Chapter 3Doing Business in Global Markets©McGraw-Hil

Chapter 3
Doing Business in Global Markets
©McGraw-Hill Education. All rights reserved. Authorized only
for instructor use in the classroom. No reproduction or further
distribution permitted without the prior written consent of
McGraw-Hill Education.
1
Learning Objectives
LO 3-1 Discuss the importance of the global market and the
roles of comparative advantage and absolute advantage in global
trade.
LO 3-2 Explain the importance of importing and exporting, and
understand key terms used in global business.
LO 3-3 Illustrate the strategies used in reaching global markets
and explain the role of multinational corporations.
LO 3-4 Evaluate the forces that affect trading in global markets.
LO 3-5 Debate the advantages and disadvantages of trade
protectionism.
LO 3-6 Discuss the changing landscape of the global market and
the issue of offshore outsourcing.
©McGraw-Hill Education.

2
The Dynamic Global Market
LO 3-1
Business in the Global Market
Over 90% of companies doing business globally believe it is
important for employees to have international experience.
U.S. organizations are also expanding abroad.
Importing — Buying products from another country.
Exporting — Selling products to another country.
The United States is the largest importing and the third-largest
exporting nation in the world.
3
Figure 3.1 World Population by Continent
LO 3-1

4
Why Trade with Other Nations? 1 of 2
LO 3-1
Countries with abundant natural resources (like Venezuela or
Iraq) need technological resources from other countries (like
Japan).
Global trade allows countries to produce what they make best
and buy what they need from others.
Free trade—The movement of goods and services among nations
without political or economic barriers.
5
Figure 3.2 The Pros and Cons of Free Trade
LO 3-1
Jump to long description in appendix

6
Why Trade with Other Nations? 2 of 2
LO 3-1
The Theories of Comparative and Absolute Advantage
Comparative advantage — A country should sell to other
countries those products that it produces most efficiently, and
buy from other countries those products that it cannot produce
as effectively or efficiently.
Absolute advantage — A country has a monopoly on producing
a specific product or is able to produce it more efficiently than
all other countries.
7
Getting Involved in Global Trade 1 of 3

LO 3-2
Importing Goods and Services
Students attending schools abroad tend to notice products that
they’re used to are unavailable in their new country.
By working with producers in their native country, some
become importers while still in school.
Exporting Goods and Services
Exporting provides a great boost to the U.S. economy.
It’s estimated every $1 billion in U.S. exports generates over
7,000 U.S. jobs.
8
LO 3-2
Measuring Global Trade
Balance of trade — The total value of a nation’s exports
compared to its imports over a particular period.
Trade surplus (favorable) — Occurs when the value of a
country’s exports exceeds that of its imports.
Trade deficit (unfavorable) — Occurs when the value of a
country’s imports exceeds that of its exports.

9
LO 3-2
Measuring Global Trade continued
Balance of payments — The difference between money coming
into a country (from exports) and money leaving the country
(from imports) plus money flows from other factors such as
tourism, foreign aid, military expenditures, and foreign
investment.
The goal is to have more money flowing into a country than
out—a favorable balance.
An unfavorable balance is when more money flows out of a
country.
Dumping — Selling products in a foreign country at lower
prices than those charged in the producing country.
Dumping is prohibited.
China and Brazil have been penalized for dumping steel in the
United States.

10
Figure 3.3 Largest Exporting Nations in the World and the
Largest U.S. Trade Partners
LO 3-2
11
Figure 3.4 Strategies for Reaching Global Markets
LO 3-3
12

Strategies for Reaching Global Markets 1 of 9
LO 3-3
Licensing
Licensing — A global strategy in which a firm (the licensor)
allows a foreign company (the licensee) to produce its product
in exchange for a fee (a royalty).
Licensing can benefit a firm by:
Gaining revenues it wouldn’t have otherwise generated
Spending little or no money to produce or market their products
13
LO 3-3
Exporting
EACs provide hands-on exporting assistance and trade-finance
support for small and medium-sized businesses that wish to
directly export goods and services.
ETCs help companies engage in indirect exporting by:
Matching buyers and sellers
Dealing with foreign customs offices, documentation, and
conversions

14
LO 3-3
Franchising
Franchising — A contractual agreement whereby someone with
a good idea for a business sells others the rights to use the name
and sell a product or service in a given territory in a specified
manner.
Franchisors need to be careful to adapt their product to the
countries they serve.
Domino’s Pizza and Dunkin Donuts all adapted their products to
different tastes in different countries.
15
LO 3-3
Contract Manufacturing

Contract manufacturing — A foreign company’s production of
private-label goods to which a domestic company then attaches
its own brand name or trademark; part of the broad category of
outsourcing.
Contract manufacturing can be used to:
Allow a company to experiment in a new market without
incurring heavy start-up costs such as building a manufacturing
plant
Temporarily meet an unexpected increase in orders
16
LO 3-3
International Joint Ventures and Strategic Alliances
Joint venture — A partnership in which two or more companies
(often from different countries) join to undertake a major
project.
The benefits of joint ventures:
Shared technology and risk
Shared marketing and management expertise
Entry into markets where foreign companies are often not
allowed unless goods are produced locally

17
LO 3-3
International Joint Ventures and Strategic Alliances continued
Strategic alliance — A long-term partnership between two or
more companies established to help each company build
competitive market advantages.
They don’t typically share costs, risks, management or profits.
Strategic alliances provide broad access to markets, capital, and
technical expertise.
18
LO 3-3
Foreign Direct Investment
Foreign direct investment (FDI) — The buying of permanent

property and businesses in foreign nations.
Foreign subsidiary — A company owned in a foreign country by
another company, called the parent company.
Primary advantage: Parent company maintains complete control
over its technology or expertise.
Primary disadvantage: Must commit funds and technology
within foreign boundaries.
19
LO 3-3
Foreign Direct Investment continued
Multinational corporation — An organization that manufactures
and markets products in many different countries and has
multinational stock ownership and multinational management.
Not all large global businesses are multinational.
Only firms that have manufacturing capacity or some other
physical presence in different nations can truly be
multinational.

20
LO 3-3
Foreign Direct Investment continued
Sovereign wealth funds (SWFs) — Investment funds controlled
by governments holding large stakes in foreign companies.
The size of the funds and the fact that they are government-
owned make some fear they might be used for:
Geopolitical objectives
Gaining control of strategic natural resources
Obtaining sensitive technologies
21
Figure 3.5 The Largest Multinational Corporations in the World
LO 3-3RankCompany Country1Wal martUnited States2State
GridChina3China National PetroleumChina4Sinopec
GroupChina5Royal Dutch ShellNetherlands6Exxon MobilUnited
States7VolkswagenGermany8Toyota MotorJapan9AppleUnited
States10BPGreat Britain

Source: Fortune, www.fortune.com, accessed June 2017.
22
Forces Affecting Trading in Global Markets 1 of 5
LO 3-4
Sociocultural Forces
To be involved in global trade, you must be aware of the
cultural differences among nations, including:
Social structures
Religion
Manners and customs
Values and attitudes
Language
Personal communication
23

Figure 3.6 Oops, Did We Say That?
LO 3-4
24
LO 3-4
Economic and Financial Forces
Exchange rate — The value of one nation’s currency relative to
the currencies of other countries.
High value of the dollar — Dollar is trading for more foreign
currency; foreign products become cheaper.
Low value of the dollar — Dollar is trading for less foreign
currency; foreign goods become more expensive.
Floating exchange rates — Currencies float in value depending
on the supply and demand for them in the global market.

25
LO 3-4
Economic and Financial Forces continued
Devaluation — Lowering the value of a nation’s currency
relative to others currencies.
Countertrading — A complex form of bartering in which several
countries may be involved, each trading goods for goods or
services for services.
26
LO 3-4
Legal and Regulatory Forces
There’s no global system of laws.
Laws may be inconsistent.
U.S. businesses must follow U.S. laws while conducting global
business.
Organization for Economic Cooperation and Development
(OECD) and Transparency International fight to end corruption
and bribery in foreign markets and have had limited success.

27
Figure 3.7 Countries Rated Highest on Corrupt Business
LO 3-4
Somalia
South Sudan
North Korea
Syria
Yemen
Sudan
Libya
Afghanistan
Venezuela
Iraq
Source: Transparency International, 2017.
28

LO 3-4
Physical and Environmental Forces
Developing countries have transportation and storage systems
that make international distribution difficult or impossible.
Often, technological capabilities are far from those in the U.S.,
which makes for a tough business environment.
29
Trade Protectionism 1 of 6
LO 3-5
Trade protectionism — The use of government regulations to
limit the import of goods and services.
Advocates of protectionism believe it allows domestic
producers to survive, grow, and produce jobs.
Tariffs — A tax imposed on imports.
Protective tariffs
Revenue tariffs

30
LO 3-5
Import quota — A limit on the number of products in certain
categories that a nation can import.
Embargo — A complete ban on the import or export of a certain
product, or the stopping of all trade with a particular country.
Political disagreements can lead to embargos, like the U.S.
embargo against Cuba.
31
LO 3-5
The World Trade Organization
General Agreement on Tariffs and Trade (GATT) — A 1948
agreement that established an international forum for
negotiating mutual reductions in trade restrictions.
World Trade Organization (WTO) — An independent entity of
164 member nations whose purpose is to oversee cross-border

trade issues and global business practices; headquartered in
Geneva.
32
LO 3-5
Common Markets
Common market — A regional group of countries that have a
common external tariff, no internal tariffs, and a coordination of
laws to facilitate exchange; also called a trading bloc.
Some common markets are:
European Union (EU)
Mercosur
ASEAN
COMESA

33
Figure 3.8 Members of the European Union
LO 3-5
34
LO 3-5
The North American and Central American Free Trade
Agreements
North American Free Trade Agreement (NAFTA) — Agreement
that created a free-trade area among the United States, Canada,
and Mexico; ratified in 1994.
Central American Free Trade Agreement (CAFTA) —
Agreement that created a free-trade zone with Costa Rica, the
Dominican Republic, El Salvador, Guatemala, Honduras, and
Nicaragua; signed into law in 2005.

35
LO 3-5
The North American and Central American Free Trade
Agreements continued
NAFTA Objectives
Eliminate trade barriers and facilitate cross-border movement of
goods and services.
Promote conditions of fair competition.
Increase investment opportunities.
Provide effective protection and enforceme nt of intellectual
property rights (patents and copyrights).
Establish a framework for further regional trade cooperation.
Improve working conditions in North America.
36
The Future of Global Trade 1 of 2
LO 3-6
China

With over 1.38 billion people, has transformed the world
economic map. Over 400 of the Fortune 500 companies have
invested in China.
India
Has seen huge growth in information technology,
biotechnology, and pharmaceuticals.
Russia
Projected to be a wealthy global economy by 2025, but
declining oil prices have slowed the economy. It is also plagued
by political, currency, and social problems.
Brazil
Seventh-largest economy in the world with well-developed
agriculture, mining, manufacturing, and service sectors.
37
The Future of Global Trade 2 of 2
LO 3-6
The Challenge of Offshore Outsourcing
Outsourcing — Process whereby one firm contracts with other
companies to do some or all of its functions.
U.S. firms have outsourced payroll functions, accounting, and
manufacturing for years.
With the growth of global markets, companies have been
shifting to offshore outsourcing — outsourcing with other
countries.

Globalization and Your Future
Study foreign languages.
Learn about foreign cultures.
Take global business courses.
38
Figure 3.9 The Pros and Cons of Offshore Outsourcing
LO 3-6
39
Appendix of Long Image Descriptions

40
Appendix 1 Figure 3.2 The Pros and Cons of Free Trade
Pros of free trade:
The global market contains over 7 billion potential customers
for goods and services.
Productivity grows when countries produce goods and services
in which they have a comparative advantage.
Global competition and less-costly imports keep prices down, so
inflation does not curtail economic growth.
Free trade inspires innovation for new products and keeps firms
competitively challenged.
Uninterrupted flow of capital gives countries access to foreign
investments, which help keeps interest rates low.
Cons of free trade:
Domestic workers (particularly in manufacturing-based jobs)
can lose their jobs due to increased imports or production shifts
to low-wage global markets.
Workers may be forced to accept pay cuts from employers, who
can threaten to move their jobs to lower-cost global markets.
Moving operations overseas because of intense competitive
pressure often means the loss of service jobs and growing
numbers of white-collar jobs.
Domestic companies can lose their comparative advantage when
competitors build advanced production operations in low -wage
countries.
Return to original slide

41
Appendix 2 Figure 3.3 Largest Exporting Nations in the World
and the Largest U.S. Trade Partners
World’s Largest Exporting Nations: United States and Italy
Top U.S. Trading Partners: India and Taiwan
Both: Canada, Mexico, Netherlands, United Kingdom, France,
Germany, China, Japan, and South Korea
42
Appendix 3 Figure 3.4 Strategies for Reaching Global Markets
From least to most amount of commitment, control, risk, and
profit potential, the strategies are:
Licensing
Exporting

Franchising
Contract manufacturing
International joint ventures and strategic alliances
Foreign direct investment
43
Appendix 4 Figure 3.6 Oops, Did We Say That?
KFC’s patented slogan “Finger-Lickin’ Good” was understood
in Japanese as “Bite Your Fingers Off.”
PepsiCo attempted a Chinese translation of “Come Alive,
You’re in the Pepsi Generation” that read to Chinese customers
as “Pepsi Brings Your Ancestors Back from the Dead.”
Coors Brewing Company put its slogan “Turn It Loose” into
Spanish and found it translated as “Suffer from Diarrhea.”
Perdue Chicken used the slogan “It Takes a Strong Man to Make
a Chicken Tender,” which was interpreted in Spanish as “It
takes an Aroused Man to Make a Chicken Affectionate.”
On the other side of the translation glitch, Electrolux, a
Scandinavian vacuum manufacturer, tried to sell its products in
the U.S. market with the slogan “Nothing Sucks Like an
Electrolux.”

44
Appendix 5 Figure 3.8 Members of the European Union
Members of the European Union: Ireland, Portugal, Spain,
France, Luxembourg, Belgium, Netherlands, Denmark,
Germany, Liechtenstein, San Marino, Monaco, Italy, Vatican
City, Malta, Sweden, Finland, Estonia, Latvia, Lithuania,
Poland, Czech Republic, Austria, Slovakia, Hungary, Slovenia,
Croatia, Romania, Bulgaria, Greece, Cyprus, Azores, Madeira,
Canary Islands, Guiana, Réunion, Martinique, and Guadeloupe.
Applicants of the European Union: Iceland, Serbia, Kosovo,
Macedonia, Albania, and Turkey.
Exiting the European Union: United Kingdom
45
Appendix 6 Figure 3.9 The Pros and Cons of Offshore
Outsourcing
Pros of offshore outsourcing:

Less-strategic tasks can be outsourced globally so that
companies can focus on areas in which they can excel and grow.
Outsourced work allows companies to create efficiencies that in
fact let them hire more workers.
Consumers benefit from lower prices generated by effective use
of global resources and developing nations grow, thus fueling
global economic growth.
Cons of offshore outsourcing:
Jobs may be lost permanently and wages fall due to low-cost
competition offshore.
Offshore outsourcing may reduce product quality and can
therefore cause permanent damage to a company’s reputation.
Communication among company members, with suppliers, and
with customers becomes much more difficult.
46
Chapter 8
Structuring Organizations for Today’s Challenges

1
Learning Objectives
LO 8-1 Outline the basic principles of organizational
management.
LO 8-2 Compare the organizational theories of Fayol and
Weber.
LO 8-3 Evaluate the choices managers make in structuring
organizations.
LO 8-4 Contrast the various organizational models.
LO 8-5 Identify the benefits of interfirm cooperation and
coordination.
LO 8-6 Explain how organizational culture can help businesses
adapt to change.
2
Organizing for Success
LO 8-1
Building an Organization from the Bottom Up
Create a division of labor.
Divide tasks through job specialization.

Set up teams or departments (departmentalization).
Allocate resources.
Assign specific tasks.
Establish procedures.
Develop an organization chart.
Adjust to new realities.
The Changing Organization 1 of 5
LO 8-2
Often change in organizations is due to evolving business
environments:
More global competition, declining economy, faster
technological change’ and pressure to protect the environment
Customer expectations have also changed
Consumers today want high-quality products with fast, friendly
service, and all at low cost.
The Development of Organizational Design
Economies of scale — Companies can reduce their production
costs by purchasing raw materials in bulk.
The average cost of goods decreases as production levels rise.
Mass production of goods led to complexities in organizing
businesses.

4
LO 8-2
Fayol’s Principles of Organization
Unity of command
Hierarchy of authority
Division of labor
Subordination of individual interests to the general interest
Authority
Degree of centralization
Clear communication channels
Order
Equity
Esprit de corps
Characteristics of organizations based on the principles
Organizations in which employees have no more than one boss;
lines of authority are clear.
Rigid organizations that often don’t respond to customers
quickly.

5
LO 8-2
Max Weber and Organizational Theory
Employees just need to do what they’re told.
In addition to Fayol’s principles, Weber emphasized:
Job descriptions
Written rules, decision guidelines, and detailed records
Consistent procedures, regulations, and policies
Staffing and promotion based on qualifications
6
LO 8-2
Turning Principles into Organizational Design
When following Fayol and Weber, managers control workers.
Hierarchy
A system in which one person is at the top of an organization
and there is a ranked or sequential ordering from the top down.

Chain of command
The line of authority that moves from the top of the hierarchy to
the lowest level.
Organization chart
A visual device that shows relationships among people and
divides the organization’s work; it shows who reports to whom.
7
Figure 8.1 Typical Organization Chart
LO 8-2
LO 8-2

Bureaucratic Organizations
Bureaucracy — An organization with many layers of managers
who set rules and regulations and oversee all decisions.
It can take weeks or months to have information passed down to
lower-level employees.
Bureaucracies can annoy customers.
9
Decisions to Make in Structuring Organizations 1 of 5
LO 8-3
Choosing Centralized or Decentralized Authority
Centralized authority
When decision-making authority is maintained at the top level
of management at the company’s headquarters.
Decentralized authority
When decision-making authority is delegated to lower-level
managers more familiar with local conditions than headquarters
management could be.

10
Figure 8.2 Advantages and Disadvantages of Centralized versus
Decentralized Authority
LO 8-3
11
LO 8-3
Choosing the Appropriate Span of Control
Span of control — The optimum number of subordinates a
manager supervises or should supervise.
When work is standardized, broad spans of control are possible.
The appropriate span narrows at higher levels of the
organization.
The trend today is to reduce middle managers and hire better
low-level employees.

LO 8-3
Choosing between Tall and Flat Organizational Structures
Tall organization structure — An organizational structure in
which the pyramidal organization chart would be quite tall
because of the various levels of management.
Flat organization structure — An organizational structure that
has few layers of management and a broad span of control.
Figure 8.3 A Flat Organizational Structure
LO 8-3

Figure 8.4 Advantages and Disadvantages of a Narrow versus a
Broad Span of Control
LO 8-3
LO 8-3
Weighing the Advantages and Disadvantages of
Departmentalization
Departmentalization — The dividing of organizational functions
into separate units.
Workers are grouped by skills and expertise to specialize their
skills.

16
LO 8-3
Advantages:
Employees develop skills and progress within a department as
they master skills.
The company can achieve economies of scale.
Employees can coordinate work within the function, and top
management can easily direct activities.
Disadvantages:
Departments may not communicate well.
Employees may identify with their department’s goals rather
than the organization’s.
The company’s response to external changes may be slow.
People may not be trained to take different managerial
responsibilities; instead they become specialists.
Department members may engage in groupthink and may need
outside input.

17
Figure 8.5 Ways to Departmentalize 1 of 5
LO 8-3
LO 8-3
LO 8-3

LO 8-3
LO 8-3

Organizational Models 1 of 5
LO 8-4
Line Organizations
Line organization
Has direct two-way lines of responsibility, authority, and
communication running from the top to the bottom, with all
people reporting to only one supervisor.
There are no specialists or legal, accounting, human resource,
or information technology departments.
Line managers issue orders, enforce discipline, and adjust the
organization to changes.
LO 8-4
Line-and-Staff Organizations
Line personnel
Employees who are part of the chain of command that is
responsible for achieving organizational goals.

Line personnel have authority to make policy decisions.
Staff personnel
Employees who advise and assist line personnel in meeting their
goals.
Staff personnel includes marketing research, legal advising, IT,
and human resource management.
Figure 8.6 A Sample Line-and-Staff Organization
LO 8-4
LO 8-4
Matrix-Style Organizations

Matrix organization — Specialists from different parts of the
organization are brought together to work on specific projects
but still remain part of a line-and-staff structure. Emphasis is on
product development, creativity, special projects, rapid
communication, and interdepartmental teamwork.
Advantages
Managers have flexibility in assigning people to projects.
Interorganizational cooperation and teamwork is encouraged.
Creative solutions to product development problems are
produced.
Organizational resources are used efficiently.
Disadvantages
It’s costly and complex.
Employees may be confused where their loyalty belongs.
Good interpersonal skills and cooperative employees are a must.
It may only be a temporary solution to a long-term problem.
Figure 8.7 A Matrix Organization
LO 8-4

LO 8-4
Cross-Functional Self-Managed Teams
Cross-functional self-managed teams — Groups of employees
from different departments who work together on a long-term
basis.
A way to fix the problem of matrix-style teams is to establish
long-lived teams.
Teams are empowered to make decisions without management
approval.
LO 8-4
Going Beyond Organizational Boundaries
Cross-functional teams work best when the voice of the
customer is heard.
Teams that include customers, suppliers, and distributors go

beyond organizational boundaries.
Government coordinators may assist in sharing market
information across national boundaries.
Managing the Interactions among Firms 1 of 2
LO 8-5
Networking — Using communications technology and other
means to link organizations and allow them to work together on
common objectives.
Transparency and Virtual Organizations
Real time — The present moment or actual time in which
something takes place.
Most companies are no longer self-sufficient; they’re part of a
global business network.

Managing the Interactions among Firms 2 of 2
LO 8-5
Transparency and Virtual Organizations continued
Transparency occurs when a company is so open to other
companies that electronic information is shared as if the
companies were one.
Virtual corporation
A temporary networked organization made up of replaceable
firms that join and leave as needed.
Benchmarking
Compares an organization’s practices, processes, and products
against the world’s best.
If a company can’t do as well as the best, they can try to
outsource the function.
Core competencies —Functions that the organization can do as
well as or better than any other organization in the world.
Figure 8.8 A Virtual Corporation
LO 8-5

Adapting to Change 1 of 4
LO 8-5
Change
Change isn’t easy; employees like to do things the way they
always have.
Get rid of old, inefficient facilities and equipment.
Use the Internet to get to know your customers and sell directly
to them.
Digital natives — Young people who have grown up using the
Internet and social networking.
LO 8-5
Restructuring for Empowerment
Restructuring
Redesigning an organization so that it can more effectively and

efficiently serve its customers.
Inverted organization
An organization that has contact people at the top and the CEO
at the bottom of the organization chart.
The manager’s job is to assist and support frontline people, not
boss them around.
Figure 8.9 Comparison of an Inverted Organizational Structure
and a Traditional Organizational Structure
LO 8-5
LO 8-6

Creating a Change-Oriented Organizational Culture
Organizational or corporate culture
Widely shared values within an organization that provide unity
and cooperation to achieve common goals.
Culture is shown in stories, traditions and myths.
Some of the best organizational cultures emphasize service.
Managing the Informal Organization
Formal organization
Details lines of responsibility, authority, and position.
The formal system is often slow and bureaucratic, but it helps
guide the lines of authority.
No organization can be effective without formal and informal
organization.
36
LO 8-6
Managing the Informal Organization continued
Informal organization
The system that develops spontaneously as employees meet and
form cliques, relationships, and lines of authority outside the
formal organization.
The informal organization helps foster camaraderie and
teamwork among employees.
The informal system is too unstructured and emotional on its

own.
The informal organization may also be powerful in resisting
management directives.
37
38
Appendix 1 Figure 8.1 Typical Organization Chart
The chart has four levels. At the bottom level are the employees
who report to the first-line supervisors. The first-line
supervisors report to a specific manager such as a production
manager, a marketing manager, or a finance manager. These
managers, in turn, report to the president, who is the top level
of the organization.

39
Appendix 2 Figure 8.2 Advantages and Disadvantages of
Centralized versus Decentralized Authority
Advantages of centralized authority:
Greater top-management control
More efficiency
Simpler distribution system
Stronger brand/corporate image
Disadvantages of centralized authority:
Less responsiveness to customers
Less empowerment
Interorganizational conflict
Lower morale away from headquarters
Advantages of decentralized authority:
Better adaptation to customer wants
More empowerment of workers
Faster decision making
Higher morale
Disadvantages of decentralized authority:
Less efficiency
Complex distribution system
Less top-management control
Weakened corporate image

40
Appendix 3 Figure 8.4 Advantages and Disadvantages of a
Narrow versus a Broad Span of Control
Advantages of a broad span of control:
Reduced costs
More responsiveness to customers
Faster decision making
More empowerment
Disadvantages of a broad span of control:
Fewer chances for advancement
Overworked managers
Loss of control
Less management expertise
Advantages of a narrow span of control:
More control by top management
More chances for advancement
Greater specialization
Closer supervision
Disadvantages of a narrow span of control:
Less empowerment
Higher costs
Delayed decision making
Less responsiveness to customers

41
Appendix 4 Figure 8.5 Ways to Departmentalize 4 of 5
A vice president of international operations oversees the
Canadian division, the Japanese division, the European division,
and the Korean division.
42
Appendix 5 Figure 8.6 A Sample Line-and-Staff Organization
The chief executive officer is at the top. Directly reporting to
the CEO is the plant manager. Three supervisors report directly
to the plant manager, and each of the three supervisors have
assembly line workers reporting to them. All of these employees
are considered line personnel. Three staff personnel
departments (human resources, legal, and marketing research)
are shown on the chart between the CEO and plant manager but
without directly reporting to any one individual.

43
Appendix 6 Figure 8.7 A Matrix Organization
The president is at the top. Directly reporting to the president
are the vice presidents of project management, manufacturing,
marketing, finance, and engineering.
Each vice president has employees that report directly to them
in a line structure. Three project managers report directly to the
vice president of project management but are also shown as
staff personnel to the other departments.
44
Appendix 7 Figure 8.8 A Virtual Corporation
In the center is the core firm. Surrounding the core firm are the
production firm, distribution firm, advertising agency, design

firm, legal firm, and accounting firm.
45
Appendix 8 Figure 8.9 Comparison of an Inverted
Organizational Structure and a Traditional Organizational
Structure
The organization chart in a traditional organization is shown as
a pyramid sectioned from top to bottom in the following order:
Top management
Middle management
Supervisory management
Frontline workers
The organization chart in an inverted organization chart is
shown as an upside-down pyramid sectioned from top to bottom
in the following order:
Empowered frontline workers (often in teams)
Support personnel
Top management

46
Chapter 7
Management and Leadership
1
Learning Objectives
LO 7-1 Describe the changes occurring today in the
management function.
LO 7-2 Describe the four functions of management.
LO 7-3 Relate the planning process and decision making to the
accomplishment of company goals.
LO 7-4 Describe the organizing function of management.
LO 7-5 Explain the differences between leaders and managers,
and describe the various leadership styles.
LO 7-6 Summarize the five steps of the control function of
management.

2
Managers’ Roles Are Evolving
LO 7-1
Managers Today
Tend to be collaborative
Emphasize teams and team building
Guide, train, support, motivate, and coach employees
Need to be skilled communi cators and team players
Need to be globally prepared
The Four Functions of Management
LO 7-2
Management Functions
Planning
Organizing
Leading

Controlling
4
Figure 7.1 What Managers Do 1 of 2
LO 7-2
5
Figure 7.1 What Managers Do 2 of 2
LO 7-2

6
Planning and Decision Making 1 of 6
LO 7-3
Vision — More than a goal; an encompassing explanation of
why the organization exists and where it’s trying to go.
Mission statement — An outline of the fundamental purposes of
an organization, including:
The organization’s self-concept
Its philosophy
Long-term survival needs
Customer needs
Social responsibility
Nature of the product or service
7

LO 7-3
Goals — The broad, long-term accomplishments an organization
wishes to attain.
Objectives — Specific, short-term statements detailing how to
achieve the organization’s goals.
LO 7-3
Planning Answers Fundamental Questions:
What is the situation now?
SWOT analysis — A planning tool used to analyze an
organization’s strengths, weaknesses, opportunities, and threats.
How can we get to our goal from here?
Strategic planning
Tactical planning
Operational planning
Contingency planning

Figure 7.2 SWOT Matrix
LO 7-3
Figure 7.3 Planning Functions
LO 7-3
LO 7-3

Strategic planning — Determining the major goals of the
organization and the policies and strategies for obtaining and
using resources to achieve those goals.
Tactical planning — Developing detailed, short-term statements
about what is to be done, who is to do it, and how it is to be
done.
Operational planning — Setting work standards and schedules
necessary to implement the company’s tactical objectives.
Contingency planning — Preparing alternative courses of action
that may be used if the primary plans don’t achieve the
organization’s objectives.
LO 7-3
Decision Making: Finding the Best Alternative
Decision making — Choosing among two or more alternatives.
Rational decision-making model
Define the situation.
Describe and collect needed information.
Develop alternatives.
Decide which alternative is best.
Do what is indicated.
Determine whether the decision was a good one, and follow up.

13
LO 7-3
Decision Making: Finding the Best Alternative continued
Problem solving — The process of solving the everyday
problems that occur; less formal than decision making and
usually calls for quicker action.
Problem-solving techniques include brainstorming and PMI —
Listing all the pluses for a solution in one column, all the
minuses in another, and the implications in a third column.
Organizing: Creating a Unified System 1 of 4
LO 7-4
Management Levels
Top management — Highest level, consisting of the president

and other key company executives who develop strategic plans
Middle management — Includes general managers, division
managers, and branch and plant managers who are responsible
for tactical planning and controlling
Supervisory management — Those directly responsible for
supervising workers and evaluating their daily performance
Figure 7.4 Levels of Management
LO 7-4
LO 7-4
Top Management

Chief executive officer (CEO) — Introduces change into an
organization.
Chief operating officer (COO) — Implements CEO’s changes.
Chief financial officer (CFO) — Obtains funds, plans budgets,
collects funds, etc.
Chief information officer (CIO) — Gets the right information to
the right people so decisions can be made.
LO 7-4
Tasks and Skills at Different Levels of Management
Technical skills
The ability to perform tasks in a specific discipline or
department.
Human relations skills
Communication and motivation; they enable managers to work
through and with people.
Conceptual skills
The ability to picture the organization as a whole and the
relationship among its various parts.

18
Figure 7.5 Skills Needed at Various Levels of Management
LO 7-4
19
LO 7-4
Staffing: Getting and Keeping the Right People
Staffing — Hiring, motivating, and retaining the best people
available to accomplish the company’s objectives.
Staffing is critical, especially in the Internet and high-tech
areas.
Many people are not willing to work at companies unless they
are treated well with fair pay.

Leading: Providing Continuous Vision and Values 1 of 4
LO 7-5
Leaders must:
Communicate a vision and rally others around that vision.
Establish corporate values.
Promote corporate ethics.
Embrace change.
Stress accountability and responsibility.
Transparency — The presentation of the company’s facts and
figures in a way that is clear and apparent to all stakeholders.
21
LO 7-5
Leadership Styles
Autocratic leadership

Make managerial decisions without consulting others.
Participative or democratic leadership
Managers and employees work together to make decisions.
Free-rein leadership
Managers set objectives and employees are relatively free to do
whatever it takes to accomplish those objectives.
22
Figure 7.6 Various Leadership Styles
LO 7-5
Source: Robert Tannenbaum and Warren Schmidt, “How to
Choose a Leadership Pattern,” Harvard Business Review,
May/June 1973.

LO 7-5
Empowering Workers
Progressive leaders give employees the authority to make
decisions on their own without consulting a manager.
Customer needs are handled quickly.
Manager’s role becomes less of a boss and more of a coach.
Enabling — Giving workers the education and tools they need
to make decisions.
24
LO 7-5
Managing Knowledge
Knowledge management
Finding the right information, keeping the information in a
readily accessible place, and making the information known to
everyone in the firm.
This tries to keep people from reinventing the wheel.

25
Controlling: Making Sure It Works
LO 7-6
Control Function
Measures performance relative to planned objectives
Rewards people for work well done
Takes necessary corrective action
A Key Criterion for Measurement: Customer Satisfaction
Traditional forms of measuring success are financial.
Pleasing employees, stakeholders, and customers is important.
External customers — Dealers, who buy products to sell to
others, and ultimate customers (or end users), who buy products
for their own use.
Internal customers — Individuals and units within the firm that
receive services from other individuals or units.
26
Figure 7.7 The Control Process
LO 7-6

27
28
Appendix 1 Figure 7.1 What Managers Do 1 of 2
Planning:
Setting organizational goals
Developing strategies to reach those goals
Determining resources needed
Setting precise standards
Leading:
Guiding and motivating employees to work effectively to
accomplish organizational goals and objectives
Giving assignments
Explaining routines

Clarifying policies
Providing feedback on performance
29
Appendix 2 Figure 7.1 What Managers Do 2 of 2
Organizing:
Allocating resources, assigning tasks, and establishing
procedures for accomplishing goals
Preparing a structure (organization chart) showing lines of
authority and responsibility
Recruiting, selecting, training, and developing employees
Placing employees where they’ll be most effective
Controlling:
Measuring results against corporate objectives
Monitoring performance relative to standards
Rewarding outstanding performance
Taking corrective action when necessary

30
Appendix 3 Figure 7.2 SWOT Matrix
Potential Internal Strengths:
Core competencies in key areas
An acknowledged market leader
Well-conceived functional area strategies
Proven management
Cost advantages
Better advertising campaigns
Potential Internal Weaknesses:
No clear strategic direction
Obsolete facilities
Subpar profitability
Lack of managerial depth and talent
Weak market image
Too narrow a product line
Potential External Opportunities:
Ability to serve additional customer groups
Expand product lines
Ability to transfer skills/technology to new products
Falling trade barriers in attractive foreign markets
Complacency among rival firms
Ability to grow due to increases in market demand
Potential External Threats:
Entry of lower-cost foreign competitors
Rising sales of substitute products
Slower market growth
Costly regulatory requirements
Vulnerability to recession and business cycles
Changing buyer needs and tastes

31
Appendix 4 Figure 7.3 Planning Functions
Strategic planning: The setting of broad, long-range goals by
top managers
Tactical planning: The identification of specific, short-range
objectives by lower-level managers
Operational planning: The setting of work standards and
schedules
Contingency planning: Backup plans in case primary plans fail
32
Appendix 5 Figure 7.4 Levels of Management
From top to bottom:
Top management includes the president and vice presidents
Middle management includes plant managers, division heads,

and branch managers
Supervisory (first-line) management includes supervisors,
foremen, department heads, and section leaders
Nonsupervisory includes employees
33
Appendix 6 Figure 7.5 Skills Needed at Various Levels of
Management
Top managers rely mostly on conceptual skills, then human
relations skills, then technical skills.
Middle managers need a good mix of technical, human
relations, and conceptual skills.
First-line managers rely mostly on technical skills, then human
relations skills, then conceptual skills.

34
Appendix 7 Figure 7.6 Various Leadership Styles
The continuum runs from boss-centered leadership to
subordinate-centered leadership. Boss-centered leadership
shows a large amount of authority used by managers, while
subordinate-centered leadership shows a large area of freedom
for employees. Along the continuum, a manager’s authority
decreases as it moves toward subordinate-centered leadership,
while an employee’s freedom increases.
From the most boss-centered to the most subordinate-centered,
the leadership styles are as follows:
Autocratic leadership: A manager makes a decision and
announces it, the manager then “sells” the decision, and then
the manager presents ideas and invites questions.
Participative/democratic leadership: A manager presents
tentative decisions subject to change; the manager presents a
problem, gets suggestions, and makes a decision; and the
manager defines limits and asks the group to make the decision.
Free rein leadership: A manager permits employees to function
within limits defined by their superior.
35
Appendix 8 Figure 7.7 The Control Process
Step 1: Establish clear standards

Step 2: Monitor and record performance
Step 3: Compare results against standards
Step 4: Communicate results
Step 5: If needed, take corrective action
Feedback results in determining if standards are realistic, and
the process may begin again at step 1.
36
Chapter 5
How to Form a Business
1
Learning Objectives

LO 5-1 Compare the advantages and disadvantages of sole
proprietorships.
LO 5-2 Describe the differences between general and limited
partners, and compare the advantages and disadvantages of
partnerships.
LO 5-3 Compare the advantages and disadvantages of
corporations and summarize the differences between C
corporations, S corporations, and limited liability companies.
LO 5-4 Define and give examples of three types of corporate
mergers, and explain the role of leveraged buyouts and taking a
firm private.
LO 5-5 Outline the advantages and disadvantages of franchises,
and discuss the opportunities for diversity in franchising and
the challenges of global franchising.
LO 5-6 Explain the role of cooperatives.
2
Basic Forms of Business Ownership
Sole proprietorship — A business owned, and usually managed,
by one person.
Partnership — A legal form of business with two or more
owners.
Corporation — A legal entity with authority to act and have
liability separate from its owners.

3
Figure 5.1 Forms of Business Ownership
Source: U.S. Census Bureau.
4
Sole Proprietorships 1 of 2
LO 5-1
Advantages of Sole Proprietorships
Ease of starting and ending the business
Being your own boss
Pride of ownership
Leaving a legacy
Retention of company profits
No special taxes

5
Sole Proprietorships 2 of 2
LO 5-1
Disadvantages of Sole Proprietorships
Unlimited liability — The responsibility of business owners for
all of the debts of the business.
Limited financial resources
Management difficulties
Overwhelming time commitment
Few fringe benefits
Limited growth
Limited life span
6

Partnerships 1 of 4
LO 5-2
Major Types of Partnerships
General partnership — A partnership in which all owners share
in operating the business and in assuming liability for the
business’s debts.
Limited partnership — A partnership with one or more general
partners and one or more limited partners.
7
Partnerships 2 of 4
LO 5-2
Types of Partners
General partner — An owner (partner) who has unlimited
liability and is active in managing the firm.
Limited partner — An owner who invests money in the business
but does not have any management responsibility or liability for
losses beyond the investment.
Limited liability — The responsibility of a business’s owners
for losses only up to the amount they invest; limited partners
and shareholders have limited liability.

8
Partnerships 3 of 4
LO 5-2
Other Forms of Partnerships
Master limited partnership (MLP) — A partnership that looks
much like a corporation (in that it acts like a corporation and is
traded on a stock exchange) but is taxed like a partnership and
thus avoids the corporate income tax.
Limited liability partnership (LLP) — A partnership that limits
partners’ risk of losing their personal assets to only their own
acts and omissions and to the acts and omissions of people
under their supervision.
9
Partnerships 4 of 4
LO 5-2
Advantages of Partnerships

More financial resources
Shared management and pooled/complementary skills and
knowledge
Longer survival
No special taxes
Disadvantages of Partnerships
Unlimited liability
Division of profits
Disagreements among partners
Difficulty of termination
10
Figure 5.2 Questions to Ask When Choosing a Business Partner
LO 5-2
Do you share the same goals?
Do you share the same vision for the company?
What skills does the person have? Do they complement yours?
What can the person bring to the business?
What type of decision maker is the person?
Do you trust each other?
How does the person respond to adversity?
Does he or she try to solve the problem or try to defend his or
her ego?
Can the person accept constructive criticism?
To what extent can you build excitement into the partnership?

11
Corporations 1 of 8
LO 5-3
Conventional (C) Corporation — A state-chartered legal entity
with authority to act and have liability separate from its owners
(its stockholders).
12
Figure 5.4 Corporate Types
LO 5-3
Alien corporations do business in the United States but are
chartered (incorporated) in another country.
Domestic corporations do business in the state in which they are

chartered (incorporated).
Foreign corporations do business in one state but are chartered
in another.
Closed (private) corporations have stock that is held by a few
people and isn’t available to the general public.
Open (public) corporations sell stock to the general public.
Quasi-public corporations are chartered by the government as an
approved monopoly to perform services to the general public.
Professional corporations are owned by those who offer
professional services.
Nonprofit (or not-for-profit) corporations don't seek personal
profit for their owners.
Multinational corporations operate in several countries.
13
Corporations 2 of 8
LO 5-3
Advantages of Corporations
Limited liability
Ability to raise more money for investment
Size
Perpetual life
Ease of ownership change
Ease of attracting talented employees
Separation of ownership from management

14
Corporations 3 of 8
LO 5-3
Disadvantages of Corporations
Initial cost
Extensive paperwork
Double taxation
Two tax returns
Size
Difficulty of termination
Possible conflict with stockholders and board of directors
15
Figure 5.5 How Owners Affect Management

LO 5-3
16
Corporations 4 of 8
LO 5-3
Individuals Can Incorporate
Anyone—truckers, doctors, plumbers, athletes, and small
business owners—can incorporate.
Normally stock is not issued to outsiders when individuals
incorporate, so the advantages and disadvantages are not exactly
the same as for large corporations.
Major advantages are limited liability and possible tax benefits.
17

Corporations 5 of 8
LO 5-3
S Corporations
S corporation — A unique government creation that looks like a
corporation but is taxed like sole proprietorships and
partnerships.
S corporations have shareholders, directors, and employees,
plus the benefit of limited liability.
Profits are taxed only as the personal income of the
shareholders.
18
Corporations 6 of 8
LO 5-3
S Corporations continued
Qualifications for S Corporations
Have no more than 100 shareholders
Have shareholders that are individuals or estates, and who (as
individuals) are citizens or permanent residents of the U.S.
Have only one class of stock
Derive no more than 25% of income from passive sources
If an S corporation loses its S status, it may not operate under it
again for at least 5 years.

19
Corporations 7 of 8
LO 5-3
Limited Liability Companies
Limited liability company (LLC) — A company similar to an S
corporation but without the special eligibility requirements.
Advantages of LLCs:
Limited liability
Choice of taxation
Flexible ownership rules
Flexible distribution of profits and losses
Operating flexibility
20

Corporations 8 of 8
LO 5-3
Limited Liability Companies continued
Disadvantages of LLCs:
No stock, therefore ownership is nontransferable
Limited life span
Fewer incentives
Taxes
Paperwork
21
Corporate Expansion: Mergers and Acquisitions 1 of 2
LO 5-4
Merger — The result of two firms forming one company.
Acquisition — One company’s purchase of the property and
obligations of another company.
Types of Mergers
Vertical merger — The joining of two companies in different
stages of related businesses.
Horizontal merger — The joining of two firms in the same
industry.
Conglomerate merger — The joining of firms in completely
unrelated industries.

22
Figure 5.8 Types of Mergers
LO 5-4
23
Corporate Expansion: Mergers and Acquisitions 2 of 2
LO 5-4
Leveraged buyout (LBO) — An attempt by employees,
management, or a group of private investors to buy out the
stockholders in a company.
LBOs have ranged in size from $50 million to $34 billion and
have involved everything from small family businesses to giant
corporations.
Business acquisitions are not limited to U.S. buyers.

24
Franchises 1 of 7
LO 5-5
Franchise agreement — An arrangement whereby someone with
a good idea for a business (franchisor) sells the rights to use the
business name and sell a product or service (franchise) to others
(franchisees) in a given territory.
More than 733,000 franchised businesses operate in the U.S.,
employing approximately 13.3 million people.
25
Franchises 2 of 7
LO 5-5

Advantages of Franchises
Management and marketing assistance
Personal ownership
Nationally recognized name
Financial advice and assistance
Lower failure rate
Disadvantages of Franchises
Large start-up costs
Shared profit
Management regulation
Coattail effects
Restrictions on selling
Fraudulent franchisors
26
Franchises 3 of 7
LO 5-5
Diversity in Franchising
Women own about half of U.S. companies, yet ownership of
franchises is about 21 percent.
More women are becoming franchisors. Auntie Anne’s,
Decorating Den, and Build-a-Bear were started by women.
DiversityFran is an initiative to build awareness of franchising
opportunities within minority communities.
Dunkin Brands’ Diversity in Franchising Initiative offers

financing and development support to minorities and military
veterans.
Over 20 percent of franchises are minority-owned.
27
Franchises 4 of 7
LO 5-5
Home-Based Franchises
Advantages:
Relief from commuting stress
Extra family time
Low overhead expenses
Main Disadvantages:
Isolation
Long hours

28
Franchises 5 of 7
LO 5-5
E-Commerce in Franchising
Most brick-and-mortar franchises have expanded online.
Many franchisors prohibit franchisee-sponsored sites because
conflicts can erupt.
Sometimes “reverse royalties” are sent to franchisees who
believe their sales were hurt by the franchisor’s site.
Other franchises are solely based online.
29
Franchises 6 of 7
LO 5-5
Using Technology in Franchising
Franchisors use technology, including social media, to:
Extend their brands
Meet the needs of both customers and franchisees
Expand their businesses

30
Franchises 7 of 7
LO 5-5
Franchising in Global Markets
Canada is the most popular target for U.S.-based franchises.
Franchisors are finding it easier now to move into China, South
Africa, the Philippines, and the Middle East.
International franchising goes both ways—some foreign
franchises have come to the U.S., including Kumon Learning
Centers and H&R Block.
31
Cooperatives
LO 5-6
Cooperative — A business owned and controlled by the people
who use it—producers, consumers, or workers with similar
needs who pool their resources for mutual gain.

Worldwide, co-ops serve one billion members!
Members democratically control the business by electing a
board of directors that hires professional management.
32
33
Appendix 1 Figure 5.1 Forms of Business Ownership
Percentage of businesses:
Sole proprietorships, 72 percent
Corporations, 20 percent
Partnerships, 8 percent
Percentage of total receipts:
Corporations, 81 percent
Partnerships, 13 percent
Sole proprietorships, 6 percent

34
Appendix 2 Figure 5.5 How Owners Affect Management
Owners and stockholders elect a board of directors. The board,
in turn, hires officers. The officers set corporate objectives and
select managers. The managers supervise employees, who are at
the bottom of the chart. The daily operations are structured as a
pyramid with officers at the top.
35
Appendix 3 Figure 5.8 Types of Mergers
A soft drink company buys a mineral water company, which is a
horizontal merger (companies in the same industry).
A soft drink company buys an artificial sweetener company,

which is a vertical merger (companies in different stages in
related industries).
A soft drink company buys a snack food company, which is a
conglomerate merger (companies in unrelated industries).
36
Chapter 1
Taking Risks and Making Profits within the Dynamic Business
Environment
1
Learning Objectives
LO 1-1 Describe the relationship between profit and risk, and

show how businesses and nonprofi t organizations can raise the
standard of living for all.
LO 1-2 Explain how entrepreneurship and the other factors of
production contribute to the creation of wealth.
LO 1-3 Analyze the effects of the economic environment and
taxes on businesses.
LO 1-4 Describe the effects of technology on businesses.
LO 1-5 Demonstrate how businesses can meet and beat
competition.
LO 1-6 Analyze the social changes affecting businesses.
LO 1-7 Identify what businesses must do to meet global
challenges, including war and terrorism.
LO 1-8 Review how past trends are being repeated in the
present and what those trends mean for tomorrow’s college
graduates.
2
Business and Wealth Building 1 of 7
LO 1-1
Business — Any activity that seeks to provide goods and
services to others while operating at a profit.
Goods — Tangible products such as computers, food, clothing,
cars, and appliances.
Services — Intangible products (that can’t be held in your hand)
such as education, health care, insurance, recreation, and travel.

3
LO 1-1
Successfully filling a market need means you could make
money for yourself.
Entrepreneur — A person who risks time and money to start and
manage a business.
4
LO 1-1
Revenues, Profits, and Losses
Revenue — The total amount of money a business takes in
during a given period by selling goods and services.

Profit — The amount of money a business earns above and
beyond what it spends for salaries and other expenses.
Loss — When a business’s expenses are more than its revenues.
5
LO 1-1
Matching Risk with Profit
Risk — The chance an entrepreneur takes of losing time and
money on a business that may not prove profitable.
Not all enterprises make the same amount of profit.
Businesses take risks, but with big risks could come big profits.
6

LO 1-1
Standard of Living and Quality of Life
Standard of living — The amount of goods and services people
can buy with the money they have.
The United States has one of the highest standards of living in
the world.
Workers in other countries may make more money, but prices
for products are higher.
Quality of life — The general well-being of a society in terms
of its political freedom, natural environment, education, health
care, safety, amount of leisure, and rewards that add to the
satisfaction and joy that other goods and services provide.
High quality of life requires combined efforts of businesses,
nonprofits, and government agencies.
7
LO 1-1
Responding to the Various Business Stakeholders
Stakeholders — All the people who stand to gain or lose by the
policies and activities of a business and whose concerns the
business needs to address.
A primary challenge is to recognize and respond to the needs of
stakeholders.

Outsourcing — Contracting with other companies (often in
other countries) to do some of the functions of a firm, like
production or accounting.
Many foreign companies are opening offices and factories in the
United States, which is called insourcing.
8
Figure 1.1 A Business and Its Stakeholders
LO 1-1
Source: John Mackey and Raj Sisodia, Conscious Capitalism
(Boston, MA: Harvard Business Review Press, 2013).
9

LO 1-1
Using Business Principles in Nonprofit Organizations
Nonprofit organization — An organization whose goals do not
include making a personal profit for its owners or organizers.
Nonprofit organizations use financial gains to meet social or
educational goals.
10
The Importance of Entrepreneurs to the Creation of Wealth 1 of
2
LO 1-2
The Positives to Being an Entrepreneur
The freedom to succeed
Make your own decisions
Possible wealth
The Negatives to Being an Entrepreneur
The freedom to fail
No paid vacations
No health insurance

11
The Importance of Entrepreneurs to the Creation of Wealth 2 of
2
LO 1-2
The Five Factors of Production
Factors of production — The resources used to create wealth.
The five factors:
Land (or natural resources)
Labor (workers)
Capital
Entrepreneurship
Knowledge
What makes rich countries rich today is entrepreneurship and
knowledge.
12
Figure 1.2 The Five Factors of Production
LO 1-2

Source: Drucker Institute, druckerinstitute.com, April 2017.
13
The Business Environment 1 of 8
LO 1-2
Business environment — The surrounding factors that either
help or hinder the development of businesses.
Economic and legal environment
Technological environment
Competitive environment
Social environment
Global business environment
14
Figure 1.3 Today’s Dynamic Business Environment

LO 1-2
15
LO 1-3
The Economic and Legal Environment
Government can promote entrepreneurship by:
Allowing private ownership of businesses
Minimizing interference with the free exchange of goods and
services
Passing laws that enable businesspeople to write enforceable
contracts
Establishing a currency that’s tradable in world markets
Minimizing corruption

16
LO 1-4
The Technological Environment
Technology — Everything from phones to computers and the
various software programs that make business processes more
effective, efficient, and productive.
How Technology Benefits Workers and You
Effectiveness — Producing the desired result.
Efficiency — Producing goods and services using the least
amount of resources.
Productivity — The amount of output you generate given the
amount of input (e.g., hours worked).
17
LO 1-4
The Technological Environment continued
The Growth of E-Commerce
E-commerce — The buying and selling of goods over the
Internet.
Business-to-consumer (B2C)
Business-to-business (B2B)

Using Technology to Be Responsive to Customers
Database — An electronic storage file for information.
Identity theft — The obtaining of individuals’ personal
information, such as Social Security and credit card numbers,
for illegal purposes.
18
LO 1-5
The Competitive Environment
Customers want good quality products at low prices with great
customer service.
Because business is more customer-driven, some managers give
frontline employees more decision-making power.
Empowerment — Giving frontline workers the responsibility,
authority, freedom, training, and equipment they need to
respond quickly to customer requests.

19
LO 1-6
The Social Environment
Demography — The statistical study of the human population
with regard to its size, density, and other characteristics such as
age, race, gender, and income.
Managing Diversity
Diversity has grown from just recruiting minority and female
workers.
The Increase in the Number of Older Citizens
People aged 65 to 74 are currently the richest demographic
group.
Retired people will be draining the economy of wealth due to
Social Security.
The Increase in the Number of Single-Parent Families
Growth of single-parent households has encouraged businesses
to implement programs such as family leave and flextime.
20

LO 1-7
The Global Environment
Globalization has grown due to efficient distribution systems
and communication systems such as the Internet.
War and Terrorism
They have drained trillions of dollars from the U.S. economy.
Money was diverted to the war effort.
Adds to the cost of insurance and security.
How Global Changes Affect You
As businesses expand to serve global markets, new jobs will be
created.
Rapid changes create a need for continuous learning.
21
LO 1-7
The Global Environment continued
The Ecological Environment
Climate change — The movement of the temperature of the
planet up or down over time.
Greening — The trend toward saving energy and producing
products that cause less harm to the environment.
Many companies say the evidence for climate change is
overwhelming.
General Electric, Coca-Cola, Shell, Nestlé, DuPont, Johnson &

Johnson, British Airways, Shanghai Electric
22
The Evolution of U.S. Business 1 of 2
LO 1-8
Progress in the Agricultural and Manufacturing Industries
In the 1800s, the agricultural industry led economic
development.
Technology, like the harvester and cotton gin, made large-scale
farming successful.
This led to fewer farmers with larger farms.
Industrialization in the 19th and 20th centuries moved jobs from
farms to factories.
As technology improved productivity, fewer workers were
needed in factories.

23
The Evolution of U.S. Business 2 of 2
LO 1-8
Progress in Service Industries
Services make up over 80 percent of the value of the U.S.
economy.
Since the mid-1980s, the service industry generated almost all
the increases in employment.
There are more high-paying jobs in service industries.
Your Future in Business
We’re in the midst of an information-based global and technical
revolution.
24

25
Appendix 1 Figure 1.1 A Business and Its Stakeholders
Typical U.S. business stakeholders are:
Stockholders
Customers
Surrounding community
Environmentalists
Dealers (retailers)
Employees
Government leaders
Suppliers
Media
Bankers
26
Appendix 2 Figure 1.3 Today’s Dynamic Business Environment
A circle shows Business Management and Job Creation in the
center. Surrounding this are four quadrants for the four
environments.
The Economic and Legal Environment:
Freedom of ownership
Contract laws
Elimination of corruption
Tradable currency

Minimum taxes and regulation
The Technological Environment:
Information technology
Databases
Bar codes
The Internet
The Social Environment:
Diversity
Demographic changes
Family changes
The Competitive Environment:
Customer service
Stakeholder recognition
Employee service
Concern for the environment
The global business environment affects the economic, legal,
and technological environments.
Global competition and free trade affect the competitive
environment.
The quality imperative affects the social environment.
27
Chapter 2
Understanding Economics and How It Affects Business

1
Learning Objectives
LO 2-1 Explain basic economics.
LO 2-2 Explain what capitalism is and how free markets work.
LO 2-3 Compare socialism and communism.
LO 2-4 Analyze the trend toward mixed economies.
LO 2-5 Describe the economic system of the United States,
including the significance of key economic indicators
(especially GDP), productivity, and the business cycle.
LO 2-6 Contrast fiscal policy and monetary policy, and explain
how each affects the economy.
2
How Economic Conditions Affect Businesses 1 of 7

LO 2-1
What Is Economics?
Economics — The study of how society chooses to employ
resources to produce goods and services and distribute them for
consumption among various competing groups and individuals.
Macroeconomics — The part of economics study that looks at
the operation of a nation’s economy as a whole.
Microeconomics — The part of economics study that looks at
the behavior of people and organizations in particular markets.
LO 2-1
What Is Economics? continued
Resource development — The study of how to increase
resources and to create conditions that will make better use of
those resources.
Examples of ways to increase resources
New energy sources
New ways of growing foods
New ways of creating goods and services

4
LO 2-1
The Secret to Creating a Wealthy Economy
Thomas Malthus and the dismal science
Malthus believed that if the rich had most of the wealth and the
poor had most of the population, resources would run out.
This belief led the writer Thomas Carlyle to call economics “the
dismal science.”
Latest world statistics show population growing more slowly
than expected.
LO 2-1
The Secret to Creating a Wealthy Economy continued
Population as a resource
Contrary to Malthus, some macroeconomists believe a large
population can be a resource.

An educated population is highly valuable.
Business owners provide jobs and economic growth for their
employees and communities as well as for themselves.
LO 2-1
Adam Smith and the Creation of Wealth
Smith believed that:
Freedom was vital to any economy’s survival.
Freedom to own land or property and the right to keep the
profits of a business is essential.
People will work hard if they believe they will be rewarded.

LO 2-1
How Businesses Benefit the Community
Invisible hand theory
As people improve their own situation in life, they help the
economy prosper through the production of goods, services and
ideas.
Invisible hand — A phrase coined by Adam Smith to describe
the process that turns self-directed gain into social and
economic benefits for all.
8
LO 2-1
How Businesses Benefit the Community continued
Understanding the invisible hand theory
A farmer earns money by selling his crops.
To earn more, the farmer hires workers to produce more crops.
When the farmer produces more, there is plenty of food for the
community.
The farmer helped his employees and his community while
helping himself.

9
Understanding Free-Market Capitalism 1 of 8
LO 2-2
Capitalism — An economic system in which all or most of the
factors of production and distribution are privately owned and
operated for profit.
Countries with capitalist systems:
United States
England
Australia
Canada
10
LO 2-2
State capitalism — A combination of freer markets and some
government control.

China has experienced rapid growth using state capitalism.
11
LO 2-2
Capitalism’s Four Basic Rights
The right to own private property
The right to own a business and keep all that business’s profits
The right to freedom of competition
The right to freedom of choice
LO 2-2
Roosevelt’s Four Additional Freedoms

Freedom of speech and expression
Freedom to worship in your own way
Freedom from want
Freedom from fear
13
LO 2-2
How Free Markets Work
Free market — Decisions about what and how much to produce
are made by the market.
Consumers send signals about what they like and how they like
it.
Price tells companies how much of a product they should
produce.
If something is wanted but hard to get, the price will rise until
more products are available.
How Prices Are Determined
A seller may want to sell shirts for $50, but only a few people
may buy them at that price.
If the seller lowers the price, quantity demanded increases.

14
LO 2-2
Supply — The quantity of products that manufacturers or
owners are willing to sell at different prices at a specific time.
Demand — The quantity of products that people are willing to
buy at different prices at a specific time.
Market price (equilibrium point) – The price determined by
supply and demand.
15
Figure 2.1 The Supply Curve at Various Prices
LO 2-2

16
Figure 2.2 The Demand Curve at Various Prices
LO 2-2
17
Figure 2.3 The Equilibrium Point
LO 2-2

18
LO 2-2
Competition within Free Markets
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
19
LO 2-2
Benefits and Limitations of Free Markets
Benefits:
It allows for open competition among companies.
It provides opportunities for poor people to work their way out
of poverty.
Limitations:
People may start to let greed drive them.

Understanding Socialism 1 of 3
LO 2-3
Socialism — An economic system based on the premise that
some, if not most, basic businesses should be owned by the
government so that profits can be more evenly distributed
among the people.
Entrepreneurs run smaller businesses.
Citizens are highly taxed.
Government is more involved in protecting the environment and
the poor.
21
LO 2-3

The Benefits of Socialism
Social equality
Free education
Free health care
Free child care
Longer vacations
Shorter work weeks
Generous sick leave
22
LO 2-3
The Negative Consequences of Socialism
Few incentives for businesspeople to take risks.
Brain drain — The loss of the best and brightest people to other
countries.
Fewer inventions and less innovation because the reward is not
as great as in capitalistic countries.

Understanding Communism
LO 2-3
Communism — An economic and political system in which the
government makes almost all economic decisions and owns
almost all the major factors of production.
Prices don’t reflect demand, which may lead to shortages of
items, including food and clothing.
Most communist countries today suffer severe economic
depression.
24
The Trend Toward Mixed Economies 1 of 2
LO 2-4
Two Major Economic Systems
Free-market economies — Economic systems in which the
market largely determines what goods and services get
produced, who gets them, and how the economy grows.
Command economies — Economic systems in which the
government largely decides what goods and services will be
produced, who will get them, and how the economy will grow.

The Trend Toward Mixed Economies 2 of 2
LO 2-4
Neither free-market nor command economies have created
sound economic conditions.
Communist governments are disappearing.
Socialist governments are cutting back on social programs,
lowering taxes, and moving toward capitalism.
Capitalist countries are increasing social programs and moving
more toward socialism.
Mixed economies — Economic systems in which some
allocation of resources is made by the market and some by the
government.

Understanding the U.S. Economic System 1 of 9
LO 2-5
Key Economic Indicators
Gross domestic product (GDP) — The total value of final goods
and services produced in a country in a given year.
As long as a company is within a country’s border, their
numbers go into the country’s GDP (even if they are foreign-
owned).
When the GDP changes, businesses feel the effect.
Gross output (GO) — A measure of total sales volume at all
stages of production.
27
LO 2-5
Key Economic Indicators continued
Unemployment rate — The number of civilians at least 16 years
old who are unemployed and tried to find a job within the prior
four weeks.
Four Types of Unemployment
Frictional
Structural
Cyclical
Seasonal

28
Figure 2.5 U.S. Unemployment Rate 1989–2017
LO 2-5
Figure 2.6 Four Types of Unemployment
LO 2-5
Structural unemployment
Cyclical unemployment
Seasonal unemployment
Frictional unemployment

30
LO 2-5
Inflation and price indexes
Inflation — A general rise in the prices of goods and services
over time.
Disinflation — A situation in which price increases are slowing
(the inflation rate is declining).
Deflation — A situation in which prices are declining.
Stagflation — A situation when the economy is slowing but
prices are going up anyhow.
31
LO 2-5

Inflation and price indexes continued
Consumer price index (CPI) — Monthly statistics that measure
the pace of inflation or deflation.
Core inflation — CPI minus food and energy costs.
Producer Price Index (PPI) — An index that measures the
change in prices at the wholesale level.
32
LO 2-5
Productivity in the United States
Productivity in the U.S. has risen due to the technological
advances that have made production faster and easier.
High productivity through computers and robots can lead to
high unemployment.
Productivity in the Service Sector
New technology adds to the quality of the services provided, but
not to the worker’s output.
A new form of measurement needs to be created to account for
the quality as well as the quantity of output.

LO 2-5
The Business Cycle
Business cycles — The periodic rises and falls that occur in
economies over time.
Four phases of long-term business cycles:
Economic Boom
Recession — Two or more consecutive quarters of decline in the
GDP.
Depression — A severe recession, usually accompanied by
deflation.
Recovery — When the economy stabilizes and starts to grow,
eventually leading to an economic boom.
34
LO 2-6

Stabilizing the Economy through Fiscal Policy
Fiscal policy — The federal government’s efforts to keep the
economy stable by increasing or decreasing taxes or government
spending.
Tools of fiscal policy:
Taxation
Government spending
35
LO 2-6
Stabilizing the Economy through Fiscal Policy continued
National deficit — The amount of money the federal
government spends beyond what it collects in taxes for a given
fiscal year.
National debt — The sum of government deficits over time.
National surplus — When the government takes in more revenue
than it spends.

LO 2-6
Using Monetary Policy to Keep the Economy Growing
Monetary policy — The management of the money supply and
interest rates by the Federal Reserve Bank.
The Fed’s most visible role is raising and lowering of interest
rates.
When the economy is booming, the Fed tends to raise interest
rates.
When the economy is in a recession, the Fed tends to decrease
the interest rates.
37

38
Appendix 1 Figure 2.1 The Supply Curve at Various Prices
The graph shows the relationship between the price of T-shirts
and the quantity supplied. An upward curving line, labeled
supply curve, indicates that as the price of T-shirts rises, the
quantity also rises.
39
Appendix 2 Figure 2.2 The Demand Curve at Various Prices
and the quantity demanded. A downward curving line on the
chart, labeled demand curve, indicates that as the price of T-
shirts decreases, the quantity demanded increases.

40
Appendix 3 Figure 2.3 The Equilibrium Point
and the quantity of T-shirts. A downward-sloping demand curve
and an upward-sloping supply curve are shown. The point at
which these two curves intersect is labeled as the equilibrium
point. Here, it shown at a price of 15 dollars and a quantity of
25.
41
Appendix 4 Figure 2.5 U.S. Unemployment Rate 1989–2017
In 1989, unemployment was at approximately 5.5 percent. It
rose to a peak of nearly 8 percent around 1992. It then dropped
to a low of just below 4 percent in 2000. It then rose again to
just over 6 percent in 2003, before dropping to just below 5
percent in 2006 and 2007. Unemployment then spiked to a high
of about 10 percent in 2009. Since then, it has dropped to about
4.75 percent in 2017.

42
Chapter 6
Entrepreneurship and Starting a Small Business
1
Learning Objectives
LO 6-1 Explain why people take the risks of entrepreneurship;
list the attributes of successful entrepreneurs; and describe
entrepreneurial teams, intrapreneurs, and home- and web-based
businesses.
LO 6-2 Discuss the importance of small business to the
American economy and summarize the major causes of small -
business failure.
LO 6-3 Summarize ways to learn about how small businesses

operate.
LO 6-4 Analyze what it takes to start and run a small business.
LO 6-5 Outline the advantages and disadvantages small
businesses have in entering global markets.
2
The Job-Creating Power of Entrepreneurs in the United States
Entrepreneurship — Accepting the risk of starting and running a
business.
Notable Entrepreneurs
French immigrant Élruthère Irènèe du Pont de Nemours started
Du Pont in 1802.
David McConnell borrowed $500 from a friend to start Avon.
George Eastman started Kodak with a $3,000 investment in
1880.
Jeff Bezos started Amazon.com with investments from his
family and friends.

3
Why People Take the Entrepreneurial Challenge 1 of 9
Reasons to Take the Entrepreneurial Risk
Opportunity
Profit
Independence
Challenge
What Does It Take to be an Entrepreneur?
Self-directed and self-nurturing
Action-oriented
Highly energetic
Tolerant of uncertainty
LO 6-1
4
LO 6-1
Turning Your Passions and Problems into Opportunities
An idea is a good opportunity if:
It fills customers’ needs.
You have the skills and resources to start a business.

You can sell the product or service at a reasonable price and
still profit.
You can get your product or service to customers before the
window of opportunity closes.
You can keep the business going.
5
LO 6-1
Entrepreneurial Teams
Entrepreneurial team — A group of experienced people from
different areas of business who join to form a managerial team
with the skills to develop, make, and market a new product.
An entrepreneurial team (Steve Jobs, Steve Wozniak, and Mike
Markkula) was key to Apple’s success.

6
LO 6-1
Entrepreneurship within Firms
Intrapreneurs — Creative people who work as entrepreneurs
within corporations.
Intrapreneurs use a company’s existing resources to launch new
products for the company.
7
LO 6-1
Micropreneurs and Home-Based Businesses
Micropreneurs — Entrepreneurs willing to accept the risk of
starting and managing a business that remains small, lets them
do the work they want to do, and offers them a balanced
lifestyle.
About half of U.S. micropreneurs are home-based business
owners—writers, consultants, video producers, architects,
bookkeepers, etc.
Nearly 60 percent of home-based micropreneurs are men.

8
LO 6-1
Micropreneurs and Home-Based Businesses continued
Computer technology has leveled the playing field.
Corporate downsizing has led many to venture on their own.
Social attitudes have changed.
New tax laws have loosened restrictions on deducting expenses
for home offices.
9
LO 6-1
Micropreneurs and Home-Based Businesses continued
Challenges of working at home:

Getting new customers is difficult.
Managing your time requires self-discipline.
Work and family tasks are sometimes not separated.
Government ordinances may restrict your business.
Homeowner’s insurance may not cover business-related claims.
10
LO 6-1
Online Businesses
Online sales reached over $381 billion in 2016, about 8 percent
of all retail sales.
Forrester Research predicts online sales to reach $500 billion by
2020.

11
LO 6-1
Encouraging Entrepreneurship: What Government Can Do
Immigration Act passed in 1990 created a category of “investor
visas” that encourage entrepreneurs to come to the U.S.
Enterprise zones — Specific geographic areas to which
governments try to attract private business investment by
offering lower taxes and other government support.
Incubators — Centers that offer new businesses low-cost offices
with basic business services.
12
Getting Started in Small Business 1 of 3
LO 6-2
Small versus Big Business
Small business — A business that is independently owned and
operated, is not dominant in its field of operation, and meets
certain standards of size (set by the Small Business
Administration) in terms of employees or annual receipts.
Businesses are “small” in relation to other businesses in their
industries.

13
LO 6-2
Small versus Big Business continued
Small business statistics:
There are 28 million small businesses in the U.S.
Of all nonfarm businesses in the U.S., almost 97% are
considered small.
Small businesses account for over 50% of the GDP.
Nearly 600,000 businesses are started every year.
Small businesses have generated 65% of new jobs since 1995.
Small businesses employ about half of all private-sector
employees.
About 80% of U.S. workers’ first jobs were in small businesses.
14

LO 6-2
Importance of Small Businesses
More personal customer service
Ability to respond quickly to opportunities
Small-Business Success and Failure
Business failures are lower than the reports because:
Owner closing a business to start another is reported as a
“failure.”
Changing forms of ownership is reported as a “failure.”
Retirement is reported as a “failure.”
15
Figure 6.3 Causes of Small-Business Failure
LO 6-2

16
Figure 6.4 Situations for Small-Business Success
LO 6-2
17
Learning about Small-Business Operations
LO 6-3
Learn from Others
Investigate your local colleges for classes on small business and
entrepreneurship.
Talk to and work for successful local entrepreneurs.
Get Some Experience
Gain three years experience in the field.
Start a part-time small business.
Take Over a Successful Firm
Serve as an apprentice and eventually take over once the owner
steps down.

18
Managing a Small Business 1 of 13
LO 6-4
Major Business Functions
Planning
Financing
Knowing customers
Managing employees
Keeping records
19
Managing a Small Business 2 of 13
LO 6-4
Planning Your Business
Business plan — A detailed written statement that describes the
nature of the business, the target market, the advantages the

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