In this course you’ll learn what it takes to run a business. As you progress though this course, you’ll begin to look at things from the eyes of an employee or a manager instead of a consumer. You’ll develop a fundamental business vocabulary that will help you keep up with the latest news and make more informed decisions. By participating in classroom discussions and completing the chapter exercises, you’ll gain some valuable critical-thinking, problem-solving, team-building, and communication skills that you can use on the job and throughout your life. Should you decide to pursue a career in business, this course will introduce you to a variety of jobs in fields such as accounting, economics, human resources, management, finance, marketing, and so on. You’ll see how people who work in these business functions contribute to the success of a company as a whole. You’ll gain insight into the types of skills and knowledge these jobs require. And most important, you’ll discover that a career in business today is fascinating, challenging, and often quite rewarding.
A business is a profit-seeking activity that provides goods and services that satisfy consumers’ needs. The driving force behind most businesses is the prospect of earning a profit— what remains after all expenses have been deducted from business revenue. Still, not every organization exists to earn a profit. Nonprofit organizations exist to provide society with a social or educational service. Although nonprofit organizations do not have a profit motive, they must operate efficiently and effectively to achieve their goals. Thus, the business opportunities, challenges, and activities discussed throughout this textbook apply to both profit-seeking and nonprofit organizations. Moreover, to be successful, both profit-seeking and nonprofit organizations must be socially responsible and ethical when dealing with investors, employees, customers, the community, and society.
Most businesses can be classified into two broad categories: goods-producing businesses and service businesses. Goods-producing businesses produce tangible goods by engaging in activities such as manufacturing, construction, mining, and agriculture. It’s difficult to start a goods-producing business without substantial investments in buildings, machinery, and equipment. Most goods-producing businesses are capital-intensive businesses; they generally require large amounts of money or equipment to get started and to operate. Service businesses produce intangible products and include those whose principal product is finance, insurance, transportation, utilities, wholesale and retail trade, banking, entertainment, health care, repairs, or information. Most service businesses are labor-intensive businesses . That is, they rely more on human resources than buildings, machinery and equipment to prosper.
Services have always played an important role in the U.S. economy. For more than 60 years, they accounted for half of all U.S. employment. In the mid-1980s services became the engine of growth for the U.S. economy. Most of the increase in U.S. employment from 1985 to the present has been generated by the service sector. Today about half of the 1,000 largest U.S. companies are service-based. And economists project that the number of service-related jobs will continue to increase—from about 94 million (or 72 percent of the 130 million or so people in today’s workforce) to about 112 million by 2006. In contrast, employment growth in the goods-producing sector is projected to remain relatively flat through 2006.
The growth in the service sector is attributable to five key factors: Consumers have more disposable income. The 76 million baby boomers in the United States (born between 1946 and 1964) are in their peak earning years. Services target changing demographic patterns and lifestyle trends. The United States has more elderly people, more single people living alone, more two-career households, and more single parents than ever before. These trends create opportunities for service companies. Services are needed to support complex goods and new technology. Computers, home entertainment centers, recreational vehicles, and security systems are examples of products that require specialized installation, repair, user training, or extensive support services. Companies are increasingly seeking professional advice. To compete in the global economy, many firms turn to consultants and professional advisors for help as they seek ways to cut costs, refine their business processes, expand overseas, and engage in electronic commerce . Barriers to entry are low for service businesses. Capital-intensive businesses generally have high barriers to entry, which means that conditions exist that make entry into these businesses extremely difficult. By contrast, the barriers to entry for most service companies are low.
Economics is the study of how a society uses its scarce resources to produce and distribute goods and services. Economists call the resources that societies use to produce goods and services factors of production. To maximize a company’s profit, businesses use five factors of production in the most efficient way possible: Natural resources —things that are useful in their natural state, such as land, forests, minerals, and water. Human resources —anyone (from company presidents to grocery clerks) who works to produce goods and services. Capital —resources (such as money, computers, machines, tools, and buildings) that a business needs to produce goods and services. Entrepreneurs —people such as Steve Case who are innovative and willing to take risks to create and operate new businesses. Knowledge— the collective intelligence of an organization.
Traditionally, a business was considered to have an advantage if it was located in a country with a plentiful supply of natural resources, human resources, capital, and entrepreneurs. But in the global marketplace, intellectual assets are the key. Today companies can obtain capital from one part of the world, purchase supplies from another, and locate production facilities in still another. They can relocate their operations to wherever they find a steady supply of affordable workers. Thus, countries with the greatest supply of knowledge workers and ones with economic systems that give workers the freedom to pursue their own economic interests will have an advantage in the new economy.
The role that individuals and government play in allocating a society’s resources depend on the society’s economic system, the basic set of rules for allocating a society’s resources to satisfy its citizens’ needs. Two main economic systems exist today: free-market systems and planned systems. In a free-market system, individuals are free to decide what products to produce, how to produce them, whom to sell them to, and at what price to sell them. Capitalism is the term used to describe the free-market system. In modern practice, however, the government sometimes intervenes in free-market systems to influence prices and wages or to change the way resources are allocated. This practice of limited intervention is called mixed capitalism . In a planned system, governments control all or part of the allocation of resources and limit the freedom of choice. The planned system that allows individuals the least degree of economic freedom is communism . Private ownership is restricted. Resource allocation is handled through centralized planning by government officials. Socialism involves a relatively high degree of government planning and some government ownership of land and resources. However, government involvement is limited to industries considered vital to the common welfare. Several socialist and communist economies are moving toward free-market systems. They are privatizing some of their government-owned enterprises by selling them to privately held firms.
In a free-market system, the marketplace determines what goods and services get produced. The following slides present three underlying elements that differentiate a free-market system from other economic systems: supply and demand, competition, and limited government intervention.
The theory of supply and demand is the immediate driving force of the free-market system. Demand refers to the amount of a good or service that consumers will buy at a given time at various prices. Supply refers to the quantities of a good or service that producers will provide on a particular date at various prices. Simply put, demand refers to the behavior of buyers, whereas supply refers to the behavior of sellers. Both work together to impose a kind of order on the free-market system. Consider the airline industry. Airline travel is a cyclical business; its revenues rise and fall with the economy. When the economy is robust, consumers and businesses spend more on discretionary travel. When the economy falters, they cut back on such discretionary spending.
Is there a price that will make both the supplier and the customer happy? The answer is yes--the price at which the quantity of jeans demanded equals the quantity supplied. This relationship is shown in the graph above. A range of possible prices is listed vertically at the left of the graph, with the lowest at the bottom and the highest at the top. Quantity of blue jeans is represented along the horizontal axis. The points plotted on the curve labeled D indicate that on a given day the store would sell 10 pairs of jeans if they were priced at $35, 15 pairs if they were priced at $27, and so on. The curve that describes this relationship between price and quantity demanded is a demand curve. Now think about the situation from the seller’s point of view. This relationship can also be depicted graphically. The line labeled S shows that the store would be willing to offer 30 pairs of jeans at $35, 25 pairs at $30, and so on. The point marked E shows that when jeans are priced at $25, consumers are willing to buy 20 pairs of them and the store is willing to sell 20 pairs. In other words, at the price of $25, the quantity supplied and the quantity demanded are in balance. The price at this point is known as the equilibrium price. Note that this intersection represents both a specific price ($25 in our example ) and a specific quantity of goods ( 20 pairs of jeans). It is also tied to a specific point in time. Note also that it is the mutual interaction between quantity demanded and quantity supplied that determines the equilibrium price.
Competition is the situation in which two or more suppliers of a product are rivals in the pursuit of the same customers. The ideal type of competition is pure competition, which is characterized by three conditions: a marketplace of multiple buyers and sellers; a product or service with nearly identical features such as wheat or cotton; and low barriers of entry. When these three conditions exist, no single firm or group of firms in an industry becomes large enough to influence prices and thereby distort the workings of the free-market system. By contrast, in a monopoly there is only one producer of a product in a given market, and thus the producer is able to determine the price. A situation in which an industry is dominated by only a few producers is called an oligopoly. Between pure competition and monopoly lie a number of firms with varying degrees of competitive power. Most of the competition in advanced free-market economic systems is monopolistic competition, in which a large number of sellers (none of which dominates the market) offer products that can be distinguished from competing products in at least some small way.
When markets become filled with competitors and products start to look alike, companies must use price, speed, quality, service, or innovation to gain a competitive advantage — something that sets one company apart from its rivals and makes its products more appealing to consumers.
Although the free-market system generally works well, it’s far from perfect. If left unchecked, the economic forces that make capitalism succeed may also create severe problems for some groups or individuals. To correct these types of problems, the government serves four major economic roles: it enacts laws and creates regulations to foster competition; it regulates and deregulates certain industries; it protects stakeholders’ rights; and it intervenes to contribute to economic stability.
Because competition generally benefits the U.S. economy, the U.S. federal government and state and local governments create thousands of new laws and regulations every year to preserve competition and ensure that no single enterprise becomes too powerful. Antitrust laws limit what businesses can and cannot do to ensure that all competitors have an equal chance of producing a product, reaching the market, and making a profit. Some of the earliest government moves in this arena produced such landmark pieces of legislation as the Sherman Antitrust Act, the Clayton Antitrust Act, and the Federal Trade Commission Act. To preserve competition, the government may also stipulate requirements companies must meet to gain approval of a proposed merger or acquisition. If the government thinks a proposed merger or acquisition might restrain competition, it may deny approval altogether.
Sometimes the government imposes regulations on specific industries to ensure fair competition, ethical business practices, safe working conditions, or general public safety. In a regulated industry, close government control is substituted for free competition, and competition is either limited or eliminated. In extreme cases, regulators may even decide who can enter an industry, what customers they must serve, and how much they can charge. For years, the telecommunications, airline, banking, and electric utility industries fell under strict government control. However, the trend over the past few decades has been to open up competition in regulated industries by removing or relaxing existing regulations. Hopes are that such deregulation will allow new industry competitors to enter the market, create more choices for consumers, and keep prices in check. But the debate is ongoing about whether deregulation achieves these goals.
In addition to fostering competition, another important role the government plays is to protect the stakeholders of a business. Businesses have many stakeholders— groups that are affected by (or that affect) a business’s operations, including colleagues, employees, supervisors, investors, customers, suppliers, and society at large. In the course of serving one or more of these stakeholders, a business may sometimes neglect the interests of other stakeholders in the process. To protect consumers, employees, shareholders, and the environment from the potentially harmful actions of business, the government has established several regulatory agencies. Many of these agencies have the power to pass and enforce rules and regulations within their specific area of authority. Such regulations are intended to encourage businesses to behave ethically and in a socially responsible way.
A nation’s economy never stays exactly the same size. Economic expansion occurs when the economy is growing and people are spending more money. Consumer purchases stimulate businesses to produce more goods and services, which it turn stimulates employment. Economic contraction occurs when such spending declines. Business cuts back on production, employees are laid off, and the economy as a whole slows down. If the period of downward swing is severe, the nation may enter into a recession, traditionally defined as two consecutive quarters of decline in real gross domestic product. When a downward swing or recession is over, the economy enters into a period of recovery: Companies buy more, factories produce more, employment is high, and workers spend their earnings. These recurrent up-and-down swings are known as the business cycle. In an attempt to avoid hardship and to foster economic stability, the government can levy new taxes or adjust the current tax rates, raise or lower interest rates, and regulate the total amount of money circulating in our economy. These government actions have two facets: monetary policy and fiscal policy. Monetary policy involves adjusting the nation’s money supply by increasing or decreasing interest rates to help control inflation. Fiscal policy involves changes in the government’s revenues and expenditures to stimulate or dampen the economy.
Economists monitor the performance of the economy by watching a variety of indicators. Unemployment statistics, for example, signal future changes in consumer spending. When unemployment rises, people have less money to spend, and the economy suffers. Housing starts, another leading indicator, show where several industries are headed. Housing is very sensitive to interest rate changes. If mortgage rates are high, fewer people can afford to build new homes. When housing starts drop, builders stop hiring, and may even lay off workers. Meanwhile, orders fall for plumbing fixtures, carpets, and appliances, so manufacturers decrease production and workers’ hours. These cutbacks ripple through the economy and lead to slower income and job growth, and weaker consumer spending. Another leading indicator is durable-goods orders, or orders for goods that typically last more than three years (which can mean everything from desk chairs to airplanes). A rise in durable-goods orders is a positive indicator that business spending is turning around. Besides unemployment data, housing starts, and durable-goods orders, economists closely monitor a nation’s price changes and output.
Price changes, especially price increases, are another important economic indicator. In a period of rising prices, the purchasing power of a dollar erodes, which means that you can purchase fewer things with today’s dollar than you could in a prior period. Price increases tend to lead to wage increases, which in turn add pressures for higher prices, setting a vicious cycle in motion. Inflation is a steady rise in the prices of goods and services throughout the economy. When the inflation rate begins to decline, economists use the term disinflation. Deflation, on the other hand, is the sustained fall in the general price level for goods and services. It is the opposite of inflation; that is, purchasing power increases because a dollar held today will buy more tomorrow. In a deflationary period, investors postpone major purchases in anticipation of lower prices in the future. The consumer price index (CPI) measures the rate of inflation by comparing the change in prices of a representative basket of goods and services such as clothing, food, housing, and utilities over time. A numerical weight is assigned to each item in the representative basket to adjust for each item’s relative importance in the marketplace. The CPI has always been a hot topic because it is used by the government to index Social Security payments, and it is widely used by businesses in private contracts to calculate cost-of-living increases. But, like most economic indicators, the CPI is far from perfect.
The broadest measure of an economy’s health is the gross domestic product (GDP). The GDP measures a country’s output--its production, distribution, and use of goods and services--by computing the sum of all goods and services produced for final use in a market during a specified period (usually a year). The goods may be produced by either domestic or foreign companies as long as these companies are located within a nation’s boundaries. A less popular measure of a country’s output is the gross national product (GNP). This measure excludes the value of production from foreign-owned businesses within a nation’s boundaries (such as Honda U.S.), but it includes receipts from the overseas operations of domestic companies-such as McDonald’s in Switzerland. Put another way, GNP considers who is responsible for the production; GDP considers where the production occurs.
Globalization— the increasing tendency of the world to act as one market instead of a series of national ones—opens new markets for a company’s goods and services. But at the same time it creates tougher competition and a raft of new challenges for businesses: Producing quality products and services that satisfy customer’s changing needs. Today’s customer is well-informed and has many product choices. Starting and managing a small business in today’s competitive environment. Starting a new business or managing a small company in today’s global economy requires creativity and a willingness to exploit new opportunities. Thinking globally and committing to a culturally diverse workforce. Globalization opens new markets for a company’s goods, increases competition, and changes the composition of the workforce into one that is more diverse in race, gender, age, physical and mental abilities, lifestyle, culture, education, ideas, and background. Behaving in an ethically and socially responsible manner. As businesses become more complex through global expansion and technological change, they must deal with an increasing number of ethical and social issues. Keeping pace with technology and electronic commerce. Technology is reshaping the world. The Internet and innovations in computerization and telecommunication have made it possible for people anywhere in the world to exchange information and goods.
Business in Action Ch1
Understanding the Fundamentals of Business and Economics
Why Study Business? <ul><li>Learn what it takes to run a business </li></ul><ul><li>Build business vocabulary </li></ul><ul><li>Develop workplace skills </li></ul><ul><li>Learn about a variety of jobs </li></ul><ul><li>Appreciate today’s business career </li></ul>
What Is a Business? For-Profit Non-Profit Money Motive Social Service Ethical Conduct Social Responsibility Efficiency Effectiveness
Categories of Business Providing Services Producing Goods Capital Intensive Labor Intensive
Why Is the Service Sector Growing? <ul><li>More disposable income </li></ul><ul><li>Changing demographics and lifestyles </li></ul><ul><li>Complex goods and technologies </li></ul><ul><li>Need for professional advice </li></ul><ul><li>Low barriers to entry </li></ul>
What Is an Economic System? Goods Services Human Resources Natural Resources Capital Knowledge Entrepreneurs Factors of Production Scarce Resources
The New Economy General Characteristics <ul><li>Physical Assets </li></ul><ul><li>Cost Control </li></ul><ul><li>Intellectual Assets </li></ul><ul><li>Adding Value </li></ul>Technology <ul><li>Mechanical </li></ul><ul><li>Information </li></ul>Workforce <ul><li>Job-Specific Skills </li></ul><ul><li>Transferable Skills </li></ul><ul><li>Lifelong Learning </li></ul>Geography <ul><li>Close to Resources </li></ul><ul><li>Near to Collaborators </li></ul><ul><li>Near to Competitors </li></ul>Capital <ul><li>Debt Financing </li></ul><ul><li>Venture Capital </li></ul>New Economy Old Economy
Types of Economic Systems Capitalism Mixed Capitalism Socialism Communism Privatization Free-Market System Planned System
How Does a Free-Market Economic System Work? Government Intervention Supply and Demand Competition
The Role of Government <ul><li>Fosters competition </li></ul><ul><li>Regulates industries </li></ul><ul><li>Deregulate industries </li></ul><ul><li>Protects stakeholder’s rights </li></ul><ul><li>Contributes to economic stability </li></ul>
Fostering Competition Antitrust Legislation Mergers and Acquisitions
Regulating and Deregulating Industries Government Regulation Free Competition Fair Competition Business Ethics Working Conditions Public Safety
Protecting Stakeholders <ul><li>Federal Trade Commission (FCC) </li></ul><ul><li>Food and Drug Administration (FDA) </li></ul><ul><li>Federal Aviation Administration (FAA) </li></ul><ul><li>Interstate Commerce Commission (ICC) </li></ul><ul><li>Securities and Exchange Commission (SEC) </li></ul>Colleagues Employees Supervisors Environment Customers Suppliers Society Investors
Contributing to Economic Stability Economic Expansion Economic Contraction Recovery Recession Business Cycle Business Cycle Monetary Policy Fiscal Policy Interest Rates Revenue and Spending
Measuring Price Changes Inflation Deflation Consumer Price Index (CPI) Purchasing Power
Measuring National Output Gross National Product (GNP) Gross Domestic Product (GDP) Dollar Value Yes Yes Final Goods and Services Yes Yes Domestic Businesses No Yes Foreign-Owned Businesses Yes No Overseas Operations
Challenges of Globalization <ul><li>Products and services </li></ul><ul><li>Managing a small business </li></ul><ul><li>Globalization and workforce diversity </li></ul><ul><li>Ethics and social responsibility </li></ul><ul><li>Technology and electronic commerce </li></ul>