Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin..

Instructor Manual

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Chapter 1: The U.S. Business Environment Chapter Overview Many students come to an introduction to business class not quite sure what it’s all about. The course has something for everyone, from those who have been in the business world a while to those just getting started. As the book unfolds, students develop an understanding of the foundations of business and will be able to apply what they learn about business to many aspects of the course.

This first chapter dives right into the world of business, explaining what business is, what its main goals and functions are, and how the external environments of business affect the success and failure of any organization.

Learning Objectives 1-1. Define the nature of U.S. business, describe the external environments of business, and discuss how these environments affect the success or failure of organizations.

1-2. Describe the different types of global economic systems according to the means by which they control the factors of production.

1-3. Show how markets, demand, and supply affect resource distribution in the United States, identify the elements of private enterprise, and explain the various degrees of competition in the U.S. economic system.

1-4. Explain the importance of the economic environment to business and identify the factors used to evaluate the performance of an economic system.

1-5. Learn about the skills you will gain through this text.

LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: What Do You Know About Business?

2. Up for Debate: Comparing Economic Systems 3. Small Group Discussion: Scanning the Environment

Description Students assess their level of knowledge about business and set their own learning goals for the class.

Teams of students discuss types of economic systems.

Students consider how parts of the external environment affect businesses and industries.

Time Limit 20 min.

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

25 min.

30 min.

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

CHAPTER OUTLINE Learning Objective 1-1: Define the nature of U.S. business, describe the external environments of business, and discuss how these environments affect the success or failure of organizations.

Business, Profit, and the External Environment Are businesses large, successful corporations, once-great but struggling companies, multinational giants, or local supermarkets and family-owned operations?

A. Business and Profit A business is an organization that provides goods and services to earn profits. Profits are the difference between a business’s revenues and expenses.

1.

Consumer Choice and Demand In a capitalistic system like that of the United States, consumers have freedom of choice. In turn, businesses must take into account consumer demand as shown through wants and needs in their pursuit of profits.

2.

Opportunity and Enterprise Opportunity involves goods or services that consumers need or want, especially if no one else is supplying them or if existing businesses are doing so inefficiently or incompletely.

3.

The Benefits of Business Businesses produce most of the goods and services consumed, employ most working people, create most innovations, and provide opportunities for new businesses to serve as suppliers. Further, businesses contribute to the quality of life and the standard of living in a society. Businesses provide incomes for owners, taxes to support government, and support to charities and community leadership.

B. The External Environments of Business The external environment consists of everything outside an organization’s boundaries that might affect it. Managers must understand their environment to understand how to operate and compete within it. Businesses can also influence their environments. Six major dimensions of the external environment are: 1.

Domestic Business Environment The domestic business environment refers to the environment in which a firm conducts its operations and derives its revenues. It includes customers, suppliers, and competitors.

2.

Global Business Environment The global business environment refers to the international forces that affect a business; various factors including international trade agreements, international economic conditions, and political unrest affect the global environment at both the general and immediate levels. International market opportunities, suppliers, cultures, competitors, and currency values can impact any business.

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

3.

Technological Environment The technological environment generally includes all the ways by which firms create value for their constituents; technology includes human knowledge, work methods, physical equipment, electronics and telecommunications, and various processing systems used to perform business activities.

4.

Political-Legal Environment The political-legal environment reflects the relationship between business and government, usually in the form of government regulation of business.

5.

Sociocultural Environment The sociocultural environment includes the customs, mores, values, and demographic characteristics of the society in which an organization functions.

6.

Economic Environment The economic environment refers to relevant conditions that exist in the economic system in which a company operates.

Use In-Class Activity 1: Icebreaker: What Do You Know About Business?

Time Limit: 20 minutes

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Learning Objective 1-2: Describe the different types of global economic systems according to the means by which they control the factors of production.

Economic Systems An economic system is a nation’s system for allocating its resources among citizens, both individuals and organizations..

A. Factors of Production A basic difference between economic systems is the way in which a system manages its factors of production—the resources that a country’s businesses use to produce goods and services.

Economists focus on five factors of production: 1.

Labor The human resource element in businesses, labor includes the physical and intellectual contributions people make while engaged in economic production.

2.

Capital The financial resources needed to operate an enterprise are known as capital.

3.

Entrepreneurs An entrepreneur is an individual who accepts the risks and opportunities entailed in creating and operating a new business.

4.

Physical Resources The tangible things that organizations use to conduct their business are physical resources and can include natural resources, raw materials, offices, storage and production facilities, supplies, and computers.

5.

Information Resources Businesses rely on information resources such as market forecasts, the specialized knowledge of people, and economic data.

KEY TEACHING TIPS ● The production of tangible goods once dominated most economic systems. But now, the most important factors of production are entrepreneurial skills and information resources. The more a country can create an environment that promotes entrepreneurship and harnesses knowledge and information, the better off it will be. ● Remind students that inputs used to produce outputs are also called factors of production; they include labor, capital, entrepreneurship, physical resources, and information resources.

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

QUICK QUESTIONS ●

What are the factors of production used to produce orange juice?

●

What are the factors of production used to produce an online video game?

● Entrepreneurship involves tremendous risk taking and is a welcome ingredient in a free market system. What characteristics of our free market system encourage risk taking?

B. Types of Economic Systems Economic systems vary, depending on how the factors of production are managed.

1.

Planned Economies These systems rely on a centralized government to control all or most of the factors of production and allocation decisions. With communism—as currently operating in North Korea—all sources of production are owned and operated by the government.

2.

Market Economies Producers and consumers control production and allocation decisions through supply and demand.

A market is a mechanism for exchange between the buyers and sellers of a particular product. The political basis of a market economy is capitalism, which allows the private ownership of the factors of production and encourages entrepreneurship by offering profits as incentives. The economic basis is the operation of demand and supply.

3.

Mixed Market Economies This type of economy features characteristics of both planned and market economies; many countries are moving from planned systems to mixed market systems through privatization, which involves the transformation of government-controlled businesses into privately owned enterprises.

In the partially planned system called socialism, the government owns and operates selected major industries. Many Western European countries, including England and France, allow free market operations in most economic areas but keep government control of others, such as health care. The United States currently is wrestling with who should control health care for the portion of the population that is not eligible (by age) for Medicare.

KEY TEACHING TIPS ● Remind students that a government’s level of control distinguishes capitalism from socialism. If you have foreign students in your class, you may want them to say a bit about the economic systems in their native countries. ● Remind students that an economic system is defined by how it allocates factors of production. In a planned economy, the government owns and controls these factors; in a market economy, producers/consumers buy and sell what they choose.

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

● Make sure students understand that a mixed market economy is characterized by government ownership of major industries working alongside privately owned industries. ● Ask students to give their opinions about the health care system in the United States, and the debates regarding restructuring it. In addition, you could ask students to research and report on any new stories concerning the health care system that appear in publications such as the Wall Street Journal. It is never too early to get students to regularly read the business news!

Use In-Class Activity 2: Up for Debate: Comparing Economic Systems Time Limit: 30 Minutes QUICK QUESTIONS ●

Give an example of a country with a planned economy. What makes this economy planned?

● Give an example of a country with a market economy. How is the economic system different in this country? ● Do you think the government should be involved in supporting the health care insurance system in the United States? Why or why not?

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Learning Objective 1-3: Show how markets, demand, and supply affect resource distribution in the United States, identify the elements of private enterprise, and explain the various degrees of competition in the U.S. economic system.

The Economics of Market Systems Understanding the complex nature of the U.S. economic system is essential to understanding the environment in which U.S. businesses operate.

A. Demand and Supply in a Market Economy Billions of exchanges take place every day between businesses and individuals; between businesses; and among individuals, businesses, and governments. Exchanges conducted in one area often affect exchanges elsewhere.

1.

The Laws of Demand and Supply: Demand is the willingness and ability of buyers to purchase a product; supply is the willingness and ability of producers to offer a good or service for sale. The law of demand states that buyers will purchase more of a product as its price drops; the law of supply states that producers will offer more of a product for sale as its price increases. a.

The Demand and Supply Schedule. The demand and supply schedule indicates how much of a product will be sold at various prices. Generally speaking, the more consumers are willing to pay for a good, the more producers are likely to divert resources to make more of the good. Conversely, as the price at which consumers are willing to pay for a product falls, production becomes less profitable and producers cut back on production to divert resources to more profitable areas. The information is obtained from market research, historical data, and other studies of the market. b.

Demand and Supply Curves. A demand curve shows how many products will be demanded at different prices; a supply curve shows how many products will be supplied at various prices. The curves are based on the observation that quantity demanded increases as price decreases and the quantity supplied increases as price increases. The point at which the curves intersect is the market price (or equilibrium price). In other words, the equilibrium price reflects that the quantity demanded and the quantity supplied are equal. c.

Surpluses and Shortages. With a surplus, the quantity supplied exceeds the quantity demanded. When quantity demanded exceeds quantity supplied there will be a shortage.

Businesses should seek the ideal combination of price charged and quantity supplied so as to maximize profits, maintain goodwill among customers, and discourage competition.

QUICK QUESTION ● What is the equilibrium price? What happens if incomes rise and demand increases? What happens if producers have a surplus and supply increases? Why should producers aim to meet, but not exceed, demand at the equilibrium price?

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

B. Private Enterprise and Competition in a Market Economy Individuals pursue their own interests with minimal government restriction in a private enterprise system; such a system requires: ● Private property rights—the ability of individuals to own resources ● Freedom of choice—the ability to choose where to work and what to buy ● Profits—the ability to take risk to earn profit, and ● Competition—the ability to compete for customers and resources. Competition occurs when two or more businesses vie for the same resources or customers.

1.

Degrees of Competition. Economists have identified four degrees of competition in a private enterprise system: a.

Perfect Competition. Many small firms exist in an industry; no single firm is powerful enough to influence price. Since no single firm is powerful enough to influence the price of the product, prices are determined by market forces such as supply and demand. b.

Monopolistic Competition. Many sellers of all sizes, but also many buyers exist, so sellers focus on numerous differentiation strategies, such as brand names, design, and advertising. c.

Oligopoly. An industry has only a handful of sellers; market entry is difficult because large capital investment is needed. Sellers tend to be large. d.

Monopoly. An industry or market has only one producer; that producer enjoys complete control over price. Utility companies are natural monopolies, industries in which one company can most efficiently supply all needed goods or services. Duplicate facilities would be wasteful.

KEY TEACHING TIPS ● Remind students that perfect competition is characterized by (a) many buyers, (b) many sellers, and (c) buyers and sellers who accept a going price. ● Remind students that monopolistic competition is characterized by (a) many buyers, (b) many sellers, and (c) products that are differentiated. ● Reinforce that an oligopoly is characterized by (a) many buyers, (b) few sellers, (c) products that are quite similar, and (d) a change in price by one seller often meaning a change in price by all sellers. ● Remind students that a monopoly is characterized by (a) many buyers, (b) only one seller, and (c) prices being set by the one seller.

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

QUICK QUESTION •

Which level of competition best describes the market in each of the following scenarios: o Your local Pizza Hut (monopolistic competition) o A local farmer selling apples for applesauce (perfect competition) o Cell phone service (oligopoly) o Apple store (monopolistic competition) o Local utility/power company (monopoly)

HOMEWORK Supply and Demand!

Now is a good time to assign Application Exercis 1-9 from the end-of-chapter materials as homework. This assignment asks students to analyze how demand effects prices for a service like Uber.

At-Home Completion Time: 1 to 1.5 hours

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Learning Objective 1-4: Explain the importance of the economic environment to business and identify the factors used to evaluate the performance of an economic system.

Economic Indicators A. Economic Indicators Economic indicators show whether an economic system is strengthening, weakening, or remaining stable.

1.

Economic Growth, Aggregate Output, and Standard of Living. The business cycle is the pattern of short-term expansions and contractions in an economy; one important use of economic measures is to help governments and businesses understand where in the business cycle they currently are. Aggregate output is the total quantity of goods and services produced by an economic system during a given period. Simply put, an increase in aggregate output is growth.

Standard of living refers to the total quantity and quality of goods and services that can be purchased with the currency used in an economic system; standard of living increases when the quantity of goods and services increases, and the economic system provides more of the goods and services people want.

2.

Gross Domestic Product (GDP): The GDP is the total value of all goods and services produced within a given period through domestic factors of production; GDP is a measurement of aggregate output. If GDP is going up, aggregate output is going up; if aggregate output is going up, the nation is experiencing economic growth. Gross national product (GNP) refers to the total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located. a.

Real Growth Rate: Real growth depends on output increasing at a faster rate than population; the real growth rate in 2019 of the U.S. economic system was 2.9 percent while the population grew at a rate of 0.60 percent, thus indicating the real growth rate is modest. b.

GDP per Capita: GDP per capita means GDP per person. GDP divided by total population equals GDP per capita. It is a better measure than GDP itself of the economic well-being of the average person. c.

Real GDP: Real GDP means that GDP has been adjusted to account for changes in currency values and price changes. Nominal GDP is GDP measured in current dollars or with all components valued at current prices, with no adjustments made. d.

Purchasing Power Parity: Purchasing power parity is the principle that exchange rates are set so that the prices of similar products in different countries are about the same. It quantifies what people can actually buy with the financial resources allocated to them by their respective economic systems; it gives a better sense of standards of living around the world.

3.

Productivity: Productivity compares how much a system produces with the resources needed to produce it; increases in productivity yield increases in the standard of living.

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

a.

Balance of Trade: A country’s balance of trade is the economic value of all the products that it exports minus the economic value of its imported products. A positive balance results when the value of a country’s exports is greater than its imports; that is, more money is flowing into the country as a result of exporting. A negative balance results when a country imports more than it exports. b.

National Debt: A country’s national debt is the amount of money that is owed by the government to creditors.

B. Economic Stability results when the amount of money available in an economic system and the quantity of goods and services produced in it are growing at about the same rate.

1.

Inflation. Inflation occurs when widespread price increases plague an economic system; the amount of money in the economic system exceeds the amount of actual output. Inflation can be measured by the consumer price index (CPI), which measures prices of typical products purchased by consumers living in urban areas.

2.

Unemployment. Unemployment is the level of joblessness among people actively seeking work in an economic system. When unemployment is low, there is a shortage of labor available for businesses to hire. Unemployment is sometimes a symptom of a recession or of a depression. For example, during downturns in the business cycle people in different sectors may lose their jobs at the same time. As a result, overall income and spending may decline to the extent that businesses may cut spending on the factors of production—including labor, leading to more unemployment.

3.

Recessions and Depressions. Aggregate output is measured to determine whether an economy is going through a recession. Governments and economists define a recession as a period during which aggregate output, as measured by real GDP, declines. The U.S. economy went into a recession in 2008 and many economists agree that we began to emerge in 2011. A prolonged and deep recession is a depression.

C. Managing the U.S. Economy. The government manages the U.S. economic system through both fiscal and monetary policies. Fiscal policies manage the collection and spending of revenues; changes in tax rates can function as fiscal policies. Monetary policies focus on controlling the size of the nation’s money supply; the government can influence banks to lend money and can influence the supply of money through stimulus packages. Stabilization policy is made up of both fiscal and monetary policies; the goal is to smooth out fluctuations in output and unemployment and to stabilize prices.

KEY TEACHING TIPS ● Make sure that students understand that gross domestic product includes only the value of products produced within a nation’s borders; the figure includes the value of products produced by both domestic and foreign companies within those borders. ●

Reinforce that gross national product includes the value of products produced by a

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

country regardless of where they are produced; this figure does not include the value of products produced within the country by a foreign company. ● Emphasize that the government regulates the money supply and interest rates through monetary policy; the government influences money supply via taxation and spending through fiscal policy. ● Make sure students understand that inflation occurs when overall price levels go up because too much money is floating around; as a result, purchasing power declines.

Use In-Class Activity 3: Small Group Discussion: Scanning the Environment Time Limit: 25 minutes HOMEWORK Supply and Demand Now is a good time to assign Application Exercise 1-10 from the end-of-chapter materials as homework. This assignment asks students to pick a product or service to determine how supply and demand operate in the real world.

At-Home Completion Time: 1–2 hours

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Learning Objective 1-5: Learn about the skills you will gain through this text.

A. Communication: This includes how leaders communicate the corporate culture (Chapter 5) and how managers communicate the delegation process (Chapter 6).

B. Critical Thinking: Chapter 9 covers the decision-making process while Chapter 11 discusses the research process and research methods.

C. Collaboration: Teams and team-based methods of organizing are covered in Chapters 6 and 8.

D.

Business Ethics and Social Responsibility: Chapter 2 is devoted to these topics.

E. Information Technology Application and Computing Skills: Information technology application and computing skills is found in Chapter 14.

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: What Do You Know About Business?

Activity Overview: This activity helps students assess their level of knowledge about business and set their own learning goals for the class.

Time Limit: 20 minutes What to Do: 1.

Ask each student to take out a piece of paper and divide it into two columns. In the first column, students should write the four or five most important things they currently know about business, and in the second column, the four or five things they would like to learn. Tell them that if they are having difficulty coming up with items to list, they should take a look at the table of contents in the text. It will give them some clues so that this task doesn’t frustrate them. (5 minutes) 2.

Divide students into groups of three to five people and ask them to share their lists with each other. As they listen, they can delete or add anything that seems relevant. (5 minutes) 3.

Ask them to switch groups, so that they are with all new people, and repeat the process of sharing their lists. (5 minutes) 4.

Ask students to switch to a third group of all new people. With this group, the goal is to synthesize their lists into one big idea of what they know, and one big idea of what they want to learn. (5 minutes) Don’t Forget: This activity allows students to get to know each other, as well as set expectations for the course.

The underlying agenda is to get them talking to each other, setting the stage for active participation throughout the class.

Wrap-Up: Wrap up the discussion by having each group report back to the class. You may want to record their responses and post them in the room for reference as you move through the course.

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

In-Class Activity 2: Up for Debate: Comparing Economic Systems Activity Overview: This activity gets students talking about similarities and differences between the U.S. economic system and other systems.

Time Limit: 30 minutes What to Do: 1.

Divide the class into small groups. Ask the groups to assume they have just overheard a classmate say, “The United States is becoming more socialist everyday—with all the government control.” Have each group list reasons why the statement could be true and reasons why the statement could be false. (15 minutes) 2.

Reassemble the class and discuss each group’s thoughts. (15 minutes)

Don’t Forget: Remind students that a government’s level of control distinguishes capitalism from socialism. If you have foreign students in your class, you may want them to say a bit about the economic systems in their native countries.

Wrap-Up: Wrap up the discussion by reminding students that the U.S. economic system and a socialist system have many similarities and differences. For example, workers in socialist economies often work fewer hours, have longer vacations, and receive more health, education, and child-care benefits than do workers in capitalist economies. On the other hand, the federal government does control some basic services in the United States as well as various aspects of the market through agencies such as the Food and Drug Administration and the Federal Communication Commission.

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

In-Class Activity 3: Small Group Discussion: Scanning the Environment Activity Overview: This activity asks students to consider how various parts of the external environment affect businesses and industries.

Time Limit: 25 minutes What to Do: 1.

For larger groups, divide the class into four-member groups; for smaller groups, divide the class into two-member groups.

2.

Assign each group a specific industry (e.g., automotive, airline, fast food, computer, apparel, or restaurant).

3.

Ask each group to consider what variables from the technological, political-legal, sociocultural, and economic environments affect their assigned industry. (15 minutes) 4.

Ask a spokesperson from each group to share their input. (10 minutes)

Don’t Forget: Remind students that external environmental elements can change dramatically, affecting specific industries differently over time.

Wrap-Up: Wrap up the discussion by making sure that students understand that the nature of a specific business within an industry and the types and quantities of products/services produced can influence the impact of external environmental variables.

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1-1. What are the benefits of a free market economy? What are the drawbacks?

In a market economy, individuals—producers and consumers—control production and allocation decisions through supply and demand. Sellers can charge what they want, and customers can buy what they choose. The political basis of market processes is capitalism, which fosters private ownership of the factors of production and encourages entrepreneurship by offering profits as an incentive. Most countries rely on some form of mixed market economy—a system featuring characteristics of both planned and market economies. Socialism may be considered a planned economy or a mixed economy, with government ownership of selected industries but considerable private ownership, especially among small businesses. (Learning Objective 1-2—AACSB— reflective thinking) 1-2. What are the factors of production? Is one factor more important than the others? If so, which one? Why? The five factors of production are labor, capital, entrepreneurs, physical resources, and information resources. All five factors are crucial; however, their relative importance depends on the product and industry. In the software development business, for example, labor and information resources are especially important, but the business couldn’t survive without capital and physical resources (computers), and it wouldn’t have been launched without an entrepreneur.

(Learning Objective 1-2—AACSB—application of knowledge) 1-3.

How are they demand and supply curves related?

The curve that describes the range of possible prices that a buyer will pay for a range of quantities demanded by a buyer is the demand curve. The curve that describes the range of prices that a seller can charge for a range of quantities supplied by the seller is called the supply curve. The point where the demand curve and the supply curve intersect is the point at which the intentions of buyers and sellers coincide. The price at this point is the equilibrium price. (Learning Objective 1-3—AACSB—application of knowledge) 1-4. Can business negatively affect society? Give an example of a negative effect.

Companies of all sizes make the products and provide the services that people are willing to buy.

Some examples of unwanted and unfortunate environmental and social problems in society include things like pollution, child labor, bribes and corruption, habitat destruction, global climate change, and a host of other negative consequences. (Learning Objective 1-1—AACSB—application of knowledge)

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

QUESTIONS FOR ANALYSIS 1-5. Identify and describe at least three factors in the external environment that affect college enrollment. Explain how each trend affects colleges and universities. Explain how each factor may affect college and university enrollment, either by increasing it or reducing it.

Answers will vary but students will probably discuss trends in birth and unemployment rates as well as wage rates. (Learning Objective 1-1—AACSB—application of knowledge) 1-6. Give an example of a situation in which a surplus of a product led to decreased prices.

Similarly, give an example of a situation in which a shortage led to increased prices. What eventually happened in each case? Why? Answers will vary; however, any clearance sale illustrates the concept of surplus driving down prices. The classic example of a shortage is scalpers selling event tickets at inflated prices. A specific example is Nike’s new releases of Air Jordan shoes, in very limited numbers, creating heightened interest and intense demand initially. In both cases, the market eventually determines a price at which all the supply can be sold. (Learning Objective 1-3—AACSB—application of knowledge) 1-7. Explain how current economic indicators, such as inflation and unemployment, affect you personally. Explain how they may affect you as a manager.

Answers will vary, but all students should include prices paid for consumer goods and the availability of desirable jobs. Managers are affected by inflation because it tends to drive up wages and by unemployment because it affects their ability to find workers. Also, both inflation and unemployment affect consumer and industrial demand, which play a key role in management.

(Learning Objective 1-4—AACSB—application of knowledge) 1-8. How are the overall economic goals of stability and growth related? Can they be reconciled to each other? If so, how?

A nation’s economic growth can be measured through its aggregate output, resulting standard of living, GDP, and productivity. Economic stability, on the other hand, refers to the condition in which the amount of money available in an economic system and the quantity of goods and services produced in it are growing at the same rate. Growth is involved in both, thus resolving the apparent inconsistency. (Learning Objective 1-4—AACSB—reflective thinking) APPLICATION EXERCISES 1-9. Sarah and Olivia live on the outskirts of town. Since their car was in the shop, they took an Uber to an early morning medical appointment. The Uber cost $20. At about 8:30 AM, when searching for an Uber home, the app notified them that the ride home would be $80. Why do you think this happened? Do you think it is fair?

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Answers will vary, but students should focus on the relationship between supply and demand as discussed in the chapter. For example, when supply is relatively fixed, such as the number of Uber drivers at a given time in a geographic area, the drivers can charge more during heavy traffic times because the price is what a willing buyer will pay a willing seller. (Learning Objective 1-3— AACSB—application of knowledge) 1-10. Pick a product or service that you buy infrequently, such as a car or a vacation. Pick a producer or provider, such as Jeep or Marriott, and determine: (1) how demand and supply affect this product or service, (2) what essential factors of production are most central to the supplier’s operations, and (3) how fluctuations in economic indicators affect this business.

Answers will vary, but students should recognize that demand and supply affect every business in some way. Typical factors of production cited in this answer include capital, labor, physical resources, information resources, and entrepreneurship. Economic indicators affect businesses differently at different times, depending on whether they are manufacturers or retailers. Ultimately, price increases in an industry will affect the buying power of consumers, which will affect how much is produced and purchased. (Learning Objective 1-3—AACSB—application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 1-11 TO 1-14 (Learning Objectives 1-2 and 1-3—AACSB—interpersonal relations and teamwork, analytical thinking, application of knowledge) Groups should consider domestic business environment, global business environment, technological environment, political-legal environment, sociocultural environment, and economic environment when identifying three trends that will create business opportunities.

The student should answer the following questions: ● What is my product or service? ● Who are my customers? ● Where are my customers located? ● Is my business idea easily copied? ● If there are substitutes for my product or service, how can I make my product/service stand out from competitors’ offerings? ● How can having competition benefit me?

TEAM EXERCISE: COMPETITION IN THE NEW MOBILE ECONOMY 1-15 TO 1-18 (Learning Objective 1-3—AACSB—interpersonal relations and teamwork, analytical thinking, application of knowledge) 1-15. What form of competition best characterizes this market? What characteristics did you identify that led you to that conclusion?

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

This market is best characterized as monopolistic competition: many sellers, many buyers, and differentiation required to attract buyers. In this scenario, differentiation might include the quality of the coffee, quality of customer service, cleanliness of the shop, and even location. However, students could argue for pure competition, since there is very little room to differentiate one coffee shop from another, causing prices across the board to be fairly uniform. In fact, retail coffee could be considered a commodity.

1-16. Develop specific pricing strategies based on each of the following situations: • The average cup of coffee sells for $3 in your area. Right now you are selling 10,000 cups of coffee a month, and your fixed costs, including your own salary and that of your partner, are about $30,000 per month.

• The big chain store around the corner reduced their average sales price per cup to $2.80.

As a result, your business falls off by 25 percent.

Scenario 1: Students should point out that the shop is running at break even, and that a price drop may increase demand, but if the market is in relative equilibrium, it is likely that decreasing price will result in an overall decrease in revenue. They may support this assertion mathematically with examples.

Scenario 2: If volume drops by 25 percent, the company will experience losses, even if it makes up the drop by lowering prices. Students should be creative in their solutions, coming up with different, nonprice ways to differentiate the business from the chain stores in order to make up the drop in volume.

1-17. Discuss the role that various inducements other than price might play in affecting demand and supply in this market.

Inducements will not directly increase overall demand. However, the initiative to take online payments may reduce demand at other stores while increasing demand at the competitor.

However, students may identify some inducements that cause tea drinkers to switch to coffee, or noncoffee drinkers to take up the habit.

1-18. Is it always in a company’s best interest to feature the lowest prices?

It is definitely not always in a company’s best interest to feature the lowest price. If that is the only point of differentiation between a company’s product and its competitors’ offerings, then customers will perceive that price is the most important differentiation. That will lead to a price war, and, in the long run, no company can win. It is a much better strategy to inform customers of why your product or service is worth paying a higher price.

EXERCISING YOUR ETHICS: GETTING CAUGHT OUT IN THE COLD (Learning Objectives 1-2 and 1-3—AACSB—ethical understanding and reasoning, reflective thinking) 1-19. What are the primary arguments both for and against using AI in this scenario?

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Businesses can use AI to analyze data, automate processes, cut costs, and improve the customer experience. Arguments against include lack of human interaction, lack of creativity, especially in design and problem solving, and becoming dependent on the technology.

1-20. What are the underlying ethical issues?

Underlying ethical issues revolve around transparency (do you tell your clients you are using AI to generate initial drafts?), bias, and accuracy. One of the primary debates surrounding the ethics of AI in law is the question of bias. AI systems rely on algorithms and machine learning to analyze data and make predictions. However, if the data used to train these systems is biased, the AI can perpetuate that bias, resulting in unfair outcomes.

1-21. What would you do if you were actually faced with this situation in both the paralegal and the managing partner roles?

Answers will vary, but students should acknowledge the ethical issues and offer ways to mitigate the drawbacks and ethical issues.

CASES: REINVENTING AN AMERICAN ICON (Learning Objectives 1-3 and 1-4—AACSB—application of knowledge, reflective thinking) 1-22. How do you think a recession would affect Harley Davidson and why?

Students should acknowledge that motorcycles in the United States are generally a luxury item and they would therefore predict that sales would decline in the face of a recession, as overall demand would decrease. A decrease in demand, especially for a nonessential item like a motorcycle, would lower prices and affect the amount supplied as well. Producing fewer motorcycles as the company struggles to sell off inventory would cause layoffs and have ripple effects down the supply chain.

Producing fewer motorcycles and selling at lower prices (or not selling at all) would decrease the company’s bottom line.

1-23. Do you think Harley made a mistake by shifting focus to smaller bikes as well as the Pan American and the LiveWire? If so, why? If not, why not?

Student answers will vary but should address the brand identity of the company as a seller of big bikes, and that diluting that brand identity may actually decrease sales as the brand become diluted due to branching out the product line. It’s also a major investment and therefore a major risk to produce motorcycles that may not appeal to a wider audience.

1-24. What economic indicators would Harley management be most likely to watch, and why?

The economic indicators most likely to be watched are: GDP, productivity, standard of living, and inflation. GDP measures economic growth; standard of living and productivity impact the purchasing power of people; inflation can cause wages to rise, but can also lead to increased prices, resulting in a decline in purchasing power.

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

1-25. Do the turbulent rising and falling fortunes of business increase or decrease your confidence in a capitalistic system based on private enterprise?

Student answers will vary regarding their level of confidence in a capitalistic system based on private enterprise. They should address the elements of private enterprise as well as the degrees of competition faced by various businesses or industries.

1-26. What is your prediction for the future of Harley Davidson? What is your rationale for your opinion based on what you have learned in this chapter?

Student answers will vary but should be grounded in the concepts of supply and demand.

COMPETITION IN THE ATHLETIC SHOE INDUSTRY (Learning Objectives 1-1 and 1-3—AACSB—application of knowledge, reflective thinking) 1-27. Do some research to determine the top three to five athletic footwear manufacturers. How do the various manufacturers differentiate their products?

Students should address brand differentiation and customer recognition, as well as price and quality.

1-28. Which manufacturer’s product do you think is superior? Give a short list of reasons for your opinion.

Student answers will vary based on individual tastes and preferences. Justification should focus on brand differentiation.

1-29. Do you think pricing strategies in the athletic footwear market are coordinated? If so, do you think the coordination is overt or a function of the market?

Students should focus on the competitive, social, technological, and economic factors that will affect the success or failure of products in the market. They should consider why a competitor would change the pricing strategy. It should not be surprising that there seems to be coordination in this market.

1-30. How hard would it be for a new company to get started in the athletic footwear industry today? What are the barriers to entry? What strategies would you suggest for someone with an idea for a new design of athletic footwear?

Students should focus on barriers to entry such as economies of scale. For instance, the big shoe companies can order more raw materials at lower prices and have the ability to outsource production to countries with lower wages. Students should identify several strategies for new shoes designs, such as selling the design to one of the big companies or starting a crowdfunding site to raise capital.

Instructor Manual Business Essentials 14th Edition By Ronald J. Ebert, Ricky W. Griffin

1-31. In terms of degrees of competition, how would you describe the market for athletic footwear? Justify your assertion.

Students could justify either monopolistic competition or perhaps oligopoly. In either case, they should tie the degrees of competition to the factors identified in the text.

1-32. Other than supply, what factors would affect the price that manufacturers and retail outlets are able to command for their products?

Students should point to brand awareness and things like perceived prestige and quality.

Once students have had time to prepare to discuss these questions, discuss them in class, focusing on degrees of competition, differentiation, supply and demand, and other market forces.

1-23 CopyrighDtow©nlo2a0d2e5d bPye: cahruseomnorErids@ ucgamtai iol.cno,mInc. All rights reserved.

Chapter 2: Understanding Business Ethics and Social Responsibility Chapter Overview There is not always a yes/no, right/wrong, black/white answer when making choices between several alternatives. Business owners and managers often choose between doing what makes sense for the bottom line versus doing what makes sense for general social welfare.

This chapter presents a discussion of business ethics, the role of a formal code of ethics, as well as business approaches to social responsibility. The chapter also discusses how the concept of social responsibility applies both to environmental issues and to a firm’s relationships with customers, employees, and investors, and how issues of social responsibility and ethics affect small business.

Learning Objectives 2-1. Explain how individuals develop their personal codes of ethics and why ethics are important in the workplace.

2-2. Distinguish social responsibility from ethics, identify organizational stakeholders, and characterize social consciousness today.

2-3. Show how the concept of social responsibility applies both to environmental issues and to a firm’s relationships with customers, employees, and investors.

2-4. Identify four general approaches to social responsibility and note the role of social responsibility in small business.

2-5. Explain the role of government in social responsibility in terms of how governments and businesses influence each other.

2-6. Discuss how businesses manage social responsibility in terms of both formal and informal dimensions and how organizations can evaluate their social responsibility.

LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: What’s Ethical in Business?

2. Class Discussion: Ethical Judgment Making 3. Up for Debate: Can Ethics Be Taught?

Description Students share their views on business ethics.

Students discuss how ethical norms affect ethical judgments.

Students discuss varying opinions on ethics training as a class.

Time Limit 20 min.

15 min.

20 min.

CHAPTER OUTLINE Learning Objective 2-1: Explain how individuals develop their personal codes of ethics and why ethics are important in the workplace.

Ethics in the Workplace Ethics are beliefs about wrong and right or bad and good; ethical behavior conforms to individual beliefs and social norms about what is right and good. Unethical behavior conforms to individual beliefs and social norms about what is defined as wrong and bad. Business ethics refers to ethical or unethical behaviors by employees and managers in the context of their jobs.

A. Individual Ethics Ethics are based on individual beliefs and social context; thus, they vary by person, situation, and culture.

B. The Law and the Real World Societies adopt formal laws that reflect ethical standards; however, real-world situations are sometimes difficult to interpret.

C. Individual Values and Morals Individuals’ personal codes of ethics are determined by a combination of factors, beginning in childhood. Over time, peers and experiences that contribute to ethical beliefs and behavior influence individuals.

D. Business and Managerial Ethics Managerial ethics are the standards of behavior that guide individual managers in their work.

1. Behavior Toward Employees. This category covers hiring and firing, wages and working conditions, and privacy and respect.

2. Behavior Toward the Organization. Conflict of interest, confidentiality, and honesty are ethical issues. A conflict of interest occurs when an activity may benefit the individual to the detriment of the organization. Many organizations have policies that forbid buyers and other personnel from accepting gifts from suppliers or customers, thus avoiding even the appearance of bribery. Padding expense accounts and taking office supplies for personal use are examples of problems in the honesty area.

3. Behavior Toward Other Economic Agents. Ethics also come into play in the relationship between the firm and a number of primary agents of interests, such as customers, suppliers, competitors, stockholders, dealers, and unions. In 2009, Bernard Madoff’s Ponzi scheme (investment scam) cost hundreds of clients their life savings as he led them to believe that their investments were safe. Cultural norms may indicate that behavior in one country is ethical, while in another country it is unethical. As an example, bribes may be a normal part of doing business in some countries, but illegal in other countries.

E. Assessing Ethical Behavior A simple process that is often recommended when making ethical decisions is for the person to (1) gather relevant factual information, (2) analyze the facts to determine the most appropriate moral values, and (3) make an ethical decision based on the rightness or wrongness of the proposed activity or policy. Although ethical judgments are not always easy to make or even always agreed upon, this process does at least give a good starting point for an ethical decision-making process.

Ethical norms include: 1. Utility: Does a particular act optimize the benefits to those who are affected by it?

2. Rights: Does it respect the rights of all individuals involved?

3. Justice: Is it consistent with what’s fair?

4. Caring: Is it consistent with people’s responsibilities to each other?

F. Company Practices and Business Ethics Many companies set up codes of conduct and develop clear ethical positions on how the firm and its employees will conduct business. The single most effective step a company can take is to demonstrate top management support of ethical standards.

1. Adopting Written Codes Almost all major corporations have written codes of ethics. While business strategies and practices can change, an organization’s core principles and values should not.

2. Instituting Ethics Programs Ethical responses can be learned through experience; companies must take the responsibility for educating employees. More and more companies, like Microsoft and ExxonMobil, require managers to go through regular ethics training to remind them of the importance of ethical decision making and to update them on current laws and regulations.

KEY TEACHING TIP Remind students that individual ethics vary by person, situation, and culture. What is acceptable and unacceptable is broad enough that people may develop varying behaviors without violating general standards.

QUICK QUESTIONS •

What people and experiences have helped shape your individual code of ethics?

•

What are some examples of conflicts of interest?

Use In-Class Activity 1: Icebreaker: What’s Ethical in Business?

Time Limit: 20 minutes

Learning Objective 2-2: Distinguish social responsibility from ethics, identify organizational stakeholders, and characterize social consciousness today.

Social Responsibility Social responsibility refers to the overall way in which a business itself tries to balance its commitments to relevant groups and individuals in its environment.

A. The Stakeholder Model of Responsibility Most companies strive to be ethically responsible to five main groups (organizational stakeholders): 1. Customers Critical factors include charging fair prices, honoring warranties, meeting delivery commitments, and standing behind product quality.

2. Employees Treating workers fairly, making them a part of the team, and respecting their dignity and basic human needs promote a company’s reputation.

3. Investors Managers must follow proper accounting procedures, provide appropriate information to shareholders about financial performance, and manage the organization to protect shareholder rights and investments.

4. Suppliers Partnership arrangements with suppliers can create mutually beneficial relationships.

Keeping suppliers informed about future plans, and negotiating delivery schedules and prices that are acceptable to both firms build relationships with suppliers.

5. Local and International Communities Contributing to local and global programs has a positive impact on the community. Many businesses strive to be good corporate citizens by minimizing their negative impact on communities.

B. Contemporary Social Consciousness Views toward social responsibility continue to evolve as managers work to meet the needs of various stakeholders in their business practices. The concept of social responsibility has been developing since the days of John D. Rockefeller, J.P. Morgan, and Cornelius Vanderbilt.

The concept of accountability was formalized out of the Great Depression. Unfortunately, the spate of corporate scandals in the Great Recession (bailouts of banks, GM, and Chrysler) drew much criticism. However, with growing concerns about climate change and calls for more sustainable business practices, many businesses at least appear to have again moved toward a more responsible approach to doing business. Firms are integrating socially conscious thinking into their production plans and marketing efforts.

KEY TEACHING TIP Remind students that actions deemed unethical in the United States may be ethical in other countries, and vice versa. For example, in some countries outside of the United States, bribing is acceptable and even expected in business.

QUICK QUESTION •

How can companies benefit from adopting a written code of ethics?

HOMEWORK Social Responsibility Now is a good time to assign Application Exercise 2-9 from the end-of-chapter materials as homework. This assignment asks students to think about their own personal code of ethics and the ethical framework they use to make decisions.

At-Home Completion Time: 30 minutes

Learning Objective 2-3: Show how the concept of social responsibility applies both to environmental issues and to a firm’s relationships with customers, employees, and investors.

Areas of Social Responsibility A. Responsibility Toward the Environment The topic of global climate has become a major issue for business and government alike.

Controlling pollution is a significant challenge for contemporary business.

1. Air Pollution Under current laws, many companies must install special devices to limit pollutants they expel into the air. Such efforts are expensive.

2. Water Pollution New legislation and increased awareness of chemical and waste dumping and the resulting dangers have led to improved water quality in many areas of the country.

3. Land Pollution Proper toxic waste disposal and recycling programs are allowing companies to help restore land quality and to prevent further contamination. Recycling, the reconversion of waste materials into useful products, has become an issue not only for municipal and state governments but also for many companies engaged in high-waste activities.

B. Responsibility Toward Customers 1. Consumer Rights Consumerism is social activism dedicated to protecting the rights of consumers in their dealings with businesses.

2. Unfair Pricing Collusion occurs when two or more firms agree to collaborate on wrongful acts, such as price fixing; price gouging occurs when firms respond to increased demand with overly steep price increases.

3. Ethics in Advertising Consumers deserve to be given product information that is truthful and not misleading, as well as information that is not morally objectionable.

C. Responsibility Toward Employees 1. Legal and Social Commitments Recruiting, hiring, training, promoting, and compensating are the basis for social responsibility toward employees; a company that provides its employees with equal opportunities without regard to race, sex, or other irrelevant factors is meeting both its legal and social responsibilities.

2. Ethical Commitments: The Special Case of Whistle-Blowers A whistle-blower is an employee who discovers and tries to end a company’s unethical, illegal, or socially irresponsible actions by publicizing them.

D. Responsibility Toward Investors 1. Insider trading Insider trading occurs when someone uses confidential information to gain from the purchase or sale of stocks.

2. Misrepresentation of finances In maintaining and reporting its financial status, every corporation must conform to generally accepted accounting principles. Misrepresentation of finances occurs when unethical managers project profits that they do not expect to get or hide losses and expenses incurred to boost paper profits.

QUICK QUESTIONS •

What are some examples of what companies do to act in a socially responsible way toward customers? Toward employees? Toward investors?

•

What are some ways in which organizations act in a socially responsible way toward the environment?

Use In-Class Activity 2: Class Discussion: Ethical Judgment Making Time Limit: 15 minutes

Learning Objective 2-4: Identify four general approaches to social responsibility and note the role of social responsibility in small business.

Implementing Social Responsibility Programs A. Approaches to Social Responsibility 1. Obstructionist Stance Organizations do as little as possible to solve social or environmental problems, have little regard for ethical conduct, and will go to great lengths to deny or cover up wrongdoing.

2. Defensive Stance Organizations will do everything that is required of them legally but nothing more.

3. Accommodative Stance The organization meets its legal and ethical requirements but will also go further in certain cases, such as if it can be convinced that given programs are worthy of its support.

4. Proactive Stance Firms that adopt this approach take to heart the arguments in favor of social responsibility, view themselves as citizens in a society, indicate sincere commitment to improve general social welfare, and surpass the accommodative stance by proactively seeking opportunities to contribute.

B. Social Responsibility and the Small Business Many big business responses to ethical and social responsibility issues apply to small businesses; differences are primarily differences of scale. Small business owners are faced by the same ethical dilemmas as the large companies that we more frequently read about. It is important that small companies develop ethical policies and procedures like their larger counterparts. A key to business success is to decide in advance how to respond to the issues that underlie all questions of ethical and social responsibility.

KEY TEACHING TIPS •

Make sure that students understand that firms taking the obstructionist stance usually do as little as possible to solve social or environmental problems. If possible, list some examples of firms that take such a stance.

•

Remind students that firms taking an accommodative stance meet their legal and ethical requirements and may even exceed those requirements in certain cases.

•

Many corporate acts of social responsibility have been court-ordered. The use of biodegradable packaging, for example, may not be the choice of individual companies but rather mandated by the government as a means to protect the environment.

•

Remind students that contemporary social consciousness varies, depending on how turbulent the social, political, and economic times are.

•

Make sure students understand that social responsibility programs must be initiated and supported by top management; ultimately, a social responsibility program involves everyone in the organization.

•

Reinforce that small business responses to social responsibility are similar to big business responses—the only difference is scale.

HOMEWORK Identifying Approaches to Social Responsibility Now is a good time to assign Application Exercise 2-10 from the end-of-chapter materials in the textbook. The assignment asks students to identify one company that takes an obstructionist stance to social responsibility, one that takes a defensive stance, one that takes an accommodative stance, and one that takes a proactive stance.

At-Home Completion Time: 1 hour

Learning Objective 2-5: Explain the role of government in social responsibility in terms of how governments and businesses influence each other.

The Government and Social Responsibility An especially important element of social responsibility is the relationship between business and government.

A. How Governments Influence Business The government (national, state, or local) attempts to shape social responsibility practices through both direct and indirect channels. Direct influence most frequently is manifested through regulation, whereas indirect influence can take a number of forms, most notably taxation policies.

1. Direct Regulation The government most often directly influences organizations through regulation, the establishment of laws and rules that dictate what organizations can and cannot do. This regulation usually evolves from social beliefs about how businesses should conduct themselves. Another approach that governments can use to regulate business practices is through legislation.

2. Indirect Regulation Other forms of regulation are indirect. For example, the government can indirectly influence the social responsibility of organizations through its tax codes. In effect, the government can influence how organizations spend their social responsibility dollars by providing greater or lesser tax incentives.

B. How Business Influences Government Just as governments can influence businesses, so too can businesses influence the government.

1. Personal Contacts Because many corporate executives and political leaders travel in the same social circles, personal contacts and networks offer one method of influence.

2. Lobbying Lobbying, or the use of persons or groups to formally represent an organization or group of organizations before political bodies, is also an effective way to influence the government.

3. Political Action Committees Political action committees (PACs) are special organizations created to solicit money and then distribute it to political candidates.

4. Favors Organizations sometimes rely on favors and other influence tactics to gain support.

Although these favors may be legal, they are still subject to criticism.

KEY TEACHING TIP Government regulates business both directly and indirectly, and business influences the very government that makes those law and regulations.

QUICK QUESTION •

Do you think it is ethical for a business to influence government regulation? Why or why not?

Learning Objective 2-6: Discuss how businesses manage social responsibility in terms of both formal and informal dimensions and how organizations can evaluate their social responsibility.

Managing Social Responsibility The demands for social responsibility placed on contemporary organizations by an increasingly sophisticated and educated public are stronger than ever. Organizations should view social responsibility as a major challenge that requires careful planning, decision making, consideration, and evaluation.

A. Formal Organizational Dimensions Formal organizational dimensions that can help manage social responsibility are (1) legal compliance, (2) ethical compliance, and (3) philanthropic giving.

1. Legal Compliance Legal compliance is the extent to which the organization conforms to local, state, federal, and international laws. Keep in mind, in some instances, perfectly legal accounting practices have still resulted in deception and other problems.

2. Ethical Compliance Ethical compliance is the extent to which the members of the organization follow basic ethical (and legal) standards of behavior.

3. Philanthropic Giving Philanthropic giving is the awarding of funds or gifts to charities or other worthy causes.

B. Informal Organizational Dimensions In addition to these formal dimensions for managing social responsibility, there are also informal ones. Organization leadership and culture and how the organization responds to whistle-blowers all help shape and define people’s perceptions of the organization’s stance on social responsibility.

1. Organization Leadership and Culture Leadership practices and organizational culture can go a long way toward defining the social responsibility stance an organization and its members will adopt. Ethical leadership often sets the tone for the entire organization.

2. Whistle-Blowing Whistle-blowing is the disclosure by an employee of illegal or unethical conduct on the part of others within the organization. How an organization responds to this practice often illustrates its stance on social responsibility.

C. Evaluating Social Responsibility

To make sure their efforts are producing the desired benefits, any business that is serious about social responsibility must apply the concept of control to social responsibility. Many organizations now require all employees to read their guidelines or codes of ethics and then sign a statement agreeing to abide by it. A business should also evaluate how it responds to instances of questionable legal or ethical conduct. More formally, an organization may actually evaluate the effectiveness of its social responsibility efforts. Additionally, some businesses occasionally conduct a corporate social audit, a formal and thorough analysis of the effectiveness of a firm’s social performance.

KEY TEACHING TIP Remind students that companies still do things that are unethical, for instance, dumping toxic waste or price fixing, and may be fined, but very often no one goes to jail.

QUICK QUESTIONS •

Do you think all companies should be required to have a social audit and a formal social responsibility stance?

•

Can a company, such as a corporation, act ethically?

Use In-Class Activity 3: Up for Debate: Can Ethics Be Taught?

Time Limit: 20 minutes

IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: What’s Ethical in Business?

Activity Overview: This exercise asks students to share their views on business ethics.

Time Limit: 20 minutes What to Do: 1. Ask students to identify examples of recent ethical business practices. Examples: Donating a percentage of profits to charity and community causes (Ben & Jerry’s donates 7.5 percent of pretax profits and Levi Strauss donates 2.4 percent of pretax profits to a variety of causes), encouraging employees to volunteer using paid work time (Walt Disney’s VoluntEARS program), and recycling (McDonald’s has an environmental protection program). (10 minutes) 2. Ask students to identify examples of recent unethical business practices. Examples: Forwarding “marketing research” results to salespeople, marketing R-rated movies to kids, and deliberately selling cigarettes or alcohol to minors. (10 minutes) Don’t Forget: You might want to come prepared with numerous recent, local examples of ethical and unethical business practices to share with students.

Wrap-Up: Wrap up the discussion by encouraging students to think about whether these kinds of business practices are consistent with an organization’s responsibility to maximize profits, for example, which typically sparks a lively debate.

In-Class Activity 2: Class Discussion: Ethical Judgment Making Activity Overview: This activity asks students to consider ethical norms when making an ethical judgment.

Time Limit: 15 minutes What to Do: 1. Ask students to review the ethical norms outlined in the textbook: utility, rights, justice, and caring. (5 minutes) 2. Ask students to think of an ethical situation in which these norms did or did not prevail, sharing whatever they can with the class. (10 minutes) 3. During the spring semester, if your college/university has a Dr. Martin Luther King Jr. Observance, you can encourage your students to attend. At the next class period, ask students to discuss Dr. King’s civil rights activities and how it changed ethical judgment making in the United States. The discussion can cover historical changes in norms, society’s response to the changes, and the impact on individuals’ decisions.

During the fall semester, a Veteran’s Day event, a Columbus Day celebration, or an election campaign may provide appropriate opportunities for discussion.

Don’t Forget: You might want to come to class with examples of an ethical situation illustrating each of the norms. This exercise can also be assigned as homework.

Wrap-Up: Wrap up the discussion by reminding students that with utility, considering what is fair to all relevant parties involved is often based on perception.

In-Class Activity 3: Up for Debate: Can Ethics Be Taught?

Activity Overview: This activity asks students to share their opinions on ethics training.

Time Limit: 20 minutes What to Do: 1. As a class, ask students to consider whether ethics can be taught. Is ethics training valuable or does ethical behavior stem more from how we are raised?

2. For those students who believe that ethics can be taught and that ethics training is valuable, allow 10 minutes for discussion.

3. For those students who believe that ethical behavior comes more from how we are raised and that ethics training really does not affect our ethical behavior in the long run, allow 10 minutes for discussion.

Don’t Forget: As students are supporting or refuting the benefits of ethics training, be sure to have them cite specific examples to back up their opinions.

Wrap-Up: Wrap up the discussion by reminding students that companies sometimes issue written codes of ethics to ensure their ethical norms are upheld. The effectiveness of such codes of ethics often sparks lively debate as well.

ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 2-1. What are three broad categories of ethical behavior in business?

Students should address the (1) behavior toward employees, such as wages, working conditions, privacy, and respect; (2) behavior toward the organization, such as conflicts of interest, confidentiality, and honesty; and (3) behavior toward other economic agents, such as customers, competitors, stockholders, suppliers, dealers, and unions. (Learning Objective 21—AACSB—application of knowledge) 2-2. When making decisions, who are the stakeholders that a business should consider, and what are those stakeholders’ primary interests?

Stakeholders include customers, employees, investors, suppliers, and the firm’s local and international communities. Most businesses should be concerned with all stakeholder groups, although areas of emphasis may differ for individual businesses. Students should identify interests such as: • Customers: quality, price, delivery, fairness and honesty.

• Employees: fairness, inclusion, dignity, basic human needs • Investors: proper accounting procedures, appropriate financial performance information, protection of rights • Suppliers: delivery schedules, pricing, payment • Local and international communities: impact, involvement, environmental and ethical responsibility (Learning Objective 2-2—AACSB—application of knowledge) 2-3. What are the major areas of social responsibility with which businesses should be concerned?

The major areas include the environment, customers, employees, and investors. (Learning Objective 2-3—AACSB—application of knowledge) 2-4. What are the four basic approaches to social responsibility?

The four basic approaches to social responsibility are: • Obstructionist: Does as little as possible to promote social responsibility.

• Defensive: Meets minimal legal requirements regarding social responsibility.

• Accommodative: Exceeds minimum requirements only by special request.

• Proactive: Actively seeks opportunities to contribute to the social environment.

(Learning Objective 2-4—AACSB—application of knowledge) 2-5. What are two things top management can do to formalize ethical business practices?

Answers could include: adopting formal codes of conduct and instituting ethics programs, as well as establishing clear ethical positions, email monitoring, and creating clear social responsibility statements. (Learning Objective 2-6—AACSB—application of knowledge) QUESTIONS FOR ANALYSIS 2-6. Identify an area of your personal ethical code that seems at odds with general business practices. How do you reconcile the difference?

Answers will vary, but many students should be able to identify the difference between personal and business ethics. An example of an answer might be that general business practices focus on profit, while an individual may place a higher value on environmental impact.

(Learning Objective 2-1—AACSB—Analytical thinking) 2-7. How does government influence the social responsibility of organizations? Should government be more or less involved in regulating social responsibility in business?

The relationship between business and government is an especially important element of social responsibility. In planned economies, for example, the government heavily regulates business activities, ostensibly to ensure that business supports some overarching set of social ideals.

And even in market economies, there is still considerable government control of business, much of it directed at making sure that business interests do not damage social interests.

The government (national, state, or local) attempts to shape social responsibility practices through both direct and indirect channels. Direct influence most frequently is manifested through regulation or legislation, whereas indirect influence can take a number of forms, most notably taxation policies.

Critics argue that regulation (direct or indirect) is already excessive. They maintain that a free market system would eventually accomplish the same goals as regulation, with lower costs to both organizations and the government. (Learning Objective 2-5—AACSB—application of knowledge) 2-8. The Foreign Corrupt Practices Act makes it illegal for U.S. firms to bribe government officials in other countries. Is bribery universally considered unethical? What challenges could rules against bribery create for a U.S. company competing in the global marketplace?

The challenges will vary widely from country to country depending on the host country laws.

It is an accepted business practice in many countries to bribe government officials to “facilitate” projects. Since this is illegal under the Foreign Corrupt Practices Act, this puts American companies at a disadvantage. If the company does bribe a foreign official there are tremendous ethical as well as legal and financial considerations. (Learning Objective 2-5— AACSB—application of knowledge)

APPLICATION EXERCISES 2-9. Describe your personal code of ethics. Be sure to include what you think is right and wrong, as well as your ethical framework for making decisions, and a statement describing how you have developed your ethical standards.

Students’ personal code of ethics will probably focus on personal relationships, honesty, lying, and so on. This exercise gives students an opportunity to consider the impact of their ethical behavior. (Learning Objective 2-1—AACSB—application of knowledge) 2-10. Identify four companies, each of which takes one of the four stances on social responsibility: obstructionist, defensive, accommodative, and proactive. For each company, highlight its actions that support your conclusion.

Students should remember that an obstructionist stance is one in which companies usually do as little as possible to solve social or environmental problems, have little regard for ethical conduct, and will go to great lengths to deny or cover up wrongdoing. A defensive stance is one in which companies do everything that is required of them legally, but nothing more.

Companies taking an accommodative stance meet their legal and ethical requirements, but also go further in certain cases. Companies taking a proactive stance will go above and beyond what is required of them in meeting the needs of stakeholders. (Learning Objective 2-4— AACSB—application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 2-11 TO 2-14 (Learning Objective 2-6—AACSB—application of knowledge, interpersonal relations and teamwork, ethical understanding and reasoning) This exercise challenges the students to be proactive and think about possible ethical dilemmas their company may face. The team responses will vary but many teams will choose to complete a formal statement of company practices and business ethics since this is a proactive approach to prevent future problems.

The primary stakeholders for most of the teams will be the owners, employees, possible suppliers, and the general public. Many students will choose to develop a formal social responsibility program, recognizing that it is good business where others will see it as a cost with no advantages.

TEAM EXERCISE: HOW FAR WOULD YOU GO 2-15 TO 2-18 (Learning Objective 2-1—AACSB—analytical thinking, application of knowledge, ethical understanding and reasoning) 2-15. What personal, social, and cultural factors do you think contribute to unethical behavior in the workplace?

Answers will vary, but students may consider such factors as the person’s sense of right and wrong, desire for gain at any cost, and culture as possible factors.

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2-16. Do you agree or disagree with the following statement: “The term business ethics is an oxymoron”? Support your answer with examples from your own work experience or that of someone you know.

Answers will vary based on personal experience, but should cover, at a minimum, the opposing forces that create ethical dilemmas specific to business, such as the overarching drive to make profits, and a responsibility to society to protect health, the environment, children, among others.

2-17. If you were Tesla’s director of human resources, how would you ensure compliance with your company’s code of ethics?

Answers will vary, but students should mention, in addition to top management’s support and example, tangible steps such as specific on-going training at the supervisor and line-worker level, quick responses to violations, and positive reinforcement for compliance.

2-18. If you were a Tesla employee and discovered that these images were being shared without knowledge or consent from customers, what would you do?

Students’ answers will be highly subjective. However, students should, at a minimum, identify the stakeholders and potential harm, as well as the social, communal, and personal values and mores that might be violated. In addition, students should recognize the forces that are pulling in both directions. Students should also note the legal issues when responding to the ethical dilemmas.

EXERCISING YOUR ETHICS: YOU CAN’T HAVE YOUR CAKE (Learning Objectives 2-1, 2-2, 2-4, and 2-5—AACSB—analytical thinking, application of knowledge, ethical understanding and reasoning) 2-19. Describe the ethical issues. Be specific and clear.

Answers will vary, but students should note the potential discrimination, as well as fairness and honesty, both to the customers and the employee, and perhaps the breaking of an agreement.

2-20. What would you do in this situation? Explain your course of action.

Answers will vary, but many students will likely bring up the issue of discrimination, both racial and sexual orientation, and should have rational and logical explanations for their decision to either confront the boss or to simply acquiesce, or other courses of action, such as resignation or outright defiance.

2-21. Are the short-term consequences of your decision different from the long-term consequences? Describe the short- and long-term impacts.

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Answers will vary, but students should bring up loss of the bonus, loss of reputation in the community among some groups, and the possible legal ramification, and even loss of business from some groups if the contract is honored.

CASES: PATAGONIA: EARTH AS A SHAREHOLDER (Learning Objectives 2-3, 2-4, and 2-6—AACSB—analytical thinking, application of knowledge, ethical understanding and reasoning) 2-22. Do you think that the legal structure of Patagonia is a sustainable model that addresses social responsibility while still running a profitable business? Why or why not?

Answers will vary. Students should keep in mind the need to balance profits against social responsibility.

2-23. How would you describe Patagonia’s approach to social responsibility?

Social responsibility includes responsibility toward the environment, customers, employees, and investors. Approaches include four stances: obstructionist, defensive, accommodative, and proactive. Students are likely to determine that Patagonia is either accommodative or proactive in its approach, or perhaps a little of both.

2-24. Describe some of the informal dimensions of Patagonia’s social responsibility.

Answers will vary.

2-25. Patagonia sells high-end outdoor equipment and clothing at a high price point within the market. Is it ethical for them to price their goods so that they are out of reach for many people?

How does Patagonia’s pricing structure relate to its commitment to being socially responsible?

Students may point to the benefits of a free market economy where firms set their own prices subject to supply and demand and what the market will bear. Students may also argue that part of the premium price is related to the company’s commitment to social responsibility, the costs of which are passed on to the customer, and that customers who choose to buy Patagonia products do so knowing they are participating in the company’s socially responsibly programs.

WHEN MOTHER NATURE STORMS IN (Learning Objective 2-5—AACSB—application of knowledge, ethical understanding and reasoning) 2-26. Research a local business and determine what kinds of externalities might exist. What has the business done to mitigate those externalities?

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Student answers will vary depending upon the business selected. Possible negative externalities include pollution and traffic congestion, while things like education and infrastructure development represent positive externalities (such as the light from streetlights).

2-27. Do you think that social responsibility is good for business? What would motivate a profitseeking company to incur an additional expense to address social issues?

Some students will respond that social responsibility can be good for business since a sincere commitment to improving the general social welfare can generate positive publicity and enhance a company’s standing in the community. Others might believe that it is too costly and generates limited returns.

2-28. Research a large corporation and identify whether or not the company has a history of social responsibility. If the company has a plan, how does it square with the externalities of the business?

Students should identify at least one of the approaches: obstructionist, defensive, accommodative, and proactive, and should tie the company’s social platform to the particular aspects of the stance chosen.

2-29. Do you think that U.S. businesses have a greater responsibility to create a profit for the shareholders or to focus on social impacts? Why? Answers will vary but some students may believe that U.S. businesses have a great responsibility to support social programs. Other students may place profits before social programs, and others may see a relationship between a company’s social programs and its bottom line.

2-30. What is the appropriate role of government in regulating social responsibility?

Answers will vary but most students will answer that it is appropriate for the government to take a very active role in protecting the environment, working conditions, and other social programs. This is an opportunity to challenge students on their attitude toward taxes, government spending, and personal responsibility in relation to the responsibility of business.

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Chapter 3: Entrepreneurship, New Ventures, and Business Ownership Chapter Overview Although it’s anything but easy, starting a business can be rewarding. The U.S. economic system welcomes entrepreneurship and offers various forms of business ownership. This chapter discusses small business, its importance to the U.S. economy, and the popular areas of small business. It looks at: • • • • • •

Key characteristics of entrepreneurial personalities and activities Business plans Start-up decisions made by small businesses Sources of financial aid available Trends in small business start-ups Key reasons for success and failure among small businesses

Finally, the chapter discusses different forms of business ownership and the advantages and disadvantages of each, as well as the basic issues involved in managing a corporation and special issues related to corporate ownership.

Learning Objectives 3-1. Define small business, discuss its importance to the U.S. economy, and explain popular areas of small business.

3-2. Explain entrepreneurship and describe some key characteristics of entrepreneurial personalities and activities.

3-3. Describe distinctive competence, the business plan, and the start-up decisions made by small businesses and identify sources of financial aid available to such enterprises.

3-4. Discuss the trends in small business start-ups and identify the main reasons for success and failure among small businesses.

3-5. Explain sole proprietorships, partnerships, and cooperatives and discuss the advantages and disadvantages of each.

3-6. Describe corporations, discuss their advantages and disadvantages, and identify different kinds of corporations; explain the basic issues involved in managing a corporation and discuss special issues related to corporate ownership.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity

Description

1. Icebreaker: The Role of Small Business

Students discuss the role of small business in their communities.

Students are divided into groups to discuss ways in which the entrepreneurial spirit has been evident throughout U.S. history, and how entrepreneurship is valuable to an economic system.

2. Up for Debate: The Wide World of Risk 3.Small Group Discussion: Entrepreneurship and the Growth of Businesses 4. Small Group Discussion: What’s the Next Big Thing?

Time Limit 15 min.

30 min.

Groups of students weigh the importance of entrepreneurship in the development of fast-growing businesses.

20 min.

Groups of students design a new business and identify possible products/services being sold as well as possible customers.

45 min.

5. Small Group Discussion: How Can We Compete in the Electric Auto Industry?

Students identify the factors that would help a company in the electric auto industry become a success.

30 min.

6. Class Discussion: Conjuring Up Profits?

Students identify what makes a successful company, at least in terms of profit and growth, financially successful.

30 min.

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CHAPTER OUTLINE Learning Objective 3-1: Define small business, discuss its importance to the U.S. economy, and explain popular areas of small business.

What Is a Small Business?

A small business is independent (i.e., not part of a larger business) and has relatively little influence in its market. The U.S. Department of Commerce and the Small Business Administration (SBA) define the size of a business based on its industry and the number of employees. According to SBA standards, a small manufacturing business can have as many as 1,000 employees.

A. The Importance of Small Business in the U.S. Economy Most U.S. businesses employ fewer than 100 people, and most U.S. workers are employed by small firms. In fact, over 85 percent of all businesses employ 20 or fewer people. The contribution of small business can be measured through its impact on job creation, innovation, and its importance to big business.

1. Job Creation Small businesses are an important source of new jobs; in recent years, small businesses have accounted for two-thirds of all new jobs created in the past 25 years.

2. Innovation Major innovations are as likely to come from small businesses as they are from large ones.

In fact, small businesses produce 16 times as many patents per employee as large patenting firms.

3. Contributions to Big Business Most products made by big businesses are sold to consumers by small ones, and small businesses provide big ones with many of their services and raw materials.

B. Popular Areas of Small Business Enterprise Major small business industry groups include the following: 1. Services This is the fastest-growing segment of small business at approximately 56 percent.

Services range from marriage counseling to computer software to management consulting to professional dog walking.

2. Retailing Retailers, which sell products made by other firms directly to consumers, account for about 13.7 percent of all firms with fewer than 20 employees; retail businesses let entrepreneurs focus limited resources on narrow market segments.

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construction. Projects are primarily locally based.

4. Wholesaling Wholesalers buy products in bulk from manufacturers and sell them to retailers; wholesalers are the middlemen. About 5 percent of all firms are in this category.

5. Finance and Insurance These firms account for about 6.6 percent of all firms with fewer than 20 employees. Many are affiliates of or agents for larger national firms. Small locally owned banks are also common in smaller communities and rural areas.

6. Manufacturing More than any other industry, manufacturing lends itself to big business. Still, about 3 percent of firms with fewer than 20 employees are involved in manufacturing and may outperform big firms in innovation-driven industries.

7. Transportation About 3 percent of all companies with fewer than 20 employees are in transportation and related businesses.

8. Other The remaining 2.7 percent or so of small businesses with fewer than 20 employees are in other areas, including research and development laboratories and independent media companies.

KEY TEACHING TIP •

The definition of small business is different depending on whom you consult. The textbook defines a small business as one that (a) is independent (not part of a larger business) and (b) has little influence in its market. The U.S. Small Business Administration defines companies with as many as 1,000 employees as “small,” depending on industry, whereas the U.S. Department of Commerce considers a business “small” if it has fewer than 500 employees.

QUICK QUESTION •

In what ways is entrepreneurship an important part of our economic system?

Use In-Class Activity 1: Icebreaker: The Role of Small Business Time Limit: 15 minutes

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Learning Objective 3-2: Explain entrepreneurship and describe some key characteristics of entrepreneurial personalities and activities.

Entrepreneurship Entrepreneurs are people who assume the risk of business ownership. Entrepreneurship is the process of seeking business opportunities under conditions of risk.

A. Entrepreneurship Goals Many entrepreneurs are driven to launch new businesses by the goals of gaining independence from working for someone else and securing a financial future for themselves.

Many such entrepreneurs, however, may not aspire to grow the businesses much beyond their capacity to run them. Others launch new businesses with the goal of growth and expansion.

B. Entrepreneurial Characteristics Successful entrepreneurs are often distinguished from others through a set of characteristics, including: 1. Resourcefulness 2. A concern for good customer relations 3. A desire to be their own bosses 4. The ability to handle uncertainty 5. Ability to handle risk KEY TEACHING TIPS •

Ask how many students want to launch a business. (Typically, one-third to one-half of each class will raise their hands.) Call on these students to share their interests, including type of business and timeframe. You can then use their personal goals to illustrate concepts for each section you teach.

•

Remind students that the goals of an entrepreneur can range from independence and financial security to growth and expansion, even to transform the venture into a large business.

QUICK QUESTIONS •

What are some local examples of businesses that fit into the following small business industry groups: services, retailing, manufacturing, and transportation?

•

What are some common characteristics shared by all entrepreneurs?

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Learning Objective 3-3: Describe distinctive competence, the business plan, and the start-up decisions made by small businesses and identify sources of financial aid available to such enterprises.

Starting and Operating a New Business Entrepreneurs must make a number of decisions when they start their business. They must decide whether to buy an existing business or to start one from scratch. In addition, they must determine sources of financing needed and when to seek advice from others. Another integral part of starting a small business is a well-crafted business plan.

A. Understanding Distinctive Competencies An organization’s distinctive competencies are the aspects of business that the firm performs better than its competitors. The distinctive competencies of small business usually fall into three areas: 1. Identifying Niches in Established Markets An established market is one in which many firms compete according to relatively welldefined criteria. A niche is simply a segment of a market that is not currently being exploited. In general, small entrepreneurial businesses are better at discovering these niches than larger organizations.

2. Identifying New Markets Successful entrepreneurs excel at discovering whole new markets. There are two ways this often happens: 1) transferring a product or service that is well established in one geographic market to a second market; and 2) creating an entirely new industry.

3. First-Mover Advantages A first-mover advantage is any advantage that comes to a firm because it exploits an opportunity before any other firm does. The ability to move quickly is key to taking advantage of an opportunity.

B. Crafting a Business Plan A business plan summarizes business strategy for the new venture and shows how it will be implemented.

1. Setting Goals and Objectives A business plan should discuss the entrepreneur’s goals and objectives, the strategies used to obtain them, and how these strategies will be implemented.

2. Sales Forecasting The sales forecast requires that the entrepreneur demonstrate an understanding of the market, the strengths and weaknesses of existing firms, and the means by which the new venture will compete. The sales forecast impacts many of the other decisions regarding the business.

3. Financial Planning

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This is the entrepreneur’s plan for turning all activities into dollars. It shows how much money is needed to open for business and how much is needed to keep it going until it starts earning a profit.

C. Starting the Small Business Small business owners begin by understanding the true nature of their businesses.

1. Buying an Existing Business Existing businesses have already proven their ability to attract customers and to establish rapport with lenders, suppliers, and the community. Most consultants recommend that entrepreneurs buy existing businesses because the odds of success are greater.

2. Franchising A franchise agreement involves two parties, a franchisee (the local owner) and a franchiser (the parent company). Franchisees benefit from the parent corporation’s experience and expertise. The franchiser may pick the store location, negotiate the lease, purchase equipment, and supply financing. Franchisees invest in ready-made businesses but also receive expert help in running them. Start-up costs vary quite widely. For example, a McDonald’s franchise has an initial fee of $45,000, plus additional funds to construct the restaurant, with the total outlay reaching over $2 million. A Fantastic Sam’s hair salon is $185,000, plus the funds for the salon itself.

3. Starting from Scratch Risks with this approach are greater than with buying an existing business. However, starting from scratch does allow the entrepreneur the satisfaction to grow an idea into a successful business. An entrepreneur must identify who and where the customers are, how much customers will pay for the product, how much of the product should be expected to sell, who the competitors are, and why customers will purchase this product rather than the competitors’ products.

D. Financing the Small Business Many sources for business financing are available. Personal resources account for more than twothirds of all money invested; smaller portions of funding come from banks, independent investors, and government loans. Venture capital companies are groups of investors seeking to profit on companies with rapid growth potential; money is invested in return for partial ownership. Small business investment companies are licensed to borrow money from the Small Business Administration (SBA) and invest it in or loan it to small businesses.

1.

SBA Financial Programs Under the SBA’s 7(a) loans program, small businesses may borrow from commercial lenders with the SBA guaranteeing to repay a maximum of 75 percent of a loan over $150,000. The SBA’s special purpose loans target businesses with special needs, such as those meeting international demands. For loans under $50,000, the SBA offers a microloan program. Aside from its financing role, the SBA offers management counseling programs at virtually no cost. One of the SBA’s management counseling projects is its Small Business Development Center (SBDC) program.

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2. Other Sources of Financing Other sources of financing include overseas financing and a growing number of online companies that focus on small businesses.

KEY TEACHING TIPS •

Make sure students understand that, generally, the more resources required, the harder it is to start a new business.

•

Remind students that the odds for success are greater when buying an existing business than building one from scratch. An existing business provides a tested system, trained employees, a recognized name, and established suppliers.

•

Remind students that personal resources account for over two-thirds of the money invested in new small businesses and one-half of that is used to purchase existing businesses.

QUICK QUESTIONS

• What is the purpose of a business plan?

•

What are some advantages and disadvantages of franchising (to the franchisee)?

•

Where can a person find money to start a new venture?

•

What is the main reason that most venture capital companies invest in new businesses?

•

What types of assistance can an entrepreneur expect from the Small Business Administration?

Use In-Class Activity 4: Small Group Discussion: What’s the Next Big Thing?

Time Limit: 45 minutes HOMEWORK Franchises Now is a good time to assign Application Exercise 3-10 from the end-of-chapter materials in the textbook. The assignment asks students to research a popular food industry franchise analyzing the requirements to purchase as well as the up-front and on-going cost.

At-Home Completion Time: 30 minutes

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Learning Objective 3-4: Discuss the trends in small business start-ups and identify the main reasons for success and failure among small businesses.

Trends, Successes, and Failures in New Ventures A. Trends in Small Business Start-Ups Several factors account for the thousands of new business start-ups in the United States each year.

1. Emergence of E-Commerce The rapid emergence of electronic commerce is the most significant recent trend. Because e-commerce provides new and different ways of doing business, it has enabled savvy entrepreneurs to create and expand businesses far easier and quicker than ever before.

2. Crossovers from Big Business Many businesses are started by individuals who leave positions in large corporations to put their experience to work for themselves.

3. Opportunities for Minorities and Women The number of businesses started by minorities and women is growing rapidly.

4. Global Opportunities Many entrepreneurs are finding business opportunities throughout the world.

5. Better Survival Rates New businesses now have a better chance of survival than ever before; the SBA estimates that over half of all new businesses can expect to survive for four years. One-third makes it for 10 years or more.

B. Reasons for Failure Four general factors contribute to small business failure: 1.

2.

3.

4.

Managerial incompetence or inexperience Neglect Weak control systems Insufficient capital

C. Reasons for Success Four general factors contribute to small business success: 1.

2.

3.

4.

Hard work, drive, and dedication Market demand for the products or services being provided Managerial competence Luck

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KEY TEACHING TIPS •

Emphasize to students that web-based commerce is the most significant trend among small business start-ups. You might want to ask them for examples of recent successful ecommerce start-ups, such as Facebook, Twitter, and Snapchat.

•

Although starting a new business is risky, make sure you tell students that the small business failure rate has declined since the 1980s. The SBA estimates that one-third of all new start-ups now survive 10 years. In the 1970s, only one in five lasted that long.

QUICK QUESTION What do people with big business experience bring to a new venture?

Use In-Class Activity 5: Small Group Discussion: How Can We Compete in the Electric Auto Industry?

Time Limit: 30 minutes

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Learning Objective 3-5: Explain sole proprietorships, partnerships, and cooperatives and discuss the advantages and disadvantages of each.

Noncorporate Business Ownership A. Sole Proprietorships A sole proprietorship is owned and usually operated by one person; about 74 percent of all U.S. businesses are sole proprietorships though they provide only 4 percent of total business revenues.

1. Advantages of Sole Proprietorships Freedom, ease in forming, low start-up costs, and tax benefits are the advantages of the sole proprietorship form of business.

2. Disadvantages of Sole Proprietorships Unlimited liability, lack of continuity, and a possible lack of resources and/or managerial and financial limitations from the single individual are the major drawbacks of this form of organization.

B. Partnerships A general partnership, the most common type, is a sole proprietorship multiplied by the number of partner-owners. Partners may invest unequal sums of money. In most cases, partners share the profits equally or in proportion to their investment in the partnership.

1. Advantages of Partnerships The ability to grow with the addition of new talent and money, few legal requirements, and tax advantages are benefits of this form of ownership.

2. Disadvantages of Partnerships Unlimited liability in that each partner may be liable for the debts incurred in the name of the partnership, lack of continuity, and difficulty of transferring ownership are the major drawbacks of this form of ownership.

3. Alternatives to General Partnerships Because of the disadvantages of partnerships, general partnerships are the least popular forms of business. Limited partnerships have been formed to compensate for some of these disadvantages. This type of agreement allows for limited partners who cannot share in a firm’s management and are liable only to the limits of a partner’s investment. There is, however, a requirement that there is at least one general partner who actively manages a firm and has unlimited liability for the debt. The Master Limited Partnership is a form of ownership that sells shares to investors who are repaid from the firm’s profits. The master partner retains at least 50 percent ownership and runs the business.

C. Cooperatives Cooperatives combine the freedom of sole proprietorships with the financial power

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of corporations. These groups of sole proprietorships or partnerships agree to work together for their common benefit. They give members greater production power, greater marketing power, or both, though they are limited to serving the specific needs of their members.

KEY TEACHING TIPS •

Make sure that students understand the different forms of business ownership. For example, a sole proprietorship is owned and usually operated by one person; 74 percent of all U.S. businesses are sole proprietorships.

•

Students often forget that unlimited liability is a major drawback to a sole proprietorship and a partnership. With unlimited liability, if the business fails to generate enough money, bills must be paid out of the owner’s pocket.

•

Remind students that a general partnership is a sole proprietorship multiplied by the number of partner-owners.

•

Remind students that a limited partnership allows for limited partners who are liable for debts only to the extent of their investments in the company; a limited partnership must have at least one general partner for liability purposes.

•

Remind students that a cooperative provides the advantages of a sole proprietorship with the financial power of a corporation.

QUICK QUESTIONS •

What are some advantages and disadvantages of sole proprietorships?

•

What are some advantages and disadvantages of partnerships?

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Learning Objective 3-6: Describe corporations, discuss their advantages and disadvantages, and identify different kinds of corporations; explain the basic issues involved in managing a corporation and discuss special issues related to corporate ownership.

Corporations Both large and small corporations account for 17 percent of all businesses, but generate about 81 percent of all sales revenues in the United States.

A. The Corporate Entity Characteristics of corporations include legal status as separate entities, property rights and obligations, and indefinite life spans. Corporations may sue and be sued; buy, hold, and sell property; make and sell products to customers; commit crimes, and be tried and punished for them.

1. Advantages of Incorporation These include limited liability, continuity, and the ability to raise money.

2. Disadvantages of Incorporation Ease of transferring ownership, legal requirements and regulations, and start-up cost are drawbacks of incorporation. In addition, double taxation plagues a corporation, because a regular corporation must pay income taxes on profits and stockholders must pay taxes on income returned by their investments.

B. Types of Corporations Stock is held by only a few people and is not available for sale to the public in a closely held (or private) corporation. When shares are publicly issued, the firm becomes a publicly held (or public) corporation. The S corporation is a hybrid of a private corporation and partnership. In a limited liability corporation, owners are taxed like partners, with each paying personal taxes only. Professional corporations most likely comprise doctors, lawyers, accountants, or other professionals. A multinational (or transnational) corporation spans national boundaries.

C. Managing a Corporation Once the corporate entity comes into existence, it must be managed by people who understand the principles of corporate governance. Defined by the firm’s bylaws, corporate governance involves stockholders, the board of directors, and corporate officers.

1. Stock Ownership and Stockholders’ Rights Stockholders are the owners of a corporation. Corporations sell shares, called stock, to investors who then become stockholders, or shareholders. Profits are distributed among stockholders in the form of dividends, and corporate managers serve at stockholders’ discretion.

2. Board of Directors The board of directors is the governing body of the corporation and communicates with

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stockholders and other stakeholders, sets policies, and is legally responsible for corporate actions.

3. Officers Appointed by the board of directors, officers oversee the day-to-day operations of the corporation. The chief executive officer (CEO) oversees overall operations.

D. Special Issues in Corporate Ownership 1. Joint Ventures and Strategic Alliances In a strategic alliance, two or more organizations collaborate on a project for mutual gain; when partners share ownership of what is essentially a new enterprise, it is called a joint venture.

2. Employee Stock Ownership Plans (ESOPs) ESOPs allow employees to own a significant share of the corporation through trusts established on their behalf.

3. Institutional Ownership Institutional investors include mutual funds and pension funds that buy enormous blocks of stock.

4. Mergers, Acquisitions, Divestitures, and Spin-Offs A merger occurs when two firms combine to create a new company; in an acquisition, one firm buys another outright. Many deals that are loosely called mergers are really acquisitions. A divestiture occurs when a firm sells off unrelated and/or underperforming businesses. When a firm sells part of itself to raise capital, the strategy is known as a spin-off.

KEY TEACHING TIPS •

Ownership in a corporation is represented through the sale of stock. Remind students that shareholders own the corporation.

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Remind students that stock in a publicly held corporation is available for sale to the public, whereas stock in a closely held corporation (private) is not available for sale to the general public.

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Make sure students understand that stockholders elect the board of directors, who, in turn, hire the officers—including the CEO, president, and vice presidents.

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Students don’t always understand why companies merge. Discuss the possible reasons, including an attempt to increase product lines, expand operations, or go international.

QUICK QUESTIONS •

What is meant by “double taxation?”

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•

How do joint ventures and strategic alliances allow companies to spread risk?

Use In-Class Activity 6: Class Discussion: Conjuring Up Profits?

Time Limit: 30 minutes HOMEWORK Research a publicly traded company Now is a good time to assign Application Exercise 3-9 from the end-of-chapter materials as homework. The assignment asks students to research a publicly traded company and detail its transition from small, privately held company to its initial public offering.

At-Home Completion Time: 60 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: The Role of Small Business Activity Overview: This activity helps students understand the role of small business in their communities.

Time Limit: 15 minutes What to Do: 1. Ask students to list small businesses.

2. Ask students to share how those businesses are important to their towns or communities, whether small businesses in the area complement each other in the products and services they offer, and in what way(s) these businesses help big businesses. (10 minutes) Don’t Forget: Be sure to review the definition of small business prior to the activity.

Wrap-Up: Bring the discussion to a close by introducing how many small businesses create jobs, launch innovations, and promote big businesses. Remind students that almost all businesses begin small.

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In-Class Activity 2: Up for Debate: The Wide World of Risk Activity Overview: This activity is designed to get students thinking about the importance of entrepreneurship in the U.S. economy.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and have them list various examples of how entrepreneurial spirit has been/is evident throughout this country’s history. How is entrepreneurship valuable to an economic system? In what types of businesses is entrepreneurship especially important?

(15 minutes) 2. Reassemble the class and discuss the degree of entrepreneurial spirit evidenced by the group.

In which area(s) of the U.S. economy is entrepreneurship most important? (15 minutes) Don’t Forget: Entrepreneurship is a factor of production and an essential part of a free market economy. Risktaking promotes heavy competition, which in turn improves quality and maintains market pricing, which is valuable to the U.S. economy.

Wrap-Up: To wrap up the discussion, remind students that exhibiting entrepreneurial spirit indicates a high level of risk-taking, for which Americans are known.

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In-Class Activity 3: Small Group Discussion: Entrepreneurship and the Growth of Businesses Activity Overview: This activity asks students to weigh the importance of entrepreneurship in the development of fastgrowing businesses.

Time Limit: 20 minutes What to Do: 1. Divide the class into small groups and ask each group to identify two or three of the fastestgrowing businesses in the United States. (5 minutes) 2. Ask each group to consider what role entrepreneurship has played in the growth of these firms.

(5 minutes) 3. Reassemble the class and ask students to share their results. (10 minutes) Don’t Forget: A number of fast-growing businesses are flourishing in the United States; students can consider assessing some of the more popular, commonly cited businesses like JetBlue, Starbucks, Walmart, Dell, and Southwest Airlines. (If students require a little extra time to research a company, you may want to use this activity as a homework assignment.)

Wrap-Up: Remind students that entrepreneurial success can be driven by many variables. Some entrepreneurs launch a business with the goal of independence, whereas others seek growth and expansion. Still others may not know exactly where they are headed.

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