Memrise is a free online learning tool uses flashcards augmented with spaced repetition to boost the speed and ease of learning. I’m in the process of creating a Memrise course to supplement BUS 263 and help you to learn the legal vocabulary that is such an important part of this class. The course is under construction, and at present I have completed only the vocabulary for the first chapter, but I’ll be adding to it as the semester continues. Give it a try; I hope you’ll find it helpful:
Operations management looks at the processes businesses use to turn raw materials into finished products. Noam Shiber published a provocative article in The New Republic recently suggesting that the decline of American manufacturing is due in large part to the decline of operations management in the business school curriculum. Instead of studying how to make things, a large majority (~67%) of students at top MBA programs major in finance. As a result, business schools largely teach finance, and in many programs it isn’t even possible to major in operations.
In a similar vein, Gary Pisano at the Harvard Business Review notes that the trend of outsourcing production may weaken the ability of American companies to invent new products. When we design products here and have them manufactured overseas, those foreign companies gain an edge in learning how to manufacture efficiently, and once they know how to make our products, “they are in a much better position to move up the food chain into manufacturing and designing more sophisticated components and subsystems and, eventually, the entire product.”
What happens when we have a generation of managers who think of companies as assets to be bought and sold rather than as “makers of specific products, where the goal was to maximize quality and long-term market share”?
The field of operations management studies how a business produces its products. Remember that products include both goods and services, so that even though we tend to focus on production of goods when we discuss operations management, the same principles apply to producing services. Operations management is concerned with deciding on a production method, whether mass production, mass customization, or make to order production.
In addition, operations managers must decide on where to locate and design the layout of production facilities. Think about why Mercedes chose to locate in Vance. What advantages in terms of climate, transportation, and land and labor costs does that site provide? Would the same site be a good location for a Google data center or a Best Buy? Would The Dallas, Oregon, be a good site for a Mercedes plant?
One of the most important functions of operations management is quality management. Traditionally, firms used quality control to ensure that their products were not defective by inspecting finished goods. The problem with this method is that once the problem is found, it’s too late—you’ve already produced a defective product. QC treats the symptoms and not the causes. Since the 1950s, we’ve seen the rise of quality assurance, most notably in the form of Total Quality Management. The idea behind TQM is to make sure that the production process prevents defects from occurring in the first place. TQM seeks to constantly improve customer satisfaction by involving all employees in producing quality products, and by constantly measuring, analyzing, and controlling the production process to improve the level of quality. Because of this focus on continuous improvement, many people refer to total quality management as CQI, or continuous quality improvement. More recently, Six Sigma has taken the idea of continuous quality improvement and used statistical process control to reduce variability and keep defects below 3.4 per million (six standard deviations from the mean).
Last week we looked at sole proprietorships and partnerships, two forms of business ownership that share the advantages of easy formation and management flexibility, but which also share the disadvantages of a low ability to raise capital and unlimited personal liability. This week we turn to corporations and LLCs, which provide limited liability for business owners and make it easier to raise capital.
Corporations are a form of business ownership that allow for limited liability of the owners, known as shareholders. Corporations have some very significant advantages over sole proprietorships and partnerships. They have a perpetual duration, so that they can go on for generations, and they’re easy to transfer, so it’s simple to sell the business to a new owner. They also make it easy to raise a great deal of capital because shareholders aren’t liable for the debts of the business. Need more capital? Sell more shares. The biggest advantage of a corporation is limited liability. The owners of a corporation have some risk if the business fails—they can lose what they’ve invested—but their risk is limited. They can’t lose any more than they’ve invested and none of their personal assets are at risk. Corporations have the disadvantage of increased complexity, expense of formation, and regulation. To form a corporation, a business owner will usually hire an attorney to draft articles of incorporation to be filed with the secretary of state. Corporations also have a more complicated structure—shareholders are the owners of the corporation, but they don’t have direct control of the business. Instead, they elect a board of directors who hire corporate officers, and the officers, who are employees of the corporation, manage the company. To make sure that shareholders retain some control of their investment, a corporation is required to have a shareholders’ meeting once each year. The shareholders get a financial report and elect directors. If they don’t like the way the company is being run, they can elect a new board who will then hire new officers. That’s fine for a big corporation like Walmart, but what about a small, one-owner corporation? Seems kind of silly to send yourself notice of a meeting with yourself, then elect yourself to the board of directors so you can hire yourself as CEO, right? What if you just skip it? It’s not like you’re going to sue yourself in a shareholder’s derivative lawsuit, right? If the corporation gets sued, however, a plaintiff’s attorney may ask for minutes of annual meetings, and may ask the judge to rule that the business is a sham corporation and to pierce the corporate veil, holding the owner personally liable and removing the limited liability that was one of the main reasons for creating a corporation in the first place.
Almost every textbook warns of the dangers of double taxation for a corporation. While it is technically possible, in practice, it doesn’t happen much and is usually the result of poor tax planning. Most small corporations are subchapter S corporations, which don’t pay any tax at the corporate level, and large corporations use the tax code to eliminate most or all liability. In 2010, GE had $14Billion in profits (not revenue!) and still paid 0$ in US corporate income taxes. Many large corporations pay an effective tax rate of 0%, and some corporations even manage a negative tax rate of as much as -58%.
Finally, we have the limited liability company, or LLC. An LLC combines the best features of a partnership and the best features of a corporation. Like a partnership, LLCs provide flexible management and have no requirement for an annual meeting. An LLC can be managed by its owners (called “members”)—like a partnership, or managed by professional managers—like a corporation. Most importantly (as you’ve probably guessed from the name), LLCs provide their owners with limited personal liability. LLCs also have great flexibility when it comes to taxation. They can either be taxed as partnerships, avoiding any risk of double taxation. However, if corporate taxation is more advantageous, LLCs can be taxed as corporations in stead. Not only that, but LLCs can change from year to year, depending on which type of taxation is better.