Business: The Key Concepts

Mark Vernon

• Publisher: Routledge
• Year: 2003
• ISBN:
  9781134526222
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Here is a practical guide to the essentials of business. This book provides everything you need to know about the key concepts and terms, from accountability to zero-sum game. Everything from management, economics and finance to marketing, organizational behaviour and operations is covered in just the right amount of detail to make things clear and intelligible.

Business: The Key Concepts:

* is detailed yet approachable
* considers new developments in business, notably eBusiness and contemporary business ethics
* covers established subjects, taking an international and strategic perspective that balances theory and practice
* suggests specific further reading for many concepts and also includes an extensive bibliography.

Whether you're already in business and could do with a handy reference guide, or you're a student needing an introduction to the fundamentals, Business: The Key Concepts is the perfect companion.

ACCOUNTABILITY

The obligation placed on employees and organizations to be answerable for their actions.

In practice, the term denotes a framework of responsibilities covering various decisions and actions within which individuals or groups work. The goal is to ensure that standards, methods and timeframes are adhered to.

Accountability finds its roots in classical management theory, with its militaristic belief in lines of command and specialization that governs the division of labour. However, the concept has been modernized so that accountable management today is a practice that seeks to manage by holding employees to performance measures or objectives, agreed wherever possible with the individuals concerned. Cost and profit centres are closely associated with this style of management – the establishment of units within the organization based on function or location for which costs or profits can be reliably calculated and, therefore, controlled. Shareholders and other third parties are also developing means of holding firms to account, often over ethical concerns.

See also: Audit, Ethics, Performance

Further reading: Klatt et al., 1999

ACCOUNTING

The discipline that provides information about a business based on financial data.

Accounting information can be used by anyone making decisions about the organization or their relationship to the business. Accounting is a massive subject area embracing a variety of methods that have a profound impact upon the way a business is viewed. Here, the fundamental principles are reviewed along with some pointers as to how the subject is currently evolving.

The results of accounting procedures can range from a simple balance sheet to a voluminous record of a corporation’s entire commercial activity, but the discipline as a whole can be broken down into two broad areas. The first is financial accounting, the preparation of reports for shareholders, tax authorities and business reports. Accounts must therefore be intelligible to these third parties according to rules that might be enforced by law. The second is managerial accounting, the use of financial data within an organization to assist in decision making and driving profit and growth.

Financial accounting varies according to legal, economic and social context. This can present a number of problems to businesses. For example, accounting principles as Americans put it, or accounting practices for the UK, differ dramatically. In the UK, four principles are basic: the going concern principle, that is a company is at least initially assumed to be viable; the self-explanatory principle of prudence; the matching principle which says that records are entered in the period in which they arise not when actually transacted; and the principle of consistency which advises adherence to precedent.

Accounting standards are agreed by national professional associations to assist in the auditing process. However, these give rise to another source of variation: standards are legally enforceable in Canada and often in the US, but are voluntary in the UK.

Accounting for goodwill and foreign currency exchanges also contributes to diverse practices. Hence there are many initiatives to promote accounting harmonization. For example, it is an important driver in European Economic and Monetary Union.

Managerial accounting originates in the need to control costs. It is not necessarily subject to external rules, and variations in practice are common, typically due to inherited anomalies, although best practices are often deployed. Models such as cost volume profit analysis (CVP), that calculates financial economies of scale, are fundamental. More sophisticated tools, such as activity based costing (ABC), seek to enhance this basic information. Others deal with less tangible factors that demand a degree of personal judgement as well as objective standards. For example, cost-benefit analysis assesses the enhancement of a product or service accrued from a particular cost. Firms also implement accounting software tools, such as Enterprise Resource Planning (ERP), to overcome gaps in corporate knowledge.

The central accounting discipline has sprouted a number of branches to meet particular needs. For example, cash flow accounting provides an alternative to transaction analysis by calculating the difference between a company’s cash outlays and income over the accounting period. Inflation accounting incorporates measures that are able to deal more meaningfully with businesses working in areas in which monetary values fluctuate significantly. Infamously, creative accounting uses techniques to improve the financial profile of the firm (though whenever even two conservative accountants are looking at the same data, at least three different reports will result).

Today, the academic study of accounting embraces a number of tensions, such as the arguments between those who advocate the importance of value in accounting and those who prefer to stick to hard costs. Accounting practices are also likely to continue to develop as factors such as the demands of international capital markets grow. Further, as the firm’s relationship with its banks evolves, accounting for financial products such as swaps and derivatives will increasingly be taken in-house, making the accountant’s tasks more complex.

See also: Activity-based costing, Audit, Cash, Finance, Foreign exchange risk, Goodwill, Income statement, Inflation accounting, Opportunity cost, Transfer pricing, Zero-based budgeting

Further reading: Bishop et al., 1999; Kaplan and Atkinson, 1998; Jagolinzer, 2000; Rashad Abdel-Khalik, 1998; A. Thomas, 1999

ACCULTURATION

The process whereby a foreign culture is assimilated without losing the benefits of the original or the other.

In international business, acculturation is a tricky issue. Informal management styles in Silicon Valley, for example, do not work well with Japan’s preference for extensive deliberation. Alternatively, global labour markets demand a greater understanding of the stresses and strains on employees negotiating different cultures. The effectiveness of a workforce can be severely impaired if cultural preferences are ignored.

A further issue concerns that of cross-cultural marketing. There are relatively few genuinely global brands, with most varying according to locale. Occasionally, things go very wrong. For example, dogs associated with toilet paper works well in the West, but not in the Middle East, where the animals are regarded as dirty.

See also: Culture, Geocentricism, Joint venture

Further reading: Beechler and Stacker, 1998; Morosini, 1998

ACTIVISM

The initiatives of employees, shareholders, stakeholders or pressure groups to influence the decisions or actions of a company.

The demonstrations of activists protesting at the meetings of the World Bank and IMF have recently stolen the headlines. Powered by communications technology, these various groups are highly organized and arguably effective at raising their concerns. However, this kind of very visible activism is only one, contested, way in which people try to influence the operation of businesses.

For example, shareholder activism has long been a feature of American corporate life. Mackenzie describes it as shareholder action, a loose term that covers attempts to influence corporate decision making through the shareholder process. It can cover action by individuals, small campaigning groups, large national pressure groups, and institutional investors like pension funds. This kind of shareholder action is different from the traditional concerns of shareholders with dividend payments. It refers to attempts to encourage a company to think about a range of social and ethical policy questions.

Shareholder action in the pursuit of social interests has become increasingly common in the last two decades, particularly in the US. Today, several hundred companies face ethically motivated shareholder action campaigns at any one time. While the overwhelming majority of these campaigns take place in America, a growing number of companies in other countries have faced pressure from shareholder activists too. Institutional investors that are increasingly interested in ethical fund management, companies that want to be seen to be more accountable for their actions, and other kinds of activism, will ensure that shareholder action is a trend set to grow.

See also: Environmental audit, Ethics, Social audit, Stakeholder

Further reading: Mackenzie, 1993; Pringle and Thompson, 1999; Weinreich, 1999

ACTIVITY-BASED COSTING

An accounting method that aims to assess and include the real costs of processes, called activities, in the production of products, called cost objects.

Activity-based costing is the most important of the new accounting techniques that have emerged since the early 1980s. It developed to rectify faults with traditional cost management solutions. In particular, ABC allows the costs of products to be assessed more clearly in relation to identifying profits and economic break-even points, as well as with other managerial purposes such as improving strategic decision making and implementing business plans. ABC lends itself well to situations in which overheads are high, where accounting errors are sensitive or competition is high, and where cost objects themselves are complex.

The total cost of a product is the sum of its direct cost, such as labour and materials, and associated overheads. It is this second element that ABC addresses in particular. Traditional cost accounting arbitrarily allocates overhead costs by assuming that they can be calculated according to volume-based measures, such as machine time and labour hours. ABC focuses on tracing expenses accrued by objects and treating them as direct costs.

Understanding the relationship between cost objects, activities associated with them and the resources they consume is central. ABC requires five steps: identification of activities, determination of cost of activities, determination of cost drivers, collation of activity data and calculation of product cost.

The adoption of ABC by organizations varies, although why firms that would otherwise apparently benefit from the virtues of ABC do not adopt its practices is an open question.

See also: Accounting

Further reading: Brimson, 1999; Forrest, 1996; Innes and Mitchell, 1998; Turney, 1996

ADAPTABILITY

The flexibility of a company’s aims.

Adaptability is important to business in certain specific senses. An adaptive strategy is one in which negotiation and compromise characterize the achievement of goals that are themselves adaptable. This mode of operation is typically suited to public sector or charitable organizations. However, adaptability is increasingly recognized as a valuable quality even for organizations used to fixed targets and strict aims.

A second less significant application of adaptability refers to employees’ ability to cope with change, and is deployed in the screening of employees for work abroad. Tests include assessing the ability to handle stress and the ability to make decisions on limited knowledge.

See also: Aptitude test, Mission statement

Further reading: Birkinshaw and Hagström, 2000

ADHOCRACY

The type of organization associated with an open-ended style of decision making.

An adhocratic structure seeks to allow all staff in the organization to work together across traditional divides for the achievement of the goals of the company. The reason behind such a complex environment is to produce the dynamism necessary to make decisions that face high degrees of uncertainty or chance. For example, administrative staff might have insights on an issue that production managers alone would overlook. Alternatively, an innovative organization might adopt adhocratic methods so that good ideas can surface from a variety of sources.

Garbage can models of decision making are a famous variation. Here, the value of chaos within the organization is recognized, with management’s task being to steer the creativity that results.

See also: Creativity, Innovation

Further reading: Carter, 1999; Stredwick and Ellis, 1998; Syrett and Lamminman, 1998

ADVERTISING

The paid-for use of mass media to promote goods and services to influence customers.

Although it should immediately be added that an accurate definition of advertising, with its assumptions about the use of media, and the rationale and effectiveness of the advertisement, is notoriously hard to come by. There are a number of reasons for this, reflecting the complexity of the subject.

For example, advertising is not solely concerned with selling products. This has been the argument of the tobacco industry as it fights in various parts of the world to maintain its right to advertise: here advertisements are designed to maintain loyalty to brands and win smokers from other brands, not to sell cigarettes per se. Advertisements are also designed to establish legitimacy or significance, and to animate a company, service or product.

Another important point is that whilst advertisers use mass media, they do not in general seek to reach mass audiences. Advertisements are generally targeted at small groups of individuals who are susceptible to the message they carry.

The origins of modern advertising lie in the Industrial Revolution and the mass production of goods. The problem manufacturers had was to find or create new mass markets, and then manage them using techniques such as segmentation. Mass media provided the means and the development of brands was perceived as achieving the ends; indeed, some would argue that it was advertising that created consumer culture.

Advertising contributes to the overall marketing mix, although how much depends on who you ask. One hundred years ago, the British advertising agent S. H. Benson wrote, ‘the results of advertising are not discernible', and the study of the interaction of audiences and advertisements has been extensive and contested ever since. Academics contribute a theoretical perspective using disciplines such as semiotics. Practitioners, especially media buyers, constantly struggle to quantify the effectiveness of advertisements. Pre-testing with focus groups and post-evaluation by polling are common methods. Reach, frequency and impact are the variables that are taken into account. Effectiveness is a particularly current critical issue for new media, the aim being to justify the spending on online banner ads, for example, upon which so many of the so-called dotcoms depend.

The links between advertising and the media run deep. Andy Warhol believed that the perfect magazine would consist of nothing but advertisements, making the point that the dependency of publications on advertisements and vice-versa is often uneasy. The newspaper brand must be maintained, but advertisers represent an important source of revenue, and they will advertise more if editorial works in their favour, but then that will tend to erode the brand.

The regulation of advertising is another area of contestation. Many national laws have an impact, in addition to which in most parts of the Western world self-regulatory codes are enforced, in part to stave off periodic demands for tougher legislation. Global media create regulatory problems for advertising on satellite television or the internet. For example, in continental Europe, children are not used as extensively in advertisements as in the UK and US.

The limits of advertising, whether set by taste or code, have been incorporated into the increasingly sophisticated tricks that advertisers play, notably to win so-called below the line advertising. Here the point is to stimulate interest in the advertisement itself, thereby massively increasing its reach. Versace is a leading exponent of this art.

Recently, the advertising industry has been in something of a crisis. The hegemony of advertising agencies has been broken as the industry fragments and as the relationships between advertising specialisms change. The definition of what constitutes advertising is also being stretched, as advertisers exploit new techniques such as the ‘infomercial’ and product placement to stimulate an increasingly ad-wise public.

See also: Brand, Consumer, Marketing, Segmentation, Semiotics, Socioeconomics, Subliminal advertising

Further reading: Brierly, 1995; Cronin, 2000; Fletcher, 1999; Jones, 1998; Wilmshurst and Mackay, 1999

ANTITRUST LAW

The action of a government to sustain lively competition in a marketplace. Also called action against anticompetitive practice.

In America, the first antitrust law, the Sherman Act, was passed in 1890, making it illegal to set up monopolies that reduce competition or build cartels that limit trade. A number of laws have been enacted since, the most important being the Clayton Act and the Federal Trade Commission Act, both of 1914. In Europe, the most significant body of legislation is found in the European Union’s 1957 Treaty of Rome, especially Articles 85 and 86. One of the key differences between the US and Europe is that in Europe small- and medium-sized enterprises are allowed to operate as cartels to compete with large firms. This is forbidden in the US.

These laws have also become a powerful tool in combating exclusionary marketing tactics. As long ago as 1912 NCR (National Cash Register) was successfully prosecuted. The most recent and ongoing case concerns the operations of Microsoft. However, antitrust laws are typically of a general nature, or, when covering a large trading area, incorporate the principle of subsidiarity, which means that the enforcement of legislation often proves very difficult.

Legal debate on antitrust focuses on issues such as whether these laws are concerned solely with the operation of markets or whether they aim to stem the eroding effect that large corporations wielding significant economic power might have on the functioning of democracy. The economic theory upon which these laws are based is also questioned, for example, in relating efficiency to organizational size. This confusion in turn gives rise to concern about the effectiveness of recourse to the law when...

Table of contents

• COVER PAGE
• BUSINESS
• ROUTLEDGE KEY GUIDES
• TITLE PAGE
• COPYRIGHT PAGE
• PREFACE
• ACKNOWLEDGEMENTS
• THE KEY CONCEPTS
• BIBLIOGRAPHY