1. Copyright © Cengage Learning. All rights reserved. 1 | 1 Chapter One Exploring the World of Business and Economics

2. Copyright © Cengage Learning. All rights reserved. 1 | 2 The Organized Effort of Individuals Combining Resources

3. Copyright © Cengage Learning. All rights reserved. 1 | 3 The Relationship Between Sales Revenue and Profit Profit is what remains after all business expenses have been deducted from sales revenue. A loss (negative profit) results when a firm’s expenses are greater than its revenues.

4. Copyright © Cengage Learning. All rights reserved. 1 | 4 Business Profit The purposes of profit To reward business owners for producing goods and services consumers want As payment for business owners assuming the risks of ownership Stakeholders All of the different people or groups or people who are affected by the policies and decisions made by an organization

5. Copyright © Cengage Learning. All rights reserved. 1 | 5 Economic Systems (cont’d) Factors of production Land and natural resources Labor Capital Entrepreneurship Entrepreneur A person who risks time, effort, and money to start and operate a business

6. Copyright © Cengage Learning. All rights reserved. 1 | 6 Economic Systems (cont’d) Differences in economic systems How they answer the four basic economic questions What goods and services will be produced? How will they be produced? For whom will they be produced? Who owns and controls the major factors of production?

7. Copyright © Cengage Learning. All rights reserved. 1 | 7 Types of Economic Systems Capitalism An economic system in which individuals own and operate the majority of businesses that provide goods and services Derived from Adam Smith’s laissez-faire capitalism in which a society’s best interests are served by individuals pursuing their own self-interest Creation of wealth is the concern of private individuals Resources used to create wealth must be privately owned Economic freedom ensures the existence of a free market economy Businesses and individuals decide what to produce and buy; the market determines quantities sold and prices Limited role of government

8. Copyright © Cengage Learning. All rights reserved. 1 | 8 Types of Economic Systems (cont’d) Capitalism in the United States Mixed economy with elements of capitalism and socialism Households Consumers of goods and services Resource owners of some factors of production Businesses Produce goods and services to exchange for revenues (money) Use revenues to purchase factors of production Governments In exchange for taxes, governments provide public services that would not be provided by business or would be produced only for those who could afford them

9. Copyright © Cengage Learning. All rights reserved. 1 | 9 The Circular Flow in Our Mixed Economy

10. Copyright © Cengage Learning. All rights reserved. 1 | 10 Types of Economies (cont’d) Command economies Economic systems in which the government decides what will be produced, how it will be produced, who gets what is produced, and who owns and controls the major factors of production Socialism Key industries (e.g., transportation, utilities, and banking) are owned and controlled by the government Small-scale private businesses may be permitted and workers may choose their own occupations Production is based on national goals, and distribution is controlled by the state Intent is the equitable distribution of income, elimination of poverty, social services to all who need them, elimination of the economic waste of capitalistic competition

11. Copyright © Cengage Learning. All rights reserved. 1 | 11 Types of Economies (cont’d) Command economies (cont’d) Communism All factors of production are owned and controlled by the government as proxy for ownership by all citizens Production is based on centralized state planning to meet the needs of the state and not necessarily the needs of its citizens The state dictates occupational choices and sets prices and wages Intent is to create Karl Marx’s concept of a classless society where all contribute according to their ability and receive benefits according to their needs.

12. Copyright © Cengage Learning. All rights reserved. 1 | 12 Measuring Economic Performance Productivity The average level of output per worker per hour Economic indicators Gross domestic product (GDP) The total value of all goods and services produced by all people within the boundaries of a country during a one-year period Inflation A general rise in the level of prices

13. Copyright © Cengage Learning. All rights reserved. 1 | 13 The Business Cycle The recurrence of periods of growth and recession in a nation’s economic activity Recession Two consecutive three-month periods of decline in a country’s gross domestic product Depression A severe recession that lasts longer than a recession Monetary policies Federal Reserve decisions that determine the size of the supply of money in the nation and the level of interest rates

14. Copyright © Cengage Learning. All rights reserved. 1 | 14 The Business Cycle (cont’d) Fiscal policy Government influence on the amount of savings and expenditures; accomplished by altering the tax structure and by changing the levels of government spending Federal deficit A shortfall created when the federal government spends more in a fiscal year than it receives National debt The total of all federal deficits

15. Copyright © Cengage Learning. All rights reserved. 1 | 15 Types of Competition Rivalry among businesses for sales to potential customers Perfect (or pure) competition The market situation in which there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product Supply: The quantity of a product that producers are willing to sell at each of various prices Demand: The quantity of a product that buyers are willing to purchase at each of various prices Market Price (Equilibrium): The price at which the quantity demanded is exactly equal to the quantity supplied

16. Copyright © Cengage Learning. All rights reserved. 1 | 16 Types of Competition (cont’d) Monopolistic competition A market situation where there are many buyers along with a relatively larger number of sellers who differentiate their products from the products of competitors Product differentiation The process of developing and promoting differences between one’s products and all similar products

17. Copyright © Cengage Learning. All rights reserved. 1 | 17 Types of Competition (cont’d) Oligopoly A market situation (or industry) in which there are few sellers E.g., automobile manufacturers, car rental agencies, and farm implement industries Sizable investments are required to enter into the market Each seller has considerable control over price The market actions of one seller can have a strong effect on competitors

18. Copyright © Cengage Learning. All rights reserved. 1 | 18 Types of Competition (cont’d) Monopoly A market (or industry) with only one seller Natural monopoly An industry requiring huge investments in capital and within which duplication of facilities would be wasteful and thus not in the public interest Legal monopoly (limited monopoly) A monopoly created when the federal government issues a copyright, patent, or trademark protecting the owners of written materials, ideas, or product brands from unauthorized use by competitors

19. Copyright © Cengage Learning. All rights reserved. 2 | 19 Chapter Two Being Ethical and Socially Responsible

20. Copyright © Cengage Learning. All rights reserved. 2 | 20 Business Ethics Defined Ethics The study of right and wrong and of the morality of the choices individuals make An ethical decision is one that is “right” according to some standard of behavior Business ethics The application of moral standards to business situations

21. Copyright © Cengage Learning. All rights reserved. 2 | 21 Ethical Issues Fairness and honesty Businesspeople are expected to refrain from knowingly deceiving, misrepresenting, or intimidating others Organizational relationships A businessperson should put the welfare of others and that of the organization above their own personal welfare Conflict of interest Issues arise when a businessperson takes advantage of a situation for personal gain rather than for the employer’s interest Communications Business communications that are false, misleading, or deceptive are both illegal and unethical

22. Copyright © Cengage Learning. All rights reserved. 2 | 22 Factors Affecting Ethical Behavior Three general sets of factors appear to influence the standards of behavior in an organization Individual factors Individual knowledge of an issue Personal values Personal goals Social factors Cultural norms Coworkers Significant others Use of the Internet Opportunity Presence of opportunity Ethical codes Enforcement

23. Copyright © Cengage Learning. All rights reserved. 2 | 23 Guidelines for Making Ethical Decisions

24. Copyright © Cengage Learning. All rights reserved. 2 | 24 Social Responsibility The recognition that business activities have an impact on society and the consideration of that impact in business decision making Social responsibility costs money but is also good business How socially responsible a firm acts may affect the decisions of customers to do or continue to do business with the firm.

25. Copyright © Cengage Learning. All rights reserved. 2 | 25 Two Views of Social Responsibility Economic model The view that society will benefit most when business is left alone to produce and market profitable products that society needs Managerial attitude: social responsibility is someone else’s job; the firm’s primary responsibility is to make a profit for its shareholders Firms are assumed to fulfill their social responsibility indirectly by paying the taxes that are used to meet the needs of society Social responsibility is the problem of government, environmental groups, and charitable foundations

26. Copyright © Cengage Learning. All rights reserved. 2 | 26 Two Views of Social Responsibility (cont’d) Socioeconomic model The concept that business should emphasize not only profits but also the impact of its decisions on society The corporation is a creation of society and it must act as any responsible citizen would Firms take pride in their social responsibility obligations It is in the best interest of firms to take the initiative in social responsibility matters

27. Copyright © Cengage Learning. All rights reserved. 2 | 27 The Pros and Cons of Social Responsibility Arguments for increased social responsibility: Because business is part of our society, it cannot ignore social issues. Business has the technical, financial, and managerial resources needed to tackle today’s complex social issues. By helping resolve social issues, business can create a more stable environment for long-term profitability. Socially responsible decision making by firms can prevent increased government intervention, which would force businesses to do what they fail to do voluntarily.

28. Copyright © Cengage Learning. All rights reserved. 2 | 28 The Pros and Cons of Social Responsibility (cont’d) Arguments against increased social responsibility Business managers are primarily responsible to stockholders, so management must be concerned with providing a return on owners’ investments. Corporate time, money, and talent should be used to maximize profits, not to solve society’s problems. Social problems affect society in general, so individual businesses should not be expected to solve these problems. Social issues are the responsibility of government officials who are elected for that purpose and who are accountable to the voters for their decisions.

29. Copyright © Cengage Learning. All rights reserved. 2 | 29 Consumerism (cont’d) The Six Basic Rights of Consumers

30. Copyright © Cengage Learning. All rights reserved. 2 | 30 Concern for the Environment Pollution The contamination of water, air, or land through the actions of people in an industrialized society Environmental Protection Agency (EPA) The federal agency charged with enforcing laws affecting the environment Safeguarding the environment requires Environmental legislation Voluntary compliance EPA enforcement actions

31. Copyright © Cengage Learning. All rights reserved. 2 | 31 Concern for the Environment (cont’d) Water pollution Water quality has improved in recent years, but high levels of toxic pollutants are still found in some waters Pollutants threaten the health of both people and wildlife Cleanup is complicated and costly because of runoff and toxic contamination Acid rain from sulfur emissions of industrial smokestacks is contributing to the deterioration of coastal waters, lakes, and marine life

32. Copyright © Cengage Learning. All rights reserved. 2 | 32 Concern for the Environment (cont’d) Air pollution Aviation emissions of carbon dioxidein the upper atmosphere are contributing to global warming Carbon monoxide and hydrocarbons emitted by motor vehicles and smoke and other pollutants emitted by manufacturing plants can be partially eliminated through pollution-control devices Weather and geography can contribute to air pollution

33. Copyright © Cengage Learning. All rights reserved. 2 | 33 Concern for the Environment (cont’d) Land pollution Fundamental issues are how to restore damaged or contaminated land and how to protect unpolluted land from future damage Problem is worsening because technology produces chemical and radioactive waste There is a shortage of landfill space for waste disposal Incinerators help solve the landfill shortage problem, but they produce toxic ash Other causes of land pollution include strip-mining, nonselective cutting of forests, development of agriculture land for housing and industry The EPA has been criticized for its handling of the $1.6 billion Superfund created in 1980 by Congress

34. Copyright © Cengage Learning. All rights reserved. 2 | 34 Concern for the Environment (cont’d) Noise pollution Excessive noise can do physical harm Ways to reduce noise levels Isolating the source of the noise Modifying machinery and equipment If noise cannot be reduced, workers can be protected by wearing noise-reduction gear

35. Copyright © Cengage Learning. All rights reserved. 3| 35 Chapter Three Exploring Global Business

36. Copyright © Cengage Learning. All rights reserved. 3 | 36 The Basis for International Business International business All business activities that involve exchanges across national boundaries Some countries are better equipped than others to produce particular goods or services Absolute advantage The ability to produce a specific product more efficiently than any other nation Comparative advantage The ability to produce a specific product more efficiently than any other product Goods and services are produced more efficiently when each country specializes in the products for which is has a comparative advantage

37. Copyright © Cengage Learning. All rights reserved. 3 | 37 The Basis for International Business (cont’d) Countries trade when they each have a surplus of the product they specialize in and want a product the other country specializes in Exporting Selling and shipping raw materials or products to other nations Importing Purchasing raw materials or products in other nations and bringing them into one’s own country

38. Copyright © Cengage Learning. All rights reserved. 3 | 38 The Basis for International Business (cont’d) Balance of trade The total value of a nation’s exports minus the total value of its imports over some period of time Trade deficit A negative (unfavorable) balance of trade—imports exceed exports in value Balance of payments The total flow of money into a country minus the total flow of money out of that country over a period of time

39. Copyright © Cengage Learning. All rights reserved. 3 | 39 U.S. International Trade in Goods Source: U.S. Department of Commerce, International Trade Administration, U.S. Bureau of Economic Analysis, http://bea.gov/international/bp_web/simple.cfm?anon=78260&table_id=1&area_id=3, accessed September 18, 2008.

40. Copyright © Cengage Learning. All rights reserved. 3 | 40 Types of Trade Restrictions Import duty (tariff) A tax levied on a particular foreign product entering a country Revenue tariffs are imposed to generate income for the government Protective tariffs are imposed to protect a domestic industry by keeping the prices of imports at or above the price of domestic products Dumping The exportation of large quantities of a product at a price lower than that of the same product in the home market

41. Copyright © Cengage Learning. All rights reserved. 3 | 41 Types of Trade Restrictions (cont’d) Nontariff barriers Nontax measures imposed by a government to favor domestic over foreign suppliers Import quota—a limit on the amount of a particular good that may be imported during a given time Embargo—a complete halt to trading with a particular nation or in a particular product Foreign exchange control—restriction on amount of foreign currency that can be purchased or sold

42. Copyright © Cengage Learning. All rights reserved. 3 | 42 Types of Trade Restrictions (cont’d) Nontariff barriers (cont’d) Currency devaluation—the reduction of the value of a nation’s currency relative to the currencies of other nations Bureaucratic red tape—a subtle form of trade restriction that imposes unnecessarily burdensome and complex standards and requirements for imported goods Cultural attitudes—can impede acceptance of products in foreign countries

43. Copyright © Cengage Learning. All rights reserved. 3 | 43 Reasons for and Against Trade Restrictions FOR To equalize a nation’s balance of payments To protect new or weak industries To protect national security To protect the health of citizens To retaliate for another country’s trade restrictions To protect domestic jobs AGAINST Higher prices for consumers Restriction of consumers’ choices Misallocation of international resources Loss of jobs

44. Copyright © Cengage Learning. All rights reserved. 3 | 44 Value of U.S. Merchandise Exports and Imports, 2007 Source: U.S. Department of Commerce, International Trade Administration, http://www.census.gov/foreign-trade/statistics/ highlights/top/top0712.html, accessed September 22, 2008.

45. Copyright © Cengage Learning. All rights reserved. 3 | 45 The General Agreement on Tariffs and Trade and the World Trade Organization General Agreement on Tariffs and Trade (GATT) International organization of 153 nations dedicated to reducing or eliminating tariffs and other trade barriers Most-favored-nation status (MFN)—Each member of GATT was to be treated equally by all other members Kennedy Round, Tokyo Round, Uruguay Round, Doha Round World Trade Organization (WTO) Created in the Uruguay Round of GATT negotiation as a successor to GATT WTO oversees GATT provisions, has judicial powers to meditate trade disputes arising from GATT rules and exerts more binding authority than GATT

46. 3 | 46 Methods of Entering International Business Licensing A contractual agreement in which one firm permits another to produce and market its product and use its brand name in return for a royalty or other compensation Advantage It allows expansion into foreign markets with little or no direct investment Disadvantages The product image may be damaged if standards are not upheld The original producer does not gain foreign marketing experience Copyright © Cengage Learning. All rights reserved.

47. 3 | 47 Methods of Entering International Business (cont’d) Joint ventures A partnership formed to achieve a specific goal or to operate for a specific period of time Advantages Immediate market knowledge and access Reduced risk Control over the product attributes Disadvantages Complexity of establishing agreements across national borders High level of commitment required of all parties involved Copyright © Cengage Learning. All rights reserved.

48. 3 | 48 Methods of Entering International Business (cont’d) Totally owned facilities Production and marketing facilities in one or more foreign nations Advantage Direct investment provides complete control over operations Disadvantage Risk is greater than that of a joint venture Two forms Building new facilities in the foreign country Purchasing an existing firm in the foreign country Copyright © Cengage Learning. All rights reserved.

49. 3 | 49 Methods of Entering International Business (cont’d) Strategic alliances Partnerships formed to create competitive advantage on a worldwide basis Trading companies Firm that provide a link between buyers and sellers in different countries Take title to products and perform all the activities necessary to move the products from one country to another Copyright © Cengage Learning. All rights reserved.

50. 3 | 50 Methods of Entering International Business (cont’d) Countertrade An international barter transaction Avoids restrictions on converting domestic currency to foreign currency Multinational enterprise A firm that operates on a worldwide scale without ties to any specific nation or region Copyright © Cengage Learning. All rights reserved.

51. Copyright © Cengage Learning. All rights reserved. 3 | 51 Financing International Business The Export-Import Bank of the United States (Eximbank) An independent agency of the U.S. government whose function it is to assist in financing the exports of American firms Multilateral Development Bank (MDB) An internationally supported bank that provides loans to developing countries to help them grow World Bank, Inter-American Development Bank (IDB), Asian Development Bank (ADB), African Development Bank (AFDB), European Bank for Reconstruction and Development (EBRD) The International Monetary Fund (IMF) An international bank with 185 member nations that makes short-term loans to developing countries experiencing balance-of-payment deficits

52. Copyright © Cengage Learning. All rights reserved. 4 | 52 Chapter Four Choosing a Form of Business Ownership

53. Copyright © Cengage Learning. All rights reserved. 4 | 53 Sole Proprietorships A business that is owned (and usually operated) by one person The simplest form of business ownership and the easiest to start Many large businesses began as a small struggling sole proprietorships The most widespread form of business ownership

54. Copyright © Cengage Learning. All rights reserved. 4 | 54 Relative Percentages of Sole Proprietorships, Partnerships, and Corporations in the U.S. Sole proprietorships are most common in retailing, agriculture, and the service industries Source: U.S. Bureau of the Census, Statistical Abstract of the United States, Washington, D.C., 2008, p. 487 (www.census.gov).

55. Copyright © Cengage Learning. All rights reserved. 4 | 55 Advantages and Disadvantages of Sole Proprietorships ADVANTAGES Ease of start-up and closure Pride of ownership Retention of all profits Flexibility of being your own boss No special taxes DISADVANTAGES Unlimited liability A legal concept that holds a business owner personally responsible for all the debts of the business Lack of continuity Lack of money Limited management skills Difficulty in hiring employees

56. A voluntary association of two or more persons to act as co-owners of business for profit Less common form of ownership than sole proprietorship or corporation No legal limit on the maximum number of partners; most have only 2 Large accounting, law, and advertising partnerships have multiple partners Partnerships are usually a pooling of special talents or the result of a sole proprietor taking on a partner Copyright © Cengage Learning. All rights reserved. 4 | 56 Partnerships

57. Copyright © Cengage Learning. All rights reserved. 4 | 57 Types of Partners General partner A person who assumes full or shared responsibility for operating a business General partnership: a business co-owned by two or more general partners who are liable for everything the business does Limited partner A person who contribute capital to a business but has no management responsibility or liability for losses beyond the amount he or she invested in the partnership Limited partnership: a business co-owned by one or more general partners who manage the business and limited partners who invest money in it Master limited partnership (MLP): a business partnership that is owned and managed like a corporation but taxed like a partnership

58. Copyright © Cengage Learning. All rights reserved. 4 | 58 Advantages and Disadvantages of Partnerships DISADVANTAGES Unlimited liability Management disagreements Lack of continuity Frozen investment ADVANTAGES Ease of start-up Availability of capital and credit Personal interest Combined business skills and knowledge Retention of profits No special taxes

59. Copyright © Cengage Learning. All rights reserved. 4 | 59 Corporations An artificial person created by law with most of the legal rights of a real person, including the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts There are 5.6 million corporations in the U.S. They comprise only 20% of all businesses, but they account for 83.8 % of sales revenues

60. Copyright © Cengage Learning. All rights reserved. 4 | 60 Corporate Ownership Corporate ownership Stock The shares of ownership of a corporation Stockholder A person who owns a corporation’s stock Closed corporation A corporation whose stock is owned by relatively few people and is not sold to the general public Open corporation A corporation whose stock is bought and sold on security exchanges and can be purchased by any individual

61. Copyright © Cengage Learning. All rights reserved. 4 | 61 Forming a Corporation Incorporation The process of forming a corporation Most experts recommend consulting a lawyer

62. Copyright © Cengage Learning. All rights reserved. 4 | 62 Forming a Corporation (cont’d) Where to incorporate Businesses can incorporate in any state they choose Some states offer fewer restrictions, lower taxes, and other benefits to attract new firms Domestic corporation A corporation in the state in which it is incorporated Foreign corporation A corporation in any state in which it does business except the one it which it is incorporated Alien corporation A corporation chartered by a foreign government and conducting business in the U.S.

63. Copyright © Cengage Learning. All rights reserved. 4 | 63 Forming a Corporation (cont’d) Articles of incorporation A contract between the corporation and the state in which the state recognizes the formation of the artificial person that is the corporation Articles of incorporation includes Firm’s name and address Incorporators’ names and addresses Purpose of the corporation Maximum amount of stock and types of stock to be issued Rights and privileges of stockholders Length of time the corporation is to exist

64. Copyright © Cengage Learning. All rights reserved. 4 | 64 Forming a Corporation (cont’d) Stockholders’ rights Common stock Stock owned by individuals or firms who may vote on corporate matters but whose claims on profit and assets are subordinate to the claims of others Preferred stock Stock owned by individuals or firms who usually do not have voting rights but whose claims on dividends are paid before those of common-stock holders Dividend A distribution of earnings to the stockholders of a corporation Proxy A legal form listing issues to be decided at a stockholders’ meeting and enabling stockholders to transfer their voting rights to some other individual or individuals

65. Copyright © Cengage Learning. All rights reserved. 4 | 65 Forming a Corporation (cont’d) Organizational meeting The last step in forming a corporation The incorporators and original stockholders meet to elect their first board of directors Board members are directly responsible to stockholders for how they operate the firm

66. Copyright © Cengage Learning. All rights reserved. 4 | 66 Corporate Structure Board of directors The top governing body of a corporation, the members of which are elected by the stockholders Responsible for setting corporate goals, developing strategic plans to meet those goals, and the firm’s overall operation Outside directors: experienced managers or entrepreneurs from outside the corporation who have specific talents Inside directors: top managers from within the corporation

67. Copyright © Cengage Learning. All rights reserved. 4 | 67 Corporate Structure (cont’d) Corporate officers The chairman of the board, president, executive vice presidents, corporate secretary, treasurer, and any other top executive appointed by the board Implement the chosen strategy and direct the work of the corporation, periodically reporting results to the board and stockholders

68. Copyright © Cengage Learning. All rights reserved. 4 | 68 Hierarchy of Corporate Structure Stockholders exercise a great deal of influence through their right to elect the board of directors

69. Copyright © Cengage Learning. All rights reserved. 4 | 69 Advantages and Disadvantages of Corporations ADVANTAGES Limited liability Each owner’s financial liability is limited to the amount of money that he or she has paid for the corporation’s stock Ease of raising capital Ease of transfer of ownership Perpetual life Specialized management DISADVANTAGES Difficulty and expense of formation Government regulation and increased paperwork Conflict within the corporation Double taxation Lack of secrecy

70. Copyright © Cengage Learning. All rights reserved. 4 | 70 Advantages and Disadvantages

71. S-corporations A corporation that is taxed as though it were a partnership (income is taxed only as the personal income of stockholders) Advantages Avoids double taxation of a corporation Retains the corporation’s legal benefit of limited liability S-corporation criteria No more than 100 stockholders allowed Stockholders must be individuals, estates, or exempt organizations There can be only one class of outstanding stock The firm must be a domestic corporation There can be no nonresident-alien stockholders All stockholders must agree to the decision to form an S-corporation Copyright © Cengage Learning. All rights reserved. 4 | 71 Special Types of Business Ownership

72. Copyright © Cengage Learning. All rights reserved. 4 | 72 Special Types of Business Ownership (cont’d) Limited-liability company (LLC) A form of business ownership that provides limited-liability protection and is taxed like a partnership Advantages Avoids double taxation of a corporation Retains the corporation’s legal benefit of limited liability Provides more management flexibility Difference between LLC and S-corporation LLCs not restricted to 100 stockholders LLCs have fewer restrictions on who can be a stockholder

73. Copyright © Cengage Learning. All rights reserved. 4 | 73 Advantages and Disadvantages

74. Copyright © Cengage Learning. All rights reserved. 4 | 74 Special Types of Business Ownership (cont’d) Government-owned corporations A corporation owned and operated by a local, state, or federal government Purpose To ensure that a public service is available Examples Tennessee Valley Authority (TVA), the National Aeronautics and Space Administration (NASA), and the Federal Deposit Insurance Corporation (FDIC)

75. Copyright © Cengage Learning. All rights reserved. 4 | 75 Special Types of Business Ownership (cont’d) Not-for-profit corporations Corporations organized to provide social, educational, religious, or other services, rather than to earn a profit Charities, museums, private schools, and colleges are organized as not-for-profits primarily to ensure limited liability

76. Copyright © Cengage Learning. All rights reserved. 4 | 76 Cooperatives, Joint Ventures, Syndicates Cooperatives Associations of individuals or firms whose purpose is to perform some business function for its members Members benefit from the efficiencies of the cooperatives’ activities, such as reducing unit costs by making bulk purchases and coordinating services such as transportation, processing, and marketing products

77. Copyright © Cengage Learning. All rights reserved. 4 | 77 Cooperatives, Joint Ventures, Syndicates (cont’d) Joint ventures Agreements between two or more groups to form a business entity in order to achieve a specific goal or to operate for a specific period of time Example: Wal-Mart and India’s Bharti Enterprises Syndicates Temporary associations of individuals or firms organized to perform a specific task that requires a large amount of capital Most commonly used to underwrite large insurance policies, loans, and investments

78. Copyright © Cengage Learning. All rights reserved. 4 | 78 Corporate Growth Growth from within Introducing new products Entering new markets Growth through mergers and acquisitions Merger: the purchase of one corporation by another; essentially the same as an acquisition Hostile takeover: a situation in which the management and board of directors of the firm targeted for acquisition disapprove of the merger Tender offer: an offer to purchase the stock of a firm targeted for acquisition at a price just high enough to tempt stockholders to sell their shares Proxy fight: a technique used to gather enough stockholder votes to control the targeted company

79. Copyright © Cengage Learning. All rights reserved. 4 | 79 Three Types of Growth by Merger

80. Copyright © Cengage Learning. All rights reserved. 5 | 80 Chapter Five Small Business, Entrepreneurship, and Franchises

81. Copyright © Cengage Learning. All rights reserved. 5 | 81 Small Business: A Profile A business that is independently owned and operated for profit and is not dominant in its field SBA “smallness” guidelines Manufacturing—500 employees Wholesale trade—100 employees Agriculture—$750,000 Retail trade—$6.5 million General and heavy construction—$31 million Dredging—$18.5 million Special trade construction—$13 million Travel agencies—$3.5 million (commissions & other income) Business and personal services—$6.5 million Architectural, engineering, surveying, etc.—$4.5 million Dry cleaning, carpet cleaning—$4.5 million

82. Copyright © Cengage Learning. All rights reserved. 5 | 82 Small Business: A Profile (cont’d) Small-business sector There are about 27.2 million businesses in the U.S. Just over 17,000 employ more than 500 workers In the last decade, the number of small businesses increased 49 percent Part-time entrepreneurs have increase fivefold and account for one-third of all small businesses Two-thirds of new businesses survive at least two years, 44 percent survive at least four years, and 31 percent survive at least seven years The primary reason for these failures is due to poor management stemming from a lack of business know-how Small businesses provide over 50% of the jobs in the U.S.

83. Copyright © Cengage Learning. All rights reserved. 5 | 83 Industry Group-Size Standards Source:http://www.sba.gov/services/contractingopportunities/sizestandardstopics/summarywhatis/, accessed October 3, 2008.

84. Copyright © Cengage Learning. All rights reserved. 5 | 84 The People in Small Businesses: The Entrepreneurs Why people go into business for themselves The “entrepreneurial spirit” The desire for independence The desire to determine one’s own destiny The willingness to find and accept a challenge Personal background Age “Had enough” of working for someone else High-tech opportunities, especially for teens Losing a job and deciding to start a business An idea for a new product An opportunity presents itself

85. Copyright © Cengage Learning. All rights reserved. 5 | 85 How Old Is the Average Entrepreneur? Source: Data developed from and provided by the National Federation of Independent Business Foundation and sponsored by the American Express Travel Related Services Company, Inc.

86. Copyright © Cengage Learning. All rights reserved. 5 | 86 Why Some Entrepreneurs and Small Businesses Fail Lack of capital and cash-flow problems Lack of management skills Overexpansion

87. Copyright © Cengage Learning. All rights reserved. 5 | 87 The Importance of Small Businesses in Our Economy Providing technological innovation Innovation among small-business workers is higher than among workers in large businesses Small firms produce 2.5 times as many innovations as large firms relative to the number of persons employed More than half of the major technological advances of the 20th century originated with individual inventors and small businesses Inventions may spark new industries or contribute to established industries

88. Copyright © Cengage Learning. All rights reserved. 5 | 88 The Importance of Small Business in Our Economy (cont’d) Providing employment Small firms hire a larger proportion of younger workers, older workers, women, and part-time workers Small businesses provide 67% of workers with their first job and initial job skills Small businesses represent 99.7% of all employers and employ about 50% of the private work force Small businesses provide 2/3 of the net new jobs added to the economy

89. Copyright © Cengage Learning. All rights reserved. 5 | 89 The Importance of Small Business in Our Economy (cont’d) Providing competition Small firms can compete with large firms, forcing the larger firm to become more efficient and responsive to customer needs Filling needs of society and other businesses Small firms can meet the special needs of smaller groups of customers Small firms can act as specialized suppliers of goods and services to larger businesses

90. Copyright © Cengage Learning. All rights reserved. 5 | 90 The Pro and Cons of Smallness ADVANTAGES Personal relationships with customers and employees Ability to adapt to change Simplified recordkeeping Independence Advantages of sole proprietorships Keeping all profits Ease and low cost of going into business Keeping business information secret DISADVANTAGES Risk of failure Limited potential Limited ability to raise capital

91. Copyright © Cengage Learning. All rights reserved. 5 | 91 Sources of Capital for Entrepreneurs Source: Data developed from and provided by the National Federation of Independent Business Foundation and sponsored by the American Express Travel Related Services Company, Inc.

92. Copyright © Cengage Learning. All rights reserved. 5 | 92 Developing a Business Plan Business plan—A carefully constructed guide for the person starting a business Three basic purposes Communication Management Planning Accuracy and realistic expectations are crucial

93. Copyright © Cengage Learning. All rights reserved. 5 | 93 The Small Business Administration A governmental agency that assists, counsels, and protects the interests of small business in the U.S. SBA management assistance Management courses and workshops Service Core of Retired Executives (SCORE) Help for minority-owned small businesses Small-business institutes Small-business development centers SBA publications

94. Copyright © Cengage Learning. All rights reserved. 5 | 94 The Small Business Administration (cont’d) SBA financial assistance Regular business loans Loans are made by private banks but are partially guaranteed by the SBA Small-business investment companies Venture capital: money invested in small firms that have the potential to become very successful Small business investment companies: privately owned firms that provide venture capital to small enterprises that meet their investment standards

95. Copyright © Cengage Learning. All rights reserved. 5 | 95 Franchising Franchise A license to operate an individually owned business as though it were part of a chain of outlets or stores Franchising The actual granting of a franchise Franchisor An individual or organization granting the franchise Franchisee A person or organization purchasing a franchise

96. Copyright © Cengage Learning. All rights reserved. 5 | 96 Types of Franchises A manufacturer authorizes retailers to sell a certain brand-name item A producer licenses distributors to sell a product to retailers A franchisor supplies brand names, techniques, or services instead of a complete product

97. Copyright © Cengage Learning. All rights reserved. 5 | 97 Franchising (cont’d) Are franchises successful? The success rate for franchises is higher than that for other small businesses 94 percent of franchise owners report that they are successful Too rapid expansion, inadequate capital or management skills, or other problems can cause franchises to fail

98. Copyright © Cengage Learning. All rights reserved. 5 | 98 Advantages of Franchising TO THE FRANCHISOR Fast and well controlled distribution of its products No need to construct and operate its own outlets More working capital available for expanded production and advertising Franchising agreements maintain product and quality standards Motivated work force of franchisees TO THE FRANCHISEE Opportunity to start a proven business with limited capital Guaranteed customers Franchisor available for advice and guidance Materials for local promotional campaigns and participation in national campaigns Cost savings when purchasing in cooperation with other franchisees

99. Copyright © Cengage Learning. All rights reserved. 5 | 99 Disadvantages of Franchising TO THE FRANCHISOR Failure of the franchisee to operate franchise properly Disputes with and lawsuits by franchisees over the terms of the franchise TO THE FRANCHISEE Franchisor retains a large amount of control over the franchisee’s activities Franchisor opening competing franchises within the franchisee’s market