting actual observation and comparing data. Positive economic statement: That which can be proved or disproved by reference to facts. 213


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Normative economic statement: That which is based upon opinion and can be neither proved nor disproved. Economic analysis errors Association-is-causation: Error that results from the incorrect premise that if two economic variables are associated in time, that one must cause the other. Fallacy of composition: Error that results from the incorrect premise that what is true for the individual, or part, must be true for the group, or whole. Secondary effects: Errors that result from slowly developing economic actions that occur over time as people react to events. Tools of economic analysis Opportunity costs: The value of the best alternative forgone when an item is chosen. Sunk cost: An unavoidable cost incurred by a prior commitment. Comparative advantage: Exists when a country experiencing an absolute disadvantage in the production of two goods in relation to another nation, and specifically refers to the product the disadvantaged country produces more of. Absolute advantage: The ability of one country to produce more product than another country, given identical resources. Law of comparative advantage: States that the country with the lowest opportunity cost of producing specific goods should specialize in those goods. Barter: The direct exchange of one good for another without the use of currency. Division of labor: The subdivision of labor into specialized tasks and individual jobs.

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â&#x20AC;˘ Also known as work specialization. Specialization of labor: Focuses an individualâ&#x20AC;&#x2122;s efforts on a single product or task in producing a product. Production possibilities frontier: A curve that depicts all alternative combinations of goods that can be produced when resources are used efficiently.

Law of increasing opportunity costs: States that as more of a particular good is produced, increasing quantities of alternative goods must be sacrificed to perpetuate continued resource efficiency. Maximum efficiency: Occurs when there is no way resources can be reallocated to increase production of one good without decreasing the production of another. Economic system: Set of mechanisms that and institutions that determine the nature of the economic model. Economic systems Pure capitalism: Characterized by private resource ownership where prices are set to coordinate economic activity in an unregulated environment. Command economy: Characterized by public ownership of resources and centralized economic planning.

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Mixed capitalist economy: Characterized by private ownership of some resources and public ownership of others, where there is a mix of regulated and unregulated markets. The market system Demand: The quantities of goods that consumers are willing to buy at varying prices under otherwise constant conditions. Law of demand: States that the quantity of goods demanded is inversely related to price. Substitution effect: When the price of a good falls, consumers tend to substitute it for other goods, which have become relatively more expensive. Real income: Income measured in terms of how many goods and services it can buy. Income effect: Falling consumer prices result in increased real income, which increases demand. Demand curve: A curve showing demand for a good at different prices, with all other elements remaining constant.

Normal good: A good for which demand increases with increased consumer income. Inferior good: A good for which demand decreases with increased consumer income. Substitutes: Goods that are similar to the extent that an increase in the price of one leads to increased demand in others.

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Complements: Goods that are related in such a way that a decrease in price of one leads to increased demand for others. Tastes: Consumer preferences. Change in quantity demanded: Movement along the demand curve that inversely correlates with price. Change in demand: A shift in demand caused by a non-price determinant. Supply: The quantities of goods that producers are willing to sell at various prices. Law of supply: States that the quantity of a product supplied is usually directly related to its price. Supply curve: A curve showing demand for a good at different prices, with all other elements remaining constant.

Relevant resources: Resources used to produce specific goods. Alternative goods: Goods that use some or all of the resources for production as other goods. Change in quantity supplied: Movement along the supply curve that inversely correlates with price. Change in supply: A shift in supply caused by a non-price determinant. Transaction costs: The costs associated with the process of carryingout market exchanges. 217


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Market equilibrium: Market condition where plans of buyers match plans of sellers. Surplus: Excess of supply over demand. Shortage: Excess of demand over supply. Disequilibrium: A temporary mismatch between quantity demanded and quantity supplied as the market seeks equilibrium. Price floor: The minimum legal price for a good, as set by regulation. Price ceiling: The maximum legal price for a good, as set by regulation. Market failure: Occurs when unrestrained market operations yield undesirable social results. Monopoly: The control of an industry by a single company. Natural monopoly: An industry controlled by one firm that can serve an entire market better than one or more competing firms. Public good: A good that is available for all to consume, regardless of who pays or who does not. Externality: A cost that falls on a third party that is ignored by two parties making exchanges. Governmental economics Fiscal policy: The use of purchasing, making transfer payments, taxation, and borrowing to influence aggregate economic activity. Monetary policy: Controlling the supply of money to influence aggregate economic activity. International economic actors

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Balance of Payments (BOPs): A financial statement that compares payments made by citizens of one country to citizens of another, with payments to domestic residents by foreign residents. Merchandise trade balance: The difference in value between a country’s exports and imports over a given period of time. Foreign exchange: The currency of another country needed to carry out international transactions. Tariffs: Taxes imposed on imports, designed to drive up their prices and provide competitive advantages to domestically produced items. Quotas: Limits that are placed on the number of items imported. Macroeconomics Economy: The structure of economic activity in a national or geographic region. Money: An acceptable medium of exchange. Flow: Variable that measures an amount of activity over a period of time. Stock: Variable that measures an amount of activity at a specific time. Economic fluctuations: The rise and fall of economic activity as measured against long-term growth trends. • Also known as business cycles. Depression: A catastrophic reduction in an economy’s total activity, characterized by high unemployment for over one year. Recession: A moderate reduction in an economy’s total activity, as marked by contractions in many sectors thereof. Expansion: A phase of economic activity characterized by decreased unemployment and increased economic output.

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Aggregate output: The total value of finished goods and delivered services produced in an economy during a given period. • Also known as the Gross Domestic Product (GDP). Aggregate demand: The demand across an economy in relation to price levels. Price level: A composite measure of the prices of all goods and services in an economy, measured against a base year. • Also known as the Consumer Price Index (CPI). Aggregate demand curve: A curve that represents the relationship between an economy’s price level and the amount of aggregate output demanded.

Aggregate supply curve: A curve that represents the relationship between an economy’s price level and the amount of aggregate output supplied. Keynesian economics Government budget deficit: Flow variable that measures government expenditure in excess of government revenues. Demand-side economics: Economic philosophy of altering aggregate demand as a means of increasing employment and promoting price stability. Stagflation: A contraction of economic output coupled with inflation. Supply-side economics: Economic philosophy of increasing aggregate supply through decreasing taxes and offering incentives to produce. 220


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Government debt: Stock variable that measures the net accumulation of preceding budget deficits. Productivity: The measure of economic output in relation to resource input. Per-worker production function: The measure of worker capital in relation to economic output. Industrial policy: Government policy that applies taxes, subsidies, and regulations to nurturing industrial growth. Convergence: Economic theory that global economies will become increasingly similar over time. Unemployment Labor force: All able-bodied individuals over 16 years of age who are actively employed or seeking employment. Unemployment rate: The number of individuals who are seeking jobs in relation to the labor force. Discouraged worker: An otherwise eligible individual who has dropped out of the labor force due to a lack of success in finding a job. Labor force percentage rate: The ratio between the labor force and the population of working age. Frictional unemployment: Unemployment that occurs because of the amount of time necessary to match qualified job seekers with job openings. Structural unemployment: Unemployment that occurs because skills demanded by employers do not match the skills of the unemployed population. Seasonal unemployment: Unemployment resulting from seasonal changes in labor supply and labor demand.

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Cyclical unemployment: Unemployment that occurs during recessions due to reduced economic output. Full employment: Exists in the absence of cyclical unemployment. Unemployment insurance: Temporary income provided to qualified individuals seeking employment. Inflation: Sustained increases in an economy's price levels. Hyperinflation: An extremely high rate of inflation, typically in excess of 20%. Deflation: Sustained decreases in an economy's price levels. Demand-pull inflation: Sustained increases in an economy's price levels caused by increases in aggregate demand. Cost-push inflation: Sustained increases in an economy's price levels caused by decreases in aggregate supply. Interest: The dollar amount paid to lenders to forgo present consumption. Interest rate: A percentage of principal charged to borrowers by lenders. Nominal interest rate: Measures interest in terms of dollars paid to lenders, despite interest. Real interest rate: Measures interest rates in terms of real dollar values, as eroded by inflation. Real rate = nominal rate â&#x20AC;&#x201C; inflation rate Economic aggregates Gross Domestic Product (GDP): The value of all goods and services produced by an economy. Expenditure approach: GDP calculation by adding all expenditures on all goods and services. 222


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Income approach: GDP calculation by adding all payments to owners of resources used to produce output. Final goods and services: The completed goods and services considered in calculating GDP. Aggregate expenditure: Total spending on final goods and services. • Consumption + Investment + Government purchases + (Exports – Imports) = GDP Government purchases: Spending by all levels of government on all goods and services. Net exports: The value of an economy's exports minus imports. Underground economy: All transactions that are unreported due to illegality or tax evasion and are not used in GDP calculations. Depreciation: Capital stock that is consumed during the GDP reporting period. Net domestic product: The Gross Domestic Product minus depreciation. Nominal GDP: Based upon prevailing prices at the time of transaction. • Also known as current dollar GDP. Real GDP: Measure of GDP that eliminates the impact of price changes in the nominal GDP. Price indexes Base year: The year against which other years are compared when constructing an index, where the value is 100. • Also known as the base period. Consumer Price Index (CPI): Time-based measure of a fixed set of "market basket" goods and services. 223


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GDP Price Index: Comprehensive price index based upon all goods and services included in the GDP. Consumption Classical economists: Economists from the 18th and 19th centuries who believed that recessions and depressions were natural occurrences that were generally short-lived, and that economies were self-adjusting. Disposable income: Income that consumers have after paying taxes and receiving transfer payments. Net taxes: Taxes minus transfer payments. Financial markets: Banks and like-institutions that enable the flow of funds from savers to borrowers. Leakage: Diversion of funds from the domestic spending stream due to savings, taxes, and imports. Injection: Payment of income other than by organizations, as well as any spending by entities other than households. Planned investment: The amount of investment firms plan to make during the fiscal year. Actual investment: The actual amount of investment that occurs during a fiscal year, calculated as planned investment plus unplanned changes in inventories. Consumption function: The relationship between income and household spending. Marginal propensity to consume: The change in consumption spending divided by the change in income that caused it. Marginal propensity to save: The change in savings divided by the change in income that caused it. Savings functions: Relationship between savings and the level of income in the economy. 224


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Net wealth: Value of household assets minus household liabilities. Investment function: Relationship between planned investment and income. Autonomous investment: Investment that is independent of income. Government purchase function: Relationship between government purchases and the income level in the economy. Net export function: Relationship between net exports and the level of income in the economy. Aggregate expenditure Income-expenditure model: Relationship between aggregate income and aggregate spending that determines at what point income equals spending. Aggregate expenditure function: Relationship that depicts planned spending for different levels of income. Aggregate supply Nominal wage: Earnings measured in current dollars. Real wage: Earnings measured in purchasing power. Potential output: An economy's maximum sustainable output. Efficiency wage theory: Holds that maintaining wages above required levels attracts sufficient levels of quality workers and results in increased productivity. Short-run aggregate supply (SRAS) curve: Curve that depicts the relationship between price level and quantity of aggregate output supplied in the short term. Long-run aggregate supply (LRAS) curve: Vertical line drawn at potential output.

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Expansionary gap: Amount by which actual aggregate output exceeds possible maximum sustained output. Contractionary gap: Amount by which actual aggregate output falls below possible maximum sustained output. Coordination failure: Occurs when managers and their subordinates fail to achieve organizational goals because they are unable to jointly choose and employ production strategies. Supply shocks: Unanticipated events that temporarily affect aggregate supply. Beneficial supply shocks: Supply shocks that increase aggregate supply. Adverse supply shocks: Supply shocks that decrease aggregate supply. Hysteresis: Theory that lengthy patterns of high or low unemployment levels can result in corresponding increased or decreased natural rates of unemployment. Fiscal policy Autonomous net tax multiplier: Ratio of changes in real GDP demanded to the initial changes of autonomous net taxes that caused them. MPC/(1-MPC)

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Balanced budget multiplier: Factor that demonstrates that identical changes in government purchases and net tax adjustments alter real GDP. Automatic stabilizers: Features of government spending and taxation that stabilize fluctuations in disposable income during the natural business cycle. Discretionary fiscal policy: Intentional manipulation of government spending and taxation with the purpose of promoting maximized employment and price stability. The financial system Double coincidence of wants: Occurs when two traders are willing to directly exchange their respective products. Commodity money: Anything that serves both as money and a commodity. Unit of account: Common unit that measures the value of every good and service. Store of value: Anything that retains its value over time. Standard of deferred payment: Agreed-upon unit of measures that enables parties to contract for future purchases, payments, and receipts. Gresham's law: States that individuals tend to trade inferior money away and hoard the best. Seigniorage: Difference between the value of money and the costs incurred producing it. Token money: Money that has a face value in excess of the cost of producing it. Fractional reserve banking system: Banking system where only a portion of deposits are backed by reserves. Bank notes: Papers that promise to pay an amount of gold or silver to individuals possessing them.

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Fiat money: Money that is unredeemable for any specific commodity and has a value that is set by the issuing government. Legal tender: Currency that creditors are required to accept as payment for debts. Financial intermediaries: Institutions that accept funds from savings and lend them to borrowers. Depository institutions: Commercial banks that accept deposits from the general public. Commercial banks: Institutions that make short-term loans to businesses. Demand deposits: Accounts that receive no interest, into which depositors may write checks and withdraw their deposits at any time. Thrift institutions: Depository entities that make long-term loans to borrowers. â&#x20AC;˘ Also known as thrifts. Federal Reserve System: The central bank and monetary authority of the United States. â&#x20AC;˘ Also known as the fed. Reserves: Deposits of the fed plus physical currency held by banks. Discount rate: Rate charged to banks by Federal Reserve banks for discount loans. Open-market operations: Transactions of government securities by the Federal Reserve for the purpose of influencing the money supply. Bank holding company: An entity that owns banks. Money market mutual fund: Collection of short-term assets purchased with funds deposited by many shareholders. The money supply 228


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Asymmetric information: Unequal information known by each party of a transaction. Checkable deposits: Accounts in financial institutions from which funds may be withdrawn by check. Monetary aggregates: The economy's measure of money supply. M1: Currency held by the public. M2: Monetary aggregate consisting of M1 plus savings deposits and money market mutual funds. M3: Monetary aggregate consisting of M2 plus certificates of deposits. Liquidity: Ease with which an asset can be converted to currency. Savings deposits: Interest-earning deposits that have no maturity date. Time deposits: Deposits that earn fixed interest for an established period of time. Monetary policy Transactions demand for money: Demand for money for the exchange of goods and services. Equation of exchange: Money times velocity equals nominal income. M*V=P*Y Velocity of money: The average number of times a dollar is used to purchase goods and services in a year. â&#x20AC;˘ Also known as the dollar cycle. Quantity theory of money: States that if the velocity of money is unstable, then changes in the money supply have predictable effects on nominal income.

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Federal budget policy Government policy: Plan for government expenditures and receipts during a fiscal year. Continuing resolutions: Agreements between the President and Congress that allow agencies to continue spending at the prior year's rate in the absence of an approved budget. Entitlement programs: Guaranteed benefits to qualified classes of citizens. Annually balanced budget: Budget philosophy that pervaded prior to the Great Depression that equated expenditure to income. Cyclically balanced budget: Budget philosophy that calls for deficit spending during recessions and deficit repayment during expansions. Functional finance: Budget philosophy that aims to achieve potential GDP rather than balancing budgets. Crowding out: Displacement of private investment that occurs when increased government spending drives-up interest rates. Crowding in: The stimulation of the economy that occurs as a result of targeted government spending. Elasticity of supply and demand Price elasticity of demand: Change in quantity demanded divided by percent of change in price. Inelastic demand: Exists when price changes have little effect on quantity demanded. Unit-elastic demand: Exists when a price change creates an inversely proportional percentage change in quantity demanded. Elastic demand: Exists when price changes have large effects on quantity demanded. Linear demand curve: Straight-line demand curve. 230


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Perfectly elastic demand curve: Horizontal line that represents the fact that any price increase reduces demand to zero. Perfectly inelastic demand curve: Vertical line that represents the fact that any price change has no effect on demand. Constant elasticity of demand: Exists when price elasticity is the same at all points on the curve. Price elasticity of supply: Change in quantity supplied divided by percentage change in price. Perfectly elastic supply curve: Horizontal line that represents the fact that any price decrease reduces quantity supplied to zero. Perfectly inelastic supply curve: Vertical line that represents the fact that any price change has no effect on quantity supplied. Unit-elastic supply: Exists when a price change creates an inversely proportional percentage change in quantity supplied. Income elasticity of demand: Percent change of demand divided by the percent change in income. Cross-price elasticity of demand: Percent change in the demand of one good resulting from the price change of another. Consumer demand Tastes: Consumer preferences for particular goods and services. Total utility: Satisfaction that consumers derive from consumption. Marginal utility: Change in total utility due to a one-unit change in consumption of a good. Law of diminishing marginal utility: States that the more a good is consumed, the total utility of the good is diminished.

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Consumer equilibrium: Condition that occurs when a consumer's budget is exhausted and that last dollar spent on each good results in the same marginal utility. Marginal valuation: Dollar value of marginal utility that results from the consumption of each additional unit of good. Consumer surplus: Difference between what consumers are willing to pay for a good and what they actually pay. Cost and production Explicit cost: Opportunity cost of resources that are paid for in cash. Implicit cost: Opportunity cost of using internal resources without corresponding cash payments. Accounting profit: Total revenue minus explicit cost. Economic profit: Total revenue minus explicit and implicit cost. Normal profit: Accounting profit required to induce shareholders to employ their collective resources in the organization. Variable resource: That which can be varied to increase or decrease output. Fixed resource: That which cannot be varied. Total product: The complete output of an organization. Marginal product: Change in total product that occurs when the utilization of a resource increases by one unit. Increasing marginal returns: Marginal product increases that occur when another unit of a particular resource is utilized. Law of diminishing marginal returns: States that when increasing variable resources are used, output will diminish. Economies of scale: Reductions in costs that result from increased long-term production. 232


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Diseconomies of scale: Increases in costs that result from increased long-term production. Minimum efficient scale: The lowest rate of production at which an organization can take full advantage of economies of scale. Perfect competition: Market in which exist large numbers of fully informed buyers and sellers of products with no obstacles to market entry or exit.

Market structure: Defined features of a particular market. Price taker: An organization that faces fixed market prices and whose actions have no effect upon them. Perfect marginal revenue: Exists when marginal revenue equals market price. Short run firm supply curve: Curve that depicts quantity supplied at each price in the short run. Long-run industry supply curve: Curve that depicts the fully adjusted relationship between price and quantity supplied. Constant cost industry: An industry that can expand or contract with no effect on long-term costs of production. Increasing cost industry: An industry that experiences increased long-term costs as output expands in the long-run. Producer surplus: Occurs when total revenue exceeds total variable cost. Monopoly

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Barrier to entry: Impediment that prevents competition from entering a market and competing on an equal basis in an industry. Price searcher: An organization that possesses control over the price it charges because its demand curve slopes downward. Contestable market: A market in which potential entrants can serve the same customers as an existing firm. Deadweight loss: Loss of consumer and producer surpluses that result from monopolistic conditions. Rent seeking: Actions by individuals or firms intended to influence public policy for the purpose of increasing their incomes. Price discrimination: The selling of the same goods at different priced to different consumers in an effort to maximize revenue. Perfectly discriminating monopolist: Monopolist who charges different prices for every unit of product. Monopolistic competition: Market structure in which several firms sell products that are close substitutes, but different enough that each firm's demand curve slopes downward. Excess capacity: The difference between a monopolistic competitor's minimum cost and its most profitable level of output. Oligopoly: Market structure in which few competitors exist and their behaviors are interdependent. Cartel: Group of firms that form strategic alliances to coordinate output and pricing with the intent of behaving as monopolists. Price leader: Firm that sets prices that are adopted across an industry. Cost-plus pricing: Method of setting prices by adding percentages to variable cost. Game theory: Analytical model for oligopolistic behavior that studies strategic moves and countermoves by firms.

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â&#x20AC;˘ Conceived by John von Neumann and Oskar Morgenstern in 1944. Duopoly: Oligopoly that has only two competitors. Strategy: Under game theory, refers to the operational plan of a player. Payoff matrix: Under game theory, a table of payoff that players can expect as a result of their strategies. Kinked demand curve: Illustration of price stickiness that occurs when one member of an oligopoly lowers prices, which is followed by competitors, but increases in price are not followed.

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EXTRACTS ABOUT THE AUTHOR

Kelly Vinal is an active duty Chief Warrant Officer in the Army, stationed at Fort Bragg, NC. In this capacity, he manages a large electronic maintenance facility that serves the entire 18th Airborne Corps. At night, he teaches management sciences at Campbell University and at the Central Texas College extension on Fort Bragg. When he's not writing long, monotonous books, he enjoys biking, fishing, and the outdoors. Kelly Vinal lives in Fayetteville, North Carolina.

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EXTRACTED BIBLIOGRAPHY

Abernathy, William J., Kim B. Clark, and Alan M. Kantrow. Industrial Renaissance: Producing a Competitive Future for America. New York: Basic Books, 1983. Ackoff, R. Creating the Corporate Future. New York: John Wiley & Sons, 1981. Babbage, Charles. On the Economy of Machinery and Manufacturers. 1832. Reprint, New York: Augustus M. Kelley, 1963. Bell, Daniel. The Coming of Post-Industrial Society: A Venture in Social Forecasting. New York: Basic Books, 1973. Chakraborty, S. K. Ethics in Management: Vadantic Perspectives. Delhi: Oxford University Press, 1995. Drucker, Peter. "The Coming of the New Organization." Harvard Business Review 66, no. 1 (January-February 1988). Fayol, Henri. General and Industrial Management. Translated by Constance Storrs. London: Pitman, 1949. Lawler, Edward E., III. High-Involvement Management: Participative Strategies for Improving Organizational Performance. San Francisco: Jossey-Bass, 1986. Marsh, James, ed. Handbook of Organizations. Chicago: Rand McNally, 1965. Mintzberg, Henry. The Nature of Managerial Work. New York: Harper & Row, 1973. Quinn, James Brian. Intelligent Enterprises: A New Paradigm for a New Era. New York: The Free Press, 1992. Senge, Peter. Fifth Discipline: The Art and Practice of the Learning Organization. New York: Doubleday, 1990. Smith, Adam. The Wealth of Nations. London: Penguin Classics, 1987. Taylor, Frederick Winslow. Scientific Management (comprising "Shop Management," "Principles of Scientific Management," and "Testimony Before the Special House Committee"). New York: Harper and Brothers, 1947. Argyris, Chris. "How Learning and Reasoning Processes Affect Organizational Change." In Change in Organizations, Paul S. Goodman and Associates . San Francisco: Jossey-Bass, 1982, 47-86. Bennett, Sherrin, and Juanita Brown. "Mindshift: Strategic Dialogue for Breakthrough Thinking." In Learning Organizations: Developing Cultures for Tomorrow's Workplace. Edited by Sarita Chawla and John Renesch. Portland, OR: Productivity Press, 1995.

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Deal, Terrence E., and Allan A. Kennedy. Corporate Cultures: The Rites and Rituals of Corporate Life. Reading, MA: Addison-Wesley, 1982. Fukuda, Ryuji. Managerial Engineering: Techniques for Improving Quality and Productivity in the Workplace. Stamford, CT: Productivity, Inc., 1983. Goldstein, Jeffrey. The Unshackled Organization: Facing the Challenge of Unpredictability through Spontaneous Reorganization. Portland, OR: Productivity Press, 1994. Lancourt, Joan. "Human Resource Leadership in Reengineering the Organizational Culture and Infrastructure." Compensation and Benefits Management, Autumn 1994). Mohrman, Susan Albers, Susan Cohen, and Allan Mohrman. Designing Team-Based Organizations: New Forms for Knowledge Work. New York: Jossey-Bass, 1995. Pedler, Mike, John Burgoyne, and Tom Boydell. The Learning Company: A Strategy for Sustainable Development. London: McGrawHill, 1991. Rothlisberger, Fritz J., and William J. Dickson. Management and the Worker: An Account of Research Conducted by the Western Electric Company, Hawthorne Works, Chicago. Cambridge, MA: Harvard University Press, 1967. Scott-Morgan, Peter. The Unwritten Rules of the Game: Master Them, Shatter Them, and Break Through the Barriers to Organizational Change. New York: McGraw-Hill, 1994. Stauffer, Robert N. "Converting Customers to Partners at Ingersoll." Manufacturing Engineering (September 1988): 41-44. Weber, Max. The Theory of Social and Economic Organization. Translated by A. M. Henderson. New York: The Free Press, 1969. Naisbett, John. Megatrends. New York: Warner Books, 1982. Maslow, Abraham. Toward a Psychology of Being. Princeton, NJ: D. van Nostrand, 1968. Prahalad, C. K., and Gary Hamel. "The Core Competence of the Corporation." Harvard Business Review (May-June, 1991). Schein, Edgar. Organizational Psychology. Englewood Cliffs, NJ: Prentice-Hall, 1961. Simon, Herbert. Administrative Behavior. 3rd ed. New York: The Free Press, 1976. Sveiby, Karl-Erik. Toward a Knowledge Perspective on Organization. Endsbruk, Sweden: Akademitryck AB, 1994. Trompernaars, Fons. Riding the Waves of Culture: Understanding Cultural Diversity in Business. London: The Economist Books, 1993. 238


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Vogt, Eric Edwards. "Learning Out of Context." In Learning Organizations: Developing Cultures for Tomorrow's Workplace. Edited by Sarita Chawla and John Renesch. Portland, OR: Productivity Press, 1995. Porter, Michael E. Competitive Advantage: Techniques for Analyzing Industries and Competitors. New York: The Free Press, 1985. Zuboff, Shoshana. "Automate/Informate: The Two Faces of Intelligent Technology." Organizational Dynamics 14, no. 2 (autumn 1985): 5-18. Treacy, Michael, and Fred Wiersema. The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market. Reading, MA: Addison-Wesley, 1995. Waterman, Robert H. The Renewal Factor: How the Best Get and Keep the Competitive Edge. New York: Bantam Books, 1987. Lardner, James. "Integration and Information in an Automated Factory." Proceedings of the AUTOFACT 1984, Anaheim, CA. Dearborn, MI: Society of Manufacturing Engineers, 1984. Marks, Peter, and Kathleen Riley. Aligning Technology: A Guide for Selecting and Implementing Computer-aided Design and Manufacturing Tools. Los Gatos, CA: Design Insight, 1995. Morton, Michael S. Scott. The Corporation of the 1990s: Information Technology and Organizational Transformation. New York: Oxford University Press, 1991. Moto-oka, Tohru, ed. Fifth Generation Computer Systems: Proceedings of the International Conference on Fifth Generation Computer Systems. Amsterdam: North-Holland, 1982. Mullin, Tom, ed. The Nature of Chaos. Oxford: Clarendon Press, 1993. O'Connor, Dennis, and Wendy Wilkerson. Guide to Expert Systems Program Management, Artificial Intelligence Guide Series. Intelligent Systems Technologies Group. Maynard, MA: Digital Equipment Corp., 1985. Ranky, Paul G. Computer Integrated Manufacturing: An Introduction with Case Studies. Englewood Cliffs, NJ: Prentice-Hall International, 1986. Rheingold, Howard. Virtual Reality. New York: Summit Books, 1991. Rockart, John F., and Christine V. Bullen. The Rise of Managerial Computing: The Best of the Center for Information Systems Research. Homewood, IL: Dow Jones-Irwin, 1986. Roitman, David B., and Manoj K. Sinha. "CIM as a Process of Organizational Change." Presentation at AUTOFACT Conference, 9 November 1987. Dearborn, MI: Society of Manufacturing Engineers, 1987. Shaiken, Harley. Work Transformed: Automation and Labor in the Computer Age. New York: Holt, Rinehart and Winston, 1984.

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Webber, Alan. "What's So New About the New Economy?" Harvard Business Review (January-February) 1993. Monden, Yasuhiro. "Adaptable Kanban Systems Help Toyota Maintain Just-in-Time Production." Industrial Engineering (May 1981): 29-46. Moody, Patricia. "Take Down the Walls! Building World-Class Customer, Supplier Partnerships." AME (Association for Manufacturing Excellence) Target (AME's periodical news service) (September 1992). Peters, Tom, and Nancy Austin. A Passion for Excellence. New York: Random House, 1985. von Neumann, John, and Oskar Morganstern. The Theory of Games and Economic Behavior. Princeton: Princeton University Press, 1944.

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